UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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, CO 80021
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(303) 222-3600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, $.0001 PAR VALUE
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 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in a definitive proxy or
information statement incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [_]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant was approximately $33,368,080 as of
March 21, 2001, based upon the closing price on the Nasdaq National Market
reported for such date. As of March 21, 2001, 5,955,578 shares of the
Registrant's $.0001 par value Class A common stock and 5,400,000 shares of
the Registrant's Class B common stock were outstanding. Shares of Common
Stock held by each executive officer and director and by each person who
beneficially owns more than 5% of the outstanding Common Stock has been
excluded in that such person may, under certain circumstances, be deemed to
be affiliates. This determination for executive officer or affiliate status
is not necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or portions thereof) are incorporated by reference
into the Parts of this Form 10-K noted:
Part III incorporates by reference from the definitive proxy statement for
the Registrant's 2001 Annual Meeting of Stockholders to be filed with the
Commission pursuant to Regulation 14A not later than 120 days after the end
of the fiscal year covered by this Form.
Gaiam, Inc.
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Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2000
Part I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
This report may contain forward-looking statements that involve risks and
uncertainties. When used in this discussion, the words "anticipate,"
"believe," "plan," "estimate," "expect," "strive," "future," "intend" and
similar expressions as they relate to Gaiam or its management are intended
to identify such forward-looking statements. Gaiam'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,"
"Market Risk" and elsewhere in this report. Risks and uncertainties that
could cause actual results to differ included, without limitation,
competition, loss of key personnel, pricing, brand reputation, growth of
e-commerce, acquisitions, security and information systems, legal liability
for website content, merchandise supply problems, failure of third parties
to provide adequate service, reliance on centralized customer service,
overstocks and merchandise returns, future internet related taxes, control
of Gaiam by its founder, fluctuations in quarterly operating results,
limited experience in operating retail stores, consumer trends, customer
interest in our products, general economic conditions, the effect of
government regulation and other risks and uncertainties included in Gaiam's
filings with the Securities and Exchange Commission. 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 information.
PART I
ITEM 1. BUSINESS
GAIAM
Gaiam is a multi-channel lifestyle company that markets to customers who
value personal development, healthy living and the environment. We are
dedicated to providing a broad selection of high quality information, goods
and services in a customer-friendly manner using a multi-channel approach
through catalogs, e-commerce, business to business channel, media
broadcasts and 21,000 retail points including leading names such as
Discovery, Borders, Musicland, Dicks, Amazon.com, Target and Whole Foods.
We provide customers with natural and healthy alternatives to traditional
products.
We strive to serve consumers who live a lifestyle that places a high
value on promoting healthy living, personal development and the quality of
the Earth's environment, recognizing that our personal health and the
health of our children depend on it. We offer to consumers an opportunity
to make purchasing decisions for goods and services based on these values,
in addition to the traditional criteria of price and performance.
OUR HISTORY
Gaiam was founded in Boulder, Colorado in 1988 to support "Conscious
Commerce", the practice of making purchasing decisions based on lifestyle
and values. In 1995, we began to expand our business nationally. In 1996,
Gaiam made a large investment in infrastructure and operating systems to
support rapid growth. In 1998, a team of key executives joined Gaiam to
help facilitate future growth.
OUR CORE VALUES
Gaiam's approach to business is based on our core values:
. We emphasize integrity in all of our relationships.
. We stress a triple bottom line: profits - people - planet.
. We value the environment as a base to personal health and view
all resources as precious assets.
. We understand living our beliefs is more than just the right thing
to do; it is the only path to take.
. We strive to motivate every person to make a positive difference in
their lives and in our world by the simple choices they make every
day.
OUR MARKET - THE LOHAS INDUSTRY
The Lifestyles of Health and Sustainability (LOHAS) industry was $230
billion in the year 2000 in the United States alone, according to Natural
Business Communications. The industry consists of five main sectors:
. Sustainable Economy is comprised of renewable energy, energy
conservation, recycling and recycled goods, environmental management
services, sustainable manufacturing processes and related services
and information.
. Healthy Living includes natural and organic foods, dietary
supplements, personal care products and related information and
services.
. Alternative Healthcare includes health and wellness solutions and
alternative health practices. The Journal of American Medical
Association conducted a study in 1998 that concluded 83 million
Americans practiced some sort of alternative healthcare in 1997
accounting for $27 billion, mostly out of pocket expenses.
. Personal Development includes solutions, information, products and
experiences relating to mind, body and spiritual development.
Companies offering yoga and other stress reducing fitness
alternatives to their employees are enhancing this sector. A survey
by Wall Street Journal found that 23% of adults surveyed did yoga,
meditation or other similar practices.
. Ecological Lifestyles include environmentally friendly cleaning and
household products, green and organic cotton bedding and clothing,
and eco-tourism. According to Natural Business Communication, this
may be the fastest growing segment of the industry as business-to-
business industries and consumer services (such as the hospitality
industry) are pressured by consumers to incorporate these products
and services into their business.
Gaiam participates in all five segments of the LOHAS industry.
OUR DISTRIBUTION CHANNELS
. Catalogs/Print Advertising
Gaiam offers a large variety of LOHAS products directly to the consumer
through our catalogs and through consumer lifestyle publications such as
Self, Shape and Yoga Journal magazines. We produce quality catalogs in all
segments of LOHAS utilizing sub-brands such as Gaiam Harmony, Gaiam Living
Arts, Gaiam Innerbalance, Gaiam Real Goods and Gaiam Jade Mountain. We
circulate catalogs to the 1.5 million customers in our database on a
regular basis.
For the benefit of our direct customers, we provide unconditional return
guarantees, toll-free telephone ordering, an in-house, well-trained
customer service staff, and on-hand inventory to support over 90% of our
in-stock orders. It is our practice to ship each order no later than the
next business day.
. Retailers
Gaiam currently sells products through 21,000 retail points including
lifestyle stores such as Discovery Stores and The Walking Company, book
stores such as Borders and Barnes and Noble, mass merchants such as Target,
sporting goods stores such as Dicks and Galyans, women's beauty stores such
as Ulta and Origins, specialty stores such as Pea in the Pod and Dandelion,
on-line retailers such as Amazon.com and natural food retailers such as
Whole Foods. We have recently launched our integrated branded lifestyle
concepts in selected retail establishments.
Gaiam is expanding proprietary product offerings to our retailers.
. E-Commerce
We believe that our business is also well suited to Internet commerce.
The use of many of our products is enhanced by extensive product education
and information that we are making available online. The online environment
offers wider shelf space and the capacity to present consumer information
less expensively. In addition, many Internet products and information are
not widely found in conventional stores.
We have upgraded our website and technology systems to create a platform
that takes advantage of the unique characteristics of online retailing. We
currently have approximately 10,000 SKU's on our website. Our online gross
profit average margin is over 55%, making our Internet channel an
attractive business model.
Our goal is to grow this segment of our customers and to educate them
about their own ability to affect positive change through purchases that
will result in improvements to the environment and their well being - and
thereby demonstrating to them that their choices can "make a difference."
. Corporate Supplier
Gaiam provides products and services to businesses that desire healthy
and natural alternatives, which range from organic cotton robes and bedding
to hospitals and hospitality chains to solar powered safety and security
systems to the Dallas Airport. Gaiam is developing a line of promotional
products in organic cotton that includes t-shirts, sweatshirts, caps, bags,
etc. for customers such as Mercedes Benz and Aveda.
