AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 1999
REGISTRATION NO. 333-83283
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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GAIAM, INC.
(exact name of registrant as specified in its charter)
Colorado 5961,7375 84-111-35-27
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
360 INTERLOCKEN BLVD., SUITE 300
BROOMFIELD, COLORADO 80021
(303) 464-3600
(address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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JIRKA RYSAVY
CHIEF EXECUTIVE OFFICER
GAIAM, INC.
360 INTERLOCKEN BLVD, SUITE 300
BROOMFIELD, COLORADO 80021
(303) 464-3600
(name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
JAMES L. PALENCHAR, ESQ. KEVIN A. CUDNEY, ESQ.
BARTLIT BECK HERMAN PALENCHAR & SCOTT DORSEY & WHITNEY LLP
511 16/TH/ STREET, SUITE 700 370 17/TH/ STREET, SUITE 4400
DENVER, COLORADO 80202 DENVER, COLORADO 80202
TELEPHONE: 303-592-3100 TELEPHONE: 303-629-3400
FACSIMILE: 303-592-3140 FACSIMILE: 303-629-3450
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. [_]
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.
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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.
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Subject to completion, __________ __, 1999
PROSPECTUS
____________ __, 1999
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2,000,000 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. We will apply for quotation of our
shares on the Nasdaq National Market under the symbol "GAIA."
We intend to allocate shares first to our customers and then to the general
public. Our customers will receive a 10% discount from the initial public
offering price (or a price of $4.50 per share) on up to 200 shares per customer.
The minimum order size in this offering for Gaiam customers and for the public
is 50 shares.
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See "Risk Factors" beginning on page __ to read about material risks
you should consider before buying our shares.
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Per Share Total
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Public offering price: $5.00 $7,000,000*
Underwriting discounts and commissions: $0.50 $ 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. The underwriters have an option to purchase an
additional 300,000 shares from Gaiam at $5.00 per share to cover any over-
allotments. The closing of this offering is expected to occur on or about
October __, 1999.
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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.
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TUCKER ANTHONY CLEARY GULL ADAMS, HARKNESS & HILL, INC.
[Inside front cover]
[Pictures]
TABLE OF CONTENTS
Page
Prospectus Summary......................................................
Questions and Answers for Gaiam Customers ..............................
Risk Factors............................................................
Use of Proceeds.........................................................
Capitalization..........................................................
Dilution................................................................
Selected Financial Data.................................................
Management's Discussion and.............................................
Analysis of Financial Condition.......................................
and Results of Operations.............................................
Our Business............................................................
Management..............................................................
Certain Transactions....................................................
Gaiam Shareholders......................................................
Description of Capital Stock............................................
Shares Eligible for Future Sale.........................................
Underwriting............................................................
Legal Matters...........................................................
Experts.................................................................
Additional Information..................................................
PROSPECTUS SUMMARY
You should read the following summary, together with the more detailed
information and Gaiam's consolidated financial statements and related notes
appearing elsewhere in this prospectus.
[Gaiam logo]
OUR BUSINESS
Founded in Boulder, Colorado in 1988, Gaiam (pronounced "gi am") produces and
sells goods, services and information targeted to customers who value the
environment, a sustainable economy, healthy lifestyles and personal development.
We reach our customers through catalogs, the Internet and retailers.
We strive to provide our customers an opportunity to practice what we call
"conscious commerce." This term describes the practice of making purchasing
decisions based on the personal values and beliefs. We believe many of our
consumers are concerned about personal and planetary health and sustainability
and want to use their purchasing decisions to effect positive change. We call
this "voting for their values with their dollars."
Our name, Gaiam, is a fusion of the words "Gaia" 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, recreation and
the environment and believed that the Earth was directly connected to their
existence and daily life.
The concept of Gaia stems from this ancient philosophy that the Earth is a
living entity. At Gaiam, we believe that all of the Earth's living matter, air,
oceans and land form an interconnected system that can be seen as a single
entity. 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 lifestyles and personal
development, numbered 44 million in the United States in 1994. The author of
this study, Paul Ray, has agreed to join our board of directors upon completion
of this offering.
From 1996 to 1998, our revenues increased from $14.8 million to $30.7 million,
representing a compound annual growth rate of approximately 44%. 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.
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 channel 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.
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OUR MARKET OPPORTUNITY
We believe that several markets share 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
market of the LOHAS industry under three brand names:
. Harmony targets the Sustainable Economy 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
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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
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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.
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Gaiam was organized as a Colorado corporation on July 7, 1988. Gaiam's principal
office is located at 360 Interlocken Blvd., Suite 300, Broomfield, Colorado
80021, and its telephone number is (303) 464-3600.
The Offering
Class A common stock offered by Gaiam................... 2,000,000 shares
Class A common stock outstanding after this offering.... 3,496,429 shares/(1)/
Class B common stock outstanding after this offering.... 7,035,000 shares
Total common stock outstanding after this offering...... 10,531,429 shares
Use of 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 amount of
debt. See "Use of
Proceeds" and "Our
Business."
