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 September 30, 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 November 8, 2000
- ---------------------- -----------------------------------------
Class A Common Stock 5,462,780
($.0001 par value)
Class B Common Stock 5,400,000
($.0001 par value)
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2000
and December 31, 1999 3
Consolidated Statements of Income for the three
months ended September 30, 2000 and 1999 4
Consolidated Statements of Income for the nine
months ended September 30, 2000 and 1999 5
Consolidated Statement of Cash Flows for the nine
months ended September 30, 2000 and 1999 6
Notes to Interim Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
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
September 30, December 31,
Assets 2000 1999
------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 5,016,853 $ 3,877,465
Accounts receivable, net 4,452,909 4,326,594
Accounts and notes receivable, other 2,333,861 573,450
Inventory, less allowances 8,255,777 4,555,436
Income tax receivable - 182,474
Deferred advertising costs 3,719,821 2,176,325
Other current assets 976,707 393,330
------------------------------------
Total current assets 24,755,928 16,085,074
Property and equipment, net 7,042,543 3,168,183
Capitalized production costs, net 2,214,637 1,636,706
Video library, net 4,556,362 4,792,456
Goodwill, net 1,190,175 1,239,507
Other assets 836,812 337,759
------------------------------------
Total assets $ 40,596,457 $ 27,259,685
====================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 7,282,839 $ 7,618,344
Accrued liabilities 1,789,186 1,734,310
Accrued royalties 262,311 725,541
Income taxes payable 331,158 -
Capital lease obligations, current 88,292 95,844
------------------------------------
Total current liabilities 9,753,786 10,174,039
Capital lease obligations, long-term 136,712 209,074
Line of credit 2,900,000 1,900,000
------------------------------------
Total long-term liabilities 3,036,712 2,109,074
Minority interest 5,917,127 26,030
Stockholders' equity:
Class A common stock, $.0001 par value,
150,000,000 shares authorized, 5,462,780
and 5,441,537 shares issued and
outstanding at September 30, 2000 and
December 31, 1999, respectively 546 544
Class B common stock, $.0001 par value,
50,000,000 shares authorized, 5,400,000
issued and outstanding at September 30,
2000 and December 31, 1999, respectively 540 540
Redeemable Class A preferred stock in
subsidiary, $.0001 par value, 10,000 shares
authorized, 6,000 shares issued and outstanding 6,000,000 -
Additional paid-in capital 10,982,986 11,038,551
Deferred compensation (96,293) (106,992)
Retained earnings 5,001,053 4,017,899
------------------------------------
Total stockholders' equity 21,888,832 14,950,542
------------------------------------
Total liabilities and stockholders' equity $ 40,596,457 $ 27,259,685
====================================
3
GAIAM, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months Ended
September 30,
2000 1999
---------------------------------
Net revenue $ 13,630,024 $ 10,288,134
Cost of goods sold 5,501,528 4,066,441
---------------------------------
Gross profit 8,128,496 6,221,693
Expenses:
Selling and operating 5,952,080 4,780,442
Corporate, general and administration 1,194,039 1,046,137
---------------------------------
Total expenses 7,146,119 5,826,579
---------------------------------
Income from operations 982,377 395,114
Other income (expense):
Realized gain on sale of securities
and other income (expense) (42,531) 714,909
Interest income (expense) 10,837 (83,040)
---------------------------------
Other income (expense) (31,694) 631,869
---------------------------------
Income before income taxes and minority
interest 950,683 1,026,983
Provision for income taxes 356,792 382,038
Minority interest in net income of
consolidated subsidiary, net of tax 14,481 92,738
---------------------------------
Net income $ 579,410 $ 552,207
=================================
Net income per share:
Basic $ 0.05 $ 0.06
Diluted $ 0.05 $ 0.06
Shares used in computing net income per share:
Basic 10,862,780 8,531,429
Diluted 11,537,474 8,826,429
4
GAIAM, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Nine Months Ended
