<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 1999
REGISTRATION NO. 333-83283
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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GAIAM, INC.
(exact name of registrant as specified in its charter)
Colorado 5961,7375 84-111-35-27
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
360 INTERLOCKEN BLVD., SUITE 300
BROOMFIELD, COLORADO 80021
(303) 464-3600
(address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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JIRKA RYSAVY
CHIEF EXECUTIVE OFFICER
GAIAM, INC.
360 INTERLOCKEN BLVD, SUITE 300
BROOMFIELD, COLORADO 80021
(303) 464-3600
(name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
COPIES TO:
JAMES L. PALENCHAR, ESQ. KEVIN A. CUDNEY, ESQ.
BARTLIT BECK HERMAN PALENCHAR & SCOTT DORSEY & WHITNEY LLP
511 16/TH/ STREET, SUITE 700 370 17/TH/ STREET, SUITE 4400
DENVER, COLORADO 80202 DENVER, COLORADO 80202
TELEPHONE: 303-592-3100 TELEPHONE: 303-629-3400
FACSIMILE: 303-592-3140 FACSIMILE: 303-629-3450
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, check
the following box. [X]
<PAGE>
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) 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 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 this Form is a post-effective amendment filed pursuant to Rule 462(d) 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, check
the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
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Subject to completion, __________ __, 1999
PROSPECTUS
____________ __, 1999
================================================================================
2,000,000 Shares of Class A Common Stock
$5.00 per share
($4.50 per share for Gaiam customers, up to 200 shares per customer)
[Gaiam logo]
================================================================================
Gaiam produces and sells goods, services and information targeted to
customers who value the environment, a sustainable economy, healthy lifestyles
and personal development.
This is our initial public offering. We will apply for quotation of our
shares on the Nasdaq National Market under the symbol "GAIA."
We intend to allocate shares first to our customers and then to the general
public. Our customers will receive a 10% discount from the initial public
offering price (or a price of $4.50 per share) on up to 200 shares per customer.
The minimum order size in this offering for Gaiam customers and for the public
is 50 shares.
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See "Risk Factors" beginning on page __ to read about material risks
you should consider before buying our shares.
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<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price: $5.00 $7,000,000*
Underwriting discounts and commissions: $0.50 $ 700,000*
Proceeds to Gaiam: $4.50 $6,300,000*
Gaiam offering price (up to 200 shares): $4.50 $2,700,000*
Underwriting discounts and commissions: $0.45 $ 270,000*
Proceeds to Gaiam: $4.05 $2,430,000*
</TABLE>
*We do not know how many of the 2,000,000 shares offered will be purchased
by our customers at the $4.50 offering price. We have assumed for purposes of
this table that 600,000 shares are sold at $4.50 per share and 1,400,000 shares
are sold at $5.00 per share. The underwriters have an option to purchase an
additional 300,000 shares from Gaiam at $5.00 per share to cover any over-
allotments. The closing of this offering is expected to occur on or about
October __, 1999.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed
upon the adequacy or accuracy of this prospectus.
Any representation to the contrary is a criminal offense.
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TUCKER ANTHONY CLEARY GULL ADAMS, HARKNESS & HILL, INC.
<PAGE>
[Inside front cover]
[Pictures]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary......................................................
Questions and Answers for Gaiam Customers ..............................
Risk Factors............................................................
Use of Proceeds.........................................................
Capitalization..........................................................
Dilution................................................................
Selected Financial Data.................................................
Management's Discussion and.............................................
Analysis of Financial Condition.......................................
and Results of Operations.............................................
Our Business............................................................
Management..............................................................
Certain Transactions....................................................
Gaiam Shareholders......................................................
Description of Capital Stock............................................
Shares Eligible for Future Sale.........................................
Underwriting............................................................
Legal Matters...........................................................
Experts.................................................................
Additional Information..................................................
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary, together with the more detailed
information and Gaiam's consolidated financial statements and related notes
appearing elsewhere in this prospectus.
[Gaiam logo]
OUR BUSINESS
Founded in Boulder, Colorado in 1988, Gaiam (pronounced "gi am") produces and
sells goods, services and information targeted to customers who value the
environment, a sustainable economy, healthy lifestyles and personal development.
We reach our customers through catalogs, the Internet and retailers.
We strive to provide our customers an opportunity to practice what we call
"conscious commerce." This term describes the practice of making purchasing
decisions based on the personal values and beliefs. We believe many of our
consumers are concerned about personal and planetary health and sustainability
and want to use their purchasing decisions to effect positive change. We call
this "voting for their values with their dollars."
Our name, Gaiam, is a fusion of the words "Gaia" and "I am." Gaia, mother Earth,
was honored on the Isle of Crete in ancient Greece 4,000 years ago by the Minoan
civilization. This civilization valued education, art, science, recreation and
the environment and believed that the Earth was directly connected to their
existence and daily life.
The concept of Gaia stems from this ancient philosophy that the Earth is a
living entity. At Gaiam, we believe that all of the Earth's living matter, air,
oceans and land form an interconnected system that can be seen as a single
entity. According to a 1996 study published by the Institute of Noetic Sciences,
"The Integral Culture Survey," this view is shared by over 90% of a group called
"cultural creatives." This study estimates that this demographic group, which
shares the values of environmental awareness, healthy lifestyles and personal
development, numbered 44 million in the United States in 1994. The author of
this study, Paul Ray, has agreed to join our board of directors upon completion
of this offering.
From 1996 to 1998, our revenues increased from $14.8 million to $30.7 million,
representing a compound annual growth rate of approximately 44%. Our number of
unique individual customers increased from 300,000 at the end of 1996, to
685,000 at the end of 1998 and to 800,000 at June 30, 1999.
Although our historical sales have been predominantly through catalogs and
retailers, we are shifting our sales emphasis to the Internet and we intend to
make the Internet our primary channel of distribution. Engaging in sales on the
Internet, sometimes called "e-commerce," may subject us to risks and
uncertainties not historically associated with our business.
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OUR MARKET OPPORTUNITY
We believe that several markets share a common customer base that we believe
practices conscious commerce. Because of this common customer base, we believe
these markets should be viewed collectively as one industry. We have named this
industry "LOHAS" -- an acronym for Lifestyles Of Health And Sustainability, and
we divide the LOHAS industry into five markets that shape the industry:
Sustainable Economy. This market includes environmental management
services and solutions, renewable energy, energy conservation products
and services, sustainable manufacturing processes, recycling and goods
made from recycled materials.
Healthy Living. This market includes food supplements, vitamins and
minerals, natural and organic foods, and natural personal body care
and information and services related to these products.
Alternative Healthcare. This market includes natural health and
wellness solutions, information, products and services, including
alternative, noninvasive treatments, massage, chiropractic,
acupuncture, acupressure, biofeedback and aromatherapy.
Personal Development. This market includes experiences, solutions,
products, information and services relating to mind, body and spiritual
development such as yoga, meditation, relaxation, spirituality, ancient
religions, esoteric sciences and realizing human potential. The fitness
elements of this market are often referred to as "mind-body-spirit."
Ecological Lifestyles. This market includes information,
products and services that offer environment-friendly solutions,
natural untreated fiber products and eco-tourism.
Gaiam currently produces and sells information, goods and services in each
market of the LOHAS industry under three brand names:
. Harmony targets the Sustainable Economy and Ecological Lifestyles
markets;
. Living Arts targets the Personal Development market; and
. InnerBalance targets the Alternative Healthcare and Healthy Living
markets.
OUR STRATEGY
We are not aware of a dominant market leader for the entire LOHAS industry and
we believe the industry is characterized by a fragmented supplier and
distribution network.
Gaiam seeks to establish itself as a brand name, information resource and
authority in the LOHAS industry.
We view the Internet as an opportunity to enhance relationships with our
customers and reduce consumption of natural resources. Through
our Internet site, www.gaiam.com, we strive to create an online community where
our customers will share information, solutions and experiences and promote
interactive feedback. Our customer service representatives have learned from our
customers that many of them desire to acquire information from a trusted source
offering them a personalized, concise and reliable view into the vast and
inconsistent universe of information. We believe we are well positioned to be a
source such as this because of our customer participation, as evidenced by a
customer survey which drew a 50% response rate. However, because the
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Internet and e-commerce industry are subject to technological changes, our
strategy to expand our presence online and create an online community has
additional costs and risks associated with it.
We intend to pursue the following strategies to benefit our customers:
. Focus on Our Online Presence
. Strengthen Our Brand
. Offer Quality, Convenience and Wide Selection
. Develop Business-to-Business Opportunities
. Complete our Existing Business with Selective Strategic Acquisitions
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We believe customers should have opportunities to invest in companies they
helping create. In this offering, we will give preference to our customers in
allocating shares and give them a 10% discount for purchases of up to 200
shares.
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Gaiam was organized as a Colorado corporation on July 7, 1988. Gaiam's principal
office is located at 360 Interlocken Blvd., Suite 300, Broomfield, Colorado
80021, and its telephone number is (303) 464-3600.
The Offering
Class A common stock offered by Gaiam................... 2,000,000 shares
Class A common stock outstanding after this offering.... 3,496,429 shares/(1)/
Class B common stock outstanding after this offering.... 7,035,000 shares
Total common stock outstanding after this offering...... 10,531,429 shares
Use of proceeds......................................... Working capital and
other general
corporate purposes,
including the possible
acquisition of the
minority interest in
one of our
subsidiaries, other
acquisitions and the
repayment of up to
$2.725 million
principal amount of
debt. See "Use of
Proceeds" and "Our
Business."
Proposed Nasdaq National Market symbol.................. GAIA
/1)/ Based on the number of shares outstanding on June 30, 1999. Excludes
approximately 675,000 shares issuable upon exercise of options outstanding
as of June 30, 1999, each at an exercise price of $4.375 per share. No
options are currently exercisable. See "Management."
The information in this prospectus assumes that Gaiam's proposed 1-for-2.5
reverse stock split has occurred and that the underwriters' over-allotment
option is not exercised. Except where specified, references to Gaiam's shares
refer to shares of its class A common stock. The information on our website,
including any online discussion forums, and in our catalogs and other marketing
materials is
5
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not part of this prospectus. References in this prospectus to "Gaiam," "we,"
"our" and "us" refer to Gaiam, Inc., and not to the persons who manage Gaiam or
sit on its Board of Directors.
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<PAGE>
QUESTIONS AND ANSWERS FOR GAIAM CUSTOMERS
This summary answers some questions about how the offering process will work for
Gaiam customers who wish to purchase shares. You should also carefully read the
rest of this prospectus for information about this offering, the shares and
Gaiam.
Q. What is the price of the shares for Gaiam customers?
A. Shares purchased by a Gaiam customer, up to the first 200, will be
discounted 10% and will cost $4.50 per share. Fifty shares, the minimum
order, will cost $225, and 200 shares will cost $900.
Customer purchases of additional shares over the initial 200 shares will
cost $5.00 per share. For example, an additional 100 shares will cost $500
(or $1,400 for all 300 shares).
Q. Is there a minimum number of shares I have to buy?
A. Yes. Orders for fewer than 50 shares will not be accepted.
Q. How many shares can I request?
A. There is no limit on the number of shares a customer may request, but we
may not have enough shares to meet your request.
Q. Is there a guarantee that I will be able to buy shares?
A. No, but Gaiam intends to prioritize the allocation process so that
customers who ask to buy shares and place orders early will be able to buy
shares. There is no guarantee, however, that this will be possible. We may
need to allocate shares if we receive orders for more shares than are
offered by this prospectus.
Q. Will Gaiam allocate shares on a first come, first served basis?
A. Yes. If we receive orders for more shares than we have available for
customers, we will take into account the time your check and paperwork were
received. As a result, you should return your paperwork as soon as
possible.
Q. What paperwork do I have to complete?
A. Customers must fill out an account application to open a brokerage account
at Tucker Anthony Incorporated, an affiliate of Tucker Anthony Cleary Gull.
The application includes some necessary questions, and a place for you to
indicate how many shares you would like to buy. Customers can obtain the
account application by calling Tucker Anthony Incorporated at the phone
number listed below.
Q. When do I send a check?
A. Customers should send checks as soon as possible because timeliness of your
check and paperwork is one of the criteria we will use to allocate shares.
Customers must send a check for the total price of the shares you would
like to buy, along with your paperwork.
Q. What is the deadline for placing my order to buy shares?
A. The deadline for customers is the close of business on __________, __ 1999.
By that date, customers' checks and completed paperwork must be received by
Tucker Anthony Incorporated, at the address on the account
application.
Q. Will I get my money back if I do not receive shares?
A. Yes. Funds not used to purchase shares will be sent back to customers
by check promptly, unless you direct Tucker Anthony Incorporated
otherwise.
Q. Will I receive a stock certificate?
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<PAGE>
A. Yes. All customers buying stock in this offering will receive a stock
certificate for the shares purchased. In addition, customers who buy shares
will also receive a gift package, including a Gaiam t-shirt, cap, mug and
canvas shopping bag.
Q. Whom do I call if I have questions?
A. Call Tucker Anthony Incorporated toll free at 1-877-IPO-GAIA
(1-877-476-4242).
8
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SUMMARY FINANCIAL DATA
(Amounts in thousands, except per share data)
The following table summarizes the financial data of our business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The financial results for the six months ended June 30, 1998 and
1999 and as of June 30, 1999, are unaudited.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
----------------------- --------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues ............................ $14,801 $19,898 $30,739 $10,475 $17,563
Gross profit ............................ 8,039 11,436 17,565 6,061 10,488
Other income (expense) .................. 2,984 1,583 388 (114) 202
Net income after minority interest/(1)/.. $ 340 $ 654 $860 $ 39 $ 116
Net income per share (basic and
diluted) ................................ $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.01
Shares outstanding (basic) .............. 8,040 8,040 8,073 8,040 8,318
Shares outstanding (dilute) ............. 8,040 8,040 8,119 8,040 8,318
<CAPTION>
June 30, 1999
----------------------------------
Actual Pro forma/(2)/
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<S> <C> <C>
Balance Sheet Data:
Cash........................................... $ 856 $ 7606
Securities available-for-sale.................. 1,505 1,505
Working capital................................ 2,534 10,285
Total assets................................... 15,839 22,589
Long-term debt (net of current maturities)..... 1,664 914/(3)/
Stockholders' equity........................... 5,216 12,716
</TABLE>
___________________________
/(1)/ Net income after minority interest includes net income of consolidated
Gaiam operations excluding the portion attributable to the minority
shareholder of Healing Arts Publishing, LLC, a majority owned subsidiary
of Gaiam.
/(2)/ Gives effect to the sale by Gaiam of 2,000,000 shares at an assumed
initial public offering price of $5.00 per share, after deducting the
estimated underwriting discount, customer discounts and offering expenses
payable by Gaiam. See "Use of Proceeds" and "Capitalization."
/(3)/ Gives effect to the repayment of $750,000 of long-term debt from the
proceeds of this offering.
9
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RISK FACTORS
This offering involves a high degree of risk. You should carefully consider the
risks described below and the other information in this prospectus before
deciding to invest in our shares. If any of the following risks actually occurs,
our business could be harmed and the trading price of our shares could decline.
In that case, you might lose all or part of your investment.
We may not be able to compete successfully against current and future
competitors.
Our goal is to establish ourselves as the market leader in the LOHAS
industry.
We believe that the LOHAS industry has thousands of small, local and regional
businesses. We believe that some smaller businesses may be able to more
effectively personalize their relationships with customers.
Our direct marketing business is evolving and competitive. We expect more
business to move to the Internet. As this happens, we expect competition to
intensify because barriers to entry are minimal and competitors can launch new
sites at a relatively low cost.
Some of our competitors have, and our potential competitors may have, greater
financial and marketing resources. In addition, larger, well-established and
well-financed entities may acquire, invest in or form joint ventures with our
online competitors as the use of the Internet and other online services
increases. Increased competition from these or other competitors could
negatively impact our revenue.
Our ability to grow our customer base and generate sales depends largely upon
the importance consumers place on environmental issues, promoting a sustainable
economy, healthy lifestyles and personal development.
Our business is targeted at a demographic group -- the cultural creatives --that
assigns high value to environmental consciousness, promoting a sustainable
economy, healthy lifestyles and personal development. The success of our
business assumes that that we will be able to capture market share within this
group. Our success also depends upon the willingness of consumers to purchase
goods and services that promote the values we espouse. While we believe our
business plan and assumptions are reasonable, we cannot assure that the
demographic trends on which they are based will continue or that the current
levels of environmental consciousness or concerns about promoting a sustainable
economy, healthy lifestyles and personal development will be sustained. The
decrease of consumer interest in purchasing goods and services that promote the
values we espouse would materially and adversely affect the growth of our
customer base and sales revenues and, accordingly, our financial prospects.
Some products and services we sell may put us at a competitive price
disadvantage.
Some environmentally friendly products are priced at a premium to products that
have similar uses but are not environmentally friendly. Our sales growth assumes
that consumers will sometimes be willing to pay higher prices in order to
enhance the environment, promote a sustainable economy and achieve healthy
lifestyles and personal development or that, over time, we will be able to
reduce prices through volume purchases from our suppliers.
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If the protection of our Internet domain names are inadequate, our brand
recognition could be impaired and we could lose customers.
We currently hold various web domain names relating to our brand, including
www.gaiam.com. The acquisition and maintenance of domain names is regulated by
governmental agencies and their designees. The regulation of domain names in the
U.S. and in foreign countries is changing and is expected to continue to change
in the future. As a result, we may not be able to acquire or maintain the domain
names we want in all countries in which we seek to conduct business.
Furthermore, we may be unable to prevent third parties from acquiring domain
names whose similarity decreases the value of our trademarks and proprietary
rights. Loss of our Internet domain names could adversely affect our ability to
develop brand recognition.
We may engage in future acquisitions that may harm our financial results, cause
our stock price to decline, or dilute our shareholders' interest if we do not
successfully execute them.
Acquisitions have been part of our growth. Living Arts and Inner Balance,
acquired in 1998, accounted for approximately one-third of our revenues for the
six months ended June 30, 1999. Even though our strategy does not depend on
making acquisitions, we expect to make them. These acquisitions may be of entire
companies, controlling interests in companies or of minority interests in
companies where we intend to invest as part of a strategic alliance. However, we
may not succeed in identifying attractive acquisitions or attractive acquisition
candidates may not be available at reasonable prices. We are also likely to face
competition for attractive acquisition candidates, which may increase the
expense of completing acquisitions. Making acquisitions may harm our operating
results or cause our stock price to decline because we may:
- issue equity or equity-related securities that dilute our current
shareholders' percentage ownership or incur substantial debt or assume
liabilities of an acquired business;
- experience reduced earnings or adverse tax consequences by failing to
efficiently integrate the operations, assets and personnel of the
acquired companies in a timely manner, being required to amortize a
significant amount of intangible assets acquired in an acquisition, or
otherwise; and
- divert management's attention from operating the business.
Moreover, the presence of minority ownership interests in any acquired company,
and our strategy of allowing our subsidiaries to retain some autonomy in their
management and operation, could make integration more difficult.
The loss of the services of our key personnel could disrupt our business.
The services of our officers, Jirka Rysavy, Lynn Powers, Pavel Bouska, Mark
Lipien and Linda West, are critical to our business. Our strategy of allowing
the management teams of acquired companies to continue to exercise significant
management responsibility for those companies makes it especially important that
we retain key employees, particularly the e-commerce and creative teams, of the
companies we might acquire. Competition for qualified personnel is intense,
particularly given the scarcity of qualified and experienced management in the
commerce and the direct marketing industries.
Government regulation and legal uncertainties could add additional costs to
doing business on the Internet.
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E-commerce is new and rapidly changing. Federal and state regulation relating to
the Internet and e-commerce is evolving. Currently, there are few laws or
regulations directly applicable to the Internet or e-commerce on the Internet.
Due to the increasing popularity of the Internet, it is possible that laws and
regulations may be enacted with respect to the Internet, covering issues such as
user privacy, pricing, taxation, content, copyrights, distribution, antitrust
and quality of products and services. Additionally, the rapid growth of e-
commerce may trigger the development of tougher consumer protection laws.
Our business could also be affected by regulations adopted in the future. For
example, a number of different bills are under consideration by Congress and
various state legislatures that would restrict disclosure of consumers' personal
information. If legislation of this type were enacted, it would make it more
difficult for us to obtain additional names for our distribution lists, and
restrict our ability to send unsolicited electronic mail or printed catalogs.
Both of which could slow the growth of our customer base.
Because of our recent shift of emphasis to the Internet, we cannot be certain
that our Internet business will succeed.
Although our historical sales have been predominantly through catalogs and
retailers, we are shifting our sales emphasis to the Internet. We intend to make
the Internet our primary channel of distribution.
The development of a website and other proprietary technology entails
significant technical, financial and business risks. We have spent approximately
$500,000 during 1999 in the development of our websites and may spend up to an
additional $500,000 to introduce the website features we describe in this
prospectus under "Business." We intend to continue to invest resources to
enhance our websites and keep our systems up to date. In addition, the adoption
of new Internet, networking or telecommunications technologies may require us to
devote substantial resources to modify and adapt our services.
The success of our business depends on continued growth of e-commerce.
The emergence of the Internet and the growing popularity of e-commerce provides
a new channel for direct access to consumers. Since the introduction of e-
commerce to the Internet, the number of websites competing for customer
attention has increased very rapidly. We expect future competition to intensify
given the relative ease with which new websites can be developed. We believe
that the primary competitive factors in e-commerce are brand recognition,
reputation, site content, ease of use, price, fulfillment speed, customer
support and reliability. Our success in e-commerce will depend heavily upon our
ability to continue to provide a compelling and satisfying shopping experience.
Other factors that will affect our success include our continued ability to
attract and retain experienced marketing, technology, operations and management
talent. The nature of the Internet as an electronic marketplace (which may,
among other things, facilitate competitive entry and comparison shopping) may
render it inherently more competitive than traditional retailing formats.
Increased competitiveness among online retailers may result in reduced operating
margins, loss of market share and a diminished brand franchise.
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To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our online technology. The
Internet and the e-commerce industry are subject to rapid technological change,
frequent new product and service introductions embodying new technologies, and
the emergence of new industry standards and practices that could render our
existing Internet strategy obsolete. Our success will depend, in part, on our
ability to license leading technologies useful in our business, enhance existing
services, develop new services and technology that address the needs of our
customers and our ability to respond to technological advances and emerging
industry standards and practices on a cost-effective and timely basis.
If we cannot maintain and continuously update our information systems, our
business could suffer.
Information systems are critical to our business. These systems assist in
processing orders, managing inventory, purchasing and shipping merchandise on a
timely basis, responding to customer service inquiries, and gathering and
analyzing operating data by business segment, customer, and SKU (a specific
identifier for each different product). If our systems should require
substantial updating or fail, we could incur substantial expenses.
A material security breach could cause us to lose sales, damage our reputation
or result in liability to us.
Our computer servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. We may need to expend significant
additional capital and other resources to protect against a security breach or
to alleviate problems caused by any breaches. Our relationships with our
customers may be adversely affected if the security measures that we use to
protect their personal information, such as credit card numbers, are
ineffective. We currently rely on security and authentication technology that we
license from third parties. We may not be able to prevent all security
breaches.
Our systems may fail or limit user traffic, which would cause us to lose
sales.
We are dependent on our ability to maintain our computer and telecommunications
equipment in effective working order and to protect against damage from fire,
natural disaster, power loss, telecommunications failure or similar events. In
addition, growth of our customer base may strain or exceed the capacity of our
computer and telecommunications systems and lead to degradations in performance
or systems failure. We have experienced capacity constraints and failure of
information systems in the past that have resulted in decreased levels of
service delivery or interruptions in service to customers for limited periods of
time. While we continually review and seek to upgrade our technical
infrastructure and provide for system redundancies and backup power to limit the
likelihood of systems overload or failure, substantial damage to our systems or
a systems failure that causes interruptions for a number of days could adversely
affect our business.
We may face legal liability for the content contained on our website or other
content that is accessed from our website.
We intend to keep increasing the amount of content on our website. We could face
legal liability for defamation, negligence, copyright, patent or trademark
infringement, personal injury or other claims based on the nature and content
of
13
<PAGE>
materials that we publish or distribute on our website. These types of claims
have been brought, sometimes successfully, against on-line services in the past.
We can be exposed to litigation for the content and services that are accessible
from our website through links to other websites or through content and
materials that may be posted by our users in chat rooms or bulletin boards. If
we are held liable for damages for the content on our website, our business may
suffer. Our insurance may not adequately protect us against these types of
claims. We do not currently offer health-related information on our website, but
we may do so in the future. This could increase our legal exposure. Further, our
business is based on establishing www.Gaiam.com as a trustworthy and dependable
provider of information and services. Allegations of impropriety, even if
unfounded, could therefore have a material adverse effect on our reputation and
our business.
Our suppliers may not be able to supply us merchandise in a timely manner, which
could cause us to lose sales and harm our business.
To successfully operate our business, we must receive timely delivery of
merchandise from our vendors and suppliers. As we grow, some of these vendors
may not have sufficient capital, resources or personnel to satisfy their
commitments to us. Any significant delay in the delivery of products by vendors
could result in a loss of sales, increased fulfillment expenses and damage to
our customer service reputation.
The legal rights of Living Arts' minority equity holders may adversely affect
Gaiam.
Gaiam owns 67% of Living Arts, and the previous owners continue to own the
remaining 33%. Because Gaiam has certain fiduciary duties to the minority equity
holders, Gaiam may not always be able to manage Living Arts in the manner that
is most advantageous to Gaiam and its shareholders. In addition, we may have
disputes with minority equity owners concerning management of the business or
the governance of Living Arts. See "Legal Proceedings." We could also have
similar issues arising in future acquisitions in which Gaiam acquires less than
the entire equity interest in a company.
The failure of third parties to provide an adequate level of service could
decrease our revenues and increase our costs.
Given our emphasis on customer service, the efficient and uninterrupted
operation of order-processing and fulfillment functions is critical to our
business. To maintain a high level of customer service, we rely heavily on a
number of different outside service providers, such as printers,
telecommunications companies and delivery companies. Any interruption in
services from outside service providers, including delays or disruptions
resulting from labor disputes, power outages, human error, adverse weather
conditions or natural disasters, could materially adversely affect our business.
Relying on our centralized fulfillment center could expose us to losing
revenue.
Prompt and efficient fulfillment of our customers' orders is critical to our
business. Our facility in Cincinnati, Ohio handles our fulfillment functions and
some customer-service related operations, such as returns processing.
Approximately 90% of our orders are filled and shipped from the Cincinnati
facility. The balance is shipped directly from suppliers. Because we rely on a
centralized fulfillment center, our fulfillment functions could be severely
impaired in the event of fire, extended adverse weather conditions, or natural
disasters. Since we charge customers' credit cards only when we ship orders,
interruption of our shipping would diminish our revenues.
14
<PAGE>
Our costs could be increased by overstocks and merchandise returns, as well as
by our strategy to offer branded products.
An important part of our strategy is to feature "branded" products. These
products are sold under our brand names and are manufactured to our
specifications. We expect our reliance on branded merchandise to increase. To be
successful, we must periodically update and expand the product offerings for our
catalogs and websites. The use of branded merchandise requires us to incur costs
and risks relating to the design and purchase of products, including submitting
orders earlier and making longer initial purchase commitments.
In addition, the use of branded merchandise limits our ability to return unsold
products to vendors, which can result in higher markdowns in order to sell
excess inventory. Our commitment to customer service typically results in more
emphasis being placed on keeping a high level of merchandise in stock so we can
fill orders immediately. Consequently, we run the risk of having excess
inventory, which may also contribute to higher markdowns. Our failure to
successfully execute a branded merchandise strategy or to achieve anticipated
profit margins on these goods, or a higher than anticipated level of overstocks,
may materially adversely affect our revenues.
We offer our customers liberal merchandise return policies. Our financial
statements include a reserve for anticipated merchandise returns, which is based
on historical return rates. It is possible that actual returns may increase as
a result of factors such as the introduction of new merchandise, new product
offerings, changes in merchandise mix or other factors. Any significant increase
in our merchandise returns will correspondingly reduce our revenues.
Our sales could be negatively affected if we are required to charge additional
taxes on purchases.
We generally collect sales taxes only on sales to residents of the state of
Colorado and where we have other locations, currently California and Ohio.
Federal laws currently limit the imposition of state and local taxes on
Internet-related sales. However, there is a possibility that Congress may not
renew this legislation in 2001. If Congress chooses not to renew this
legislation, state and local governments would be free to impose taxes on
electronically purchased goods, which could adversely affect us. Due to the high
level of uncertainty regarding the imposition of taxes on electronic commerce, a
number of states, as well as a Congressional advisory commission, are reviewing
appropriate tax treatment for companies engaged in e-commerce. Such proposals,
if adopted, could substantially impair the growth of e-commerce and could
adversely affect our opportunity to derive financial benefit from these
activities.
Many states have attempted to require that out-of-state direct marketers collect
sales and use taxes on the sale of merchandise shipped to its residents. If
Congress enacts legislation permitting states to impose sales or use tax
obligations on out-of-state direct marketing companies, or if other changes
require us to collect additional sales or use taxes, these obligations would
make it more expensive to purchase our products and would increase our
administrative costs. Audits by state tax authorities could give rise to a
retroactive assessment for tax liabilities if it was determined we had
sufficient activities in that state. State sales tax laws typically provide for
a lengthy statute of limitations, and if we were retroactively assessed for
taxes, the assessment could adversely affect our business.
15
<PAGE>
Our founder and Chief Executive Officer Jirka Rysavy will control Gaiam.
After this offering, Mr. Rysavy will hold 100% of the outstanding class B common
stock. The shares of class B common stock are convertible into class A shares at
any time. Each share of class B common stock has ten votes per share, and the
class A shares have one vote per share. Assuming Mr. Rysavy's planned purchase
of an additional 100,000 shares in this offering, he will beneficially own
approximately 77% of the outstanding shares, assuming Mr. Rysavy's class B
common stock was converted into shares. In addition, he will also have
approximately 96.7% of the total votes. As a result, Mr. Rysavy will be able to
exert substantial influence over Gaiam and to control matters requiring approval
by the shareholders of Gaiam, including the election of directors and preventing
any change in control of Gaiam.
We may be adversely affected if the software, computer technology and other
systems we use are not year 2000 compliant.
If our important information management systems or those of our vendors are not
year 2000 compliant, our business could suffer. For example, we could have
difficulties in operating our website, taking product orders, making product
deliveries or conducting other fundamental parts of our business. We have been
assessing and are continuing to assess the year 2000 readiness of the software,
computer technology and other services that we use. We do not, however,
anticipate that we will devote extensive efforts to assess whether our vendors
or the Internet are year 2000 compliant. The cost of developing and implementing
any year 2000 related measures, if necessary, could be material.
We also depend on the year 2000 compliance of the computer systems and financial
services used by consumers. A significant disruption in the ability of consumers
to access the Internet or portions of it or to use their credit cards would have
a material adverse effect on demand for our products and services and would have
a material adverse effect on us. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000."
16
<PAGE>
Fluctuations in our quarterly operating results may negatively affect our stock
price.
Prior to this offering, you could not buy or sell our shares publicly. The
market price of our shares after the offering may vary from the initial public
offering price and could be subject to wide fluctuations in response to factors
such as the following, some of which are beyond our control:
- quarterly variations in our operating results;
- operating results that vary from the expectations of securities
analysts and investors;
- changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
- announcements by third parties of significant claims or proceedings
against us;
- future sales of shares; and
- stock market price and volume fluctuations
Shares eligible for public sale after this offering could adversely affect our
stock price.
Sales of a substantial number of shares in the public market following this
offering, or the perception that sales could occur, could adversely affect the
market price for our shares and impair our ability to raise equity capital in
the future. Immediately after this offering 3,496,429 shares and 7,035,000
shares of class B common stock will be outstanding. Of this number, the
1,860,000 shares sold in this offering will be freely tradeable, and an
additional remaining 1,145,000 shares and all shares of class B common stock
will be eligible for sales under Rule 144 of the Securities Act after 180 days.
Please see "Shares Eligible for Future Sale."
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risk and
uncertainties. These statements refer to our future plans, objectives,
expectations and intentions. We use words such as "anticipates," "believes,"
"plans," "expects," "future," "intends," "strive" and similar expressions to
identify forward-looking statements. These forward-looking statements involve
risks and uncertainties. Gaiam's actual results could differ materially from
those anticipated in these forward-looking statements, as a result of certain
factors, as more fully described in "Risk Factors" and elsewhere in this
prospectus. We caution you that no forward-looking statement is a guarantee of
future performance, and you should not place undue reliance on these forward-
looking statements which reflect our management's view only as of the date of
this prospectus.
USE OF PROCEEDS
The net proceeds to Gaiam from the sale of the shares in this offering are
estimated to be $7.5 million, after deducting the estimated underwriting
discount, customer discounts and offering expenses payable by Gaiam.
17
<PAGE>
The principal purposes of this offering are to increase our working capital, to
create a public market for our common stock, to facilitate our future access to
the public capital markets, and to increase our visibility in the retail
marketplace.
We intend to pay off approximately $750,000 of our approximately $1.7 million in
bank debt with the net proceeds of this offering. In connection with this
offering, we are extending to each of our eight debenture holders the option to
purchase shares for the outstanding principal amount of the debentures,
excluding interest, at the offering price of $5.00 per share. We anticipate a
total of 395,000 shares will be sold to these debenture holders in exchange for
$1.975 million in debentures. To the extent any holder elects to receive cash,
this will represent a use of the proceeds of this offering.
We have no specific plans for the remaining proceeds. They will be used for
general corporate purposes and working capital. This allocation is only an
estimate, and we may adjust it as necessary to address our operational needs in
the future. We may also use a portion of the net proceeds to acquire the
minority interest in one of our subsidiaries, Healing Arts Publishing, LLC, or
to make other acquisitions or strategic minority interest investments. However,
we currently have no commitments or agreements and are not involved in
negotiations with respect to acquisitions. Pending these uses, we will invest
the net proceeds of this offering in short-term, interest-bearing, investment-
grade securities. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DIVIDEND POLICY
Gaiam has never declared or paid any cash dividends on its capital stock. Gaiam
currently intends to retain earnings, if any, to support its growth strategy and
does not anticipate paying cash dividends in the foreseeable future. In
addition, our bank credit agreement prohibits payment of any dividends to our
shareholders.
CAPITALIZATION
The following table sets forth the capitalization of Gaiam as of June 30, 1999,
on a pro forma basis, as adjusted, to reflect:
. sale by Gaiam of 1,400,000 shares in this offering at an initial
public offering price of $5.00 per share,
. the sale by Gaiam of 600,000 shares in this offering at the price to
customers (for up to 200 shares) of $4.50 per share, and
. deducting the estimated underwriting discount and offering expenses
payable by Gaiam.
You should read this information together with our consolidated financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
June 30, 1999
ACTUAL PRO FORMA
--------- ------------
<S> <C> <C>
Long-term debt and capital leases, less
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C>
current portion................................ $ 1,664 $ 914/(2)/
Stockholders' equity:
Class A Common Stock, $0.0001 par
value; 92,965,000 shares authorized and
1,496,429/(1)/ shares issued and
outstanding (actual); 3,496,429/(1)/ shares
outstanding (pro forma)..................... 1 1
Class B Common Stock, $.0001 par
value; 7,035,000 shares authorized and
7,035,000 shares issued and
outstanding (actual, pro forma)............. 1 1
Additional paid-in capital..................... 1,827 9,327
Accumulated other comprehensive income......... 910 910
Retained earnings.............................. 2,477 2,477
--------- ----------
Total stockholders' equity..................... 5,216 12,716
--------- ----------
Total capitalization........................... $ 6,880 $ 13,630
========= ==========
</TABLE>
- ----------------------
(1) Excludes an aggregate of approximately 675,000 shares issuable pursuant to
options outstanding as of June 30, 1999.
(2) Gives effect to the repayment of $750,000 of long-term debt from the
proceeds this offering.
19
<PAGE>
DILUTION
The net tangible book value of Gaiam stock as of June 30, 1999 was $0.21 per
share. Net tangible book value represents the amount of Gaiam's total tangible
assets less total liabilities.
Pro forma net tangible book value per share is determined by dividing Gaiam's
pro forma net tangible book value by the number of shares outstanding after this
offering. Giving effect to the sale of 1,400,000 shares in the offering at a
price of $5.00 per share and 600,000 shares in the offering at $4.50 and after
deducting the estimated underwriting discount and offering expenses payable by
Gaiam, pro forma net tangible book value per share would have been $0.88 per
share. This represents an immediate increase in pro forma net tangible book
value of $0.67 per share to existing shareholders and an immediate dilution of
$4.12 per share to new investors purchasing shares in this offering. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share................................. $ 5.00
Net tangible book value per common share before this offering......... $ 0.21
Increase per common share attributable to new investors............... 0.67
------
Pro forma net tangible book value per common share after this offering.. 0.88
------
Dilution per common share to new investors.............................. $ 4.12
</TABLE>
The following table summarizes, on a pro forma basis at June 30, 1999 as
described above (giving effect to the issuance of the shares to be issued in
this offering but not the exercise of any outstanding stock options), the total
consideration paid and the average price per share of common stock paid by
existing shareholders (including both holders of class A shares and class B
common stock) and new investors in this offering. The price paid per share paid
by new investors is the initial public offering price of $5.00 per share (before
deducting the estimated underwriting discount, customer discount and offering
expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing shareholders
New investors 8,531,429 81.0% $ 1,828,455 15.5% $ 0.21
2,000,000 19.0 10,000,000 84.5 $ 5.00
---------- ----- ------------ -----
TOTAL 10,531,429 100.0% $ 11,828,034 100.0%
========== ===== ============ =====
</TABLE>
This discussion and table assumes no exercise of outstanding stock options and
warrant, and no issuance of shares reserved for future issuance under Gaiam's
option plans. As of August 30, 1999, there were options outstanding to purchase
a total of approximately 675,000 shares at a price of $4.375 per share, and a
warrant to purchase 24,000 shares at a price of $0.50 per share. No options or
warrants are currently exercisable. To the extent that any of these options are
exercised, there will be further dilution to new investors. See
"Capitalization."
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected statement of operations for the years ended December 31, 1996, 1997
and 1998 and balance sheet data as of December 31, 1997 and 1998 set forth below
are derived from Gaiam's audited consolidated financial statements, which appear
elsewhere in this prospectus. The selected statement of operations for the year
ended December 31, 1995 set forth below are derived from Gaiam's audited
consolidated financial statements, and the selected statement of operations for
the year ended December 31, 1994 are derived from Gaiam's unaudited consolidated
financial statements. The selected balance sheet data as of June 30, 1999 and
selected statement of operations for the six-month periods ended June 30, 1998
and 1999 set forth below are derived from Gaiam's unaudited consolidated
financial statements as of June 30, 1999 and for the six-month periods ended
June 30, 1998 and 1999, which appear elsewhere in this prospectus. In the
opinion of management, the unaudited consolidated financial statements include
all adjustments, consisting only of normal recurring accruals and adjustments,
necessary for a fair presentation of the financial position and results of
operations for these unaudited periods. The historical operating results are not
necessarily indicative of the results to be expected for any other period. The
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Gaiam's
consolidated financial statements and related notes, included elsewhere in this
prospectus.
21
<PAGE>
SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
----------------------------------------------------------- ------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data: 1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- --------
<S>
Net revenues.............. $229 $6,696 $14,801 $19,898 $30,739 $10,475 $17,563
Costs of goods sold....... 179 2,943 6,762 8,462 13,174 4,414 7,075
------- ------- ------- ------- ------- ------- -------
Gross profit.............. 50 3,753 8,039 11,436 17,565 $6,061 10,488
Expenses:
Selling and operating 5 3,281 9,253 10,427 14,186 5,250 8,877
Corporate, general and
administration.......... 15 876 1,218 1,575 2,394 635 1,796
------- ------- ------- ------- ------- ------- -------
Total expenses 20 4,157 10,471 12,002 16,580 5,885 10,673
------- ------- ------- ------- ------- ------- -------
Operating income (loss) 30 (404) (2,432) (566) 985 175 (185)
Other income (expense)(1) (2) 1,029 2,984 1,583 388 (114) 202
------- ------- ------- ------- ------- ------- -------
Income before income
taxes and minority interest
.......................... 28 625 552 1,017 1,373 61 17
Income taxes.............. 6 238 212 363 251 22 6
Minority interest......... -- -- -- 262 (167)
------- ------- ------- ------- ------- ------- -------
Net income................ $22 $387 $340 $654 $860 $39 $178
Net income per share -
basic..................... $0.00 $0.05 $0.04 $0.08 $0.11 $0.00 $0.02
diluted................... $0.00 $0.05 $0.04 $0.08 $0.11 $0.00 $0.02
- -
Shares outstanding -
basic..................... 8,040 8,040 8,040 8,040 8,073 8,040 8,318
- -
diluted 8,040 8,040 8,040 8,040 8,119 8,040 8,565
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
----------- --------
Balance Sheet Data 1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash $16 $419 $380 $1,612 $1,410 $653 $856
Securities
available-for-sale(2) 71 56 38 1,634 38 1,505
Working capital (deficiency) 22 192 (1,838) 436 (81) (60) 2,534
Total assets 81 2,476 6,256 5,985 16,677 5,479 15,839
Long-term debt (net of
current maturities) - - 89 42 299 17 1,664
Stockholders' equity (2) 59 580 920 1,574 3,661(1) 1,613 5,216
</TABLE>
______________________________________
(1) Other income in 1995, 1996, 1997 and 1998 primarily reflects income from
sale of securities available-for-sale.
(2) Securities valued at cost in 1994, 1995, 1996 and 1997 and at fair market
value in 1998. See Note 6 of notes to the consolidated financial
statements.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of Gaiam's financial condition and results
of operations should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this prospectus.
Overview
Gaiam produces and sells goods, services and information marketed to customers
who value the environment, a sustainable economy, healthy lifestyles and
personal development. Gaiam was incorporated in Colorado in 1988 as a local
distributor of earth-friendly products. In 1995, Gaiam began to expand
nationally and make acquisitions. From 1996 to 1998, our revenues increased from
$14.8 million to $30.7 million, representing a compound annual growth rate of
approximately 44%, and our number of unique individual customers increased from
300,000 to 685,000 over this period.
Gaiam's business model is evolving as evidenced by the increase in the
percentage of our revenues attributable to our business to business segment from
13% in 1998 to 21% in 1999. In addition, Gaiam's gross margin continues to
increase because we are developing more private brand merchandise, on which we
have better margins, and negotiating better pricing from our venders due to
volume discounts. However, the competitive search engines available on the
Internet may force retail price reductions, and thus affect our gross
margin.
During 1998, Gaiam completed two acquisitions. On September 14, 1998, we
obtained 67% of Healing Arts Publishing LLC, which does business as "Living
Arts," for approximately $2.5 million in cash. On October 1, 1998, we acquired
100% of Inner Balance, Inc. for a debenture with a principal amount of
approximately $530,000. Living Arts produces and sells yoga and other mind-body-
spirit informational videos and products, while InnerBalance is a direct
marketer of alternative health products and solutions. Acquisitions accounted
for approximately one-third of our revenues during the first two quarters of
1999. We incurred expenses in the first six months of 1999, particularly in the
second quarter, to integrate these acquisitions, including relocation of Living
Arts' warehousing to our Ohio distribution center, customer service functions to
Colorado, and conversion of direct marketing operating system to Gaiam's
operating system. We do not anticipate further material integration
expenses.
23
<PAGE>
Results Of Operations
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
----------------------- --------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of goods sold 78.2 44.0 45.7 42.5 42.9 42.1 40.3
------- ------- ------- ------- ------- ------- -------
Gross profit 21.8 56.0 54.3 57.5 57.1 57.9 59.7
Expenses:
Selling and operating 2.2 49.0 62.5 52.4 46.1 50.1 50.5
Corporate, general and
administration 6.5 13.1 8.2 7.9 7.8 6.1 10.3
------- ------- ------- ------- ------- ------- -------
Total expenses 8.7 62.1 70.7 60.3 53.9 56.2 60.8
------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations 13.1 (6.1) (16.4) (2.8) 3.2 1.8 (1.1)
Other income (expense), net (0.9) 15.4 20.1 8.0 1.3 (1.1) 1.2
------- ------- ------- ------- ------- ------- -------
Income before income
taxes 12.2 9.3 3.7 5.2 4.5 0.7 1.1
and minority interest 2.6 3.6 1.4 1.8 0.8 0.3 0.0
Provision for income taxes
Minority interest in net
income of consolidated
subsidiary, net of tax 0.0 0.0 0.0 0.0 0.9 0.0 (1.0)
------- ------- ------- ------- ------- ------- -------
Net income 9.6% 5.7% 2.3% 3.4% 2.8% 0.4% 1.0%
</TABLE>
Six months ended June 30, 1999 compared to six months ended June 30, 1998
- -------------------------------------------------------------------------
Revenues increased 67.7% from $10.5 million in the first six months of 1998 to
$17.6 million in the first six months of 1999. This increase was primarily
attributable to the acquisitions of InnerBalance and Living Arts, and revenues
generated by increased purchases by current customers and growth in our customer
base.
Gross profit, which consists of revenues less cost of sales (primarily
merchandise acquisition costs and in-bound freight) increased 73.1% from $6.1
million in the first six months of 1998 to $10.5 million in the first six months
of 1999. As a percentage of revenues, gross profit increased from 57.9% to
59.7%. This was primarily attributable to increases in sales of private branded
products, on which we have better margins than other products, and continued
better pricing from vendors due to increased volume.
Selling and operating expenses, which consist primarily of sales and marketing
costs, commissions, and fulfillment expenses increased 69.1% from $5.2 million
in the first six months of 1998 to $8.9 million in the first six months of 1999
primarily due to increased revenues. As a percentage of revenues, selling and
operating expenses increased from 50.1% to 50.5%. This percentage increase was
primarily due to additional costs associated with the relocation of Living Arts'
customer service function to Colorado, the transfer of Living Arts' warehousing
to our distribution center in Ohio, and the conversion of Living Arts operating
system to Gaiam's direct marketing operating system.
24
<PAGE>
Corporate, general and administrative expenses increased 182.5% from $635,723 in
the first six months of 1998 to $1.8 million in the first six months of 1999. As
a percentage of revenues, general and administrative expenses increased from
6.1% to 10.3%, primarily attributable to expenses associated with the
acquisition of Living Arts and InnerBalance [_].
Other income, comprised primarily of gains on sales of marketable securities and
interest expense, increased from a net expense of $113,938 in 1998 to $201,762
of net income in 1999. This change was primarily due to gains on the sale of
marketable securities during the first six months of 1999, which was partially
offset by higher interest expense due to borrowings used to fund acquisitions.
Minority interest of $166,822 for the first six months of 1999 was added to our
consolidated financial results to reflect the minority interest in Living Art's
loss for the six months ended June 30, 1999. This amount represents our minority
partners' one-third interest in the Living Arts' loss, net of tax, for the
period.
Income tax provision represented 36.7% of our pre-tax net income in the first
six months of 1998, as compared to an income tax provision of 37.2% of pre-tax
income in the first six months of 1999.
Net income, as a result of the factors described above, increased from $38,753,
or 0.4% of revenues, in the first six months of 1998 to $177,630, or 1.0% of
revenues, in the first six months of 1999.
Year ended December 31, 1998 compared to year ended December 31, 1997
- ---------------------------------------------------------------------
Revenues increased 54.5% from $19.9 million in 1997 to $30.7 million in 1998.
This increase was primarily attributable to the acquisitions of Living Arts and
InnerBalance. Additionally, revenues generated by our Harmony brand increased as
a result of additional purchases made by Harmony's current customers and growth
in its customer base.
Gross profit increased 53.6% from $11.4 million in 1997 to $17.6 million in
1998. As a percentage of revenues, gross profit decreased from 57.5% to 57.1%.
This reflects a change in sales mix due to the acquisition of Living Arts, which
had generally lower margin products than that of our other operations.
Selling and operating expenses increased 36.0% from $10.4 million in 1997 to
$14.2 million in 1998, due to increases in revenues. As a percentage of
revenues, selling and operating decreased from 52.4% to 46.1%. This decrease in
selling and operating expenses as a percentage of revenues was primarily due to
increased operating efficiencies.
Corporate, general and administration expenses increased 52% from $1.6 million
in 1997 to $2.4 million in 1998, primarily as a result of initiatives to support
our growth. As a percentage of revenues, those expenses decreased from 7.9% to
7.8% of revenues.
Other income, which is primarily comprised of gains on sales of marketable
securities and interest expense, decreased from $1.6 million in 1997 to $388,491
in 1998, largely due to a decrease in the sales of marketable securities during
1998 as compared to 1997.
25
<PAGE>
Provision for income tax provision represented 35.7% of our pre-tax income in
1997, as compared to 18.3% of its pre-tax income in 1998. The decrease in our
effective tax rate was primarily due to a one-time tax benefit related to the
1998 settlement of a Living Arts legal judgment incurred prior to Gaiam's
ownership.
Minority interest of $261,598 for 1998 was deducted from our consolidated
financial results to account for the minority interest in Living Arts.
Net income, as a result of the factors described above, increased from $654,312,
or 3.4% of revenues, in 1997, to $859,781, or 2.8% of revenues, in 1998.
Year ended December 31, 1997 compared to year ended December 31, 1996
- ---------------------------------------------------------------------
Revenues increased by 34.4% from $14.8 million in 1996 to $19.9 million in 1997.
This increase is primarily attributable to growth of our Harmony brand and an
expansion of product offerings that resulted in an increase in average
transaction size.
Gross profit increased 42.3% from $8.0 million in 1996 to $11.4 million in 1997.
As a percentage of revenues, gross profit increased from 54.3% to 57.5% due to
increases in sales of private branded products, on which we have better margins
than other products, and better pricing from vendors due to increased
volume.
Selling and operating expenses increased 12.7% from $9.3 million in 1996 to
$10.4 million in 1997, due to increases in revenues. As a percentage of
revenues, selling and operating expenses decreased from 62.5% to 52.4%. This
decrease as a percentage of revenues was primarily due to increased efficiencies
due to higher average transaction size. In addition, our central warehouse was
opened in 1996, resulting in reductions in shipping costs and other operational
efficiencies.
Corporate, general and administrative expenses increased 29.3% from $1.2 million
in 1996 to $1.6 million in 1997. As a percentage of revenues, general and
administrative expenses decreased from 8.2% to 7.9%. The overall dollar increase
in general and administrative expenses was due to various initiatives undertaken
to prepare for and support future growth.
Other income declined from $3.0 million in 1996 to $1.6 million in 1997,
primarily due to our decision to sell fewer securities that we held.
Income tax provision represented 38.4% of our pre-tax income in 1996, as
compared to 35.7% of our pre-tax income in 1997.
As a result of the factors described above, net income increased from $339,700,
or 2.3% of revenues, in 1996 to $654,312, or 3.4% of revenues, in 1997.
Selected Quarterly Operating Results
The following table sets forth our unaudited quarterly results of operations for
each of the quarters in 1997 and 1998 and the first two quarters of 1999. In
management's opinion, this unaudited financial information includes all
adjustments, consisting solely of normal recurring accruals and adjustments,
necessary for a fair presentation of the results of operations for the quarters
presented. This financial information should be read in conjunction with our
consolidated financial statements and related notes
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included elsewhere in this prospectus. The results of operations for any quarter
are not necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
QUARTER ENDED
(In thousands, except per share data)
---------------------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1997 1997 1997 1997 1998 1998 1998 1998 1999 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $4,218 $4,426 $4,811 $6,443 $5,300 $5,175 $5,987 $14,277 $9,495 $8,068
Gross profit 2,454 2,554 2,645 3,783 3,012 3,049 3,538 7,966 5,639 4,849
Operating income
(loss) (317) (86) (137) (26) 98 77 200 610 110 (294)
Net income (239) (104) (142) 1,139 24 15 395 426 106 72
Net income (loss) per
share $ (0.03) $(0.01) $(0.02) $ 0.14 $ 0.00 $ 0.00 $ 0.05 $ 0.05 $ 0.01 $ 0.01
Weighted average shares
outstanding 8,040 8,040 8,040 8,040 8,040 8,040 8,040 8,073 8,215 8,420
</TABLE>
Quarterly fluctuations in Gaiam's revenues and operating results are due to a
number of factors, including the timing of new product introductions and
mailings to customers, advertising, acquisitions (including costs of
acquisitions and expenses related to integration of acquisitions), competition,
pricing of products by vendors and expenditures on our systems and
infrastructure. The impact on revenue and operating results, due to the timing
and extent of these factors, can be significant. Our sales are also affected by
seasonal influences. On an aggregate basis, Gaiam experiences strongest revenues
and net income in the fourth quarter due to increased holiday spending.
Liquidity And Capital Resources
Gaiam's capital needs arise from working capital required to fund our
operations, capital expenditures related to expansions and improvements to
Gaiam's infrastructure, development of e-commerce and funds required in
connection with the acquisition of new businesses and its anticipated future
growth. These capital requirements depend on numerous factors, including the
rate of market acceptance of Gaiam's product offerings, the ability to expand
Gaiam's customer base, the cost of ongoing upgrades to its product offerings,
the level of expenditures for sales and marketing, the level of investment in
distribution and other factors. The timing and amount of these capital
requirements cannot accurately be predicted. Additionally, Gaiam will continue
to evaluate possible investments in businesses, products and technologies, and
plans to expand its sales and marketing programs and conduct more aggressive
brand promotions.
Gaiam has funded its operations and acquisitions primarily through bank loans,
private placements of shares and subordinated debentures, and sales of
marketable securities contributed to Gaiam by Gaiam's founder, Mr. Rysavy.
During 1996 and 1997, we had operating losses which were offset primarily by
sales of marketable securities contributed by Mr. Rysavy.
We raised approximately $1.2 million from private placements during 1998
($575,000 for 160,000 shares and $550,000 in debentures), $150,000 during the
first quarter of 1999 ($75,000 for 17,143 shares and $75,000 in debentures) and
$2.7 million during the second quarter of 1999 ($1.37 million for 314,286 shares
and $1.35 million in debentures). The privately placed shares were sold at
$4.375 per share. The debentures described above bear interest at 8% per annum.
With the exception of Ms. Lynn Powers, the holders of the debentures, have
certain registration rights requiring Gaiam to register the shares obtained in
the private placement. See the consolidated financial statements of Gaiam for
additional information relating to Gaiam's private placements. In connection
with this offering, we are extending to each of our eight debenture holders the
option to purchase shares for the outstanding principal amount of the debentures
(excluding interest) at the
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<PAGE>
offering price of $5.00 per share. We anticipate a total of 395,000 shares will
be sold to these debenture holders in exchange for $1.975 million in
debentures.
Gaiam is party to credit agreements with Norwest Bank, which extend through
December 31, 2001. The credit agreements permit borrowings of up to $2 million
(of which approximately $1.65 million was outstanding at June 30, 1999), and
these borrowings are secured by a pledge of Gaiam's assets. Borrowings under the
Norwest credit agreements bear interest at the prime rate plus 1% (currently
7.75%). The Norwest credit agreements contain various financial covenants and
also prohibit Gaiam from paying dividends to its shareholders, except that
dividends by Living Arts are permitted for 1998 taxes on minority interests. Mr.
Rysavy guarantees the Norwest credit agreements.
Gaiam has, from time to time, borrowed funds from BT Alex. Brown under a margin
loan agreement against securities held for sale. Gaiam had no outstanding
indebtedness to BT Alex. Brown as of June 30, 1999. Borrowings under the BT
Alex. Brown margin loan agreement bear interest at the call money rate plus
3/4%.
Gaiam's operating activities used net cash of $2.7 million and $1.3 million
during 1996 and 1997, respectively, and provided $759,205 of net cash in 1998.
The use of cash in 1996 and 1997 was primarily attributable to increases in
inventories and prepaid costs associated with the increased sales volumes. Net
cash provided during 1998 was primarily a result of Gaiam's net income. Gaiam's
operating activities for the six months ended June 30, 1999 used net cash of
$4.6 million primarily to reduce the level of accounts payable and accrued
expenses, resulting from seasonal fluctuations and the Living Arts
acquisition.
Gaiam's investing activities generated cash of $738,755 and $3.6 million during
1996 and 1997, respectively, and used cash of $1.1 million during 1998. In 1996
and 1997, the cash generated from investing activities resulted primarily from
sales of marketable securities and property and equipment. During 1998, Gaiam
used cash to purchase a majority interest in Living Arts. Gaiam's investing
activities generated $382,736 in net cash for the six months ended June 30,
1999, resulting primarily from the sale of marketable securities.
Gaiam's financing activities generated $1.9 million in net cash during 1996,
primarily from borrowings, which were partially repaid during 1997, resulting in
a use of cash of $1.1 million. During 1998, Gaiam's financing activities
generated $175,300, which resulted from the private placement of shares and
debentures, net of the reduction in other outstanding debt. Gaiam's financing
activities generated $3.7 million in net cash for the six months ended June 30,
1999, resulting from the private placement of shares and debentures, and
borrowings on its Norwest line of credit, net of reductions in other outstanding
debt.
During 1999, Gaiam anticipates that it will make capital expenditures of
approximately $1.3 million primarily for Gaiam's continuing development of
e-commerce.
We believe our available cash, cash expected to be generated from operations,
cash to be generated through the sale of marketable securities held by Gaiam,
and borrowings available under our bank credit agreements, will be sufficient to
fund our operations, as described in this prospectus, on both a short-term and
long-term basis. However, our projected cash needs may change as a result of
acquisitions, unforeseen operational difficulties or other factors.
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<PAGE>
In the normal course of our business, we investigate, evaluate, and discuss
acquisition, joint venture, minority investment, strategic relationship and
other business combination opportunities in the LOHAS industry. In the event of
any future investment, acquisition or joint venture opportunities, we may
consider using then-available liquidity, issuing equity securities or incurring
additional indebtedness. However, we currently have no commitments or agreements
and are not involved in negotiations with respect to acquisitions.
Quantitative and Qualitative Disclosure About Market Risk
We do not believe that any of our financial instruments have significant risk
associated with market sensitivity.
Year 2000
The year 2000 issue relates to computer programs and systems that recognize
dates using two-digit year data rather than four-digit year data. As a result,
these programs and systems may fail or provide incorrect information when using
dates after December 31, 1999. If the year 2000 issue were to cause disruptions
to Gaiam's internal information technology systems or to the information
technology systems of entities with which Gaiam has commercial relationships,
material adverse effects to Gaiam's operations could result.
Gaiam's internal computer programs and operating systems consist of programs and
systems relating to virtually all segments of Gaiam's business, including
merchandising, customer database management and marketing, order-processing,
fulfillment, inventory management, customer service and financial reporting.
These programs and systems are primarily comprised of:
. "Front-end" systems. These systems automate and manage business
functions such as order-taking and order-processing, inventory
management and financial reporting.
. Warehouse management systems. These systems manage and automate
fulfillment operations of Gaiam's companies. Currently Gaiam's
internal warehouse management system is integrated with its internal
front-end system.
. Customer database management systems. These systems facilitate the
storage of customer data for each Gaiam business. Each Gaiam customer
database management system is integrated with Gaiam's existing front-
end system.
. Telecommunications systems. These systems enable Gaiam's companies to
manage their order-taking and customer service functions.
. Office automation systems, personal computers and local area networks.
These systems are used for word processing and other administrative
tasks at individual Gaiam companies and at Gaiam's central office.
. Voicemail systems. These systems are used for receiving and storing
messages to employees at individual Gaiam companies and at Gaiam's
central office.
. Ancillary services systems. These include systems such as heating,
ventilation and air conditioning control systems and security
systems.
To assess the potential impact of the year 2000 issue, Gaiam has completed
reviews of its internal front-end systems, its internal warehouse management
systems, its customer database management systems, its internal
telecommunications systems and its personal computers and local area networks.
These reviews were completed by Gaiam's existing workforce at no identifiable
incremental cost. Based upon these reviews, Gaiam believes that these systems
and equipment will operate correctly when processing data that include dates
after December 31, 1999, although no assurances can be given that these systems
and equipment will operate correctly. See "Our Business -- Management
Information Systems."
29
<PAGE>
The computer programs and operating systems used by entities with whom Gaiam has
commercial relationships also pose potential problems relating to the year 2000
issue, which may affect Gaiam's operations in a variety of ways. These risks are
more difficult to assess than those posed by internal programs and systems, and
Gaiam has not yet completed the process of assessing them. Gaiam believes that
the programs and operating systems used by entities with which it has commercial
relationships generally fall into two categories:
. First, Gaiam relies on communication and data processing programs and
systems used by organizations such as the United States Postal
Service, UPS, telephone companies and banks. Services provided by
these entities affect almost all facets of Gaiam's operations,
including processing of orders, printing and mailing of catalogs,
shipping of goods and certain financial services (e.g., credit card
processing). Programs and services in this category generally are not
specific to Gaiam's business, and disruptions in their availability
would likely have a negative impact on Gaiam, as well as most other
enterprises within the direct marketing industry, and on many
enterprises outside the direct marketing industry. Gaiam believes that
the most serious potential disruptions to its operations stemming from
the year 2000 issue relate to programs and systems in this category.
Gaiam intends to include an evaluation of the potential disruptions in
its assessment of the programs and systems of the entities with which
it has commercial relationships.
. Second, Gaiam purchases goods from over 150 vendors (none of which
accounted for more than 10% of aggregate purchases for 1998). Each of
these vendors and service providers are dependent on programs and
systems that could be disrupted by year 2000 problems. We believe that
year 2000 risks relating to programs and systems used by our product
vendors are well-diversified because we use a large number of vendors.
We have assessed the risks posed by the programs and systems used by
entities who provide front-end and warehouse management services and
determined that these risks do not require remediation. We have
received or intends to seek assurances of year 2000 compliance from
each product vendor that accounts for more than approximately 1% of
our aggregate purchases on an annual basis and from other significant
vendors and service providers.
Gaiam expects to complete its assessment of the programs and systems of the
entities with which it has commercial relationships and the identification of
potential problems by the end of the third quarter of fiscal 1999. Once this
identification has been completed, Gaiam intends to resolve any potential
problems identified by communicating further with the relevant vendors and
providers, by working internally to identify alternative sourcing and by
formulating contingency plans. Gaiam expects the resolution of these issues to
be an ongoing process until all year 2000 problems are satisfactorily
resolved.
OUR BUSINESS
Gaiam
Gaiam produces and sells goods, services and information targeted to customers
who value the environment, a sustainable economy, healthy lifestyles and
personal development.
Although our historical sales have been predominantly through catalogs and
retailers, we are shifting our sales emphasis to the Internet and we intend to
make the Internet our primary channel of distribution.
30
<PAGE>
Under the umbrella brands of Gaiam and Gaiam.com, we use specific brands to
target related but distinct markets. We use the Harmony, Living Arts, and
InnerBalance brands to offer our products through direct marketing via catalogs
and the Internet and through business-to-business relationships. Gaiam has
approximately 800,000 unique individual customers in addition to leading
retailers such as Target, Musicland, Book of the Month and Amazon.com.
We strive to serve consumers who place a high value on promoting healthy living
and personal development, contributing to the sustainability of the Earth's
natural resources and purchasing decisions that enhance the quality of the
Earth's environment. In our view, these consumers make purchasing decisions for
goods and services based on these values, in addition to the traditional
criteria of price and performance. We believe that these consumers, whom we
refer to as "cultural creatives," are growing in number, as evidenced by the
growth of our customer base. Our number of unique individual customers increased
from 300,000 at the end of 1996, to 685,000 at the end of 1998 and to 800,000 at
June 30, 1999. Cultural creatives tend to be well-educated consumers, with a
median age of 42, a 60/40 women-to-men ratio and an average annual income of
$52,000.
The following terms are important to understand our business:
. By "sustainable" we mean the ability of a product or service to reduce the
burden placed on living systems and to maintain productivity without
depleting natural resources or producing waste.
. By "natural" we mean the characteristic of a product that is organic
and/or otherwise produced without chemicals and additives.
. By "eco-friendly" or "green" we mean products that have low or minimal
impact upon the ecosystem in which the product is created or used.
. By "alternative health" we mean the natural and holistic approach to
healthcare typified by chiropractic care, nutrition, homeopathy,
naturopathic medicine, acupuncture, acupressure, massage, aromatherapy and
other holistic approaches.
. By "mind-body-spirit" we mean the natural and holistic portion of the
personal development market that incorporates physical and mental elements,
such as yoga and Tai Chi.
. By "conscious commerce" we mean the practice of making purchasing decisions
based on personal values and beliefs.
Our Industry
We have named the industry we serve "Lohas" -- an acronym for Lifestyles Of
Health And Sustainability. We divide the Lohas industry into five markets that
shape this industry:
Sustainable Economy. This market includes environmental management
services and solutions, renewable energy, energy conservation products and
services, sustainable manufacturing processes, recycling and goods made
from recycled materials.
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Healthy Living. This market includes food supplements, vitamins and
minerals, natural and organic foods and natural and personal body
care.
Alternative Healthcare. This market includes natural health and wellness
solutions, information, products and services, including alternative,
noninvasive treatments, massage, chiropractic, acupuncture, acupressure,
biofeedback and aromatherapy.
Personal Development. This market includes experiences, solutions products,
information and services relating to mind, body and spiritual development,
such as yoga, meditation, relaxation, spirituality, ancient religions,
esoteric sciences and realizing human potential. The fitness elements of
this market are often referred to as "mind-body-spirit."
Ecological Lifestyles. This market includes environment friendly
solutions, natural untreated fiber products and eco-tourism.
Because of a common customer base, we believe these five markets should be
viewed collectively as one industry. We believe that, by serving all of these
markets, we can benefit our customers by providing them with a larger array of
choices, the convenience of one-stop shopping and access to a online community
of shared values.
Our History
Gaiam was founded in Boulder, Colorado. In 1995, we began to expand our
business nationally through the acquisition of the direct marketing business of
Seventh Generation, Inc., a supplier of eco-friendly household products. This
business became the base of our Harmony brand. In 1998, we acquired
InnerBalance, a direct marketer of alternative health products and solutions,
and a majority interest in Living Arts, a producer and supplier of yoga and
other mind-body-spirit informational videos and products.
Our Core Values
Gaiam's approach to business is based on its core values:
We emphasize integrity in all our relationships.
We value the environment and view all resources as precious assets.
Living our beliefs is more than just the right thing to do; it is the only
path to take.
We believe we can motivate every person to make a positive difference in
their lives and in our world by the simple choices they make every day.
Our Brand
Gaiam plans to use its brand name to establish itself as an authority and
information resource in the Lohas industry. Under the Gaiam and Gaiam.com
umbrella brands, we use our Harmony,
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InnerBalance, and Living Arts brands to target the industry's various markets.
The chart below illustrates the market and examples of products offered under
each of our brands.
[Chart of Gaiam brands appears here]
Our Competitive Strengths
We believe the following factors have contributed to our growth and success:
. Focus On Large Market
Gaiam targets cultural creatives. A study published by the Institute of Noetic
Sciences in 1996 coined the term "cultural creatives." This study was authored
by Paul Ray, who has since agreed to join our board of directors. The article
estimates that this demographic segment, which has in common the values of
environmental awareness, healthy lifestyles and personal development, numbered
44 million in the United States alone in 1996.