Proposed Nasdaq National Market symbol.................. GAIA
/1)/ Based on the number of shares outstanding on June 30, 1999. Excludes
approximately 675,000 shares issuable upon exercise of options outstanding
as of June 30, 1999, each at an exercise price of $4.375 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
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not part of this prospectus. References in this prospectus to "Gaiam," "we,"
"our" and "us" refer to Gaiam, Inc., 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?
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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).
8
SUMMARY FINANCIAL DATA
(Amounts in thousands, except per share data)
The following table summarizes the financial data of our business. See
"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.
Six Months
Year Ended December 31, Ended June 30,
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1996 1997 1998 1998 1999
---- ---- ---- ---- ----
Statement of Operations Data:
Net revenues ............................ $14,801 $19,898 $30,739 $10,475 $17,563
Gross profit ............................ 8,039 11,436 17,565 6,061 10,488
Other income (expense) .................. 2,984 1,583 388 (114) 202
Net income after minority interest/(1)/.. $ 340 $ 654 $860 $ 39 $ 116
Net income per share (basic and
diluted) ................................ $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.01
Shares outstanding (basic) .............. 8,040 8,040 8,073 8,040 8,318
Shares outstanding (dilute) ............. 8,040 8,040 8,119 8,040 8,318
June 30, 1999
----------------------------------
Actual Pro forma/(2)/
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Balance Sheet Data:
Cash........................................... $ 856 $ 7606
Securities available-for-sale.................. 1,505 1,505
Working capital................................ 2,534 10,285
Total assets................................... 15,839 22,589
Long-term debt (net of current maturities)..... 1,664 914/(3)/
Stockholders' equity........................... 5,216 12,716
___________________________
/(1)/ Net income after minority interest includes net income of consolidated
Gaiam operations excluding the portion attributable to the minority
shareholder of Healing Arts Publishing, LLC, a majority owned subsidiary
of Gaiam.
/(2)/ Gives effect to the sale by Gaiam of 2,000,000 shares at an assumed
initial public offering price of $5.00 per share, after deducting the
estimated underwriting discount, customer discounts and offering expenses
payable by Gaiam. 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.
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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 current and future
competitors.
Our goal is to establish ourselves as the market leader in the LOHAS
industry.
We believe that the LOHAS industry has thousands of small, local and regional
businesses. We believe that some smaller businesses may be able to more
effectively personalize their relationships with customers.
Our direct marketing business is evolving and competitive. We expect more
business to move to the Internet. As this happens, we expect competition to
intensify because barriers to entry are minimal and competitors can launch new
sites at a relatively low cost.
Some of our competitors have, and 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. Increased competition from these or other competitors could
negatively impact our revenue.
Our ability to grow 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.
Our business is targeted at a demographic group -- the cultural creatives --that
assigns 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. 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.
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 achieve healthy
lifestyles and personal development or that, over time, we will be able to
reduce prices through volume purchases from our suppliers.
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If the protection of our Internet domain names are inadequate, our brand
recognition could be impaired and we could lose customers.
We currently hold various web 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 Internet domain names could adversely affect our ability to
develop brand recognition.
We may engage in future acquisitions that may harm our financial results, cause
our stock price to decline, or dilute our shareholders' interest if we do not
successfully execute them.
Acquisitions have been part of our growth. Living Arts and Inner Balance,
acquired in 1998, accounted for approximately one-third of our revenues for the
six months ended June 30, 1999. Even though our strategy does not depend on
making acquisitions, we expect to make them. 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 acquisitions 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, 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 loss of the services of our key personnel could disrupt our business.
The services of our officers, Jirka Rysavy, Lynn Powers, Pavel Bouska, Mark
Lipien and Linda West, are critical to our business. 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-commerce 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.
Government regulation and legal uncertainties could add additional costs to
doing business on the Internet.
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E-commerce is new and rapidly changing. Federal and state regulation relating to
the Internet and e-commerce is evolving. Currently, there are few laws or
regulations directly applicable to the Internet or e-commerce on the Internet.
Due to the increasing popularity of the Internet, it is possible that laws and
regulations may be enacted with respect to the 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.
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.
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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 continuously 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). If our systems should require
substantial updating or fail, we could incur substantial expenses.
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 are dependent on our ability to maintain our computer and telecommunications
equipment 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 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. While 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.
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
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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.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 merchandise in a timely manner, which
could cause us to lose sales and harm our business.
To successfully operate our business, we must receive timely delivery of
merchandise from our vendors and suppliers. As we grow, some of these vendors
may not have sufficient capital, resources or personnel 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 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 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. Since we charge customers' credit cards 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 offer branded products.
An important part of our strategy is to feature "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 only on sales to residents of the state of
Colorado and where we have other locations, currently California and Ohio.
Federal laws currently limit the imposition of state and local taxes on
Internet-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.
15
Our founder and Chief Executive Officer Jirka Rysavy will control Gaiam.