Gaiam also has a design and consulting service for corporate accounts
that assesses their energy needs and makes recommendations for more
efficient solutions. We have consulted with clients such as The White
House, The Vatican, Sony, Disney, NASA and Discovery Channel. We expect
this service be in considerable demand with the ongoing energy crisis in
California.
. Media
Gaiam produces information and programming targeted to consumers who
value healthy and environmental lifestyles. Currently, thirteen of our
programs are broadcast domestically and five internationally. Our programs
are also available in over 500,000 hotel rooms in the U.S. and 200,000 in
Canada through on demand programming available in such hotels as Marriott,
Hyatt, Westin, Hilton, Radisson and Four Seasons.
Gaiam also publishes programs on DVD and video and co-publishes books and
programming on sustainable living as well as over 100 music titles.
OUR COMPETITIVE STRENGTHS
We believe the following factors have contributed to our growth and
success:
. Focus on Large Market
Gaiam believes that the expansion and fast growth of the LOHAS industry
is being fueled by Conscious Commerce, a trend of making purchasing
decisions based on lifestyle and personal values, driven by a growing
population segment called Cultural Creatives. A study published by the
Institute of Noetic Sciences in 1996 coined the term "Cultural Creatives."
Paul Ray, who authored this study, is now a member of our board of
directors. American Demographics (February 1997) estimates that this
growing population segment, which has in common the values of environmental
awareness, healthy lifestyles and personal development, numbered 44 million
adults in the United States alone in 1996 and according to Mr. Ray, grew to
50 million in 1998. We believe the growth of these consumers is evidenced
also by the growth of our customer base. Cultural Creatives tend to be
well-educated consumers, with a median age of 42, a 60/40 women-to-men
ratio and an average annual income of $52,000.
Gaiam targets Cultural Creatives and we believe that our customer
demographics and loyalty contribute significantly to our high average order
value of approximately $90 for the year ended December 31, 2000, as
compared to a lower average for the direct marketing industry and the
e-commerce sector.
See Note 1 to Gaiam's Consolidated Financial Statements for information
about our international sales.
. Experienced Executive Team
Gaiam 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., which he built to a Fortune 500
company. He was also the founder and CEO of Crystal Market, Inc., which was
sold to 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 for 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.
. Distinctive, Branded Products
Gaiam offers information, proprietary products and services under its
brand name. These products appeal to Gaiam's well-educated customers and
are not widely available in conventional stores. These products are
designed to enhance customers' lifestyles and experiences and provide
healthy, natural solutions while being eco-friendly and promoting a
sustainable economy. Private brand product sales were approximately 37% in
year 2000, up from 24% in 1999 and 10% in 1998. Because we use a multi-
channel approach to our business we are able to leverage our product
development costs across all channels of our business.
. 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. Gaiam
stands by its advertised "no-risk guarantee" by providing its customers a
full refund of the purchase price for products that are returned any time,
for any reason. We believe that this guarantee, coupled with the quality of
our customer service personnel, encourages greater customer loyalty and
repeat sales. We ensure that we have on hand inventory to support 90% of
in-stock orders. It is our practice to ship each order no later than the
next business day.
According to Jupiter Communications, 90% of online customers prefer human
interaction when they require customer service. Our in-house customer
service department includes product specialists, who have specific product
knowledge and assist customers in selecting products and solutions that
meet their needs, design, price and style criteria. Gaiam also enhances its
customer service through initiatives such as extensive product training for
customer service representatives. We believe that, by offering exceptional
customer service, we encourage repeat purchases by our customers, enhance
our brand identity and reputation and build stronger relationships with our
customers.
. Established Infrastructure
Gaiam has invested in its physical facilities, technology and information
systems. In 2000, we expanded our distribution to a 208,100 square foot
fulfillment center near Cincinnati, Ohio, a facility that is in the central
United States and conveniently located to hubs for major shipping
companies. This location allows us to achieve shipping cost efficiency to
most locations across the Continental United States. It is located within
30 minutes of both UPS and Airborne hubs. We also installed our supply
chain management information system to support virtually all segments of
our business, including, merchandising, customer database management and
marketing, order processing, fulfillment, inventory management, customer
service and financial reporting. This investment reduced our costs of
fulfillment by providing an integrated system that reduces labor costs and
time needed to procure inventory and fill orders. This existing
infrastructure is allowing us to integrate acquired businesses in an
efficient and cost-effective manner.
. Operating Model
Our business structure is designed to provide high operating leverage on
the revenue growth and enable each Gaiam distribution channel to achieve
individual sales growth, while realizing cost savings from the combined
enterprise. The managers of our channels retain responsibility for
merchandising and creative presentation. Gaiam provides strategic
direction, technology, financial resources and administrative services, as
well as marketing, customer service, fulfillment, purchasing and sourcing,
thus leveraging our current infrastructure in a highly scaleable model.
OUR OPERATING STRATEGIES
. Strengthen our Brand
We are striving to establish the Gaiam brand as an authority in the LOHAS
industry. We plan to strengthen the Gaiam brand by increasing marketing
efforts, strengthening relationships with traditional and e-commerce
retailers, and increasing the breadth of our proprietary product and audio,
video and digital informational offerings while maintaining our high level
of customer service. Our products, services and information will generally
bear the Gaiam symbol.
We believe that the expanding demand by consumers for eco-friendly and
natural products will permit us to obtain products in greater volume and,
in turn, offer the products at lower prices than might otherwise be
available. As we are able to lower prices in this manner, we expect to
attract additional customers.
. Capitalize on our Multi-channel Approach
We intend to make purchasing quality, natural and healthy lifestyle
products from us convenient regardless of the channel customers prefer. In
our direct business, we are open 24 hours a day, and shopping for our
products does not need to require a trip to a store. We offer our entire
selection of products on our Internet site. We cross-market between our
catalogs and our e-commerce, introducing our customers to all aspects of
LOHAS. A direct customer coming to us for a yoga videotape will also be
exposed to our organic cotton performance wear line.
In our business-to-business sector, we are expanding our retail exposure,
which is currently at 21,000 retail points, and building store-within-store
concepts in Whole Foods Markets, Discovery Stores, Dicks and Galyans. We
are expanding into women's beauty stores such as Ulta and Origins, sporting
goods chains such as Dicks and Galyans, and bed and bath specialty stores
such as Bed Bath and Beyond. This expansion at the retail level
increasingly allows our customers to find Gaiam products no matter how or
where they shop.
Our media, especially TV broadcast, is also an excellent opportunity for
Gaiam to strengthen its brand. We partner with experts in LOHAS to produce
proprietary content that we leverage through TV broadcast, on demand
programming as well as audio, video and digital products, which we market
through our consumer and B-to-B channels.
. Expand our Proprietary Products
We grew our proprietary products from 24% of our business in 1999 to 37%
of our business in 2000. These products carry a higher margin and
distinguish us from many of our competitors. We now offer over 2000 SKUs of
proprietary product that range from audio and video tapes to organic cotton
baby clothes. We are expanding our supply chain with overseas suppliers in
Europe and South America. Our merchants are continuing to develop and
source new product in all aspects of LOHAS. We leverage our development
costs over all sales channels.
