AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 1999JUNE 20, 2001

                                                      REGISTRATION NO. 333-83283
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- -------------------------------------------------------------------------------333-_____

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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                               ----------------

                                Amendment No. 1
                                      to

                                   FORM S-1
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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                                  GAIAM, INC.Gaiam, Inc.
            (exact name of registrant as specified in its charter)

Colorado                     5961,7375
            Colorado                           5961, 7375              84-111-35-27
 (State or other jurisdiction of    (Primary Standard             (I.R.S. Employer
 of incorporation or Industrial     (I.R.S. Employer
incorporation or organization)      Classification Code Number)     Identification No.)
organization)                 Code Number)
360 INTERLOCKEN BLVD., SUITE 300 BROOMFIELD, COLORADO 80021 (303) 464-3600222-3600 (address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ---------------- JIRKA RYSAVY CHIEF EXECUTIVE OFFICER GAIAM, INC. 360 INTERLOCKEN BLVD, SUITE 300 BROOMFIELD, COLORADO 80021 (303) 464-3600222-3600 (name, address, including zip code, and telephone number, including area code, of agent for service) ---------------- COPIES TO: JAMES L. PALENCHAR, ESQ. KEVIN A. CUDNEY, ESQ. BARTLIT BECK HERMAN PALENCHARCopies to: Thomas R. Stephens, Esq. Richard R.Plumridge, Esq. Polly S. Swartzfager, Esq. John E. Hayes III, Esq. Bartlit Beck Herman Palenchar & SCOTT DORSEYScott Brobeck, Phleger & WHITNEYHarrison LLP 511 16/TH/ STREET, SUITE 7001899 Wynkoop Street, 8/th/ Floor 370 17/TH/ STREET, SUITE 4400 DENVER, COLORADOInterlocken Blvd. Suite 500 Denver, Colorado 80202 DENVER, COLORADO 80202 TELEPHONE: 303-592-3100 TELEPHONE: 303-629-3400 FACSIMILE: 303-592-3140 FACSIMILE: 303-629-3450Broomfield, Colorado 80021 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [X][_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------- Title of Each Proposed Proposed Class of Maximum Maximum Securities to be Amount to be Offering Price Aggregate Amount of Registered Registered (1) Per Share (2) Offering Price Registration Fee - --------------------------------------------------------------------------------------------------------- Class A common 2,530,000 shares $14.32 $36,229,600 $9,057.50 stock - ---------------------------------------------------------------------------------------------------------
____________ (1) Includes shares of class A common stock on which the underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(c) of the Securities Act of 1933, as amended, and based on the average of high and low sales prices of the Class A Common Stock as reported on the Nasdaq National Market on June 15, 2001. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ---------------- The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. ================================================================================ Subject to completion, __________ __, 1999 PROSPECTUS ____________ __, 1999 ================================================================================ 2,000,000SUBJECT TO COMPLETION, DATED JUNE 20, 2001 2,200,000 Shares of Class A Common Stock $5.00 per share ($4.50 per share for Gaiam customers, up to 200 shares per customer) [Gaiam logo] ================================================================================ Gaiam produces and sells goods, services and information targeted to customers who value the environment, a sustainable economy, healthy lifestyles and personal development. This is our initial public offering.GAIAM We will apply for quotationare offering 2,200,000 shares of our sharesclass A common stock. Our class A common stock is listed on the Nasdaq National Market under the symbol "GAIA." We intend to allocate shares first to our customers and then toOn June 15, 2001, the general public. Our customers will receive a 10% discount from the initial public offering price (or alast reported sale price of $4.50 per share)our class A common stock on up to 200 shares per customer. The minimum order sizethe Nasdaq National Market as $14.17. Investing in this offering for Gaiam customers and for the public is 50 shares. - --------------------------------------------------------------------------------our common stock involves risks. See "Risk Factors" beginning on page __5. Per Share Total ----- ----- Public offering price:............................ $ $ Underwriting discounts and commissions:........... $ $ Proceeds to read about material risks you should consider before buying our shares. - --------------------------------------------------------------------------------
Per Share Total --------- ----- Public offering price: $5.00 $7,000,000* Underwriting discounts and commissions: $0.50Gaiam:................................ $ $ 700,000* Proceeds to Gaiam: $4.50 $6,300,000* Gaiam offering price (up to 200 shares): $4.50 $2,700,000* Underwriting discounts and commissions: $0.45 $ 270,000* Proceeds to Gaiam: $4.05 $2,430,000*
*We do not know how many of the 2,000,000 shares offered will be purchased by our customers at the $4.50 offering price. We have assumed for purposes of this table that 600,000 shares are sold at $4.50 per share and 1,400,000 shares are sold at $5.00 per share. Thegranted the underwriters have ana 30-day option to purchase an additional 300,000up to 330,000 shares from Gaiamof our class A common stock for resale to the public at $5.00the $ offering price per share to cover any over- allotments. The closing of this offering is expected to occur on or about October __, 1999. - --------------------------------------------------------------------------------share. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- TUCKER ANTHONY CLEARY GULL ADAMS, HARKNESSTucker Anthony Sutro Adams, Harkness & HILL, INC.Hill, Inc. Capital Markets The date of this prospectus is June , 2001. [Inside front cover] [Pictures][Pictures of Gaiam products] TABLE OF CONTENTS
Page ---- Prospectus Summary...................................................... Questions and Answers for Gaiam Customers ..............................Summary....................................... 1 Risk Factors............................................................Factors............................................. 5 Forward-Looking Statements............................... 11 Use of Proceeds......................................................... Capitalization.......................................................... Dilution................................................................Proceeds.......................................... 11 Price Range of Common Stock.............................. 12 Dividend Policy.......................................... 12 Capitalization........................................... 13 Selected Consolidated Financial Data.................................................Data..................... 14 Management's Discussion and.............................................and Analysis of Financial Condition.......................................Condition and Results of Operations.............................................Operations.................... 16 Our Business............................................................ Management..............................................................Business............................................. 23 Management............................................... 31 Certain Transactions.................................................... Gaiam Shareholders......................................................Relationships and Related Transactions........... 35 Principal Shareholders................................... 37 Description of Capital Stock............................................Stock............................. 39 Shares Eligible for Future Sale......................................... Underwriting............................................................Sale.......................... 41 Underwriting............................................. 43 Legal Matters........................................................... Experts................................................................. Additional Information..................................................Matters............................................ 45 Experts.................................................. 45 Where You Can Find More Information...................... 45 Index to Financial Statements............................ F-1
You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. (i) PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all the information that you should consider before buying shares in this offering. You should read the following summary, together with the more detailed information and Gaiam'sentire prospectus carefully, including our consolidated financial statements and the related notes appearingincluded elsewhere in this prospectus. [Gaiam logo] OUR BUSINESS Founded in Boulder, Colorado in 1988, Gaiam (pronounced "gi am") producesis a lifestyle company providing a broad selection of information, products and sells goods, services and information targeted to customers who value the environment, a sustainable economy, healthy lifestylesnatural health, personal development and personal development.renewable energy. We reachoffer our customers through catalogs, the Internet and retailers. We striveability to provide our customers an opportunity to practice what we call "conscious commerce." This term describes the practice of makingmake purchasing decisions based on these values while striving to provide products at prices comparable to conventional alternatives. Our direct customer base is 80% female and 70% college-educated, has a median age of 44 and has an average annual household income of approximately $60,000. The Gaiam lifestyle brand was built around our ability to continuously develop content that establishes Gaiam as an authority in the Lifestyle Of Health And Sustainability (LOHAS) market. Our content provides solutions that improve quality of life, promote personal valuesdevelopment and beliefs.protect the environment. It also forms the basis of our proprietary products, on which we realize our highest margins, and drives demand for parallel product and service offerings. We sell our content in the form of television broadcasts, on-demand visual media programming, DVDs, videotapes, music CDs, books and other media. We also provide content through our catalogs, on the internet, at point of purchase and as part of the packaging for our products. Our content together with the Gaiam brand creates barriers to entry for competitors. We market our products and services direct-to-consumers and business- to-business through five sales channels: our catalogs, the internet, retailers, media and corporate accounts. Our products are sold by leading retailers including lifestyle stores such as Discovery Channel Stores and The Walking Company; women's beauty stores such as Ulta and Origins; sporting goods chains such as Sports Authority and Big 5; home furnishing stores such as Bed, Bath and Beyond; natural food stores such as Whole Foods Market; book stores such as Borders and Barnes & Noble; music stores such as Musicland and Wherehouse Music; sporting good stores such as Dick's and mass merchants such as Target, Kohl's and Wal-Mart; and e-tailers such as Amazon.com. A number of our retailers display our products in store-within-a-store Gaiam lifestyle shops. We believe manywe have an opportunity to become the single source solution for LOHAS products for our retail accounts. Our media channel includes television broadcast, on- demand visual media programming coverage to more than 600,000 hotel rooms in North America, video streaming, video tapes, DVDs and three music labels. Our media partners include the Discovery Channel, Universal Studios and On Command. Our corporate account customers include The White House, NASA, Disney, Sony, AT&T, Mercedes Benz, the U.S. Departments of Energy and Defense and the Government of Brazil. We distribute our consumersproducts in each of these sales channels from a single fulfillment center. Gaiam has a highly centralized, scaleable business model. Gaiam's operations are concerned aboutvertically integrated from content creation, through product development and sourcing, to customer service and fulfillment. The LOHAS market, which represented $227 billion in sales in 2000 according to Natural Business Communication, consists of five main sectors: . Sustainable Economy. Renewable energy, energy conservation, recycled goods, environmental management services, sustainable manufacturing processes and related information and services. . Healthy Living. Natural and organic foods, dietary supplements, personal care products and planetaryrelated information and services. . Alternative Healthcare. Health and wellness solutions and alternative health practices. 1 . Personal Development. Solutions, information, products and sustainabilityexperiences relating to mind, body and want to use their purchasing decisions to effect positive change. We call this "votingspiritual development. . Ecological Lifestyles. Environmentally friendly cleaning and household products, organic cotton clothing and bedding, and eco-tourism. Gaiam provides lifestyle product solutions for their values with their dollars." Our name, Gaiam, is a fusionall segments of the words "Gaia"LOHAS market. We offer solutions for a sustainable economy such as renewable energy systems, energy efficient lighting and "I am." Gaia, mother Earth, was honored on the Isle of Crete in ancient Greece 4,000 years ago by the Minoan civilization. This civilization valued education, art, science, recreationproducts made from recycled materials; healthy living solutions such as nutrition content, air and the environment and believed that the Earth was directly connected to their existence and daily life. The concept of Gaia stems from this ancient philosophy that the Earth is a living entity. At Gaiam, we believe that all of the Earth's living matter, air, oceans and land form an interconnected system that can be seen as a single entity. According to a 1996 study published by the Institute of Noetic Sciences, "The Integral Culture Survey," this view is shared by over 90% of a group called "cultural creatives." This study estimates that this demographic group, which shares the values of environmental awareness, healthy lifestyleswater filters and personal care items; alternative healthcare solutions such as back and neck care products, stress relief and wellness information; personal development numbered 44 millionsolutions such as mind-body fitness information, fitness accessories and performance wear; ecological lifestyle solutions such as natural cleaners, organic cotton bedding and bath products and organic cotton clothing. We intend to pursue the following strategic initiatives in order to continue to grow our business and serve the United States in 1994. The authorLOHAS market: . Strengthen Our Lifestyle Brand . Capitalize on Our Multi-Channel Approach . Expand Our Proprietary Product Selection . Broaden Our Content Through Growth of this study, Paul Ray, has agreed to join our board of directors upon completion of this offering.Gaiam Media . Complement Our Business with Selective Strategic Acquisitions From 1996 to 1998,2000, our revenues increased from $14.8 million to $30.7 million, representing a compound annual growth rate of approximately 44%.$60.6 million. Our number of unique individual customersdirect customer file has increased from 300,000 at the end of 1996 to 685,000approximately 1.7 million at the end of May 2001. Our retailer channel grew from its inception in 1998 and to 800,00025,500 stores at June 30, 1999. Although our historical sales have been predominantly through catalogs and retailers, we are shifting our sales emphasis to the Internet and we intend to make the Internet our primary channelend of distribution. Engaging in sales on the Internet, sometimes called "e-commerce," may subject us to risks and uncertainties not historically associated with our business. 3 OUR MARKET OPPORTUNITY We believe that several markets shareMay 2001. The name Gaiam is a common customer base that we believe practices conscious commerce. Because of this common customer base, we believe these markets should be viewed collectively as one industry. We have named this industry "LOHAS" -- an acronym for Lifestyles Of Health And Sustainability, and we divide the LOHAS industry into five markets that shape the industry: Sustainable Economy. This market includes environmental management services and solutions, renewable energy, energy conservation products and services, sustainable manufacturing processes, recycling and goods made from recycled materials. Healthy Living. This market includes food supplements, vitamins and minerals, natural and organic foods, and natural personal body care and information and services related to these products. Alternative Healthcare. This market includes natural health and wellness solutions, information, products and services, including alternative, noninvasive treatments, massage, chiropractic, acupuncture, acupressure, biofeedback and aromatherapy. Personal Development. This market includes experiences, solutions, products, information and services relating to mind, body and spiritual development such as yoga, meditation, relaxation, spirituality, ancient religions, esoteric sciences and realizing human potential. The fitness elements of this market are often referred to as "mind-body-spirit." Ecological Lifestyles. This market includes information, products and services that offer environment-friendly solutions, natural untreated fiber products and eco-tourism. Gaiam currently produces and sells information, goods and services in each marketfusion of the LOHAS industry under three brand names: . Harmony targetswords "Gaia," the Sustainable Economyname for Mother Earth in ancient Greece, and Ecological Lifestyles markets; . Living Arts targets the Personal Development market; and . InnerBalance targets the Alternative Healthcare and Healthy Living markets. OUR STRATEGY We are not aware of a dominant market leader for the entire LOHAS industry and we believe the industry is characterized by a fragmented supplier and distribution network. Gaiam seeks to establish itself as a brand name, information resource and authority in the LOHAS industry. We view the Internet as an opportunity to enhance relationships with our customers and reduce consumption of natural resources. Through our Internet site, www.gaiam.com, we strive to create an online community where our customers will share information, solutions and experiences and promote interactive feedback. Our customer service representatives have learned from our customers that many of them desire to acquire information from a trusted source offering them a personalized, concise and reliable view into the vast and inconsistent universe of information. We believe we are well positioned to be a source such as this because of our customer participation, as evidenced by a customer survey which drew a 50% response rate. However, because the 4 Internet and e-commerce industry are subject to technological changes, our strategy to expand our presence online and create an online community has additional costs and risks associated with it. We intend to pursue the following strategies to benefit our customers: . Focus on Our Online Presence . Strengthen Our Brand . Offer Quality, Convenience and Wide Selection . Develop Business-to-Business Opportunities . Complete our Existing Business with Selective Strategic Acquisitions - ---------------------------------------------------------------------------- We believe customers should have opportunities to invest in companies they helping create. In this offering, we will give preference to our customers in allocating shares and give them a 10% discount for purchases of up to 200 shares. - ----------------------------------------------------------------------------"I am." Gaiam was founded in Boulder, Colorado and organized as a Colorado corporation on July 7, 1988. Gaiam's principal office is located at 360 Interlocken Blvd., Suite 300, Broomfield, Colorado 80021, and its telephone number is (303) 464-3600. The Offering222-3600. 2 THE OFFERING Class A common stock offered by Gaiam................... 2,000,000Gaiam.................... 2,200,000 shares Class A common stock outstanding after this offering.... 3,496,429 shares/(1)/offering..... 8,163,137 shares(1) Class B common stock outstanding after this offering.... 7,035,000offering..... 5,400,000 shares Total common stock outstanding after this offering...... 10,531,429offering....... 13,563,137 shares Use of proceeds.........................................proceeds....................... Working capital and other general corporate purposes, including the possible acquisition of the minority interest in one of our subsidiaries, other acquisitions and the repayment of up to $2.725 million principal amountindebtedness, expansion of debt.sales channels, new product launches and acquisitions. See "Use of Proceeds" and "Our Business." Proposed Nasdaq National Market symbol..................symbol......... GAIA /1)/__________________ (1) Based on the number of shares outstanding on June 30, 1999.May 31, 2001. Excludes approximately 675,0001,494,318 shares issuable upon exercise of options and warrants outstanding as of June 30, 1999, eachMay 31, 2001, at an average exercise price of $4.375$7.72 per share. No options are currently exercisable. See "Management." The information in this prospectus assumes that Gaiam's proposed 1-for-2.5 reverse stock split has occurred and that the underwriters' over-allotment option is not exercised. Except where specified, references to Gaiam's shares refer to shares of its class A common stock. The information on our website, including any online discussion forums, and in our catalogs and other marketing materials is 5 not part of this prospectus. References in this prospectus to "Gaiam," "we," "our" and "us" refer to Gaiam, Inc., and our wholly- and majority-owned subsidiaries and not to the persons who manage Gaiam or sit on its Board of Directors. 6 QUESTIONS AND ANSWERS FOR GAIAM CUSTOMERS This summary answers some questions about how the offering process will work for Gaiam customers who wish to purchase shares. You should also carefully read the rest of this prospectus for information about this offering, the shares and Gaiam. Q. What is the price of the shares for Gaiam customers? A. Shares purchased by a Gaiam customer, up to the first 200, will be discounted 10% and will cost $4.50 per share. Fifty shares, the minimum order, will cost $225, and 200 shares will cost $900. Customer purchases of additional shares over the initial 200 shares will cost $5.00 per share. For example, an additional 100 shares will cost $500 (or $1,400 for all 300 shares). Q. Is there a minimum number of shares I have to buy? A. Yes. Orders for fewer than 50 shares will not be accepted. Q. How many shares can I request? A. There is no limit on the number of shares a customer may request, but we may not have enough shares to meet your request. Q. Is there a guarantee that I will be able to buy shares? A. No, but Gaiam intends to prioritize the allocation process so that customers who ask to buy shares and place orders early will be able to buy shares. There is no guarantee, however, that this will be possible. We may need to allocate shares if we receive orders for more shares than are offered by this prospectus. Q. Will Gaiam allocate shares on a first come, first served basis? A. Yes. If we receive orders for more shares than we have available for customers, we will take into account the time your check and paperwork were received. As a result, you should return your paperwork as soon as possible. Q. What paperwork do I have to complete? A. Customers must fill out an account application to open a brokerage account at Tucker Anthony Incorporated, an affiliate of Tucker Anthony Cleary Gull. The application includes some necessary questions, and a place for you to indicate how many shares you would like to buy. Customers can obtain the account application by calling Tucker Anthony Incorporated at the phone number listed below. Q. When do I send a check? A. Customers should send checks as soon as possible because timeliness of your check and paperwork is one of the criteria we will use to allocate shares. Customers must send a check for the total price of the shares you would like to buy, along with your paperwork. Q. What is the deadline for placing my order to buy shares? A. The deadline for customers is the close of business on __________, __ 1999. By that date, customers' checks and completed paperwork must be received by Tucker Anthony Incorporated, at the address on the account application. Q. Will I get my money back if I do not receive shares? A. Yes. Funds not used to purchase shares will be sent back to customers by check promptly, unless you direct Tucker Anthony Incorporated otherwise. Q. Will I receive a stock certificate? 7 A. Yes. All customers buying stock in this offering will receive a stock certificate for the shares purchased. In addition, customers who buy shares will also receive a gift package, including a Gaiam t-shirt, cap, mug and canvas shopping bag. Q. Whom do I call if I have questions? A. Call Tucker Anthony Incorporated toll free at 1-877-IPO-GAIA (1-877-476-4242). 83 SUMMARY CONSOLIDATED FINANCIAL DATA (Amounts in(in thousands, except per share data) The following table summarizes the consolidated financial data of our business. SeeYou should read the summary consolidated financial data below in conjunction with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The financial results for the six months ended June 30, 1998 and 1999 and as of June 30, 1999, are unaudited.
SixThree Months Ended Year Ended December 31, Ended June 30, ----------------------- -------------- 1996 1997 1998March 31, ------------------------------------------------------------------------------------- 1998 1999 ---- ---- ---- ---- ----2000 2000 2001 (Unaudited) Statement of Operations Data: Net revenues ............................ $14,801 $19,898 $30,739 $10,475 $17,563$45,725 $60,588 $12,558 $17,672 Gross profit ............................ 8,039 11,436 17,565 6,061 10,48827,549 36,795 7,636 10,824 Other income (expense) .................. 2,984 1,583 388 (114) 202606 (283) (123) 68 Net income after minority interest/(1)/.. $ 340 $ 654 $860 $ 39 $ 116 860 1,718 2,649 203 419 Net income per share (basic and diluted) ................................ $ 0.04 $ 0.08Basic $ 0.11 $ 0.000.20 $ 0.010.24 $ .02 $ .04 Diluted $ 0.11 $ 0.19 $ 0.23 $ .02 $ .04 Shares outstanding (basic) .............. 8,040 8,040 8,073 8,040 8,3188,785 10,858 10,846 11,206 Shares outstanding (dilute) ............. 8,040 8,040(diluted) 8,119 8,040 8,3189,119 11,525 11,505 11,563
June 30, 1999 ----------------------------------March 31, 2001 (Unaudited) ------------------------ Actual Pro forma/As Adjusted (2)/ ------ -------------- ------- ----------- Balance Sheet Data: Cash...........................................Cash............................................................ $ 856 $ 7606 Securities available-for-sale.................. 1,505 1,5056,374 $24,742 Working capital................................ 2,534 10,285capital................................................. 11,312 33,161 Total assets................................... 15,839 22,589assets.................................................... 59,118 77,486 Long-term debt (net of current maturities)..... 1,664 914/(3)/............................. ................... 6,780 261 Stockholders' equity........................... 5,216 12,716equity............................................ 22,168 50,536
___________________________ /(1)/__________ (1) Net income after minority interest includes net income of consolidated Gaiam operations, excluding thethat portion attributable to the minority shareholdershareholders' interest in the net income or loss in the consolidated subsidiary, net of Healing Arts Publishing, LLC, a majority owned subsidiary of Gaiam. /(2)/tax. (2) Gives effect to the sale by Gaiam of 2,000,0002,200,000 shares at an assumed initial public offering price of $5.00$14.17 per share, after deducting the estimated underwriting discount customer discounts and offering expenses payable by Gaiam.Gaiam and application of the net proceeds for repayment of $6.5 million of long-term debt (at March 31, 2001) from the proceeds of this offering. (Gaiam intends to use an additional $3.5 million in proceeds from this offering to repay debt incurred subsequent to March 31, 2001.) See "Use of Proceeds" and "Capitalization." /(3)/ Gives effect to the repayment of $750,000 of long-term debt from the proceeds of this offering. 94 RISK FACTORS This offering involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus before deciding to invest in our shares. If any of the following risks actually occurs, our business could be harmed and the trading price of our shares could decline. In that case, you might lose all or part of your investment. We may not be able to compete successfully against our current and future competitors. Our goal is to establish ourselves as the market leader in the LOHAS market industry. We believe that the LOHAS industrymarket has thousands of small, local and regional businesses. We believe that someSome smaller businesses may be able to more effectively personalize their relationships with customers. Our direct marketing business is evolvingcustomers, thereby gaining a competitive advantage. Although we believe that we do not compete directly with any single company with respect to our entire range of merchandise, within each merchandise category we have competitors and competitive. We expect more business to move to the Internet. As this happens, we expectmay face competition to intensify because barriers to entry are minimal and competitors can launchfrom new sites at a relatively low cost.entrants. Some of our competitors have, andor our potential competitors may have greater financial and marketing resources. In addition, larger, well-established and well-financed entities may acquire, invest in or form joint ventures with our online competitors as the use of the Internet and other online services increases.competitors. Increased competition from these or other competitors could negatively impact our revenue. Our ability to growbusiness. Changing consumer preferences and general economic conditions may have an adverse effect on our customer base and generate sales depends largely upon the importance consumers place on environmental issues, promoting a sustainable economy, healthy lifestyles and personal development.business. Our business is targeted at a demographic group -- the cultural creatives --that assignsconsumers who assign high value to environmental consciousness, promoting a sustainable economy, healthy lifestyles, and personal development. The success of our business assumes that that we will be able to capture market share within this group. Our success also depends upon the willingness of consumers to purchase goods and services that promote the values we espouse. While we believe our business plan and assumptions are reasonable, we cannot assure that the demographic trends on which they are based will continue or that the current levels of environmental consciousness or concerns about promoting a sustainable economy, healthy lifestyles and personal development, will be sustained. Therenewable energy and the environment. A decrease of consumer interest in purchasing goods and services that promote the values we espouse would materially and adversely affect the growth of our customer base and sales revenues and, accordingly, our financial prospects. Further, consumer preferences are difficult to predict. Our future success depends in part on our ability to anticipate and respond to changes in consumer preferences and we may not respond in a timely or commercially appropriate manner to such changes. Failure to anticipate and respond to changing consumer preferences could lead to, among other things, lower sales of our products, increased merchandise returns and lower margins, which would have a material adverse effect on our business. We may face quarterly and seasonal fluctuations that could harm our business. Our revenue and results of operations have fluctuated and can be expected to continue to fluctuate on a quarterly basis as a result of a number of factors, including the timing of catalog offerings, recognition of costs or net sales contributed by new merchandise and catalog offerings, fluctuations in response rates, fluctuations in paper, production and postage costs and expenses, merchandise returns, adverse weather conditions that affect distribution or shipping, shifts in the timing of holidays and changes in our merchandise mix. In addition, our net sales and profits have historically been higher during the fourth quarter holiday season. We believe that this seasonality will continue in the future. If, for any reason, our sales were to fall below expectations during the fourth quarter holiday season, our financial condition and results of operations would be adversely affected. Some products and services we sell may put us at a competitive price disadvantage. Some environmentally friendly products are priced at a premium to products that have similar uses but are not environmentally friendly. Our sales growth assumes that consumers will sometimes be willing to pay higher prices in order to enhance the environment, promote a sustainable economy and 5 achieve healthy lifestyles and personal development or that, over time, we will be able to reduce prices through volume purchases from our suppliers. 10 If we are unable to sustain price levels of these products, or to increase sales volume to a level that would allow us to reduce our costs, our business will be adversely affected. If the protection of our Internetinternet domain names areis inadequate, our brand recognition could be impaired and we could lose customers. We currently hold various webinternet domain names relating to our brand, including www.gaiam.com. The acquisition and maintenance of domain names is regulated by governmental agencies and their designees. The regulation of domain names in the U.S. and in foreign countries is changing and is expected to continue to change in the future. As a result, we may not be able to acquire or maintain the domain names we want in all countries in which we seek to conduct business. Furthermore, we may be unable to prevent third parties from acquiring domain names whose similarity decreases the value of our trademarks and proprietary rights. Loss of our Internetinternet domain names could adversely affect our ability to develop brand recognition. Our success depends on the value of the Gaiam brand, and if the value of our brand were to diminish, our revenues, results of operations and prospects would be adversely affected. Because we are increasing our sales of proprietary products, our success increasingly depends on the Gaiam brand and its value in the LOHAS market. Building and maintaining recognition of the Gaiam brand is important to attracting and expanding our customer base. We may engage in future acquisitionscannot be certain that our marketing efforts or brands will attract new customers, retain existing customers or encourage repeat purchases. Acquisitions may harm our financial results, cause our stock price to decline, or dilute our shareholders' interest if we do not successfully execute them.interests. Acquisitions have been part of our growth. Living Artsgrowth and Inner Balance, acquired in 1998, accounted for approximately one-thirdmay continue to be part of our revenues forgrowth in the six months endedfuture. In June 30, 1999. Even though2000, Gaiam and Whole Foods Market, Inc., a publicly-traded company, merged their internet properties into gaiam.com, Inc. In January 2001, we acquired Real Goods Trading Corporation. We will opportunistically evaluate acquisition opportunities and they may be part of our strategy does not depend on making acquisitions, we expect to make them.growth in the future. These acquisitions may be of entire companies, controlling interests in companies or of minority interests in companies where we intend to invest as part of a strategic alliance. However, we may not succeed in identifying attractive acquisitions or attractive acquisition candidates may not be available at reasonable prices. We are also likely to face competition for attractive acquisition candidates, which may increase the expense of completing acquisitions. Making acquisitionsAcquisitions may harm our operating results or cause our stock price to decline because we may: -. issue equity or equity-related securities that dilute our current shareholders' percentage ownership or incur substantial debt or assume liabilities of an acquired business; -. experience reduced earnings or adverse tax consequences by failing to efficiently integrate the operations, assets and personnel of the acquired companies in a timely manner, being required to amortize a significant amount of intangible assets acquired in an acquisition, or otherwise; and -. divert management's attention from operating the business. Moreover, we may have difficulties integrating the operations, products and personnel of the companies we acquire. The presence of minority ownership interests in any acquired company, and our strategy of allowing our subsidiaries to retain some autonomy in their management and operation, could make integration more difficult. The success of future acquisitions is dependent on our ability to effectively integrate the acquired companies' operations and brands, including our ability to recognize potentially available marketing synergies and cost savings, some of which may involve operational changes. If we are not successful in integrating companies that we may acquire, our business could be materially and adversely affected. The loss of the services of our key personnel could disrupt our business. The services of our officers, Jirka Rysavy, Lynn Powers and Pavel Bouska, Mark Lipien and Linda West, are critical to our business. We do not carry any key-man life insurance. Our strategy of allowing the management teams of acquired companies to continue to exercise significant management responsibility for those companies makes it especially important that we retain key employees, particularly the e-commercesales and creative teams, of the companies we might acquire. Competition for qualified personnel is intense, particularly given the scarcity of qualified and experienced management in the commerce and the direct marketing industries.6 Government regulation and legal uncertainties could add additional costs to doing business on the Internet. 11 internet. E-commerce is new and rapidly changing. Federal and state regulation relating to the Internetinternet and e-commerce is evolving. Currently, there are few laws or regulations directly applicable to the Internetinternet or e-commerce on the Internet. Due to the increasing popularity of the Internet, it is possible that lawsinternet. Laws and regulations may be enacted with respect to the Internet,internet, covering issues such as user privacy, pricing, taxation, content, copyrights, distribution, antitrust and quality of products and services. Additionally, the rapid growth of e- commerce may trigger the development of tougher consumer protection laws. Our business could also be affected by regulations adopted in the future. For example, a number of different bills are under consideration by Congress and various state legislatures that would restrict disclosure of consumers' personal information. If legislation of this type were enacted, it would make it more difficult for us to obtain additional names for our distribution lists, and restrict our ability to send unsolicited electronic mail or printed catalogs. Bothcatalogs, both of which could slow the growth of our customer base. Because of our recent shift of emphasis to the Internet, we cannot be certain that our Internet business will succeed. Although our historical sales have been predominantly through catalogs and retailers, we are shifting our sales emphasis to the Internet. We intend to make the Internet our primary channel of distribution. The development of a website and other proprietary technology entails significant technical, financial and business risks. We have spent approximately $500,000 during 1999 in the development of our websites and may spend up to an additional $500,000 to introduce the website features we describe in this prospectus under "Business." We intend to continue to invest resources to enhance our websites and keep our systems up to date. In addition, the adoption of new Internet, networking or telecommunications technologies may require us to devote substantial resources to modify and adapt our services. The success of our business depends on continued growth of e-commerce. The emergence of the Internet and the growing popularity of e-commerce provides a new channel for direct access to consumers. Since the introduction of e- commerce to the Internet, the number of websites competing for customer attention has increased very rapidly. We expect future competition to intensify given the relative ease with which new websites can be developed. We believe that the primary competitive factors in e-commerce are brand recognition, reputation, site content, ease of use, price, fulfillment speed, customer support and reliability. Our success in e-commerce will depend heavily upon our ability to continue to provide a compelling and satisfying shopping experience. Other factors that will affect our success include our continued ability to attract and retain experienced marketing, technology, operations and management talent. The nature of the Internet as an electronic marketplace (which may, among other things, facilitate competitive entry and comparison shopping) may render it inherently more competitive than traditional retailing formats. Increased competitiveness among online retailers may result in reduced operating margins, loss of market share and a diminished brand franchise. 12 To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our online technology. The Internet and the e-commerce industry are subject to rapid technological change, frequent new product and service introductions embodying new technologies, and the emergence of new industry standards and practices that could render our existing Internet strategy obsolete. Our success will depend, in part, on our ability to license leading technologies useful in our business, enhance existing services, develop new services and technology that address the needs of our customers and our ability to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. If we cannot maintain and continuouslycontinually update our information systems, our business could suffer. Information systems are critical to our business. These systems assist in processing orders, managing inventory, purchasing and shipping merchandise on a timely basis, responding to customer service inquiries, and gathering and analyzing operating data by business segment, customer, and SKU (a specific identifier for each different product). As our business grows we will need to continually update these systems. Furthermore, if we acquire other companies, we will need to integrate the acquired companies' systems with ours, a process that could be time-consuming and costly. If our systems should require substantial updatingcannot accomodate our growth or fail, we could incur substantial expenses. Although we are a multi-channel company, the internet is an important sales channel for us. The development of a website and other proprietary technology entails significant technical, financial and business risks. We have spent approximately $5.5 million in the development of our websites to date to introduce several new website features. We intend to continue to invest resources to enhance our websites and keep our systems up to date. In addition, the adoption of new internet, networking or telecommunications technologies may require us to devote substantial resources to modify and adapt our services. Our success in e-commerce will depend upon our ability to continue to provide a compelling and satisfying shopping experience. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our online technology. A material security breach could cause us to lose sales, damage our reputation or result in liability to us. Our computer servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. We may need to expend significant additional capital and other resources to protect against a security breach or to alleviate problems caused by any breaches. Our relationships with our customers may be adversely affected if the security measures that we use to protect their personal information, such as credit card numbers, are ineffective. We currently rely on security and authentication technology that we license from third parties. We may not be able to prevent all security breaches. Our systems may fail or limit user traffic, which would cause us to lose sales. We maintain a single call center in Broomfield, Colorado. We are dependent on our ability to maintain our computer and telecommunications equipment in this center in effective working order and to protect against damage from fire, natural disaster, power loss, telecommunications failure or similar events. In addition, growth of our customer base may strain or exceed the capacity of our computer and telecommunications systems and lead to degradations in performance or systems failure. We have 7 experienced capacity constraints and failure of information systems in the past that have resulted in decreased levels of service delivery or interruptions in service to customers for limited periods of time. WhileAlthough we continually review and seek to upgrade our technical infrastructure and provide for system redundancies and backup power to limit the likelihood of systems overload or failure, substantial damage to our systems or a systems failure that causes interruptions for a number of days could adversely affect our business. Additionally, if we are unsuccessful in updating and expanding our infrastructure, including our call center, our ability to grow may be constrained. We may face legal liability for the content contained on our website or other content that is accessed from our website. We intend to keep increasing the amount of content on our website. We could face legal liability for defamation, negligence, copyright, patent or trademark infringement, personal injury or other claims based on the nature and content of 13 materials that we publish or distribute on our website. These types of claims have been brought, sometimes successfully, against on-line services in the past. We can be exposed to litigation for the content and services that are accessible from our website through links to other websites or through content and materials that may be posted by our users in chat rooms or bulletin boards. If we are held liable for damages for the content on our website, our business may suffer. Our insurance may not adequately protect us against these types of claims. We do not currently offer health-related information on our website, but we may do so in the future. This could increase our legal exposure. Further, our business is based on establishing www.Gaiam.comwww.gaiam.com as a trustworthy and dependable provider of information and services. Allegations of impropriety, even if unfounded, could therefore have a material adverse effect on our reputation and our business. Our suppliers may not be able to supply us with merchandise in a timely manner, which could cause us to lose sales and harm our business.sales. To successfully operate our business, we must receive timely delivery of merchandise from our vendors and suppliers.suppliers, many of which are small private companies. As we grow, some of these vendors may not have sufficient capital, resources, or personnel to increase their sales to us or to satisfy their commitments to us. Any significant delay in the delivery of products by vendors could result in a loss of sales, increased fulfillment expenses and damage to our customer service reputation. The legal rights of Living Arts' minority equity holders may adversely affect Gaiam. Gaiam owns 67% of Living Arts, and the previous owners continue to own the remaining 33%. Because Gaiam has certain fiduciary duties to the minority equity holders, Gaiam may not always be able to manage Living Arts in the manner that is most advantageous to Gaiam and its shareholders. In addition, we may have disputes with minority equity owners concerning management of the business or the governance of Living Arts. See "Legal Proceedings." We could also have similar issues arising in future acquisitions in which Gaiam acquires less than the entire equity interest in a company. The failure of third parties to provide an adequate level of service could decrease our revenues and increase our costs. Given our emphasis on customer service, the efficient and uninterrupted operation of order-processing and fulfillment functions is critical to our business. To maintain a high level of customer service, we rely heavily on a number of different outside service providers, such as printers, telecommunications companies and delivery companies. Any interruption in services from our principal outside service providers, including delays or disruptions resulting from labor disputes, power outages, human error, adverse weather conditions or natural disasters, could materially adversely affect our business. Relying on our centralized fulfillment center could expose us to losing revenue. Prompt and efficient fulfillment of our customers' orders is critical to our business. Our facility in Cincinnati, Ohio handles our fulfillment functions and some customer-service related operations, such as 8 returns processing. Approximately 90% of our orders are filled and shipped from the Cincinnati facility. The balance is shipped directly from suppliers. Because we rely on a centralized fulfillment center, our fulfillment functions could be severely impaired in the event of fire, extended adverse weather conditions, or natural disasters. SinceBecause we charge customers' credit cardsrecognize revenue only when we ship orders, interruption of our shipping would diminish our revenues. 14 Our costs could be increased by overstocks and merchandise returns, as well as by our strategy to offerof offering branded products. An important part of our strategy is to feature "branded"branded products. These products are sold under our brand names and are manufactured to our specifications. We expect our reliance on branded merchandise to increase. To be successful, we must periodically update and expand the product offerings for our catalogs and websites. The use of branded merchandise requires us to incur costs and risks relating to the design and purchase of products, including submitting orders earlier and making longer initial purchase commitments. In addition, the use of branded merchandise limits our ability to return unsold products to vendors, which can result in higher markdowns in order to sell excess inventory. Our commitment to customer service typically results in more emphasis being placed on keeping a high level of merchandise in stock so we can fill orders immediately. Consequently, we run the risk of having excess inventory, which may also contribute to higher markdowns. Our failure to successfully execute a branded merchandise strategy or to achieve anticipated profit margins on these goods, or a higher than anticipated level of overstocks, may materially adversely affect our revenues. We offer our customers liberal merchandise return policies. Our financial statements include a reserve for anticipated merchandise returns, which is based on historical return rates. It is possible that actual returns may increase as a result of factors such as the introduction of new merchandise, new product offerings, changes in merchandise mix or other factors. Any significant increase in our merchandise returns will correspondingly reduce our revenues. Our sales could be negatively affected if we are required to charge additional taxes on purchases. We generally collect sales taxes on our internet and catalog sales only on sales to residents of the state of Colorado and where we have other locations,locations. We currently collect sales taxes on internet and catalog sales in Colorado, California and Ohio. Federal laws currently limit the imposition of state and local taxes on Internet-relatedinternet-related sales. However, there is a possibility that Congress may not renew this legislation in 2001. If Congress chooses not to renew this legislation, state and local governments would be free to impose taxes on electronically purchased goods, which could adversely affect us. Due to the high level of uncertainty regarding the imposition of taxes on electronic commerce, a number of states, as well as a Congressional advisory commission, are reviewing appropriate tax treatment for companies engaged in e-commerce. Such proposals, if adopted, could substantially impair the growth of e-commerce and could adversely affect our opportunity to derive financial benefit from these activities. Many states have attempted to require that out-of-state direct marketers collect sales and use taxes on the sale of merchandise shipped to its residents. If Congress enacts legislation permitting states to impose sales or use tax obligations on out-of-state direct marketing companies, or if other changes require us to collect additional sales or use taxes, these obligations would make it more expensive to purchase our products and would increase our administrative costs. Audits by state tax authorities could give rise to a retroactive assessment for tax liabilities if it was determined we had sufficient activities in that state. State sales tax laws typically provide for a lengthy statute of limitations, and if we were retroactively assessed for taxes, the assessment could adversely affect our business. 159 Postage and shipping costs may increase and therefore increase our expenses. We ship our products, catalogs, and lifestyle publications to consumers and the cost of shipping is a material expenditure. Postage and shipping prices increase periodically and can be expected to increase in the future. Any inability to secure suitable or commercially favorable prices or other terms for the delivery of our merchandise and catalogs could have a material adverse effect on our financial condition and results of operations. Our founder and Chief Executive Officerchief executive officer Jirka Rysavy will controlcontrols Gaiam. After this offering, Mr. Rysavy will holdholds 100% of theGaiam's 5,400,000 outstanding classshares of Class B common stock. The shares of classClass B common stock are convertible into classshares of Class A sharescommon stock at any time. Each share of classClass B common stock has ten votes per share, and the classeach share of Class A shares havecommon stock has one vote per share. Assumingshare, although pursuant to a voting agreement between Gaiam and Mr. Rysavy's plannedRysavy, the Class B common stock is limited to 49% of the total votes and all shares over this percentage are voted proportionately with the Class A common stock. Mr. Rysavy also owns 2,686,200 shares of Class A common stock and options to purchase 400,000 shares of an additional 100,000Class A common stock (of which options to purchase 64,000 shares of common stock are exercisable within 60 days). After giving effect to the issuance of Class A common stock in thisthe offering, heMr. Rysavy will beneficially own approximately 77%59.8% of the outstanding shares of Gaiam common stock, assuming Mr. Rysavy's classClass B common stock was converted into shares.Class A common stock. In addition, he will also have approximately 96.7%65.8% of the total votes. As a result, Mr. Rysavy will be able to exert substantial influence over Gaiam and to control matters requiring approval by the shareholders of Gaiam, including the election of directors, increasing our authorized capital stock, our dissolution, the merger or sale of our assets and preventing anythe general affairs of Gaiam. This control by Mr. Rysavy may discourage transactions involving a change inof control of Gaiam. WeThe price of our class A common stock may be adversely affected ifsubject to wide fluctuations and may trade below the software, computer technology and other systems we use are not year 2000 compliant. If our important information management systems or those of our vendors are not year 2000 compliant, our business could suffer. For example, we could have difficulties in operating our website, taking product orders, making product deliveries or conducting other fundamental parts of our business. We have been assessing and are continuing to assess the year 2000 readiness of the software, computer technology and other services that we use. We do not, however, anticipate that we will devote extensive efforts to assess whether our vendors or the Internet are year 2000 compliant. The cost of developing and implementing any year 2000 related measures, if necessary, could be material. We also depend on the year 2000 compliance of the computer systems and financial services used by consumers. A significant disruption in the ability of consumers to access the Internet or portions of it or to use their credit cards would have a material adverse effect on demand for our products and services and would have a material adverse effect on us. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000." 16 Fluctuations in our quarterly operating results may negatively affect our stockoffering price. Prior to this offering, you could not buy or sell our shares publicly. The market price of our shares after the offering may vary from the initial public offering price and could be subject to wide fluctuations in response to factors such as the future issuance of shares as well as the following some of whichfactors that are beyond our control: --- quarterly variations in our operating results; --- operating results that vary from the expectations of securities analysts and investors; --- changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; --- announcements by third parties of significant claims or proceedings against us; - future sales of shares;-- strategic moves by us or our competitors, such as acquisitions or restructurings; and --- stock market price and volume fluctuationsfluctuations. Shares eligible for public sale after this offering could adversely affect our stock price. Sales of a substantial number of shares in the public market following this offering, or the perception that sales could occur, could adversely affect the market price for our shares and impair our ability to raise equity capital in the future. Immediately after this offering 3,496,4298,163,137 shares of class A common stock and 7,035,0005,400,000 shares of class B common stock (which are immediately convertible into 5,400,000 shares of class A common stock) will be outstanding. Of this number, the 1,860,000approximately 4,500,000 shares sold in this offering will be freely tradeable, and anapproximately 3,700,000 additional remaining 1,145,000 shares of class A common stock and all shares of class 10 B common stock will beare eligible for sales under Rule 144 of the Securities Act after 180 days.Act. Please see "Shares Eligible for Future Sale." FORWARD LOOKING STATEMENTS This prospectus contains forward-looking statements that involve riskrisks and uncertainties. These statements refer to our future plans, objectives, expectations and intentions. We use words such as "anticipates," "believes," "plans," "estimates," "expects," "future," "intends," "strive" and similar expressions to identify forward-looking statements. These forward-looking statements involve risks and uncertainties. Gaiam's actual results could differ materially from those anticipated in these forward-looking statements, as a result of certain factors, as more fully described in "Risk Factors" and elsewhere in this prospectus. We caution you that no forward-looking statement is a guarantee of future performance, and you should not place undue reliance on these forward- lookingforward-looking statements which reflect our management's view only as of the date of this prospectus. We undertake no obligation to update any forward- looking information. USE OF PROCEEDS The net proceeds to Gaiam from the sale of the shares in this offering are estimated to be $7.5approximately $28.5 million, giving effect to the sale by Gaiam of 2,200,000 shares at an assumed public offering price of $14.17 per share and after deducting the estimated underwriting discount, customer discounts and offering expenses payable by Gaiam. 17 The principal purposes of this offering are to increase our working capital, to create a public market for our common stock, to facilitate our future access to the public capital markets, and to increase our visibility in the retail marketplace. We intend to pay offuse approximately $750,000$10 million of our approximately $1.7 million in bank debt with the net proceeds of this offering. Inthe offering to reduce the amount outstanding under our Wells Fargo Bank West N. A. revolving line of credit and to repay debt we assumed in connection with this offering, we are extending to eachthe Real Goods Trading Corporation merger. Our revolving line of our eight debenture holders the option to purchase shares for the outstanding principal amount of the debentures, excludingcredit extends through June 30, 2003 and bears interest at the offering pricelower of $5.00 per share.prime rate less 0.5% or LIBOR plus 2.75%. We anticipate a total of 395,000 shares will be soldplan to these debenture holders in exchange for $1.975 million in debentures. To the extent any holder elects to receive cash, this will represent a use of the proceeds of this offering. We have no specific plans for the remaining proceeds. They will be usedproceeds to fund expansion of our media channel, launch new products and for working capital and general corporate purposes and working capital. This allocation is only an estimate, and we may adjust it as necessary to address our operational needs in the future.purposes. We may also use a portion of the net proceeds to acquire the minority interest in one of our subsidiaries, Healing Arts Publishing, LLC, or to make other acquisitions or strategic minority interest investments. However, we currently have no commitments or agreements and are not involved in negotiations with respect to acquisitions. Pending these uses, we will invest the net proceeds of this offering in short-term, interest-bearing, investment- gradeinvestment-grade securities. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations." 11 PRICE RANGE OF COMMON STOCK Our shares have been quoted on the Nasdaq National Market under the symbol "GAIA" since October 29, 1999. Prior to that time, there was no public market for the shares. The following table sets forth, for the period indicated, the high and low bid prices per share of the shares as reported on the Nasdaq National Market: High Low ------ ------ 1999 - ---- Fourth Quarter (commencing October 29, 1999).......... $18.25 $ 5.38 2000 - ---- First Quarter......................................... $19.00 $13.92 Second Quarter........................................ $24.69 $14.00 Third Quarter......................................... $19.00 $15.00 Fourth Quarter........................................ $18.25 $14.63 2001 - ---- First Quarter......................................... $15.75 $ 9.38 Second Quarter (through June 15, 2001) ............... $16.00 $ 9.40 On June 15, 2001, the reported last sale price of the common stock on the Nasdaq National Market was $14.17. As of May 31, 2001, there were approximately 9,100 stockholders of record of Gaiam's class A common stock and one stockholder of record of Gaiam's class B common stock. DIVIDEND POLICY Gaiam has never declared or paid any cash dividends on its capital stock. GaiamWe currently intendsintend to retain earnings, if any, to support itsour growth strategy and doesdo not anticipate paying cash dividends in the foreseeable future. In addition, our bank credit agreement prohibits payment of any dividends to our shareholders. 12 CAPITALIZATION The following table sets forth the capitalization of Gaiam as of June 30, 1999,March 31, 2001 on a pro formaan actual basis and as adjusted to reflect: .reflect the sale by Gaiam of 1,400,0002,200,000 shares in this offering at an initialassumed public offering price of $5.00$14.17 per share, .less the sale by Gaiamunderwriters' discounts and commissions and estimated offering expenses, and the application of 600,000 shares in this offering at the price to customers (for up to 200 shares) of $4.50 per share, and . deducting the estimated underwriting discount and offering expenses payable by Gaiam.net proceeds therefrom. See "Use of Proceeds." You should read this information together with our consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus.