September 30,
2000 1999
---------------------------------
Net revenue $ 37,574,443 $ 27,851,214
Cost of goods sold 15,079,401 11,141,104
---------------------------------
Gross profit 22,495,042 16,710,110
Expenses:
Selling and operating 17,437,528 13,657,802
Corporate, general and administration 3,324,337 2,841,747
---------------------------------
Total expenses 20,761,865 16,499,549
---------------------------------
Income from operations 1,733,177 210,561
Other income (expense):
Realized gain on sale of securities
and other income (expense) 3,092 1,124,597
Interest expense (131,859) (290,966)
---------------------------------
Other income (expense) (128,767) 833,631
---------------------------------
Income before income taxes and minority
interest 1,604,410 1,044,192
Provision for income taxes 602,135 388,439
Minority interest in net income (loss) of
consolidated subsidiary, net of tax 19,121 (74,084)
---------------------------------
Net income $ 983,154 $ 729,837
=================================
Net income per share:
Basic $ 0.09 $ 0.09
Diluted $ 0.09 $ 0.09
Shares used in computing net income per share:
Basic 10,851,084 8,371,302
Diluted 11,522,223 8,611,872
5
GAIAM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Nine Months
Ended September 30,
2000 1999
----------------------------
Operating activities
Net income $ 983,154 $ 728,267
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,124,821 641,648
Interest expense added to principal of margin loan - 16,053
Minority interest in consolidated subsidiary 19,121 (74,084)
Realized gains on sale of securities and property and
equipment - (1,412,366)
Changes in operating assets and liabilities,
net of effects from acquisitions:
Accounts receivable (126,315) 384,680
Inventory (3,542,708) (1,591,452)
Deferred advertising costs (1,543,496) (928,091)
Capitalized production costs (577,931) (707,549)
Prepaid assets (583,377) (840,680)
Other assets (165,872) (64,732)
Accounts payable (534,052) (492,008)
Accrued liabilities (486,351) (877,059)
Income taxes payable 513,632 165,105
----------------------------
Net cash provided by (used in) operating activities (4,919,374) (5,052,268)
----------------------------
Investing activities
Purchase of property, equipment and other assets (5,111,612) (374,951)
Proceeds from the sale of securities available-for-sale - 1,432,818
Cash acquired through acquisition activities 3,000,000 -
Payments (borrowings) on notes receivable 1,239,589 (115,047)
----------------------------
Net cash provided by (used in) investing activities (872,023) 942,820
----------------------------
Financing activities
Principal payments on capital leases (79,914) (7,980)
Proceeds from issuance of common stock 10,699 1,450,000
Proceeds from sale of preferred stock in subsidiary 6,000,000 -
Proceeds from convertible debt - 1,151,949
Net proceeds from (payments on) borrowings 1,000,000 1,658,659
----------------------------
Net cash provided by (used in) financing activities 6,930,785 4,252,628
----------------------------
Net change in cash and cash equivalents 1,139,388 143,180
Cash and cash equivalents at beginning of period 3,877,465 1,409,939
----------------------------
Cash and cash equivalents at end of period $ 5,016,853 $ 1,553,119
============================
Supplemental cash flow information
Interest paid $ 222,065 $ 208,720
Income taxes paid 88,503 222,404
6
Gaiam, Inc.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2000
1. Interim Condensed Consolidated Financial Statements
---------------------------------------------------
Organization and Nature of Operations
-------------------------------------
Gaiam, Inc. (the "Company") was incorporated under the laws of the
State of Colorado on July 7, 1988. Gaiam is a lifestyle company providing
information, goods and services to customers who value the environment,
personal development and healthy lifestyles.
The accompanying consolidated financial statements include the
accounts of the Company, its subsidiaries and partnerships in which
ownership is greater than 50% and considered to be under the control of the
Company. All material intercompany accounts and transaction balances have
been eliminated in consolidation.