Gaiam believes that its appealing customer demographics contribute significantly
to its high average order value in excess of $90 for the year ended December 31,
1998, as compared to a lower average for the direct marketing industry.
. Experienced Executive Team
We have an experienced team of corporate managers. Our founder and Chief
Executive Officer, Jirka Rysavy, was the founder and Chief Executive Officer of
Corporate Express, Inc., which he built to a Fortune 500 company, and founder
and CEO of Crystal Market, Inc., which was sold to become the first store of
Wild Oats Markets. Our President and Chief Operating Officer, Lynn Powers, has
over 15 years of senior management experience in the retail industry as a Senior
Vice President of Merchandising, Marketing and Strategic Planning of Miller's
Outpost. Our Chief Information Officer, Pavel Bouska, was a member of the
founding team and an officer of Corporate Express for over 10 years, serving in
various positions, including Chief Information Officer and Vice President of
Information Systems.
. Distinctive, Branded Products
Gaiam offers information, products and services under the Harmony, InnerBalance
and Living Arts brand names. These products appeal to Gaiam's well-educated
customers and are not widely available in conventional stores. These products
are designed to enhance customers' lifestyles and experiences and provide
healthy, natural solutions while being eco-friendly and promoting a sustainable
economy.
. Exceptional Customer Service
Gaiam maintains a customer-focused approach at all stages of its business to
build long-term customer relationships based on loyalty and trust. We ensure
that we have on hand inventory to support 93% of in-stock orders. It is our
practice to ship each order no later than the next business day. According to
Jupiter Communications, 90% of online customers prefer human interaction when
they require customer service. Our in-house customer service department includes
product specialists, who have specific product knowledge and assist customers in
selecting products and solutions that meet their needs, design, price and style
criteria. Gaiam also enhances its customer service through initiatives such as
extensive training of customer service representatives and unconditional
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<PAGE>
return guarantees. We believe that, by offering exceptional customer service, we
encourage repeat purchases by our customers, enhance our brand identity and
reputation and build stronger relationships with our customers.
. Established Infrastructure
Gaiam has invested in its physical facilities, technology and information
systems. In 1996, we established our 64,000 square foot fulfillment center in
Cincinnati, Ohio, a facility that is in the central United States and
conveniently located to hubs for major shipping companies. This location allows
us to achieve shipping cost efficiency to most locations across the Continental
United States. It is located within 30 minutes of both UPS and Airborne hubs. In
the same year, we installed our supply chain management information system to
support virtually all segments of our business, including merchandising,
customer database management and marketing, order processing, fulfillment,
inventory management, customer service and financial reporting. This investment
reduced our costs of fulfillment by providing an integrated system that reduces
labor costs and times needed to procure inventory and fill orders. This existing
infrastructure has also allowed us to integrate acquired businesses in an
efficient and cost-effective manner. Our existing infrastructure also gives us
an advantage over start up e-commerce companies, many of which will need to
devote substantial resources to the development of these capabilities.
. Our Operating Model
Our business structure is designed to enable each Gaiam brand to achieve
individual sales growth, while realizing cost savings from the combined
enterprise. The managers of our brands retain responsibility for merchandising
and creative presentation. Gaiam provides strategic direction, technology,
financial resources and administrative services, as well as marketing, customer
service, fulfillment, purchasing and sourcing.
Our Strategies
. Focus on our Online Presence
We are upgrading our website and technology systems to create a platform that
will expand our product offerings and take advantage of the unique
characteristics of online retailing. We are developing an online community of
consumers who are concerned about personal and planetary health and want to use
their purchase decisions to effect positive change. We believe that the
interactive environment available on the Internet will make possible
customer-to-customer and customer-to-company communications that will increase
the usefulness of our services to customers, provide valuable feedback to us,
and help us and our customers establish a database of valuable information about
environmental issues, natural health and personal development. From this
interaction and feedback, we believe that the online community can grow.
Our goal is to grow this segment of our customers and to educate them about
their own ability to effect positive change through purchases that will result
in improvements to the environment and their well-being -- and thereby
demonstrating to them that their choices can "make a difference."
. Strengthen Our Brand
We plan to establish the Gaiam name as an authority in the LOHAS industry. Gaiam
and Gaiam.com will also function as the umbrella brands for Harmony,
InnerBalance and Living Arts and any additional
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<PAGE>
brands we may acquire or develop. We plan to strengthen these brands by
increasing marketing efforts, strengthening relationships with traditional and
e-commerce retailers and increasing the breadth of our videotape and digital
informational offerings while maintaining our high level of customer
service.
We believe that creating demand by consumers for eco-friendly and natural
products will permit us to obtain these products in greater volume and, in turn,
offer the products at lower prices than might otherwise be available. As we are
able to lower prices in this manner, we expect to attract additional
customers.
. Offer Quality, Convenience and Selection
We intend to make purchasing quality, natural and healthy lifestyle products
from us more convenient than shopping in a physical store. We are open 24 hours
a day, and shopping for our products does not require a trip to a store. We
ship products directly to the customer's home or office. We believe that
customers may buy more natural and healthy lifestyle products from us because
they can get the information and advice they require, have more hours to shop,
can act immediately on a purchase impulse and can locate products that may be
hard-to-find. Because catalog and online shopping are not tied to a geographic
location, we can deliver a wide selection of natural and healthy lifestyle
products to customers in rural or other locations that cannot support a large-
scale Lohas products retail store.
. Develop Business-to-Business Opportunities
Gaiam is focusing on increasing its sales to other businesses that have a need
for sustainable or natural and healthy lifestyle products and services. These
businesses include retailers, hospitality companies, spas and resorts, health
care providers, as well as industrial companies. We believe that the Gaiam
brands and product mix are well-suited to these industries.
We believe that the expertise and knowledge we have and can develop in the Lohas
industry will make Gaiam the information source of choice for businesses that
wish to service the Lohas industry. As a result, we believe that we can build a
successful consulting and "green audit" business. Part of our strategy is to set
the standard for the industry and then offer information, products and services
under Gaiam's approval or recommendation. The Gaiam approval can be earned by
companies, business lines and products in the LOHAS industry.
. Complement our Existing Business with Selective Strategic Acquisitions
Even though our strategy is not dependent on acquisitions, we will consider
strategic acquisitions in the LOHAS industry that complement our existing
business. We believe that significant acquisition opportunities exist and our
willingness to retain existing operating management will make us an attractive
acquiring party. Gaiam generally allows the acquired company's management team
to retain responsibility for critical front-end business functions such as
merchandising, creative presentation and marketing, while consolidating
operational functions under the Gaiam organization to realize economies of
scale. We will consider strategic acquisitions in product sales, customer and
product information data bases that can augment our own business.
Product Brands
We have organized our merchandising and creative functions under three strategic
brands:
. Harmony targets the industry's Sustainable Economy and Ecological
Lifestyles markets,
. Living Arts targets the industry's Personal Development market, and
. InnerBalance targets the industry's Alternative Healthcare and Healthy
Living market.
Common logistics, information systems, finance, legal, human resources and
general administrative functions support the entire organization. Most of our
corporate functions located at our administrative headquarters in Broomfield,
Colorado and most inventory storage and fulfillment for our brands originate
from our Cincinnati, Ohio fulfillment center.
Harmony
Harmony focuses on eco-friendly household products that offer alternatives for
the product categories found in mainstream supermarkets and department
stores.
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We work with our vendors to ensure that the sourcing of ingredients, the
processes utilized and packaging materials --- are all eco-friendly and
responsible. Where appropriate, we submit our products to a rigorous testing
and approval process for both efficacy and safety. We also send out items to
independent labs for additional testing and approval. We use no animals in our
testing process.
Our merchandising department remains committed to the ongoing expansion of
Harmony's exclusive lines to pioneer conscious alternatives for everyday
household products.
Because of the uniqueness of our products, Harmony has been featured in
editorial articles in the Wall Street Journal, Daily News, San Francisco
Chronicle, Elle and Vogue.
Some of our Harmony customers have made automatic reorder arrangements whereby
Harmony regularly ships products in bulk on specific dates. Popular automatic
reorder products include paper towels, bathroom tissue and cleaning supplies.
[Harmony graphics appears here and includes the following text]
<TABLE>
<S> <C> <C>
[Sustainable Economy Ecological Lifestyles
Energy-Efficient Lights Natural Fiber Clothing
(20,000 hour bulbs, fluorescent bulbs) (Hemp, Green/Organic Cotton)
Energy-Efficient Appliances Home Furnishings (Natural Fiber,
Recycled Paper Products Sustainably Harvested &
Reclaimed Woods)
SOLAR Recycled Plastic Products Natural Bed & Bath Products
PATH (Radios, Lights, Security System) (Hemp, Green/Organic Cotton)
LIGHT & Jute - Beds, Sheets, Pillows,
Recycling & Composting Products Comforters, Blankets, Towels,
Shower Curtains & Rugs
Recycled Plastic Products (Clothes Non-Toxic Cleaning Supplies
Hammocks, Blankets, Throws) Non-Toxic Laundry Products
Battery Recharger & Natural Pest Repellents
Rechargeable Batteries
Energy-Efficient Laundry Products Outdoor/Garden Supplies
Conservation Information & Products]
</TABLE>
Living Arts
In September 1998, we acquired a majority interest in Living Arts. Living Arts
is a producer and supplier of videos and accessories targeted to the Personal
Development market. The videos cover mind-body-spirit fitness subjects, such as
yoga exercises. All videos are recorded on film or digital formats.
Living Arts markets its own video and audio tapes, as well as licensed video
titles, for sale to mass merchandisers, specialty stores, sporting goods stores,
and online retailers. Living Arts sells to companies such as Target, Price-
Costco, K-Mart, Sam's Club, Musicland, Borders, Blockbuster, Amazon.com, Wild
Oats Markets and Whole Foods Market as well as abroad in Germany, Italy,
Switzerland and Australia.
Living Arts also sells directly to consumers through direct marketing efforts,
including catalog, e-commerce and direct magazine advertising.
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<PAGE>
Living Arts has reciprocal relationships with authorities in the mind-body-
spirit arena such as yoga teachers and publications such as Yoga Journal to
create content for informational videotapes.
[Livingarts graphic appears here and the following text]
[Personal Development
Meditation
Yoga
Tai Chi
YOGA ACCESSORIES Qi Gong
& CLOTHING Relaxation
Stress Reduction
(Information, Video, Audio, DVD, Clothing
Accessories, Books)]
InnerBalance
InnerBalance offers alternative health products and solutions focused on
enhancing the quality of life. Its principal products include air and water
filters, fitness accessories, herbal supplements and home spa accessories
targeted to the Alternative Healthcare and Healthy Living markets. According to
a Journal of the American Medical Association study published in 1998, 83
million Americans tried alternative health procedures in 1997, for a total of
629 million visits to practitioners.
At this time, we generate the majority of InnerBalance sales through our catalog
and other direct sales efforts; however, we intend to make the Internet our
primary channel of distribution. According to Cyber Dialogue, over 22 million
U.S. adults searched for health information on the Internet for the year ended
December 1998, and this number is estimated to increase by 50% during the next
year, to a total of 33 million.
[InnerBalance graphic appears here and the following text]
[Alternative Healthcare Healthy Living
Water & Air Filters Personal Care Products
Massage Therapy (Natural Body Products,
Allergy Solutions Oral Hygiene, Hair Care)
Light Therapy Natural Supplements
Magnetic Therapy Nutritional Products
SOY MILK MAKER Aromatherapy Products & & Information
Information Natural Beauty Products
Sound Therapy
Fitness products & Information
Back Care
Natural pain Relief
Detox Products & Information]
Our Channels of Distribution
We offer our products through two primary distribution channels consisting of
direct marketing (catalogs, the Internet and consumer advertising) and
business-to-business.
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Direct marketing
We ensure that we have on-hand inventory to support 93% of in-stock orders. It
is our practice to ship each order no later than the next business day. While
this practice may result in higher costs, we believe that it enhances customer
satisfaction and loyalty. Our in-house customer service department includes
product specialists who are trained to have in-depth product knowledge and
assist customers in selecting products and solutions that meet their needs,
design, price and style criteria. For the benefit of our customers, we also
provide toll-free telephone ordering and unconditional return guarantees.
Business-to-Business
Gaiam markets certain products, principally videos featuring yoga and fitness,
to national and regional mass merchandisers, specialty stores, sporting goods
stores, bookstores, natural foods stores and online retailers. We are in the
process of expanding our range of products produced and sold in the retail
market, as well as creating an integrated branded retail display on the premises
of a larger retail establishment in which we will offer customers a number of
exclusive items.
Gaiam is in the process of significantly increasing its sales to other
businesses that have a need for eco-friendly products and services, or natural
and healthy lifestyle products. Business-to-business revenues were 13% of 1998
revenues and 21% of revenues for the first six months of 1999.
By offering both a direct marketing and business-to-business approach to
distribution, we believe that we are maximizing our ability to reach our core
customers as well as enhancing our brand.
Our Customer Service
Gaiam stands by its advertised "no-risk guarantee" by providing its customers a
full refund of the purchase price for products that are returned any time for
any reason. We believe that this guarantee, coupled with the quality of our
customer service personnel, encourages greater customer loyalty and repeat
sales.
In addition to our e-commerce ordering systems, our customer service staff
accepts orders, product questions and other customer service requests, 362 days
per year (excluding Thanksgiving, Christmas Day and New Year's Day) via our
dedicated toll-free telephone numbers, fax, mail and e-mail. Sales
representatives are responsible for verifying purchasing history, order status,
delivery dates, returns processing and account credits. Our information system
allows real time verification of in-stock positions, credit card authorizations,
stock moves and transfers. Product information in printed form is generally
available to customers upon request, and questions from customers are answered
within 24 hours. Merchandise is delivered to customers through the U.S. Postal
Service, United Parcel Service and other common carriers.
We train our service representatives to "think for the benefit of the customer"
and help them choose among the best possible solutions. This training includes
providing to them samples of all products for their inspection and use, and
databases of specifications about these products. Many of our representatives
purchase our products and information and can speak to customers about their
personal experiences with them. We also encourage our sales representatives to
provide us with feedback about products to assure quality and performance.
Several representatives also have personal 800 numbers so customers can call
them directly and receive personal assistance with their requests. We have also
trained dedicated product specialists to assist sales representatives with
technical questions and
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supplemental research by compiling product-specific information packets
accessible on our company-wide server.
We also maintain a research library stocked with books, videos and audio tapes
for our employees' use. Customer service representatives are encouraged to watch
videos and research products so that they can respond to our customers'
questions.
We maintain a toll-free customer service telephone number, separate from the
telephone number for merchandise orders, to handle inquires relating to matters
such as order status, scheduled delivery dates and product inquiries. Returns
are closely monitored to determine whether any product quality issues exist.
Returned merchandise is promptly inspected and recycled to inventory unless
damaged or worn.
Purchasing and Inventory Management
We strive to develop long-term and close working relationships with certain
vendors, which we believe increases the quality and selection of merchandise
available to us and enables us to develop products which are not readily
available from other sources. Gaiam uses an automated inventory management
system to maximize fulfillment and to reach the proper balance between inventory
turn and optimal in-stock positions. Both inventory turn and in-stock rates
carry associated benefits and costs to a fulfillment operation. High in-stock
rates have a positive impact on sales and customer satisfaction, but carry the
potential risk of excess inventory and obsolescence. Gaiam utilizes historical
sales results, manufacturing and delivery lead times, volume discounts, the
experience of its employees and other related factors in an integrated analysis
model to determine optimum inventory levels.
Liquidations, sales of overstocks and end-of-season merchandise is disposed of
primarily through our outlet store, located in Boulder, Colorado, sales inserts
and website offerings. Cost recovery efforts for excess inventory are
continually monitored, and balance sheet reserves are adjusted accordingly.
Our Internet Business
We believe that our business is particularly well-suited to Internet commerce.
The use of many of our products is enhanced by extensive product education and
information that we will make available online. The online environment has
virtually unlimited shelf space, the capacity to present vast amounts of
consumer information and offers consumers the convenience of shopping online.
In addition, many of our products are not widely found in conventional
stores.
Although our historical sales have been predominantly through catalogs and
retailers, we are shifting our sales emphasis to the Internet and making the
Internet our primary channel of distribution. According to Forrester Research,
an independent media research firm, the number of U.S. households using e-mail,
the Internet or a consumer online service will grow from an estimated 20.5
million households in 1996 to 55 million households, representing over 50% of
all U.S. households by the year 2002. Furthermore, the number of U.S. households
making at least one online purchase is expected to grow from approximately 10
million at the end of 1998 to 36 million at the end of 2002.
Our website provides online purchasing capability for many products that we
offer. Following placement of an order, the customer will receive an order
confirmation that will summarize the purchase, the total amount of sale and any
shipping information. We are currently in the process of adding incremental
features to our website for the convenience of our customers. These features
will be gradually introduced during the remainder of 1999.
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<PAGE>
The following forms of online customer service will be available:
. Visitors will be able to search for answers to their questions on our
website. Answers to frequently asked customer inquiries may be searched by
topic, product and category. Visitors will have access to their account
information and will be able to update their personal information.
. Customers will be able to complete a form at our website or e-mail
questions or concerns directly to our customer support staff. An inquiry
will be acknowledged immediately, and we anticipate that a personalized
response will be delivered within 24 hours via e-mail.
. We will provide live customer service support through a toll-free
telephone number. Our customer service representatives will have complete
access to and familiarity with our website and applications. Visitors may
modify their online preferences or profile through this channel, if
necessary.
After registering, a visitor will be invited to create a personal profile
containing product information and content of particular interest to the
visitor. Once registered, visitors will be able to check order status, make
payments, and communicate with customer service.
Future Acquisitions
We will consider strategic acquisitions of companies with a strong brand
identity and with customer and product information data bases that augment our
data bases. It has been Gaiam's practice to allow the acquired company's
management team to retain responsibility for critical front-end business
functions such as merchandising, creative presentation and marketing, while
consolidating operational functions under the Gaiam organization to realize
economies of scale.
Information Technology
Gaiam uses modern computer systems to support merchandising, customer management
and marketing, order processing, fulfillment, inventory management, customer
service and financial reporting. We believe that these systems provide us with
the data needed to perform effective analysis about our business, products and
customers. Further, we believe that this analysis can improve performance,
customer loyalty and service by identifying current conditions and trends in
marketing, customer buying behavior, customer service and fulfillment
operations. We believe our current systems will accommodate Gaiam's operations
for the foreseeable future.
We are implementing new Internet software to automate online sales and
operations. The system is compatible with our existing systems. This new
Internet software links Internet merchandising, order taking, payment and
security, order management, warehousing and shipping, customer service,
inventory management and accounting with our existing system.
Gaiam also makes extensive use of company-wide e-mail and voice-mail systems for
internal communication, as well as communication with customers and
suppliers.
Our Competitive Position
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<PAGE>
We believe that the LOHAS industry is characterized by a supplier and
distribution network and we not aware of a dominant leader. Gaiam's goal is to
establish itself as the leader.
The direct marketing business is evolving and competitive. We expect more
business to use the Internet. As this happens, we expect competition to
intensify because barriers to entry are minimal and competitors can launch new
sites at a relatively low cost. In addition, larger, well-established and well-
financed entities may acquire, invest in or form joint ventures with our online
competitors as the use of the Internet and other online services increases.
Increased competition from these or other competitors could reduce our
revenue.
We believe that the principal competitive factors in the direct marketing
business in the LOHAS industry for the goods and services we sell are:
. integrity
. product distinctiveness, quality and performance
. depth of knowledge and research made available to the consumer
. quality of personalized customer service
. creative presentation of product
. brand name recognition
. easy and satisfying shopping experience
Our principal competitors in the direct marketing of goods and services we sell
are:
. catalog retailers such as Feel Good Catalog and Real Goods Trading Company
. online retailers such as mothernature.com and GreenMountain.com
. thousands of small, local and regional businesses.
. product lines or items offered by large retailers, manufacturers,
publishers and video producers
While we believe that we compare favorably with our competitors on the key
competitive factors, we have no control over how successful our competitors are
in addressing these same factors. In addition, the smaller businesses we
compete against may be able to more effectively personalize their relationships
with customers.
We expect industry consolidation to increase competition. As our competitors
grow, they may adopt aggressive pricing or inventory policies, which could
result in reduced operating margins, loss of market share and a diminished brand
franchise.
Some environmentally friendly products are priced at a premium to products that
have similar uses that are not environmentally friendly. Our sales growth
assumes that consumers will sometimes be willing to pay higher prices in order
to enhance the environment, promote a sustainable economy, and achieve healthy
lifestyles and personal development or that we will be able to reduce prices
over time through volume purchases.
Because Gaiam uses multiple distribution channels for our products, we also
compete with other producers of similar mind-body-spirit fitness products sold
to traditional retail stores. Our principal competitors are PPI Entertainment,
Sony Wonder and Goldhil Media.
We believe the principal competitive factors in this market are:
41
<PAGE>
. distinctiveness of product
. authoritative information
. quality of product
. brand recognition
. price
We believe we compete favorably on all relevant factors in direct marketing and
selling to traditional retailers as evidenced by our sales growth. Many of our
competitors are larger, have longer operating histories and have greater
financial and marketing resources than we have.
Our success also depends upon the willingness of consumers to purchase goods and
services that promote the values we espouse. While we believe our business plan
and assumptions are reasonable, we cannot assure you that the demographic trends
on which they are based will continue or that the current levels of
environmental consciousness or concerns about promoting a sustainable economy,
healthy lifestyles and personal development will be sustained. The decrease of
consumer interest in purchasing goods and services that promote the values we
espouse would materially and adversely affect the growth of our customer base
and sales revenues and, accordingly, our financial prospects.
Our Intellectual Property
Gaiam, Gaiam.com, Harmony, InnerBalance and Living Arts and various product
names are subject to trademark or pending trademark applications, of Gaiam or a
Gaiam company. We also currently hold various web domain names relating to our
brand, including "www.gaiam.com."
Our Employees
As of June 30, 1999, Gaiam and the Gaiam companies employed approximately 150
persons. None of our employees is covered by a collective bargaining agreement.
Our Facilities
Our principal executive offices are located in Boulder County, Colorado. Our
main fulfillment center is located in the Cincinnati, Ohio area. This facility
houses most of our fulfillment functions. We selected the Cincinnati site after
considering the availability and cost of facilities and labor, proximity to
major highways, air delivery hubs and support of local government of new
businesses. We also believe that Cincinnati is ideal for providing the lowest
cost shipping available from a single central point to a customer base that
conforms to the overall U.S. population. Approximately 90% of all orders are
filled and shipped from the Cincinnati facility. The balance is shipped
directly from suppliers.
The following table sets forth certain information relating to our facilities,
all of which are leased:
<TABLE>
<CAPTION>
Location Size Use Lease Expiration
- -------- --- --- ----------------
<S> <C> <C> <C>
Boulder County, CO 25,000 sq. ft. Headquarters and customer service October 2001
Outlet center January 2000
Cincinnati, OH 64,000 sq. ft. Fulfillment center October 2000
Santa Monica, CA 5,000 sq. ft. Creative staff offices June 2000
</TABLE>
42
<PAGE>
We have options to renew our headquarters and fulfillment center leases. We
believe our facilities are adequate to meet our current needs and that suitable
additional facilities will be available for lease or purchase when and as we
need.
Regulatory Matters
Our business is subject to a number of governmental regulations, including the
Mail or Telephone Order Merchandise Rule and related regulations of the Federal
Trade Commission. These regulations prohibit unfair methods of competition and
unfair or deceptive acts or practices in connection with mail and telephone
order sales and require sellers of mail and telephone order merchandise to
conform to certain rules of conduct with respect to shipping dates and shipping
delays. We are also subject to regulations of the U.S. Postal Service and
various state and local consumer protection agencies relating to matters such as
advertising, order solicitation, shipment deadlines and customer refunds and
returns. In addition, merchandise imported by Gaiam is subject to import and
customs duties and, in some cases, import quotas.
Gaiam's business could also be affected by regulations promulgated in the
future. For example, there are a number of different bills under consideration
by Congress and various state legislatures that would restrict disclosure of
consumers' personal information, which may make it more difficult for Gaiam to
generate additional names for its direct marketing, and restrict a company's
right to send unsolicited electronic mail or printed materials. Although Gaiam
believes it is generally in compliance with current laws and regulations and
that these laws and regulations have not had a significant impact on our
business to date, it is possible that existing or future regulatory requirements
will impose a significant burden on us.
There is an increasing number of laws and regulations pertaining to the
Internet. In addition, a number of legislative and regulatory proposals are
under consideration by federal, state, local and foreign governments and
agencies. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, online content regulation, user privacy, taxation and quality of
products and services. Moreover, it may take years to determine whether and how
existing laws such as those governing issues such as intellectual property
ownership and infringement, privacy, libel, copyright, trade mark, trade secret,
obscenity, personal privacy, taxation, regulation of professional services,
regulation of medical devices and the regulation of the sale of other specified
goods and services apply to the Internet and Internet advertising. The
requirement that we comply with any new legislation or regulation, or any
unanticipated application or interpretation of existing laws, may decrease the
growth in the use of the Internet, which could in turn decrease the demand for
our products, information and services, increase our cost of doing business or
otherwise have a material adverse effect on our business, results of operations
and financial condition. The adoption of new laws or regulations could reduce
the rate of growth of the Internet, which could potentially decrease the usage
of our online stores or could otherwise materially adversely affect our
business. In addition, applicability to the Internet of existing laws governing
issues such as property ownership, copyrights and other intellectual property
issues, taxation, libel, obscenity and personal privacy is uncertain. The vast
majority of these laws were adopted prior to the advent of the Internet and
related technologies and, as a result, do not contemplate or address the unique
issues of the Internet and related technologies.
Further, several telecommunications carriers have requested the Federal
Communications Commission
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("FCC") to regulate telecommunications over the Internet. Due to the increasing
use of the Internet and the burden it has placed on the current
telecommunications infrastructure, telephone carriers have requested the FCC to
regulate Internet service providers and online service providers and impose
access fees on those providers. If the FCC imposes access fees, the costs of
using the Internet could increase dramatically. This could result in the reduced
use of the Internet as a medium for commerce, which could materially adversely
affect our business.
The Gaiam companies generally collect sales taxes only on sales to residents of
the state in which Gaiam is headquartered, where orders are fulfilled or where
Gaiam has a location, currently, California, Colorado and Ohio.
A number of legislative proposals have been made at the federal, state and local
level, and by foreign governments, that would impose additional taxes on the
sale of goods and services over the Internet and certain states have taken
measures to tax Internet-related activities. Although Congress recently placed a
three-year moratorium on state and local taxes on Internet access or on
discriminatory taxes on electronic commerce, existing state or local laws were
expressly excepted from this moratorium. Further, once this moratorium is
lifted, some type of federal and/or state taxes may be imposed upon Internet
commerce. Legislation or other attempts at regulating commerce over the Internet
may substantially impair the growth of commerce on the Internet and, as a
result, adversely affect our opportunity to derive financial benefit from these
activities.
Legal Proceedings
Gaiam is not a party to any material legal proceedings.
In 1998 we acquired a majority interest in Living Arts. At the time Living Arts
continued to employ one of the previous owners, who held part of a minority
interest in Living Arts. In 1999, Living Arts terminated the employment of this
person for chronic absenteeism, misappropriation of funds and breaching his
various other employment obligations. The former employee has asserted that
Living Arts wrongfully terminated his employment, and that we breached fiduciary
duties by managing Living Arts in a manner designed to injure him, and that we
owe him various amounts of money. Both parties are seeking to resolve these
disputes, but litigation could result. We believe that the former employee's
claims are without merit.
MANAGEMENT
Executive Officers And Directors
Our executive officers and directors, including directors who will join the
board upon conclusion of this offering, their respective ages as of August 30,
1999 and their positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- ----- ------------------------
<S> <C> <C>
Jirka Rysavy 45 Founder, Chairman of the Board and Chief Executive Officer
Lynn Powers 50 President, Chief Operating Officer and Director
Pavel Bouska 45 Executive Vice President and Chief Information Officer
Paul H. Ray 60 Director*
</TABLE>
*Mr. Ray will join the board upon completion of this offering.
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<PAGE>
JIRKA RYSAVY - Founder, Chairman and Chief Executive Officer of Gaiam. He has
been Chairman since Gaiam's inception and became the full-time Chief Executive
Officer in December 1998. Mr. Rysavy is also Chairman Emeritus and a director of
Corporate Express, Inc., a Fortune 500 company that supplies office and computer
products and services. Mr. Rysavy founded Corporate Express in 1986 and was its
Chairman and Chief Executive Officer until September 1998. Previously, he
founded and served as Chairman and Chief Executive Officer of Crystal Market, a
health food market, which was sold to Michael Gilliland in 1987 to become the
first store of Wild Oats Markets. Mr. Rysavy is also a director of Whole Foods
Markets, Inc.
LYNN POWERS - President, Chief Operating Officer and a director of Gaiam since
February 1996. From 1992 to 1996, she was Chief Executive Officer of La Scelta,
an importer of natural fiber clothing products. Before that, Ms. Powers was
Senior Vice President Marketing/Strategic Development and Vice President
Merchandising of Miller's Outpost, a specialty retailer.
PAVEL BOUSKA - Executive Vice President and Chief Information Officer since
March 1999. He served as a director of Gaiam from 1991 until August 1999. Prior
to joining Gaiam, from June 1988 to March 1999, Mr. Bouska was an officer and
one of the founding members of Corporate Express, serving in various positions,
including Chief Information Officer and Vice President Information Systems,
responsible for system development, information technology, operations, systems
conversions and business consolidations. Prior to joining Corporate Express, he
was project leader for Software Design & Management, a German software company
subsequently acquired by Ernst & Young.
PAUL H. RAY - Will become a director of Gaiam at the conclusion of this
offering. Mr. Ray has been Executive Vice President of American LIVES, Inc., a
market research and opinion polling firm since November 1986. Prior to joining
American LIVES, Mr. Ray was Chief of Policy Research on Energy Conservation at
the Department of Energy, Mines and Resources of the Government of Canada from
1981 to 1983. From 1973 to 1981, Mr. Ray was Associate Professor of Urban
Planning at the University of Michigan. Mr. Ray holds a B.A. (cum laude) in
anthropology from Yale University and a Ph.D. in sociology from the University
of Michigan. He is the author of The Integral Culture Survey, which first
identified the cultural creative subculture.
Each director serves for a one-year term. Each officer serves at the discretion
of the Board of Directors. There are no family relationships among any of the
directors or officers of Gaiam.
Our Board of Directors currently has three vacancies, that may be filled by the
Board of Directors. In addition to Mr. Ray, upon conclusion of this offering,
the Board of Directors intends to appoint two directors who are not officers or
employees of Gaiam. To maintain Gaiam's listing on the Nasdaq National Market,
we are required to add at least one director, in addition to Mr. Ray, who is not
an officer or employee of Gaiam. If we do not make this addition within 90 days
following this offering, our shares could be delisted from the Nasdaq National
Market, which would have an adverse effect on the liquidity and price of the
shares.
Committees of the Board of Directors
Gaiam intends to establish an Audit Committee within 90 days following this
offering composed of at least two directors, which is required to maintain
Gaiam's listing on the Nasdaq National Market. The majority of the members of
the Audit Committee will not be employees of Gaiam. The Audit Committee will
report to the Board regarding the appointment of the independent public
accountants of Gaiam, the
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scope and fees of prospective annual audits and the results thereof, compliance
with Gaiam's accounting and financial policies and management's procedures and
policies relative to the adequacy of Gaiam's internal accounting controls.
Following this offering, we also intend to establish a Compensation Committee,
that we expect to be comprised entirely of non-employee directors.
Director Compensation
Currently, directors of Gaiam do not receive any compensation for their services
as directors. Following consummation of this offering, Gaiam expects to
establish a compensation plan for non-employee directors.
Limitation of Liability and Indemnification Matters
Gaiam's charter provides indemnity to its directors and officers to the extent
permitted by Colorado law. The charter also includes provisions to eliminate the
personal liability of its directors and officers to Gaiam and its shareholders
to the fullest extent permitted by Colorado law. Under current law, exculpation
would cover an officer's or director's breaches of fiduciary duty, except
for:
. breaches of a person's duty of loyalty to Gaiam,
. those instances where a person is found not to have acted in good
faith,
. those instances where a person received an improper personal benefit
as the result of the breach, and
. acts in violation of the Colorado Business Corporation Act.
Gaiam's bylaws provide that Gaiam will indemnify its directors, officers and
employees against judgments, fines, amounts paid in settlement and reasonable
expenses.
Executive Compensation
The following table sets forth compensation, for the year ended December 31,
1998, of Gaiam's executive officers, Mr. Rysavy and Ms. Powers. Information is
also included with respect to 1998 Compensation for two of Gaiam's Vice
Presidents:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Principal Position Annual 1998 All Other 1998
-----------
Compensation Compensation
------------ ------------
Salary Bonus
<S> <C> <C> <C>
Jirka Rysavy - Chairman and Chief Executive Officer $ ----(1) $ --- $ ---/(2)/
Lynn Powers - President and Chief Operating Officer 110,009 --- ---/(2)/
Mark Lipien - Vice President Operations 70,802 10,000 ---/(2)/
Linda West - Vice President Merchandising 83,076 10,000 ---/(2)/
</TABLE>
____________________
(1) Gaiam began compensating Mr. Rysavy in January 1999. His annual salary is
currently $125,000.
(2) Until June 1, 1999, Gaiam did not make any restricted stock awards, grant
any stock appreciation rights, make any long-term incentive plan payouts or
grant any stock options.
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Stock Plans
We recently adopted a long-term incentive plan and an employee stock purchase
plan. The incentive plan provides for the grant of stock options and similar
stock based compensation. We have reserved a total of 1,600,000 shares for
options and other grants under the incentive plan. Of that number, we have
granted approximately 675,000 options, all at a price of $4.375 per share. The
employee purchase plan will allow our employees to purchase shares at up to a
15% discount from market value, subject to restrictions. We have reserved a
total of 500,000 shares under the employee purchase plan.
Employment Agreements
Gaiam does not have any employment agreements with any of its executive officers
and does not typically enter into written employment agreements with any
employees. However, Gaiam directors, officers and managers are required to sign
a confidentiality agreement and, upon receiving a stock option grant, a two-year
non-compete agreement commencing with the date they leave Gaiam.
CERTAIN TRANSACTIONS
On October 1, 1998, Mr. Rysavy sold InnerBalance to Gaiam for a $531,000 note
carrying interest at 8% per annum, due June 30, 2001. A portion of the note was
repaid in 1998. On January 1, 1999, Gaiam issued a $289,000 8% debenture to Mr.
Rysavy for the balance. This debenture was repaid in full on June 30, 1999.
On December 7, 1998, Ms. Powers exercised warrants she received in 1996 to
purchase 40,000 shares at $1.25 per share and also purchased $50,000 in
debentures issued by Gaiam. The debenture bears interest at 8% per annum and
may be prepaid at any time by Gaiam. In connection with this offering, Ms.
Powers has the right to purchase shares for the outstanding principal amount of
the debenture at the offering price of $5.00 per share. Accrued and unpaid
interest will be paid in cash.
All sales of securities available for resale made by Gaiam in 1998 and 1999 were
made to a company wholly owned by Mr. Rysavy at prevailing market prices based
on NASDAQ quotations. The proceeds of these sales were $703,125 in 1998 and
$538,750 in 1999. See note 6 of the notes to consolidated financial statements.
We obtained the securities by exercising options granted by Mr. Rysavy to us in
1993.
Gaiam subleases its fulfillment center in Cincinnati, Ohio from a subsidiary of
Corporate Express, Inc. at an annual rental rate of approximately $205,200,
which is the same rate as paid by Corporate Express, Inc. under its lease. Mr.
Rysavy is a director of Corporate Express and beneficially owns approximately
4.9% of the stock of Corporate Express, but does not control Corporate Express.
The lease expires in October 2000.
Michael Gilliland purchased $100,000 of shares and $100,000 in debentures from
us on May 7, 1999. Mr. Gilliland is the founder of the Wild Oats Markets. In
1987, Mr. Rysavy sold a natural foods store in Boulder, Colorado, Crystal
Market, to Mr. Gilliland, and that store became the first Wild Oats Market
store. The shares purchased by Mr. Gilliland were sold at $4.375 per share, and
the debentures he purchased bear interest at 8% per annum and may be prepaid at
any time by Gaiam. Mr. Gilliland has certain registration rights requiring us to
register his shares. See our consolidated financial statements for additional
information relating to this private placement. In connection with this
offering, we are offering Mr. Gilliland the option to purchase shares for the
outstanding principal amount of the
47
<PAGE>
debentures (excluding interest) at the offering price of $5.00 per share. We
anticipate Mr. Gilliand will purchase 20,000 shares in exchange for his
debenture.
Mr. Rysavy is a guarantor of Gaiam's line of credit with Norwest Bank. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
OUR SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the class A and class B common stock of Gaiam by each of our
shareholders who beneficially owned shares on June 30, 1999, and as adjusted to
reflect the sale of the shares offered in this offering. Percentages are based
on the 3,496,429 shares to be outstanding after the offering, plus the 7,035,000
shares reserved for issuance upon conversion of class B common stock. The
address for each person, except as otherwise provided, is 360 Interlocken Blvd.,
Broomfield, Colorado, 80021.
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares to be Beneficially Owned
Prior to this Offering/(11)/ After this Offering/(11)(12)/
----------------------------- -------------------------------
Beneficial Owner Number of Shares/(13)/ Percent Number of Shares/(13)/ Percent
<S> <C> <C> <C> <C>
Jirka Rysavy/(1)/ 8,000,000 93.8% 8,100,000 77.0%
Lynn Powers/(2)/ 40,000 .5% 60,000 .6%
Pavel Bouska/(3)/ 40,000 .5% 60,000 .6%
James Argyropoulos/
Argyropoulos Investor G.P./(4)/ 120,000 1.4% 220,000 2.1%
Michael Gilliland/(5)/ 22,857 .3% 42,857 .4%
Lennart Perlhagen/(6)/ 57,143 .7% 107,143 1.0%
Mo Siegel/(7)/ 17,143 .2% 32,143 .3%
Herbert Simon/(8)/ 57,143 .7% 107,143 1.0%
Edward Snider/(9)/ 57,143 .7% 107,143 1.0%
Jeffrey Steiner/(10)/ 120,000 1.4% 220,000 2.1%
All Executive Officers
and Directors (3 persons) 8,080,000 95.7% 8,220,000 78.2%
</TABLE>
/(1)/ Mr. Rysavy owns 7,035,000 shares of class B common stock, which
constitute all of the issued and outstanding class B common stock and are
convertible into an equal number of shares. Mr. Rysavy also owns 965,000
shares. Includes 100,000 shares Mr. Rysavy will purchase in this
offering. See "Description of Capital Stock -- Shares" for a description
of the voting rights of the class B common stock.
/(2)/ Includes 20,000 shares Ms. Powers will purchase in this offering.
/(3)/ Includes 20,000 shares Mr. Bouska will purchase in this offering
/(4)/ Mr. Argyropoulos is the general partner of Argyropoulos Investor G.P. He
is the founder, and, until 1989, was Chairman, of The Cherokee Group, and
currently is the founder and Chairman of The Walking Company. His address
is 9349 Oso Avenue, Chatsworth, California. Includes 100,000 shares Mr.
Argyropoulos or his entities will purchase in this offering.
/(5)/ Mr. Gilliland is the founder, Chairman and Chief Executive Officer of
Wild Oats Markets. Includes 20,000 shares he will purchase in this
offering.
/(6)/ Mr. Perlhagen is the founder and Chairman of CrossPharma AB; and
currently Chairman of Meda Pharmaceuticals AB. Includes 50,000 shares he
will purchase in this offering.
/(7)/ Mr. Siegel is co-founder and Chairman of Celestial Seasonings, Inc.
Includes 15,000 shares he will purchase in this offering.
/(8)/ Mr. Simon is Chairman of Simon Property Group. Includes 50,000 shares he
will purchase in this offering.
48
<PAGE>
/(9)/ Mr. Snider is the founder and Chairman of Comcast Spectator. Includes
50,000 shares he will purchase in this offering.
/(10)/ Mr. Steiner is the founder, Chairman and Chief Executive Officer of
Fairchild Industries. His address is 110 East 59th Street, New York,
New York 10022. Includes 100,000 shares he will purchase in this
offering.
/(11)/ Each shareholder possesses sole voting and investment power with respect
to the shares listed, except as provided by applicable community
property laws. In accordance with the rules of the Securities and
Exchange Commission, each shareholder is deemed to beneficially own any
shares obtainable upon the exercise of stock options or warrants which
are currently exercisable or which become exercisable within 60 days
after June 30, 1999, or the conversion of convertible securities that
are currently convertible or become convertible within 60 days after
June 30, 1999. The inclusion in this table of shares listed as
beneficially owned does not constitute an admission of beneficial
ownership.
/(12)/ The number and percentage of shares owned after this offering assumes
none of the listed shareholders will purchase additional shares in this
offering, except as otherwise indicated.
/(13)/ The number of shares deemed outstanding includes shares outstanding as of
June 30, 1999 and any shares obtainable through the conversion of class
B common stock held by Mr. Rysavy. No options are exercisable within 60
days of the date of this prospectus. Ownership percentages based solely
on the 1,496,429 shares outstanding prior to this offering are Mr.
Rysavy (965,000 shares) 64.5%; Ms. Powers and Mr. Bouska, 2.7% each;
Argyropoulos Investor G.P./Mr. Argyropoulos and Mr. Steiner, 8.0% each;
Mr. Simon, Mr. Snider and Mr. Perlhagen, 3.8% each; Mr. Gilliland, 1.5%;
and Mr. Siegel, 1.2%. Ownership percentages based solely on the
3,496,429 shares assumed to be outstanding after this offering are Mr.
Rysavy (1,065,000 shares) 30.5%; Ms. Powers and Mr. Bouska, 1.7% each;
Argyropoulos Investor G.P./Mr. Argyropoulos and Mr. Steiner, 6.3% each;
Mr. Simon, Mr. Snider and Mr. Perlhagen, 3.1% each; Mr. Gilliland, 1.2%;
and Mr. Siegel, 0.9%.
49
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
After the filing of Gaiam's Amended and Restated Articles of Incorporation in
connection with this offering, the authorized capital stock of Gaiam will
consist of 250,000,000 shares, consisting of 150,000,000 shares of Class A
common stock, $.0001 par value per share, 50,000,000 shares of class B common
stock, $.0001 par value per share, and 50,000,000 shares of preferred stock, par
value $.0001 per share. As of August 30, 1999, there were 1,496,429 shares
outstanding held by ten shareholders of record, options to purchase an aggregate
of approximately 675,000 shares, a warrant to purchase 24,000 shares and
7,035,000 shares of class B common stock outstanding. There were no shares of
preferred stock outstanding.
Although Gaiam believes the following summary description of Gaiam's shares,
class B common stock, Preferred Stock, Amended and Restated Articles of
Incorporation and Amended and Restated Bylaws covers all material provisions
affecting the rights of holders of capital stock of Gaiam, this summary is not
intended to be complete and is qualified by reference to the provisions of
applicable law and to Gaiam's Amended and Restated Articles of Incorporation and
Amended and Restated Bylaws, both of which are included as exhibits to the
Registration Statement of which this prospectus is a part. See "Additional
Information."
Capital Stock
Each holder of shares is entitled to one vote for each share held on all matters
submitted to a vote of shareholders. Each share of class B common stock is
entitled to ten votes on all matters submitted to a vote of shareholders. There
are no cumulative voting rights. All holders of shares and shares of class B
common stock vote as a single group on all matters that are submitted to the
shareholders for a vote. Accordingly, holders of a majority of the votes of the
shares and shares of class B common stock entitled to vote in any election of
directors may elect all of the directors who stand for election.
Shares and class B common stock are entitled to dividends, if any, as may be
declared by the Board of Directors out of legally available funds. In the event
of a liquidation, dissolution or winding up of Gaiam, the shares and shares of
class B common stock would be entitled to share ratably in Gaiam's assets
remaining after the payment of all of Gaiam's debts and other liabilities.
Holders of shares and shares of class B common stock have no preemptive,
subscription or redemption rights, and there are no redemption or sinking fund
provisions applicable to the shares and class B common stock. The outstanding
shares and shares of class B common stock are, and the shares offered by Gaiam
in this offering will be, when issued and paid for, fully paid and
non-assessable.
The class B common stock may not be transferred unless converted into class A
shares, other than certain transfers to affiliates and family members. The
shares of class B common stock are convertible one-for-one into class A shares,
at the option of the holder of the shares of class B common stock.
50
<PAGE>
Gaiam's Board of Directors is authorized, subject to any limitations prescribed
by Colorado law, to issue at any time up to 50,000,000 shares of preferred
stock. The Board may provide for the issuance of the preferred stock in one or
more series or classes with designations, preferences, limitations and relative
rights determined by the Board without any vote or action by the shareholders,
although the Board may not issue voting preferred stock without the consent or
approval of a majority of the Class B common stock. As a result, the Board has
the power to issue preferred stock with voting, conversion and other rights and
preferences that could adversely affect the voting power or other rights of the
holders of the shares. Although Gaiam has no current plans to issue any
preferred stock, the issuance of preferred stock or of rights to purchase
preferred stock could have the effect of making it more difficult for a third
party to acquire Gaiam, or of discouraging a third party from attempting to
acquire Gaiam. Such an issuance could also dilute your voting power or other
incidents of ownership as a holder of shares.
Bylaws
The Bylaws provide, in accordance with Colorado law, that shareholders may take
action without a shareholders' meeting, provided that all shareholders entitled
to vote consent to do so in writing. The Bylaws also require advance notice of
any proposal to be brought before an annual meeting of shareholders that relates
to an amendment to the Articles of Incorporation, a merger, the sale of all or
substantially all of Gaiam's assets, the dissolution of Gaiam, or any nomination
for election of directors other than by the Gaiam board of directors. These
provisions could have the effect of delaying, deferring or preventing a change
of control of Gaiam.
Transfer Agent and Registrar
The transfer agent and registrar for the shares is American Securities Transfer
& Trust, Inc.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares in the public market following this
offering, or the perception that sales could occur, could adversely effect the
prevailing market price for our shares. Furthermore, since no shares will be
available for sale shortly after this offering because of the contractual and
legal restrictions on resale described below, sales of a substantial number of
shares in the public market after these restrictions lapse could adversely
affect the prevailing market price and impair our ability to raise equity
capital in the future.
Upon the closing of this offering, based upon the number of shares outstanding
as of June 30, 1999, there will be 3,496,429 shares and 7,035,000 shares of
class B common stock outstanding. Of these shares, all 2,000,000 shares sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act, other than shares are purchased by
"affiliates" of Gaiam as that term is defined in Ruled 144 under the Securities
Act or the shares are purchased by holders who have entered into lock-up
arrangements with the underwriters for this offering. See " -- Lock-up
Agreements" below. The remaining 1,496,429 shares and all 7,035,000 shares of
class B common stock will be "restricted securities" as that term is defined in
Rule 144 under the Securities Act. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144, or 144(k) under the Securities Act, which rules
are summarized below.
Following this offering, we intend to file a registration statement under the
Securities Act covering approximately
51
<PAGE>
500,000 shares reserved under our stock employee purchase plan. The registration
statement would permit persons acquiring shares under the plans (other than
persons who have entered into the lock-up agreements referred to below) to sell
the shares in the public market after the shares are purchased under the plans.
The registration statement covering these shares will become effective upon
filing.
Securities Act Rules
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are required to be aggregated), including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of:
. 1% of the then outstanding shares (approximately 35,000 shares immediately
after this offering), or
. the average weekly trading volume of the shares on the Nasdaq National
Market during the four calendar weeks preceding the filing of a notice on
Form 144 with respect to the sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
us.
In addition, under Rule 144(k), a person who is not one of our affiliates at any
time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years (including the holding period
of any prior owner other than an affiliate) is entitled to sell the shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144. Therefore, unless otherwise restricted,
"144(k) shares" may be sold immediately upon the completion of this
offering.
Lock-up Agreements
All of our directors, officers and existing shareholders (who in the aggregate
hold 1,496,429 shares and shares of 7,035,000 class B common stock, and who will
acquire an additional 495,000 shares in this offering) are covered by lock-up
agreements under which they will not be permitted to transfer or otherwise
dispose of, directly or indirectly, any shares or any securities convertible
into or exercisable or exchangeable for shares, for a period of 180 days after
the closing of the offering. Transfers or dispositions can be made sooner:
. with the prior written consent of Tucker Anthony Cleary Gull;
. in the case of certain transfers to affiliates;
. as a bona fide gift; or
. to a trust for the benefit of the transferor or immediate family members of
the transferor.
Upon expiration of the lock-up period, 180 days after the date of this
prospectus, 8,641,429 shares (including 7,035,000 shares of class B common
stock) will be available for resale to the public in accordance with Rule 144,
subject to the transfer restrictions described above.
In addition, Gaiam has agreed not to sell or otherwise dispose of, directly or
indirectly, any shares or any securities convertible into or exercisable or
exchangeable for shares, for a period of 180 days after the
52
<PAGE>
closing of the offering, without the prior written consent of Tucker Anthony
Cleary Gull, except that we may:
. issue shares upon the exercise of outstanding options and grant options
to purchase shares under our incentive plan;
. issue shares under our stock employee purchase plan; and
. issue shares in connection with the acquisition of another company if
the terms of the issuance provide that the shares shall not be resold
prior to the expiration of the 180-day lock-up period described
above.
Registration Rights
After our filing of the registration statement relating to this offering, we are
required to file a registration statement covering approximately 451,429 shares
held by existing shareholders. The holders may not request the filing of
registration statements until after July 20, 2001. Gaiam generally is required
to bear all of the expenses of the registration, except underwriting discounts
and commissions. We have agreed with the underwriters that we will not permit
any of these holders to sell these shares for 180 days after the closing of the
offering. In addition, if these shares are not sold in a registered offering,
the holders will be required to comply with the provisions of Rule 144 as
described above.
UNDERWRITING
The underwriting agreement, dated ____, 1999, provides that subject to certain
conditions, Gaiam has agreed to sell to each of the underwriters named below,
and each of these underwriters has agreed to purchase from Gaiam, the respective
number of shares set forth opposite their names below:
<TABLE>
<CAPTION>
Underwriters: Number of Shares
<S> <C>
Tucker Anthony Cleary Gull......................... 1,000,000
Adams, Harkness & Hill, Inc........................ 1,000,000
Total......................................... 2,000,000
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an over-allotment option to buy up to an
additional 300,000 shares from Gaiam at $5.00 per share to cover these sales.
They may exercise that option for 30 days after the initial sale of the shares
to the underwriters. If any of these optioned shares are purchased, the
underwriters will purchase shares in approximately the same proportion as set
forth in the table above. The underwriters must purchase and accept delivery of
all the shares offered in this prospectus, other than those shares covered by
the over-allotment option, if any are purchased.
The following table shows the underwriting fees to be paid to the underwriters
by Gaiam in connection with this offering. These amounts are shown assuming both
no exercise and full exercise of the underwriters' option to purchase additional
shares, and assuming that 1,400,000 shares are sold at the public offering price
of $5.00 per share and 600,000 shares are sold at the customer discount price of
$4.50 per share.
<TABLE>
<CAPTION>
No Exercise Full Exercise
<S> <C> <C>
Per share (customer discount)...... $0.45 $0.45
</TABLE>
53
<PAGE>
<TABLE>
<S> <C> <C>
Per share.......................... $0.50 $0.50
Total.............................. $970,000 $1,120,000
</TABLE>
Gaiam will pay offering expenses in connection with the opening of accounts for
Gaiam customers, estimated to be approximately $400,000. The compensation to be
paid to the underwriters and Gaiam's agreement to reimburse the underwriters for
expenses associated with opening accounts were determined through negotiations
between Gaiam and the underwriters.
In connection with this offering, we are offering each of our debenture holders
the option to purchase shares for the outstanding principal amount of the
debentures (excluding interest) at the offering price of $5.00 per share. As a
result, a total of 395,000 shares will be sold to the debenture holders,
assuming that each of the debenture holders elects to purchase shares in this
offering. In addition, we will offer Mr. Rysavy the opportunity to purchase
100,000 shares at the offering price of $5.00 per share. The result of these
offers is that 1,505,000 shares will be available for sale to Gaiam customers
and the public in this offering.
If more requests for shares are received than Gaiam is offering, Gaiam and the
underwriters intend to prioritize the allocation process so that Gaiam customers
will be able to buy at least 50 shares, although it may not be possible to
allocate 50 shares to each customer who requests shares. Our customers will
receive a 10% discount from the initial public offering price set forth on the
cover of this prospectus (a discount of $.50 per share, resulting in a purchase
price of $4.50 per share) on the first 200 shares purchased per customer. Gaiam
employees may also take advantage of the customer discount. Any shares not sold
to customers and employees at the discounted price will be offered by the
underwriters to the public at $5.00 per share.
If more requests for shares are received than Gaiam is offering, Gaiam and the
underwriters intend to allocate at least 80% of the available shares, or
approximately 1,200,000 shares, to Gaiam customers. Shares will be allocated to
customers in three ways. A total of approximately 500,000 shares will be
allocated on a first come, first served basis based on the date on which
customers' account applications and checks are received by the underwriters. A
total of approximately 500,000 shares will be allocated to customers based on
the size of customer's purchases from Gaiam over the past 12 months or allocated
to Gaiam employees, consultants, contractors or family members, provided they
are also Gaiam customers. Finally, a total of approximately 200,000 shares will
be allocated to customers by lottery.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $__ per share from the $5.00 initial public offering price.
Any securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $__ per share from
the $5.00 initial public offering price.
An electronic final prospectus will be available on Gaiam's website,
www.gaiam.com, and the underwriters' websites, www.tucker-anthony.com and
www.ahh.com.
Gaiam, its directors, officers and existing shareholders have agreed with the
underwriters not to dispose of any of their shares or securities convertible
into or exercisable or exchangeable for shares during the period from the date
of this prospectus continuing through the date 180 days after the closing of the
offering, except with the prior written consent of Tucker Anthony Cleary Gull or
in certain limited circumstances. Please see "Shares Available for Future Sale"
for a discussion of certain transfer restrictions.
54
<PAGE>
The underwriters have informed us that they do not intend to confirm sales to
any account over which they exercise discretionary authority.
In connection with this offering, the underwriters may purchase and sell the
shares in the open market. These transactions may include over-allotment and
stabilizing transactions and purchases to cover short positions created in
connection with this offering. Stabilizing transactions consist of certain bids
or purchases made for the purpose of preventing or retarding a decline in the
market price of the shares. Short positions involve the sale by the underwriters
of a greater number of shares than they are required to purchase from Gaiam in
this offering. These activities may stabilize, maintain or otherwise affect the
market price of the shares, which may as a result be higher than the price that
might otherwise prevail in the open market. These transactions may be effected
on the Nasdaq National Market, in the over-the-counter market or otherwise, and
may, if commenced, be discontinued at any time.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be $5.00 per share. The initial public
offering price has been negotiated among Gaiam and the underwriters. In
determining the initial public offering price of the shares, Gaiam and the
underwriters considered prevailing market conditions, Gaiam's historical
performance, estimates of Gaiam's business potential and earnings prospects, an
assessment of Gaiam's management and industry, and the consideration of the
above factors in relation to market valuations of companies in related
businesses.
We will apply to have the shares quoted for trading on the Nasdaq National
Market under the symbol "GAIA." We anticipate that the offering will close on
approximately October __, 1999, at which point our shares will begin trading on
the Nasdaq National Market. There will not a be a when issued market in the
shares prior to the closing of the offering.
We have agreed to indemnify the underwriters against or contribute to losses
arising out of certain liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be passed
on for Gaiam by Bartlit Beck Herman Palenchar & Scott, Denver, Colorado. Certain
legal matters will be passed upon for the underwriters by Dorsey & Whitney LLP,
Denver, Colorado.
EXPERTS
Ernest & Young LLP, independent auditors, have audited the consolidated
financial statements and schedule of Gaiam, Inc. at December 31, 1998 and 1997,
and for the years then ended and the financial statements of Healing Arts
Publishing, LLC at December 31, 1998 and for year then ended, as set forth in
their reports. The consolidated statements of income, stockholders' equity and
cash flows of Gaiam, Inc. at December 31, 1996 and for the year then ended have
been audited by Wendell T. Walker and Associates, independent auditors as set
forth in their report. We've included the financial statements and schedule of
Gaiam, Inc. and the financial statements of Healing Arts Publishing, LLC in this
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's reports and Wendell T. Walker and Associates' reports, given on
their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
55
<PAGE>
We have filed with the U.S. Securities and Exchange Commission a registration
statement on Form S-1, including various exhibits and schedules, under the
Securities Act covering the shares to be sold in this offering. This prospectus
does not contain all of the information set forth in the registration statement
and the related exhibits and schedules. Whenever we make reference in this
prospectus to any of our contracts, agreements or other documents, the
references are intended to set forth the material information regarding these
contracts agreements or other documents. These references, however, are not
necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract, agreement or other
document.
You may read without charge and copy at prescribed rates all or any portion of
Gaiam's registration statement or any reports, statements or other information
Gaiam files at the Commission's public reference room at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's
regional offices located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You can also request copies of these documents upon payment of a
duplicating fee, by writing to the Commission. Please call the Commission at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Gaiam's Commission filings, including the registration statement, will
also be available to you on the Commission's Internet site (www.sec.gov).
After this offering, we intend to send to its shareholders annual reports
containing audited consolidated financial statements and quarterly reports
containing unaudited consolidated financial statements for the first three
quarters of each fiscal year.
56
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Gaiam, Inc. Page
<S> <C>
Report of Independent Auditors - Ernst & Young LLP........................ F-1
Independent Auditors' Report -Wendell T. Walker & Associates.............. F-2
Consolidated Financial Statements at December 31, 1998
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Income.................................... F-4
Consolidated Statements of Stockholders' Equity...................... F-5
Consolidated Statements of Cash Flows................................ F-6
Notes to Consolidated Financial Statements........................... F-7
Unaudited Pro Forma Statement of Operations............................... F-20
Report of Independent Auditors - Ernst & Young LLP........................ F-23
Financial Statements of Healing Arts Publishing, LLC
at December 31, 1998
Balance Sheet........................................................ F-24
Statement of Operations.............................................. F-25
Statement of Stockholders' Deficit and Members Equity................ F-26
Statement of Cash Flows.............................................. F-27
Notes to Financial Statements........................................ F-28
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Gaiam, Inc.
We have audited the accompanying consolidated balance sheets of Gaiam, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended. Our audits also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Gaiam, Inc. and
subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Denver, Colorado
June 4, 1999,
except for Notes 1 and 11, as to
which the date is ________, 1999
The foregoing report is in the form that will be signed upon the effective date
of the Company's registration of Class A Common Stock in a registration
statement on Form S-1 and the concurrent 2.5 to 1 reverse stock split of the
Company's common shares.
/s/ ERNST & YOUNG LLP
Denver, Colorado
July ________, 1999
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Gaiam, Inc.
We have audited the accompanying consolidated statement of income of Gaiam,
Inc., and subsidiaries, as of December 31, 1996, and the related statement of
stockholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gaiam, Inc., and subsidiaries,
and the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ WENDELL T. WALKER AND ASSOCIATES, P.C.
Boulder, Colorado
September 12, 1997
F-2
<PAGE>
GAIAM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 June 30
1997 1998 1999
-------------------------------------------------------------
Assets (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $1,611,793 $ 1,409,939 $ 856,045
Securities available-for-sale 38,333 1,633,905 1,505,000
Accounts receivable, net of allowance for
doubtful accounts of $31,000 in 1997
and $67,915 in 1998 111,424 2,579,927 1,088,054
Accounts receivable, other 109,957 13,995 42,608
Note receivable 154,391 9,351 100,481
Inventory, less allowances 1,648,083 3,393,712 3,914,887
Deferred advertising costs 1,028,680 1,757,845 1,746,613
Prepaid assets 76,894 68,367 474,729
Other current assets - 215,469 438,697
-------------------------------------------------------------
Total current assets 4,779,555 11,082,510 10,167,114
Property and equipment, net 1,096,888 1,079,694 992,029
Capitalized production costs, net - 672,438 824,607
Video library, net - 3,543,764 3,422,894
Other assets 108,124 298,106 432,114
-------------------------------------------------------------
Total assets $5,984,567 $16,676,512 $15,838,758
=============================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $2,152,739 $ 6,900,492 $ 3,185,557
Accrued liabilities 473,504 1,456,338 1,194,064
Accrued Royalties - 804,772 511,928
Capital lease obligations, current 46,693 42,261 25,707
Margin loan payable 1,359,130 575,288 -
Convertible debentures, related party - 550,000 1,975,000
Income taxes payable 311,702 242,271 133,672
Deferred tax liability - 592,566 606,540
-------------------------------------------------------------
Total current liabilities 4,343,768 11,163,988 7,632,468
Deferred tax liability 24,113 59,809 -
Capital lease obligations, long-term 42,275 25,588 14,253
Convertible debentures and other borrowings, related party - 273,051 -
Note payable, related party -
Line of credit - - 1,650,000
Minority interest - 1,492,941 1,326,119
Stockholders' equity:
Class A common stock, $.0001 par value,
92,965,000 shares authorized, 1,005,000
and 1,165,000 shares issued and
outstanding at December 31 1997 and
1998, respectively 101 117 149
Class B common stock, $.0001 par value,
7,035,000 shares authorized, issued and
outstanding at December 31 1997
and in 1998 704 704 704
Additional paid-in capital 133,833 377,634 1,827,602
Accumulated other comprehensive income - 983,126 910,279
Retained earnings 1,439,773 2,299,554 2,477,184
-------------------------------------------------------------
Total stockholders' equity 1,574,411 3,661,135 5,215,918
-------------------------------------------------------------
Total liabilities and stockholders' equity $5,984,567 $16,676,512 $15,838,758
=============================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
GAIAM, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended Six months
December 31 ended June 30
1996 1997 1998 1998 1999
--------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue $14,800,993 $19,897,690 $30,738,540 $10,474,976 $17,563,080
Cost of goods sold 6,762,500 8,462,151 13,173,536 4,414,408 7,074,663
--------------------------------------------------------------------------------------
Gross profit 8,038,493 11,435,539 17,565,004 6,060,568 10,488,417
Expenses:
Selling and operating 9,253,263 10,427,258 14,186,215 5,249,717 8,877,360
Corporate, general and
administration 1,217,436 1,574,770 2,393,946 635,723 1,795,610
--------------------------------------------------------------------------------------
Total expenses 10,470,699 12,002,028 16,580,161 5,885,440 10,672,970
--------------------------------------------------------------------------------------
Income (loss) from operations (2,432,206) (566,489) 984,843 175,128 (184,553)
Other income (expense):
Realized gain (loss) on sale of
securities and other 3,094,390 1,820,034 696,992 (25,266) 409,688
Interest expense (110,549) (236,699) (308,501) (88,672) (207,926)
--------------------------------------------------------------------------------------
Other income (expense), net 2,983,841 1,583,335 388,491 (113,938) 201,762
--------------------------------------------------------------------------------------
Income before income taxes and
minority interest 551,635 1,016,846 1,373,334 61,190 17,209
Provision for income taxes 211,935 362,534 251,955 22,437 6,401
Minority interest in net income
(loss) of consolidated
subsidiary, net of tax - - 261,598 - (166,822)
--------------------------------------------------------------------------------------
Net income $ 339,700 $ 654,312 $ 859,781 $ 38,753 $ 177,630
======================================================================================
Net income per share:
Basic $0.04 $0.08 $0.11 $0.00 $0.02
Diluted 0.04 0.08 0.11 $0.00 $0.02
Shares used in computing net income
per share:
Basic 8,040,000 8,040,000 8,072,877 8,040,000 8,317,822
Diluted 8,040,000 8,040,000 8,118,792 8,040,000 8,564,932
</TABLE>
See accompanying notes.
F-4
<PAGE>
GAIAM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Class A Class B Additional Compre-
Common Stock Common Stock Paid-in hensive Retained
Shares Amount Shares Amount Capital Income Earnings Total
------------------- ----------------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 1,005,000 $101 7,035,000 $704 $ 133,833 $ - $ 445,761 $ 580,399
Net income - - - - - - 339,700 339,700
------------------- ----------------- ----------- -------------- ---------- ----------
Balance at December 31 1996 1,005,000 101 7,035,000 704 133,833 - 785,461 920,099
Net income - - - - - - 654,312 654,312
------------------- ----------------- ----------- -------------- ---------- ----------
Balance at December 31, 1997 1,005,000 101 7,035,000 704 133,833 - 1,439,773 1,574,411
Issuance of common stock 160,000 16 - - 574,984 - - 575,000
Return of capital to shareholder
through Purchase of Inner
Balance Inc. - - - - (331,183) - - (331,183)
Comprehensive income:
Net income - - - - - - 859,781 859,781
Other comprehensive income:
Increase in fair market
value of securities
available for sale, net of
tax of $618,578 - - - - - 983,126 - 983,126
----------
Total comprehensive income 1,842,907
------------------- ----------------- ----------- -------------- ---------- ----------
Balance at December 31, 1998 1,165,000 117 7,035,000 704 377,634 983,126 2,299,554 3,661,135
Issuance of common stock 331,429 32 - - 1,449,968 - - 1,450,000
(unaudited)
Comprehensive income:
Net income (unaudited) - - - - - - 177,630 177,630
Other comprehensive income:
Increase in fair market value
of securities available
for sale, net of reclassification
adjustment (see disclosure),
net of tax of $ 572,743
(unaudited) - - - - - ( 72,847) - ( 72,847)
----------
Total comprehensive income
(unaudited) 104,783
------------------- ----------------- ----------- -------------- ---------- ----------
Balance at June 30, 1999
(unaudited) 1,496,429 $149 7,035,000 $704 $1,827,602 $ 910,279 $2,477,184 $5,215,918
=================== ================= =========== ============== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
GAIAM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended Six months ended
December 31 June 30
1996 1997 1998 1998 1999
------------------------------------------------------------------------
Operating activities (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net income $ 339,700 $ 654,312 $ 859,781 $ 38,753 $ 177,630
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 265,151 241,985 240,431 189,597 152,549
Amortization 1,062 2,785 85,466 - 120,870
Interest expense added to principal of margin loan - 175,562 116,158 51,106 7,411
Minority interest in consolidated subsidiary - - 261,598 - (166,822)
Provision for doubtful accounts - - 258,993 - -
Realized gains on sale of securities and property and
equipment (3,621,047) (1,902,802) (691,137) - (482,692)
Deferred tax expense 52,493 50,832 9,684 - (45,835)
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable 11,633 (62,317) (1,905,275) 85,457 1,463,260
Inventory (672,020) (4,536) (591,519) 207,391 (521,175)
Deferred advertising costs (398,058) (371,840) (243,630) (378,429) 11,232
Capitalized production costs - - (212,361) - (152,169)
Prepaid assets 46,415 (55,982) 8,527 (36,819) (406,362)
Other assets - 1,839 (266,757) (406,950) (357,236)
Accounts payable 1,620,973 (267,316) 2,569,358 (190,802) (3,714,935)
Accrued liabilities (85,634) (133,528) 329,672 (84,717) (579,287)
Income taxes payable (261,762) 390,521 (69,784) (289,663) (108,599)
------------------------------------------------------------------------
Net cash provided by (used in) operating activities (2,701,094) (1,280,485) 759,205 (815,076) (4,602,160)
Investing activities
Purchase of property, equipment and other assets (2,829,179) (157,987) (134,378) (143,251) (64,884)
Proceeds from the sale of property and equipment - 1,440,409 32,090 32,090 -
Proceeds from the sale of securities available-for-sale 3,800,000 1,931,250 477,500 538,750
Payments for acquisitions, net of cash acquired - - (1,656,611) - -
Payments (borrowings) on notes receivable (232,066) 361,259 145,040 (2,095) (91,130)
------------------------------------------------------------------------
Net cash provided by (used in) investing activities 738,755 3,574,931 (1,136,359) (113,256) 382,736
Financing activities
Principal payments on capital leases - (40,989) (49,699) (30,130) (27,889)
Proceeds from sale of stock - - 575,000 - 1,450,000
Proceeds from convertible debt - - 549,999 - 1,151,949
Net proceeds from (payments on) borrowings, net 1,923,681 (1,021,875) (900,000) - 1,091,470
------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,923,681 (1,062,864) 175,300 (30,130) 3,665,530
------------------------------------------------------------------------
Net change in cash and cash equivalents (38,658) 1,231,582 (201,854) (958,462) (553,894)
Cash and cash equivalents at beginning of year 418,869 380,211 1,611,793 1,611,793 1,409,939
------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 380,211 $ 1,611,793 $ 1,409,939 $ 653,331 856,045
========================================================================
Supplemental cash flow information
Interest paid $ 128,282 $ 237,147 $ 126,025 3,740 166,824
Income taxes paid 238,654 312,100 312,100 115,000
Note receivable in connection with the sale of property
and equipment - 154,391 - - -
</TABLE>
See accompanying notes
F-6
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1998 is unaudited.)