June 30, 1999 ACTUAL PRO FORMA --------- ------------ Long-term debt and capital leases, less
18 March 31, 2001 (Unaudited) ---------------------- Pro Forma As Actual Adjusted ------ -------- Long-term debt and capital leases, less current portion................................portion (1).............................................. $ 1,6646,780 $ 914/(2)/261 Stockholders' equity: Class A Common Stock, $0.0001 par value; 92,965,000150,000,000 shares authorized and 1,496,429/(1)/5,958,505(2) shares issued and outstanding (actual); 3,496,429/(1)/8,158,505 (2) shares outstanding (pro forma)................................................................. 1 1 Class B Common Stock, $.0001$0.0001 par value; 7,035,00050,000,000 shares authorized and 7,035,0005,400,000 shares issued and outstanding (actual and pro forma)............. 1 1................................................. - - Additional paid-in capital..................... 1,827 9,327 Accumulated other comprehensive income......... 910 910capital.............................. 15,486 43,854 Deferred compensation................................... (405) (405) Retained earnings.............................. 2,477 2,477 --------- ----------earnings....................................... 7,086 7,086 -------- -------- Total stockholders' equity..................... 5,216 12,716 --------- ----------equity............................ $ 22,168 $ 50,536 -------- -------- Total capitalization...........................capitalization.................................. $ 6,88028,948 $ 13,630 ========= ==========50,797 ======== ========
- ----------------------___________ (1) Excludes an aggregate of approximately 675,000 shares issuable pursuant to options outstanding as of June 30, 1999. (2) Gives effect to the repayment of $750,000$6.5 million of long-term debt from the proceeds of this offering, which was outstanding as of March 31, 2001. Gaiam has incurred approximately $3.5 million of additional long-term debt as of May 31, 2001, which shall also be repaid with the proceeds from this offering. 19 DILUTION The net tangible book value(2) Excludes an aggregate of Gaiam stock1,494,318 shares issuable pursuant to options and warrants outstanding as of June 30, 1999 was $0.21 per share. Net tangible book value represents the amount of Gaiam's total tangible assets less total liabilities. Pro forma net tangible book value per share is determined by dividing Gaiam's pro forma net tangible book value by the number of shares outstanding after this offering. Giving effect to the sale of 1,400,000 shares in the offering at a price of $5.00 per share and 600,000 shares in the offering at $4.50 and after deducting the estimated underwriting discount and offering expenses payable by Gaiam, pro forma net tangible book value per share would have been $0.88 per share. This represents an immediate increase in pro forma net tangible book value of $0.67 per share to existing shareholders and an immediate dilution of $4.12 per share to new investors purchasing shares in this offering. The following table illustrates the per share dilution: Initial public offering price per share................................. $ 5.00 Net tangible book value per common share before this offering......... $ 0.21 Increase per common share attributable to new investors............... 0.67 ------ Pro forma net tangible book value per common share after this offering.. 0.88 ------ Dilution per common share to new investors.............................. $ 4.12
The following table summarizes, on a pro forma basis at June 30, 1999 as described above (giving effect to the issuance of the shares to be issued in this offering but not the exercise of any outstanding stock options), the total consideration paid and the average price per share of common stock paid by existing shareholders (including both holders of class A shares and class B common stock) and new investors in this offering. The price paid per share paid by new investors is the initial public offering price of $5.00 per share (before deducting the estimated underwriting discount, customer discount and offering expenses):
Shares Purchased Total Consideration Average Price Per Number Percent Amount Percent Share ---------- ------- ------------ ------- ------- Existing shareholders New investors 8,531,429 81.0% $ 1,828,455 15.5% $ 0.21 2,000,000 19.0 10,000,000 84.5 $ 5.00 ---------- ----- ------------ ----- TOTAL 10,531,429 100.0% $ 11,828,034 100.0% ========== ===== ============ =====
This discussion and table assumes no exercise of outstanding stock options and warrant, and no issuance of shares reserved for future issuance under Gaiam's option plans. As of August 30, 1999, there were options outstanding to purchase a total of approximately 675,000 shares at a price of $4.375 per share, and a warrant to purchase 24,000 shares at a price of $0.50 per share. No options or warrants are currently exercisable. To the extent that any of these options are exercised, there will be further dilution to new investors. See "Capitalization." 20May 31, 2001. 13 SELECTED CONSOLIDATED FINANCIAL DATA The selected statement of operations for the years ended December 31, 1996, 19971998, 1999 and 19982000 and balance sheet data as of December 31, 1999 and 2000 set forth below are derived from Gaiam's audited consolidated financial statements. The audited consolidated financial statements include statements of operations for the years ended December 31, 1998, 1999 and 2000, and balance sheets as of December 31, 1999 and 2000. These financial statements appear elsewhere in this prospectus. The selected statement of operations for the years ended December 31, 1996 and 1997 and balance sheet data as of December 31, 1996, 1997 and 1998 set forth below are derived from Gaiam's audited consolidated financial statements, which appear elsewhere in this prospectus. The selected statement of operations for the year ended December 31, 1995 set forth below are derived from Gaiam's audited consolidated financial statements, and the selected statement of operations for the year ended December 31, 1994 are derived from Gaiam's unaudited consolidated financial statements. The selected balance sheet data as of June 30, 1999March 31, 2001 and selected statement of operations for the six-monththree-month periods ended June 30, 1998March 31, 2000 and 19992001 set forth below are derived from Gaiam's unaudited consolidated financial statements as of June 30, 1999March 31, 2001 and for the six-monththree-month periods ended June 30, 1998March 31, 2000 and 1999,2001, which appear elsewhere in this prospectus. In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting only of normal recurring accruals and adjustments, necessary for a fair presentation of the financial position and results of operations for these unaudited periods. The historical operating results are not necessarily indicative of the results to be expected for any other period. TheYou should read the following selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Gaiam's consolidated financial statements and related notes, included elsewhere in this prospectus. 2114 SELECTED FINANCIAL DATA (Amounts in thousands, except per share data)
SixThree Months Year Ended December 31, Ended June 30, ----------------------------------------------------------- ------------------------ (unaudited) Statement of Operations Data: 1994 1995March 31, --------------------------------------------------------------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- ------- -------- Net revenues.............. $229 $6,696 $14,801 $19,898 $30,739 $10,475 $17,563 Costs of goods sold....... 179 2,943 6,762 8,462 13,174 4,414 7,075 ------- ------- ------- ------- ------- ------- ------- Gross profit.............. 50 3,753 8,039 11,436 17,565 $6,061 10,488 Expenses: Selling and operating 5 3,281 9,253 10,427 14,186 5,250 8,877 Corporate, general and administration.......... 15 876 1,218 1,575 2,394 635 1,796 ------- ------- ------- ------- ------- ------- ------- Total expenses 20 4,157 10,471 12,002 16,580 5,885 10,673 ------- ------- ------- ------- ------- ------- ------- Operating income (loss) 30 (404) (2,432) (566) 985 175 (185) Other income (expense)(1) (2) 1,029 2,984 1,583 388 (114) 202 ------- ------- ------- ------- ------- ------- ------- Income before income taxes and minority interest .......................... 28 625 552 1,017 1,373 61 17 Income taxes.............. 6 238 212 363 251 22 6 Minority interest......... -- -- -- 262 (167) ------- ------- ------- ------- ------- ------- ------- Net income................ $22 $387 $340 $654 $860 $39 $178 Net income per share - basic..................... $0.00 $0.05 $0.04 $0.08 $0.11 $0.00 $0.02 diluted................... $0.00 $0.05 $0.04 $0.08 $0.11 $0.00 $0.02 - - Shares outstanding - basic..................... 8,040 8,040 8,040 8,040 8,073 8,040 8,318 - - diluted 8,040 8,040 8,040 8,040 8,119 8,040 8,565
December 31, June 30, ----------- -------- Balance Sheet Data 1994 1995 1996 1997 1998 1998 19992000 2000 2001 ------- ------- ------- ------- ------- ------- ------- Cash $16 $419 $380 $1,612 $1,410 $653 $856(Unaudited) Statement of Operations Data: Net revenues................. $14,801 $19,898 $30,739 $45,725 $60,588 $12,558 $17,672 Costs of goods sold.......... 6,762 8,462 13,174 18,176 23,793 4,922 6,848 ------- ------- ------- ------- ------- ------- ------- Gross profit................. 8,039 11,436 17,565 27,549 36,795 7,636 10,824 Expenses: Selling and operating...... 9,253 10,427 14,186 22,338 27,310 6,064 8,539 Corporate, general and administration............. 1,218 1,575 2,394 3,087 5,057 1,116 1,550 ------- ------- ------- ------- ------- ------- ------- Total expenses............. 10,471 12,002 16,580 25,425 32,367 7,180 10,089 ------- ------- ------- ------- ------- ------- ------- Operating income (loss)..................... (2,432) (566) 985 2,124 4,428 456 735 Other income (expense)/(1)/............. 2,984 1,583 388 606 (283) (123) 68 ------- ------- ------- ------- ------- ------- ------- Income before income taxes and minority interest................... 552 1,017 1,373 2,730 4,145 333 803 Income taxes................. (212) (363) (251) (1,063) (1,556) (125) (301) Minority interest............ -- -- (262) 51 60 (5) (83) ------- ------- ------- ------- ------- ------- ------- Net income................... $ 340 $ 654 $ 860 $ 1,718 $ 2,649 $ 203 $ 419 ======= ======= ======= ======= ======= ======= ======= Net income per share Basic...................... $ 0.04 $ 0.08 $ 0.11 $ 0.20 $ 0.24 $ 0.02 $ 0.04 ======= ======= ======= ======= ======= ======= ======= Diluted.................... $ 0.04 $ 0.08 $ 0.11 $ 0.19 $ 0.23 $ 0.02 $ 0.04 ======= ======= ======= ======= ======= ======= ======= Shares outstanding Basic...................... 8,040 8,040 8,073 8,785 10,858 10,846 11,206 Diluted.................... 8,040 8,040 8,119 9,119 11,525 11,505 11,563 December 31, March 31, --------------------------------------------------------------------- 1996 1997 1998 1999 2000 2000 2001 ---- ---- ---- ---- ---- ---- ---- (Unaudited) Balance Sheet Data: Cash......................... $ 380 $ 1,612 $ 1,410 $ 3,877 $ 8,579 $ 2,063 $ 6,374 Securities available-for-sale(2) 71available-for-sale /(2)/........................ 56 384,828 1,634 38 1,505-- -- -- -- Working capital (deficiency) 22 192............... (1,838) 4365,226 (81) (60) 2,5345,911 15,269 2,290 11,312 Total assets 81 2,476assets................. 6,256 5,98510,774 16,677 5,479 15,83927,260 48,477 29,445 59,118 Long-term debt (net of current maturities) - -........ 89 42 299 17 1,6642,109 5,770 2,083 6,780 Stockholders' equity equity/(2) 59 580/.... 920 1,574 3,661(1) 1,613 5,2164,736 3,661 14,951 18,111 15,154 22,168
______________________________________ (1)/(1)/ Other income in 1995, 1996, 1997, 1998 and 19981999 primarily reflects income from sale of securities available-for-sale. (2)/(2)/ Securities valued at cost in 1994, 1995, 1996 and 1997 and at fair market value in 1996, 1997 and 1998. See Note 6 of notes to the consolidated financial statements. 2215 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of Gaiam's financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus. Overview Gaiam producesis a lifestyle company providing a broad selection of information, products and sells goods, services and information marketed to customers who value the environment, a sustainable economy, healthy lifestylesnatural health, personal development and personal development.renewable energy. Gaiam was incorporated in Boulder, Colorado in 1988 as a local distributor of earth-friendly products.1988. In 1995, Gaiam began to expandexpanding nationally and makemaking acquisitions. In 1996, Gaiam made a large investment in infrastructure and operating systems to support its rapid growth. In 1998, a team of key executives joined Gaiam to help facilitate future growth. From 1996 to 1998,2000, our revenues increased from $14.8 million to $30.7 million, representing a compound annual growth rate of approximately 44%, and our number of unique individual customers increased from 300,000 to 685,000 over this period.$60.6 million. Gaiam's business model is evolving as evidenced by the increase in the percentage of our revenues attributable to our businessbusiness-to-business segment and the launch of our internet channel. During 1998, business-to-business revenues accounted for approximately 13% of our revenues, while in 2000 this segment's revenues increased to business segment from 13% in 1998 to 21% in 1999.approximately 28% of total revenue. In addition, Gaiam's gross margin continues to increase because we are developing more private brandproprietary merchandise, on which we have better margins, and negotiating better pricing from our vendersvendors due to volume discounts. However,In June 2000, Whole Foods Market, Inc. and Gaiam merged their internet properties into Gaiam.com, Inc. Gaiam owns 50.1% of Gaiam.com, Whole Foods Market owns 35% and the competitive search engines available onremainder is owned by various venture capital funds. Gaiam.com is the Internet may force retail price reductions,exclusive e-commerce site for both Gaiam and thus affect our gross margin. During 1998,Whole Foods Market. Whole Foods Market and Gaiam completed two acquisitions. On September 14, 1998, we obtained 67% of Healing Arts Publishing LLC, which doeshave also entered into a 10 year joint marketing agreement to promote each other's business as "Living Arts," for approximately $2.5 millionand share customer data. The companies are presenting Gaiam's lifestyle products in cash. On October 1, 1998,a store-within-a- store concept in Whole Foods Market's larger stores. In January 2001, we acquired 100%Real Goods Trading Corporation in a merger. In the merger, each shareholder of Inner Balance, Inc.Real Goods received one Class A share for each 10 shares of Real Goods held. We have already consolidated a debenture with a principal amountmajority of approximately $530,000. Living Arts producesReal Goods' operations into our infrastructure, significantly reducing operating expenses. We have closed Real Goods' Santa Rosa headquarters, Ukiah distribution center and sells yoga and other mind-body- spirit informational videos and products, while InnerBalance is a direct marketer of alternative health products and solutions. Acquisitions accounted for approximately one-thirdcall center. We have also improved the gross profit margin through the introduction of our revenues duringproprietary products, through our purchasing power and by streamlining the first two quarters of 1999. We incurred expensesReal Goods product offering. Also in the first six monthsquarter of 1999, particularly in2001, we acquired the second quarter, to integrate these acquisitions, including relocationSelfcare.com and Gaia.com URLs, as well as selected inventory of Living Arts' warehousing to our Ohio distribution center, customer service functions to Colorado, and conversionMedical SelfCare from the assignee for the benefit of direct marketing operating system to Gaiam's operating system. We do not anticipate further material integration expenses. 23its creditors. 16 Results Ofof Operations The following table sets forth certain financial data as a percentage of revenues for the periods indicated.
SixThree Months Ended March Year Ended December 31, Ended June 30, ----------------------- -------------- 1994 199531, ------------------------------------ ------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- ------- -------2000 2000 2001 ---- ---- ---- ---- ---- ---- ---- Net revenuesrevenues........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Costs of goods sold 78.2 44.0sold.................... 45.7 42.5 42.9 42.1 40.3 ------- ------- ------- ------- ------- ------- -------39.8 39.3 39.2 38.7 ----- ----- ----- ----- ----- ----- ----- Gross profit 21.8 56.0profit........................... 54.3 57.5 57.1 57.9 59.760.2 60.7 60.8 61.3 Expenses: Selling and operating 2.2 49.0operating................ 62.5 52.4 46.1 50.1 50.548.8 45.1 48.3 48.3 Corporate, general and administration 6.5 13.1administrative...................... 8.2 7.9 7.8 6.1 10.3 ------- ------- ------- ------- ------- ------- -------6.7 8.3 8.9 8.8 ----- ----- ----- ----- ----- ----- ----- Total expenses 8.7 62.1expenses..................... 70.7 60.3 53.9 56.2 60.8 ------- ------- ------- ------- ------- ------- -------55.5 53.4 57.2 57.1 ----- ----- ----- ----- ----- ----- ----- Income (loss) from operations 13.1 (6.1)operations............................ (16.4) (2.8) 3.2 1.8 (1.1)4.7 7.3 3.6 4.2 Other income (expense), net (0.9) 15.4net............ 20.1 8.0 1.3 (1.1) 1.2 ------- ------- ------- ------- ------- ------- -------1.3 (0.4) (1.0) (0.3) ----- ----- ----- ----- ----- ----- ----- Income before income taxes 12.2 9.3and minority interest..................... 3.7 5.2 4.5 0.7 1.1 and minority interest6.0 6.9 2.6 3.6 1.4 1.8 0.8 0.3 0.04.5 Provision for income taxestaxes............. (1.4) (1.8) (0.8) (2.3) (2.6) (1.0) (1.7) Minority interest in net income of consolidated subsidiary, net of taxtax................ 0.0 0.0 (0.9) 0.1 0.1 0.0 0.0 0.9 0.0 (1.0) ------- ------- ------- ------- ------- ------- -------(0.5) ----- ----- ----- ----- ----- ----- ----- Net income 9.6% 5.7%income......................... 2.3% 3.4% 2.8% 0.4% 1.0%3.8% 4.4% 1.6% 2.4% ===== ===== ===== ===== ===== ===== =====
SixThree months ended June 30, 1999March 31, 2001 compared to sixthree months ended June 30, 1998 - -------------------------------------------------------------------------March 31, 2000 Revenues increased 67.7%40.7% to $17.7 million for the three months ended March 31, 2001 from $10.5$12.6 million induring the first sixthree months of 1998 to $17.6 million inended March 31, 2000. Gaiam's internal growth rate was 21%, fueled primarily by the first six months of 1999. This increase was primarily attributable to the acquisitions of InnerBalance and Living Arts, and revenues generated by increased purchases by current customers and growth in our customer base.sales of Gaiam's proprietary products. Gross profit, which consists of revenues less cost of sales (primarily merchandise acquisition costs and in-bound freight) increased 73.1%41.7% to $10.8 million for the first quarter of 2001 from $7.6 million during the same period in 2000. As a percentage of revenue, gross profit increased to 61.3% in the first quarter of 2001 from 60.8% in the first quarter of 2000. This increase in gross profit percentage was primarily the result of Gaiam's continuing efforts to increase the number of proprietary products offered, on which Gaiam has better margins than other products. Selling and operating expenses, which consist primarily of sales and marketing costs, commission and fulfillment expenses, increased 40.8%, consistent with the revenue increase of 40.7%, to $8.5 million for the three months ended March 31, 2001 from $6.1 million for the same period in 2000. As a percentage 17 of revenues, selling and operating expenses were 48.3% for the comparable periods in both 2001 and 2000. Corporate, general and administrative expenses increased to $1.6 million during the first quarter of 2001, from $1.1 million during 2000, primarily as a result of Gaiam's growth. As a percentage of revenues, general and administrative expenses decreased to 8.8% in the first sixquarter of 2001 from 8.9% for the same period in 2000. Operating income, as a result of the factors described above, increased 61.1% to $735,365 for the three months ended March 31, 2001, from $456,359 for the comparable period in 2000. Gaiam recorded $67,698 in other income for the three months ended March 31, 2001 compared to $122,945 in other expense for the three month ended March 31, 2000. Minority interest in net income of 1998consolidated subsidiaries was $82,645 during the first quarter of 2001, compared to $10.5$4,992 during the first quarter of 2000. Income tax provision increased to $301,390 for the three months ended March 31, 2001 from $125,130 for the comparable period in 2000. The effective tax rate on pre-tax income for both periods was 37.5%. Net income, as a result of the factors described above, increased 106.1% to $419,028 for the three months ended March 31, 2001, from $203,292 for the three months ended March 31, 2000. Year ended December 31, 2000 compared to year ended December 31, 1999: Revenues increased 32.5% to $60.6 million in 2000 from $45.7 million in 1999. Gaiam's internal growth rate was 24%, fueled primarily by sales to retail chains and by our internet business. Business-to-business revenues grew 50.3% to $16.8 million in 2000 from $11.2 million in 1999. Gross profit increased 33.6% to $36.8 million in 2000 from $27.5 million during 1999. As a percentage of revenue, gross profit increased to 60.7% in 2000 from 60.2% in 1999. This was primarily attributable to the first six monthsgrowth of our proprietary product offerings, on which we have better margins, which constituted 37% of sales in 2000, up from 24% in 1999. Selling and operating expenses increased 22.3%, which is less than the revenue increase of 32.5%, to $27.3 million in 2000 from $22.3 million in 1999. As a percentage of revenues, selling and operating expenses decreased to 45.1% in 2000 from 48.8% in 1999. Corporate, general and administrative expenses increased to $5.1 million for 2000 from $3.1 million in 1999. As a percentage of revenues, general and administrative expenses increased to 8.3% in 2000 from 6.7% in 1999, primarily as a result of an increase in depreciation expense and the expenses associated with being a public company. Operating income, as a result of the factors described above, increased 108.4% to $4.4 million in 2000 from $2.1 million in 1999. Gaiam recorded $73,947 in other expense during 2000, compared to other income of $971,159 in 1999. During 1999, Gaiam recognized gains on the sales of marketable securities held by Gaiam of $2.5 million. Net interest expense declined to $209,167 in 2000 from $365,294 in 1999, primarily as a result of interest income generated in the third and fourth quarters of 2000. 18 Minority interest net income was $59,706 in 2000 and $50,858 during 1999. Income tax provision increased to $1.6 million in 2000, an effective tax rate of 37.5% on pre-tax income, from $1.0 million in 1999. Net income, as a result of the factors described above, increased 54.2% to $2.6 million in 2000 from $1.7 million during 1999. Year ended December 31, 1999 compared to year ended December 31, 1998: Revenues increased 48.8% to $45.7 million in 1999 from $30.7 million in 1998. This revenue growth was primarily attributable to acquisitions. Gaiam's internal growth rate was 18% for fiscal 1999. Business-to-business revenues grew 49.4% to $11.2 million in 1999 compared to $7.5 million in 1998. The commencement of internet sales in September 1999 resulted in $2.1 million of revenues, with $2.0 million recognized during the fourth quarter. Gross profit increased 56.8% to $27.5 million in 1999 from $17.6 million in 1998. As a percentage of revenues, gross profit increased to 60.2% in 1999 from 57.9% to 59.7%.57.1% in 1998. This was primarily attributable to increases in sales of private brandedproprietary products, on which we haveGaiam has better margins than other products, and continued better pricing from vendors due to increased volume. Selling and operating expenses which consist primarily of sales and marketing costs, commissions, and fulfillment expenses increased 69.1% from $5.257.5% to $22.3 million in the first six months of 19981999 compared to $8.9$14.2 million in the first six months of 1999 primarily due to increased revenues.1998. As a percentage of revenues, selling and operating expenses increased to 48.8% in 1999 from 50.1% to 50.5%. This percentage increase was primarily due to additional costs associated with46.1% in 1998, as a result of the relocation of Living Arts' customer service function to Colorado,increased emphasis on revenue growth, particularly in the transfer of Living Arts' warehousing to our distribution center in Ohio,business-to-business and internet sectors, and the conversionsourcing, development and branding of Living Arts operating system to Gaiam's direct marketing operating system. 24 our proprietary products. Corporate, general and administrative expenses increased 182.5% from $635,723 in the first six months of 1998 to $1.8$3.1 million in the first six months of 1999.1999 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 in 1999 from 6.1% to 10.3%, primarily attributable to expenses associated with the acquisition of Living Arts and InnerBalance [_].$984,843 in 1998. Other income, comprised primarily of gains on sales of marketable securities and interest expense, increased to $605,865 in 1999 from a net expense of $113,938$388,491 in 1998 to $201,762 of net income in 1999.1998. This change wasis primarily due to gains onan increase in the salenumber of marketable securities sold during the first six months of 1999, whichand was partially offset by higher interest expense due to borrowings used to fund acquisitions. Minority interestand other extraordinary expenses associated with our initial public offering, the acquisition of $166,822 for the first six months of 1999 was added to our consolidated financial results to reflect the minority interest in Living Art's lossArts, and expenses associated with moving our warehousing and distribution center. Minority interest expense decreased to a negative $50,858 for the six months ended June 30, 1999. This1999 compared to $261,598 in 1998. The majority of this amount represents our former minority partners'partner's one-third interest in the Living Arts' loss,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.period September 14, 1998 through December 31, 1998. Income tax provision represented 36.7% of our pre-tax net incomegrew to $1.0 million in the first six months of 1998,1999, as compared to an income tax provision of 37.2% of pre-tax income in the first six months of 1999. Net income, as a result of the factors described above, increased from $38,753, or 0.4% of revenues, in the first six months of 1998 to $177,630, or 1.0% of revenues, in the first six months of 1999. Year ended December 31, 1998 compared to year ended December 31, 1997 - --------------------------------------------------------------------- Revenues increased 54.5% from $19.9 million in 1997 to $30.7 million in 1998. This increase was primarily attributable to the acquisitions of Living Arts and InnerBalance. Additionally, revenues generated by our Harmony brand increased as a result of additional purchases made by Harmony's current customers and growth in its customer base. Gross profit increased 53.6% from $11.4 million in 1997 to $17.6 million in 1998. As a percentage of revenues, gross profit decreased from 57.5% to 57.1%. This reflects a change in sales mix due to the acquisition of Living Arts, which had generally lower margin products than that of our other operations. Selling and operating expenses increased 36.0% from $10.4 million in 1997 to $14.2 million in 1998, due to increases in revenues. As a percentage of revenues, selling and operating decreased from 52.4% to 46.1%. This decrease in selling and operating expenses as a percentage of revenues was primarily due to increased operating efficiencies. Corporate, general and administration expenses increased 52% from $1.6 million in 1997 to $2.4 million in 1998, primarily as a result of initiatives to support our growth. As a percentage of revenues, those expenses decreased from 7.9% to 7.8% of revenues. Other income, which is primarily comprised of gains on sales of marketable securities and interest expense, decreased from $1.6 million in 1997 to $388,491 in 1998, largely due to a decrease in the sales of marketable securities during 1998 as compared to 1997. 25 Provision for income tax provision represented 35.7% of our pre-tax income in 1997, as compared to 18.3% of its pre-tax income$251,955 in 1998. The decrease in ourthe 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. Minority interest of $261,598 for 1998 was deducted from our consolidated financial results to account for the minority interest in Living Arts.19 Net income, as a result of the factors described above, increased 99.9% to $1.7 million for 1999 from $654,312, or 3.4% of revenues, in 1997, to $859,781 or 2.8% of revenues, infor 1998. Year ended December 31, 1997 compared to year ended December 31, 1996 - --------------------------------------------------------------------- Revenues increased by 34.4% from $14.8 million in 1996 to $19.9 million in 1997. This increase is primarily attributable to growth of our Harmony brand and an expansion of product offerings that resulted in an increase in average transaction size. Gross profit increased 42.3% from $8.0 million in 1996 to $11.4 million in 1997. As a percentage of revenues, gross profit increased from 54.3% to 57.5% due to increases in sales of private branded products, on which we have better margins than other products, and better pricing from vendors due to increased volume. Selling and operating expenses increased 12.7% from $9.3 million in 1996 to $10.4 million in 1997, due to increases in revenues. As a percentage of revenues, selling and operating expenses decreased from 62.5% to 52.4%. This decrease as a percentage of revenues was primarily due to increased efficiencies due to higher average transaction size. In addition, our central warehouse was opened in 1996, resulting in reductions in shipping costs and other operational efficiencies. Corporate, general and administrative expenses increased 29.3% from $1.2 million in 1996 to $1.6 million in 1997. As a percentage of revenues, general and administrative expenses decreased from 8.2% to 7.9%. The overall dollar increase in general and administrative expenses was due to various initiatives undertaken to prepare for and support future growth. Other income declined from $3.0 million in 1996 to $1.6 million in 1997, primarily due to our decision to sell fewer securities that we held. Income tax provision represented 38.4% of our pre-tax income in 1996, as compared to 35.7% of our pre-tax income in 1997. As a result of the factors described above, net income increased from $339,700, or 2.3% of revenues, in 1996 to $654,312, or 3.4% of revenues, in 1997. Selected Quarterly Operating Results The following table sets forth our unaudited quarterly results of operations for each of the quarters in 19971999 and 19982000 and the first two quartersquarter of 1999.2001. In management's opinion, this unaudited financial information includes all adjustments, consisting solely of normal recurring accruals and adjustments, necessary for a fair presentation of the results of operations for the quarters presented. ThisYou should read this financial information should be read in conjunction with our consolidated financial statements and related notes 26 included elsewhere in this prospectus. The results of operations for any quarter are not necessarily indicative of future results of operations.
