AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULYJUNE 20, 19992001
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________----------------
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
Colorado 5961, 7375 84-111-35-27
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
360 INTERLOCKEN BLVD., SUITE 300
BROOMFIELD, COLORADO 80021
(303) 464-3600222-3600
(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) 464-3600222-3600
(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----------------
Copies to:
Thomas R. Stephens, Esq. Richard R.Plumridge, Esq.
Polly S. Swartzfager, Esq. John E. Hayes III, Esq.
Bartlit Beck Herman Palenchar & SCOTT DORSEYScott Brobeck, Phleger & WHITNEYHarrison LLP
511 16TH STREET, SUITE 7001899 Wynkoop Street, 8/th/ Floor 370 17TH STREET, SUITE 4400
DENVER, COLORADOInterlocken Blvd. Suite 500
Denver, Colorado 80202 DENVER, COLORADO 80202
TELEPHONE: 303-592-3100 TELEPHONE: 303-629-3400
FACSIMILE: 303-592-3140 FACSIMILE: 303-629-3450Broomfield, Colorado 80021
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. [_]
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. [_]
CALCULATION OF REGISTRATION FEE
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- --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Title of Each Proposed Proposed
Class of Maximum Maximum
Securities to Bebe Amount to be Proposed Maximum Proposed MaximumOffering Price Aggregate Amount of
Registered Registered (1) Offering Price Per Share Aggregate(2) Offering Price Registration Fee
- ------------------- -------------- ------------------------ ------------------------ -------------------------------------------------------------------------------------------------------------------------
Class A Common Stock 2,300,000 $5.00 $11,500,000 $3,197common 2,530,000 shares $14.32 $36,229,600 $9,057.50
stock
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------____________
(1) Includes shares of class A common stock on which the underwriters have the
option to purchase to cover over-allotments, if any.
________________(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) of the Securities Act of 1933, as
amended, and based on the average of high and low sales prices of the Class
A Common Stock as reported on the Nasdaq National Market on June 15, 2001.
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
==============================================================================
2,000,000SUBJECT TO COMPLETION, DATED JUNE 20, 2001
2,200,000 Shares of
Class A Common Stock
$5.00 per share
[LOGO OF GAIAM]
==============================================================================
Gaiam is[Gaiam logo]
GAIAM
We are offering 2,000,0002,200,000 shares of itsour class A common stock. Our class A common
stock in an
initial public offering at $5.00 per share. Gaiam provides information, goods
and services to customers who value the environment, a sustainable economy,
healthy lifestyles and personal development
This is our initial public offering. Currently, no public market for our
shares exists. We will apply for quotation of our shareslisted on the Nasdaq National Market under the symbol "GAIA." We intend to allocate shares first to our customers and then toOn June
15, 2001, the general
public. Our customers will receive a 10% discount from the initial public
offering price (or alast reported sale price of $4.50 per share)our class A common stock on up to 200 shares per customer.
The minimum order sizethe Nasdaq
National Market as $14.17.
Investing in this offering is 50 shares.
- ------------------------------------------------------------------------------our common stock involves risks. See "Risk Factors" beginning on page __5.
Per
Share Total
----- -----
Public offering price:............................ $ $
Underwriting discounts and commissions:........... $ $
Proceeds to read about certain factors
you should consider before buying our shares.
- ------------------------------------------------------------------------------
Per Share Total
--------- ------------
Public offering price: $ 5.00 $ 10,000,000
Underwriting discounts and commissions: $ ____ $ __________
Proceeds to Gaiam $ ____ $ __________
TheGaiam:................................ $ $
We have granted the underwriters have ana 30-day option to purchase an additional 300,000up to 330,000
shares from Gaiamof our class A common stock for resale to cover any over-allotments. The closing of thisthe public at the $
offering is
expected to occur on or about October __, 1999.
- ------------------------------------------------------------------------------price per share.
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, HARKNESSTucker Anthony Sutro Adams, Harkness & HILL, INC.Hill, Inc.
Capital Markets
The date of this prospectus is June , 2001.
[Pictures of Gaiam products]
TABLE OF CONTENTS
Page
Page----
Prospectus Summary ............................... Our Business ...........................
Questions and Answers for Gaiam Customers ........ Management .............................Summary....................................... 1
Risk Factors ..................................... Certain Transactions ...................Factors............................................. 5
Forward-Looking Statements............................... 11
Use of Proceeds .................................. Gaiam Shareholders .....................
Capitalization ...................................Proceeds.......................................... 11
Price Range of Common Stock.............................. 12
Dividend Policy.......................................... 12
Capitalization........................................... 13
Selected Consolidated Financial Data..................... 14
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 16
Our Business............................................. 23
Management............................................... 31
Certain Relationships and Related Transactions........... 35
Principal Shareholders................................... 37
Description of Capital Stock ...........
Dilution .........................................Stock............................. 39
Shares Eligible for Future Sales .......
SelectedSale.......................... 41
Underwriting............................................. 43
Legal Matters............................................ 45
Experts.................................................. 45
Where You Can Find More Information...................... 45
Index to Financial Data .......................... Underwriting ...........................
Management's Discussion and Legal Matters ..........................
Analysis of Financial Condition Experts ................................
and Results of Operations .................... Additional Information .................Statements............................ F-1
You should rely only on the information contained in this prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted.
(i)
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. Because this is only a summary, it does not contain all the
information that you should consider before buying shares in this offering. You
should read the following summary, together with the more detailed
information and Gaiam'sentire prospectus carefully, including our consolidated
financial statements and the related notes appearingincluded elsewhere in this
prospectus.
To understand concepts that are key to
Gaiam please see the back cover of this prospectus.
[LOGO OF GAIAM APPEARS HERE]
Founded in Boulder, Colorado in 1988, Gaiam (pronounced "gi am") is a providerlifestyle company providing a broad selection of
goods,information, products and services and information to customers who value the environment, a
sustainable economy, healthy lifestyles and personal development.
Our name, Gaiam, is a fusion of the words "Gaia" and "I am." On the Isle of
Crete in ancient Greece 4,000 years ago, the Minoan civilization honored Gaia,
mother Earth. 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. This view is shared by over 90% of an emerging group of individuals
called cultural creatives, /1/ the market segment identified by shared values of
authenticity, environmental awareness, healthy lifestyles andnatural health,
personal development numbering 50 million inand renewable energy. We offer our customers the United States alone.
Our 800,000 customers, most of whom are cultural creatives, place a high value
on goods and services that promote healthy living and personal development,
contributeability to the sustainability of the Earth's natural resources, and enhance
the quality of the environment. Our customers increasingly
make purchasing decisions based on these values while striving to provide
products at prices comparable to conventional alternatives. Our direct customer
base is 80% female and 70% college-educated, has a median age of 44 and has an
average annual household income of approximately $60,000.
The Gaiam lifestyle brand was built around our ability to continuously
develop content that establishes Gaiam as an authority in additionthe Lifestyle Of
Health And Sustainability (LOHAS) market. Our content provides solutions that
improve quality of life, promote personal development and protect the
environment. It also forms the basis of our proprietary products, on which we
realize our highest margins, and drives demand for parallel product and service
offerings. We sell our content in the form of television broadcasts, on-demand
visual media programming, DVDs, videotapes, music CDs, books and other media. We
also provide content through our catalogs, on the internet, at point of purchase
and as part of the packaging for our products. Our content together with the
Gaiam brand creates barriers to performanceentry for competitors.
We market our products and price.services direct-to-consumers and business-
to-business through five sales channels: our catalogs, the internet, retailers,
media and corporate accounts. Our products are sold by leading retailers
including lifestyle stores such as Discovery Channel Stores and The Walking
Company; women's beauty stores such as Ulta and Origins; sporting goods chains
such as Sports Authority and Big 5; home furnishing stores such as Bed, Bath and
Beyond; natural food stores such as Whole Foods Market; book stores such as
Borders and Barnes & Noble; music stores such as Musicland and Wherehouse Music;
sporting good stores such as Dick's and mass merchants such as Target, Kohl's
and Wal-Mart; and e-tailers such as Amazon.com. A number of our retailers
display our products in store-within-a-store Gaiam lifestyle shops. We offer
our customersbelieve
we have an opportunity to "vote with their dollarsbecome the single source solution for their values" with
an interactive forum, as well asLOHAS products
for our retail accounts. Our media channel includes television broadcast, on-
demand visual media programming coverage to more than 600,000 hotel rooms in
North America, video streaming, video tapes, DVDs and three music labels. Our
media partners include the Discovery Channel, Universal Studios and On Command.
Our corporate account customers include The White House, NASA, Disney, Sony,
AT&T, Mercedes Benz, the U.S. Departments of Energy and Defense and the
Government of Brazil. We distribute our products in each of these sales channels
from a single fulfillment center.
Gaiam has a highly centralized, scaleable business model. Gaiam's
operations are vertically integrated from content creation, through product
development and sourcing, to customer service and fulfillment.
The LOHAS market, which represented $227 billion in sales in 2000
according to Natural Business Communication, consists of five main sectors:
. Sustainable Economy. Renewable energy, energy conservation, recycled
goods, environmental management services, sustainable manufacturing
processes and related information and services.
. Healthy Living. Natural and organic foods, dietary supplements,
personal care products and related information and services.
. Alternative Healthcare. Health and wellness solutions and alternative
health practices.
1
. Personal Development. Solutions, information, products and services alignedexperiences
relating to mind, body and spiritual development.
. Ecological Lifestyles. Environmentally friendly cleaning and household
products, organic cotton clothing and bedding, and eco-tourism.
Gaiam provides lifestyle product solutions for all segments of the
LOHAS market. We offer solutions for a sustainable economy such as renewable
energy systems, energy efficient lighting and products made from recycled
materials; healthy living solutions such as nutrition content, air and water
filters and personal care items; alternative healthcare solutions such as back
and neck care products, stress relief and wellness information; personal
development solutions such as mind-body fitness information, fitness accessories
and performance wear; ecological lifestyle solutions such as natural cleaners,
organic cotton bedding and bath products and organic cotton clothing.
We intend to pursue the following strategic initiatives in order to
continue to grow our business and serve the LOHAS market:
. Strengthen Our Lifestyle Brand
. Capitalize on Our Multi-Channel Approach
. Expand Our Proprietary Product Selection
. Broaden Our Content Through Growth of Gaiam Media
. Complement Our Business with these values. We call this "conscious commerce."Selective Strategic Acquisitions
From 1996 to 1998,2000, our revenues increased from $14.8 million to $30.7 million,
representing a compound annual growth rate of approximately 44%.$60.6
million. Our number of
unique individual customersdirect customer file has increased from 300,000 at the end of 1996
to 685,000approximately 1.7 million at the end of May 2001. Our retailer channel grew
from its inception in 1998 and to 800,00025,500 stores at June 30, 1999. Our growththe end of May 2001.
The name Gaiam is in
part the result of consumers, led by the emerging cultural creatives,
increasingly practicing conscious commerce.
_____________________________
/1/ The Integral Culture Survey, authored by Paul H. Ray, who has since agreed
to join our board of directors
3
We believe the emergence of conscious commerce is defining a new industry. We
have named this industry "Lohas" -- an acronym for Lifestyles Of Health And
Sustainability. Five segments shape the Lohas industry:
Sustainable Economy. This segment 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 segment includes food supplements, vitamins and
minerals, natural and organic foods, and natural and personal body care and
information and services related to these products.
Alternative Healthcare. This segment includes natural health and wellness
solutions, information, products and services, including alternative,
noninvasive treatments, massage, chiropractic, acupuncture, acupressure,
biofeedback and aromatherapy.
Personal Development. This segment includes experiences, solutions,
products, information and services relating to mind-body-spirit fitness,
meditation, relaxation, spirituality, ancient religions, esoteric sciences
and realizing human potential.
Ecological Lifestyles. This segment includes information, products and
services that offer environment-friendly solutions, natural untreated fiber
products and eco-tourism.
We believe that we are the first company to recognize that these segments share
a common customer base and should be viewed collectively as one industry. We
believe that the annual salesfusion of the Lohas industry may approach $200 billionwords "Gaia," the name for Mother
Earth in the United Statesancient Greece, and $500 billion worldwide by 2000. This industry is
fragmented, with no market leader."I am." Gaiam seeks to establish itself as the leading authority, brand namewas founded in Boulder, Colorado and
information resource in the growing Lohas industry. 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 offerings in the Lohas industry.
Gaiam currently produces and markets information, goods and services in each
segment of the Lohas market. We are presently organized as three strategic
brands: Harmony targets the Sustainable Economy and Ecological Lifestyles market
segments, Living Arts targets the Personal Development segment, and InnerBalance
targets the Alternative Healthcare and Healthy Living market segments.
We are forming an online community of consumers who are concerned about personal
and planetary health and sustainability and want to use their purchasing
decisions to effect positive change. We view the Internet as an opportunity to
enhance our personal relationships with our customers and dramatically reduce
our consumption of natural resources. We are creating a community platform for
sharing information, solutions and experiences to promote interactive feedback.
We believe cultural creatives want advice from a trusted source. They desire a
personalized, concise and reliable view into the vast and inconsistant universe
of information.
We believe that we are in a unique position to provide this service because of
our customers' loyalty and participation. In an extensive customer survey, we
achieved a 52% response rate, in comparison with typical customer survey
response rates of less than 2%.
4
We are positioned to provide information, products and services to all five
Lohas segments. See "Our Business," page __. We intend to pursue the following
strategies to benefit our customers:
. Focus on Our Online Presence
We are building an interactive online community for customers to share
experiences, access information and provide them with an opinion forum and
conscious commerce.
. Strengthen Our Brand
We intend to set the standards for the Lohas industry with a Gaiam approval
and recommendation process, based on independent research and customer
feedback.
. Pursue Strategic Acquisitions
We believe that the Lohas industry is highly fragmented, with no market
leader, and we seek to pursue acquisitions that meet our values, strategic
focus and economic criteria.
. Develop Business-to-Business Opportunities
Gaiam intends to allocate substantial resources to expand its business-to-
business segment to provide information, products and services that promote
personal and planetary health and economic sustainability.
We believe our current competitive strengths are:
. Focus on growing market segment
. Experienced management team
. Exceptional customer service
. Distinctive branded products
. Efficient operating model
. Multiple distribution channels
. Established infrastructure
. Acquisition experience
- --------------------------------------------------------------------------------
We believe customers should have special opportunities to invest in companies
they are helping create. In our offering, we will give preference in
allocating shares to our customers and a 10% discount
for purchases of up to 200 shares.
- --------------------------------------------------------------------------------
Corporate Overview
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 Offering222-3600.
2
THE OFFERING
Class A common stock offered by Gaiam .................. 2,000,000Gaiam.................... 2,200,000 shares
Class A common stock outstanding after this offering ... 3,496,429 shares /(1)/offering..... 8,163,137 shares(1)
Class B common stock outstanding after this offering ... 7,035,000offering..... 5,400,000 shares
Total common stock outstanding after this offering ..... 10,531,429offering....... 13,563,137 shares
Use of proceeds ........................................proceeds....................... Working capital and other general
corporate purposes, including
the
repayment of debtindebtedness,
expansion of sales channels, new
product launches and acquisitions.
See "Use of Proceeds" and "Our
Business."
Proposed Nasdaq National Market symbol .................symbol......... GAIA
/(1)/__________________
(1) Based on the number of shares outstanding on June 30, 1999.May 31, 2001. Excludes
approximately 650,0001,494,318 shares issuable upon exercise of options and warrants outstanding as
of June 30, 1999, eachMay 31, 2001, at an average exercise price of $4.375$7.72 per share. No
options are currently exercisable. See
"Management."
5
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 theits
class A common stock. The information on our website, including any online
discussion forums, and in our catalogs and other marketing materials is not part
of this prospectus. References in this prospectus to "Gaiam," "we," "our" and
"us" refer to Gaiam, Inc., and our wholly- and majority-owned subsidiaries 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. The first 200 shares purchased by each Gaiam customer will be discounted
10% and cost $4.50 per share, or a total of $900 for 200 shares. 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 you 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.
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. You must fill out an account application to open a brokerage account at
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.
Q. When do I send a check?
A. As soon as possible, because timeliness of your check and paperwork is one
of the criteria we will use to allocate shares. You 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 close of business on __________, __ 1999. By that date, your check and
your completed paperwork must be received by Tucker Anthony Cleary Gull, 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 you by check
promptly unless you direct Tucker Anthony Cleary Gull otherwise.
Q. Will I receive a stock certificate?
A. Yes. If you do not want a stock certificate, you can contact Tucker Anthony
Cleary Gull. All participants will automatically receive a stock
certificate for shares purchased at $4.50 per share.
Q. Whom do I call if I have questions?
A. Call Tucker Anthony Cleary Gull toll free at 1-877-IPO-GAIA (1-877-476-
4242).
73
SUMMARY CONSOLIDATED FINANCIAL DATA
(Amounts in(in thousands, except per share data)
The following table summarizes the consolidated financial data of our
business. SeeYou should read the summary consolidated financial data below in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The financial results as of March 31, 1999 and for the three months
ended March 31, 1998 are unaudited.
Three Months Ended
Year Ended December 31, Ended March 31,
----------------------- ---------------
1996 1997 1998-------------------------------------------------------------------------------------
1998 1999 ---- ---- ---- ---- ----2000 2000 2001
(Unaudited)
Statement of Operations Data:
Net revenues....................... $14,801 $19,898revenues $30,739 $5,300 $9,495$45,725 $60,588 $12,558 $17,672
Gross profit....................... 8,039 11,436profit 17,565 3,012 5,63927,549 36,795 7,636 10,824
Other income (expense)............. 2,984 1,583 388 (60) 52606 (283) (123) 68
Net income after minority interest. $ 340 $ 654 $interest/(1)/ 860 $ 24 $ 106
======= ======= ======= ====== ======1,718 2,649 203 419
Net income per share
(basic)....... $ 0.04 $ 0.08Basic $ 0.11 $ 0.000.20 $ 0.010.24 $ .02 $ .04
Diluted $ 0.11 $ 0.19 $ 0.23 $ .02 $ .04
Shares outstanding................. 8,040 8,040outstanding (basic) 8,073 8,040 8,2158,785 10,858 10,846 11,206
Shares outstanding (diluted) 8,119 9,119 11,525 11,505 11,563
March 31, 1999
-----------------------------------------------------------------
PRO PRO FORMA,/(2)/2001
(Unaudited)
------------------------
Actual FORMA/(1)/ AS ADJUSTED
------ ----------As Adjusted (2)
------- -----------
Balance Sheet Data:
CashCash............................................................ $ 421 $ 1,796 $ 7,846
Securities available-for-sale (/1)/ 1,375 1,375 1,3756,374 $24,742
Working capital 1,369 2,744 9,294capital................................................. 11,312 33,161
Total assets 14,991 16,366 22,416assets.................................................... 59,118 77,486
Long-term debt (net of current maturities) 1,670 1,670 720............................. ................... 6,780 261
Stockholders' equity/(1)/ 3,686 5,061 12,061equity............................................ 22,168 50,536
___________________________
/1)/ Gives effect__________
(1) Net income after minority interest includes net income of consolidated Gaiam
operations, excluding that portion attributable to the private placement duringminority shareholders'
interest in the second quarternet income or loss in the consolidated subsidiary, net of 1999 of
$1,350,000 of debentures and 314,286 shares at $4.375 per share. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources."
/(2)/tax.
(2) Gives effect to the sale by Gaiam of 2,000,0002,200,000 shares at an assumed initial public
offering price of $5.00$14.17 per share, after deducting the estimated underwriting
discount customer discounts and offering expenses payable by Gaiam.Gaiam and application of the net
proceeds for repayment of $6.5 million of long-term debt (at March 31, 2001)
from the proceeds of this offering. (Gaiam intends to use an additional $3.5
million in proceeds from this offering to repay debt incurred subsequent to
March 31, 2001.) See "Use of Proceeds" and "Capitalization."
84
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. The risks and uncertainties described below
are not the only ones we face. Some additional risks and uncertainties are ones
we do not currently think are material. Others are simply matters of which we
are not aware. 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.
The markets forWe may not be able to compete successfully against our current and future
competitors.
Our goal is to establish ourselves as the products andmarket leader in the services offered by Gaiam are competitive.
Gaiam believesLOHAS market
industry. We believe that the LohasLOHAS market has thousands of small, local and
regional businesses, most of which have revenues of less than $20 million. Gaiam believes
that somebusinesses. Some smaller businesses may be able to more effectively
personalize their relationships with customers. To becustomers, thereby gaining a competitive
advantage. Although we believe that we do not compete directly with any single
company with respect to our entire range of merchandise, within each merchandise
category we have competitors and may face competition from new entrants. Some of
our competitors or 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 competitors.
Increased competition from these businesses, Gaiam
must developor other competitors could negatively impact
our business.
Changing consumer preferences and general economic conditions may have an
adverse effect on our business.
Our business is targeted at consumers who assign high value to healthy
lifestyles, personal development, renewable energy and the same trust with its customersenvironment. A
decrease of consumer interest in purchasing goods and services that local businesses develop. Wepromote the
values we espouse would materially and adversely affect the growth of our
customer base and sales revenues and, accordingly, our financial prospects.
Further, consumer preferences are difficult to predict. Our future success
depends in part on our ability to anticipate and respond to changes in consumer
preferences and we may not be ablerespond in a timely or commercially appropriate
manner to such changes. Failure to anticipate and as a resultrespond to changing consumer
preferences could lead to, among other things, lower sales of our business may not succeed.
Many of the companies that are potential competitors of Gaiam are largerproducts,
increased merchandise returns and have substantially greater resources than Gaiam. Such competition couldlower margins, which would have a material
adverse effect on Gaiam'sour business.
We may face quarterly and seasonal fluctuations that could harm our business.
Our revenue and results of operations have fluctuated and can be expected
to continue to fluctuate on a quarterly basis as a result of a number of
factors, including the timing of catalog offerings, recognition of costs or net
sales contributed by new merchandise and catalog offerings, fluctuations in
response rates, fluctuations in paper, production and postage costs and
expenses, merchandise returns, adverse weather conditions that affect
distribution or shipping, shifts in the timing of holidays and changes in our
merchandise mix. In addition, our net sales and profits have historically been
higher during the fourth quarter holiday season. We believe that this
seasonality will continue in the future. If, for any reason, our sales were to
fall below expectations during the fourth quarter holiday season, our financial
condition and results of operations would be adversely affected.
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
5
achieve healthy lifestyles and personal development or that, over time, we will
be able to reduce prices through volume purchases from our suppliers. If we are
unable to sustain price levels of these products, or to increase sales volume
to a level that would allow us to reduce our costs, our business operating results and financial
condition. See "Our Business--Our Competitive Position."
We will rely on Internetbe
adversely affected.
If the protection of our internet domain names to establishis inadequate, our brand.brand
recognition could be impaired and we could lose customers.
We currently hold various webinternet 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 relevantthe 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 Internetinternet domain names could adversely affect our
business.ability to develop brand recognition.
Our success depends on the value of the Gaiam brand, and if the value of our
brand were to diminish, our revenues, results of operations and prospects would
be adversely affected.
Because we are increasing our sales of proprietary products, our success
increasingly depends on the Gaiam brand and its value in the LOHAS market.
Building and maintaining recognition of the Gaiam brand is important to
attracting and expanding our customer base. We cannot be certain that our
marketing efforts or brands will attract new customers, retain existing
customers or encourage repeat purchases.
Acquisitions may harm our financial results, cause our stock price to decline,
or dilute our shareholders' interests.
Acquisitions have been part of our growth and may continue to be part of
our growth in the future. In June 2000, Gaiam and Whole Foods Market, Inc., a
publicly-traded company, merged their internet properties into gaiam.com, Inc.
In January 2001, we acquired Real Goods Trading Corporation. We will
opportunistically evaluate acquisition opportunities and they may be part of our
growth in the future. 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 be able to make good acquisitions.
Completing acquisitions is one of the elements of our strategy, and Gaiam will
search for acquisition opportunities. However, there can be no assurance that
Gaiam will be successfulsucceed in
identifying attractive acquisitions in the Lohas
industry or that attractive acquisition candidates willmay 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. Gaiam's shareholders generally will not have a chanceAcquisitions may harm our operating results or cause our stock
price to review
the businessdecline because we may:
. issue equity or financial statementsequity-related securities that dilute our current
shareholders' percentage ownership or incur substantial debt or assume
liabilities of companies beingan acquired business;
. experience reduced earnings or adverse tax consequences by failing to
vote on
the acquisitions.
We depend upon our ability to integrate acquired companies.
Acquisitions have played an important role in building our business. Our
business may not succeed if we fail to integrate the operations of acquired
companies into our overall operations on a timely and economic basis. If we
complete an acquisition, we face a number of special risks, including the
diversion of management's attention, the possibility we may not be able toefficiently integrate the operations, assets and personnel of the
acquired companies the
possibilityin a timely manner, being required to amortize a
significant amount of material adverse effects on reported
9
operating results and material adverse tax consequences, the amortization of
acquired intangible assets acquired in an acquisition, or
otherwise; and
. divert management's attention from operating the lossbusiness.
Moreover, we may have difficulties integrating the operations, products and
personnel of key employees. Moreover, the companies we acquire. 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 success of future acquisitions is dependent on
our ability to effectively integrate the acquired companies' operations and
brands, including our ability to recognize potentially available marketing
synergies and cost savings, some of which may involve operational changes. If we
are not successful in integrating companies that we may acquire, our business
could be materially and adversely affected.
The loss of the services of our key executives and employees are critical topersonnel could disrupt our business.
The services of our officers, Jirka Rysavy, Lynn Powers and Pavel Bouska, Mark
Lipien and Linda West,
are critical to our business. We do not carry any key-man life insurance. 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 the key employees, particularly the e-commercesales and
creative teams, of the companies we might acquire.
Our success will also depend in significant part6
Government regulation and legal uncertainties could add additional costs to
doing business on the ability to continue to attract and retain qualified personnel.
Competition for qualified personnel is intense, particularly given the scarcity
of qualified and experienced management in e-commerce and the direct marketing
industry. The loss of the services of certain key employees, or the inability to
continue to attract and retain qualified personnel, could materially adversely
affect our business. See "Our Business--Our Employees" and "Management."
We may need to change the manner in which we conduct our business if government
regulation increases.internet.
E-commerce is new and rapidly changing. Federal and state regulation
relating to the Internetinternet and e-commerce is evolving. Currently, there are few
laws or regulations directly applicable to access to the Internetinternet or e-commerce on the
Internet. Due to the increasing popularity of the Internet, it is possible that
lawsinternet. Laws and regulations may be enacted with respect to the Internet,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 is subject to a number of governmental regulations, including the
Mail or Telephone Order Merchandise Rule and related regulations promulgated by
the Federal Trade Commission and regulations promulgated by 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.
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, which mayinformation. If legislation of this type were enacted, it would make it more
difficult for Gaiamus to obtain additional names for itsour distribution lists, and
restrict our ability to send unsolicited electronic mail or printed catalogs. See "Our Business--Regulatory Matters."
Ourcatalogs,
both of which could slow the growth may depend on the success of our e-commerce strategy.
The emergence of the Internetcustomer base.
If we cannot maintain and the growing popularity of electronic commerce
provides a new channel for direct access to consumers. Both the e-commerce
market and the Lohas market are competitive. Since the introduction of e-
commerce to the Internet, the number of e-commerce websites competing for
customer attention has increased very rapidly. Gaiam expects future competition
to intensify given the relative ease with which new websites can be developed.
Gaiam believes that the
10
primary competitive factors in e-commerce are brand recognition, reputation,
site content, ease of use, price, fulfillment speed, customer support and
reliability. Gaiam's success in e-commerce will depend heavily upon its ability
to continue to provide a compelling and satisfying shopping experience. Other
factors that will affect Gaiam's success include Gaiam's 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. See "Our
Business--Our Competitive Position."
To remain competitive, Gaiam must continue to enhance and improve the
responsiveness, functionality and features of its online technology. The
Internet and the e-commerce industry are subject to rapid technological change,
changes in user and customer requirements and preferences, frequent new product
and service introductions embodying new technologies, and the emergence of new
industry standards and practices that could rendercontinually update 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 increasingly sophisticated and
varied needs of our existing and prospective customers and our ability to
respond to technological advances and emerging industry standards and practices
on a cost-effective and timely basis.
The development of a website and other proprietary technology entails
significant technical, financial and business risks. If Gaiam is unable, for
technical, legal, financial or other reasons, to adapt in a timely manner in
response to changing market conditions or customer requirements,information systems, our
business could be materially adversely affected. Further, the adoption of new Internet,
networking or telecommunications technologies may require us to devote
substantial resources to modify and adapt our services.
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. With this technology, we perform
real-time credit card authorization and verification with our bank. We cannot
predict whether events or developments will result in a compromise or breach of
the technology that we use to protect a customer's personal information. If, as
a result, we lose customers, our sales could decrease.
Although our historical sales have been predominantly through catalogs and
retailers, we are shifting our sales to the Internet and we intend to make the
Internet our primary channel of distribution. As a result of the factors
described above, it cannot be certain that our Internet business will succeed.
We depend on sophisticated management information systems.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). IfAs our business grows we cannot maintain and continuouslywill need to
continually update these systems. Furthermore, if we acquire other companies, we
will need to integrate the acquired companies' systems with ours, a process that
could be time-consuming and costly. If our systems cannot accomodate our growth
or fail, we could incur substantial expenses.
Although we are a multi-channel company, the internet is an important sales
channel for us. The development of a website and other proprietary technology
entails significant technical, financial and business risks. We have spent
approximately $5.5 million in the development of our websites to date to
introduce several new website features. 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. Our
success in e-commerce will depend upon our ability to continue to provide a
compelling and satisfying shopping experience. To remain competitive, we must
continue to enhance and improve the responsiveness, functionality and features
of our online technology.
A material security breach could suffer. See "Our Business--Information
Technology" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000."
Furthermore,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 11
protect against a security breach or
to alleviate problems caused by any breaches. We cannot assureOur relationships with our
customers may be adversely affected if the security measures that we canuse to
protect 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 maintain a single call center in Broomfield, Colorado. We are dependent
on our ability to maintain our computer and telecommunications equipment in this
center 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
7
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. Whilecustomers for limited periods of time. Although 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, anysubstantial damage failureto our systems or delaya systems failure that causes
interruptions in Gaiam's
operationsfor a number of days could adversely affect our business.
ManyAdditionally, if we are unsuccessful in updating and expanding our
infrastructure, including our call center, our ability to grow may be
constrained.
We may face legal liability for the content contained 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 materials that we publish or distribute on our website. If we are
held liable for damages for the content on our website, our business may suffer.