1. Summary of Significant Accounting Policies
Organization
Gaiam, Inc. (the "Company") was incorporated under the laws of the State of
Colorado on July 7, 1988. The Company's primary business is providing
information, goods, and services to customers who value the environment, a
sustainable economy and healthy lifestyles.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company, its subsidiaries and partnerships in which ownership is 50% or greater
and considered to be under the control of the Company. All material
intercompany accounts and transaction balances have been eliminated in
consolidation.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents includes
demand deposit accounts with financial institutions and all highly liquid
investments with an original maturity of three months or less.
Securities Available-for-Sale
Securities available-for-sale consist of equity securities and are recorded at
market value for 1998 (see Note 6). All unrealized gains or losses, net of tax,
are recorded as a separate component of stockholders' equity.
Provision for Doubtful Accounts
The Company records a provision for doubtful accounts for all receivables not
expected to be collected.
Interim Financial Statements
The consolidated results as of June 30, 1999, and for the six months ended
June 30, 1998 and 1999 are unaudited, but included all adjustments (consisting
only of normal recurring accruals) that the Company considers necessary for a
fair presentation of its financial position as of such date and results of
operations and cash flows for such period. The results of operations for the
six months ended June 30, 1999 are not necessarily indicative of results for
a full year.
F-7
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
1. Summary of Significant Accounting Policies (continued)
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share (Statement No. 128). Statement
No. 128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented and conform to the Statement No. 128 requirements.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1997 1998 1998 1999
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Numerator for basic earnings per share $ 339,700 $ 654,312 $ 859,781 $ 38,753 $ 177,630
Effect of Dilutive Securities:
8% convertible debentures - - 19,234 - 24,245
--------------------------------------------------------------
Numerator for diluted earnings per share $ 339,700 $ 654,312 $ 879,015 $ 38,753 $ 201,875
==============================================================
Denominator:
Weighted average shares for basic
earnings per share 8,040,000 8,040,000 8,072,877 8,040,000 8,317,822
Effect of Dilutive Securities:
Convertible debentures - - 41,153 - 247,110
Stock warrants - - 4,762 - -
--------------------------------------------------------------
Denominators for diluted earnings per
share--adjusted weighted average
shares and assumed conversion 8,040,000 8,040,000 8,118,792 8,040,000 8,564,932
==============================================================
Net income per share--basic $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.02
Net income per share--diluted $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.02
</TABLE>
F-8
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
1. Summary of Significant Accounting Policies (continued)
In 1998, basic earnings per share data was computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share was adjusted for the assumed conversion of all
potentially dilutive securities including warrants to purchase common stock. In
1997 and 1996, the computations do not reflect the warrants as there is no
dilutive effect.
Inventory
Inventory, consisting of finished goods, net of valuation allowances of $79,016
and $198,744 at December 31, 1997 and 1998, is stated at the lower of cost
(first-in, first-out method) or market.
Depreciation and Amortization
Depreciation of property and equipment, including amortization recorded under
capital leases, is computed on the straight-line method over estimated useful
lives of five to seven years for furniture and equipment and ten years for
leasehold improvements.
Capitalized Production Costs
Capitalized production costs include costs incurred to produce instructional
videos marketed by the Company to retail and direct-mail customers. These costs
are deferred for financial reporting purposes until the videos are released,
then amortized over succeeding periods on the basis of estimated sales.
Historical sales statistics are the principal factor used in estimating the
amortization rate. Accumulated amortization at December 31, 1998 was $927,331.
Long-Lived Assets
The carrying values of intangible and other long-lived assets are reviewed
quarterly to determine if any impairment indicators are present. If it is
determined that such indicators are present and the review indicates that the
assets will not be recoverable, based on undiscounted estimated cash flows over
the remaining amortization and depreciation period, their carrying values are
reduced to estimated fair market value. Impairment indicators include, among
other conditions, cash flow deficits, an historic or anticipated decline in
revenue or operating profit, adverse legal or regulatory developments,
accumulation of costs significantly in excess of amounts originally expected to
acquire the asset and a material decrease in the fair value of some or all of
the assets. Assets are grouped at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows generated
by other asset groups.
F-9
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
1. Summary of Significant Accounting Policies (continued)
Deferred Advertising Costs
Deferred costs primarily relate to preparation, printing and distribution of
catalogs. Such costs are deferred for financial reporting purposes until the
catalogs are distributed, then amortized over succeeding periods (not to exceed
seven months) on the basis of estimated sales. Historical sales statistics are
the principal factor used in estimating the amortization rate. Other
advertising and promotional costs are expensed as incurred. Advertising costs
incurred were $3,019,320, $4,866,223 and $7,121,648 for the years ended December
31, 1996, 1997, and 1998, respectively.
Revenues
The Company recognizes revenue at the time merchandise is shipped to the
customer. Amounts billed to customers for postage and handling charges, which
approximate $1.2 million for 1996, $1.7 million for 1997 and $2.2 million for
1998, are recognized as revenue at the time that the revenues on the product
shipments are recognized. The company provides a reserve for expected future
returns at the time the sale is recorded based upon historical experience.
The Company's sales are attributable mainly to sales within the U.S., with a
very small percentage, less than 1% of sales, to international customers. No
customer represented more than 10% of sales for either the years ended December
31, 1996, 1997 and 1998. The Company generally does not require collateral.
Realized gain on sale of securities and other for the year ended December 31,
1996 includes $782,053 of expenses relating to the May 1995 acquisition of the
catalog sales division of Seventh Generation. The terms of the acquisition
required the Company to enter into a licensing agreement for the use of the
Seventh Generation name, an operating agreement and a supply agreement. The
supply agreement required the Company to purchase a specified dollar amount of
products at a specified markup. The Company also incurred costs related to the
abandonment of acquired equipment and facilities and relocation expenses for
warehouse and office operations.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
securities available-for-sale, accounts receivable, payables and debt
obligations. The carrying values of these financial instruments as reported in
the accompanying balance sheets are assumed to approximate their fair value.
F-10
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
1. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company provides for income taxes pursuant to the liability method as
prescribed in Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. The liability method requires recognition of deferred income
taxes based on temporary differences between financial reporting and income tax
bases of assets and liabilities, using currently enacted income tax rates and
regulations.
Reclassifications
Certain reclassifications have been made to the December 31, 1996 financial
statements to conform to the December 31, 1997 and 1998 financial statement
presentation. Such reclassifications have had no effect on net income
previously reported.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
Actual results could differ from those estimates.
Reporting Comprehensive Income
During 1998, the Company adopted the Financial Accounting Standards Board
("FASB") issued Statement No. 130, Reporting on Comprehensive Income ("Statement
No. 130"). Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
During 1998, the Company adopted Statement of Financial Accounting Standard No.
131, Disclosures About Segments of an Enterprise and Related Information,
("Statement No. 131") which requires reporting of summarized financial results
for operating segments and establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company
evaluates performance based on two different operating segments: direct-to-
customer and business-to-business operations. For 1996 and 1997, direct-to-
customer operations was the only significant operating segment.
The reclassification adjustment for gains included in net income, net of tax of
$572,743 include unrealized gains of $239,257 and realized gains of $312,104.
F-11
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
2. Property and Equipment
At December 31, 1997 and 1998, property and equipment, stated at cost, consists
of the following:
<TABLE>
<CAPTION>
December 31
1997 1998
-------------------------------------
<S> <C> <C>
Furniture and equipment $ 424,196 $ 614,804
Leasehold improvements 270,937 288,324
Computer equipment 754,000 965,449
Warehouse equipment 210,026 210,033
-------------------------------------
1,659,159 2,078,610
Accumulated depreciation and
amortization (562,271) (998,916)
-------------------------------------
$1,096,888 $1,079,694
=====================================
</TABLE>
3. Margin Loan Payable
The Company has a margin loan agreement with a brokerage firm that is due on
demand. The Company has pledged 265,000 shares of its securities available-for-
sale (see Note 6) as collateral for the loan. The interest rate charged on the
loan varies depending on market rates and was 7.0% at December 31, 1998.
Interest incurred on the balance of the loan is added to the outstanding balance
payable.
4. Convertible Debentures
As of December 31, 1998, the Company had $823,051 issued in 8% convertible
debentures to three individuals. Of the total outstanding, $323,051 was issued
to two officers of the Company, the President and the Chief Executive Officer of
the Company. The debentures are payable on the earlier of September 30, 1999 or
the closing of an initial public offering. The debentures are automatically
converted to shares of Class A common stock at the initial public offering per
share price. The debenture payable to the Chief Executive Officer of the
Company is due December 31, 2000. The debenture is convertible, at the option
of the officer, upon the closing of the initial public offering by the Company,
into shares of common stock at the initial public offering per share price.
F-12
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
5. Leases
At December 31, 1997 and 1998, the Company's property held under capital leases
consisted of the following, which is included in property and equipment:
<TABLE>
<CAPTION>
December 31
1997 1998
---------------------------------
<S> <C> <C>
Warehouse equipment $ 40,229 $ 40,229
Computer equipment 130,822 130,822
---------------------------------
171,051 171,051
Accumulated amortization (47,867) (79,777)
---------------------------------
$123,184 $ 91,274
=================================
</TABLE>
The Company leases equipment and office, retail, and warehouse space through
capital and operating leases. The following schedule represents the annual
future minimum payments, as of December 31, 1998:
<TABLE>
<CAPTION>
Capital Operating
------------------------------
<S> <C> <C>
1999 $ 46,012 $ 621,601
2000 22,680 419,038
2001 4,212 142,566
2002 - 3,540
------------------------------
Total minimum lease payments 72,904 $1,186,745
==============
Less portion related to interest (5,055)
-------------
Present value of future minimum lease payments 67,849
Less current portion (42,261)
-------------
$ 25,588
=============
</TABLE>
The Company incurred rent expense of $652,974, $508,590 and $646,886 for the
years ended December 31, 1996, 1997, and 1998, respectively.
6. Securities Available-for-Sale
Securities available-for-sale consist of 315,000 shares of common stock from one
issuer. The cost and fair value of the securities at December 31, 1998 were
$32,200 and $1,633,905, respectively. The fair market value of the shares was
determined by using the closing NASDAQ price of the common stock at December 31,
1998.
F-13
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
6. Securities Available-for-Sale (continued)
For the year ended December 31, 1997, the securities were considered restricted
as a related party, controlled by the majority owner and chief executive officer
of the Company, had the right to require the Company to donate any and all
unsold shares to a not-for-profit organization. This requirement could be made
at the sole discretion of the third party and expired in fiscal 1998. Given
this restriction, the Company had recorded the restricted securities at cost.
The Company did not believe it could attribute a fair market value to the
securities in 1997 as a result of the restriction. However, if unrestricted,
the fair market value would be $4,828,125 based on quoted market prices. During
1997, the Company sold 150,000 shares at a market value of $1,932,000 to a
related party, and recognized a gain of $1,904,242 on the sale.
For the year ended December 31, 1998, the securities were no longer restricted
and were recorded at fair market value. The fair market value of the shares was
$1,633,905, which was determined by using the closing NASDAQ price of the common
stock on
December 31, 1998. During 1998, the Company sold 60,000 shares at a market
value of $703,125 to a related party, and recognized a gain of $696,992 on the
sale.
7. Income Taxes
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
December 31
1996 1997 1998
--------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $139,308 $269,919 $197,142
State 20,134 41,783 45,129
--------------------------------------------------
159,442 311,702 242,271
Deferred:
Federal 45,456 34,420 25,852
State 7,037 16,412 (16,168)
--------------------------------------------------
52,493 50,832 9,684
--------------------------------------------------
Total $211,935 $362,534 $251,955
==================================================
</TABLE>
F-14
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
7. Income Taxes (continued)
Variations from the federal statutory rate are as follows:
<TABLE>
<CAPTION>
December 31
1996 1997 1998
----------------------------------------------------
<S> <C> <C> <C>
Expected federal income tax expense at
statutory rate of 34% $187,556 $345,728 $ 466,934
Effect of legal judgment - permanent
difference - - (251,609)
Effect of other permanent differences 2,172 (16,983) 20,276
State income tax expense, net of federal
benefit 22,207 33,789 16,354
----------------------------------------------------
Income tax expense $211,935 $362,534 $ 251,955
====================================================
</TABLE>
The legal judgment was a liability acquired in the purchase of a 67% interest in
Healing Arts Publishing. This $740,000 liability paid by the Company in 1998
resulted in a permanent tax benefit.
Deferred income taxes reflect net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The components of the net
accumulated deferred income tax liability as of December 31, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
December 31
1997 1998
----------------------------------
<S> <C> <C>
Deferred tax assets:
Reserve for bad debts $ 13,428 $ 26,012
Deferred tax liabilities:
Securities available-for-sale - (618,578)
Amortization (1,956) (2,435)
Depreciation (35,585) (57,374)
----------------------------------
(37,541) (678,387)
----------------------------------
Deferred tax liability, net $(24,113) $(652,375)
==================================
</TABLE>
F-15
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
8. Stockholders' Equity
The Company had warrant certificates outstanding that entitled the holder to
five warrants to purchase 40,000 shares of common stock at $1.25 per share. The
warrants were held by the Company's President and were exercised in December
1998 for $50,000
The Company had warrant certificates outstanding during the year and at December
31, 1998 that entitled the holder to purchase 24,000 shares of Class A common
stock at $.50 per share. The warrants are exercisable in a two year period
beginning January 20, 2002 and ending January 9, 2004.
During 1998, the Company's shareholders voted to increase the authorized shares
of stock, create two classes of common stock and split the existing outstanding
shares on a 20,000-to-1 basis. These changes have been reflected retroactively
in the Company's consolidated financial statements. The Class B common stock is
owned entirely by the Company's founder and Chief Executive Officer and is
restricted as to its sale or transfer. Each share of Class A common stock is
entitled to one vote, while each share of Class B common stock is entitled to 10
votes.
9. Business Acquisitions
On September 14, 1998, the Company acquired a 67% ownership in Healing Arts
Publishing. The acquired company produces videos that are informational and
fitness oriented. The acquisition was accounted for using the purchase method
of accounting for a total consideration of approximately $2.5 million. Results
of operations for the Healing Arts entity for the period from the acquisition
date through December 31, 1998 are included in the consolidated financial
statements of the Company. As part of the purchase, in addition to tangible
assets, the Company acquired a video library which is being amortized using the
straight line method over a period of 15 years.
On October 1, 1998, the Company acquired all of the stock and net assets of
InnerBalance Health, Inc. from a related party who is the founder and Chief
Executive Officer of the Company. The acquired entity provides similar services
as the Company. As these were companies under common control, the Company
accounted for the purchase using historical cost. Therefore, the excess of the
purchase price of $523,677 over the value of net assets was accounted for as a
return of capital to the primary shareholder. The payment was made partially
through a transfer of stock and a subordinated debenture with the related party.
Results of operations for the InnerBalance Health entity for the period from the
acquisition date through December 31, 1998 are included in the consolidated
financial statements of the Company.
The following represents the unaudited pro forma results of operations as if the
above noted acquisitions had occurred as of January 1, 1998 and at the beginning
of the immediately preceding period:
<TABLE>
<CAPTION>
Years ended December 31
1997 1998
-----------------------------------
(Unaudited)
<S> <C> <C>
Revenues $27,222,601 $38,063,794
Net income 625,257 34,128
Net income per common share 0.08 0.00
</TABLE>
F-16
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
9. Business Acquisitions (continued)
The December 31, 1997 pro forma results exclude a $975,000 unusual legal
settlement that occurred during 1997.
10. Related Party Transactions
In 1997, the Company entered into separate fulfillment agreements with
InnerBalance Health (which was acquired by the Company during 1998, see Note 9)
and Explorations Video Catalog, Inc. (related parties under common ownership
with the owner and Chief Executive Officer of the Company) whereby the Company
provides customer sales, service, warehousing and distribution services. The
agreements are for a two-year period but may be terminated by either party with
30 days notice. During 1998, the Company billed a total of $372,039, consisting
of $272,637 to Explorations Video Catalog, Inc. and $99,402 to InnerBalance
Health.
11. Subsequent Events
The Company entered into a revolving line of credit agreement with a financial
institution in January 1999 in the amount of $1 million. The Company's accounts
receivable and finished goods inventory are collateral for the line of credit.
In June 1999, the Company completed a private placement whereby 331,428 shares
of Class A common stock were issued at $4.375 per share. Additionally,
$1,275,000 convertible debentures with stated interest rate of 8% were issued.
These debentures are convertible automatically upon the closing of the initial
public offering into Class A common stock at the initial public offering per
share price.
In connection with the purchase of Healing Arts Publishing, the Company entered
into a royalty agreement with an actor to produce a series of videos. The
agreement was entered into during January 1999. The Company has agreed to pay a
minimum royalty of $225,000 to the individual for his services in relation to
the video production, and in exchange for marketing activities that he may
participate in. The royalty agreement also requires the Company to pay certain
amounts above and beyond the minimum once video sales exceed a certain level.
In June 1999, the Company adopted an employee stock option plan (the "Plan")
that will serve as a long-term incentive plan for individuals who contribute
significantly to the strategic and long-term incentive performance objectives
and growth of the Company. Under the Plan, the Company may issue an aggregate of
not more than 1,600,000 common shares to eligible individuals.
F-17
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
11. Subsequent Events (continued)
In ________ 1999, the Company amended the convertible debentures issued to all
subscribers to remove the automatic conversion of the securities.
On _________, 1999, the Company's Board approved a reverse stock split of 2.5 to
1.
12. Segment Information
The Company has two business segments: Direct to Consumers and Direct to
Businesses; both of which sell products, services and information produced
and/or purchased from other suppliers and shipped directly to either the end
user or reseller. Although the customer bases do not overlap to any extent, the
purchase and delivery processes overlap in some areas.
Each of the two segments qualifies as such because each is more than 10% of the
combined revenue. Contribution margin is defined as net sales, less cost of
goods sold and direct expenses. Financial information for the Company's business
segments was as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Six months ended June 30,
1997 1998 1998 1999
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue:
Direct to consumer $19,897,690 $26,897,236 $10,474,976 $13,771,675
Direct to business - 3,841,304 - 3,791,405
Consolidated net revenue 19,897,690 30,738,540 10,474,976 17,563,080
Contribution margin:
Direct to consumer (566,490) 128,691 175,128 (448,539)
Direct to business - 856,152 - 263,986
-----------------------------------------------------------------
Consolidated contribution margin $ (566,490) $ 984,843 $ 175,128 $ (184,553)
</TABLE>
F-18
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
<TABLE>
<CAPTION>
Year Ended December 31, Six months ended June 30,
1997 1998 1998 1999
----------------------------------------------------------
<S> <C> <C> <C> <C>
Reconciliation of Contribution
margin to net income:
Other income 1,583,336 388,491 (113,938) 201,762
Income tax expense 362,534 251,955 22,437 6,401
Minority interest expense - 261,598 - (166,822)
-----------------------------------------------------------
Net income $ 654,312 $859,781 $ 38,753 $ 177,630
===========================================================
</TABLE>
F-19
<PAGE>
GAIAM, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF
OPERATIONS
The following unaudited pro forma consolidated statement of operations for the
year ended December 31, 1998 is derived from the historical consolidated
statements of operations of Gaiam, Inc. and Healing Arts Publishing and
InnerBalance Health (the "Acquisitions"), adjusted to give effect to the Mergers
using the purchase method of accounting for business combinations.
The unaudited pro forma consolidated statement of operations for the twelve
months ended December 31, 1998 assumes that the Acquisitions occurred as of
January 1, 1998.
The pro forma consolidated statement of operations is provided for illustrative
purposes only and should be read in conjunction with the accompanying notes
thereto, and the audited consolidated financial statements and notes thereto of
Gaiam, Inc. for the year ended December 31, 1998 and the audited financial
statements and the notes thereto of Healing Arts Publishing LLC as of and for
the year ended December 31, 1998. The pro forma data is not necessarily
indicative of the operating results or financial position that would have been
achieved had the Acquisitions been consummated at the dates indicated, nor is it
necessarily indicative of future operating results and financial condition.
F-20
<PAGE>
GAIAM, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF
OPERATIONS
Year ended December 31, 1998
<TABLE>
<CAPTION>
Healing Arts InnerBalance Total
Gaiam, Inc. Publishing (c) Health (d) Adjustments Pro Forma
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue $30,738,540 $5,990,059 $1,339,947 (4,752)(b) $38,063,794
Cost of goods sold 13,173,536 2,678,344 569,645 (4,752)(b) 16,416,773
---------------------------------------------------------------------------
Gross profit 17,565,004 3,311,715 770,302 - 21,647,021
Expenses:
Selling and operating 14,186,215 2,999,499 1,017,415 168,871 (a) 18,372,000
Corporate, general and
administration 2,393,946 736,868 - - 3,130,814
---------------------------------------------------------------------------
Total expenses 16,580,161 3,736,367 1,017,415 168,871 21,502,814
---------------------------------------------------------------------------
Income (loss) from operations 984,843 (424,652) (247,113) (168,871) 144,207
Other income (expense):
Realized gain on sale of
securities and other 696,992 - - - 696,992
Interest expense (308,501) (61,161) (17,312) (386,974)
---------------------------------------------------------------------------
Total other income (expense) 388,491 (61,161) (17,312) - 310,018
---------------------------------------------------------------------------
Income (loss) before taxes and
minority interest 1,373,334 (485,813) (264,425) (168,871) 454,225
Provision for income taxes 251,955 - - - 251,955
Minority interest in net income of
consolidated subsidiary, net of
tax (261,598) - - 93,456 (e) (168,142)
---------------------------------------------------------------------------
Net income (loss) $ 859,781 $ (485,813) $ (264,425) $ (75,415) $ 34,128
===========================================================================
Net income:
Basic $ 0.11 $ 0.00
Diluted 0.11 $ 0.00
Shares used in computing net
income per share:
Basic 8,072,877 8,072,877
Diluted 8,263,677 8,263,677
</TABLE>
See accompanying notes.
F-21
<PAGE>
GAIAM, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF
OPERATIONS
Notes to Unaudited Pro Forma Combined Statement of Operations:
(a) The statement of operations has been adjusted to reflect the additional
amortization of the video library had the Company. acquired Healing Arts
Publishing, Inc. on January 1, 1998.
<TABLE>
<S> <C>
Intangible Asset $3,576,100
Amortization Life 15 years
Additional Period 8.5 months
----------
Adjustment $ 168,871
==========
</TABLE>
(b) The statement of operations has been adjusted to reflect the effect of
intercompany sales and cost of goods sold between Healing Arts Publishing,
Inc. and Gaiam, Inc. for the nine months prior to the merger.
(c) Represents the results of operations of Healing Arts Publishing, Inc. from
January 1, 1998 through September 13, 1998.
(d) Represents the results of operations of Inner Balance Health from January
1, 1998 through September 30, 1998. The Company accounted for the
acquisition of Inner Balance Health at historical cost as the acquisition
was considered a transfer of interest under common control.
(e) Represents the adjustment to minority interest to reflect ownership of
Healing Arts Publishing, Inc. for the entire year.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Healing Arts Publishing, LLC
We have audited the accompanying balance sheet of Healing Arts Publishing, LLC
(successor to Healing Arts Publishing, Inc.) as of December 31, 1998, and the
related statement of operations, stockholders' deficit and members equity, and
cash flows for the year then ended on a basis as described in Note 1. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Healing Arts Publishing, LLC at
December 31, 1998, and the results of operations and cash flows for the year
then ended on a basis as described in Note 1 in conformity with generally
accepted accounting principles.
Denver, Colorado
June 25, 1999
/s/ Ernst & Young LLP
F-23
<PAGE>
HEALING ARTS PUBLISHING, LLC
BALANCE SHEET
December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Assets
Current assets:
Accounts receivable, net of allowance for doubtful
accounts of $57,915 $2,466,925
Receivable from Gaiam Holdings, Inc. 450,000
Inventory, net 992,904
Deferred advertising costs 262,578
Prepaid and other current assets 215,469
------------------
Total current assets 4,387,876
Property and equipment, net 139,536
Capitalized production costs 672,438
Video library, net 3,493,764
Other assets 76,648
------------------
Total assets $8,770,262
==================
Liabilities and members' equity
Current liabilities:
Accounts payable $2,704,779
Accrued royalties 804,772
Accrued liabilities 671,430
------------------
Total current liabilities 4,180,981
Members' equity 4,589,281
------------------
Total liabilities and members' equity $8,770,262
==================
</TABLE>
See accompanying notes.
F-24
<PAGE>
HEALING ARTS PUBLISHING, LLC
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended
1998 June 30, 1999
-------------------------------------
(See Note 1) (Unaudited)
<S> <C> <C>
Net revenue $11,803,170 $5,783,307
Cost of goods sold 5,468,992 2,107,903
------------------ ----------------
Gross profit 6,334,178 3,675,404
Expenses:
Selling and operating 4,398,787 2,725,448
Corporate, general and administrative 1,443,337 1,145,424
-------------------------------------
Total expenses 5,842,124 3,870,872
-------------------------------------
Income (loss) from operations 492,054 (195,468)
Interest expense and other (119,927) (173,713)
-------------------------------------
Net income (loss) $ 372,127 $ (369,181)
=====================================
</TABLE>
See accompanying notes.
F-25
<PAGE>
HEALING ARTS PUBLISHING, LLC
STATEMENT OF STOCKHOLDERS' DEFICIT AND MEMBERS' EQUITY
<TABLE>
<CAPTION>
Stockholders' Deficit
------------------------------------------
Common Accumulated Members'
Stock Deficit Equity Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(See Note 1)
Balance at January 1, 1998 for Healing Arts
Publishing, Inc. (predecessor) $ 10 $(1,191,696) $ - $(1,191,686)
Distributions paid to stockholder - (197,690) - (197,690)
Net loss - (485,811) - (485,811)
Assets and liabilities contributed to Healing
Arts Publishing, LLC (successor) (10) 1,875,197 - 1,875,187
---------------------------------------------------------------------------
Ending capitalization at September 13, 1998
of Healing Arts Publishing, Inc. (predecessor) $ - $ - $ - $ -
===========================================================================
Beginning balance at September 14, 1998 for
Healing Arts Publishing, LLC (successor)
reflecting the contributed net assets and
capital from the members at fair value $3,731,343 $3,731,343
Net income 857,938 857,938
---------------------------------------------------------------------------
Balance at December 31, 1998 4,589,281 4,589,281
Net loss (unaudited) (369,181) (369,181)
---------------------------------------------------------------------------
Balance at June 30, 1999 (unaudited) $4,220,100 $ 4,220,100
===========================================================================
</TABLE>
See accompanying notes.
F-26
<PAGE>
HEALING ARTS PUBLISHING, LLC
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended
1998 June 30, 1999
-------------------------------------
(See Note 1) (Unaudited)
<S> <C> <C>
Operating activities
Net income (loss) $ 372,127 $ (369,181)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 45,070 27,027
Amortization 82,336 70,870
Changes in operating assets and liabilities:
Accounts receivable (1,328,823) 1,439,044
Inventory (31,202) (157,642)
Deferred advertising costs (105,842) 116,037
Prepaid and other current assets (141,857) (143,115)
Capitalized production costs (273,701) (152,169)
Other assets (43,038) 13,777
Accounts payable 655,971 (1,792,439)
Accrued royalties 256,275 256,653
Accrued liabilities (310,717) (532,682)
-------------------------------------
Net cash used by operating activities (823,401) (1,223,820)
Investing activities
Purchase of property and equipment (49,299) (33,449)
-------------------------------------
Net cash used by investing activities (49,299) (33,449)
Financing activities
Distribution to stockholder (197,690) -
Contributed capital by members 1,700,000 450,000
Payments of notes payable (629,610) -
Proceeds from borrowings - 900,000
-------------------------------------
Net cash provided by financing activities 872,700 1,350,000
-------------------------------------
Net change in cash and cash equivalents - 92,731
Cash and cash equivalents at beginning of year - -
Cash and cash equivalents at end of year $ - $ 92,731
=====================================
</TABLE>
See accompanying notes.
F-27
<PAGE>
HEALING ARTS PUBLISHING, LLC
NOTES TO FINANCIAL STATEMENTS
(Information subsequent to December 31, 1998 is unaudited)
1. Organization
Healing Arts Publishing, LLC (the "Company" or "successor"), a limited liability
company that was formed September 14, 1998, produces and distributes exercise
and relaxation videos and sells personal development products through mail order
catalogs and direct sales.
The Company was formed from the contributed net assets, liabilities and
operations of Healing Arts Publishing, Inc., (predecessor) a California-based
company, for a 33% ownership interest in the Company, valued at $1.3 million.
Gaiam Holdings, Inc. ("Gaiam"), a Colorado-based direct-mail retailer of
services and products to customers who value the environment, a sustainable
economy and healthy lifestyles, acquired a 67% ownership of the Company for an
approximate capital contribution of $2.5 million, including $100,000 paid to the
owner of Healing Arts Publishing, Inc. for a covenant not to compete. The
effect of these purchase price adjustments were pushed down to the Company at
the formation date and are reflected in the balance sheet at December 31,
1998.
The operations and cash flow for the Company for the year ended December 31 1998
reflect the combined operations of Healing Arts Publishing, Inc. (predecessor)
from January 1, 1998 through the September 13, 1998 acquisition date and the
Company (successor) from September 14, 1999 through December 31, 1999.
Had the intangible created by the push down of the purchase price adjustments
been annualized for a full year, the unaudited pro forma net income for 1998 on
a combined basis would have been $203,256.
2. Summary of Significant Accounting Policies
Inventory
Inventory, consisting of finished goods, net of obsolescence allowances of
$80,109, is stated at the lower of cost (first-in, first-out method) or market.
Depreciation and Amortization
Depreciation of property and equipment, including amortization recorded under
capital leases, is computed on the straight-line method over estimated useful
lives of approximately five to seven years.
F-28
<PAGE>
Healing Arts Publishing, LLC
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Deferred Advertising Costs
Deferred costs primarily relate to preparation, printing and distribution of
catalogs. Such costs are deferred for financial reporting purposes until the
catalogs are distributed, then amortized over succeeding periods (not to exceed
four months) on the basis of estimated sales. Historical sales statistics are
the principal factor used in estimating the amortization rate. Other
advertising and promotional costs are expensed as incurred. Combined
advertising costs were $511,230 for the year ended December 31, 1998.
Deferred Production Costs
Deferred production costs relate to the preparation, filming and editing of
exercise videos produced by the Company. Such costs are deferred for financial
reporting purposes until the videos are distributed, then amortized over
succeeding periods on the basis of estimated sales. Historical sales statistics
are the principal factor used in estimating the amortization rate. Video
production costs on a combined basis were $178,685 for the year ended December
31, 1998.
Video Library
The video library asset represents the excess of cost over the identifiable net
assets of the Company upon formation and are being amortized using the straight-
line method. The library consists of approximately seventeen videos owned or
licensed by the Company. This library is amortized over a fifteen-year period.
Accumulated amortization at December 31, 1998 was $82,336.
Pursuant to the provisions of Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, the carrying value of long-lived assets, including
intangible assets, is reviewed periodically to determine if any impairment
indicators are present. If it is determined that such indicators are present
and the review indicates that the assets will not be recoverable, the carrying
value of such assets is reduced to estimated fair market value. Impairment
indicators include, among other conditions, cash flow deficits; an historic or
anticipated decline in revenue or operating profit; adverse legal or regulatory
developments; or a material decrease in the fair market value of some or all of
the assets. During the period ended December 31, 1998, no indications of
impairment were present.
F-29
<PAGE>
Healing Arts Publishing, LLC
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Revenues
The Company recognizes revenue at the time merchandise is shipped to the
customer. Amounts billed to customers for postage and handling charges, which
approximate $425,000 on a combined basis are recognized as revenue at the time
that the revenues on the product shipments are recognized. The Company provides
a reserve for expected future returns at the time the sale is recorded based
upon historical experience.
The Company's accounts receivable are derived from revenue earned from customers
located in the U.S. The Company maintains an allowance for doubtful accounts
receivable based upon the expected collectibility of accounts receivable. For
the year ended December 31, 1998, on a combined basis, the Company's two largest
trade customers comprised approximately 31% of the accounts receivable balance
and 24% of total revenues.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
Actual results could differ from those estimates.
Financial Instruments
Financial instruments consist of accounts receivable and certain current
liabilities. The carrying amounts reported in the balance sheet for these
financial instruments approximate fair value.
Interim Financial Statements
The financial results for the six months ended June 30, 1999 are unaudited, but
include all adjustments (consisting only of normal recurring accounts) that the
Company considers necessary for a fair presentation of its results of operations
and cash flows for such period. The results of operations for the six months
ended June 30, 1999 are not necessarily indicative of results for a full year.
F-30
<PAGE>
Healing Arts Publishing, LLC
Notes to Financial Statements (continued)
3. Property and Equipment
At December 31, 1998, property and equipment, stated at cost, consists of the
following:
<TABLE>
<S> <C>
Furniture and equipment $ 238,305
Computer equipment 106,062
-------------------
344,367
Accumulated depreciation and amortization (204,831)
-------------------
$ 139,536
===================
</TABLE>
4. Leases
As of December 31, 1998, the Company's principal operating lease commitments are
for equipment and office space. The Company's future minimum lease payments
under noncancelable operating lease agreements are as follows:
<TABLE>
<S> <C>
1999 $ 89,995
2000 17,140
2001 4,383
2002 3,540
------------------
$115,058
==================
</TABLE>
The Company incurred rent expense, on a combined basis, of $212,451 for the year
ended December 31, 1998.
5. Income Taxes
No provision has been made in the accompanying statements for income taxes as
the income is taxable to each member based upon its pro rata ownership of the
Company.
6. Contingencies
The Company is involved in legal actions in the normal course of business, some
of which may seek substantial monetary damages, including claims for punitive
damages which may not be covered by insurance. After review, including
consultation with legal counsel, management believes the ultimate liability in
excess of any amounts accrued which could arise from these actions would not
materially affect the Company's financial position or results of operations.
F-31
<PAGE>
Healing Arts Publishing, LLC
Notes to Financial Statements (continued)
7. Subsequent Events
The Company entered into a revolving line of credit agreement with a financial
institution in May 1999 in the amount of $1 million. The Company's accounts
receivable and inventory are collateral for the line of credit.
In June 1999, the Company entered into a three-year exclusive royalty agreement
with an instructor to produce a series of videos. The Company has agreed to pay
a minimum annual royalty of $225,000 to the individual for his services in
relation to the video production, and in exchange for marketing activities in
which he may participate. The agreement requires the Company to pay royalties
above and beyond the minimum once video sales exceed a predetermined volume.
8. Impact of Year 2000 (Unaudited)
Until recently, computer programs were written to store only two digits of date-
related information in order to more efficiently handle and store data.
Accordingly, such programs were unable to properly distinguish between the year
1900 and the year 2000. This is frequently referred to as the "Year 2000
Problem." During 1998, the Company conducted an initial review of its computer
systems. Based upon its initial review, it does not appear significant changes
to computer systems and related applications will be necessary to achieve a year
2000 date conversion. However, there can be no assurance that the systems of
other companies on which the Company may rely will be timely converted or that
such failure to convert by another company would not have an adverse effect on
the Company's systems.
F-32
<PAGE>
[Inside Back cover]
[Pictures]
<PAGE>
[Back cover]
[Pictures]
Until ____, 1999, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The registrant's expenses in connection with the offering described in this
registration statement are set forth below. All amounts except the Securities
and Exchange Commission registration fee, the NASD filing fee and the listing
fee are estimated.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.................................... $ 3,197
NASD filing fee........................................................................ 5,000
NASDAQ National Market listing fee..................................................... 48,750
Printing and engraving expenses. ......................................................
Accounting fees and expenses...........................................................
Legal fees and expenses................................................................
Blue Sky fees and expenses (including legal fees) .....................................
Transfer agent's and registrar fees and expenses ......................................
Miscellaneous.......................................................................... 700,000
--------
Total..................................................................................
========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Colorado law provides for indemnification of directors, officers and other
employees in certain circumstances (C.R.S. (S) 7-108-102 (1994)) and for the
elimination or limitation of the personal liability for monetary damages of
directors under certain circumstances (C.R.S. (S) 7-108-402 (1994)). The Amended
and Restated Articles of Incorporation of Gaiam eliminates the personal
liability for monetary damages of directors under certain circumstances and
provides indemnification to directors and officers of Gaiam to the fullest
extent permitted by the Colorado Business Corporation Act. Among other things,
these provisions provide indemnification for officers and directors against
liabilities for judgments in and settlements of lawsuits and other proceedings
and for the advance and payment of fees and expenses reasonably incurred by the
director or officer in defense of the lawsuit or proceeding.
Gaiam intends to obtain directors and officers insurance providing insurance
indemnifying certain of Gaiam's directors, officers and employees for certain
liabilities.
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
The following table summarizes securities issued or sold by Gaiam within the
past three years that were not sold pursuant to registered offerings:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Date Purchaser Number of Debentures/ Warrants/ Consideration Exemption(s)
Shares of Notes Options Claimed*
Class A
Common Stock
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
privately
September 30, 1998 James Argyopoulos/ 120,000 $500,000 -- $1,025,000 negotiated sale
Argyopoulos under Section 4(2)
Investor G.P. of the Securities
Act.
- ------------------------------------------------------------------------------------------------------------------------------------
privately
October 1, 1998 Jirka Rysavy -- $531,000 -- Stock of negotiated sale
InnerBalance under Section 4(2)
of the Securities
Act.
- ------------------------------------------------------------------------------------------------------------------------------------
privately
December 7, 1998 Lynn Powers 40,000 $ 50,000 -- $ 100,000 negotiated sale
under Section 4(2)
of the Securities
Act.
- ------------------------------------------------------------------------------------------------------------------------------------
privately
January 7, 1999 Mo Siegel 17,143 $ 75,000 -- $ 150,000 negotiated sale
under Section 4(2)
of the Securities
Act.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Date Purchaser Number of Debentures/ Warrants/ Consideration Exemption(s)
Shares of Notes Options Claimed*
Class A
Common Stock
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
April 20, 1999 Jeffrey Steiner 120,000 $500,000 -- $1,025,000 negotiated sale
under Section 4(2)
of the Securities
Act.
- ------------------------------------------------------------------------------------------------------------------------------------
privately
May 6, 1999 Edward Snider 57,143 $250,000 -- $ 500,000 negotiated sale
under Section 4(2)
of the Securities
Act.
- ------------------------------------------------------------------------------------------------------------------------------------
privately
May 6, 1999 Herbert Simon 57,143 $250,000 -- $ 500,000 negotiated sale
under Section 4(2)
of the Securities
Act.
- ------------------------------------------------------------------------------------------------------------------------------------
privately
May 7, 1999 Mike Gilliland 22,857 $100,000 -- $ 200,000 negotiated sale
under Section 4(2)
of the Securities
Act.
- ------------------------------------------------------------------------------------------------------------------------------------
privately
May 6, 1999 Lennart Perlhagen 57,143 $250,000 -- $ 500,000 negotiated sale
and June 8, under Section 4(2)
1999 of the Securities
Act.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Date Purchaser Number of Debentures/ Warrants/ Consideration Exemption(s)
Shares of Notes Options Claimed*
Class A
Common Stock
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 1, 1999** Gaiam employees -- -- 674,800 Services N/A
and service
providers
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* We believe that exemptions in addition to those specified above may exist
with respect to the listed transactions.
** Options are exercisable at $4.375 per share and vest in monthly increments
of 2% per month, commencing 10 months after the date of grant. The options
expire 10 years after the date of the grant.
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
EXHIBITS:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Exhibit No. Description
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement
- -----------------------------------------------------------------------------------------------------------------------------------
2.1 Purchase Agreement dated September 14, 1998 among Gaiam Holdings, Inc., Healing Arts Publishing, LLC,
Steven P. Adams, Healing Arts Publishing, Inc., and Gaiam, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of Gaiam, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
3.2 Bylaws of Gaiam, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
4.1 Form of Gaiam, Inc. Stock Certificate
- -----------------------------------------------------------------------------------------------------------------------------------
5.1 Opinion of Bartlit Beck Herman Palenchar & Scott
- -----------------------------------------------------------------------------------------------------------------------------------
10.1 Gaiam, Inc.1999 Long-Term Incentive Plan
- -----------------------------------------------------------------------------------------------------------------------------------
10.2 Operating Agreement of Healing Arts Publishing, LLC dated September 14, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
10.3 Sublease dated September 16, 1998 between Corporate Express Office Products, Inc.
and Gaiam, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
10.4 Lease Agreement dated December 18, 1997 between Orix Prime West Broomfield
Venture and Gaiam, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
21.1 Subsidiaries of Gaiam, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
23.1 Consent of Ernest & Young
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Exhibit No. Description
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
23.2 Consent of Wendell T. Walker & Associates
- -----------------------------------------------------------------------------------------------------------------------------------
23.3 Consent of Bartlit Beck Herman Palenchar & Scott (included in Exhibit 5.1)
- -----------------------------------------------------------------------------------------------------------------------------------
23.4 Consent of Paul H. Ray
- -----------------------------------------------------------------------------------------------------------------------------------
24.1** Power of Attorney
- -----------------------------------------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* To be filed by amendment
** Previously filed
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 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 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 begin 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 Act and will
be governed by the final adjudication of such issue.
(c) Gaiam hereby undertakes that for purposes of determining any liability
under the Securities Act of 1933, 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.
(d) Gaiam hereby undertakes that for the purpose of determining any
liability under the Securities Act of 1933, 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
<PAGE>
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(e) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
II-7
<PAGE>
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 Broomfield, State of
Colorado, on August 30, 1999.
Gaiam, Inc.
By: /s/ Jirka Rysavy
---------------------
Jirka Rysavy
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated opposite their names.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Signature Title Date
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ Jirka Rysavy Jirka Rysavy , Chairman of the Board and Chief August 30, 1999
Executive Officer
- ---------------------------------------------------------------------------------------------------------------------------
/s/ Lynn Powers* Lynn Powers, President, Chief Operating Officer August 30, 1999
and director
- ---------------------------------------------------------------------------------------------------------------------------
/s/ Pavel Bouska* Pavel Bouska, Executive Vice President and August 30, 1999
Chief Information Officer
- ---------------------------------------------------------------------------------------------------------------------------
/s/ Janet Mathews* Janet Mathews, Controller and August 30, 1999
principal financial officer
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*By /s/ Jirka Rysavy
Jirka Rysavy, Attorney-in-fact
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Exhibit No. Description
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement
- ---------------------------------------------------------------------------------------------------------------
2.1 Purchase Agreement dated September 14, 1998 among Gaiam Holdings, Inc., Healing
Arts Publishing, LLC, Steven P. Adams, Healing Arts Publishing, Inc., and Gaiam,
Inc.
- ---------------------------------------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of Gaiam, Inc.
- ---------------------------------------------------------------------------------------------------------------
3.2* Bylaws of Gaiam, Inc.
- ---------------------------------------------------------------------------------------------------------------
4.1 Form of Gaiam, Inc. Stock Certificate
- ---------------------------------------------------------------------------------------------------------------
5.1 Opinion of Bartlit Beck Herman Palenchar & Scott
- ---------------------------------------------------------------------------------------------------------------
10.1 Gaiam, Inc. 1999 Long-Term Incentive Plan
- ---------------------------------------------------------------------------------------------------------------
10.2 Operating Agreement of Healing Arts Publishing, LLC dated September 14, 1998
- ---------------------------------------------------------------------------------------------------------------
10.3 Sublease dated September 16, 1998 between Corporate Express Office Products, Inc.
and Gaiam, Inc.
- ---------------------------------------------------------------------------------------------------------------
10.4 Lease Agreement dated December 18, 1997 between Orix Prime West Broomfield
Venture and Gaiam, Inc.
- ---------------------------------------------------------------------------------------------------------------
21.1 Subsidiaries of Gaiam, Inc.
- ---------------------------------------------------------------------------------------------------------------
23.1 Consent of Ernest & Young
- ---------------------------------------------------------------------------------------------------------------
23.2 Consent of Wendell T. Walker & Associates
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Exhibit No. Description
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
23.3 Consent of Bartlit Beck Herman Palenchar & Scott (included in Exhibit 5.1)
- ---------------------------------------------------------------------------------------------------------------
23.4 Consent of Paul H. Ray
- ---------------------------------------------------------------------------------------------------------------
24.1** Power of Attorney, included on signature page
- ---------------------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
* To be filed by amendment
** Previously filed.
<PAGE>
Exhibit 2.1
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (this "Agreement"), dated this 14th
day of September, 1998 (the "Effective Date"), is entered into at Los Angeles,
California, and Broomfield, Colorado, by and among Gaiam Holdings, Inc. a
Colorado corporation ("Buyer"); Healing Arts Publishing, LLC, a California
limited liability company ("LLC"), Steven P. Adams ("Adams" or "Shareholder,"
depending on the context); and Healing Arts Publishing, Inc., a California
corporation ("Corporation") (Shareholder and Corporation are collectively
referred to as "Sellers") and, for purposes of Section 5.4 only, Gaiam, Inc., a
Colorado corporation, with respect to the following:
A. Shareholder has represented that he owns all the outstanding capital stock
of Corporation (the "Shares").
B. Buyer desires to purchase from Corporation, and Corporation desires to sell
to Buyer, 50.37% of the assets of the business of Corporation (the "Business"),
subject to certain liabilities.
C. In order to effect the sale of assets, Corporation hereby transfers all of
the assets of the Business, subject to certain liabilities, to LLC in exchange
for 49.63% of the membership interests in LLC.
D. Buyer hereby purchases membership interests in LLC representing 50.37% of
the membership interests (subject to adjustment as described below).
E. Buyer hereby loans certain funds to LLC and contributes certain additional
funds to LLC in order to conduct the Business.
F. In order to induce Buyer to loan funds to LLC and otherwise to enter into
the transaction contemplated by this Agreement, Corporation and Shareholder
hereby guarantee all of the obligations of LLC and hereby secure such
guaranties, Adams and LLC hereby enter into an Employment Agreement, and the
parties hereby enter into a Non-Compete and Confidentiality Agreement.
ACCORDINGLY, in consideration of the mutual covenants,
agreements, representations and warranties contained in this Agreement, the
parties agree as follows:
1. TRANSACTION.
On the terms and subject to all of the conditions hereof, and upon the
performance by the parties hereto of their respective obligations hereunder,
simultaneously with the execution of this Agreement, the following shall be
effected:
1.1 Transfer of Assets. Corporation shall hereby transfer to LLC
all of its assets,
1
<PAGE>
including without limitation, its equipment, inventory, fixtures, receivables,
tradenames, trademarks, servicemarks, personal property (tangible and
intangible), intellectual property rights, choses in action, and contract rights
(the "Assets"), subject only to those liabilities set forth on Exhibit 1.1
hereof (the "Assumed Liabilities"), which LLC shall hereby assume.
1.2 Loan to LLC. Corporation is subject to that certain Judgment in
favor of Terence Dunn and InterArts Productions (collectively, "Dunn") pursuant
to Case No. SC 032426, Superior Court of the State of California, County of Los
Angeles (the "Dunn Judgment"). Buyer shall loan to LLC the sum of $740,024.85 in
order to partially satisfy the Dunn Judgment (such amount is referred to as the
"Dunn Judgment Costs"), which loan shall be evidenced by a Secured Promissory
Note of even date in the form of Exhibit 1.2 (the "Secured Promissory Note"),
and LLC shall execute the Secured Promissory Note. The Secured Promissory Note
shall be secured by all of the assets of LLC and shall be guaranteed by
Corporation and Shareholder. Buyer shall, in lieu of payment to LLC, deliver the
Dunn Judgment Costs to the Sheriff's Department of the County of Los Angeles,
State of California, or, in Buyer's sole discretion, to Kirsch & Mitchell,
counsel to Corporation. Corporation shall immediately pay the balance of the
amounts necessary to pay the Dunn Judgment in full, without (except as otherwise
provided by law) waiving any rights of appeal which Corporation may have.
1.3 Additional Loan to LLC. Under certain conditions, Buyer shall
loan additional funds to LLC as described in Section 2 hereof, which loan shall
be evidenced by a Second Advance Note (Secured) of even date in the form of
Exhibit 1.3 hereof (the "Second Advance Note"), and LLC shall execute the Second
Advance Note. The Secured Promissory Note and Second Advance Notes are
collectively referred to in this Agreement as the "Notes."
1.4 Security. As security for the Notes and all other obligations
of LLC, Corporation, and Shareholder under this Agreement (including all of the
exhibits thereto):
1.4.1 LLC shall execute the Security Agreement in the form of
Exhibit 1.4A hereof (the "LLC Security Agreement"), the UCC-1 Financing
Statement in the form of Exhibit 1.4B hereof (the "LLC Financing Statement"),
and the Assignment of Audio-Visual Documents and Rights in the form of Exhibit
1.4C (the "Assignment");
1.4.2 Corporation shall execute the Security Agreement in the
form of 1.4D hereof (the "Corporation Security Agreement"), the UCC-1 Financing
Statement in the form of Exhibit 1.4E hereof (the "Corporation Financing
Agreement"), and the Guaranty in the form of Exhibit 1.4F hereof (the
"Corporation Guaranty"); and
1.4.3 Shareholder shall execute the Security Agreement in the
form of Exhibit 1.4G hereof (the "Shareholder Security Agreement"), the UCC-1
Financing Statement in the form of Exhibit 1.4H hereof (the "Shareholder
Financing Agreement"), the Guaranty in the form of Exhibit 1.4I hereof (the
"Shareholder Guaranty"), and the Pledge Agreement in the form of Exhibit 1.4J
hereof (the "Pledge Agreement").
2
<PAGE>
1.5 Contribution to LLC. Buyer shall contribute the amount of Ten
Thousand Dollars ($10,000) to the capital of LLC.
1.6 Purchase of Bank Note. Buyer shall purchase the obligation of
Corporation and Shareholder to Wells Fargo Bank, N.A., under the Promissory Note
and Accounts Receivable Primeline Agreement (both dated November 13, 1996), the
present amount of which is $562,100 (the "Wells Note"), which Wells Note is
secured by a Commercial Security Agreement and Commercial Guaranty of the same
date (collectively, the "CSA"), for an amount agreed by and between Buyer and
the holder of the Wells Note in their sole discretion (the "Wells Note Purchase
Amount"). Sellers acknowledge that the amounts loaned by Buyer pursuant to the
Notes are made as additional advances under the Wells Note and the CSA (in
addition to the Security Agreements) and that this Agreement and the Notes
constitute modifications of the Wells Note only with respect to such additional
advances and with respect to the due date. Buyer hereby waives any defaults
which may exist under the Wells Note and the CSA as of the Effective Date and
hereby extends the due date of the Wells Note (subject to the provisions of the
last two sentences of Section 10 hereof) to December 14, 1998.
1.7 Issuance of Interests. Corporation and Buyer shall execute
the Operating Agreement of LLC in the form of Exhibit 1.7 hereof.
1.8 Non-Compete Agreement. Shareholder and Corporation shall
execute the Non-Compete and Confidentiality Agreement in the form of Exhibit 1.8
hereof (the "Non- Compete Agreement").
1.9 Employment Agreement. LLC and Adams shall execute the
Employment Agreement in the form of Exhibit 1.9 hereof (the "Employment
Agreement").
1.10 Bill of Sale. Corporation shall execute a bill of sale and
other assignment documents in the form of Exhibit 1.10 hereof (the "Bill of
Sale"), transferring all of the Assets to LLC.
1.11 Opinion of Counsel. Sellers shall deliver to Buyer an opinion
of Shareholder's counsel in substantially the form set forth in Exhibit 1.11 to
the Agreement.
1.12 Corporate Approval. Sellers shall deliver to Buyer copies of
all resolutions pertaining to due authorization by all necessary corporate
action of and delivery of this Agreement by Corporation, and the performance of
its covenants and obligations under it, certified by the secretary of
Corporation.
1.13 Consents. Sellers shall deliver to Buyer all necessary
agreements and consents of any parties to the consummation of the transaction
contemplated by this Agreement, or otherwise pertaining to the matters covered
by it.
3
<PAGE>
2. ADDITIONAL AMOUNTS DUE TO LLC.
On or before the Second Advance Date (as hereinafter defined), Buyer
shall loan the additional sum of $490,000 to LLC, which loan shall be evidenced
by the Second Advance Note. The proceeds of such loan shall be used first for
the costs of preparing, printing, and mailing a catalog (with circulation of at
least 600,000 copies) of LLC's products, as well as the inventory associated
with the catalog, and payment of amounts due to Dunn under contracts with LLC,
and Buyer and Corporation shall agree with respect to application and
disbursement of the balance of such loan proceeds. The "Second Advance Date"
shall mean September 15, 1998, or such later date, if ever, as, to the
satisfaction of Buyer (in its sole discretion), (a) Shareholder shall have
obtained the consent of Shareholder's wife Elizabeth Adams to the transactions
contemplated by this Agreement, (b) Corporation and LLC have implemented a plan
satisfactory to Buyer to bring current the accounting books and records of
Corporation and LLC and to implement proper and appropriate accounting
procedures, and (c) with Jonathan Kirsch, Esq., counsel to Corporation, Mark
Shaner, Esq., counsel to Buyer, shall have contacted Dunn or Dunn's counsel with
respect to a settlement of all claims arising between Corporation or LLC and
Dunn and Dunn's successors and assigns, the terms of which are no less favorable
to Corporation and LLC than those set forth in Schedule 2 to this Agreement.
3. VALUATION.
On or before the First Price Adjustment (as that term is defined in
Section 11.1 hereof), Corporation and LLC shall engage Ernst & Young, LLP (the
"Independent Accountant") to do the following:
3.1 Audit. The Independent Accountant shall perform an audit of
Corporation and LLC and shall prepare and deliver to Buyer an audited balance
sheet, statement of income, and cash flows for Corporation and LLC for the
period from January 1, 1998, to the Effective Date (the "Corporation Short
Period") and the period from the Effective Date to December 31, 1998 (the "LLC
Short Period"), respectively.
3.2 The Valuation. The Independent Accountant shall evaluate
Corporation and LLC (the "Valuation") as follows:
3.2.1 The Independent Accountant shall determine adjusted net
income (as hereinafter defined) of Corporation for the Corporation Short Period
(the "Corporation Short Period Net Income").
3.2.2 The Independent Accountant shall determine the adjusted
net income (as hereinafter defined) of LLC for the LLC Short Period (the "LLC
Short Period Net Income").
3.2.3 For purposes of the Valuation, "adjusted net income"
shall mean the
4
<PAGE>
net income, determined in accordance with generally accepted accounting
principles consistently applied ("GAAP") and in accordance with Exhibit 12.4
hereof, adjusted as follows:
3.2.3.1 Net income shall be reduced by any amounts not
actually collected by March 25, 1999, or reserved.
3.2.3.2 Net income shall be reduced by:
3.2.3.2.1 The fees and costs of the Independent
Accountant for the audit of the Corporation
Short Period;
3.2.3.2.2 The costs of preparing financial records of
Corporation or LLC (as applicable) for the
Valuation; and
3.2.3.2.3 The amount of income generated (or expected
to be generated) for the applicable period
by material contracts (other than contracts
with Dunn), termination of which is caused
during the LLC Short Period by reason of
action or inaction of Corporation or Adams.
but shall not be reduced by:
3.2.3.2.4 Any taxes arising out of the transactions
contemplated in this Agreement;
3.2.3.2.5 The fees and costs of the Independent
Accountant for the audit of the LLC Short
Period;
3.2.3.2.6 Any legal fees or consulting fees of
Magazine Consulting Group incurred by
Corporation or LLC in connection with the
transactions contemplated in this
Agreement; or
3.2.3.2.7 The Dunn Judgment Costs and any legal fees,
interest, and other costs relating to the
Dunn Judgment or other legal matters
relating to the "Tai Chi for Health"
videos.
3.2.4 The Independent Accountant shall determine the
"Valuation Amount," which shall mean six (6) times the sum of (a) the
Corporation Short Period Net Income and (b) the
5
<PAGE>
LLC Short Period Net Income.
3.3 Adjustment of Percentage Interests. Upon determination of the
Valuation Amount, and retroactive to the Effective Date, the Percentage Interest
of Corporation shall be decreased, and the Percentage Interest of Buyer in LLC
shall be increased by multiplying such Percentage Interests by a fraction, as
follows:
3.3.1 The numerator of the fraction shall be the Valuation
Amount (but not more than $5,000,000).
3.3.2 The denominator of the fraction shall be $5,000,000.
In no event shall Corporation's Percentage Interest be less than thirty-three
percent (33%).
4. FIRST PRICE ADJUSTMENT.
On the terms and subject to all of the conditions hereof, and upon the
performance by the parties hereto of their respective obligations hereunder, at
the First Price Adjustment (as that term is defined in Section 11.1 hereof),
Buyer shall pay to Corporation and Shareholder in the aggregate (to be allocated
between them as they shall direct) the sum of $100,000 as payment in full of all
amounts due under the Non-Compete Agreement. In addition, Buyer shall pay the
First Price Adjustment Amount as follows:
4.1 Determination of First Price Adjustment Amount. The First Price
Adjustment Amount shall mean (a) the sum of $2,400,000, less (b) the sum of (i)
the amount of the Dunn Judgment Costs, (ii) the amount contributed to the
capital of LLC by Buyer pursuant to Section 1.5 hereof, (iii) the Wells Note
Purchase Amount, and (iv) the amount lent to LLC pursuant to Section 2 hereof.
4.2 Contribution to LLC. Buyer shall contribute to LLC, to be
allocated to the capital accounts of Corporation and Buyer in the ratio of their
Percentage Interests (as defined in the Operating Agreement) one-half (1/2) of
the First Price Adjustment Amount plus the amount of $50,000. Buyer may, in its
sole discretion, apply all or any portion of such amount to repayment in full of
all amounts owing from Shareholder to Goldhil Home Media International, Inc.,
under that certain Note Secured by Conditional Licenses entered into by
Shareholder, the amount of which repayment shall be charged to Shareholder's
capital account.
4.3 Payment to Corporation. Buyer shall pay to Corporation the
lesser of (a) the amount of $300,000 or (b) (i) one-half (1/2) of the First
Price Adjustment Amount, less (ii) the sum of $50,000 (but not less than zero
(0).
6
<PAGE>
5. SECOND PRICE ADJUSTMENT AND EARNOUT.
5.1 Payment at Second Price Adjustment. On the terms and subject to
all of the conditions hereof, and upon the performance by the parties hereto of
their respective obligations hereunder, at the Second Price Adjustment (as that
term is defined in Section 11.2 hereof), Buyer shall pay to Corporation one-
quarter (1/4) of the Valuation Amount, less the amount of $1,850,000 (but not
less than zero (0)).
5.2 Contribution to LLC. On the terms and subject to all of the
conditions hereof, and upon the performance by the parties hereto of their
respective obligations hereunder, at the Second Price Adjustment (as that term
is defined in Section 11.2 hereof), Buyer shall:
5.2.1 Cancel and contribute the Notes and the Wells Note to
the capital of LLC (but all accrued but unpaid interest shall be due and payable
in full in cash); and
5.2.2 Shall contribute to the capital of LLC one-quarter (1/4)
of the Valuation Amount, less the amount of $1,250,000 (but not less than zero
(0) (the "Second Price Adjustment Amount").
Such contributions shall be allocated to the capital accounts of Corporation and
Buyer in the ratio of their Percentage Interests (as defined in the Operating
Agreement). Buyer's obligation to make such cancellation and contribution shall
be deemed hereby to be incorporated into the provisions of the Notes and the
Wells Note, notwithstanding the negotiable provisions thereof.
5.3 Earnout Amounts. On the terms and subject to all of the
conditions hereof, and upon the performance by the parties hereto of their
respective obligations hereunder, and provided that Adams is not then in default
under the terms of the Employment Agreement and has not terminated the
Employment Agreement during its term pursuant thereto, Buyer shall pay to
Corporation the following (collectively, the "Earnout Amounts"):
5.3.1 The sum of (a) one-half (1/2) of the lesser of (i) (A)
one-quarter (1/4) of the Valuation Amount, less (B) the amount of $1,250,000
(but not less than zero (0)) and (ii) $600,000, plus (b) the amount of fifteen
percent (15%) of the amount described in subparagraph (a) hereof shall be
payable on March 31, 2000, if, for the calendar year ending December 31, 1999,
LLC shall have net income (as determined in accordance with GAAP) of not less
than $300,000; otherwise, such Earnout Amount shall be forfeited.
5.3.2 The sum of (a) one-half (1/2) of the lesser of (i) (A)
one-quarter (1/4) of the Valuation Amount, less (B) the amount of $1,250,000
(but not less than zero (0)) and (ii) $600,000, plus (b) the amount of fifteen
percent (15%) of the amount described in subparagraph (a) hereof shall be
payable on March 31, 2001, if, for the calendar year ending December 31, 2000,
LLC shall have net income (as determined in accordance with GAAP) of not less
than $300,000; otherwise, such Earnout Amount shall be forfeited.
7
<PAGE>
5.4 Guaranties. The obligations of Buyer to pay the First Price
Adjustment Amount, the Second Price Adjustment Amount, and the Earnout Amounts
shall be, and hereby are, guarantied by Gaiam, Inc., a Colorado corporation.
Jirka Rysavy shall guaranty the obligation of Gaiam, Inc., naming as LLC and
Corporation as express third party beneficiaries of such guaranty.
6. WARRANTIES OF SHAREHOLDER.
As an inducement to Buyer to enter into this Agreement, upon which
Buyer has relied, and intends to rely, Sellers hereby jointly and severally
represent and warrant that:
6.1 Corporate Status. Corporation is a corporation duly organized,
validly existing and in good standing under the laws of California and has all
necessary corporate powers to own its properties and operate its business as now
owned and operated by it. Healing Arts is a validly filed fictitious business
name of Corporation. Neither the ownership of its properties nor the nature of
its business requires Corporation to be qualified in any jurisdiction other than
the state of its incorporation.
6.2 Capital Structure. The authorized capital stock of Corporation
consists of 10,000 shares of common stock, of which 100 (the "Shares") are
issued and outstanding. All the Shares are validly issued, fully paid and
nonassessable, and the Shares have been so issued in full compliance with all
federal and state securities laws. There are no outstanding subscriptions,
options, rights, warrants, convertible securities or other agreements or
commitments obligating Corporation to issue or to transfer from treasury any
additional shares of its capital stock of any class.
6.3 Title to Shares. Except as set forth on Schedule 6.3 hereof,
Shareholder is the owner, beneficially and of record, of all of the Shares, free
and clear of all liens, encumbrances, security agreements, equities, options,
claims, charges and restrictions.
6.4 Subsidiaries. Corporation does not own, directly or indirectly,
any interest or investment (whether equity or debt) in any corporation,
partnership, business, trust or other entity.
6.5 Financial Statements. Exhibit 6.5 to this Agreement sets forth
a reviewed balance sheet of Corporation as of December 31, 1997, and the related
statements of income and retained earnings for the period ending on that date
(the "Balance Sheet Date") and the balance sheet for such date is hereinafter
referred to as the "Latest Balance Sheet." All of such statements are certified
by the treasurer/chief operating officer of Corporation as accurately reflecting
the financial condition of Corporation for the applicable period. The balance
sheet and statements comprising Exhibit 6.5 are collectively referred to as the
"Financial Statements." The Financial Statements have been prepared in
accordance with generally accepted accounting principles consistently followed
by Corporation throughout the periods indicated, and fairly present the
financial position of Corporation on the Balance Sheet Date.
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6.6 Absence of Changes. Except as set forth in Schedule 6.6 to this
Agreement, since the Balance Sheet Date, Corporation has conducted its business
only in the ordinary course and in a manner consistent with past practice, and
there has not been (a) any material damage, destruction, or loss (whether or not
covered by insurance) with respect to any assets of Corporation, (b) any change
by Corporation in its accounting or tax reporting methods, principles, or
practices; (c) any declaration, setting aside, or payment of any dividends or
distributions in respect of shares of the Shares, or any redemption, repurchase,
or other acquisition by Corporation of any of Corporation's securities; (d) any
increase in the benefits under, or the establishment or amendment of, any bonus,
insurance, severance, deferred compensation, pension, retirement, profit
sharing, stock option (including, without limitation, the granting of stock
options, stock appreciation rights, performance awards, or restricted stock
awards), stock purchase, or other employee benefit plan, or any increase in the
compensation payable or to become payable to directors, officers, or employees
of Corporation, (e) any entry by Corporation into any material commitment or
transaction not in the ordinary course of business and consistent with past
practice (other than this Agreement and the transactions contemplated by this
Agreement); (f) any increase in indebtedness for borrowed money; or (g) any
other change, effect, or condition that, individually or when taken together
with all other such changes, effects, or conditions, would be materially adverse
to the business, operations, assets, financial condition, results of operations,
or prospects of Corporation (a "Material Adverse Effect").
6.7 Absence of Undisclosed Liabilities. Corporation has no material
debt, liability or obligation of any nature, whether accrued, absolute,
contingent or otherwise, and whether due or to become due, that is not reflected
or reserved in the Latest Balance Sheet, except for (1) those that may have been
incurred after the Balance Sheet Date and (2) those that are not required by
generally accepted accounting principles to be included in a balance sheet. All
debts, liabilities and obligations incurred after that date were incurred in the
ordinary course of business and are usual and normal in amount both individually
and in the aggregate.