After this offering, Mr. Rysavy will hold 100% of the outstanding class B common
stock. The shares of class B common stock are convertible into class A shares at
any time. Each share of class B common stock has ten votes per share, and the
class A shares have one vote per share. Assuming Mr. Rysavy's planned purchase
of an additional 100,000 shares in this offering, he will beneficially own
approximately 77% of the outstanding shares, assuming Mr. Rysavy's class B
common stock was converted into shares. In addition, he will also have
approximately 96.7% 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 and preventing
any change in control of Gaiam.
We may be adversely affected if the software, computer technology and other
systems we use are not year 2000 compliant.
If our important information management systems or those of our vendors are not
year 2000 compliant, 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 stock
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 following, some of which 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; and
- stock market price and volume fluctuations
Shares eligible for public sale after this offering could adversely affect our
stock price.
Sales of a substantial number of shares in the public market following this
offering, or the perception that sales could occur, could adversely affect the
market price for our shares and impair our ability to raise equity capital in
the future. Immediately after this offering 3,496,429 shares and 7,035,000
shares of class B common stock will be outstanding. Of this number, the
1,860,000 shares sold in this offering will be freely tradeable, and an
additional remaining 1,145,000 shares and all shares of class B common stock
will be eligible for sales under Rule 144 of the Securities Act after 180 days.
Please see "Shares Eligible for Future Sale."
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risk and
uncertainties. These statements refer to our future plans, objectives,
expectations and intentions. We use words such as "anticipates," "believes,"
"plans," "expects," "future," "intends," "strive" and similar expressions to
identify forward-looking statements. These forward-looking statements involve
risks and uncertainties. Gaiam's actual results could differ materially from
those anticipated in these forward-looking statements, as a result of certain
factors, as more fully described in "Risk Factors" and elsewhere in this
prospectus. We caution you that no forward-looking statement is a guarantee of
future performance, and you should not place undue reliance on these forward-
looking statements which reflect our management's view only as of the date of
this prospectus.
USE OF PROCEEDS
The net proceeds to Gaiam from the sale of the shares in this offering are
estimated to be $7.5 million, 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 off approximately $750,000 of our approximately $1.7 million in
bank debt with the net proceeds of this offering. In connection with this
offering, we are extending to each of our eight debenture holders the option to
purchase shares for the outstanding principal amount of the debentures,
excluding interest, at the offering price of $5.00 per share. We anticipate a
total of 395,000 shares will be sold 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 used for
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. 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-
grade securities. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DIVIDEND POLICY
Gaiam has never declared or paid any cash dividends on its capital stock. Gaiam
currently intends to retain earnings, if any, to support its growth strategy and
does not anticipate paying cash dividends in the foreseeable future. In
addition, our bank credit agreement prohibits payment of any dividends to our
shareholders.
CAPITALIZATION
The following table sets forth the capitalization of Gaiam as of June 30, 1999,
on a pro forma basis, as adjusted, to reflect:
. sale by Gaiam of 1,400,000 shares in this offering at an initial
public offering price of $5.00 per share,
. the sale by Gaiam 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.
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
current portion................................ $ 1,664 $ 914/(2)/
Stockholders' equity:
Class A Common Stock, $0.0001 par
value; 92,965,000 shares authorized and
1,496,429/(1)/ shares issued and
outstanding (actual); 3,496,429/(1)/ shares
outstanding (pro forma)..................... 1 1
Class B Common Stock, $.0001 par
value; 7,035,000 shares authorized and
7,035,000 shares issued and
outstanding (actual, pro forma)............. 1 1
Additional paid-in capital..................... 1,827 9,327
Accumulated other comprehensive income......... 910 910
Retained earnings.............................. 2,477 2,477
--------- ----------
Total stockholders' equity..................... 5,216 12,716
--------- ----------
Total capitalization........................... $ 6,880 $ 13,630
========= ==========
- ----------------------
(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 of long-term debt from the
proceeds this offering.
19
DILUTION
The net tangible book value of Gaiam stock 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."
20
SELECTED CONSOLIDATED FINANCIAL DATA
The selected statement of operations for the years ended December 31, 1996, 1997
and 1998 and balance sheet data as of December 31, 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, 1999 and
selected statement of operations for the six-month periods ended June 30, 1998
and 1999 set forth below are derived from Gaiam's unaudited consolidated
financial statements as of June 30, 1999 and for the six-month periods ended
June 30, 1998 and 1999, 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. The
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Gaiam's
consolidated financial statements and related notes, included elsewhere in this
prospectus.
21
SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
Six Months
Year Ended December 31, Ended June 30,
----------------------------------------------------------- ------------------------
(unaudited)
Statement of Operations
Data: 1994 1995 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 1999
------- ------- ------- ------- ------- ------- -------
Cash $16 $419 $380 $1,612 $1,410 $653 $856
Securities
available-for-sale(2) 71 56 38 1,634 38 1,505
Working capital (deficiency) 22 192 (1,838) 436 (81) (60) 2,534
Total assets 81 2,476 6,256 5,985 16,677 5,479 15,839
Long-term debt (net of
current maturities) - - 89 42 299 17 1,664
Stockholders' equity (2) 59 580 920 1,574 3,661(1) 1,613 5,216
______________________________________
(1) Other income in 1995, 1996, 1997 and 1998 primarily reflects income from
sale of securities available-for-sale.