QUARTER ENDED (In thousands, except per share data) ---------------------------------------------------------------------------------------------------------Quarter Ended Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000 2001 ---- ---- ---- ---- ---- ---- ---- ---- ---- ----(In thousands, except per share data) Net revenues $4,218 $4,426 $4,811 $6,443 $5,300 $5,175 $5,987 $14,277revenue........... $9,495 $8,068 $10,288 $17,874 $12,558 $11,386 $13,630 $23,014 $17,672 Gross profit 2,454 2,554 2,645 3,783 3,012 3,049 3,538 7,966profit......... 5,639 4,849 6,222 10,839 7,636 6,730 8,129 14,300 10,824 Operating income (loss) (317) (86) (137) (26) 98 77 200 610................ 110 (294) 393 1,915 456 295 982 2,695 735 Net income (239) (104) (142) 1,139 24 15 395 426income...... 106 72 551 989 203 201 579 1,666 419 Net income (loss) per share $ (0.03) $(0.01) $(0.02) $ 0.14 $ 0.00 $ 0.00 $ 0.05 $ 0.05share............. $ 0.01 $ 0.01 $ 0.06 $ 0.10 $ 0.02 $ 0.02 $ 0.05 $ 0.14 $ 0.04 Weighted average shares outstanding 8,040 8,040 8,040 8,040 8,040 8,040 8,040 8,073Shares outstanding........... 8,215 8,420 8,826 10,633 11,505 11,552 11,538 11,506 11,563
Quarterly fluctuations in Gaiam's revenues and operating results are due to a number of factors, including the timing of new product introductions and mailings to customers, advertising, acquisitions (including costs of acquisitions and expenses related to integration of acquisitions), competition, pricing of products by vendors and expenditures on our systems and infrastructure. The impact on revenue and operating results, due to the timing and extent of these factors, can be significant. 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 Andand Capital Resources Gaiam's capital needs arise from working capital required to fund our operations, capital expenditures related to expansions and improvements to Gaiam's infrastructure, development of e-commerce, and funds required in connection with the acquisitionacquisitions of new businesses and itsGaiam's anticipated future growth. These capital requirements depend on numerous factors, including the rate of market acceptance of Gaiam's product offerings, the ability to expand Gaiam's customer base, the cost of ongoing upgrades to itsGaiam's product offerings, the level of expenditures for sales and marketing, the level of investment in distribution and other factors. The timing and amount of these capital requirements cannot accurately be predicted. Additionally, Gaiam will continuecontinues to evaluate possible investments in businesses, products and technologies, and plans to expand its sales and marketing programs and conduct more aggressive brand promotions. 20 During the first six months of 1999, Gaiam has funded its operations and acquisitions primarily through bank loans, private placements of shares and subordinated debentures, and sales of marketable securities contributed to Gaiam by Gaiam's founder, Mr. Rysavy. During 1996 and 1997, we had operating losses which were offset primarily by sales of marketable securities contributed by Mr. Rysavy. We raised approximately $1.2$1.45 million from the private placements during 1998 ($575,000 for 160,000placement of 331,429 shares of Class A common stock and $550,000 in debentures), $150,000 during the first quarter of 1999 ($75,000 for 17,143 shares and $75,000 in debentures) and $2.7 million during the second quarter of 1999 ($1.37 million for 314,286 shares and $1.35$1.425 million in debentures).debentures. The privately placed shares were sold at $4.375 per share. Theshare, and the 8% convertible debentures described above bear interest at 8% per annum. Withmatured on the exceptionearlier of Ms. Lynn Powers,one year after the holdersdate of the debenture or the closing date of the initial public offering. In October 1999, Gaiam repaid $500,000 of the convertible debentures have certain registration rights requiring Gaiamand, simultaneous with the closing of the initial public offering, converted the remaining $1.475 million in debentures to register the295,000 shares obtainedof Class A common stock. Gaiam's initial public offering of 1,705,000 shares of Class A common stock at $5.00 per share was completed in the private placement. See the consolidated financial statements of Gaiam for additional information relating to Gaiam's private placements. In connectionOctober 1999. Simultaneous with this offering, we are extendingGaiam converted $1.475 million in debentures to each295,000 shares of our eight debenture holders the option to purchase shares for the outstanding principal amount of the debentures (excluding interest) at the 27 offering price of $5.00 per share. We anticipatecommon stock, resulting in a total issuance of 395,0002,000,000 shares. The offering's underwriters also exercised their overallotment option for 102,861 additional shares will be soldduring November 1999. Net proceeds to these debenture holdersGaiam, after deducting all commissions and expenses associated with the offering, were $6.1 million. During April 2001, Gaiam entered into a new loan agreement with Wells Fargo increasing Gaiam's borrowing capacity from $6.5 million to $14.9 million. The new revolving line of credit, which extends through June 30, 2003, allows borrowings up to $10 million based upon the collateral value of Gaiam's accounts receivable and inventory held for resale. Wells Fargo has also provided Gaiam with a term loan in exchange for $1.975 million in debentures. Gaiam is party to credit agreements with Norwest Bank, which extend through December 31, 2001. The credit agreements permit borrowingsthe amount of up to $2$4.9 million, (of which approximately $1.65 million was outstanding at June 30, 1999),matures on July 1, 2006, and these borrowingsallowed a $537,228 term note assumed as part of the Real Goods merger to remain outstanding. Borrowings under the agreement are secured by a pledge of Gaiam's assets. Borrowings under the Norwest credit agreementsassets, and bear interest at the lower of prime rate less 50 basis points or LIBOR plus 1% (currently 7.75%).275 basis points. The NorwestWells Fargo credit agreements containagreement contains various financial covenants and also prohibitprohibits Gaiam from paying cash dividends to its shareholders, except that dividends by Living Arts are permittedshareholders. Gaiam's operating activities provided net cash of $1.2 million for 1998 taxes on minority interests. Mr. Rysavy guarantees the Norwest credit agreements. Gaiam has,three months ended March 31, 2001, primarily as a result of an increase in cash generated from time to time, borrowed funds from BT Alex. Brown under a margin loan agreement against securities held for sale. Gaiam had no outstanding indebtedness to BT Alex. Brown as of June 30, 1999. Borrowings under the BT Alex. Brown margin loan agreement bear interest at the call money rate plus 3/4%.net income and depreciation and amortization. Gaiam's operating activities used net cash of $2.7$1.7 million and $1.3$4.6 million during 19962000 and 1997,1999, respectively, and provided $759,205$904,245 of net cash in 1998. The useGaiam's net cash used in operating activities for 2000 arose primarily from increases in accounts receivable of $4.1 million associated with growth in the business-to-business segment, increased inventories of $1.7 million correlating to increased business volumes, and $1.0 million to produce additional Living Arts video titles. These uses were partially offset by net cash in 1996 and 1997provided by operations of $4.8 million. Net cash used during 1999 was primarily attributable toa result of increases in inventoriesaccounts receivable and prepaid costsinventories associated with the increased sales volumes.business-to-business growth. Net cash provided during 1998 was primarily a result of Gaiam's net income. Gaiam's operatinginvesting and acquisition activities used cash of $3.9 million for the sixthree months ended June 30, 1999 usedMarch 31, 2001. During the first quarter of 2001, Gaiam acquired all of the stock and net assets of Earthlings, Inc. and Self Care, Inc. for a total combined purchase price for both companies of $3.8 million, and completed its merger with Real Goods Trading Corporation. Gaiam's investing activities provided net cash of $4.6 million primarily to reduce the level of accounts payable and accrued expenses, resulting from seasonal fluctuations and the Living Arts acquisition. Gaiam's investing activities generated cash of $738,755 and $3.6$2.9 million during 1996 and 1997, respectively,2000 and used cash of $2.4 and $1.1 million during 1998.1999 and 1998, respectively. In 1996June 2000, Gaiam sold 6,000 shares of Redeemable Class A preferred stock in Gaiam.com, Inc. at a price of $1,000 per share for an aggregate price of $6 million. On June 30, 2000, Gaiam and 1997,Whole Foods Market, Inc. merged their internet businesses into Gaiam.com, Inc. Gaiam owns 50.1% of Gaiam.com, Whole Foods Market currently owns 35% and the remainder is owned by various venture capital funds. As part of this transaction, Whole Foods Market, through its subsidiary, contributed $6 million in cash plus other assets to Gaiam.com. During 2000, Gaiam used approximately $8.7 million primarily for the Gaiam.com website, the purchase of a 160 acre conference resort in Paulden, Arizona (Gaiam Yoga Center), and additional infrastructure improvements to support Gaiam's growth. During 1999, Gaiam generated $2.5 million from investing activities resulted primarily from salesthe sale of marketable securities and propertyused $2.7 million primarily for its acquisitions. Gaiam also used $2.2 million primarily to expand and equipment.upgrade the 21 internet, computer and telecommunications systems. During 1998, Gaiam used cash to purchase a majority interest in Living Arts. During the three months ended March 31, 2001, Gaiam's investingfinancing activities generated $382,736provided $490,290 in cash, as borrowing under Gaiam's line of credit agreement increased $500,000. Gaiam's financing activities provided net cash for the six months ended June 30, 1999, resultingof $3.5 million during 2000, primarily from the saleincreased borrowings on Gaiam's line of marketable securities.credit. During 1999, Gaiam's financing activities generated $1.9$9.5 million in net cash, during 1996, primarily from borrowings, which were partially repaid during 1997, resulting in a use of cash of $1.1 million.the initial public offering. During 1998, Gaiam's financing activities generated $175,300, which resulted from the private placement of shares and debentures, net of the reduction in other outstanding debt. Gaiam's financing activities generated $3.7 million in net cash for the six months ended June 30, 1999, resulting from the private placement of shares and debentures, and borrowings on its Norwest line of credit, net of reductions in other outstanding debt. During 1999, Gaiam anticipates that it will make capital expenditures of approximately $1.3 million primarily for Gaiam's continuing development of e-commerce. We believe our available cash, cash expected to be generated from operations, cash to be generated through the sale of marketable securities held by Gaiam, and borrowings available under our bank credit agreements,borrowing capabilities will be sufficient to fund our operations as described in this prospectus, on both a short-term and long-term basis. However, our projected cash needs may change as a result of acquisitions, unforeseen operational difficulties or other factors. 28 In the normal course of our business, we investigate, evaluate and discuss acquisition, joint venture, majority and minority investment, strategic relationship and other business combination opportunities in the LOHAS industry.market. In the event of any future investment, acquisition or joint venture opportunities, we may consider using then-available liquidity, issuing equity securities or incurring additional indebtedness. However, we currently have no commitments or agreements and are not involved in negotiations with respect to acquisitions. Quantitative and Qualitative Disclosure About Market Risk We do not believe that any of our financial instruments have significant risk associated with market sensitivity. Year 2000 The year 2000 issue relates to computer programs and systems that recognize dates using two-digit year data rather than four-digit year data. As a result, these programs and systems may fail or provide incorrect information when using dates after December 31, 1999. If the year 2000 issue were to cause disruptions to Gaiam's internal information technology systems or to the information technology systems of entities with which Gaiam has commercial relationships, material adverse effects to Gaiam's operations could result. Gaiam's internal computer programs and operating systems consist of programs and systems relating to virtually all segments of Gaiam's business, including merchandising, customer database management and marketing, order-processing, fulfillment, inventory management, customer service and financial reporting. These programs and systems are primarily comprised of: . "Front-end" systems. These systems automate and manage business functions such as order-taking and order-processing, inventory management and financial reporting. . Warehouse management systems. These systems manage and automate fulfillment operations of Gaiam's companies. Currently Gaiam's internal warehouse management system is integrated with its internal front-end system. . Customer database management systems. These systems facilitate the storage of customer data for each Gaiam business. Each Gaiam customer database management system is integrated with Gaiam's existing front- end system. . Telecommunications systems. These systems enable Gaiam's companies to manage their order-taking and customer service functions. . Office automation systems, personal computers and local area networks. These systems are used for word processing and other administrative tasks at individual Gaiam companies and at Gaiam's central office. . Voicemail systems. These systems are used for receiving and storing messages to employees at individual Gaiam companies and at Gaiam's central office. . Ancillary services systems. These include systems such as heating, ventilation and air conditioning control systems and security systems. To assess the potential impact of the year 2000 issue, Gaiam has completed reviews of its internal front-end systems, its internal warehouse management systems, its customer database management systems, its internal telecommunications systems and its personal computers and local area networks. These reviews were completed by Gaiam's existing workforce at no identifiable incremental cost. Based upon these reviews, Gaiam believes that these systems and equipment will operate correctly when processing data that include dates after December 31, 1999, although no assurances can be given that these systems and equipment will operate correctly. See "Our Business -- Management Information Systems." 29 The computer programs and operating systems used by entities with whom Gaiam has commercial relationships also pose potential problems relating to the year 2000 issue, which may affect Gaiam's operations in a variety of ways. These risks are more difficult to assess than those posed by internal programs and systems, and Gaiam has not yet completed the process of assessing them. Gaiam believes that the programs and operating systems used by entities with which it has commercial relationships generally fall into two categories: . First, Gaiam relies on communication and data processing programs and systems used by organizations such as the United States Postal Service, UPS, telephone companies and banks. Services provided by these entities affect almost all facets of Gaiam's operations, including processing of orders, printing and mailing of catalogs, shipping of goods and certain financial services (e.g., credit card processing). Programs and services in this category generallyWe are not specificexposed to Gaiam's business,financial market risks from changes in foreign currency exchange rates and disruptionsare only minimally impacted by changes in their availability would likely haveinterest rates. Borrowings under our bank credit facility are at a negative impactvariable rate of interest, and based on Gaiam, as well as most other enterprises within the direct marketing industry, and on many enterprises outsidecurrent level of borrowings, we experience only modest changes in interest expense when market interest rates change. However, in the direct marketing industry. Gaiam believes thatfuture, we may enter into transactions denominated in non-U.S. currencies or increase the most serious potential disruptionslevel of our borrowings, which could increase our exposure to its operations stemming from the year 2000 issue relate to programs and systems in this category. Gaiam intends to include an evaluation of the potential disruptions in its assessment of the programs and systems of the entities with which it has commercial relationships. . Second, Gaiam purchases goods from over 150 vendors (none of which accounted for more than 10% of aggregate purchases for 1998). Each of these vendors and service providers are dependent on programs and systems that could be disrupted by year 2000 problems. We believe that year 2000 risks relating to programs and systems used by our product vendors are well-diversified because we use a large number of vendors.market risks. We have assessed the risks posed by the programsnot used, and systems used by entities who provide front-end and warehouse management services and determined that these riskscurrently do not require remediation. We have received or intends to seek assurances of year 2000 compliance from each product vendor that accounts for more than approximately 1% of our aggregate purchases on an annual basis and from other significant vendors and service providers. Gaiam expects to complete its assessment of the programs and systems of the entities with which it has commercial relationships and the identification of potential problems by the end of the third quarter of fiscal 1999. Once this identification has been completed, Gaiam intends to resolvecontemplate using, any potential problems identified by communicating further with the relevant vendors and providers, by working internally to identify alternative sourcing and by formulating contingency plans. Gaiam expects the resolution of these issues to be an ongoing process until all year 2000 problems are satisfactorily resolved.derivative financial instruments. 22 OUR BUSINESS Gaiam Gaiam producesis a lifestyle company providing a broad selection of information, products and sells goods, services and information targeted to customers who value natural health, personal development and renewable energy. We offer our customers the environment, a sustainable economy, healthy lifestyles and personal development. Although our historical sales have been predominantly through catalogs and retailers, we are shifting our sales emphasis to the Internet and we intendability to make the Internet our primary channel of distribution. 30 Under the umbrella brands of Gaiam and Gaiam.com, we use specific brands to target related but distinct markets. We use the Harmony, Living Arts, and InnerBalance brands to offer our products through direct marketing via catalogs and the Internet and through business-to-business relationships. Gaiam has approximately 800,000 unique individual customers in addition to leading retailers such as Target, Musicland, Book of the Month and Amazon.com. We strive to serve consumers who place a high value on promoting healthy living and personal development, contributing to the sustainability of the Earth's natural resources and purchasing decisions that enhance the quality of the Earth's environment. In our view, these consumers make purchasing decisions for goods and services based on these values in additionwhile striving to the traditional criteria of priceprovide products at prices comparable to conventional alternatives. Our direct customer base is 80% female and performance. We believe that these consumers, whom we refer to as "cultural creatives," are growing in number, as evidenced by the growth of our customer base. Our number of unique individual customers increased from 300,000 at the end of 1996, to 685,000 at the end of 1998 and to 800,000 at June 30, 1999. Cultural creatives tend to be well-educated consumers, with70% college-educated, has a median age of 42, a 60/40 women-to-men ratio44 and has an average annual household income of $52,000. The following terms are importantapproximately $60,000. Gaiam has established itself as a leading lifestyle brand, information resource and authority in the LOHAS market and seeks to understand our business: . By "sustainable" we mean the ability ofbecome a product or service to reduce the burden placed on living systems and to maintain productivity without depleting natural resources or producing waste. . By "natural" we mean the characteristic of a product that is organic and/or otherwise produced without chemicals and additives. . By "eco-friendly" or "green" we mean products that have low or minimal impact upon the ecosystem in which the product is created or used. . By "alternative health" we mean the natural and holistic approach to healthcare typified by chiropractic care, nutrition, homeopathy, naturopathic medicine, acupuncture, acupressure, massage, aromatherapy and other holistic approaches. . By "mind-body-spirit" we mean the natural and holistic portionunifying symbol of the personalemerging LOHAS lifestyle. Our lifestyle brand is built around our ability to develop and offer content, products and solutions to consumers in the LOHAS market. Our content forms the basis of our proprietary products, which yield our highest margins, and drives demand for parallel product and service offerings. We market our products and services direct-to-consumers and business- to-business through five sales channels: our catalogs, the internet, retailers, media and corporate accounts. We distribute our products in each of these sales channels from a single fulfillment center. Gaiam's operations are vertically integrated from content creation, through product development and sourcing, to customer service and fulfillment. The LOHAS Market The LOHAS market, that incorporates physical and mental elements, such as yoga and Tai Chi.which represented $227 billion in sales in 2000 according to Natural Business Communication, consists of five main sectors: . By "conscious commerce" we mean the practice of making purchasing decisions based on personal values and beliefs. Our Industry We have named the industry we serve "Lohas" -- an acronym for Lifestyles Of Health And Sustainability. We divide the Lohas industry into five markets that shape this industry: Sustainable Economy. This market includes environmental management services and solutions, renewableRenewable energy, energy conservation, products andrecycled goods, environmental management services, sustainable manufacturing processes recycling and goods made from recycled materials. 31 related information and services. . Healthy Living. This market includes food supplements, vitamins and minerals, naturalNatural and organic foods, dietary supplements, personal care products and naturalrelated information and personal body care.services. . Alternative Healthcare. This market includes natural healthHealth and wellness solutions and alternative health practices. . Personal Development. Solutions, information, products and services, including alternative, noninvasive treatments, massage, chiropractic, acupuncture, acupressure, biofeedback and aromatherapy. Personal Development. This market includes experiences solutions products, information and services relating to mind, body and spiritual development,development. . Ecological Lifestyles. Environmentally friendly cleaning and household products, organic cotton clothing and bedding, and eco-tourism. Gaiam participates in all five sectors of the LOHAS industry. 23 Our Products We currently stock over 7,000 SKUs. Our best selling products, by LOHAS sector, are as follows:
- ----------------------------------------------------------------------------------------------------------- Sustainable Healthy Living Alternative Personal Ecological Economy Healthcare Development Lifestyles - ----------------------------------------------------------------------------------------------------------- Solar Panels and Air Filters Natural Lighting Yoga Information Natural Cleaners Accessories and Accessories - ----------------------------------------------------------------------------------------------------------- Energy Systems Water Filters Back and Neck Care Pilates Information Organic Cotton Products and Accessories Bedding - ----------------------------------------------------------------------------------------------------------- Energy Efficient Personal Air Supply Massage Accessories Meditation Organic Cotton Lighting Information and Towels Accessories - ----------------------------------------------------------------------------------------------------------- Energy Information EMF Filters Stress Relief Fitness Equipment Organic Cotton Clothing - ----------------------------------------------------------------------------------------------------------- Evaporative Coolers Personal Care Allergy and Pain Recycled Household Products Relief Performance Wear Paper Products - ----------------------------------------------------------------------------------------------------------- Intertie Systems Natural Beauty Sleep Enhancers Personal Growth Natural Garden Products Information Products - ----------------------------------------------------------------------------------------------------------- Composters Whole Foods Brand Wellness Information Kids Fitness Non-Toxic Pest Supplements Products and Control Information - ----------------------------------------------------------------------------------------------------------- Air Dryers Natural Pet Care Aroma Therapy Relaxation Music Green Cotton Home Accessories - -----------------------------------------------------------------------------------------------------------
Our Sales Channels We conduct our direct-to-consumer business through our catalogs, the internet and media. Our business-to-business customers are primarily retailers, corporate accounts and the media. . Catalogs Gaiam offers a variety of LOHAS products directly to the consumer through our catalogs and through consumer lifestyle publications such as yoga, meditation, relaxation, spirituality, ancient religions, esoteric sciencesNatural Home, Self, Shape and realizing human potential. The fitness elementsYoga Journal. We produce catalogs in all sectors of this market are often referredLOHAS, using our sub-brands Gaiam Harmony (ecological lifestyles and healthy living), Gaiam Living Arts (personal development), Gaiam Innerbalance (alternative healthcare and healthy living), and Gaiam Real Goods (sustainable economy). Our direct customer file has grown from approximately 300,000 as of December 31, 1996 to over 1.7 million as "mind-body-spirit." Ecological Lifestyles. This market includes environment friendly solutions, natural untreated fiberof the end of May 2001. . Internet We use the internet to sell our products and eco-tourism. Becauseto provide information on the LOHAS lifestyle. We currently offer over 7,000 SKUs on our website, www.gaiam.com. We promote our website through our visual media, catalogs, print - ------------- publications, and product packaging. A key component of our internet approach is to provide customer support for internet sales from our in-house call center. According to a commonJupiter Communications study, 90% of on-line customers prefer human interaction when they require 24 customer base,service. This is particularly important for Gaiam because the use of many of our products is enhanced by the extensive product education and information that we make available online and through customer service. . Retailers Since the inception of our retailer channel in 1998, we have increased its breadth and diversity, expanding our coverage to over 23,000 stores in the United States as of the end of May 2001. Gaiam products currently are sold in a variety of leading retailers, including lifestyle stores such as Discovery Channel Stores and The Walking Company; women's beauty stores such as Ulta and Origins; Sporting Goods Chains such as Sports Authority and Big 5 home furnishing stores such as Bed, Bath and Beyond; natural food stores such as Whole Foods Market; sporting goods stores such as Dick's and Galyan's; book stores such as Borders and Barnes & Noble; music stores such as Musicland and Wherehouse Music; mass merchants such as Target, Kohl's and Wal-Mart; and e- tailers such as Amazon.com. A number of these retailers display our products in store-within-a-store Gaiam lifestyle shops. We believe we have an opportunity to become the single source solution for Lohas products for retail accounts.In addition, since entering the Canadian market in May of 2000, we have expanded to over 2,500 stores as of the end of May 2001. . Media Gaiam produces information and programming targeted to consumers who value natural health, personal development and renewable energy. Currently, thirteen of our programs are broadcast in the United States and five are broadcast internationally. Our programs are also available in approximately 600,000 hotel rooms in North America through on-demand visual media programming available in such hotels as Four Seasons, Hyatt, InterContinental, Sheraton and Westin. Our media partners include the Discovery Channel, Universal Studios and On Command. Gaiam also publishes print media on personal development, alternative healthcare and sustainable living and operates three music labels with approximately 150 titles. . Corporate Accounts Gaiam provides products and services to businesses that are considering renewable energy solutions or desire healthy and natural alternatives to traditional products or processes. Such products and services include environmental reviews, organic cotton robes and bedding, and solar-powered safety and security systems. In addition, we have developed a line of promotional products in organic cotton that includes t-shirts, sweatshirts, caps and bags and other similar products for customers such as Mercedes Benz and Aveda. We have a design and consulting service for corporate accounts that assesses their energy needs and makes recommendations for more efficient solutions. We have provided our consulting services to clients including The White House, NASA, Disney, Sony, Fetzer Winery, AT&T, the U.S. Departments of Energy and Defense and the Government of Brazil. We expect increased demand for this service because of national energy policy concerns and the ongoing energy crisis in California. Our Strategy . Strengthen Our Lifestyle Brand Our goal is to maintain the Gaiam brand as an authority in the LOHAS market and to establish Gaiam as a unifying symbol of the emerging LOHAS lifestyle. We plan to strengthen the Gaiam brand by growing our media channel, increasing our marketing efforts, strengthening relationships with retailers, and increasing the breadth of our proprietary product and audio, video and print media 25 offerings. We intend to maintain our commitment to a high level of customer service. We maintain a "no-risk guarantee" policy, whereby a customer is provided a full refund for products that are returned at any time, for any reason. Our products, services and information generally bear the Gaiam symbol. . Capitalize on Our Multi-channel Approach Our multi-channel approach makes purchasing our lifestyle products convenient regardless of the channel customers prefer. In our direct-to- consumer business we are open 24 hours a day, offering our entire selection of products on our internet site. In our business-to-business segment, we are expanding our retail presence. We have expanded to 25,500 current retail points and we are building store- within-a-store Gaiam lifestyle shops in a variety of stores, including Whole Foods Markets, Discovery Channel Stores, Dick's and Galyan's. We are expanding into women's beauty stores such as Ulta and Origins, sporting goods chains such as Big 5, home furnishing stores such as Bed, Bath and Beyond and mass merchants such as Target and Wal-Mart. Our Gaiam Organix line is being launched in August 2001 in department and specialty stores such as Jacobsons and Fred Segal. Our media channel, especially television broadcast and on-demand cable programming, enables us to reach customers who might not be familiar with Gaiam through our other sales channels. . Expand Our Proprietary Product Selection Our proprietary products, which we introduced in 1997, represented 40% of our revenues in the first quarter of 2001. These products carry a higher margin and distinguish us from many of our competitors. We now offer over 2,000 SKUs of proprietary products that range from media products to organic cotton baby clothes. We are expanding our supply chain with overseas suppliers in Europe and South America and are continuing to develop and source new products in each of the five LOHAS sectors. Based on our success with bedding and bath products, infant clothing and performance wear, we are planning to offer these products into our business-to- business segment under the Gaiam Organix brand. We believe the demand for naturally processed organic cotton clothing and home furnishing is increasing, and we have an opportunity to increase our brand presence in our current retailers as well as add new retailers with this initiative. We plan to use our existing store-within-a-store lifestyle presence to support this initiative. . Broaden Our Content Through Growth of Gaiam Media Our media channel introduces customers to Gaiam and helps to establish Gaiam as an authority in the LOHAS market. Our visual media programs are currently broadcast both domestically and internationally, are shown in approximately 600,000 hotel rooms in North America and are packaged as videos, DVDs and CDs. Our print media becomes content for national publications, catalogs, the internet and books. We intend to continue to expand our media content. We will add visual media programming on wellness, longevity and sustainable living, as well as specialty programs on pregnancy and childcare. We expect to expand international distribution of our visual media. We also plan to develop or acquire additional media properties in music, magazines and book publishing. . Complement our Existing Business with Selective Strategic Acquisitions 26 Even though our strategy is not dependent on acquisitions, we will consider strategic acquisitions in the LOHAS industry that complement our existing business, especially companies with a strong brand identity and with customer and product information databases that augment ours. Gaiam generally allows the acquired company's management team to retain responsibility for front-end business functions such as creative presentation and marketing, while consolidating operational functions under the Gaiam organization to realize economies of scale. Our Operations Gaiam's brand is built around a vertically integrated business strategy, which enables us to develop content, products and solutions for our LOHAS market consumers. From our strong focus on new content creation, we establish a basis from which to develop additional proprietary product lines and extend our content-based merchandise for distribution through our five markets shouldsales channels from our single fulfillment center. . Content Creation We have in-house production and creative services terms that designs all of our content, packaging, branding, media and marketing pieces, as well as our website. After identifying a topic or solution of interest to our customers, our creative team researches an idea and identifies an expert, where appropriate, to develop our content. We use written materials to create print media, internet content, packaging and magazine and catalog editorials. Using our own production capabilities and editing facilities, we produce high quality visual media content that we distribute by broadcast, on-demand cable programming, videotape or DVD. We develop and maintain a library of lifestyle photography that we use primarily for our print media, website, catalogs and packaging. We either develop or purchase our audio titles, which are comprised primarily of relaxation music that we sell in CD form, and background music for our visual media content. . Product Development and Sourcing Gaiam branded products, are sold in our five sales channels. Non- proprietary products are only available through our catalogs and over the internet where we initially test products before branding them and distributing them through our other sales channels. Proprietary product sales have increased as a percentage of our revenue from 2% in 1997 to approximately 40% in the first quarter of 2001. We are able to leverage our product development costs across our multiple sales channels. Our proprietary products are designed by our product development team, sourced both domestically and internationally by our merchandisers and produced by our suppliers to our specifications. Our suppliers are screened for their environmental and social responsibility before contracts are awarded. In order to minimize risk, we have identified an alternate supplier in a separate location for most products. No single supplier is responsible for more than 3% of our business except our video duplication, which is done with only one supplier to minimize production costs. However, duplicate masters of each program are maintained in an off-site vault allowing us to be viewed collectively as one industry.able to switch to a new duplicator with minimal down time. . Customer Service Gaiam focuses on building and maintaining customer relationships that thrive on loyalty and trust. We maintain a "no-risk guarantee" policy, whereby a customer is provided a full refund for 27 products that are returned at any time, for any reason. Our in-house customer service department includes product specialists who have specific product knowledge and assist customers in selecting products and solutions that meet their needs. We employ telephone routing software that directs each call to the appropriate representative. Our policy is to ship orders no later than the next business day, which we accomplish by stocking inventory that supports over 90% of our orders. We believe that by serving all of these markets,offering exceptional customer service we can benefitencourage repeat purchases by our customers, by providing themenhance our brand identity and reputation and build stronger relationships with a larger array of choices,our customers. . Fulfillment During 2000, we moved from our 64,000 square foot facility into our new 208,000 square foot fulfillment center near Cincinnati, Ohio, which provides significant capacity to support the convenience of one-stop shopping and access to a online community of shared values. Our History Gaiam was founded in Boulder, Colorado. In 1995, we began to expand our business nationally through the acquisition of the direct marketing business of Seventh Generation, Inc., a supplier of eco-friendly household products. This business became the basegrowth of our Harmony brand. In 1998, we acquired InnerBalance,business. This central United States location allows us to achieve shipping cost efficiencies to most locations. The center is also located within 30 minutes of several major shipping company hubs. We use a direct marketer of alternative health productssupply chain management system that supports our entire operation, including fulfillment, inventory management, and solutions, and a majority interest in Living Arts, a producer and supplier of yoga and other mind-body-spirit informational videos and products.customer service. Our Core Values Gaiam's approach to businessfulfillment center is based on its core values: We emphasize integrity in all our relationships. We value the environment and view all resources as precious assets. Living our beliefs is more than just the right thing to do; it is the only path to take. We believe we can motivate every person to make a positive difference in their lives and in our world by the simple choices they make every day. Our Brand Gaiam plans to use its brand name to establish itself as an authority and information resource in the Lohas industry. Under the Gaiam and Gaiam.com umbrella brands, we use our Harmony, 32 InnerBalance, and Living Arts brands to target the industry's various markets. The chart below illustrates the market and examples of products offered under each of our brands. [Chart of Gaiam brands appears here] Our Competitive Strengths We believe the following factors have contributedconnected to our growth and success:other facilities by a state-of-the art voice-over-IP telecom network that allows us to maintain a high degree of connectivity within our organization. . Focus On Large Market Gaiam targets cultural creatives. A study published by the Institute of Noetic Sciences in 1996 coined the term "cultural creatives." This study was authored by Paul Ray, who has since agreed to join our board of directors. The article estimates that this demographic segment, which has in common the values of environmental awareness, healthy lifestyles and personal development, numbered 44 million in the United States alone in 1996. Gaiam believes that its appealing customer demographics contribute significantly to its high average order value in excess of $90 for the year ended December 31, 1998, as compared to a lower average for the direct marketing industry. . Experienced Executive Team We haveGaiam has an experienced team of corporate managers. Our founder and Chief Executive Officer, Jirka Rysavy, was the founder and Chief Executive Officer of Corporate Express, Inc., which he built to a Fortune 500 company, andcompany. He was also the founder and CEOChief Executive Officer of Crystal Market, Inc., which was sold to become the first store of Wild Oats Markets.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 of Miller's Outpost.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 ProductsOur Business Segments We separate our business into two business segments: direct-to-consumer and business-to-business. Business-to-business revenues as a percentage of total revenues increased to 40.4% in the first quarter of 2001 from 12.5% in 1998. See Note 12 to our consolidated financial statements included in this prospectus for further information on our segments. Our Intellectual Property Gaiam, offers information, productsGaiam.com and services under the Harmony, InnerBalancevarious product names are subject to trademark or pending trademark applications filed or hold by Gaiam or one of our wholly- or majority-owned subsidiaries. We also currently hold various internet domain names relating to our brand, including gaiam.com and Living Arts brand names. These products appeal to Gaiam's well-educated customers and are not widely available in conventional stores. These products are designed to enhance customers' lifestyles and experiences and provide healthy, natural solutions while being eco-friendly and promoting a sustainable economy. . Exceptional Customer Service Gaiam maintains a customer-focused approach at all stages of its business to build long-term customer relationships based on loyalty and trust. We ensure that we have on hand inventory to support 93% of in-stock orders. It is our practice to ship each order no later than the next business day. According to Jupiter Communications, 90% of online customers prefer human interaction when they require customer service. Our in-house customer service department includes product specialists, who have specific product knowledge and assist customers in selecting products and solutions that meet their needs, design, price and style criteria. Gaiam also enhances its customer service through initiatives such as extensive training of customer service representatives and unconditional 33 return guarantees.gaia.com. We believe that, by offering exceptional customer service, we encourage repeat purchases by our customers, enhance our brand identitythese trademarks and reputation and build stronger relationships with our customers. . Established Infrastructure Gaiam has invested in its physical facilities, technology and information systems. In 1996, we established our 64,000 square foot fulfillment center in Cincinnati, Ohio, a facility that is in the central United States and conveniently located to hubs for major shipping companies. This location allows us to achieve shipping cost efficiency to most locations across the Continental United States. It is located within 30 minutes of both UPS and Airborne hubs. In the same year, we installed our supply chain management information system to support virtually all segments of our business, including merchandising, customer database management and marketing, order processing, fulfillment, inventory management, customer service and financial reporting. This investment reduced our costs of fulfillment by providing an integrated system that reduces labor costs and times needed to procure inventory and fill orders. This existing infrastructure has also allowed us to integrate acquired businesses in an efficient and cost-effective manner. Our existing infrastructure also gives us an advantage over start up e-commerce companies, many of which will need to devote substantial resources to the development of these capabilities. . Our Operating Model Our business structure is designed to enable each Gaiam brand to achieve individual sales growth, while realizing cost savings from the combined enterprise. The managers of our brands retain responsibility for merchandising and creative presentation. Gaiam provides strategic direction, technology, financial resources and administrative services, as well as marketing, customer service, fulfillment, purchasing and sourcing. Our Strategies . Focus on our Online Presence Wedomain names are upgrading our website and technology systems to create a platform that will expand our product offerings and take advantage of the unique characteristics of online retailing. We are developing an online community of consumers who are concerned about personal and planetary health and want to use their purchase decisions to effect positive change. We believe that the interactive environment available on the Internet will make possible customer-to-customer and customer-to-company communications that will increase the usefulness of our services to customers, provide valuable feedback to us, and help us and our customers establish a database of valuable information about environmental issues, natural health and personal development. From this interaction and feedback, we believe that the online community can grow. Our goal is to grow this segment of our customers and to educate them about their own ability to effect positive change through purchases that will result in improvements to the environment and their well-being -- and thereby demonstrating to them that their choices can "make a difference." . Strengthen Our Brand We plan to establish the Gaiam name as an authority in the LOHAS industry. Gaiam and Gaiam.com will also function as the umbrella brands for Harmony, InnerBalance and Living Arts and any additional 34 brands we may acquire or develop. We plan to strengthen these brands by increasing marketing efforts, strengthening relationships with traditional and e-commerce retailers and increasing the breadth of our videotape and digital informational offerings while maintaining our high level of customer service. We believe that creating demand by consumers for eco-friendly and natural products will permit us to obtain these products in greater volume and, in turn, offer the products at lower prices than might otherwise be available. As we are able to lower prices in this manner, we expect to attract additional customers. . Offer Quality, Convenience and Selection We intend to make purchasing quality, natural and healthy lifestyle products from us more convenient than shopping in a physical store. We are open 24 hours a day, and shopping for our products does not require a trip to a store. We ship products directly to the customer's home or office. We believe that customers may buy more natural and healthy lifestyle products from us because they can get the information and advice they require, have more hours to shop, can act immediately on a purchase impulse and can locate products that may be hard-to-find. Because catalog and online shopping are not tied to a geographic location, we can deliver a wide selection of natural and healthy lifestyle products to customers in rural or other locations that cannot support a large- scale Lohas products retail store. . Develop Business-to-Business Opportunities Gaiam is focusing on increasing its sales to other businesses that have a need for sustainable or natural and healthy lifestyle products and services. These businesses include retailers, hospitality companies, spas and resorts, health care providers, as well as industrial companies. We believe that the Gaiam brands and product mix are well-suited to these industries. We believe that the expertise and knowledge we have and can develop in the Lohas industry will make Gaiam the information source of choice for businesses that wish to service the Lohas industry. As a result, we believe that we can build a successful consulting and "green audit" business. Part of our strategy is to set the standard for the industry and then offer information, products and services under Gaiam's approval or recommendation. The Gaiam approval can be earned by companies, business lines and products in the LOHAS industry. . Complement our Existing Business with Selective Strategic Acquisitions Even though our strategy is not dependent on acquisitions, we will consider strategic acquisitions in the LOHAS industry that complement our existing business. We believe that significant acquisition opportunities exist and our willingness to retain existing operating management will make us an attractive acquiring party. Gaiam generally allows the acquired company's management team to retain responsibility for critical front-end business functions such as merchandising, creative presentation and marketing, while consolidating operational functions under the Gaiam organization to realize economies of scale. We will consider strategic acquisitions in product sales, customer and product information data bases that can augment our own business. Product Brands We have organized our merchandising and creative functions under three strategic brands: . Harmony targets the industry's Sustainable Economy and Ecological Lifestyles markets, . Living Arts targets the industry's Personal Development market, and . InnerBalance targets the industry's Alternative Healthcare and Healthy Living market. Common logistics, information systems, finance, legal, human resources and general administrative functions support the entire organization. Most of our corporate functions located at our administrative headquarters in Broomfield, Colorado and most inventory storage and fulfillment for our brands originate from our Cincinnati, Ohio fulfillment center. Harmony Harmony focuses on eco-friendly household products that offer alternatives for the product categories found in mainstream supermarkets and department stores. 35 We work with our vendors to ensure that the sourcing of ingredients, the processes utilized and packaging materials --- are all eco-friendly and responsible. Where appropriate, we submit our products to a rigorous testing and approval process for both efficacy and safety. We also send out items to independent labs for additional testing and approval. We use no animals in our testing process. Our merchandising department remains committed to the ongoing expansion of Harmony's exclusive lines to pioneer conscious alternatives for everyday household products. Because of the uniqueness of our products, Harmony has been featured in editorial articles in the Wall Street Journal, Daily News, San Francisco Chronicle, Elle and Vogue. Some of our Harmony customers have made automatic reorder arrangements whereby Harmony regularly ships products in bulk on specific dates. Popular automatic reorder products include paper towels, bathroom tissue and cleaning supplies. [Harmony graphics appears here and includes the following text] [Sustainable Economy Ecological Lifestyles Energy-Efficient Lights Natural Fiber Clothing (20,000 hour bulbs, fluorescent bulbs) (Hemp, Green/Organic Cotton) Energy-Efficient Appliances Home Furnishings (Natural Fiber, Recycled Paper Products Sustainably Harvested & Reclaimed Woods) SOLAR Recycled Plastic Products Natural Bed & Bath Products PATH (Radios, Lights, Security System) (Hemp, Green/Organic Cotton) LIGHT & Jute - Beds, Sheets, Pillows, Recycling & Composting Products Comforters, Blankets, Towels, Shower Curtains & Rugs Recycled Plastic Products (Clothes Non-Toxic Cleaning Supplies Hammocks, Blankets, Throws) Non-Toxic Laundry Products Battery Recharger & Natural Pest Repellents Rechargeable Batteries Energy-Efficient Laundry Products Outdoor/Garden Supplies Conservation Information & Products]