6.8 Tax Returns and Audits.
6.8.1 Within the times and in the manner prescribed by law,
Corporation has filed all returns required by law with respect to any federal,
state, county and local taxes applicable to Corporation ("Taxes") and has paid
all Taxes, assessments and penalties due and payable.
6.8.2 No federal income tax returns or California franchise
tax returns of Corporation have been audited by the Internal Revenue Service or
the California Franchise Tax Board.
6.8.3 The provisions for Taxes reflected in the Latest
Balance Sheet are adequate for Taxes for the period ending on the Balance Sheet
Date and for all prior periods, whether disputed or undisputed. There are no
present disputes about Taxes payable by Corporation.
6.8.4 No extensions of time with respect to the due date of
any Tax returns are in force, and no waiver or agreement for any extension of
time for the assessment, collection, or
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payment of any Tax has been made by Corporation.
6.8.5 Corporation has disclosed on its federal income tax
returns all positions taken that could give rise to a substantial understatement
of federal income tax, within the meaning of Section 6662 of the Internal
Revenue Code of 1986, as amended (the "Code").
6.8.6 All Taxes payable by Corporation or which Corporation
was required to withhold and pay with respect to any amounts paid by Corporation
to any persons (including without limitation employees and persons who are
nominally independent contractors) have been paid.
6.8.7 Corporation will not be required to include any amount
in taxable income for any taxable period beginning after the Balance Sheet Date
as a result of a change in accounting method for any taxable period ending on or
before the Balance Sheet Date or pursuant to any agreement with any Tax
authority with respect to any such taxable period.
6.8.8 No property of Corporation is subject to a safe-harbor
lease (pursuant to Section 168(f) (8) of the Code of 1954 as in effect after the
Economic Recovery Tax Act of 1981 and before the Tax Reform Act of 1986) or is
"tax-exempt use property" (within the meaning of Section 168(h) of the Code) or
"tax-exempt bond financed property" (within the meaning of Section 168(g) (5) of
the Code).
6.8.9 Corporation has not made an election under Section
341(f) of the Code. Corporation is not a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
6.8.10 Schedule 6.8.10 to this Agreement sets forth the
following information with respect to Corporation as of the most recent
practicable date (as well as on an estimated pro forma basis as of the Effective
Date giving effect to the consummation of the transactions contemplated by this
Agreement) its basis in its assets.
6.9 Real Property. Schedule 6.9 to this Agreement is a complete and
accurate list of all real property owned by or leased to Corporation, together
with an accurate brief description of each property. Schedule 6.9 to this
Agreement also sets forth brief descriptions of all building and other major
improvements located on these properties. The zoning of each parcel of property
described in Schedule 6.9 to this Agreement permits the presently existing
improvements and the continuation of the business presently being conducted on
such parcel. Corporation has not commenced, nor has Shareholder or Corporation
received notice of the commencement of, any proceeding that would affect the
present zoning classification of any such parcel.
6.10 Environmental Matters. To the best of Sellers' knowledge:
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6.10.1 (a) The properties, operations, and activities of
Corporation comply currently with, and have at all times complied with, all
applicable Environmental Laws (as defined below);
6.10.2 Corporation (or its properties or operations) is not
subject to any existing, pending, or threatened action, suit, claim,
investigation, inquiry, or proceeding by or before any Governmental Entity under
any Environmental Law;
6.10.3 There are no physical or environmental conditions
existing on any property used by Corporation or resulting from Corporation's
operations or activities, past or present, at any location, that would give rise
to any on-site or off-site remedial obligations or other liabilities imposed
under any Environmental Laws or that would affect the soil, groundwater, surface
water, or human health;
6.10.4 There has been no exposure of any person or property to
hazardous substances or any pollutant or contaminant, nor has there been any
release of hazardous substances or any pollutant or contaminant into the
environment, by Corporation or in connection with its properties or operations;
and
6.10.5 Corporation has made available to Buyer all internal
and external environmental audits and studies and all correspondence on
environmental matters in the possession of Corporation relating to any of the
current or former properties or operations of Corporation.
For purposes of this Agreement, the term "Environmental Laws" means
any and all Laws, statutes, ordinances, rules, regulations, or orders of any
governmental or regulatory authority, domestic or foreign, pertaining to health
or the environment currently in effect in any and all jurisdictions in which
Corporation owns property or conducts business, including without limitation,
the Comprehensive Environmental, Response, Compensation, and Liability Act of
1980 ("CERCLA"), as amended; the Resource Conservation and Recovery Act of 1976
("RCRA"), as amended; any state Laws implementing the foregoing federal laws;
and all other environmental conservation or protection Laws. For purposes of
this Agreement, the terms "hazardous substance" and "release" have the meanings
specified in CERCLA and RCRA, and the term "disposal" has the meaning specified
in RCRA; provided, however, that to the extent the laws of the state in which
the property is located establish a meaning for "hazardous substance,"
"release," or "disposal" that is broader than that specified in either CERCLA or
RCRA, such broader meaning will apply.
6.11 Inventory.
6.11.1 The inventory shown on Schedule 6.11.1 to this
Agreement (the "Inventory") consists of items of a quality and quantity usable
and salable in the ordinary course of business by Corporation, except for
obsolete and slow-moving items and items below standard quality, all of which
have been written down on the books of Corporation to net realizable market
value or have been provided for by adequate reserves.
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6.11.2 All items included in the Inventory are the property of
Corporation, except for sales made in the ordinary course of business since the
date of the balance sheet. For each of these sales, either the purchaser has
made full payment or the purchaser's liability to make payment is reflected in
the books of Corporation. Except as set forth in Schedule 6.11.2 to this
Agreement, no items included in the Inventory have been pledged as collateral or
are held by Corporation on consignment from others. The Inventory shown in the
Financial Statements is based on quantities determined by physical count or
measurement, taken within the preceding twelve (12) months, and is valued at the
lower of cost (determined on a first-in, first-out basis) or market value and on
a basis consistent with that of prior years.
6.11.3 All items included in the Inventory are the property of
Corporation except for items sold, lost or destroyed in the ordinary course of
business since the date of Schedule 6.11.1 to this Agreement. No items included
in the Inventory have been pledged as collateral or are held by Corporation on
consignment from others.
6.12 Accounts Receivable. Schedule 6.12 to this Agreement is a
complete and accurate schedule of the accounts receivable of Corporation as of
September 8, 1998, together with an accurate aging of these accounts. Except for
immaterial amounts (not to exceed $70,000 in the aggregate), these accounts
receivable, and all accounts receivable of Corporation created after the date of
Schedule 6.12 to this Agreement, arose from valid transactions in the ordinary
course of business. These accounts have been collected in full since that date
or are collectible in their full amount or have been reserved.
6.13 Intellectual Property. Schedule 6.13 to this Agreement is a
schedule of all trade names, trademarks, service marks and copyrights and their
registrations, owned by Corporation or in which it has any rights or licenses,
together with a brief description of each. Neither Corporation nor Shareholder
has any knowledge of any infringement or alleged infringement by others of any
trade name, trademark, service mark or copyright. Corporation has not infringed,
and is not now infringing on any trade name, trademark, service mark or
copyright belonging to any other person, firm or corporation. Corporation is not
a party to any license, agreement or arrangement, whether as licensor, licensee,
franchiser, franchisee or otherwise with respect to any trademarks, service
marks, trade names or applications for them, or any copyright. Corporation owns,
or holds adequate licenses or other rights to use all trademarks, service marks,
trade names and copyrights necessary for its business as now conducted by
Corporation (including without limitation those listed on Schedule 6.13), and
that use does not, and will not, conflict with, infringe on or otherwise violate
any rights of others.
6.14 Title to Assets. Corporation has good and marketable title
to all its assets and interests in assets, whether real, personal, mixed,
tangible or intangible, which constitute all the assets and interest in assets
that are used in the business of Corporation. All these assets are free and
clear of restrictions on or conditions to transfer or assignment and free and
clear of mortgages, liens, pledges, charges, encumbrances, equities, claims,
easements, rights of way, covenants, conditions
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or restrictions except for (a) those disclosed in the Latest Balance Sheet or in
Schedules to this Agreement which specifically refer to this Section 6.14; (b)
the lien of current property taxes not yet due and payable; and (c) possible
minor matters that, in the aggregate, are not substantial in amount and do not
have a Material Adverse Effect. Corporation is not in default or in arrears in
any respect under any lease which would have a Material Adverse Effect. All
buildings and structures (including roofs and machinery and equipment
permanently affixed to such buildings and structures) and tangible personal
property of Corporation that is necessary to the operation of the Business are
in good operating condition and repair, ordinary wear and tear excepted.
Corporation is in possession of all premises leased to it from others. Neither
Shareholder; nor any officer, director or employee of Corporation, nor any
spouse, child or other relative of any of these persons, owns, or has any
interest, directly or indirectly, in any of the real or personal property owned
by or leased to Corporation or any copyrights, patents, trademarks, trade names
or trade secrets licensed by Corporation.
6.15 Programs. By the Bill of Sale, Corporation has transferred to
LLC all of its right, title and interest in, to and under any and all audio
and/or visual programs and materials created by Corporation (alone or jointly
with others) (the "Programs"), including, where held by Corporation, the
copyrights thereto, that Corporation owns or controls with respect to the
Programs, and all contracts, licenses, agreements, options, and rights relating
thereto, including without limitation agreements with writers, editors,
instructors, performers, musicians, licensing bodies, societies, producers,
directors, other technical personnel, distributors, subdistributors, licensees
and sub-licensees, and fulfillment houses (collectively, "Contracts").
6.15.1 The rights transferred by the Bill of Sale include,
without limitation the sole and exclusive right to the following:
6.15.1.1 To use the title or titles by which the
Program is or may be known or identified and to change the title of the Program;
6.15.1.2 To use and perform any and all music, lyrics
and musical compositions contained in the Program and/or recorded in the
soundtrack thereof in connection with the distribution, exhibition, advertising,
publicizing and exploiting of the Program;
6.15.1.3 To make such dubbed and titled versions of
the Program, and any trailers thereof, including without limitation, cut-in,
synchronized and superimposed versions in any and all languages for use in such
parts of the world as Corporation may deem advisable;
6.15.2 To make such changes, alterations, cuts, additions,
interpolations, deletions and eliminations into and from the Program and trailer
as may deem necessary or desirable, or as its licensees may deem necessary or
desirable for the effective marketing, distribution, exploitation or other use
of the Program.
6.15.3 The Bill of Sale also conveys to LLC throughout the
world the sole
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and exclusive right, license and privilege to any and all ancillary rights
and derivative works in the Programs. Such rights may include but are not
limited to all underlying work(s), all literary publishing rights, live
television rights, merchandising rights, music publishing rights, soundtrack
recording rights, radio rights, additional motion picture rights, remake rights
and sequel motion picture rights subject to the terms and conditions of the
agreements pursuant to which Corporation acquired the foregoing rights with
respect to the literary, dramatic and/or musical material used by Corporation in
connection with the Programs.
6.15.4 Corporation is the sole and absolute owner of the
rights granted herein, and has the absolute right to grant to and vest in LLC,
all the rights, licenses and privileges granted to LLC under this Agreement.
6.15.5 To the best of Corporation's knowledge, neither the
Programs nor any part thereof, nor any materials contained therein or
synchronized therewith, nor the title thereof, nor the exercise of any right,
license or privilege herein granted, violates or will violate or infringe or
will infringe any trademark, trade name, contract, agreement, copyright (whether
common law or statutory), patent, literary, artistic, dramatic, personal,
private, civil or property right or right of privacy or "moral rights of
authors" or any other right whatsoever of or slanders or libels any person,
firm, corporation or association whatsoever.
6.15.6 All terms, covenants and conditions required to be kept
or performed by Corporation under each and all of the contracts, licenses or
other documents relating to the production of the Programs have been kept and
performed and will hereafter be kept and performed by LLC and there is no
existing breach or other act of default by Corporation under any such agreement,
license or other document which has had or is likely to have a Material Adverse
Effect on Corporation or LLC.
6.15.7 LLC will quietly and peacefully enjoy and possess each
and all of the rights, licenses and privileges herein granted or purported to be
granted to LLC in perpetuity.
6.15.8 The performing rights to all musical compositions
contained in the Programs are: (a) controlled by the American Society of
Composers, Authors and Publishers (ASCAP), Broadcast Music, Inc., (BMI) or
similar organizations in other countries such as the Japanese Society of Rights
of Authors and Composers (JASEAC), the Performing Right Society Ltd. (PRS), the
Society of European Stage Authors and Composers (SESAC), the Societe des Auteurs
Compositeurs Et Editeurs de Musique (SACEM), Gesellschaft fur Misikalische
Auffuhrungs und Mechanische Vervielfaltigungsrechte (GEMA) or their affiliates,
or (b) in the public domain in the world or (c) controlled by Corporation to the
extent required for the purposes of this Agreement and Corporation similarly
controls or has licenses for any necessary synchronization and recording rights.
6.15.9 Except as set forth in Schedule 6.15.9 to this
Agreement or as hereinafter provided and except for the existing financing
statements in favor of Wells Fargo Bank
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(No. 94127460) and Dana Commercial Credit Corporation (No. 9528660443),
Corporation has made no other assignment of any of its rights which pertain to
the Programs to any other person or entity; that it has done no act, nor failed
to do any act, which might prevent LLC from exercising any of the rights, powers
and privileges conferred upon Corporation by the Programs as contemplated by
this Assignment; and, that Corporation is not in default under the provisions of
any of the Contracts and, to the knowledge of Corporation, none of the other
parties to any of the Contracts is in default under the provisions thereof.
6.16 Insurance. Schedule 6.16 to this Agreement is a description,
including policy number, of all insurance policies held by Corporation
concerning the Business and the Assets or insuring the life of any individual.
All these policies are in the respective principal amounts set forth in Schedule
6.16. Corporation has maintained and now maintains (1) insurance on the Assets
and the Business of a type customarily insured, covering property damage and
loss of income by fire or other casualty, and (2) adequate insurance protection
against all liabilities, claims and risks against which it is customary to
insure. Corporation is not in default with respect to payment of premiums on any
such policy. Except as set forth in an exhibit to this Agreement no claim is
pending under any such policy. As of the date of this Agreement, Corporation has
not received any notice that any of the policies listed on Schedule 6.16 have
been or will be canceled prior to its scheduled termination date, or would not
be renewed substantially on the same terms now in effect if the insured party
requested renewal or has received notice from any of its insurance carriers that
any insurance premiums will be subject to increase in an amount materially
disproportionate to the amount of the increases with respect thereto (or with
respect to similar insurance) in prior years.
6.17 Other Contracts. Other than as required by this Agreement,
Corporation is not a party to, nor is the property of Corporation bound by, any
agreement not entered into in the ordinary course of business; any indenture,
mortgage, deed of trust, or lease; or any agreement that is unusual in nature,
duration or amount (including any agreement requiring the performance by
Corporation of any obligation for more than one (1) year from the Effective Date
or calling for consideration of more than $10,000.00); except the agreements
listed in Schedule 6.17 to this Agreement, copies of which have been furnished
or made available to Buyer. There is no default or event that with notice, lapse
of time or both would constitute a default by any party to any of these
agreements. Corporation has not received notice that any party to any of these
agreements intends to cancel or terminate any of these agreements or to exercise
or not exercise any options under any of these agreements. Corporation is not a
party to nor is it or its property bound by any agreement that has a Material
Adverse Effect. Neither Corporation nor Shareholder knows or has reason to know
that any material artist, licensor, or licensee (other than Dunn) intends to
terminate its relationship with Corporation as a result of the transactions
contemplated by this Agreement.
6.18 Compliance with Laws. Neither Corporation nor Shareholder has
received notice of any violation of any applicable federal, state or local
statute, law or regulation (including any applicable building, zoning,
environmental protection or other ordinance or regulation) affecting their
properties or operation of their business; and to the best of the knowledge of
Corporation and Shareholder, there are no such violations.
<PAGE>
6.19 Litigation. Except as set forth in Schedule 6.19 to this
Agreement, there is no pending, or to the best knowledge of Shareholder, or
Corporation, threatened, suit, action, arbitration or legal, administrative or
other proceeding, or governmental investigation against or affecting Corporation
or any of its business, assets, or financial condition. Corporation is not in
default with respect to any order, writ, injunction or decree of any federal,
state, local or foreign court, department, agency or instrumentality. Neither
Corporation nor Shareholder is presently engaged in any legal action to recover
money due to any of them or damages sustained by any of them.
6.20 Agreement Will Not Cause Breach or Violation. The consummation
of the transaction contemplated by this Agreement will not result in or
constitute any of the following:
6.20.1 A material breach of any term or provision of this
Agreement or of any applicable federal or state law;
6.20.2 A default or an event that with notice, lapse of time
or both would be a default, breach or violation of the Articles of Incorporation
or By-Laws of Corporation or any lease, license, promissory note, conditional
sales contract, commitment, indenture, mortgage, deed of trust or other
agreement, instrument or arrangement to which Shareholder or Corporation is a
party or by which any of them or the property of any of them is bound (other
than the Wells Note or the CSA); or
6.20.3 An event that would permit any party to terminate any
agreement or to require a payment under or accelerate the maturity of any
indebtedness or other obligation of Corporation; or
6.20.4 Other than the liens created under this Agreement and
the Corporation Security Agreement, creation or imposition of any lien, charge
or encumbrance on any of the properties of Corporation.
6.21 Authority and Consents. Corporation and Shareholder each have
the right, power, legal capacity and authority to enter into and perform their
respective obligations under this Agreement; and no approvals or consents of any
persons other than Shareholder and the Board of Directors of Corporation are
necessary in connection with it. The execution and delivery of this Agreement by
Corporation has been duly authorized by all necessary corporate action.
6.22 Documents Provided. Buyer has been furnished for its
examination copies of the Articles of Incorporation and By-Laws of Corporation.
In addition, Buyer has been furnished Schedule 6.22A, an unaudited balance sheet
and income statement of Corporation for the seven-month period ending July 31,
1998, as well as Schedule 6.22B, projected financial statements for the calendar
year 1998.
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6.23 Employees. Schedule 6.23(a) to this Agreement sets forth
an accurate, correct, and complete list of all employees of Corporation as of
the Effective Date, including name, title or position, the present annual
compensation or wage rate, any interests in any bonus or incentive compensation
plan, and any other perquisite or form of non-cash compensation. No employee of
Corporation is subject to a non-competition or any other form of agreement,
whether written or oral, that would prevent such employee from continuing as an
employee of Corporation upon consummation of the transaction contemplated by
this Agreement or devoting his or her full talents, knowledge, and efforts to
Corporation upon consummation of the transaction contemplated by this Agreement.
Schedule 6.23(b) to this Agreement sets forth an accurate and complete list of
all loans, debts, and other obligations (collectively, "Employee Loans") owed by
any employee of Corporation to Corporation. Except as set forth in Schedule
6.23(b) to this Agreement, all outstanding Employee Loans owed to Corporation by
Shareholder will be repaid to Corporation at the Effective Date.
6.24 Employee Benefit Plans; Labor Matters.
6.24.1 Set forth in Schedule 6.24.1 to this Agreement is a
complete and correct list of all "employee benefit plans" (as defined in the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")), all
plans or policies providing for "fringe benefits" (including but not limited to
vacation, paid holidays, personal leave, employee discount, educational benefit,
or similar programs), and each other bonus, incentive, compensation, deferred
compensation, profit sharing, stock, severance, retirement, health, life,
disability, group insurance, employment, stock option, stock purchase, stock
appreciation right, supplemental unemployment, layoff, consulting, or any other
similar plan, agreement, policy, or understanding (whether written or oral,
qualified or nonqualified, currently effective or terminated), and any trust,
escrow, or other agreement related thereto that (a) is or has been established,
maintained, or contributed to by Corporation or any ERISA Affiliate (as defined
below) or with respect to which Corporation or any ERISA Affiliate has any
liability, or (b) provides benefits, or describes policies or procedures
applicable, to any officer, employee, director, former officer, former employee,
or former director of Corporation or any ERISA Affiliate, or any dependent
thereof, regardless of whether funded (each, an "Employee Plan," and
collectively, the "Employee Plans "). For purposes of this Agreement, "ERISA
Affiliate " means Corporation and each Person or other trade or business,
whether or not incorporated, that is or has been treated as a single employer or
controlled group member with Corporation pursuant to Section 414 of the Code or
ERISA Section 4001.
6.24.2 No written or oral representations have been made to
any employee or officer or former employee or officer of Corporation promising
or guaranteeing any coverage under any employee welfare plan for any period of
time beyond the end of the current plan year (except to the extent of coverage
required under Section 4980B of the Code), and no Employee Plan provides
benefits to any employee of Corporation or any ERISA Affiliate or any employee's
dependents after the employee terminates employment other than as required by
law. The consummation of the transactions contemplated by this Agreement will
not accelerate the time of payment or vesting, or increase the amount of
compensation (including amounts due under Employee Plans) due to any employee,
officer, former employee, or former officer of Corporation.
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6.24.3 Except as set forth on Schedule 6.24.3 to this
Agreement, all employees of Corporation are terminable at the will of
Corporation, and Corporation has not, nor has any present or former director,
officer, employee, or agent of Corporation, made any binding commitments of
Corporation, written or oral, to any present or former director, officer, agent,
or employee concerning his or her term, condition or benefits of employment by
Corporation other than as set forth in Schedule 6.24.3.
6.24.4 With respect to each Employee Plan, Corporation has
furnished to Buyer true, correct, and complete copies of (a) the plan documents
and summary plan description; (b) the most recent determination letter received
from the Internal Revenue Service; (c) the annual reports required to be filed
for the two most recent plan years of each such Employee Plan; (d) all related
trust agreements, insurance contracts; or other funding agreements that
implement such Employee Plan; and (e) all other documents, records, or other
materials related thereto requested by Buyer.
6.24.5 None of the Employee Plans are employee pension
benefit plans. All Employee Plans purporting to qualify for special tax
treatment under any provision of the Code, including, without limitation, Code
sections 79, 105, 106, 125, 127, 129, 132, 421, or 501(c)(9), meet the
requirement of such sections in form and in operation. All reports, returns, or
filings required by law have been timely filed in accordance with all applicable
requirements.
6.24.6 Neither Corporation, nor any ERISA Affiliate, nor any
plan fiduciary of any Employee Plan has engaged in any transaction in violation
of Section 406(a) or (b) of ERISA or any "prohibited transaction" (as defined in
Section 4975(c)(1) of the Code), that could subject Corporation, any ERISA
Affiliate, LLC, or Buyer to any taxes, penalties, or other liabilities resulting
from such prohibited transaction. No condition exists that would subject
Corporation, any ERISA Affiliate, or Buyer to any excise tax, penalty tax, or
fine related to any Employee Plan.
6.24.7 There is no Employee Plan that is or was subject to
Part 3 of Title I of ERISA or Title IV of ERISA; each Employee Plan has been
operated in all material respects in compliance with ERISA, the Code, and all
other applicable laws; none of the Employee Plans is or was a "multiple employer
plan" or "multiemployer plan" (as described or defined in ERISA or the Code),
nor has Corporation or any ERISA Affiliate ever contributed or been required to
contribute to any such plan; there are no material unfunded liabilities existing
under any Employee Plans; and each Employee Plan that has not been terminated
could be terminated as of the Effective Date without any material liability to
Buyer, Corporation, LLC, or any ERISA Affiliate. All contributions required to
be made to the Employee Plans have been made timely.
6.24.8 Corporation is not now nor has it ever been a party to
any collective bargaining or other labor union contract, and no collective
bargaining agreement is being negotiated by Corporation. Corporation is in
compliance in all material respects with all applicable laws respecting
employment, employment practices, and wages and hours. There is no pending or
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threatened labor dispute, strike, or work stoppage against Corporation that may
interfere with the business activities of Corporation. Neither Corporation nor
any of its representatives or employees has committed any unfair labor practices
in connection with the operation of the business of Corporation, and there is no
pending or threatened charge or complaint against Corporation by the National
Labor Relations Board or any comparable state authority.
6.24.9 Corporation is not a party to or bound by any
severance agreements, programs, policies, plans, or arrangements, whether or not
written. Schedule 6.24.9 sets forth, and Corporation has provided to Buyer true
and correct copies of, (a) all employment agreements with officers or employees
of Corporation; (b) all agreements with consultants of Corporation obligating
Corporation to make annual cash payments in an amount exceeding $10,000, and (c)
all noncompetition agreements with Corporation.
6.24.10 Corporation has not amended or taken any other
action with respect to any of the Employee Plans or any of the plans, programs,
agreements, policies, or other arrangements described in this Section 6.24.1
since the Balance Sheet Date.
6.24.11 If requested in writing by Buyer at least three (3)
business days prior to the First Price Adjustment Date, Corporation will
terminate its employee benefit pension plans listed in Schedule 6.24.5 prior to
the First Price Adjustment Date and will comply with all provisions of the Code,
ERISA and applicable laws in terminating such plan.
6.25 Powers of Attorney; Bank Accounts. Schedule 6.25 to this
Agreement lists (a) the names and addresses of all persons holding a power of
attorney on behalf of Corporation and (b) the names and addresses of all banks
or other financial institutions in which Corporation has an account, deposit, or
safe deposit box, with the names of all persons authorized to draw on these
accounts or deposits or to have access to these boxes, including account
numbers.
6.26 Full Disclosure. None of the representations or warranties
made by Shareholder or Corporation or made in any certificate, memorandum or
exhibit furnished or to be furnished by Corporation or Shareholder or on their
behalf, contains or will contain any untrue statement of a material fact, or
omits to state any material fact necessary to make the statements made true.
7. BUYER'S REPRESENTATIONS AND WARRANTIES
Buyer represents and warrants that Buyer has the right, power, legal
capacity and authority to enter into and perform their respective obligations
under this Agreement; and no approvals or consents of any persons other than
Buyer are necessary in connection with it.
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8. RELEASE OF SHAREHOLDER.
Effective upon the Effective Date, except as expressly provided in
this Agreement, Shareholder, for itself and its successors, and assigns, hereby
fully and unconditionally releases and forever discharges and holds harmless
Corporation and LLC and their employees, officers, directors, successors, and
assigns and Buyer from any and all claims of every kind and nature whatsoever,
whether or not now existing or known, relating in any way, directly or
indirectly, to Corporation, LLC, or Buyer that Shareholder may now have or may
hereafter claim to have against Corporation or LLC or any of their employees,
officers, directors, successors, or assigns or Buyer arising before the
Effective Date or as a result of the transactions contemplated by this
Agreement.
9. CONFIDENTIAL INFORMATION.
Corporation and Shareholder waive any cause of action, right or claim
arising out of the access of Buyer or its representatives to any trade secrets
or any other confidential business information of Corporation from the date of
this Agreement until October 8, 1998, except for the intentional competitive
misuse by Buyer or its representatives of such trade secrets or other
confidential business information. If Buyer makes Buyer's Recision Election (as
defined in Section 10.1 hereof), Buyer shall promptly return to Corporation and
Shareholder all written documents, records, and other information provided to
Buyer by Corporation, Shareholder, or their agents, attorneys, or accountants,
in connection with the transactions contemplated in this Agreement and shall
destroy all copies thereof.
10. CONDITIONS PRECEDENT TO BUYER'S PERFORMANCE
The obligations of Buyer to consummate the transactions contemplated
by this Agreement are subject to the satisfaction, at or before each of the
First Adjustment Date and the Second Adjustment Date (except as otherwise
specifically provided), of all of the conditions set out below in this Section
10. Buyer may waive any or all of these conditions in whole or in part without
prior notice; provided, however, any such waiver shall be in writing and that no
such waiver of a condition will constitute a waiver by Buyer of any of its other
rights or remedies, at law or in equity, if Shareholder or Corporation is in
default of any of the representations, warranties of covenants under this
Agreement:
10.1 Due Diligence. Satisfaction of Buyer, in its sole discretion,
with the results of its investigation and analysis of Shareholder, Corporation,
the Business, and the Assets (its "due diligence"). Such condition shall have no
further effect after October 8, 1998, or, if later, completion of financial
statements for Corporation for the period ending September 8, 1998 (including a
balance sheet as of such date), satisfactory in form to Buyer, unless Buyer
shall have notified Sellers of its disapproval of such condition on or before
such date. Buyer's notification of such disapproval is hereinafter referred to
as "Buyer's Recision Election." The parties acknowledge that Buyer's preliminary
evaluation of the Business and its decision to enter into this Agreement have
been based in significant part on financial information for the period from
January 1, 1998, through July 31,
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1998, and that as a result of its due diligence, Buyer may determine, among
other things, that the true financial condition and results of the Business for
such period materially vary from that information.
10.2 Corporate Documents. Sellers shall have furnished to Buyer for
its examination:
10.2.1 The minute books of Corporation containing all records
required to be set forth of all proceedings, consents, actions and meetings of
shareholders and boards of directors of Corporation;
10.2.2 All permits, orders and consents issued by the
California Commissioner of Corporations with respect to Corporation or with
respect to any security of Corporation, and all applications for such permits,
orders and consents; and
10.2.3 The stock transfer books of Corporation setting forth
all transfers of any capital stock.
10.3 Dunn Judgment. Satisfaction in full of the Dunn Judgment and
release of all liens arising therefrom.
10.4 Accuracy of Warranties. Except as otherwise permitted by this
Agreement, all representations and warranties by Shareholder in this Agreement,
or in any written statement that will be delivered to Buyer by Corporation or
Shareholder under this Agreement must be true in all material respects on the
applicable Adjustment Date as though made at that time.
10.5 Performance. Corporation and Shareholder must have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement to be performed or complied with by
them, or either of them, by the applicable Adjustment Date.
10.6 Absence of Litigation. No action, suit or proceeding before
any court or any governmental body or authority, pertaining to the transaction
contemplated by this Agreement or to its consummation will have been instituted
or threatened on or before the applicable Adjustment Date.
10.7 Consent of Elizabeth Adams. Sellers shall have obtained and
furnished to Buyer, in form satisfactory to Buyer, the consent of Elizabeth
Adams, Shareholder's wife, to the transactions contemplated by this Agreement.
10.8 No Material Adverse Change. During the period from the Balance
Sheet Date to the First Adjustment Date, other than the consequences of
enforcement of the Dunn Judgment, there will not have been any change in the
financial condition or results of operations of Corporation or LLC which has a
Material Adverse Effect, and neither Corporation nor LLC will have
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sustained any insured or uninsured loss or damage to its assets that will have a
Material Adverse Effect on its ability to conduct its business.
10.9 Certification. Buyer will have received a certificate, dated
as of the applicable Adjustment Date, signed and verified by Shareholder,
certifying, in such detail as Buyer and its counsel may reasonably request, that
to the best of Shareholder's knowledge the conditions specified in Sections 10.1
through 10.8 hereof have been fulfilled.
If any of the foregoing conditions shall fail, then subject to Section 16.1
hereof, Buyer may, in its sole discretion, declare that the Notes and the Wells
Note are due and payable in full and take all actions permitted by law to
collect the amounts due thereunder. Otherwise, Buyer shall extend the due dates
of the Notes and the Wells Note to March 31, 1999.
11. TIME AND PLACE OF ADJUSTMENTS.
11.1 First Price Adjustment. The First Price Adjustment will take
place at the offices Gaiam Holdings, Inc., at 360 Interlocken Blvd. Suite 300,
Broomfield, CO 80021, at 2:00 pm local time, at the earliest time after which
(a) Corporation has implemented accounting procedures outlined in Exhibit 12.4
hereof to the satisfaction of Buyer and (b) the Dunn Judgment has been satisfied
in full and all liens against Sellers, LLC, and the Assets have been released,
or at such other time and place as the parties may agree in writing. That date
or if the First Price Adjustment is advanced or postponed under this Section
11.1, the date to which it is advanced or postponed, is called the First Price
Adjustment Date.
11.2 Second Price Adjustment. The Second Price Adjustment will take
place at the offices of Gaiam Holdings, Inc., 360 Interlocken Blvd. Suite 300,
Broomfield, CO 80021, at 2:00 pm local time, on the later of March 31, 1999, or
fifteen (15) days after delivery of the audited financial statements of the
Corporation Short Period and the LLC Short Period prepared by the Independent
Accountant to Buyer or at such other time and place as the parties may agree in
writing. That date or if the Second Price Adjustment is advanced or postponed
under this Section 11.2, the date to which it is advanced or postponed is called
the Second Price Adjustment Date. The First Adjustment Date and the Second
Adjustment Date are collectively referred to as "Adjustment Dates."
12. SELLERS' OBLIGATIONS AFTER EFFECTIVE DATE
12.1 Sellers' Indemnity. Sellers shall jointly and severally
indemnify, defend and hold harmless, Buyer and LLC against and in respect of
claims, demands, losses, costs, expenses. obligations, liabilities, damages,
recoveries and deficiencies including interest, penalties and reasonable
attorney fees ("claims"), that either may incur or suffer, which arise, result
from or relate to any breach of, or failure by Sellers to perform, any of their
representations, warranties, covenants or agreements in this Agreement or in any
schedule, certificate, exhibit or other instrument furnished or to be furnished
to Buyer under this Agreement, or arising out of the ownership or operation of
the
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Business and the Assets prior to the Effective Date (except Assumed
Liabilities).
12.2 Sellers' Right to Defend. Buyer will promptly notify Sellers
of the existence of any claim, demand or other matter to which Sellers'
indemnification obligation would apply and will give Sellers a reasonable
opportunity to defend the same at Sellers' own expense and with counsel of
Sellers' own selection; provided that Buyer will at all times also have the
right to participate fully in the defense at Buyer's own expense. If Sellers,
within a reasonable time after this notice, fails to defend, Buyer will have the
right, but not the obligation, to undertake the defense of and to compromise or
settle (exercising reasonable business judgment), the claim or other matter on
behalf of or for the account and at the risk of Sellers. If the claim is one
that cannot by its nature be defended solely by Sellers (including any Tax
proceedings), Buyer will make available and cause LLC to make available all
information and assistance that Sellers may reasonably request.
12.3 Tax and Accounting Matters. On and after the Second Adjustment
Date, at the election of Buyer, Sellers shall cause the incorporation of LLC as
a "C" corporation, provided that Buyer shall indemnify and hold Sellers harmless
from any adverse tax consequences to Sellers (including Corporation in its
capacity as a member of LLC) resulting from such incorporation (and not from the
operations of the "C" corporation). In addition, Sellers shall cooperate with
Buyer in restructuring the transactions contemplated by this Agreement to effect
the best possible positions for Buyer with respect to accounting and tax matters
relating to the Business and the transactions contemplated by this Agreement,
provided that Buyer shall bear any additional expenses incurred as a result of
such restructuring and such restructuring shall not result in any tax
consequences to Sellers which vary materially from the tax consequences of the
transactions contemplated by this Agreement.
12.4 Accounting Issues. On and after the Effective Date, to the
satisfaction of Buyer, Sellers shall use their best efforts to cause LLC to
implement the accounting issues outlined in Exhibit 12.4 hereof. If the parties
are unable to agree on the appropriate accounting issues, the Independent
Accountant (or another "Big 5" accounting firm replacing the Independent
Accountant mutually agreed upon by the parties) shall determine the appropriate
accounting issues.
12.5 Right of First Refusal. If, at any time while Corporation is a
member of LLC, Shareholder receives a bona fide third party offer to purchase
all or any part of the stock of Corporation (the "offered shares") (such offer
is referred to hereinafter as the "offer"), Shareholder shall immediately submit
a complete copy of the offer to Buyer. Buyer shall then have fourteen (14) days
in which to notify Shareholder, if at all, of its intent to purchase the offered
shares for the price set forth in the offer. If Buyer so elects, Buyer shall
purchase the offered shares for such price and on such terms. Such purchase
shall close within one hundred twenty (120) days of such notice, regardless of
any other terms of the offer. If Buyer does not so notify Shareholder,
Shareholder shall be free to sell the offered shares at the price and on the
terms set forth in the offer. Except as provided in this Section 12.5,
Corporation may not sell, exchange, or otherwise transfer all or any part of the
shares of Corporation.
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12.6 Name Change. As soon as possible after the Effective Date,
Shareholder shall change the name of Corporation to "Steven P. Adams Holdings,
Inc.," or a substantially similar name.
12.7 Negotiations with Dunn. After the Effective Date, Buyer or its
representative may enter into discussions with Dunn respecting settlement of
claims arising between Corporation or LLC and Dunn, provided that such
discussions are conducted together with Jonathan Kirsch, Esq., counsel to
Corporation, and that no settlement offer is made to Dunn which does not comply
with Schedule 2 to this Agreement.
13. BUYER'S INDEMNITY.
13.1 Buyer's Indemnity. Buyer shall indemnify, defend and hold
harmless, Sellers against and in respect of claims, demands, losses, costs,
expenses. obligations, liabilities, damages, recoveries and deficiencies
including interest, penalties and reasonable attorney fees that Sellers may
incur or suffer, which arise, result from or relate to any breach of, or failure
by Buyer to perform, any of its representations, warranties, covenants or
agreements in this Agreement or in any schedule, certificate, exhibit or other
instrument furnished or to be furnished to Sellers under this Agreement. In
addition, provided that no changes are made to the tax basis of the Assets as
set forth on the 1997 federal income tax return of Corporation, Buyer shall
indemnify Sellers and hold them harmless against any tax liabilities of Sellers
arising solely from the casting of the form of the transactions contemplated in
this Agreement as a purchase by Buyer of a membership interest in LLC, rather
than a sale to Buyer of an undivided portion of the Assets.
13.2 Buyer's Right to Defend. Sellers will promptly notify Buyer of
the existence of any claim, demand or other matter to which Buyer's
indemnification obligation would apply and will give Buyer a reasonable
opportunity to defend the same at Buyer's own expense and with counsel of
Buyer's own selection; provided that Sellers will at all times also have the
right to participate fully in the defense at Sellers' own expense. If Buyer,
within a reasonable time after this notice, fails to defend, Sellers will have
the right, but not the obligation, to undertake the defense of and to compromise
or settle (exercising reasonable business judgment), the claim or other matter
on behalf of or for the account and at the risk of Buyer. If the claim is one
that cannot by its nature be defended solely by Buyer, Sellers will make
available all information and assistance that Buyer may reasonably request.
14. PUBLICITY.
All notices to third parties and all other publicity concerning
the transaction contemplated by this Agreement will be jointly planned and
coordinated between Buyer and Sellers, and no party will act unilaterally in
this regard without the prior written approval of the other, which approval will
not be unreasonable withheld.
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15. COSTS AND EXPENSES.
15.1 Broker; Finder's Fee. Each party represents and warrants that
it has dealt with no broker or finder in connection with any transaction
contemplated by this Agreement and, as far as it knows, no broker or other
person is entitled to any commission or finder's fee in connection with any of
these transactions. Sellers will indemnify and hold LLC and Buyer, and Buyer
will indemnify and hold Sellers, harmless against any loss, liability, damage,
costs claim or expense incurred by reason of any brokerage, commission, or
finder's fee alleged to be payable because of any act, omission or statement of
the indemnifying party.
15.2 Expenses. Each party will pay all costs and expenses incurred
or to be incurred by it in negotiating and preparing this Agreement and closing
and carrying out the transactions contemplated by this Agreement, including
without limitation any taxes incurred by it as a result of or arising out of
such transactions.
16. MISCELLANEOUS PROVISIONS.
16.1 Buy-Back Right. If, on or before October 8, 1998, Buyer make
Buyer's Recision Election, Corporation shall have the right, upon notice given
within ten (10) days after receipt of notice from Buyer of such Election, to
purchase Buyer's entire right, title, and interest in and to its membership
interest in LLC for the sum of $100,000 and payment in full of the Wells Note,
the Notes, and all accounting expenses of Buyer in connection with the
transactions contemplated by this Agreement (including reasonable and actual
costs), which amounts shall be due and payable in full on or before December 14,
1998.
16.2 Covenants re Operations of LLC.
16.2.1 The parties acknowledge that the Valuation is
dependent upon the operations of the LLC during the LLC Short Period. In order
to assure that such operations fairly reflect the profitability of the Business,
during the LLC Short Period, except in the event of a business emergency, Buyer
shall not cause any extraordinary measures to be instituted by LLC or cause LLC
to incur any extraordinary expenses which would unfairly distort the income of
LLC for such period. Sellers agree to operate the Business in the ordinary
course, not sacrificing value for short-term gain. Neither Corporation nor
Shareholder, in his capacity as President of LLC, shall cause LLC to incur any
capital expenditures in excess of $10,000 or enter into any long-term contracts
without the approval of Buyer.
16.2.2 Corporation and Shareholder shall take no actions
which cause (and shall perform all actions required to prevent) termination of
any contracts of LLC.
16.2.3 After Buyer's receipt of financial statements for
Corporation for the period ending September 8, 1998 (including a balance sheet
as of such date), satisfactory in form to Buyer, Corporation and Shareholder may
pursue obtaining financing of LLC for the purpose of
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repayment of the Wells Note.
16.3 Effect of Headings. The subject headings of the paragraphs and
subparagraphs are included for convenience only and will not effect the
construction or interpretation of any of its provisions.
16.4 Word Usage. Unless the context clearly requires otherwise: (a)
plural and singular number will each be considered to include the other; (b) the
masculine, feminine and neuter genders will each be considered to include the
others; (c) "shall," "will," "must," "agree," and "covenants" are each
mandatory; (d) "may" is permissive; (e) "or" is not exclusive; and (f)
"includes" and "including" are not limiting.
16.5 Entire Agreement; Modification and Waiver. This Agreement and
the ancillary documents and agreements referred to in this Agreement constitute
the entire agreement between the parties pertaining to the subject matter
contained in it and supersedes all prior and contemporaneous agreements,
representations and understandings of the parties. No supplement, modification
or amendment to this Agreement will be binding unless executed in writing by all
parties. No waiver of any of the provisions of this Agreement will constitute a
waiver of any other provision, whether or not similar, nor will any waiver
constitute a continuing waiver. No waiver will be binding unless executed in
writing by the party making the waiver.
16.6 Counterparts. This Agreement may be executed simultaneously or
in one or more counterparts, each of which will be deemed an original, but all
of which together will constitute one and the same Agreement.
16.7 Parties in Interest. Nothing in this Agreement, whether
expressed or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any persons other than the parties to it and their
respective successors and assigns. Nothing in this Agreement is intended to
relieve or discharge the obligation or liability of any third persons to any
party to this Agreement. No provision gives any third persons any right of
subrogation or action against any party to this Agreement.
16.8 Assignment. This Agreement will be binding on and will enure
to the benefit of the parties to it and their respective heirs, legal
representatives, successors and assigns; provided, however, Buyer may not assign
any of its rights under this Agreement, except to a family member of Buyer or to
an entity owned or controlled by Buyer or which owns or controls Buyer. No such
assignment by Buyer will relieve Buyer of any of Buyer's obligations or duties
under this Agreement.
16.9 Arbitration. Any controversy or claim arising out of, or
relating to this Agreement or the making, performance or interpretation of it
will be settled by arbitration in Denver, Colorado, under the Commercial
Arbitration rules of the American Arbitration Association then existing, and
judgment on the arbitration award may be entered in any court having
jurisdiction over the subject matter of the controversy. Arbitrators will be
persons experienced in negotiating, making
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and consummating acquisition agreements.
16.10 Specific Performance and Waiver of Recision Rights. Each
party's obligations under this Agreement are unique. If any party should default
in its obligations under this Agreement, the parties acknowledge that it would
be extremely impractical to measure the resulting damages; accordingly, the non-
defaulting party or parties, in addition to any other available rights or
remedies, may sue in equity for specific performance and the parties each
expressly waive the defense that a remedy in damages will be adequate. Despite a
breach or default by any of the parties or any of their respective
representations, warranties, covenants or agreements under this Agreement, if
the agreement and sale contemplated by it is consummated at the closing, each of
the parties waive any unilateral right that such party may have to rescind this
Agreement or the transaction consummated by it; provided, however, that this
waiver will not effect any rights or remedies available to the parties under
this Agreement or under law.
16.11 Attorney Fees. If any legal action, arbitration or other
proceeding is brought for the enforcement of this Agreement because of an
alleged dispute, breach, default or misrepresentation in connection with any of
the provisions of this Agreement, the successful or prevailing party or parties
will be entitled to recover reasonable attorney fees and other costs incurred in
that action or proceeding, in addition to any other relief to which it or they
may be entitled.
16.12 Nature and Survival of Warranties and Obligations; Setoffs.
All representations, warranties, covenants and agreements of Buyer and Sellers
contained in this Agreement or in any instruments, certificate, opinion or other
writing provided for in it (other than the representations of Shareholder set
forth in Section 6.8 hereof ("Tax Warranties")) will survive until September 8,
2001. All Tax Warranties will survive without limitation. All statements
contained in any schedule, certificate, or other writing delivered in connection
with this Agreement or the transactions contemplated by this Agreement will
constitute representations and warranties under this Agreement. Buyer may reduce
any amounts due to Sellers or LLC, and set off against its obligations
hereunder, without any further action or notice to Sellers or LLC, any amounts
due and payable from Sellers or LLC to Buyer under the terms of this Agreement,
including without limitation Section 12.1 hereof. Notwithstanding the foregoing,
any amounts in excess of disputed amounts shall be paid to Corporation or
Shareholder when otherwise due.
16.13 Notices. Unless otherwise specifically permitted by this
Agreement, all notices under this Agreement shall be in writing and shall be
delivered by personal service, federal express or comparable overnight service
or certified mail (if such service is not available, then by first class mail),
postage prepaid, to such address as may be designated from time to time by the
relevant party, and which shall initially be:
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If to Corporation:
Healing Art Publishing, Inc.
2434 Main Street
Santa Monica, California 90405
Attn: Steven P. Adams
With a copy to:
Harvey Gilbert, Esq.
9777 Wilshire, Ste. 505
Beverly Hills, CA 90212
If to Shareholder:
Steven P. Adams
2434 Main Street
Santa Monica, California 90405
With a copy to:
Harvey Gilbert, Esq.
9777 Wilshire, Ste. 505
Beverly Hills, CA 90212
If to Buyer:
Gaiam Holdings Inc.
360 Interlocken Blvd. Suite 300
Broomfield, CO 80021
Attn: Lynn Powers
With a copy to:
Leslie S. Klinger, Esq.
Kopple & Klinger, LLP
2029 Century Park East
Suite 3290
Los Angles, CA 90067
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And a copy to:
Mark K. Shaner, Esq.
3177 South Parker Road
Aurora, CO 80014
Any notice sent by certified mail shall be deemed to have been
given three (3) days after the date on which it is mailed. All other notices
shall be deemed given when received. No objection may be made to the manner of
delivery of any notice actually received in writing by an authorized agent of a
party.
Any party may change its address for purposes of this
paragraph by giving the other parties written notice of the new address in the
manner set forth above.
16.14 Governing Law. This Agreement and the ancillary documents
executed together with this Agreement will (except to the extent otherwise
specifically provided in such documents) be construed in accordance with and
governed by the laws of the State of Colorado, as applied to contracts that are
executed and performed entirely in Colorado.
16.15 Further Assurances. Sellers, at any time after the
Effective Date, will execute, acknowledge, and deliver any further deeds,
assignments, conveyances, and other assurances, documents, and instruments of
transfer, reasonably requested by Buyer (and will use their best efforts to
cause third parties to do the same), and will take any other action consistent
with the terms of this Agreement that may reasonably be requested by Buyer for
the purpose of assigning, transferring, granting, conveying, and confirming to
Buyer, or reducing to possession, any or all property to be conveyed and
transferred under this Agreement. If requested by Buyer, Corporation will
prosecute or otherwise enforce in its own name for the benefit of LLC any
claims, rights, or benefits that are transferred to LLC under this agreement and
that require prosecution or enforcement in Corporation's name. Any prosecution
or enforcement of claims, rights, or benefits under this Section 16.15 will be
solely at LLC's expense, unless the prosecution or enforcement is made necessary
by a breach of this agreement by any of Sellers.
16.16 Severability. If any provision of this Agreement is held
invalid or unenforceable by any court of final jurisdiction, it is the intent of
the parties that all other provisions of this Agreement be construed to remain
fully valid, enforceable and binding on the parties.
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IN WITNESS WHEREOF, the parties to this Agreement have duly
executed it on the day and year first above written.
Buyer: GAIAM HOLDINGS, INC.
By: /s/ Lynn Powers
-------------------------------------
Corporation: HEALING ARTS PUBLISHING, INC.
By: /s/ Steven P. Adams
-------------------------------------
Steven P. Adams, President
By: /s/ Kathleen Mulcahy
-------------------------------------
Kathleen Mulcahy, Assistant Secretary
Shareholder:
/s/ Steven P. Adams
-------------------------------------
STEVEN P. ADAMS
LLC: HEALING ARTS PUBLISHING, LLC
By: /s/ Steven P. Adams
-------------------------------------
Steven P. Adams, President
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For purposes of Section 5.4 only:
GAIAM, INC.
By: /s/ Lynn Powers
- --------------------------------
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EXHIBIT 3.1
________________________________________________________________________________
Amended and Restated Articles of Incorporation
of
Gaiam, Inc.
________________________________________________________________________________
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned Corporation hereby adopts the following Amended and Restated
Articles of Incorporation. These Amended and Restated Articles of Incorporation
amend, restate, and supersede the Corporation's Articles of Incorporation
originally filed July 7, 1988, as subsequently amended. These Amended and
Restated Articles of Incorporation were adopted by the shareholders of the
Corporation as of September __, 1999. The number of votes cast by each voting
group entitled to vote separately on the amendment was sufficient for approval
by that voting group.
ARTICLE I
NAME
The name of the Corporation shall be Gaiam, Inc.
ARTICLE II
CORPORATE PURPOSE
The nature of the business of the Corporation and the objects and purpose
to be transacted, promoted, and carried on by it are to engage generally in any
lawful business.
ARTICLE III
DURATION
The Corporation shall have perpetual existence.
ARTICLE IV
SHARES OF STOCK
A. Authorized Capital Stock. The aggregate number of shares that the
Corporation shall have authority to issue is two hundred fifty million
(250,000,000), consisting of one hundred million (150,000,000) shares of Class A
Common Stock, par value $.0001 per share, fifty million (50,000,000) shares of
Class B Common Stock, par value $.0001 per share and fifty million (50,000,000)
shares of Preferred Stock, par value $.0001 per share (the "Preferred Stock").
The Class A Common Stock and Class B Common Stock are sometimes referred to in
these Articles as the "Common Stock". References to these "Articles" shall be
understood to mean these
<PAGE>
Amended and Restated Articles of Incorporation as set forth herein and as
amended from time to time hereafter in accordance with the provisions of these
Articles and of applicable law.
B. Outstanding Shares. Upon the filing of these Articles, each share of
Class A Common Stock outstanding immediately prior to the filing of these
Articles shall be converted into four tenths of a share of Class A Common Stock,
and each share of Class B Common Stock outstanding immediately prior to the
filing of these Articles shall be converted into four tenths of a share of Class
B Common Stock.
C. Preemptive Rights. Unless subsequently granted by the Board of
Directors, shareholders of the Common Stock of the Corporation shall not have
the preemptive right to acquire unissued shares or securities convertible into
such shares or carrying a right to subscribe to or acquire shares. Such
provisions shall apply to both shares outstanding and to newly issued shares.
D. Dividends. No dividends or any other distribution may be paid or
declared or set aside for Class B Common Stock unless an equal amount is paid or
declared or set aside for the Class A Common Stock, and no dividends or any
other distribution may be paid or declared or set aside for Class A Common Stock
unless an equal amount is paid or declared or set aside for the Class B Common
Stock. In the case of dividends or other distributions payable in Common Stock
of the Corporation, such distributions or dividends shall be in the same
proportion with respect to each class of Common Stock, but only shares of Class
A Common Stock shall be distributed with respect to Class A Common Stock and
only shares of Class B Common Stock shall be distributed with respect to Class B
Common Stock. In the case of any combination or reclassification of Class A
Common Stock, the shares of Class B Common Stock shall also be combined or
reclassified so that the relationship between the number of shares of Class B
Common Stock and Class A Common Stock outstanding immediately following such
combination or reclassification shall be the same as the relationship between
the Class B Common Stock and the Class A Common Stock immediately prior to such
combination or reclassification.
E. Voting. Each holder of Class A Common Stock shall have one (1) vote on
all matters submitted to shareholders for each share of Class A Common Stock
standing in the name of such holder on the books of the Corporation. Each holder
of Class B Common Stock shall have ten (10) votes on all matters submitted to
shareholders for each share of Class B Common Stock standing in the name of such
holder on the books of the Corporation. Except as otherwise provided in these
Articles or as otherwise provided by law, all shares of Common Stock of the
Corporation entitled to vote shall vote as a single group on all matters
submitted to the shareholders. The Corporation may not issue any additional
shares of Class B Common Stock (except in connection with stock splits and stock
dividends) and the provisions of these Articles relating to the rights of the
Class B Common Stock may not be amended unless and until such action is
authorized by the holders of a majority of the voting power of the shares of
Class A Common Stock and of Class B Common Stock entitled to vote, each voting
separately as a class. In the election of directors, cumulative voting shall not
be allowed.
F. Quorum. At all meetings of the shareholders, the holders of a majority
of the votes eligible to be cast shall constitute a quorum. If a quorum is
present, the affirmative vote of
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a majority of the votes eligible to be cast on the subject matter shall be the
act of the shareholders unless the vote of a greater number or voting by groups
is required by the Colorado Business Corporation Act or these Articles.
G. Liquidation. In the event of either an involuntary or a voluntary
liquidation or dissolution of the Corporation, the holders of Class A and Class
B Common Stock shall share ratably all assets and surplus funds of the
Corporation available for distribution to the holders of Common Stock.
H. Restrictions on Transfer of the Class B Common Stock. No holder of
record of Class B Common Stock (a "Class B Holder") may transfer, and the
Corporation shall not register the transfer of, such shares of Class B Common
Stock, whether by sale, assignment, gift, bequest, appointment or otherwise,
except to a Permitted Transferee, as defined below.
1. Permitted Transferees.
(a) Natural Persons. In the case of a Class B Holder who is a
natural person, a Permitted Transferee shall mean: (i) the spouse of
such Class B Holder, any lineal descendant of a grandparent of such
Class B Holder and any spouse of such a lineal descendant; (ii) the
trustee of a trust (including a voting trust) principally for the
benefit of such Class B Holder and/or one or more of his or her
Permitted Transferees described in this Section H(1)(a); (iii) any
organization described in Section 170(c) of the Internal Revenue Code,
as it may from time to time be amended (the "Code"), or any split-
interest trust described in Section 4947 of the Code (hereinafter
called a "Charitable Organization"); (iv) a corporation, a majority of
the beneficial ownership of outstanding capital stock of which entitled
to vote for the election of directors is owned by, or a partnership a
majority of the beneficial ownership of the partnership interests of
which entitled to participate in the management of the partnership are
held by, such Class B Holder or his or her Permitted Transferees
determined under this Section H(1)(a); and (v) the executor,
administrator or personal representative of the estate of such Class B
Holder or the guardian of the estate of such Class B Holder.
(b) Trustees, Charitable Organizations, and Corporations and
Partnerships. In the case of a Class B Holder that is a trust, a
Charitable Organization, a corporation or partnership, "Permitted
Transferee" means (i) any person transferring shares of Class B Common
Stock to such entity or organization and (ii) any Permitted Transferee
of any such transferor as determined under Section H(1)(a) above.
(c) Executors. In the case of a Class B Holder that is the
executor, administrator, personal representative or guardian of the
estate of a deceased Class B Holder, or that is the trustee or receiver
of the estate of a bankrupt or insolvent Class B Holder, "Permitted
Transferee" means a Permitted Transferee of such deceased, bankrupt or
insolvent Class B Holder as determined pursuant to Section H(1)(a)
above.
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2. Transfer of Control. If by reason of any change in the
ownership of the stock or partnership interests of a Permitted Transferee
that is a corporation or partnership, such corporation or partnership would
no longer qualify as a Permitted Transferee as set forth in Section H(1)(a)
above, then all shares of Class B Common Stock then held by such
corporation or partnership shall, upon the election of the Corporation
given by written notice to such corporation or partnership, without further
action, be converted into shares of Class A Common Stock effective upon the
date of the giving of such notice.
3. Pledge. A Class B Holder may pledge such holder's shares of
Class B Common Stock to a pledgee pursuant to a bona fide pledge of such
shares as collateral security for indebtedness due to the pledgee, provided
that such shares shall not be transferred to or registered in the name of
the pledgee and shall remain subject to the provisions of this Section H.
In the event of foreclosure or other similar action by the pledgee, such
pledged shares of Class B Common Stock may only be transferred to a
Permitted Transferee of the pledgor or converted into shares of Class A
Common Stock, as the pledgee may elect.
4. Interpretations. For purposes of this Section H, (a) the
relationship of any person that is derived by or through legal adoption
shall be considered a natural one; (b) each joint owner of shares of Class
B Common Stock shall be considered a "Class B Holder" of such shares; (c) a
minor for whom shares of Class B Common Stock are held pursuant to a
Uniform Gifts to Minors Act or similar law shall be considered a Class B
Holder of such shares; (d) unless otherwise specified, the term "person"
means both natural persons and legal entities; (e) without limiting the
rights of the Corporation pursuant to Section H(2) above, each reference to
a corporation or partnership shall include any successor corporation or
partnership resulting from merger or consolidation; each reference to a
partnership shall include any successor partnership resulting from the
death or withdrawal of a partner; and each reference to a trustee shall
include any successor trustee.
5. Transfers other than to Permitted Transferees. Any transfer
of shares of Class B Common Stock not permitted under these Articles shall
result in the conversion of the transferee's shares of Class B Common Stock
into shares of Class A Common Stock, effective the date on which
certificates representing such shares are presented for transfer on the
books of the Corporation.
6. Record Holder. Shares of Class B Common Stock shall not be
registered in "street" or "nominee" name. The Corporation shall note on the
certificates for shares of Class B Common Stock the restrictions on
transfer imposed by this Section H.
I. Conversion Rights. Subject to the terms and conditions of this Section
I, each share of Class B Common Stock shall be convertible at any time or from
time to time at the option of a Class B Holder into one (1) share of Class A
Common Stock. At any time when the
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<PAGE>
holders of a majority of the outstanding shares of Class B Common Stock approve
the conversion of all or part of the Class B Common Stock into Class A Common
Stock, then each outstanding shares of Class B Common Stock designated for
conversion shall be converted into one (1) share of Class A Common Stock as of
the close of business on the date approved by the holders of a majority of the
outstanding shares of Class B Common Stock.
1. Conversion Procedure. A Class B Holder desiring conversion
shall (a) surrender the certificate or certificates evidencing the Class B
Common Stock being converted, duly endorsed by such Class B Holder to the
Corporation or in blank or accompanied by proper instruments of transfer to
the Corporation, and (b) give written notice to the Corporation that such
Class B Holder elects to convert such Class B Holder's Class B Common
Stock. As soon as practicable after receipt of such notice and deposit of
such certificate, the Corporation shall issue and deliver to the converting
Class B Holder a certificate or certificates for the number of full shares
of Class A Common Stock to which the Class B Holder shall be entitled
pursuant to this Section I. Such conversion shall be deemed to have been
made as of the close of business on the date upon which the Corporation
receives such notice and deposit, and the person or persons entitled to
receive the Class A Common Stock issuable upon conversion of such Class B
Common Stock shall be treated for all purposes as the record holder or
holders of such Class A Common Stock as of the close of business on such
date.
2. Reservation of Class A Common Stock. The Corporation shall
at all times reserve and keep available, solely for the purpose of issuing
Class A Common Stock upon conversion of the outstanding shares of Class B
Common Stock, such number of shares of Class A Common Stock as shall be
issuable upon the conversion of all such outstanding shares of Class B
Common Stock. All shares of Class A Common Stock which shall be issued upon
conversion of the shares of Class B Common Stock, will, upon issuance, be
fully paid and nonassessable. All shares of Class B Common Stock converted
into Class A Common Stock shall be cancelled and restored to the status of
authorized but unissued shares of Class B Common Stock.
J. Preferred Stock. The Board of Directors is expressly authorized, at
any time and from time to time, to provide for the issuance of shares of
Preferred Stock in one or more series or classes, with such designations,
preferences, limitations and relative rights as shall be expressed in articles
of amendment to these Articles, which shall be adopted by the Board of Directors
and shall be effective without shareholder action, as provided in Section 7-106-
102 of the Colorado Business Corporation Act; provided, however, that the Board
of Directors shall not issue or authorize any voting Preferred Stock without the
consent or approval of a majority of the Class B Common Stock.
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<PAGE>
ARTICLE V
DIRECTORS
The number of persons constituting the Board of Directors of the
Corporation shall be fixed by the Bylaws of the Corporation. Directors need not
be residents of the State of Colorado or shareholders of the Corporation and
shall exercise all the powers conferred on the Corporation by these Articles and
by the laws of the State of Colorado.
ARTICLE VI
INDEMNIFICATION
The Corporation shall indemnify its directors and officers to the fullest
extent authorized or permitted by law, as now or hereafter in effect, and such
right to indemnification shall continue as to a person who has ceased to be a
director or officer of the Corporation and shall inure to the benefit of his or
her heirs, executors and personal and legal representatives; provided, however,
that except for proceedings to enforce rights to indemnification, the
Corporation shall not be obligated to indemnify any director or officer (or his
or her heirs, executors or personal or legal representatives ) in connection
with a proceeding (or part thereof) initiated by such person unless such
proceeding (or part thereof) was authorized or consented to by the Board of
Directors or the shareholders representing a majority of the Common Stock. The
right to indemnification conferred by this Article VI shall include the right to
be paid by the Corporation the expenses incurred in defending or otherwise
participating in any proceeding in advance of its final disposition.
The Corporation may, to the extent authorized from time to time by the
Board of Directors, provide rights to indemnification and to the advancement of
expenses to employees and agents of the Corporation similar to those conferred
in this Article to the directors and officers of the Corporation.
The rights to indemnification and to the advance of expenses conferred in
this Article shall not be exclusive of any other right which any person may have
or hereafter acquire under this Certificate of Incorporation, the By-laws of the
Corporation, any statute, agreement, vote of shareholders or disinterested
directors or otherwise.
Any repeal or modification of this Article by the shareholders of the
Corporation shall not adversely affect any rights to indemnification and to the
advancement of expenses of a director or officer of the Corporation existing at
the time of such repeal or modification with respect to any acts or omissions
occurring prior to such repeal or modification.
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<PAGE>
ARTICLE VII
LIMITATION ON DIRECTOR'S LIABILITY
A director's personal liability to the Corporation or its shareholders is
limited to the fullest extend permitted by the Colorado Business Corporation
Act, as amended from time to time. Any limitation on liability in effect prior
to the date of these Articles shall remain in full force and effect. Any repeal
or modification of this Article VII shall not adversely affect any right or
protection of a director hereunder existing at the time of such repeal or
modification.
Dated October __, 1999.
GAIAM, INC.
By:_____________________________
Lynn Powers, President
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<PAGE>
Exhibit 3.2
GAIAM, INC.
AMENDED AND RESTATED
BYLAWS
ARTICLE I
Offices and Agents
------------------
1. Principal Office. The principal office of the Corporation shall be
----------------
located in Broomfield, Colorado, or elsewhere within or without the State of
Colorado, as may be subsequently designated by the Board of Directors. The
Corporation may have other offices and places of business at such places within
or without the State of Colorado as shall be determined by the directors or as
the business of the Corporation may require from time to time.
2. Registered Office. The registered office of the Corporation required by
-----------------
the Colorado Business Corporation Act must be continually maintained in the
State of Colorado, and it may be, but need not be, identical with the principal
office, if located in the State of Colorado. The address of the registered
office of the Corporation may be changed from time to time as provided by the
Colorado Business Corporation Act.
3. Registered Agent. The Corporation shall maintain a registered agent in
----------------
the State of Colorado as required by the Colorado Business Corporation Act.
Such registered agent may be changed from time to time as provided by the
Colorado Business Corporation Act.
ARTICLE II
Shareholders Meetings
---------------------
1. Annual Meetings. The annual meeting of the shareholders shall be held for
---------------
the purpose of electing directors and transacting such other corporate business
as may come before the meeting. The date, time and place of the annual meeting
shall be determined by resolution of the Board of Directors. If the election of
directors is not held as provided herein at any annual meeting of the
shareholders, or at any adjournment thereof, the Board of Directors shall cause
the election to be held at a special meeting of the shareholders as soon
thereafter as it may conveniently be held.
2. Special Meetings. Unless otherwise prescribed by the Colorado Business
----------------
Corporation Act, special meetings of the shareholders of the Corporation may be
called at any time by the chairman of the Board of Directors, by the chief
executive officer, by the president, by resolution of the Board of Directors or
upon receipt of one or more written demands for a meeting, stating the purpose
or purposes for which it is to be held, signed and dated by the holders of at
least ten percent (10%) of all votes entitled to be cast on any issue proposed
to be considered at the
<PAGE>
meeting. Notice of a special meeting shall include a description of the purpose
or purposes for which the meeting is called.
3. Place of Meeting. The annual meeting of the shareholders of the
----------------
Corporation may be held at any place, either within or without the State of
Colorado, as may be designated by the Board of Directors. Except as limited by
the following sentence, the person or persons calling any special meeting of the
shareholders may designate any place, within or without the State of Colorado,
as the place for the meeting. If no designation is made or if a special meeting
shall be called other than by the Board of Directors, the chairman of the Board
of Directors, the chief executive officer or the president, the place of meeting
shall be the principal office of the Corporation.
4. Notice of Meeting. Except as otherwise provided in these Bylaws or by the
-----------------
Colorado Business Corporation Act, notice stating the date, time and place of
the meeting shall be given no fewer than ten (10) and no more than sixty (60)
days before the date of the meeting, except that if the number of authorized
shares is to be increased, at least thirty (30) days' notice shall be given.
Notice shall be given personally or by mail, private carrier, telephone (if
reasonable under the circumstances), telegraph, teletype, electronically
transmitted facsimile or other form of wire or wireless communication by or at
the direction of the chief executive officer, the president, the secretary, or
the officer or other person calling the meeting to each shareholder of record
entitled to vote at such meeting. If mailed and if in a comprehensible form,
such notice shall be deemed to be given and effective when deposited in the
United States mail, addressed to the shareholder at his or her address as it
appears in the Corporation's current record of shareholders, with postage
prepaid. If notice is given other than by mail, and provided that the notice is
in comprehensible form, the notice is given and effective on the date received
by the shareholder. No notice need be sent to any shareholder if three
successive notices mailed to the last known address of such shareholder have
been returned as undeliverable until such time as another address for such
shareholder is made known to the Corporation by such shareholder.
When a meeting is adjourned to a different date, time or place, notice need
not be given of the new date, time or place if the new date, time or place is
announced at the meeting before adjournment. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than 120 days, or if a new
record date is fixed for the adjourned meeting, a new notice of the adjourned
meeting shall be given to each shareholder of record entitled to vote at the
meeting as of the new record date.