Preparation of Interim Condensed Consolidated Financial Statements
------------------------------------------------------------------
The interim condensed 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 the Company's consolidated financial position as of September 30,
2000 and the interim results of operations and cash flows for the three and
nine months ended September 30, 2000 and 1999. These interim statements
have not been audited. 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.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally
accepted accounting principals have been condensed or omitted pursuant to
such rules and regulations. 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. The consolidated financial statements contained herein should be read in
conjunction with the audited financial statements, including the notes
thereto, for the year ended December 31, 1999.
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.
7
Gaiam, Inc.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2000
Use of Estimates
----------------
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements. Actual
results could differ from those estimates.
Recently Issued Accounting Standards Not Yet Adopted
----------------------------------------------------
On June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000. SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet as either an asset
or liability measured at their fair value. In June 1999, the FASB issued
Statement of Financial Accounting Standard No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferrral of the Effective
Date of FASB No. 133" delaying the effective date of SFAS No. 133. In June
2000, the FASB issued Statement of Financial Accounting Standard No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities" amending certain accounting and reporting standards of SFAS No.
133. SFAS No. 133, as amended, is effective for the Company's fiscal 2001
financial statements. As the Company is currently not a party to any
derivative instruments and does not anticipate becoming a party to any
derivative instruments, management does not currently expect the adoption
of SFAS No. 133, as amended, to have a material impact on the Company's
consolidated financial statements.
In May 2000, the Emerging Issues Task Force issued EITF 00-14,
"Accounting for Certain Sales Incentives." Under the provisions of EITF 00-
14, for sales incentives that will not result in a loss on the sale of a
product or service, a vendor should recognize the "cost" of the sales
incentive at the latter of the date the related revenue is recorded by the
vendor or the date the sales incentive is offered. A reduction to or refund
of the selling price of the product or service resulting from any cash
sales incentive should be classified as a reduction of revenue. Costs of
free products or services delivered at the time of sale should be
classified as an expense. The EITF should be applied in the fourth quarter
of the fiscal year beginning after December 15, 1999. Management does not
expect the adoption of EITF 00-14 to have a material impact on the
Company's consolidated financial statements.
8
Gaiam, Inc.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2000
Recently Issued Accounting Standards Not Yet Adopted (continued)
----------------------------------------------------------------
In July 2000, the Emerging Issues Task Force issued EITF 00-10,
"Accounting for Shipping and Handling Fees and Costs." Under the
provisions of EITF 00-10, amounts billed to a customer in a sale
transaction related to shipping and handling represent revenues earned
for the goods provided and should be classified as sales revenues.
However, the related shipping and handling costs may not be netted
against sales revenue. In September 2000, the EITF made an addition to
the final consensus reached at the July 2000 meeting requiring the dollar
amount and income statement classification of any significant shipping
and handling costs be disclosed pursuant to APB Opinion No. 22,
"Disclosure of Accounting Policies." The Company currently, and
historically, has classified shipping and handling fees earned as
revenue, and shipping and handling costs within "selling and operating"
expenses. Therefore, management believes the adoption of EITF 00-10 will
not have an impact on the Consolidated Statements of Income.
2. Mergers and Acquisitions
------------------------
On June 30, 2000, Gaiam, Inc. and Wholepeople.com, Inc. ("Amrion")
contributed their Internet properties (the "Contribution") into a newly
formed company subsequently renamed Gaiam.com, Inc. The Contribution was
made pursuant to the terms of a contribution agreement among Gaiam,
Amrion, and certain related parties. In exchange for the contributed
Internet properties, Gaiam received 50.1% of Gaiam.com's common stock and
Amrion received the remaining 49.9% of Gaiam.com's common stock.
Gaiam.com, which will continue its Internet e-commerce business, and will
be consolidated by Gaiam with Gaiam's other operations. In exchange for
their share of Gaiam.com, Amrion contributed $3.0 million in cash, a $3.0
million short-term note and other Internet assets. On September 15, 2000,
Gaiam, Inc. filed a report on Form 8-K/A reporting this transaction.