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 are small businesses.may not be able to supply us with merchandise in a timely manner,
which could cause us to lose sales.
To successfully operate our business, we must receive timely delivery of
merchandise from our vendors and suppliers, many of which are small businesses.
These businessesprivate
companies. As we grow, some of these vendors may not have sufficient capital,
resources, or personnel to increase their sales to us or 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 contractualfailure of third parties to provide an
adequate level of service could decrease our revenues and legal rights of minority equity holders may adversely affect
Gaiam.
Gaiam owns 67% of Living Arts, and the previous owners continue to own the
remaining 33%. Because of the fiduciary duties that Gaiam may owe to the
minority equity holders in Living Arts, and the contractual protections that
these equity holders have, 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 contract provisions. We could also have similar issues arising in
future acquisitions in which Gaiam acquires less than the entire equity interest
in a company.
We are subject to the risks of a business marketing directly to individual
customers and to business customers.
Production and marketing of a particular product offering involves significant
expenses, which cannot be adjusted based upon the actual performance of the
offering. In addition, direct marketing operations involve relatively high
costs-such as costs for merchandise, order-processing, fulfillment, merchandise
returns and management information systems - which also are difficult to adjust
in a limited time period. Moreover, the successful operation of a direct
marketing business is dependent upon the timely and efficient preparation and
distribution of product offerings.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 our principal 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.
12
The success of our business reliesRelying on the operation of our centralized fulfillment center.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 all of our fulfillment functions
and othersome customer-service related operations, such as
8
returns processing. Approximately 90% of our orders are filled and shipped from
the Cincinnati facility. The balance areis shipped directly from suppliers. Because
we rely on a single centralized fulfillment center, our fulfillment functions could be
severely impaired in the event of fire, extended adverse weather conditions, or
natural disasters. Because we recognize revenue only when we ship orders,
interruption of our shipping would diminish our revenues.
Our business is exposed to changing consumer preferences and general economic
conditions.
Our success depends on our ability to anticipate and respond to changes in
customer preferences and to educate customers to accept our product offerings.
We may notcosts could be able to respond in a timely or commercially appropriate manner to
such changes.
In addition, our business is sensitive to changes in customers' spending and
discretionary income patterns which, in turn, are controlled to a large extentincreased by customer confidence and prevailing economic conditions. If we do not
anticipate and respond to changing customer preferences or adverse economic
conditions, our revenues would decrease, and we could experience significant
markdowns or write-offs of inventory, increased merchandise returns, and lower
margins, all of which would materially adversely affect our business.
We are subject to risks of overstocks and merchandise returns.returns, as well as
by our strategy of offering branded products.
An important part of our strategy is to feature "branded"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 higherlonger initial purchase commitments.
In addition, the use of branded merchandise will limitlimits 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,
willmay materially adversely affect our business.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 willmay 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 materially adversely affect our business. See "Our
Business--Our Customer Service."
Collection of state salesbe negatively affected if we are required to charge additional
taxes could affect our business.on purchases.
We generally collect sales taxes on our internet and catalog sales only
on sales to residents of the state of Colorado and where we have other
locations,locations. We currently collect sales taxes on internet and catalog sales in
Colorado, California and Ohio. Federal laws currently limit the imposition of
state and local taxes on Internet-relatedinternet-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, 13
as well as a Congressional advisory commission,
are reviewing appropriate tax treatment for companies engaged in e-commerce.
Any additional laws or
regulationsSuch proposals, if adopted, could substantially impair the growth of e-commerce
and could adversely affect us.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, suchthese obligations would
make it more expensive to purchase our products and would increase our
administrative costs. These changes would materially adversely affect our business. In
addition,Audits by state tax authorities could choose to audit us. An audit 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.
See "Our Business--
Regulatory Matters."
Existing shareholders will control Gaiam.
After this offering,9
Postage and shipping costs may increase and therefore increase our expenses.
We ship our products, catalogs, and lifestyle publications to consumers and the
cost of shipping is a material expenditure. Postage and shipping prices increase
periodically and can be expected to increase in the future. Any inability to
secure suitable or commercially favorable prices or other terms for the delivery
of our merchandise and catalogs could have a material adverse effect on our
financial condition and results of operations.
Our founder and chief executive officer Jirka Rysavy Gaiam's Chairman, founder and Chief Executive
Officer, will holdcontrols Gaiam.
Mr. Rysavy holds 100% of theGaiam's 5,400,000 outstanding classshares of Class B
common stockstock. The shares of classClass B common stock are convertible into classshares of
Class A sharescommon stock at any time. Each share of classClass B common stock has ten
votes per share, and the classeach share of Class A shares havecommon stock has one vote per share. Assumingshare,
although pursuant to a voting agreement between Gaiam and Mr. Rysavy's plannedRysavy, the Class
B common stock is limited to 49% of the total votes and all shares over this
percentage are voted proportionately with the Class A common stock. Mr. Rysavy
also owns 2,686,200 shares of Class A common stock and options to purchase
400,000 shares of an additional 100,000Class A common stock (of which options to purchase 64,000
shares of common stock are exercisable within 60 days). After giving effect to
the issuance of Class A common stock in thisthe offering, heMr. Rysavy will
beneficially own approximately 77%59.8% of the outstanding shares of Gaiam common
stock, assuming Mr. Rysavy's classClass B common stock was converted into shares.Class A
common stock. In addition, he will also have approximately 96.7%65.8% of the total
votes. As a result, Mr. Rysavy will be able to exert substantial influence over
Gaiam and to effectively control matters requiring approval by the shareholders of Gaiam,
including the election of directors, increasing our authorized capital stock,
our dissolution, the merger or sale of our assets and preventingthe general affairs of
Gaiam. This control by Mr. Rysavy may discourage transactions involving a change
inof control of Gaiam.
See "Our Shareholders."
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, then 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."
14
Fluctuations in our quarterly operating results may negatively affect our stock
price.
Quarter-to-quarter comparisons of our results of operations are not a reliable
indicator of our future performance. It is possible that in some future periods
our results of operations may be below the expectations of public market
analysts and investors. In this event, the price of our class A common stock may fall.
As a result,be subject to wide fluctuations and
may trade below the offering price.
The market price of our shares after the offering may vary from timethe
offering price and could be subject to timewide fluctuations in response to factors
such as the future issuance of shares as well as the following factors that are
beyond our futurecontrol:
-- quarterly variations in our operating results;
-- operating results may not
meetthat 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 investors, which may have a
material adverse effect on theproceedings
against us;
-- strategic moves by us or our competitors, such as acquisitions or
restructurings; and
-- stock market price of our stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Selected Quarterly Results."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
prevailing market price for our shares and impair our ability to raise equity capital in
the future. Immediately after this offering 8,163,137 shares of class A common
stock and 5,400,000 shares of class B common stock (which are immediately
convertible into 5,400,000 shares of class A common stock) will be outstanding.
Of this number, approximately 4,500,000 shares will be freely tradeable, and
approximately 3,700,000 additional shares of class A common stock and all shares
of class
10
B common stock are eligible for sales under Rule 144 of the Securities Act.
Please see "Shares Eligible for Future Sale."
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve riskrisks and
uncertainties. These statements refer to our future plans, objectives,
expectations and intentions. We use words such as "anticipates," "believes,"
"plans," "estimates," "expects," "future," "intends""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. All forward-looking statements are based on current information we
have, and we assumeWe undertake no obligation to update any forward-looking statements.forward-
looking information.
USE OF PROCEEDS
The net proceeds to Gaiam from the sale of the shares in this offering are
estimated to be $7.5approximately $28.5 million, giving effect to the sale by Gaiam
of 2,200,000 shares at an assumed public offering price of $14.17 per share and
after deducting the estimated underwriting
discount, customer discounts and offering expenses
payable by Gaiam.
We intend to use approximately $10 million of the net proceeds of the
offering to reduce the amount outstanding under our Wells Fargo Bank West N. A.
revolving line of credit and to repay debt we assumed in connection with the
Real Goods Trading Corporation merger. Our revolving line of credit extends
through June 30, 2003 and bears interest at the lower of prime rate less 0.5% or
LIBOR plus 2.75%.
We plan to use the remaining proceeds to fund expansion of our media
channel, launch new products and for working capital and general corporate
purposes. We may also use a portion of the net proceeds to make 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 for working capital and general
corporate purposes, including repayment of debt and acquisitions. A portion of
the net proceeds from this offering will be used to promote our brands and
expand our sales and marketing efforts.in short-term, interest-bearing, investment-grade securities. Please
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Pending such uses,
we will invest11
PRICE RANGE OF COMMON STOCK
Our shares have been quoted on the net proceedsNasdaq National Market under the symbol
"GAIA" since October 29, 1999. Prior to that time, there was no public market
for the shares. The following table sets forth, for the period indicated, the
high and low bid prices per share of this offering in short-term, interest-
bearing, investment-grade securities.the shares as reported on the Nasdaq
National Market:
High Low
------ ------
1999
- ----
Fourth Quarter (commencing October 29, 1999).......... $18.25 $ 5.38
2000
- ----
First Quarter......................................... $19.00 $13.92
Second Quarter........................................ $24.69 $14.00
Third Quarter......................................... $19.00 $15.00
Fourth Quarter........................................ $18.25 $14.63
2001
- ----
First Quarter......................................... $15.75 $ 9.38
Second Quarter (through June 15, 2001) ............... $16.00 $ 9.40
On June 15, 2001, the reported last sale price of the common stock on the
Nasdaq National Market was $14.17. As of May 31, 2001, there were approximately
9,100 stockholders of record of Gaiam's class A common stock and one stockholder
of record of Gaiam's class B common stock.
DIVIDEND POLICY
Gaiam has never declared or paid any cash dividends on its capital stock.
GaiamWe currently intendsintend to retain earnings, if any, to support itsour growth strategy
and doesdo not anticipate paying cash dividends in the foreseeable future. In
addition, Gaiam'sour bank credit agreement prohibits payment of any dividends to Gaiamour
shareholders.
1512
CAPITALIZATION
The following table sets forth the capitalization of Gaiam as of March 31,
1999:
. On a pro forma2001 on an actual basis giving effect to the private placement of
$1,350,000 of debentures and 314,286 shares completed during the second
quarter of 1999; and
. On a pro forma basis, as adjusted to reflect the sale by Gaiam of
2,000,0002,200,000 shares in this offering at an initialassumed public offering price of $5.00$14.17
per share, after deductingless the underwriters' discounts and commissions and estimated
offering expenses, and the application of the estimated underwriting discount,
customer discount and offering expenses payable by Gaiam.net proceeds therefrom.
See "Use of Proceeds."
You should read this information together with Gaiam'sour consolidated financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
March 31, 1999
--------------
PRO
FORMA AS
ACTUAL PRO FORMA ADJUSTED2001
(Unaudited)
----------------------
Pro Forma
As
Actual Adjusted
------ --------- --------
(in thousands)
Long-term debt and capital leases, less current
portion $1,670 $1,670(1).............................................. $ 7206,780 $ 261
Stockholders' equity:
Class A Common Stock, $0.0001 par value;
92,965,000150,000,000 shares authorized and
1,182,1435,958,505(2) shares issued and outstanding
(actual); 1,496,4298,158,505 (2) shares outstanding
(pro forma); 3,496,429 shares
outstanding (pro forma as adjusted);............................................ 1 2 31
Class B Common Stock, $.0001$0.0001 par value;
7,035,00050,000,000 shares authorized and 7,035,0005,400,000
shares issued and outstanding (actual and pro
forma, pro forma as
adjusted) 1 1 1forma)................................................. - -
Additional paid-in capital 451 1,825 8,825
Accumulated other comprehensive income 827 827 827capital.............................. 15,486 43,854
Deferred compensation................................... (405) (405)
Retained earnings 2,406 2,406 2,406
------ ------ -------earnings....................................... 7,086 7,086
-------- --------
Total stockholders' equity 3,686 5,061 12,062
------ ------ -------equity............................ $ 22,168 $ 50,536
-------- --------
Total capitalization $5,356 $6,731 $12,782
====== ====== =======capitalization.................................. $ 28,948 $ 50,797
======== ========
______________________
/(1)/___________
(1) Gives effect to the repayment of $6.5 million of long-term debt from the
proceeds of this offering, which was outstanding as of March 31, 2001. Gaiam has
incurred approximately $3.5 million of additional long-term debt as of May 31,
2001, which shall also be repaid with the proceeds from this offering.
(2) Excludes an aggregate of approximately 650,0001,494,318 shares issuable pursuant to options
and warrants outstanding as of June 30, 1999.
16
DILUTION
The net tangible book value of Gaiam stock as of MarchMay 31, 1999 was $0.02 per
share. Net tangible book value represents the amount of Gaiam's total tangible
assets less total liabilities. Giving effect to the completion of Gaiam's
private offering of $1,350,000 in debentures and 314,286 shares during the
second quarter of 1999, pro-forma tangible net book value was $0.03 per share.
Pro forma net tangible book value per share is determined by dividing Gaiam's
pro forma tangible net worth by the number of shares outstanding after this
offering. Giving effect to the sale of the shares in the offering at a price of
$5.00 per share and after deducting the estimated underwriting discount,
customer discounts and offering expenses payable by Gaiam, pro forma net
tangible book value per share would have been $0.81 per share. This represents
an immediate increase in pro forma net tangible book value of $0.63 per share to
existing shareholders and an immediate dilution of $4.19 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/(1)/... 0.18
Increase per common share attributable to new investors.............. 0.63
----
Pro forma net tangible book value per common share after this offering.. 0.81
----
Dilution per common share to new investors.............................. $4.19
- -------------------------
/(1)/ After the private offering of $1,350,000 in debentures and 314,386 shares
but before this offering.
The following table summarizes, on a pro forma basis at March 31, 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 8,531,429 81.0% $ 1,828,043 15.5% $0.21
New Investors 2,000,000 19.0 $10,000,000 84.5 $5.00
---------- ----- ----------- -----
10,531,429 100.0% $11,828,034 100.0%
TOTAL ========== ===== =========== =====
This discussion and table assumes no exercise of outstanding stock options and
warrants, and no issuance of shares reserved for future issuance under Gaiam's
option plans. As of June 30, 1999, there were options outstanding to purchase a
total of approximately 650,000 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."
172001.
13
SELECTED CONSOLIDATED FINANCIAL DATA
The selected statement of operations for the years ended December 31, 1996, 19971998,
1999 and 19982000 and balance sheet data as of December 31, 1999 and 2000 set forth
below are derived from Gaiam's audited consolidated financial statements. The
audited consolidated financial statements include statements of operations for
the years ended December 31, 1998, 1999 and 2000, and balance sheets as of
December 31, 1999 and 2000. These financial statements appear elsewhere in this
prospectus. The selected statement of operations for the years ended December
31, 1996 and 1997 and balance sheet data as of December 31, 1996, 1997 and 1998
set forth below are derived from Gaiam's audited consolidated financial
statements, which appear
elsewhere in this prospectus.statements. The selected balance sheet data as of March 31, 19992001 and selected
statement of operations for the three-month periods ended March 31, 19982000 and
19992001 set forth below are derived from Gaiam's unaudited consolidated financial
statements as of March 31, 19992001 and for the three-month periods ended March 31,
19982000 and 1999,2001, 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. TheYou
should read the following selected consolidated financial 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.
1814
SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
Three Months
Year Ended Three MonthsDecember 31, Ended March 31,
---------------------------------------------------------------------
1996 1997 1998 1999 2000 2000 2001
------- ------- ------- ------- ------- ------- -------
(Unaudited)
Statement of Operations
Data:
Net revenues................. $14,801 $19,898 $30,739 $45,725 $60,588 $12,558 $17,672
Costs of goods sold.......... 6,762 8,462 13,174 18,176 23,793 4,922 6,848
------- ------- ------- ------- ------- ------- -------
Gross profit................. 8,039 11,436 17,565 27,549 36,795 7,636 10,824
Expenses:
Selling and operating...... 9,253 10,427 14,186 22,338 27,310 6,064 8,539
Corporate, general and
administration............. 1,218 1,575 2,394 3,087 5,057 1,116 1,550
------- ------- ------- ------- ------- ------- -------
Total expenses............. 10,471 12,002 16,580 25,425 32,367 7,180 10,089
------- ------- ------- ------- ------- ------- -------
Operating income
(loss)..................... (2,432) (566) 985 2,124 4,428 456 735
Other income
(expense)/(1)/............. 2,984 1,583 388 606 (283) (123) 68
------- ------- ------- ------- ------- ------- -------
Income before income
taxes and minority
interest................... 552 1,017 1,373 2,730 4,145 333 803
Income taxes................. (212) (363) (251) (1,063) (1,556) (125) (301)
Minority interest............ -- -- (262) 51 60 (5) (83)
------- ------- ------- ------- ------- ------- -------
Net income................... $ 340 $ 654 $ 860 $ 1,718 $ 2,649 $ 203 $ 419
======= ======= ======= ======= ======= ======= =======
Net income per share
Basic...................... $ 0.04 $ 0.08 $ 0.11 $ 0.20 $ 0.24 $ 0.02 $ 0.04
======= ======= ======= ======= ======= ======= =======
Diluted.................... $ 0.04 $ 0.08 $ 0.11 $ 0.19 $ 0.23 $ 0.02 $ 0.04
======= ======= ======= ======= ======= ======= =======
Shares outstanding
Basic...................... 8,040 8,040 8,073 8,785 10,858 10,846 11,206
Diluted.................... 8,040 8,040 8,119 9,119 11,525 11,505 11,563
December 31, March 31,
------------------------------------------------ ----------------------------
(unaudited)
Statement of
Operations Data: 1994 1995---------------------------------------------------------------------
1996 1997 1998 1998 1999 2000 2000 2001
---- ---- ---- ---- ---- ---- ----
Net revenues.............(Unaudited)
Balance Sheet Data:
Cash......................... $ 229 $6,696 $14,801 $19,898 $30,739 $5,300 $9,495
Costs of goods sold...... 179 2,943 6,762 8,462 13,174 2,288 3,856
------ ------ ------- ------- ------- ------ ------
Gross profit............. 50 3,753 8,039 11,436 17,565 $3,012 5,639
------ ------ ------- ------- ------- ------ ------
Operating expenses:
Selling and operating 5 3,281 9,253 10,427 14,186 2,629 4,576
Corporate, general and
administration......... 15 876 1,218 1,575 2,394 285 953
------ ------ ------- ------- ------- ------ ------
Total operating expenses 20 4,157 10,471 12,002 16,580 2,914 5,529
Operating income (loss) 30 (404) (2,432) (566) 985 98 110
Other income expense)380 $ 1,612 $ 1,410 $ 3,877 $ 8,579 $ 2,063 $ 6,374
Securities available-for-sale
/(2)/(1)/ (2) 1,029 2,984 1,583 388 (60) 52
------ ------ ------- ------- ------- ------ ------
Income before income
taxes and minority
interest................. 28 625 552 1,017 1,373 38 162
Income taxes............. 6 238 212 363 251 14 60
Minority interest................................ 56 4,828 1,634 -- -- -- --
262 -- (4)
------ ------ ------- ------- ------- ------ ------
Net income............... $ 22 $ 387 $ 340 $ 654 $ 860 $ 24 $ 106
====== ====== ======= ======= ======= ====== ======
Net income per share -
basic.................... $ 0.00 $0.05 $0.04 $0.08 $0.11 $0.00 $0.01
====== ====== ======= ======= ======= ====== ======
Net income per share -
diluted.................. $ 0.00 $0.05 $0.04 $0.08 $0.11 $0.00 $0.01
====== ====== ======= ======= ======= ====== ======
Shares outstanding -
basic.................... 8,040 8,040 8,040 8,040 8,073 8,040 8,215
Shares outstanding -
diluted.................. 8,040 8,040 8,040 8,040 8,119 8,040 8,394
December 31, March 31,
------------ ---------
Balance Sheet Data 1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
Cash $ 16 $ 419 $ 380 $1,612 $ 1,410 $ 933 $ 421
Securities available-for-sale/(2)/ 71 56 38 1,634 38 1,375
Working capital
(deficiency) 22 192............... (1,838) 4365,226 (81) 476 1,3695,911 15,269 2,290 11,312
Total assets 81 2,476assets................. 6,256 5,98510,774 16,677 5,659 14,99127,260 48,477 29,445 59,118
Long-term debt (net of
- -current maturities)........ 89 42 299 30 1,670
current maturities)
Stockholder's2,109 5,770 2,083 6,780
Stockholders' equity/(2)/ 59 580.... 920 1,574 3,661/(1)/ 1,599 3,6864,736 3,661 14,951 18,111 15,154 22,168
____________________________
(1)/(1)/ Other income in 1995, 1996, 1997, 1998 and 19981999 primarily reflects income from
sale of securities available-for-sale.
(2)/(2)/ Securities valued at cost in 1994, 1995, 1996 and 1997 and at fair market value in 1996, 1997 and 1998.
See Note 6 to the financial statements.
1915
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS'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.
This section
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" 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 statementOverview
Gaiam is a guaranteelifestyle company providing a broad selection 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. All forward-looking
statements are based on current information,
we have, and we assume no obligation
to update any forward-looking statement.
Overview
Gaiam provides information, goodsproducts and services to customers who value the
environment, a sustainable economy, healthy lifestylesnatural health, personal
development and personal development.renewable energy. Gaiam was incorporated in Boulder, Colorado in
1988 as a local distributor of earth-
friendly products.1988. In 1995, Gaiam began to expandexpanding nationally and makemaking acquisitions. In
1996, Gaiam made a large investment in infrastructure and operating systems to
support its rapid growth. In 1998, a team of key executives joined Gaiam to help
facilitate future growth. From 1996 to 1998,2000, our revenues increased from $14.8
million to $30.7 million, representing a compound annual growth rate$60.6 million.
Gaiam's business model is evolving as evidenced by the increase in the
percentage of approximately 44%,our revenues attributable to our business-to-business segment and
the launch of our number of unique individual customers increased from 300,000 to 685,000
over this period.internet channel. During 1998, Gaiam completed two acquisitions. We acquired 67% of Healing Arts
Publishing LLC, which does business as Living Arts, on September 14, 1998, and
100% of Inner Balance, Inc. on October 1, 1998. These acquisitionsbusiness-to-business revenues
accounted for approximately 40%13% of our revenues, duringwhile in 2000 this segment's
revenues increased to approximately 28% of total revenue. In addition, Gaiam's
gross margin continues to increase because we are developing more proprietary
merchandise, on which we have better margins, and negotiating better pricing
from our vendors due to volume discounts.
In June 2000, Whole Foods Market, Inc. and Gaiam merged their internet
properties into Gaiam.com, Inc. Gaiam owns 50.1% of Gaiam.com, Whole Foods
Market owns 35% and the remainder is owned by various venture capital funds.
Gaiam.com is the exclusive e-commerce site for both Gaiam and Whole Foods
Market. Whole Foods Market and Gaiam have also entered into a 10 year joint
marketing agreement to promote each other's business and share customer data.
The companies are presenting Gaiam's lifestyle products in a store-within-a-
store concept in Whole Foods Market's larger stores.
In January 2001, we acquired Real Goods Trading Corporation in a merger. In
the merger, each shareholder of Real Goods received one Class A share for each
10 shares of Real Goods held. We have already consolidated a majority of Real
Goods' operations into our infrastructure, significantly reducing operating
expenses. We have closed Real Goods' Santa Rosa headquarters, Ukiah distribution
center and call center. We have also improved the gross profit margin through
the introduction of our proprietary products, through our purchasing power and
by streamlining the Real Goods product offering.
Also in the first quarter of 1999. We
anticipate2001, we will incur expenses inacquired the second quarterSelfcare.com and
Gaia.com URLs, as well as selected inventory of 1999 to integrate
these acquisitions, at which pointMedical SelfCare from the
consolidationassignee for the benefit of these acquisitions will
be substantially complete.
20its creditors.
16
Results Ofof Operations
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated.
Three Months
Ended March
Year Ended December 31, March 31,
----------------------- ---------
1994 1995------------------------------------ -------------
1996 1997 1998 1998 1999 -----2000 2000 2001
---- ---- ---- ---- ---- ---- ----
Net revenuesrevenues........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of goods sold 78.2 44.0sold.................... 45.7 42.5 42.9 43.2 40.639.8 39.3 39.2 38.7
----- ----- ----- ----- ----- ----- -----
Gross profit 21.8 56.0profit........................... 54.3 57.5 57.1 56.8 59.460.2 60.7 60.8 61.3
Expenses:
Selling and operating 2.2 49.0operating................ 62.5 52.4 46.1 49.6 48.248.8 45.1 48.3 48.3
Corporate, general and
administration 6.5 13.1administrative...................... 8.2 7.9 7.8 5.4 10.06.7 8.3 8.9 8.8
----- ----- ----- ----- ----- ----- -----
Total expenses 8.7 62.1expenses..................... 70.7 60.3 53.9 55.0 58.255.5 53.4 57.2 57.1
----- ----- ----- ----- ----- ----- -----
Income (loss) from
13.1 (6.1)operations............................ (16.4) (2.8) 3.2 1.8 1.2
operations4.7 7.3 3.6 4.2
Other income (expense), net (0.9) 15.4net............ 20.1 8.0 1.3 (1.1) 0.51.3 (0.4) (1.0) (0.3)
----- ----- ----- ----- ----- ----- -----
Income before income taxes and
minority interest 12.2 9.3interest..................... 3.7 5.2 4.5 0.7 1.76.0 6.9 2.6 4.5
Provision for income taxes 2.6 3.6 1.4 1.8 0.8 0.3 0.6taxes............. (1.4) (1.8) (0.8) (2.3) (2.6) (1.0) (1.7)
Minority interest in net
income of consolidated
subsidiary, net of taxtax................ 0.0 0.0 (0.9) 0.1 0.1 0.0 0.0 0.9 0.0 0.0(0.5)
----- ----- ----- ----- ----- ----- -----
Net income 9.6% 5.7%income......................... 2.3% 3.4% 2.8% 0.4% 1.1%3.8% 4.4% 1.6% 2.4%
===== ===== ===== ===== ===== ===== =====
Three months ended March 31, 19992001 compared to three months ended March 31, 1998
- -------------------------------------------------------------------------------2000
Revenues increased 79.1% from $5.340.7% to $17.7 million infor the first three months of 1998 to
$9.5ended March 31,
2001 from $12.6 million induring the first three months of 1999. This increaseended March 31, 2000. Gaiam's
internal growth rate was 21%, fueled primarily attributable toby the acquisitions of InnerBalance and Living Arts, which
represented approximately 40%growth in sales of Gaiam's
$9.5 million revenues during the first
three months of 1999. Internal growth was 29.1%, primarily attributable to
higher customer response rates and the introduction of newproprietary products.
Gross profit, which consists of revenues less cost of sales (primarily
merchandise acquisition costs and in-bound freight), increased 87.2%41.7% to $10.8
million for the first quarter of 2001 from $3.0$7.6 million during the same period
in 2000. As a percentage of revenue, gross profit increased to 61.3% in the
first three monthsquarter of 1998 to $5.6 million2001 from 60.8% in the first quarter of 2000. This increase in
gross profit percentage was primarily the result of Gaiam's continuing efforts
to increase the number of proprietary products offered, on which Gaiam has
better margins than other products.
Selling and operating expenses, which consist primarily of sales and marketing
costs, commission and fulfillment expenses, increased 40.8%, consistent with the
revenue increase of 40.7%, to $8.5 million for the three months ended March 31,
2001 from $6.1 million for the same period in 2000. As a percentage
17
of revenues, selling and operating expenses were 48.3% for the comparable
periods in both 2001 and 2000.
Corporate, general and administrative expenses increased to $1.6 million during
the first quarter of 2001, from $1.1 million during 2000, primarily as a result
of Gaiam's growth. As a percentage of revenues, general and administrative
expenses decreased to 8.8% in the first quarter of 2001 from 8.9% for the same
period in 2000.
Operating income, as a result of the factors described above, increased 61.1% to
$735,365 for the three months ended March 31, 2001, from $456,359 for the
comparable period in 2000.
Gaiam recorded $67,698 in other income for the three months ended March 31, 2001
compared to $122,945 in other expense for the three month ended March 31, 2000.
Minority interest in net income of consolidated subsidiaries was $82,645 during
the first quarter of 2001, compared to $4,992 during the first quarter of 2000.
Income tax provision increased to $301,390 for the three months ended March 31,
2001 from $125,130 for the comparable period in 2000. The effective tax rate on
pre-tax income for both periods was 37.5%.
Net income, as a result of the factors described above, increased 106.1% to
$419,028 for the three months ended March 31, 2001, from $203,292 for the three
months ended March 31, 2000.
Year ended December 31, 2000 compared to year ended December 31, 1999:
Revenues increased 32.5% to $60.6 million in 2000 from $45.7 million in 1999.
Gaiam's internal growth rate was 24%, fueled primarily by sales to retail chains
and by our internet business. Business-to-business revenues grew 50.3% to $16.8
million in 2000 from $11.2 million in 1999.
Gross profit increased 33.6% to $36.8 million in 2000 from $27.5 million during
1999. As a percentage of revenue, gross profit increased to 60.7% in 2000 from
60.2% in 1999. This was primarily attributable to the growth of our proprietary
product offerings, on which we have better margins, which constituted 37% of
sales in 2000, up from 24% in 1999.
Selling and operating expenses increased 22.3%, which is less than the revenue
increase of 32.5%, to $27.3 million in 2000 from $22.3 million in 1999. As a
percentage of revenues, selling and operating expenses decreased to 45.1% in
2000 from 48.8% in 1999.
Corporate, general and administrative expenses increased to $5.1 million for
2000 from $3.1 million in 1999. As a percentage of revenues, general and
administrative expenses increased to 8.3% in 2000 from 6.7% in 1999, primarily
as a result of an increase in depreciation expense and the expenses associated
with being a public company.
Operating income, as a result of the factors described above, increased 108.4%
to $4.4 million in 2000 from $2.1 million in 1999.
Gaiam recorded $73,947 in other expense during 2000, compared to other income of
$971,159 in 1999. During 1999, Gaiam recognized gains on the sales of marketable
securities held by Gaiam of $2.5 million. Net interest expense declined to
$209,167 in 2000 from $365,294 in 1999, primarily as a result of interest income
generated in the third and fourth quarters of 2000.
18
Minority interest net income was $59,706 in 2000 and $50,858 during 1999.
Income tax provision increased to $1.6 million in 2000, an effective tax rate of
37.5% on pre-tax income, from $1.0 million in 1999.
Net income, as a result of the factors described above, increased 54.2% to $2.6
million in 2000 from $1.7 million during 1999.