Living Arts In September 1998, we acquired a majority interest in Living Arts. Living Arts is a producer and supplier of videos and accessories targeted to the Personal Development market. The videos cover mind-body-spirit fitness subjects, such as yoga exercises. All videos are recorded on film or digital formats. Living Arts markets its own video and audio tapes, as well as licensed video titles, for sale to mass merchandisers, specialty stores, sporting goods stores, and online retailers. Living Arts sells to companies such as Target, Price- Costco, K-Mart, Sam's Club, Musicland, Borders, Blockbuster, Amazon.com, Wild Oats Markets and Whole Foods Market as well as abroad in Germany, Italy, Switzerland and Australia. Living Arts also sells directly to consumers through direct marketing efforts, including catalog, e-commerce and direct magazine advertising. 36 Living Arts has reciprocal relationships with authorities in the mind-body- spirit arena such as yoga teachers and publications such as Yoga Journal to create content for informational videotapes. [Livingarts graphic appears here and the following text] [Personal Development Meditation Yoga Tai Chi YOGA ACCESSORIES Qi Gong & CLOTHING Relaxation Stress Reduction (Information, Video, Audio, DVD, Clothing Accessories, Books)] InnerBalance InnerBalance offers alternative health products and solutions focused on enhancing the quality of life. Its principal products include air and water filters, fitness accessories, herbal supplements and home spa accessories targeted to the Alternative Healthcare and Healthy Living markets. According to a Journal of the American Medical Association study published in 1998, 83 million Americans tried alternative health procedures in 1997, for a total of 629 million visits to practitioners. At this time, we generate the majority of InnerBalance sales through our catalog and other direct sales efforts; however, we intend to make the Internet our primary channel of distribution. According to Cyber Dialogue, over 22 million U.S. adults searched for health information on the Internet for the year ended December 1998, and this number is estimated to increase by 50% during the next year, to a total of 33 million. [InnerBalance graphic appears here and the following text] [Alternative Healthcare Healthy Living Water & Air Filters Personal Care Products Massage Therapy (Natural Body Products, Allergy Solutions Oral Hygiene, Hair Care) Light Therapy Natural Supplements Magnetic Therapy Nutritional Products SOY MILK MAKER Aromatherapy Products & & Information Information Natural Beauty Products Sound Therapy Fitness products & Information Back Care Natural pain Relief Detox Products & Information] Our Channels of Distribution We offer our products through two primary distribution channels consisting of direct marketing (catalogs, the Internet and consumer advertising) and business-to-business. 37 Direct marketing We ensure that we have on-hand inventory to support 93% of in-stock orders. It is our practice to ship each order no later than the next business day. While this practice may result in higher costs, we believe that it enhances customer satisfaction and loyalty. Our in-house customer service department includes product specialists who are trained to have in-depth product knowledge and assist customers in selecting products and solutions that meet their needs, design, price and style criteria. For the benefit of our customers, we also provide toll-free telephone ordering and unconditional return guarantees. Business-to-Business Gaiam markets certain products, principally videos featuring yoga and fitness, to national and regional mass merchandisers, specialty stores, sporting goods stores, bookstores, natural foods stores and online retailers. We are in the process of expanding our range of products produced and sold in the retail market, as well as creating an integrated branded retail display on the premises of a larger retail establishment in which we will offer customers a number of exclusive items. Gaiam is in the process of significantly increasing its sales to other businesses that have a need for eco-friendly products and services, or natural and healthy lifestyle products. Business-to-business revenues were 13% of 1998 revenues and 21% of revenues for the first six months of 1999. By offering both a direct marketing and business-to-business approach to distribution, we believe that we are maximizing our ability to reach our core customers as well as enhancing our brand. Our Customer Service Gaiam stands by its advertised "no-risk guarantee" by providing its customers a full refund of the purchase price for products that are returned any time for any reason. We believe that this guarantee, coupled with the quality of our customer service personnel, encourages greater customer loyalty and repeat sales. In additionassets to our e-commerce ordering systems, our customer service staff accepts orders, product questions and other customer service requests, 362 days per year (excluding Thanksgiving, Christmas Day and New Year's Day) via our dedicated toll-free telephone numbers, fax, mail and e-mail. Sales representatives are responsible for verifying purchasing history, order status, delivery dates, returns processing and account credits. Our information system allows real time verification of in-stock positions, credit card authorizations, stock moves and transfers. Product information in printed form is generally available to customers upon request, and questions from customers are answered within 24 hours. Merchandise is delivered to customers through the U.S. Postal Service, United Parcel Service and other common carriers. We train our service representatives to "think for the benefit of the customer" and help them choose among the best possible solutions. This training includes providing to them samples of all products for their inspection and use, and databases of specifications about these products. Many of our representatives purchase our products and information and can speak to customers about their personal experiences with them. We also encourage our sales representatives to provide us with feedback about products to assure quality and performance. Several representatives also have personal 800 numbers so customers can call them directly and receive personal assistance with their requests. We have also trained dedicated product specialists to assist sales representatives with technical questions and 38 supplemental research by compiling product-specific information packets accessible on our company-wide server. We also maintain a research library stocked with books, videos and audio tapes for our employees' use. Customer service representatives are encouraged to watch videos and research products so that they can respond to our customers' questions. We maintain a toll-free customer service telephone number, separate from the telephone number for merchandise orders, to handle inquires relating to matters such as order status, scheduled delivery dates and product inquiries. Returns are closely monitored to determine whether any product quality issues exist. Returned merchandise is promptly inspected and recycled to inventory unless damaged or worn. Purchasing and Inventory Management We strive to develop long-term and close working relationships with certain vendors, which we believe increases the quality and selection of merchandise available to us and enables us to develop products which are not readily available from other sources. Gaiam uses an automated inventory management system to maximize fulfillment and to reach the proper balance between inventory turn and optimal in-stock positions. Both inventory turn and in-stock rates carry associated benefits and costs to a fulfillment operation. High in-stock rates have a positive impact on sales and customer satisfaction, but carry the potential risk of excess inventory and obsolescence. Gaiam utilizes historical sales results, manufacturing and delivery lead times, volume discounts, the experience of its employees and other related factors in an integrated analysis model to determine optimum inventory levels. Liquidations, sales of overstocks and end-of-season merchandise is disposed of primarily through our outlet store, located in Boulder, Colorado, sales inserts and website offerings. Cost recovery efforts for excess inventory are continually monitored, and balance sheet reserves are adjusted accordingly. Our Internet Business We believe that our business is particularly well-suited to Internet commerce. The use of many of our products is enhanced by extensive product education and information that we will make available online. The online environment has virtually unlimited shelf space, the capacity to present vast amounts of consumer information and offers consumers the convenience of shopping online. In addition, many of our products are not widely found in conventional stores. Although our historical sales have been predominantly through catalogs and retailers, we are shifting our sales emphasis to the Internet and making the Internet our primary channel of distribution. According to Forrester Research, an independent media research firm, the number of U.S. households using e-mail, the Internet or a consumer online service will grow from an estimated 20.5 million households in 1996 to 55 million households, representing over 50% of all U.S. households by the year 2002. Furthermore, the number of U.S. households making at least one online purchase is expected to grow from approximately 10 million at the end of 1998 to 36 million at the end of 2002. Our website provides online purchasing capability for many products that we offer. Following placement of an order, the customer will receive an order confirmation that will summarize the purchase, the total amount of sale and any shipping information. We are currently in the process of adding incremental features to our website for the convenience of our customers. These features will be gradually introduced during the remainder of 1999. 39 The following forms of online customer service will be available: . Visitors will be able to search for answers to their questions on our website. Answers to frequently asked customer inquiries may be searched by topic, product and category. Visitors will have access to their account information and will be able to update their personal information. . Customers will be able to complete a form at our website or e-mail questions or concerns directly to our customer support staff. An inquiry will be acknowledged immediately, and we anticipate that a personalized response will be delivered within 24 hours via e-mail. . We will provide live customer service support through a toll-free telephone number. Our customer service representatives will have complete access to and familiarity with our website and applications. Visitors may modify their online preferences or profile through this channel, if necessary. After registering, a visitor will be invited to create a personal profile containing product information and content of particular interest to the visitor. Once registered, visitors will be able to check order status, make payments, and communicate with customer service. Future Acquisitions We will consider strategic acquisitions of companies with a strong brand identity and with customer and product information data bases that augment our data bases. It has been Gaiam's practice to allow the acquired company's management team to retain responsibility for critical front-end business functions such as merchandising, creative presentation and marketing, while consolidating operational functions under the Gaiam organization to realize economies of scale. Information Technology Gaiam uses modern computer systems to support merchandising, customer management and marketing, order processing, fulfillment, inventory management, customer service and financial reporting. We believe that these systems provide us with the data needed to perform effective analysis about our business, products and customers. Further, we believe that this analysis can improve performance, customer loyalty and service by identifying current conditions and trends in marketing, customer buying behavior, customer service and fulfillment operations. We believe our current systems will accommodate Gaiam's operations for the foreseeable future. We are implementing new Internet software to automate online sales and operations. The system is compatible with our existing systems. This new Internet software links Internet merchandising, order taking, payment and security, order management, warehousing and shipping, customer service, inventory management and accounting with our existing system. Gaiam also makes extensive use of company-wide e-mail and voice-mail systems for internal communication, as well as communication with customers and suppliers.business. Our Competitive Position 40 We believe that the LOHAS industrymarket is characterized by afragmented supplier and distribution networknetworks, and we are not aware of a dominant leader. Gaiam's goal is to establish itself as the market leader. The direct marketing28 Our business is evolving and competitive. We expect more business to use the Internet. As this happens, we expect competition to intensify because barriers to entry are minimalLarger and competitors can launch new sites at a relatively low cost. In addition, larger, well-established and well- financedbetter established entities may acquire, invest in or form joint ventures with our online competitors as the usecompetitors. Many of the Internetthese entities have longer operating histories and other online services increases.have greater financial and marketing resources than we have. Increased competition from these or other competitors could reduce our revenue. We believe that the principal competitive factors in the direct marketing business in the LOHAS industry for the goodsrevenue and services we sell are: . integrity . product distinctiveness, quality and performance . depth of knowledge and research made available to the consumer . quality of personalized customer service . creative presentation of product . brand name recognition . easy and satisfying shopping experience Our principal competitors in the direct marketing of goods and services we sell are: . catalog retailers such as Feel Good Catalog and Real Goods Trading Company . online retailers such as mothernature.com and GreenMountain.com . thousands of small, local and regional businesses. . product lines or items offered by large retailers, manufacturers, publishers and video producers While we believe that we compare favorably with our competitors on the key competitive factors, we have no control over how successful our competitors are in addressing these same factors.profits. In addition, the smaller businesses we compete against may be able to more effectively personalize their relationships with customers. Because Gaiam uses multi-channel distribution for our products, we compete with various producers of similar products and services. Our competitors include PPI Entertainment, Goldhil Media, Greenmarketplace.com, thousands of small, local and regional businesses, and product lines or items that are offered by large retailers, manufacturers, publishers and media producers. We believe the principal competitive factors in the LOHAS market are authenticity of information, distinctiveness of products and services, quality of product, brand recognition and price. We believe we compete favorably on all these relevant factors. We expect industry consolidation to increase competition. As our competitors grow, they may adopt aggressive pricing or inventory policies, which could result in reduced operating margins, loss of market share and a diminished brand franchise. Some environmentally friendly products are priced at a premium to products that have similar uses that are not environmentally friendly. Our sales growth assumes that consumers will sometimes be willing to pay higher prices in order to enhance the environment, promote a sustainable economy, and achieve healthy lifestyles and personal development or that we will be able to reduce prices over time through volume purchases. Because Gaiam uses multiple distribution channels for our products, we also compete with other producers of similar mind-body-spirit fitness products sold to traditional retail stores. Our principal competitors are PPI Entertainment, Sony Wonder and Goldhil Media. We believe the principal competitive factors in this market are: 41 . distinctiveness of product . authoritative information . quality of product . brand recognition . price We believe we compete favorably on all relevant factors in direct marketing and selling to traditional retailers as evidenced by our sales growth. Many of our competitors are larger, have longer operating histories and have greater financial and marketing resources than we have. Our success also depends upon the willingness of consumers to purchase goods and services that promote the values we espouse. While we believe our business plan and assumptions are reasonable, we cannot assure you that the demographic trends on which they are based will continue or that the current levels of environmental consciousness or concerns about promoting a sustainable economy, healthy lifestyles and personal development will be sustained. The decrease of consumer interest in purchasing goods and services that promote the values we espouse would materially and adversely affect the growth of our customer base and sales revenues and, accordingly, our financial prospects. Our Intellectual Property Gaiam, Gaiam.com, Harmony, InnerBalance and Living Arts and various product names are subject to trademark or pending trademark applications, of Gaiam or a Gaiam company. We also currently hold various web domain names relating to our brand, including "www.gaiam.com." Our Employees As of June 30, 1999,May 31, 2001, Gaiam, together with our wholly-owned and the Gaiam companiesmajority- owned subsidiaries, employed approximately 150247 persons. None of our employees is covered by a collective bargaining agreement. Our Facilities Our principal executive offices are located in Boulder County, Colorado. Our main fulfillment center is located in the Cincinnati, Ohio area. This facility houses most of our fulfillment functions. We selected the Cincinnati site after considering the availability and cost of facilities and labor, proximity to major highways, air delivery hubs and support of local government of new businesses. We also believe that Cincinnati is ideal for providing the lowest cost shipping available from a single central point to a customer base that conforms to the overall U.S. population. Approximately 90% of all orders are filled and shipped from the Cincinnati facility. The balance is shipped directly from suppliers. The following table sets forth certain information relating to our facilities, all of which are leased:principal facilities:
Lease Location Size Use Lease Expiration - -------- ---- --- --- -------------------------- Boulder County, CO 25,00032,000 sq. ft. Headquarters and customer service October 2001 Outlet center January 2000March 2002 Cincinnati, OH 64,000208,100 sq. ft. Fulfillment center October 2000 Santa Monica,March 2006 Venice, CA 5,0009,000 sq. ft. Creative staff offices June 2000July 2005 Hopland, CA 12 acres Renewable Energy Demo Site Owned
42 We have options to renew our headquarters and fulfillment center leases.lease. We believe our facilities are adequate to meet our current needs and that suitable additional facilities will be available for lease or purchase when, and as, we need.need them. Regulatory Matters 29 There are a number of different bills under consideration by Congress and various state legislatures that would restrict disclosure of consumers' personal information, which may make it more difficult for Gaiam to generate additional names for its direct marketing, and restrict a company's right to send unsolicited electronic mail or printed materials. Although Gaiam believes it is generally in compliance with current laws and regulations and that these laws and regulations have not had a significant impact on our business to date, it is possible that existing or future regulatory requirements will impose a significant burden on us. We generally collect internet and catalog sales taxes only on sales to residents of the state in which Gaiam is headquartered, where orders are fulfilled or where Gaiam has a location. Currently, Gaiam collects sales taxes in California, Colorado and Ohio. A number of legislative proposals have been made at the federal, state and local level, and by foreign governments, that would impose additional taxes on the sale of goods and services over the internet and certain states have taken measures to tax internet-related activities. Although Congress placed a moratorium on state and local taxes on internet access or on discriminatory taxes on electronic commerce, existing state or local laws were expressly excepted from this moratorium. Further, once this moratorium is lifted, some type of federal and/or state taxes may be imposed upon internet commerce. Our business is also subject to a number of other governmental regulations, including the Mail or Telephone Order Merchandise Rule and related regulations of the Federal Trade Commission. These regulations prohibit unfair methods of competition and unfair or deceptive acts or practices in connection with mail and telephone order sales and require sellers of mail and telephone order merchandise to conform to certain rules of conduct with respect to shipping dates and shipping delays. We are also subject to regulations of the U.S. Postal Service and various state and local consumer protection agencies relating to matters such as advertising, order solicitation, shipment deadlines and customer refunds and returns. In addition, merchandise imported by Gaiam is subject to import and customs duties and, in some cases, import quotas. Gaiam's business could also be affected by regulations promulgatedLegal Proceedings We are subject to non-material legal proceedings arising in the future. For example, there are a number of different bills under consideration by Congress and various state legislatures that would restrict disclosure of consumers' personal information, which may make it more difficult for Gaiam to generate additional names for its direct marketing, and restrict a company's right to send unsolicited electronic mail or printed materials. Although Gaiam believes it is generally in compliance with current laws and regulations and that these laws and regulations have not had a significant impact on our business to date, it is possible that existing or future regulatory requirements will impose a significant burden on us. There is an increasing number of laws and regulations pertaining to the Internet. In addition, a number of legislative and regulatory proposals are under consideration by federal, state, local and foreign governments and agencies. Laws or regulations may be adopted with respect to the Internet relating to liability for information retrieved from or transmitted over the Internet, online content regulation, user privacy, taxation and quality of products and services. Moreover, it may take years to determine whether and how existing laws such as those governing issues such as intellectual property ownership and infringement, privacy, libel, copyright, trade mark, trade secret, obscenity, personal privacy, taxation, regulation of professional services, regulation of medical devices and the regulation of the sale of other specified goods and services apply to the Internet and Internet advertising. The requirement that we comply with any new legislation or regulation, or any unanticipated application or interpretation of existing laws, may decrease the growth in the use of the Internet, which could in turn decrease the demand for our products, information and services, increase our cost of doing business or otherwise have a material adverse effect on our business, results of operations and financial condition. The adoption of new laws or regulations could reduce the rate of growth of the Internet, which could potentially decrease the usageordinary course of our online stores or could otherwisebusiness. We do not believe that any of these proceedings will materially adversely affect our business. In addition, applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy is uncertain. The vast majority of these laws were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Further, several telecommunications carriers have requested the Federal Communications Commission 4330 ("FCC") to regulate telecommunications over the Internet. Due to the increasing use of the Internet and the burden it has placed on the current telecommunications infrastructure, telephone carriers have requested the FCC to regulate Internet service providers and online service providers and impose access fees on those providers. If the FCC imposes access fees, the costs of using the Internet could increase dramatically. This could result in the reduced use of the Internet as a medium for commerce, which could materially adversely affect our business. The Gaiam companies generally collect sales taxes only on sales to residents of the state in which Gaiam is headquartered, where orders are fulfilled or where Gaiam has a location, currently, California, Colorado and Ohio. A number of legislative proposals have been made at the federal, state and local level, and by foreign governments, that would impose additional taxes on the sale of goods and services over the Internet and certain states have taken measures to tax Internet-related activities. Although Congress recently placed a three-year moratorium on state and local taxes on Internet access or on discriminatory taxes on electronic commerce, existing state or local laws were expressly excepted from this moratorium. Further, once this moratorium is lifted, some type of federal and/or state taxes may be imposed upon Internet commerce. Legislation or other attempts at regulating commerce over the Internet may substantially impair the growth of commerce on the Internet and, as a result, adversely affect our opportunity to derive financial benefit from these activities. Legal Proceedings Gaiam is not a party to any material legal proceedings. In 1998 we acquired a majority interest in Living Arts. At the time Living Arts continued to employ one of the previous owners, who held part of a minority interest in Living Arts. In 1999, Living Arts terminated the employment of this person for chronic absenteeism, misappropriation of funds and breaching his various other employment obligations. The former employee has asserted that Living Arts wrongfully terminated his employment, and that we breached fiduciary duties by managing Living Arts in a manner designed to injure him, and that we owe him various amounts of money. Both parties are seeking to resolve these disputes, but litigation could result. We believe that the former employee's claims are without merit. MANAGEMENT Executive Officers And Directors Our executive officers and directors, including directors who will join the board upon conclusion of this offering, their respective ages as of August 30, 1999June 20, 2001 and their positions are as follows:
NAME AGE POSITIONName Age Position - ---- ----- --------------------------- -------- Jirka Rysavy 45Rysavy............. 47 Founder, Chairman of the Board and Chief Executive Officer Lynn Powers 50Powers.............. 52 President, Chief Operating Officer and Director Pavel Bouska 45Bouska............. 47 Executive Vice President and Chief Information Officer Barnet M. Feinblum....... 53 Director John Mackey.............. 47 Director Barbara Mowry............ 53 Director Paul H. Ray 60 Director*Ray.............. 61 Director
*Mr. Ray will join the board upon completion of this offering. 44 JIRKA RYSAVY -RYSAVY. Founder, Chairman and Chief Executive Officer of Gaiam. He has been Chairman since Gaiam's inception and became the full-time Chief Executive Officer in December 1998. In 1986, Mr. Rysavy is also Chairman Emeritus and a director offounded Corporate Express, Inc., which, under his leadership, grew to become a Fortune 500 company that suppliessupplying office and computer products and services. Mr. Rysavy founded Corporate Express in 1986 andHe was its Chairman and Chief Executive Officer until September 1998. Previously, heMr. Rysavy also founded and served as Chairman and Chief Executive Officer of Crystal Market, Inc., a health foodfoods market, which was sold to Michael Gilliland in 1987 to becomeand became the first store of Wild Oats Markets.Markets store. Mr. Rysavy is also a director of Whole Foods Markets,Market, Inc. LYNN POWERS -POWERS. President, Chief Operating Officer and a director of Gaiam since February 1996. From 1992 to 1996, she was Chief Executive Officer of La Scelta, an importer of natural fiber clothing products. Before that, Ms. Powers was Senior Vice President Marketing/Strategic Development and Vice President Merchandising of Miller's Outpost, a specialty retailer. PAVEL BOUSKA -BOUSKA. Executive Vice President and Chief Information Officer since March 1999. He served as a director of Gaiam from 1991 until August 1999. Prior to joining Gaiam, from June 1988 to March 1999, Mr. Bouska was an officer and one of the founding members of Corporate Express, serving in various positions, including Chief Information Officer and Vice President Information Systems, responsible for system development, information technology, operations, systems conversions and business consolidations. Prior to joining Corporate Express, he was project leader for Software Design & Management, a German software company subsequently acquired by Ernst & Young. PAUL H. RAY - Will becomeBARNET M. FEINBLUM. Director since October 1999. Mr. Feinblum is a director of GaiamHorizon Organic Dairy and served as the President and Chief Executive Officer of Horizon from May 1995 to January 2000. From July 1993 through March 1995, Mr. Feinblum was the President of Natural Venture Partners, a private investment company. From August 1976 until August 1993, Mr. Feinblum held various positions at Celestial Seasonings, Inc., including President, Chief Executive Officer, and Chairman of the conclusionBoard. Mr. Feinblum is also a director of this offering.Seventh Generation, Inc. JOHN MACKEY. Director since September 2000. Mr. Mackey has been the Chairman and Chief Executive Officer of Whole Foods Market, Inc., the world's largest natural food retailer, since he co-founded the company 20 years ago. Mr. Mackey is also a director of Jamba Juice. BARBARA MOWRY. Director since October 1999. From November 1997 until February 2001, Ms. Mowry was the President and Chief Executive Officer of Requisite Technology, a business-to- 31 business e-commerce company specializing in the creation and management of electronic content and catalogs. Prior to joining Requisite Technology, Ms. Mowry was an officer of Telecommunications, Inc. (cable television) from 1995 to 1997. In 1990, Ms. Mowry founded, and until 1995 served as Chief Executive Officer of, The Mowry Company, a relationship marketing firm focusing on the development of customer relations for businesses. PAUL H. RAY. Director since October 1999. Mr. Ray has beenis a senior partner in Integral Partnership, a consulting firm specializing in Cultural Creative topics. From November 1986 to December 2000, he was Executive Vice President of American LIVES, Inc., a market research and opinion polling firm since November 1986.firm. Prior to joining American LIVES, Mr. Ray was Chief of Policy Research on Energy Conservation at the Department of Energy, Mines and Resources of the Government of Canada from 1981 to 1983. From 1973 to 1981, Mr. Ray was Associate Professor of Urban Planning at the University of Michigan. Mr. Ray holds a B.A. (cum laude) in anthropology from Yale University and a Ph.D. in sociology from the University of Michigan. He is the author of The"The Integral Culture Survey," which first identified the cultural creativeCultural Creatives subculture. Each director serves for a one-year term. Each officer serves at the discretion of the Board of Directors. There are no family relationships among any of the directors or officers of Gaiam. Our Board of Directors currently has three vacancies, that may be filled by the Board of Directors. In addition to Mr. Ray, upon conclusion of this offering, the Board of Directors intends to appoint two directors who are not officers or employees of Gaiam. To maintain Gaiam's listing on the Nasdaq National Market, we are required to add at least one director, in addition to Mr. Ray, who is not an officer or employee of Gaiam. If we do not make this addition within 90 days following this offering, our shares could be delisted from the Nasdaq National Market, which would have an adverse effect on the liquidity and price of the shares. Committees of the Board of Directors Our board has standing audit and compensation committees. We have adopted written charters for both committees. Audit Committee. Our audit committee consists of Messrs. Feinblum and Ray and Ms. Mowry, and each member of the committee is independent within the meaning of applicable NASDAQ rules. Ms. Mowry serves as chairperson of the audit committee. The audit committee oversees (a) management's maintenance of the reliability and integrity of our accounting policies and financial reporting and disclosure practices; (b) management's establishment and maintenance of processes to assure that an adequate system of internal control is functioning; and (c) management's establishment and maintenance of processes to assure our compliance with all laws, regulations and company policies relating to financial reporting. The audit committee held one meeting during fiscal 2000. Compensation Committee. Our compensation committee consists of Messrs. Feinblum and Ray and Ms. Mowry. Mr. Feinblum serves as chairperson of the compensation committee. The compensation committee establishes compensation amounts and policies applicable to executive officers and establishes salaries, bonuses and other compensation plans and matters for executive officers of Gaiam intends to establish an Audit Committee within 90 days following this offering composed of at least twoand administers Gaiam's stock option plans and employee stock purchase plan. The compensation committee held four meetings during fiscal 2000. We do not have a nominating committee, and nominations for directors which isare made by our board. Our bylaws set forth certain procedures that are required to maintain Gaiam's listing onbe followed by shareholders in nominating persons for election to our board. Generally, written notice of a proposed nomination must be received by the Nasdaq National Market.Secretary of the Corporation not later than the 45/th/ day nor earlier than the 70/th/ day prior to the anniversary of the mailing of the preceding year's proxy materials. Compensation Committee Interlocks and Insider Participation The majoritycompensation committee consisted of Messrs. Feinblum and Ray and Ms. Mowry during fiscal 2000. None of the members of the Audit Committee willcompensation committee is currently, or has ever been at any time since our formation, one of our officers or employees or an officer or employee of any of our subsidiaries. During 2000, no executive officer of Gaiam served as a member of the board of directors or 32 compensation committee of any entity that had one or more executive officers serving as a member of our Board of Directors or compensation committee. Director Compensation Directors who are not be employees of Gaiam. The Audit Committee will reportGaiam or its affiliates are paid a fee of $3,000 for each meeting of our board that they attend, and a fee of $1,000 for each telephonic meeting attended. In addition, non-employee directors are paid a fee of $500 for attendance at each committee meeting and non-employee chairpersons of each standing committee receive an annual fee of $1,000. All directors have elected to receive their compensation in Gaiam shares. During 1999, each non-employee director received a stock option to acquire 10,000 shares of class A common stock at an exercise price of $5, which was the offering price in our initial public offering. Mr. Mackey received a stock option to acquire 10,000 shares of Class A Common Stock at an exercise price of $16.375 when he joined the Board regarding the appointment of the independent public accountants of Gaiam, the 45 scope and fees of prospective annual audits and the results thereof, compliance with Gaiam's accounting and financial policies and management's procedures and policies relative to the adequacy of Gaiam's internal accounting controls. Following this offering, we also intend to establish a Compensation Committee, that we expect to be comprised entirely of non-employee directors. Director Compensation Currently, directors of Gaiam do not receive any compensation for their services as directors. Following consummation of this offering, Gaiam expects to establish a compensation plan for non-employee directors.in September 2000. Limitation of Liability and Indemnification Matters Gaiam's charter provides indemnity to its directors and officers to the extent permitted by Colorado law. The charter also includes provisions to eliminate the personal liability of its directors and officers to Gaiam and its shareholders to the fullest extent permitted by Colorado law. Under current law, exculpation would cover an officer's ora director's breaches of fiduciary duty, except for: . breaches of a person's duty of loyalty to Gaiam, . those instances where a person is found not to have acted in good faith, . those instances where a person received an improper personal benefit as the result of the breach, and . acts in violation of the Colorado Business Corporation Act. Gaiam's bylaws provide that Gaiam will indemnify its directors, officers and employees against judgments, fines, amounts paid in settlement and reasonable expenses. Executive Compensation The following table sets forth the compensation, for the yearyears ended December 31, 1998, 1999 and 2000, of Gaiam's executive officers, Mr. Rysavy and Ms. Powers. Information is also included with respect to 1998 Compensationcompensation for twothree of Gaiam's Vice Presidents:Presidents for 1998, 1999 and 2000: 33 SUMMARY COMPENSATION TABLE
Name and Principal Position Year Annual 1998 All Other 1998Long Term Compensation Compensation(1) - --------------------------- ---- -------------------------- ----------- Compensation Compensation ------------ ------------Securities Underlying Salary Bonus Options ------------ --------- ----------- Jirka Rysavy - Chairman and Chief Executive Officer $ ----(1) $ --- $ ---/2000 $140,385 -- -- 1999 125,000 -- 200,000 1998 --(2)/ -- -- Lynn Powers - President and Chief Operating Officer 2000 140,385 $100,000 90,000 1999 125,000 -- 160,000 1998 110,009 --- ---/(2)/ Mark Lipien - Vice President Operations 70,802-- -- Pavel Bouska Chief Information Officer 2000 134,231 20,000 -- 1999 100,632 -- 80,000 1998 -- -- -- Janet Mathews Chief Financial Officer 2000 116,724 30,000 -- 1999 104,592 -- 20,000 1998 102,686 10,000 ---/(2)/-- Linda West - Vice President Merchandising 2000 96,154 15,000 -- 1999 88,077 -- 20,000 1998 83,076 10,000 ---/(2)/--
____________________________________________ (1) See table below regarding stock option grants. (2) Gaiam began compensating Mr. Rysavy in January 1999. HisStock Option Grants The following table provides information with respect to the individual stock option grants to the named officers under the 1999 Long-Term Incentive Plan during fiscal year 2000. Options under the plan vest at 2% per month during the 11/th/ through the 60/th/ month after the grant. OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Number of Percent of Value at Assumed Securities Total Options Rates of Stock Underlying Granted to Exercise or Appreciation for Options Employees in Base Price Expiration Option Term(1) -------------------------- Name Granted(#) Fiscal Year ($/Share) Date 5%($) 10%($) - ---- ---------- ------------- ----------- ---------- ----------- ------------ Lynn Powers............. 90,000 30.8% $ 15.25 December 6, 2007 558,745 1,302,114
_____________________ (1) The 5% and 10% assumed annual salary is currently $125,000. (2) Until June 1, 1999,rates of compound stock price appreciation over the term of the options are computed in accordance with the rules and regulations of the Securities and Exchange Commission and do not represent Gaiam's estimate of stock price appreciation or a projection by Gaiam did not make any restrictedof future stock awards, grant anyprices. 34 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table provides information, with respect to the named officers, concerning the value of unexercised stock appreciation rights, make any long-term incentive plan payouts or grantoptions exercisable for Gaiam Class A Common Stock held as of December 31, 2000. In 2000, no named officer exercised any stock options. 46 Stock Plans We recently adopted a long-term incentive plan and an employee stock purchase plan.Number of Shares Underlying Value of Unexercised Unexercised Options at In-the-Money Options December 31, 2000 (#) at December 31, 2000 (1) -------------------------- -------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- Jirka Rysavy......... 32,000 168,000 354,000 1,858,500 Lynn Powers.......... 25,600 224,400 283,200 1,503,675 Pavel Bouska......... 12,800 67,200 141,600 743,400 Janet Mathews........ 2,000 18,000 21,875 193,125 Linda West........... 2,000 18,000 21,875 193,125 _____________ (1) The incentive plan provides forvalue of unexercised in-the-money options is based on the grantdifference between the exercise price of the individual stock options and similar stock based compensation. We have reserved a total of 1,600,000 shares for options and other grants under the incentive plan. Of that number, we have granted approximately 675,000 options, all at aclosing price of $4.375 per share. The employee purchase plan will allow our employees to purchase shares at up to a 15% discount from market value, subject to restrictions. We have reserved a total of 500,000 shares under$15 7/16 as reported on the employee purchase plan.NASDAQ exchange on December 31, 2000. Employment Agreements Gaiam does not have any employment agreements with any of its executive officers and does not typically enter into written employment agreements with any employees. However, GaiamGaiam's directors, officers and managers are required to sign a confidentiality agreement and, upon receiving a stock option grant, a two-year non-compete agreement commencing with the date they leave Gaiam. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On October 1, 1998, Mr. Rysavy sold InnerBalance to Gaiam for a $531,000 note carrying interest at 8% per annum, due June 30, 2001. A portion of the note was repaid in 1998. On January 1, 1999, Gaiam issued a $289,000 8% debenture to Mr. Rysavy for the balance. This debenture was repaid in full on June 30, 1999. On December 7, 1998, Ms. Powers exercised warrants she received in 1996 to purchase 40,000 shares at $1.25 per share and also purchased $50,000 in debentures issued by Gaiam. The debenture bearswas subject to mandatory conversion into shares simultaneous with the closing of Gaiam's initial public offering at the initial offering price and bore interest at 8% per annum and may be prepaid at any time by Gaiam. In connectionannum. Simultaneous with thisthe closing of Gaiam's initial public offering in October 1999, Ms. Powers hasPowers' debentures were automatically converted into 10,000 shares, which are restricted securities as defined in Rule 144 under the right to purchase shares for the outstanding principal amount of the debenture at the offering price of $5.00 per share.Securities Act. Accrued and unpaid interest will bewas paid in cash. AllCertain sales of securities available for resale made by Gaiam in 1998 and 1999 were made to a company wholly owned by Mr. Rysavy at prevailing market prices based on NASDAQ quotations. The proceeds of these sales were $703,125 in 1998 and $538,750 in 1999. See note 6 of the notes to consolidated financial statements. WeGaiam obtained the securities by exercising options granted by Mr. Rysavy to usGaiam in 1993. During 1999 and until April 2000, Gaiam subleasessubleased its fulfillment center in Cincinnati, Ohio from a subsidiary of Corporate Express, Inc. at an annual rental rate of approximately $205,200, which iswas the same rate as paid by Corporate Express, Inc. under its lease. During 1999, Mr. Rysavy iswas a director of Corporate Express and beneficially ownsowned approximately 4.9% of the stock of Corporate Express but doesdid not control Corporate Express. The lease expireswas terminated in April 2000 in connection with Gaiam's lease of a new 208,000 sq. ft. distribution center. 35 Until October 2000. Michael Gilliland purchased $100,000 of shares and $100,000 in debentures from us on May 7, 1999. Mr. Gilliland is the founder of the Wild Oats Markets. In 1987,1999, Mr. Rysavy sold a natural foods store in Boulder, Colorado, Crystal Market, to Mr. Gilliland, and that store became the first Wild Oats Market store. The shares purchased by Mr. Gilliland were sold at $4.375 per share, and the debentures he purchased bear interest at 8% per annum and may be prepaid at any time by Gaiam. Mr. Gilliland has certain registration rights requiring us to register his shares. See our consolidated financial statements for additional information relating to this private placement. In connection with this offering, we are offering Mr. Gilliland the option to purchase shares for the outstanding principal amount of the 47 debentures (excluding interest) at the offering price of $5.00 per share. We anticipate Mr. Gilliand will purchase 20,000 shares in exchange for his debenture. Mr. Rysavy is a guarantor ofguaranteed Gaiam's line of credit with Wells Fargo Bank (formerly Norwest Bank. See "Management's DiscussionBank). The credit agreement permitted borrowings up to $3 million (of which $1.9 million was outstanding at December 31, 1999) based upon the collateral value of Gaiam's accounts receivable and Analysisinventory held for resale. These borrowings were secured by a pledge of Financial ConditionGaiam's assets and Resultsbore interest at the prime rate plus 1%. In 1999, Gaiam engaged the services of Operations -- Liquidityccplanet.com, Inc. to develop and Capital Resources." OURimplement a new web site design using the latest technology for Gaiam's direct- to-consumer operations. Mr. Rysavy owns a majority of ccplanet's stock. Gaiam paid ccplanet $1.2 million for work performed on the project through December 31, 1999 and an additional $3.3 million in 2000 (the new site was placed into service during March, 2000). Gaiam made its customer database and certain visual media available to ccplanet in exchange for fees totaling $600,000 during 1999 and $1.4 million during 2000. In 2000, Mr. Rysavy advanced funds to Gaiam to purchase a 70% interest in an organic clothing manufacturer. These advances, plus applicable interest, were repaid in December 2000. Additionally, Gaiam purchased approximately $300,000 in inventory from Earthlings, Inc. (a related party under common ownership with Mr. Rysavy) at Earthlings' cost. On January 5, 2001, Gaiam purchased Earthlings for $47,509. On June 30, 2000, Whole Foods Market, Inc., a publicly traded company, and Gaiam merged their Internet properties into Gaiam.com, Inc. Gaiam owns 50.1% of Gaiam.com, Inc., Whole Foods Market owns 35% and the remainder is owned by various venture capital funds. Gaiam is the exclusive internet site for both Gaiam and Whole Foods Market. Whole Foods Market and Gaiam have also entered into a 10 year joint marketing agreement to promote each other's business and share customer data. The companies are currently testing a store-within-a-store concept, presenting Gaiam's lifestyle products, in 21 of Whole Foods Market's larger stores. During 2000, a subsidiary of Whole Foods Market engaged the services of ccplanet for total consideration of $ 1.5 million, and Infocenter, Inc., a company formed by Mr. Rysavy, assumed certain liabilities of the Whole Foods Market subsidiary and received funding ($500,000 in cash and a note in the principal amount of $3,000,000) to satisfy such liabilities. On December 29, 2000, Self Care Holdings, Inc., a corporation owned by Mr. Rysavy, purchased certain inventory and other assets of Medical SelfCare, Inc. in an auction conducted in connection with an assignment for the benefit of creditors of Medical SelfCare. On February 1, 2001, Gaiam acquired substantially all of the inventory and assets from Self Care Holdings by acquiring Self Care Inc., a wholly-owned subsidiary of Self Care Holdings, for $3.9 million, an amount equal to Self Care Holdings' purchase price for the purchased inventory and assets plus related transaction costs. 36 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the class A and class B common stock of Gaiam by each of our directors, executive officers and 5% shareholders who beneficially owned shares on June 30, 1999,20, 2001, and as adjusted to reflect the sale of the shares offered in this offering. Percentages are based on the 3,496,429 shares to be outstanding after the offering, plus the 7,035,000 shares reserved for issuance upon conversion of class B common stock. The address for each person, except as otherwise provided, is 360 Interlocken Blvd., Broomfield, Colorado, 80021.