(2) Securities valued at cost in 1994, 1995, 1996 and 1997 and at fair market
value in 1998. See Note 6 of notes to the consolidated financial
statements.
22
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 produces and sells goods, services and information marketed to customers
who value the environment, a sustainable economy, healthy lifestyles and
personal development. Gaiam was incorporated in Colorado in 1988 as a local
distributor of earth-friendly products. In 1995, Gaiam began to expand
nationally and make acquisitions. From 1996 to 1998, 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.
Gaiam's business model is evolving as evidenced by the increase in the
percentage of our revenues attributable to our business to business segment from
13% in 1998 to 21% in 1999. In addition, Gaiam's gross margin continues to
increase because we are developing more private brand merchandise, on which we
have better margins, and negotiating better pricing from our venders due to
volume discounts. However, the competitive search engines available on the
Internet may force retail price reductions, and thus affect our gross
margin.
During 1998, Gaiam completed two acquisitions. On September 14, 1998, we
obtained 67% of Healing Arts Publishing LLC, which does business as "Living
Arts," for approximately $2.5 million in cash. On October 1, 1998, we acquired
100% of Inner Balance, Inc. for a debenture with a principal amount of
approximately $530,000. Living Arts produces 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-third of our revenues during the first two quarters of
1999. We incurred expenses in the first six months of 1999, particularly in the
second quarter, to integrate these acquisitions, including relocation of Living
Arts' warehousing to our Ohio distribution center, customer service functions to
Colorado, and conversion of direct marketing operating system to Gaiam's
operating system. We do not anticipate further material integration
expenses.
23
Results Of Operations
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated.
Six Months
Year Ended December 31, Ended June 30,
----------------------- --------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
Net revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of goods sold 78.2 44.0 45.7 42.5 42.9 42.1 40.3
------- ------- ------- ------- ------- ------- -------
Gross profit 21.8 56.0 54.3 57.5 57.1 57.9 59.7
Expenses:
Selling and operating 2.2 49.0 62.5 52.4 46.1 50.1 50.5
Corporate, general and
administration 6.5 13.1 8.2 7.9 7.8 6.1 10.3
------- ------- ------- ------- ------- ------- -------
Total expenses 8.7 62.1 70.7 60.3 53.9 56.2 60.8
------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations 13.1 (6.1) (16.4) (2.8) 3.2 1.8 (1.1)
Other income (expense), net (0.9) 15.4 20.1 8.0 1.3 (1.1) 1.2
------- ------- ------- ------- ------- ------- -------
Income before income
taxes 12.2 9.3 3.7 5.2 4.5 0.7 1.1
and minority interest 2.6 3.6 1.4 1.8 0.8 0.3 0.0
Provision for income taxes
Minority interest in net
income of consolidated
subsidiary, net of tax 0.0 0.0 0.0 0.0 0.9 0.0 (1.0)
------- ------- ------- ------- ------- ------- -------
Net income 9.6% 5.7% 2.3% 3.4% 2.8% 0.4% 1.0%
Six months ended June 30, 1999 compared to six months ended June 30, 1998
- -------------------------------------------------------------------------
Revenues increased 67.7% from $10.5 million in the first six months of 1998 to
$17.6 million in 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.
Gross profit, which consists of revenues less cost of sales (primarily
merchandise acquisition costs and in-bound freight) increased 73.1% from $6.1
million in the first six months of 1998 to $10.5 million in the first six months
of 1999. As a percentage of revenues, gross profit increased from 57.9% to
59.7%. This was primarily attributable to increases in sales of private branded
products, on which we have 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 $5.2 million
in the first six months of 1998 to $8.9 million in the first six months of 1999
primarily due to increased revenues. As a percentage of revenues, selling and
operating expenses increased from 50.1% to 50.5%. This percentage increase was
primarily due to additional costs associated with the relocation of Living Arts'
customer service function to Colorado, the transfer of Living Arts' warehousing
to our distribution center in Ohio, and the conversion of Living Arts operating
system to Gaiam's direct marketing operating system.
24
Corporate, general and administrative expenses increased 182.5% from $635,723 in
the first six months of 1998 to $1.8 million in the first six months of 1999. As
a percentage of revenues, general and administrative expenses increased from
6.1% to 10.3%, primarily attributable to expenses associated with the
acquisition of Living Arts and InnerBalance [_].
Other income, comprised primarily of gains on sales of marketable securities and
interest expense, increased from a net expense of $113,938 in 1998 to $201,762
of net income in 1999. This change was primarily due to gains on the sale of
marketable securities during the first six months of 1999, which was partially
offset by higher interest expense due to borrowings used to fund acquisitions.
