-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TMA2uDl0aJRHKU5MHTfo1eEaVz1Na4qDrHIiudWrZlYcvuue70SzNFaOg3kBww+c 2yrco7OHnjRbYeXoExhk2A== 0000927356-99-001460.txt : 19990831 0000927356-99-001460.hdr.sgml : 19990831 ACCESSION NUMBER: 0000927356-99-001460 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19990830 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GAIAM INC CENTRAL INDEX KEY: 0001089872 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-83283 FILM NUMBER: 99703014 BUSINESS ADDRESS: STREET 1: 360 INTERLOCKEN BLVD #300 CITY: BROOMFIELD STATE: CO ZIP: 80021 MAIL ADDRESS: STREET 1: 360 INTERLOCKEN BLVD #300 CITY: BROOMFIELD STATE: CO ZIP: 80021 S-1/A 1 AMENDMENT #1 TO FORM S-1 FOR GAIAM, INC. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 1999 REGISTRATION NO. 333-83283 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- Amendment No. 1 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- 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) ---------------- 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] 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. ---------------- 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. ================================================================================ 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. - -------------------------------------------------------------------------------- See "Risk Factors" beginning on page __ to read about material risks you should consider before buying our shares. - --------------------------------------------------------------------------------
Per Share Total --------- ----- 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*
*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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- TUCKER ANTHONY CLEARY GULL ADAMS, HARKNESS & HILL, INC. [Inside front cover] [Pictures] TABLE OF CONTENTS
Page 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..................................................
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. 3 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 4 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 - ---------------------------------------------------------------------------- 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. - ---------------------------------------------------------------------------- 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 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. 6 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? 7 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 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.
Six Months Year Ended December 31, Ended June 30, ----------------------- -------------- 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- 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 June 30, 1999 ---------------------------------- Actual Pro forma/(2)/ ------ -------------- 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
___________________________ /(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 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. 10 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. 11 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. 12 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 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 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 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 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 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.
June 30, 1999 ACTUAL PRO FORMA --------- ------------ Long-term debt and capital leases, less
18 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 ========= ==========
- ---------------------- (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 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: 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
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):
Shares Purchased Total Consideration Average Price Per Number Percent Amount Percent Share ---------- ------- ------------ ------- ------- 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% ========== ===== ============ =====
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 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 SELECTED FINANCIAL DATA (Amounts in thousands, except per share data)
Six Months Year Ended December 31, Ended June 30, ----------------------------------------------------------- ------------------------ (unaudited) Statement of Operations Data: 1994 1995 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- ------- -------- 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
December 31, June 30, ----------- -------- Balance Sheet Data 1994 1995 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- ------- ------- 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
______________________________________ (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 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 Results Of Operations The following table sets forth certain financial data as a percentage of revenues for the periods indicated.
Six Months Year Ended December 31, Ended June 30, ----------------------- -------------- 1994 1995 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- ------- ------- 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%
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 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 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 26 included elsewhere in this prospectus. The results of operations for any quarter are not necessarily indicative of future results of operations.
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 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 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
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 27 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. 28 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 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 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. 31 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, 32 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 33 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 34 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. 35 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] [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]
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. 36 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. 37 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 38 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. 39 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 40 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 . 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:
Location Size Use Lease Expiration - -------- --- --- ---------------- 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
42 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 43 ("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:
NAME AGE POSITION - ---- ----- ------------------------ 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*
*Mr. Ray will join the board upon completion of this offering. 44 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 45 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
Name and Principal Position Annual 1998 All Other 1998 ----------- Compensation Compensation ------------ ------------ Salary Bonus 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)/
____________________ (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. 46 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 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.
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 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%
/(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 /(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 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 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 51 500,000 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 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:
Underwriters: Number of Shares Tucker Anthony Cleary Gull......................... 1,000,000 Adams, Harkness & Hill, Inc........................ 1,000,000 Total......................................... 2,000,000
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.