On October 13, 2000, Gaiam, Inc. entered into a Merger Agreement
with Real Goods Trading Corporation, Inc. pursuant to which Gaiam will
acquire 100% of the Real Goods issued and outstanding common stock in
exchange for shares of Gaiam's Class A common stock. The merger is
subject to approval by the Real Goods shareholders and certain other
conditions described in the Merger Agreement. The merger is expected to
close in January 2001. If the merger is approved, the Real Goods
shareholders will receive one share of Gaiam Class A common stock in
exchange for each ten shares of Real Goods common stock. In
9
Gaiam, Inc.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2000
Mergers and Acquisitions (continued)
------------------------------------
addition, the Real Goods shareholders will receive $1 in gift
certificates for Gaiam products for each share owned, up to $100 per
person.
3. Line of Credit
--------------
In May 2000, the Company consolidated its line of credit agreements
with Wells Fargo Bank into one agreement. The new credit agreement,
which extends through January 31, 2002, permits borrowings up to $5
million based upon the collateral value of Gaiam's accounts receivable
and inventory held for resale. Borrowings under this agreement bear
interest at the prime rate, which was 9.5% at September 30, 2000. These
borrowings are secured by a pledge of Gaiam's assets and contain various
financial covenants, including prohibiting the payment of cash dividends
to its shareholders and requiring maintenance of certain financial
ratios.
4. Stockholders' Equity
--------------------
On June 19, 2000, Gaiam, Inc. sold 6,000 shares of Redeemble Class A
preferred stock in its Internet subsidiary, Gaiam.com, Inc., at a price
of $1,000 per share for an aggregate price of $6,000,000. This stock is
redeemable upon the consummation of any offering by Gaiam.com of its
equity securities to the public pursuant to an effective registration
statement with the Securities and Exchange Commission.
During the second quarter of 2000, Gaiam issued 21,243 shares of
Class A common stock for an acquisition, and the e-commerce rights and
purchase option in an organic clothing manufacturer.
5. 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 period have been presented and conform to the Statement
No. 128 requirements.
10
Gaiam, Inc.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2000
Earnings per Share (continued)
------------------------------
The following table sets forth the computation of basic and diluted
earnings per share:
Nine Months Ended
September 30,
2000 1999
-----------------------------
Numerator for basic earnings per share $ 983,154 $ 729,837
Effect of Dilutive Securities:
8% convertible debentures - 47,872
----------- ------------
Numerator for diluted earnings per share $ 983,154 $ 777,709
=========== ============
Denominator:
Weighted average shares for basic
earnings per share 10,851,084 8,371,302
Effect of Dilutive Securities:
Weighted average of common stock,
stock options, warrants and
convertible debentures 671,139 240,570
----------- ------------
Denominator for diluted earnings per share 11,522,223 8,611,872
=========== ============
Net income per share - basic $ 0.09 $ 0.09
Net income per share - diluted $ 0.09 $ 0.09
6. Segment Information
-------------------
The Company 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 significant extent, the production, purchase and delivery
processes overlap in some areas. The Company 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
11
Gaiam, Inc.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2000
Segment Information (continued)
-------------------------------
sold and direct expenses. Financial information for the Company's
business segments was as follows:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net revenue:
Direct to consumer $ 9,567,414 $ 7,573,779 $28,299,288 $21,345,454
Business to business 4,062,610 2,714,355 9,275,155 6,505,760
----------- ----------- ----------- -----------
Consolidated net revenue 13,630,024 10,288,134 37,574,443 27,851,214
Contribution margin:
Direct to consumer 143,986 (135,808) 150,526 (584,347)
Business to business 838,391 530,922 1,582,651 794,908
----------- ----------- ----------- -----------
Consolidated contribution margin 982,377 395,114 1,733,177 210,561
Reconciliation of contribution
margin to net income:
Other income (expense) (31,694) 631,869 (128,767) 833,631
Income tax expense 356,792 382,038 602,135 388,439
Minority interest expense 14,481 92,738 19,121 (74,084)
----------- ----------- ----------- -----------
Net income $ 579,410 $ 552,207 $ 983,154 $ 729,837
=========== =========== =========== ===========
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 condensed
consolidated financial statements included elsewhere in this document.