. Offer Quality, Convenience and Selection
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 online and catalog shopping are
not tied to a geographic location, we can deliver a wide selection of
natural and healthy lifestyle products to customers in rural or other
locations that cannot support a large-scale LOHAS products retail store.
. Develop Business-to-Business Opportunities
Gaiam is focused on increasing its sales to other businesses that have a
need for sustainable or natural and healthy lifestyle products and
services. These businesses include retailers, broadcasters, governmental
agencies, hospitality companies, spas and resorts, health care providers,
as well as industrial companies. We believe that the Gaiam brand and
product mix are well suited to these businesses. As companies prepare to
market to consumers in the LOHAS industry, we believe many will desire to
partner with a lifestyle authority such as Gaiam. We believe that the
expertise and knowledge we have and can develop in the LOHAS industry will
make Gaiam one of the information sources of choice for businesses that
wish to service the LOHAS industry.
. Complement our Existing Business with Selective Strategic
Acquisitions
Even though our strategy is not dependent on acquisitions, we will
consider strategic acquisitions in the LOHAS industry that complement our
existing business, especially companies with a strong brand identity and
with customer and product information databases that augment our databases.
We believe that significant acquisition opportunities exist and our
willingness to retain existing operating management makes us an
attractive acquiring party. 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 BUSINESS SEGMENTS
We separate our business into two business segments: Direct-to-Consumer,
which includes catalogs, print advertising, and e-commerce; and
Business-to-Business, which includes sales to retailers, corporations and
our media channel.
We are in the process of significantly increasing our sales to other
businesses that have a need for eco-friendly products and services or
natural and healthy lifestyle products. Business-to-Business revenues were
13% of 1998 revenues, 24% of revenues for 1999 and 28% of revenues for
2000. See Note 12 to our Consolidated Financial Statements for further
information on our segments.
OUR INTELLECTUAL PROPERTY
Gaiam, Gaiam.com, and various product names are subject to trademark or
pending trademark applications of Gaiam or a Gaiam company. We also
currently hold various web domain names relating to our brand, including
www.gaiam.com. We believe these trademarks and domain names are
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significant assets to our business.
OUR COMPETITIVE POSITION
We believe that the LOHAS industry 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 industry leader.
Our business is evolving and competitive. Larger, well-established and
well-financed entities may acquire, invest in or form joint ventures with
our competitors. Many of such entities are larger, 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.
We expect industry consolidation to increase competition. Our competitors
may adopt aggressive pricing or inventory policies, which could result in
reduced operating margins, loss of market share and a diminished brand
franchise.
We believe the principal competitive factors in the LOHAS market are
distinctiveness of products and services, authenticity of information,
quality of product, brand recognition, and price. We believe we compete
favorably on the relevant factors as evidenced by our sales growth.
OUR EMPLOYEES
As of March 15, 2001, Gaiam and the Gaiam companies employed
approximately 295 persons. None of our employees is covered by a collective
bargaining agreement.
REGULATORY MATTERS
An increasing number of laws and regulations pertaining to the Internet
exist. In addition, a number of legislative and regulatory proposals are
under consideration by federal, state, local and foreign governments and
agencies. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over
the Internet, online content regulation, user privacy, taxation and quality
of products and services. Moreover, it may take years to determine whether
and how existing laws such as those governing such issues 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. New legislation or regulations, 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.
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.
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 customers, and restrict 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.
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. 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. Legislation or
other attempts at regulating commerce over the Internet may substantially
impair the growth of commerce on the Internet and, as a result, adversely
affect our opportunity to derive financial benefit from these activities.
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.
SEASONALITY
See the Quarterly and Seasonal Fluctuations section of Item 7.,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, for information pertaining to the seasonal aspects of our
business.
ITEM 2. PROPERTIES
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 our 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 primary
facilities, all of which are leased:
Primary Locations Size Use Lease Expiration
- ----------------------------------- ---------------- ------------------------------------------ ---------------------------
Boulder County, CO 32,000 sq. ft. Headquarters and customer service March 2002
Cincinnati, OH 208,100 sq. ft. Fulfillment center March 2006
Venice, CA 9,000 sq. ft. Creative staff offices July 2005
We have options to renew our headquarters lease. On March 1, 2000, due to
the growth of our operations, we entered into a new fulfillment center
lease, which expanded our facility to 208,100 sq. ft. This site holds our
warehousing and distribution services group. 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 it.
The Gaiam Yoga Center, purchased in December 2000, is situated on 160 acres
in Paulden, Arizona.
ITEM 3. LEGAL PROCEEDINGS
Gaiam is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were brought to a vote of our stockholders in the fourth quarter
of the fiscal year ended December 31, 2000.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, their respective ages as of December
31, 2000 and their positions are as follows:
NAME AGE POSITION
---------- --------- ------------
Jirka Rysavy 46 Founder, Chairman of the Board and Chief Executive Officer
Lynn Powers 51 President, Chief Operating Officer and Director
Pavel Bouska 46 Executive Vice President and Chief Information Officer
Barnet M. Feinblum (1) (2) 53 Director
Barbara Mowry (1) (2) 52 Director
John Mackey 47 Director
Paul H. Ray (1) (2) 61 Director
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
JIRKA RYSAVY - Founder, Chairman and Chief Executive Officer of Gaiam. He
has been Chairman since Gaiam's inception and became the full-time Chief
Executive Officer in December 1998. In 1986, Mr. Rysavy founded Corporate
Express, Inc., which, under his leadership, grew to become a Fortune 500
company supplying office and computer products and services. He was its
Chairman and Chief Executive Officer until September 1998. Mr. Rysavy also
founded and served as Chairman and Chief Executive Officer of Crystal
Market, a health foods market, which was sold in 1987 and became the first
Wild Oats Markets store. Mr. Rysavy is also a director of Whole Foods
Market.
LYNN POWERS - President, Chief Operating Officer and a director of Gaiam
since February 1996. From 1992 to 1996, she was Chief Executive Officer of
La Scelta, an importer of natural fiber clothing products. Before that, Ms.
Powers was Senior Vice President Marketing/Strategic Development and Vice
President Merchandising of Miller's Outpost, a specialty retailer.
PAVEL BOUSKA - Executive Vice President and Chief Information Officer since
March 1999. He served as a director of Gaiam from 1991 until August 1999.
Prior to joining Gaiam, from June 1988 to March 1999, Mr. Bouska was an
officer and one of the founding members of Corporate Express, serving in
various positions, including Chief Information
Officer and Vice President Information Systems, responsible for system
development, information technology, operations, systems conversions and
business consolidations. Prior to joining Corporate Express, he was project
leader for Software Design & Management, a German software company
subsequently acquired by Ernst & Young.
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-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 two Fortune 500 companies, Telecommunications, Inc. (cable television)
from 1995 to 1997, and UAL, Inc. (airline) from 1983 to 1990. 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.
JOHN MACKEY - Director since September 2000. Mr. Mackey has been the
Chairman and Chief Executive Officer of Whole Foods Markets, Inc., the
world's largest natural food retailer, since he co-founded the company 20
years ago. Mr. Mackay is also a director of Jamba Juice.
BARNET M. FEINBLUM - Director since October 1999. Mr. Feinblum is a
director and served as the President and Chief Executive Officer of Horizon
Organic Dairy from May 1995 until 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 Board. He is also
a director of Seventh Generation, Inc.