Minority interest 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
loss for the six months ended June 30, 1999. This amount represents our minority
partners' one-third interest in the Living Arts' loss, net of tax, for the
period.
Income tax provision represented 36.7% of our pre-tax net income in the first
six months of 1998, 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 in 1998. The decrease in our
effective tax rate 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.
Net income, as a result of the factors described above, increased from $654,312,
or 3.4% of revenues, in 1997, to $859,781, or 2.8% of revenues, in 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 1997 and 1998 and the first two quarters of 1999. In
management's opinion, this unaudited financial information includes all
adjustments, consisting solely of normal recurring accruals and adjustments,
necessary for a fair presentation of the results of operations for the quarters
presented. This financial information should be read in conjunction with our
consolidated financial statements and related notes
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)
---------------------------------------------------------------------------------------------------------
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
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net revenues $4,218 $4,426 $4,811 $6,443 $5,300 $5,175 $5,987 $14,277 $9,495 $8,068
Gross profit 2,454 2,554 2,645 3,783 3,012 3,049 3,538 7,966 5,639 4,849
Operating income
(loss) (317) (86) (137) (26) 98 77 200 610 110 (294)
Net income (239) (104) (142) 1,139 24 15 395 426 106 72
Net income (loss) per
share $ (0.03) $(0.01) $(0.02) $ 0.14 $ 0.00 $ 0.00 $ 0.05 $ 0.05 $ 0.01 $ 0.01
Weighted average shares
outstanding 8,040 8,040 8,040 8,040 8,040 8,040 8,040 8,073 8,215 8,420
Quarterly fluctuations in Gaiam's revenues and operating results are due to a
number of factors, including the timing of new product introductions and
mailings to customers, advertising, acquisitions (including costs of
acquisitions and expenses related to integration of acquisitions), competition,
pricing of products by vendors and expenditures on our systems and
infrastructure. The impact on revenue and operating results, due to the timing
and extent of these factors, can be significant. Our sales are also affected by
seasonal influences. On an aggregate basis, Gaiam experiences strongest revenues
and net income in the fourth quarter due to increased holiday spending.
Liquidity And Capital Resources
Gaiam's capital needs arise from working capital required to fund our
operations, capital expenditures related to expansions and improvements to
Gaiam's infrastructure, development of e-commerce and funds required in
connection with the acquisition of new businesses and its anticipated future
growth. These capital requirements depend on numerous factors, including the
rate of market acceptance of Gaiam's product offerings, the ability to expand
Gaiam's customer base, the cost of ongoing upgrades to its product offerings,
the level of expenditures for sales and marketing, the level of investment in
distribution and other factors. The timing and amount of these capital
requirements cannot accurately be predicted. Additionally, Gaiam will continue
to evaluate possible investments in businesses, products and technologies, and
plans to expand its sales and marketing programs and conduct more aggressive
brand promotions.
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 million from private placements during 1998
($575,000 for 160,000 shares 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 million in debentures). The privately placed shares were sold at
$4.375 per share. The debentures described above bear interest at 8% per annum.
With the exception of Ms. Lynn Powers, the holders of the debentures, have
certain registration rights requiring Gaiam to register the shares obtained in
the private placement. See the consolidated financial statements of Gaiam for
additional information relating to Gaiam's private placements. In connection
with this offering, we are extending to each 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 anticipate a total of 395,000 shares will
be sold to these debenture holders in exchange for $1.975 million in
debentures.
Gaiam is party to credit agreements with Norwest Bank, which extend through
December 31, 2001. The credit agreements permit borrowings of up to $2 million
(of which approximately $1.65 million was outstanding at June 30, 1999), and
these borrowings are secured by a pledge of Gaiam's assets. Borrowings under the
Norwest credit agreements bear interest at the prime rate plus 1% (currently
7.75%). The Norwest credit agreements contain various financial covenants and
also prohibit Gaiam from paying dividends to its shareholders, except that
dividends by Living Arts are permitted for 1998 taxes on minority interests. Mr.
Rysavy guarantees the Norwest credit agreements.
Gaiam has, 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%.
Gaiam's operating activities used net cash of $2.7 million and $1.3 million
during 1996 and 1997, respectively, and provided $759,205 of net cash in 1998.
The use of cash in 1996 and 1997 was primarily attributable to increases in
inventories and prepaid costs associated with the increased sales volumes. Net
cash provided during 1998 was primarily a result of Gaiam's net income. Gaiam's
operating activities for the six months ended June 30, 1999 used 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 million during
1996 and 1997, respectively, and used cash of $1.1 million during 1998. In 1996
and 1997, the cash generated from investing activities resulted primarily from
sales of marketable securities and property and equipment. During 1998, Gaiam
used cash to purchase a majority interest in Living Arts. Gaiam's investing
activities generated $382,736 in net cash for the six months ended June 30,
1999, resulting primarily from the sale of marketable securities.