Three months ended September 30, 2000 compared to three months ended September
- ------------------------------------------------------------------------------
30, 1999
--------
Revenues increased 32.5% to $13.6 million for the three months ended September
30, 2000 from $10.3 million during the three months ended September 30, 1999.
The Company's internal growth rate was 23% for the third quarter of 2000, fueled
primarily by a growing presence of the Gaiam brand in national retailers and the
e-commerce business.
Gross profit, which consists of revenues less costs of sales, increased 30.6% to
$8.1 million for the third quarter of 2000 from $6.2 million during the same
period in 1999. As a
12
percentage of revenue, gross profit decreased to 59.6% in 2000 from 60.5% in
1999. This was primarily attributable to a shift in the sales mix.
Selling and operating expenses, which consist primarily of sales and marketing
costs, commissions and fulfillment expenses, increased 24.5% to $6.0 million for
the three months ended September 30, 2000 from $4.8 million for the same period
in 1999. As a percentage of revenues, selling and operating expenses decreased
to 43.7% in 2000 from 46.5% in 1999.
Corporate, general and administrative expenses increased to $1.2 million for the
third quarter of 2000, compared to $1 million for the corresponding period in
1999. As a percentage of revenues, general and administrative expenses
decreased to 8.8% in 2000 from 10.2% in 1999.
Operating income, as a result of the factors described above, increased 148.6%
to $982,377 for the three months ended September 30, 2000 from $395,114 for the
three months ended September 30, 1999.
The Company recorded $42,531 in other expense during the third quarter of 2000,
compared to other income of $714,909 for the comparable period in 1999. During
the third quarter of 1999, the Company recognized a gain on the sale of its
marketable securities of $883,838. The Company generated net interest income of
$10,837 for the three months ended September 30, 2000. During the comparable
period in 1999, the Company incurred net interest expense of $83,040.
Minority interest in net income was $14,481 for the three months ended September
30, 2000 compared to $92,738 for the same period in 1999.
Income tax provision was $356,792 for the three months ended September 30, 2000
as compared to $382,038 for the three months ended September 30, 1999.
Net income, as a result of the factors described above, increased 4.9% to
$579,410 for the three months ended September 30, 2000 from $552,207 for the
comparable period in 1999.
Nine months ended September 30, 2000 compared to nine months ended September 30,
- --------------------------------------------------------------------------------
1999
- ----
Revenues increased 34.9% to $37.6 million for the nine months ended September
30, 2000 from $27.9 million during the nine months ended September 30, 1999.
The Company's internal growth rate was 27% for the first nine months of 2000,
fueled primarily by the growth in sales to national retail chains and e-commerce
business.
Gross profit, which consists of revenues less costs of sales, increased 34.6% to
$22.5 million for the first nine months of 2000 from $16.7 million during the
same period in 1999. As a percentage of revenue, gross profit decreased to
59.9% in 2000 from 60.0% in 1999.
13
Selling and operating expenses, which consist primarily of sales and marketing
costs, commissions and fulfillment expenses, increased 27.7%, less than the
revenue increase of 34.9%, to $17.4 million for the nine months ended September
30, 2000 from $13.7 million for the same period in 1999. As a percentage of
revenues, selling and operating expenses decreased to 46.4% in 2000 from 49.0%
in 1999.
Corporate, general and administrative expenses increased to $3.3 million for the
first nine months of 2000, compared to $2.8 million for the corresponding period
in 1999. As a percentage of revenues, general and administrative expenses
decreased to 8.8% in 2000 from 10.2% in 1999.