Shares Beneficially Owned Shares to be Beneficially Shares Beneficially Owned Owned Prior to this Offering/(11)/ After this Offering/(11)(12)/ -----------------------------Offering(7) Offering(7)(8) ------------------------------ ------------------------------- Number of Number of Beneficial Owner Number of Shares/(13)/ Percent Number of Shares/(13)/ PercentShares(9) Percent(9) Shares Percent(10) - ---------------- ------------- -------------- ------------- --------------- Jirka Rysavy/(1)/ 8,000,000 93.8% 8,100,000 77.0%Rysavy(1)..................... 8,150,200 71.32% 8,150,200 59.8% Lynn Powers/(2)/ 40,000 .5% 60,000 .6%Powers(2)...................... 142,200 2.36% 142,200 1.7% Pavel Bouska/(3)/ 40,000 .5% 60,000 .6% James Argyropoulos/ Argyropoulos Investor G.P./(4)/ 120,000 1.4% 220,000 2.1% Michael Gilliland/(5)/ 22,857 .3% 42,857 .4% Lennart Perlhagen/(6)/ 57,143 .7% 107,143 1.0% Mo Siegel/(7)/ 17,143 .2% 32,143 .3% Herbert Simon/(8)/ 57,143 .7% 107,143 1.0% Edward Snider/(9)/ 57,143 .7% 107,143 1.0% Jeffrey Steiner/(10)/ 120,000 1.4% 220,000 2.1%Bouska(3)..................... 119,520 2.00% 119,520 1.5% Barnet Feinblum(4).................. 13,304 * 13,304 * John Mackey ........................ 85,300 1.43% 85,300 1.0* Barbara Mowry(5).................... 7,304 * 7,304 * Paul Ray(6)......................... 7,168 * 7,168 * All Executive Officers and Directors (3(7 persons) 8,080,000 95.7% 8,220,000 78.2%.............. 8,524,966 73.99% 8,524,966 62.1%
/(1)/________ * Less than one percent (1) Includes options held by Mr. Rysavy owns 7,035,000to acquire a total of 64,000 shares which options have vested or will vest within 60 days of the date of this prospectus. Mr. Rysavy, our Chairman and Chief Executive Officer, holds all 5,400,000 outstanding shares of class B common stock which constitute alland 2,686,200 shares of the issuedclass A common stock (or approximately 45% of the outstanding shares of class A common stock). The shares of class B common stock vote ten votes per share. Pursuant to a voting agreement between Mr. Rysavy and outstandingGaiam, Mr. Rysavy has agreed to limit the number of shares of class B common stock that he votes to 49% of the combined votes of the class B common stock and class A common stock. His remaining shares of Class B Common Stock are convertible into an equal numbervoted in proportion to the votes of shares. Mr. Rysavy also owns 965,000 shares. Includes 100,000 shares Mr. Rysavy will purchase in this offering.the Class A Common Stock. See "Description of Capital Stock -- Shares"Stock--Shares" for a description of the voting rights of the class B common stock. /(2)/(2) Includes 20,000 sharesoptions held by Ms. Powers to acquire a total of 51,200 shares which options have vested or will purchase invest within 60 days of the date of this offering. /(3)/prospectus. (3) Includes 20,000 sharesoptions held by Mr. Bouska to acquire a total of 25,600 shares which options have vested or will purchasevest within 60 days of the date of this prospectus, and 1,100 shares and 2,720 in options to acquire shares, which options have vested or will vest within 60 days of the date of this offering /(4)/prospectus, held by Mr. Argyropoulos isBouska's spouse, an employee of Gaiam. (4) Includes options held by Mr. Feinblum to acquire a total of 5,000 shares, which options have vested or will vest within 60 days of the general partnerdate of Argyropoulos Investor G.P. He isthis prospectus, and 1,000 shares held by Mr. Feinblum's spouse. (5) Includes options held by Ms. Mowry to acquire a total of 5,000 shares, which options have vested or will vest within 60 days of the founder, and, until 1989, was Chairman,date of The Cherokee Group, and currently isthis prospectus. (6) Includes options held by Mr. Ray to acquire a total of 5,000 shares, which options have vested or will vest within 60 days of the founder and Chairmandate of The Walking Company. His address is 9349 Oso Avenue, Chatsworth, California. Includes 100,000 shares Mr. Argyropoulos or his entities will purchase in this offering. /(5)/ Mr. Gilliland is the founder, Chairman and Chief Executive Officer of Wild Oats Markets. Includes 20,000 shares he will purchase in this offering. /(6)/ Mr. Perlhagen is the founder and Chairman of CrossPharma AB; and currently Chairman of Meda Pharmaceuticals AB. Includes 50,000 shares he will purchase in this offering. /(7)/ Mr. Siegel is co-founder and Chairman of Celestial Seasonings, Inc. Includes 15,000 shares he will purchase in this offering. /(8)/ Mr. Simon is Chairman of Simon Property Group. Includes 50,000 shares he will purchase in this offering. 48 /(9)/ Mr. Snider is the founder and Chairman of Comcast Spectator. Includes 50,000 shares he will purchase in this offering. /(10)/ Mr. Steiner is the founder, Chairman and Chief Executive Officer of Fairchild Industries. His address is 110 East 59th Street, New York, New York 10022. Includes 100,000 shares he will purchase in this offering. /(11)/prospectus. (7) Each shareholder possesses sole voting and investment power with respect to the shares listed, except as provided by applicable community property laws.laws or as otherwise noted. In accordance with the rules of the Securities and Exchange Commission, each shareholder is deemed to beneficially own any shares obtainable by him or her upon the exercise of stock options or warrants which are currently exercisable or which become exercisable within 60 days after June 30, 1999,20, 2001, or the conversion of convertible securities that are currently convertible or become convertible within 60 days after June 30, 1999.20, 2001. The inclusion in this table of shares listed as beneficially owned does not constitute an admission of beneficial ownership. /(12)/(8) The number and percentage of shares owned after this offering assumes none of the listed shareholders will purchase additional shares in this offering, except as otherwise indicated. /(13)/(9) The number of shares deemed outstanding prior to this offering includes all shares of class A common stock outstanding as of June 30, 1999 and20, 2001. In addition, the number of shared deemed outstanding for each shareholder includes any shares obtainable by such shareholder through the conversion of class B common stock held by Mr. Rysavy. Noor through the exercise of options to purchase shares that are exercisable within 60 days of the date of this prospectus. Ownership percentages based solely on the 1,496,42937 (10) The number of shares outstanding prior to this offering are Mr. Rysavy (965,000 shares) 64.5%; Ms. Powers and Mr. Bouska, 2.7% each; Argyropoulos Investor G.P./Mr. Argyropoulos and Mr. Steiner, 8.0% each; Mr. Simon, Mr. Snider and Mr. Perlhagen, 3.8% each; Mr. Gilliland, 1.5%; and Mr. Siegel, 1.2%. Ownership percentages based solely on the 3,496,429 shares assumed to bedeemed outstanding after this offering includes all shares of class A common stock outstanding as of the date of this prospectus including the shares offered pursuant to this prospectus. In addition, for each shareholder, such number of deemed outstanding includes any shares obtainable by such shareholder through the conversion of class B common stock or through the exercise of options to purchase shares that are Mr. Rysavy (1,065,000 shares) 30.5%; Ms. Powers and Mr. Bouska, 1.7% each; Argyropoulos Investor G.P./Mr. Argyropoulos and Mr. Steiner, 6.3% each; Mr. Simon, Mr. Snider and Mr. Perlhagen, 3.1% each; Mr. Gilliland, 1.2%; and Mr. Siegel, 0.9%. 49exercisable within 60 days of the date of this prospectus. 38 DESCRIPTION OF CAPITAL STOCK General After the filing of Gaiam's Amended and Restated Articles of Incorporation in connection with this offering, theThe authorized capital stock of Gaiam will consist ofis 250,000,000 shares, consisting of 150,000,000 shares of Classclass A common stock, $.0001 par value per share, 50,000,000 shares of class B common stock, $.0001 par value per share, and 50,000,000 shares of preferred stock, par value $.0001 per share. As of August 30, 1999,May 31, 2001, there were 1,496,4295,963,137 shares of class A common stock outstanding held by ten9,115 shareholders of record, options to purchase an aggregate of approximately 675,0001,470,318 shares, a warrant to purchase 24,000 shares and 7,035,0005,400,000 shares of class B common stock outstanding. There were no shares of preferred stock outstanding. Although Gaiam believes the following summary description of Gaiam's shares, class B common stock, Preferred Stock,preferred stock, Amended and Restated Articles of Incorporation, and Amended and Restated Bylaws covers all material provisions affecting the rights of holders of capital stock of Gaiam, this summary is not intended to be complete and is qualified by reference to the provisions of applicable law and to Gaiam's Amended and Restated Articles of Incorporation and Amended and Restated Bylaws, both of which are included as exhibits to the Registration Statement of which this prospectus is a part. See "Additional Information." Capital Stock Each holder of shares of class A common stock is entitled to one vote for each share held on all matters submitted to a vote of shareholders. Each share of class B common stock is entitled to ten votes on all matters submitted to a vote of shareholders. There are no cumulative voting rights. All holders of shares of class A common stock and shares of class B common stock vote as a single group on all matters that are submitted to the shareholders for a vote. Accordingly, holders of a majority of the votes of the shares of class A common stock and shares of class B common stock entitled to vote in any election of directors may elect all of the directors who stand for election. Shares of class A common stock and shares of class B common stock are entitled to equal dividends, if any, as may be declared by the Board of Directors out of legally available funds. In the event of a liquidation, dissolution or winding up of Gaiam, the shares of class A common stock and shares of class B common stock would be entitled to share ratably in Gaiam's assets remaining after the payment of all of Gaiam's debts and other liabilities. Holders of shares of class A common stock and shares of class B common stock have no preemptive, subscription or redemption rights, and there are no redemption or sinking fund provisions applicable to the shares of class A common stock and class B common stock. The outstanding shares of class A common stock and shares of class B common stock are, and the shares of class A common stock offered by Gaiam in this offering will be, when issued and paid for, fully paid and non-assessable. The class B common stock may not be transferred unless converted into shares of class A shares,common stock, other than certain transfers to affiliates and family members. The shares of class B common stock are convertible one-for-one into shares of class A shares,common stock, at the option of the holder of the shares of class B common stock. 50 Gaiam's Board of Directors is authorized, subject to any limitations prescribed by Colorado law, to issue at any time up to 50,000,000 shares of preferred stock. The Board may provide for the issuance of the preferred stock in one or more series or classes with designations, preferences, limitations and relative rights determined by the Board without any vote or action by the shareholders, although the Board may not issue voting preferred stock without the consent or approval of a majority of the Classclass B common stock. As a result, the Board has the power to issue preferred stock with voting, conversion and other rights and preferences that could adversely affect the voting power or other rights of the holders of the shares. Although Gaiam has no current plans to issue any preferred stock, the issuance of preferred stock 39 or of rights to purchase preferred stock could have the effect of making it more difficult for a third party to acquire Gaiam, or of discouraging a third party from attempting to acquire Gaiam. Such an issuance could also dilute your voting power or other incidents of ownership as a holder of shares.power. Bylaws The Bylaws provide in accordance with Colorado law, that shareholders may not take action without a shareholders' meeting, provided that all shareholders entitled to vote consent to do so in writing.meeting. The Bylaws also require advance notice of any proposal to be brought before an annual meeting of shareholders that relates to an amendment to the Articles of Incorporation, a merger, the sale of all or substantially all of Gaiam's assets, the dissolution of Gaiam, or any nomination for election of directors other than by the Gaiam board of directors. These provisions could have the effect of delaying, deferring or preventing a change of control of Gaiam. Voting Agreement Mr. Rysavy, our Chairman and Chief Executive Officer, holds all 5,400,000 outstanding shares of class B common stock and 2,686,200 shares of the class A common stock (or approximately 45% of the outstanding shares of class A common stock). The shares of class B common stock vote ten votes per share. Pursuant to a voting agreement between Mr. Rysavy and Gaiam, Mr. Rysavy has agreed to limit the number of shares of class B common stock that he votes to 49% of the combined votes of the class B common stock and class A common stock. His remaining shares of class B common stock are voted in proportion to the votes of the class A common stock. Transfer Agent and Registrar The transfer agent and registrar for the shares is American Securities Transfer &Computershare Trust Company, Inc. 40 SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares in the public market following this offering, or the perception that sales could occur, could adversely effectaffect the prevailing market price for our shares. Furthermore, sincebecause no shares will be available for sale shortly after this offering because of the contractual and legal restrictions on resale described below, sales of a substantial number of shares in the public market after these restrictions lapse could adversely affect the prevailing market price and impair our ability to raise equity capital in the future. Upon the closing of this offering, based upon the number of shares outstanding as of June 30, 1999,May 31, 2001, there will be 3,496,4298,163,137 shares of class A common stock (including the 2,200,000 shares sold in this offering but assuming no exercise of the underwriters' over-allotment option) and 7,035,0005,400,000 shares of class B common stock outstanding. Of these shares, all 2,000,000approximately 4,500,000 shares of class A common stock (including the 2,200,000 shares sold in this offeringoffering) will be freely tradable without restriction or further registration under the Securities Act, other than shares that are purchased by "affiliates"affiliates of Gaiam as that term is defined in RuledRule 144 under the Securities Act or the shares are purchased by holders who have entered into lock-up arrangements with the underwriters for this offering. See " -- Lock-up"--Lock-up Agreements" below. TheOf the remaining 1,496,429 shares, approximately 3,700,000 shares of class A common stock and all 7,035,0005,400,000 shares of class B common stock will be "restricted securities"restricted securities as that term is defined in Rule 144 under the Securities Act.Act or shares held by affiliates of Gaiam. Restricted securities and shares held by affiliates may be sold in the public market only if registered or if they qualify for an exemption from registration under RulesRule 144 or 144(k) under the Securities Act, which rules are summarized below. Following this offering, we intend to file a registration statement under the Securities Act covering approximately 51 500,000 shares reserved under our stock employee purchase plan. The registration statement would permit persons acquiring shares under the plans (other than persons who have entered into the lock-up agreements referred to below) to sell the shares in the public market after the shares are purchased under the plans. The registration statement covering these shares will become effective upon filing. Securities Act Rules In general, under Rule 144 as currently in effect, a person (or persons whose shares are required to be aggregated), including an affiliate, who has beneficially owned restricted shares for at least one year, or any affiliate, is entitled to sell, within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of: . 1% of the then outstanding shares (approximately 35,00082,000 shares immediately after this offering),; or . the average weekly trading volume of the shares on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. In addition, under Rule 144(k), a person who is not one of our affiliates at any time during the 90 days preceding a sale and who has beneficially owned the restricted shares proposed to be sold for at least two years (including the holding period of any prior owner other than an affiliate) is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k) shares"such shares may be sold immediately upon the completion of this offering.at any time. Lock-up Agreements All of our directors officers and existing shareholdersofficers (who in the aggregate hold 1,496,429 shares and2,966,476 shares of 7,035,000class A common stock and 5,400,000 shares of class B common stock, and whostock) will acquire an additional 495,000 shares in this offering) arebe covered by lock-up agreements under which they will not be permitted to transfer or otherwise dispose of, directly or indirectly, any shares or any securities convertible into or exercisable or exchangeable for shares, for a period of 180 days after the closing of the offering. Transfers or dispositions can be made sooner: 41 . with the prior written consent of Tucker Anthony Cleary Gull;Sutro Capital Markets; . in the case of certain transfers to affiliates; . as a bona fide gift; or . to a trust for the benefit of the transferor or immediate family members of the transferor. Upon expiration of the lock-up period, 180 days after the date of this prospectus, 8,641,429approximately 9,100,000 shares shares (including 7,035,0005,400,000 shares of class B common stock) will be available for resale to the public in accordance with Rule 144, subject to the transfer restrictions described above. In addition, Gaiam has agreed not to sell or otherwise dispose of, directly or indirectly, any shares or any securities convertible into or exercisable or exchangeable for shares, for a period of 180 days after the 52 closing of the offering, without the prior written consent of Tucker Anthony Cleary Gull,Sutro Capital Markets, except that we may: . issue shares upon the exercise of outstanding options and grant options to purchase shares under our incentive plan;1999 Long-term Incentive Plan; . issue shares under our employee stock employee purchase plan; and . issue shares in connection with the acquisition of another company if the terms of the issuance provide that the shares shall not be resold prior to the expiration of the 180-day lock-up period described above. Registration Rights After our filing of the registration statement relating to this offering, we areWe may be required to file aone or more registration statementstatements covering up to approximately 451,429 shares held by existing shareholders. The holders may not request the filing of registration statements until after July 20, 2001. Gaiam generally is required to bear all of the expenses of the registration,registrations, except underwriting discounts and commissions. We have agreed with the underwriters that we will not permit any of these holders to sell these shares for 180 days after the closing of the offering. In addition, if these shares are not sold in a registered offering, the holders will be required to comply with the provisions of Rule 144 as described above. 42 UNDERWRITING The underwriting agreement, dated ____, 1999,which is filed as an exhibit to the registration statement relating to this prospectus, provides that subject to certain conditions, Gaiam has agreed to sell to each of the underwriters named below, and each of these underwriters has agreed to purchase from Gaiam, the respective number of shares set forth opposite their names below:
Underwriters: Number of Shares Tucker Anthony Cleary Gull......................... 1,000,000 Adams, Harkness & Hill, Inc........................ 1,000,000 Total......................................... 2,000,000
IfNumber of Underwriters: Shares ------------- ------ Tucker Anthony Sutro Capital Markets.................... Adams, Harkness & Hill, Inc............................. _________ Total.................................................. _________ The underwriting agreement provides that the underwriters sell more shares than the total number set forth in the table above, the underwriters have an over-allotment optionare obligated to buy up to an additional 300,000 shares from Gaiam at $5.00 per share to cover these sales. They may exercise that option for 30 days after the initial salepurchase all of the shares toof class A common stock in the underwriters. Ifoffering if any of these optioned shares are purchased, the underwriters will purchase shares in approximately the same proportion as set forth in the table above. The underwriters must purchase and accept delivery of all the shares offered in this prospectus, other than those shares covered by the over-allotment option described below. Tucker Anthony Sutro Capital Markets and Adams, Harkness & Hill, Inc., on behalf of the underwriters, expect to deliver the shares on or about , 2001. We have granted the underwriters a 30 day option after the date of the underwriting agreement to purchase, from time to time, up to 330,000 shares at the public offering price less underwriting discounts and commissions. The option may be exercised to cover over-allotments, if any, are purchased.made in connection with the offering. To the extent that this option is exercised, each underwriter will be obligated, subject to certain conditions, to purchase its pro rata portion of these additional shares based on the underwriter's percentage underwriting commitment in the offering as indicated in the preceding table. The representatives of the underwriters have advised us that the underwriters propose to offer shares of class A common stock directly to the public at the public offering price on the cover of this prospectus and to selected dealers, who may include the underwriters, at this public offering price less a selling concession not in excess of $ per share. The underwriters may allow, and the selected dealers may re-allow, a discount from the concession not in excess of $ per share to other dealers. After the completion of the offering, the representatives may change the public offering price and other selling terms. The following table showssummarizes the underwriting fees to be paiddiscounts and commissions we will pay to the underwriters by Gaiam in connection with this offering.underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase 330,000 additional shares, and assuming that 1,400,000 shares are sold atshares. The underwriting fee is the difference between the initial price to the public and the amount the underwriters pay to Gaiam for the shares. No Exercise Full Exercise of Over- of Over- allotment allotment Option Option --------- ----------- Per share........................................... $ $ Total.............................................. $________ $________ We estimate that the total expense of this offering, price of $5.00 per shareexcluding the underwriting discounts and 600,000 shares are sold atcommissions, will be approximately $___________. Our class A common stock is quoted on the customer discount price of $4.50 per share.
No Exercise Full Exercise Per share (customer discount)...... $0.45 $0.45
53NASDAQ National Market under the symbol "GAIA." 43 Per share.......................... $0.50 $0.50 Total.............................. $970,000 $1,120,000
Gaiam will pay offering expensesWe have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act and liabilities incurred in connection with the opening of accounts for Gaiam customers, estimateddirected share program referred to be approximately $400,000. The compensationbelow, and to be paidcontribute to payments that the underwriters and Gaiam's agreementmay be required to reimbursemake for these liabilities. The representatives of the underwriters may engage in over-allotment, stabilizing transactions, syndicate covering transactions, and penalty bids or purchases for expenses associatedthe purpose of pegging, fixing or maintaining the price of the class A common stock, in accordance with opening accounts were determined through negotiations between Gaiam andRegulation M under the underwriters. In connection with thisSecurities Exchange Act. . Over-allotment involves syndicate sales in excess of the offering we are offering each of our debenture holders the optionsize, which creates a syndicate short position. . Stabilizing transactions permit bids to purchase shares for the outstanding principal amountunderlying security so long as the stabilizing bids do not exceed a specific maximum. . Syndicate covering transactions involve purchases of the debentures (excluding interest) atclass A common stock in the offering price of $5.00 per share. Asopen market after the distribution has been completed. . Penalty bids permit the representatives to reclaim a result,selling concession from a total of 395,000 shares will be sold tosyndicate member when the debenture holders, assuming that each of the debenture holders elects to purchase shares in this offering. In addition, we will offer Mr. Rysavy the opportunity to purchase 100,000 shares at the offering price of $5.00 per share. The result of these offers is that 1,505,000 shares will be available for sale to Gaiam customers and the public in this offering. If more requests for shares are received than Gaiam is offering, Gaiam and the underwriters intend to prioritize the allocation process so that Gaiam customers will be able to buy at least 50 shares, although it may not be possible to allocate 50 shares to each customer who requests shares. Our customers will receive a 10% discount from the initial public offering price set forth on the cover of this prospectus (a discount of $.50 per share, resulting in a purchase price of $4.50 per share) on the first 200 shares purchased per customer. Gaiam employees may also take advantage of the customer discount. Any shares not sold to customers and employees at the discounted price will be offered by the underwriters to the public at $5.00 per share. If more requests for shares are received than Gaiam is offering, Gaiam and the underwriters intend to allocate at least 80% of the available shares, or approximately 1,200,000 shares, to Gaiam customers. Shares will be allocated to customers in three ways. A total of approximately 500,000 shares will be allocated on a first come, first served basis based on the date on which customers' account applications and checks are received by the underwriters. A total of approximately 500,000 shares will be allocated to customers based on the size of customer's purchases from Gaiam over the past 12 months or allocated to Gaiam employees, consultants, contractors or family members, provided they are also Gaiam customers. Finally, a total of approximately 200,000 shares will be allocated to customers by lottery. Any sharescommon stock originally sold by the underwriterssyndicate member is purchased in a syndicate covering transaction to securities dealers may be sold at a discount of up to $__ per share from the $5.00 initial public offering price. Any securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $__ per share from the $5.00 initial public offering price. An electronic final prospectus will be available on Gaiam's website, www.gaiam.com, and the underwriters' websites, www.tucker-anthony.com and www.ahh.com. Gaiam, its directors, officers and existing shareholders have agreed with the underwriters not to dispose of any of their shares or securities convertible into or exercisable or exchangeable for shares during the period from the date of this prospectus continuing through the date 180 days after the closing of the offering, except with the prior written consent of Tucker Anthony Cleary Gull or in certain limited circumstances. Please see "Shares Available for Future Sale" for a discussion of certain transfer restrictions. 54 cover syndicate short positions. The underwriters have informed us that they do not intend to confirm sales to any account over which they exercise discretionary authority. In connection with this offering, the underwriters may purchase and sell the shares of class A common stock in the open market. These transactions may include over-allotment andshort sales, stabilizing transactions and purchases to cover short positions created in connection with this offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the shares.by short sales. Short positionssales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Covered short sales are sales made in an amount not greater than the underwriters' option to purchase additional shares from Gaiamthe issuer in thisthe offering. These activitiesThe underwriters may stabilize, maintainclose out any covered short position by either exercising their option to purchase additional shares or otherwisepurchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Naked short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the class A common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of class A common stock made by the underwriters in the open market prior to the completion of th e offering. Similar to other purchase transactions, the underwriters' purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of the shares, which may asclass A common stock or preventing or retarding a decline in the market price of the class A common stock. As a result, the price of the class A common stock may be higher than the price that might otherwise prevailexist in the open market. TheseNeither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may be effectedhave on the Nasdaq National Market, in the over-the-counter market or otherwise, and may, if commenced, be discontinued at any time. Prior to this offering, there has been no public market for the shares. The initial public offering price will be $5.00 per share. The initial public offering price has been negotiated among Gaiam and the underwriters. In determining the initial public offering price of the shares, Gaiam andclass A common stock. In addition, neither we nor any of the underwriters considered prevailing market conditions, Gaiam's historical performance, estimates of Gaiam's business potential and earnings prospects, an assessment of Gaiam's management and industry, andmake any representation that the considerationrepresentatives will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice. The underwriters have informed us that they do not intend to confirm sales to discretionary accounts that exceed 5% of the above factorstotal number of shares offered by them. We, our directors, officers and stockholders that hold over 5% of our securities will agree not to offer to sell, sell or otherwise dispose of, directly or indirectly, any shares of capital stock or any 44 securities that may be converted into or exchanged for any shares of our capital stock for a period of 180 days from the date of the prospectus without the prior written consent of Tucker Anthony Sutro Capital Markets, except that we may: . issue and grant options to purchase shares of common stock under our 1999 Long Term Incentive Plan. . issue shares under our employee stock purchase plan; and . issue shares in relation to market valuationsconnection with the acquisition of companies in related businesses. We will apply to haveanother company if the terms of the issuance provide that the shares quoted for trading on the Nasdaq National Market under the symbol "GAIA." We anticipate that the offering will close on approximately October __, 1999, at which point our shares will begin trading on the Nasdaq National Market. There willshall not a be a when issued market in the sharesresold prior to the closingexpiration of the offering. We have agreed180-day lock-up period described above. See "Shares Eligible for Future Sale." An electronic final prospectus will be available on Tucker Anthony Sutro Capital Markets' website at www.tascm.com. Purchasers of the shares of class A common stock offered in this prospectus may be required to indemnify the underwriters against or contribute to losses arising out of certain liabilities, including liabilitiespay stamp taxes and other charges under the Securities Act.laws and practices of the county of purchase, in addition to the offering price listed on the cover of this prospectus. LEGAL MATTERS The validity of the shares of class A common stock being offered hereby will be passed on for Gaiam by Bartlit Beck Herman Palenchar & Scott, Denver, Colorado. Certain legal matters will be passed upon for the underwriters by Dorsey & WhitneyBrobeck, Phleger and Harrison LLP, Denver,Broomfield, Colorado. EXPERTS Ernest & Young LLP, independent auditors, have audited theThe consolidated financial statements and schedule of Gaiam, Inc. at December 31, 19982000 and 1997,1999, and for each of the three years thenin the period ended and the financial statements of Healing Arts Publishing, LLC at December 31, 19982000, appearing in this Prospectus and for year then ended, as set forth in their reports. The consolidated statements of income, stockholders' equity and cash flows of Gaiam, Inc. at December 31, 1996 and for the year then endedRegistration Statement have been audited by Wendell T. Walker and Associates,Ernst & Young LLP, independent auditors, as set forth in their report. We'vereport thereon appearing elsewhere herein, and are included in reliance upon such report given on the financial statementsauthority of such firm as experts in accounting and schedule of Gaiam, Inc. and theauditing. The financial statements of Healing Arts Publishing, LLCReal Goods Trading Corporation for the year ended March 31, 2000 included in this prospectus have been audited by Moss Adams LLP, independent auditors, as stated in their report and elsewhere in the registration statement in reliance on Ernst & Young LLP's reports and Wendell T. Walker and Associates' reports,have been given onupon their authority as experts in accounting and auditing. ADDITIONALThe financial statements of Real Goods Trading Corporation as of March 31, 1999 and for the year then ended included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION 55 Gaiam files annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (SEC). You may read and copy any reports, statements or other information we file at the SEC's public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Gaiam's SEC filings, including the registration statement, are also available to the public from commercial document retrieval services and at the web site maintained by the SEC at www.sec.gov. You may also obtain additional information at Gaiam's web site at www.gaiam.com. We have filed with the U.S. Securities and Exchange CommissionSEC a registration statement on Form S-1, including various exhibits and schedules, under the Securities Act covering the shares to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement and the related exhibits and schedules. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are intended to set forth the material information regarding these contracts agreements or other documents. These references, however, are not necessarily complete and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreement or other document. You may read without charge and copy at prescribed rates all or any portion of Gaiam's registration statement or any reports, statements or other information Gaiam files at the Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can also request copies of these documents upon payment of a duplicating fee, by writing to the Commission. Please call the Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Gaiam's Commission filings, including the registration statement, will also be available to you on the Commission's Internet site (www.sec.gov). After this offering, weWe intend to send to itsour shareholders annual reports containing audited consolidated financial statements and quarterly reports containing unaudited consolidated financial statements for the first three quarters of each fiscal year. 5645 INDEX TO FINANCIAL STATEMENTS
Gaiam, Inc. Page ---- Index to Gaiam's Financial Statements: Report of Independent Auditors - Ernst & Young LLP........................ F-1 Independent Auditors' Report -Wendell T. Walker & Associates..............Auditors.................................................................. F-2 Consolidated Financial Statements at December 31, 1998 Consolidated Balance Sheets..........................................Sheets..................................................................... F-3 Consolidated Statements of Income....................................Income............................................................... F-4 Consolidated Statements of Stockholders' Equity......................Equity................................................. F-5 Consolidated Statements of Cash Flows................................Flows........................................................... F-6 Notes to Consolidated Financial Statements...........................Statements...................................................... F-7 Index to Real Goods' Financial Statements: Independent Auditors' Report--Moss Adams, LLP................................................... F-21 Independent Auditors' Report--Deloitte & Touche, LLP............................................ F-22 Balance Sheets.................................................................................. F-23 Statements of Operations........................................................................ F-24 Statements of Cash Flows........................................................................ F-25 Statements of Shareowners' Equity............................................................... F-26 Notes to Financial Statements.................................................................. F-27 Real Goods Condensed Statements of Operations................................................... F-35 Real Goods Condensed Statements of Cash Flows................................................... F-36 Notes to Condensed Financial Statements......................................................... F-37 Gaiam Unaudited Pro Forma Consolidated Statement of Operations............................... F-20 Report of Independent Auditors - Ernst & Young LLP........................ F-23 Financial Statements of Healing Arts Publishing, LLC at December 31, 1998 Balance Sheet........................................................ F-24 Statement of Operations.............................................. F-25 Statement of Stockholders' Deficit and Members Equity................ F-26 Statement of Cash Flows.............................................. F-27 Notes to Financial Statements........................................ F-28Operations.................................. F-39
F-1 REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Gaiam, Inc. We have audited the accompanying consolidated balance sheets of Gaiam, Inc. and subsidiaries as of December 31, 19981999 and 1997,2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years then ended. Our audits also included the financial statement schedule listed in the Index at Item 14(a).period ended December 31, 2000. These financial statements and schedule are the responsibility of the Company'sGaiam's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted auditing standards.in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gaiam, Inc. and subsidiaries at December 31, 19981999 and 1997,2000, and the consolidated results of their operations and their cash flows for each of the three years thenin the period ended December 31, 2000, in conformity with accounting principles generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Denver, Colorado June 4, 1999, except for Notes 1 and 11, as to which the date is ________, 1999 The foregoing report is in the form that will be signed upon the effective date of the Company's registration of Class A Common Stock in a registration statement on Form S-1 and the concurrent 2.5 to 1 reverse stock split of the Company's common shares.United States. /s/ ERNSTErnst & YOUNGYoung LLP Denver, Colorado July ________, 1999 F-1 INDEPENDENT AUDITORS' REPORT Board of Directors Gaiam, Inc. We have audited the accompanying consolidated statement of income of Gaiam, Inc., and subsidiaries, as of December 31, 1996, and the related statement of stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gaiam, Inc., and subsidiaries, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ WENDELL T. WALKER AND ASSOCIATES, P.C. Boulder, Colorado September 12, 1997February 27, 2001, F-2 GAIAM, INC. CONSOLIDATED BALANCE SHEETS
December 31, June 30 1997 1998March 31, 1999 ------------------------------------------------------------- Assets (Unaudited)2000 2001 ------------------------------------------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $1,611,793 $ 1,409,9393,877,465 $ 856,045 Securities available-for-sale 38,333 1,633,905 1,505,0008,578,668 $ 6,374,022 Accounts receivable, net of allowance for doubtful accounts of $31,000$158,292 in 19971999 and $67,915$301,539 in 1998 111,424 2,579,927 1,088,0542000 4,326,594 8,472,828 8,407,739 Accounts and notes receivable, other 109,957 13,995 42,608 Note receivable 154,391 9,351 100,481755,924 1,097,390 755,110 Inventory, less allowances 1,648,083 3,393,712 3,914,8874,555,436 6,361,046 10,332,540 Deferred advertising costs 1,028,680 1,757,845 1,746,613 Prepaid assets 76,894 68,367 474,7292,176,325 1,625,285 1,587,663 Other current assets - 215,469 438,697 -------------------------------------------------------------393,330 1,307,416 _1,492,794 Total current assets 4,779,555 11,082,510 10,167,114----------- ----------- ------------- 16,085,074 27,442,633 $ 28,949,868 Property and equipment, net 1,096,888 1,079,694 992,0293,168,183 10,797,501 15,098,313 Capitalized production costs, net - 672,438 824,6071,636,706 2,656,666 2,634,363 Video library, net - 3,543,764 3,422,8944,792,456 4,631,140 4,555,481 Goodwill, net 1,239,507 2,379,861 6,032,943 Deferred tax assets 87,163 146,132 1,285,132 Other assets 108,124 298,106 432,114 -------------------------------------------------------------317,837 450,409 562,004 ----------- ----------- ------------- Total assets $5,984,567 $16,676,512 $15,838,758 ============================================================= Liabilities and stockholders' equity$27,326,926 $48,504,342 $ 59,118,104 =========== =========== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:liabilities Accounts payable $2,152,739 $ 6,900,4927,618,344 $ 3,185,5578,091,569 $ 11,150,709 Accrued liabilities 473,504 1,456,338 1,194,0641,734,310 2,109,036 4,416,092 Accrued Royalties - 804,772 511,928royalties 725,541 867,667 1,136,738 Income taxes payable -- 790,267 591,832 Capital lease obligations, current 46,693 42,261 25,707 Margin loan payable 1,359,130 575,288 - Convertible debentures, related party - 550,000 1,975,000 Income taxes payable 311,702 242,271 133,672 Deferred tax liability - 592,566 606,540 -------------------------------------------------------------95,844 147,649 160,705 Other current liabilities -- 167,349 181,888 ----------- ----------- ------------- Total current liabilities 4,343,768 11,163,988 7,632,468 Deferred tax liability 24,113 59,809 -10,174,039 12,173,537 17,637,964 Capital lease obligations, long-term 42,275 25,588 14,253 Convertible debentures and other borrowings, related party - 273,051 - Note payable, related party - Line of credit - - 1,650,000209,074 270,171 260,614 Deferred tax liability 67,241 412,001 412,001 Long term debt 1,900,000 5,500,000 6,518,887 ----------- ----------- ------------- Total long-term liabilities 2,176,315 6,182,172 7,191,502 Minority interest - 1,492,941 1,326,11926,030 6,037,868 6,120,513 Redeemable Class A preferred stock in subsidiary -- 6,000,000 6,000,000 Stockholders' equity: Class A common stock, $.0001 par value, 92,965,000150,000,000 shares authorized, 1,005,0005,441,537, 5,473,184 and 1,165,0005,958,505 shares issued and outstanding at December 31, 19971999 and 1998,2000 and March 31, 2001 respectively 101 117 149544 547 596 Class B common stock, $.0001 par value, 7,035,00050,000,000 shares authorized, 5,400,000 issued and outstanding at December 31, 19971999 and in 1998 704 704 7042000, and March 31, 2001 540 540 540 Additional paid-in capital 133,833 377,634 1,827,602 Accumulated other comprehensive income - 983,126 910,27911,038,551 11,865,734 15,486,392 Deferred compensation (106,992) (422,826) (405,201) Retained earnings 1,439,773 2,299,554 2,477,184 -------------------------------------------------------------4,017,899 6,666,770 7,085,798 ----------- ----------- ------------- Total stockholders' equity 1,574,411 3,661,135 5,215,918 -------------------------------------------------------------14,950,542 18,110,765 22,168,125 ----------- ----------- ------------- Total liabilities and stockholders' equity $5,984,567 $16,676,512 $15,838,758 =============================================================$27,326,926 $48,504,342 $ 59,118,104 =========== =========== =============
See accompanying notes. F-3 GAIAM, INC. CONSOLIDATED STATEMENTS OF INCOME
Years ended SixThree months December 31, ended June 30 1996 1997 1998March 31, 1998 1999 -------------------------------------------------------------------------------------- (Unaudited)2000 2000 2001 ---- ---- ---- ---- ---- (Unaudited) Net revenue $14,800,993 $19,897,690 $30,738,540 $10,474,976 $17,563,080$45,724,662 $60,588,018 $12,558,437 $17,671,513 Cost of goods sold 6,762,500 8,462,151 13,173,536 4,414,408 7,074,663 --------------------------------------------------------------------------------------18,175,787 23,793,492 4,922,311 6,847,590 ----------- ----------- ----------- ----------- ----------- Gross profit 8,038,493 11,435,539 17,565,004 6,060,568 10,488,41727,548,875 36,794,526 7,636,126 10,823,923 Expenses: Selling and operating 9,253,263 10,427,258 14,186,215 5,249,717 8,877,36022,337,950 27,309,857 6,063,790 8,538,352 Corporate, general and administration 1,217,436 1,574,770 2,393,946 635,723 1,795,610 --------------------------------------------------------------------------------------3,086,514 5,056,903 1,115,977 1,550,206 ----------- ----------- ----------- ----------- ----------- Total expenses 10,470,699 12,002,028 16,580,161 5,885,440 10,672,970 --------------------------------------------------------------------------------------25,424,464 32,366,760 7,179,767 10,088,558 ----------- ----------- ----------- ----------- ----------- Income (loss) from operations (2,432,206) (566,489) 984,843 175,128 (184,553)2,124,411 4,427,766 456,359 735,365 Other income (expense): Realized gain (loss) on sale of securities and other, 3,094,390 1,820,034(see Note 3) 696,992 (25,266) 409,688971,159 (73,947) (76,295) 184,615 Interest expense (110,549) (236,699) (308,501) (88,672) (207,926) --------------------------------------------------------------------------------------(365,294) (209,167) (46,650) (116,917) ----------- ----------- ----------- ----------- ----------- Other income (expense), net 2,983,841 1,583,335 388,491 (113,938) 201,762 --------------------------------------------------------------------------------------605,865 (283,114) (122,945) 67,698 ----------- ----------- ----------- ----------- ----------- Income before income taxes and minority interest 551,635 1,016,846 1,373,334 61,190 17,2092,730,276 4,144,652 333,414 803,063 Provision for income taxes 211,935 362,534 251,955 22,437 6,401(251,955) (1,062,789) (1,555,487) (125,130) (301,390) Minority interest in net income (loss)(income) loss of consolidated subsidiary, net of tax - - 261,598 - (166,822) --------------------------------------------------------------------------------------(261,598) 50,858 59,706 (4,992) (82,645) ----------- ----------- ----------- ----------- ----------- Net income $ 339,700 $ 654,312 $ 859,781 $ 38,7531,718,345 $ 177,630 ======================================================================================2,648,871 $ 203,292 $ 419,028 =========== =========== =========== =========== =========== Net income per share: Basic $0.11 $0.20 $0.24 $0.02 $0.04 $0.08Diluted $0.11 $0.00$0.19 $0.23 $0.02 Diluted 0.04 0.08 0.11 $0.00 $0.02$0.04 Shares used in computing net income per share: Basic 8,040,000 8,040,000 8,072,877 8,040,000 8,317,8228,785,205 10,858,139 10,846,460 11,205,844 Diluted 8,040,000 8,040,000 8,118,792 8,040,000 8,564,9329,119,108 11,525,120 11,504,973 11,563,172