Gaiam's financing activities generated $1.9 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. 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, 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, minority investment, strategic relationship and
other business combination opportunities in the LOHAS industry. In the event of
any future investment, acquisition or joint venture opportunities, we may
consider using then-available liquidity, issuing equity securities or incurring
additional indebtedness. 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 generally are not
specific to Gaiam's business, and disruptions in their availability
would likely have a negative impact on Gaiam, as well as most other
enterprises within the direct marketing industry, and on many
enterprises outside the direct marketing industry. Gaiam believes that
the most serious potential disruptions to its operations stemming from
the year 2000 issue relate to programs and systems in this category.
Gaiam intends to include an evaluation of 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.
We have assessed the risks posed by the programs and systems used by
entities who provide front-end and warehouse management services and
determined that these risks 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 resolve 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.
OUR BUSINESS
Gaiam
Gaiam produces and sells goods, services and information targeted to customers
who value 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 intend 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 addition to the traditional
criteria of price 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, with a
median age of 42, a 60/40 women-to-men ratio and an average annual income of
$52,000.
The following terms are important to understand our business:
. By "sustainable" we mean the ability of a product or service to reduce the
burden placed on living systems and to maintain productivity without
depleting natural resources or producing waste.
. By "natural" we mean the characteristic of a product that is organic
and/or otherwise produced without chemicals and additives.
. By "eco-friendly" 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 portion of the
personal development market that incorporates physical and mental elements,
such as yoga and Tai Chi.
. 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, renewable energy, energy conservation products and
services, sustainable manufacturing processes, recycling and goods made
from recycled materials.
31
Healthy Living. This market includes food supplements, vitamins and
minerals, natural and organic foods and natural and personal body
care.
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 environment friendly
solutions, natural untreated fiber products and eco-tourism.
Because of a common customer base, we believe these five markets should be
viewed collectively as one industry. We believe that, by serving all of these
markets, we can benefit our customers by providing them with a larger array of
choices, 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 base of our Harmony brand. In 1998, we acquired
InnerBalance, a direct marketer of alternative health products and solutions,
and a majority interest in Living Arts, a producer and supplier of yoga and
other mind-body-spirit informational videos and products.
Our Core Values
Gaiam's approach to business 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 contributed to our growth and success:
. 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 have 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, and founder
and CEO of Crystal Market, Inc., which was sold to become the first store of
Wild Oats Markets. 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. Our Chief Information Officer, Pavel Bouska, was a member of the
founding team and an officer of Corporate Express for over 10 years, serving in
various positions, including Chief Information Officer and Vice President of
Information Systems.
. Distinctive, Branded Products
Gaiam offers information, products and services under the Harmony, InnerBalance
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. We believe that, by offering exceptional customer service, we
encourage repeat purchases by our customers, enhance our brand identity and
reputation and build stronger relationships with our customers.
. Established Infrastructure
Gaiam has invested in its physical facilities, technology and information
systems. In 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
We 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 addition 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.
Our Competitive Position
40
We believe that the LOHAS industry is characterized by a supplier and
distribution network and we not aware of a dominant leader. Gaiam's goal is to
establish itself as the leader.
The direct marketing 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 minimal and competitors can launch new
sites at a relatively low cost. 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.
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 goods 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. In addition, the smaller businesses we
compete against may be able to more effectively personalize their relationships
with customers.
We expect industry consolidation to increase competition. 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, Gaiam and the Gaiam companies employed approximately 150
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:
Location Size Use Lease Expiration
- -------- --- --- ----------------
Boulder County, CO 25,000 sq. ft. Headquarters and customer service October 2001
Outlet center January 2000
Cincinnati, OH 64,000 sq. ft. Fulfillment center October 2000
Santa Monica, CA 5,000 sq. ft. Creative staff offices June 2000
42
We have options to renew our headquarters and fulfillment center leases. 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.
Regulatory Matters
Our business is subject to a number of 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 promulgated 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 usage
of our online stores or could otherwise 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
43
("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,
1999 and their positions are as follows:
NAME AGE POSITION
- ---- ----- ------------------------
Jirka Rysavy 45 Founder, Chairman of the Board and Chief Executive Officer
Lynn Powers 50 President, Chief Operating Officer and Director
Pavel Bouska 45 Executive Vice President and Chief Information Officer
Paul H. Ray 60 Director*
*Mr. Ray will join the board upon completion of this offering.
44
JIRKA RYSAVY - Founder, Chairman and Chief Executive Officer of Gaiam. He has
been Chairman since Gaiam's inception and became the full-time Chief Executive
Officer in December 1998. Mr. Rysavy is also Chairman Emeritus and a director of
Corporate Express, Inc., a Fortune 500 company that supplies office and computer
products and services. Mr. Rysavy founded Corporate Express in 1986 and was its
Chairman and Chief Executive Officer until September 1998. Previously, he
founded and served as Chairman and Chief Executive Officer of Crystal Market, a
health food market, which was sold to Michael Gilliland in 1987 to become the
first store of Wild Oats Markets. Mr. Rysavy is also a director of Whole Foods
Markets, Inc.