Year ended December 31, 1999 compared to year ended December 31, 1998:
Revenues increased 48.8% to $45.7 million in 1999 from $30.7 million in 1998.
This revenue growth was primarily attributable to acquisitions. Gaiam's internal
growth rate was 18% for fiscal 1999. Business-to-business revenues grew 49.4% to
$11.2 million in 1999 compared to $7.5 million in 1998. The commencement of
internet sales in September 1999 resulted in $2.1 million of revenues, with $2.0
million recognized during the fourth quarter.
Gross profit increased 56.8% to $27.5 million in 1999 from $17.6 million in
1998. As a percentage of revenues, gross profit increased to 60.2% in 1999 from
56.8%
to 59.4%.57.1% in 1998. This increase was primarily attributable to increases in sales of
private brandedproprietary products, on which we haveGaiam has better margins than other products, and
continued better pricing from vendors due to increased volume.
Selling and operating expenses which consist primarily of the cost of sales,
commissions, marketing expenses, developing and operating our website, and
fulfillment costs, increased 74.0% from $2.657.5% to $22.3 million in the first three months
of 19981999 compared
to $4.6$14.2 million in the first three months of 1999.1998. As a percentage of revenues, selling and operating
expenses decreasedincreased to 48.8% in 1999 from 49.6% to 48.2%. This
reduction46.1% in 1998, as a percentageresult of revenues was primarily due to revenues increasing
at higher rates than certain fixed operating expenses.
21
the
increased emphasis on revenue growth, particularly in the business-to-business
and internet sectors, and the sourcing, development and branding of our
proprietary products.
Corporate, general and administrative expenses increased 234.9% from $284,724to $3.1 million in the first three months of 19981999
compared to $953,565$2.4 million in the first three months of 1999.1998. As a percentage of revenues, general and
administrative expenses increaseddecreased to 6.7% in 1999 from 5.4% to 10.0%. The overall increase7.8% in general and administrative expenses was
due to various initiatives undertaken to prepare for and support our future
growth, including the hiring of additional personnel, the development of Gaiam's
website and e-commerce infrastructure, and the growth of Gaiam's business, both
internally and1998.
Operating income, as a result of the acquisitions.factors described above, increased 115.7%
to $2.1 million in 1999 from $984,843 in 1998.
Other income, comprised primarily of gains on sales of marketable securities and
interest expense, increased to $605,865 in 1999 from a $59,619 net expense$388,491 in 1998 to a $52,622 net
income in 1999.1998. This
change wasis primarily due to the sale of marketable
securitiesan increase in the first quarternumber of securities sold during
1999, whichand was partially offset by higher interest expense due to borrowings used to fund acquisitions.
Minority interestand
other extraordinary expenses associated with our initial public offering, the
acquisition of $4,253 for the first three months of 1999 was added to
Gaiam's consolidated financial results to account for the minority interest in Living Arts' lossArts, and expenses associated
with moving our warehousing and distribution center.
Minority interest expense decreased to a negative $50,858 for 1999 compared to
$261,598 in 1998. The majority of this amount represents our former minority
partner's one-third interest in the Living Arts losses, net of tax. During 1998,
minority interest of $261,598 represented the 33% Living Arts minority interest,
net of tax, for the three months ended Marchperiod September 14, 1998 through December 31, 1999.1998.
Income tax provision represented 36.8% of Gaiam's pre-tax net incomegrew to $1.0 million in the
first three months of 1998,1999, as compared to an income tax provision representing
37.2% of our pre-tax net income in the first three months of 1999.
As a result of the factors described above, Gaiam's net income increased from
$24,447, or 0.4% of revenues, in the first three months of 1998 to $106,167, or
1.1% of revenues, in the first three 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, which represented approximately $6.9 million of 1998 revenues.
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 margins than Gaiam's 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 sales. 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
efficiencies resulting from a higher average transaction size.
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
Gaiam's 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.
22
Provision for income tax provision represented 35.7% of Gaiam's pre-tax income
in 1997, as compared to 18.3% of its pre-tax income$251,955 in
1998. The decrease in Gaiam'sthe effective tax rate to 18.4% of pre-tax net income for
1998 was primarily due to a one-time tax benefit related to the 1998 settlement
of a Living Arts legal judgment in 1998.
Minority interest of $261,598 for 1998 was deducted fromincurred prior to Gaiam's consolidated
financial results to account for the minority interest in Living Arts.ownership.
19
Net income, as a result of the factors described above, increased 99.9% to $1.7
million for 1999 from $654,312,
or 3.4% of revenues, in 1997, to $859,781 or 2.8% of revenues, infor 1998.
Year ended December 31, 1997 compared to year ended December 31, 1996
- ---------------------------------------------------------------------
Revenues increased 34.4% from $14.8 million in 1996 to $19.9 million in 1997.
This increase was attributable to internal growth driven by improvements in
customer retention rate, transaction size and other operational improvements.
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 Gaiam has 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 sales. 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, Gaiam's central warehouse was opened in
1996, resulting in reductions in shipping costs and other operational
efficiencies.
Corporate, general and administrative expenses increased 29.4% 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 its pre-tax income in 1996, as
compared to 35.7% of its 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 of
Gaiam for
each of the quarters in 19971999 and 19982000 and the first quarter of 1999.2001. 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. ThisYou should read this financial information should be read in conjunction with Gaiam'sour
consolidated financial statements and related
23
notes 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)
-------------------------------------------------------------------------------------------------Quarter Ended
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001
---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands, except per share data)
Revenues $4,218 $4,426 $4,811 $6,443 $5,300 $5,175 $5,987 $14,277Net revenue........... $9,495 $8,068 $10,288 $17,874 $12,558 $11,386 $13,630 $23,014 $17,672
Gross profit 2,454 2,554 2,645 3,783 3,012 3,049 3,538 7,966profit......... 5,639 4,849 6,222 10,839 7,636 6,730 8,129 14,300 10,824
Operating income
(loss) (317) (86) (137) (26) 98 77 200 610................ 110 (294) 393 1,915 456 295 982 2,695 735
Net income (239) (104) (142) 1,139 24 15 395 426income...... 106 72 551 989 203 201 579 1,666 419
Net income (loss)
per share $(0.03) $(0.01) $(0.02)share............. $ 0.01 $ 0.01 $ 0.06 $ 0.10 $ 0.02 $ 0.02 $ 0.05 $ 0.14 $ 0.00 $ 0.00 $ 0.05 $ 0.05 $ 0.010.04
Weighted average
shares
outstanding 8,040 8,040 8,040 8,040 8,040 8,040 8,040 8,073Shares
outstanding........... 8,215 8,420 8,826 10,633 11,505 11,552 11,538 11,506 11,563
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. ourOur 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 Andand 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 acquisitionacquisitions of new businesses and itsGaiam's 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 itsGaiam's product
offerings, the level of expenditures for sales and marketing, the level of
investment in distribution and other factors. The timing and amount of suchthese
capital requirements cannot accurately be predicted. Additionally, Gaiam
will continuecontinues to evaluate possible investments in businesses, products and
technologies, and plans to expand its sales and marketing programs and conduct more
aggressive brand promotions.
20
During the first six months of 1999, Gaiam has funded its operations and acquisitions primarily through internally
generated funds, 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$1.45 million from the
private placements during 1998
($575,000 for 160,000placement of 331,429 shares of Class A common stock 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$1.425 million
in debentures).debentures. The privately placed shares were sold at $4.375 per share. Theshare, and
the 8% convertible debentures described above bear interest at 8% per annum
and may be prepaid at any time by Gaiam. Withmatured on the exceptionearlier of Ms. Powers,one year after the holdersdate
of the debenture or the closing date of the initial public offering. In October
1999, Gaiam repaid $500,000 of the convertible debentures have certain registration rights requiring Gaiamand, simultaneous with
the closing of the initial public offering, converted the remaining $1.475
million in debentures to register the295,000 shares obtainedof Class A common stock.
Gaiam's initial public offering of 1,705,000 shares of Class A common stock
at $5.00 per share was completed in the private placement. See the consolidated
financial statements of Gaiam for additional information relating to Gaiam's
private placements. In connectionOctober 1999. Simultaneous with this
offering, we are offering eachGaiam converted $1.475 million in debentures to 295,000 shares of
our eight debenture holders thecommon stock, resulting in a total issuance of 2,000,000 shares. The offering's
underwriters also exercised their overallotment option for 102,861 additional
shares during November 1999. Net proceeds to purchase shares for the outstanding
principal amount of the debentures (excluding interest) atGaiam, after deducting all
commissions and expenses associated with the offering, pricewere $6.1 million.
During April 2001, Gaiam entered into a new loan agreement with Wells Fargo
increasing Gaiam's borrowing capacity from $6.5 million to $14.9 million. The
new revolving line of $5.00 per
24
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 a credit, agreements with Norwest Bank, which extends through December 31, 2001,June 30, 2003, allows
borrowings up to $10 million based upon the collateral value of Gaiam's accounts
receivable and inventory held for resale. Wells Fargo has also provided Gaiam
with BT Alex. Brown Inc. The credit agreements permit
borrowingsa term loan in the amount of up to $4 million.$4.9 million, which matures on July 1,
2006, and allowed a $537,228 term note assumed as part of the Real Goods merger
to remain outstanding. Borrowings under the Norwest credit agreement
bear interest at the prime rate plus 1%, and borrowings under the BT Alex. Brown
credit agreement bear interest at the call money rate plus 3/4%. The credit
agreements are secured by a pledge
of allGaiam's assets, and bear interest at the lower of Gaiam's assets.prime rate less 50 basis
points or LIBOR plus 275 basis points. The NorwestWells Fargo credit agreements containagreement contains
various financial covenants and also prohibitprohibits Gaiam from paying cash dividends
to its shareholders, except that dividends by Living Arts are
permittedshareholders.
Gaiam's operating activities provided net cash of $1.2 million for 1998 taxes on minority interests. Mr. Rysavy guarantees the
Norwest credit agreement.three months ended March 31, 2001, primarily as a result of an increase in cash
generated from net income and depreciation and amortization. Gaiam's operating
activities used net cash of $2.7$1.7 million and $1.3$4.6 million during 19962000 and 1997,1999,
respectively, and provided $759,205$904,245 of net cash in 1998. The useGaiam's net cash used
in operating activities for 2000 arose primarily from increases in accounts
receivable of $4.1 million associated with growth in the business-to-business
segment, increased inventories of $1.7 million correlating to increased business
volumes, and $1.0 million to produce additional Living Arts video titles. These
uses were partially offset by net cash in 1996 and 1997provided by operations of $4.8 million.
Net cash used during 1999 was primarily attributable toa result of increases in inventoriesaccounts
receivable and prepaid costsinventories associated with the increased sales volumes.business-to-business growth. Net cash
provided during 1998 was primarily a result of Gaiam's net income.
Gaiam's investing and acquisition activities generatedused cash of $738,755$3.9 million for
the three months ended March 31, 2001. During the first quarter of 2001, Gaiam
acquired all of the stock and $3.6net assets of Earthlings, Inc. and Self Care, Inc.
for a total combined purchase price for both companies of $3.8 million, and
completed its merger with Real Goods Trading Corporation. Gaiam's investing
activities provided net cash of $2.9 million during 1996 and 1997, respectively,2000 and used cash of $2.4
and $1.1 million during 1998.1999 and 1998, respectively. In 1996June 2000, Gaiam sold
6,000 shares of Redeemable Class A preferred stock in Gaiam.com, Inc. at a price
of $1,000 per share for an aggregate price of $6 million. On June 30, 2000,
Gaiam and 1997,Whole Foods Market, Inc. merged their internet businesses into
Gaiam.com, Inc. Gaiam owns 50.1% of Gaiam.com, Whole Foods Market currently owns
35% and the remainder is owned by various venture capital funds. As part of this
transaction, Whole Foods Market, through its subsidiary, contributed $6 million
in cash plus other assets to Gaiam.com. During 2000, Gaiam used approximately
$8.7 million primarily for the Gaiam.com website, the purchase of a 160 acre
conference resort in Paulden, Arizona (Gaiam Yoga Center), and additional
infrastructure improvements to support Gaiam's growth. During 1999, Gaiam
generated $2.5 million from investing activities resulted primarily from
salesthe sale of marketable securities and propertyused $2.7
million primarily for its acquisitions. Gaiam also used $2.2 million primarily
to expand and equipment.upgrade the
21
internet, computer and telecommunications systems. During 1998, Gaiam used cash
to purchase a majority interest in Living Arts.
During the three months ended March 31, 2001, Gaiam's financing activities
provided $490,290 in cash, as borrowing under Gaiam's line of credit agreement
increased $500,000. Gaiam's financing activities provided net cash of $3.5
million during 2000, primarily from increased borrowings on Gaiam's line of
credit. During 1999, Gaiam's financing activities generated $1.9$9.5 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.the initial public offering. 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.
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 that the proceeds of this offering, together with our available cash, cash expected to be generated from
our operations, and borrowings under our bank
credit agreement,borrowing capabilities 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.
Year 2000
The year 2000 issue relates to computer programsIn the normal course of our business, we investigate, evaluate and systems that recognize
dates using two digit year data rather than four digit year data. As a result,
such programsdiscuss
acquisition, joint venture, majority 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:
25
. "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 processingminority investment, strategic
relationship and other administrative tasks
at individual Gaiam companiesbusiness combination opportunities in the LOHAS market.
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.
Quantitative 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 such systems as heating,
ventilation and air conditioning control systems and security systems.
To assess the potential impactQualitative Disclosure About Market Risk
We do not believe that any 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. See "Our Business -- Management Information Systems."
The computer programs and operating systems used by entitiesour financial instruments have significant
risk associated 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 such 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 generallymarket sensitivity. We are not specificexposed to Gaiam's business,financial market
risks from changes in foreign currency exchange rates and disruptionsare only minimally
impacted by changes in their availability would likelyinterest rates. Borrowings under our bank credit facility
are at a variable rate of interest, and based on the current level of
borrowings, we experience only modest changes in interest expense when market
interest rates change. However, in the future, we may enter into transactions
denominated in non-U.S. currencies or increase the level of our borrowings,
which could increase our exposure to these market risks. We have a negative impact on
Gaiam, as well as most other enterprises within the direct marketing
industrynot used, 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 such
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
26
dependent on programs and systems that could be disrupted by year 2000
problems. Year 2000 risks relating to programs and systems used by
product vendors are well diversified because we use a large number of
vendors. Gaiam has assessed the risks posed by the programs and systems
used by entities who provide front-end and warehouse management services
and determined that such riskscurrently do not require remediation. Gaiam has
received or intends to seek assurances of year 2000 compliance from each
product vendor that accounts for more than approximately 1% of the
aggregate purchases by Gaiam 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 such
identification has been completed, Gaiam intends to resolvecontemplate using, 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.derivative financial instruments.
22
OUR BUSINESS
Gaiam
Gaiam is a providerlifestyle company providing a broad selection of goods,information,
products and services and information to customers who value the environment, a sustainable economy, healthy lifestylesnatural health, personal
development and personal
development.
Under the flagship brands Gaiam and Gaiam.com, we are using specific brands to
target related but distinct market segments.renewable energy. We use the Harmony, Living Arts,
and InnerBalance brands to offer our products throughcustomers the consumer direct
marketing channel, using catalogs and the Internet, and through business-to-
business relationships. Gaiam has approximately 800,000 unique individual
customers in additionability to leading retailers such as Target, Borders 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 andmake
purchasing decisions that enhance the quality of the
Earth's environment. In our view, these consumers are increasingly making
purchasing decisions for goods and services based on these values in additionwhile striving to the traditional criteria of priceprovide products at
prices comparable to conventional alternatives. Our direct customer base is 80%
female 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 are affluent and well-
educated consumers, with70% college-educated, has a median age of 42, a 60/40 women-to-men ratio44 and has an average
annual household income of $52,000.approximately $60,000.
Gaiam has established itself as a leading lifestyle brand, information
resource and authority in the LOHAS market and seeks to become a unifying symbol
of the emerging LOHAS lifestyle. Our Industrylifestyle brand is built around our ability
to develop and offer content, products and solutions to consumers in the LOHAS
market. Our content forms the basis of our proprietary products, which yield
our highest margins, and drives demand for parallel product and service
offerings. We namedmarket our products and services direct-to-consumers and business-
to-business through five sales channels: our catalogs, the industry we serve "Lohas" -- an acronym for Lifestyles Of Health
And Sustainability.internet, retailers,
media and corporate accounts. We divide the Lohas industry intodistribute our products in each of these sales
channels from a single fulfillment center. Gaiam's operations are vertically
integrated from content creation, through product development and sourcing, to
customer service and fulfillment.
The LOHAS Market
The LOHAS market, which represented $227 billion in sales in 2000 according
to Natural Business Communication, consists of five segments that shape
this market:main sectors:
. Sustainable Economy. This segment includes environmental management
services and solutions, renewableRenewable energy, energy conservation, products andrecycled goods,
environmental management services, sustainable manufacturing processes recycling and
goods made
from recycled materials.
27
related information and services.
. Healthy Living. This segment includes food supplements, vitamins and
minerals, naturalNatural and organic foods, dietary supplements, personal
care products and naturalrelated information and personal body care.services.
. Alternative Healthcare. This segment includes natural healthHealth and wellness solutions and alternative
health practices.
. Personal Development. Solutions, information, products and services, including alternative,
noninvasive treatments, massage, chiropractic, acupuncture, acupressure,
biofeedbackexperiences
relating to mind, body and aromatherapy.
Personal Development. This segment includes experiences and solutions
concerning mind-body-spirit fitness, meditation, relaxation, spirituality,
ancient religions, esoteric sciences and realizing human potential.spiritual development.
. Ecological Lifestyles. This segment includes environmentEnvironmentally friendly solutions, natural untreated fibercleaning and household
products, organic cotton clothing and bedding, and eco-tourism.
Gaiam participates in all five sectors of the LOHAS industry.
23
Our Products
We believe that wecurrently stock over 7,000 SKUs. Our best selling products, by LOHAS
sector, are as follows:
- -----------------------------------------------------------------------------------------------------------
Sustainable Healthy Living Alternative Personal Ecological
Economy Healthcare Development Lifestyles
- -----------------------------------------------------------------------------------------------------------
Solar Panels and Air Filters Natural Lighting Yoga Information Natural Cleaners
Accessories and Accessories
- -----------------------------------------------------------------------------------------------------------
Energy Systems Water Filters Back and Neck Care Pilates Information Organic Cotton
Products and Accessories Bedding
- -----------------------------------------------------------------------------------------------------------
Energy Efficient Personal Air Supply Massage Accessories Meditation Organic Cotton
Lighting Information and Towels
Accessories
- -----------------------------------------------------------------------------------------------------------
Energy Information EMF Filters Stress Relief Fitness Equipment Organic Cotton
Clothing
- -----------------------------------------------------------------------------------------------------------
Evaporative Coolers Personal Care Allergy and Pain Recycled Household
Products Relief Performance Wear Paper Products
- -----------------------------------------------------------------------------------------------------------
Intertie Systems Natural Beauty Sleep Enhancers Personal Growth Natural Garden
Products Information Products
- -----------------------------------------------------------------------------------------------------------
Composters Whole Foods Brand Wellness Information Kids Fitness Non-Toxic Pest
Supplements Products and Control
Information
- -----------------------------------------------------------------------------------------------------------
Air Dryers Natural Pet Care Aroma Therapy Relaxation Music Green Cotton Home
Accessories
- -----------------------------------------------------------------------------------------------------------
Our Sales Channels
We conduct our direct-to-consumer business through our catalogs, the
first companyinternet and media. Our business-to-business customers are primarily retailers,
corporate accounts and the media.
. Catalogs
Gaiam offers a variety of LOHAS products directly to recognize that these market segments
share a common customer base and should be viewed collectively as one industry.
Based on market research data, we believe that this industry will approach $200
billion in annual sales in the United States and $500 billion in annual sales
worldwide by the year 2000. We believe that, by serving all of these segments,
we can benefitconsumer through
our customers by providing them with a larger array of choices,
the convenience of one-stop shopping and access to a community of shared values.
The Internet
Although our historical sales have been predominantly through catalogs and retailers, we are shiftingthrough consumer lifestyle publications such as Natural Home,
Self, Shape and Yoga Journal. We produce catalogs in all sectors of LOHAS, using
our sales to the Internetsub-brands Gaiam Harmony (ecological lifestyles and making the Internet our
primary channelhealthy living), Gaiam
Living Arts (personal development), Gaiam Innerbalance (alternative healthcare
and healthy living), and Gaiam Real Goods (sustainable economy). Our direct
customer file has grown from approximately 300,000 as of distribution. According to Jupiter Communications, 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 15.2 million
households inDecember 31, 1996 to
57over 1.7 million households representing over 50%as 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 1998May 2001.
. Internet
We use the internet to 36 million atsell our products and to provide information on the
endLOHAS lifestyle. We currently offer over 7,000 SKUs on our website,
www.gaiam.com. We promote our website through our visual media, catalogs, print
- -------------
publications, and product packaging. A key component of 2002.
We believe that our businessinternet approach
is to provide customer support for internet sales from our in-house call center.
According to a Jupiter Communications study, 90% of on-line customers prefer
human interaction when they require
24
customer service. This is particularly well suited to Internet commerce.
Many of our products are not widely found in conventional stores. In addition,important for Gaiam because the use of
many of our products is enhanced by the extensive product education and
information that we will make available online. The online environment has
virtually unlimited shelf space,and through customer service.
. Retailers
Since the capacity to present vast amountsinception of consumer information,our retailer channel in 1998, we have increased
its breadth and offers consumers the convenience of shopping online.
Our existing 800,000 loyal customers and our exceptional fulfillment and
customer service operations represent a distinct advantage fordiversity, expanding our online business.
Gaiam intendscoverage to become an authoritative and reliable source of data and
information for consumers.
Our History
Gaiam was foundedover 23,000 stores in Boulder, Colorado. In 1995, we began to expand our
business nationally through the
acquisitionUnited States as of the direct marketing businessend of Seventh Generation, Inc.,May 2001. Gaiam products currently are sold in a
suppliervariety of eco-friendly household products. This
business became the baseleading retailers, including lifestyle stores such as Discovery
Channel Stores and The Walking Company; women's beauty stores such as Ulta and
Origins; Sporting Goods Chains such as Sports Authority and Big 5 home
furnishing stores such as Bed, Bath and Beyond; natural food stores such as
Whole Foods Market; sporting goods stores such as Dick's and Galyan's; book
stores such as Borders and Barnes & Noble; music stores such as Musicland and
Wherehouse Music; mass merchants such as Target, Kohl's and Wal-Mart; and e-
tailers such as Amazon.com. A number of these retailers display our Harmony brand. In 1998, we acquired
InnerBalance, a direct marketer of alternative health products and solutions,
and a majority interest in
28
Living Arts, a producer and supplier of yoga and other mind-body-spirit
informational videos and products.
Our name,store-within-a-store Gaiam is a fusion of the words "Gaia" and "I am." The concept of Gaia
stems from an ancient philosophy that was based on the belief that the Earth is
a living entity. On the Isle of Crete in ancient Greece 4,000 years ago, the
Minoan civilization honored Gaia, mother Earth. 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 current Gaia
concept is based upon the premise that all of Earth's living matter, air, oceans
and land form an interconnected system which can be seen as a single entity with
the ability to generate and support life.
Our Core Values
Gaiam's approach to business is based on its core values:
We value the environment and view all resources as precious assets.
We emphasize integrity in all our relationships.
Living our beliefs is more than just the right thing to do; it is the only
path to take.lifestyle shops. We believe we can motivate every personhave an opportunity to
make a positive differencebecome the single source solution for Lohas products for retail accounts.In
addition, since entering the Canadian market in their livesMay of 2000, we have expanded to
over 2,500 stores as of the end of May 2001.
. Media
Gaiam produces information and in our world by the simple choices they make every day.
Our Brand
Gaiam plansprogramming targeted to use its brand name to establish itself as the leading authorityconsumers who
value natural health, personal development and information resource in the Lohas industry. Under the Gaiam and Gaiam.com
umbrella brands, we use our Harmony, InnerBalance, and Living Arts brands to
target the industry's market segments. These specific market segment brands
share the following characteristics: high-quality merchandise offerings; an
affluent customer base; a strong brand identity; and enhancement of use through
extensive product education and information. The chart below illustrates the
market segment and examples of products offered under eachrenewable energy. Currently,
thirteen of our brands.
29
[LOGO OF GAIAM APPEARS HERE]
[CHART APPEARS HERE]
Our Competitive Strengths
We believe the following factors have contributed to our growth and success:
. Focus On Growing Market Segment
Gaiam targets the market segment of cultural creatives. A study published in
American Demographics in 1997/2/ coined the term "cultural creatives." This
group had grown to 50 million by 1998 and is the main source of Lohas industry
growth. Based on our own statistical sampling, we believe that the majority of
our 800,000 customersprograms are cultural creatives. Gaiam believes that cultural
creatives are the driving force behind the Lohas industry. We believe annual
sales of the Lohas industry will approach $200 billionbroadcast in the United States and $500 billion worldwidefive are
broadcast internationally. Our programs are also available in approximately
600,000 hotel rooms in North America through on-demand visual media programming
available in such hotels as Four Seasons, Hyatt, InterContinental, Sheraton and
Westin. Our media partners include the Discovery Channel, Universal Studios and
On Command. Gaiam also publishes print media on personal development,
alternative healthcare and sustainable living and operates three music labels
with approximately 150 titles.
. Corporate Accounts
Gaiam provides products and services to businesses that are considering
renewable energy solutions or desire healthy and natural alternatives to
traditional products or processes. Such products and services include
environmental reviews, organic cotton robes and bedding, and solar-powered
safety and security systems. In addition, we have developed a line of
promotional products in organic cotton that includes t-shirts, sweatshirts, caps
and bags and other similar products for customers such as Mercedes Benz and
Aveda.
We have a design and consulting service for corporate accounts that
assesses their energy needs and makes recommendations for more efficient
solutions. We have provided our consulting services to clients including The
White House, NASA, Disney, Sony, Fetzer Winery, AT&T, the U.S. Departments of
Energy and Defense and the Government of Brazil. We expect increased demand for
this service because of national energy policy concerns and the ongoing energy
crisis in California.
Our Strategy
. Strengthen Our Lifestyle Brand
Our goal is to maintain the Gaiam brand as an authority in the LOHAS market
and to establish Gaiam as a unifying symbol of the emerging LOHAS lifestyle. We
plan to strengthen the Gaiam brand by 2000.growing our media channel, increasing our
marketing efforts, strengthening relationships with retailers, and increasing
the breadth of our proprietary product and audio, video and print media
25
offerings. We intend to maintain our commitment to a high level of customer
service. We maintain a "no-risk guarantee" policy, whereby a customer is
provided a full refund for products that are returned at any time, for any
reason. Our products, services and information generally bear the Gaiam believessymbol.
. Capitalize on Our Multi-channel Approach
Our multi-channel approach makes purchasing our lifestyle products
convenient regardless of the channel customers prefer. In our direct-to-
consumer business we are open 24 hours a day, offering our entire selection of
products on our internet site.
In our business-to-business segment, we are expanding our retail presence.
We have expanded to 25,500 current retail points and we are building store-
within-a-store Gaiam lifestyle shops in a variety of stores, including Whole
Foods Markets, Discovery Channel Stores, Dick's and Galyan's. We are expanding
into women's beauty stores such as Ulta and Origins, sporting goods chains such
as Big 5, home furnishing stores such as Bed, Bath and Beyond and mass merchants
such as Target and Wal-Mart. Our Gaiam Organix line is being launched in August
2001 in department and specialty stores such as Jacobsons and Fred Segal.
Our media channel, especially television broadcast and on-demand cable
programming, enables us to reach customers who might not be familiar with Gaiam
through our other sales channels.
. Expand Our Proprietary Product Selection
Our proprietary products, which we introduced in 1997, represented 40% of
our revenues in the first quarter of 2001. These products carry a higher margin
and distinguish us from many of our competitors. We now offer over 2,000 SKUs of
proprietary products that range from media products to organic cotton baby
clothes. We are expanding our supply chain with overseas suppliers in Europe
and South America and are continuing to develop and source new products in each
of the affluencefive LOHAS sectors.
Based on our success with bedding and time-constrained lifestylesbath products, infant clothing and
performance wear, we are planning to offer these products into our business-to-
business segment under the Gaiam Organix brand. We believe the demand for
naturally processed organic cotton clothing and home furnishing is increasing,
and we have an opportunity to increase our brand presence in our current
retailers as well as add new retailers with this initiative. We plan to use our
existing store-within-a-store lifestyle presence to support this initiative.
. Broaden Our Content Through Growth of cultural
creatives increaseGaiam Media
Our media channel introduces customers to Gaiam and helps to establish
Gaiam as an authority in the likelihoodLOHAS market. Our visual media programs are
currently broadcast both domestically and internationally, are shown in
approximately 600,000 hotel rooms in North America and are packaged as videos,
DVDs and CDs. Our print media becomes content for national publications,
catalogs, the internet and books.
We intend to continue to expand our media content. We will add visual
media programming on wellness, longevity and sustainable living, as well as
specialty programs on pregnancy and childcare. We expect to expand
international distribution of our visual media. We also plan to develop or
acquire additional media properties in music, magazines and book publishing.
. Complement our Existing Business with Selective Strategic Acquisitions
26
Even though our strategy is not dependent on acquisitions, we will consider
strategic acquisitions in the LOHAS industry that they will respondcomplement our existing
business, especially companies with a strong brand identity and with customer
and product information databases that augment ours. Gaiam generally allows the
acquired company's management team to retain responsibility for front-end
business functions such as creative presentation and marketing, while
consolidating operational functions under the Gaiam organization to realize
economies of scale.
Our Operations
Gaiam's brand is built around a vertically integrated business strategy,
which enables us to develop content, products and solutions for our LOHAS market
consumers. From our strong focus on new content creation, we establish a basis
from which to develop additional proprietary product lines and extend our
content-based merchandise for distribution through our five sales channels from
our single fulfillment center.
. Content Creation
We have in-house production and creative services terms that designs all of
our content, packaging, branding, media and marketing pieces, as well as our
website. After identifying a topic or solution of interest to our customers, our
creative team researches an idea and identifies an expert, where appropriate, to
develop our content. We use written materials to create print media, internet
content, packaging and magazine and catalog editorials. Using our own production
capabilities and editing facilities, we produce high quality visual media
content that we distribute by broadcast, on-demand cable programming, videotape
or DVD. We develop and maintain a library of lifestyle photography that we use
primarily for our print media, website, catalogs and packaging. We either
develop or purchase our audio titles, which are comprised primarily of
relaxation music that we sell in CD form, and background music for our visual
media content.