PAUL H. RAY - Director since October 1999. Mr. Ray is a senior partner in
Integral Partnership, consulting firm specializing in Cultural Creative
topics. From November 1986 until December 2000, he was Executive Vice
President of American LIVES, Inc., a market research and opinion-polling
firm, since November 1986. Prior to joining American LIVES, Mr. Ray was
Chief of Policy Research on Energy Conservation at the Department of
Energy, Mines and Resources of the Government of Canada from 1981 to 1983.
From 1973 to 1981, Mr. Ray was Associate Professor of Urban Planning at the
University of Michigan. He is the author of "The Integral Culture Survey,"
which first identified the Cultural 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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Stock Price History
-------------------
Gaiam's Class A common stock has been quoted on the NASDAQ under the
symbol "GAIA" since the Gaiam's initial public offering on October 29,
1999. On March 21, 2001, the Company had 9,287 stockholders of record and
5,955,578 shares of $.0001 par value Class A common stock outstanding, and
one stockholder and 5,400,000 shares of $.0001 par value Class B common
stock outstanding.
The following table sets forth certain sales price and trading volume
data for the Company's Class A common stock for the period indicated:
Average
Daily
High Bid Low Bid Close Volume
--------- --------- -------- ------
Fiscal 2000:
First Quarter $ 19 $13 59/64 $ 17 1/2 11,057
Second Quarter $24 11/16 $ 14 $ 18 1/2 12,383
Third Quarter $ 19 $ 15 $ 18 5/16 11,176
Fourth Quarter $ 18 1/4 $ 14 5/8 $ 15 7/16 8,224
Fiscal 1999 - Fourth Quarter
Commencing October 29, 1999 $ 18 1/4 $ 5 3/8 $ 15 7/8 58,952
Dividend Policy
---------------
Gaiam has never declared or paid any cash dividends on its capital
stock. Gaiam currently intends to retain earnings, to support its growth
strategy and does not anticipate paying cash dividends in the foreseeable
future. In addition, our bank credit agreement prohibits payment of any
dividends to our shareholders.
Sales of Unregistered Securities
--------------------------------
During 2000, we acquired a yoga props company and a 70% interest in an
organic clothing manufacturer. Total consideration paid for these
acquisitions was approximately $315,000 in cash and 21,243 shares of Class
A common stock. These shares were issued on February 29, 2000 (14,000
shares) and June 20, 2000 (7,243 shares). The shares were issued pursuant
to an exemption from registration under Section 4(2) of the Securities Act
of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The selected statement of operations for the years ended December 31,
1998, 1999 and 2000 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 Form 10-K. 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. The
historical operating results are not necessarily indicative of the results
to be expected for any other period. The data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Gaiam's consolidated financial
statements and related notes, included elsewhere in this Form 10-K.
SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
Year Ended December 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Net revenues $60,588 $45,725 $30,739 $19,898 $14,801
Cost of goods sold 23,793 18,176 13,174 8,462 6,762
------------------------------------------------------------------
Gross profit 36,795 27,549 17,565 11,436 8,039
Selling, operating, general
and administrative expenses 32,367 25,425 16,580 12,002 10,471
------------------------------------------------------------------
Operating income (loss) 4,428 2,124 985 (566) (2,432)
Other income (loss) (1) (283) 606 388 1,583 2,984
------------------------------------------------------------------
Income before income taxes and
Minority interest 4,145 2,730 1,373 1,017 552
Income taxes 1,556 1,063 251 363 212
Minority interest (60) (51) 262 - -
------------------------------------------------------------------
Net income $ 2,649 $ 1,718 $ 860 $ 654 $ 340
==================================================================
Net income per share:
Basic $0.24 $0.20 $0.11 $0.08 $0.04
Diluted $0.23 $0.19 $0.11 $0.08 $0.04
==================================================================
Shares outstanding:
Basic 10,858 8,785 8,073 8,040 8,040
Diluted 11,525 9,119 8,119 8,040 8,040
December 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------
BALANCE SHEET DATA
Cash $ 8,579 $ 3,877 $ 1,410 $ 1,612 $ 380
Securities available-for-sale (2) - - 1,634 4,828 56
Working capital (deficiency) 15,269 5,911 (81) 5,226 (1,838)
Total assets 48,477 27,260 16,677 10,774 6,256
Long-term debt (net of current maturities) 5,770 2,109 299 42 89
Stockholders' equity (2) 18,111 14,951 3,661 4,736 920
(1) Other income in 1996, 1997, 1998 and 1999 primarily reflects income from
sale of securities available-for-sale.
(2) Securities valued at fair market value in 1996, 1997 and 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of Gaiam's financial condition
and results of operations should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in
this document.
Overview
--------
Gaiam is a multi-channel lifestyle company catering to customers who
value personal development, healthy living and the environment. Gaiam was
incorporated in Colorado in 1988. In 1995, Gaiam began to expand
nationally and make acquisitions. From 1996 to 2000, our revenues
increased from $14.8 million to $60.6 million, representing a compound
annual growth rate of approximately 42.2%.
Gaiam's business model is evolving as evidenced by the increase in the
percentage of our revenues attributable to our business-to-business segment
and the launch of our e-commerce channel. During 1998, business-to-
business revenues accounted for approximately 13% of all revenues, while in
2000, this segment's revenues increased to approximately 28% of total
revenue. Although Gaiam has used acquisitions to grow its business,
internal growth remained strong at 24% during 2000, up from 18% in 1999.
In addition, Gaiam's gross margin continued to increase as a result of
developing more proprietary merchandise, on which we have better margins,
and negotiating better pricing from our vendors due to volume discounts.
Results of Operations
---------------------
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated:
For the Year Ended December 31,
2000 1999 1998
----- ----- -----
Net revenue 100.0% 100.0% 100.0%
Cost of goods sold 39.3% 39.8% 42.9%
----- ----- -----
Gross profit 60.7% 60.2% 57.1%
Expenses:
Selling and operating 45.1% 48.8% 46.1%
Corporate, general and administrative 8.3% 6.7% 7.8%
----- ----- -----
Total expenses 53.4% 55.5% 53.9%
----- ----- -----
Income (loss) from operations 7.3% 4.7% 3.2%
Other income (expense), net -0.4% 1.3% 1.3%
----- ----- -----
Income before income taxes and minority interest 6.9% 6.0% 4.5%
Provision for income taxes 2.6% 2.3% 0.8%
Minority interest in net income of consolidated
subsidiary, net of tax -0.1% -0.1% 0.9%
----- ----- -----
Net income 4.4% 3.8% 2.8%
===== ===== =====
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 the
growth in sales to national retail chains and e-commerce business.
Business-to-business revenues grew 50.3% to $16.8 million in 2000 from
$11.2 million in 1999.
Gross profit, which consists of revenues less cost of sales (primarily
merchandise acquisition costs and in-bound freight), 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 Gaiam's
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, which consist primarily of sales and
marketing costs, commissions and fulfillment 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 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 its marketable securities 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.
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 e-commerce sales in September 1999 resulted in
$2.1 million of revenues, with $2.0 million recognized during the fourth
quarter.
Gross profit, which consists of revenues less cost of sales, 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 57.1% in 1998.
This was primarily attributable to increases in sales of proprietary or
private-labeled branded products, on which Gaiam has better margins than
other products, and continued better pricing from vendors due to increased
volume.