No Exercise Full Exercise Per share (customer discount)...... $0.45 $0.45
53 Per share.......................... $0.50 $0.50 Total.............................. $970,000 $1,120,000
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 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 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 INDEX TO FINANCIAL STATEMENTS
Gaiam, Inc. Page 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
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 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 GAIAM, INC. CONSOLIDATED BALANCE SHEETS
December 31 June 30 1997 1998 1999 ------------------------------------------------------------- Assets (Unaudited) 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 =============================================================
See accompanying notes. F-3 GAIAM, INC. CONSOLIDATED STATEMENTS OF INCOME
Years ended Six months December 31 ended June 30 1996 1997 1998 1998 1999 -------------------------------------------------------------------------------------- (Unaudited) (Unaudited) 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
See accompanying notes. F-4 GAIAM, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Other Class A Class B Additional Compre- Common Stock Common Stock Paid-in hensive Retained Shares Amount Shares Amount Capital Income Earnings Total ------------------- ----------------- ---------- -------------- ---------- ---------- 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 =================== ================= =========== ============== ========== ==========
See accompanying notes. F-5 GAIAM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended Six months ended December 31 June 30 1996 1997 1998 1998 1999 ------------------------------------------------------------------------ Operating activities (Unaudited) (Unaudited) 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 - - -
See accompanying notes F-6 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 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:
June 30, June 30, 1996 1997 1998 1998 1999 -------------------------------------------------------------- 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
F-8 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 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 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 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:
December 31 1997 1998 ------------------------------------- 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 =====================================
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 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:
December 31 1997 1998 --------------------------------- 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 =================================
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:
Capital Operating ------------------------------ 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 =============
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 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:
December 31 1996 1997 1998 -------------------------------------------------- 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 ==================================================
F-14 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:
December 31 1996 1997 1998 ---------------------------------------------------- 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 ====================================================
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:
December 31 1997 1998 ---------------------------------- 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) ==================================
F-15 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:
Years ended December 31 1997 1998 ----------------------------------- (Unaudited) Revenues $27,222,601 $38,063,794 Net income 625,257 34,128 Net income per common share 0.08 0.00
F-16 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 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:
Year Ended December 31, Six months ended June 30, 1997 1998 1998 1999 ----------------------------------------------------------------- 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)
F-18 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Information subsequent to December 31, 1998 is unaudited.)
Year Ended December 31, Six months ended June 30, 1997 1998 1998 1999 ---------------------------------------------------------- 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 ===========================================================
F-19 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 GAIAM, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS Year ended December 31, 1998
Healing Arts InnerBalance Total Gaiam, Inc. Publishing (c) Health (d) Adjustments Pro Forma --------------------------------------------------------------------------- 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
See accompanying notes. F-21 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. Intangible Asset $3,576,100 Amortization Life 15 years Additional Period 8.5 months ---------- Adjustment $ 168,871 ==========
(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 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 HEALING ARTS PUBLISHING, LLC BALANCE SHEET December 31, 1998
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 ==================
See accompanying notes. F-24 HEALING ARTS PUBLISHING, LLC STATEMENT OF OPERATIONS
Year Ended Six Months December 31, Ended 1998 June 30, 1999 ------------------------------------- (See Note 1) (Unaudited) 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) =====================================
See accompanying notes. F-25 HEALING ARTS PUBLISHING, LLC STATEMENT OF STOCKHOLDERS' DEFICIT AND MEMBERS' EQUITY
Stockholders' Deficit ------------------------------------------ Common Accumulated Members' Stock Deficit Equity Total --------------------------------------------------------------------------- (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 ===========================================================================
See accompanying notes. F-26 HEALING ARTS PUBLISHING, LLC STATEMENT OF CASH FLOWS
Year Ended Six Months December 31, Ended 1998 June 30, 1999 ------------------------------------- (See Note 1) (Unaudited) 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 =====================================
See accompanying notes. F-27 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 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 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 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: Furniture and equipment $ 238,305 Computer equipment 106,062 ------------------- 344,367 Accumulated depreciation and amortization (204,831) ------------------- $ 139,536 ===================
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: 1999 $ 89,995 2000 17,140 2001 4,383 2002 3,540 ------------------ $115,058 ==================
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 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 [Inside Back cover] [Pictures] [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. 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. 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.................................................................................. ========
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. 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:
- ------------------------------------------------------------------------------------------------------------------------------------ Date Purchaser Number of Debentures/ Warrants/ Consideration Exemption(s) Shares of Notes Options Claimed* Class A Common Stock - ------------------------------------------------------------------------------------------------------------------------------------ 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. - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ Date Purchaser Number of Debentures/ Warrants/ Consideration Exemption(s) Shares of Notes Options Claimed* Class A Common Stock - ------------------------------------------------------------------------------------------------------------------------------------ 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. - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ Date Purchaser Number of Debentures/ Warrants/ Consideration Exemption(s) Shares of Notes Options Claimed* Class A Common Stock - ------------------------------------------------------------------------------------------------------------------------------------ June 1, 1999** Gaiam employees -- -- 674,800 Services N/A and service providers - ------------------------------------------------------------------------------------------------------------------------------------
* 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. Item 16. Exhibits and Financial Statement Schedules. EXHIBITS:
- ----------------------------------------------------------------------------------------------------------------------------------- Exhibit No. Description - ----------------------------------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------------------------------
II-5
- ----------------------------------------------------------------------------------------------------------------------------------- Exhibit No. Description - ----------------------------------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------------------------------
* 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 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 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.
