United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the Fiscal Quarter Ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
Commission File Number 0-27517
GAIAM, INC.
(Exact name of registrant as specified in its charter)
COLORADO 84-1113527
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
360 INTERLOCKEN BLVD., SUITE 300
BROOMFIELD, COLORADO 80021
(Address of principal executive offices)
(303) 222-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO _____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Shares outstanding as of May 10, 2000
- ---------------------- -------------------------------------
Class A Common Stock 5,441,537
($.0001 par value)
Class B Common Stock 5,400,000
($.0001 par value)
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 2000
and December 31, 1999 3
Consolidated Statements of Income for the three
months ended March 31, 2000 and March 31, 1999 4
Consolidated Statement of Cash Flows for the three
months ended March 31, 2000 and March 31, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities and Use of Proceeds 9
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
This report may contain forward-looking statements that involve risks and
uncertainties. When used in this discussion, the words "anticipate," "believe,"
"estimate," "expect," and similar expressions as they relate to the Company or
its management are intended to identify such forward-looking statements. The
Company's actual results could differ materially from the results anticipated in
these forward-looking statements as a result of certain factors set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this report. Risks and uncertainties that could
cause actual results to differ include, without limitation, competition,
pricing, brand reputation, acquisitions, our shift in emphasis to Internet
sales, security and information systems, consumer trends, customer interest in
our products, general economic conditions, and the effect of government
regulation. 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 report. We undertake no obligation to update any forward-looking
statement.
2
GAIAM, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
Assets 2000 1999
---------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 2,063,213 $ 3,877,465
Accounts receivable, net 3,919,132 4,326,594
Accounts and notes receivable, other 140,309 573,450
Inventory, less allowances 5,903,278 4,555,436
Income tax receivable 71,235 182,474
Deferred advertising costs 1,936,001 2,176,325
Other current assets 434,104 393,330
---------------------------------------
Total current assets 14,467,272 16,085,074
Property and equipment, net 6,910,047 3,168,183
Capitalized production costs, net 1,833,583 1,636,706
Video library, net 4,707,042 4,792,456
Goodwill, net 1,222,564 1,239,507
Other assets 304,206 337,759
---------------------------------------
Total assets $29,444,714 $27,259,685
=======================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $10,023,838 $ 7,618,344
Accrued liabilities 1,517,490 1,734,310
Accrued royalties 536,017 725,541
Capital lease obligations, current 99,509 95,844
---------------------------------------
Total current liabilities 12,176,854 10,174,039
Capital lease obligations, long-term 183,004 209,074
Line of credit 1,900,000 1,900,000
Minority interest 31,022 26,030
Stockholders' equity:
Class A common stock, $.0001 par value,
92,965,000 shares authorized, 5,441,537
shares issued and outstanding at March 31,
2000 and December 31, 1999, respectively 544 544
Class B common stock, $.0001 par value,
7,035,000 shares authorized, 5,400,000
issued and outstanding at March 31, 2000
and December 31, 1999, respectively 540 540
Additional paid-in capital 11,038,551 11,038,551
Deferred compensation (106,992) (106,992)
Retained earnings 4,221,191 4,017,899
---------------------------------------
Total stockholders' equity 15,153,834 14,950,542
---------------------------------------
Total liabilities and stockholders' equity $29,444,714 $27,259,685
=======================================
3
GAIAM, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months Ended
March 31,
2000 1999
--------------------------------------
Net revenue $12,558,437 $9,495,011
Cost of goods sold 4,922,311 3,855,660
--------------------------------------
Gross profit 7,636,126 5,639,351
Expenses:
Selling and operating 6,063,790 4,576,125
Corporate, general and administration 1,115,977 953,565
--------------------------------------
Total expenses 7,179,767 5,529,690
--------------------------------------
Income from operations 456,359 109,661
Other income (expense):
Realized gain on sale of securities
and other income (expense) (76,295) 147,748
Interest expense (46,650) (95,126)
--------------------------------------
Other income (expense) (122,945) 52,622
--------------------------------------
Income before income taxes and minority
interest 333,414 162,283
Provision for income taxes 125,130 60,369
Minority interest in net income (loss) of
consolidated subsidiary, net of tax 4,992 (4,253)
--------------------------------------
Net income $ 203,292 $ 106,167
======================================
Net income per share:
Basic $0.02 $0.01
Diluted $0.02 $0.01
Shares used in computing net income per share:
Basic 10,841,537 8,214,857
Diluted 11,504,669 8,394,468
4
GAIAM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31,
2000 1999
-----------------------------------
Operating activities
Net income $ 203,292 $ 106,167
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 185,070 73,141
Amortization 102,357 60,435
Interest expense added to principal of margin loan - 7,411
Minority interest in consolidated subsidiary 4,992 (4,253)
Realized gains on sale of securities and property and
equipment - 31,225
Deferred tax expense 13,891 (98,584)
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable 407,462 557,841
Inventory (1,347,842) (152,362)
Deferred advertising costs 240,324 (40,438)
Capitalized production costs (196,877) 51,983
Prepaid assets (40,774) (165,269)
Other assets 19,662 142,218
Accounts payable 2,405,494 (2,463,950)
Accrued liabilities (406,344) (466,290)