Selling and operating expenses, which consist primarily of sales and
marketing costs, commissions and fulfillment expenses, increased 57.5% to
$22.3 million in 1999 compared to $14.2 million in 1998. As a percentage
of revenues, selling and operating expenses increased to 48.8% in 1999 from
46.1% in 1998, as a result of the increased emphasis on revenue growth,
particularly in the business-to-business and e-commerce sectors, and the
sourcing, development and branding of our proprietary products.
Corporate, general and administrative expenses increased to $3.1
million in 1999 compared to $2.4 million in 1998. As a percentage of
revenues, general and administrative expenses decreased to 6.7% in 1999
from 7.8% in 1998.
Operating income, as a result of the factors described above,
increased 115.7% to $2.1 million fro 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
$388,491 in 1998. This change is primarily due to an increase in the
number of securities sold during 1999, and was partially offset by higher
interest expense due to borrowings and other extraordinary expenses
associated with our initial public offering, the acquisition of the
minority interest in Living Arts, 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 period September 14,
1998 through December 31, 1998.
Income tax provision grew to $1.0 million in 1999, as compared to
$251,955 in 1998. The decrease in the 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 incurred
prior to Gaiam's ownership.
Net income, as a result of the factors described above, increased
99.9% to $1.7 million for 1999 from $859,781 for 1998.
Quarterly and Seasonal Fluctuations
-----------------------------------
The following table sets forth our unaudited quarterly results of
operations for each of the quarters in 2000 and 1999. In management's
opinion, this unaudited financial information includes all adjustments,
consisting solely of normal recurring accruals and adjustments, necessary
for a fair presentation of the results of operations for the quarters
presented. This financial information should be read in conjunction with
our consolidated financial statements and related notes included elsewhere
in this Form 10-K. The results of operations for any quarter are not
necessarily indicative of future results of operations.
Fiscal 2000
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- --------------- ---------------- ----------------
(in thousands, except for per share data)
Net revenue $12,558 $11,386 $13,630 $23,014
Gross profit 7,636 6,730 8,129 14,300
Operating income (loss) 456 295 982 2,695
Net income 203 201 579 1,666
Net income per share $ 0.02 $ 0.02 $ 0.05 $ 0.14
Weighted average shares outstanding 11,505 11,552 11,538 11,506
Fiscal 1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- --------------- ---------------- ----------------
(in thousands, except for per share data)
Net revenue $ 9,495 $ 8,068 $10,288 $17,874
Gross profit 5,639 4,849 6,222 10,839
Operating income (loss) 110 (294) 393 1,915
Net income 106 72 551 989
Net income per share $ 0.01 $ 0.01 $ 0.06 $ 0.10
Weighted average shares outstanding 8,215 8,420 8,826 10,633
Note: The aggregate of certain of the above amounts differs from that reported
for the the full fiscal year due to the effects of rounding.
Quarterly fluctuations in Gaiam's revenues and operating results are
due to a number of factors, including the timing of new product
introductions and mailings to customers, advertising, acquisitions
(including costs of acquisitions and expenses related to integration of
acquisitions), competition, pricing of products by vendors and expenditures
on our systems and infrastructure. The impact on revenue and operating
results, due to the timing and extent of these factors, can be significant.
Our sales are also affected by seasonal influences. On an aggregate basis,
Gaiam experiences strongest revenues and net income in the fourth quarter
due to increased holiday spending.
Liquidity and Capital Resources
-------------------------------
Gaiam's capital needs arise from working capital required to fund our
operations, capital expenditures related to expansions and improvements to
Gaiam's infrastructure, development of e-commerce, and funds required in
connection with the 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.
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.
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. Giving effect to
the conversion of $1.475 million in debentures to 295,000 shares of common
stock, the total issuance was 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.
During 2000, Gaiam consolidated its line of credit agreements with
Wells Fargo Bank into one agreement. The new credit agreement, which
extends through January 31, 2003, permits borrowings of up to $6.5 million
based upon the collateral value of Gaiam's accounts receivable and
inventory. 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 agreement, 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 $1.7 million and $4.6
million during 2000 and 1999, respectively. Gaiam'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 provided by operations of $4.8 million. Net cash used during 1999
was primarily a result of increases in accounts receivable and inventories
associated with business-to-business growth.
Gaiam's investing activities provided net cash of $2.9 million during
2000 and used cash of $2.4 million during 1999. In June 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 Whole Foods Market merged their Internet businesses into
Gaiam.com, Inc. Gaiam owns 50.1% of Gaiam.com, while 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 the Gaiam's growth. During 1999, Gaiam generated
$2.5 million from the sale of marketable securities and used $2.7 million
primarily for its acquisitions. Gaiam also used $2.2 million primarily to
expand and upgrade e-commerce, computer and telecommunications systems.
Gaiam's financing activities provided net cash of $3.5 million during
2000, primarily from increased borrowings on the Gaiam's line of credit.
During 1999, Gaiam's financing activities generated $9.5 million in net
cash, primarily from the initial public offering.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe that any of our financial instruments have
significant risk associated with market sensitivity. We are not exposed to
financial market risks from changes in foreign currency exchange rates and
are only minimally impacted by changes in interest 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 not used, and currently do not contemplate
using, any derivative financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors................... F-1
Consolidated Financial Statements
Consolidated Balance Sheets...................... F-2
Consolidated Statements of Income................ F-3
Consolidated Statements of Stockholders' Equity.. F-4
Consolidated Statements of Cash Flows............ F-5
Notes to Consolidated Financial Statements....... F-6
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, 2000 and 1999, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2000. 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
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, 2000 and 1999 and the consolidated results of its
operations and its 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
GAIAM, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
Assets 2000 1999
------------------------------------------
Current assets:
Cash and cash equivalents $ 8,578,668 $ 3,877,465
Accounts receivable, net of allowance for
doubtful accounts of $301,539 in 2000
and $158,292 in 1999 8,472,828 4,326,594
Accounts and notes receivable, other 1,097,390 755,924
Inventory, less allowances 6,361,046 4,555,436
Deferred advertising costs 1,625,285 2,176,325
Other current assets 1,307,416 393,330
------------------------------------------
Total current assets 27,442,633 16,085,074
Property and equipment, net 10,797,501 3,168,183
Capitalized production costs, net 2,656,666 1,636,706
Video library, net 4,631,140 4,792,456
Goodwill, net 2,379,861 1,239,507
Other assets 569,508 337,759
------------------------------------------
Total assets $48,477,309 $27,259,685
==========================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 8,091,569 $ 7,618,344
Accrued liabilities 2,276,385 1,734,310
Accrued royalties 867,667 725,541
Capital lease obligations, current 147,649 95,844
Income taxes payable 790,267 -
------------------------------------------
Total current liabilities 12,173,537 10,174,039
Capital lease obligations, long-term 270,171 209,074
Deferred tax liability 384,968 -
Line of credit 5,500,000 1,900,000
-------------------------------------------
Total long-term liabilities 6,155,139 2,109,074
Minority interest 6,037,868 26,030
Redeemable Class A preferred stock in
subsidiary 6,000,000 -
Stockholders' equity:
Class A common stock, $.0001 par value,
92,965,000 shares authorized, 5,473,184
and 5,441,537shares issued and outstanding
at December 31, 2000 and 1999, respectively 547 544
Class B common stock, $.0001 par value,
7,035,000 shares authorized, 5,400,000 and
5,400,000 shares issued and outstanding at
December 31, 2000 and 1999, respectively 540 540
Additional paid-in capital 11,865,734 11,038,551
Deferred compensation (422,826) (106,992)
Retained earnings 6,666,770 4,017,899
------------------------------------------
Total stockholders' equity 18,110,765 14,950,542
------------------------------------------
Total liabilities and stockholders' equity $48,477,309 $27,259,685
===========================================
See accompanying notes.