5. Fixing of Record Date. The Board of Directors of the Corporation may
---------------------
provide that the stock transfer books shall be closed for a stated period, but
not to exceed, in any case, fifty (50) days. If the stock transfer books shall
be closed for the purpose of determining shareholders entitled to notice of or
to vote at a meeting of shareholders such books shall be closed for at least ten
(10) days immediately preceding said meeting. The Board of Directors may fix in
advance a date as the record date for the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or shareholders entitled to receive payment of any dividend
or in order to make a determination of shareholders for any other proper
purpose, such date in any case to be not more than seventy (70) days before the
meeting or
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action requiring a determination of shareholders. If no record date is fixed for
the determination of shareholders entitled to notice of or to vote at a meeting
of shareholders or shareholders entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the date on which the
resolution of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this Section such determination shall
apply to any adjournment thereof.
Notwithstanding the foregoing, the record date for determining the
shareholders entitled to take action without a meeting or entitled to be given
notice of action so taken shall be the date a writing upon which the action is
taken is first received by the Corporation. The record date for determining
shareholders entitled to demand a special meeting shall be the date of the
earliest of the demands pursuant to which the meeting is called.
6. Shareholders List. The officer or agent having charge of the stock
-----------------
transfer books for share of the Corporation shall make, at least ten (10) days
before each meeting of shareholders, or two business days after notice of the
meeting is given and continuing through the meeting and any adjournment thereof,
a complete list of the shareholders entitled to vote at such meeting (or any
adjournment thereof) arranged in alphabetical order by voting groups and within
each voting group by class or series, with the address of and the number of
shares held by each, which list shall be kept on file at the principal office of
the Corporation or at a place identified in the notice of the meeting in the
city where the meeting will be held. A shareholder, his agent or attorney shall
be entitled upon written demand to inspect and copy the list during regular
business hours, during the period it is available for inspection, provided, (i)
the shareholder has been a shareholder for at least three (3) months immediately
preceding the demand or holds at least five percent (5%) of all outstanding
shares of any class of shares as the date of the demand, (ii) the demand is made
in good faith and for a purpose reasonably related to the demanding
shareholder's interest as a shareholder, (iii) the shareholder describes with
reasonable particularity the purpose and records the shareholder desires to
inspect, (iv) the records are directly connected with the described purpose and
(v) the shareholder pays a reasonable charge covering the costs of labor and
material for such copies, not to exceed the cost of production and reproduction.
Such list shall also be produced and kept open at the time and place of the
meeting and shall be subject to the inspection of any shareholder for any
purpose germane to the meeting during the whole time of the meeting. The
original stock transfer books shall be prima facie evidence as to who are the
shareholders entitled to examine such list or transfer books or to vote at any
meeting of shareholders.
7. Notice of Business. At any meeting of the shareholders of the
------------------
Corporation, only such proper business shall be conducted as shall have been
brought before the meeting (i) by or at the direction of the Board of Directors
or (ii) by any shareholder of the Corporation who is a shareholder of record at
the time of giving of the notice provided for in this Section 7, who shall be
entitled to vote at such meeting and who complies with the notice procedures set
forth in this Section 7. For business to be brought before a meeting of
shareholders by a shareholder, the shareholder shall have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice shall be delivered to or mailed and received at the
principal executive office of the Corporation (i) in the case of the annual
meeting of the Corporation's
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shareholders commencing in 2001 and thereafter (other than an annual meeting in
which the date of the meeting has been changed by more than 30 days from the
prior year), not less than 45 nor more than 70 days before the date on which the
Corporation first mailed its proxy materials for the prior year's annual meeting
of shareholders, or (ii) in the case of any other meeting of the Corporation's
shareholders, not less than 50 nor more than 75 days prior to the meeting;
provided, however, that in the event that less than 60 days' notice or prior
public disclosure of the date of such other meeting is given or made to
shareholders, notice by the shareholder to be timely must be so received not
later than the close of business on the tenth day following the day on which
such notice of the date of such other meeting was mailed or such public
disclosure was made, whichever first occurs. Such shareholder's notice to the
Secretary of the Corporation shall set forth as to each matter the shareholder
proposes to bring before the meeting (i) a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and, in the event that such business includes a proposal
to amend any document, including these Bylaws, the language of the proposed
amendment, (ii) the name and address, as they appear on the Corporation's books,
of the shareholder proposing such business, (iii) the class and number of shares
of capital stock of the Corporation which are beneficially owned by such
shareholder and (iv) any material interest of such shareholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at a meeting of the shareholders except in accordance with the
procedures set forth in this Section 7. The chairman of the meeting of
shareholders shall, if the facts warrant, determine and declare to the meeting
that business was not properly brought before the meting and in accordance with
the provisions of these Bylaws, and if he or she should so determine, the
chairman shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted. Notwithstanding the
foregoing provisions of this Section 7, a shareholder shall also comply with all
applicable requirements of the Securities and Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder with respect to matters set
forth in this Section 7.
8. Proxies. At all meetings of shareholders, a shareholder may vote in
-------
person or by proxy by signing an appointment form either personally or by his
duly authorized attorney-in-fact. A shareholder may also appoint a proxy by
transmitting or authorizing the transmission of a telegram, teletype, or other
electronic transmission providing a written statement of the appointment to the
proxy, to a proxy solicitor, proxy support service organization or other person
duly authorized by the proxy to receive appointments as agent for the proxy, or
to the Corporation. The transmitted appointment shall set forth or be
transmitted with written evidence from which it can be determined that the
shareholder transmitted or authorized the transmission of the appointment. The
proxy appointment form shall be filed with the Secretary of the Corporation by
or at the time of the meeting. The appointment of a proxy is effective when
received by the Corporation and is valid for eleven (11) months unless a
different period is expressly provided in the appointment form.
Any complete copy, including an electronically transmitted facsimile, of an
appointment of a proxy may be substituted for or used in lieu of the original
appointment for any purpose for which the original appointment could be used.
Revocation of a proxy does not affect the right of the Corporation to accept
the proxy's appointment unless (i) the Corporation had notice that the
appointment was coupled with an
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<PAGE>
interest and notice that the interest is extinguished is received by the
Secretary or other officer or agent authorized to tabulate votes before the
proxy exercises his authority under the appointment or (ii) other notice of the
revocation of the appointment is received by the Secretary or other officer or
agent authorized to tabulate votes before the proxy exercises his authority
under the appointment. Other notice of revocation may, in the discretion of the
Corporation, be deemed to include the appearance at a shareholders meeting of
the shareholder who granted the proxy appointment and his voting in person on
any matter subject to a vote at such meeting.
The death or incapacity of the shareholder appointing a proxy does not affect
the right of the Corporation to accept the proxy's authority unless notice of
the death or incapacity is received by the Secretary or other officer or agent
authorized to tabulate votes before the proxy exercises his authority under the
appointment.
The Corporation shall not be required to recognize an appointment made
irrevocable if it has received a writing revoking the appointment signed by the
shareholder either personally or by the shareholder's attorney-in-fact,
notwithstanding that the revocation may be a breach of an obligation of the
shareholder to another person not to revoke the appointment.
A transferee for value of shares subject to an irrevocable appointment may
revoke the appointment if the transferee did not know of its existence when he
acquired the shares and the existence of the irrevocable appointment was not
noted on the certificate representing the shares.
Subject to the provisions of this Article II, Section 10 below or any express
limitation on the proxy's authority appearing on the appointment form, the
Corporation is entitled to accept the proxy's vote or other action as that of
the shareholder making the appointment.
9. Voting Rights. Except as otherwise provided in the Articles of
-------------
Incorporation, each outstanding share, regardless of class, shall be entitled to
one vote and each fractional share is entitled to a corresponding fractional
vote on each matter submitted to a vote at a meeting of shareholders.
At each election for directors every shareholder of record entitled to vote at
such election shall have the right to vote in person or by proxy the number of
votes to which such shareholder is entitled for as many persons as there are
directors to be elected and for whose election he has a right to vote.
Cumulative voting shall not be permitted for any purpose.
Shares held by another corporation, if the majority of shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares entitled to vote at any given time. Except as
provided in the preceding sentence, shares standing in the name of another
corporation, domestic or foreign, may be voted by such officer, agent or proxy
as the Bylaws of such corporation may prescribe or, in the absence of such
provision, as the Board of Directors of such corporation may determine, or in
the absence of such determination, by the chief executive officer of such
corporation.
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<PAGE>
If shares having voting power stand of record in the names of two or more
persons, whether fiduciaries, members of a partnership, joint tenants, tenants
in common, tenants by the entirety or otherwise, or if two or more persons have
the same fiduciary relationship respecting the same shares, voting with respect
to the shares shall have the following effect: (i) if only one person votes, his
act binds all; (ii) if two or more persons vote, but the vote is evenly split on
any particular matter, each faction may vote the shares in question
proportionately, or any person voting the shares of a beneficiary, if any, may
apply to any court of competent jurisdiction in the State of Colorado to appoint
an additional person to act with the persons voting the shares. The shares
shall then be voted as determined by a majority of such persons and the person
appointed by the court. If a tenancy is held in unequal interests, a majority
or even split for the purpose of this subsection shall be a majority or even
split in interest, except that the effects of voting stated above shall not be
applicable if the secretary of the Corporation is given written notice of
alternative voting provisions and is furnished with a copy of the instrument or
order wherein the alternate voting provisions are stated.
Shares held by an administrator, executor, guardian or conservator may be
voted by him, either in person or by proxy, without a transfer of such shares
into his name. Shares standing in the name of a trustee may be voted by him,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him without a transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such receiver, and
shares held by or under the control of a receiver may be voted by such receiver
without the transfer thereof into his name if authority so to do be contained in
an appropriate order of the court by which such receiver was appointed.
10. Corporation's Acceptance of Votes. If the name signed on a vote,
---------------------------------
consent, waiver, proxy appointment, or proxy appointment revocation corresponds
to the name of a shareholder, the Corporation, if acting in good faith, is
entitled to accept the vote, consent, waiver, proxy appointment, or proxy
appointment revocation and to give it effect as the act of the shareholder. If
the name signed on a vote, consent, waiver, proxy appointment, or proxy
appointment revocation does not correspond to the name of a shareholder, the
Corporation, if acting in good faith, is nevertheless entitled to accept the
vote, consent, waiver, proxy appointment, or proxy appointment revocation and to
give it effect as the act of the shareholder if:
(a) The shareholder is an entity and the name signed purports to be that of an
officer or agent of the entity;
(b) The name signed purports to be that of an administrator, executor,
guardian, or conservator representing the shareholder and, if the
Corporation requests, evidence of fiduciary status acceptable to the
Corporation has been presented with respect to the vote, consent, waiver,
proxy appointment or proxy appointment revocation;
(c) The name signed purports to be that of a receiver or trustee in bankruptcy
of the shareholder and, if the Corporation requests, evidence of this
status acceptable to the Corporation has been presented with respect to
the vote, consent, waiver, proxy appointment or proxy appointment
revocation;
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(d) The name signed purports to be that of a pledgee, beneficial owner, or
attorney-in-fact of the shareholder and, if the Corporation requests,
evidence acceptable to the Corporation of the signatory's authority to
sign for the shareholder has been presented with respect to the vote,
consent, waiver, proxy appointment or proxy appointment revocation;
(e) Two or more persons are the shareholder as co-tenants or fiduciaries and
the name signed purports to be the name of at least one of the co-tenants
or fiduciaries and the person signing appears to be acting on behalf of
all the co-tenants or fiduciaries; or
(f) The acceptance of the vote, consent, waiver, proxy appointment or proxy
appointment revocation is otherwise proper under rules established by the
Corporation that are not inconsistent with the provisions of this Section
10.
The Corporation is entitled to reject a vote, consent, waiver, proxy
appointment, or proxy appointment revocation if the secretary or other officer
or agent authorized to tabulate votes, acting in good faith, has reasonable
basis for doubt about the validity of the signature on it or about the
signatory's authority to sign for the shareholder.
The Corporation and its officer or agent who accepts or rejects a vote,
consent, waiver, proxy appointment or proxy appointment revocation in good faith
and in accordance with the standards of this Section 10 are not liable in
damages for the consequences of the acceptance or rejection.
11. Quorum and Voting Requirements for Voting Groups. The provisions of
------------------------------------------------
Section 7-107-206 of the Colorado Business Corporation Act shall govern quorums
and other voting requirements for shareholders.
12. Adjournments. If less than a quorum of shares entitled to vote is
------------
represented at any meeting of the shareholders, a majority of the shares so
represented may adjourn the meeting from time to time without further notice,
for a period not to exceed one hundred twenty (120) days at any one adjournment.
At such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. Any meeting of the shareholders may adjourn from time to
time until its business is completed.
13. Action by Shareholders Without Meeting. Shareholders may not take any
--------------------------------------
action without a meeting, whether by written consent or otherwise.
14. Meetings by Telecommunication. Any or all of the shareholders may
-----------------------------
participate in an annual or special shareholders' meeting by, or the meeting may
be conducted through the use of, any means of communication by which all persons
participating in the meeting may hear each other during the meeting. A
shareholder participating in a meeting by this means is deemed to be present in
person at the meeting.
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ARTICLE III
Board of Directors
------------------
1. Number, Qualifications and Term of Office. Except as otherwise provided
-----------------------------------------
in the Articles of Incorporation or the Colorado Business Corporation Act, the
business and affairs of the Corporation shall be managed by a Board of
Directors, consisting of a number of directors set by the Board of Directors.
Each director shall be a natural person of the age of eighteen years or older,
but does not need to be a resident of the State of Colorado or a shareholder of
the Corporation. The Board of Directors, by resolution, may increase or
decrease the number of directors from time to time. Except as otherwise
provided in these Bylaws, each director shall be elected at each annual meeting
of shareholders and shall hold such office until the next annual meeting of
shareholders and until his successor shall be elected and shall qualify. No
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director.
2. Performance of Duties. Pursuant to the provisions of the Colorado
---------------------
Business Corporation Act, a director shall perform his duties as a director,
including his duties as a member of any committee of the Board of Directors upon
which he may serve, in good faith, in a manner he reasonably believes to be in
the best interests of the Corporation, and with such care as an ordinarily
prudent person in a like position would use under similar circumstances.
3. Vacancies. Any director may resign at any time by giving written notice
---------
to the chairman of the Board of Directors and to the chief executive officer,
president or secretary of the Corporation. A resignation of a director is
effective when the notice is received by the Corporation unless the notice
specifies a later effective date. Unless otherwise specified in the notice, the
acceptance of such resignation by the Corporation shall not be necessary to make
it effective. Any vacancy on the Board of Directors may be filled by the
affirmative vote of a majority of the remaining Board of Directors even if less
than a quorum is remaining in office. A director elected to fill a vacancy
shall be elected for the unexpired term of his predecessor in office. Any
directorship to be filled by reason of an increase in the number of directors
shall be filled by the affirmative vote of a majority of the directors then in
office or by an election at an annual meeting or special meeting of shareholders
called for that purpose. A director elected to fill a position resulting from
an increase in the number of directors shall hold office until the next annual
meeting of shareholders and until his or her successor has been elected and
qualified.
4. Removal. At a meeting of shareholders called expressly for that purpose,
-------
the entire Board of Directors or any individual director may be removed from
office without assignment of cause by the vote of the majority of the shares
entitled to vote in an election of directors.
5. Removal of Directors by Judicial Proceeding. A director may be removed by
-------------------------------------------
the district court of the county where the principal office is located or, if
the Corporation has no principal office in the State of Colorado, by the
district court of the county in which its registered office is located, upon a
finding by the district court that the director engaged in fraudulent or
dishonest conduct or gross abuse of authority or discretion with respect to the
Corporation and that removal is in the best interests of the Corporation. The
judicial proceeding
8
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may be commenced either by the Corporation or by shareholders holding at least
ten percent (10%) of the outstanding shares of any class.
6. Election of Directors. Except as provided in this Section 6 of this
---------------------
Article and subject to the right to elect additional directors under specified
circumstances which may be granted, pursuant to the provisions of Article Four
of the Articles of Incorporation of the Corporation, to the holders of any class
or series of preferred stock, directors shall be elected by a plurality of the
votes cast at annual meetings of shareholders, and each director so elected
shall hold office until his successor is duly elected and qualified, or until
his earlier resignation or removal. Directors need not be shareholders. Only
persons who are nominated in accordance with the following procedures shall be
eligible for election by the shareholders as directors of the Corporation.
Nominations of persons for election as directors of the Corporation may be made
at a meeting of shareholders (a) by or at the direction of the Board of
Directors, (b) by any nominating committee or persons appointed by the Board of
Directors or (c) by any shareholders of the Corporation entitled to vote for the
election of directors at the meeting who complies with the notice procedures set
forth in this Section 6. Such nominations, other than those made by or at the
direction of the Board of Directors or any nominating committee or persons
appointed by the Board of Directors, shall be made pursuant to timely notice in
writing to the Secretary of the Corporation. To be timely, a shareholder's
notice shall be delivered to or mailed and received at the principal executive
office of the Corporation (i) in the case of the annual meeting of the
Corporation's shareholders commencing in 2001 and thereafter (other than an
annual meeting in which the date of the meeting has been changed by more than 30
days from the prior year), not less than 45 nor more than 70 days before the
date on which the Corporation first mailed its proxy materials for the prior
year's annual meeting of shareholders, or (ii) in the case of any other meeting
of the Corporation's shareholders, not less than 50 nor more than 75 days prior
to the meeting; provided, however, that in the event that less than 60 days'
notice or prior public disclosure of the date of such other meeting is given or
made to shareholders, notice by the shareholder to be timely must be so received
not later than the close of business on the tenth day following the day on which
such notice of the date of such other meeting was mailed or such public
disclosure was made, whichever first occurs. Such shareholder's notice to the
Secretary of the Corporation shall set forth (a) as to each person whom the
shareholder proposes to nominate for election or reelection as a director, (i)
the name, age, business address and residence address of the person, (ii) the
principal occupation or employment of the person, (iii) the class and number of
shares of capital stock of the corporation which are beneficially owned by the
person and (iv) any other information relating to the person that is required to
be disclosed in solicitations for proxies for election of directors pursuant to
Rule 14a under the Securities Exchange Act of 1934, as now or hereafter amended;
and (b) as to the shareholder giving the notice (i) the name and record address
of such shareholder and (ii) the class and number of shares of capital stock of
the Corporation which are beneficially owned by such shareholder. The
Corporation may require any proposed nominee to furnish such other information
as may reasonably be required by the Corporation to determine the eligibility of
such proposed nominee to serve as a director of the Corporation. No person
shall be eligible for election by the shareholders as a director of the
Corporation unless nominated in accordance with the procedures set forth herein.
The chairman of the meeting of the shareholders shall, if the facts warrant,
determine and declare to the meeting that nomination was not made in accordance
with the foregoing procedure, and if he or she should so determine, the chairman
shall so declare to the meeting and the defective nomination shall be
disregarded.
9
<PAGE>
7. Compensation. By resolution of the Board of Directors, any director may
------------
be paid any one or more of the following: his expenses, if any, of attendance at
meetings; a fixed sum for attendance at each meeting; a stated salary as
director; or such other compensation as the Corporation and the director may
reasonably agree upon. No such payment shall preclude any director from serving
the Corporation in any other capacity and receiving compensation therefor.
ARTICLE IV
Meetings of the Board
---------------------
1. Place of Meetings. The regular or special meetings of the Board of
-----------------
Directors or of any committee designated by the Board of Directors shall be held
at the principal office of the Corporation or at any other place within or
without the State of Colorado that a majority of the Board of Directors or of
any such committee, as the case may be, may designate from time to time by
resolution.
2. Regular Meetings. Unless otherwise agreed to by the Board of Directors,
----------------
the Board of Directors shall meet each year immediately before or after and at
the same place as the annual meeting of the shareholders for the purpose of
electing officers and transacting such other business as may come before the
meeting. The Board of Directors or any committee designated by the Board of
Directors may provide, by resolution, for the holding of additional regular
meetings without other notice than such resolution.
3. Special Meetings. Special meetings of the Board of Directors or of any
----------------
committee designated by the Board of Directors may be called at any time by the
chairman of the Board, if any, by the chief executive officer, or by three or
more members of the Board of Directors or of any such committee, as the case may
be, provided that if any such committee consists of less than four members, then
a special meeting of such committee may be called by a majority of the members
thereof.
4. Notice of Meetings. Notice of the regular meetings of the Board of
------------------
Directors or of any committee designated by the Board of Directors need not be
given. Except as otherwise provided by these Bylaws or the laws of the State of
Colorado, written notice of each special meeting of the Board of Directors or of
any such committee setting forth the time and the place of the meeting shall be
given to each director not less than one (1) day prior to the date and time
fixed for the meeting. Notice of any special meeting may be either personally
delivered or mailed to each director at his business address, by telephone (if
reasonable under the circumstances) or by notice transmitted by telegraph,
electronically transmitted facsimile or other form of wire or wireless
communication. If mailed, such notice shall be deemed to be given and to be
effective on the earlier of (i) three (3) days after such notice is deposited in
the United States mail properly addressed, with postage prepaid, or (ii) the
date shown on the return receipt if mailed by registered or certified mail
return receipt requested. If notice be given by telephone (if reasonable under
the circumstances), electronically transmitted facsimile or other similar form
of wire or wireless communication, such notice shall be deemed to be given and
to be effective when sent, and with respect to a telegram, such notice shall be
deemed to be given and to be effective when the telegram
10
<PAGE>
is delivered to the telegraph company. If a director has designated in writing
one or more reasonable addresses or facsimile numbers for delivery of notice to
him, notice sent by mail, telegraph, electronically transmitted facsimile or
other form of wire or wireless communication shall not be deemed to have been
given or to be effective unless sent to such addresses or facsimile numbers, as
the case may be. Neither the business to be transacted at, nor the purpose of,
any regular or special meeting of the Board of Directors need be specified in
the notice or waiver of notice of such meeting.
5. Waiver of Notice. A director may waive notice of a meeting of the Board
----------------
of Directors or of any committee designated by the Board of Directors either
before, at, or after the meeting. Such waiver shall be in writing and signed by
the director and delivered to the Corporation for filing with the corporate
records, but such delivery and filing shall not be a condition to the
effectiveness of the waiver. Attendance or participation of a director at a
meeting waives any required notice of that meeting unless at the beginning of
the meeting or promptly upon the director's arrival, the director objects to
holding the meeting or transacting business at the meeting because of lack of
notice or defective notice and does not thereafter vote for or assent to action
taken at the meeting, or if special notice was required of a particular purpose
pursuant to this Section 5, the director objects to transacting business with
respect to the purpose for which such special notice was required and does not
thereafter vote for or assent to action taken at the meeting with respect to
such purpose.
6. Quorum. At meetings of the Board of Directors or of any committee
------
designated by the Board of Directors a majority of the number of directors fixed
by these Bylaws, or a majority of the members of any such committee, as the case
may be, shall be necessary to constitute a quorum for the transaction of
business. If the number of directors is not fixed, then a majority of the
number in office immediately before the meeting begins, shall constitute a
quorum. If a quorum is present, the act of the majority of directors present
shall be the act of the Board of Directors or of any such committee, as the case
may be, unless the act of a greater number is required by these Bylaws, the
Articles of Incorporation or the Colorado Business Corporation Act.
7. Presumption of Assent. A director who is present at a meeting of the
---------------------
Board of Directors or a committee thereof when action is taken is deemed to have
assented to the action taken unless:
(a) the director objects at the beginning of such meeting or promptly upon his
arrival, to the holding of the meeting or the transacting of business at
the meeting and does not thereafter vote for or assent to any action taken
at the meeting;
(b) the director contemporaneously requests that his dissent or abstention as
to any specific action taken be entered in the minutes of such meeting; or
(c) the director causes written notice of his dissent or abstention as to any
specific action to be received by the chairman of the Board, if any, or
the presiding officer of such meeting before adjournment of the meeting or
by the Corporation promptly after adjournment of the meeting.
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<PAGE>
The right of dissent or abstention pursuant to this Section 7 as to a specific
action is not available to a director who votes in favor of the action taken.
8. Committees. The Board of Directors may, by a majority of the full Board
----------
of Directors, designate one (1) or more of its members to constitute an
executive committee and one or more other committees, each of which shall have
and may exercise all of the authority of the Board of Directors or such lesser
authority as may be set forth in said resolution; except that no such committee
shall have the authority of the Board of Directors to: (i) declare dividends or
distributions; (ii) approve or recommend to shareholders actions or proposals
required to be approved by shareholders; (iii) fill vacancies on the Board of
Directors or any committee thereof; (iv) amend these Bylaws or the Articles of
Incorporation; (v) approve a plan of merger not requiring shareholder approval;
(vi) authorize or approve the reacquisition of shares unless pursuant to a
general formula method specified by the Board of Directors; or (vii) authorize
or approve the issuance or sale of, or any contract to issue or sell shares or
designate the terms of a series of a class of shares and except that the Board
of Directors, having acted regarding general authorization for the issuance or
sale of shares or any contract therefor, may pursuant to a general formula or
method specified by the Board of Directors by resolution or by adoption of a
stock option or other plan, authorize a committee to fix the terms of any
contract for the sale of the shares and to fix the terms upon which such shares
may be issued or sold, including, without limitation, the price, the dividend
rate, provisions for redemption, sinking fund, conversion, or voting or
preferential rights, and provisions for other features of a class of shares or a
series of a class of shares, with full power in such committee to adopt any
final resolution setting forth all terms thereof and to authorize the statement
of the terms of a series for filing with the Secretary of State of the State of
Colorado under the Colorado Business Corporation Act. If any such delegation of
the authority of the Board of Directors is made as provided herein, all
references to the Board of Directors contained in these Bylaws, the Articles of
Incorporation, the Colorado Business Corporation Act or any other applicable law
or regulation relating to the authority so delegated shall be deemed to refer to
such committee.
Neither the designation of any such committee, the delegation of authority to
such committee, nor any action by such committee pursuant to its authority shall
alone constitute compliance by any member of the Board of Directors, not a
member of the committee in question, with his responsibility to act in good
faith, in a manner he reasonably believes to be in the best interests of the
Corporation, and with such care as an ordinarily prudent person in a like
position would use under similar circumstances.
9. Action by Directors without a Meeting. Any action required or permitted
-------------------------------------
be taken at a Board of Directors' meeting or a meeting of any committee thereof
may be taken without a meeting if all members thereof consent to such action in
writing. Action is taken under this Section 9 at the time the last director
signs a writing describing the action taken, unless, before such time, a
director has revoked his consent by a writing signed by the director and
received by the chief executive officer and secretary. Action taken pursuant to
this Section 9 has the same effect as action taken at a meeting of the directors
or committee members and may be described as such in any document.
12
<PAGE>
10. Meetings. One or more members of the Board of Directors or any committee
--------
designated by the Board of Directors may participate in a regular or special
meeting by or conduct the meeting through the use of any means of communication
by which all directors participating may hear each other during the meeting. A
director participating in a meeting by this means is deemed to be present in
person at the meeting.
ARTICLE V
Standards of Conduct
--------------------
In discharging his duties, a director or officer is entitled to rely on
information, opinions, reports, or statements, including financial statements
and other financial data, if prepared or presented by (i) one or more officers
or employees of the Corporation whom the director or officer reasonably believes
to be reliable and competent in the matters presented, (ii) legal counsel, a
public accountant, or other person as to matters which the director or officer
reasonably believes to be within such persons' professional or expert
competence, or (iii) in the case of a director, a committee of the Board of
Directors of which the director is not a member if the director reasonably
believes the committee merits confidence.
A director or officer is not liable as such to the Corporation or its
shareholders for any action he takes or omits to take as a director or officer,
as the case may be, if, in connection with such action or omission, he performed
the duties of the position in compliance with this Article V.
ARTICLE VI
Officers and Agents
-------------------
1. General. The officers of the Corporation shall consist of a chairman of
-------
the Board, a chief executive officer, a president and a secretary and, in the
discretion of the Board, a treasurer; in addition, one or more vice presidents,
and such other officers, assistant officers, agents and employees that the Board
of Directors may from time to time deem necessary may be elected by the Board of
Directors or be appointed in a manner prescribed by the Board. Two or more
offices may be held by the same person. Officers shall hold office until their
successors are chosen and have qualified, unless they are sooner removed from
office as provided in these Bylaws. All officers of the Corporation shall be
natural persons of the age of eighteen years or older. Officers of the
Corporation need not be residents of the State of Colorado or directors or
shareholders of the Corporation.
2. General Duties. All officers and agents of the Corporation, as between
--------------
themselves and the Corporation, shall have such authority and shall perform such
duties in the management of the Corporation as may be provided in these Bylaws
or as may be determined by resolution of the Board of Directors not inconsistent
with these Bylaws. In all cases where the duties of any officer, agent or
employee are not prescribed by the Bylaws or by the Board of Directors, such
officer, agent or employee shall follow the orders and instructions of the chief
executive officer.
13
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3. Vacancies. When a vacancy occurs in one of the executive offices by
---------
reason of death, resignation or otherwise, it shall however be filled by a
resolution of the Board of Directors. The officer so selected shall hold office
until his successor is chosen and qualified.
4. Salaries. The salaries of the officers, agents and employees of the
--------
Corporation may be fixed by the Board of Directors, or by any committee
designated by the Board or, in the absence of contrary resolution or action by
the Board, by the chief executive officer.
5. Resignation. An officer may resign at any time by giving written notice
-----------
of resignation to the Corporation. A resignation of an officer is effective
when the notice is received by the Corporation unless the notice specifies a
later effective date. If a resignation is made effective at a later date, the
Board of Directors may permit the officer to remain in office until the
effective date and may fill the pending vacancy before the effective date if the
Board of Directors provides that the successor does not take office until the
effective date, or the Board of Directors may remove the officer at any time
before the effective date and may fill the resulting vacancy.
6. Removal. Any officer, agent or employee of this Corporation may be
-------
removed with or without cause by the Board of Directors or the chief executive
officer whenever in its judgment it is in the best interests of the Corporation,
without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer, agent or employee shall not, of itself,
create contract rights.
7. Chairman of the Board. The Chairman of the Board shall preside as
---------------------
chairman at meetings of the shareholders and the Board of Directors. He shall,
in addition, have such other duties as the Board of Directors may prescribe that
he perform. At the request of the chief executive officer, the chairman of the
Board of Directors may, in the case of the chief executive officer's absence or
inability to act, temporarily act in his place. In the case of death of the
chief executive officer or in the case of his absence or inability to act
without having designated the Chairman of the Board of Directors to act
temporarily in his place, the Chairman of the Board of Directors shall perform
the duties of the chief executive officer. If the chairman of the Board of
Directors shall be unable to act in place of the chief executive officer, the
president may exercise such powers and perform such duties as provided below.
8. Chief Executive Officer. The chief executive officer shall, subject to
-----------------------
the direction and supervision of the Board of Directors, be the most senior
officer of the Corporation and shall have primary, general and active control of
its affairs and business and general supervision of its officers, agents and
employees. He shall have authority to expend Corporation funds, to incur debt
on behalf of the Corporation, and to acquire and dispose of property, real and
personal, tangible and intangible. In the event the position of chairman of the
Board of Directors shall not be occupied or the chairman shall be absent or
otherwise unable to act, the chief executive officer shall preside at meetings
of the shareholders and directors and shall discharge the duties of the
presiding officer. He shall, unless otherwise directed by the Board of
Directors, attend in person or by substitute appointed by him, or shall execute
on behalf of the Corporation written instruments appointing a proxy or proxies
to represent the Corporation at all meetings of the shareholders of any other
corporation in which the Corporation shall hold any stock. He may, on
14
<PAGE>
behalf of the Corporation, in person or by substitute or by proxy, execute
written waivers of notice and consents with respect to any such meetings. At all
such meetings and otherwise, the chief executive officer, in person or by
substitute or by proxy as aforesaid, may vote the stock so held by the
Corporation and may execute written consents and other instruments with respect
to such stock and may exercise any and all rights and powers incident to the
ownership of said stock, subject however to the instructions, if any, of the
Board of Directors. The chief executive officer shall have custody of the
treasurer's bond, if any.
9. President. The president shall assist the chief executive officer, as
---------
directed by the Board of Directors or the chief executive officer, and shall
perform such duties as may be assigned to him from time to time by the Board of
Directors or the chief executive officer. If the office of chief executive
officer is vacant, the president shall have the powers and perform the duties of
chief executive officer until such vacancy is filled by the Board of Directors.
10. Vice Presidents. Each vice president shall have such powers and perform
---------------
such duties as the Board of Directors may from time to time prescribe or as the
chief executive officer may from time to time delegate to him. At the request
of the chief executive officer, in the case of the president's absence or
inability to act, any vice president may temporarily act in the president's
place. In the case of the death of the president, or in the case of his absence
or inability to act without having designated a vice president or vice
presidents to act temporarily in his place, the Board of Directors, by
resolution, may designate a vice president or vice presidents, to perform the
duties of the president.
11. Secretary. The secretary shall keep or cause to be kept in books,
---------
provided for that purpose, the minutes of the meetings of the shareholders,
executive committee, if any, and any other committees, and of the Board of
Directors; shall see that all notices are duly given in accordance with the
provisions of these Bylaws and as required by law; shall be custodian of the
records and of the seal of the Corporation and see that the seal is affixed to
all documents, the execution of which on behalf of the Corporation under its
seal is duly authorized and in accordance with the provisions of these Bylaws;
and, in general, shall perform all duties incident to the office of secretary
and such other duties as may, from time to time, be assigned to him by the Board
of Directors or by the president. In the absence of the secretary or his
inability to act, the assistant secretaries, if any, shall act with the same
powers and shall be subject to the same restrictions as are applicable to the
secretary.
12. Treasurer. The treasurer shall have custody of corporate funds and
---------
securities. He shall keep full and accurate accounts of receipts and
disbursements and shall deposit all corporate monies and other valuable effects
in the name and to the credit of the Corporation in the depository or
depositories of the Corporation, and shall render an account of his transactions
as treasurer and of the financial condition of the Corporation to the chief
executive officer, president and/or the Board of Directors upon request. Such
power given to the treasurer to deposit and disburse funds shall not, however,
preclude any other officer or employee of the Corporation from also depositing
and disbursing funds when authorized to do so by the Board of Directors. The
treasurer shall, if required by the Board of Directors, give the Corporation a
bond in such amount and with such surety or sureties as may be ordered by the
Board of Directors for the faithful performance of the duties of his office.
The treasurer shall have such other powers and perform
15
<PAGE>
such other duties as may be from time to time prescribed by the Board of
Directors or the chief executive officer or such other person appointed from
time to time by the chief executive officer. In the absence of the treasurer or
his inability to act, the assistant treasurers, if any, shall act with the same
authority and shall be subject to the same restrictions as are applicable to the
treasurer.
13. Delegation of Duties. Whenever an officer is absent, or whenever, for
--------------------
any reason, the Board of Directors may deem it desirable, the Board of Directors
may delegate the powers and duties of an officer to any other officer or
officers or to any director or directors.
ARTICLE VII
Conflicts of Interests
----------------------
No contract or other transaction between the Corporation and one or more of
its directors, or any other corporation, partnership, association or other
organization in which one or more of its directors or officers is a director or
officer or is financially interested shall be either void or voidable solely for
that reason or solely because such director or officer is present at or
participates in the meeting of the Board of Directors or a committee thereof
that authorizes, approves, or ratifies such contract or transaction or solely
because their votes are counted for such purpose if:
(A) The material facts of such relationship, interest, contract or
transaction are disclosed to or known by the Board of Directors or a committee
thereof, that in good faith authorizes, approves, or ratifies the contract or
transaction by the affirmative vote of a majority of the disinterested
directors, even though the disinterested directors are less than a quorum;
(B) The material facts of such relationship, interest, contract or
transaction are disclosed to or known by the shareholders entitled to vote
thereon, and the contract or transaction is specifically authorized, approved or
ratified in good faith by vote of the shareholders; or
(C) The contract or transaction is fair as to the Corporation.
Common or interested directors may be counted in determining the presence of a
quorum at a meeting of the Board of Directors or a committee thereof which
authorizes, approves or ratifies such contract or transaction.
The Board of Directors shall comply with any applicable provisions of Section
7-108-501 of the Colorado Business Corporation Act in connection with any loan
or guaranty by the Corporation.
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ARTICLE VIII
Indemnification of Officers, Directors and Others
-------------------------------------------------
1. Definitions. Unless the context of this Article VIII indicates otherwise,
-----------
initially capitalized terms used herein shall have the meanings given in Section
7-109-101 of the Colorado Business Corporation Act.
2. Standards for Indemnification
-----------------------------
A. General. Except as provided in Subsection 2(D) below, the Corporation
-------
shall indemnify against Liability, to the fullest extent authorized by the
Colorado Business Corporation Act, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
permitted prior thereto), incurred in any Proceeding by an individual made a
Party to the Proceeding because he is or was a Director of the Corporation or
any subsidiary of the Corporation (an "Indemnitee") if: (a) he conducted himself
in good faith; (b) he reasonably believed: (i) in the case of conduct in his
Official capacity with the Corporation, that his conduct was in the
Corporation's best interests; or (ii) that in all other cases, that his conduct
was at least not opposed to the Corporation's best interests; and (c) in the
case of any criminal proceeding, he had no reasonable cause to believe his
conduct was unlawful.
B. Employee Benefit Plans. An Indemnitee's conduct with respect to an
----------------------
employee benefit plan for a purpose he reasonably believed to be in the
interests of the participants in or beneficiaries of the plan is conduct that
satisfies the requirements of clause (b)(ii) of paragraph 2, subsection A above.
An Indemnitee's conduct with respect to an employee benefit plan for a purpose
that he did not reasonably believe to be in the interests of the participants in
or beneficiaries of the plan shall be deemed not to satisfy the requirements of
clause (b)(ii) of paragraph 2, subsection A above.
C. Termination of a Proceeding. The termination of any proceeding by
---------------------------
judgment, order, settlement, or conviction, or upon a plea of nolo contendere or
its equivalent, is not of itself determinative that the Indemnitee did not meet
the standard of conduct set forth in paragraph 2, subsection A above.
D. Cases in Which Indemnification is Prohibited. The Corporation may not
--------------------------------------------
indemnify an Indemnitee under paragraph 2, subsection A above, either (a) in
connection with a Proceeding by or in the right of the Corporation in which the
Indemnitee was adjudged liable to the Corporation; or (b) in connection with any
Proceeding charging improper personal benefit to the Indemnitee, whether or not
involving action in his Official capacity, in which he was adjudged liable on
the basis that personal benefit was improperly received by him.
E. Reasonable Expenses Only. Indemnification permitted under this Section B
------------------------
in connection with a Proceeding by or in the right of the Corporation is limited
to reasonable expenses incurred in connection with the Proceeding.
17
<PAGE>
F. Application of Indemnification Obligations. The indemnity and prepayment
obligations of the Corporation and the standards for indemnification set forth
in this Article VIII shall apply in all cases, even if the conduct, act or
omission in question occurred prior to the date that such indemnity and
prepayment obligations were adopted by the Corporation by amendment to these
Bylaws.
3. Mandatory Indemnification. Unless limited by the articles of
-------------------------
incorporation, the Corporation shall be required to indemnify an Indemnitee who
was wholly successful, on the merits or otherwise, in the defense of any
Proceeding to which he was a Party because he is or was a director, against
reasonable expenses incurred by him in connection with the Proceeding.
4. Court Ordered Indemnification. Unless otherwise provided in the articles
-----------------------------
of incorporation, an Indemnitee who is or was a Party to a Proceeding may apply
for indemnification to the court conducting the Proceeding or to another court
of competent jurisdiction. On receipt of an application, the court, after
giving any notice the court considers necessary, may order indemnification in
the following manner:
A. Mandatory Indemnification. If it determines the Indemnitee is entitled to
-------------------------
mandatory indemnification under paragraph 3 above, the court shall order
indemnification, in which case the court shall also order the Corporation to pay
the Indemnitee's reasonable expenses incurred to obtain court-ordered
indemnification.
B. Indemnification Where Regardless of Meeting Standard of Conduct. If it
---------------------------------------------------------------
determines that the Indemnitee is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances, whether or not he met
the standard of conduct set forth in paragraph 2, subsection A of this Article
VIII or was adjudged liable in the circumstances described in paragraph 2,
subsection D of this Article VIII, the court may order such indemnification as
the court deems proper; except that the indemnification with respect to any
Proceeding in which liability shall have been adjudged in the circumstances
described in said paragraph 2, subsection D of this Article VIII is limited to
reasonable expenses incurred in connection with the proceeding and reasonable
expenses incurred to obtain court-ordered indemnification.
5. Indemnification Procedure.
-------------------------
A. Authorization of Indemnification Required. The Corporation may not
-----------------------------------------
indemnify an Indemnitee under paragraph 2, subsection A of this Article VIII
unless authorized in the specific case after a determination has been made that
indemnification of the Indemnitee is permissible in the circumstances because he
has met the standard of conduct set forth in paragraph 2 of this Article VIII.
B. Determination by the Board of Directors. The determination required by
---------------------------------------
paragraph 5, subsection A of this Article VIII, shall be made: (a) by the
Corporation's Board of Directors by a majority vote of those present at a
meeting at which a quorum is present, and only those directors who are not
parties to the Proceeding shall be counted in satisfying the quorum; or (b) if a
quorum cannot be obtained, by a majority vote of a committee of the Board of
Directors
18
<PAGE>
designated by the Board, which committee shall consist of two or more directors
who are not parties to the proceeding; except that directors who are parties to
the proceeding may participate in the designation of directors for the
committee.
C. Determination by Body Other Than the Board of Directors. If a quorum
-------------------------------------------------------
cannot be obtained by a majority vote of a committee of the Board of Directors
designated by the Board of Directors under paragraph 5, subsection B or even if
a quorum is obtained or a committee is designated, if a majority of the
directors constituting such quorum or committee so directs, the determination
required to be made by subparagraph B of this section 5 shall be made: (a) by
independent legal counsel selected by a vote of the Corporation's Board of
Directors or the committee in the manner specified in clauses (a) or (b) of
subparagraph B of this section 5 or, if a quorum of the full Board of Directors
cannot be obtained and a committee cannot be established, by independent legal
counsel selected by a majority vote of the full Board; or (b) by the
shareholders.
D. Standard for Authorizing Indemnification. Authorization of indemnification
----------------------------------------
and advance of reasonable expenses shall be made in the same manner as the
determination that indemnification or advance of expenses is permissible; except
that, if the determination that indemnification or advance of expenses is
permissible is made by independent legal counsel, authorization of
indemnification and advance of expenses shall be made by the body that selected
such counsel.
6. Pre-Payment or Reimbursement of Expenses
----------------------------------------
A. General. The Corporation may pay for or reimburse the reasonable expenses
-------
incurred by an Indemnitee who is a Party to a Proceeding in advance of the final
disposition of the Proceeding if: (a) the Indemnitee furnishes the Corporation a
written affirmation of his good-faith belief that he has met the standard of
conduct described in paragraph 2, subsection A of this Article; (b) the
Indemnitee furnishes the Corporation a written undertaking, executed personally
or on his behalf, to repay the advance if it is ultimately determined that he
did not meet such standard of conduct; and (c) a determination is made that the
facts then known to those making the determination would not preclude
indemnification under this Article.
B. Undertaking. The undertaking required by paragraph (b) of subsection A of
-----------
this Section, shall be an unlimited general obligation of the Indemnitee but
need not be secured and may be accepted without reference to financial ability
to make repayment.
C. Authorization of Pre-Payments. Determinations and authorizations of
-----------------------------
payments under this Section 6 shall be made in the manner specified in paragraph
5, subsection C of this Article VIII.
7. Expenses Incurred as a Witness. The Corporation shall pay or reimburse
Expenses incurred by an Indemnitee in connection with his appearance, or
preparation for his appearance, as a witness in a Proceeding or at a deposition
related to a Proceeding, at a time when he has not been made a named defendant
or respondent in the Proceeding. If the Indemnitee is not an officer or
Director of the Company at the time his appearance is required at a Proceeding
or
19
<PAGE>
deposition related to a Proceeding, the Company shall pay the Indemnitee $500.00
for each day (or part thereof) that the Indemnitee is required to attend such
Proceeding or deposition.
8. Officers, Employees, Fiduciaries and Agents. Unless otherwise provided in
-------------------------------------------
the articles of incorporation:
A. Officer Indemnification. An officer of the Corporation is entitled to
------------------------
mandatory indemnification under paragraph 3 of this Article VIII, and is
entitled to apply for court-ordered indemnification under paragraph 4 of this
Article VIII, in each case to the same extent as a director.
B. Indemnification and Advancement of Expenses. The Corporation may
-------------------------------------------
indemnify and advance expenses to an officer, employee, fiduciary or agent of
the Corporation to the same extent as an Indemnitee; and
C. Greater Rights of Indemnification Permitted. The Corporation may also
-------------------------------------------
indemnify and advance expenses to an officer, employee, fiduciary or agent of
the Corporation who is not an Indemnitee to a greater extent, not inconsistent
with public policy, and if provided for by these bylaws, general or specific
action of its board or shareholders, or directors.
9. Insurance. The Corporation may purchase and maintain insurance on behalf
---------
of a person who is or was a Director, officer, employee, fiduciary or agent of
the Corporation, or who, while a Director, officer, employee, fiduciary or agent
of the Corporation, is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee, fiduciary or agent of another
foreign or domestic corporation or other person or employee benefit plan against
any liability asserted against or 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 VIII. Any such insurance may be procured from any insurance company
designated by the Board of Directors of the Corporation, whether such insurance
company is formed under the laws of Colorado or any other jurisdiction of the
United States or elsewhere, including any insurance company in which the
Corporation has equity or any other interest, through stock ownership or
otherwise.
10. Report to Shareholders. Any indemnification of or advance of expenses to
----------------------
a Director in accordance with this Article VIII, if arising out of a proceeding
by or on behalf of the Corporation, shall be reported in writing to the
shareholders with or before the notice of the next shareholders' meeting. If
the next shareholder action is taken without a meeting at the instigation of the
Board of Directors, such notice shall be given to the shareholders at or before
the time the first shareholder signs a writing consenting to such action.
11. Governing Law. This Article VIII shall be governed by and construed in
-------------
accordance with Title 7, Article 109 of the Colorado Business Corporation Act,
as amended from time to time.
12. Non-Exclusivity of Rights. The rights to indemnification and to the
-------------------------
advancement of expenses conferred in this Article VIII shall not be exclusive of
any other right
20
<PAGE>
which any person may have or hereafter acquire under any statute, the
Corporation's Articles of Amendment and Restatement, agreement, vote of
shareholders or disinterested directors or otherwise. To the extent that the
rights to indemnification granted by these Bylaws are inconsistent with those
granted by the Corporation's Articles of Amendment and Restatement, the
provisions of these Articles of Amendment and Restatement shall govern.
ARTICLE IX
Share Certificates and the Transfer of Shares
---------------------------------------------
1. Certificates Representing Shares. The shares shall be represented by
--------------------------------
certificates. Such certificates shall be in a form approved by the Board of
Directors, consecutively numbered, and signed in the name of the Corporation by
the chairman or vice chairman of the Board of Directors or by the chief
executive officer, the president or a vice president and by the treasurer or an
assistant treasurer or by the secretary or an assistant secretary, and shall be
sealed with the seal of the Corporation or a facsimile thereof. Any or all of
the signatures upon a certificate may be facsimiles if the certificate is
countersigned by a transfer agent or registered by a registrar other than the
Corporation itself or an employee of the Corporation. In case any officer who
has signed such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer at the date of its issue.
2. Issuance of Shares. Except as provided in the Articles of Incorporation,
------------------
the Board of Directors may authorize the issuance of shares for consideration
consisting of any tangible, intangible property or benefit to the Corporation,
including cash, promissory notes, services performed and other securities of the
Corporation. The Board of Directors shall determine that the consideration
received or to be received for the shares to be issued is adequate. Such
determination, in the absence of fraud, is conclusive insofar as the adequacy of
such consideration relates to whether the shares are validly issued, fully paid
and nonassessable. The promissory note of a subscriber or an affiliate of a
subscriber for shares shall not constitute consideration for the shares unless
the note is negotiable and is secured by collateral other than the shares,
having a fair market value at least equal to the principal amount of the note.
For the purposes of this Section 2, "promissory note" means a negotiable
instrument on which there is an obligation to pay independent of collateral and
does not include a nonrecourse note. Unless otherwise expressly provided in the
Articles of Incorporation, shares having a par value may be issued for less than
the par value.
3. Lost Certificates. The Board of Directors may direct a new certificate to
-----------------
be issued in place of a certificate alleged to have been destroyed or lost if
the owner makes an affidavit or affirmation of that fact and produces such
evidence of loss or destruction as the Board of Directors may require. The
Board, in its discretion, may as a condition precedent to the issuance of a new
certificate require the owner to give the Corporation a bond in such form and
amount and with such surety as it may determine as indemnity against any claim
that may be made against the Corporation relating to the certificate allegedly
destroyed or lost.
21
<PAGE>
4. Transfer of Shares.
------------------
(a) Shares of the Corporation shall only be transferred on the stock transfer
books of the Corporation by the holder of record thereof upon the surrender to
the Corporation of the share certificates duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer and such documentary
stamps as may be required by law. In that event, the surrendered certificates
shall be cancelled, new certificates issued to the persons entitled to them, and
the transaction recorded on the books of the Corporation.
5. Registered Shareholders. The Corporation shall be entitled to treat the
-----------------------
registered holder of any shares of the Corporation as the owner thereof for all
purposes, and the Corporation shall not be bound to recognize any equitable or
other claim to, or interest in, such shares or rights deriving from such shares
on the part of any person other than the registered holder, including without
limitation any purchaser, assignee or transferee of such shares or rights
deriving from such shares, unless and until such other person becomes the
registered holder of such shares, whether or not the Corporation shall have
either actual or constructive notice of the claimed interest of such other
person.
6. Stock Ledger. An appropriate stock journal and ledger shall be kept by
------------
the secretary or such registrars or transfer agents as the directors by
resolution may appoint in which all transactions in the shares of stock of the
Corporation shall be recorded.
7. Notice of Restriction on Transfer. Notice of any restriction on the
---------------------------------
transfer of the stock of the Corporation shall be placed on each certificate of
stock issued.
ARTICLE X
Insurance
---------
By action of the Board of Directors, notwithstanding any interest of the
directors in the action, the Corporation may purchase and maintain insurance, in
such scope and amounts as the Board of Directors deems appropriate, on behalf of
any person who is or was a director, officer, employee, fiduciary or agent of
the Corporation, or who, while a director, officer, employee, fiduciary or agent
of the Corporation, is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee, fiduciary or agent of any other
foreign or domestic corporation or of any partnership, joint venture, trust,
profit or nonprofit unincorporated association, limited liability company or
other enterprise or employee benefit plan, against any liability asserted
against, or incurred by, him in that 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 the Colorado Business Corporation
Act. Any such insurance may be procured from any insurance company designated
by the Board of Directors of the Corporation, whether such insurance company is
formed under the laws of the State of Colorado or any company in which the
Corporation has an equity interest or any other interest, through stock
ownership or otherwise.
22
<PAGE>
ARTICLE XI
Amendments
----------
Subject to repeal or change by action of the shareholders, the Board of
Directors may amend, supplement or repeal these Bylaws or adopt new Bylaws, and
all such changes shall affect and be binding upon the holders of all shares
heretofore as well as hereafter authorized, subscribed for or offered.
ARTICLE XII
Miscellaneous
-------------
1. Gender. Whenever required by the context, the singular shall include the
------
plural, the plural the singular, and one gender shall include all genders.
2. Invalid Provision. The invalidity or unenforceability of any particular
-----------------
provision of these Bylaws shall not affect the other provisions herein, and
these Bylaws shall be construed in all respects as if such invalid or
unenforceable provision was omitted.
38784.4
23
<PAGE>
EXHIBIT 4.1
INCORPORATED UNDER THE LAWS OF
COLORADO
CLASS __ COMMON STOCK
NUMBER __ ___________ SHARES
GAIAM, INC.
Shares are with .0001 par value
This Certifies that ___________ is the owner of
____________________________________________ Shares of the Class __ Common Stock
of Gaiam, Inc. FULLY PAID AND NON-ASSESSABLE, transferable only on the books of
the Corporation by the holder hereof in person or by Attorney upon surrender of
this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunder
affixed this ___ day of September AD _____.
President _________________
Secretary _____________________
For Value Received, _____ hereby sell, assign and transfer unto
________________________________________________________________________________
_________________________Shares of the Capital Stock represented by the within
Certificate, and do hereby irrevocably constitute and appoint
__________________________________________________ Attorney to transfer the said
Stock on the books of the within named Corporation with full power of
substitution in the premises.
Dated________________ ________
In presence of _______________________________________________________
<PAGE>
Exhibit 5.1
Bartlit Beck Herman Palenchar & Scott
511 Sixteenth Street, Suite 700
Denver, Colorado 80202
August __, 1999
Gaiam, Inc.
360 Interlocken Blvd., Suite 300
Broomfield, Colorado 80021
Re: Common Stock of Gaiam, Inc.
---------------------------
Ladies and Gentlemen:
We have examined Registration Statement on Form S-1 No. 333-83283
together with all amendments thereto (the "Registration Statement"), filed by
Gaiam, Inc. (the "Company") with the Securities and Exchange Commission (the
"Commission") in connection with the registration under the Securities Act of
1933, as amended (the "Securities Act"), of 2,000,000 shares (2,300,000 shares
if the underwriters' over-allotment option is exercised in full) of the
Company's Class A common stock, $.0001 par value per share (the "Shares"). We
are familiar with the proceedings taken by the Company in connection with the
authorization, issuance and sale of the Shares.
Based upon the foregoing, we are of the opinion that: when, as and if
(i) the Registration Statement shall have become effective pursuant to the
provisions of the Securities Act, (ii) the Company shall have received payment
in full for the Shares, and (iii) the Shares shall have been issued in the form
and containing the terms described in the Registration Statement, the
resolutions of the Company's Board of Directors (and any authorized committee
thereof) authorizing the foregoing and any legally required consents, approvals,
authorizations and other orders of the Commission and any other regulatory
authorities to be obtained, the Shares will, when sold, be legally issued, fully
paid and nonassessable.
We consent to the use of this opinion as an exhibit to the
Registration Statement and to the use of our name under the heading "Legal
Matters" in the Registration Statement.
Very truly yours,
TRS/s
<PAGE>
Exhibit 10.1
Gaiam, Inc.
1999 Long-Term Incentive Plan
Section 1. Purpose. The purpose of this Plan is to advance the interests
of Gaiam and its shareholders by providing incentives to certain Eligible
Persons (as defined below) who contribute significantly to the strategic and
long-term performance objectives and growth of the Company.
Section 2. Definitions. The definitions applicable to this Plan are
provided in Appendix A.
Section 3. Administration. The Committee shall administer this Plan and
shall have all the powers vested in it by the terms of this Plan, such powers to
include exclusive authority to select the Eligible Persons to be granted Awards
under this Plan, to determine the type, size and terms of the Award to be made
to each Eligible Person selected, to modify the terms of any Award that has been
granted, to determine the time when Awards will be granted, to establish
performance objectives, to make any adjustments necessary or desirable as a
result of the granting of Awards to Eligible Persons located outside the United
States and to prescribe the form of the agreements evidencing Awards made under
this Plan. The Committee is authorized to interpret this Plan and the Awards
granted under this Plan, to establish, amend and rescind any rules and
regulations relating to this Plan, and to make any other determinations that it
deems necessary or desirable for the administration of this Plan. The Committee
may correct any defect or supply any omission or reconcile any inconsistency in
this Plan or in any Award in the manner and to the extent the Committee deems
necessary or desirable to carry it into effect. Any decision of the Committee in
the interpretation and administration of this Plan, as described this Plan,
shall lie within its sole and absolute discretion and shall be final, conclusive
and binding on all parties concerned. The Committee may act only by a majority
of its members in office, except that the members thereof may authorize any one
or more of their members or any officer of the Company to execute and deliver
documents or to take any other ministerial action on behalf of the Committee
with respect to Awards made or to be made to Participants.
No member of the Committee and no officer of the Company shall be liable
for anything done or omitted to be done by him, by any other member of the
Committee or by any officer of the Company in connection with the performance of
duties under this Plan, except for his own willful misconduct or as expressly
provided by statute. In addition to all other rights of indemnification and
reimbursement to which a member of the Committee and an officer of the Company
may be entitled, the Company shall indemnify and hold harmless each such member
or officer who was or is a party or is threatened to be made a party to any
threatened, pending or completed proceeding or suit in connection with the
performance of duties under this Plan against expenses (including reasonable
attorneys' fees), judgments, fines, liabilities, losses and amounts paid in
settlement actually and reasonably incurred by him in connection with such
proceeding or suit, except for his own willful misconduct or as expressly
provided otherwise by statute. Expenses (including reasonable attorneys' fees)
incurred by a such a member or officer in defending any such proceeding or suit
shall be paid by the Company in advance of the final disposition of such
proceeding or suit upon receipt of a written affirmation by such member or
officer of his good faith belief that he has met the standard of conduct
necessary for indemnification and a written undertaking by or on behalf of such
member or officer to repay such amount if it shall ultimately be determined that
he is not entitled to be indemnified by the Company as authorized in this
Section.
Section 4. Participation. Consistent with the purposes of this Plan, the
Committee shall have exclusive power to select the Eligible Persons who may
participate in this Plan and be granted Awards under this Plan. Eligible Persons
may be selected individually or by groups or categories, as determined by the
Committee in its discretion.
<PAGE>
Section 5. Awards under this Plan.
(a) Types of Awards. Awards under this Plan may include, but need not
be limited to, one or more of the following types, either alone or in any
combination thereof: (i) Stock Options, (ii) Stock Appreciation Rights,
(iii) Restricted Stock, (iv) Performance Grants and (v) any other type of
Award deemed by the Committee in its discretion to be consistent with the
purposes of this Plan (including, but not limited to, Awards of or options
or similar rights granted with respect to unbundled stock units or
components thereof, and Awards to be made to Participants who are foreign
nationals or are employed or performing services outside the United
States).
(b) Maximum Number of Shares that May be Issued. There may be issued
under this Plan (as Restricted Stock, in payment of Performance Grants,
pursuant to the exercise of Stock Options or Stock Appreciation Rights or
in payment of or pursuant to the exercise of such other Awards as the
Committee, in its discretion, may determine) an aggregate of not more than
4,000,000 Common Shares, subject to adjustment as provided in Section 15.
No Eligible Person may receive Awards under this Plan for more than
1,000,000 Common Shares in any one fiscal year of Gaiam, subject to
adjustment as provided in Section 15. Common Shares issued pursuant to this
Plan may be either authorized but unissued shares, treasury shares,
reacquired shares or any combination thereof. If any Common Shares issued
as Restricted Stock or otherwise subject to repurchase or forfeiture rights
are reacquired by the Company pursuant to such rights or, if any Award is
canceled, terminates or expires unexercised, any Common Shares that would
otherwise have been issuable pursuant thereto will be available for
issuance under new Awards.
(c) Rights with Respect to Common Shares and Other Securities. Except
as provided in subsection 8(c) with respect to Awards of Restricted Stock
and unless otherwise determined by the Committee in its discretion, a
Participant to whom an Award is made (and any person succeeding to such a
Participant's rights pursuant to this Plan) shall have no rights as a
shareholder with respect to any Common Shares or as a holder with respect
to other securities, if any, issuable pursuant to any such Award until the
date of the issuance of a stock certificate to him for such Common Shares
or other instrument of ownership, if any. Except as provided in Section 15,
no adjustment shall be made for dividends, distributions or other rights
(whether ordinary or extraordinary, and whether in cash, securities, other
property or other forms of consideration, or any combination thereof) for
which the record date is prior to the date such stock certificate or other
instrument of ownership, if any, is required to be issued based upon the
date any Award was exercised. In all events, a Participant with whom an
Award agreement is made to issue Common Shares in the future, shall have no
rights as a shareholder with respect to Common Shares related to such
agreement until issuance to him of a stock certificate representing such
shares.
Section 6. Stock Options. The Committee may sell Purchased Options or
grant other Stock Options either alone, or in conjunction with Associated
Awards, either at the time of grant or by amendment thereafter; provided that an
Incentive Stock Option may be granted only to Eligible Persons who are employees
of the Company and who have Associated Awards only to the extent that such
Associated Awards do not disqualify the Incentive Stock Option's status as such
under the Code. Each Stock Option granted or sold under this Plan shall be
evidenced by an agreement in such form as the Committee shall prescribe from
time to time in accordance with this Plan and shall comply with the applicable
terms and conditions of this Section and this Plan, and with such other terms
and conditions, including, but not limited to, restrictions upon the Stock
Option or the Common Shares issuable upon exercise thereof, as the Committee, in
its discretion, shall establish.
-2-
<PAGE>
(a) The exercise price of a Stock Option may be less than, equal to,
or greater than, the Fair Market Value of the Common Shares subject to such
Stock Option at the time the Stock Option is granted, as determined by the
Committee; provided, however, that in the case of an Incentive Stock Option
granted to an employee of the Company, the exercise price shall not be less
than the Fair Market Value of the Common Shares subject to such Stock
Option at the time the Stock Option is granted, or if granted to a Ten
Percent Employee, such exercise price shall not be less than 110% of such
Fair Market Value at the time the Stock Option is granted. In no event,
however, will the exercise price per share of a Stock Option be less than
the par value per share of a Common Share.
(b) The Committee shall determine the number of Common Shares to be
subject to each Stock Option. In the case of a Stock Option awarded in
conjunction with an Associated Award, the number of Common Shares subject
to an outstanding Stock Option may be reduced on an appropriate basis to
the extent that the Associated Award has been exercised, paid to or
otherwise received by the Participant, as determined by the Committee.
(c) Any Stock Option may be exercised during its term only at such
time or times and in such installments as the Committee may establish.
(d) A Stock Option shall not be exercisable:
(i) in the case of any Incentive Stock Option granted to a Ten
Percent Employee, after the expiration of five years from the date it
is granted, and, in the case of any other Stock Option, after the
expiration of ten years from the date it is granted; and
(ii) unless payment in full is made for the shares being acquired
thereunder at the time of exercise as provided in subsection 6(i).
(e) The Committee shall determine in its discretion and specify in
each agreement evidencing a Stock Option the effect, if any, the
termination of the Participant's employment with or performance of services
for the Company shall have on the exercisability of the Stock Option;
provided, however, that an Incentive Stock Option shall not be exercisable
at a time that is beyond the time an Incentive Stock Option may be
exercised in order to qualify as such under the Code.
(f) In the case of an Incentive Stock Option, the amount of the
aggregate Fair Market Value of Common Shares (determined at the time of
grant of the Stock Option) with respect to which incentive stock options
are exercisable for the first time by an employee of the Company during any
calendar year (under all such plans of his employer corporation and its
parent and subsidiary corporations) shall not exceed $100,000 or such other
amount as is specified in the Code.
(g) It is the intent of Gaiam that Nonqualified Stock Options granted
under this Plan not be classified as Incentive Stock Options, that the
Incentive Stock Options granted under this Plan be consistent with and
contain or be deemed to contain all provisions required under Section 422
and the other appropriate provisions of the Code and any implementing
regulations (and any successor provisions thereof), and that any
ambiguities in construction shall be interpreted in order to effectuate
such intent.
(h) A Purchased Option may contain such additional terms not
inconsistent with this Plan, including but not limited to the circumstances
under which the purchase price of such
-3-
<PAGE>
Purchased Option may be returned to the holder of the Purchased Option, as
the Committee may determine in its sole discretion.
(i) For purposes of payments made to exercise Stock Options, such
payment shall be made in such form (including, but not limited to, cash,
Common Shares, the surrender of another outstanding Award under this Plan
or any combination thereof) as the Committee may determine in its
discretion; provided, however, that, unless the Committee determines
otherwise, for purposes of making such payment in Common Shares, such
shares shall be valued at their Fair Market Value on the day of exercise
and shall have been held by the Participant for a period of at least six
(6) months.
Section 7. Stock Appreciation Rights. The Committee may grant Stock
Appreciation Rights either alone, or in conjunction with Associated Awards,
either at the time of grant or by amendment thereafter. Each Award of Stock
Appreciation Rights granted under this Plan shall be evidenced by an agreement
in such form as the Committee shall prescribe from time to time in accordance
with this Plan and shall comply with the applicable terms and conditions of this
Section and this Plan, and with such other terms and conditions, including, but
not limited to, restrictions upon the Award of Stock Appreciation Rights or the
Common Shares issuable upon exercise thereof, as the Committee, in its
discretion, shall establish.
(a) The Committee shall determine the number of Common Shares to be
subject to each Award of Stock Appreciation Rights. In the case of an Award
of Stock Appreciation Rights awarded in conjunction with an Associated
Award, the number of Common Shares subject to an outstanding Award of Stock
Appreciation Rights may be reduced on an appropriate basis to the extent
that the Associated Award has been exercised, paid to or otherwise received
by the Participant, as determined by the Committee.
(b) The Award of Stock Appreciation Rights shall not be exercisable:
(i) unless the Associated Award, if any, is at the time
exercisable;
(ii) if the Associated Award is a Stock Option and the Fair
Market Value per share of the Common Shares on the exercise date does
not exceed the exercise price per share of such Stock Option; and
(iii) if the Associated Award is an Incentive Stock Option and
the exercise of the Award of Stock Appreciation Rights would
disqualify the Incentive Stock Option as such under the Code.
(c) The Committee shall determine in its discretion and specify in
each agreement evidencing an Award of Stock Appreciation Rights the effect,
if any, the termination of the Participant's employment with or performance
of services for the Company shall have on the exercisability of the Award
of Stock Appreciation Rights.
(d) An Award of Stock Appreciation Rights shall entitle the holder to
exercise such Award or to surrender unexercised an Associated Award (or any
portion of such Associated Award) to Gaiam and to receive from Gaiam in
exchange thereof, without payment to Gaiam, that number of Common Shares
having an aggregate value equal to (or, in the discretion of the Committee,
less than) the excess of the Fair Market Value of one share, at the time of
such exercise, over the exercise price, times the number of shares subject
to the Award or the Associated Award, or portion thereof, that is so
exercised or surrendered, as the case may be. The
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Committee shall be entitled in its discretion to elect to settle the
obligation arising out of the exercise of a Stock Appreciation Right by the
payment of cash or Other Gaiam Securities or property, or other forms of
payment or any combination thereof, as determined by the Committee, equal
to the aggregate value of the Common Shares it would otherwise be obligated
to deliver. Any such election by the Committee shall be made as soon as
practicable after the receipt by the Committee of written notice of the
exercise of the Stock Appreciation Right.
(e) A Stock Appreciation Right may provide that it shall be deemed to
have been exercised at the close of business on the business day preceding
the expiration date of the Stock Appreciation Right or of the related Stock
Option (or other Award), or such other date as specified by the Committee,
if at such time such Stock Appreciation Right has a positive value. Such
deemed exercise shall be settled or paid in the same manner as a regular
exercise thereof as provided in subsection 7(d) of this Agreement.
Section 8. Restricted Stock. The Committee may grant Awards of Restricted
Stock either alone, or in conjunction with Associated Awards, either at the time
of grant or by amendment thereafter. Each Award of Restricted Stock under this
Plan shall be evidenced by an agreement in such form as the Committee shall
prescribe from time to time in accordance with this Plan and shall comply with
the applicable terms and conditions of this Section and this Plan, and with such
other terms and conditions as the Committee, in its discretion, shall establish.