LYNN POWERS - President, Chief Operating Officer and a director of Gaiam since
February 1996. From 1992 to 1996, she was Chief Executive Officer of La Scelta,
an importer of natural fiber clothing products. Before that, Ms. Powers was
Senior Vice President Marketing/Strategic Development and Vice President
Merchandising of Miller's Outpost, a specialty retailer.
PAVEL BOUSKA - Executive Vice President and Chief Information Officer since
March 1999. He served as a director of Gaiam from 1991 until August 1999. Prior
to joining Gaiam, from June 1988 to March 1999, Mr. Bouska was an officer and
one of the founding members of Corporate Express, serving in various positions,
including Chief Information Officer and Vice President Information Systems,
responsible for system development, information technology, operations, systems
conversions and business consolidations. Prior to joining Corporate Express, he
was project leader for Software Design & Management, a German software company
subsequently acquired by Ernst & Young.
PAUL H. RAY - Will become a director of Gaiam at the conclusion of this
offering. Mr. Ray has been Executive Vice President of American LIVES, Inc., a
market research and opinion polling firm since November 1986. Prior to joining
American LIVES, Mr. Ray was Chief of Policy Research on Energy Conservation at
the Department of Energy, Mines and Resources of the Government of Canada from
1981 to 1983. From 1973 to 1981, Mr. Ray was Associate Professor of Urban
Planning at the University of Michigan. 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 Integral Culture Survey, which first
identified the cultural creative 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
Gaiam intends to establish an Audit Committee within 90 days following this
offering composed of at least two directors, which is required to maintain
Gaiam's listing on the Nasdaq National Market. The majority of the members of
the Audit Committee will not be employees of Gaiam. The Audit Committee will
report to 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.
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 or 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 compensation, for the year ended December 31,
1998, of Gaiam's executive officers, Mr. Rysavy and Ms. Powers. Information is
also included with respect to 1998 Compensation for two of Gaiam's Vice
Presidents:
SUMMARY COMPENSATION TABLE
Name and Principal Position Annual 1998 All Other 1998
-----------
Compensation Compensation
------------ ------------
Salary Bonus
Jirka Rysavy - Chairman and Chief Executive Officer $ ----(1) $ --- $ ---/(2)/
Lynn Powers - President and Chief Operating Officer 110,009 --- ---/(2)/
Mark Lipien - Vice President Operations 70,802 10,000 ---/(2)/
Linda West - Vice President Merchandising 83,076 10,000 ---/(2)/
____________________
(1) Gaiam began compensating Mr. Rysavy in January 1999. His annual salary is
currently $125,000.
(2) Until June 1, 1999, Gaiam did not make any restricted stock awards, grant
any stock appreciation rights, make any long-term incentive plan payouts or
grant any stock options.
46
Stock Plans
We recently adopted a long-term incentive plan and an employee stock purchase
plan. The incentive plan provides for the grant of 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 a 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 the employee purchase plan.
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, Gaiam 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 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 bears interest at 8% per annum and
may be prepaid at any time by Gaiam. In connection with this offering, Ms.
Powers has the right to purchase shares for the outstanding principal amount of
the debenture at the offering price of $5.00 per share. Accrued and unpaid
interest will be paid in cash.
All 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.
We obtained the securities by exercising options granted by Mr. Rysavy to us in
1993.
Gaiam subleases its fulfillment center in Cincinnati, Ohio from a subsidiary of
Corporate Express, Inc. at an annual rental rate of approximately $205,200,
which is the same rate as paid by Corporate Express, Inc. under its lease. Mr.
Rysavy is a director of Corporate Express and beneficially owns approximately
4.9% of the stock of Corporate Express, but does not control Corporate Express.
The lease expires in 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, 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 of Gaiam's line of credit with Norwest Bank. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
OUR 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
shareholders who beneficially owned shares on June 30, 1999, 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 Owned
Prior to this Offering/(11)/ After this Offering/(11)(12)/
----------------------------- -------------------------------
Beneficial Owner Number of Shares/(13)/ Percent Number of Shares/(13)/ Percent
Jirka Rysavy/(1)/ 8,000,000 93.8% 8,100,000 77.0%
Lynn Powers/(2)/ 40,000 .5% 60,000 .6%
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%
All Executive Officers
and Directors (3 persons) 8,080,000 95.7% 8,220,000 78.2%
/(1)/ Mr. Rysavy owns 7,035,000 shares of class B common stock, which
constitute all of the issued and outstanding class B common stock and are
convertible into an equal number of shares. Mr. Rysavy also owns 965,000
shares. Includes 100,000 shares Mr. Rysavy will purchase in this
offering. See "Description of Capital Stock -- Shares" for a description
of the voting rights of the class B common stock.
/(2)/ Includes 20,000 shares Ms. Powers will purchase in this offering.