. Product Development and Sourcing
Gaiam branded products, are sold in our five sales channels. Non-
proprietary products are only available through our catalogs and over the
internet where we initially test products before branding them and distributing
them through our other sales channels. Proprietary product sales have increased
as a percentage of our revenue from 2% in 1997 to approximately 40% in the first
quarter of 2001. We are able to leverage our product development costs across
our multiple sales channels.
Our proprietary products are designed by our product development team,
sourced both domestically and internationally by our merchandisers and produced
by our suppliers to our specifications. Our suppliers are screened for their
environmental and social responsibility before contracts are awarded. In order
to minimize risk, we have identified an alternate supplier in a separate
location for most products. No single supplier is responsible for more than 3%
of our business except our video duplication, which is done with only one
supplier to minimize production costs. However, duplicate masters of each
program are maintained in an off-site vault allowing us to be able to switch to
a new duplicator with minimal down time.
. Customer Service
Gaiam focuses on building and maintaining customer relationships that
thrive on loyalty and trust. We maintain a "no-risk guarantee" policy, whereby
a customer is provided a full refund for
27
products that are returned at any time, for any reason. 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. We employ telephone routing software that directs each call to the
convenience,
efficiencyappropriate representative. Our policy is to ship orders no later than the next
business day, which we accomplish by stocking inventory that supports over 90%
of our orders. We believe that by offering exceptional customer service we
encourage repeat purchases by our customers, enhance our brand identity and
individuality offeredreputation and build stronger relationships with our customers.
. Fulfillment
During 2000, we moved from our 64,000 square foot facility into our new
208,000 square foot fulfillment center near Cincinnati, Ohio, which provides
significant capacity to support the growth of our business. This central United
States location allows us to achieve shipping cost efficiencies to most
locations. The center is also located within 30 minutes of several major
shipping company hubs. We use a supply chain management system that supports
our entire operation, including fulfillment, inventory management, and customer
service. Our fulfillment center is connected to our other facilities by home shopping tailored for them by
Gaiam. Gaiam believesa
state-of-the art voice-over-IP telecom network that its appealing customer demographics contribute
significantlyallows us to itsmaintain a high
average order value in excessdegree of $90 for the year
ended December 31, 1998, as compared to the direct marketing industry average of
less than $45.connectivity within our organization.
. Experienced Executive Team
We haveGaiam has 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. With Mr. Rysavy as Chairman, which he built to a Fortune 500 company. He was also
the founder and Chief Executive Officer Corporate Express grew from $30 million in annual revenuesof Crystal Market, Inc., which was sold
to over $3 billion in
a five year period and completed a number of strategic acquisitions.become the first Wild Oats Markets store. 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.Planning of Miller's Outpost, which she helped to grow from a $25
million startup to over $500 million in revenues. 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.
Our executive
team also sharesBusiness Segments
We separate our business into two business segments: direct-to-consumer and
business-to-business. Business-to-business revenues as a strong desirepercentage of total
revenues increased to effect positive change on the planet. Each
joined Gaiam to combine their business acumen with their passion for making a
difference.
. Distinctive, Branded Products
Gaiam offers high-quality information, products and services under the Harmony,
InnerBalance and Living Arts brand names. These products appeal to Gaiam's
well-educated and affluent customers and
______________________
/2/ Authored by Paul Ray, who has since agreed to join our board of directors.
30
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. Gaiam
devotes substantial resources to the development, design, testing and sourcing
of products that are consistent with and enhance the image of Gaiam's brands.
. 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. For example,
over 95% of in-stock orders are shipped within 24 hours from receipt of the
order. While prompt shipping may result in higher costs, Gaiam believes that it
enhances customer satisfaction and loyalty. 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 in-depth 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 return
guarantees. We believe that, by offering exceptional customer service, we
encourage repeat purchases by our customers, we enhance our brand identity and
reputation and we build stronger relationships with our customers.
. Established Infrastructure
Gaiam has made substantial investments in its physical facilities, technology
and information systems. In 1996, we established our fulfillment center in
Cincinnati, Ohio, a 64,000 square foot facility that is strategically located40.4% in the population centerfirst quarter of gravity of the United States. 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. In addition to allowing us to provide
an exceptional level of service2001 from 12.5% in 1998.
See Note 12 to our customers today,consolidated financial statements included in this investment reduces
our costs and provides us with a platformprospectus
for future growth. 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 market segment brands retain responsibility for
merchandising and creative presentation. Gaiam provides strategic direction,
31
technology, financial resources and administrative services, as well as
marketing, customer service, fulfillment, purchasing and sourcing.
Our Strategies
. Focusfurther information on our Online Presence
We are upgrading our website and technology systems to create a sophisticated,
interactive commerce 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. Our
"make a difference" philosophy educates consumers about their own ability to
effect positive change through purchases that will result in improvements to the
environment and their well-being.
We believe that creating a large community of consumers of eco-friendly and
natural products will permit us to utilize the collective buying power of these
individual consumers to obtain and, in turn, offer Lohas products and services
at lower prices than might otherwise be available. As we are able to lower
prices in this manner, we expect to attract additional customers. Finally, we
believe that the interactive environment fostered by 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.
. Strengthen Our Brand
We plan to establish the Gaiam name as the leading authority in the Lohas
industry. Gaiam will focus on the needs of cultural creatives by creating an
online environment that solves everyday problems quickly in those areas of life
most important to them, including natural health solutions, eco-friendly
alternatives and personal development. The customer's experience with Gaiam will
center on solving these problems in one destination through an interactive
community, access to experts, reliable information, practical online tools and
Lohas commerce opportunities. Gaiam and Gaiam.com will also function as the
umbrella brands for Harmony, InnerBalance and Living Arts, and any additional
brands we may acquire or develop. We plan to strengthen these brands by
increasing marketing efforts, strengthening relationships with established
retailers and e-tailers and increasing the breadth of our informational
offerings, while maintaining our high level of customer service.
. Pursue Strategic Acquisitions
Because our industry is highly fragmented with no market leaders, we believe
that significant acquisition opportunities exist and that our operating model
positions us as an attractive partner. We will consider strategic acquisitions
that satisfy our focused criteria, including high-quality offerings in the Lohas
market, strong brand identity, a talented and entrepreneurial management team,
high average transaction value, and substantial potential for improved
profitability through shared data bases.
. Offer Quality, Convenience and Selection
32
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 our "store" has unlimited reach, it 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 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 developing synergistic relationships with these
industries. Currently, Gaiam supplies products to companies including Sheraton
Hotels, Hilton Hotels and American Health Specialties, an alternative healthcare
provider.
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 market. As a result, we believe that we can build a
successful consulting and "green audit" business.
Product Brands
While the product offerings of each Gaiam brand are different, reflecting the
needs of the different Lohas market segments, the underlying strategies are the
same:
. Offer the highest quality branded products and information.
Products and information, often created or developed
exclusively by or for Gaiam, are the leaders in their respective
market segments. We continue to incorporate innovations that add
value and differentiate our brands from the competition.
. Develop product and information offerings consistent with Gaiam's
mission. Our product and information mix is unique and is
intended to communicate and demonstrate that Gaiam is a reliable,
authoritative source for the Lohas industry.
. Establish key vendor partnerships to allow Gaiam to expand its
mix of Lohas products. Extensive research is completed on any
vendor before a relationship is formed. As part of our
philosophy, we seek to deal directly with our vendors and to
avoid intermediaries.
. Create distinctive visual presentations for each brand. Gaiam
believes that presenting merchandise in attractive and creative
settings is critical to reinforcing brand identity and to
stimulating interest in our products and information. Most of
this merchandising is handled in-house to enable Gaiam's creative
team to control the process as much as possible.
The merchandising and creative functions of Gaiam are presently organized as
three strategic brands: Harmony targets the industry's Sustainable Economy and
Ecological Lifestyles market segments, Living Arts targets the industry's
Personal Development market segment, and InnerBalance targets the
33
industry's Alternative Healthcare and Healthy Living market segments. Common
logistics, information systems, finance, legal, human resources and general
administrative functions support the entire organization. Gaiam is centralized
with most corporate functions located at our administrative headquarters in
Boulder County, Colorado and most inventory storage and fulfillment for our
brands located at our Cincinnati, Ohio fulfillment center.
Harmony
Harmony focuses on a broad spectrum of household products, that offer eco-
friendly options for the product categories found in mainstream supermarkets and
department stores.
Harmony buyers travel the world to source new products for our customers. We
participate directly with manufacturers to develop a "best of all worlds"
version to earn the Harmony label. We work with our vendors to ensure that
every component of production --- sourcing the ingredients, the processes
utilized and packaging materials --- are all eco-friendly and responsible. We
submit all products to a rigorous testing and approval process for both efficacy
and safety. Aside from this extensive internal scrutiny, we also send out items
to independent labs for additional testing and approval. Naturally, 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, USA Today, The Los Angeles Times,
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 Ecologoical Lifestyles
Energy-Efficient Lights Natural Fiber Clothing
(20,000 hour bulbs, fluorescents) (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
Hammocks, Blankets, Throws) Non-Toxic Cleaning Supplies
Battery Recharger & Non-Toxic Laundry Products
Rechargeable Batteries Natural Pest Repellents
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 aimed at the Personal
Development market segment.
Living Arts produces high quality mind-body-spirit fitness videos. All videos
are recorded on film or digital formats. Living Arts pioneered the 30-minute
fitness video for under $10.00, which has set the standard for the trade.
Living Arts markets its own video and audio tapes, as well as licensed video
titles, for sale to mass merchandisers, department stores, sporting goods
stores, and online retailers. Living Arts sells to companies such as Target,
Price-Costco, K-Mart, Sam's Club, 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.
34
Living Arts partners with leading authorities in the mind-body-spirit arena such
as renowned yoga teachers and publications such as Yoga Journal to create
content.
[Livingarts graphic appears here and the following text]
[Personal Development
Meditation
Yoga
Tai Chi
YOGA PROPS Qi Gong
& CLOTHING Relaxation
Stress Reduction
(Information, Video, Audio, DVD, Clothing,
Accessories, Books)]
InnerBalance
InnerBalance offers a wide selection of 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 aimed at the Alternative Healthcare and Healthy Living market
segments. According to a Journal of the American Medical Association study, 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 the
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.
Direct marketing
We devote significant resources to ensuring that 95% of in-stock orders are
shipped within 24 hours after receipt of the order, unusual in the e-commerce
world. 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 have in-depth product knowledge and
assist customers in selecting products and solutions that meet their needs,
design, price and style criteria. We also enhance our customer service through
initiatives such as extensive training of customer service representatives,
toll-free telephone ordering and unconditional return guarantees. By offering
exceptional customer service experiences, we believe that we encourage repeat
purchases and enhance brand identity, as well as our reputation for integrity.
Business-to-Business
Gaiam markets certain products, principally videos featuring yoga and fitness,
to national and regional mass merchandisers, department stores, sporting goods
stores, bookstores, natural foods stores and online retailers. We are in the
process of expanding our range of products sold in the retail market, as well as
implementing branded "store-within-a-store" facilities, 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. We believe that the Gaiam brands and product mix
are suited to developing synergistic relationships with other businesses.
35
By offering both a direct marketing and business-to-business approach to
distribution, we are maximizing our ability to reach our core customers as well
as enhancing our brand.
Our Customer Service
Gaiam stands behind its 100% Money Back Guarantee. Customers may return
products any time for any reason and receive a full refund of the purchase
price. We believe that this guarantee, coupled with the quality of our customer
service personnel translates into greater customer loyalty and repeat sales.
Referral generated business is becoming an important driver of Gaiam's growth.
Our customer service staff accepts orders, product questions and other customer
service requests, 365 days per year via our dedicated toll free telephone
numbers, fax, mail and e-mail. Our sales representatives verify purchasing
history, order status, delivery dates, returns processing and account credits.
Our fully integrated computer system allows real time verification of in-stock
positions, credit card authorizations, stock moves and transfers. All printed
materials are 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.
Our staff is trained to "think for the benefit of the customer" and help them
choose among the best possible solutions. Our representatives, as part of our
extensive training program, test products and share their experiences with
customers. This feedback assures product quality throughout the organization.
Our service representatives have access to samples of all Gaiam products, as
well as complete 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, which makes for a highly
personalized customer service experience. Several representatives also have
personal 800 numbers so customers can call them directly and receive tailored
assistance with their requests. Dedicated product specialists assist our sales
representatives with technical questions and supplemental research by compiling
product-specific information packets accessible on Gaiam's company-wide e-mail
server.
Our customer service staff members receive hourly wages and commissions. Our
top performers are rewarded with incentive packages including trips and bonuses.
Because of our mission and our recognition programs, we believe that we attract
and retain a loyal and highly qualified customer service staff.
Gaiam also maintains an extensive research library stocked with books, videos
and audio tapes for its 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 processed using the same customer service standards that Gaiam applies
throughout its operations and 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
36
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 an 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 Website
Our website provides online purchasing capability for many products that we
offer. Following placement of an order, the customer will receive an e-mail
order confirmation that will summarize the purchase, the total amount of sale
and any shipping information including the anticipated delivery date. We are
currently in the process of enhancing our website for the convenience of our
customers.
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 might be searched
by topic, product and category. Visitors will have access to their complete
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 24-hour 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.
Our website will encourage visitors to register upon entering to receive a more
personalized site experience. The registration process will consist of a short
questionnaire that will gather information about the visitor's environmental
concerns, product and service interests and standard contact information.
Visitors will not be required to register in order to purchase products or
experience our complete website.
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 and
account balances, make payments, see how their purchases have contributed to
helping the environment and communicate with customer service to answer
questions or resolve problems.
37
Future Acquisitions
We intend to continue to pursue attractive strategic acquisitions that meet our
strict criteria, and fit into the Gaiam objectives of shaping and leading the
Lohas industry. Gaiam continuously monitors acquisition opportunities. 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.
Information Technology
Gaiam uses supply chain management information systems to support virtually all
segments of its business, including merchandising, customer database management
and marketing, order-processing, fulfillment, inventory management, customer
service and financial reporting. We believe that the ability to analyze
information efficiently about our business, products and customers can improve
performance, customer loyalty and service. We believe our current systems will
accommodate at least two years of future growth.
We are implementing a real-time Internet commerce solution designed to
completely automate its online sales and operations. The system offers dynamic
personalization of merchandise offerings, order taking, payment and security,
order management, warehousing and shipping, customer service, real-time
inventory management and accounting as well as comprehensive marketing and
operations reporting and analysis.
The back-end of this e-commerce system is optimized for high volume, real-time
transaction processing utilizing Hewlett Packard's Precision Architecture RISC
systems. The front-end is integrated into our website using e-commerce shopping
paradigms and real-time interfaces to the back-end enterprise data. Online
customers access their accounts, place orders and check order status utilizing
the same back-end enterprise databases as our customer service representatives.
Gaiam operates enterprise-wide e-mail and voice-mail systems integrated into its
internal operations, as well as customer and supplier communications. Our
knowledge library databases are updated and accessed through enterprise-wide
office automation tools.
Our Competitive Position
The markets for the products, information and services offered by Gaiam are
highly fragmented and are characterized by thousands of small and often
undercapitalized businesses. We believe that we compete on the basis of
integrity, the distinctiveness, quality and performance of offerings, depth of
knowledge and research, customer service, creative presentations and brand name
recognition.
Gaiam believes that the primary competitive factors in e-commerce are brand
recognition, site content, ease of use, price, fulfillment speed, customer
support, reliability and integrity. Gaiam's success will depend heavily upon its
ability to provide a compelling and satisfying shopping experience.
Our Intellectual Property
38
Gaiam, Gaiam.com Harmony, InnerBalance and Living Arts and various product names are subject to trademark or
pending trademark applications offiled or hold by Gaiam or a
Gaiam company in the United States.one of our wholly- or
majority-owned subsidiaries. We also currently hold various webinternet domain
names relating to our brand, including "www.gaiam.com."gaiam.com and gaia.com. We believe these
trademarks and domain names are significant assets to our business.
Our Competitive Position
We believe that the LOHAS market is characterized by fragmented supplier
and distribution networks, and we are not aware of a dominant leader. Gaiam's
goal is to establish itself as the market leader.
28
Our business is evolving and competitive. Larger and better established
entities may acquire, invest in or form joint ventures with our competitors.
Many of these entities have longer operating histories and have greater
financial and marketing resources than we have. Increased competition from
these or other competitors could reduce our revenue and profits. In addition,
the smaller businesses we compete against may be able to more effectively
personalize their relationships with customers.
Because Gaiam uses multi-channel distribution for our products, we compete
with various producers of similar products and services. Our competitors include
PPI Entertainment, Goldhil Media, Greenmarketplace.com, thousands of small,
local and regional businesses, and product lines or items that are offered by
large retailers, manufacturers, publishers and media producers.
We believe the principal competitive factors in the LOHAS market are
authenticity of information, distinctiveness of products and services, quality
of product, brand recognition and price. We believe we compete favorably on all
these relevant factors.
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.
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 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 revenues and, accordingly, our
financial prospects.
Our Employees
As of June 30, 1999,May 31, 2001, Gaiam, together with our wholly-owned and the Gaiam companiesmajority-
owned subsidiaries, employed approximately 150247 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:principal
facilities:
Lease
Location Size Use Lease Expiration
-
-------- ---- --- --------------------------
Boulder County, CO 25,00032,000 sq. ft. Headquarters and customer service October 2001
Outlet center January 2000March 2002
Cincinnati, OH 64,000208,100 sq. ft. Fulfillment center October 2000
Santa Monica,March 2006
Venice, CA 5,0009,000 sq. ft. Creative staff offices June 2000July 2005
Hopland, CA 12 acres Renewable Energy Demo Site Owned
We have options to renew our key leases.headquarters lease. 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.need them.
Regulatory Matters
29
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.
We generally collect internet and catalog 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, Gaiam collects sales taxes
in 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 placed a 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.
Our business is also subject to a number of other 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 promulgatedLegal Proceedings
We are subject to non-material legal proceedings arising 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
39
electronic mail or printed materials. Although Gaiam believes it is generally in
compliance with current laws and regulations and that such 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, on-line 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 such laws or regulations could reduce
the rate of growth of the Internet, which could potentially decrease the usageordinary
course of our online stores or could otherwisebusiness. We do not believe that any of these proceedings will
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 such 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 ("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 such
activities.
4030
Legal Proceedings
Gaiam is not a party to any material legal proceedings.
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 June 30,
199920,
2001 and their positions are as follows:
NAME AGE POSITIONName Age Position
- ---------------- --- ------------------------
Jirka Rysavy 45Rysavy............. 47 Founder, Chairman of the Board and Chief Executive Officer
Lynn Powers 50Powers.............. 52 President, Chief Operating Officer and Director
Pavel Bouska 45Bouska............. 47 Executive Vice President and Chief Information Officer
Barnet M. Feinblum....... 53 Director
John Mackey.............. 47 Director
Barbara Mowry............ 53 Director
Paul H. Ray 60 Director*Ray.............. 61 Director
*Mr. Ray will join the board upon conclusion of this offering.
JIRKA RYSAVY -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 $4 billion corporate supplier of non-production
goods.In 1986, Mr. Rysavy founded Corporate
Express, in 1986Inc., which, under his leadership, grew to become a Fortune 500 company
supplying office and until September 1998computer products and services. He was its Chairman and
Chief Executive Officer. Previously heOfficer until September 1998. Mr. Rysavy also founded and served
as Chairman and Chief Executive Officer of Crystal Market, Inc., a health foodfoods
market, which was sold in 1987 and became the first store of Wild Oats Markets.Markets store. Mr.
Rysavy is also a director of Whole Foods Markets,Market, Inc.
LYNN POWERS -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 which she helped grow
from $25 million to $575 million in annual revenues.retailer.
PAVEL BOUSKA -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 becomeBARNET M. FEINBLUM. Director since October 1999. Mr. Feinblum is a director
of GaiamHorizon Organic Dairy and served as the President and Chief Executive Officer
of Horizon from May 1995 to January 2000. From July 1993 through March 1995, Mr.
Feinblum was the President of Natural Venture Partners, a private investment
company. From August 1976 until August 1993, Mr. Feinblum held various positions
at Celestial Seasonings, Inc., including President, Chief Executive Officer, and
Chairman of the conclusionBoard. Mr. Feinblum is also a director of this
offering.Seventh Generation,
Inc.
JOHN MACKEY. Director since September 2000. Mr. Mackey has been the
Chairman and Chief Executive Officer of Whole Foods Market, Inc., the world's
largest natural food retailer, since he co-founded the company 20 years ago. Mr.
Mackey is also a director of Jamba Juice.
BARBARA MOWRY. Director since October 1999. From November 1997 until
February 2001, Ms. Mowry was the President and Chief Executive Officer of
Requisite Technology, a business-to-
31
business e-commerce company specializing in the creation and management of
electronic content and catalogs. Prior to joining Requisite Technology, Ms.
Mowry was an officer of Telecommunications, Inc. (cable television) from 1995 to
1997. In 1990, Ms. Mowry founded, and until 1995 served as Chief Executive
Officer of, The Mowry Company, a relationship marketing firm focusing on the
development of customer relations for businesses.
PAUL H. RAY. Director since October 1999. Mr. Ray has beenis a senior partner in
Integral Partnership, a consulting firm specializing in Cultural Creative
topics. From November 1986 to December 2000, he was Executive Vice President of
American LIVES, Inc., a market research and opinion polling firm since November 1986.firm. 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 BA, cum laude, in
anthropology from Yale
41
University and a Ph.D. in sociology from the University of Michigan. He is the author of The"The
Integral Culture Survey," which first identified and named the cultural creativeCultural Creatives
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, which 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 could have an adverse effect on the liquidity and price of the
shares.
Committees of the Board of Directors
Our board has standing audit and compensation committees. We have adopted
written charters for both committees.
Audit Committee. Our audit committee consists of Messrs. Feinblum and Ray
and Ms. Mowry, and each member of the committee is independent within the
meaning of applicable NASDAQ rules. Ms. Mowry serves as chairperson of the audit
committee. The audit committee oversees (a) management's maintenance of the
reliability and integrity of our accounting policies and financial reporting and
disclosure practices; (b) management's establishment and maintenance of
processes to assure that an adequate system of internal control is functioning;
and (c) management's establishment and maintenance of processes to assure our
compliance with all laws, regulations and company policies relating to financial
reporting. The audit committee held one meeting during fiscal 2000.
Compensation Committee. Our compensation committee consists of Messrs.
Feinblum and Ray and Ms. Mowry. Mr. Feinblum serves as chairperson of the
compensation committee. The compensation committee establishes compensation
amounts and policies applicable to executive officers and establishes salaries,
bonuses and other compensation plans and matters for executive officers of Gaiam
intends to establish an Audit Committee within 90 days following this
offering composed of at least twoand administers Gaiam's stock option plans and employee stock purchase plan. The
compensation committee held four meetings during fiscal 2000.
We do not have a nominating committee, and nominations for directors which isare
made by our board. Our bylaws set forth certain procedures that are required to
maintain
Gaiam's listing onbe followed by shareholders in nominating persons for election to our board.
Generally, written notice of a proposed nomination must be received by the
Nasdaq National Market.Secretary of the Corporation not later than the 45/th/ day nor earlier than the
70/th/ day prior to the anniversary of the mailing of the preceding year's proxy
materials.
Compensation Committee Interlocks and Insider Participation
The majoritycompensation committee consisted of Messrs. Feinblum and Ray and Ms.
Mowry during fiscal 2000. None of the members of the Audit Committee willcompensation committee is
currently, or has ever been at any time since our formation, one of our officers
or employees or an officer or employee of any of our subsidiaries. During 2000,
no executive officer of Gaiam served as a member of the board of directors or
32
compensation committee of any entity that had one or more executive officers
serving as a member of our Board of Directors or compensation committee.
Director Compensation
Directors who are not be employees of Gaiam. The Audit Committee will
reportGaiam or its affiliates are paid a fee
of $3,000 for each meeting of our board that they attend, and a fee of $1,000
for each telephonic meeting attended. In addition, non-employee directors are
paid a fee of $500 for attendance at each committee meeting and non-employee
chairpersons of each standing committee receive an annual fee of $1,000. All
directors have elected to receive their compensation in Gaiam shares.
During 1999, each non-employee director received a stock option to acquire
10,000 shares of class A common stock at an exercise price of $5, which was the
offering price in our initial public offering. Mr. Mackey received a stock
option to acquire 10,000 shares of Class A Common Stock at an exercise price of
$16.375 when he joined the Board regarding the appointment of the independent public
accountants of Gaiam, the 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 intends to
establish a Compensation Committee, which we expect to be comprised 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.in September 2000.
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, such
exculpation
would cover an officer's ora director's breaches of fiduciary duty, except for:
. breaches of sucha person's duty of loyalty to Gaiam,
. those instances where sucha person is found not to have acted in good faith,
. those instances where sucha person received an improper personal benefit as the
result of suchthe 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.
42
Executive Compensation
The following table sets forth certain information regarding the compensation, for the yearyears ended
December 31, 1998, 1999 and 2000, of Gaiam's executive officers, Mr. RysauyRysavy and
Ms. Powers. Information is also included with respect to 1998 Compensationcompensation for twothree
of Gaiam's Vice Presidents:Presidents for 1998, 1999 and 2000:
33
SUMMARY COMPENSATION TABLE
Name and Principal Position Year Annual 1998 All Other 1998Long Term
Compensation Compensation
------------ --------------Compensation(1)
- --------------------------- ---- -------------------------- -----------
Securities
Underlying
Salary Bonus Options
------------ --------- -----------
Jirka Rysavy
- Chairman and Chief Executive
Officer $ ----/1/ $ --- $ ---/2/2000 $140,385 -- --
1999 125,000 -- 200,000
1998 --(2) -- --
Lynn Powers -
President and Chief
Operating Officer 2000 140,385 $100,000 90,000
1999 125,000 -- 160,000
1998 110,009 --- ---/2/
Mark Lipien - Vice President Operations 70,802-- --
Pavel Bouska
Chief Information Officer 2000 134,231 20,000 --
1999 100,632 -- 80,000
1998 -- -- --
Janet Mathews
Chief Financial Officer 2000 116,724 30,000 --
1999 104,592 -- 20,000
1998 102,686 10,000 ---/2/--
Linda West -
Vice President Merchandising 2000 96,154 15,000 --
1999 88,077 -- 20,000
1998 83,076 10,000 ---/2/--
____________________________________________
(1) See table below regarding stock option grants.
(2) Gaiam began compensating Mr. Rysavy in January 1999.
His salary is
currently $125,000.
(2) Until June 1,Stock Option Grants
The following table provides information with respect to the individual
stock option grants to the named officers under the 1999 Long-Term Incentive
Plan during fiscal year 2000. Options under the plan vest at 2% per month during
the 11/th/ through the 60/th/ month after the grant.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Rates of Stock
Underlying Granted to Exercise or Appreciation for
Options Employees in Base Price Expiration Option Term(1)
--------------------------
Name Granted(#) Fiscal Year ($/Share) Date 5%($) 10%($)
- ---- ---------- ------------- ----------- ---------- ----------- ------------
Lynn Powers............. 90,000 30.8% $ 15.25 December 6, 2007 558,745 1,302,114
_____________________
(1) The 5% and 10% assumed annual rates of compound stock price appreciation
over the term of the options are computed in accordance with the rules and
regulations of the Securities and Exchange Commission and do not represent
Gaiam's estimate of stock price appreciation or a projection by Gaiam did not make any restrictedof future
stock awards, grant
anyprices.
34
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table provides information, with respect to the named
officers, concerning the value of unexercised stock appreciation rights, make any long-term incentive plan payouts or
grantoptions exercisable for
Gaiam Class A Common Stock held as of December 31, 2000. In 2000, no named
officer exercised any stock options.
Stock Plans
We recently adopted a long term incentive plan and an employee stock purchase
plan.Number of Shares
Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
December 31, 2000 (#) at December 31, 2000 (1)
-------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Jirka Rysavy......... 32,000 168,000 354,000 1,858,500
Lynn Powers.......... 25,600 224,400 283,200 1,503,675
Pavel Bouska......... 12,800 67,200 141,600 743,400
Janet Mathews........ 2,000 18,000 21,875 193,125
Linda West........... 2,000 18,000 21,875 193,125
_____________
(1) The incentive plan provides forvalue of unexercised in-the-money options is based on the grantdifference
between the exercise price of the individual 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 650,000 options, all at aclosing price
of $4.375 per share. The
employee purchase plan will allow our employees to purchase shares at a 15%
discount from market value, subject to restrictions. We have reserved a total
of 500,000 shares under$15 7/16 as reported on the employee purchase plan.NASDAQ exchange on December 31, 2000.
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, upon joining GaiamGaiam's directors, officers and managers are required to
sign a confidentiality agreement and, upon receiving a stock option grant, a
two yeartwo-year non-compete agreement commencing with the date they leave Gaiam.
CERTAIN RELATIONSHIPS AND RELATED 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, and on1998. 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 bearswas subject to mandatory conversion
into shares simultaneous with the closing of Gaiam's initial public offering at
the initial offering price and bore interest at 8% per annum and
may be prepaid at any time by Gaiam. In connectionannum. Simultaneous with
thisthe closing of Gaiam's initial public offering in October 1999, Ms. Powers hasPowers'
debentures were automatically converted into 10,000 shares, which are restricted
securities as defined in Rule 144 under the right to purchase shares for the outstanding principal amount of
the debenture at the offering price of $5.00 per share.Securities Act. Accrued and unpaid
interest will bewas paid in cash.
43
AllCertain 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. See note 6The proceeds of these sales were $538,750 in 1999. Gaiam
obtained the notessecurities by exercising options granted by Mr. Rysavy to consolidated financial
statements.
Gaiam subleasesin
1993.
During 1999 and until April 2000, Gaiam subleased its fulfillment center in
Cincinnati, Ohio from a subsidiary of Corporate Express, Inc. at an annual
rental rate of approximately $205,200, which we believe to be a market rate.was the same rate as paid by
Corporate Express, Inc. under its lease. During 1999, Mr. Rysavy iswas a director
of Corporate Express and beneficially owned approximately 4.9% of the stock of
Corporate Express but did not control Corporate Express. The lease expireswas
terminated in April 2000 in connection with Gaiam's lease of a new 208,000 sq.
ft. distribution center.