See accompanying notes. F-4 GAIAM, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Other Class A Class B Additional Compre- Common Stock Common Stock Paid-in hensive Retained Shares Amount Shares Amount Capital Income Earnings Total ------------------- -------------------------------------- --------------------- ---------- -------------- ---------- ---------- Balance at January 1, 19961998 1,005,000 $101 7,035,000 $704 $ 133,833 $ - $ 445,761 $ 580,399 Net income - - - - - - 339,700 339,700 ------------------- ----------------- ----------- -------------- ---------- ---------- Balance at December 31 1996 1,005,000 101 7,035,000 $ 704 $ 133,833 - 785,461 920,099 Net income - - - - - - 654,312 654,312 ------------------- ----------------- ----------- -------------- ---------- ---------- Balance at December 31, 1997 1,005,000 101 7,035,000 704 133,833 - 1,439,773 1,574,411 Issuance of common stock 160,000 16 - - 574,984 - - 575,000 Return of capital to shareholder through Purchasepurchase of Inner Balance, Inc. - - - - (331,183) - - (331,183) Comprehensive income:income (loss): Net income - - - - - - 859,781 859,781 Other comprehensive income: Increase in fair market value of securities available for sale, net of tax of $618,578 - - - - - 983,126 - 983,126 ---------- Total comprehensive income 1,842,907 ------------------- ----------------- ----------- -------------- ---------- ---------- Balance at December 31, 1998 1,165,000 117 7,035,000 704 377,634 983,126 2,299,554 3,661,135 Issuance of common stock 331,429 32 - - 1,449,968 - - 1,450,000 (unaudited) Comprehensive income: Net income (unaudited) - - - - - - 177,630 177,630 Other comprehensive income: IncreaseDecrease in fair market value of securities available for sale, net of reclassification adjustment (see disclosure)Note 1), net of tax of $ 572,743 (unaudited)$618,578 - - - - - ( 72,847)Total comprehensive loss --------------------- --------------------- ---------- Balance at December 31, 1998 1,165,000 117 7,035,000 704 377,634 Issuance of common stock 331,429 32 - ( 72,847)1,449,968 Shares issued in connection with IPO, including the underwriter's overallotment 1,807,861 181 - - 6,142,007 Issuance of common stock in conjunction with acquisitions and share conversion 1,842,247 185 (1,635,000) (164) 1,593,971 Shares issued in connection with conversion of debt 295,000 29 - - 1,474,971 Comprehensive income (loss): Net income - - - - - Decrease in fair market value of available for sale securities, net of reclassification (see Note 1) - - - - - --------------------- --------------------- ---------- Total comprehensive income (unaudited) 104,783 ------------------- ----------------- ----------- -------------- ------------------------------- --------------------- ---------- Balance at June 30,December 31, 1999 5,441,537 544 5,400,000 540 11,038,551 Issuance of common stock in conjunction with acquisitions and compensation 31,647 3 827,183 Net income and comprehensive income -------------------------------------------------------------- Balance at December 31, 2000 5,473,184 $ 547 5,400,000 $ 540 $ 11,865,734 Return of Capital to shareholder through purchase of Earthlings, Inc. and Selfcare, Inc. (unaudited) 1,496,429 $149 7,035,000 $704 $1,827,602(3,620,658) Issuance of common stock in conjunction with acquisitions and compensation (unaudited) 485,321 49 6,693,719 Net income and comprehensive income -------------------------------------------------------------- Balance at March 31, 2001 (unaudited) 5,958,505 $ 910,279 $2,477,184 $5,215,918 =================== ================= =========== ============== ========== ==========596 5,400,000 $ 540 $ 15,486,392 ============================================================== Accumulated Other Deferred Comprehensive Retained Compensation Income Earning -------------- ------------- -------- Balance at January 1, 1998 $ - $ 3,161,263 $ 1,439,773 $ 4,735,674 Issuance of common stock - - - 575,000 Return of capital to shareholder through purchase of Inner Balance, Inc. - - - (331,183) Comprehensive income (loss): Net income - - 859,781 859,781 Decrease in fair market value of securities available for sale, net of reclassification adjustment (see Note 1), net of tax of $618,578 - (2,178,137) - (2,178,137) Total comprehensive loss (1,318,356) -------------- ------------- ----------- ------------ Balance at December 31, 1998 - 983,126 2,299,554 3,661,135 Issuance of common stock - - - 1,450,000 Shares issued in connection with IPO, including the underwriter's overallotment - - - 6,142,188 Issuance of common stock in conjunction with acquisitions and share conversion (106,992) - - 1,487,000 Shares issued in connection with conversion of debt - - - 1,475,000 Comprehensive income (loss): Net income - - 1,718,345 1,718,345 Decrease in fair market value of available for sale securities, net of reclassification (see Note 1) - (983,126) - (983,126) -------------- ------------- ----------- ------------ Total comprehensive income -------------- ------------- ----------- ------------ Balance at December 31, 1999 (106,992) - 4,017,899 14,950,542 Issuance of common stock in conjunction with acquisitions and compensation (315,834) 511,352 Net income and comprehensive income 2,648,871 2,648,871 ------------------------------------------------------------------------------ Balance at December 31, 2000 $ (422,826) - $ 6,666,770 $ 18,110,765 Return of capital to shareholder through purchase of Earthlings, Inc. and SelfCare, Inc. (unaudited) (3,073,061) Issuance of common stock in conjunction with acquisitions and compensation (unaudited) 17,625 6,711,393 Net income and comprehensive income (unaudited) 419,028 419,028 ------------------------------------------------------------------------------ Balance at March 31, 2001 (unaudited) $ (405,201) - $ 7,085,798 $ 22,168,125 ==============================================================================
See accompanying notes. F-5 GAIAM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended Years ended Six months endedEnded December 31, June 30 1996 1997 1998March 31, 1998 1999 ------------------------------------------------------------------------ Operating activities (Unaudited)2000 2000 2001 ---- ---- ---- ---- ---- (Unaudited) Operating activities: Net income $ 339,700 $ 654,312 $ 859,781 $ 38,7531,718,345 $ 177,6302,648,871 $ 203,292 $ 419,028 Adjustments to reconcile net income to net cash provided by (used in) operating activities:activities Depreciation 265,151 241,985 240,431 189,597 152,549391,000 1,245,155 185,070 846,832 Amortization 1,062 2,785 85,466 - 120,870293,315 414,695 102,357 148,738 Stock compensation -- -- 147,492 -- 17,625 Interest expense added to principal of margin loan - 175,562 116,158 51,106 7,411 Minority interest in consolidated subsidiary - - 261,598 - (166,822) Provision for doubtful accounts - - 258,993 - -116,158 16,513 -- -- -- Realized gainsgain on the sale of securities and property and equipment (3,621,047) (1,902,802) (691,137) - (482,692)261,598 (50,858) (59,706) 4,992 82,645 Deferred tax expense 52,493 50,832 9,684 - (45,835)(691,137) (2,516,110) -- -- -- Changes in operating assets and liabilities, 9,684 (53,718) 384,968 13,891 -- net of effects from acquisitions: Accounts receivable 11,633 (62,317) (1,905,275) 85,457 1,463,260 Inventory (672,020) (4,536) (591,519) 207,391 (521,175)(1,501,242) (2,296,771) (4,127,458) 840,603 311,406 Deferred advertising costs (398,058) (371,840) (243,630) (378,429) 11,232(591,519) (1,161,724) (1,739,231) (1,347,842) (1,601,314) Capitalized production costs - - (212,361) - (152,169)(243,630) (418,480) 551,040 240,324 146,269 Prepaid assets 46,415 (55,982) 8,527 (36,819) (406,362)(212,361) (964,268) (1,019,960) (196,877) 22,303 Other assets - 1,839 (266,757) (406,950) (357,236)8,527 (109,494) (914,086) (40,774) (338,722) Accounts payable 1,620,973 (267,316) 2,569,358 (190,802) (3,714,935)(266,757) 41,615 (229,295) 19,662 (31,153) Accrued liabilities (85,634) (133,528) 329,672 (84,717) (579,287)2,569,358 717,852 (8,730) 2,405,494 1,999,746 Income taxes payable (261,762) 390,521329,672 198,741 167,310 (406,344) (661,410) (69,784) (289,663) (108,599) ------------------------------------------------------------------------(424,745) 805,123 111,239 (188,610) ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities (2,701,094) (1,280,485) 759,205 (815,076) (4,602,160)904,245 (4,618,787) (1,733,812) 2,135,087 1,173,383 ----------- ----------- ----------- ----------- ----------- Investing activitiesactivities: Purchase of property and equipment and other assets (2,829,179) (157,987) (134,378) (143,251) (64,884)(2,212,961) (8,735,390) (3,926,934) (467,656) Proceeds from the sale of property and equipment - 1,440,409 32,090 32,090 --- -- -- -- Proceeds from the sale of securities available-for-sale 3,800,000 1,931,250available-for- sale 477,500 538,7502,548,310 -- -- -- Proceeds from sale of stock in subsidiary -- -- 11,959,923 -- -- Payments for acquisitions, net of cash acquired - - (1,656,611) - - Payments (borrowings) on notes receivable (232,066) 361,259 145,040 (2,095) (91,130) ------------------------------------------------------------------------(2,740,703) (305,773) -- (3,400,663) ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) investing activities 738,755 3,574,931 (1,136,359) (113,256) 382,736(1,281,399) (2,405,354) 2,918,760 (3,926,934) (3,868,319) ----------- ----------- ----------- ----------- ----------- Financing activitiesactivities: Principal payments on capital leases - (40,989) (49,699) (30,130) (27,889)(60,671) (99,617) (22,405) (28,819) Proceeds from saleissuance of common stock - - 575,000 - 1,450,0002,875,002 15,872 -- 19,109 Net proceeds from initial public offering -- 6,142,188 -- -- -- Proceeds from convertible debt - - 549,999 - 1,151,949-- -- -- -- Net proceeds from (payments on) borrowings net 1,923,681 (1,021,875) (900,000) - 1,091,470 ------------------------------------------------------------------------535,148 3,600,000 -- 500,000 ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities 1,923,681 (1,062,864) 175,300 (30,130) 3,665,530 ------------------------------------------------------------------------9,491,667 3,516,255 (22,405) 490,290 ----------- ----------- ----------- ----------- ----------- Net change in cash and cash equivalents (38,658) 1,231,582 (201,854) (958,462) (553,894)2,467,526 4,701,203 (1,814,252) (2,204,646) Cash and cash equivalents at beginning of year 418,869 380,211 1,611,793 1,611,793 1,409,939 ------------------------------------------------------------------------3,877,465 3,877,465 8,578,668 ----------- ----------- ----------- ----------- ----------- $ 1,409,939 $ 3,877,465 $ 8,578,668 $ 2,063,213 $ 6,374,022 Cash and cash equivalents at end of year $ 380,211 $ 1,611,793 $ 1,409,939 $ 653,331 856,045 ========================================================================period =========== =========== =========== =========== =========== Supplemental cash flow informationinformation: Interest paid $ 128,282126,025 $ 237,147348,580 $ 126,025 3,740 166,824287,080 $ 48,609 $ 98,592 Income taxes paid 238,654 312,100 312,100 115,000 Note receivable in connection with the sale of property and equipment - 154,391 - - -1,541,253 82,099 -- 490,000 Common stock issued for acquisitions 1,487,000 333,131 Common stock issued for convertible debt 1,425,000 -- Fixed assets acquired under capital lease 297,740 212,519
See accompanying notesnotes. F-6 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information subsequent to December 31, 19982000 is unaudited.) 1. Summary of Significant Accounting Policies Organization Gaiam, Inc. (the "Company"("Gaiam") was incorporated under the laws of the State of Colorado on July 7, 1988. The Company's primary businessGaiam is a multi-channel lifestyle company providing information, goods and services to customers who value personal development, healthy lifestyles and the environment, a sustainable economy and healthy lifestyles.environment. Basis of Consolidation The accompanying consolidated financial statements include the accounts of the Company,Gaiam, its subsidiaries and partnerships in which ownership is 50% or greater and considered to be under the control of the Company.Gaiam. All material intercompany accounts and transaction balances have been eliminated in consolidation. Cash and Cash Equivalents For purposes of the statement of cash flows, cash and cash equivalents includes demand deposit accounts with financial institutions and all highly liquid investments, with an original maturity ofwhich mature within three months or less.of date of purchase. Securities Available-for-Sale Securities available-for-sale consist of equity securities and are recordedstated at market value for 1998 (see Note 6).value. All unrealized gains or losses, net of tax, are recorded as a separate component of stockholders' equity. Provision for Doubtful Accounts The CompanyGaiam records a provision for doubtful accounts for all receivables not expected to be collected. Interim Financial Statements The interim consolidated results asfinancial statements included herein have been prepared by the management of June 30, 1999,Gaiam, Inc. pursuant to the rules and forregulations of the six months ended June 30, 1998United States Securities and 1999 are unaudited, but includedExchange Commission, and, in the opinion of management, contain all adjustments (consisting of only of normal recurring accruals) that the Company considersadjustments) necessary for a fair presentation of itsto present fairly Gaiam's consolidated financial position as of such dateMarch 31, 2001 and the interim results of operations and cash flows for such period.the three months ended March 31, 2000 and 2001. These interim statements have not been audited. The consolidated financial position, results of operations and cash flows for the six months ended June 30, 1999interim periods disclosed within this report are not necessarily indicative of results for a full year. F-7 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Information subsequent to December 31, 1998 is unaudited.) 1. Summary of Significant Accounting Policies (continued) Earnings Per Share In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (Statement No. 128). Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and conform to the Statement No. 128 requirements. The following table sets forth the computation of basic and diluted earnings per share:
June 30, June 30, 1996 1997 1998 1998 1999 -------------------------------------------------------------- Numerator for basic earnings per share $ 339,700 $ 654,312 $ 859,781 $ 38,753 $ 177,630 Effect of Dilutive Securities: 8% convertible debentures - - 19,234 - 24,245 -------------------------------------------------------------- Numerator for diluted earnings per share $ 339,700 $ 654,312 $ 879,015 $ 38,753 $ 201,875 ============================================================== Denominator: Weighted average shares for basic earnings per share 8,040,000 8,040,000 8,072,877 8,040,000 8,317,822 Effect of Dilutive Securities: Convertible debentures - - 41,153 - 247,110 Stock warrants - - 4,762 - - -------------------------------------------------------------- Denominators for diluted earnings per share--adjusted weighted average shares and assumed conversion 8,040,000 8,040,000 8,118,792 8,040,000 8,564,932 ============================================================== Net income per share--basic $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.02 Net income per share--diluted $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.02
F-8 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Information subsequent to December 31, 1998 is unaudited.) 1. Summary of Significant Accounting Policies (continued) In 1998, basic earnings per share data was computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share was adjusted for the assumed conversion of all potentially dilutive securities including warrants to purchase common stock. In 1997 and 1996, the computations do not reflect the warrants as there is no dilutive effect.future financial results. Inventory Inventory, consisting primarily of finished goods, net of valuation allowances of $79,016 and $198,744 at December 31, 1997 and 1998, is stated at the lower of cost (first-in, first-out method) or market. DepreciationDeferred Advertising Costs Deferred costs primarily relate to preparation, printing and Amortizationdistribution of catalogs. Such costs are deferred for financial reporting purposes until the catalogs are distributed, then amortized over succeeding F-7 periods (not to exceed seven months) on the basis of estimated sales. Historical sales statistics are the principal factor used in estimating the amortization rate. Other advertising and promotional costs are expensed as incurred. Advertising costs incurred were $7.1 million, $10.1 million and $10.5 million for the years ended December 31, 1998, 1999 and 2000, respectively. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization, which includes the amortization of assets recorded under capital leases. Included in property and equipment is the cost of internal-use software, including software used in connection with Gaiam's websites. Gaiam expenses all costs related to the development of internal-use software other than those incurred during the application development stage. Costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the software (generally five years). Depreciation of property and equipment including amortization recorded under capital leases, is computed on the straight-line method over estimated useful lives of(generally five to seven years for furnitureten years). Property and equipment and ten years for leasehold improvements.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 instructionalinformational videos marketed by the CompanyGaiam 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, 19981999 and 2000 was $927,331.$1.3 million and $1.7 million, respectively. Video Library The video library asset represents the cost of the library of produced videos acquired through a business combination. The video library is presented net of accumulated amortization of $332,401 and $674,059 at December 31, 1999 and 2000 and is being amortized over a 15-year life. Goodwill Goodwill represents the excess of the purchase price over the fair value of assets acquired in business acquisitions accounted for under the purchase method. Goodwill is presented net of related accumulated amortization of $15,884 and $88,922 at December 31, 1999 and 2000, and is being amortized over lives ranging from 10 to 20 years. Long-Lived Assets The carrying values of intangible and other long-lived assets are reviewed quarterly to determine if any impairment indicators are present. To date, no such impairment has been indicated. If it is determined that such indicators are present and the review indicates that the assets will not be recoverable, based on undiscounted estimated cash flows over the remaining amortization and depreciation period, their carrying values are reduced to estimated fair market value. Impairment indicators include, among other conditions, cash flow deficits, an historic or anticipated decline in revenue or operating profit, adverse legal or regulatory developments, accumulationAccrued Royalties Gaiam has various royalty agreements with instructors and artists requiring royalty payments of costs significantly in excess of amounts originally expected to acquire the asset and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. F-9 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Information subsequent to December 31, 1998 is unaudited.) 1. Summary of Significant Accounting Policies (continued) Deferred Advertising Costs Deferred costs primarily relate to preparation, printing and distribution of catalogs. Such costs are deferred for financial reporting purposes until the catalogs are distributed, then amortized over succeeding periods (not to exceed seven months) on the basis of estimated sales. Historicalspecified product sales statistics are the principal factor used in estimating the amortization rate. Other advertising and promotional costs are expensed as incurred. Advertising costs incurred were $3,019,320, $4,866,223 and $7,121,648 for the years ended December 31, 1996, 1997, and 1998, respectively. Revenues The Company recognizes revenue at the time merchandise is shipped to the customer. Amounts billed to customers for postage and handling charges, which approximate $1.2 million for 1996, $1.7 million for 1997 and $2.2 million for 1998, are recognized as revenue at the time that the revenues on the product shipments are recognized. The company provides a reserve for expected future returns at the time the sale is recorded based upon historical experience. The Company'sunit sales, are attributable mainly to sales within the U.S., with a very small percentage, less than 1% of sales, to international customers. No customer represented more than 10% of sales for either the years ended December 31, 1996, 1997 and 1998. The Company generally does not require collateral. Realized gain on sale of securities and other for the year ended December 31, 1996 includes $782,053 of expenses relating to the May 1995 acquisition of the catalog sales division of Seventh Generation. The terms of the acquisition required the Company to enter into a licensing agreement for the use of the Seventh Generation name, an operating agreement and a supply agreement. The supply agreement required the Company to purchaseor upon a specified dollar amount of products at a specified markup. The Company also incurred costs related to the abandonment of acquired equipmentminimum royalty amount. Payments are made quarterly and facilities and relocation expenses for warehouse and office operations. Fair Value of Financial Instruments The Company's financial instruments consist of cash and cash equivalents, securities available-for-sale, accounts receivable, payables and debt obligations. The carrying values of these financial instruments as reported in the accompanying balance sheets are assumed to approximate their fair value. F-10semi-annually. F-8 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Information subsequent to December 31, 1998 is unaudited.) 1. Summary of Significant Accounting Policies (continued) Income Taxes The CompanyGaiam 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. Reclassifications Certain reclassifications have been madeRevenues Gaiam recognizes revenue at the time merchandise is shipped to the customer. Amounts billed to customers for postage and handling charges, which approximate $2.2 million for 1998, $3.0 million for 1999, and $3.5 million for 2000, are recognized as revenue at the time that the revenues on the product shipments are recognized. Postage and handling costs, which approximate $2.1 million for 1998, $3.0 million for 1999, and $3.3 million for 2000, are included in selling and operating expense along with other fulfillment costs incurred to warehouse, package and deliver products to customers. Gaiam provides a reserve for expected future returns at the time the sale is recorded based upon historical experience. Gaiam's sales are attributable mainly to sales within the U.S., with a very small percentage, less than 1% of sales, to international customers. No customer represented more than 5% of sales for any of the years ended December 31, 19961998, 1999 and 2000. Gaiam generally does not require collateral. Fair Value of Financial Instruments Gaiam's financial statementsinstruments consist of cash and cash equivalents, accounts receivable, payables and debt obligations. The carrying values of these financial instruments as reported in the accompanying balance sheets are assumed to conform to the December 31, 1997 and 1998 financial statement presentation. Such reclassifications have had no effect on net income previously reported.approximate their fair value. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions.assumptions that affect the amounts reported in Gaiam's financial statements and accompanying notes, including the valuation of stated accounts receivable and inventory balances. Actual results could differ from those estimates. Stock-Based Compensation Gaiam accounts for its stock-based compensation arrangements under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25") and related 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, Gaiam adopted a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code, which covers substantially all employees. Eligible employees may contribute amounts to the plan, via payroll withholding, subject to certain limitations. The 401(k) plan permits, but does not require, additional matching contributions to the 401(k) plan by Gaiam on behalf of all participants in the 401(k) plan. To date, Gaiam has not made any matching contributions to the 401(k) plan. Reporting Comprehensive Income DuringF-9 On January 1, 1998, the CompanyGaiam adopted the Financial Accounting Standards Board ("FASB") issued StatementSFAS No. 130, Reporting on Comprehensive Income ("StatementSFAS No. 130"). StatementSFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements. During 1998, the Company adopted StatementThe only item of Financial Accounting Standard No. 131, Disclosures About Segments of an Enterprise and Related Information, ("Statement No. 131") which requires reporting of summarized financial results for operating segments and establishes standards for related disclosures about products and services, geographic areas and major customers. The Company evaluates performance basedcomprehensive income that Gaiam has is unrealized gains (losses) on two different operating segments: direct-to- customer and business-to-business operations. For 1996 and 1997, direct-to- customer operations was the only significant operating segment.securities available-for-sale. The reclassification adjustment for gains and losses included in net income for 1998, net of tax of $572,743$618,578, include unrealized gainslosses of $239,257$1.8 million and net realized gains of $312,104.$427,813. The reclassification adjustment for gains and losses included in net income for 1999 include unrealized losses of $2.6 million and net realized gains of $1.6 million. As of December 1999, all available-for- sale securities were sold. Adoption of Accounting Standards In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statements 137 and 138 in June 1999 and June 2000, respectively. SFAS No. 133 is effective for Gaiam's fiscal year beginning on January 1, 2001. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and, if it is, the type of hedge transaction. The adoption of SFAS No. 133, effective January 1, 2001, did not have any impact on Gaiam's consolidated financial statements. Reclassifications Certain reclassifications have been made to the 2000 financial statements to conform to 2001 presentation. Earnings Per Share Basic earnings per share excludes any dilutive effects of options, warrants and dilutive securities. Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period. Common equivalent shares are excluded from the computation if their effect is antidilutive. All earnings per share amounts for all periods have been presented and conform to the SFAS No. 128, Earnings per Share, requirements. F-10 The following table sets forth the computation of basic and diluted earnings per share:
December 31, March 31, - ---------------------------------------------------------------------------------------------------------------- 1998 1999 2000 2000 2001 ------------- ---------- ----------- ----------- ----------- (Unaudited) Numerator for basic earnings per share......... $ 859,781 $1,718,345 $ 2,648,871 $ 203,292 $ 419,028 Effect of Dilutive Securities: 8% convertible debentures............... 19,234 56,401 -- -- -- ------------- ---------- ----------- ----------- ----------- Numerator for diluted earnings per share....... $ 879,015 $1,774,746 $ 2,648,871 $ 203,292 $ 419,028 ============= ========== =========== =========== =========== Denominator: Weighted average shares for basic earnings per share....... 8,072,877 8,785,205 10,858,139 10,846,460 11,205,844 Effect of Dilutive Securities: Weighted average of Common stock, stock options warrants and convertible debentures.... 45,915 333,903 666,981 658,513 357,328 ------------- ---------- ----------- ----------- ----------- Denominators for diluted earnings per share......... 8,118,792 9,119,108 11,525,120 11,504,973 11,563,172 Net income per share-- basic..................... $ 0.11 $ 0.20 $ 0.24 $ 0.02 $ 0.04 Net income per share-- diluted................... $ 0.11 $ 0.19 $ 0.23 $ 0.02 $ 0.04
2. Mergers and Acquisitions In September 1998, Gaiam acquired a 67% ownership in a newly formed entity, Healing Arts Publishing, LLC (dba Living Arts) for $2.5 million in cash. Healing Arts Publishing, Inc., which produced and distributed exercise and relaxation videos and sold environmentally oriented products through its mail order catalogs and through sales to retailers, contributed the majority of its assets and certain liabilities to Living Arts in exchange for a 33% membership interest. Effective July 1999, Gaiam acquired the remaining 33% minority interest in Living Arts. Additionally, effective November 1999, Gaiam acquired a 50.1% controlling interest in an environmental products provider. Total consideration paid by Gaiam for the 1999 acquisitions was $2.3 million in cash and 207,247 shares of Gaiam's Class A common stock. On June 30, 2000, Gaiam, Inc. and Whole Foods Market, Inc. merged their Internet businesses into Gaiam.com, Inc. Gaiam owns 50.1% of Gaiam.com. Whole Foods Market currently owns 35% of Gaiam.com, and the remainder is owned by various venture capital funds. As part of the transaction, Whole Foods Market, through its subsidiary, contributed $6 million in cash plus other assets to Gaiam.com. On June 19, 2000, Gaiam sold 6,000 shares of Redeemable Class A preferred stock in Gaiam.com, Inc. at a price of $1,000 per share for an aggregate price of $6,000,000. This stock doesn't carry any dividend rights and is redeemable only upon the consummation of an offering by Gaiam.com of its equity securities to the public pursuant to an effective registration statement with the Securities and Exchange Commission. F-11 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Information subsequentAdditionally, in 2000, Gaiam acquired a yoga props company and a 70% interest in an organic clothing manufacturer. Total consideration paid by Gaiam for these acquisitions was approximately $315,000 in cash and 21,243 shares of Class A common stock. These acquisitions were accounted for using the purchase method and the results of operations are included in the consolidated financial statements of Gaiam 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. On January 29, 2001, Gaiam completed its merger with Real Goods Trading Corporation. In the tax-free stock-for-stock transaction, Real Goods shareholders received one share of Gaiam Class A common stock in exchange for each ten shares of Real Goods stock owned. Gaiam issued 481,424 shares of Class A common stock at an approximate value of $6.7 million to December 31,complete the merger. The merger was accounted for using the purchase method and the results of operations are included in the consolidated financial statements of Gaiam from the effective acquisition date. On January 5, 2001 and February 1, 2001, respectively, Gaiam acquired all of the stock of Earthlings, Inc. and Self Care, Inc. (companies under common ownership with the Chief Executive Officer of Gaiam) at his company's net investment cost plus transaction expenses. As these companies were under common control, the purchase was accounted for using historical costs, similar to a pooling transaction. Therefore, the difference between the purchase price and the value of net assets acquired was accounted for as a reduction to additional paid-in capital. The total combined purchase price for both companies was $3,848,014. 3. Securities Available-for-Sale Securities available-for-sale consisted of shares of common stock from one issuer. During 1998, is unaudited.) 2.Gaiam sold 60,000 shares of this common stock at market value for $703,125 to a related party and recognized a gain of $696,992 on the sale. During the first and second quarters of 1999, Gaiam sold 100,000 shares of the common stock at market value for $538,750 to a related party, and recognized a gain of $528,528 on the sale. During the third and fourth quarters of 1999, Gaiam sold its remaining 215,000 shares of common stock for $2.0 million to a non-related party and recognized a gain of $2.0 million on the sale. 4. Property and Equipment At December 31, 1997 and 1998, propertyProperty and equipment, stated at cost, consists of the following:
December 31 1997 1998 ------------------------------------- Furniture and equipment $ 424,196 $ 614,804 Leasehold improvements 270,937 288,324 Computer equipment 754,000 965,449 Warehouse equipment 210,026 210,033 ------------------------------------- 1,659,159 2,078,610 Accumulated depreciation and amortization (562,271) (998,916) ------------------------------------- $1,096,888 $1,079,694 =====================================
3. Margin Loan Payable The Company has a margin loan agreement with a brokerage firm that is due on demand. The Company has pledged 265,000 shares of its securities available-for- sale (see Note 6) as collateral for the loan. The interest rate charged on the loan varies depending on market rates and was 7.0% at December 31, 1998. Interest incurred on the balance of the loan is added to the outstanding balance payable. 4. Convertible Debentures As of December 31, 1998, the Company had $823,051 issued in 8% convertible debentures to three individuals. Of the total outstanding, $323,051 was issued to two officers of the Company, the President1999 2000 -------------------------- Land -- $ 1,100,000 Buildings -- 1,800,000 Furniture, fixtures and the Chief Executive Officer of the Company. The debentures are payable on the earlier of September 30, 1999 or the closing of an initial public offering. The debentures are automatically converted to shares of Class A common stock at the initial public offering per share price. The debenture payable to the Chief Executive Officer of the Company is due December 31, 2000. The debenture is convertible, at the option of the officer, upon the closing of the initial public offering by the Company, into shares of common stock at the initial public offering per share price.equipment $ 805,182 1,295,030 Leasehold improvements 333,747 714,460 Website development (including construction-in-process costs) 1,600,728 5,391,243 Computer/telephone equipment 1,632,065 2,571,033 Warehouse equipment 222,329 567,667 - -------------------------------------------------------------- 4,594,051 13,439,433 Accumulated depreciation and amortization (1,425,868) (2,641,932) - -------------------------------------------------------------- $ 3,168,183 $10,797,501 ============================================================== F-12 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Information subsequent to December 31, 1998 is unaudited.) 5. LeasesCommitments At December 31, 19971999 and 1998, the Company's2000, Gaiam's property held under capital leases consisted of the following, which is included in property and equipment:
December 31, 1997 1998 ---------------------------------1999 2000 ----------------------- Warehouse equipment $ 40,229 $ 40,229 ComputerComputer/telephone equipment 130,822 130,822 --------------------------------- 171,051 171,051365,545 578,064 - -------------------------------------------------------------------- 405,774 618,293 Accumulated amortization (47,867) (79,777) --------------------------------- $123,184(99,189) (181,085) -------- --------- $306,585 $ 91,274 =================================437,208 ====================================================================
The CompanyGaiam leases equipment and office, retail, and warehouse space through capital and operating leases. The following schedule represents the annual future minimum payments, as of December 31, 1998:2000:
Capital Operating ------------------------------- ----------------------------------------------------------------------------- 19992001 $ 46,012 $ 621,601 2000 22,680 419,038 2001 4,212 142,566155,692 $1,100,818 2002 147,379 1,081,874 2003 125,412 1,039,092 2004 55,458 1,039,092 - 3,540 ----------------------------------------------------------------------------------------------------------- Total minimum lease payments 72,904 $1,186,745 ==============$ 483,941 $4,260,876 ============================================================================= Less portion related to interest (5,055) -------------(66,121) Present value of future minimum lease payments 67,849417,820 Less current portion (42,261) -------------(147,649) ---------- $ 25,588 =============270,171 =============================================================================
The CompanyGaiam incurred rent expense of $652,974, $508,590$646,886, $790,393 and $646,886$1,084,071 for the years ended December 31, 1996, 1997,1998, 1999 and 1998,2000, respectively. 6. Securities Available-for-Sale Securities available-for-sale consistLine of 315,000 sharesCredit Gaiam was a party to revolving line of common stock from one issuer.credit agreements, which extended through January 31, 2003. The cost and faircredit agreements permitted borrowings up to $6.5 million based upon the collateral value of Gaiam's accounts receivable and inventory. Borrowings under these agreements bear interest at the securitiesprime rate, which was 9.5% at December 31, 19982000. These borrowings were $32,200secured by a pledge of Gaiam's assets, and $1,633,905, respectively. The fair market valuecontained various financial covenants, including prohibiting the payment of cash dividends to its shareholders and requiring the shares was determined by using the closing NASDAQ pricemaintenance of the common stock atcertain financial ratios. At December 31, 1998.2000, Gaiam was in compliance with all the financial covenants. During April 2001, Gaiam entered into new credit agreements with Wells Fargo Bank West N.A. These agreements increase Gaiam's borrowing capacity from $6.5 million to $14.9 million. Under a revolving line of credit, Gaiam has availability of up to $10 million with a maturity date of June 30, 2003, and under a term loan, Gaiam may borrow up to $4.9 million, with a maturity of July 1, 2006. Borrowings under these agreements bear interest at the lower of prime rate less 50 basis points or LIBOR plus 275 basis points. These borrowings are secured by a pledge of Gaiam's assets, and contain various F-13 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Information subsequentfinancial covenants, including prohibiting the payment of cash dividends to December 31, 1998 is unaudited.) 6. Securities Available-for-Sale (continued) ForGaiam's shareholders and requiring the year ended December 31, 1997, the securities were considered restricted as a related party, controlled by the majority owner and chief executive officermaintenance of the Company, had the right to require the Company to donate any and all unsold shares to a not-for-profit organization. This requirement could be made at the sole discretion of the third party and expired in fiscal 1998. Given this restriction, the Company had recorded the restricted securities at cost. The Company did not believe it could attribute a fair market value to the securities in 1997 as a result of the restriction. However, if unrestricted, the fair market value would be $4,828,125 based on quoted market prices. During 1997, the Company sold 150,000 shares at a market value of $1,932,000 to a related party, and recognized a gain of $1,904,242 on the sale. For the year ended December 31, 1998, the securities were no longer restricted and were recorded at fair market value. The fair market value of the shares was $1,633,905, which was determined by using the closing NASDAQ price of the common stock on December 31, 1998. During 1998, the Company sold 60,000 shares at a market value of $703,125 to a related party, and recognized a gain of $696,992 on the sale.certain financial ratios. 7. Income Taxes The provision for income taxes is comprised of the following:
December 31, 1996 1997 1998 --------------------------------------------------1999 2000 - ----------------------------------------------------------------------------- Current: Federal $139,308 $269,919 $197,142$ 197,142 $1,006,008 $1,117,823 State 20,134 41,783 45,129 -------------------------------------------------- 159,442 311,702156,426 155,954 - ----------------------------------------------------------------------------- 242,271 1,162,434 1,273,777 Deferred: Federal 45,456 34,420 25,852 (37,610) 322,798 State 7,037 16,412 (16,168) -------------------------------------------------- 52,493 50,832(62,035) (41,088) - ----------------------------------------------------------------------------- 9,684 --------------------------------------------------(99,645) (281,710) - ----------------------------------------------------------------------------- Total $211,935 $362,534 $251,955 ==================================================$ 251,955 $1,062,789 $1,555,487 =================================================
F-14 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Information subsequent to December 31, 1998 is unaudited.) 7. Income Taxes (continued) Variations from the federal statutory rate are as follows:
December 31, 1996 1997 1998 ----------------------------------------------------1999 2000 ------------------------------------------------------ Expected federal income tax expense at statutory rate of 34% $187,556 $345,728 $ 466,934 $ 928,294 $1,409,182 Effect of legal judgment - permanent difference - - (251,609) -- -- Effect of other permanent differences 2,172 (16,983) 20,276 40,104 27,359 State income tax expense, net of federal benefit 22,207 33,789 16,354 ----------------------------------------------------94,391 118,946 - ------------------------------------------------------------------------------------------------------ Income tax expense $211,935 $362,534 $ 251,955 ====================================================$1,062,789 1,555,487 ======================================================================================================
The legal judgment was a liability acquired in the purchase of a 67% interest in Healing Arts Publishing. This $740,000 liability paid by the CompanyGaiam 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, 19981999 and 19972000 are as follows: F-14
December 31, 1997 1998 ----------------------------------1999 2000 --------------- Deferred tax assets: Reserve for bad debts $ 13,42857,386 $ 26,012113,373 Capitalized inventory 29,777 30,165 Amortization -- 2,594 -------- --------- 87,163 146,132 Deferred tax liabilities: Securities available-for-sale - (618,578) Amortization (1,956) (2,435)(66,060) -- Prepaid catalog costs -- (24,439) Depreciation (35,585) (57,374) ---------------------------------- (37,541) (678,387) ----------------------------------(1,181) (387,562) -------- --------- (67,241) (412,001) -------- --------- Deferred tax liability,asset (liability), net $(24,113) $(652,375) ==================================$ 19,922 $(265,869) ======== =========
F-15 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Information subsequent to December 31, 1998 is unaudited.) 8. Stockholders' Equity The Company had warrant certificates outstanding that entitled the holder to five warrants to purchase 40,000 shares of common stock at $1.25 per share. The warrants were held by the Company's President and were exercised in December 1998 for $50,000 The Company hadGaiam has warrant certificates outstanding during the year and at December 31, 19982000 that entitled the holder to purchase 24,000 shares of Class A common stock at $.50 per share. The warrants arewarrant is exercisable induring a two yeartwo-year period beginning January 20, 2002 and ending January 9, 2004. During 1998, the Company's shareholders voted to increase the authorizedIn June 1999, Gaiam completed a private placement whereby 331,429 shares of stock, create two classes of common stock and split the existing outstanding shares on a 20,000-to-1 basis. These changes have been reflected retroactively in the Company's consolidated financial statements. The Class B common stock is owned entirely by the Company's founder and Chief Executive Officer and is restricted as to its sale or transfer. Each share of Class A common stock is entitledwere 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 one vote, while each shareGaiam, after deducting all commissions and expenses associated with the offering, were $6.1 million. In 1999, Gaiam issued 207,247 shares of Class A common stock in lieu of cash payments for acquisitions, and Gaiam's Chief Executive Officer converted 1,635,000 shares of Class B common stock into 1,635,000 shares of Class A common stock. During 2000, Gaiam issued 21,243 shares of Class A common stock for two acquisitions, 6,776 shares of Class A common stock to three directors, in lieu of cash compensation, and 3,628 shares of Class A common stock upon exercise of options granted under the 1999 Long-Term Incentive Plan. As of December 31, 2000, Gaiam had the following Class A common shares reserved for future issuance: Awards under the 1999 Long-Term Incentive Plan 1,127,562 Shares reserved for warrant exercise 24,000 --------- Total shares reserved for future issuance 1,151,562 ========= F-15 During the first quarter of 2001, Gaiam agreed to issue approximately 481,424 shares of Class A common stock in conjunction with its merger with Real Goods, and issued 3,897 shares of Class A common stock upon exercise of options granted under the 1999 Long-Term Incentive Plan. 9. Stock Option Plans On June 1, 1999, Gaiam adopted the 1999 Long-Term Incentive Plan ("the Plan"), which provides for the granting of options to purchase up to 1.6 million shares of Gaiam's common stock. Both incentive stock options and non-qualified stock options may be issued under the provisions of the Plan. Employees of Gaiam and its affiliates, members of the Board of Directors, consultants and certain key advisors are eligible to participate in the plan, which shall terminate no later than June 1, 2009. These options granted under the Plan generally vest and become exercisable at 2% per month for the 50 months beginning in the eleventh month after the date of grant. All grants expire 7 years from the date of grant. Gaiam recorded deferred compensation of $106,992 and $413,320 in 1999 and 2000, respectively. In 2000, deferred compensation was recorded in connection with: acquisitions made by Gaiam in which options were issued to employees of an acquired company; options issued to employees whereby the grant price differed from the deemed fair value of Gaiam's common stock; and options issued to non- employees for services to be provided over the related terms of their respective agreements. The amounts recorded in 1999 represent the difference between the grant price and the deemed fair value of Gaiam's common stock for shares subject to options granted in 1999. The amortization of deferred compensation is entitledcharged to 10 votes. 9. Business Acquisitions On September 14, 1998,operations over the Company acquiredservice period of the options, which is typically 5 years. Total amortization expense recognized in 1999 and 2000 related to deferred compensation was $0 and $97,486, respectively. A summary of stock option activity and weighted average exercise prices for the years ended December 31, 1999 and 2000 follows:
1999 2000 ------------------------ -------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------------------------ ------------------------- Outstanding at beginning of year -- $ -- 890,900 $ 6.10 Granted: Price equal to fair value 851,200 4.51 253,500 15.96 Price less than fair value 39,700 7.18 39,000 15.28 Exercised -- -- (3,628) 4.38 Forfeited -- -- (52,210) 6.52 --------------------- ------------------------ Outstanding at end of year 890,900 $ 6.10 1,127,562 $ 7.45 -- $ -- 128,552 $ 4.47 Exercisable at end of year Shares available on December 31, for options that may be granted 709,100 472,438
F-16 A summary of stock options outstanding as of December 31, 2000 follows:
Outstanding Stock Options Exercisable Stock Options - -------------------------------------------------------------------------------- ------------------------------------- Weighted Weighted Weighted Average Average Average Range of Shares Remaining Exercise Exercise Exercise Prices Outstanding Life (Years) Price Shares Price - --------------------------------------------------------------------------------- ------------------------------------- $ 4.00 - $ 4.99 637,712 5.4 $ 4.38 102,128 $ 4.38 $ 5.00 - $ 5.99 171,500 5.8 $ 5.00 24,950 $ 5.00 $ 7.00 - $ 7.99 33,350 5.9 $ 7.18 1,334 $ 7.18 $15.00 - $15.99 193,000 6.8 $15.28 140 $15.50 $16.00 - $16.99 15,000 6.6 $16.34 - - $17.00 - $17.99 77,000 6.7 $17.18 - - - ------------------------------------------------------------------------ ------------------------------------- $ 4.00 - $17.99 1,127,562 5.9 $ 7.46 128,552 $ 4.54
Had compensation cost for Gaiam's stock-based compensation plan been determined under the fair value methodology for determining compensation cost under SFAS No. 123, Gaiam's net income and income per share for the years ended December 31, 2000 and 1999, would have been as follows:
For the Years Ended December 31, ---------------------- 1999 2000 ---------------------- Net income As reported $1,718,345 $2,648,871 Pro forma 1,599,102 2,258,005 Net income per common share As reported $ 0.20 $ 0.24 Pro forma $ 0.18 $ 0.21 Fully diluted net income per common share: As reported $ 0.19 $ 0.23 Pro forma $ 0.18 $ 0.20
In estimating the pro forma compensation expense for each equity award granted during the year, Gaiam used the Black Scholes option pricing model, with the following weighted-average assumptions used for grants in 1999 and 2000, respectively: risk-free interest rates in a 67% ownership in Healing Arts Publishing. The acquired company produces videos that are informationalrange of 5.78% and fitness oriented. The acquisition was accounted for6.00%, expected dividend yield of zero; expected option lives of 5 years, and expected volatility of 1.29 and 0.48. Options granted prior to Gaiam's initial public offering were valued using the purchaseminimum value method and, therefore, volatility was not applicable. 1999 2000 ---- ---- Weighted-average fair value of accounting foroptions granted during the year: Price equal to fair value $ 1.85 $11.85 Price less than fair value $11.21 $11.38 F-17 10. Related Party Transactions In 1997, Gaiam entered into a total considerationfulfillment agreement with InnerBalance Health, publisher of approximately $2.5 million. Resultsa natural health catalog, (a related party under common ownership with the Chief Executive Officer of operations for the Healing Arts entity for the period from the acquisition date through December 31, 1998 are included in the consolidated financial statements of the Company. As part of the purchase, in additionGaiam) to tangible assets, the Company acquired a video library which is being amortized using the straight line method over a period of 15 years.provide customer sales, service, warehousing and distribution services. On October 1, 1998, the CompanyGaiam acquired all of the stock and net assets of InnerBalance Health, Inc. from a related party who is the founder and Chief Executive Officer of the Company. The acquired entity provides similar services as the Company. As these were companies under common control, the CompanyGaiam 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 returnreduction to additional paid-in capital. In 1999, Gaiam engaged the services of capital to the primary shareholder. The payment was made partially through a transfer of stock and a subordinated debenture with theccplanet.com, Inc. (a related party. Results of operations for the InnerBalance Health entity for the period from the acquisition date through December 31, 1998 are included in the consolidated financial statements of the Company. The following represents the unaudited pro forma results of operations as if the above noted acquisitions had occurred as of January 1, 1998 and at the beginning of the immediately preceding period:
Years ended December 31 1997 1998 ----------------------------------- (Unaudited) Revenues $27,222,601 $38,063,794 Net income 625,257 34,128 Net income per common share 0.08 0.00
F-16 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Information subsequent to December 31, 1998 is unaudited.) 9. Business Acquisitions (continued) The December 31, 1997 pro forma results exclude a $975,000 unusual legal settlement that occurred during 1997. 10. Related Party Transactions In 1997, the Company entered into separate fulfillment agreements with InnerBalance Health (which was acquired by the Company during 1998, see Note 9) and Explorations Video Catalog, Inc. (related partiesparty under common ownership with the owner and Chief Executive Officer of Gaiam) to develop and implement a new web site design utilizing the Company) whereby the Company provides customer sales, service, warehousing and distribution services. The agreements arelatest technology for a two-year period but may be terminated by either party with 30 days notice. During 1998, the Company billedits direct to consumer operations. Gaiam paid ccplanet a total of $372,039, consisting$4.5 million for work performed on this project during 1999 and 2000, and the new Gaiam.com website was placed into service in March 2000. Gaiam has made its customer database and certain visual media available to ccplanet in exchange for additional fees totaling $600,000 during 1999 and $1.4 million in 2000. Because of $272,637Whole 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 Explorations Video Catalog,promote each other's businesses and share customer data. The companies are installing a store- within-store concept, presenting Gaiam's lifestyle products in Whole Goods Market's larger stores. In 2000, the Chief Executive Officer advanced funds to purchase a 70% interest in an organic clothing manufacturer. These advances, plus applicable interest, were repaid in December 2000. Additionally, Gaiam purchased approximately $300,000 in inventory from Earthlings, Inc. (a related party under common ownership with the Chief Executive Officer of Gaiam) at Earthling's cost. On January 5, 2001 and February 1, 2001, respectively, Gaiam acquired all of the Stock of Earthlings, Inc. and $99,402Self Care, Inc. (companies under common ownership with the Chief Executive Officer of Gaiam) at his company's net investment plus transaction expenses. As these companies were under common control, the purchase was accounted for using historical costs, similar to InnerBalance Health.a pooling transaction. Therefore, the difference between the purchase price and the value of net assets acquired was accounted for as reduction to additional paid-in capital. The total combined purchase price for both companies was $3,848,014. 11. Subsequent Events The CompanyDuring April 2001, Gaiam entered into new credit agreements with Wells Fargo Bank West N.A. These agreements increase Gaiam's borrowing capacity from $6.5 million to $14.9 million. Under a revolving line of credit agreementGaiam has availability of up to $10 million with a financial institution in January 1999 in the amountmaturity date of $1 million. The Company's accounts receivableJune 30, 2003, and finished goods inventory are collateral for the lineunder a term loan Gaiam may borrow up to $4.9 million, with a maturity of credit. In June 1999, the Company completed a private placement whereby 331,428 shares of Class A common stock were issued at $4.375 per share. Additionally, $1,275,000 convertible debentures with statedJuly 1, 2006. Borrowings under these agreements bear interest rate of 8% were issued. These debentures are convertible automatically upon the closing of the initial public offering into Class A common stock at the initial public offering per share price. In connection withlower of prime rate less 50 basis points or LIBOR plus 275 basis points. These borrowings are secured by a pledge of Gaiam's assets, and contain various financial F-18 covenants, including prohibiting the purchasepayment of Healing Arts Publishing,cash dividends to Gaiam's shareholders and requiring the Company entered into a royalty agreement with an actor to produce a seriesmaintenance of videos. The agreement was entered into during January 1999. The Company has agreed to pay a minimum royalty of $225,000 to the individual for his services in relation to the video production, and in exchange for marketing activities that he may participate in. The royalty agreement also requires the Company to pay certain amounts above and beyond the minimum once video sales exceed a certain level. In June 1999, the Company adopted an employee stock option plan (the "Plan") that will serve as a long-term incentive plan for individuals who contribute significantly to the strategic and long-term incentive performance objectives and growth of the Company. Under the Plan, the Company may issue an aggregate of not more than 1,600,000 common shares to eligible individuals. F-17 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Information subsequent to December 31, 1998 is unaudited.) 11. Subsequent Events (continued) In ________ 1999, the Company amended the convertible debentures issued to all subscribers to remove the automatic conversion of the securities. On _________, 1999, the Company's Board approved a reverse stock split of 2.5 to 1.financial ratios. 12. Segment Information The CompanyGaiam has two business segments: Direct to ConsumersConsumer and DirectBusiness to Businesses;Business; both of which sell products, services and information produced and/or purchased from other suppliers and shipped directly to either the end user or reseller.suppliers. Although the customer bases do not overlap to any extent, the production, purchase and delivery processes overlap in some areas. Gaiam does not accumulate the balance sheet by segment for purposes of management review. Each of the two segments qualifies as such because each is more than 10% of the combined revenue. Contribution margin is defined as net sales, less cost of goods sold and direct expenses. Financial information for the Company'sGaiam's business segments was as follows: F-19
Year Ended December 31, Six months ended June 30, 1997 1998Three Months Ended March 31 1998 1999 2000 2000 2001 (Unaudited) ----------------------------------------------------------------- Net revenue: Direct to consumer $19,897,690 $26,897,236 $10,474,976 $13,771,675 Direct$34,573,540 $43,823,460 $ 9,809,655 $10,536,386 Business to business - 3,841,304 - 3,791,40511,151,122 16,764,558 2,748,782 7,135,127 --------------------------------------------------------------------- Consolidated net revenue 19,897,690 30,738,540 10,474,976 17,563,080$45,724,662 60,588,018 12,558,437 17,671,513 Contribution margin: Direct to consumer (566,490) 128,691 175,128 (448,539) Direct(243,949) 841,351 44,376 97,736 Business to business - 856,152 - 263,986 -----------------------------------------------------------------2,368,360 3,586,415 411,983 637,629 --------------------------------------------------------------------- Consolidated contribution margin $ (566,490) $ 984,843 $ 175,128 $ (184,553)
F-18 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Information subsequent to December 31, 1998 is unaudited.)
Year Ended December 31, Six months ended June 30, 1997 1998 1998 1999 ---------------------------------------------------------- 2,124,411 4,427,766 456,359 735,365 Reconciliation of Contribution margin to net income: Other income 1,583,336(expense) 388,491 (113,938) 201,762605,865 283,114 (122,945) 67,698 Income tax expense 362,534 251,955 22,437 6,4011,062,789 1,555,487 125,130 301,390 Minority interest expense - 261,598 - (166,822) -----------------------------------------------------------(50,858) (59,706) 4,992 82,645 --------------------------------------------------------------------- Net income $ 654,312 $859,781859,781 1,718,345 $ 38,7532,648,871 $ 177,630 ===========================================================203,292 $ 419,028 =====================================================================
F-19 GAIAM, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS The following unaudited pro forma consolidated statement of operations for the year ended December 31, 1998 is derived from the historical consolidated statements of operations of Gaiam, Inc. and Healing Arts Publishing and InnerBalance Health (the "Acquisitions"), adjusted to give effect to the Mergers using the purchase method of accounting for business combinations. The unaudited pro forma consolidated statement of operations for the twelve months ended December 31, 1998 assumes that the Acquisitions occurred as of January 1, 1998. The pro forma consolidated statement of operations is provided for illustrative purposes only and should be read in conjunction with the accompanying notes thereto, and the audited consolidated financial statements and notes thereto of Gaiam, Inc. for the year ended December 31, 1998 and the audited financial statements and the notes thereto of Healing Arts Publishing LLC as of and for the year ended December 31, 1998. The pro forma data is not necessarily indicative of the operating results or financial position that would have been achieved had the Acquisitions been consummated at the dates indicated, nor is it necessarily indicative of future operating results and financial condition. F-20 GAIAM, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS Year ended December 31, 1998
Healing Arts InnerBalance Total Gaiam, Inc. Publishing (c) Health (d) Adjustments Pro Forma --------------------------------------------------------------------------- Net revenue $30,738,540 $5,990,059 $1,339,947 (4,752)(b) $38,063,794 Cost of goods sold 13,173,536 2,678,344 569,645 (4,752)(b) 16,416,773 --------------------------------------------------------------------------- Gross profit 17,565,004 3,311,715 770,302 - 21,647,021 Expenses: Selling and operating 14,186,215 2,999,499 1,017,415 168,871 (a) 18,372,000 Corporate, general and administration 2,393,946 736,868 - - 3,130,814 --------------------------------------------------------------------------- Total expenses 16,580,161 3,736,367 1,017,415 168,871 21,502,814 --------------------------------------------------------------------------- Income (loss) from operations 984,843 (424,652) (247,113) (168,871) 144,207 Other income (expense): Realized gain on sale of securities and other 696,992 - - - 696,992 Interest expense (308,501) (61,161) (17,312) (386,974) --------------------------------------------------------------------------- Total other income (expense) 388,491 (61,161) (17,312) - 310,018 --------------------------------------------------------------------------- Income (loss) before taxes and minority interest 1,373,334 (485,813) (264,425) (168,871) 454,225 Provision for income taxes 251,955 - - - 251,955 Minority interest in net income of consolidated subsidiary, net of tax (261,598) - - 93,456 (e) (168,142) --------------------------------------------------------------------------- Net income (loss) $ 859,781 $ (485,813) $ (264,425) $ (75,415) $ 34,128 =========================================================================== Net income: Basic $ 0.11 $ 0.00 Diluted 0.11 $ 0.00 Shares used in computing net income per share: Basic 8,072,877 8,072,877 Diluted 8,263,677 8,263,677
See accompanying notes. F-21 GAIAM, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS Notes to Unaudited Pro Forma Combined Statement of Operations: (a) The statement of operations has been adjusted to reflectINDEPENDENT AUDITOR'S REPORT To the additional amortization of the video library had the Company. acquired Healing Arts Publishing, Inc. on January 1, 1998. Intangible Asset $3,576,100 Amortization Life 15 years Additional Period 8.5 months ---------- Adjustment $ 168,871 ==========
(b) The statement of operations has been adjusted to reflect the effect of intercompany sales and cost of goods sold between Healing Arts Publishing, Inc. and Gaiam, Inc. for the nine months prior to the merger. (c) Represents the results of operations of Healing Arts Publishing, Inc. from January 1, 1998 through September 13, 1998. (d) Represents the results of operations of Inner Balance Health from January 1, 1998 through September 30, 1998. The Company accounted for the acquisition of Inner Balance Health at historical cost as the acquisition was considered a transfer of interest under common control. (e) Represents the adjustment to minority interest to reflect ownership of Healing Arts Publishing, Inc. for the entire year. F-22 REPORT OF INDEPENDENT AUDITORS Board of Directors Healing Arts Publishing, LLCReal Goods Trading Corporation We have audited the accompanying balance sheet of Healing Arts Publishing, LLC (successor to Healing Arts Publishing, Inc.)Real Goods Trading Corporation as of DecemberMarch 31, 1998,2000, and the related statementstatements of operations, stockholders' deficit and membersshareholders' equity and cash flows for the year then ended on a basis as described in Note 1.ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Healing Arts Publishing, LLC at DecemberReal Goods Trading Corporation as of March 31, 1998,2000, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ Moss Adams LLP ------------------------------- Moss Adams LLP Santa Rosa, California May 24, 2000 F-21 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareowners Real Goods Trading Corporation: We have audited the accompanying balance sheet of Real Goods Trading Corporation (the "Company") as of March 31, 1999 and the related statements of operations, shareowners' equity and cash flows for the year then endedended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as describedwell as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in Note 1all material respect, the financial position of Real Goods Trading Corporation as of March 31, 1999, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted accounting principles. Denver, Colorado June 25,in the United States of America. /s/ Deloitte & Touche LLP ------------------------------- Deloitte & Touche LLP Oakland, CA May 21, 1999 /s/ Ernst & Young LLPF-22 REAL GOODS TRADING CORPORATION BALANCE SHEETS March 31, 2000 and 1999 (In thousands except share data) 2000 1999 ------- ------ ASSETS ------ Current assets: Cash........................................................ $ 876 $2,048 Marketable securities....................................... 1,568 -- Accounts receivable, net of allowance of $6 in 2000 and 1999....................................................... 152 240 Note receivable............................................. -- 20 Inventories, net............................................ 3,165 2,080 Deferred catalog costs, net................................. 381 272 Prepaid expenses............................................ 150 266 Deferred income taxes....................................... 34 89 ------- ------ Total current assets...................................... 6,326 5,015 Property, equipment and improvements, net..................... 4,063 3,553 Other assets.................................................. 253 198 Property held for sale........................................ 78 78 Note receivable--affiliate, net of allowance of $259 in 2000.. 60 196 Deferred income taxes......................................... 664 39 ------- ------ Total assets.............................................. $11,444 $9,079 ======= ====== LIABILITIES AND SHAREOWNERS' EQUITY ----------------------------------- Current liabilities: Accounts payable............................................ $ 1,374 $ 873 Accrued expenses............................................ 309 620 Deposits.................................................... 55 138 Current maturities of long-term debt........................ 17 16 Other taxes payable......................................... 39 57 Total current liabilities................................. 1,794 1,704 Long-term debt, less current maturities....................... 534 552 ------- ------ Total liabilities......................................... 2,328 2,256 ------- ------ Shareowners' equity: Common stock, without par value: Authorized 10,000,000 shares; issued and outstanding, 4,881,742 and 4,080,742 shares, respectively............... 10,771 7,188 Accumulated deficit........................................... (1,655) (365) ------- ------ Total shareowners' equity................................. 9,116 6,823 ------- ------ Total liabilities and shareowners' equity............... $11,444 $9,079 ======= ====== See notes to financial statements F-23 HEALING ARTS PUBLISHING, LLC BALANCE SHEET DecemberREAL GOODS TRADING CORPORATION STATEMENTS OF OPERATIONS Years Ended March 31, 19982000 and 1999 (In thousands except share and per share data) 2000 1999 ---------- ---------- Net Sales............................................. $ 18,979 $ 18,736 Cost of sales......................................... 11,145 10,904 Gross profit........................................ 7,834 7,832 Selling, general and administrative expenses.......... 9,402 8,497 Loss from operations................................ (1,568) (665) Interest income, net.................................. 63 42 Loss on disposition of assets......................... (354) (9) Loss before income taxes............................ (1,859) (632) Income tax benefit.................................... 569 150 ---------- ---------- Net loss............................................ $ (1,290) $ (482) ========== ========== Net loss per share, basic and diluted................. $ (0.29) $ (0.12) Weighted average shares outstanding, basic and diluted.............................................. 4,384,887 4,004,286 See notes to financial statements F-24 REAL GOODS TRADING CORPORATION STATEMENTS OF CASH FLOWS Years Ended March 31, 2000 and 1999 (In Thousands) 2000 1999 ------- ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss..................................................... $(1,290) $ (482) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization.............................. 452 344 Loss/writedown on disposition of assets.................... 252 9 Deferred income taxes...................................... (570) (151) Other...................................................... (18) 14 Changes in assets and liabilities: Accounts receivable........................................ 88 (30) Note receivable............................................ 20 (20) Inventories................................................ (1,085) 256 Deferred catalog costs, net................................ (109) 167 Prepaid expenses........................................... 116 (52) Income taxes receivable.................................... -- 167 Accounts payable........................................... 501 147 Accrued expenses and other................................. (311) 298 Deposits................................................... (83) (296) ------- ------ NET CASH FROM OPERATING ACTIVITIES........................... (2,037) 371 ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment, and construction in progress........ (962) (514) Investments in marketable securities....................... (3,093) -- Maturities of marketable securities........................ 1,525 -- Purchase of other assets................................... (55) (45) Proceeds from sale of equipment and other assets........... -- 25 Note receivable--affiliate................................. (116) (196) ------- ------ NET CASH FROM INVESTING ACTIVITIES........................... (2,701) (730) ------- ------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net................ 3,586 1,138 Repayment of debt.......................................... (17) (17) Purchase of common stock................................... (3) (15) ------- ------ NET CASH FROM FINANCING ACTIVITIES........................... 3,566 1,106 ------- ------ NET INCREASE (DECREASE) IN CASH.............................. (1,172) 747 CASH AT BEGINNING OF PERIOD.................................. 2,048 1,301 ------- ------ CASH AT END OF PERIOD........................................ $ 876 $2,048 ======= ====== Other cash flow information: Interest paid.............................................. $ 47 $ 48 Income taxes paid.......................................... 1 1 See notes to financial statements F-25 REAL GOODS TRADING CORPORATION STATEMENTS OF SHAREOWNERS' EQUITY Years Ended March 31, 2000 and 1999 (In thousands)
Assets Current assets: Accounts receivable, netCommon Stock --------------------- Number Retained Total of allowance for doubtful accounts of $57,915 $2,466,925 Receivable from Gaiam Holdings, Inc. 450,000 Inventory, net 992,904 Deferred advertising costs 262,578 Prepaid and other current assets 215,469 ------------------ Total current assets 4,387,876 Property and equipment, net 139,536 Capitalized production costs 672,438 Video library, net 3,493,764 Other assets 76,648 ------------------ Total assets $8,770,262 ================== Liabilities and members' equity Current liabilities: Accounts payable $2,704,779 Accrued royalties 804,772 Accrued liabilities 671,430 ------------------ Total current liabilities 4,180,981 Members' equity 4,589,281 ------------------ Total liabilities and members' equity $8,770,262 ==================
See accompanying notes. F-24 HEALING ARTS PUBLISHING, LLC STATEMENT OF OPERATIONS
Year Ended Six Months December 31, Ended 1998 June 30, 1999 ------------------------------------- (See Note 1) (Unaudited) Net revenue $11,803,170 $5,783,307 Cost of goods sold 5,468,992 2,107,903 ------------------ ---------------- Gross profit 6,334,178 3,675,404 Expenses: Selling and operating 4,398,787 2,725,448 Corporate, general and administrative 1,443,337 1,145,424 ------------------------------------- Total expenses 5,842,124 3,870,872 ------------------------------------- Income (loss) from operations 492,054 (195,468) Interest expense and other (119,927) (173,713) ------------------------------------- Net income (loss) $ 372,127 $ (369,181) =====================================
See accompanying notes. F-25 HEALING ARTS PUBLISHING, LLC STATEMENT OF STOCKHOLDERS' DEFICIT AND MEMBERS' EQUITY
Stockholders' Deficit ------------------------------------------ Common Accumulated Members' Stock DeficitEarnings Shareowners Shares Amount (Deficit) Equity Total --------------------------------------------------------------------------------- ------- --------- ----------- (See Note 1) Balance at January 1, 1998 for Healing Arts Publishing, Inc. (predecessor)BALANCE, MARCH 31, 1998................ 3,857 $ 10 $(1,191,696)6,065 $ - $(1,191,686) Distributions paid to stockholder - (197,690) - (197,690)117 $ 6,182 Issuance of common stock in direct public offering, net of offering costs of $99................................ 228 1,138 -- 1,138 Shares repurchased..................... (4) (15) -- (15) Net loss - (485,811) - (485,811) Assets and liabilities contributed to Healing Arts Publishing, LLC (successor) (10) 1,875,197 - 1,875,187 --------------------------------------------------------------------------- Ending capitalization at September 13, 1998loss............................... -- -- (482) (482) ----------------------------------------------- BALANCE, MARCH 31, 1999................ 4,081 7,188 (365) 6,823 Issuance of Healing Arts Publishing, Inc. (predecessor)common stock, net of issue costs of $22.......................... 800 3,578 -- 3,578 Exercise of common stock options under option plan........................... 2 8 -- 8 Shares repurchased..................... (1) (3) -- (3) Net loss............................... -- -- (1,290) (1,290) ----------------------------------------------- BALANCE, MARCH 31, 2000................ 4,882 $10,771 $ -(1,655) $ - $ - $ - =========================================================================== Beginning balance at September 14, 1998 for Healing Arts Publishing, LLC (successor) reflecting the contributed net assets and capital from the members at fair value $3,731,343 $3,731,343 Net income 857,938 857,938 --------------------------------------------------------------------------- Balance at December 31, 1998 4,589,281 4,589,281 Net loss (unaudited) (369,181) (369,181) --------------------------------------------------------------------------- Balance at June 30, 1999 (unaudited) $4,220,100 $ 4,220,100 ===========================================================================9,116 ===============================================
See accompanying notes.notes to financial statements F-26 HEALING ARTS PUBLISHING, LLC STATEMENT OF CASH FLOWS
Year Ended Six Months December 31, Ended 1998 June 30, 1999 ------------------------------------- (See Note 1) (Unaudited) Operating activities Net income (loss) $ 372,127 $ (369,181) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 45,070 27,027 Amortization 82,336 70,870 Changes in operating assets and liabilities: Accounts receivable (1,328,823) 1,439,044 Inventory (31,202) (157,642) Deferred advertising costs (105,842) 116,037 Prepaid and other current assets (141,857) (143,115) Capitalized production costs (273,701) (152,169) Other assets (43,038) 13,777 Accounts payable 655,971 (1,792,439) Accrued royalties 256,275 256,653 Accrued liabilities (310,717) (532,682) ------------------------------------- Net cash used by operating activities (823,401) (1,223,820) Investing activities Purchase of property and equipment (49,299) (33,449) ------------------------------------- Net cash used by investing activities (49,299) (33,449) Financing activities Distribution to stockholder (197,690) - Contributed capital by members 1,700,000 450,000 Payments of notes payable (629,610) - Proceeds from borrowings - 900,000 ------------------------------------- Net cash provided by financing activities 872,700 1,350,000 ------------------------------------- Net change in cash and cash equivalents - 92,731 Cash and cash equivalents at beginning of year - - Cash and cash equivalents at end of year $ - $ 92,731 =====================================
See accompanying notes. F-27 HEALING ARTS PUBLISHING, LLCREAL GOODS TRADING CORPORATION NOTES TO FINANCIAL STATEMENTS (Information subsequent to December 31, 1998 is unaudited) 1. Organization Healing Arts Publishing, LLCSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION--Real Goods Trading Corporation (the "Company" or "successor"), a limited liability company that was formed September 14, 1998, produces and distributes exercise and relaxation videosorganized on July 1, 1990 and sells personal developmentprimarily environmentally related, "healthy living" and renewable energy products through mail order catalogs, four retail stores, the Internet, and direct sales. The Company was formedsales from the contributed net assets, liabilities and operationsits renewable energy department. USE OF ESTIMATES--The preparation of Healing Arts Publishing, Inc., (predecessor) a California-based company, for a 33% ownership interest in the Company, valued at $1.3 million. Gaiam Holdings, Inc. ("Gaiam"), a Colorado-based direct-mail retailer of services and products to customers who value the environment, a sustainable economy and healthy lifestyles, acquired a 67% ownership of the Company for an approximate capital contribution of $2.5 million, including $100,000 paid to the owner of Healing Arts Publishing, Inc. for a covenant not to compete. The effect of these purchase price adjustments were pushed down to the Company at the formation date and are reflected in the balance sheet at December 31, 1998. The operations and cash flow for the Company for the year ended December 31 1998 reflect the combined operations of Healing Arts Publishing, Inc. (predecessor) from January 1, 1998 through the September 13, 1998 acquisition date and the Company (successor) from September 14, 1999 through December 31, 1999. Had the intangible created by the push down of the purchase price adjustments been annualized for a full year, the unaudited pro forma net income for 1998 on a combined basis would have been $203,256. 2. Summary of Significant Accounting Policies Inventory Inventory, consisting of finished goods, net of obsolescence allowances of $80,109, is stated at the lower of cost (first-in, first-out method) or market. Depreciation and Amortization Depreciation of property and equipment, including amortization recorded under capital leases, is computed on the straight-line method over estimated useful lives of approximately five to seven years. F-28 Healing Arts Publishing, LLC Notes to Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) Deferred Advertising Costs Deferred costs primarily relate to preparation, printing and distribution of catalogs. Such costs are deferred for financial reporting purposes until the catalogs are distributed, then amortized over succeeding periods (not to exceed four months) on the basis of estimated sales. Historical sales statistics are the principal factor used in estimating the amortization rate. Other advertising and promotional costs are expensed as incurred. Combined advertising costs were $511,230 for the year ended December 31, 1998. Deferred Production Costs Deferred production costs relate to the preparation, filming and editing of exercise videos produced by the Company. Such costs are deferred for financial reporting purposes until the videos are distributed, then amortized over succeeding periods on the basis of estimated sales. Historical sales statistics are the principal factor used in estimating the amortization rate. Video production costs on a combined basis were $178,685 for the year ended December 31, 1998. Video Library The video library asset represents the excess of cost over the identifiable net assets of the Company upon formation and are being amortized using the straight- line method. The library consists of approximately seventeen videos owned or licensed by the Company. This library is amortized over a fifteen-year period. Accumulated amortization at December 31, 1998 was $82,336. Pursuant to the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the carrying value of long-lived assets, including intangible assets, is reviewed periodically to determine if any impairment indicators are present. If it is determined that such indicators are present and the review indicates that the assets will not be recoverable, the carrying value of such assets is reduced to estimated fair market value. Impairment indicators include, among other conditions, cash flow deficits; an historic or anticipated decline in revenue or operating profit; adverse legal or regulatory developments; or a material decrease in the fair market value of some or all of the assets. During the period ended December 31, 1998, no indications of impairment were present. F-29 Healing Arts Publishing, LLC Notes to Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) Revenues The Company recognizes revenue at the time merchandise is shipped to the customer. Amounts billed to customers for postage and handling charges, which approximate $425,000 on a combined basis are recognized as revenue at the time that the revenues on the product shipments are recognized. The Company provides a reserve for expected future returns at the time the sale is recorded based upon historical experience. The Company's accounts receivable are derived from revenue earned from customers located in the U.S. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of accounts receivable. For the year ended December 31, 1998, on a combined basis, the Company's two largest trade customers comprised approximately 31% of the accounts receivable balance and 24% of total revenues. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions.assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial Instruments Financial instrumentsCHANGE IN PRESENTATION--Included in net sales for fiscal years 2000 and 1999 are shipping and handling fees collected from customers of $1,388,000 and $1,516,000, respectively. Included in cost of sales for fiscal years 2000 and 1999 are freight out expenses of $1,118,000 and $1,152,000 respectively. Previously, these amounts were presented as a net amount in selling, general and administrative expenses. Such sales and cost of sales have been reclassified into net sales and cost of sales for the periods presented because management believes this more accurately represents the Company's true sales and cost of sales amounts. CASH AND MARKETABLE SECURITIES--Marketable securities are classified as available-for-sale and are available to support current operations or to take advantage of other investment opportunities. Marketable securities are stated at estimated fair value based upon market quotes and consist of bonds, commercial paper and Federal agency securities. As of March 31, 2000, fair value approximated cost and no unrealized gain or loss was included in retained earnings. Realized gains and losses are included in other income. Interest earned is included in interest income. The Company has deposits in money funds in excess of federally insured levels. These deposits are placed with quality financial institutions. INVENTORIES are stated at the lower of cost (first-in/first-out method) or market. Inventories include expenses associated with acquiring the inventory. DEFERRED CATALOG COSTS--The Company capitalizes the direct cost of producing and distributing its mail order catalogs. Deferred catalog costs are amortized based on the estimated sales lives of the catalogs, generally eighteen weeks. PROPERTY, EQUIPMENT AND IMPROVEMENTS are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from 5 to 40 years. INTERNET SITE COSTS are capitalized in accordance with AICPA Statement of Position (SOP) 98-1 and EITF 00-2 in connection with construction of Internet site. PROPERTY HELD FOR SALE--The building and land which were the former Snow Belt Store are currently held for sale. NOTE RECEIVABLE--AFFILIATE--The note receivable represents net funds advanced to the Real Goods Institute for Solar Living ("ISL") and bears interest at 5.25% per year. Interest only is payable until the ISL becomes self-funding. PRE-OPENING COSTS for retail stores are expensed as incurred. INCOME TAXES--The Company accounts for its income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events F-27 REAL GOODS TRADING CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than changes in tax laws. LOSS PER SHARE--Basic loss per share is computed by dividing net loss by the weighted average number of shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted to common stock. Dilutive stock options were not included for the fiscal years ended March 31, 2000 and 1999, as the Company incurred a net loss in each year and the effect would be antidilutive. RECLASSIFICATION--The 1999 financial statements have been reclassified in order to conform to the March 31, 2000 presentation. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS--Statement of Financial Accounting Standard ("SFAS") No. 107, "Disclosures About Fair Value of Financial Instruments" requires disclosure of the estimated fair value of financial instruments. The carrying values of cash, marketable securities, accounts receivable, accounts payable, and long-term debt approximates their estimated fair values. STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". COMPREHENSIVE INCOME--Comprehensive loss and net loss are the same. 2. MARKETABLE SECURITIES During the year ended March 31, 2000, the Company purchased marketable securities consisting of bonds and commercial paper. The following is a summary of short-term investments included in marketable securities (in thousands): Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Loses Value ------- ---------- ---------- --------- March 31, 2000: Corporate Bonds.................... $ 411 $ -- $ -- $ 411 Federal agency securities.......... 579 -- -- 579 Commercial Paper................... 578 -- -- 578 ------- ------ ------ ------ $ 1,568 $ -- $ -- $1,568 ======= ====== ====== ====== All short-term investments mature within one year of March 31, 2000. F-28 REAL GOODS TRADING CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) 3. PROPERTY, EQUIPMENT AND IMPROVEMENTS Property, equipment and improvements consist of the following at March 31 (in thousands): 2000 1999 ------- ------- Land....................................................... $ 480 $ 480 Land improvements.......................................... 783 783 Buildings and leasehold improvements....................... 1,821 1,551 Equipment, furniture and fixtures.......................... 2,219 1,732 Internet site costs........................................ 139 -- Construction in progress................................... 84 15 ------- ------- Total.................................................... 5,526 4,561 Less accumulated depreciation.............................. (1,463) (1,008) ------- ------- Property, equipment and improvements, net.................. $ 4,063 $ 3,553 ======= ======= 4. LINE OF CREDIT The Company has a line of credit agreement for $1,500,000 with National Bank of the Redwoods (the "Bank"), which expires on February 28, 2001. Borrowings bear interest at 1.5% over the prime rate, payable in monthly installments. At March 31, 2000 and 1999, no amounts were outstanding on the Company's line of credit. The line of credit agreement contains restrictive covenants including debt to net worth and current ratios, restrictions on capital expenditures, positive cash flow at a certain point in the fiscal year and prohibitions on payment of cash dividends without the Bank's approval. The line is collateralized by substantially all of the Company's assets, including inventory, accounts receivable and mailing lists as well as a key person life insurance policy on the life of the Company's Chairman and largest shareowner. 5. DEBT Long term debt consists of the following at March 31 (in thousands): 2000 1999 ---- ---- Small Business Administration term loan, interest at 7.77%, payable through September 2016, secured by land and building in Hopland, California............................................. $551 $568 Less: current portion............................................ 17 16 Long-term portion................................................ $534 $552 Principal payments on long-term debt are as follows (in thousands): Fiscal Year ending March 31: 2001................................................................ $ 17 2002................................................................ 19 2003................................................................ 20 2004................................................................ 22 2005................................................................ 23 Thereafter.......................................................... 450 ---- Total............................................................. $551 ==== F-29 REAL GOODS TRADING CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) 6. ASSET HELD FOR SALE The Company owns land and buildings in Amherst, Wisconsin which it is seeking to sell. At March 31, 1999 and 2000, the land and building had a net book value of $78,000 and was rented out while it is being offered for sale. 7. LEASES The Company has operating leases for its offices, warehouse facilities, the Eugene and Berkeley stores and certain current liabilities.equipment, which expire from October 2000 through March 2010. Rental expense for the years ended March 31, 2000 and 1999 was $403,000 and $308,000 respectively. Future minimum annual lease payments under operating leases are as follows (in thousands): Fiscal Year ending March 31: 2001.............................................................. $ 533 2002.............................................................. 525 2003.............................................................. 463 2004.............................................................. 456 2005.............................................................. 193 Thereafter........................................................ 631 ------ Total........................................................... $2,801 ====== 8. INCOME TAXES Income tax benefits consist of the following for the years ended March 31 (in thousands): 2000 1999 ----- ----- Current: Federal...................................................... $ -- $ -- State........................................................ 1 1 ----- ----- Total...................................................... 1 1 Deferred--federal............................................ (570) (151) ----- ----- Total benefit.............................................. $(569) $(150) ===== ===== The carrying amounts reportedincome tax benefit for financial reporting purposes are different from the tax provision computed by applying the statutory federal income tax rate. The differences for each year are reconciled as follows (in thousands): 2000 1999 ----- ----- Federal income taxes at statutory income tax rate (34%)....... $(632) $(215) State taxes net of federal tax benefit........................ (112) (14) Effect of permanent differences............................... 6 8 Valuation allowance........................................... 100 107 Other......................................................... 69 (36) ----- ----- Benefit....................................................... $(569) $(150) ===== ===== F-30 REAL GOODS TRADING CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) The components of the net deferred tax asset (liability) at year-end are as follows (in thousands): 2000 1999 ----- ----- Deferred tax assets: Benefit of net operating loss carryforwards.................. $ 792 $ 183 Allowance for doubtful accounts.............................. 110 -- Stock option compensation.................................... 14 14 Reduction in cost of property................................ 30 15 Other........................................................ 1 10 947 222 Less valuation allowance....................................... (283) (183) ----- ----- Non-current deferred tax asset................................. 664 39 ----- ----- Deferred tax assets (liabilities): Inventory reserves........................................... 47 99 Catalog costs................................................ (22) (37) Accruals..................................................... 24 32 Other........................................................ 3 (5) ----- ----- Current deferred tax assets................................ 52 89 Less valuation allowance....................................... (18) -- ----- ----- Current deferred tax asset..................................... 34 89 ----- ----- Net deferred tax asset......................................... $ 698 $ 128 ===== ===== Because of the uncertain nature of their ultimate utilization, a partial valuation allowance is recorded against the deferred tax assets associated with the net operating losses. At March 31, 2000, the Company has net operating losses available for carryforward of approximately $1,950,000 and $1,536,000 for federal and state purposes, respectively. The federal net operating loss and $430,000 of the state net operating losses will expire in 2013 through 2020. The remaining state net operating losses expire through 2005. The Company intends to use various tax planning strategies to fully utilize the loss carryforwards prior to expiration. 9. SHAREOWNER AGREEMENTS The Chairman of the Board, founder and largest shareowner has a renewable one-year employment agreement with the Company which provides for an annual salary of $125,000. As of April 1, 2000 the Chairman voluntarily agreed to a reduction in such salary to $110,000 on a month to month basis. The Company also has a split dollar life insurance agreement with this individual whereby the Company pays the premiums. The Company has been granted a security interest in the balance sheetcash value and death benefit of the policy, and certain shares of the Company stock owned by the Chairman of the Board have been pledged as additional collateral during the period in which the premiums exceed the cash surrender value. The net cash surrender value at March 31, 2000 was $215,000 and is included in other assets. 10. SHAREOWNERS' EQUITY On August 11, 1997 the Company commenced a direct public offering of up to 1,000,000 shares of newly issued stock and 300,000 shares offered by a selling shareholder at $5.50 per share. The offering closed on June 30, 1998. Through March 31, 1999, the Company had issued 676,641 new shares of common stock, generating gross proceeds of $3,620,000, and had incurred costs of $697,000 related to the direct public offering. F-31 REAL GOODS TRADING CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) In August 1998, the Company was authorized to repurchase up to $100,000 of common stock in open market and private transactions. In fiscal 1999, 3,900 shares were repurchased for these$14,850. In fiscal 2000, 800 shares were repurchased for $2,750. Through March 31, 2000, a total of 13,884 shares had been repurchased for $66,643. On September 23, 1999 WholePeople.com purchased 800,000 shares of common stock for $3,578,000, net of issuance costs of $22,000. Subsequent to year-end, in April 2000, the Company repurchased 50,000 shares for $100,000. 11. BENEFIT PLANS AND STOCK OPTIONS The Company sponsors a 401(k) retirement plan. The plan does not require matching funds from the Company, and the Company has made no contributions to the plan. Under the Company's Third Amended and Restated Fiscal 1993 Stock Incentive Plan ("Employee Plan") the Company can grant incentive and non-qualified options to purchase 1,200,000 shares of common stock. Incentive Stock Options can be granted at prices not less than 100% of the fair market value of the common shares (85% for non-qualified options) on the date the option is granted, and normally vest over a period not exceeding five years from the date of grant. Options expire ten years from date of grant. As of March 31, 2000, options to purchase 1,110,550 shares were outstanding. In September 1998 the Board of Directors revised the exercise price of all outstanding Employee Plan options to $4.50 per share. The Company has reserved 100,000 shares of common stock for its Non-Employee Directors' Stock Option Plan ("Director's Plan"). As of March 31, 2000, options to purchase 75,000 shares were outstanding and none have been exercised.