(a) The Committee shall determine the number of Common Shares to be
issued to a Participant pursuant to the Award of Restricted Stock, and the
extent, if any, to which they shall be issued in exchange for cash, other
consideration, or both.
(b) Until the expiration of such period as the Committee shall
determine from the date on which the Award is granted and subject to such
other terms and conditions as the Committee in its discretion shall
establish (the "Restricted Period"), a Participant to whom an Award of
Restricted Stock is made shall be issued, but shall not be entitled to the
delivery of, a stock certificate representing the Common Shares subject to
such Award.
(c) Unless otherwise determined by the Committee in its discretion, a
Participant to whom an Award of Restricted Stock has been made (and any
person succeeding to such a participant's rights pursuant to this Plan)
shall have, after issuance of a certificate for the number of Common Shares
awarded and prior to the expiration of the Restricted Period, ownership of
such Common Shares, including the right to vote such Common Shares and to
receive dividends or other distributions made or paid with respect to such
Common Shares (provided that such Common Shares, and any new, additional or
different shares, or Other Gaiam Securities or property, or other forms of
consideration that the Participant may be entitled to receive with respect
to such Common Shares as a result of a stock split, stock dividend or any
other change in the corporation or capital structure of Gaiam, shall be
subject to the restrictions set forth in this Plan as determined by the
Committee in its discretion), subject, however, to the options,
restrictions and limitations imposed thereon pursuant to this Plan.
(d) The Committee shall determine in its discretion and specify in
each agreement evidencing an Award of Restricted Stock the effect, if any,
the termination of the Participant's employment with or performance of
services for the Company during the Restricted Period shall have on such
Award of Restricted Stock.
Section 9. Performance Grants. The Committee may grant Awards of
Performance Grants either alone, or in conjunction with Associated Awards,
either at the time of grant or by amendment
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thereafter. The Award of a Performance Grant to a Participant will entitle him
to receive a specified amount determined by the Committee (the "Actual Value"),
if the terms and conditions specified in this Plan and in the Award are
satisfied. Each Award of a Performance Grant shall be subject to the applicable
terms and conditions of this Section and this Plan, and to such other terms and
conditions, including but not limited to, restrictions upon any cash, Common
Shares, Other Gaiam Securities or property, or other forms of payment, or any
combination thereof, issued with respect to the Performance Grant, as the
Committee, in its discretion, shall establish, and shall be embodied in an
agreement in such form and substance as is determined by the Committee.
(a) The Committee shall determine the value or range of values of a
Performance Grant to be awarded to each Participant selected for an Award
and whether or not such a Performance Grant is granted in conjunction with
an Associated Award. As determined by the Committee, the maximum value of
each Performance Grant (the "Maximum Value") shall be: (i) an amount fixed
by the Committee at the time the Award is made or amended thereafter, (ii)
an amount that varies from time to time based in whole or in part on the
then current value of the Common Shares, Other Gaiam Securities or
property, or other securities or property, or any combination thereof or
(iii) an amount that is determinable from criteria specified by the
Committee. Performance Grants may be issued in different classes or series
having different names, terms and conditions. In the case of a Performance
Grant awarded in conjunction with an Associated Award, the Performance
Grant may be reduced on an appropriate basis to the extent that the
Associated Award has been exercised, paid to or otherwise received by the
Participant, as determined by the Committee.
(b) The award period ("Award Period") related to any Performance Grant
shall be a period determined by the Committee. At the time each Award is
made, the Committee shall establish performance objectives to be attained
within the Award Period as the means of determining the Actual Value of
such a Performance Grant. The performance objectives shall be based on such
measure or measures of performance, which may include, but need not be
limited to, the performance of the Participant, the Company or one or more
of its divisions or units, or any combination of the foregoing, as the
Committee shall determine, and may be applied on an absolute basis or be
relative to industry or other indices or any combination thereof. The
Actual Value of a Performance Grant shall be equal to its Maximum Value
only if the performance objectives are attained in full, but the Committee
shall specify the manner in which the Actual Value of Performance Grants
shall be determined if the performance objectives are met in part. Such
performance measures, the Actual Value or the Maximum Value, or any
combination thereof, may be adjusted in any manner by the Committee in its
discretion at any time and from time to time during or as soon as
practicable after the Award Period, if it determines that such performance
measures, the Actual Value or the Maximum Value, or any combination
thereof, are not appropriate under the circumstances.
(c) The Committee shall determine in its discretion and specify in
each agreement evidencing a Performance Grant the effect, if any, the
termination of the Participant's employment with or performance of services
for the Company during the Award Period shall have on such Performance
Grant.
(d) The Committee shall determine whether the conditions of a
Performance Grant have been met and, if so, shall ascertain the Actual
Value of the Performance Grant. If the Performance Grant has no Actual
Value, the Award and such Performance Grant shall be deemed to have been
canceled and the Associated Award, if any, may be canceled or permitted to
continue in effect in accordance with its terms. If the Performance Grant
has any Actual Value and:
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(i) was not awarded in conjunction with an Associated Award, the
Committee shall cause an amount equal to the Actual Value of the
Performance Grant earned by the Participant to be paid to him or his
permitted assignee or Beneficiary; or
(ii) was awarded in conjunction with an Associated Award, the
Committee shall determine, in accordance with criteria specified by
the Committee (A) to cancel the Performance Grant, in which event no
amount with respect thereto shall be paid to the Participant or his
permitted assignee or Beneficiary, and the Associated Award may be
permitted to continue in effect in accordance with its terms, (B) to
pay the Actual Value of the Performance Grant to the Participant or
his permitted assignee or Beneficiary as provided below, in which
event the Associated Award may be canceled or (C) to pay to the
Participant or his Beneficiary, the Actual Value of only a portion of
the Performance Grants, in which event all or a portion of the
Associated Award may be permitted to continue in effect in accordance
with its terms or be canceled, as determined by the Committee.
Such determination by the Committee shall be made as promptly as
practicable following the end of the Award Period or upon the earlier
termination of employment or performance of services, or at such other time
or times as the Committee shall determine, and shall be made pursuant to
criteria specified by the Committee.
(e) Payment of any amount with respect to the Performance Grants that
the Committee determines to pay as provided above shall be made by Gaiam as
promptly as practicable after the end of the Award Period or at such other
time or times as the Committee shall determine, and may be made in cash,
Common Shares, Other Gaiam Securities or property, or other forms of
payment, or any combination thereof or in such other manner, as determined
by the Committee in its discretion. Notwithstanding anything in this
Section to the contrary, the Committee may, in its discretion, determine
and pay out the Actual Value of the Performance Grants at any time during
the Award Period.
Section 10. Deferral of Compensation. The Committee shall determine
whether or not an Award shall be made in conjunction with the deferral of the
Participant's salary, bonus or other compensation, or any combination thereof,
and whether or not such deferred amounts may be:
(a) forfeited to the Company or to other Participants or any
combination thereof, under certain circumstances (which may include, but
need not be limited to, certain types of termination of employment or
performance of services for the Company);
(b) subject to increase or decrease in value based upon the attainment
of or failure to attain, respectively, certain performance measures; and/or
(c) credited with income equivalents (which may include, but need not
be limited to, interest, dividends or other rates of return) until the date
or dates of payment of the Award, if any.
Section 11. Deferred Payment of Awards. The Committee may specify that
the payment of all or any portion of cash, Common Shares, Other Gaiam Securities
or property, or any other form of payment, or any combination thereof, under an
Award shall be deferred until a later date. Deferrals shall be for such periods
or until the occurrence of such events, and upon such terms, as the Committee
shall determine in its discretion. Deferred payments of Awards may be made by
undertaking to make payment in the future based upon the performance of certain
investment equivalents (which may include, but need
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not be limited to, government securities, Common Shares, other securities,
property or consideration, or any combination thereof), together with such
additional amounts of income equivalents (which may be compounded and may
include, but need not be limited to, interest, dividends or other rates of
return or any combination thereof) as may accrue thereon until the date or dates
of payment, such investment equivalents and such additional amounts of income
equivalents to be determined by the Committee in its discretion.
Section 12. Transferability of Awards. A Participant's rights and
interest under this Plan or any Award may not be assigned or transferred,
hypothecated or encumbered in whole or in part either directly or by operation
of law or otherwise, including, but not by way of limitation, execution, levy,
garnishment, attachment, pledge, bankruptcy or in any other manner; provided,
however, the Committee may permit such transfer to a Permitted Transferee; and
provided, further, that, unless otherwise permitted by the Code, any Incentive
Stock Option granted pursuant to this Plan shall not be transferable other than
by will, by the laws of descent and distribution, or by a gift or through a
domestic relations order to a Permitted Transferee, and shall be exercisable
during the Participant's lifetime only by Participant or by such Permitted
Transferee who has acquired any Incentive Stock Option from Participant through
a gift or a domestic relations order.
Section 13. Amendment or Substitution of Awards under this Plan. The
terms of any outstanding Award under this Plan may be amended or modified from
time to time by the Committee in its discretion in any manner that it deems
appropriate (including, but not limited to, acceleration of the date of exercise
of any Award and/or payments thereunder) if the Committee could grant such
amended or modified Award under the terms of this Plan at the time of such
amendment or modification; provided that no such amendment or modification shall
adversely affect in a material manner any right of a Participant under the Award
without his written consent, unless the Committee determines in its discretion
that there have occurred or are about to occur significant changes in the
Participant's position, duties or responsibilities, or significant changes in
economic, legislative, regulatory, tax, accounting or cost/benefit conditions
that are determined by the Committee in its discretion to have or to be expected
to have a substantial effect on the performance of the Company, or any
affiliate, division or department thereof, on this Plan or on any Award under
this Plan. The Committee may, in its discretion, permit holders of Awards under
this Plan to surrender outstanding Awards in order to exercise or realize the
rights under other Awards, or in exchange for the grant of new Awards, or
require holders of Awards to surrender outstanding Awards as a condition
precedent to the grant of new Awards under this Plan.
Section 14. Termination of a Participant. For all purposes under this
Plan, the Committee shall determine whether a Participant has terminated
employment with, or the performance of services for, the Company; provided,
however, an absence or leave approved by the Company, to the extent permitted by
applicable provisions of the Code, shall not be considered an interruption of
employment or performance of services for any purpose under this Plan.
Section 15. Dilution and Other Adjustments. If any change in the
outstanding Common Shares of the Company occurs by reason of any stock split of
or stock dividend on the Common Shares, then, except as otherwise determined by
the Committee, the terms of any outstanding Awards shall be equitably adjusted.
If any change in the outstanding Common Shares occurs by reason of any split-up,
split-off, spin-off, recapitalization, merger, consolidation, rights offering,
reorganization, combination or exchange of shares, sale by the Company of all of
its assets, distribution to shareholders (other than a stock dividend or a
normal cash dividend on the Common Shares), or other extraordinary or unusual
event (other than a stock split of the Common Stock as provided above), then the
Committee may determine, in its discretion, to terminate all outstanding Awards
immediately prior to the consummation of any such event, or make an equitable
adjustment in the terms of any outstanding Award and/or the number of Common
Shares available for Awards. Any such termination or adjustment made by the
Committee and
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shall be final, conclusive and binding for all purposes of the Plan. Unless
otherwise provided by the Committee, all outstanding Awards shall terminate
immediately prior to the consummation of any dissolution or liquidation of the
Company.
Section 16. Designation of Beneficiary by Participant. A Participant may
name a beneficiary to receive any payment to which he may be entitled with
respect to any Award under this Plan in the event of his death, on a written
form to be provided by and filed with the Committee, and in a manner determined
by the Committee in its discretion (a "Beneficiary"). The Committee reserves the
right to review and approve Beneficiary designations. A Participant may change
his Beneficiary from time to time in the same manner, unless such Participant
has made an irrevocable designation. Any designation of a Beneficiary under this
Plan (to the extent it is valid and enforceable under applicable law) shall be
controlling over any other disposition, testamentary or otherwise, as determined
by the Committee in its discretion. If no designated Beneficiary survives the
Participant and is living on the date on which any amount becomes payable to
such a Participant's Beneficiary, such payment will be made to the legal
representatives of the Participant's estate, and the term "Beneficiary" as used
in this Plan shall be deemed to include such person or persons. If there are any
questions as to the legal right of any Beneficiary to receive a distribution
under this Plan, the Committee in its discretion may determine that the amount
in question be paid to the legal representatives of the estate of the
Participant, in which event the Company, the Board, the Committee, the
Designated Administrator (if any), and the members thereof, will have no further
liability to anyone with respect to such amount.
Section 17. Financial Assistance. If the Committee determines that such
action is advisable, the Company may assist any Participant in obtaining
financing from the Company (or under any program of the Company approved
pursuant to applicable law), or from a bank or other third party, on such terms
as are determined by the Committee, and in such amount as is required to
accomplish the purposes of this Plan, including, but not limited to, to permit
the exercise of an Award, the participation therein, and/or the payment of any
taxes with respect thereto. Such assistance may take any form that the Committee
deems appropriate, including, but not limited to, a direct loan from the
Company, a guarantee of the obligation by the Company or the maintenance by the
Company of deposits with such bank or third party.
Section 18. Miscellaneous Provisions.
(a) Any proceeds from Awards shall constitute general funds of Gaiam .
(b) No fractional shares may be delivered under an Award, but in lieu
thereof a cash or other adjustment may be made as determined by the
Committee in its discretion.
(c) No Eligible Person or other person shall have any claim or
right to be granted an Award under this Plan. Determinations made by the
Committee under this Plan need not be uniform and may be made selectively
among Eligible Persons under this Plan, whether or not such Eligible
Persons are similarly situated. Neither this Plan nor any action taken
hereunder shall be construed as giving any Eligible Person any right to
continue to be employed by or perform services for the Company, and the
right to terminate the employment of or performance of services by Eligible
Persons at any time and for any reason is specifically reserved.
(d) No Participant or other person shall have any right with
respect to this Plan, the Common Shares reserved for issuance under this
Plan or in any Award, contingent or otherwise, until written evidence of
the Award shall have been delivered to the recipient and all the terms,
conditions and provisions of this Plan and the Award applicable to such
recipient (and each person claiming under or through him) have been met.
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(e) No Common Shares, Other Gaiam Securities or property, other
securities or property or other forms of payment shall be issued hereunder
with respect to any Award unless counsel for Gaiam shall be satisfied that
such issuance will be in compliance with applicable law and any applicable
rules of any stock exchange or other market quotation system on which
Common Shares are listed.
(f) It is the intent of Gaiam that this Plan comply in all respects
with Rule 16b-3 and Section 162(m) with respect to Awards granted to
executive officers of Gaiam, that any ambiguities or inconsistencies in
construction of this Plan be interpreted to give effect to such intention
and that if any provision of this Plan is found not to be in compliance
with Rule 16b-3 or Section 162(m), such provision shall be deemed null and
void with respect to Awards granted to executive officers of Gaiam to the
extent required to permit such Awards to comply with Rule 16b-3 and Section
162(m). It is also the intent of Gaiam that this Plan comply in all
respects with the provisions of the Code providing favorable treatment to
Incentive Stock Options, that any ambiguities or inconsistencies in
construction of this Plan be interpreted to give effect to such intention
and that if any provision of this Plan is found not to be in compliance
with the Incentive Stock Option provisions of the Code, such provision
shall be deemed null and void with respect to Incentive Stock Options
granted to employees of the Company to the extent required to permit such
Incentive Stock Options to receive favorable treatment under the Code.
(g) The Company shall have the right to deduct from any payment made
under this Plan any federal, state, local or foreign income or other taxes
required by law to be withheld with respect to such payment. It shall be a
condition to the obligation of Gaiam to issue Common Shares, Other Gaiam
Securities or property, other securities or property, or other forms of
payment, or any combination thereof, upon exercise, settlement or payment
of any Award under this Plan, that the Participant (or any Beneficiary or
person entitled to act) pay to Gaiam, upon its demand, such amount as may
be required by the Company for the purpose of satisfying any liability to
withhold federal, state, local or foreign income or other taxes. If the
amount requested is not paid, Gaiam may refuse to issue Common Shares,
Other Gaiam Securities or property, other securities or property, or other
forms of payment, or any combination thereof. Notwithstanding anything in
this Plan to the contrary, the Committee may, in its discretion, permit an
Eligible Person (or any Beneficiary or person entitled to act) to elect to
pay a portion or all of the amount requested by the Company for such taxes
with respect to such Award, at such time and in such manner as the
Committee shall deem to be appropriate (including, but not limited to, by
authorizing Gaiam to withhold, or agreeing to surrender to Gaiam on or
about the date such tax liability is determinable, Common Shares, Other
Gaiam Securities or property, other securities or property, or other forms
of payment, or any combination thereof, owned by such person or a portion
of such forms of payment that would otherwise be distributed, or have been
distributed, as the case may be, pursuant to such Award to such person,
having a Fair Market Value equal to the amount of such taxes).
(h) The expenses of this Plan shall be borne by the Company; provided,
however, the Company may recover from a Participant or his Beneficiary,
heirs or assigns any and all damages, fees, expenses and costs incurred by
the Company arising out of any actions taken by a Participant in breach of
this Plan or any agreement evidencing such Participant's Award.
(i) This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Award under this Plan, and rights to
the payment of Awards shall be no greater than the rights of the Company's
general creditors.
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(j) By accepting any Award or other benefit under this Plan, each
Participant and each person claiming under or through him shall be
conclusively deemed to have indicated his acceptance and ratification of,
and consent to, any action taken under this Plan by the Company, the Board,
the Committee or the Designated Administrator (if applicable).
(k) The appropriate officers of the Company shall cause to be filed
any reports, returns or other information regarding Awards hereunder of any
Common Shares issued pursuant hereto as may be required by applicable law
and any applicable rules of any stock exchange or other market quotation
system on which Common Shares are listed.
(l) The validity, construction, interpretation, administration and
effect of this Plan, and of its rules and regulations, and rights relating
to this Plan and to Awards granted under this Plan, shall be governed by
the substantive laws, but not the choice of law rules, of the State of
Colorado.
(m) Records of the Company shall be conclusive for all purposes under
this Plan or any Award, unless determined by the Committee to be incorrect.
(n) If any provision of this Plan or any Award is held to be illegal
or invalid for any reason, the illegality or invalidity shall not affect
the remaining provisions of this Plan or any Award, but such provision
shall be fully severable, and this Plan or Award, as applicable, shall be
construed and enforced as if the illegal or invalid provision had never
been included in this Plan or Award, as applicable.
(o) The terms of this Plan shall govern all Awards under this Plan and
in no event shall the Committee have the power to grant any Award under
this Plan that is contrary to any of the provisions of this Plan.
(p) For purposes of interpretation of this Plan, the masculine pronoun
includes the feminine and the singular includes the plural wherever
appropriate.
Section 19. Plan Amendment or Suspension. This Plan may be amended or
suspended in whole or in part at any time from time to time by the Board. No
amendment of this Plan shall adversely affect in a material manner any right of
any Participant with respect to any Award previously granted without such
Participant's written consent, except as permitted under Section 13.
Section 20. Plan Termination. This Plan shall terminate upon the earlier
of the following dates or events to occur:
(a) upon the adoption of a resolution of the Board terminating this
Plan; or
(b) the tenth anniversary of the Effective Date; provided, however,
that the Board may, prior to such date, extend the term of this Plan for an
additional period of up to five years for the grant of Awards other than
Incentive Stock Options. No termination of this Plan shall materially alter
or impair any of the rights or obligations of any person, without his
consent, under any Award previously granted under this Plan, except that
subsequent to termination of this Plan, the Committee may make amendments
or modifications permitted under Section 13.
Section 21. Effective Date. This Plan shall be effective, and Awards may
be granted under this Plan, on or after the Effective Date.
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ADOPTED BY THE BOARD: ___________, 1999
EFFECTIVE DATE: ___________, 1999
EXECUTED to evidence this Gaiam, Inc. 1999 Long-Term Incentive Plan adopted
by the Board on __________, 1999.
GAIAM, INC.
By:
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APPENDIX A
The following terms shall have the meaning indicated:
(a) "Actual Value" has the meaning set forth in Section 9.
(b) "Associated Award" shall mean an Award granted concurrently or
subsequently in conjunction with another Award.
(c) "Award" shall mean an award of rights to an Eligible Person under
this Plan.
(d) "Award Period" has the meaning set forth in subsection 9(b).
(e) "Beneficiary" has the meaning set forth in Section 16.
(f) "Board" shall mean the board of directors of Gaiam.
(g) "Code" shall mean the Internal Revenue Code of 1986, as it now
exists or may be amended from time to time, and the rules and regulations
promulgated thereunder, as they may exist or may be amended from time to
time.
(h) "Committee" shall mean the person or persons responsible for
administering the Plan. The Board shall constitute the Committee until the
Board appoints a Board Committee, after which time the Board Committee
shall constitute the Committee, provided, however, that at any time the
Board may designate itself as the Committee or designate itself to
administer certain of the Committee's authority under the Plan, including
administering certain Awards under the Plan. The Board or the Board
Committee may designate a Designated Administrator to constitute the
Committee or to administer certain of the Committee's authority under the
Plan, including administering certain Awards under the Plan, subject to the
right of the Board or the Board Committee, as applicable, to revoke its
designation at any time and to make such designation on such terms and
conditions as it may determine in its discretion. For purposes of this
definition, the "Board Committee" shall mean a committee of the Board
designated by the Board to administer this Plan. Except as otherwise
determined by the Board, the Board Committee (i) shall be comprised of not
fewer than two directors, (ii) shall meet any applicable requirements under
Rule 16b-3, including any requirement that the Board Committee consist of
"nonemployee directors" (as defined in Rule 16b-3), (iii) shall meet any
applicable requirements under Section 162(m), including any requirement
that the Board Committee consist of "outside directors" (as defined in
Treasury Regulation (S)1.162-27(e)(3)(i) or any successor regulation), and
(iv) shall meet any applicable requirements of any stock exchange or other
market quotation system on which Common Shares are listed. For purposes of
this definition, the "Designated Administrator" shall mean a person or
person designated by the Board or a Board Committee to act as a Designated
Administrator pursuant to this Plan. Except as otherwise determined by the
Board, a Designated Administrator shall only be appointed if Rule 16b-3
permits such appointment and the exercise of any authority without
adversely affecting the ability of Awards to officers of Gaiam to comply
with the conditions for Rule 16b-3 or Section 162(m).
(i) "Company" shall mean Gaiam and any parent, subsidiary or affiliate
of Gaiam.
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(j) "Common Shares" shall mean shares of Class A common stock, par
value $0.0001 per share, of Gaiam and stock of any other class into which
such shares may thereafter be changed.
(k) "Effective Date" shall mean the date the Board adopts this Plan.
(l) "Eligible Person(s)" shall mean those persons who are full or
part-time employees of the Company or other individuals who perform
services for the Company, including, without limitation, directors who are
not employees of the Company and consultants and independent contractors
who perform services for the Company.
(m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
it now exists or may be amended from time to time, and the rules
promulgated thereunder, as they may exist or may be amended from time to
time.
(n) "Fair Market Value" shall mean such value rounded up to the
nearest cent as determined by the Committee in accordance with applicable
law.
(o) "Incentive Stock Option" shall mean a Stock Option that is an
incentive stock option as defined in Section 422 of the Code. Incentive
Stock Options are subject, in part, to the terms, conditions and
restrictions described in Section 6.
(p) "Maximum Value" has the meaning set forth in subsection 9(a).
(q) "Gaiam" shall mean Gaiam, Inc., a Colorado corporation.
(r) "Nonqualified Stock Option" shall mean a Stock Option that is not
an incentive stock option as defined in Section 422 of the Code.
Nonqualified Stock Options are subject, in part, to the terms, conditions
and restrictions described in Section 6.
(s) "Other Gaiam Securities" shall mean Gaiam securities (which may
include, but need not be limited to, unbundled stock units or components
thereof, debentures, preferred stock, warrants, securities convertible into
Common Shares or other property) other than Common Shares.
(t) "Participant" shall mean an Eligible Person to whom an Award has
been granted under this Plan.
(u) "Performance Grant" shall mean an Award subject, in part, to the
terms, conditions and restrictions described in Section 9, pursuant to
which the recipient may become entitled to receive cash, Common Shares,
Other Gaiam Securities or property, or other forms of payment, or any
combination thereof, as determined by the Committee.
(v) "Permitted Transferee" means (i) any person defined as an employee
in the Instructions to Registration Statement Form S-8 promulgated by the
Securities and Exchange Commission, as such Form may be amended from time
to time, which persons include, as of the date of adoption of the Plan, (a)
executors, administrators or beneficiaries of the estates of deceased
Participants, guardians or members of a committee for incompetent former
Participants, or similar persons duly authorized by law to administer the
estate or assets of former Participants, and (b) Participants' family
members who acquire Awards from the Participant other than for value,
through a gift or a domestic relations order. For purposes of this
definition, "family
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member" includes any child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, former spouse, sibling, niece, exercised or
surrendered, as the case may be. The nephew, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-nin-law, or sister-in-law, including
adoptive relationships, any person sharing the Participant's household
(other than a tenant or employee), a trust in which these persons have more
than fifty percent of the beneficial interest, a foundation in which these
persons (or the Participant) control the management of assets, and any
other entity in which these persons (or the Participant) own more than
fifty percent of the voting interests. For purposes of this definition,
neither (i) a transfer under a domestic relations order in settlement of
marital property rights; nor (ii) a transfer to an entity in which more
than fifty percent of the voting interests are owned by family members (or
the Participant) in exchange for an interest in that entity is considered a
transfer for "value".
(w) "Plan" shall mean this Gaiam, Inc. 1999 Long-Term Incentive Plan.
(x) "Purchased Option" shall mean a Stock Option that is sold to an
Eligible Person at a price determined by the Committee. Purchased Options
are subject, in part, to the terms, conditions and restrictions described
in Section 6.
(y) "Restricted Period" has the meaning set forth in subsection 8(b).
(z) "Restricted Stock" shall mean an Award of Common Shares that are
issued subject, in part, to the terms, conditions and restrictions
described in Section 8.
(aa) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities
and Exchange Commission under the Exchange Act and any successor rule.
(bb) "Section 162(m)" shall mean (S)162(m) of the Code, any rules or
regulations promulgated thereunder, as they may exist or may be amended
from time to time, or any successor to such section.
(cc) "Stock Appreciation Right" shall mean an Award of a right to
receive (without payment to Gaiam) cash, Common Shares, Other Gaiam
Securities or property, or other forms of payment, or any combination
thereof, as determined by the Committee, based on the increase in the value
of the number of Common Shares specified in the Stock Appreciation Right.
Stock Appreciation Rights are subject, in part, to the terms, conditions
and restrictions described in Section 7.
(dd) "Stock Option" shall mean an Award of a right to purchase Common
Shares. The term Stock Option shall include Nonqualified Stock Options,
Incentive Stock Options and Purchased Options.
(ee) "Ten Percent Employee" shall mean an employee of the Company who
owns stock representing more than ten percent of the voting power of all
classes of stock of Gaiam or any parent or subsidiary of Gaiam.
(ff) "Treasury Regulation" shall mean a final, proposed or temporary
regulation of the Department of Treasury under the Code and any successor
regulation.
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Exhibit 10.2
OPERATING AGREEMENT
OF
HEALING ARTS PUBLISHING, LLC
THIS OPERATING AGREEMENT (this "Agreement") is made and entered into
as of September 14, 1998 by and between GAIAM HOLDINGS, INC., a Colorado
corporation ("Holdings") and HEALING ARTS PUBLISHING, INC., a California
corporation ("HAP" and, with Holdings, each a "Member" and collectively the
"Members"), with reference to the following facts:
A. Steven P. Adams ("Adams") owns all of the issued and outstanding
shares of capital stock of HAP.
B. Gaiam, Inc. ("Gaiam") owns all of the issued and outstanding shares of
capital stock of Holdings.
C. The parties have caused articles of organization (as amended from time
to time, the "Articles") for a limited liability company named Healing Arts
Publishing, LLC (the "Company") to be filed with the California Secretary of
State on September 4, 1998, and has caused to be assigned and transferred to the
Company certain assets (the "HAP Assets") as more particularly described in that
certain Purchase Agreement of even date herewith by and among HAP, the Company,
Adams, Holdings, and certain other parties (the "Purchase Agreement").
D. Pursuant to the Purchase Agreement, Holdings as the "Purchaser"
thereunder purchased and acquired a Membership Interest in the Company
representing a fifty and 37/100 percent (50.37%) interest in the capital and
profits of the Company (the "Holdings Percentage"), and HAP has a forty-nine and
63/100 percent (49.63%) interest.
E. HAP and Holdings wish to enter into this Agreement in order to provide
for the purposes for which the Company is formed, the division of profits and
losses from the operations thereof, restrictions on dispositions of interests
therein, the management thereof, and other matters related thereto.
ACCORDINGLY, the parties hereto agree as follows:
1. FORMATION AND PURPOSE; GENERAL DEFINITIONS
1.1 Organization; Governance. The business and affairs of the Company
shall be governed by the Articles and, where not inconsistent with the Articles,
this Agreement and, where not inconsistent with the Articles or this Agreement,
sections 17000 through 17705, inclusive, of the California Corporations Code,
commonly known as the Beverly-Killea Limited Liability Company Act, as amended
(the "Act").
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1.2 Principal Office; Agent. The Company shall continuously maintain a
registered agent and principal office in the State of California as required by
the Act. The principal office of the Company and the registered agent for
service of process shall be as set forth in the Articles and shall be designated
by the Board (defined in Section 4.1 hereof) from time to time.
1.3 Purpose. The Company is formed and shall be conducted
1.3.1 to acquire, develop, own, operate, and deal with the
existing business of HAP;
1.3.2 to acquire, develop, own, operate, and deal with such other
businesses as the Board may determine from time to time; and
1.3.3 to conduct such other activities related to or incidental to
the acquisition, development, ownership, operation, management, sale, financing,
refinancing or disposition of all or any portion of the businesses described in
Section 1.3.1 or 1.3.2 hereof; to exercise all other power necessary to or
reasonably connected with such businesses as may be legally exercised by limited
liability companies in California and in such other states in which the Company
shall qualify to do business or own assets; and to engage in all activities
necessary, customary, convenient, or incident to any of the foregoing.
1.4 Independent Activities. Subject to the Non-Compete Agreement, (a) any
Member or its Affiliate (defined in Sections 1.6.1 hereof) may engage in or
possess an interest in any other business venture of any nature and description
on its own behalf without participation by the other Members and without
liability on the part of such Member or Affiliate to the other Members; (b)
neither the Company nor any Member not included in such venture shall have any
right by virtue of this Agreement in and to such independent ventures or to the
income or profits derived therefrom; and (C) each Member hereby waives any
rights which may otherwise be implied to the contrary.
1.5 Term. The Company shall continue in existence until the latest date on
which the Company is to dissolve as set forth in the Articles, unless sooner
dissolved pursuant to this Agreement or under the Act.
1.6 Definitions. In addition to such terms as are defined elsewhere in
this Agreement, the following terms shall have the following meanings:
1.6.1 "Affiliate" means, with respect to any person (the "first
person"), (a) any second person directly or indirectly controlling, controlled
by or under common control with the first person or owning or controlling ten
percent (10%) or more of the outstanding securities of or in the first person;
(b) any officer, director, manager, trustee, or general partner or Family member
of or in the first person; or (C) if the first person is an officer, director,
manager, trustee or general partner, any corporation, partnership, trust, or
limited liability company for which such first person acts in that capacity. For
purposes of this Section 1.6.1, (I) the term "control" (including the terms
"controlled by" and "under common control with") means the possession, direct or
indirect, of the
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power to direct or cause the direction of the management and policies of a
person, whether through the ownership of voting securities, by contract or
otherwise, and (II) a manager of a limited liability company includes a member
of a limited liability company that is managed by its members rather than by
managers. Corporate Express, Inc, is not an "affiliate" within the meaning of
this Section 1.6.1.
1.6.2 "Assignee" is as defined in Section 5.4.2 hereof.
1.6.3 "Available Cash" means, with respect to any fiscal period,
total gross revenues generated by the Company's business and any other revenues
of the Company from other sources and from the elimination or reduction of
reserves previously established, less cash expenditures (including, but not
limited to, compensation and reimbursements to a Manager or any Affiliate
thereof), current debt service (including, but not limited to, payments on debts
to a Member), operating expenses, and the establishment or increase of reserves
as determined by the Board.
1.6.4 "Bankruptcy" or "Bankrupt" means, with respect to a person,
(a) the making by such person of an assignment for the benefit of creditors; (b)
the filing by such person of a voluntary petition in bankruptcy; (C) the
adjudication of such person as being bankrupt or insolvent; (d) the filing by
such person of a petition or answer seeking for such person any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any statute, law or regulation; (e) the filing by such person of an
answer or other pleading admitting or failing to contest the material
allegations of a petition filed against such person in any proceeding of a
nature described in clauses (a) through (d) hereof; (f) the seeking, consenting
to, or acquiescing in, the appointment of a trustee, receiver or liquidator for
such person or of all or any substantial part of such person's property; or (g)
the continuation of any proceedings against such person seeking reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any statute, law or regulation, one hundred and twenty (120) days
after the commencement thereof, or the appointment of a trustee, receiver or
liquidator of such person or all or any substantial part of such person's
property without such member's consent or acquiescence, which appointment is not
vacated or stayed within ninety (90) days or, if the appointment is stayed,
ninety (90) days after the expiration of the stay during which the appointment
is not vacated.
1.6.5 "Capital Contribution" of a Member means any and all
contributions to the capital of the Company by such Member pursuant to Section
2.1 hereof.
1.6.6 "Cause" means, with respect to a Manager,
1.6.6.1 in the case of an individual, either (a) the
Incompetence of such person or (b) a disability or other incapacity that renders
such person unable to discharge such person's duties as a Manager for a
continuous period of sixty (60) days, or for ninety (90) days during any period
of twelve (12) months;
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1.6.6.2 gross negligence, misconduct or fraud by such
person in the management of the Company or its business;
1.6.6.3 a material breach by such person of any provision
of this Agreement, together with failure to correct such breach within thirty
(30) days after notice of such breach is given by a Member; or
1.6.6.4 the conviction of or plea of guilty or nolo
contendere by such person with respect to any felony arising from or related to
the conduct of the Company's affairs.
1.6.7 "Code" means the Internal Revenue Code of 1986, as amended.
1.6.8 The "Family" of an individual includes such individual's
current spouse; lineal ancestors (including those by adoption); sibling(s)
(including those by adoption) and spouses of the foregoing; and lineal
descendants (including those by adoption) and spouses of the foregoing.
1.6.9 "Fiscal Year" is as defined in Section 7.4.4 hereof.
1.6.10 "Incompetence" or "Incompetent" means, with respect to an
individual, the adjudication of such individual by a court of competent
jurisdiction as insane or incompetent to manage such individual's person or
property.
1.6.11 "Majority in Interest" or "Majority" at any time means those
Members owning Membership Interests representing more than fifty percent (50%)
of the Percentage Interests represented by all Membership Interests, except
that, where this Agreement expressly refers to a Majority in Interest of fewer
than all of the Members, then Majority in Interest means those Members in such
sub-group owning Membership Interests representing more than fifty percent (50%)
of the Percentage Interests encompassed in that sub-group.
1.6.12 "Member" (collectively, "Members") means any of the persons
described in the first paragraph of this Agreement or a permitted transferee of
such person who has been duly admitted as a Member under Section 5 hereof. A
"Member" shall also be deemed to include an Assignee for purposes of Section 3
only.
1.6.13 "Membership Interest" means a Member's rights in the
Company, collectively, including the Member's right to share in the income,
gains, losses, deductions, credit, or similar items of, and to receive
distributions from, the Company; any right to vote or participate in management;
and any right to information concerning the business and affairs of the Company.
Notwithstanding any provision of the Act to the contrary, a Member's right to
share in the income, gains, losses, deductions, credit, or similar items of, and
to receive distributions from, the Company (an "Economic Interest") may not be
transferred apart from the full Membership Interest except as expressly provided
to the contrary in this Agreement, and references herein to a "portion" of a
Membership Interest refer to an undivided portion of a Membership Interest.
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1.6.14 "Non-Compete Agreement" means that certain Non-Compete and
Confidentiality Agreement of even date herewith by and between Holdings, HAP,
Steven P. Adams, and the Company.
1.6.15 "Percentage Interest" of a Member at any time means such
Member's percentage interest in the capital, profits and losses of the Company.
As of the date hereof, (a) the Percentage Interest represented by Holdings'
Membership Interest equals the Holdings Percentage (as defined in paragraph D
above) and (b) the Percentage Interest represented by HAP's Membership Interest
equals one hundred and 00/100 percent (100.00%) minus the Holdings Percentage.
1.6.16 A "person" means an individual or a corporation,
partnership, limited liability company, trust or other legal entity.
1.6.17 "Regulations" mean the Treasury regulations promulgated
under the Code.
1.6.18 "Termination Event" with respect to a Member means (a) the
Bankruptcy of such Member; (b) a withdrawal by such Member of its entire Capital
Account; (C) in the case of a Member who is an individual, the death or
Incompetence of such Member; or (d) in the case of a Member that is not an
individual, the dissolution, revocation, merger or other termination of such
Member unless the resulting transfer of the Membership Interest of such Member
is described in Sections 5.3.1.3, 5.3.1.4 or 5.3.1.5 or hereof.
1.6.19 A "transfer" of a Membership Interest means a sale,
assignment, conveyance, exchange, gift, encumbrance, pledge, hypothecation, use
as collateral, or other disposition or transfer of legal or beneficial ownership
of such Membership Interest, whether voluntary or involuntary.
2. CAPITALIZATION
2.1 Capital Contributions. Effective as of the date of this Agreement, (a)
HAP shall be deemed to have contributed the HAP Assets to the Company in
exchange for a Membership Interest representing the Percentage Interest
reflected in Section 1.6.15 hereof, and (b) Holdings shall be deemed to have
contributed the cash consideration described in the Purchase Agreement to the
Company in exchange for a Membership Interest representing the Percentage
Interest reflected in Section 1.6.15 hereof. A Member may not, and shall not be
required to, contribute additional amounts to the capital of the Company except
with the approval of all the Members, and a person may become a Member by making
a contribution to the capital of the Company with the consent of all the
Members.
2.2 Capital Accounts. For financial accounting purposes, a "Capital
Account" shall be established and maintained for each Member in accordance with
the following provisions:
2.2.1 Each Member's Capital Account shall be credited with such
Member's Capital Contributions, any income or gain allocated to such Member
pursuant to Section 3 hereof, and the
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amount of any Company liabilities assumed by such Member or which are secured by
any property distributed to such Member.
2.2.2 Each Member's Capital Account shall be reduced by the amount
of cash distributed to such Member, any losses or deductions allocated to such
Member pursuant to Section 3 hereof, and the amount of any liabilities of such
Member assumed by the Company or which are secured by any property contributed
by such Member to the Company.
2.2.3 For federal income tax purposes, such Capital Accounts shall
be maintained for each Member in accordance with section 1.704-1(b)(2)(iv) of
the Regulations.
2.3 Advances and Loans. Any Member (directly or through an Affiliate) may,
but shall not be obligated to, advance funds to or on behalf of the Company upon
such terms as the lending Member and the other Member may agree, subject to the
following:
2.3.1 such advance shall be a debt owed by the Company to such
person in such person's capacity as a creditor and not in such person's capacity
as a Member, shall not increase such Member's Capital Account, and shall not
entitle such Member to a greater share of distributions or allocations pursuant
to Section 3 hereof;
2.3.2 such advance shall be segregated in a loan payable account;
and
2.3.3 principal and interest on such advance shall be paid from
the gross receipts of the Company, net of all other expenses of the Company,
before any distributions are made under Section 3 hereof.
2.4 Withdrawal. Notwithstanding any provision of the Act to the contrary,
a Member shall not have the right to have its Membership Interest redeemed or to
withdraw all or any portion of such Member's Capital Account or Capital
Contributions until the full and complete winding up and liquidation of the
business and affairs of the Company except with the consent of the other Member,
which consent may be withheld in the other Member's sole and absolute
discretion.
2.5 Adjustment. The Percentage Interests of the Members shall be adjusted
at the time and in the manner described under the "Valuation" provisions of the
Purchase Agreement without any amendment to this Agreement.
3. ALLOCATIONS AND DISTRIBUTIONS
3.1 Distributions. Except upon the liquidation of the Company, in which
event distributions shall be made according to Section 6.2.4 hereof, Available
Cash shall be distributed to the Members in such aggregate amounts and at such
times as the Board shall determine as follows:
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3.1.1 first, to Holdings, until Holdings shall have received an
aggregate amount of Available Cash during the current Fiscal Year and prior
Fiscal Years equal to its Capital Contribution;
3.1.2 second, to HAP, until HAP shall have received an aggregate
amount of Available Cash during the current Fiscal Year and prior Fiscal Years
equal to its Capital Contribution; and
3.1.3 third, to the Members according to their Percentage
Interests.
Distributions shall be deemed made to a Member notwithstanding that all or a
portion of such amounts are withheld by the Company pursuant to any requirement
of the Code or of state or local tax law, provided that such amounts are duly
remitted to the appropriate taxing authority. Notwithstanding the foregoing, the
Company shall distribute to each Member for each Fiscal Year of the Company, not
later than April 15 of the succeeding Fiscal Year, an amount equal to forty-six
percent (46%) of the taxable income of the Company allocated to such Member and,
for the Fiscal Year ended December 31, 1998, only, shall distribute to HAP an
amount equal to forty-six percent (46%) of the taxable income of HAP for the
period from January 1, 1998, through September 8, 1998.
3.2 Allocations. Subject to Section 3.3 hereof, items of income, gain,
loss, deduction and credit with respect to each Fiscal Year shall be allocated
to the Members according to their Percentage Interests, subject to the following
provisions:
3.2.1 With respect to each Fiscal Year, net income for tax
purposes shall be first allocated to each Member in the amount and in proportion
to the prior distributions to such Member for the current Fiscal Year and prior
Fiscal Years under Section 3.1 hereof until the amount of net income allocated
to each Member pursuant to this Section 3.2.1 for the current Fiscal Year and
prior Fiscal Years shall equal such aggregate distributions.
3.2.2 Upon a liquidation of the Company, items of income, gain,
loss, and deduction shall be allocated with respect to the Fiscal Year in which
such liquidation takes place so that, when distributions shall be made according
to Section 6.2.4 hereof, such distributions shall conform as closely as possible
with Section 3.1 hereof.
3.3 Special Allocation Provisions. Sections 1.704-1(b)(2)(ii)(d) and
1.704-2 of the Regulations are incorporated by reference and shall apply
notwithstanding any provision of this Section 3 to the contrary. In addition,
the requirements of the Code and Regulations (including, but not limited to,
sections 704(c), 706(d) and 752 and the Regulations promulgated thereunder)
shall be applied in any reasonable method selected by the Board.
3.4 Covenant of Members. Each Member agrees to file federal, state, and
local income tax returns on a basis consistent with the terms and provisions of
this Agreement, and each Member
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agrees not to take a position inconsistent therewith before any federal, state
or local taxing authority without first obtaining the prior consent of all the
other Members.
4. GOVERNANCE
4.1 Powers of Members. The business and affairs of the Company shall be
managed by managers (each a "Manager" and collectively the "Managers" or the
"Board") who shall be designated by the Members as set forth in Section 4.2.1
hereof. No Member solely by virtue of being a Member is an agent of the Company
or has the authority to make any contracts, enter into any transactions, or make
any commitments on behalf of the Company, except as expressly provided in this
Section 4.1.
4.1.1 Voting Rights. In addition to such voting and approval
rights as are expressly set forth elsewhere in this Agreement, the Members shall
have the following powers:
4.1.1.1 to approve the sale or other disposition of all or
substantially all of the assets of the Company; the contribution of all or
substantially all of the assets of the Company to a corporation, partnership or
limited liability company; the merger of the Company; or the conversion of the
Company to a corporation or partnership; or
4.1.1.2 to approve any act by the Board that would make it
impossible to carry on the ordinary business of the Company; confess a judgment
against the Company; or allow any Member to possess Company property, or assign
the Company's right in such property, for other than a Company purpose.
4.1.2 Voting Procedures. The Members shall confer and vote
according to such procedures as they determine among themselves from time to
time or, in the absence of such procedures, as provided by the Act. Wherever
this Agreement requires a vote, approval or consent by the Members, and except
as expressly provided otherwise in this Agreement, such vote, approval or
consent shall be by a Majority.
4.2 Managers
4.2.1 Designation of Managers. The Company shall at all times have
three (3) Managers, with one (1) Manager appointed by HAP and two (2) Managers
appointed by Holdings. The Members hereby appoint the Managers set forth in
Schedule 4.2.1 hereto, which the parties acknowledge includes only one (1)
Manager appointed by Holdings. Holdings may appoint an additional Manager at any
time.
4.2.2 Manager Also Member. A Manager may, but need not, be a
Member. If a Manager is also a Member, such Manager shall have all the rights
and obligations of a Member; the removal or resignation of such Manager under
Section 4.2.8 hereof shall not by itself affect such Manager's rights and
obligations as a Member; and a Termination Event with respect to such
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Member shall not by itself constitute a resignation or removal of such Manager.
If a Manager is not a Member, such Manager shall in writing acknowledge the
terms of this Operating Agreement and agree to be bound by such of its
provisions as apply to a Manager.
4.2.3 Authority. Subject to Section 4.1 hereof, the Board (and no
one else) shall have full, exclusive and complete authority and discretion in
the management, direction and control of the Company and its business and
affairs, and shall have all such rights, power and authority generally conferred
by law or as necessary to, advisable for or consistent with accomplishing the
purposes of the Company. Without limiting the generality of the foregoing, and
in addition to such other powers and responsibilities as are conferred elsewhere
in this Agreement or the Act, the Board shall have the right
4.2.3.1 to make all decisions concerning the development
and operation of the Company's business;
4.2.3.2 to spend the capital and income of the Company in
the exercise of any rights or powers possessed by the Board hereunder;
4.2.3.3 to sell, exchange, purchase, hold, operate, and
manage any Company property;
4.2.3.4 to designate one or more officers of the Company
with appropriate titles (which may specifically include a President) and to
assign duties and delegate responsibilities to one or more officers or employees
of the Company;
4.2.3.5 to purchase, at the expense of the Company,
contracts of liability and other insurance that the Board deems advisable,
appropriate or convenient for the protection of the properties or affairs of the
Company; for the protection of the Managers or any officer, employee, agent or
contractor of the Company; or for any other purpose convenient or beneficial to
the Company;
4.2.3.6 to invest Company funds in commercial paper,
government securities, certificates of deposit, money market accounts, and
similar investments;
4.2.3.7 to borrow money on behalf of the Company and to
encumber the Company assets or place title to such assets in the name of a
nominee for the purpose of obtaining financing;
4.2.3.8 to prepay in whole or in part, to refinance,
increase, modify or extend any obligation;
4.2.3.9 to pay all organization expenses incurred in the
creation of the Company, and all operating expenses incurred in the operation of
the Company and its business;
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4.2.3.10 to employ, engage, retain or deal with such
persons as accountants, attorneys and such other persons as the Board deems
advisable for the proper operation of the Company; and
4.2.3.11 to enter into and perform any other agreements,
contracts, documents and instruments with such parties and to give such
receipts, releases and discharges with respect to all of the foregoing and any
matters incident thereto as the Board may deem advisable, appropriate or
convenient.
4.2.4 Voting by Board. Notwithstanding any provision of this
Agreement or the Act to the contrary, no Manager shall take any action or omit
to take any action on behalf of the Company (including, without limitation, the
execution of any contract, agreement, promissory note or other instrument or
document for or on behalf of the Company or the representation to any party that
such Manager is authorized to act for or on behalf of or to bind the Company in
any manner whatsoever) unless such Manager has been authorized to do so by the
Board in the manner described in this Section 4.2.4.
4.2.4.1 Vote Required. Wherever this Agreement requires a
vote, approval or consent by the Board and unless expressly provided otherwise
in this Agreement, such vote, approval or consent shall be by a majority in
number of the Managers.
4.2.4.2 Procedure. The Managers shall confer and vote
according to such procedures as they determine among themselves from time to
time or, in the absence of such procedures, according to the Act.
4.2.5 Duties. Each Manager shall at all times be under a duty to
(a) discharge such Manager's duties in good faith, with the care an ordinarily
prudent person in a like position would exercise under similar circumstances,
and in a manner the Manager reasonably believes to be in the best interests of
the Company, (b) take all actions that may be necessary or appropriate for the
continuation of the Company as a limited liability company under California law,
the protection of the Members from personal liability for the debts and
liabilities of the Company, and the accomplishment of the Company's purposes,
and (C) devote such time to the Company as shall be necessary to manage the
Company's business; and each Manager further shall at all times be under a
fiduciary duty to conduct the affairs of the Company in the best interests of
the Company, including the safekeeping and use of all of the Company property
for the exclusive benefit of the Company. In discharging the duties hereunder, a
Manager may rely on information received from other persons if such reliance is
consistent with the Manager's duties under this Section 4.2.5.
4.2.6 Compensation. The Managers shall receive compensation from
the Company for their services in such amounts and in such manner as the
Managers and the Members may unanimously agree from time to time.
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4.2.7 Reimbursement. A Manager or such Manager's Affiliates,
agents, employees and consultants, and such Manager's counsel and accountants,
shall be entitled to reimbursement for all reasonable out-of-pocket expenses
incurred by them for the benefit of the Company as determined by the Board and
upon presentation of satisfactory evidence thereof. In no event may a Manager or
Affiliate thereof be reimbursed for compensation to officers and directors of
such Manager or Affiliate, or overhead expenses of such Manager or Affiliate
(including, without limitation, rents, salaries and general office expenses).
4.2.8 Resignation and Removal of Manager
4.2.8.1 Resignation. A Manager may resign upon ninety (90)
days' written notice to the Board.
4.2.8.2 Removal. A Manager shall serve at the pleasure of,
and may be removed for any reason by, the Member who appointed such Manager
under Section 4.2.1 hereof (provided, that notice of such removal shall be given
to the Board). In addition, a Manager may be removed for Cause by the Member
other than the Member who designated such Manager under Section 4.2.1 hereof.
4.3 Liability and Indemnity
4.3.1 Release. No Member, Manager or Affiliate thereof shall be
liable, responsible or accountable in damages or otherwise to the Company or any
Member or any of their successors or assigns for any act or omission by such
Member, Manager or Affiliate performed or omitted in good faith pursuant to the
authority granted by this Agreement; provided, that such Member, Manager or
Affiliate is not guilty of fraud, bad faith, or gross negligence. No amendment
or repeal of this Section 4.3.1 affects any liability or alleged liability of
any Member, Manager or Affiliate thereof for any acts, omissions, or conduct
that occurred prior to the amendment or repeal.
4.3.2 Indemnification. To the maximum extent permitted by section
317 of the California General Corporation Law (which section shall apply as if
the Company were a corporation and a Member or Manager an "agent" as defined in
that section), but subject to section 17155(a) of the Act, the Company shall
indemnify, defend, and hold harmless a Member or Manager (and any Affiliate,
officer, director, shareholder, employee, agent, attorney, subsidiary and assign
thereof) from any liability, loss, claim, expense or damage incurred by them by
reason of any act performed or omitted to be performed by them in connection
with the Company, including costs and attorney's fees and any amounts expended
in the settlement of any claims of liability, loss or damage; provided, that
nothing in this Section 4.3.2 shall entitle a person to be indemnified in the
case of fraud, bad faith, or gross negligence. No amendment or repeal of this
Section 4.3.2 affects the liability of any person or obligations of the Company
with respect to any acts, omissions, or conduct that occurred prior to the
amendment or repeal.
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5. TRANSFER OF INTERESTS
5.1 In General. Notwithstanding any provision of the Act to the contrary,
a Member may not transfer all or any portion of such Member's Membership
Interest except in compliance with this Section 5. In addition to such other
restrictions as are set forth in this Section 5, the following provisions shall
govern any transfer of a Membership Interest:
5.1.1 Applicability of Agreement. Upon the consummation of any
transfer of a Membership Interest, the Membership Interest so transferred shall
continue to be subject to this Agreement and any further transfers of such
Membership Interest must comply with this Agreement.
5.1.2 Effect of Violation. Any transfer in violation of this
Section 5 shall be null and void ab initio and of no effect whatsoever.
5.1.2.1 Recognition of Non-Permitted Transfers. If the
Company is required to recognize a transfer of a Membership Interest that is not
permitted by or does not comply with this Section 5 (an "attempted transfer"),
the Membership Interest subject to such attempted transfer shall be strictly
limited to an Economic Interest and any distributions with respect to such
Economic Interest may be applied (without limiting any other legal or equitable
rights of the Company) to satisfy any debts, obligations, or liabilities for
damages that the attempted transferor or transferee may have to the Company, and
such attempted transferee shall have no other rights under this Agreement or the
Act.
5.1.2.2 Indemnity. In the case of an attempted transfer of
a Membership Interest that does not comply with this Section 5, the parties
engaging in such attempted transfer shall be liable to indemnify and hold
harmless the Company and the other Members and their successors and assigns from
all cost, liability, and damage that any of such indemnified parties may incur
(including, without limitation, incremental tax liability and attorneys' fees
and expenses) as a result of such attempted transfer and efforts to enforce the
indemnity in this Section 5.1.2.2.
5.2 Right of First Refusal. If a Member receives a bona fide offer to
purchase, exchange, or otherwise transfer all or any part of its Membership
Interest to any person other than a Member (other than a permitted transfer, as
defined in Section 5.3.1 hereof) (the "offered interest") (such offer is
referred to hereinafter as the "offer"), the Member receiving the offer (the
"offeree") shall immediately submit a complete copy of the offer to the other
Member. The other Member shall then have fourteen (14) days in which to notify
the offeree, if at all, of its intent to purchase the offered interest for the
price and on the terms set forth in the offer and, if such Member so elects,
shall purchase the offered interest for such price and on such terms. Such
purchase shall close within one hundred twenty (120) days of such notice,
regardless of any other terms of the offer. If the non- offering Member does not
so notify the offeree, the offeree shall be free to sell the offered interest at
the price and on the terms set forth in the offer, subject to the remaining
provisions of this Section 5.
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5.3 Consent of Members. A Member may transfer all or a portion of a
Membership Interest with the consent of a Majority in Interest of the other
Member, which consent may be withheld in its sole and absolute discretion, and
provided that the conditions of Section 5.3.2 hereof are met.
5.3.1 Pre-Approval. The Members hereby covenant that they will
approve the transfer of all or a portion of a Membership Interest by a Member to
the following ("permitted transfers"):
5.3.1.1 the Company;
5.3.1.2 in the case of an individual Member, after all
amounts due from the Company to Holdings under the Note (as defined in the
Purchase Agreement) have been repaid in full, to (a) a trust all of the
beneficial interests in which are owned by such Member and/or members of such
Member's family and of which such Member and/or such Member's spouse is or are
the sole trustee(s), or (b) a limited partnership or limited liability company
with managers all of the capital and profits interests in which are owned by
such Member, members of such Member's Family, and/or a trust described in the
foregoing clause (a) and of which such Member and/or such Member's spouse is or
are the sole general partner(s) or manager(s);
5.3.1.3 to the grantor of a trust pursuant to a power of
revocation by such grantor contained in the trust instrument with respect to the
Membership Interest;
5.3.1.4 in the case of HAP, after all amounts due from the
Company to Holdings under the Note (as defined in the Purchase Agreement) have
been repaid in full, (a) to Adams or (b) to a corporation of which Adams owns
one hundred percent (100%) of the voting stock and is a director as well as the
chief executive officer or president;
5.3.1.5 in the case of Holdings, (a) to Gaiam; (b) to
another corporation that, at the time of such transfer, is a member of an
"affiliated group" together with Gaiam within the meaning of section 1504 of the
Code (not taking into account section 1504(b) of the Code); or (C) to an
unincorporated entity one hundred percent (100%) of the capital and profits
interests or beneficial interests in or of which are owned by Gaiam and/or a
corporation described in the foregoing clause (b).
5.3.2 Conditions. No transfer of a Membership Interest under this
Section 5.3 shall be permitted unless each of the following conditions has been
satisfied; provided, that the Board may waive such condition in the Board's sole
and absolute discretion:
5.3.2.1 the transferor or transferee shall give written
notice of such transfer to the Company and provide the Company with the name,
address, and taxpayer identification number of the transferee and such other
information as the Board shall request to prepare tax returns and other filings
reflecting such transfer as are required by the Act or otherwise;
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5.3.2.2 the transferor or transferee shall furnish the
Company with an opinion of counsel in form and substance satisfactory to the
Board and counsel for the Company to the effect that such transfer will not
result in a termination of the Company under section 708(b)(1)(B) of the Code;
5.3.2.3 if the Company owns real estate in California, the
transferor or transferee shall furnish the Company with an opinion of counsel in
form and substance satisfactory to the Board and counsel for the Company to the
effect that such transfer will not result in a reassessment of such real estate
for property tax purposes;
5.3.2.4 the transferor or transferee shall deliver to the
Company an opinion of counsel in form and substance satisfactory to the Board
and counsel for the Company to the effect that the transfer of such Membership
Interest may be made without violating federal or state securities laws;
5.3.2.5 the transferor and/or transferee shall be jointly
and severally responsible for, and shall reimburse the Company for, all costs
and expenses related to such transfer; and
5.3.2.6 the transferee shall execute a copy of this
Agreement along with an express statement that it agrees to be bound by the
terms and conditions of this Agreement, and executes any other documents as the
Board may request to prepare tax returns and other filings reflecting such
transfer as are required by the Act or otherwise.
A permitted transferee shall become a Member upon compliance with all of the
conditions of this Section 5.3.2 without further action by the Members.
5.4 Involuntary Transfers
5.4.1 In General. This Section 5.4 shall apply to the following
transfers of a Membership Interest:
5.4.1.1 Actual Transfers. A transfer of a Membership
Interest (other than a transfer described in Section 5.3.1 hereof) is subject to
this Section 5.4 if it results from (a) a Termination Event with respect to a
Member or (b) any other involuntary means (including, without limitation,
attachment, garnishment, execution, levy or seizure.
5.4.1.2 Deemed Transfers. A transfer of a Membership
Interest shall also be deemed to occur for purposes of and shall be subject to
this Section 5.4 if a permitted transferee of a Membership Interest described in
Sections 5.3.1.4 or 5.3.1.5 hereof shall cease to be so described.
5.4.2 Rights of Assignee. In the case of a transfer described in
Section 5.4.1 hereof, the transferring Member's executor, administrator,
guardian, conservator, successor, assign, trustee
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or other legal representative (such Member's "Successor in Interest," which term
shall also include the Member in the case of a deemed transfer under Section
5.4.1.2 hereof) shall be a mere assignee of the Economic Interest transferred
and shall have only such rights of an assignee of such Economic Interest (an
"Assignee").
5.4.3 Option to Purchase. Within sixty (60) days after a transfer
described in Section 5.4.1 hereof (or, if later, after the date that the non-
transferring Member first becomes aware of such transfer pursuant to a notice
given by the Successor in Interest), the non-transferring Member may, by notice
to the Successor in Interest, elect to purchase or cause the Company to purchase
the transferred Membership Interest upon the following terms and conditions:
5.4.3.1 Purchase Price. In order to determine the purchase
price, the Successor in Interest on the one hand and the person electing to
purchase the transferred Membership Interest on the other hand shall designate
one (1) independent appraiser, and the appraisers thereby designated shall
select a third independent appraiser. Each of the three (3) appraisers thereby
selected shall determine, within sixty (60) days after notice is given pursuant
to this Section 5.4.3, the fair market value of such Membership Interest based
on the value of the Company as a going concern and the price at which such
Membership Interest would change hands between a willing buyer and a willing
seller, neither being under any compulsion to buy or sell and both having
reasonable knowledge of the relevant facts and circumstances. The final purchase
price of such Membership Interest shall equal the average of the values
determined by the appraisers; shall be final and binding; and shall be
communicated as soon as is practical by the appraisers to the Successor in
Interest and to the person electing to purchase such Membership Interest. If the
non- transferring Member is not satisfied with such purchase price, the non-
transferring Member may arrange to cause such Membership Interest to be sold at
public auction (at which such non- transferring Member is free to purchase such
Membership Interest).
5.4.3.2 Revocation of Election. The person electing to
purchase the transferred Membership Interest may revoke such election within ten
(10) days after notice of the purchase price of such Membership Interest has
been given pursuant to Section 5.4.3.1 hereof.
5.4.3.3 Closing Date. The closing date of such purchase
shall be no later than thirty (30) days after notice of the purchase price of
such Membership Interest has been given pursuant to Section 5.4.3.1 hereof.
5.4.3.4 Manner of Payment. The purchase price shall be paid
in cash on the closing date.
5.4.4 Admission as Member. A Successor in Interest may be admitted
to the Company as a Member with the consent of the non-transferring Member,
which consent may be withheld in its sole and absolute discretion, and provided
that the conditions of Section 5.3.2 are met.
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5.5 Transfer to Spouse. If a Member transfers all or any part of such
Member's Membership Interest to such Member's spouse or former spouse (whether
pursuant to a marital settlement or separation agreement, order of court, or
otherwise) the transferring Member shall have the right to notify such spouse or
former spouse, within fourteen (14) days of such transfer, that such Member
elects to purchase the interest of such spouse or former spouse in such
Membership Interest for a proportionate amount of the purchase price of the
entire such Membership Interest, determined pursuant to Section 5.4.3.1 hereof,
and to effect such purchase within thirty (30) days of such election. If such
Member does not give such notice within such fourteen (14) days, the non-
transferring Member shall have the right to notify such spouse or former spouse,
within thirty (30) days of such transfer, that such Member elects to purchase
such interest on the terms set forth above.
6. DISSOLUTION
6.1 Events of Dissolution. The Company shall be dissolved upon the
occurrence of any of the following events:
6.1.1 the vote by a Majority of the Members to dissolve the Company;
6.1.2 a sale or other disposition of all or substantially all of the
Company's assets, or any other event that causes the Company to be unable to
continue its business as a practical matter; or
6.1.3 the end of the term of the Company as set forth in Section 1.5
hereof.
6.2 Liquidation. Upon the occurrence of an event of dissolution as
described in Section 6.1 hereof, the Board (or, if there is no Manager, such
other person as shall be designated by a Majority in Interest of the Members)
shall take full account of the Company's assets and liabilities; collect the
receivables of the Company; and liquidate the Company's assets as promptly as is
consistent with obtaining the fair market value thereof. Upon dissolution, the
Company shall engage in no further business other than that necessary to collect
its receivables and to liquidate its assets. The proceeds from the liquidation
of Company assets and collection of Company receivables, together with assets
distributed in kind, shall, to the extent sufficient therefore, be applied and
distributed in the following order:
6.2.1 first, to the expenses of liquidation, including brokerage
commissions from the sale of Company assets, escrow costs, accounting and legal
fees, and other expenses;
6.2.2 second, to the liabilities and obligations of the Company to
its creditors (including any Member that may have made a loan or advance to the
Company);
6.2.3 third, to the creation or increase of any reserves; and
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6.2.4 fourth, to the Members in proportion to the positive balances
of their Capital Accounts after taking into effect all allocations under Section
3 hereof ( with distributions under this Section 6.2.4 to be made within the
Fiscal Year of the Company in which the liquidation of the Company (within the
meaning of section 1.704-1(b)(2)(ii)(g) of the Regulations) is deemed to occur
or, if later, ninety (90) days after such date of liquidation).
6.3 Termination Upon Liquidation. Upon completion of the dissolution,
winding up, liquidation and distribution of the Company assets and liquidation
proceeds, the Company shall terminate and the Board (or, if there is no Manager,
such person as is designated by the Members under Section 6.2 hereof) shall file
or cause to be filed with all appropriate governmental authorities a Certificate
of Cancellation as required by the Act.
7. FINANCIAL MATTERS
7.1 Books and Records. The books and records of, and other information
pertaining to, the Company shall be available for inspection, audit, and copying
by any Member or such Member's representative during normal business hours at
the principal office of the Company set forth in Section 1.2 hereof.
7.2 Minimum Books and Records Required. The books, records and other
information described in this Section 7.1 shall include at least the following:
(a) a current list of the full name and last known business or residence address
of each Member, together with the contribution and share in profits and losses
of each Member; (b) a copy of the Articles and all amendments thereto, and
executed copies of any powers of attorney pursuant to which any such instrument
has been executed; (C) copies of this Agreement and all amendments thereto; (d)
copies of the Company's federal, state and local income tax or information
returns and reports, if any, for the six (6) most recent Fiscal Years; (e)
financial statements of the Company for the six (6) most recent Fiscal Years;
and (f) the Company's books and records for the current and past three (3)
Fiscal Years.
7.3 Delivery to Members and Inspection
7.3.1 Delivery Upon Request. Upon the request of a Member or an
Assignee, the Company shall promptly deliver to the requesting person, at the
expense of the Company, a copy of the information required to be maintained by
clauses (a) through (c), inclusive, of Section 7.2 hereof.
7.3.2 Inspection. Each Member or such Member's representative has
the right, upon reasonable request, to inspect and copy at such Member's expense
during normal business hours any of the Partnership records required to be
maintained under Section 7.2 hereof.
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7.4 Tax Information and Elections
7.4.1 Returns and Information Statements. The Board shall cause
income tax returns for the Company to be prepared and filed with all appropriate
governmental authorities, and corresponding schedules to be distributed to the
Members and Assignees, no later than seventy-five (75) days after the end of
each Fiscal Year.
7.4.2 Elections. The Board shall from time to time make such tax
elections under the Code with respect to the Company as the Board deems
necessary or desirable (including, without limitation, an election pursuant to
section 754 of the Code to adjust the basis of the Company's assets pursuant to
sections 734(b) and 743(b) of the Code to reflect the Capital Contribution of
any Member that may be admitted to the Company or distributions to any
withdrawing Members); provided, that the Board may not elect to cause the
Company to be treated as an association taxable as a corporation under the
Regulations except with the unanimous approval of the Members.
7.4.3 Tax Matters Partner. Such member as is designated by the Board
from time to time shall serve as the tax matters partner of the Company within
the meaning of section 6321(a)(7) of the Code. The Board hereby designates the
Member set forth on Schedule 7.4.3 hereto as the initial tax matters partner.
7.4.4 Fiscal Year. The fiscal year of the Company shall be the
calendar year (the "Fiscal Year").
8. GENERAL PROVISIONS
8.1 Complete Agreement. This Agreement, and any schedules, exhibits or
documents referred to herein or executed contemporaneously herewith (including,
without limitation, the Purchase Agreement and the Non-Compete Agreement),
constitute the entire agreement among the parties hereto with respect to the
subject matter hereof, and supersede all prior written, and all prior and
contemporaneous oral, agreements, representations, warranties, statements,
promises and understandings with respect to the subject matter hereof, whether
express or implied.
8.2 Amendments. Except as expressly provided otherwise in this Section
8.2, this Agreement may be amended only with the written consent of a Majority
in Interest of the Members. Amendments of this Agreement may be proposed by the
Board or by any Member.