35
Until October 2000.1999, Mr. Rysavy is a guarantor ofguaranteed Gaiam's line of credit with Wells
Fargo Bank (formerly Norwest Bank. See
"Management's DiscussionBank). The credit agreement permitted borrowings
up to $3 million (of which $1.9 million was outstanding at December 31, 1999)
based upon the collateral value of Gaiam's accounts receivable and Analysisinventory
held for resale. These borrowings were secured by a pledge of Financial ConditionGaiam's assets and
Resultsbore interest at the prime rate plus 1%.
In 1999, Gaiam engaged the services of Operations -- Liquidityccplanet.com, Inc. to develop and
Capital Resources."
OURimplement a new web site design using the latest technology for Gaiam's direct-
to-consumer operations. Mr. Rysavy owns a majority of ccplanet's stock. Gaiam
paid ccplanet $1.2 million for work performed on the project through December
31, 1999 and an additional $3.3 million in 2000 (the new site was placed into
service during March, 2000). Gaiam made its customer database and certain visual
media available to ccplanet in exchange for fees totaling $600,000 during 1999
and $1.4 million during 2000.
In 2000, Mr. Rysavy advanced funds to Gaiam to purchase a 70% interest in
an organic clothing manufacturer. These advances, plus applicable interest, were
repaid in December 2000. Additionally, Gaiam purchased approximately $300,000 in
inventory from Earthlings, Inc. (a related party under common ownership with Mr.
Rysavy) at Earthlings' cost. On January 5, 2001, Gaiam purchased Earthlings for
$47,509.
On June 30, 2000, Whole Foods Market, Inc., a publicly traded company, and
Gaiam merged their Internet properties into Gaiam.com, Inc. Gaiam owns 50.1% of
Gaiam.com, Inc., Whole Foods Market owns 35% and the remainder is owned by
various venture capital funds. Gaiam is the exclusive internet site for both
Gaiam and Whole Foods Market. Whole Foods Market and Gaiam have also entered
into a 10 year joint marketing agreement to promote each other's business and
share customer data. The companies are currently testing a store-within-a-store
concept, presenting Gaiam's lifestyle products, in 21 of Whole Foods Market's
larger stores. During 2000, a subsidiary of Whole Foods Market engaged the
services of ccplanet for total consideration of $ 1.5 million, and Infocenter,
Inc., a company formed by Mr. Rysavy, assumed certain liabilities of the Whole
Foods Market subsidiary and received funding ($500,000 in cash and a note in the
principal amount of $3,000,000) to satisfy such liabilities.
On December 29, 2000, Self Care Holdings, Inc., a corporation owned by Mr.
Rysavy, purchased certain inventory and other assets of Medical SelfCare, Inc.
in an auction conducted in connection with an assignment for the benefit of
creditors of Medical SelfCare. On February 1, 2001, Gaiam acquired substantially
all of the inventory and assets from Self Care Holdings by acquiring Self Care
Inc., a wholly-owned subsidiary of Self Care Holdings, for $3.9 million, an
amount equal to Self Care Holdings' purchase price for the purchased inventory
and assets plus related transaction costs.
36
PRINCIPAL 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
directors, executive officers and 5% shareholders who beneficially owned shares
on June 30, 1999,20, 2001, 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
Shares Beneficially Owned
Owned Prior to this Offering/11/ After this
Offering/11//12/
--------------------------Offering(7) Offering(7)(8)
------------------------------ -------------------------------
Number of Number of
Beneficial Owner Number of Shares/13/ Percent Number of Shares/13/ PercentShares(9) Percent(9) Shares Percent(10)
- ---------------- ------------- -------------- ------------- ---------------
Jirka Rysavy/1/ 8,000,000 93.8% 8,100,000 77.0%Rysavy(1)..................... 8,150,200 71.32% 8,150,200 59.8%
Lynn Powers/2/ 40,000 .5% 60,000 .6%Powers(2)...................... 142,200 2.36% 142,200 1.7%
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%Bouska(3)..................... 119,520 2.00% 119,520 1.5%
Barnet Feinblum(4).................. 13,304 * 13,304 *
John Mackey ........................ 85,300 1.43% 85,300 1.0*
Barbara Mowry(5).................... 7,304 * 7,304 *
Paul Ray(6)......................... 7,168 * 7,168 *
All Executive Officers and
Directors 8,080,000 95.7% 8,220,000 78.2%(7 persons).............. 8,524,966 73.99% 8,524,966 62.1%
/1/________
* Less than one percent
(1) Includes options held by Mr. Rysavy owns 7,035,000to acquire a total of 64,000 shares
which options have vested or will vest within 60 days of the date of this
prospectus. Mr. Rysavy, our Chairman and Chief Executive Officer, holds
all 5,400,000 outstanding shares of class B common stock which constitute
alland 2,686,200
shares of the issuedclass A common stock (or approximately 45% of the
outstanding shares of class A common stock). The shares of class B common
stock vote ten votes per share. Pursuant to a voting agreement between Mr.
Rysavy and outstandingGaiam, Mr. Rysavy has agreed to limit the number of shares of
class B common stock that he votes to 49% of the combined votes of the
class B common stock and class A common stock. His remaining shares of
Class B Common Stock are convertible into an equal numbervoted in proportion to the votes of shares. Mr. Rysavy also owns
965,000 shares. Includes 100,000 shares Mr. Rysavy will purchase in
this offering.the Class A
Common Stock. See "Description of Capital Stock -- Shares"Stock--Shares" for a description
of the voting rights of the class B common stock.
/2/(2) Includes 20,000 sharesoptions held by Ms. Powers to acquire a total of 51,200 shares
which options have vested or will purchase invest within 60 days of the date of this
offering.
/3/prospectus.
(3) Includes 20,000 sharesoptions held by Mr. Bouska to acquire a total of 25,600 shares
which options have vested or will purchasevest within 60 days of the date of this
prospectus, and 1,100 shares and 2,720 in options to acquire shares, which
options have vested or will vest within 60 days of the date of this
offering
/4/prospectus, held by Mr. Argyropoulos isBouska's spouse, an employee of Gaiam.
(4) Includes options held by Mr. Feinblum to acquire a total of 5,000 shares,
which options have vested or will vest within 60 days of the general partnerdate of Argyropoulos Investor G.P. He isthis
prospectus, and 1,000 shares held by Mr. Feinblum's spouse.
(5) Includes options held by Ms. Mowry to acquire a total of 5,000 shares, which
options have vested or will vest within 60 days of the founder, and until 1989 was Chairman,date of The Cherokee Group, and
currently isthis
prospectus.
(6) Includes options held by Mr. Ray to acquire a total of 5,000 shares, which
options have vested or will vest within 60 days of the founder and Chairmandate 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.
44
/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.
/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 59/th/ Street, New York,
New York 10022. Includes 100,000 shares he will purchase in this
offering.
/11/prospectus.
(7) Each shareholder possesses sole voting and investment power with respect to
the shares listed, except as provided by applicable community property
laws.laws or as otherwise noted. In accordance with the rules of the Securities
and Exchange Commission, each shareholder is deemed to beneficially own
any shares obtainable by him or her upon the exercise of stock options or
warrants which are currently exercisable or which become exercisable
within 60 days after June 30, 1999,20, 2001, or the conversion of convertible
securities that are currently convertible or become convertible within 60
days after June 30, 1999.20, 2001. The inclusion in this table of shares listed as
beneficially owned does not constitute an admission of beneficial
ownership.
/12/(8) 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/(9) The number of shares deemed outstanding prior to this offering includes all
shares of class A common stock outstanding as of June 30, 1999 and20, 2001. In
addition, the number of shared deemed outstanding for each shareholder
includes any shares obtainable by such shareholder through the conversion
of class B common stock held by Mr. Rysavy. Noor through the exercise of options to purchase
shares that are exercisable within 60 days of the date of this prospectus.
Ownership percentages based solely
on the 1,496,42937
(10) The number of 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 bedeemed outstanding after this offering includes all
shares of class A common stock outstanding as of the date of this
prospectus including the shares offered pursuant to this prospectus. In
addition, for each shareholder, such number of deemed outstanding includes
any shares obtainable by such shareholder through the conversion of class B
common stock or through the exercise of options to purchase shares that 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%.exercisable within 60 days of the date of this prospectus.
38
DESCRIPTION OF CAPITAL STOCK
General
After the filing of Gaiam's Amended and Restated Articles of Incorporation in
connection with this offering, theThe authorized capital stock of Gaiam will
consistis 250,000,000 shares, consisting of
92,965,000150,000,000 shares of class A common stock, $.0001 par value per share,
and 7,035,00050,000,000 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 June 30, 1999,May 31,
2001, there were 1,496,4295,963,137 shares of class A common stock outstanding held by
ten9,115 shareholders of record, options to purchase an aggregate of approximately 650,0001,470,318
shares, a warrant to purchase 24,000 shares and 7,035,0005,400,000 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."
45
SharesCapital Stock
Each holder of shares of class A common stock 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 of class A common stock 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 of class A common
stock 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 of class A common stock and shares of class B common stock are
entitled to equal dividends, if any, as may be declared by the Board of
Directors out of legally available funds, only if any
other class of stock have also received dividends of an equal or greater amount.funds. In the event of a liquidation,
dissolution or winding up of Gaiam, the shares of class A common stock 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 of class A common stock 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 of class A
common stock and class B common stock. The outstanding shares of class A common
stock and shares of class B common stock are, and the shares of class A common
stock 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
shares of class A shares,common stock, other than certain transfers to affiliates and
family members. The shares of class B common stock are convertible one-for-one
into shares of class A shares,common stock, at the option of the holder of the shares
of class B common stock.
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 rights, preferences and privileges of holdersBoard may provide for the issuance of the sharespreferred 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 are subject to,with voting, conversion and
may beother rights and preferences that could adversely affected by,affect the voting power or
other rights of the holders of shares ofthe shares. Although Gaiam has no current plans
to issue any seriespreferred stock, the issuance of preferred stock
that39
or of rights to purchase preferred stock could have the effect of making it more
difficult for a third party to acquire Gaiam, may authorize,
designate and issue in the future.or of discouraging a third party
from attempting to acquire Gaiam. Such an issuance could also dilute your voting
power.
Bylaws
The Bylaws provide in accordance with Colorado law, that shareholders may not take action without a
shareholders' meeting, provided that all shareholders entitled
to vote consent to do so in writing.meeting. 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 matter for which a statement of purpose is requiredthan by the Colorado Business
Corporation Act.Gaiam board of directors. These
provisions could have the effect of delaying, deferring or preventing a change
of control of Gaiam.
Voting Agreement
Mr. Rysavy, our Chairman and Chief Executive Officer, holds all 5,400,000
outstanding shares of class B common stock and 2,686,200 shares of the class A
common stock (or approximately 45% of the outstanding shares of class A common
stock). The shares of class B common stock vote ten votes per share. Pursuant
to a voting agreement between Mr. Rysavy and Gaiam, Mr. Rysavy has agreed to
limit the number of shares of class B common stock that he votes to 49% of the
combined votes of the class B common stock and class A common stock. His
remaining shares of class B common stock are voted in proportion to the votes of
the class A common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the shares is __________.Computershare Trust
Company, Inc.
40
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 effectaffect the
prevailing market price for our shares. Furthermore, sincebecause 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.
46
Upon the closing of this offering, based upon the number of shares
outstanding as of June 30, 1999,May 31, 2001, there will be 3,496,4298,163,137 shares of class A common
stock (including the 2,200,000 shares sold in this offering but assuming no
exercise of the underwriters' over-allotment option) and 7,035,0005,400,000 shares of
class B common stock outstanding. Of these shares, all 2,000,000approximately 4,500,000
shares of class A common stock (including the 2,200,000 shares sold in this
offeringoffering) will be freely tradable without restriction or further registration
under the Securities Act, unless either suchother than shares that are purchased by "affiliates"affiliates of
Gaiam as that term is defined in RuledRule 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"--Lock-up Agreements" below. TheOf the
remaining 1,496,429 shares, approximately 3,700,000 shares of class A common stock and all
7,035,0005,400,000 shares of class B common stock will be "restricted securities"restricted securities as that term is
defined in Rule 144 under the Securities Act.Act or shares held by affiliates of
Gaiam. Restricted securities and shares held by affiliates may be sold in the
public market only if registered or if they qualify for an exemption from
registration under RulesRule 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 1,600,000 shares reserved for issuance
under our incentive plan and approximately 500,000 shares reserved under our
stock employee purchase plan, which would permit persons acquiring such shares
(other than persons who have entered into the lock-up agreements referred to
below) to sell such shares in the public market as the options vest. 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
restricted shares for at least one year, or any affiliate, 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 35,00082,000 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 suchthe 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 restricted 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
suchthe 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"such shares may be sold immediately upon the completion of this offering.at any time.
Lock-up Agreements
All of our directors officers and existing shareholdersofficers (who in the aggregate hold 1,496,429 shares and2,966,476
shares of 7,035,000class A common stock and 5,400,000 shares of class B common stock, and whostock)
will acquire an additional 495,000 shares in this offering) have signedbe covered by lock-up agreements under which they agreedwill 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 dateclosing of this prospectus.the offering. Transfers or dispositions
can be made sooner:
4741
. with the prior written consent of Tucker Anthony Cleary Gull;Sutro Capital Markets;
. in the case of certain transfers to affiliates;
. as a bona fide gift; or
. to a trust.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, 8,641,429approximately 9,100,000 shares
shares (including 7,035,0005,400,000 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 dateclosing of this
prospectus,the
offering, without the prior written consent of Tucker Anthony Cleary Gull,Sutro Capital
Markets, except that we may:
. issue shares upon the exercise of outstanding options and grant options to
purchase shares under our incentive plan;1999 Long-term Incentive Plan;
. issue shares under our employee stock employee purchase plan; and
. issue shares in connection with the acquisition of another company if the
terms of suchthe issuance provide that suchthe 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 areWe may be required to file aone or more registration statementstatements covering up
to approximately 451,429 shares held by existing shareholders. The holders may
not request the filing of such
registration statements until after July __,20, 2001.
Gaiam generally is required to bear all of the expenses of such registration,the registrations,
except underwriting discounts and commissions. 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.
42
UNDERWRITING
The underwriting agreement, dated ____, 1999,which is filed as an exhibit to the registration
statement relating to this prospectus, provides that 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:
Number of
Underwriters: 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 to cover such sales. They may exercise that
option for 30 days. 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.
48
Underwriters: Shares
------------- ------
Tucker Anthony Sutro Capital Markets....................
Adams, Harkness & Hill, Inc............................. _________
Total.................................................. _________
The underwriting agreement provides that the obligationsunderwriters are obligated to
purchase all of the shares of class A common stock in the offering if any are
purchased, other than those covered by the over-allotment option described
below. Tucker Anthony Sutro Capital Markets and Adams, Harkness & Hill, Inc., on
behalf of the underwriters, expect to deliver the shares on or about , 2001.
We have granted the underwriters a 30 day option after the date of the
underwriting agreement to purchase, from time to time, up to 330,000 shares at
the public offering price less underwriting discounts and accept deliverycommissions. The
option may be exercised to cover over-allotments, if any, made in connection
with the offering. To the extent that this option is exercised, each
underwriter will be obligated, subject to certain conditions, to purchase its
pro rata portion of these additional shares based on the underwriter's
percentage underwriting commitment in the offering as indicated in the preceding
table.
The representatives of the underwriters have advised us that the
underwriters propose to offer shares offered inof class A common stock directly to the
public at the public offering price on the cover of this prospectus are
subject to approval by their counsel of certain legal matters and to
certain
other conditions.selected dealers, who may include the underwriters, at this public offering
price less a selling concession not in excess of $ per share. The
underwriters must purchasemay allow, and accept deliverythe selected dealers may re-allow, a discount from
the concession not in excess of all$ per share to other dealers. After the
shares offered in this prospectus,completion of the offering, the representatives may change the public offering
price and other than those shares covered by the over-
allotment option, if any are purchased.selling terms.
The following table showssummarizes the underwriting fees to be paiddiscounts and commissions
we will pay to the underwriters
by Gaiam in connection with this offering.underwriters. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase 330,000
additional shares.
No Exercise Full Exercise
Per share............... $ $
Total................... $ $
Gaiam will pay offering expenses, estimated to be $______.
In connection with this offering, we are offering each of our debenture holdersThe underwriting fee is 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.
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. Our customers will receive a 10%
discount fromdifference between 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. Any sharesand the amount the underwriters pay to Gaiam for the shares.
No Exercise Full Exercise
of Over- of Over-
allotment allotment
Option Option
--------- -----------
Per share........................................... $ $
Total.............................................. $________ $________
We estimate that the total expense of this offering, excluding the
underwriting discounts and commissions, will be approximately $___________.
Our class A common stock is quoted on the NASDAQ National Market under the
symbol "GAIA."
43
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act and liabilities incurred in
connection with the directed share program referred to below, and to contribute
to payments that the underwriters may be required to make for these liabilities.
The representatives of the underwriters may engage in over-allotment,
stabilizing transactions, syndicate covering transactions, and penalty bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
class A common stock, in accordance with Regulation M under the Securities
Exchange Act.
. Over-allotment involves syndicate sales in excess of the offering
size, which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specific
maximum.
. Syndicate covering transactions involve purchases of the class A
common stock in the open market after the distribution has been
completed.
. Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the underwriterssyndicate member is purchased in a
syndicate covering transaction to securities
dealers may be sold at a discount of up to $__ per share from the $5.00 initial
public offering price. Any such 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.tuckeranthony.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 date of this
prospectus, 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.cover syndicate short
positions.
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 of class A common stock in
the open market. These transactions may include over-allotment andshort sales, stabilizing
transactions and purchases to cover short positions created in
connection with this offering. Stabilizing transactions consist of certain bids
or
49
purchases made for the purpose of preventing or retarding a decline in the
market price of the shares.by short sales. Short
positionssales involve the sale by the underwriters of a greater number of shares than
they are required to purchase in the offering. Covered short sales are sales
made in an amount not greater than the underwriters' option to purchase
additional shares from Gaiamthe issuer in thisthe offering. These activitiesThe underwriters may stabilize, maintainclose
out any covered short position by either exercising their option to purchase
additional shares or otherwisepurchasing shares in the open market. In determining the
source of shares to close out the covered short position, the underwriters will
consider, among other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase shares through
the over-allotment option. Naked short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the class A common stock in the open market after pricing that could
adversely affect investors who purchase in the offering. Stabilizing
transactions consist of various bids for or purchases of class A common stock
made by the underwriters in the open market prior to the completion of th e
offering.
Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the shares, which may asclass A common stock or preventing or retarding a
decline in the market price of the class A common stock. As a result, the price
of the class A common stock may be higher than the price that might otherwise
prevailexist in the open market.
TheseNeither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may be effectedhave 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. Among the factors
considered in determining the initial public offering price of the class A common stock. In addition,
neither we nor any of the underwriters make any representation that the
representatives will engage in these stabilizing transactions or that any
transaction, once commenced, will not be discontinued without notice.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed 5% of the total number of shares offered
by them.
We, our directors, officers and stockholders that hold over 5% of our
securities will agree not to offer to sell, sell or otherwise dispose of,
directly or indirectly, any shares of capital stock or any
44
securities that may be converted into or exchanged for any shares of our capital
stock for a period of 180 days from the date of the prospectus without the prior
written consent of Tucker Anthony Sutro Capital Markets, except that we may:
. issue and grant options to purchase shares of common stock under our 1999
Long Term Incentive Plan.
. issue shares under our employee stock 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.
See "Shares Eligible for Future Sale."
An electronic final prospectus will be available on Tucker Anthony Sutro
Capital Markets' website at www.tascm.com.
Purchasers of the shares of class A common stock offered in this prospectus
may be required to pay stamp taxes and other charges under the laws and
practices of the county of purchase, in addition to prevailing market conditions, are Gaiam's historical performance,
estimates of Gaiam's business potential and earnings prospects, an assessment of
Gaiam's management 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 tradingoffering price listed on
the Nasdaq National
Market under the symbol "GAIA."
We have agreed to indemnify the underwriters against or contribute to losses
arising outcover of certain liabilities, including liabilities under the Securities
Act.this prospectus.
LEGAL MATTERS
The validity of the shares of class A 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 & WhitneyBrobeck, Phleger and Harrison LLP, Denver,Broomfield, 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, Inc. at September 30, 1998 and for the nine month period then ended,
as set forth in their reports.
The consolidated financial statements of Gaiam, Inc. at December 31, 19962000
and 1999, and for each of the year thenthree years in the period ended December 31, 2000,
appearing in this Prospectus and Registration Statement have been audited by
Wendell T. Walker and Associates,Ernst & Young LLP, independent auditors, as set forth in their report. We'vereport thereon
appearing elsewhere herein, and are included in reliance upon such report given
on the financial statementsauthority of such firm as experts in accounting and schedule of Gaiam, Inc. and
theauditing.
The financial statements of Healing Arts Publishing, Inc.Real Goods Trading Corporation for the year
ended March 31, 2000 included in this prospectus have been audited by Moss Adams
LLP, independent auditors, as stated in their report and elsewhere in the registration statement in reliance on Ernst & Young LLP's
reports and Wendell T. Walker and Associates' reports,have been given onupon
their authority as experts in accounting and auditing.
ADDITIONALThe financial statements of Real Goods Trading Corporation as of March 31,
1999 and for the year then ended included in this prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein, and have been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Gaiam files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission (SEC). You may
read and copy any reports, statements or other information we file at the SEC's
public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms.
Gaiam's SEC filings, including the registration statement, are also
available to the public from commercial document retrieval services and at the
web site maintained by the SEC at www.sec.gov. You may also obtain additional
information at Gaiam's web site at www.gaiam.com.
We have filed with the U.S. Securities and Exchange CommissionSEC 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.
50
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, weWe intend to send to itsour 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.
5145
INDEX TO FINANCIAL STATEMENTS
Gaiam, Inc. Page
----
Index to Gaiam's Financial Statements:
Report of Independent Auditors - Ernst & Young LLP........................ F-1
Independent Auditors' Report -Wendell T. Walker & Associates..............Auditors.................................................................. F-2
Consolidated Financial Statements at December 31, 1998
Consolidated Balance Sheets..........................................Sheets..................................................................... F-3
Consolidated Statements of Income....................................Income............................................................... F-4
Consolidated Statements of Stockholders' Equity......................Equity................................................. F-5
Consolidated Statements of Cash Flows................................Flows........................................................... F-6
Notes to Consolidated Financial Statements...........................Statements...................................................... F-7
Index to Real Goods' Financial Statements:
Independent Auditors' Report--Moss Adams, LLP................................................... F-21
Independent Auditors' Report--Deloitte & Touche, LLP............................................ F-22
Balance Sheets.................................................................................. F-23
Statements of Operations........................................................................ F-24
Statements of Cash Flows........................................................................ F-25
Statements of Shareowners' Equity............................................................... F-26
Notes to Financial Statements.................................................................. F-27
Real Goods Condensed Statements of Operations................................................... F-35
Real Goods Condensed Statements of Cash Flows................................................... F-36
Notes to Condensed Financial Statements......................................................... F-37
Gaiam Unaudited Pro Forma Consolidated Statement of Operations............................... F-20Operations.................................. F-39
F-1
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Gaiam, Inc.
We have audited the accompanying consolidated balance sheets of Gaiam,
Inc. and subsidiaries as of December 31, 19981999 and 1997,2000, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years then
ended. Our audits also included the financial statement schedule listed in the Index at Item 14(a).period ended December 31, 2000. These financial
statements and schedule are the responsibility of the Company'sGaiam'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 auditing standards
generally accepted auditing
standards.in the United States. 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, 19981999 and 1997,2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Denver, Colorado
February 27, 2001,
F-2
GAIAM, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1999 2000 2001
-------------------------------------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,877,465 $ 8,578,668 $ 6,374,022
Accounts receivable, net of allowance for
doubtful accounts of $158,292 in 1999 and
$301,539 in 2000 4,326,594 8,472,828 8,407,739
Accounts and notes receivable, other 755,924 1,097,390 755,110
Inventory, less allowances 4,555,436 6,361,046 10,332,540
Deferred advertising costs 2,176,325 1,625,285 1,587,663
Other current assets 393,330 1,307,416 _1,492,794
Total current assets ----------- ----------- -------------
16,085,074 27,442,633 $ 28,949,868
Property and equipment, net 3,168,183 10,797,501 15,098,313
Capitalized production costs, net 1,636,706 2,656,666 2,634,363
Video library, net 4,792,456 4,631,140 4,555,481
Goodwill, net 1,239,507 2,379,861 6,032,943
Deferred tax assets 87,163 146,132 1,285,132
Other assets 317,837 450,409 562,004
----------- ----------- -------------
Total assets $27,326,926 $48,504,342 $ 59,118,104
=========== =========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 7,618,344 $ 8,091,569 $ 11,150,709
Accrued liabilities 1,734,310 2,109,036 4,416,092
Accrued royalties 725,541 867,667 1,136,738
Income taxes payable -- 790,267 591,832
Capital lease obligations, current 95,844 147,649 160,705
Other current liabilities -- 167,349 181,888
----------- ----------- -------------
Total current liabilities 10,174,039 12,173,537 17,637,964
Capital lease obligations, long-term 209,074 270,171 260,614
Deferred tax liability 67,241 412,001 412,001
Long term debt 1,900,000 5,500,000 6,518,887
----------- ----------- -------------
Total long-term liabilities 2,176,315 6,182,172 7,191,502
Minority interest 26,030 6,037,868 6,120,513
Redeemable Class A preferred stock
in subsidiary -- 6,000,000 6,000,000
Stockholders' equity:
Class A common stock, $.0001 par value,
150,000,000 shares authorized, 5,441,537, 5,473,184
and 5,958,505 shares issued and outstanding at
December 31, 1999 and 2000 and
March 31, 2001 respectively 544 547 596
Class B common stock, $.0001 par value,
50,000,000 shares authorized, 5,400,000
issued and outstanding at December 31,
1999 and 2000, and March 31, 2001 540 540 540
Additional paid-in capital 11,038,551 11,865,734 15,486,392
Deferred compensation (106,992) (422,826) (405,201)
Retained earnings 4,017,899 6,666,770 7,085,798
----------- ----------- -------------
Total stockholders' equity 14,950,542 18,110,765 22,168,125
----------- ----------- -------------
Total liabilities and stockholders' equity $27,326,926 $48,504,342 $ 59,118,104
=========== =========== =============
See accompanying notes.
F-3
GAIAM, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended Three months
December 31, ended March 31,
1998 1999 2000 2000 2001
---- ---- ---- ---- ----
(Unaudited)
Net revenue $30,738,540 $45,724,662 $60,588,018 $12,558,437 $17,671,513
Cost of goods sold 13,173,536 18,175,787 23,793,492 4,922,311 6,847,590
----------- ----------- ----------- ----------- -----------
Gross profit 17,565,004 27,548,875 36,794,526 7,636,126 10,823,923
Expenses:
Selling and operating 14,186,215 22,337,950 27,309,857 6,063,790 8,538,352
Corporate, general and
administration 2,393,946 3,086,514 5,056,903 1,115,977 1,550,206
----------- ----------- ----------- ----------- -----------
Total expenses 16,580,161 25,424,464 32,366,760 7,179,767 10,088,558
----------- ----------- ----------- ----------- -----------
Income from operations 984,843 2,124,411 4,427,766 456,359 735,365
Other income (expense):
Realized gain (loss) on sale of
securities and other, (see Note 3) 696,992 971,159 (73,947) (76,295) 184,615
Interest expense (308,501) (365,294) (209,167) (46,650) (116,917)
----------- ----------- ----------- ----------- -----------
Other income (expense), net 388,491 605,865 (283,114) (122,945) 67,698
----------- ----------- ----------- ----------- -----------
Income before income taxes and
minority interest 1,373,334 2,730,276 4,144,652 333,414 803,063
Provision for income taxes (251,955) (1,062,789) (1,555,487) (125,130) (301,390)
Minority interest in net (income)
loss of consolidated subsidiary,
net of tax (261,598) 50,858 59,706 (4,992) (82,645)
----------- ----------- ----------- ----------- -----------
Net income $ 859,781 $ 1,718,345 $ 2,648,871 $ 203,292 $ 419,028
=========== =========== =========== =========== ===========
Net income per share:
Basic $0.11 $0.20 $0.24 $0.02 $0.04
Diluted $0.11 $0.19 $0.23 $0.02 $0.04
Shares used in computing net
income per share:
Basic 8,072,877 8,785,205 10,858,139 10,846,460 11,205,844
Diluted 8,118,792 9,119,108 11,525,120 11,504,973 11,563,172
See accompanying notes.
F-4
GAIAM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Class A Class B Additional
Common Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
--------------------- --------------------- ----------
Balance at January 1, 1998 1,005,000 $ 101 7,035,000 $ 704 $ 133,833
Issuance of common stock 160,000 16 - - 574,984
Return of capital to shareholder through
purchase of Inner Balance, Inc. - - - - (331,183)
Comprehensive income (loss):
Net income - - - - -
Decrease in fair market value of
securities available for sale, net of
reclassification adjustment (see
Note 1), net of tax of $618,578 - - - - -
Total comprehensive loss
--------------------- --------------------- ----------
Balance at December 31, 1998 1,165,000 117 7,035,000 704 377,634
Issuance of common stock 331,429 32 - 1,449,968
Shares issued in connection with IPO,
including the underwriter's overallotment 1,807,861 181 - - 6,142,007
Issuance of common stock in conjunction
with acquisitions and share conversion 1,842,247 185 (1,635,000) (164) 1,593,971
Shares issued in connection with conversion
of debt 295,000 29 - - 1,474,971
Comprehensive income (loss):
Net income - - - - -
Decrease in fair market value of
available for sale securities,
net of reclassification
(see Note 1) - - - - -
--------------------- --------------------- ----------
Total comprehensive income --------------------- --------------------- ----------
Balance at December 31, 1999 5,441,537 544 5,400,000 540 11,038,551
Issuance of common stock in conjunction
with acquisitions and compensation 31,647 3 827,183
Net income and comprehensive income
--------------------------------------------------------------
Balance at December 31, 2000 5,473,184 $ 547 5,400,000 $ 540 $ 11,865,734
Return of Capital to shareholder through purchase
of Earthlings, Inc. and Selfcare, Inc.