GAIAM, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
2000 1999 1998
-----------------------------------------------------------
Net revenue $60,588,018 $45,724,662 $30,738,540
Cost of goods sold 23,793,492 18,175,787 13,173,536
-----------------------------------------------------------
Gross profit 36,794,526 27,548,875 17,565,004
Expenses:
Selling and operating 27,309,857 22,337,950 14,186,215
Corporate, general and administration 5,056,903 3,086,514 2,393,946
-----------------------------------------------------------
Total expenses 32,366,760 25,424,464 16,580,161
-----------------------------------------------------------
Income from operations 4,427,766 2,124,411 984,843
Other income (expense):
Realized gain on sale of securities
And other (see Note 3) (73,947) 971,159 696,992
Interest expense (209,167) (365,294) (308,501)
-----------------------------------------------------------
Other income (expense) (283,114) 605,865 388,491
-----------------------------------------------------------
Income before income taxes and minority
interest 4,144,652 2,730,276 1,373,334
Provision for income taxes 1,555,487 1,062,789 251,955
Minority interest in net income (loss) of
consolidated subsidiary, net of tax (59,706) (50,858) 261,598
-----------------------------------------------------------
Net income $ 2,648,871 $ 1,718,345 $ 859,781
===========================================================
Net income per share:
Basic $0.24 $0.20 $0.11
Diluted $0.23 $0.19 $0.11
S Shares used in computing net income per share:
Basic 10,858,139 8,785,205 8,072,877
Diluted 11,525,120 9,119,108 8,118,791
See accompanying notes.
GAIAM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Class A Class B Additional Other
Common Stock Common Stock Paid-in Deferred Comprehensive Retained
Shares Amount Shares Amount Capital Compensation Income Earnings Total
----------------------------------------------------------------------------------------------------------------
Balance at
December
31, 1997 1,005,000 $101 7,035,000 $ 704 $ 133,833 $ - $ 3,161,263 $1,439,773 $ 4,735,674
Issuance of
common stock 160,000 16 - - 574,984 - - - 575,000
Return of
capital to
shareholder
through
purchase of
Inner Balance,
Inc. - - - - (331,183) - - - (331,183)
Comprehensive
income (loss):
Net income - - - - - - - 859,781 859,781
Decrease in
fair market
value of
securities
available for
sale, net of
reclass-
ification
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 1,165,000 117 7,035,000 704 377,634 - 983,126 2,299,554 3,661,135
Issuance of
common stock 331,429 32 - - 1,449,968 - - - 1,450,000
Shares issued
in connection
with IPO,
including the
underwriter's
overallotment 1,807,861 181 - - 6,142,007 - - - 6,142,188
Issuance of
common stock
in conjunction
with acquisitions
and share
conversion 1,842,247 185 (1,635,000) (164) 1,593,971 (106,992) - - 1,487,000
Shares issued
in connection
with conversion
of debt 295,000 29 - - 1,474,971 - - - 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 735,219
----------------------------------------------------------------------------------------------------------------
Balance at
December
31, 1999 5,441,537 544 5,400,000 540 11,038,551 (106,992) - 4,017,899 14,950,542
Issuance of
common stock
in conjunction
with acquisitions
and compensation 31,647 3 827,183 (315,834) 511,352
Net income and
comprehensive
income 2,648,871 2,648,871
----------------------------------------------------------------------------------------------------------------
Balance at
December
31, 2000 5,473,184 $547 5,400,000 $ 540 $11,865,734 $(422,826) - $6,666,770 $18,110,765
====================================================================================================================
See accompanying notes.
GAIAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
2000 1999 1998
--------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 2,648,871 $ 1,718,345 $ 859,781
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 1,245,155 391,000 240,431
Amortization 414,695 293,315 85,466
Stock compensation 147,492 - -
Interest expense added to principal of margin loan - 16,513 116,158
Minority interest in consolidated subsidiary (59,706) (50,858) 261,598
Realized gains on sales of securities and property and
equipment - (2,516,110) (691,137)
Deferred tax expense 384,968 (53,718) 9,684
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable (4,127,458) (2,296,771) (1,501,242)
Inventory (1,739,231) (1,161,724) (591,519)
Deferred advertising costs 551,040 (418,480) (243,630)
Capitalized production costs (1,019,960) (964,268) (212,361)
Other current assets (914,086) (109,494) 8,527
Other assets (229,295) 41,615 (266,757)
Accounts payable (8,730) 717,852 2,569,358
Accrued liabilities 167,310 198,741 329,672
Income taxes payable 805,123 (424,745) (69,784)
--------------------------------------------------------
Net cash provided by (used in) operating activities (1,733,812) (4,618,787) 904,245
--------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (8,735,390) (2,212,961) (134,378)
Proceeds from the sale of property and equipment - - 32,090
Proceeds from the sale of securities available-for-sale - 2,548,310 477,500
Proceeds from sale of stock in subsidiary 11,959,923 - -
Payments for acquisitions, net of cash acquired (305,773) (2,740,703) (1,656,611)
--------------------------------------------------------
Net cash provided by (used in) investing activities 2,918,760 (2,405,354) (1,281,399)
--------------------------------------------------------
FINANCING ACTIVITIES
Principal payments on capital leases (99,617) (60,671) (49,699)
Proceeds from issuance of common stock 15,872 2,875,002 575,000
Net proceeds from initial public offering - 6,142,188 -
Proceeds from convertible debt - - 549,999
Net proceeds from (payments on) borrowings 3,600,000 535,148 (900,000)
--------------------------------------------------------
Net cash provided by financing activities 3,516,255 9,491,667 175,300
--------------------------------------------------------
Net change in cash and cash equivalents 4,701,203 2,467,526 (201,854)
Cash and cash equivalents at beginning of year 3,877,465 1,409,939 1,611,793
Cash and cash equivalents at end of year $ 8,578,668 $ 3,877,465 $ 1,409,939
========================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 287,080 $ 348,580 $ 126,025
Income taxes paid 82,099 1,541,253 312,100
Common stock issued for acquisitions 333,131 1,487,000 -
Common stock issued for convertible debt - 1,425,000 -
Fixed assets acquired under capital lease 212,519 297,740 -
See accompanying notes.
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Gaiam, Inc. (the "Company") was incorporated under the laws of the State of
Colorado on July 7, 1988. Gaiam is a multi-channel lifestyle company
providing information, goods, and services to customers who value personal
development, healthy living and the environment.
Basis of Consolidation
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.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents
include 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 recorded
at market value. 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.
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 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 $10.5 million, $10.1 million and $7.1
million for the years ended December 31, 2000, 1999 and 1998, 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 the Company's
websites. The Company 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).
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment (continued)
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 the Company 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, 2000 and 1999 was $1.7 million and $1.3
million, respectively.
Video Library, Net
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 $674,059 and $332,401 at
December 31, 2000 and 1999 and is being amortized over a 15-year life.