8.2.1 Super-Majority Provisions. Any provision of this Agreement
that requires the consent of more Members than a Majority in Interest of the
Members may be amended only by whatever vote of the Members is necessary under
the provision proposed to be amended.
8.2.2 Amendments Affecting Certain Members. Any amendment affecting
a Member's voting rights under this Agreement, transfer rights under Section 5
hereof, or allocations and distributions under Section 3 hereof is ineffective
unless signed by the Member so affected.
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8.2.3 Managers. Any provision of this Agreement that would expand
the duties, responsibilities or liabilities of the Managers, or reduce the
indemnification rights of a Manager, shall require the signature of each
Manager.
8.3 Notice. Whenever this Agreement requires that notice be given to the
Company, a Manager or a Member, such notice shall be given to the Company at the
address set forth in Section 1.2 hereof, to such Member at the address set forth
in Schedule 8.3 hereto, or to a Manager c/o the address of the Member appointing
such Manager as set forth in Schedule 8.3 hereto (together with a courtesy copy
of such notice to such person designated by a Member in Schedule 8.3 hereto) as
follows: by personal delivery, in which case notice shall be deemed given on the
date of delivery; by certified mail, return receipt requested, in which case
notice shall be deemed given three (3) days after deposit of such notice in the
mail; by overnight delivery service, in which case notice shall be deemed given
the day after deposit of such notice with such service; or by facsimile with a
copy of such notice sent by mail, in which case notice shall be deemed given on
the day of the facsimile transmission as set forth in a facsimile log. A person
may change such person's address for notice purposes, or the designation of a
person to receive a courtesy copy of such notices, pursuant to a notice
complying with this Section 8.3.
8.4 Arbitration. Subject to Section 8.13 hereof, any and all
controversies, claims or disputes in any way concerning the negotiation for,
execution, interpretation, performance or breach of this Agreement shall be
determined, at the request of any party to this Agreement, by final and binding
arbitration conducted in Los Angeles, California under and in accordance with
the Commercial Arbitration Rules of the American Arbitration Association
("AAA"), and a final judgment embodying any award rendered by the arbitrators
may be entered by any state or federal court having jurisdiction thereof.
8.4.1 Selection of Arbitrators. The parties shall select three (3)
arbitrators pursuant to the above-referenced AAA rules to hear and decide the
dispute, unless the dispute involves less than One Hundred Thousand and 00/100
Dollars ($100,000), in which case the parties shall select one (1) arbitrator.
At least one of the arbitrators selected for a three-person panel and any single
arbitrator must be an attorney with at least five (5) years of experience in
general business law.
8.4.2 Discovery. The provisions of section 1283.05 of the California
Code of Civil Procedure or its successor section(s) are expressly incorporated
in and made a part of this Agreement. However, the limitation on depositions set
forth in section 1283.05(e) of the California Code of Civil Procedure is not.
8.4.3 Powers of Arbitrators. In addition to all powers given to
arbitrators under the above-referenced AAA rules and/or statutes and case law,
the arbitrators selected hereunder shall have the power to give such directions
and to make such orders in the matters so referred to them as they deem just and
reasonable and shall specifically have the power, notwithstanding any judicial
opinions to the contrary, to award any remedy or relief which they deem just,
equitable and within
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the scope, meaning and intent of this Agreement. The arbitrators shall not,
however, have the power to negate, add to or modify the terms of this Agreement.
8.4.4 Time Limits; Reasoned Opinion. Unless the time is extended by
stipulation of the parties or by order of the arbitrators made for good cause
shown, the arbitrators shall render their award not later than one hundred and
eighty (180) days from the date of their appointment. The award shall be in
writing and shall set forth the reason for the arbitrators' decision on each
issue in sufficient detail so as to enable the parties to understand the factual
and legal base for the decision.
8.5 Waivers. The failure of any party hereto at any time to require
performance by another party hereto of any provision hereof shall in no way
affect the full right to require such performance at any time thereafter, nor
shall the waiver by any party of a breach of any provision hereof be taken or
held to be a waiver of any succeeding breach of such provision or as a waiver of
the provision itself.
8.6 Additional Documents. Each party hereto agrees to execute any and all
further documents and writings and to perform such other actions which may be or
become necessary or expedient to effectuate and carry out this Agreement.
8.7 Good Faith. Every obligation or duty of a party in this Agreement
imposes an obligation of good faith in its performance and reasonableness in its
enforcement.
8.8 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto, their respective successors and
permitted assigns. Nothing in this Section 8.8 shall be deemed to modify in any
way the prohibition on transfer contained in Section 5 hereof.
8.9 Exhibits. All schedules and exhibits attached hereto are hereby
incorporated in and made a part of this Agreement as if fully set forth herein.
8.10 Governing Law. This Agreement shall be governed by the laws of the
State of California, regardless of the choice of law provisions of California or
any other jurisdiction and regardless of where the parties hereto may now or
hereafter reside, be organized or do business.
8.11 Headings; Gender; Interpretation. The headings in this Agreement are
inserted only as a matter of convenience, and in no way define, limit, or
interpret the scope of this Agreement or of any particular section hereof. As
used in this Agreement, the masculine, feminine or neuter gender, and the
singular or plural number, shall each include the others whenever the context so
indicates. This Agreement shall be deemed to have been drafted by all the
parties hereto, since all parties were assisted by their counsel in reviewing,
drafting and agreeing to this Agreement, and no ambiguity shall be resolved
against any party by virtue of its participation in the drafting of this
Agreement.
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8.12 Severability. The validity, legality or enforceability of the
remainder of this Agreement shall not be affected even if one or more of the
provisions of this Agreement shall be held to be invalid, illegal or
unenforceable in any respect.
8.13 Injunctive Relief. Each of the parties acknowledges that the
covenants and the restrictions contained herein are necessary and required for
the adequate protection of their Membership Interests; such covenants relate to
matters which are of a special, unique and extraordinary character that give
each of such covenants or restrictions a special, unique and extraordinary
value; and a breach of any such covenant or restriction will result in loss of
goodwill and other irreparable harm and damages to the Company which cannot be
adequately compensated by a monetary award. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically its terms and provisions, this being
in addition to any other remedy to which they are entitled at law or in equity.
8.14 Attorneys' Fees and Other Costs. Should any arbitration or litigation
be commenced (including any proceedings in a Bankruptcy court) between the
parties hereto or their representatives concerning any provision of this
Agreement or the rights and duties of any person or entity hereunder, the party
or parties prevailing in such proceeding shall be entitled, in addition to such
other relief as may be granted, to the reasonable attorneys' fees and court
costs incurred by reason of such litigation (including, without limitation, such
party's share of the arbitrators' fees and AAA charges and its reasonable expert
witness fees).
8.15 Facsimile Signatures. Any signed copy of this Agreement or of any
other document or agreement referred to herein, or copy or counterpart thereof,
delivered by facsimile transmission, shall for all purposes be treated as if it
were delivered containing an original manual signature of the whose signature
appears in the facsimile, and shall be binding upon such party in the same
manner as though an originally signed copy had been delivered.
8.16 Counterparts. This Agreement may be executed simultaneously 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.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
"Members"
GAIAM HOLDINGS, INC. HEALING ARTS PUBLISHING, INC.
By /s/ Lynn Powers By: /s/ Steven P. Adams
---------------------- -------------------------------------
Lynn Powers, President Steven P. Adams, President
By: /s/ Kathleen Mulcahy
-------------------------------------
Kathleen Mulcahy, Assistant Secretary
"Managers"
/s/ Lynn Powers /s/ Steven P. Adams
- -------------------------- ------------------------------------------
STEVEN P. ADAMS LYNN POWERS
__________________________
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EXHIBIT 10.3
SUBLEASE
This SUBLEASE is made as of the _____day of September, 1998 by and between
CORPORATE EXPRESS OFFICE PRODUCTS, INC. a Delaware corporation ("Sublessor"),
whose street address is 1 Environmental Way, Broomfield, Colorado 80021, and
GAIAM, INC., a Colorado corporation ("Sublessee"), whose street address is 360
Interlocken Blvd., Suite 300, Broomfield, Colorado 80021.
I. GENERAL
-------
1.1 Lease. As used herein, the term "Lease" shall mean the Lease
-----
Agreement, dated August 28, 1995, between Duke Realty Limited Partnership
("Landlord") and Sublessor. A copy of the Lease is attached hereto as Exhibit 1
and incorporated herein.
1.2 Premises. As used herein, the term "Premises" shall mean
--------
approximately 64,400 square feet of floor space which is a portion of the Leased
Premises (as defined in the Lease) located at World Park Building 14, 5443 Duff
Drive, Cincinnati, Ohio 45246, (as defined in the Lease) as depicted on the
floor plan attached hereto as Exhibit 2 and incorporated herein.
1.3 Lease Term. As used herein, the term "Lease Term" means the
----------
period commencing on October 1, 1998, and expiring on October 31, 2000, unless
terminated sooner pursuant to any term or provision set forth in this Sublease.
II. DEMISE OF PREMISES
------------------
2.1 Demise. Under and subject to the provisions, covenants and
------
agreements contained herein and in the Lease, Sublessor hereby subleases and
demises to Sublessee, and Sublessee hereby subleases from Sublessor, the
Premises for the Lease Term.
2.2 Early Termination. Both Sublessor and Sublessee shall have the
-----------------
right to terminate this Lease prior to the expiration of the Lease Term by
giving written notice of termination to the other party at least 180 days prior
to the date designated in such notice as the termination date (the "Termination
Date"). In the event of such termination, both Sublessor and Sublessee shall be
obligated to perform all of their respective obligations under this Lease
through the Termination Date.
2.3 Approval of Landlord. This Sublease has been approved Landlord as
--------------------
required by Section 9 of the Lease as evidenced by the Consent set forth on the
last page of this Lease.
<PAGE>
III. BASIC RENT AND OTHER UNITS
--------------------------
3.1 Rental Covenant. Sublessee covenants and agrees to pay the Rent,
---------------
as hereinafter defined, to Sublessor during the Lease Term, without notice and
without offset, deduction, or abatement.
3.2 Rent. As used herein, the term "Rent" shall mean an amount equal
----
to the product of the Sublessee's Pro Rata Share (as hereinafter defined)
multiplied by the sum of the following amounts payable by Sublessor under the
Lease during the Lease Term:
(1) The total amount of Mininum Rent as that term is defined Section
4 of the Lease.
(2) The total amount of Additional Rent as that term is defined in
Section 5 of the lease.
(3) The total amount of all utility and other similar charges
incurred by Sublessor under Section 6 of the Lease.
(4) The total amount of all costs incurred by Sublessor under Section
8 of the Lease.
(5) The total amount of all costs incurred by Sublessor under Section
15 of the Lease.
(6) The total amount of any and all additional costs and liabilities
paid or incurred by Sublessor under the Lease.
Rent shall be payable in advance in monthly installments on October 1, 1998 and
continuing on the 1st day of each month thereafter for the balance of the Lease
Term. As used herein, the term "Sublessee's Pro Rata Share" shall mean 38.7%
which amount is equal to the share that the number of square feet in the
Premises (64,400) represents of the total number of square feet leased by
Sublessor under the Lease (166,400).
3.3 Place of Payments. All items of Rent payable by Sublessee to
Sublessor under this Sublease shall be paid to Sublessor at the address for
Sublessor who is set forth at the beginning of this Sublease.
IV. OTHER AGREEMENTS OF THE PARTIES
-------------------------------
4.1 Lease Provisions Binding On Sublessee. All of the terms,
-------------------------------------
conditions and provisions contained in the Lease are incorporated herein as
terms and conditions of this Sublease. Sublessee shall take subject to and be
bound by all of the provisions of the Lease, and shall comply with and shall be
obligated to perform all of Sublessor's obligations, duties and liabilities in,
under, and with respect to the Lease to the extent that the same apply to the
Leased Premises, and shall indemnify and hold Sublessor harmless therefrom and
from all liabilities,
2
<PAGE>
costs and expenses, including, without limitation, reasonable attorney's fees,
incurred in connection therewith. Sublessee shall not commit or permit to be
committed any act or omission which shall violate any term or condition of the
Lease.
4.2 Premises Taken "As Is". Sublessee agrees that it is taking the
----------------------
Premises in an "as is" condition and without warranty of condition, express or
implied.
4.3 No Assignment by Subleases. Sublessee may not assign or otherwise
--------------------------
transfer any of its rights, duties, liabilities or obligations under this
sublease without the prior written consent of Sublessor.
4.4 Right of Reentry. Sublessor reserves the right to re-enter the
----------------
Premises in the event Sublessor defaults under this Sublease or otherwise to
inspect the Premises to verify Sublessee's compliance with the terms of this
Sublease.
V. MISCELLANEOUS
-------------
5.1 Notices. All notices, demands, consents or other instruments or
-------
communications provided for under this Sublease and the Lease shall be in
writing, shall be signed by or on behalf of the party giving the same and shall
be deemed properly given and received (a) when actually received or refused; (b)
when actually delivered personally, by messenger service, by fax or telecopy
delivery or otherwise; or (c) on the next business day after deposit for
delivery by an overnight courier service such as Federal Express, whichever is
earliest. All such notices and such instruments shall be delivered or sent with
transmission and delivery charges paid, to the address of a party given in the
first paragraph of this Sublease or such other address as such party may
designate by written notice given to the other party pursuant to the terms set
forth in this Section 5.1.
5.2 No Implied Waiver. No failure by Sublessor to insist upon the
-----------------
strict, performance of any term, covenant or agreement contained in this
Sublease, no failure by Sublessor to exercise any right or remedy under this
Sublease, and no, acceptance of full or partial payment during the continuance
of any default by Sublessee, shall constitute a waiver of any such term,
covenant or agreement, or a waiver of any such right or remedy, or a waiver of
any such default by Sublessee.
5.3 Entire Agreement - No Representation. This Sublease and any
------------------------------------
Exhibits referred to herein, constitute the final and complete expression of the
parties' agreements with respect to the subject matter hereof. Each party agrees
that it has not relied upon or regarded as binding any prior agreements,
negotiations, representations, or understandings, whether oral or written,
except as expressly set forth herein. Sublessor and Sublessee acknowledge and
agree that, except as otherwise may be specifically provided for herein, neither
party has made any representations, warranties, or agreements to or on behalf of
the other party as to any matter concerning the Premises or this Sublease.
3
<PAGE>
5.4 Modifications in Writing. No amendments or modifications of this
------------------------
Sublease, and no approvals, consents or waivers by Sublessor under this
Sublease, shall be valid or binding unless in writing and executed by the party
to be bound by thereby.
5.5 Severability. If any provision of this Sublease shall be
------------
invalid, illegal or unenforceable it shall not affect or impair the validity,
legality or enforceability of any other provision of this Sublease, and there
shall be substituted for the affected provision, a valid and enforceable
provision as similar as possible to the affected provision.
5.6 Binding Effect. This Sublease shall extend to and be binding
--------------
upon the heirs, personal representatives, successors and assigns of the
respective parties hereto. The terms, covenants, agreements and conditions in
this Sublease shall be construed as covenants running with the Land.
5.7 Time of the Essence. Time is of the essence under this Sublease,
-------------------
and all provisions herein relating thereto shall be strictly construed.
5.8 Survival of Provisions. Notwithstanding any termination of this
----------------------
Sublease, the same shall continue in force and effect as to any provisions
hereof which require observance or performance by Subleasee subsequent to
termination.
5.9 Applicable Law. This lease shall be interpreted and enforced
--------------
according to the laws of the State of Ohio.
5.10 Captions for Convenience. The headings and captions hereof are
------------------------
for convenience only and shall not be considered in interpreting the provisions
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this lease to be
executed the day and year first above written.
SUBLESSEE: SUBLESSOR:
GAIAM, INC., CORPORATE EXPRESS
a Colorado corporation OFFICE PRODUCTS, INC.,
a Delaware corporation
By:___________________________ By:______________________________
Its:__________________________ Its:_____________________________
4
<PAGE>
EXHIBIT 10.4
OFFICE LEASE
ORIX PRIME WEST BROOMFIELD VENTURE
"LANDLORD"
and
TRANSECON, INC.
"TENANT"
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
ARTICLE 1
DEMISE.................................................................................................... 1
1.1 Demise............................................................................... 1
ARTICLE 2
TERM...................................................................................................... 1
2.1 Term................................................................................. 1
2.2 Supplemental Agreement............................................................... 1
2.3 Landlord's Work...................................................................... 1
ARTICLE 3
RENT...................................................................................................... 2
3.1 Base Rent............................................................................ 2
3.2 Additional Rent...................................................................... 2
3.3 Interest on Late Payments and Late Payment
Charge............................................................................... 2
ARTICLE 4
TAXES AND OPERATING EXPENSE ADJUSTMENT.................................................................... 2
4.1 Definitions.......................................................................... 2
4.2 Payments of Taxes and Operating Expenses............................................. 4
4.3 Reimbursement Survives Termination................................................... 5
ARTICLE 5
BUILDING SERVICES......................................................................................... 6
5.1 Standard Services.................................................................... 6
5.2 Interruption of Standard Services.................................................... 6
5.3 Services Paid by Tenant.............................................................. 7
5.4 Above-Standard Service Requirements.................................................. 7
5.5 Cleaning............................................................................. 7
5.6 Re-Lamping........................................................................... 8
5.7 Fiber Optic.......................................................................... 8
5.8 After Hours Access................................................................... 8
ARTICLE 6
TENANT REPAIR............................................................................................. 8
6.1 Damage by Tenant..................................................................... 8
6.2 Maintenance.......................................................................... 8
6.3 Good Condition....................................................................... 9
6.4 Surrender............................................................................ 9
6.5 Broken Glass......................................................................... 9
ARTICLE 7
ASSIGNMENT AND SUBLETTING................................................................................. 9
7.1 Limitations.......................................................................... 9
7.2 Acceptance of Performance............................................................ 10
7.3 Document Review...................................................................... 10
7.4 Subletting........................................................................... 10
7.5 Affiliated Entity.................................................................... 10
ARTICLE 8
TRANSFER BY LANDLORD AND LIMITED LIABILITY................................................................ 11
8.1 Transfer of Landlord's Interest...................................................... 11
8.2 Limited Liability of Landlord........................................................ 11
8.3 Limited Liability of Tenant.......................................................... 11
ARTICLE 9
USE OF LEASED PREMISES.................................................................................... 11
9.1 Use.................................................................................. 11
9.2 Compliance with Rules and Regulations................................................ 11
9.3 Electronics Testing Lab.............................................................. 12
ARTICLE 10
INSURANCE................................................................................................. 12
10.1 Tenant's Insurance................................................................... 12
10.2 Landlord's Insurance................................................................. 13
10.3 Subrogation.......................................................................... 13
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE 11
OBSERVANCE OF LAW......................................................................................... 14
11.1 Law.................................................................................. 14
11.2 Taxes................................................................................ 14
ARTICLE 12
WASTE AND NUISANCE........................................................................................ 14
ARTICLE 13
ENTRY BY LANDLORD......................................................................................... 14
ARTICLE 14
INDEMNIFICATION OF LANDLORD............................................................................... 15
14.1 Tenant's Indemnity................................................................... 15
14.2 Landlord's Indemnity................................................................. 15
14.3 Comparative Negligence............................................................... 16
ARTICLE 15
ALTERATIONS............................................................................................... 16
15.1 Alterations by Tenant................................................................ 16
15.2 Alterations by Landlord.............................................................. 17
ARTICLE 16
SIGNS AND ADVERTISING..................................................................................... 17
ARTICLE 17
SUBORDINATION TO MORTGAGES AND DEEDS OF TRUST............................................................. 18
ARTICLE 18
ESTOPPEL CERTIFICATE/FINANCIAL INFORMATION................................................................ 18
18.1 Estoppel Certificate................................................................. 18
18.2 Financial Information................................................................ 19
ARTICLE 19
QUIET ENJOYMENT........................................................................................... 19
ARTICLE 20
FIXTURES.................................................................................................. 19
ARTICLE 21
DAMAGE OR DESTRUCTION..................................................................................... 20
21.1 Casualty............................................................................. 20
21.2 Casualty Caused by Tenant............................................................ 20
ARTICLE 22
CONDEMNATION.............................................................................................. 20
22.1 Eminent Domain....................................................................... 20
22.2 Damages.............................................................................. 21
22.3 Restoration.......................................................................... 21
ARTICLE 23
LOSS AND DAMAGE AND DELAY................................................................................. 21
23.1 Loss and Damage...................................................................... 21
23.2 Delays............................................................................... 21
ARTICLE 24
DEFAULT AND REMEDIES...................................................................................... 22
24.1 Default by Tenant.................................................................... 22
24.2 Remedies of Landlord................................................................. 22
24.3 Landlord's Default................................................................... 24
24.4 Personal Property Lien............................................................... 24
ARTICLE 25
HOLDING OVER.............................................................................................. 24
ARTICLE 26
NOTICE.................................................................................................... 25
26.1 Notice............................................................................... 25
26.2 Change of Address.................................................................... 26
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
ARTICLE 27
SECURITY DEPOSIT.......................................................................................... 26
ARTICLE 28
MISCELLANEOUS PROVISIONS.................................................................................. 26
28.1 Captions............................................................................. 26
28.2 Waiver............................................................................... 26
28.3 Entire Agreement..................................................................... 26
28.4 Severability......................................................................... 27
28.5 Modification......................................................................... 27
28.6 Governing Law........................................................................ 27
28.7 Successors and Assigns............................................................... 27
28.8 Authorization to Execute............................................................. 27
28.9 Guaranty of Lease.................................................................... 27
28.10 Approval of Documents................................................................ 27
28.11 Attorneys Fees....................................................................... 27
28.12 Use of Names......................................................................... 27
ARTICLE 29
SUBSTITUTION OF PREMISES.................................................................................. 27
29.1 Intentionally Deleted................................................................ 27
ARTICLE 30
RECORDING................................................................................................. 28
ARTICLE 31
REAL ESTATE BROKER........................................................................................ 28
ARTICLE 32
RENT PREPAYMENT........................................................................................... 28
32.1 Intentionally Deleted................................................................ 28
ARTICLE 33
OPTION.................................................................................................... 28
33.1 Option to Extend..................................................................... 28
33.2 Right of First Refusal............................................................... 30
33.3 Option to Purchase................................................................... 31
</TABLE>
EXHIBIT A - FLOOR PLAN
EXHIBIT B - LEGAL DESCRIPTION
EXHIBIT C - TENANT WORK LETTER
EXHIBIT D - SUPPLEMENTAL AGREEMENT
EXHIBIT E - SUBLEASE AGREEMENT
EXHIBIT F - RULES AND REGULATIONS
EXHIBIT G - RESERVED PARKING DESIGNATION
iii
<PAGE>
LEASE
360 INTERLOCKEN BOULEVARD
BROOMFIELD, COLORADO
THIS LEASE is made this 19th day of June 1996, by and between ORIX PRIME
WEST BROOMFIELD VENTURE, a Colorado general partnership ("Landlord") and
TRANSECON, INC., a Colorado corporation ("Tenant").
W I T N E S S E T H :
ARTICLE 1
DEMISE
------
1.1 Demise. Landlord does hereby lease to Tenant and Tenant hereby
------
leases from Landlord Suite 300 (the "Premises") consisting of approximately
18,011 rentable square feet (the "Rentable Area"), such Premises generally
depicted on the floor plan attached hereto as Exhibit A, which Premises are
---------
situated in that certain building known as 360 Interlocken Building, located at
360 Interlocken Boulevard, Broomfield, Colorado (the "Building"), which Building
is situated on that certain real Property (the "Property") legally described in
Exhibit B, attached hereto, together with a non-exclusive right subject to the
- ---------
provisions hereof, to use all appurtenances thereto, including, but not limited
to, any plazas, common areas, walkways or other areas in the Building or on the
Property designated by Landlord for the exclusive or non-exclusive use of the
tenants of the Building, all of which inclusive of the Building are hereinafter
collectively called the "Building Complex".
Such letting and hiring is upon and subject to the terms, conditions and
covenants herein set forth, and Tenant covenants as a material part of the
consideration for this Lease to keep and perform each and all of said terms,
conditions and covenants by it to be kept and performed and that this Lease is
made upon the condition of such performance.
ARTICLE 2
TERM
----
2.1 Term. The term of this Lease and Tenant's obligation to pay rent
----
shall commence on the earlier to occur of (a) the date which is seventy-five
(75) days after full execution hereof, or (b) the date upon which Tenant takes
occupancy of the Premises for the purposes of conducting its business (the
"Commencement Date") and shall end at 5:00 p.m. on the last day of the sixtieth
(60th) month thereafter, unless extended or sooner terminated as herein provided
(the "Lease Term").
2.2 Supplemental Agreement. Within five (5) days after the
----------------------
commencement of the term of this Lease, Tenant agrees to execute a Supplemental
Agreement in the form attached as Exhibit D to become a part hereof, setting
---------
forth the commencement and termination dates of the term of this Lease and such
other information as set forth therein in accordance with Paragraph 2.1 above.
2.3 Landlord's Work. Other than as set forth in the Tenant Work
---------------
Letter, Landlord shall have no obligation for the completion of the Premises and
Tenant shall accept the Premises in its "AS IS" condition as of the date
Landlord delivers possession thereof in accordance with the provisions of the
Tenant Work Letter, including any punch list items.
1
<PAGE>
ARTICLE 3
RENT
----
3.1 Base Rent. Tenant agrees to pay as base annual rent (the "Base
---------
Rent") during the Term of this Lease the sum of $16.00 per rentable square foot
of the Premises per annum, triple net, which equates to approximately
$288,176.00 per annum payable in equal monthly installments of $24,014.67,
without notice, deduction, set-off or abatement to the Landlord at the address
of Landlord as set forth in Section 26.1 or at such other address as the
Landlord may notify the Tenant of in writing, in lawful money of the United
States payable in advance on the first day of each month. If the Lease Term
commences or terminates on a day other than the first or last day of a calendar
month respectively, then the installments of Base Rent for such month or months
shall be prorated and the installments so prorated shall be paid in advance. The
term "Lease Year" shall mean each twelve month period subsequent to the
Commencement Date.
3.2 Additional Rent. Any other sums of money or charges to be paid
---------------
by the Tenant pursuant to the provisions of this Lease may be designated as
"Additional Rent". A failure to pay Additional Rent shall be treated in all
events as the failure to pay rent.
3.3 Interest on Late Payments and Late Payment Charge. Any rent
-------------------------------------------------
(whether Base Rent or Additional Rent) or other amount due from Tenant to
Landlord under this Lease not paid within five (5) days of the date due shall
bear interest from the date due until the date paid at the rate of two percent
(2%) per month (the "Default Rate"), but the payment of such interest shall not
excuse or cure any default by Tenant under this Lease. Failure to charge or
collect such interest in connection with any one or more such late payments
shall not constitute a waiver of Landlord's right to charge and collect such
interest in connection with any other or similar or like late payments.
Furthermore, in the event any rent or other amounts owing hereunder are not
paid within five (5) days after the due date, then Landlord and Tenant agree
that Landlord will incur additional administrative expenses, the amount of which
will be difficult if not impossible to determine. Accordingly, in addition to
such required payment, Tenant shall pay to Landlord an additional one time late
charge for any such late payment in the amount of five percent (5%) of the
amount of such late payment.
Notwithstanding the above, Landlord agrees that it shall waive such late
charge and interest twice during any calendar year provided Tenant is not
otherwise in default hereunder. Tenant shall not be deemed late if the Rent
payment is postmarked by the United States Post Office no later than the last
day of the five (5) day period set forth above, the payment is actually received
and Tenant uses all reasonable efforts to make all payments when due.
ARTICLE 4
TAXES AND OPERATING EXPENSE ADJUSTMENT
--------------------------------------
In addition to Base Rent, Tenant shall reimburse Landlord for Real Estate
Taxes and Operating Expenses (which sum may be adjusted pursuant to Section 4.2)
for the Building Complex as hereinafter set forth in this Section.
4.1 Definitions. The following terms shall have the following
-----------
meanings with respect to the provisions of this Section 4.1:
2
<PAGE>
(a) "Tenant's Proportionate or Prorata Share" shall mean that
fraction, the numerator of which is the Rentable Area of the Premises and the
denominator of which is 51,430 square feet being the total Rentable Area of the
Building Complex and is equal to 35% which calculation shall be final except as
specifically set forth herein. At such time, if ever, any space is added to or
subtracted from the Premises as hereinbelow provided, the Tenant's Prorata Share
shall be adjusted accordingly. Landlord's system for measurement of rentable
area shall be a modified BOMA, as determined by Landlord, and as applied to all
tenants.
(b) "Real Estate Taxes" shall include (a) any form of assessment
(including any so-called "special" assessments), license tax, business license
fee, business license tax, commercial rental tax, levy, charge, penalty or tax,
imposed by any authority having the direct power to tax, including any city,
county, state or federal government, or any school, agricultural, lighting,
water, drainage or other improvement or special district thereof, against the
Premises, the Building, Property, or Building Complex or any legal or equitable
interest of the Landlord therein; (b) any tax on the Landlord's right to rent or
other income from the Premises or against the Landlord's business of leasing the
Premises; and (c) any assessments, tax, fee, levy or charge in substitution,
partially or totally, of or in addition to any assessment, tax, fee, levy or
charge previously included within the definition of Real Estate Taxes which may
be imposed by governmental agencies for such services as fire protection,
street, sidewalk and road maintenance, refuse removal and for other governmental
services formerly provided without charge to property owners or occupants. It
is the intention of the Landlord and the Tenant that all such new and increased
assessments, taxes, fees, levies and charges be included within the definition
of Real Estate Taxes for purposes of this Lease. The following shall also be
included within the definition of Real Estate Taxes for purposes of this Lease,
provided, however, that the Tenant shall pay the Landlord the entire amount
thereof: (i) any tax allocable to or measured by the area of the Premises or
the rental payable hereunder, including without limitation, any gross income,
privilege, sales or excise tax levied by the State, any political subdivision
thereof, city, municipal or federal government, with respect to the receipt of
such rental, or upon or with respect to the possession, leasing, operating,
management, maintenance, alteration, repair, use or occupancy by the Tenant of
the Premises or any portion thereof; and (ii) any tax upon this transaction or
any document to which the Tenant is a party, creating or transferring an
interest or an estate in the Premises. "Real Estate Taxes" shall not include
the Landlord's federal or state income, franchise, inheritance or estate taxes.
"Real Estate Taxes" included in this definition mean taxes or assessments in the
year assessed, without regard to the year in which same become due or payable.
(c) "Operating Expenses" shall mean all maintenance and
operating costs of any kind or nature with respect to the operation, ownership
and maintenance of the Building Complex and shall include, but not be limited
to, the cost of building supplies, window cleaning, costs incurred in connection
with all energy sources for the Building such as propane, butane, natural gas,
steam, electricity, solar energy and fuel oil; the costs of water and sewer
service, janitorial services, both interior and exterior, general maintenance
and repair of the Building Complex including the heating and air conditioning
systems and structural components of the Building; landscaping, maintenance,
repair and striping of all parking areas; insurance, including fire and extended
coverage and public liability insurance and any rental insurance and all risk
insurance carried by Landlord pursuant to Section 10.2; labor costs incurred in
the operation and maintenance of the Building Complex, including wages and other
payments; costs to the Landlord for Workmen's Compensation and disability
insurance; payroll taxes and welfare fringe benefits, including professional
building management fees which shall not exceed four
3
<PAGE>
percent (4%) of gross receipts for the Building Complex, legal, inspection and
consultation fees incurred in connection with the Building Complex; any
association fees due in accordance with or as referenced in recorded documents;
any expense attributable to costs incurred by the Landlord for any capital
improvements or structural repairs to the Building or Property required by any
change in the laws, ordinances, rules, regulations or otherwise which were not
in effect on the date the Landlord obtained its building permit to construct the
Building required by any governmental or quasi-governmental authority having
jurisdiction over the Building which costs shall be amortized over the useful
life of the capital improvements or structural repair; and any costs incurred by
the Landlord in making capital improvements or other modifications to the
Building or any part thereof, which costs shall be amortized over the useful
life of such improvement or modification with interest at the rate of ten
percent (10%) per annum on the unamortized amount, in accordance with such
reasonable life and amortization schedules and shall be determined by Landlord
in accordance with generally accepted accounting principles. Operating Expenses
shall expressly exclude costs of maintenance and repair reimbursed by insurance
proceeds, alterations or other specific costs attributable solely to other
tenant's space in the Building which was under the respective terms of the lease
such tenant's responsibility and thereupon billed to such tenants, and legal
fees for financing, sales of the Building Complex, preparing and enforcing
leases and any other legal fees which do not specifically relate to the
operation and maintenance of the Building Complex.
(d) "Variable Operating Expenses" shall mean those Operating
Expenses which vary with occupancy levels or which vary with areas serviced
based upon occupied Rentable Area. Landlord agrees that Tenant, if it is paying
any utilities directly or performing its own janitorial services (including
light bulb replacement), shall be responsible for its prorata share of such
utilities and services (including light bulbs) only for the common areas of the
Building Complex.
4.2 Payments of Taxes and Operating Expenses. It is hereby agreed
----------------------------------------
that during each Lease Year of the Lease Term hereof, the Tenant shall pay to
the Landlord Tenant's Prorata Share of the amount of the Operating Expenses and
Real Estate Taxes for the Building Complex as set forth above, with appropriate
and equitable adjustment for Variable Operating Expenses. It is agreed that the
Tenant shall, during each calendar year, including the calendar year in which
the term of this Lease commences, pay to the Landlord an estimate of the
Tenant's Prorata Share of such Real Estate Taxes and Operating Expenses as
hereinafter set forth. Beginning with the calendar year in which this Lease
commenced, the Tenant shall pay to the Landlord each month on the first day of
the month an amount equal to one-twelfth (1/12) of Tenant's Prorata Share of the
Real Estate Taxes and Operating Expenses for the new calendar year as reasonably
estimated by the Landlord, with an adjustment to be made between the parties at
a later date as hereinafter provided. Furthermore, Landlord may from time to
time but no more than three (3) times during any Lease Year furnish Tenant with
notice of a re-estimation of the Real Estate Taxes and Operating Expenses and
Tenant shall commence paying its re-estimated Prorata Share on the first day of
the month following receipt of said notice. As soon as practicable following
the end of any calendar year but in no event later than April 15th, the Landlord
shall submit to the Tenant a statement setting forth the exact amount of the
Tenant's Prorata Share of the Real Estate Taxes and Operating Expenses for the
calendar year just completed and the difference, if any, between the Tenant's
actual Prorata Share of the Real Estate Taxes and Operating Expenses for the
calendar year just completed and the estimated amount of the Tenant's Prorata
Share of the Real Estate Taxes and Operating Expenses (which were paid in
accordance with this subparagraph) for such year. Such statement shall also set
forth the amount of the estimated Real Estate Taxes and Operating Expenses
reimbursement for the new calendar year computed in
4
<PAGE>
accordance with the foregoing provisions. To the extent that the Tenant's
Prorata Share of the actual Real Estate Taxes and Operating Expenses for the
period covered by such statement are higher than the estimated payments which
the Tenant previously paid during the calendar year just completed, the Tenant
shall pay to the Landlord the difference within thirty (30) days following
receipt of said statement from the Landlord. To the extent that the Tenant's
Prorata Share of the actual Real Estate Taxes and Operating Expenses for the
period covered by the Statements are less than the estimated payments which the
Tenant previously paid during the calendar year just completed, the Landlord may
at its option either refund said amount to Tenant or credit the difference
against the Tenant's estimated reimbursement for such Real Estate Taxes and
Operating Expenses for the current year. In addition, with respect to the
monthly reimbursement, until the Tenant receives such statement, the Tenant's
monthly reimbursement for the new calendar year shall continue to be paid at the
then current rate, but the Tenant shall commence payment to the Landlord of the
monthly installments of reimbursement on the basis of the statement beginning on
the first day of the month following the month in which Tenant receives such
statement.
The Tenant's obligation with respect to its Prorata Share of the Real
Estate Taxes and Operating Expenses shall survive the expiration or early
termination of this Lease and the Landlord shall have the right to retain the
Security Deposit, or so much thereof as it deems necessary, to secure payment of
the Tenant's Prorata Share of the actual Real Estate Taxes and Operating
Expenses for the portion of the final calendar year of the Lease during which
the Tenant was obligated to pay such expenses. If the Tenant occupies the
Premises for less than a full calendar year during the first or last calendar
years of the term hereof, the Tenant's Prorata Share for such partial year shall
be calculated by proportionately reducing the Real Estate Taxes and Operating
Expenses to reflect the number of months in such year during which Tenant
occupied the Premises. The Tenant shall pay its Prorata Share within thirty
(30) days following receipt of notice thereof.
The Tenant shall have the right but not more than once per annum, at
any time within thirty (30) days after a statement of actual Real Estate Taxes
and Operating Expenses for a particular calendar year has been rendered by the
Landlord as provided herein, at Tenant's sole cost and expense, to examine the
Landlord's books and records during normal business hours (upon reasonable prior
written notice to Landlord), at Landlord's office relating to the determination
of such Real Estate Taxes and Operating Expenses. Unless Tenant objects to the
statement provided by Landlord, within said thirty (30) day period, such
statement and adjustment shall be deemed conclusive.
4.3 Reimbursement Survives Termination. In the event of the
----------------------------------
termination of this Lease by expiration of the stated term or for any other
cause or reason whatsoever prior to the determination of rental adjustment as
hereinafter set forth, the Tenant's agreement to reimburse Landlord up to the
time of termination shall survive termination of the Lease and the Tenant shall
pay any amount due to the Landlord within fifteen (15) days after being billed
therefor. In the event of the termination of this Lease by expiration of the
stated term or for any other cause or reason whatsoever, except default by the
Tenant of any of the terms or provisions of this Lease, prior to the
determination of rental adjustments as hereinabove set forth, the Landlord's
agreement to refund any excess additional rental paid by the Tenant up to the
time of termination shall survive termination of the Lease and the Landlord
shall pay the amount due to the Tenant within fifteen (15) days of the
Landlord's determination of such amount. This covenant shall survive the
expiration or termination of this Lease.
If the last year of the term of this Lease ends on any day other than
the last day of December, any payment due to the Landlord by reason of any
increase in Real Estate Taxes and
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Operating Costs shall be prorated on the basis by which the number of days in
such partial year bears to 365.
Any failure of Landlord to furnish Tenant with an estimate of its
Prorata Share of Real Estate Taxes and Operating Expenses or any statements as
set forth in this Section 4 shall not act to relieve Tenant of its liability
therefor; and with respect to any deficiencies, Tenant agrees to pay same within
thirty (30) days of written demand from Landlord.
ARTICLE 5
BUILDING SERVICES
-----------------
5.1 Standard Services. Landlord agrees to furnish to the Premises
-----------------
during regular business hours from 7:00 a.m. to 6:00 p.m. Mondays through
Fridays and from 8:00 a.m. to 1:00 p.m. Saturdays, except for holidays as the
same are determined by Landlord, and subject to the rules and regulations of the
Building, heat and air conditioning for the use and occupancy of the Premises,
passenger elevator service and freight elevator service, subject to scheduling
by Landlord. Landlord shall also furnish: (i) electric current to be supplied
for lighting the Premises and public halls, and for the operation of ordinary
office equipment, exclusive of heavy-duty equipment and computers, copying
equipment which is not standard for general offices, or comparable equipment;
(ii) janitorial and cleaning services, and (iii) domestic water in reasonable
quantity. Elevator service shall mean service either by non-attended automatic
elevators or elevators with attendants at the option of Landlord. Landlord
shall also furnish, at rates set from time to time as reasonably determined by
Landlord (reflecting actual costs of such additional HVAC), heating and air
conditioning and such other items as are not provided for herein, provided if
Tenant does not have special HVAC controls for its Premises installed pursuant
to Exhibit C, then Tenant shall give Landlord reasonable prior notice of
---------
Tenant's needs for such additional heating or air conditioning and Landlord
shall use all reasonable efforts to provide same. Landlord shall also, at said
times, maintain and keep lighted the common stairs, entries, and toilet rooms in
the Building that would reasonably be subject to use by Tenant, its agents and
employees during other than regular business hours. Landlord also has the right
to charge Tenant for energy costs incurred because of Tenant's above Building
average usage or by reason of usage of the Premises or the Building during other
than regular business hours. However, in no event shall Landlord charge Tenant
more for excess utilities or after hours HVAC than it charges other tenants in
the Building for such usage. Furthermore, if Landlord were to grant any tenant
longer regular business hours, then such hours shall also be applicable to
Tenant. Tenant agrees to pay for any excess HVAC within fifteen (15) days of
the billing therefor, such billing to occur no more frequently than monthly.
5.2 Interruption of Standard Services. Tenant agrees that Landlord
---------------------------------
shall not be liable for failure to supply any heating, air conditioning,
elevator, janitorial services, electric current, or any other service described
in Section 5.1 above during any period when Landlord uses reasonable diligence
to restore or to supply such services or electric current, it being further
agreed that Landlord reserves the right to temporarily discontinue such services
or any of them, or electric current at such times as may be necessary by reason
of accident, unavailability of employees, repairs, alterations, or improvements,
or whenever by reason of strikes, lockouts, riots, acts of God or any other
happening or occurrence beyond the reasonable control of Landlord. If Landlord
is unable to furnish such services or electric current, Landlord shall not be
liable for damages to persons or property for any such discontinuance, nor shall
such discontinuance in any way be construed as a constructive or actual eviction
of Tenant or cause an abatement of rent or operate to release Tenant from any of
Tenant's obligations hereunder. Landlord's obligation to furnish
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services or electric current shall be conditioned upon the availability of
adequate energy sources from the public utility companies presently serving the
Building Complex. If Landlord elects for any reason to temporarily discontinue
services to Tenant and/or the Building Complex then Landlord shall give Tenant
prior notice thereof and Tenant shall have the right to approve the scheduling
thereof, which approval shall not be unreasonably withheld or delayed and in any
event Landlord shall use reasonable efforts to restore as soon as possible any
service which has been interrupted. Landlord shall have the right to reduce
heating, cooling or lighting within the Premises and in the public area in the
Building as required by any mandatory fuel or energy-saving program.
Furthermore, due to energy code design requirements as promulgated from time to
time, Tenant hereby acknowledges that it may on certain days experience
discomfort with the heating and air conditioning cycle, and Landlord shall have
no responsibility or liability therefor.
5.3 Services Paid by Tenant. Unless otherwise provided by Landlord,
-----------------------
Tenant shall separately arrange with the applicable local public authorities or
utilities, as the case may be, for the furnishing of and payment for all
telephone services as may be required by Tenant in the use of the Premises.
Tenant shall directly pay for such telephone services, including the
establishment and connection thereof, at the rates charged for such services by
said authority or utility, and the failure of Tenant to obtain or to continue to
receive such services for any reason whatsoever shall not relieve Tenant of any
of its obligations under this Lease.
5.4 Above-Standard Service Requirements. If unusual heat-generating
-----------------------------------
machines or equipment cause the temperature in the Premises, or any part
thereof, to exceed the temperatures the Building's air conditioning system would
be able to maintain in such Premises were it not for such heat generating
equipment, then Landlord reserves the right to install supplementary air
conditioning units in the Premises, and the cost thereof, including the cost of
installation and the cost of operation and maintenance thereof, shall be paid by
Tenant to Landlord upon demand by Landlord.
Tenant shall not, without the written consent of Landlord, use any
apparatus or device which will in any way increase the amount of electricity or
water which Landlord determines to be reasonable for use of the Premises as
general office space, nor connect with electric current (except through existing
electrical outlets in the Premises) or water pipes any apparatus or device for
the purposes of using electric current, other energy or water except as set
forth in Article 15 hereof. Landlord shall have the right to install one or more
separately submetered electrical circuits to serve all of the Tenant's
equipment, machinery or appliances which equipment, machinery or appliances
requires electrical current supplied to the Premises for general office purposes
as the same is determined by Landlord which costs of submetering shall be
payable by Tenant to Landlord upon demand. Tenant shall also, at its own cost
(or as a part of the Allowance as set forth in Exhibit C), have the right to
---------
directly meter the electric services for its Premises in which event Landlord
shall have no right to object to any equipment that uses "above-standard"
amounts of electricity. Tenant agrees to reimburse the Landlord for the
submetered electrical current utilized by Tenant at the rates charged to
Landlord to purchase electrical current for the Building, such reimbursement to
be made within fifteen (15) days of the date of the billing therefor; such
billing to occur no more frequently than monthly.
5.5 Cleaning. Upon prior written notice to Landlord, Tenant may
--------
provide its own janitorial or cleaning services subject to supervision of
Landlord, at Tenant's sole responsibility, and by a janitorial or cleaning
contractor or employees at all times satisfactory to Landlord. Landlord shall
provide janitorial and
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cleaning services, in accordance with such reasonable standards generally
provided in Class A suburban office buildings in the Denver-Boulder metropolitan
area for the common areas of the Building Complex.
5.6 Re-Lamping. Exclusive of the Premises, Landlord shall have the
----------
exclusive right to make any replacement of electric light bulbs, fluorescent
tubes and ballasts in the Building Complex throughout the Lease Term and any
renewal thereof. Landlord may adopt a system of relamping and reballasting
periodically on a group basis in accordance with good management practice.
5.7 Fiber Optic. Landlord at Landlord's cost agrees to bring fiber
-----------
optic capability from the street to the Building (which obligation is dependent
upon there being a fiber optics system in the street immediately adjacent to the
Building Complex which is accessible for the benefit of tenants and other users)
and that the Building shall have DS3 (T3) capability and for Tenant's Premises
the capability for at least one hundred telephone lines. Landlord shall have no
responsibility or liability for bringing either the phone system or fiber optics
to the Premises. Nothing herein shall prohibit Landlord from entering into
licensing or other agreements with any telecommunications company or entity for
the Building nor shall Landlord be prohibited from installing a minimum point of
entry fiber optics system and/or updating or replacing any system from time to
time in the Building.
5.8 After Hours Access. Except as specifically set forth in Sections
------------------
15.2, 21.1 and 22.2, and subject to applicable local laws and emergencies,
Tenant shall have access to its Premises twenty-four hours a day, seven days a
week. Tenant acknowledges that certain security measures may apply during
nonregular business hours or holidays, including the use of keys for access to
the Building.
ARTICLE 6
TENANT REPAIR
-------------
6.1 Damage by Tenant. If the Building Complex, the Building, the
----------------
Premises or any portion thereof including but not limited to the elevators,
boilers, engines, pipes and other apparatus, or members of elements of the
Building (or any of them) used for the purpose of climate control of the
Building or operating the elevators, or if the water pipes, drainage pipes,
electric lighting or other equipment of the Building or the roof or outside
walls of the Building or parking facilities of Landlord and also the Tenant
Finish including but not limited to the carpet, wall covering, doors and
woodwork, become damaged or are destroyed through the negligence, carelessness
or misuse of the Tenant, its servants, agents, employees or anyone permitted by
Tenant to be in the Building, or through it or them, then the cost of the
necessary repairs, replacements or alterations shall be borne by the Tenant who
shall forthwith pay the same on demand to the Landlord as Additional Rent.
Landlord shall have the exclusive right, but not the obligation, to make any
repairs necessitated by such damage.
6.2 Maintenance. Tenant shall keep the Premises in as good order,
-----------
condition and repair as when they were entered upon. If Tenant fails to keep the
Premises in such good order, condition and repair as required hereunder to the
satisfaction of Landlord, Landlord may restore the Premises to such good order
and condition and make such repairs without liability to Tenant for any loss or
damage that may accrue to Tenant's property or business by reason thereof, and
upon completion thereof, Tenant shall pay to Landlord, as Additional Rent, upon
demand, the cost of restoring the Leased Premises to such good order and
condition and of the making of the repairs.
8
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6.3 Good Condition. Tenant shall leave the Premises at the end of
--------------
each Business Day in a reasonable condition for the purpose of allowing the
performance of the Landlord's cleaning services hereinafter described.
6.4 Surrender. Tenant shall deliver, at the expiration of the Term
---------
hereof or upon sooner termination of the Term, the Premises in good repair as
aforesaid and in a state of broom cleanliness.
6.5 Broken Glass. Tenant shall pay on demand the cost of replacement
------------
with identical quality, size and characteristics of glass broken on the
Premises, including outside windows and doors of the perimeter of the Leased
Premises (including perimeter windows in the exterior walls) during the
continuance of this Lease, unless the glass shall be broken by Landlord, its
servants, employees or agents acting on its behalf.
ARTICLE 7
ASSIGNMENT AND SUBLETTING
-------------------------
7.1 Limitations. Except as specifically set forth in Section 7.4
-----------
below, Tenant shall not assign or in any manner transfer this Lease or any
estate or interest therein the Premises or any part thereof, or grant any
license, concession or other right to occupy any portion of the Premises without
the prior written consent of Landlord which may be given or withheld in
Landlords sole discretion. In no event shall Tenant have any right to assign if
there exists any default under this Lease. Consent by Landlord to one or more
assignments of this Lease or of the Premises shall not operate as a waiver of
Landlord's rights under this section. Any such assignment or subletting without
Landlord's consent shall be deemed void and confer no rights upon a third party.
Notwithstanding any assignment, Tenant and any guarantor of Tenant's obligations
under this Lease shall at all times remain fully responsible and liable for the
payment of the rental herein specified and for compliance with all other terms
and conditions of this Lease. Without in any way limiting Landlord's right to
refuse to give consent, Landlord reserves the right in the event it does give
consent to impose such conditions upon its consent as Landlord deems necessary
including the requirement of additional security which in Landlord's business
judgment shall insure the state of the Premises and the rentals due under this
Lease. Landlord shall also have the right in the event of such proposed
assignment to terminate this Lease in which event Landlord shall have the right,
but not the obligation, to enter into a Lease with such proposed assignee.
Neither this Lease nor any interest therein shall be assignable as to
the interest of Tenant by operation of law, without the written consent of
Landlord. A sale by Tenant of all or substantially all of its assets or all or
substantially all of its stock, if Tenant is a publicly traded corporation, a
merger of Tenant with another corporation; or the transfer of twenty-five
percent (25%) or more of the stock of Tenant if Tenant's stock is not publicly
traded; or the transfer of fifty percent (50%) or more of the beneficial
ownership interest in Tenant if Tenant is a partnership without the prior
written consent of Landlord, shall constitute a prohibited assignment hereunder,
subject to the limitations set forth above. Notwithstanding the foregoing such
assignment shall not be prohibited if the Tenant is not in default hereunder and
the net worth of the Tenant upon such assignment is not less than ten million
dollars with not more than ten percent of such net worth attributable to good
will. Prior to such assignment being deemed effective Tenant shall deliver to
Landlord current financials prepared in accordance with GAAP by an independent
certified public accountant.
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7.2 Acceptance of Performance. If this Lease be assigned or if the
-------------------------
Premises or any part thereof be sublet or occupied by anybody other than Tenant,
Landlord may, after default by Tenant, collect the rent from the assignee,
subtenant or occupant and apply the net amount collected to the rent herein
reserved retaining the remainder, if any, for the account of Landlord, but no
such assignment, subletting, occupancy or collection shall be deemed an
acceptance of the assignee, subtenant or occupant as the Tenant hereof, or
constitute a release of Tenant from further performance by Tenant of the
covenants on the part of Tenant herein contained.
7.3 Document Review. All documents utilized by Tenant to evidence
---------------
any subletting or assignment for which Landlord's consent has been requested,
shall be subject to prior reasonable approval by Landlord or its attorney.
Tenant shall pay on demand all of Landlord's reasonable costs and expenses,
including reasonable attorney's fees, incurred in determining whether or not to
consent to any requested subletting or assignment and for the review and
approval of such documentation, provided, however, that if the subletting or
assignments are on Landlord's forms without changes then Landlord shall not be
entitled to recover any attorneys fees for review of such documentation.
7.4 Subletting. Provided that Tenant is not in default hereunder,
----------
Tenant may from time to time sublet all or any portion of the Premises to any
subtenant without Landlord's prior consent, subject, however, to each of the
following conditions being fully complied with by Tenant:
(a) The subtenant must use the Leased Premises in compliance
with the provisions set forth in Article 9 and for no other purpose.
(b) The subtenant and Tenant shall execute a sublease
substantially in the form set forth as Exhibit E, attached hereto and made a
---------
part hereof.
(c) A fully executed sublease shall be delivered by Tenant to
Landlord within thirty (30) days of full execution thereof. Failure by Tenant to
deliver a copy thereof to Landlord within the above time frame shall give
Landlord, at its option, the right to terminate the sublease which right of
termination shall be in addition to and not in limitation of any other right or
remedy of Landlord.
(d) The Tenant, Transecon, Inc., shall at all times remain
primarily liable under the Lease. This right to sublet without Landlord's prior
consent shall be personal to Transecon, Inc., and shall terminate if Transecon,
Inc. assigns its interest in the Lease in whole or in part.
(e) No subtenant may further sublease or assign its interest in
the sublease without both Transecon, Inc.'s and Landlord's prior written
consent, which may be given or withheld in their respective sole and absolute
discretion.
7.5 Affiliated Entity. Provided Tenant is not in default of this
-----------------
Lease, which default has not been cured within any applicable cure period, and
subject to the ten million dollar minimum net worth requirement more
specifically described in Section 7.1 above, Tenant may, without Landlord's
prior written consent assign the Lease to: (i) a subsidiary, affiliate, division
or corporation controlled or under common control with Tenant; (ii) a successor
corporation to Tenant by merger, consolidation, or nonbankruptcy reorganization;
(iii) a purchaser of substantially all of Tenant's assets and who continues to
operate as "Tenant" in the Premises (collectively, Permitted Assignees").
Tenant acknowledges warrants and agrees that the Permitted Assignee shall assume
all liabilities and obligations of Tenant under the Lease. Tenant shall notify
Landlord of all Permitted Assignee(s) within
10
<PAGE>
thirty (30) days of such assignment or subletting. For the purpose of this
Lease, sale or transfer of Tenant's capital stock, including without limitation,
a transfer in reorganization of Tenant and any sale through any public exchange,
shall not be deemed an assignment, subletting, or any other transfer of the
Lease or the Premises, provided that the surviving entity in such transfer
assumes the Lease by operation of law.
ARTICLE 8
TRANSFER BY LANDLORD AND LIMITED LIABILITY
------------------------------------------
8.1 Transfer of Landlord's Interest. In the event of a sale,
-------------------------------
conveyance, or assignment by Landlord of Landlord's interest in the Building
Complex (other than a transfer for security purposes only), Landlord shall be
relieved from and after the date specified in any such notice of transfer or
assignment of all of Landlord's obligations and liabilities accruing thereafter
on the part of Landlord, and Tenant agrees to look only toward such assignee or
transferee of Landlord's interest.
8.2 Limited Liability of Landlord. Anything contained in this Lease
-----------------------------
to the contrary notwithstanding, Tenant agrees that Tenant shall look solely to
the estate of Landlord in the Building Complex for the collection of any
judgment (or other judicial process) requiring the payment of money by Landlord
in the event of any default or breach by Landlord with respect to any of the
terms and provisions of this Lease to be observed or performed by Landlord,
subject, however, to the prior rights of the holder of any mortgage covering the
Building Complex, and no other assets of Landlord, its partners, agents,
employees, officers, or employees or officers of any of its partners shall be
subject to levy, execution or other judicial process for the satisfaction of
Tenant's claim and Landlord shall not be liable for any such default or breach
except to the extent of Landlord's estate in the Building Complex.
8.3 Limited Liability of Tenant. Landlord agrees that the personal
---------------------------
assets of Tenant's employees, directors and officers shall not be subject to
levy, execution, or other judicial process for the satisfaction of Landlord's
claim against Tenant.
ARTICLE 9
USE OF LEASED PREMISES
----------------------
9.1 Use. Except as expressly permitted by prior written consent of
---
the Landlord, the Leased Premises shall not be used other than for a video
production company and for other general business office purposes. Any other
use shall require Landlord's prior written consent, which shall not be
unreasonably withheld provided that such use complies with applicable
restrictive covenants and zoning, the use is consistent with a first class
suburban office building, and does not generate, store, use, or dispose of any
hazardous, toxic or infectious substances in or from the Premises. All use of
the Premises shall comply with the terms of this Lease and all applicable laws,
ordinances, regulations or other governmental ordinances from time to time in
existence.
9.2 Compliance with Rules and Regulations. Tenant and employees and
-------------------------------------
all persons visiting or doing business with the Tenant in the Leased Premises
shall be bound by and shall observe the reasonable Rules and Regulations as set
forth in Exhibit F, attached hereto and made a part hereof, which may, at
---------
Landlord's sole discretion, be promulgated, amended, or expanded from time to
time during the Lease term by the Landlord relating to the Building, the
Building Complex and/or the Premises of which notice in writing shall be given
to the Tenant within thirty (30) days of such clause at which time they will
become effective and all such
11
<PAGE>
rules and regulations as changed from time to time shall be deemed to be
incorporated into and form a part of this Lease. Any default in the performance
or observance of such rules and regulations shall be a default hereunder and
Landlord shall have all remedies provided for in this Lease in the event of
default by Tenant, Landlord however, shall not be responsible to Tenant for
nonobservance by any other tenant or person of any tenant or person of any such
rules and regulations. Notwithstanding the above except as required by any
governmental authority, law, or pursuant to recorded documents, Landlord shall
not adversely impose any new rules and regulations upon Tenant without Tenant's
consent, which shall not be unreasonably withheld.
9.3 Electronics Testing Lab. Subject to compliance with (i) all
-----------------------
other provisions of this Lease, (ii) applicable zoning, use and building code
restrictions, (iii) insurance requirements, and (iv) any restrictions and
requirements imposed by applicable recorded covenants and regulations, Tenant
may use a portion of the Premises for and electronics testing lab.
ARTICLE 10
INSURANCE
---------
10.1 Tenant's Insurance. Tenant shall, during its occupancy of the
------------------
Premises and during the entire term hereof, at its sole cost and expense,
obtain, maintain and keep in full force and effect, and with the Tenant, the
Landlord, Landlord's agents, and Landlord's mortgagees named as additional
insureds therein as their respective interests may appear, the following types
and kinds of insurance:
(a) Upon property of every description and kind owned by the
Tenant and located in the Building Complex or for which the Tenant is legally
liable or installed by or on behalf of the Tenant, including, without
limitation, furniture, fittings, installations, alterations, additions,
partitions, fixtures and anything in the nature of a leasehold improvement in an
amount not less than the full replacement cost thereof, with a minimum coverage
including sprinkler leakage (where applicable); and in the event that there
shall be a dispute as to the amount which comprises full replacement cost, the
decision of the Landlord or the mortgagees of the Landlord shall be conclusive.
(b) Commercial general liability including bodily injury,
property damage and public liability insurance including personal liability,
contractual liability, non-owned automotive liability, tenants' legal liability
for the full replacement costs of the Leased Premises, and owners' and
contractors' protective insurance coverage and a cross-liability clause with
respect to the Leased Premises and the Tenant's use of any part of the Building
Complex and which coverage shall include the business operations conducted by
the Tenant and any other persons on the Leased Premises. Such policies shall be
written on a comprehensive basis with limits of not less than $2,000,000 with
respect to injuries or death of one or more persons, and not less than
$1,000,000 with respect to property damage and not less than $2,000,000 for any
one occurrence and such higher limits after expiration of the initial lease term
as the Landlord or the mortgagees of the Landlord may reasonably require from
time to time.
(c) Any other form or forms of insurance as the Landlord or the
mortgagees of the Landlord may reasonably require from time to time in form, in
amounts and for insurance risks against which a prudent tenant in greater
metropolitan Denver would protect itself, which are standard in the industry.
(d) Intentionally deleted.
12
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(e) Workers' Compensation Insurance and Employers liability
insurance in amounts as required by law.
(f) If Tenant performs any work on the Leased Premises (costing
more than $1,000.00 or which requires any type of building permit), prior to the
commencement of any such work, Tenant shall deliver to Landlord certificates
issued by insurance companies qualified to do business in the State of Colorado,
evidencing that workmen's compensation and public liability insurance and
property damage insurance and such other insurance as reasonably required by
Landlord, all in the amounts satisfactory to Landlord, are in force and effect
and maintained by all contractors and subcontractors engaged by Tenant to
perform such work.
All policies shall be taken out with insurers licensed to do
business in the State of Colorado and shall carry an A.M.Best rating of not less
than A-XII (A minus 12). All policies shall be primary and noncontributory. The
Tenant agrees that certificates of insurance, or, if required by the Landlord or
the mortgagees of the Landlord, certified copies of binders for such insurance
policies will be delivered to the Landlord within ten (10) days after the
placing of the required insurance with delivery of copies of the policies, no
event later than thirty (30) days after Tenant takes possession of all or any
part of the Leased Premises. All policies shall contain an undertaking by the
insurers to notify the Landlord and the mortgagees of the Landlord in writing
not less than thirty (30) days prior to any material adverse change,
cancellation or sooner termination thereof.
The Tenant covenants and agrees that in the event of damage or
destruction to the leasehold improvements in the Leased Premises covered by
insurance as required to be taken out by the Tenant herein, and if the Landlord
or Tenant do not terminate this Lease pursuant to Section 21.1 herein, the
Tenant will use the proceeds of such insurance for the purpose of repairing or
restoring such leasehold improvements. In the event that Landlord or Tenant are
entitled to terminate the Lease pursuant to Article 21, then if the Premises
have also been damaged, Tenant shall pay to Landlord all of its insurance
proceeds relative to the leasehold improvements.
10.2 Landlord's Insurance. Landlord agrees to carry or cause to be
--------------------
carried during the term hereof public liability insurance on the Building
Complex providing coverage of not less than Two Million and No/100 Dollars
($2,000,000.00) for personal injury or death arising out of any one occurrence.
Landlord also agrees to carry during the term hereof insurance for fire,
extended coverage, vandalism and malicious mischief, insuring the Building
Complex (excluding foundations, excavations and other non-insurable items) for
the full insurable value thereof. Landlord may, but shall not be obligated to,
take out and carry any other form or forms of insurance as it or the mortgagees
of Landlord may reasonably determine to be advisable. Notwithstanding any
contribution by Tenant to the cost of insurance premiums, as provided in Article
4, Tenant acknowledges that it has no right to receive any proceeds from any
such insurance policies carried by Landlord, and that such insurance will be for
the sole benefit of Landlord, with no coverage for Tenant for any risk insured
against.
10.3 Subrogation. The parties hereto agree that any and all fire,
-----------
extended coverage and/or property damage insurance which is required to be
carried by either shall be endorsed with a subrogation clause, substantially as
follows: "This insurance shall not be invalidated should the insured waive, in
writing prior to a loss, any and all right of recovery against any party for any
special causes of loss," and each party hereto waives all claims for recovery
from the other party, its officers, agents or employees for any loss or damage
(whether or not such loss or damage is caused by negligence of the other party),
and notwithstanding any provisions contained in this Lease to the contrary, to
any of its real or personal property insured under
13
<PAGE>
valid and collectible insurance policies to the extent of the collectible
recovery under such insurance.
ARTICLE 11
OBSERVANCE OF LAW
-----------------
11.1 Law. Tenant shall comply with all provisions of law, including
---
without limitation, federal, state, county and city laws, ordinances and
regulations and any other governmental, quasi-governmental or municipal
regulations, which shall impose any duty upon Landlord or Tenant, and which
relate to the partitioning, equipment operation, alteration, occupancy and use
of the Leased Premises, and to the making of any repairs, replacements,
alterations, additions, changes, substitutions or improvements of or to the
Leased Premises. Moreover, Tenant shall comply with all police, fire and
sanitary regulations imposed by any federal, state, county or municipal
authorities, or made by insurance underwriters, and to observe and obey all
governmental and municipal regulations and other requirements governing the
conduct of any business conducted in the Leased Premises.
11.2 Taxes. Tenant shall fully and timely pay all business and other
-----
taxes, charges, rates, duties, assessments and license fees levied, rates
imposed, charged or assessed against or in respect of the Tenant's occupancy of
the Leased Premises or in respect of the personal property, trade fixtures,
furniture and facilities of the Tenant or the business or income of the Tenant
on and from the Leased Premises, if any, as and when the same shall become due,
and to indemnify and hold Landlord harmless from and against all payment of such
taxes, charges, rates, duties, assessments and license fees and against all
loss, costs, charges and expenses occasioned by or arising from any and all such
taxes, rates, duties, assessments and license fees, and to promptly deliver to
Landlord for inspection, upon written request of the Landlord, evidence
satisfactory to Landlord of any such payments.
ARTICLE 12
WASTE AND NUISANCE
------------------
12.1 Tenant shall not commit, suffer or permit any waste or damage or
disfiguration or injury to the Leased Premises or common areas in the Building
or the fixtures and equipment located therein or thereon, or permit or suffer
any overloading of the floors thereof and shall not place therein any safe,
heavy business machinery, computers, data processing machines, or other heavy
things without first obtaining the consent in writing of the Landlord and, if
requested, by Landlord's superintending architect, and not use or permit to be
used any part of the Leased Premises for any dangerous, noxious or offensive
trade or business, and shall not cause or permit any nuisance, noise or action
in, at or on the Premises. Tenant shall not store, produce, maintain or dispose
of any materials or substances in or about the Premises, the Building or
Building Complex which is a regulated, toxic, hazardous or infectious material
or substance under any environmental statute, rule, regulation, or ordinance of
any governmental authority.
ARTICLE 13
ENTRY BY LANDLORD
-----------------
13.1 Landlord and its agents shall have the right to enter the
Premises escorted by an employee or representative of Tenant, at all reasonable
times, upon prior verbal notice to Tenant as set forth below for the purpose of
examining or inspecting the
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same, and any other services to be provided by Landlord to Tenant hereunder, to
show the same to prospective bona fide purchasers, lenders, investors or tenants
of the Building (collectively, "Prospect Visits"), and to make such alterations,
repairs, improvements or additions, whether structural or otherwise, to the
Premises or to the Building as Landlord may deem necessary or desirable. Tenant
shall reasonably cooperate with Landlord to permit such access and provide an
escort. Notices for entry shall be given to an officer or supervisor of Tenant,
as set forth on a written list delivered by Tenant to Landlord. Notwithstanding
the above, Landlord shall have the right (but not the obligation) to enter
unescorted and without notice for janitorial services (if not supplied by
Tenant) or if Landlord reasonably believes that there exists an emergency.
Landlord may enter by means of a master key without liability to Tenant except
for any failure to exercise due care for Tenant's property and without affecting
this Lease. Landlord shall use reasonable efforts to give Tenant not less than
48 hours prior notice of Prospect Visits and will coordinate such entry with
Tenant so as to not interfere with any of Tenant's film production including
delaying or scheduling of such visits after business hours if reasonably
requested by Tenant. If such Prospect Visits exceed ten (10) per calendar year
then Landlord will pay to Tenant for each additional visit during such calendar
year a visitation fee equal to $50.00 per hour for each additional Prospect
Visit during the applicable calendar year, prorata for any partial hour of
visitation.