(unaudited) (3,620,658)
Issuance of common stock in conjunction
with acquisitions and compensation (unaudited) 485,321 49 6,693,719
Net income and comprehensive income --------------------------------------------------------------
Balance at March 31, 2001 (unaudited) 5,958,505 $ 596 5,400,000 $ 540 $ 15,486,392
==============================================================
Accumulated
Other
Deferred Comprehensive Retained
Compensation Income Earning
-------------- ------------- --------
Balance at January 1, 1998 $ - $ 3,161,263 $ 1,439,773 $ 4,735,674
Issuance of common stock - - - 575,000
Return of capital to shareholder through
purchase of Inner Balance, Inc. - - - (331,183)
Comprehensive income (loss):
Net income - - 859,781 859,781
Decrease in fair market value of
securities available for sale, net of
reclassification adjustment (see
Note 1), net of tax of $618,578 - (2,178,137) - (2,178,137)
Total comprehensive loss (1,318,356)
-------------- ------------- ----------- ------------
Balance at December 31, 1998 - 983,126 2,299,554 3,661,135
Issuance of common stock - - - 1,450,000
Shares issued in connection with IPO,
including the underwriter's overallotment - - - 6,142,188
Issuance of common stock in conjunction
with acquisitions and share conversion (106,992) - - 1,487,000
Shares issued in connection with conversion
of debt - - - 1,475,000
Comprehensive income (loss):
Net income - - 1,718,345 1,718,345
Decrease in fair market value of
available for sale securities,
net of reclassification
(see Note 1) - (983,126) - (983,126)
-------------- ------------- ----------- ------------
Total comprehensive income
-------------- ------------- ----------- ------------
Balance at December 31, 1999 (106,992) - 4,017,899 14,950,542
Issuance of common stock in conjunction
with acquisitions and compensation (315,834) 511,352
Net income and comprehensive income 2,648,871 2,648,871
------------------------------------------------------------------------------
Balance at December 31, 2000 $ (422,826) - $ 6,666,770 $ 18,110,765
Return of capital to
shareholder through purchase
of Earthlings, Inc. and
SelfCare, Inc. (unaudited) (3,073,061)
Issuance of common stock in conjunction
with acquisitions and compensation (unaudited) 17,625 6,711,393
Net income and comprehensive income (unaudited) 419,028 419,028
------------------------------------------------------------------------------
Balance at March 31, 2001 (unaudited) $ (405,201) - $ 7,085,798 $ 22,168,125
==============================================================================
See accompanying notes.
F-5
GAIAM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
Years Ended December 31, March 31,
1998 1999 2000 2000 2001
---- ---- ---- ---- ----
(Unaudited)
Operating activities:
Net income $ 859,781 $ 1,718,345 $ 2,648,871 $ 203,292 $ 419,028
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation 240,431 391,000 1,245,155 185,070 846,832
Amortization 85,466 293,315 414,695 102,357 148,738
Stock compensation -- -- 147,492 -- 17,625
Interest expense added to principal of margin
loan
Minority interest in consolidated subsidiary 116,158 16,513 -- -- --
Realized gain on the sale of securities 261,598 (50,858) (59,706) 4,992 82,645
Deferred tax expense (691,137) (2,516,110) -- -- --
Changes in operating assets and liabilities, 9,684 (53,718) 384,968 13,891 --
net of effects from acquisitions:
Accounts receivable
Inventory (1,501,242) (2,296,771) (4,127,458) 840,603 311,406
Deferred advertising costs (591,519) (1,161,724) (1,739,231) (1,347,842) (1,601,314)
Capitalized production costs (243,630) (418,480) 551,040 240,324 146,269
Prepaid assets (212,361) (964,268) (1,019,960) (196,877) 22,303
Other assets 8,527 (109,494) (914,086) (40,774) (338,722)
Accounts payable (266,757) 41,615 (229,295) 19,662 (31,153)
Accrued liabilities 2,569,358 717,852 (8,730) 2,405,494 1,999,746
Income taxes payable 329,672 198,741 167,310 (406,344) (661,410)
(69,784) (424,745) 805,123 111,239 (188,610)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities 904,245 (4,618,787) (1,733,812) 2,135,087 1,173,383
----------- ----------- ----------- ----------- -----------
Investing activities:
Purchase of property and equipment (134,378) (2,212,961) (8,735,390) (3,926,934) (467,656)
Proceeds from sale of property and equipment 32,090 -- -- -- --
Proceeds from sale of securities available-for-
sale 477,500 2,548,310 -- -- --
Proceeds from sale of stock in subsidiary -- -- 11,959,923 -- --
Payments for acquisitions, net of cash acquired (1,656,611) (2,740,703) (305,773) -- (3,400,663)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities (1,281,399) (2,405,354) 2,918,760 (3,926,934) (3,868,319)
----------- ----------- ----------- ----------- -----------
Financing activities:
Principal payments on capital leases (49,699) (60,671) (99,617) (22,405) (28,819)
Proceeds from issuance of common stock 575,000 2,875,002 15,872 -- 19,109
Net proceeds from initial public offering -- 6,142,188 -- -- --
Proceeds from convertible debt 549,999 -- -- -- --
Net proceeds from (payments on) borrowings (900,000) 535,148 3,600,000 -- 500,000
----------- ----------- ----------- ----------- -----------
Net cash provided (used in) financing activities 175,300 9,491,667 3,516,255 (22,405) 490,290
----------- ----------- ----------- ----------- -----------
Net change in cash and cash equivalents (201,854) 2,467,526 4,701,203 (1,814,252) (2,204,646)
Cash and cash equivalents at beginning of year 1,611,793 1,409,939 3,877,465 3,877,465 8,578,668
----------- ----------- ----------- ----------- -----------
$ 1,409,939 $ 3,877,465 $ 8,578,668 $ 2,063,213 $ 6,374,022
Cash and cash equivalents at end of period =========== =========== =========== =========== ===========
Supplemental cash flow information:
Interest paid $ 126,025 $ 348,580 $ 287,080 $ 48,609 $ 98,592
Income taxes paid 312,100 1,541,253 82,099 -- 490,000
Common stock issued for acquisitions 1,487,000 333,131
Common stock issued for convertible debt 1,425,000 --
Fixed assets acquired under capital lease 297,740 212,519
See accompanying notes.
F-6
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 2000 is unaudited.)
1. Summary of Significant Accounting Policies
Organization
Gaiam, Inc. ("Gaiam") was incorporated under the laws of the State of
Colorado on July 7, 1988. Gaiam is a multi-channel lifestyle company providing
information, goods and services to customers who value personal development,
healthy lifestyles and the environment.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
Gaiam, its subsidiaries and partnerships in which ownership is 50% or greater
and considered to be under the control of Gaiam. 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, which mature within three months of date of purchase.
Securities Available-for-Sale
Securities available-for-sale consist of equity securities and are stated
at market value. All unrealized gains or losses, net of tax, are recorded as a
separate component of stockholders' equity.
Provision for Doubtful Accounts
Gaiam records a provision for doubtful accounts for all receivables not
expected to be collected.
Interim Financial Statements
The interim consolidated financial statements included herein have been
prepared by the management of Gaiam, Inc. pursuant to the rules and regulations
of the United States Securities and Exchange Commission, and, in the opinion of
management, contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly Gaiam's consolidated financial position
as of March 31, 2001 and the interim results of operations and cash flows for
the three months ended March 31, 2000 and 2001. These interim statements have
not been audited. The consolidated financial position, results of operations and
cash flows for the interim periods disclosed within this report are not
necessarily indicative of future financial results.
Inventory
Inventory, consisting primarily of finished goods, is stated at the lower
of cost (first-in, first-out method) or market.
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
F-7
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 $7.1 million, $10.1 million and $10.5 million
for the years ended December 31, 1998, 1999 and 2000, respectively.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization, which includes the amortization of assets recorded under capital
leases. Included in property and equipment is the cost of internal-use software,
including software used in connection with Gaiam's websites. Gaiam expenses all
costs related to the development of internal-use software other than those
incurred during the application development stage. Costs incurred during the
application development stage are capitalized and amortized over the estimated
useful life of the software (generally five years).
Depreciation of property and equipment is computed on the straight-line
method over estimated useful lives (generally five to ten years). Property and
equipment purchased under capital leases are amortized on a straight-line basis
over the lesser of the estimated useful life of the asset or the lease term.
Capitalized Production Costs
Capitalized production costs include costs incurred to produce
informational videos marketed by Gaiam to retail marketers 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, 1999
and 2000 was $1.3 million and $1.7 million, respectively.
Video Library
The video library asset represents the cost of the library of produced
videos acquired through a business combination. The video library is presented
net of accumulated amortization of $332,401 and $674,059 at December 31, 1999
and 2000 and is being amortized over a 15-year life.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
assets acquired in business acquisitions accounted for under the purchase
method. Goodwill is presented net of related accumulated amortization of $15,884
and $88,922 at December 31, 1999 and 2000, and is being amortized over lives
ranging from 10 to 20 years.
Long-Lived Assets
The carrying values of intangible and other long-lived assets are reviewed
quarterly to determine if any impairment indicators are present. To date, no
such impairment has been indicated. 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.
Accrued Royalties
Gaiam has various royalty agreements with instructors and artists requiring
royalty payments of specified product sales based upon unit sales, or upon a
specified minimum royalty amount. Payments are made quarterly and semi-annually.
F-8
Income Taxes
Gaiam provides for income taxes pursuant to the liability method as
prescribed in Statement of Financial Accounting Standards SFAS) 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.
Revenues
Gaiam recognizes revenue at the time merchandise is shipped to the
customer. Amounts billed to customers for postage and handling charges, which
approximate $2.2 million for 1998, $3.0 million for 1999, and $3.5 million for
2000, are recognized as revenue at the time that the revenues on the product
shipments are recognized. Postage and handling costs, which approximate $2.1
million for 1998, $3.0 million for 1999, and $3.3 million for 2000, are included
in selling and operating expense along with other fulfillment costs incurred to
warehouse, package and deliver products to customers. Gaiam provides a reserve
for expected future returns at the time the sale is recorded based upon
historical experience.
Gaiam'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 5% of sales for any of the years ended December 31, 1998,
1999 and 2000. Gaiam generally does not require collateral.
Fair Value of Financial Instruments
Gaiam's financial instruments consist of cash and cash equivalents,
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.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles. Also,principles requires management to make estimates
and assumptions that affect the amounts reported in our opinion,Gaiam's financial statements
and accompanying notes, including the valuation of stated accounts receivable
and inventory balances. Actual results could differ from those estimates.
Stock-Based Compensation
Gaiam accounts for its stock-based compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB No. 25") and related financial statement schedule, when considered in relationinterpretations, including FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, rather than the alternative fair value accounting allowed by SFAS
No. 123, Accounting for Stock Based Compensation.
Defined Contribution Plan
In 1999, Gaiam adopted a defined contribution retirement plan under Section
401(k) of the Internal Revenue Code, which covers substantially all employees.
Eligible employees may contribute amounts to the plan, via payroll withholding,
subject to certain limitations. The 401(k) plan permits, but does not require,
additional matching contributions to the 401(k) plan by Gaiam on behalf of all
participants in the 401(k) plan. To date, Gaiam has not made any matching
contributions to the 401(k) plan.
Reporting Comprehensive Income
F-9
On January 1, 1998, Gaiam adopted the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, Reporting on Comprehensive Income ("SFAS No.
130"). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements. The only
item of comprehensive income that Gaiam has is unrealized gains (losses) on
securities available-for-sale.
The reclassification adjustment for gains and losses included in net income
for 1998, net of tax of $618,578, include unrealized losses of $1.8 million and
net realized gains of $427,813. The reclassification adjustment for gains and
losses included in net income for 1999 include unrealized losses of $2.6 million
and net realized gains of $1.6 million. As of December 1999, all available-for-
sale securities were sold.
Adoption of Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by Statements 137 and 138 in June
1999 and June 2000, respectively. SFAS No. 133 is effective for Gaiam's fiscal
year beginning on January 1, 2001. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designed as part of a
hedge transaction and, if it is, the type of hedge transaction. The adoption of
SFAS No. 133, effective January 1, 2001, did not have any impact on Gaiam's
consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the 2000 financial statements
to conform to 2001 presentation.
Earnings Per Share
Basic earnings per share excludes any dilutive effects of options, warrants
and dilutive securities. Basic earnings per share is computed using the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed using the weighted average number of common and common
stock equivalent shares outstanding during the period. Common equivalent shares
are excluded from the computation if their effect is antidilutive. All earnings
per share amounts for all periods have been presented and conform to the SFAS
No. 128, Earnings per Share, requirements.
F-10
The following table sets forth the computation of basic and diluted earnings per
share:
December 31, March 31,
- ----------------------------------------------------------------------------------------------------------------
1998 1999 2000 2000 2001
------------- ---------- ----------- ----------- -----------
(Unaudited)
Numerator for basic
earnings per share......... $ 859,781 $1,718,345 $ 2,648,871 $ 203,292 $ 419,028
Effect of Dilutive
Securities:
8% convertible
debentures............... 19,234 56,401 -- -- --
------------- ---------- ----------- ----------- -----------
Numerator for diluted
earnings per share....... $ 879,015 $1,774,746 $ 2,648,871 $ 203,292 $ 419,028
============= ========== =========== =========== ===========
Denominator:
Weighted average
shares for basic
earnings per share....... 8,072,877 8,785,205 10,858,139 10,846,460 11,205,844
Effect of Dilutive
Securities:
Weighted average of
Common stock, stock
options warrants and
convertible debentures.... 45,915 333,903 666,981 658,513 357,328
------------- ---------- ----------- ----------- -----------
Denominators for diluted
earnings per share......... 8,118,792 9,119,108 11,525,120 11,504,973 11,563,172
Net income per share--
basic..................... $ 0.11 $ 0.20 $ 0.24 $ 0.02 $ 0.04
Net income per share--
diluted................... $ 0.11 $ 0.19 $ 0.23 $ 0.02 $ 0.04
2. Mergers and Acquisitions
In September 1998, Gaiam acquired a 67% ownership in a newly formed entity,
Healing Arts Publishing, LLC (dba Living Arts) for $2.5 million in cash. Healing
Arts Publishing, Inc., which produced and distributed exercise and relaxation
videos and sold environmentally oriented products through its mail order
catalogs and through sales to retailers, contributed the majority of its assets
and certain liabilities to Living Arts in exchange for a 33% membership
interest. Effective July 1999, Gaiam acquired the remaining 33% minority
interest in Living Arts. Additionally, effective November 1999, Gaiam acquired a
50.1% controlling interest in an environmental products provider. Total
consideration paid by Gaiam for the 1999 acquisitions was $2.3 million in cash
and 207,247 shares of Gaiam's Class A common stock.
On June 30, 2000, Gaiam, Inc. and Whole Foods Market, Inc. merged their
Internet businesses into Gaiam.com, Inc. Gaiam owns 50.1% of Gaiam.com. Whole
Foods Market currently owns 35% of Gaiam.com, and the remainder is owned by
various venture capital funds. As part of the transaction, Whole Foods Market,
through its subsidiary, contributed $6 million in cash plus other assets to
Gaiam.com. On June 19, 2000, Gaiam sold 6,000 shares of Redeemable Class A
preferred stock in Gaiam.com, Inc. at a price of $1,000 per share for an
aggregate price of $6,000,000. This stock doesn't carry any dividend rights and
is redeemable only upon the consummation of an offering by Gaiam.com of its
equity securities to the public pursuant to an effective registration statement
with the Securities and Exchange Commission.
F-11
Additionally, in 2000, Gaiam acquired a yoga props company and a 70%
interest in an organic clothing manufacturer. Total consideration paid by Gaiam
for these acquisitions was approximately $315,000 in cash and 21,243 shares of
Class A common stock. These acquisitions were accounted for using the purchase
method and the results of operations are included in the 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 uponof Gaiam from the effective dateacquisition dates. Goodwill associated
with these acquisitions totaled approximately $1.2 million, and is being
amortized on a straight line basis over a period of 20 years.
On January 29, 2001, Gaiam completed its merger with Real Goods Trading
Corporation. In the Company's registrationtax-free stock-for-stock transaction, Real Goods
shareholders received one share of Gaiam Class A common stock in exchange for
each ten shares of Real Goods stock owned. Gaiam issued 481,424 shares of Class
A Common Stockcommon stock at an approximate value of $6.7 million to complete the merger.
The merger was accounted for using the purchase method and the results of
operations are included in the consolidated financial statements of Gaiam from
the effective acquisition date.
On January 5, 2001 and February 1, 2001, respectively, Gaiam acquired all
of the stock of Earthlings, Inc. and Self Care, Inc. (companies under common
ownership with the Chief Executive Officer of Gaiam) at his company's net
investment cost plus transaction expenses. As these companies were under common
control, the purchase was accounted for using historical costs, similar to a
pooling transaction. Therefore, the difference between the purchase price and
the value of net assets acquired was accounted for as a reduction to additional
paid-in capital. The total combined purchase price for both companies was
$3,848,014.
3. Securities Available-for-Sale
Securities available-for-sale consisted of shares of common stock from one
issuer. During 1998, Gaiam sold 60,000 shares of this common stock at market
value for $703,125 to a related party and recognized a gain of $696,992 on the
sale. During the first and second quarters of 1999, Gaiam sold 100,000 shares of
the common stock at market value for $538,750 to a related party, and recognized
a gain of $528,528 on the sale. During the third and fourth quarters of 1999,
Gaiam sold its remaining 215,000 shares of common stock for $2.0 million to a
non-related party and recognized a gain of $2.0 million on the sale.
4. Property and Equipment
Property and equipment, stated at cost, consists of the following:
December 31,
1999 2000
--------------------------
Land -- $ 1,100,000
Buildings -- 1,800,000
Furniture, fixtures and equipment $ 805,182 1,295,030
Leasehold improvements 333,747 714,460
Website development (including
construction-in-process costs) 1,600,728 5,391,243
Computer/telephone equipment 1,632,065 2,571,033
Warehouse equipment 222,329 567,667
- --------------------------------------------------------------
4,594,051 13,439,433
Accumulated depreciation and
amortization (1,425,868) (2,641,932)
- --------------------------------------------------------------
$ 3,168,183 $10,797,501
==============================================================
F-12
5. Commitments
At December 31, 1999 and 2000, Gaiam's property held under capital leases
consisted of the following, which is included in property and equipment:
December 31,
1999 2000
-----------------------
Warehouse equipment $ 40,229 $ 40,229
Computer/telephone equipment 365,545 578,064
- --------------------------------------------------------------------
405,774 618,293
Accumulated amortization (99,189) (181,085)
-------- ---------
$306,585 $ 437,208
====================================================================
Gaiam 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, 2000:
Capital Operating
- -----------------------------------------------------------------------------
2001 $ 155,692 $1,100,818
2002 147,379 1,081,874
2003 125,412 1,039,092
2004 55,458 1,039,092
- -----------------------------------------------------------------------------
Total minimum lease payments $ 483,941 $4,260,876
=============================================================================
Less portion related to interest (66,121)
Present value of future minimum lease
payments 417,820
Less current portion (147,649)
----------
$ 270,171
=============================================================================
Gaiam incurred rent expense of $646,886, $790,393 and $1,084,071 for the years
ended December 31, 1998, 1999 and 2000, respectively.
6. Line of Credit
Gaiam was a party to revolving line of credit agreements, which extended
through January 31, 2003. The credit agreements permitted borrowings up to $6.5
million based upon the collateral value of Gaiam's accounts receivable and
inventory. Borrowings under these agreements bear interest at the prime rate,
which was 9.5% at December 31, 2000. These borrowings were secured by a pledge
of Gaiam's assets, and contained various financial covenants, including
prohibiting the payment of cash dividends to its shareholders and requiring the
maintenance of certain financial ratios. At December 31, 2000, Gaiam was in
compliance with all the financial covenants.
During April 2001, Gaiam entered into new credit agreements with Wells
Fargo Bank West N.A. These agreements increase Gaiam's borrowing capacity from
$6.5 million to $14.9 million. Under a revolving line of credit, Gaiam has
availability of up to $10 million with a maturity date of June 30, 2003, and
under a term loan, Gaiam may borrow up to $4.9 million, with a maturity of July
1, 2006. Borrowings under these agreements bear interest at the lower of prime
rate less 50 basis points or LIBOR plus 275 basis points. These borrowings are
secured by a pledge of Gaiam's assets, and contain various
F-13
financial covenants, including prohibiting the payment of cash dividends to
Gaiam's shareholders and requiring the maintenance of certain financial ratios.
7. Income Taxes
The provision for income taxes is comprised of the following:
December 31,
1998 1999 2000
- -----------------------------------------------------------------------------
Current:
Federal $ 197,142 $1,006,008 $1,117,823
State 45,129 156,426 155,954
- -----------------------------------------------------------------------------
242,271 1,162,434 1,273,777
Deferred:
Federal 25,852 (37,610) 322,798
State (16,168) (62,035) (41,088)
- -----------------------------------------------------------------------------
9,684 (99,645) (281,710)
- -----------------------------------------------------------------------------
Total $ 251,955 $1,062,789 $1,555,487
=================================================
Variations from the federal statutory rate are as follows:
December 31,
1998 1999 2000
------------------------------------------------------
Expected federal income tax
expense at statutory rate
of 34% $ 466,934 $ 928,294 $1,409,182
Effect of legal judgment -
permanent difference (251,609) -- --
Effect of other permanent
differences 20,276 40,104 27,359
State income tax expense,
net of federal benefit 16,354 94,391 118,946
- ------------------------------------------------------------------------------------------------------
Income tax expense $ 251,955 $1,062,789 1,555,487
======================================================================================================
The legal judgment was a liability acquired in the purchase of a 67%
interest in Healing Arts Publishing. This $740,000 liability paid by Gaiam in
1998 resulted in a registration
statement on Form S-1permanent 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 concurrent 2.5 to 1 reverse stock splitamounts used for income tax purposes. The components of the
Company'snet accumulated deferred income tax asset or liability as of December 31, 1999
and 2000 are as follows:
F-14
December 31,
1999 2000
---------------
Deferred tax assets:
Reserve for bad debts $ 57,386 $ 113,373
Capitalized inventory 29,777 30,165
Amortization -- 2,594
-------- ---------
87,163 146,132
Deferred tax liabilities:
Amortization (66,060) --
Prepaid catalog costs -- (24,439)
Depreciation (1,181) (387,562)
-------- ---------
(67,241) (412,001)
-------- ---------
Deferred tax asset (liability), net $ 19,922 $(265,869)
======== =========
8. Stockholders' Equity
Gaiam has warrant certificates outstanding during the year and at December
31, 2000 that entitled the holder to purchase 24,000 shares of Class A common
shares.
/s/ ERNST & YOUNG LLP
Denver, Colorado
July ________,stock at $.50 per share. The warrant is exercisable during a two-year period
beginning January 20, 2002 and ending January 9, 2004.
In June 1999, F-1Gaiam completed a private placement whereby 331,429 shares of
Class A common stock were issued at $4.375 per share. A total of $2.0 million in
convertible debentures with a stated interest rate of 8% were issued during 1998
and the first six months of 1999. These debentures were convertible
automatically upon the closing of the initial public offering into Class A
common stock at the initial public offering per share price. A total of $1.5
million of these debentures were converted into 295,000 shares of Class A common
stock, and a $500,000 debenture was repaid in cash.
Gaiam's initial public offering of 1,705,000 shares of Class A common stock
at $5.00 per share was completed in October 1999. The underwriters also
exercised their overallotment option for 102,861 additional shares during
November 1999. Net proceeds to Gaiam, after deducting all commissions and
expenses associated with the offering, were $6.1 million.
In 1999, Gaiam issued 207,247 shares of Class A common stock in lieu of
cash payments for acquisitions, and Gaiam's Chief Executive Officer converted
1,635,000 shares of Class B common stock into 1,635,000 shares of Class A common
stock.
During 2000, Gaiam issued 21,243 shares of Class A common stock for two
acquisitions, 6,776 shares of Class A common stock to three directors, in lieu
of cash compensation, and 3,628 shares of Class A common stock upon exercise of
options granted under the 1999 Long-Term Incentive Plan.
As of December 31, 2000, Gaiam had the following Class A common shares
reserved for future issuance:
Awards under the 1999 Long-Term Incentive Plan 1,127,562
Shares reserved for warrant exercise 24,000
---------
Total shares reserved for future issuance 1,151,562
=========
F-15
INDEPENDENT AUDITORS' REPORTDuring the first quarter of 2001, Gaiam agreed to issue approximately
481,424 shares of Class A common stock in conjunction with its merger with Real
Goods, and issued 3,897 shares of Class A common stock upon exercise of options
granted under the 1999 Long-Term Incentive Plan.
9. Stock Option Plans
On June 1, 1999, Gaiam adopted the 1999 Long-Term Incentive Plan ("the
Plan"), which provides for the granting of options to purchase up to 1.6 million
shares of Gaiam's common stock. Both incentive stock options and non-qualified
stock options may be issued under the provisions of the Plan. Employees of
Gaiam and its affiliates, members of the Board of Directors, consultants and
certain key advisors are eligible to participate in the plan, which shall
terminate no later than June 1, 2009. These options granted under the Plan
generally vest and become exercisable at 2% per month for the 50 months
beginning in the eleventh month after the date of grant. All grants expire 7
years from the date of grant.
Gaiam recorded deferred compensation of $106,992 and $413,320 in 1999 and
2000, respectively. In 2000, deferred compensation was recorded in connection
with: acquisitions made by Gaiam in which options were issued to employees of an
acquired company; options issued to employees whereby the grant price differed
from the deemed fair value of Gaiam's common stock; and options issued to non-
employees for services to be provided over the related terms of their respective
agreements. The amounts recorded in 1999 represent the difference between the
grant price and the deemed fair value of Gaiam's common stock for shares subject
to options granted in 1999. The amortization of deferred compensation is charged
to operations over the service period of the options, which is typically 5
years. Total amortization expense recognized in 1999 and 2000 related to
deferred compensation was $0 and $97,486, respectively.
A summary of stock option activity and weighted average exercise prices for the
years ended December 31, 1999 and 2000 follows:
1999 2000
------------------------ --------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------ -------------------------
Outstanding at beginning of year -- $ -- 890,900 $ 6.10
Granted:
Price equal to fair value 851,200 4.51 253,500 15.96
Price less than fair value 39,700 7.18 39,000 15.28
Exercised -- -- (3,628) 4.38
Forfeited -- -- (52,210) 6.52
--------------------- ------------------------
Outstanding at end of year 890,900 $ 6.10 1,127,562 $ 7.45
-- $ -- 128,552 $ 4.47
Exercisable at end of year
Shares available on December 31,
for options that may be granted 709,100 472,438
F-16
A summary of stock options outstanding as of December 31, 2000 follows:
Outstanding Stock Options Exercisable Stock Options
- -------------------------------------------------------------------------------- -------------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Shares Remaining Exercise Exercise
Exercise Prices Outstanding Life (Years) Price Shares Price
- --------------------------------------------------------------------------------- -------------------------------------
$ 4.00 - $ 4.99 637,712 5.4 $ 4.38 102,128 $ 4.38
$ 5.00 - $ 5.99 171,500 5.8 $ 5.00 24,950 $ 5.00
$ 7.00 - $ 7.99 33,350 5.9 $ 7.18 1,334 $ 7.18
$15.00 - $15.99 193,000 6.8 $15.28 140 $15.50
$16.00 - $16.99 15,000 6.6 $16.34 - -
$17.00 - $17.99 77,000 6.7 $17.18 - -
- ------------------------------------------------------------------------ -------------------------------------
$ 4.00 - $17.99 1,127,562 5.9 $ 7.46 128,552 $ 4.54
Had compensation cost for Gaiam's stock-based compensation plan
been determined under the fair value methodology for determining compensation
cost under SFAS No. 123, Gaiam's net income and income per share for the years
ended December 31, 2000 and 1999, would have been as follows:
For the Years Ended
December 31,
----------------------
1999 2000
----------------------
Net income
As reported $1,718,345 $2,648,871
Pro forma 1,599,102 2,258,005
Net income per common share
As reported $ 0.20 $ 0.24
Pro forma $ 0.18 $ 0.21
Fully diluted net income per common share:
As reported $ 0.19 $ 0.23
Pro forma $ 0.18 $ 0.20
In estimating the pro forma compensation expense for each equity award
granted during the year, Gaiam used the Black Scholes option pricing model, with
the following weighted-average assumptions used for grants in 1999 and 2000,
respectively: risk-free interest rates in a range of 5.78% and 6.00%, expected
dividend yield of zero; expected option lives of 5 years, and expected
volatility of 1.29 and 0.48. Options granted prior to Gaiam's initial public
offering were valued using the minimum value method and, therefore, volatility
was not applicable.
1999 2000
---- ----
Weighted-average fair value of options
granted during the year:
Price equal to fair value $ 1.85 $11.85
Price less than fair value $11.21 $11.38
F-17
10. Related Party Transactions
In 1997, Gaiam entered into a fulfillment agreement with InnerBalance
Health, publisher of a natural health catalog, (a related party under common
ownership with the Chief Executive Officer of Gaiam) to provide customer sales,
service, warehousing and distribution services. On October 1, 1998, Gaiam
acquired all of the stock and net assets of InnerBalance Health, Inc. As these
were companies under common control, Gaiam 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 reduction to additional paid-in
capital.
In 1999, Gaiam engaged the services of ccplanet.com, Inc. (a related party
under common ownership with the Chief Executive Officer of Gaiam) to develop and
implement a new web site design utilizing the latest technology for its direct
to consumer operations. Gaiam paid ccplanet a total of $4.5 million for work
performed on this project during 1999 and 2000, and the new Gaiam.com website
was placed into service in March 2000. Gaiam has made its customer database and
certain visual media available to ccplanet in exchange for additional fees
totaling $600,000 during 1999 and $1.4 million in 2000.
Because of Whole Foods Market's investments in Gaiam.com, Whole Foods
Market may be considered a related party. Whole Foods Market and Gaiam have
also entered into a 10-year joint marketing agreement to promote each other's
businesses and share customer data. The companies are installing a store-
within-store concept, presenting Gaiam's lifestyle products in Whole Goods
Market's larger stores.
In 2000, the Chief Executive Officer advanced funds to purchase a 70%
interest in an organic clothing manufacturer. These advances, plus applicable
interest, were repaid in December 2000. Additionally, Gaiam purchased
approximately $300,000 in inventory from Earthlings, Inc. (a related party under
common ownership with the Chief Executive Officer of Gaiam) at Earthling's cost.
On January 5, 2001 and February 1, 2001, respectively, Gaiam acquired all
of the Stock of Earthlings, Inc. and Self Care, Inc. (companies under common
ownership with the Chief Executive Officer of Gaiam) at his company's net
investment plus transaction expenses. As these companies were under common
control, the purchase was accounted for using historical costs, similar to a
pooling transaction. Therefore, the difference between the purchase price and
the value of net assets acquired was accounted for as reduction to additional
paid-in capital. The total combined purchase price for both companies was
$3,848,014.