Operating income, as a result of the factors described above, increased to
$1,733,177 for the nine months ended September 30, 2000 from $210,561 for the
nine months ended September 30, 1999.
The Company recorded $3,092 in other income during the nine months ended
September 30, 2000, compared to other income of $1,124,597 for the comparable
period in 1999. During 1999, the Company recognized gains on the sale of its
marketable securities of $1,412,366. Net interest expense declined to $131,859
for the first nine months of 2000 from $290,966 for the nine months ended
September 30, 1999, due to interest income generated during the third quarter of
2000.
Minority interest in net income was $19,121 for the nine months ended September
30, 2000 compared to a negative $74,084 for the same period in 1999.
Income tax provision of $602,135 represented 37.5% of pre-tax income for the
nine months ended September 30, 2000, as compared to a $388,439 tax provision,
or 37.2% of pre-tax income, for the nine months ended September 30, 1999.
Net income, as a result of the factors described above, increased 34.7% to
$983,154 for the nine months ended September 30, 2000 from $729,837 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 Gaiam'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 Gaiam'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 these
capital requirements cannot accurately be predicted. Additionally, Gaiam will
continue to evaluate possible investments in businesses, products and
technologies, and plans to expand sales and marketing programs and conduct more
aggressive brand promotions.
14
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 Gaiam's 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.
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
Class A 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.
In May 2000, Gaiam consolidated its line of credit agreements with Wells
Fargo Bank into one agreement. The new credit agreement, which extends through
January 31, 2002, permits borrowings up to $5 million based upon the collateral
value of Gaiam's accounts receivable and inventory held for resale. Borrowings
under this agreement are secured by a pledge of Gaiam's assets. Principal
repayment of amounts borrowed under this line of credit agreement 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 Wells Fargo credit agreement bear interest at the
prime rate. The Wells Fargo credit agreement contains various financial
covenants and also prohibits Gaiam from paying dividends to shareholders.
Gaiam's operating activities used net cash of $4.9 million for the nine
months ended September 30, 2000 and used $5.1 million of net cash for the same
period in 1999. Gaiam's net cash used by operating activities for 2000 arose
primarily from an increase in inventories in order to support additional revenue
growth, including store-within-store rollouts, and seasonal increases in prepaid
expenses. Net cash used during 1999 was primarily a result of seasonal
increases in inventories and prepaid expenses associated with the increased
sales volumes generated during the fourth quarter.
Gaiam's investing activities used cash of $872,023 for the nine months
ended September 30, 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 totaling $5.1 million. On
June 30, 2000, Gaiam and Wholepeople.com ("Amrion"), a subsidiary of Whole Foods
Market, merged their Internet businesses into a newly formed company
subsequently renamed Gaiam.com, Inc. In exchange for contributed Internet
properties, Gaiam received 50.1% of Gaiam.com's common stock and Amrion received
the remaining 49.9% of Gaiam.com's common stock. As part of this transaction,
Amrion contributed $3 million in cash, a $3 million short-term note and other
Internet assets to Gaiam.com. During the first nine months of 1999, Gaiam
generated $942,820 in cash from investing activities, largely from the sale of
marketable securities.
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During the nine months ended September 30, 2000, Gaiam's financing
activities provided $6.9 million in cash. In June 2000, Gaiam sold 6,000 shares
of Redeemable Series A Preferred Stock in Gaiam.com for a total consideration of
$6 million. During the same period in 1999, Gaiam's financing activities
provided $4.3 million in cash primarily from borrowing activities and the
issuance of common stock.
As Gaiam continues to expand, we anticipate making additional investments
in web site design and technology, and, with additional planned business growth,
will be investing in additional 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, majority and 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
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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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
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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)
November 13, 2000
By: /s/ Jirka Rysavy
Jirka Rysavy
Chief Executive Officer
/s/ Janet Mathews
Janet Mathews
Chief Financial and Accounting Officer
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