ARTICLE 14
INDEMNIFICATION OF LANDLORD
---------------------------
14.1 Tenant's Indemnity. Subject to the provisions of Section 10.3 of
------------------
this Lease and Section 14.3 below, Tenant shall indemnify the Landlord and save
it harmless from and against any and all loss (including loss of rentals payable
by the Tenant or other tenants in the event of loss either directly or
indirectly caused by any act or omission of Tenant unless such loss is covered
by Landlord's rent abatement insurance), claims, actions, damages, liability and
expenses in connection with loss of life and personal injury, hazardous
substance or environmental claims, and damage to property arising from any
occurrence in, upon or at Premises during the term of this Lease or any part
thereof, or occasioned wholly or in part by any act or omission of the Tenant,
its agents, contractors, employees, servants, licensees, or concessionaires or
invitees or by anyone permitted to be on Premises by the Tenant; however in no
event shall Tenant indemnify Landlord or hold it harmless from any negligence or
misconduct of Landlord, its agents, employees or contractors or Landlord's
invitees. In case the Landlord shall be made a party to any litigation
commenced by or against the Tenant (except litigation where the Tenant is
seeking relief from or a remedy against Landlord, its agents, employees, or
contractors), then the Tenant shall protect and hold the Landlord harmless and
shall pay all costs, expenses and reasonable attorney's fees incurred or paid by
the Landlord in connection with such litigation whether or not such action is
contested or prosecuted to judgement. All personal property on Premises shall
be at the Tenant's sole risk, and Landlord shall not be liable for any damage
done to or loss of such personal property or for damage or loss suffered by
Tenant, unless caused solely by Landlord's negligence, subject to the provisions
of Sections 10.3 and 23.1.
14.2 Landlord's Indemnity. Subject to the provisions of Section 8.2,
--------------------
Section 10.3 and Section 14.3 below, Landlord shall indemnify and hold Tenant
harmless from and against any and all loss, claims, actions or damages,
liability and expenses in connection with loss of life and personal injury, and
damage to property arising from any occurrence occasioned wholly or in part by
any act or omission of the Landlord, its agent, employees or contractors, except
as set forth herein, however in no event shall Landlord indemnify Tenant or hold
it harmless from any negligence
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of Tenant, its agents, employees or contractors. If Landlord has any liability
pursuant to Article 23, then this indemnity shall apply to any claims or
expenses of Tenant arising in conjunction with such liability, however this
indemnity shall not change or increase Landlord's liability under Article 23.
14.3 Comparative Negligence. Subject to the provisions of Section
----------------------
10.3 but notwithstanding any indemnity provision or other provisions contained
in this Lease to the contrary, if both the Landlord's and the Tenant's
negligence (which shall include the agents, partners, contractors, invitees and
employees of either, as applicable) caused or contributed to any claim for
damages for injury to person or property then neither party shall indemnify the
other for such negligence and each party shall be responsible for such claims
pursuant to the provisions of C.R.S. (S) 13-21-111 pertaining to comparative
negligence, as amended from time to time.
ARTICLE 15
ALTERATIONS
-----------
15.1 Alterations by Tenant. Tenant shall not make, install or erect
---------------------
in or to the Premises any installations, alterations, additions or partitions
which require a building or similar permit and/or affect any structural portion
of the Building including the roof or effect any of the Building systems
including but not limited to HVAC, plumbing and electrical systems, without
submitting the drawings and specifications to the Landlord and obtaining the
Landlord's prior written consent in each instance, which consent may not be
unreasonably withheld. Furthermore, the Tenant shall obtain the Landlord's
prior written consent to any change or changes in such drawings or
specifications submitted as aforesaid, subject to the payment of the cost to the
Landlord of having its architects and/or consultants review such plans and
changes thereto prior to proceeding with any work based on such drawings or
specifications. All such work shall be performed free and clear of all
mechanic's liens and Landlord shall have no liability for the performance of
such work, notwithstanding its consent to any plans and specifications.
PROVIDED NEVERTHELESS that the Landlord may, at its option, at Tenant's expense,
require that the Landlord's contractors be engaged for any mechanical or
electrical work. Without limiting the generality of the foregoing, any work
performed by or for the Tenant shall be performed by competent workmen whose
labor union affiliations are not incompatible with those of any workmen who may
be employed in the Building Complex by the Landlord, its contractors or
subcontractors and all work shall be subject to the inspection and reasonable
review and approval by Landlord and/or its consultants. In addition to the
above all contractors and subcontractors must meet Landlord's specifications, as
solely determined by Landlord, for minimum requirements for insurance, bonds,
quality of work, experience and such other reasonably applicable factors. The
Tenant shall submit to the Landlord's supervision over construction, shall
provide Landlord upon request with financial assurances prior to the
commencement of alterations, and promptly pay to the Landlord's or the Tenant's
subcontractors, as the case may be, when due, the costs of all such work and of
all materials, labor and services involved therein and of all decoration and all
changes in the Building, its equipment or services necessitated thereby. The
Tenant covenants that the Tenant will not suffer or permit during the Term
hereof any mechanics' or other liens for work, labor, services or materials
ordered by the Tenant or for the cost of which the Tenant may be in any way
obligated, to attach to the Premises or to the Building Complex and that
whenever and so often as any such liens shall attach or claims therefor shall be
filed, the Tenant shall, within thirty (30) days after the Landlord has notice
of the filing of the claim for lien, procure the discharge thereof by payment or
by giving security or in such other manner as is or may be required or permitted
by law or which shall otherwise satisfy Landlord and/or Landlord's lender. The
Tenant
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shall, at its own cost and expense, take out or cause to be taken out any
additional insurance or bonds reasonably required by the Landlord to protect the
Landlord's and the Tenant's interest during the period of alteration.
At least five (5) days prior to the commencement of any work
permitted to be done by persons requested by the Tenant on the Premises, the
Tenant shall notify the Landlord of the proposed work and the names and
addresses of the persons supplying labor and materials for the proposed work so
that the Landlord may avail itself of the provisions of statutes such as Section
38-22-105(2) of the Colorado Revised Statutes (1973). During any such work on
the Premises, the Landlord, or its representatives, shall have the right to go
upon and inspect the Premises at all reasonable times, and shall have the right
to post and keep posted thereon notices such as those provided for by Section
38-22-105(2) C.R.S. (1973) or to take any further action which the Landlord may
deem to be proper for the protection of the Landlord's interest in the Premises.
15.2 Alterations by Landlord. Landlord hereby reserves the right at
-----------------------
any time and from time to time to make changes in, additions to, subtractions
from or rearrangements of the Building Complex, including, without limitation,
all improvements at any time thereof, all entrances and exits thereto, and to
grant, modify and terminate easements or other agreements pertaining to the use
and maintenance of all or parts of the Building, including, but not limited to,
the entrance foyer and lobby, and the common corridors and to make changes or
additions to the pipes, conduits, ducts, utilities and other necessary building
services in the Premises which serve other portions of the Building, provided
that prior to the Commencement Date, the Landlord may alter the Premises to the
extent found necessary by the Landlord to accommodate changes in construction
design or facilities including major alterations but provided always that the
Premises, as altered, shall be in all material aspects comparable to the
Premises as defined herein. Landlord shall not unreasonably obstruct or
interrupt Tenant's access to the Premises and in such event Landlord shall
provide alternative access during all business hours. If Landlord elects to
block Tenant's access during non-business hours for non-emergencies, then
Landlord shall reasonably coordinate same with Tenant. Notwithstanding the
provision set forth above, Landlord agrees during the first five (5) years of
the initial term, provided Tenant is not in default, not to materially change
the character or configuration of the first floor lobby of the Building without
Tenant's consent which will not be unreasonably withheld or delayed.
ARTICLE 16
SIGNS AND ADVERTISING
---------------------
16.1 Tenant shall not install, paint, display, inscribe, place or
affix any sign, picture, advertisements, notice, lettering or direction on any
part of the Building Complex or in the interior of the Premises or other portion
of the Building. The Landlord will prescribe a uniform pattern of
identification signs for tenants to be placed on the outside corridor wall which
is near the door leading into the Premises and other than such identification
signs, Tenant shall not install, paint, display, inscribe, place or affix, or
otherwise attach, any sign, picture, advertisement, notice, lettering or
direction on the inside or outside of the Premises for exterior view without the
written consent of the Landlord.
16.2 Landlord shall at Landlord's cost install directory signage for
Tenant in the lobby, which causes the name "Transecon, Inc." to be readily
visible upon entry to the main lobby of the Building and which identifies Tenant
as being on the third floor.
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ARTICLE 17
SUBORDINATION TO MORTGAGES AND DEEDS OF TRUST
---------------------------------------------
17.1 This Lease and the rights of Tenant hereunder shall be and are
hereby made subject and subordinate to the lien of any mortgages or deeds of
trust now or hereafter existing against the Building Complex and to all
renewals, modifications, consolidations, replacements and extensions thereof and
to all advances made, or hereafter to be made, upon the security thereof.
Although such subordination shall be self-operating, Tenant, or its successors
in interest, shall upon Landlord's request, execute and deliver upon the demand
of Landlord any and all instruments desired by Landlord, subordinating, in the
manner reasonably requested by Landlord, this Lease to any such mortgage or deed
of trust. Landlord is hereby irrevocably appointed and authorized as agent and
attorney-in-fact of Tenant to execute all such subordination instruments in the
event Tenant fails to execute said instruments within fifteen (15) days after
notice from Landlord demanding the execution thereof.
Should any mortgage or deed of trust affecting the Building
Complex be foreclosed, then:
(a) the liability of the mortgagee, beneficiary or purchaser at
such foreclosure sale shall exist only so long as such mortgagee, beneficiary or
purchaser is the owner of the Building Complex and such liability shall not
continue or survive after further transfer of ownership; and
(b) Tenant shall be deemed to have attorned, as Tenant under
this Lease, to the purchaser at any foreclosure sale thereunder, and this Lease
shall continue in full force and effect as a direct lease between and binding
upon Tenant and such purchaser at any foreclosure sale.
As used in this Article 17 "mortgagee" and "beneficiary" shall
include successors and assigns of any such party, whether immediate or remote,
the purchaser of any mortgage or deed of trust, whether at foreclosure or
otherwise, and the successors, assigns and mortgagees and beneficiaries of such
purchaser, whether immediate or remote.
Landlord, at the written request of Tenant, agrees to request any
mortgagee or beneficiary to enter into a non-disturbance agreement with Tenant,
in a form satisfactory to such mortgagee or beneficiary, stating that Tenant's
right to the continued use and possession of the Premises shall be under the
same terms and conditions as set forth in this Lease provided that at such time
Tenant is not in default of its obligations herein. Landlord makes no
representations or warranties that such non-disturbance agreement will be
entered into by any beneficiary or mortgagee, however, the self-operative
subordination of this Lease and attornment by Tenant is in such event
conditioned upon the mortgagee or beneficiary not disturbing Tenant's right
under this Lease, provided that Tenant is not in default hereof.
ARTICLE 18
ESTOPPEL CERTIFICATE/FINANCIAL INFORMATION
------------------------------------------
18.1 Estoppel Certificate. Tenant agrees that it will from time to
--------------------
time, upon request by Landlord, execute and deliver to Landlord within ten (10)
days after demand therefor an estoppel certificate on Landlord's reasonable form
certifying that this Lease is unmodified and in full force and effect (or if
there have been modifications, that the same is in full force and effect as so
modified). Notwithstanding the above, if during such ten (10) day period an
authorized representative or officer of Tenant is not available in Colorado to
execute the estoppel certificate, then
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Tenant shall not be in default if it returns the executed certificate within
twenty (20) days of demand therefor.
18.2 Financial Information. Tenant shall, upon Landlord's written
---------------------
request and upon Tenant's receipt from Landlord of a copy of a fully executed
letter of interest which evidences either a bona fide proposed sale of or
refinancing with a federally chartered lending institution, pension fund,
insurance company or other source of capital for the Building Complex, deliver
to such lender or purchaser a copy of Tenant's most recent financial statement,
which annual financial statement shall be prepared and reviewed by an
independent certified public accountant no less often than once per year in
accordance with generally accepted accounting principals ("GAAP"), provided,
however, Landlord shall not be required to provide Tenant with written evidence
of a proposed refinancing for the first two refinancing requests made by
Landlord during the term of this Lease in conjunction with a proposed
refinancing of the Building Complex. Except in the manner specifically set
forth in the preceding sentence, Landlord shall not include Tenant's financial
statements in any attempt to obtain a purchaser for, or refinancing on, the
Building Complex. Tenant agrees that any letter of interest shall be
confidential as to the name of the lender and/or purchaser and as to the term,
if any, contained in such letter of interest, and Tenant agrees to execute a
reasonable confidentiality agreement if requested by Landlord. Tenant shall have
the right to require a reasonable confidentiality agreement from such lender or
purchaser concerning such financials, if Tenant is not a public company.
Furthermore, such lender or purchaser may, if it has reasonable questions about
matters contained in the financials, address such questions in writing to the
president of Tenant, and the president shall reasonably and promptly cooperate
with such lender or purchaser with respect to the responses to the questions.
ARTICLE 19
QUIET ENJOYMENT
---------------
19.1 Subject to the terms and provisions of this Lease, Landlord
covenants and agrees that Tenant shall peaceably and quietly enjoy the Premises
and Tenant's rights hereunder during the term hereof, without hindrance by
Landlord.
ARTICLE 20
FIXTURES
--------
20.1 Any or all installations, alterations, additions, partitions and
fixtures in or upon the Premises other than the Tenant's trade fixtures, work
stations with movable walls, mounted video screens, raised platforms and cables
beneath the raised platforms, which are located upon the Premises, whether
placed there by the Tenant or the Landlord, shall, immediately upon such
placement, become the property of the Landlord without compensation therefor to
the Tenant. Notwithstanding anything herein contained, the Landlord shall be
under no obligation to repair, maintain or insure such installations,
alterations, additions, partitions and fixtures or anything in the nature of a
leasehold improvement made or installed by or on behalf of the Tenant. The
Landlord may elect that any or all installations made or installed by or on
behalf of the Tenant be removed at the end of the Lease Term and, if the
Landlord so elects, it shall be the Tenant's obligation to restore the Premises
to the conditions they were in previous to such alterations, installations,
partitions and fixtures on or before the termination of this Lease. Such
removal and restoration shall be at the sole expense of the Tenant.
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ARTICLE 21
DAMAGE OR DESTRUCTION
---------------------
21.1 Casualty. In the event that the Building should be totally
--------
destroyed by fire, tornado or other casualty, or should be so damaged that
rebuilding or repairs cannot be completed within one hundred and eighty (180)
days after the date of such damage, Landlord may, at its option, terminate this
Lease in which event the rent shall be abated during the unexpired portion of
this Lease effective with the date of such damage, or Landlord may proceed to
rebuild the Building and the Premises. If the damage prohibits Tenant's use of
the Premises, cannot be repaired within one hundred and eighty days and was not
caused by the Tenant, then Tenant can elect to terminate this Lease by written
notice to Landlord received within sixty (60) days of the date of damage. In
the event the Building should be damaged by fire, tornado or other casualty, but
only to such extent that rebuilding or repairs in Landlord's reasonable
estimation can be completed within one hundred and eighty (180) days after the
date of such damage, or if the damage cannot be repaired within such time frame
but Landlord does not elect to terminate this Lease, in either such event,
Landlord shall, within sixty (60) days after the date of such damage commence to
rebuild or repair the Building and shall proceed with reasonable diligence to
restore the Building to substantially the same condition in which it was
immediately prior to the happening of the casualty, except that the Landlord
shall not be required to rebuild, repair or replace any part of the partitions,
fixtures and other improvements which may have been placed by the Tenant or
other tenants within the Building and rent shall equitably abate from the date
of damage until such damage is repaired if such casualty results in damage to
Tenant's Premises or prohibits its access to the Premises or use thereof. In
the event any mortgagee under a deed of trust, security agreement or mortgage on
the Building should require that the insurance proceeds be used to retire the
mortgage debt, Landlord shall have no obligation to rebuild and if Landlord so
elects, this Lease shall terminate upon notice to Tenant. Unless otherwise
provided in this Lease, any insurance which may be carried by the Landlord or
the Tenant against loss or damage to the Building or to the Premises shall be
for the sole benefit of the party carrying such insurance and under its sole
control.
21.2 Casualty Caused by Tenant. If fire or other casualty causing
-------------------------
injury to the Premises or other parts of the Building shall have been caused by
the negligence or misconduct of the Tenant, its agents, servants or employees,
or by any other persons entering the Building under express or implied
invitation of the Tenant, such injury may be reasonably repaired by the Landlord
at the reasonable expense of the Tenant.
ARTICLE 22
CONDEMNATION
------------
22.1 Eminent Domain. If any part of the Rentable Area of the Premises
--------------
is taken by eminent domain, or by conveyance in lieu thereof then this Lease, at
the option of either party evidenced by notice to the other given within thirty
(30) days from such taking or conveyance, shall forthwith cease and terminate
entirely. In the event of such termination of this Lease, then rental shall be
due and payable to the actual date of such termination. If neither party
terminates this Lease, this Lease shall cease and terminate as to that portion
of the Premises so taken as of the date of such taking, and the rental
thereafter payable under this Lease shall be abated prorata from the date of
such taking in an amount by which that portion of the Rentable Area of the
Premises so taken shall bear to the Rentable Area of the Premises prior to such
taking. If any part of the Building Complex shall be taken by eminent domain,
or by conveyance in lieu thereof, and if such taking substantially
20
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interferes with the Landlord's ownership or use of the Building Complex, the
Landlord, at its option, may upon thirty (30) days' notice to the Tenant,
terminate this Lease as of the date of such taking.
22.2 Damages. All compensation awarded for any taking (or the
-------
proceeds of private sale in lieu thereof) of the Premises or Building Complex
shall be the property of Landlord and Tenant hereby assigns its interest in any
such award to Landlord; provided, however, Landlord shall have no interest in
any award made to Tenant for the taking of Tenant's fixtures and other personal
property or moving expenses if a separate award for such items is made to
Tenant.
22.1 Restoration. If both Landlord and Tenant elect not to terminate
-----------
this Lease, Tenant shall remain in that portion of the Premises which shall not
have been appropriated or taken as herein provided, and Landlord agrees, at
Landlord's sole cost and expense (not to exceed the amount of condemnation
proceeds received by Landlord), to, as soon as reasonably possible, restore the
remaining portion of the Premises to a complete unit of like quality and
character as existed prior to such appropriation or taking.
ARTICLE 23
LOSS AND DAMAGE AND DELAY
-------------------------
23.1 Loss and Damage. The Landlord shall not be liable or responsible
---------------
in any way for:
(a) any death or injury arising from or out of any occurrence
in, upon or at the Building Complex or for damage to property of the Tenant or
others located on the Premises, nor shall it be responsible in any event for
damage to any property of the Tenant or others from any cause whatsoever, unless
such damage, loss, injury or death results from the intentional misconduct or
sole negligence of the Landlord, its agents, servants or employees. Without
limiting the generality of the foregoing, the Landlord shall not be liable for
any injury or damage to persons or property resulting from fire, explosion,
falling plaster, steam, gas, electricity, water, rain, snow or leaks from any
part of the Premises or from the pipes, appliances, plumbing works, roof,
street, or subsurface of any floor or ceiling or from any other place or because
of dampness or climatic conditions from any other cause of whatsoever kind. The
Landlord shall not be liable for any damage whatsoever caused by any other
tenant or persons in or about the Building Complex, or by an occupant of
adjacent property thereto, or the public, or construction of any private, public
or quasi-public work. All property of the Tenant kept or stored on the Premises
shall be kept or stored at the risk of the Tenant only and the Tenant shall
indemnify the Landlord in the event of any claims arising out of damages to the
same, including any subrogation claim by the Tenant's insurers;
(b) any act or omission (including theft, malfeasance or
negligence) on the part of any agent, contractor or person from time to time
employed by the Landlord to perform janitor services or security services, or
repairs or maintenance services, in or about the Premises or the Building; or
(c) loss or damage, however caused, to money, securities,
negotiable instruments, papers or other valuables of the Tenant.
23.2 Delays. Whenever and to the extent that the Landlord shall be
------
unable to fulfill, or shall be delayed or restricted in the fulfillment of, any
obligation hereunder in respect to the supply of or provision for, any service
or utility or the doing of any work or the making of any repairs by reason of
21
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being unable to obtain the material, goods, equipment, service, utility or labor
required to enable it to fulfill such obligation or by reason of any statute,
law or any regulation or order passed or made pursuant thereto or by reason of
the order or direction of any governmental or quasi-governmental administrator,
controller or board, or any governmental department or officer or other
authority, or by reason of not being able to obtain any permission or authority
required thereby, or by reason of any other cause beyond its control, whether of
the foregoing character or not, the Landlord shall be entitled to extend the
time for fulfillment of such obligation by a time equal to the duration of such
delay or restriction, and the Tenant shall not be entitled to compensation for
any inconvenience, nuisance or discomfort thereby occasioned.
ARTICLE 24
DEFAULT AND REMEDIES
--------------------
24.1 Default by Tenant. The following events shall be deemed to be
-----------------
events of default by Tenant under this Lease:
(a) Tenant shall fail to pay any installment of rent or any
other sum due to Landlord within five (5) days of receipt of written notice of
such nonpayment.
(b) Tenant shall fail to comply with any term, provision or
covenant of this Lease, other than payment of rent or other sums due to
Landlord, and shall not cure such failure within fifteen (15) days after written
notice thereof to Tenant or if such default cannot reasonably be cured within
fifteen (15) days then Tenant shall not be in default so long as it has
commenced to cure within fifteen (15) days and is diligently prosecuting same to
completion.
(c) Tenant or any guarantor of Tenant's obligations under this
Lease shall die, cease to exist as a corporation or partnership or be otherwise
dissolved or liquidated or become insolvent, or shall make a transfer in fraud
of creditors, or shall make an assignment for the benefit of creditors, or is
otherwise unable to pay its debts as they come due.
(d) Tenant or any guarantor of Tenant's obligations under this
Lease shall file a petition under any section or chapter of the national
bankruptcy act as amended or under any similar law or statute of the United
States or any state thereof; or Tenant or any guarantor of Tenant's obligations
under this Lease shall be adjudged bankrupt or insolvent in proceedings filed
against Tenant or any guarantor of Tenant's obligations under this Lease.
(e) A receiver or trustee shall be appointed for all of the
Premises or for all or substantially all of the assets of Tenant or any
guarantor of Tenant's obligations under this Lease.
(f) Tenant shall abandon or vacate any portion of the Premises,
in whole or in part.
(g) Tenant assigns or sublets in violation of the provisions of
this Lease.
24.2 Remedies of Landlord. Upon the occurrence of any such events of
--------------------
default, Landlord shall have the option to pursue any one or more of the
following remedies without any notice or demand whatsoever except as required by
applicable law:
(a) Terminate this Lease, in which event Tenant shall
immediately surrender the Premises to Landlord, and if Tenant fails to do so,
Landlord may, without prejudice to any other remedy which it may have for
possession or arrearages in rent, enter upon and take possession of the Premises
and expel or remove Tenant and
22
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any other person who may be occupying such Premises or any part thereof, by
force if necessary, without being liable for prosecution of any claim of damages
therefor.
(b) Enter upon and take possession of the Premises and expel or
remove Tenant and any other person who may be occupying such Premises or any
part thereof, by force if necessary pursuant to applicable law, without being
liable for prosecution or any claim for damages therefor (except for acts in
violation of law), and relet the Premises and receive the rent therefor.
(c) Enter upon the Premises, by force if necessary pursuant to
applicable law, without being liable for prosecution or any claim for damages
therefor (except for acts in violation of law), and do whatever Tenant is
obligated to do under the terms of this Lease; and Tenant agrees to reimburse
Landlord on demand for any expenses which Landlord may incur in thus effecting
compliance with Tenant's obligations under this Lease, and Tenant further agrees
that Landlord shall not be liable for any damages resulting to the Tenant from
such action, whether caused by the negligence of Landlord or otherwise.
(d) Alter all locks and other security devices at the Premises
without terminating this Lease.
Exercise by Landlord of any one or more of the remedies hereunder
granted or otherwise available shall not be deemed to be an acceptance of
surrender of the Premises by Tenant, whether by agreement or by operation of
law, it being understood that such surrender can be effected only by the written
agreement of Landlord and Tenant. No such alteration of locks or other security
devices and no removal or other exercise of dominion by Landlord over the
property of Tenant or others at the Premises shall be deemed unauthorized or
constitute a conversion, Tenant hereby consenting, after any event of default,
to the aforesaid exercise of dominion over Tenant's property within the
Premises. All claims for damages by reason of such reentry and/or repossession
and/or alteration of locks or other security devices are hereby waived, as all
claims for damages by reason of any distress warrant, forcible detainer
proceedings, sequestration proceedings or other legal process, to the extent
permitted by law. Tenant agrees that any reentry by Landlord may be pursuant to
judgment obtained in forcible detainer proceedings or other legal proceedings or
without the necessity for any legal proceedings, as Landlord may elect, and
Landlord shall not be liable in trespass or otherwise, to the extent permitted
by law.
In the event Landlord elects to terminate the Lease by reason of
an event of default then notwithstanding such termination, Tenant shall be
liable for and shall pay to Landlord, at the address specified for notice to
Landlord herein, the sum of all rental and other indebtedness accrued to date of
such termination, plus, as damages, an amount equal to the total rental
hereunder for the remaining portion of the Lease term (had such term not been
terminated by Landlord prior to the date of expiration as stated herein), less
the reasonable rental value thereof, plus a sum equal to any other damages
incurred by Landlord by reason of such default.
In the event that Landlord elects to repossess the Premises
without terminating the Lease, then Tenant shall be liable for and shall pay to
Landlord at the address specified for notice to Landlord herein, all rental and
other indebtedness accrued to the date of such repossession, plus rent required
to paid by Tenant to Landlord during the remainder of the Lease term until the
date of expiration of the term as stated herein diminished by any net sums
thereafter received by Landlord through reletting the Premises during such
period (after deducting expenses incurred by Landlord as provided below). In no
event shall Tenant be entitled to any excess of any rental obtained by reletting
over and above the rental herein reserved. Actions to collect amounts due by
Tenant
23
<PAGE>
to Landlord under this subparagraph may be brought from time to time, on one or
more occasions, without the necessity of Landlord's waiting until expiration of
the Lease term.
In the event of any default or breach by Tenant, or threatened or
anticipatory breach or default, Tenant shall also be liable and shall pay to
Landlord, in addition to any sums provided to be paid above, broker's fees
incurred by Landlord in connection with reletting the whole or any part of the
Premises; the costs of removing and storing Tenant's or other occupants'
property; the costs of repairing, altering, remodeling, or otherwise putting the
Premises into condition acceptable to a new tenant or tenants; and all
reasonable expenses incurred by Landlord in enforcing or defending Landlord's
rights and/or remedies, including reasonable attorney's fees whether suit was
actually filed or not.
In the event of termination or repossession of the Premises for
an event of default, Landlord shall not, except as set forth herein, have any
obligation to relet or attempt to relet the Premises or any portion thereof, or
to collect rental after reletting; and in the event of reletting, Landlord may
relet the whole or any portion of the Premises for any period to any tenant and
for any use or purpose. Landlord agrees to use reasonable efforts to mitigate
its damages, however, Landlord shall have no obligation to expend sums, give the
Premises priority over other vacant space nor to lease the space on less than
market terms.
If Tenant shall fail to make any payment or cure any default
hereunder within the time herein permitted, Landlord, without being under any
obligation to do so and without thereby waiving such default, may make such
payment and/or remedy such other default for the account of Tenant (and enter
the Premises for such purpose), and thereupon Tenant shall be obligated to, and
hereby agrees to pay Landlord upon demand all costs, expenses and disbursements,
including reasonable attorney's fees incurred by Landlord in taking such
remedial action.
Landlord is entitled to accept, receive in cash or deposit any
payment made by Tenant for any reason or purpose or in any amount whatsoever,
and apply the same at Landlord's option to any obligation of Tenant and the same
shall not constitute payment of any amount owed except that to which Landlord
has applied the same. No endorsement or statement on any check or letter of
Tenant shall be deemed an accord and satisfaction or recognized for any purpose
whatsoever. The acceptance of any such check or payment shall be without
prejudice to Landlord's rights to recover any and all amounts owed by Tenant
hereunder and shall not be deemed to cure any other default nor prejudice
Landlord's rights to pursue any other available remedy.
24.3 Landlord's Default. Landlord shall not be deemed in default
------------------
hereunder unless Tenant shall have given Landlord written notice of such default
specifying such default with particularity and Landlord shall thereupon have
thirty (30) days in which to cure any default unless such default cannot
reasonably be cured within such period wherein Landlord shall not be in default
if it commences to cure the default within the thirty (30) day period and
diligently pursues completion of same. In the event of any default, Tenant
agrees that its exclusive remedy shall be an action for damages.
24.4 Personal Property Lien. Intentionally Deleted.
----------------------
ARTICLE 25
HOLDING OVER
------------
25.1 If the Tenant shall continue to occupy and continue to pay rent
for the Premises after the expiration of this Lease with or without the consent
of the Landlord, and without any
24
<PAGE>
further written agreement, the Tenant shall be a tenant from month to month at a
monthly Base Rent equal to two hundred percent (200%) of the last full monthly
Base Rent payment due hereunder, and subject to all of the additional rentals,
terms and conditions herein set out except as to expiration of the Lease Term.
Such holding over may be terminated by the Landlord or the Tenant upon fifteen
(15) days' notice. In the event that the Tenant fails to surrender the Premises
upon termination or expiration of this Lease or such month to month tenancy,
then the Tenant shall indemnify the Landlord against loss or liability resulting
from any delay of the Tenant in not surrendering the Premises, including, but
not limited to, any amounts required to be paid to third parties who were to
have occupied the Premises and any attorney's fees related thereto.
ARTICLE 26
NOTICE
------
26.1 Notice. Any notice, request, statement or other writing pursuant
------
to this Lease shall be deemed to have been given if sent by registered,
certified mail or recognized receipted overnight mail service, postage prepaid,
return receipt requested or delivered by hand to the party at the addresses set
forth below;
TENANT: Transecon, Inc.
1908 Pearl Street
Boulder, Colorado 80302
Attention: President
with a copy to:
Transecon, Inc.
Suite 300
360 Interlocken Boulevard
Broomfield, Colorado 80021
with a copy to:
Chrisman Bynum & Johnson, P.C.
1900 Fifteenth Street
Boulder, CO 80302
Attention: Clayton N. Johnson, Esq.
LANDLORD: ORIX PRIME WEST BROOMFIELD VENTURE
c/o Prime West Real Estate Services
6025 South Quebec, Suite 350
Englewood, Colorado 80111
Attention: Stephen F. Clarke
with a copy to:
Brownstein Hyatt Farber & Strickland, P.C.
410 17th Street, 22nd Floor
Denver, Colorado 80202
Attention: Laura Jean Christman, Esq.
and with a copy to:
ORIX PRIME WEST BROOMFIELD VENTURE
c/o ORIX Real Estate Equities, Inc.
100 North Riverside Plaza
Suite 1400
Chicago, Illinois 60606
Attn: James H. Purinton
and such notice shall be deemed to have been received by the Landlord or the
Tenant, as the case may be, on the earlier of actual receipt or the second
business day after the date on which it shall have been so mailed.
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<PAGE>
26.2 Change of Address. Any party may, by notice to the other, from
-----------------
time to time, designate another address, which notices mailed more than ten (10)
days thereafter shall be addressed.
ARTICLE 27
SECURITY DEPOSIT
----------------
27.1 Tenant shall deposit with Landlord on or before the date of
execution hereof by Tenant the sum of Thirty-Three Thousand and No/100 Dollars
($33,000.00) as security for the performance by Tenant of all of the terms,
covenants, and conditions required to be performed by it hereunder. Landlord
agrees upon receipt thereof to place the security deposit in an interest bearing
account with a federally insured financial institution which interest shall be
returned to Tenant with the security deposit, when delivered pursuant to the
terms hereof with an adjustment for income tax, attributable to such interest
bearing account. Such sum shall be returned to Tenant after a reasonable period
after the expiration of the Lease Term and delivery of possession of the
Premises to Landlord if, at such time, Tenant has fully performed all such
terms, covenants and conditions. Prior to the time when Tenant is entitled to
the return of the security deposit, Landlord shall be entitled to intermingle
such deposit with its own funds and to use same for such purposes as Landlord
may determine. In the event of default by Tenant in performing any of its
obligations under this Lease, Landlord may, in addition to any other right or
remedy available to Landlord hereunder, use, apply, or retain all or any part of
this security deposit for the payment of any unpaid rent or for any other amount
which Landlord may be required to expend by reason of the default of Tenant,
including any damages or deficiency in the reletting of the Premises or any
attorney's fees associated therewith, regardless of the whether the accrual of
such damages or deficiency occurs before or after an eviction. If a portion of
the security deposit is used or applied by Landlord during the term hereof,
Tenant shall, upon five (5) days written demand, deposit with Landlord an amount
sufficient to restore the security deposit to its original amount. Landlord
shall return the security deposit together with interest (or that portion of the
security deposit not previously applied) within thirty (30) days after the later
of expiration of the lease term or surrender by Tenant of the Premises without
default.
ARTICLE 28
MISCELLANEOUS PROVISIONS
------------------------
28.1 Captions. The captions used herein are for convenience only and
--------
do not limit or amplify the provisions hereof. Whenever the singular is used the
same shall include the plural, and words of any gender shall include the other
gender.
28.2 Waiver. One or more waivers of any covenant, term or condition
------
of this Lease by either party should not be construed as a waiver of a
subsequent breach of the same covenant, term or condition. The consent or
approval by either party shall not be construed as a waiver of a subsequent
breach of the same covenant, term or condition. The consent or approval by
either party to or of any act by the other party requiring such consent or
approval should not be deemed to waive or render unnecessary consent to or
approval of any subsequent similar act.
28.3 Entire Agreement. This Lease contains the entire agreement
----------------
between the parties and no agreement shall be effective to change, modify or
terminate this Lease in whole or in part unless such agreement is in writing and
duly signed by the parties hereto.
26
<PAGE>
28.4 Severability. The invalidity or unenforceability of any
------------
provision hereof shall not affect or impair any other provision.
28.5 Modification. Should any mortgagee or beneficiary under a deed
------------
of trust require a modification of this Lease, which modification will not bring
about any increased cost or expense to Tenant or will in any way substantially
change the rights and obligations of Tenant hereunder, then and in such event,
Tenant agrees that this Lease may be so modified.
28.6 Governing Law. This Lease shall be governed by and construed
-------------
pursuant to the laws of the State of Colorado.
28.7 Successors and Assigns. The covenants and conditions herein
----------------------
contained shall inure to and bind the respective heirs, permitted successors,
executors, administrators and assigns of the parties hereto, and the terms
"Landlord" and "Tenant" shall include the permitted successors and assigns of
either such party, whether immediate or remote, except as otherwise specifically
set forth in this Lease to the contrary.
28.8 Authorization to Execute. In the event the Tenant hereunder
------------------------
shall be a corporation, the parties executing this Lease on behalf of the Tenant
hereby covenant and warrant that the Tenant is a duly qualified corporation and
all steps have been taken prior to the date hereof to qualify Tenant to do
business in the State of Colorado; all franchise and corporate taxes have been
paid to date, and all future forms, reports, fees and other documents necessary
to comply with applicable laws will be filed.
28.9 Guaranty of Lease. Intentionally Deleted.
-----------------
28.10 Approval of Documents. Landlord's approval of Tenant's plans for
---------------------
work performed by Landlord or Tenant in the Premises shall create no
responsibility or liability on the part of Landlord for their completeness,
design, sufficiency, or compliance with any laws, rules, or regulations of
governmental agencies or authorities.
28.11 Attorneys Fees. In the event of any dispute hereunder the
--------------
prevailing party in such action shall be entitled to its reasonable attorneys
and costs in such action.
28.12 Use of Names. Landlord shall not publish, relating to this Lease
------------
or in conjunction with the Building Complex the name "Transecon, Inc." or the
name of any employee, officer or director of "Transecon, Inc." in any newsletter
or similar publication, including press releases, without Tenant's prior
consent. Tenant shall not publish Landlord's name or the name of any partner or
affiliated entity or officer of such entity or use the name of the Building
Complex relating to this Lease or the Building Complex in any newsletter or
similar publication, including press releases, without Landlord's prior consent.
In the event either party is in default hereof, such defaulting party's only
remedy shall be an action for actual damages (not consequential) arising from
such default.
ARTICLE 29
SUBSTITUTION OF PREMISES
------------------------
29.1 Intentionally Deleted.
27
<PAGE>
ARTICLE 30
RECORDING
---------
28
<PAGE>
30.1 Tenant agrees not to place this Lease of record unless requested
to execute a Memorandum of Lease by Landlord, which may, at the Landlord's
option, be placed of record. In addition, if requested by the Landlord, the
Tenant will execute a memorandum of lease to be filed with the Colorado
Department of Revenue on such form as may be prescribed by said department
within ten (10) days after the execution of this Lease or any other such
memorandum so that the Landlord may avail itself of the provisions of the
statutes such as Section 39-22-604(7)(c) of the Colorado Revised Statutes
(1973).
Any recording by Tenant without Landlord's prior written consent shall
at Landlord's option be deemed a default pursuant to Article 24 hereof and
Landlord shall have all of the rights and remedies set forth therein.
ARTICLE 31
REAL ESTATE BROKER
------------------
31.1 Except as set forth below, Tenant represents and warrants that
Tenant has not dealt with any broker in connection with this Lease, and that
insofar as Tenant knows, no other broker negotiated or participated in the
negotiations of this Lease, or submitted or showed the Premises, or is entitled
to any commission in connection herewith (except the Landlord's listing brokers
Cushman & Wakefield and the Colorado Group) and Tenant agrees to indemnify
Landlord against any liability arising from a breach of this representation and
warranty including reasonable attorney's fees. Tenant has dealt with Buyer's
Edge, Inc., as broker and Mark Shaner agent (collectively Tenant's Broker) as
licensed Colorado broker in connection with the Lease and Landlord has directed
its listing brokers to pay half of the commission payable by Landlord in
conjunction with this Lease to Tenant's Broker, subject to and in accordance
with the letter agreement from listing brokers to Landlord agreeing to pay one-
half of the commission to Tenant's Broker. Tenant agrees to indemnify Landlord
from any claims by Tenant's Broker for any commissions demanded by Tenant's
Broker from Landlord except as set forth in the letter agreement referenced
above from the listing brokers. Landlord shall have no obligation to pay any
commission except as specifically set forth in its agreement with the listing
brokers.
ARTICLE 32
RENT PREPAYMENT
---------------
32.1 Intentionally Deleted.
ARTICLE 33
OPTION
------
33.1 Option to Extend. Tenant shall have an option to extend the
----------------
Lease for one (1) additional term of five (5) years. In order to exercise such
option, Tenant shall notify Landlord in writing at least 180, but not more than
365, days prior to the expiration of the lease term of its election to exercise
the option, upon which time Landlord shall submit in writing within 30 days a
proposal for the then current Market Base Rental Rate (per rentable square foot
per annum, "NNN") for the extended term. The Market Base Rental Rate shall not
be less than $16.00 per rentable square foot per annum "NNN," nor more than
$18.40 per rentable square foot per annum "NNN." Tenant shall have thirty (30)
days from the receipt of said notice to (i) accept the proposed Base Rental Rate
in writing to Landlord (ii) to reject the Base Rental Rate and elect the
appraisal process set forth below or (iii) elect not to extend. If Tenant
elects not to extend or fails to timely
29
<PAGE>
exercise its option, time being of the essence, the option shall automatically
terminate and be of no further force and effect and this Lease shall terminate
upon expiration of the then Lease term. Any such extension shall be upon all of
the terms, conditions and covenants of this Lease except as to (i) the amount of
Base Rent, which shall be determined as set forth herein, (ii) options to
extend, expand or purchase, which shall not be applicable, and (iii) Tenant
finish or other allowances or concessions which shall not be applicable to the
renewal term. As used herein, "Market Base Rental Rate" shall mean the then Base
Rental Rate for comparable first class multi-tenant office buildings of
comparable size, location and age in the County of Boulder, Colorado, at such
time, taking into account the following factors (1) rent per rentable square
foot; (2) operating expenses and real estate tax payments; (3) current rental
escalators and (4) rental concessions, if any.
If Tenant, by written notice delivered no later than thirty (30) days after
the date Landlord notifies Tenant of the Market Base Rental Rate, objects to the
Market Base Rental Rate determined by Landlord and elects to submit the rate
determination to appraisal, then, within seven (7) days of the date of Tenant's
objection, each party shall appoint a non-affiliated certified M.A.I. Appraiser
that has at least five (5) years' full-time commercial appraisal experience in
Boulder County to determine the Market Base Rental Rate, such process to be
completed within twenty (20) days after the date of the appointment of the last
appraiser. If a party does not appoint a qualified appraiser within five (5)
days after the other party has given notice of the name of the appraiser then
the single appraiser shall be the sole appraiser and shall set the Market Base
Rental Rate. The appraisers appointed by the parties shall meet promptly and
attempt to set the Market Base Rental Rate. If they are unable to agree on the
Market Base Rental Rate within twenty (20) days after the date the second
appraiser has been appointed, they shall elect a third appraiser meeting the
qualifications stated in this paragraph within seven (7) days after the last day
the two (2) appraisers are to set the Market Base Rental Rate. If the
appraisers are unable to agree on the third appraiser, either of the parties to
this Lease, after giving five (5) days' prior written notice to the other party,
may apply to the then president of the real estate board of Denver, Colorado for
the selection of a third appraiser who meets the qualifications stated in this
Section, which selection shall be made within three (3) days. All
determinations of Market Base Rental Rate shall be subject to the limitations on
Market Base Rental Rate set forth in the first paragraph of this Section. Each
of the parties shall pay for the appraiser appointed by it and shall bear one-
half of the cost of appointing the third appraiser and of paying the third
appraiser's fee. The third appraiser, however selected, shall be a person who
has not previously acted in any capacity for either party. The appraisers shall
be instructed to consider the criteria above stated in determining the Market
Base Rental Rate.
Within twenty (20) days after the selection of the third appraiser, the
third appraiser shall determine the Market Base Rental Rate and all three of the
appraiser's Market Base Rental Rates shall be averaged excluding any single
Market Base Rental Rate which is either ten percent (10%) higher or lower than
the middle appraisal of Market Base Rental Rate and the remaining appraisals
shall then be averaged.
If the Market Base Rental Rate is not established for the extended term
prior to its commencement, Tenant shall continue to pay the applicable Base Rent
required for the last full month of the Lease term until the appraisers have
made their determination. The Market Base Rental Rate in question, when finally
determined by the appraisers, shall be retroactive to the commencement of the
extension term, and the first Base Rent payment becoming due after the
determination of the applicable Market Base Rental Rate shall include the
retroactive amounts of monthly Base Rent installments accrued and unpaid. In no
event may either Landlord or Tenant
30
<PAGE>
elect not to extend the Lease based upon the Market Base Rental Rate established
in accordance herewith.
This option to extend may not be exercised and the Lease shall not be
extended if Landlord has given Tenant notice of default which default is not
cured within any applicable cure periods or waived by Landlord.
33.2 Right of First Refusal. Landlord hereby grants to Tenant a right
----------------------
of first refusal (the "Right of First Refusal") to lease space on the second
floor of the Building in the Building Complex subject to and in accordance with
the following provisions:
(a) Prior to Landlord executing any lease with a bona fide third
party for space in the Building Complex, Landlord shall deliver to Tenant a
written notice identifying a proposed lease or letter of intent which Landlord
is willing to accept, subject to this Right of First Refusal (the "Offer
Notice"). The Offer Notice shall set forth the name of the proposed tenant and
shall identify all material business terms of the lease, including the proposed
premises (the "Expansion Space"), Base Rent, term, options, extension,
concessions and allowances, if any.
(b) The Tenant shall have three (3) business days from receipt
of the Offer Notice to either accept or reject the terms set forth in the Offer
Notice. If Tenant rejects the terms of the Offer Notice or if Landlord has not
received the written acceptance or rejection of the Offer Notice from Tenant by
5:00 p.m. on the third (3rd) business day as set forth herein, time being of the
essence, then Landlord shall have no further obligation or liability to Tenant
pertaining to the Expansion Space and Landlord may enter into a lease with such
tenant on materially the same economic terms as set forth in the Offer Notice,
including renewal rights.
(c) If Tenant accepts such offer, then this Lease shall be
amended to include the space so offered on the terms set forth in the Offer
Notice except (i) the lease for such space shall be coterminous with this Lease,
(ii) the options to extend the Lease as contained in the Offer Notice, if any,
shall be void, and (iii) the option to extend as contained in this Lease shall
be applicable to the Expansion Space. If the expiration date of the term set
forth in the Offer Notice is different than the expiration date hereof, the Base
Rent as set forth in the Offer Notice shall be equitably adjusted to provide the
same net economic benefit to Landlord. None of the concessions, Allowances or
other options set forth in this Lease shall be applicable to the Expansion
Space.
(d) Tenant shall accept possession of the Expansion Space in its
"as is" condition.
(e) This Right of First Refusal is subject to any rights of
existing tenants for the Building Complex or tenants under leases for which
Tenant did not exercise this Right of First Refusal.
(f) Except as set forth herein, this Right of First Refusal may
not be exercised if it would result in Tenant leasing the Expansion Space for
less than thirty-six (36) months. Tenant may in such event (provided that the
right to exercise the option to extend is still viable and has not otherwise
been terminated or expired) exercise its option to extend the Lease inclusive of
the Expansion Space. The Base Rent for the Premises and the Expansion Space for
the Extension Period shall be determined at the times and methods set forth in
Extension Option and once determined shall be binding upon both Landlord and
Tenant notwithstanding the fact that it is possible that such determination may
be made several months or years after the receipt of the election to extend this
Lease. The Base Rent for the Expansion Space for the remainder of the lease term
shall be determined in accordance with subparagraph c. above.
31
<PAGE>
(g) This Right of First Refusal shall be deemed void and of no
further force and effect if Tenant is in default hereof, which default is not
cured within any applicable cure period or if Tenant assigns this Lease or
sublets the Premises (except for subleases or assignments to entities affiliated
with Tenant as set forth in Article 7).
33.3 Option to Purchase. Provided Tenant is not in default of this
------------------
Lease, Landlord hereby grants to Tenant an option to purchase the Building
Complex on the following terms:
(a) Purchase Price. The purchase price shall be calculated
--------------
pursuant to the following formula:
1. Total of all costs of any kind or nature through the Closing Date
including all hard costs and soft costs incurred by the Landlord
ORIX PRIME WEST BROOMFIELD VENTURE, and its predecessor in
interest, Prime West Development, Inc., related to or arising
from the Building Complex including costs incurred in the
acquisition of the land, development, construction, formation of
ownership entities, financing and leasing of the Building Complex
including without limitation leasing costs, commissions, legal
fees, construction interest, loan fees, "Carry Costs" (as
hereinafter defined), tenant finish costs and closing costs. The
aggregate cost paid through May 30, 1996 is $5,289,605.00.
Additional costs incurred but not paid as of May 30, 1996 are
estimated to be $324,142.13, for a total estimated cost through
May 30, 1996 of $5,613,747.13. These costs shall not preclude any
costs which may arise subsequent to the date hereof. Such costs
do not include (i) any costs associated with this Lease including
tenant finish ($430,150) and commissions ($92,927.76) to the
extent borne by Landlord or legal costs, or (ii) costs not yet
invoiced or payable all of which, together with Carry Costs and
the other costs recoverable hereunder, shall be included in the
Purchase Price on the Closing Date. Funds received from Coram
Healthcare for the buyout of the Coram Healthcare Lease
($232,000) have been deducted from the purchase price referenced
above.
Plus 2. A sum equal to twelve dollars ($12.00) per gross square foot of
the area of the Building (which reflects profit to the Landlord).
(b) Deed. The Building Complex shall be conveyed by Special
----
Warranty Deed subject to existing leases, taxes and easements, all matters of
record (except mortgages or deeds of trust, if any, which shall be paid and
released with proceeds of the sale).
(c) No later than fourteen (14) business days after full
execution hereof, Landlord shall deliver to Tenant for its review each of the
following (collectively, the "Due Diligence Documents"):
(1) copies of all executed leases (exclusive of this Lease) for
the Building Complex;
(2) copies of all presently existing executed contracts
including service contracts and management contracts for the
Building Complex;
(3) Landlord's most recently prepared ALTA boundary survey for
the Building Complex;
32
<PAGE>
(4) copies of as-built plans and specifications for the
Building;
(5) a copy of Landlord's title insurance policy together with
copies of all exceptions to title set forth therein;
(6) copy of Phase I Environmental Report which was received by
Landlord prior to its acquisition of the real property;
(7) the updated costs of the Building Complex as updated costs
is set forth above, together with such invoices evidencing
payment, as requested by Tenant;
(8) a soils report for the Building Complex received by Landlord
prior to it acquisition of the real property; and
(9) copy of the construction contract for the Building Complex
and all warranties for any construction.
Tenant acknowledges that Landlord makes no representation or
warranty as to the accuracy or completeness of any of the above documentation
prepared by third parties and Landlord makes no representation or warranty as to
the competency of the party preparing such documentation. Landlord agrees to
deliver to Tenant, upon receipt of written request, such other documents
specifically requested which directly and reasonably relate to the acquisition
of the Building Complex by Tenant (to the extent that such documents are in
Landlord's actual possession at the time of the request). The delivery of such
additional documents shall not extend the Option Date, the Closing Date or any
other dates set forth in this Option.
Subsequent to exercise by Tenant of this Option, Landlord will
submit to Tenant for its prior reasonable review and approval any new contracts
relating to the Property which would be assumed by the Tenant on the Closing
Date. Failure of Tenant to respond in writing as to approval or disapproval of
such contract within seven (7) business days of receipt of such contract shall
be deemed approval thereof. If Tenant disapproves the new contract then Landlord
will not execute the contract.
(d) Exercise of Option and Closing. Tenant shall exercise its
------------------------------
option to purchase in writing received by Landlord no later than ninety (90)
days from full execution hereof (the "Option Date") and shall deliver to a title
company designated by Landlord a nonrefundable one million dollar earnest money
deposit. Such exercise of the Option shall be deemed full acceptance of the
Building Complex in its "as is" condition, including full acceptance of the Due
Diligence Documents. The title company shall deposit the $1,000,000.00 in an
interest bearing account, such interest taxable to the Tenant. The
$1,000,000.00, together with interest thereon, shall hereinafter collectively be
called the Earnest Money Deposit. Closing shall be through escrow with the title
company one hundred twenty (120) days after the exercise of the Option (the
"Closing Date") but if the one hundred twentieth (120th) day occurs on other
than a business day then on the next business day, time being of the essence.
Closing shall be subject to standard prorations for 1996 taxes, assessments and
rents. Prior to the Option Date, Landlord shall deliver to Tenant on the fifth
(5th) business day following Tenant's written request an estimated Purchase
Price to the date of the request. Landlord will deliver notice of the final
Purchase Price on the second (2nd) business day prior to the Closing Date with a
per diem increase for Carry Costs and other costs together with invoices or
other evidence of such costs.
33
<PAGE>
(e) Default. Time being of the essence, if Tenant fails to give
-------
notice in accordance herewith, fails to deliver the earnest money or fails to
close for any reason on the Closing Date, including failure to deliver the
balance of the Purchase Price as calculated by Landlord in accordance with the
above formula, then this option shall become null and void and of no further
force and effect and neither party shall have any further obligation or
liability to the other and the Earnest Money Deposit shall be delivered to
Landlord as liquidated damages and Landlord's sole remedy for Tenant's default,
it being understood and agreed that damages are difficult to determine and the
Earnest Money Deposit is a reasonable estimate of damages arising from Tenant's
default. If Tenant wrongfully claims return of the Earnest Money Deposit then
Landlord shall be entitled to all additional costs, expenses and damages,
including reasonable attorneys' fees arising from Tenant's default and wrongful
claims.
(f) Transfer. This option is personal to Tenant and may not be
--------
transferred or assigned in whole or in part, directly or indirectly by Tenant,
except to Tenant's majority stockholder upon ten (10) days written notice to
Landlord by written assignment and assumption agreement in which event Tenant
shall have no further rights or obligations under this option, directly or
indirectly.
(g) Prior to the Option Date, Landlord agrees to notify Tenant
in writing of the names of prospective bona fide tenants with whom Landlord
reasonably intends (pursuant to a letter of intent or approved proposed lease)
to execute a lease. Tenant shall have five (5) business days from receipt of
such notice to disapprove such prospective tenant, by exercising the Option in
accordance with the terms hereof, including the delivery of the Earnest Money
Deposit to the Title Company. Such exercise shall be deemed full acceptance of
the Building Complex in its "as is" condition including full acceptance of the
Due Diligence Documents. If Tenant fails to exercise this Option strictly in
accordance with the terms hereof, time being of the essence, Landlord shall have
the right to enter into a lease with the proposed tenant on any terms acceptable
to Landlord, and Landlord shall have no further liability or responsibility of
any kind or nature to Tenant arising from or related to such lease to the
prospective tenant. Tenant acknowledges that all information concerning a
prospective tenant (including such tenant's name) is confidential and may not be
disclosed to any person, party or entity without the prior written consent of
Landlord, which may be given or withheld in its sole discretion. Subsequent to
the Option Date, if Tenant exercises the foregoing Option in accordance with the
terms and provisions hereof, Landlord may not execute any lease for the Building
unless such lease is first approved by Tenant, which approval may be given or
withheld in Tenant's sole discretion. If Tenant approves the lease, the costs of
leasing shall be included in the Purchase Price. Landlord shall have no
obligation to lease the Building, or any part thereof, prior to the Closing
Date.
(h) This sale shall be an "as is" sale, and Landlord has made no
-----
representations or warranties whatsoever and Landlord shall have no
responsibility or liability to the Tenant arising from or related to this Option
or the conveyance of the Building Complex, except as specifically set forth
herein. Landlord shall assign all leases and contracts pertaining to the
Building Complex to Tenant at Closing without recourse and Tenant shall assume
such leases and contracts. In the event of casualty or condemnation, Landlord
shall assign all insurance proceeds and condemnation proceeds to Tenant, unless
such condemnation or casualty renders unusable 50% or more of the gross area of
the Building, in which event Tenant may terminate its Option upon written notice
to Landlord received within ten (10) days of the casualty or condemnation and
neither party shall have any obligation to the other pursuant to this Option,
except the Earnest Money Deposit shall be returned to Tenant, provided, however,
the
34
<PAGE>
Lease shall remain in full force and effect in accordance with its terms.
(i) For purposes hereof, "Carry Costs" shall mean the interest
on indebtedness for the Building Complex which interest is accruing monthly at
the annual rate of 400 Basis Points above the 30-day LIBOR rate.
(j) If for any reason Tenant fails to exercise this Option or
close on the Closing Date, then all the Due Diligence Documents will be kept
confidential and will be returned by Tenant to Landlord within five (5) business
days of receipt of written request therefor.
[ REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
35
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease this ______
day of ________________, 1996.
LANDLORD:
ORIX PRIME WEST BROOMFIELD VENTURE, a
Colorado general partnership
BY: Prime West Broomfield, Inc.
general partner
By: ___________________________________,
Title: ________________________________
BY: Orix Broomfield, Inc. general partner
BY: ___________________________________,
Title: ________________________________
TENANT:
TRANSECON, INC., a Colorado corporation
By: ___________________________________
Title: ________________________________
36
<PAGE>
STATE OF _____________________)
) ss.
COUNTY OF ____________________)
The foregoing instrument was acknowledged before me this _______ day of
________________, 1996, by _____________________
as ___________________ of PRIME WEST BROOMFIELD, INC., general partner of ORIX
PRIME WEST BROOMFIELD VENTURE, a Colorado general partnership.
WITNESS my hand and official seal.
____________________________________
( S E A L ) Notary Public
My commission expires:
STATE OF _____________________)
) ss.
COUNTY OF ____________________)
The foregoing instrument was acknowledged before me this _______ day of
________________, 1996, by _____________________
as ___________________ of ORIX BROOMFIELD, INC., general partner of ORIX PRIME
WEST BROOMFIELD VENTURE, a Colorado general partnership.
WITNESS my hand and official seal.
____________________________________
( S E A L ) Notary Public
My commission expires:
37
<PAGE>
STATE OF _____________________)
) ss.
COUNTY OF ____________________)
The foregoing instrument was acknowledged before me this _______ day of
________________, 1996, by _____________________ as ___________________ of
Transecon, Inc.
WITNESS my hand and official seal.
_______________________________________
( S E A L ) Notary Public
My commission expires:
38
<PAGE>
EXHIBIT 10.4
FIRST AMENDMENT
TO TRANSECON, INC. LEASE
THIS FIRST AMENDMENT TO TRANSECON, INC. LEASE ("First Amendment") is made
and entered into this 19/th/ day of December, 1997, by and between ORIX PRIME
WEST BROOMFIELD VENTURE, a Colorado general partnership ("Landlord") and
TRANSECON, INC., a Colorado corporation ("Tenant").
WHEREAS, Landlord and Tenant are parties to that certain lease entered into
as of June 19, 1996 (the "Lease"); and
WHEREAS, effective January 1, 1997 Tenant partially terminated the Lease as
to the premises described on Exhibit A-1 consisting of approximately 6,621.33
-----------
rentable square feet, which space has been leased by Golden Rule (the "Golden
Rule Space"); and
WHEREAS, the remaining premises are described on Exhibit A-2; and
-----------
WHEREAS, as a condition of Landlord permitting the partial termination,
Tenant has agreed to guaranty the Golden Rule Lease;
WHEREAS, Tenant is desirous of leasing certain space on the first floor.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1. Section 1.1, Demise, shall be amended as follows:
------
Effective January 1, 1997, the portion of the Premises on the third floor
shall consist of approximately 11,389.67 rentable square feet, as shown on
Exhibit A-2 attached hereto (the "Third-Floor Space"). In addition to the
-----------
above, tenant shall lease Suite 105 consisting of approximately 1,510
rentable square feet on the first floor as shown on Exhibit B attached
---------
hereto (the "Expansion Space"). The total rentable area of the Premises
(inclusive of the "Third-Floor Space" and the "Expansion Space") shall be
approximately 12,899.67 rentable square feet. Any reference hereinafter to
the Premises shall mean the Premises as described herein and as shown on
Exhibits A-1, A-2 and B hereto unless otherwise specifically set forth to
------------ --- -
the contrary.
2. Section 2.1, Term, shall be amended as follows:
----
The Commencement Date, as applicable solely to the Expansion Space, shall
be the earlier of February 1, 1998 or the date that the Expansion Space is
Substantially Complete as set forth in the Work Letter attached hereto as
Exhibit C. The expiration date for the Expansion Premises is conterminous
---------
with the balance of the Premises.
<PAGE>
3. Section 3.1, Base Rent, shall be amended as follows:
---------
Base Rent for the Third Floor Space is $16.00 per rentable square foot per
annum, triple net, which equates to equal monthly installments of
$15,186.23. Base Rent for the Expansion Space shall be $16.00 per rentable
square foot per annum, triple net, which equates to equal monthly
installments of $2,013.33. The Base Rent for the expansion Space shall
thereafter on each anniversary of the Commencement Date for the Expansion
Space be increased annually at the rate of three percent (3%) per annum.
Base Rent for the Expansion Space shall commence on the Commencement Date
as set forth above and shall be paid in accordance with Article 3 of the
Lease.
4. Section 4.1, Taxes and Operating Expense Adjustment, shall be amended as
--------------------------------------
follows:
Effective January 1, 1997, Tenant's Pro Rata Share for the Third-Floor
Space shall be 22.14%. Effective as of the Commencement Date as set forth
above, Tenant's Pro Rata Share for the Expansion Space shall be 2.91%.
5. Section 27.1, Security Deposit, shall be amended as follows:
----------------
On or before full execution hereof, Tenant shall deposit with Landlord an
additional sum of $2,763.00 as additional security for the performance by
Tenant under this Lease as more specifically set forth in Section 27.1.
The total security deposit, inclusive of the addition sum, shall be
$35,763.00, which shall be held and applied (as applicable) by Landlord in
accordance with the terms of Section 27.1.
6. Section 33.1, Option to Extend, shall be amended as follows:
----------------
The Option to Extend shall apply independently to the Third-Floor Space and
the Expansion Space and Tenant may elect to extend both spaces or either
space on the terms set forth in Section 33.1.
7. Golden Rule Lease: Tenant hereby agrees to guaranty the Golden Rule Lease
-----------------
in accordance with the Guaranty attached hereto as Exhibit D. Furthermore,
---------
Tenant hereby agrees to release Landlord, indemnify and hold Landlord harmless
from any and all claims, demands, expenses or loss of any kind or nature,
whether known or unknown, now existing or arising hereafter, including claims of
Tenant, Golden Rule and any third parties, arising from or related to the Golden
Rule Lease and the use and occupancy thereof, including reasonable attorneys'
fees and costs. Tenant further acknowledges that there is no dividing wall
between Premises and that any issues, risks or claims arising therefrom are at
the sole cost and risk of Tenant.
8. The parties hereto acknowledge that the option to purchase set forth in
Section 33.3 has expired and is of no further force and effect.
9. Each party hereby represents to the other that the Lease is in full force
and effect and that to its knowledge there is no default by either Landlord or
Tenant thereunder.
2
<PAGE>
10. Tenant hereby represents that it has not assigned, transferred or sublet
any interest in the Lease and that it has full power and authority to enter into
this First Amendment to Transecon, Inc. Lease including all exhibits hereto.
11. Tenant represents and warrants that insofar as Tenant knows no broker
except for Buyer's Edge, Inc., as Tenant's broker, and Cushman & Wakefield, as
Landlord's broker, negotiated or participated in the negotiations of this First
Amendment to Transecon, Inc. Lease, or submitted or showed the Premises, or is
entitled to any commission in connection herewith. Tenant agrees to indemnify
Landlord against any liability arising from a breach of this representation and
warranty including reasonable attorneys' fees.
12. All capitalized terms used herein and not otherwise defined herein shall
have the same meanings as set forth in the Lease.
13. Except as otherwise modified or amended hereby, the terms and provisions of
the Lease shall remain unchanged and are hereby ratified and confirmed.
14. This Amendment may be signed in counterparts, each of which shall be deemed
an original and all of which, when taken together, shall constitute one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
signed, effective as of the date and year first above written.
LANDLORD:
ORIX PRIME WEST BROOMFIELD VENTURE, a
Colorado general partnership
BY: PRIME WEST BROOMFIELD, INC., general partner
By: ________________________________________,
Name:_______________________________________
Title:______________________________________
BY: ORIX BROOMFIELD, INC., general partner
By: ________________________________________
Name:_______________________________________
Title:______________________________________
3
<PAGE>
TENANT:
TRANSECON, INC., a Colorado corporation
By: ________________________________________
Name:_______________________________________
Title:______________________________________
4
<PAGE>
STATE OF ________________)
) ss.
COUNTY OF _______________)
The foregoing instrument was acknowledged before me this ________ day of
________________, 1997, by _____________________ as ___________________ of PRIME
WEST BROOMFIELD, INC., general partner of ORIX PRIME WEST BROOMFIELD VENTURE, a
Colorado general partnership.
WITNESS my hand and official seal.
________________________________________
( S E A L ) Notary Public
My commission expires:
STATE OF ________________)
) ss.
COUNTY OF _______________)
The foregoing instrument was acknowledged before me this ________ day of
________________, 1997, by _____________________ as ___________________ of ORIX
BROOMFIELD, INC., general partner of ORIX PRIME WEST BROOMFIELD VENTURE, a
Colorado general partnership.
WITNESS my hand and official seal.
________________________________________
( S E A L ) Notary Public
My commission expires:
5
<PAGE>
STATE OF ________________)
) ss.
COUNTY OF _______________)
The foregoing instrument was acknowledged before me this ________ day of
________________, 1997, by _____________________ as ___________________ of
TRANSECON, INC., a Colorado corporation.
WITNESS my hand and official seal.
______________________________________________
( S E A L ) Notary Public
My commission expires:
6
<PAGE>
Exhibit 21.1
Name Jurisdiction
Business Express, Inc. (dba Business Express of Boulder) Colorado
Gaiam Catalog, Inc. (dba Harmony) Colorado
Gaiam Holding, Inc. Colorado
Healing Arts Publishing LLC (dba Living Arts) California
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated June 4, 1999, except for Notes 1, 8 and 11 as to which
the date is __________ 1999, in the Registration Statement (Form S-1) and
related prospectus of Gaiam, Inc. for the registration of 2,300,000 shares of
its Class A Common Stock.
We also consent to the use of our report dated June 25, 1999, on the financial
statements of Healing Arts Publishing, LLC as of and for the year ended December
31, 1998, in the Registration Statement (Form S-1) and related Prospectus of
Gaiam, Inc. for the registration of 2,300,000 shares of Gaiam, Inc.'s Class A
Common Stock.
Denver, Colorado
August 30, 1999
The foregoing consent is in the form that will be signed upon the effective date
of Gaiam, Inc.'s registration of Class A Common Stock in this registration
statement and the concurrent 2.5 to 1 reverse stock split of the Gaiam, Inc.'s
common shares.
/s/ ERNST & YOUNG LLP
Denver, Colorado
August 30, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated September 12, 1997 with respect to the financial
statements of Gaiam, Inc. included in the Registration Statement (Form S-1) and
related Prospectus of Gaiam, Inc. for the registration of 2,300,000 shares of
Class A Common Stock.
/s/ Wendell T. Walker and Associates, P.C.
Boulder, Colorado
August 30, 1999
38945
<PAGE>
EXHIBIT 23.4
Consent of Paul H. Ray
I hereby consent to the use of my name in the Registration Statement on Form S-1
No. 333-83283, together with all amendments thereto, filed by Gaiam, Inc. with
the Securities and Exchange Commission in connection with Gaiam's registration
under the Securities Act of 1933, as amended, of shares of Gaiam's Class A
common stock, $.0001 par value per share.
/s/ Paul H. Ray
August 26, 1999
38945
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1998
<PERIOD-END> JAN-01-1998 JAN-01-1997
<CASH> 1,409,939 1,611,793
<SECURITIES> 1,633,905 38,333
<RECEIVABLES> 2,671,188 406,772
<ALLOWANCES> 67,915 31,000
<INVENTORY> 3,393,712 1,648,083
<CURRENT-ASSETS> 11,082,510 4,779,555
<PP&E> 2,078,610 1,659,159
<DEPRECIATION> 998,916 562,271
<TOTAL-ASSETS> 16,676,512 5,984,567
<CURRENT-LIABILITIES> 11,163,987 4,343,768
<BONDS> 0 0
0 0
0 0
<COMMON> 821 805
<OTHER-SE> 3,660,314 1,573,606
<TOTAL-LIABILITY-AND-EQUITY> 16,676,512 5,984,567
<SALES> 30,738,540 19,897,690
<TOTAL-REVENUES> 30,738,540 19,897,690
<CGS> 13,173,536 8,462,151
<TOTAL-COSTS> 16,580,161 12,002,028
<OTHER-EXPENSES> (696,992) (1,820,034)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 308,501 236,699
<INCOME-PRETAX> 1,373,334 1,016,846
<INCOME-TAX> 251,955 362,534
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 261,598 0
<CHANGES> 0 0
<NET-INCOME> 859,781 654,312
<EPS-BASIC> .11 .08
<EPS-DILUTED> .11 .08
</TABLE>