Income taxes payable 111,239 (195,682)
-----------------------------------
Net cash provided by (used in) operating activities 1,701,946 (2,556,407)
-----------------------------------
Investing activities
Purchase of property, equipment and other assets (3,926,934) (14,665)
Proceeds from the sale of securities available-for-sale - 228,125
Payments (borrowings) on notes receivable 433,141 (76,050)
-----------------------------------
Net cash provided by (used in) investing activities (3,493,793) 137,410
-----------------------------------
Financing activities
Principal payments on capital leases (22,405) (19,728)
Proceeds from issuance of common stock - 75,000
Proceeds from convertible debt - 75,000
Net proceeds from (payments on) borrowings - 1,299,395
-----------------------------------
Net cash provided by (used in) financing activities (22,405) 1,429,667
-----------------------------------
Net change in cash and cash equivalents (1,814,252) (989,330)
Cash and cash equivalents at beginning of year 3,877,465 1,409,939
-----------------------------------
Cash and cash equivalents at end of year $ 2,063,213 $ 420,609
===================================
Supplemental cash flow information
Interest paid $ 48,609 $ -
Income taxes paid - 100,000
5
Gaiam, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
For the Three Months Ended March 31, 2000 and 1999
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 March 31, 2000 and
the interim results of operations and cash flows for the three months ended
March 31, 2000 and 1999. The balance sheet as of December 31, 1999 was
derived from the Company's audited consolidated financial statements
included in the Company's annual report on Form 10-K.
Accounting policies followed by the Company are described in Note 1 to the
audited financial statements for the fiscal year ended December 31, 1999
included in the Company's annual report on Form 10-K. 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 consolidated financial statements should be read in
conjunction with the audited financial statements, including the notes
thereto, for the year ended December 31, 1999.
The results from operations for the three-month period herein presented are
not necessarily indicative of the results to be expected for the full year.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of Gaiam's financial condition and
results of operations should be read in conjunction with the consolidated
financial statements included elsewhere in this document.
Three months ended March 31, 2000 compared to three months ended March 31, 1999
- -------------------------------------------------------------------------------
Revenues increased 32.3% to $12.6 million for the three months ended March 31,
2000 from $9.5 million during the three months ended March 31, 1999. The
Company's internal growth rate was 26% for the first quarter of 2000, fueled
primarily by the success of its e-commerce business.
Gross profit, which consists of revenues less costs of sales (primarily
merchandise acquisition costs and in-bound freight), increased 35.4% to $7.6
million for the first quarter of 2000 from $5.6 million during the same period
in 1999. As a percentage of revenue, gross
6
profit increased to 60.8% in 2000 from 59.4% in 1999. This was primarily
attributable to increases in the sales of proprietary or private-labeled branded
products, on which Gaiam has better margins than other products.
Selling and operating expenses, which consist primarily of sales and marketing
costs, commissions and fulfillment expenses increased 32.5%, corresponding to
the revenue increase, to $6.1 million for the three months ended March 31, 2000
from $4.6 million for the same period in 1999. As a percentage of revenues,
selling and operating expenses increased to 48.3% in 2000 from 48.2% in 1999.
Corporate, general and administrative expenses increased to $1.1 million for the
first quarter of 2000, compared to $953,565 for the corresponding period in
1999. As a percentage of revenues, general and administrative expenses
decreased to 8.9% in 2000 from 10.0% in 1999.
Operating income, as a result of the factors described above, increased 316.2%
to $456,359 for the three months ended March 31, 2000 from $109,661 for the
three months ended March 31, 1999.
The Company recorded $76,295 in other expense during the first quarter of 2000,
compared to other income of $147,748 for the comparable period in 1999. During
1999, the Company recognized a gain on the sale of its marketable securities of
$223,014. Interest expense declined to $46,650 for the three months ended March
31, 2000 from $95,126 for the three months ended March 31, 1999, due to a
reduction in debt levels.
Minority interest in net income increased to $4,992 for the three months ended
March 31, 2000 from a negative $4,253 for the same period in 1999.
Income tax provision of $125,130 for the three months ended March 31, 2000 as
compared to a provision of $60,369 for the three months ended March 31, 1999.
Net income, as a result of the factors described above, increased 91.5% to
$203,292 for the three months ended March 31, 2000 from $106,167 for the
comparable period in 1999.
Liquidity and Capital Resources
- -------------------------------
Gaiam's capital needs arise from working capital required to fund our
operations, capital expenditures related to expansions and improvements to
Gaiam's infrastructure, development of e-commerce, and funds required in
connection with the acquisitions of new businesses and its anticipated future
growth. These capital requirements depend on numerous factors, including the
rate of market acceptance of Gaiam's product offerings, the ability to expand
Gaiam's customer base, the cost of ongoing upgrades to its product offerings,
the level of expenditures for sales and marketing, the level of investment in
distribution and other factors. The timing and amount of these capital
requirements cannot
7
accurately be predicted. Additionally, Gaiam will continue to evaluate possible
investments in businesses, products and technologies, and plans to expand its
sales and marketing programs and conduct more aggressive brand promotions.