Goodwill, Net
Goodwill, net 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 $88,922 and $15,884 at December 31, 2000 and 1999, 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
The Company 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.
Income Taxes
The Company 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
The Company recognizes revenue at the time merchandise is shipped to the
customer. Amounts billed to customers for postage and handling charges,
which approximate $3.5 million for 2000, $3.0 million for
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue (continued)
1999 and $2.2 million for 1998, are recognized as revenue at the time that
the revenues on the product shipments are recognized. Postage and handling
costs, which approximate $3.3 million for 2000, $3.0 million for 1999, and
$2.1 million for 1998, are included in selling and operating expense along
with other fulfillment costs incurred to warehouse, package and deliver
products to customers. 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 5% of sales for any of the years ended
December 31, 2000, 1999 and 1998. The Company generally does not require
collateral.
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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in our 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
The Company 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 interpretations,
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, the Company 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 the Company on behalf of all participants in the 401(k)
plan. To date, the Company has not made any matching contributions to the
401(k) plan.
Reporting Comprehensive Income
On January 1, 1998, the Company adopted the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, Reporting on Comprehensive Income
("Statement 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 the Company 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 31,
1999, all available-for-sale securities were sold.
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements
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 the
Company'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 Company does not expect that the
adoption of SFAS No. 133 will have a material impact on its financial
statements because it does not currently hold any derivative instruments.
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 SFAS No. 128, Earnings per Share, requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
2000 1999 1998
---------------------------------------------------------
Numerator for basic earnings per share $ 2,648,871 $ 1,718,345 $ 859,781
Effect of Dilutive Securities:
8% convertible debentures -- 56,401 19,234
---------------------------------------------------------
Numerator for diluted earnings per share $ 2,648,871 $ 1,774,746 $ 879,015
=========================================================
Denominator:
Weighted average shares for basic
earnings per share 10,858,139 8,785,205 8,072,877
Effect of Dilutive Securities:
Weighted average of common stock, stock
options, warrants and convertible debentures 666,981 333,903 45,915
---------------------------------------------------------
Denominators for diluted earnings per share 11,525,120 9,119,108 8,118,792
=========================================================
Net income per share--basic $ 0.24 $ 0.20 $ 0.11
Net income per share--diluted $ 0.23 $ 0.19 $ 0.11
2. MERGERS AND ACQUISITIONS
In September 1998, the Company 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
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. MERGERS AND ACQUISITIONS (CONTINUED)
Living Arts in exchange for a 33% membership interest. Effective July 1999,
the Company acquired the remaining 33% minority interest in Living Arts.
Additionally, effective November 1999, the Company acquired a 50.1%
controlling interest in an environmental products provider. Total
consideration paid by the Company for the 1999 acquisitions was $2.3
million in cash and 207,247 shares of the Company's Class A common stock.
On June 30, 2000, Gaiam, Inc. and Whole Foods Market 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, Inc. 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.
Additionally, in 2000, the Company acquired a yoga props company and a 70%
interest in an organic clothing manufacturer. Total consideration paid by
the Company 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 of the Company from the effective
acquisition 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.
3. SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale consisted of shares of common stock from one
issuer. During 1998, the Company 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, the
Company 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, the Company 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.
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, consists of the following:
December 31,
2000 1999
--------------------------------------------
Land $ 1,100,000 $ -
Buildings 1,800,000 -
Furniture, fixtures and equipment 1,295,030 805,182
Leasehold improvements 714,460 333,747
Website development (including construction-
in-process costs) 5,391,243 1,600,728
Computer/telephone equipment 2,571,033 1,632,065
Warehouse equipment 567,667 222,329
--------------------------------------------
13,439,433 4,594,051
Accumulated depreciation and amortization (2,641,932) (1,425,868)
--------------------------------------------
$10,797,501 $ 3,168,183
============================================
5. COMMITMENTS
At December 31, 2000 and 1999, the Company's property held under capital
leases consisted of the following, which is included in property and
equipment:
December 31,
2000 1999
--------------------------------------------
Warehouse equipment $ 40,229 $ 40,229
Computer/telephone equipment 578,064 365,545
--------------------------------------------
618,293 405,774
Accumulated amortization (181,085) (99,189)
$ 437,208 $306,585
============================================
The Company leases equipment and office, retail, and warehouse space
through capital and operating leases. The following schedule represents the
annual future minimum payments, as of December 31, 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
==================
The Company incurred rent expense of $1,084,071, $790,393 and $646,886 for
the years ended December 31, 2000, 1999 and 1998, respectively.
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. LINE OF CREDIT
The Company is party to revolving line of credit agreements, which extend
through January 31, 2003. The credit agreements permit borrowings up to
$6.5 million based upon the collateral value of the Company'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
are secured by a pledge of the Company's assets, and contain 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, the Company is in compliance with all the financial
covenants.
7. INCOME TAXES
The provision for income taxes is comprised of the following:
December 31,
2000 1999 1998
-----------------------------------------------------------------
Current:
Federal $1,117,823 $1,006,008 $197,142
State 155,954 156,426 45,129
-----------------------------------------------------------------
1,273,777 1,162,434 242,271
Deferred:
Federal 322,798 (37,610) 25,852
State (41,088) (62,035) (16,168)
-----------------------------------------------------------------
281,710 (99,645) 9,684
-----------------------------------------------------------------
Total $1,555,487 $1,062,789 $251,955
=================================================================
Variations from the federal statutory rate are as follows:
December 31,
2000 1999 1998
----------------------------------------------------------------
Expected federal income tax expense at
statutory rate of 34% $1,409,182 $ 928,294 $ 466,934
Effect of legal judgment - permanent difference - - (251,609)
Effect of other permanent differences 27,359 40,104 20,276
State income tax expense, net of federal benefit 118,946 94,391 16,354
----------------------------------------------------------------
Income tax expense $1,555,487 $1,062,789 $ 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 asset or liability as
of December 31, 2000 and 1999 are as follows:
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. INCOME TAXES (CONTINUED)
December 31,
2000 1999
--------------------------------------
Deferred tax assets:
Reserve for bad debts $ 113,373 $ 57,386
Capitalized inventory 30,165 29,777
Amortization 2,594 -
--------------------------------------
146,132 87,163
Deferred tax liabilities:
Amortization - (66,060)
Prepaid catalog costs (24,439) -
Depreciation (387,562) (1,181)
--------------------------------------
(412,001) (67,241)
--------------------------------------
Deferred tax asset (liability), net $(265,869) $ 19,922
======================================
8. Stockholders' Equity
The Company has warrant certificates outstanding during the year and at
December 31, 2000 that entitle the holder to purchase 24,000 shares of
Class A common 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, the Company 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, the Company 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
==================
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. STOCK OPTION PLANS
On June 1, 1999, the Company 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 the Company's common stock. Both incentive stock
options and non-qualified stock options may be issued under the provisions
of the Plan. Employees of the Company 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
date of grant. All grants expire 7 years from the date of grant.
The Company recorded deferred compensation of $413,320 and $106,992 in 2000
and 1999, respectively. In 2000, deferred compensation was recorded in
connection with: acquisitions made by the Company 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 the
Company'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 the Company'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 2000 and 1999
related to deferred compensation was $97,486 and $0, respectively.