- --------------------------------------------------------------------------------------------------------------------------- Signature Title Date - --------------------------------------------------------------------------------------------------------------------------- /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 - ---------------------------------------------------------------------------------------------------------------------------
*By /s/ Jirka Rysavy Jirka Rysavy, Attorney-in-fact II-8 EXHIBIT INDEX
- --------------------------------------------------------------------------------------------------------------- Exhibit No. Description - --------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------- Exhibit No. Description - --------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------
* To be filed by amendment ** Previously filed. EX-2.1 2 PURCHASE AGREEMENT DATED 9/14/98 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 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 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 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 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 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 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 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. 8 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 9 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: 10 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. 11 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 12 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 13 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 14 (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. 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. 16 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. 17 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 18 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. 19 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, 20 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 21 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 22 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. 23 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. 24 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 25 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 26 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: 27 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 28 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. 29 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 30 For purposes of Section 5.4 only: GAIAM, INC. By: /s/ Lynn Powers - -------------------------------- 31 EX-3.1 3 AMENDED AND RESTATED ARTICLES OF INCORP OF GAIAM 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 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 2 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. 3 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 4 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. 5 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. 6 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 7 EX-3.2 4 AMENDED AND RESTATED BYLAWS 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 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 2 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 3 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 4 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. 5 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; 6 (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. 7 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 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 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 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. 11 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 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 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 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 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. 16 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 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 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 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 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 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 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 EX-4.1 5 FORM OF GAIAM, INC. STOCK CERTIFICATE 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 _______________________________________________________ EX-5.1 6 OPINION OF BARTLIT BECK HERMAN PALENCHAR & SCOTT 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 EX-10.1 7 GAIAM, INC. 1999 LONG-TERM INCENTIVE PLAN 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. 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- (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- 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 -4- 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 -5- 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: -6- (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 -7- 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 -8- 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. -9- (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. -10- (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. -11- 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: -12- 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. -13- (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 -14- 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. -15- EX-10.2 8 AGREEMENT OF HEALING ARTS PUBLISHING LLC 9/14/98 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"). 1 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 2 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; 3 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. 4 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 5 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: 6 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 7 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 8 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; 9 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. 10 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. 11 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. 12 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; 13 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 14 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. 15 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 16 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. 17 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. 18 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 19 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. 20 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. 21 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 __________________________ 22 EX-10.3 9 SUBLEASE DATED SEPTEMBER 16, 1998 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. 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 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 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 EX-10.4 10 LEASE AGREEMENT DATED DECEMBER 18, 1997 EXHIBIT 10.4 OFFICE LEASE ORIX PRIME WEST BROOMFIELD VENTURE "LANDLORD" and TRANSECON, INC. "TENANT" TABLE OF CONTENTS ----------------- 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
i 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
ii 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
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 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 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 (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 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 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 5 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 6 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 7 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 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. 9 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 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 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 (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 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 14 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 15 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 16 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. 17 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 18 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. 19 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 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 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 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 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 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. 25 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 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 ARTICLE 30 RECORDING --------- 28 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 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 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 (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 (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 (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 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 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 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 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 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. 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 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 TENANT: TRANSECON, INC., a Colorado corporation By: ________________________________________ Name:_______________________________________ Title:______________________________________ 4 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 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 EX-21.1 11 SUBSIDIARIES OF GAIAM, INC. 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 EX-23.1 12 CONSENT OF ERNEST & YOUNG 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 EX-23.2 13 CONSENT OF WENDELL T. WALKER & ASSOCIATES 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 EX-23.4 14 CONSENT OF PAUL H. RAY 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 EX-27.1 15 FINANCIAL DATA SCHEDULE
5 YEAR YEAR DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1998 JAN-01-1998 JAN-01-1997 1,409,939 1,611,793 1,633,905 38,333 2,671,188 406,772 67,915 31,000 3,393,712 1,648,083 11,082,510 4,779,555 2,078,610 1,659,159 998,916 562,271 16,676,512 5,984,567 11,163,987 4,343,768 0 0 0 0 0 0 821 805 3,660,314 1,573,606 16,676,512 5,984,567 30,738,540 19,897,690 30,738,540 19,897,690 13,173,536 8,462,151 16,580,161 12,002,028 (696,992) (1,820,034) 0 0 308,501 236,699 1,373,334 1,016,846 251,955 362,534 0 0 0 0 261,598 0 0 0 859,781 654,312 .11 .08 .11 .08
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