11. Subsequent Events
During April 2001, Gaiam entered into new credit agreements with Wells
Fargo Bank West N.A. These agreements increase Gaiam's borrowing capacity from
$6.5 million to $14.9 million. Under a revolving line of credit Gaiam has
availability of up to $10 million with a maturity date of June 30, 2003, and
under a term loan Gaiam may borrow up to $4.9 million, with a maturity of July
1, 2006. Borrowings under these agreements bear interest at the lower of prime
rate less 50 basis points or LIBOR plus 275 basis points. These borrowings are
secured by a pledge of Gaiam's assets, and contain various financial
F-18
covenants, including prohibiting the payment of cash dividends to Gaiam's
shareholders and requiring the maintenance of certain financial ratios.
12. Segment Information
Gaiam has two business segments: Direct to Consumer and Business to
Business; both of which sell products, services and information produced or
purchased from other suppliers. Although the customer bases do not overlap to
any extent, the production, purchase and delivery processes overlap in some
areas. Gaiam does not accumulate the balance sheet by segment for purposes of
management review.
Each of the two segments qualifies as such because each is more than 10% of
combined revenue. Contribution margin is defined as net sales, less cost of
goods sold and direct expenses. Financial information for Gaiam's business
segments was as follows:
F-19
Year Ended December 31, Three Months Ended March 31
1998 1999 2000 2000 2001
(Unaudited)
-----------------------------------------------------------------
Net revenue:
Direct to consumer $26,897,236 $34,573,540 $43,823,460 $ 9,809,655 $10,536,386
Business to business 3,841,304 11,151,122 16,764,558 2,748,782 7,135,127
---------------------------------------------------------------------
Consolidated net revenue 30,738,540 $45,724,662 60,588,018 12,558,437 17,671,513
Contribution margin:
Direct to consumer 128,691 (243,949) 841,351 44,376 97,736
Business to business 856,152 2,368,360 3,586,415 411,983 637,629
---------------------------------------------------------------------
Consolidated contribution margin 984,843 2,124,411 4,427,766 456,359 735,365
Reconciliation of Contribution margin
to net income:
Other income (expense) 388,491 605,865 283,114 (122,945) 67,698
Income tax expense 251,955 1,062,789 1,555,487 125,130 301,390
Minority interest expense 261,598 (50,858) (59,706) 4,992 82,645
---------------------------------------------------------------------
Net income $ 859,781 1,718,345 $ 2,648,871 $ 203,292 $ 419,028
=====================================================================
F-20
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Real Goods Trading Corporation
We have audited the accompanying balance sheet of Gaiam, Inc., and subsidiaries,Real Goods Trading
Corporation as of DecemberMarch 31, 1996,2000, and the related statements of Income and retained
earnings, stockholders'operations,
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the company'sCompany'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,Real Goods Trading
Corporation as of March 31, 2000, 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
Boulder, Colorado
September 12, 1997
F-2Moss Adams LLP
-------------------------------
Moss Adams LLP
Santa Rosa, California
May 24, 2000
F-21
GAIAM, INC.
CONSOLIDATED BALANCE SHEETS
December 31 March 31
1997 1998 1999
-------------------------------------------------------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $1,611,793 $ 1,409,939 $ 420,609
Securities available-for-sale 38,333 1,633,905 1,374,555
Accounts receivable, net of allowance for
doubtful accounts of $31,000 in 1997
and $67,915 in 1998 111,424 2,579,927/a/ 2,017,736
Accounts receivable, other 109,957 13,995 18,345
Note receivable 154,391 9,351 85,401
Inventory, less allowances 1,648,083 3,393,712 3,546,074
Deferred advertising costs 1,028,680 1,757,845 1,798,283
Prepaid assets 76,894 68,367 233,636
Other current assets - 215,469 21,109
-------------------------------------------------------------
Total current assets 4,779,555 11,082,510 9,515,748
Property and equipment, net 1,096,888 1,079,694 1,021,218
Capitalized production costs, net - 672,438 620,455
Video library, net - 3,543,764 3,483,329
Other assets 108,124 298,106 350,248
-------------------------------------------------------------
Total assets $5,984,567 $16,676,512 $14,990,998
=============================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $2,152,739 $ 6,900,492 $ 4,436,542
Accrued liabilities 473,504 2,261,110 1,794,820
Capital lease obligations, current 46,693 42,261 29,654
Margin loan payable 1,359,130 575,288 503,857
Convertible debentures, related party - 550,000 625,000
Income taxes payable 311,702 242,271 202,640
Deferred tax liability - 592,566 553,791
-------------------------------------------------------------
Total current liabilities 4,343,768 11,163,988 8,146,304
Deferred tax liability 24,113 59,809 -
Capital lease obligations, long-term 42,275 25,588 18,467
Convertible debentures and other borrowings, related party - 273,051 273,052
Note payable, related party 428,236
Line of credit - - 950,000
Minority interest - 1,492,941 1,488,688
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 101 117 118
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 133,833 377,634 452,633
Accumulated other comprehensive income - 983,126 827,075
Retained earnings 1,439,773 2,299,554 2,405,721
-------------------------------------------------------------
Total stockholders' equity 1,574,411 3,661,135 3,686,251
-------------------------------------------------------------
Total liabilities and stockholders' equity $5,984,567 $16,676,512 $14,990,998
=============================================================
SeeINDEPENDENT AUDITORS' REPORT
Board of Directors and Shareowners
Real Goods Trading Corporation:
We have audited the accompanying notes.
F-3
GAIAM, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended Three months
December 31 ended March 31
1996 1997 1998 1998 1999
--------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Net revenue $14,800,993 $19,897,690 $30,738,540 $5,300,458 $9,495,011
Cost of goods sold 6,762,500 8,462,151 13,173,536 2,288,279 3,855,660
--------------------------------------------------------------------------------------
Gross profit 8,038,493 11,435,539 17,565,004 3,012,179 5,639,351
Expenses:
Selling and operating 9,253,263 10,427,258 14,186,215 2,629,235 4,576,125
Corporate, general and
administration 1,217,436 1,574,770 2,393,946 284,724 953,565
--------------------------------------------------------------------------------------
Total expenses 10,470,699 12,002,028 16,580,161 2,913,959 5,529,690
--------------------------------------------------------------------------------------
Income (loss) from operations (2,432,206) (566,489) 984,843 98,220 109,661
Other income (expense):
Realized gain on sale of securities
and other 3,094,390 1,820,034 696,992 - 147,748
Interest expense (110,549) (236,699) (308,501) (59,619) (95,126)
--------------------------------------------------------------------------------------
Other income (expense), net 2,983,841 1,583,335 388,491 (59,619) 52,622
--------------------------------------------------------------------------------------
Income before income taxes and
minority interest 551,635 1,016,846 1,373,334 38,601 162,283
Provision for income taxes 211,935 362,534 251,955 14,154 60,369
Minority interest in net income
(loss) of consolidated
subsidiary, net of tax - - 261,598 - (4,253)
--------------------------------------------------------------------------------------
Net income $ 339,700 $ 654,312 $ 859,781 $ 24,447 $ 106,167
======================================================================================
Net income per share:
Basic $0.04 $0.08 $0.11 $0.00 $0.01
Diluted 0.04 0.08 0.11 $0.00 $0.01
Shares used in computing net income
per share:
Basic 8,040,000 8,040,000 8,072,877 8,040,000 8,214,857
Diluted 8,040,000 8,040,000 8,118,791 8,040,000 8,394,468
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
Dividend to shareholder - - - - (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 17,143 1 - - 74,999 - - 75,000
(unaudited)
Comprehensive income:
Net income (unaudited) - - - - - - 106,167 106,167
Other comprehensive income:
Reclassification adjustment
for gains included
in net income,
net of tax benefit of
$520,391(unaudited - - - - - (156,051) - (156,051)
------------------- ----------------- ----------- -------------- ---------- ----------
Total comprehensive loss
(unaudited) (49,884)
------------------- ----------------- ----------- -------------- ---------- ----------
Balance at March 31, 1999 1,182,143 $118 7,035,000 $704 $ 452,633 $ 827,075 $2,405,721 $3,686,251
=================== ================= =========== ============== ========== ==========
See accompanying notes.
F-5
GAIAM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended Three months ended
December 31 March 31
1996 1997 1998 1998 1999
------------------------------------------------------------------------
Operating activities (Unaudited) (Unaudited)
Net income $ 339,700 $ 654,312 $ 859,781 $ 24,447 $ 106,167
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 265,151 241,985 240,431 46,723 73,141
Amortization 1,062 2,785 85,466 - 60,435
Interest expense added to principal of margin loan - 175,562 116,158 23,541 7,411
Minority interest in consolidated subsidiary - - 261,598 - (4,253)
Provision for doubtful accounts - - 258,993 - -
Realized gains on sale of securities and property and
equipment (3,621,047) (1,902,802) (691,137) - 31,225
Deferred tax expense 52,493 50,832 9,684 - (98,584)
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable 11,633 (62,317) (1,905,275) (167,011) 557,841
Inventory (672,020) (4,536) (591,519) (16,916) (152,362)
Deferred advertising costs (398,058) (371,840) (243,630) (264,461) (40,438)
Capitalized production costs - - (212,361) - 51,983
Prepaid assets 46,415 (55,982) 8,527 32,395 (165,269)
Other assets - 1,839 (266,757) (2,499) 142,218
Accounts payable 1,620,973 (267,316) 2,569,358 37,552 (2,463,950)
Accrued liabilities (85,634) (133,528) 329,672 (96,175) (466,290)
Income taxes payable (261,762) 390,521 (69,784) (297,946) (195,682)
------------------------------------------------------------------------
Net cash provided by (used in) operating activities (2,701,094) (1,280,485) 759,205 (680,350) (2,556,407)
Investing activities
Purchase of property, equipment and other assets (2,829,179) (157,987) (134,378) (80,890) (14,665)
Proceeds from the sale of property and equipment - 1,440,409 32,090 65,315 -
Proceeds from the sale of securities available-for-sale 3,800,000 1,931,250 477,500 228,125
Payments for acquisitions, net of cash acquired - - (1,656,611) - -
Payments (borrowings) on notes receivable (232,066) 361,259 145,040 34,044 (76,050)
------------------------------------------------------------------------
Net cash provided by (used in) investing activities 738,755 3,574,931 (1,136,359) 18,469 137,410
Financing activities
Principal payments on capital leases - (40,989) (49,699) (16,698) (19,728)
Proceeds from sale of stock - - 575,000 - 75,000
Proceeds from convertible debt - - 549,999 - 75,000
Net proceeds from (payments on) borrowings, net 1,923,681 (1,021,875) (900,000) - 1,299,395
------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,923,681 (1,062,864) 175,300 (16,698) 1,429,667
------------------------------------------------------------------------
Net change in cash and cash equivalents (38,658) 1,231,582 (201,854) (678,579) (989,330)
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 $ 933,214 420,609
========================================================================
Supplemental cash flow information
Interest paid $ 128,282 $ 237,147 $ 126,025 - -
Income taxes paid 238,654 312,100 312,100 100,000
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. Summarybalance sheet of Significant Accounting Policies
Organization
Gaiam, Inc.Real Goods Trading
Corporation (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 March 31, 1999 and for the three months ended
March 31, 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 resultsrelated statements of
operations, shareowners' 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 auditing standards generally
accepted in the United States of America. 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, such period. The resultsfinancial statements present fairly, in all material
respect, the financial position of operations for the
three months endedReal Goods Trading Corporation as of March
31, 1999, are not necessarily indicativeand the results of resultsits operations and its cash flows for a full year.
F-7the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
-------------------------------
Deloitte & Touche LLP
Oakland, CA
May 21, 1999
F-22
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIALREAL GOODS TRADING CORPORATION
BALANCE SHEETS
March 31, 2000 and 1999
(In thousands except share data)
2000 1999
------- ------
ASSETS
------
Current assets:
Cash........................................................ $ 876 $2,048
Marketable securities....................................... 1,568 --
Accounts receivable, net of allowance of $6 in 2000 and
1999....................................................... 152 240
Note receivable............................................. -- 20
Inventories, net............................................ 3,165 2,080
Deferred catalog costs, net................................. 381 272
Prepaid expenses............................................ 150 266
Deferred income taxes....................................... 34 89
------- ------
Total current assets...................................... 6,326 5,015
Property, equipment and improvements, net..................... 4,063 3,553
Other assets.................................................. 253 198
Property held for sale........................................ 78 78
Note receivable--affiliate, net of allowance of $259 in 2000.. 60 196
Deferred income taxes......................................... 664 39
------- ------
Total assets.............................................. $11,444 $9,079
======= ======
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
Current liabilities:
Accounts payable............................................ $ 1,374 $ 873
Accrued expenses............................................ 309 620
Deposits.................................................... 55 138
Current maturities of long-term debt........................ 17 16
Other taxes payable......................................... 39 57
Total current liabilities................................. 1,794 1,704
Long-term debt, less current maturities....................... 534 552
------- ------
Total liabilities......................................... 2,328 2,256
------- ------
Shareowners' equity:
Common stock, without par value:
Authorized 10,000,000 shares; issued and outstanding,
4,881,742 and 4,080,742 shares, respectively............... 10,771 7,188
Accumulated deficit........................................... (1,655) (365)
------- ------
Total shareowners' equity................................. 9,116 6,823
------- ------
Total liabilities and shareowners' equity............... $11,444 $9,079
======= ======
See notes to financial statements
F-23
REAL GOODS TRADING CORPORATION
STATEMENTS (continued)
(Information subsequent to DecemberOF OPERATIONS
Years Ended March 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 primary2000 and fully diluted earnings1999
(In thousands except share and per share with basicdata)
2000 1999
---------- ----------
Net Sales............................................. $ 18,979 $ 18,736
Cost of sales......................................... 11,145 10,904
Gross profit........................................ 7,834 7,832
Selling, general and diluted earnings per share. Unlike primary earningsadministrative expenses.......... 9,402 8,497
Loss from operations................................ (1,568) (665)
Interest income, net.................................. 63 42
Loss on disposition of assets......................... (354) (9)
Loss before income taxes............................ (1,859) (632)
Income tax benefit.................................... 569 150
---------- ----------
Net loss............................................ $ (1,290) $ (482)
========== ==========
Net loss 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 ofdiluted................. $ (0.29) $ (0.12)
Weighted average shares outstanding, basic and
diluted earnings per
share:diluted.............................................. 4,384,887 4,004,286
See notes to financial statements
F-24
REAL GOODS TRADING CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended March 31, 2000 and 1999
(In Thousands)
2000 1999
------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................... $(1,290) $ (482)
Adjustments to reconcile net loss to net cash from operating
activities:
Depreciation and amortization.............................. 452 344
Loss/writedown on disposition of assets.................... 252 9
Deferred income taxes...................................... (570) (151)
Other...................................................... (18) 14
Changes in assets and liabilities:
Accounts receivable........................................ 88 (30)
Note receivable............................................ 20 (20)
Inventories................................................ (1,085) 256
Deferred catalog costs, net................................ (109) 167
Prepaid expenses........................................... 116 (52)
Income taxes receivable.................................... -- 167
Accounts payable........................................... 501 147
Accrued expenses and other................................. (311) 298
Deposits................................................... (83) (296)
------- ------
NET CASH FROM OPERATING ACTIVITIES........................... (2,037) 371
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, and construction in progress........ (962) (514)
Investments in marketable securities....................... (3,093) --
Maturities of marketable securities........................ 1,525 --
Purchase of other assets................................... (55) (45)
Proceeds from sale of equipment and other assets........... -- 25
Note receivable--affiliate................................. (116) (196)
------- ------
NET CASH FROM INVESTING ACTIVITIES........................... (2,701) (730)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net................ 3,586 1,138
Repayment of debt.......................................... (17) (17)
Purchase of common stock................................... (3) (15)
------- ------
NET CASH FROM FINANCING ACTIVITIES........................... 3,566 1,106
------- ------
NET INCREASE (DECREASE) IN CASH.............................. (1,172) 747
CASH AT BEGINNING OF PERIOD.................................. 2,048 1,301
------- ------
CASH AT END OF PERIOD........................................ $ 876 $2,048
======= ======
Other cash flow information:
Interest paid.............................................. $ 47 $ 48
Income taxes paid.......................................... 1 1
See notes to financial statements
F-25
REAL GOODS TRADING CORPORATION
STATEMENTS OF SHAREOWNERS' EQUITY
Years Ended March 31, 2000 and 1999
(In thousands)
March 31, March 31,
1996 1997 1998 1998 1999
--------------------------------------------------------------Common Stock
---------------------
Number Retained Total
of Earnings Shareowners
Shares Amount (Deficit) Equity
------ ------- --------- -----------
Numerator for basic earnings per shareBALANCE, MARCH 31, 1998................ 3,857 $ 339,7006,065 $ 654,312117 $ 859,7816,182
Issuance of common stock in direct
public offering, net of offering costs
of $99................................ 228 1,138 -- 1,138
Shares repurchased..................... (4) (15) -- (15)
Net loss............................... -- -- (482) (482)
-----------------------------------------------
BALANCE, MARCH 31, 1999................ 4,081 7,188 (365) 6,823
Issuance of common stock, net of issue
costs of $22.......................... 800 3,578 -- 3,578
Exercise of common stock options under
option plan........................... 2 8 -- 8
Shares repurchased..................... (1) (3) -- (3)
Net loss............................... -- -- (1,290) (1,290)
-----------------------------------------------
BALANCE, MARCH 31, 2000................ 4,882 $10,771 $ 24,447(1,655) $ 106,167
Effect of Dilutive Securities:
8% convertible debentures - - 19,234 - 10,104
--------------------------------------------------------------
Numerator for diluted earnings per share $ 339,700 $ 654,312 $ 879,015 $ 24,447 $ 116,271
==============================================================
Denominator:
Weighted average shares for basic
earnings per share 8,040,000 8,040,000 8,072,877 8,040,000 8,214,857
Effect of Dilutive Securities:
Convertible debentures - - 41,153 - 179,610
Stock warrants - - 4,762 - -
--------------------------------------------------------------
Denominators for diluted earnings per
share--adjusted weighted average
shares and assumed conversion 8,040,000 8,040,000 8,118,791 8,040,000 8,394,467
==============================================================
Net income per share--basic $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.01
Net income per share--diluted $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.019,116
===============================================
F-8See notes to financial statements
F-26
GAIAM, INC.REAL GOODS TRADING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(Information subsequent to December 31, 1998 is unaudited.1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--Real Goods Trading Corporation (the "Company") 1. Summary of Significant Accounting Policies (continued)
In 1998, basic earnings per share data was computed by dividing net income byorganized on
July 1, 1990 and sells primarily environmentally related, "healthy living" and
renewable energy products through mail order catalogs, four retail stores, 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
1997Internet, 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.
Historicaldirect 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 allfrom its renewable energy department.
USE OF ESTIMATES--The preparation 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.assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Reporting Comprehensive Income
During 1998,CHANGE IN PRESENTATION--Included in net sales for fiscal years 2000 and 1999
are shipping and handling fees collected from customers of $1,388,000 and
$1,516,000, respectively. Included in cost of sales for fiscal years 2000 and
1999 are freight out expenses of $1,118,000 and $1,152,000 respectively.
Previously, these amounts were presented as a net amount in selling, general and
administrative expenses. Such sales and cost of sales have been reclassified
into net sales and cost of sales for the periods presented because management
believes this more accurately represents the Company's true sales and cost of
sales amounts.
CASH AND MARKETABLE SECURITIES--Marketable securities are classified as
available-for-sale and are available to support current operations or to take
advantage of other investment opportunities. Marketable securities are stated at
estimated fair value based upon market quotes and consist of bonds, commercial
paper and Federal agency securities. As of March 31, 2000, fair value
approximated cost and no unrealized gain or loss was included in retained
earnings. Realized gains and losses are included in other income. Interest
earned is included in interest income. The Company has deposits in money funds
in excess of federally insured levels. These deposits are placed with quality
financial institutions.
INVENTORIES are stated at the lower of cost (first-in/first-out method) or
market. Inventories include expenses associated with acquiring the inventory.
DEFERRED CATALOG COSTS--The Company capitalizes the direct cost of producing
and distributing its mail order catalogs. Deferred catalog costs are amortized
based on the estimated sales lives of the catalogs, generally eighteen weeks.
PROPERTY, EQUIPMENT AND IMPROVEMENTS are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, which range from 5 to 40 years.
INTERNET SITE COSTS are capitalized in accordance with AICPA Statement of
Position (SOP) 98-1 and EITF 00-2 in connection with construction of Internet
site.
PROPERTY HELD FOR SALE--The building and land which were the former Snow Belt
Store are currently held for sale.
NOTE RECEIVABLE--AFFILIATE--The note receivable represents net funds advanced
to the Real Goods Institute for Solar Living ("ISL") and bears interest at 5.25%
per year. Interest only is payable until the ISL becomes self-funding.
PRE-OPENING COSTS for retail stores are expensed as incurred.
INCOME TAXES--The Company accounts for its income taxes using an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events
F-27
REAL GOODS TRADING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
that have been recognized in the Company's financial statements or tax returns.
In estimating future tax consequences, the Company adoptedgenerally considers all
expected future events other than changes in tax laws.
LOSS PER SHARE--Basic loss per share is computed by dividing net loss by the
Financial Accounting Standards Board
("FASB") issued Statement No. 130, Reporting on Comprehensive Income ("Statement
No. 130"). Statement No. 130 establishes standardsweighted average number of shares outstanding for reportingthe period. Diluted loss per
share reflects the potential dilution that could occur if contracts to issue
common stock were exercised or converted to common stock. Dilutive stock options
were not included for the fiscal years ended March 31, 2000 and display of
comprehensive income and its components in the financial statements.
During 1998,1999, as the
Company adopted Statementincurred a net loss in each year and the effect would be antidilutive.
RECLASSIFICATION--The 1999 financial statements have been reclassified in
order to conform to the March 31, 2000 presentation.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS--Statement of Financial
Accounting Standard ("SFAS") No. 131, Disclosures107, "Disclosures About SegmentsFair Value of an EnterpriseFinancial
Instruments" requires disclosure of the estimated fair value of financial
instruments. The carrying values of cash, marketable securities, accounts
receivable, accounts payable, and Related Information,
("Statementlong-term debt approximates their estimated
fair values.
STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 131") which requires reporting25, "Accounting for Stock Issued to Employees".
COMPREHENSIVE INCOME--Comprehensive loss and net loss are the same.
2. MARKETABLE SECURITIES
During the year ended March 31, 2000, the Company purchased marketable
securities consisting of summarized financial results
for operating segmentsbonds and establishes standards for related disclosures about
products and services, geographic areas and major customers.commercial paper. 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.
F-11following is a summary
of short-term investments included in marketable securities (in thousands):
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Loses Value
------- ---------- ---------- ---------
March 31, 2000:
Corporate Bonds.................... $ 411 $ -- $ -- $ 411
Federal agency securities.......... 579 -- -- 579
Commercial Paper................... 578 -- -- 578
------- ------ ------ ------
$ 1,568 $ -- $ -- $1,568
======= ====== ====== ======
All short-term investments mature within one year of March 31, 2000.
F-28
GAIAM, INC.REAL GOODS TRADING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
2.STATEMENTS--(Continued)
3. PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and Equipment
At December 31, 1997 and 1998, property and equipment, stated at cost, consistsimprovements consist 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 Payablefollowing at March 31 (in
thousands):
2000 1999
------- -------
Land....................................................... $ 480 $ 480
Land improvements.......................................... 783 783
Buildings and leasehold improvements....................... 1,821 1,551
Equipment, furniture and fixtures.......................... 2,219 1,732
Internet site costs........................................ 139 --
Construction in progress................................... 84 15
------- -------
Total.................................................... 5,526 4,561
Less accumulated depreciation.............................. (1,463) (1,008)
------- -------
Property, equipment and improvements, net.................. $ 4,063 $ 3,553
======= =======
4. LINE OF CREDIT
The Company has a marginline of credit agreement for $1,500,000 with National Bank
of the Redwoods (the "Bank"), which expires on February 28, 2001. Borrowings
bear interest at 1.5% over the prime rate, payable in monthly installments. At
March 31, 2000 and 1999, no amounts were outstanding on the Company's line of
credit.
The line of credit agreement contains restrictive covenants including debt to
net worth and current ratios, restrictions on capital expenditures, positive
cash flow at a certain point in the fiscal year and prohibitions on payment of
cash dividends without the Bank's approval. The line is collateralized by
substantially all of the Company's assets, including inventory, accounts
receivable and mailing lists as well as a key person life insurance policy on
the life of the Company's Chairman and largest shareowner.
5. DEBT
Long term debt consists of the following at March 31 (in thousands):
2000 1999
---- ----
Small Business Administration term loan, agreement withinterest at 7.77%,
payable through September 2016, secured by land and building in
Hopland, California............................................. $551 $568
Less: current portion............................................ 17 16
Long-term portion................................................ $534 $552
Principal payments on long-term debt are as follows (in thousands):
Fiscal Year ending March 31:
2001................................................................ $ 17
2002................................................................ 19
2003................................................................ 20
2004................................................................ 22
2005................................................................ 23
Thereafter.......................................................... 450
----
Total............................................................. $551
====
F-29
REAL GOODS TRADING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. ASSET HELD FOR SALE
The Company owns land and buildings in Amherst, Wisconsin which it is seeking
to sell. At March 31, 1999 and 2000, the land and building had a brokerage firm thatnet book value
of $78,000 and was rented out while it is due on
demand.being offered for sale.
7. LEASES
The Company has pledged 265,000operating leases for its offices, warehouse facilities, the
Eugene and Berkeley stores and certain equipment, which expire from October 2000
through March 2010. Rental expense for the years ended March 31, 2000 and 1999
was $403,000 and $308,000 respectively.
Future minimum annual lease payments under operating leases are as follows
(in thousands):
Fiscal Year ending March 31:
2001.............................................................. $ 533
2002.............................................................. 525
2003.............................................................. 463
2004.............................................................. 456
2005.............................................................. 193
Thereafter........................................................ 631
------
Total........................................................... $2,801
======
8. INCOME TAXES
Income tax benefits consist of the following for the years ended March 31 (in
thousands):
2000 1999
----- -----
Current:
Federal...................................................... $ -- $ --
State........................................................ 1 1
----- -----
Total...................................................... 1 1
Deferred--federal............................................ (570) (151)
----- -----
Total benefit.............................................. $(569) $(150)
===== =====
The income tax benefit for financial reporting purposes are different from
the tax provision computed by applying the statutory federal income tax rate.
The differences for each year are reconciled as follows (in thousands):
2000 1999
----- -----
Federal income taxes at statutory income tax rate (34%)....... $(632) $(215)
State taxes net of federal tax benefit........................ (112) (14)
Effect of permanent differences............................... 6 8
Valuation allowance........................................... 100 107
Other......................................................... 69 (36)
----- -----
Benefit....................................................... $(569) $(150)
===== =====
F-30
REAL GOODS TRADING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The components of the net deferred tax asset (liability) at year-end are as
follows (in thousands):
2000 1999
----- -----
Deferred tax assets:
Benefit of net operating loss carryforwards.................. $ 792 $ 183
Allowance for doubtful accounts.............................. 110 --
Stock option compensation.................................... 14 14
Reduction in cost of property................................ 30 15
Other........................................................ 1 10
947 222
Less valuation allowance....................................... (283) (183)
----- -----
Non-current deferred tax asset................................. 664 39
----- -----
Deferred tax assets (liabilities):
Inventory reserves........................................... 47 99
Catalog costs................................................ (22) (37)
Accruals..................................................... 24 32
Other........................................................ 3 (5)
----- -----
Current deferred tax assets................................ 52 89
Less valuation allowance....................................... (18) --
----- -----
Current deferred tax asset..................................... 34 89
----- -----
Net deferred tax asset......................................... $ 698 $ 128
===== =====
Because of the uncertain nature of their ultimate utilization, a partial
valuation allowance is recorded against the deferred tax assets associated with
the net operating losses. At March 31, 2000, the Company has net operating
losses available for carryforward of approximately $1,950,000 and $1,536,000 for
federal and state purposes, respectively. The federal net operating loss and
$430,000 of the state net operating losses will expire in 2013 through 2020. The
remaining state net operating losses expire through 2005. The Company intends to
use various tax planning strategies to fully utilize the loss carryforwards
prior to expiration.
9. SHAREOWNER AGREEMENTS
The Chairman of the Board, founder and largest shareowner has a renewable
one-year employment agreement with the Company which provides for an annual
salary of $125,000. As of April 1, 2000 the Chairman voluntarily agreed to a
reduction in such salary to $110,000 on a month to month basis.
The Company also has a split dollar life insurance agreement with this
individual whereby the Company pays the premiums. The Company has been granted a
security interest in the cash value and death benefit of the policy, and certain
shares of its securities available-for-
sale (see Note 6) as collateral for the loan. The interest rate charged onCompany stock owned by the loan varies depending on market rates and was 7.0% at December 31, 1998.
Interest incurred on the balanceChairman of the loanBoard have been pledged
as additional collateral during the period in which the premiums exceed the cash
surrender value. The net cash surrender value at March 31, 2000 was $215,000 and
is addedincluded in other assets.
10. SHAREOWNERS' EQUITY
On August 11, 1997 the Company commenced a direct public offering of up to
the outstanding balance
payable.
4. Convertible Debentures
As1,000,000 shares of Decembernewly issued stock and 300,000 shares offered by a selling
shareholder at $5.50 per share. The offering closed on June 30, 1998.
Through March 31, 1998,1999, 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,
into676,641 new shares of common
stock, atgenerating gross proceeds of $3,620,000, and had incurred costs of
$697,000 related to the initialdirect public offering per share price.
F-12offering.
F-31
GAIAM, INC.REAL GOODS TRADING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
5. Leases
At December 31, 1997 andSTATEMENTS--(Continued)
In August 1998, the Company's property held under capital leases
consistedCompany was authorized to repurchase up to $100,000 of
the following, which is includedcommon stock in propertyopen market 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, asprivate transactions. In fiscal 1999, 3,900
shares were repurchased for $14,850. In fiscal 2000, 800 shares were repurchased
for $2,750. Through March 31, 2000, a total 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 $646,88613,884 shares had been
repurchased for the
years ended December 31, 1996, 1997, and 1998, respectively.
6. Securities Available-for-Sale
Securities available-for-sale consist of 315,000$66,643.
On September 23, 1999 WholePeople.com purchased 800,000 shares of common
stock for $3,578,000, net of issuance costs of $22,000.
Subsequent to year-end, in April 2000, the Company repurchased 50,000 shares
for $100,000.