A summary of stock option activity and weighted average exercise prices for
the year ended December 31, 2000 follows:
2000 1999
------------------------- ------------------------
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 253,500 15.96 851,200 4.51
Price less than fair value 39,000 15.28 39,700 7.18
Exercised (3,628) 4.38 - -
Forfeited (52,210) 6.52 - -
------------------------- ------------------------
Outstanding at end of year 1,127,562 $ 7.45 890,900 $6.10
128,552 $ 4.47 - $ -
Exercisable at end of year
Shares available on December 31,
for options that may be granted 472,438 709,100
A summary of stock options outstanding as of December 31, 2000 follows:
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. STOCK OPTION PLANS (CONTINUED)
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 the Company's stock-based compensation plan
been determined under the fair value methodology for determining
compensation cost under SFAS No. 123, the Company'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,
------------------------------------
2000 1999
------------------------------------
Net income
As reported $2,648,871 $1,718,345
Pro forma 2,258,005 1,599,102
Net income per common share
As reported $ 0.24 $ 0.20
Pro forma $ 0.21 $ 0.18
Fully diluted net income per common share:
As reported $ 0.23 $ 0.19
Pro forma $ 0.20 $ 0.18
In estimating the pro forma compensation expense for each equity award
granted during the year, the Company used the Black Scholes option pricing
model, with the following weighted-average assumptions used for grants in
2000 and 1999, respectively: risk-free interest rates in a range of 6.00%
and 5.78%, expected dividend yield of zero; expected option lives of 5
years, and expected volatility of 0.48 and 1.29. Options granted prior to
the Company's initial public offering were valued using the minimum value
method and, therefore, volatility was not applicable.
2000 1999
---- ----
Weighted-average fair value of options
granted during the year:
Price equal to fair value $11.85 $ 1.85
Price less than fair value $11.38 $11.21
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. RELATED PARTY TRANSACTIONS
In 1997, the Company 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 the Company) to
provide customer sales, service, warehousing and distribution services. On
October 1, 1998, the Company acquired all of the stock and net assets of
InnerBalance Health, Inc. 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 reduction to additional paid-in capital.
In 1999, the Company engaged the services of ccplanet.com, Inc. (a related
party under common ownership with the Chief Executive Officer of the
Company) to develop and implement a new web site design utilizing the
latest technology for its direct to consumer operations. The Company paid
ccplanet a total of $4.5 million for work performed on said project during
1999 and 2000, and the new Gaiam.com website was placed into service in
March 2000. The Company has made its customer database and certain visual
media available to ccplanet in exchange for 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 testing a
store-within-a-store concept, presenting Gaiam's lifestyle products in
Whole Foods 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, the
Company purchased approximately $300,000 in inventory from Earthlings, Inc.
(a related party under common ownership with the Chief Executive Officer of
the Company) at Earthlings' cost.
11. SUBSEQUENT EVENTS
On October 13,2000, the Company entered into a Merger Agreement with Real
Goods Trading Corporation, Inc. (Real Goods) pursuant to which the Company
will acquire 100% of the Real Goods issued and outstanding common stock in
exchange for shares of Gaiam Class A common stock. The merger was subject
to approval by the Real Goods shareholders and certain other conditions
described in the merger agreement, which were satisfied in January 2001. In
the tax-free, stock-for-stock exchange, Real Goods shareholders received
one share of Gaiam Class A common stock in exchange for each ten shares of
Real Goods stock owned. The merger was completed on January 29,2001, and
481,424 shares of Class A common stock were issued. The merger was
accounted for using the purchase method.
12. 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 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 sold and direct expenses. Financial information for the Company's
business segments was as follows:
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. SEGMENT INFORMATION (CONTINUED)
Year Ended December 31,
2000 1999 1998
----------------------------------------------------------------
Net revenue:
Direct to consumer $43,823,460 $34,573,540 $26,897,236
Business to business 16,764,558 11,151,122 3,841,304
----------------------------------------------------------------
Consolidated net revenue 60,588,018 45,724,662 30,738,540
Contribution margin:
Direct to consumer 841,351 (243,949) 128,691
Business to business 3,586,415 2,368,360 856,152
----------------------------------------------------------------
Consolidated contribution margin 4,427,766 2,124,411 984,843
Reconciliation of Contribution margin to
net income:
Other income (expense) (283,114) 605,865 388,491
Income tax expense 1,555,487 1,062,789 251,955
Minority interest (income) expense (59,706) (50,858) 261,598
----------------------------------------------------------------
Net income $ 2,648,871 $ 1,718,345 $ 859,781
================================================================
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the executive officers of the
Registrant, See Item 4 - "Directors and Executive Officers of the
Registrant" at the end of Part I of this report. The information required
by this Item concerning the Directors of the Company is incorporated herein
by reference to the Company's Proxy Statement for its Annual Meeting of
Stockholders, to be held on June 7, 2001, to be filed with the Commission
pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the Company's Proxy Statement for its Annual Meeting of
Stockholders, to be held on June 7, 2001, to be filed with the Commission
pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference to the Company's Proxy Statement for its Annual Meeting of
Stockholders to be held on June 7, 2001, to be filed with the Commission
pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the Company's Proxy Statement for its Annual Meeting of
Stockholders to be held on June 7, 2001, to be filed with the Commission
pursuant to Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(A) Documents filed as part of this report are as follows:
1. Financial Statements.
See listing of Financial Statements included as part of this
Form 10-K in Item 8 of Part II.
2. Financial Statement Schedules.
None required.
3. Exhibits
See Item 14(c) below
(B) No reports on Form 8-K were filed during the last quarter of the
period covered by this Form 10-K.
(C) Exhibits:
1. The following exhibits are incorporated by reference:
Exhibit No. Description
----------- -----------
3.1 * Amended and Restated Articles of Incorporation
3.2 * Bylaws of Gaiam, Inc.
4.1 * Form of Gaiam, Inc. Stock Certificate
10.1 * Loan Agreement dated as of May 11, 2000 between
Gaiam, Inc. and Norwest Bank Colorado N.A. - Boulder
10.2 * Lease dated December 16, 1999, commencing March 1,
2000 between Gaiam, Inc. and Duke-Weeks Realty Limited
Partnership
10.3 * Lease dated December 18, 1977 between Gaiam, Inc.
and Orix Prime West Broomfield Venture
10.4 * Gaiam, Inc. 1999 Long-Term Incentive Plan
* Previously filed
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Registrant has caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Broomfield, State of Colorado, on this 26th day of March,
2001.
GAIAM, INC.
By: /s/ Jirka Rysavy
-----------------
Jirka Rysavy
Chief Executive Officer
Signature Title Date
--------- ----- ----
/s/ Jirka Rysavy Chairman of the Board and March 26, 2001
- ------------------ Chief Executive Officer
Jirka Rysavy
/s/ Lynn Powers President, Chief Operating Officer March 26, 2001
- --------------- Secretary and Director
Lynn Powers
/s/ Barnet M. Feinblum Director March 26, 2001
- ----------------------
Barnet M. Feinblum
- ----------------------
Barbara Mowry Director March 26, 2001
/s/ John Mackey Director March 26, 2001
- ---------------
John Mackey
/s/ Paul H. Ray Director March 26, 2001
- ---------------
Paul H. Ray
/s/ Janet Mathews Chief Financial Officer (Principal March 26, 2001
- ----------------- Financial and Accounting Officer)
Janet Mathews