During the first six months of 1999, Gaiam raised $1.45 million from the
private placement of 331,429 shares of Class A common stock and $1.425 million
in debentures. The privately placed shares were sold at $4.375 per share, and
the 8% convertible debentures matured on the earlier of one year after the date
of the debenture or the closing date of the initial public offering. In October
1999, we repaid $500,000 of the convertible debentures and, simultaneous with
the closing of the initial public offering, converted the remaining $1.475
million in debentures to 295,000 shares of Class A common stock. During 1998, we
raised approximately $1.2 million from private placements ($575,000 for 160,000
shares and $550,000 in debentures).
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. Simultaneous with this
offering, Gaiam converted $1.475 million in debentures to 295,000 shares of
common 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 Gaiam, after deducting all
commissions and expenses associated with the offering, were $6.1 million.
Gaiam is party to revolving line of credit agreements with Norwest Bank,
which extend through December 31, 2001. The credit agreements permit borrowing
up to $3 million based upon the collateral value of Gaiam's accounts receivable
and inventory held for resale. These borrowings are secured by a pledge of
Gaiam's assets. Principal repayment of amounts borrowed under these line of
credit agreements are due either when the collateral value of Gaiam's accounts
receivable and inventory drops below prescribed levels or upon maturity of the
agreements, whichever occurs first. Borrowings under the Norwest credit
agreements bear interest at the prime rate plus 1%. The Norwest credit
agreements contain various financial covenants and also prohibit Gaiam from
paying dividends to its shareholders.
Gaiam's operating activities provided net cash of $1.7 million for the
three months ended March 31, 2000 and used $2.6 million of net cash for the same
period in 1999. Gaiam's net cash provided by operating activities for 2000
arose primarily from increases in cash generated from net income, seasonal
reductions in accounts receivable and deferred advertising costs, and an
increase in payables associated with direct-to-consumer web site costs. Net
cash used during 1999 was primarily a result of a seasonal reduction in accounts
payable and accrued expenses.
8
Gaiam's investing activities used cash of $3.5 million for the three
months ended March 31, 2000. This use of cash arose primarily from costs
associated with the direct-to-consumer web site, and additional property and
equipment purchases to support our increasing volumes. During the first three
months of 1999, Gaiam generated $137,410 in cash from investing activities,
largely from the sale of marketable securities.
During the three months ended March 31, 2000, Gaiam's financing
activities used cash of $22,405 to for amounts due under capital leases. During
the same period in 1999, Gaiam's financing activities provided $1.4 million in
cash primarily from borrowing activities.
As Gaiam continues to expand its business-to-business e-commerce
presence, we anticipate making additional investments in web site design and
technology, and, with additional planned business growth, will be investing in
additional distribution capacity.
We believe our available cash, cash expected to be generated from
operations, and borrowing capabilities will be sufficient to fund our operations
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.
In the normal course of our business, we investigate, evaluate and
discuss acquisition, joint venture, minority investment, strategic relationship
and other business combination opportunities in the Lohas industry. In the
event of any future investment, acquisition or joint venture opportunities, we
may consider using then-available liquidity, issuing equity securities or
incurring additional indebtedness.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We do not believe that any of our financial instruments have significant
risk associated with market sensitivity.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Gaiam is not party to any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
(b) Report of Offering of Securities and Use of Proceeds Therefrom
On October 28, 1999, the Company's initial public offering of
1,705,000 shares of common stock was declared effective. These
shares were registered with the Securities and Exchange
Commission pursuant to a
9
registration statement on Form S-1 (No. 333-83283). During
November, 1999, the underwriters, Tucker Anthony Cleary Gull and
Adams, Harkness & Hill, Inc., exercised their overallotment
option for an additional 102,861 shares. Net proceeds to Gaiam,
after deducting all commissions and expenses associated with the
offering, were $6.1 million.
Gaiam has used the proceeds from the initial public offering to
fund the development of its new direct-to-consumer web site and
to acquire the 33% minority interest in Living Arts. None of the
net proceeds of the offering were paid directly or indirectly to
any of our directors or officers, or their associates, or persons
owning 10 percent of more of any class of our equity securities.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
27.1 Financial Data Schedule
b) Reports on Form 8-K.
None.
10
Signatures
In accordance with the requirements of the Securities and Exchange Act, the
registrant caused this report to be signed on its behalf, by the undersigned,
thereunto duly authorized.
Gaiam, Inc.
(Registrant)
May 12, 2000
By: /s/ Jirka Rysavy
Jirka Rysavy
Chief Executive Officer
/s/ Janet Mathews
Janet Mathews
Chief Financial and Accounting Officer
11