11. BENEFIT PLANS AND STOCK OPTIONS
The Company sponsors a 401(k) retirement plan. The plan does not require
matching funds from one
issuer. The costthe Company, and fair valuethe Company has made no contributions to
the plan.
Under the Company's Third Amended and Restated Fiscal 1993 Stock Incentive
Plan ("Employee Plan") the Company can grant incentive and non-qualified options
to purchase 1,200,000 shares of common stock. Incentive Stock Options can be
granted at prices not less than 100% of the securities at December 31, 1998 were
$32,200 and $1,633,905, respectively. The fair market value of the common
shares was
determined by using(85% for non-qualified options) on the closing NASDAQdate the option is granted, and
normally vest over a period not exceeding five years from the date of grant.
Options expire ten years from date of grant. As of March 31, 2000, options to
purchase 1,110,550 shares were outstanding.
In September 1998 the Board of Directors revised the exercise price of the common stock at December 31,
1998.
F-13
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequentall
outstanding Employee Plan options 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.$4.50 per share.
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 40,000has reserved 100,000 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 Decemberits Non-Employee
Directors' Stock Option Plan ("Director's Plan"). As of March 31, 1998 that entitled the holder2000, options
to purchase 24,00075,000 shares of Class A common
stock at $.50 per share. The warrants are exercisable in a two year period
beginning January 20, 2002were outstanding 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 changesnone have been reflected retroactivelyexercised.
Weighted
Average
Number of Exercise
Shares Price
-------------- --------
(in thousands)
Outstanding at March 31, 1998................... 344 $ 5.37
Granted......................................... 448 4.50
Forfeited....................................... (125) 5.37
Terminated as a result of option repricing...... (341) 5.39
Issued as a result of option repricing.......... 341 4.50
------ ------
Outstanding at March 31, 1999................... 667 4.59
Granted......................................... 838 4.50
Forfeited....................................... (317) (4.52)
Exercised....................................... (2) (4.50)
------ ------
Outstanding at March 31, 2000................... 1,186 $ 4.57
====== ======
Shares exercisable at March 31, 2000............ 194 $ 4.54
Shares available for grant at March 31, 2000.... 114
Range of exercise prices........................ $3.38 to $7.12
Weighted average remaining contractual life at
March 31, 2000 7.5 years
F-32
REAL GOODS TRADING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board No.25, "Accounting for Stock Issued to Employees" and its related
interpretations. Accordingly, no compensation expense has been recognized in the
Company's consolidated financial statements. The Class B commonstatements for employee stock is
owned entirely byarrangements in fiscal 1999 or 1998.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation", (SFAS 123) requires the Company's founderdisclosure of pro forma net income
and Chief Executive Officer and is
restricted as to its sale or transfer. Eachearnings per 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,had 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 usingadopted the purchasefair value 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 fiscal 1996. Under SFAS 123, the immediately preceding period:
Years ended December 31
1997 1998
-----------------------------------
(Unaudited)
Revenues $27,222,601 $38,063,794
Net income 625,257 625,257
Net income per common share 0.08 0.08
F-16fair value of stock-based awards
to employees is calculated through the use of the option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: Expected life, 120 months following
vesting in fiscal 2000 and fiscal 1999, stock volatility, 32% in fiscal 1999 and
55% in fiscal 2000; risk free interest rate 5.50% in fiscal 1999 and 5.65% in
fiscal 2000; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are calculated at a 50% rate, based on the Company's historical experience. If
the computed fair values of the fiscal 2000 and fiscal 1999 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
would have been $569,000 or $.14 per share in fiscal 1999, and the pro forma net
loss would have been $1,549,000 or $.35 per share in fiscal 2000.
F-33
GAIAM, INC.REAL GOODS TRADING CORPORATION
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.STATEMENTS--(Continued)
12. SEGMENT INFORMATION
The Company has agreed to pay a
minimum royalty of $225,000 to the individual for his services in relation to
the video production,three divisions (Catalog, Retail 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 toRenewables), 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 shippedfor sale directly to
either the end
user or reseller. Although thecustomers. The customer bases do notof all three divisions overlap to anysome extent, and
the purchasepurchases and delivery processes to customers overlap in some areas.as well.
Each of the two segmentsthree divisions qualifies as sucha reportable segment because each is
more than 10% of the combined revenue.revenue of all operating segments. 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,
1997 1998
-------------------------------FY 2000 FY 1999
------- -------
Net revenue:
Direct to consumer $19,897,690 $26,897,236
Direct to business - 3,841,304Sales:
Catalog Division.......................................... $11,699 $11,914
Retail Division........................................... 4,046 3,743
Renewables Division....................................... 3,234 3,079
------- -------
Consolidated net revenue 19,897,690 30,738,540
Contribution margin:
Direct to consumer (566,490) 128,691
Direct to business - 856,152
-------------------------------Net Sales.................................... $18,979 $18,736
======= =======
Contribution:
Catalog Division............................................ $ 5,327 $ 5,459
Retail Division............................................. 1,519 1,400
Renewables Division....................................... 988 973
------- -------
Consolidated contribution marginContribution................................. $ (566,490)7,834 $ 984,843
F-18
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
Year Ended December 31,
1997 1998
----------------------------7,832
======= =======
Reconciliation of Contribution margin to net income:
Other income 1,583,336 388,491loss:
Selling, general & administrative expenses
Catalog Division.......................................... $ 5,757 $ 5,687
Retail Division........................................... 2,267 1,748
Renewables Division....................................... 1,351 1,032
Solar Living Center....................................... 27 30
------- -------
Consolidated S G & A expenses............................... 9,402 8,497
Interest (income) expense................................... (63) (42)
Loss on sales of assets..................................... 354 9
Income tax expense 362,534 251,955
Minoritybenefit.......................................... (569) (150)
------- -------
Net Loss................................................ $(1,290) $ (482)
======= =======
F-34
REAL GOODS TRADING CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except share and per share data)
Six Months Ended
----------------------
Sept. 23, Sept. 25,
2000 1999
---------- ----------
Net sales..................... $ 6,679 $ 8,101
Cost of sales................. 4,148 4,822
Gross profit.................. 2,531 3,279
Selling, general and
administrative expenses.... 4,033 3,807
Loss from operations.......... (1,502) (528)
Interest income, net of
interest expense............. 42 8
Loss before income taxes...... (1,460) (520)
Income tax benefit............ 365 182
---------- ----------
Net loss.................. $ (1,095) $ (338)
========== ==========
Net loss per share, basic
and diluted.............. $ (0.23) $ (0.08)
Weighted average shares
outstanding, basic and
diluted...................... 4,824,354 4,081,339
See notes to condensed financial statements
F-35
REAL GOODS TRADING CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
------------------
Sept.
23, Sept. 25,
2000 1999
------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $(1,095) $ (338)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization............................ 259 204
Deferred income taxes.................................... (365) (182)
Changes in assets and liabilities:
Receivables.............................................. (38) (77)
Inventory................................................ 520 (1,087)
Deferred catalog costs................................... 51 --
Prepaid expenses......................................... (40) 36
Other.................................................... -- 11
Accounts payable......................................... (532) (136)
Accrued expenses......................................... (36) (122)
Customer deposits........................................ 56 (29)
Other taxes payable...................................... 16 (30)
------- -------
Net cash from operating activities..................... (1,204) (1,750)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, improvements, and construction in
progress................................................ (372) (188)
Note and interest receivable from affiliate.............. (4) (95)
Marketable Securities.................................... 1,568 --
------- -------
Net cash from investing activities..................... 1,192 (283)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of stock...................................... (147) (3)
Repayment of debt........................................ (8) (8)
Proceeds from issuance of common stock, net of issue
costs................................................... -- 3,587
------- -------
Net cash from financing activities..................... (155) 3,576
------- -------
Net increase (decrease) in cash............................ (167) 1,543
Cash at beginning of period................................ 876 2,048
------- -------
Cash at end of period...................................... $ 709 $ 3,591
======= =======
See notes to condensed financial statements
F-36
REAL GOODS TRADING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended September 23, 2000
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
from the records of the Company and, in the opinion of management, include all
adjustments (consisting of only normal recurring accruals) necessary to present
fairly the financial position as of September 23, 2000 and the interim results
of operations and cash flows for the six months ended September 23, 2000 and
September 25, 1999. Accounting policies followed by the Company are described in
Note 1 to the audited financial statements for the fiscal year ended March 31,
2000 included in the Company's fiscal 2000 Annual Report to Shareowners. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted for purposes of the condensed financial statements. The
condensed financial statements should be read in conjunction with the audited
financial statements, including notes thereto, for the year ended March 31,
2000. The results of operations for the six month periods herein presented are
not necessarily indicative of the results to be expected for the full year.
NOTE 2--PRESENTATION OF SHIPPING AND HANDLING FEES
Included in net sales for the six month periods ended September 23, 2000 and
September 25, 1999 are shipping and handling fees collected from customers of
$226,000 and $438,000 in fiscal 2001 and $259,000 and $536,000 in fiscal 2000,
respectively. Included in cost of sales for the six month periods ended
September 23, 2000 and September 25, 1999 are freight out expenses of $225,000
and $424,000 in fiscal 2001 and $184,000 and $432,000 in fiscal 2000,
respectively.
NOTE 3--LINE OF CREDIT
The Company has a line of credit agreement for $1,500,000 with National Bank
of the Redwoods (the "Bank") which expires on February 28, 2001. Borrowings
bear interest expense - 261,598
----------------------------
Net income $ 654,312 $859,781
============================
F-19at 1.5% over the prime rate, payable in monthly installments. The
line of credit agreement contains restrictive covenants including debt to net
worth, current ratios, restrictions on capital expenditures, and prohibitions
on payment of cash dividends without the Bank's approval. The line is
collateralized by substantially all of the Company's assets, including
inventory, accounts receivable and mailing lists as well as a key person life
insurance policy on the life of the Company's Chairman and largest shareowner.
As of September 23, 2000, no amounts were outstanding on the Company's line of
credit.
NOTE 4--SHAREOWNERS' EQUITY
In two separate resolutions in August 1998 and April 2000, the Board of
Directors authorized the Company to purchase up to a total of $200,000 of
common stock in open market and private transactions. During the first six
months of fiscal 2001 the Company repurchased 67,500 shares at an average cost
of $2.17 per share.
NOTE 5--SEGMENT INFORMATION
The Company has four divisions (Catalog, Internet, Retail and Renewables),
all of which sell products purchased from other suppliers directly to
customers. The customer bases of all four divisions overlap to some extent, and
the purchase and delivery processes to customers overlap as well.
F-37
GAIAM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF
OPERATIONSREAL GOODS TRADING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Each of the four divisions qualifies as a reportable segment because each is
more than 10% of the combined revenue of all operating segments. Financial
information for the Company's business segments for the six months ended
September 23, 2000 and September 25, 1999 was as follows:
Sept.
23, Sept. 25,
2000 1999
------- ---------
Net Sales:
Catalog Division.................................... $ 2,624 $4,066
Internet Division................................... 833 445
Retail Division..................................... 2,083 1,701
Renewables Division................................. 1,059 1,889
Other............................................... 80
------- ------
Consolidated Net Sales.............................. 6,679 8,101
Gross Profit:
Catalog Division.................................... 1,115 1,840
Internet Division................................... 343 200
Retail Division..................................... 773 656
Renewables Division................................. 270 583
Other............................................... 30 --
Consolidated Gross Profit........................... 2,531 3,279
Reconciliation of Gross Profit to Net Loss:
Selling, general & administrative expenses:
Catalog Division.................................. 1,678 1,979
Internet Division................................. 482 141
Retail Division................................... 1,326 921
Renewables Division............................... 472 753
Other............................................. 75 13
Consolidated S G & A expenses..................... 4,033 3,807
Interest income....................................... 65 31
Interest expense...................................... (23) (23)
Gain on sale of assets................................ -- --
Income tax benefit.................................... 365 182
Net Loss............................................ $(1,095) $ (338)
NOTE 6--SUBSEQUENT EVENT
On October 13, 2000, the Company signed an agreement to merge the Company
with a subsidiary of Gaiam, Inc. subject to Real Goods shareholder approval and
other customary conditions. Details about this agreement can be found by
examining the Company's press releases and the Form 8-K filed on October 31,
2000.
F-38
Gaiam, Inc.
Unaudited Pro Forma Combined Condensed Statement of Operations
The fiscal years for Gaiam and Real Goods differ. The following
unaudited pro forma combined statementcondensed statements of operations for the year
ended December 31, 1998 is2000 and the three months ended March 31, 2001 are derived
from the historical consolidated condensed statements of operations of Gaiam,
Inc. and Healing Arts Publishingthe historical condensed statements of operations of Real Goods Trading
Corporation for the twelve month period ended December 31, 2000 and InnerBalance Health
(the "Acquisitions"),the three
months ended March 31, 2000, adjusted to give effect to the Mergerstheir consolidation
using the purchase method of accounting for business combinations.
The unaudited pro forma combined condensed statement of operations for
the twelve months ended December 31, 19982000 assumes that the Acquisitionsmerger occurred as ofon
January 1, 1998.2000, while the unaudited pro forma combined condensed statement of
operations for the three months ended March 31, 2001 assumes that the merger
occurred on January 1, 2001.
The pro forma combined statementcondensed statements of operations isare 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. as of and the for the year ended December 31, 19982000
and the unaudited consolidated financial statements of Gaiam, Inc. as of and for
the three months ended March 31, 2001, and the audited financial statements and
the notes thereto of Healing Arts Publishing as of andReal Goods Trading Corporation for the nine monthsyear ended September 30, 1998.March 31,
2000. The pro forma data is not necessarily indicative of the operating results
or financial position that would have been achieved had the Acquisitionsmerger been
consummated at the dates indicated, nor is it necessarily indicative of future
operating results and financial condition.
F-20F-39
GAIAM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF
OPERATIONSGaiam, Inc.
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Year endedEnded December 31, 19982000
(Unaudited)
Healing Arts InnerBalanceHistorical
-------------------------------------------
Real Goods Total
Gaiam, Inc. Publishing (c) Health (d) AdjustmentsTrading Corp. (a) Pro Forma ---------------------------------------------------------------------------combined
-------------- --------------------- ------------------
Net revenue $30,738,540 $6,513,679 $1,339,947 $(523,620)(e) $38,063,794
(4,752)(b)$60,588,018 $15,897,599 $76,485,617
Cost of goods sold 13,173,536 2,868,696 569,645 (190,352)(e) 16,416,773
(4,752)(b)
---------------------------------------------------------------------------23,793,492 9,710,211 33,503,703
------------- ------------ ------------
Gross profit 17,565,004 3,644,983 770,302 (333,268) 21,647,021
Expenses:36,794,526 6,187,388 42,981,914
Selling, and operating 14,186,215 3,056,626 1,017,415 94,420 (a) 18,701,466
Corporate, general and administration 2,393,946 810,398 - (73,530)(e) 2,784,023
---------------------------------------------------------------------------
Total expenses 16,580,161 3,867,023 1,017,415 20,890 21,485,489
---------------------------------------------------------------------------administrative 32,366,760 9,291,494 41,658,254
------------- ------------ ------------
Income (loss) from operations 984,843 (222,040) (247,113) (354,158) 161,5324,427,766 (3,104,106) 1,323,660
Other income (expense):
Realized gain on sale of
securities and other 696,992 - - - 696,992 (73,947) (354,460) (428,407)
Interest expense (308,501) (61,161) (17,312) (386,974)
---------------------------------------------------------------------------
Total other income (expense) 388,491 (61,161) (17,312) - 310,018
---------------------------------------------------------------------------
Incomenet (209,167) 53,095 (156,072)
------------- ------------ ------------
Other income (expense) (283,114) (301,365) (584,479)
Profit (loss) before income taxes and
minority interest 1,373,334 (283,201) (264,425) (354,158) 471,5504,144,652 (3,405,471) 739,181
Provision for income taxes 251,955 - - - 251,955(1,555,487) 943,139 (612,348)
Minority interest in net income(income) loss of
consolidated subsidiary, net of tax (261,598)59,706 - - 93,456 (f) (168,142)
---------------------------------------------------------------------------59,706
------------- ------------ ------------
Net income (loss) $ 859,7812,648,871 ($2,462,332) $ (283,201) $ (264,425) $(260,702) $ 51,453
===========================================================================186,539
============= ============ ============
Net income:income per share:
- Basic $ 0.110.24 $ 0.010.02
- Diluted 0.11 $ 0.010.23 $ 0.02
Shares used in computing net
income per share:share (b):
- Basic 8,072,877 8,072,87710,858,139 11,339,563
- Diluted 8,263,677 8,263,67711,525,120 12,006,544
See accompanying notes.
F-21F-40
GAIAM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF
OPERATIONSGaiam, Inc.
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Three Months Ended March 31, 2001
(Unaudited)
Historical
-------------------------------------------
Real Goods Total
Gaiam, Inc. Trading Corp. (c) Pro Forma Combined
--------------- --------------------- ------------------
Net revenue $17,671,513 $1,416,077 $19,087,590
Cost of goods sold 6,847,590 961,432 7,809,022
------------- ------------ ------------
Gross profit 10,823,923 454,645 11,278,568
Selling, general and administrative 10,088,558 1,133,017 11,221,575
------------- ------------ ------------
Income (loss) from operations 735,365 (678,372) 56,993
Other income (expense) 184,615 - 184,615
Interest income (expense) - net (116,917) 2,369 (114,548)
------------- ------------ ------------
Other income (expense) 67,698 2,369 70,067
Profit (loss) before income taxes 803,063 (676,003) 127,060
Provision for income taxes (301,390) 169,271 (132,119)
Minority interest in net (income) loss of
consolidated subsidiary, net of tax (82,645) - (82,645)
------------- ------------ ------------
Net income (loss) $ 419,028 ($506,732) ($87,704)
============= ============ ============
Net income per share:
- Basic $ 0.04 $ (0.01)
- Diluted $ 0.04 $ (0.01)
Shares used in computing net
income per share (b):
- Basic 11,205,844 11,355,651
- Diluted 11,563,172 11,712,979
See accompanying notes.
F-41
Gaiam, Inc.
Unaudited Pro Forma Combined Condensed Statement of Operations
Notes to Unaudited Pro Forma Combined StatementCondensed Statements of Operations:
- ------------------------------------------------------------------------
(a) The statementRepresents the results of operations has been adjustedof Real Goods Trading Corporation from
January 1, 2000 through December 31, 2000, and was calculated by taking the
results of operations for the year ended March 31, 2000 as reported,
subtracting the results of operations for the nine month period ending
December 31, 1999, and adding the results of operations for the nine month
period ended December 31, 2000.
(b) Adjusted to reflect the additional
amortizationissuance of the video library had the Company. acquired Healing Arts
Publishing,481,424 shares of Gaiam, Inc. onClass A
common stock to Real Goods shareholders as of January 1, 1998.
Intangible Asset $3,209,000
Amortization Life 15 years
Additional Period 8.5 months
----------
Adjustment $ 151,547
==========
(b) The statement of operations has been adjusted to reflect the effect of
intercompany sales between Healing Arts Publishing, Inc.2000 and Gaiam, Inc.
for the nine months prior to the merger.2001,
respectively.
(c) Represents the results of operations of Healing Arts Publishing, Inc.Real Goods Trading Corporation from
January 1, 19982001 through September 30, 1998.
(d) Represents the resultsJanuary 29, 2001 (the date 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) As the Company has recorded the acquisition of Healing Arts Publishing,
Inc. on the acquisition date, September 14, 1998 and the audited financial
statements of Healing Arts Publishing, Inc. including the report of
operations for the nine months ended September 30, 1998. This adjustment
eliminates the 16 days of activity which are included in both the financial
statements of the Company and those of Healing Arts Publishing, Inc.
(f) Represents the adjustment to minority interest to reflect ownership of
Healing Arts Publishing, Inc. for the entire year.
F-22acquisition).
F-42
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description of Period Expenses Accounts Deductions Period
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts on
accounts receivable $ 31,000 $ 258,993 (2) $126,580 (1) (348,658)(3) $ 67,915
Reserve for obsolescence on
inventory balance $ 79,016 182,643 29,000 (1) (122,463)(3) $ 168,744
Year ended December 31, 1997
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts on
accounts receivable $ 28,531 2,469 - - $ 31,000
Reserve for obsolescence on
inventory balance 84,240 83,871 (89,095) $ 79,016
Year ended December 31, 1996
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts on
accounts receivable 5,000 23,531 $ 28,531
Reserve for obsolescence on
inventory balance 143,890 255,467 (315,117) 84,240
(1) Acquired in conjunction with acquisition of majority owned subsidiaries.
(2) Provision for doubful accounts
(3) Actual amounts written off against the allowance or reserve.[Inside Back cover]
[Pictures]
Our Core Values
Our approach to business is based on important core values.
We value the environment and view all resources as precious assets not to be
wasted.
We emphasize integrity in all our relationships.
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.
---------------------------------------------------------------------------
Understanding Us
. 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," we mean low or minimal impact upon the ecosystem in
which the product is created or used.
. By "green," we mean an attribute of products that have a less harmful
effect on the environment than other products available to consumers
having the same or a similar use.
. By "alternative health," we mean the approach to healthcare typified by
chiropractic care, nutrition, homeopathy, naturopathic medicine,
acupuncture, acupressure, massage, aromatherapy and other holistic
approaches.
---------------------------------------------------------------------------Dealer Prospectus Delivery Obligation. Until ____, 1999,______________, 2001, 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........................................................................
NASDAQ National Market listing fee.....................................................
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 [Indemnification Premiums]............
Miscellaneous.......................................................................... 700,000
----------
Total..................................................................................
==========
Securities and Exchange Commission registration fee............... $9,057.50
NASD filing fee................................................... 4,122.96
NASDAQ National Market listing fee................................ *
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..................................................... *
________
Total............................................................. $
========
________
* To be completed by amendment.
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) 7-108-1027-109-101 et. seq. (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 eliminateseliminate the personal
liability for monetary damages of directors under certain circumstances and
providesprovide 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 any suchthe lawsuit or proceeding.
Gaiam intends to obtainmaintains a $5,000,000 directors and officers insurance policy providing
insurance indemnifying certain of Gaiam's directors officers and employeesexecutive officers for certain
liabilities. This insurance policy insures the past, present and future
directors and officers of Gaiam, with certain exceptions, from claims arising
out of any error, misstatement, misleading statement, act, omission, neglect or
breach of duty by any of the directors while acting in their capacities as such.
Claims include claims arising from sales and purchases of Gaiam securities and
shareholder derivative actions.
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/ WarrantsWarrants/ Consideration Exemption(s)
Shares of Notes Options Claimed*
Class A
Common Stock
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
privately
September30,September 30, James 120,000 $500,000 -- $1,025,000 negotiated
sale
1998 Argyopoulos/ sale under
Argyopoulos Section Argyopoulos 4(2)
Investor G.P. of the
Investor G.P.
Securities Act.
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
privately
October 1, Jirka Rysavy -- $531,000 -- Stock of InnerBalance negotiated
sale
1998 InnerBalancesale under
Section 4(2)
of the
Securities Act.
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
privately
December 7, Lynn Powers 40,000 $ 50,000 -- $ 100,000 negotiated
1998 sale
1998 under
Section 4(2)
of the
Securities Act.
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
privately
January 7, Mo Siegel 17,143 $ 75,000 -- $ 150,000 negotiated
1999 sale
1999 under
Section 4(2)
of the
Securities Act.
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Date Purchaser Number of Debentures/ WarrantsWarrants/ Consideration Exemption(s)
Shares of Notes Options Claimed*
Class A
Common Stock
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
privately
April 20, 1999 Jeffrey Steiner 120,000 $500,000 -- $1,025,000 privately 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 GilliandGilliland 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, Perlhagensale under
1999 Section
1999 4(2)
of the
Securities Act.
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Date Purchaser Number of Debentures/ Warrants/ Consideration Exemption(s)
Shares of Notes Options Claimed*
Class A
Common Stock
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
of the
Securities Act.
- ------------------------------------------------------------------------------------------------------------------------------------
privately
November Steve Troy 167,247 -- -- Stock of negotiated
1999 Jade Mountain, Inc. sale under
and Section 4(2)
jademountain.com, of the
Inc. Securities Act.
- ------------------------------------------------------------------------------------------------------------------------------------
November Steven P. and 40,000 -- -- Interest in Healing Arts privately
1999 Elizabeth Adams Publishing, LLC negotiated
(dba Living Arts) sale under
Section 4(2)
of the
Securities Act.
- ------------------------------------------------------------------------------------------------------------------------------------
Privately
February 29, Daniel and 14,000 -- -- Option to purchase negotiated
2000 Marylou stock of sale under
Sanders EcoSport, Inc. Section 4(2)
of the
Securities Act.
- ------------------------------------------------------------------------------------------------------------------------------------
Privately
June 20, 2000 Sharon Conroy 7,243 -- -- Stock of Fish Crane, negotiated
Inc. sale under
Section 4(2)
of the
Securities Act.
- ------------------------------------------------------------------------------------------------------------------------------------
* We believe that exemptions in addition to those specified above may exist
with respect to the listed transactions.
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*-----------------------------------------------------------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of Gaiam, Inc.
(incorporated by reference to Exhibit 3.1 of Gaiam's Registration
Statement on Form S-1 (No. 333-83283)).
- -------------------------------------------------------------------------------
3.2*-----------------------------------------------------------------------------------------------------------------------------------
3.2 Bylaws of Gaiam, Inc. (incorporated by reference to Exhibit 3.2 of
Gaiam's Registration Statement on Form S-1 (No. 333-83283)).
- -------------------------------------------------------------------------------
4.1*-----------------------------------------------------------------------------------------------------------------------------------
4.1 Form of Gaiam, Inc. Stock Certificate (incorporated by reference to Exhibit 4.1
of Gaiam's Registration Statement on Form S-1 (No. 333-83283)).
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
5.1* Opinion of Bartlit Beck Herman Palenchar & Scott
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
10.1 Loan Agreement, dated as of April 16, 2001, between Gaiam, Inc.1999Inc. and
Wells Fargo Bank West, N.A.
- -----------------------------------------------------------------------------------------------------------------------------------
10.2 Gaiam, Inc. 1999 Long-Term Incentive Plan (incorporated by reference to
Exhibit 10.1 of Gaiam's Registration Statement on Form S-1 (No. 333-83283)).
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10.2* Operating Agreement of Healing Arts Publishing, LLC-----------------------------------------------------------------------------------------------------------------------------------
10.3 Lease, dated September 14, 1998
- --------------------------------------------------------------------------------
10.3* Sublease dated SeptemberDecember 16, 19981999, between Corporate Express
Office Products,Gaiam, Inc. and Gaiam, Inc.Duke-Weeks Realty
Limited Partnership (incorporated by reference to Exhibit 10.2 of Gaiam's
Registration Statement on Form S-4 (No. 333-505-60)).
- --------------------------------------------------------------------------------
10.4*-----------------------------------------------------------------------------------------------------------------------------------
10.4 Lease, Agreement dated December 18, 1997, between Gaiam, Inc. and Orix Prime West
Broomfield Venture and Gaiam, Inc.(incorporated by reference to Exhibit 10.4 of
Gaiam's Registration Statement on Form S-1 (No. 333-83283)).
- --------------------------------------------------------------------------------
21.1*-----------------------------------------------------------------------------------------------------------------------------------
21.1 Subsidiaries of Gaiam, Inc.
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
23.1 Consent of ErnestErnst & Young LLP, independent auditors of
Gaiam, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Exhibit No. Description
- --------------------------------------------------------------------------------
23.2 Consent of Wendell T. Walker & Associates
- --------------------------------------------------------------------------------
23.3*-----------------------------------------------------------------------------------------------------------------------------------
23.2* Consent of Bartlit Beck Herman Palenchar & Scott (included in the
opinion filed as Exhibit 5.1)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
23.3 Consent of Moss Adams LLP
- -----------------------------------------------------------------------------------------------------------------------------------
23.4 Consent of Deloitte & Touche LLP
- -----------------------------------------------------------------------------------------------------------------------------------
24.1 Power of Attorney included on(included in signature page to this Registration Statement).
- --------------------------------------------------------------------------------
27.1 Financial Data Schedule
- --------------------------------------------------------------------------------
99.1 Financial Statements of Healing Arts Publishing, Inc.
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* To be filed by amendment.
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)(b) 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)(c) 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.
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 July 19, 1999.June 20, 2001.
Gaiam, Inc.
By: /s/ Jirka Rysavy
____________________________------------------------------------------
Jirka Rysavy, Chief Executive Officer
POWER OF ATTORNEY
KNOW BY ALL MEN THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jirka Rysavy and Lynn Powers, and each of them,
his or her true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him or her and in his or her name, place and
stead, in any and all capacities to sign any and all amendments (including post-effectivepost-
effective amendments) to this Registration Statement, and to file the same, with
all exhibits thereto, and other documents in connection therewith, including,
without limitation, any registration statement filed pursuant to Rule 462 under
the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that each of said attorneys-in-fact and agents or any of them
or their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
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
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Jirka Rysavy, , Chairman of the Board and Chief
July 19, 1999/s/ Jirka Rysavy Executive Officer June 20, 2001
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Lynn Powers, President, Chief Operating
/s/ Lynn Powers Officer July 19, 1999 and director June 20, 2001
- -----------------------------------------------------------------------------------------------------------------------
Pavel Bouska, Executive Vice President and July 19, 1999
Chief Information Officer--------------------------------------------------------------------------------------------------------
/s/ Barnet M. Feinblum Barnet M. Feinblum, director May 24, 2001
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
/s/ John Mackey John Mackey, director May 24, 2001
- --------------------------------------------------------------------------------------------------------
/s/ Barbara Mowry Barbara Mowry, director May 24, 2001
- --------------------------------------------------------------------------------------------------------
/s/ Paul Ray Paul H. Ray, director May 24, 2001
- --------------------------------------------------------------------------------------------------------
Janet Mathews,
Controller and July 19, 1999
principal financial officer/s/ Janet Mathews Chief Financial Officer June 20, 2001
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
EXHIBIT INDEX
- ----------------------------------------------------------------------------------------------------------------------
Exhibit No. Description
- ----------------------------------------------------------------------------------------------------------------------
1.1* Form of Underwriting Agreement
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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.
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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)
- ----------------------------------------------------------------------------------------------------------------------
24.1 Power of Attorney, included on signature page
- ----------------------------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule
- ----------------------------------------------------------------------------------------------------------------------
99.1 Financial Statements of Healing Arts Publishing, Inc.
- ----------------------------------------------------------------------------------------------------------------------
* To be filed by amendment.