Weighted Average Number of Exercise Shares Price -------------- -------- (in thousands) Outstanding at March 31, 1998................... 344 $ 5.37 Granted......................................... 448 4.50 Forfeited....................................... (125) 5.37 Terminated as a result of option repricing...... (341) 5.39 Issued as a result of option repricing.......... 341 4.50 ------ ------ Outstanding at March 31, 1999................... 667 4.59 Granted......................................... 838 4.50 Forfeited....................................... (317) (4.52) Exercised....................................... (2) (4.50) ------ ------ Outstanding at March 31, 2000................... 1,186 $ 4.57 ====== ====== Shares exercisable at March 31, 2000............ 194 $ 4.54 Shares available for grant at March 31, 2000.... 114 Range of exercise prices........................ $3.38 to $7.12 Weighted average remaining contractual life at March 31, 2000 7.5 years
F-32 REAL GOODS TRADING CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) Additional Stock Plan Information As discussed in Note 1, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board No.25, "Accounting for Stock Issued to Employees" and its related interpretations. Accordingly, no compensation expense has been recognized in the financial instruments approximatestatements for employee stock arrangements in fiscal 1999 or 1998. Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation", (SFAS 123) requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value. Interimvalue method as of the beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of the option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: Expected life, 120 months following vesting in fiscal 2000 and fiscal 1999, stock volatility, 32% in fiscal 1999 and 55% in fiscal 2000; risk free interest rate 5.50% in fiscal 1999 and 5.65% in fiscal 2000; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are calculated at a 50% rate, based on the Company's historical experience. If the computed fair values of the fiscal 2000 and fiscal 1999 awards had been amortized to expense over the vesting period of the awards, pro forma net loss would have been $569,000 or $.14 per share in fiscal 1999, and the pro forma net loss would have been $1,549,000 or $.35 per share in fiscal 2000. F-33 REAL GOODS TRADING CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) 12. SEGMENT INFORMATION The Company has three divisions (Catalog, Retail and Renewables), all of which sell products purchased from other suppliers for sale directly to customers. The customer bases of all three divisions overlap to some extent, and the purchases and delivery processes to customers overlap as well. Each of the three divisions qualifies as a reportable segment because each is more than 10% of the combined revenue of all operating segments. Contribution is defined as net sales less cost of goods sold and direct expenses. Financial Statements The financial resultsinformation for the six months ended JuneCompany's business segments was as follows: FY 2000 FY 1999 ------- ------- Net Sales: Catalog Division.......................................... $11,699 $11,914 Retail Division........................................... 4,046 3,743 Renewables Division....................................... 3,234 3,079 ------- ------- Consolidated Net Sales.................................... $18,979 $18,736 ======= ======= Contribution: Catalog Division............................................ $ 5,327 $ 5,459 Retail Division............................................. 1,519 1,400 Renewables Division....................................... 988 973 ------- ------- Consolidated Contribution................................. $ 7,834 $ 7,832 ======= ======= Reconciliation of Contribution to net loss: Selling, general & administrative expenses Catalog Division.......................................... $ 5,757 $ 5,687 Retail Division........................................... 2,267 1,748 Renewables Division....................................... 1,351 1,032 Solar Living Center....................................... 27 30 1999 are------- ------- Consolidated S G & A expenses............................... 9,402 8,497 Interest (income) expense................................... (63) (42) Loss on sales of assets..................................... 354 9 Income tax benefit.......................................... (569) (150) ------- ------- Net Loss................................................ $(1,290) $ (482) ======= ======= F-34 REAL GOODS TRADING CORPORATION CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (In thousands except share and per share data)
Six Months Ended ---------------------- Sept. 23, Sept. 25, 2000 1999 ---------- ---------- Net sales..................... $ 6,679 $ 8,101 Cost of sales................. 4,148 4,822 Gross profit.................. 2,531 3,279 Selling, general and administrative expenses.... 4,033 3,807 Loss from operations.......... (1,502) (528) Interest income, net of interest expense............. 42 8 Loss before income taxes...... (1,460) (520) Income tax benefit............ 365 182 ---------- ---------- Net loss.................. $ (1,095) $ (338) ========== ========== Net loss per share, basic and diluted.............. $ (0.23) $ (0.08) Weighted average shares outstanding, basic and diluted...................... 4,824,354 4,081,339
See notes to condensed financial statements F-35 REAL GOODS TRADING CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six Months Ended ------------------ Sept. 23, Sept. 25, 2000 1999 ------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................................................... $(1,095) $ (338) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization............................ 259 204 Deferred income taxes.................................... (365) (182) Changes in assets and liabilities: Receivables.............................................. (38) (77) Inventory................................................ 520 (1,087) Deferred catalog costs................................... 51 -- Prepaid expenses......................................... (40) 36 Other.................................................... -- 11 Accounts payable......................................... (532) (136) Accrued expenses......................................... (36) (122) Customer deposits........................................ 56 (29) Other taxes payable...................................... 16 (30) ------- ------- Net cash from operating activities..................... (1,204) (1,750) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment, improvements, and construction in progress................................................ (372) (188) Note and interest receivable from affiliate.............. (4) (95) Marketable Securities.................................... 1,568 -- ------- ------- Net cash from investing activities..................... 1,192 (283) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Repurchase of stock...................................... (147) (3) Repayment of debt........................................ (8) (8) Proceeds from issuance of common stock, net of issue costs................................................... -- 3,587 ------- ------- Net cash from financing activities..................... (155) 3,576 ------- ------- Net increase (decrease) in cash............................ (167) 1,543 Cash at beginning of period................................ 876 2,048 ------- ------- Cash at end of period...................................... $ 709 $ 3,591 ======= =======
See notes to condensed financial statements F-36 REAL GOODS TRADING CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) For the Six Months Ended September 23, 2000 NOTE 1--BASIS OF PRESENTATION The accompanying unaudited butcondensed financial statements have been prepared from the records of the Company and, in the opinion of management, include all adjustments (consisting of only of normal recurring accounts) thataccruals) necessary to present fairly the Company considers necessary for a fair presentationfinancial position as of itsSeptember 23, 2000 and the interim results of operations and cash flows for such period.the six months ended September 23, 2000 and September 25, 1999. Accounting policies followed by the Company are described in Note 1 to the audited financial statements for the fiscal year ended March 31, 2000 included in the Company's fiscal 2000 Annual Report to Shareowners. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted for purposes of the condensed financial statements. The condensed financial statements should be read in conjunction with the audited financial statements, including notes thereto, for the year ended March 31, 2000. The results of operations for the six months ended June 30, 1999month periods herein presented are not necessarily indicative of the results to be expected for athe full year. F-30 Healing Arts Publishing, LLC Notes to Financial Statements (continued) 3. PropertyNOTE 2--PRESENTATION OF SHIPPING AND HANDLING FEES Included in net sales for the six month periods ended September 23, 2000 and Equipment At December 31, 1998, propertySeptember 25, 1999 are shipping and equipment, stated athandling fees collected from customers of $226,000 and $438,000 in fiscal 2001 and $259,000 and $536,000 in fiscal 2000, respectively. Included in cost consistsof sales for the six month periods ended September 23, 2000 and September 25, 1999 are freight out expenses of $225,000 and $424,000 in fiscal 2001 and $184,000 and $432,000 in fiscal 2000, respectively. NOTE 3--LINE OF CREDIT The Company has a line of credit agreement for $1,500,000 with National Bank of the following: Furniture and equipment $ 238,305 Computer equipment 106,062 ------------------- 344,367 Accumulated depreciation and amortization (204,831) ------------------- $ 139,536 ===================
4. LeasesRedwoods (the "Bank") which expires on February 28, 2001. Borrowings bear interest at 1.5% over the prime rate, payable in monthly installments. The line of credit agreement contains restrictive covenants including debt to net worth, current ratios, restrictions on capital expenditures, and prohibitions on payment of cash dividends without the Bank's approval. The line is collateralized by substantially all of the Company's assets, including inventory, accounts receivable and mailing lists as well as a key person life insurance policy on the life of the Company's Chairman and largest shareowner. As of December 31, 1998,September 23, 2000, no amounts were outstanding on the Company's principalline of credit. NOTE 4--SHAREOWNERS' EQUITY In two separate resolutions in August 1998 and April 2000, the Board of Directors authorized the Company to purchase up to a total of $200,000 of common stock in open market and private transactions. During the first six months of fiscal 2001 the Company repurchased 67,500 shares at an average cost of $2.17 per share. NOTE 5--SEGMENT INFORMATION The Company has four divisions (Catalog, Internet, Retail and Renewables), all of which sell products purchased from other suppliers directly to customers. The customer bases of all four divisions overlap to some extent, and the purchase and delivery processes to customers overlap as well. F-37 REAL GOODS TRADING CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) Each of the four divisions qualifies as a reportable segment because each is more than 10% of the combined revenue of all operating lease commitments aresegments. Financial information for equipmentthe Company's business segments for the six months ended September 23, 2000 and office space. The Company's future minimum lease payments under noncancelable operating lease agreements areSeptember 25, 1999 was as follows:
Sept. 23, Sept. 25, 2000 1999 ------- --------- 1999 Net Sales: Catalog Division.................................... $ 89,995 2000 17,140 2001 4,383 2002 3,540 ------------------ $115,058 ==================2,624 $4,066 Internet Division................................... 833 445 Retail Division..................................... 2,083 1,701 Renewables Division................................. 1,059 1,889 Other............................................... 80 ------- ------ Consolidated Net Sales.............................. 6,679 8,101 Gross Profit: Catalog Division.................................... 1,115 1,840 Internet Division................................... 343 200 Retail Division..................................... 773 656 Renewables Division................................. 270 583 Other............................................... 30 -- Consolidated Gross Profit........................... 2,531 3,279 Reconciliation of Gross Profit to Net Loss: Selling, general & administrative expenses: Catalog Division.................................. 1,678 1,979 Internet Division................................. 482 141 Retail Division................................... 1,326 921 Renewables Division............................... 472 753 Other............................................. 75 13 Consolidated S G & A expenses..................... 4,033 3,807 Interest income....................................... 65 31 Interest expense...................................... (23) (23) Gain on sale of assets................................ -- -- Income tax benefit.................................... 365 182 Net Loss............................................ $(1,095) $ (338)
NOTE 6--SUBSEQUENT EVENT On October 13, 2000, the Company signed an agreement to merge the Company with a subsidiary of Gaiam, Inc. subject to Real Goods shareholder approval and other customary conditions. Details about this agreement can be found by examining the Company's press releases and the Form 8-K filed on October 31, 2000. F-38 Gaiam, Inc. Unaudited Pro Forma Combined Condensed Statement of Operations The Company incurred rent expense, on afiscal years for Gaiam and Real Goods differ. The following unaudited pro forma combined basis,condensed statements of $212,451operations for the year ended December 31, 1998. 5. Income Taxes No provision has been made2000 and the three months ended March 31, 2001 are derived from the historical consolidated condensed statements of operations of Gaiam, Inc. and the historical condensed statements of operations of Real Goods Trading Corporation for the twelve month period ended December 31, 2000 and the three months ended March 31, 2000, adjusted to give effect to their consolidation using the purchase method of accounting for business combinations. The unaudited pro forma combined condensed statement of operations for the twelve months ended December 31, 2000 assumes that the merger occurred on January 1, 2000, while the unaudited pro forma combined condensed statement of operations for the three months ended March 31, 2001 assumes that the merger occurred on January 1, 2001. The pro forma combined condensed statements of operations are provided for illustrative purposes only and should be read in conjunction with the accompanying notes thereto, and the audited consolidated financial statements and notes thereto of Gaiam, Inc. as of and the for income taxesyear ended December 31, 2000 and the unaudited consolidated financial statements of Gaiam, Inc. as of and for the incomethree months ended March 31, 2001, and the audited financial statements and the notes thereto of Real Goods Trading Corporation for the year ended March 31, 2000. The pro forma data is taxable to each member based upon its pro rata ownershipnot necessarily indicative of the Company. 6. Contingencies The Company is involved in legal actions in the normal course of business, some of which may seek substantial monetary damages, including claims for punitive damages which may not be covered by insurance. After review, including consultation with legal counsel, management believes the ultimate liability in excess of any amounts accrued which could arise from these actions would not materially affect the Company'soperating results or financial position orthat would have been achieved had the merger been consummated at the dates indicated, nor is it necessarily indicative of future operating results and financial condition. F-39 Gaiam, Inc. Unaudited Pro Forma Combined Condensed Statement of Operations For the Year Ended December 31, 2000 (Unaudited)
Historical ------------------------------------------- Real Goods Total Gaiam, Inc. Trading Corp. (a) Pro Forma combined -------------- --------------------- ------------------ Net revenue $60,588,018 $15,897,599 $76,485,617 Cost of goods sold 23,793,492 9,710,211 33,503,703 ------------- ------------ ------------ Gross profit 36,794,526 6,187,388 42,981,914 Selling, general and administrative 32,366,760 9,291,494 41,658,254 ------------- ------------ ------------ Income (loss) from operations 4,427,766 (3,104,106) 1,323,660 Other income (expense) (73,947) (354,460) (428,407) Interest income (expense) - net (209,167) 53,095 (156,072) ------------- ------------ ------------ Other income (expense) (283,114) (301,365) (584,479) Profit (loss) before income taxes 4,144,652 (3,405,471) 739,181 Provision for income taxes (1,555,487) 943,139 (612,348) Minority interest in net (income) loss of consolidated subsidiary, net of tax 59,706 - 59,706 ------------- ------------ ------------ Net income (loss) $ 2,648,871 ($2,462,332) $ 186,539 ============= ============ ============ Net income per share: - Basic $ 0.24 $ 0.02 - Diluted $ 0.23 $ 0.02 Shares used in computing net income per share (b): - Basic 10,858,139 11,339,563 - Diluted 11,525,120 12,006,544
See accompanying notes. F-40 Gaiam, Inc. Unaudited Pro Forma Combined Condensed Statement of Operations For the Three Months Ended March 31, 2001 (Unaudited)
Historical ------------------------------------------- Real Goods Total Gaiam, Inc. Trading Corp. (c) Pro Forma Combined --------------- --------------------- ------------------ Net revenue $17,671,513 $1,416,077 $19,087,590 Cost of goods sold 6,847,590 961,432 7,809,022 ------------- ------------ ------------ Gross profit 10,823,923 454,645 11,278,568 Selling, general and administrative 10,088,558 1,133,017 11,221,575 ------------- ------------ ------------ Income (loss) from operations 735,365 (678,372) 56,993 Other income (expense) 184,615 - 184,615 Interest income (expense) - net (116,917) 2,369 (114,548) ------------- ------------ ------------ Other income (expense) 67,698 2,369 70,067 Profit (loss) before income taxes 803,063 (676,003) 127,060 Provision for income taxes (301,390) 169,271 (132,119) Minority interest in net (income) loss of consolidated subsidiary, net of tax (82,645) - (82,645) ------------- ------------ ------------ Net income (loss) $ 419,028 ($506,732) ($87,704) ============= ============ ============ Net income per share: - Basic $ 0.04 $ (0.01) - Diluted $ 0.04 $ (0.01) Shares used in computing net income per share (b): - Basic 11,205,844 11,355,651 - Diluted 11,563,172 11,712,979
See accompanying notes. F-41 Gaiam, Inc. Unaudited Pro Forma Combined Condensed Statement of Operations Notes to Unaudited Pro Forma Combined Condensed Statements of Operations: - ------------------------------------------------------------------------ (a) Represents the results of operations. F-31 Healing Arts Publishing, LLC Notes to Financial Statements (continued) 7. Subsequent Events The Company entered into a revolving lineoperations of credit agreement with a financial institution in May 1999 inReal Goods Trading Corporation from January 1, 2000 through December 31, 2000, and was calculated by taking the amountresults of $1 million. The Company's accounts receivable and inventory are collateraloperations for the lineyear ended March 31, 2000 as reported, subtracting the results of credit. In Juneoperations for the nine month period ending December 31, 1999, and adding the Company entered into a three-year exclusive royalty agreement with an instructorresults of operations for the nine month period ended December 31, 2000. (b) Adjusted to produce a seriesreflect the issuance of videos. The Company has agreed481,424 shares of Gaiam, Inc. Class A common stock to pay a minimum annual royaltyReal Goods shareholders as of $225,000 toJanuary 1, 2000 and 2001, respectively. (c) Represents the individual for his services in relation to the video production, and in exchange for marketing activities in which he may participate. The agreement requires the Company to pay royalties above and beyond the minimum once video sales exceed a predetermined volume. 8. Impactresults of Year 2000 (Unaudited) Until recently, computer programs were written to store only two digitsoperations of date- related information in order to more efficiently handle and store data. Accordingly, such programs were unable to properly distinguish between the year 1900 and the year 2000. This is frequently referred to as the "Year 2000 Problem." During 1998, the Company conducted an initial reviewReal Goods Trading Corporation from January 1, 2001 through January 29, 2001 (the date of its computer systems. Based upon its initial review, it does not appear significant changes to computer systems and related applications will be necessary to achieve a year 2000 date conversion. However, there can be no assurance that the systems of other companies on which the Company may rely will be timely converted or that such failure to convert by another company would not have an adverse effect on the Company's systems. F-32acquisition). F-42 [Inside Back cover] [Pictures] [Back cover] [Pictures]Dealer Prospectus Delivery Obligation. Until ____, 1999,______________, 2001, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The registrant's expenses in connection with the offering described in this registration statement are set forth below. All amounts except the Securities and Exchange Commission registration fee, the NASD filing fee and the listing fee are estimated. Securities and Exchange Commission registration fee....................................Securities and Exchange Commission registration fee............... $9,057.50 NASD filing fee................................................... 4,122.96 NASDAQ National Market listing fee................................ * Printing and engraving expenses................................... * Accounting fees and expenses...................................... * Legal fees and expenses........................................... * Blue Sky fees and expenses (including legal fees)................. * Transfer agent's and registrar fees and expenses.................. * Miscellaneous..................................................... * ________ Total............................................................. $ 3,197 NASD filing fee........................................................................ 5,000 NASDAQ National Market listing fee..................................................... 48,750 Printing and engraving expenses. ...................................................... Accounting fees and expenses........................................................... Legal fees and expenses................................................................ Blue Sky fees and expenses (including legal fees) ..................................... Transfer agent's and registrar fees and expenses ...................................... Miscellaneous.......................................................................... 700,000 -------- Total.................................................................................. ========
________ * To be completed by amendment. Item 14. Indemnification of Directors and Officers. Colorado law provides for indemnification of directors, officers and other employees in certain circumstances (C.R.S. (S) 7-108-1027-109-101 et. seq. (1994)) and for the elimination or limitation of the personal liability for monetary damages of directors under certain circumstances (C.R.S. (S) 7-108-402 (1994)). The Amended and Restated Articles of Incorporation of Gaiam eliminateseliminate the personal liability for monetary damages of directors under certain circumstances and providesprovide indemnification to directors and officers of Gaiam to the fullest extent permitted by the Colorado Business Corporation Act. Among other things, these provisions provide indemnification for officers and directors against liabilities for judgments in and settlements of lawsuits and other proceedings and for the advance and payment of fees and expenses reasonably incurred by the director or officer in defense of the lawsuit or proceeding. Gaiam intends to obtainmaintains a $5,000,000 directors and officers insurance policy providing insurance indemnifying certain of Gaiam's directors officers and employeesexecutive officers for certain liabilities. This insurance policy insures the past, present and future directors and officers of Gaiam, with certain exceptions, from claims arising out of any error, misstatement, misleading statement, act, omission, neglect or breach of duty by any of the directors while acting in their capacities as such. Claims include claims arising from sales and purchases of Gaiam securities and shareholder derivative actions. Item 15. Recent Sales of Unregistered Securities. The following table summarizes securities issued or sold by Gaiam within the past three years that were not sold pursuant to registered offerings:
- ------------------------------------------------------------------------------------------------------------------------------------ Date Purchaser Number of Debentures/ Warrants/ Consideration Exemption(s) Shares of Notes Options Claimed* Class A Common Stock - ------------------------------------------------------------------------------------------------------------------------------------ privately September 30, 1998 James Argyopoulos/ 120,000 $500,000 -- $1,025,000 negotiated 1998 Argyopoulos/ sale under Argyopoulos under Section 4(2) Investor G.P. of the Securities Act. - ------------------------------------------------------------------------------------------------------------------------------------ privately October 1, 1998 Jirka Rysavy -- $531,000 -- Stock of InnerBalance negotiated 1998 sale InnerBalance under Section 4(2) of the Securities Act. - ------------------------------------------------------------------------------------------------------------------------------------ privately December 7, 1998 Lynn Powers 40,000 $ 50,000 -- $ 100,000 negotiated 1998 sale under Section 4(2) of the Securities Act. - ------------------------------------------------------------------------------------------------------------------------------------ privately January 7, 1999 Mo Siegel 17,143 $ 75,000 -- $ 150,000 negotiated 1999 sale under Section 4(2) of the Securities Act. - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ Date Purchaser Number of Debentures/ Warrants/ Consideration Exemption(s) Shares of Notes Options Claimed* Class A Common Stock - ------------------------------------------------------------------------------------------------------------------------------------ privately April 20, 1999 Jeffrey Steiner 120,000 $500,000 -- $1,025,000 negotiated sale under Section 4(2) of the Securities Act. - ------------------------------------------------------------------------------------------------------------------------------------ privately May 6, 1999 Edward Snider 57,143 $250,000 -- $ 500,000 negotiated sale under Section 4(2) of the Securities Act. - ------------------------------------------------------------------------------------------------------------------------------------ privately May 6, 1999 Herbert Simon 57,143 $250,000 -- $ 500,000 negotiated sale under Section 4(2) of the Securities Act. - ------------------------------------------------------------------------------------------------------------------------------------ privately May 7, 1999 Mike Gilliland 22,857 $100,000 -- $ 200,000 negotiated sale under Section 4(2) of the Securities Act. - ------------------------------------------------------------------------------------------------------------------------------------ privately May 6, 1999 Lennart Perlhagen 57,143 $250,000 -- $ 500,000 negotiated sale and June 8, sale under 1999 Section 4(2) 1999 of the Securities Act. - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ Date Purchaser Number of Debentures/ Warrants/ Consideration Exemption(s) Shares of Notes Options Claimed* Class A Common Stock - ------------------------------------------------------------------------------------------------------------------------------------ June 1, 1999** Gaiam employees- ------------------------------------------------------------------------------------------------------------------------------------ of the Securities Act. - ------------------------------------------------------------------------------------------------------------------------------------ privately November Steve Troy 167,247 -- -- 674,800 Services N/AStock of negotiated 1999 Jade Mountain, Inc. sale under and service providersSection 4(2) jademountain.com, of the Inc. Securities Act. - ------------------------------------------------------------------------------------------------------------------------------------ November Steven P. and 40,000 -- -- Interest in Healing Arts privately 1999 Elizabeth Adams Publishing, LLC negotiated (dba Living Arts) sale under Section 4(2) of the Securities Act. - ------------------------------------------------------------------------------------------------------------------------------------ Privately February 29, Daniel and 14,000 -- -- Option to purchase negotiated 2000 Marylou stock of sale under Sanders EcoSport, Inc. Section 4(2) of the Securities Act. - ------------------------------------------------------------------------------------------------------------------------------------ Privately June 20, 2000 Sharon Conroy 7,243 -- -- Stock of Fish Crane, negotiated Inc. sale under Section 4(2) of the Securities Act. - ------------------------------------------------------------------------------------------------------------------------------------
* We believe that exemptions in addition to those specified above may exist with respect to the listed transactions. ** Options are exercisable at $4.375 per share and vest in monthly increments of 2% per month, commencing 10 months after the date of grant. The options expire 10 years after the date of the grant. Item 16. Exhibits and Financial Statement Schedules. EXHIBITS:
- ----------------------------------------------------------------------------------------------------------------------------------- Exhibit No. Description - ----------------------------------------------------------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement - ----------------------------------------------------------------------------------------------------------------------------------- 2.1 Purchase Agreement dated September 14, 1998 among Gaiam Holdings, Inc., Healing Arts Publishing, LLC, Steven P. Adams, Healing Arts Publishing, Inc., and Gaiam, Inc. - ----------------------------------------------------------------------------------------------------------------------------------- 3.1 Amended and Restated Articles of Incorporation of Gaiam, Inc. (incorporated by reference to Exhibit 3.1 of Gaiam's Registration Statement on Form S-1 (No. 333-83283)). - ----------------------------------------------------------------------------------------------------------------------------------- 3.2 Bylaws of Gaiam, Inc. (incorporated by reference to Exhibit 3.2 of Gaiam's Registration Statement on Form S-1 (No. 333-83283)). - ----------------------------------------------------------------------------------------------------------------------------------- 4.1 Form of Gaiam, Inc. Stock Certificate (incorporated by reference to Exhibit 4.1 of Gaiam's Registration Statement on Form S-1 (No. 333-83283)). - ----------------------------------------------------------------------------------------------------------------------------------- 5.15.1* Opinion of Bartlit Beck Herman Palenchar & Scott - ----------------------------------------------------------------------------------------------------------------------------------- 10.1 Loan Agreement, dated as of April 16, 2001, between Gaiam, Inc.1999Inc. and Wells Fargo Bank West, N.A. - ----------------------------------------------------------------------------------------------------------------------------------- 10.2 Gaiam, Inc. 1999 Long-Term Incentive Plan - ----------------------------------------------------------------------------------------------------------------------------------- 10.2 Operating Agreement(incorporated by reference to Exhibit 10.1 of Healing Arts Publishing, LLC dated September 14, 1998Gaiam's Registration Statement on Form S-1 (No. 333-83283)). - ----------------------------------------------------------------------------------------------------------------------------------- 10.3 SubleaseLease, dated SeptemberDecember 16, 19981999, between Corporate Express Office Products,Gaiam, Inc. and Gaiam, Inc.Duke-Weeks Realty Limited Partnership (incorporated by reference to Exhibit 10.2 of Gaiam's Registration Statement on Form S-4 (No. 333-505-60)). - ----------------------------------------------------------------------------------------------------------------------------------- 10.4 Lease, Agreement dated December 18, 1997, between Gaiam, Inc. and Orix Prime West Broomfield Venture and Gaiam, Inc.(incorporated by reference to Exhibit 10.4 of Gaiam's Registration Statement on Form S-1 (No. 333-83283)). - ----------------------------------------------------------------------------------------------------------------------------------- 21.1 Subsidiaries of Gaiam, Inc. - ----------------------------------------------------------------------------------------------------------------------------------- 23.1 Consent of ErnestErnst & Young - -----------------------------------------------------------------------------------------------------------------------------------
II-5
LLP, independent auditors of Gaiam, Inc. - ----------------------------------------------------------------------------------------------------------------------------------- Exhibit No. Description - ----------------------------------------------------------------------------------------------------------------------------------- 23.2 Consent of Wendell T. Walker & Associates - ----------------------------------------------------------------------------------------------------------------------------------- 23.323.2* Consent of Bartlit Beck Herman Palenchar & Scott (included in the opinion filed as Exhibit 5.1) - ----------------------------------------------------------------------------------------------------------------------------------- 23.3 Consent of Moss Adams LLP - ----------------------------------------------------------------------------------------------------------------------------------- 23.4 Consent of Paul H. RayDeloitte & Touche LLP - ----------------------------------------------------------------------------------------------------------------------------------- 24.1**24.1 Power of Attorney - ----------------------------------------------------------------------------------------------------------------------------------- 27.1 Financial Data Schedule(included in signature page to this Registration Statement). - -----------------------------------------------------------------------------------------------------------------------------------
* To be filed by amendment ** Previously filedamendment. Item 17. Undertakings. (a) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities begin registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c)(b) Gaiam hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (d)(c) Gaiam hereby undertakes that, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (e) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Broomfield, State of Colorado, on August 30, 1999.June 20, 2001. Gaiam, Inc. By: /s/ Jirka Rysavy --------------------------------------------------------------- Jirka Rysavy, Chief Executive Officer POWER OF ATTORNEY KNOW BY ALL MEN THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jirka Rysavy and Lynn Powers, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities to sign any and all amendments (including post- effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, including, without limitation, any registration statement filed pursuant to Rule 462 under the Securities Act of 1933, as amended, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated opposite their names.
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Signature Title Date - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- /s/ Jirka Rysavy, Jirka Rysavy , Chairman of the Board and Chief August 30, 1999/s/ Jirka Rysavy Executive Officer June 20, 2001 - --------------------------------------------------------------------------------------------------------------------------- /s/ Lynn Powers*-------------------------------------------------------------------------------------------------------- Lynn Powers, President, Chief Operating /s/ Lynn Powers Officer August 30, 1999 and director June 20, 2001 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- /s/ Pavel Bouska* Pavel Bouska, Executive Vice President and August 30, 1999 Chief Information OfficerBarnet M. Feinblum Barnet M. Feinblum, director May 24, 2001 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- /s/ Janet Mathews* Janet Mathews, Controller and August 30, 1999 principal financial officerJohn Mackey John Mackey, director May 24, 2001 - ---------------------------------------------------------------------------------------------------------------------------
*By /s/ Jirka Rysavy Jirka Rysavy, Attorney-in-fact II-8 EXHIBIT INDEX
-------------------------------------------------------------------------------------------------------- /s/ Barbara Mowry Barbara Mowry, director May 24, 2001 - --------------------------------------------------------------------------------------------------------------- Exhibit No. Description - --------------------------------------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement - --------------------------------------------------------------------------------------------------------------- 2.1 Purchase Agreement dated September 14, 1998 among Gaiam Holdings, Inc., Healing Arts Publishing, LLC, Steven P. Adams, Healing Arts Publishing, Inc., and Gaiam, Inc. - --------------------------------------------------------------------------------------------------------------- 3.1 Amended and Restated Articles of Incorporation of Gaiam, Inc. - --------------------------------------------------------------------------------------------------------------- 3.2* Bylaws of Gaiam, Inc. - --------------------------------------------------------------------------------------------------------------- 4.1 Form of Gaiam, Inc. Stock Certificate - --------------------------------------------------------------------------------------------------------------- 5.1 Opinion of Bartlit Beck Herman Palenchar & Scott - --------------------------------------------------------------------------------------------------------------- 10.1 Gaiam, Inc. 1999 Long-Term Incentive Plan - --------------------------------------------------------------------------------------------------------------- 10.2 Operating Agreement of Healing Arts Publishing, LLC dated September 14, 1998 - --------------------------------------------------------------------------------------------------------------- 10.3 Sublease dated September 16, 1998 between Corporate Express Office Products, Inc. and Gaiam, Inc. - --------------------------------------------------------------------------------------------------------------- 10.4 Lease Agreement dated December 18, 1997 between Orix Prime West Broomfield Venture and Gaiam, Inc. - --------------------------------------------------------------------------------------------------------------- 21.1 Subsidiaries of Gaiam, Inc. - --------------------------------------------------------------------------------------------------------------- 23.1 Consent of Ernest & Young - --------------------------------------------------------------------------------------------------------------- 23.2 Consent of Wendell T. Walker & Associates - ---------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------- Exhibit No. Description - --------------------------------------------------------------------------------------------------------------- 23.3 Consent of Bartlit Beck Herman Palenchar & Scott (included in Exhibit 5.1) - --------------------------------------------------------------------------------------------------------------- 23.4 Consent of-------------------------------------------------------------------------------------------------------- /s/ Paul Ray Paul H. Ray, director May 24, 2001 - --------------------------------------------------------------------------------------------------------------- 24.1** Power of Attorney, included on signature page-------------------------------------------------------------------------------------------------------- Janet Mathews, /s/ Janet Mathews Chief Financial Officer June 20, 2001 - --------------------------------------------------------------------------------------------------------------- 27.1 Financial Data Schedule - -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* To be filed by amendment ** Previously filed.