/(3)/ Includes 20,000 shares Mr. Bouska will purchase in this offering
/(4)/ Mr. Argyropoulos is the general partner of Argyropoulos Investor G.P. He
is the founder, and, until 1989, was Chairman, of The Cherokee Group, and
currently is the founder and Chairman 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)/ Each shareholder possesses sole voting and investment power with respect
to the shares listed, except as provided by applicable community
property laws. In accordance with the rules of the Securities and
Exchange Commission, each shareholder is deemed to beneficially own any
shares obtainable upon the exercise of stock options or warrants which
are currently exercisable or which become exercisable within 60 days
after June 30, 1999, or the conversion of convertible securities that
are currently convertible or become convertible within 60 days after
June 30, 1999. The inclusion in this table of shares listed as
beneficially owned does not constitute an admission of beneficial
ownership.
/(12)/ 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)/ The number of shares deemed outstanding includes shares outstanding as of
June 30, 1999 and any shares obtainable through the conversion of class
B common stock held by Mr. Rysavy. No options are exercisable within 60
days of the date of this prospectus. Ownership percentages based solely
on the 1,496,429 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 be outstanding after this offering 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%.
49
DESCRIPTION OF CAPITAL STOCK
General
After the filing of Gaiam's Amended and Restated Articles of Incorporation in
connection with this offering, the authorized capital stock of Gaiam will
consist of 250,000,000 shares, consisting of 150,000,000 shares of Class 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, there were 1,496,429 shares
outstanding held by ten shareholders of record, options to purchase an aggregate
of approximately 675,000 shares, a warrant to purchase 24,000 shares and
7,035,000 shares of class B common stock outstanding. There were no shares of
preferred stock outstanding.
Although Gaiam believes the following summary description of Gaiam's shares,
class B common stock, Preferred Stock, Amended and Restated Articles of
Incorporation and Amended and Restated Bylaws covers all material provisions
affecting the rights of holders of capital stock of Gaiam, this summary is not
intended to be complete and is qualified by reference to the provisions of
applicable law and to Gaiam's Amended and Restated Articles of Incorporation and
Amended and Restated Bylaws, both of which are included as exhibits to the
Registration Statement of which this prospectus is a part. See "Additional
Information."
Capital Stock
Each holder of shares 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 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 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 and class B common stock are entitled to 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 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 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 and class B common stock. The outstanding
shares and shares of class B common stock are, and the shares 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 class A
shares, other than certain transfers to affiliates and family members. The
shares of class B common stock are convertible one-for-one into class A shares,
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 Class 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 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.
Bylaws
The Bylaws provide, in accordance with Colorado law, that shareholders may take
action without a shareholders' meeting, provided that all shareholders entitled
to vote consent to do so in writing. 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.
Transfer Agent and Registrar
The transfer agent and registrar for the shares is American Securities Transfer
& Trust, Inc.
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 effect the
prevailing market price for our shares. Furthermore, since 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, there will be 3,496,429 shares and 7,035,000 shares of
class B common stock outstanding. Of these shares, all 2,000,000 shares sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act, other than shares are purchased by
"affiliates" of Gaiam as that term is defined in Ruled 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
Agreements" below. The remaining 1,496,429 shares and all 7,035,000 shares of
class B common stock will be "restricted securities" as that term is defined in
Rule 144 under the Securities Act. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 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 shares for at least one year 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 35,000 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
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" may be sold immediately upon the completion of this
offering.
Lock-up Agreements
All of our directors, officers and existing shareholders (who in the aggregate
hold 1,496,429 shares and shares of 7,035,000 class B common stock, and who will
acquire an additional 495,000 shares in this offering) are 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:
. with the prior written consent of Tucker Anthony Cleary Gull;
. 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, 8,641,429 shares (including 7,035,000 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, except that we may:
. issue shares upon the exercise of outstanding options and grant options
to purchase shares under our incentive plan;
. issue shares under our 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 are
required to file a registration statement covering 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, 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.
UNDERWRITING
The underwriting agreement, dated ____, 1999, 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
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an over-allotment option to buy up to an
additional 300,000 shares from Gaiam at $5.00 per share to cover these sales.
They may exercise that option for 30 days after the initial sale of the shares
to the underwriters. 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, if any are purchased.
The following table shows the underwriting fees to be paid to the underwriters
by Gaiam in connection with this offering. These amounts are shown assuming both
no exercise and full exercise of the underwriters' option to purchase additional
shares, and assuming that 1,400,000 shares are sold at the public offering price
of $5.00 per share and 600,000 shares are sold at the customer discount price of
$4.50 per share.
No Exercise Full Exercise
Per share (customer discount)...... $0.45 $0.45
53
Per share.......................... $0.50 $0.50
Total.............................. $970,000 $1,120,000
Gaiam will pay offering expenses in connection with the opening of accounts for
Gaiam customers, estimated to be approximately $400,000. The compensation to be
paid to the underwriters and Gaiam's agreement to reimburse the underwriters for
expenses associated with opening accounts were determined through negotiations
between Gaiam and the underwriters.
In connection with this offering, we are offering each of our debenture holders
the option to purchase shares for the outstanding principal amount of the
debentures (excluding interest) at the offering price of $5.00 per share. As a
result, a total of 395,000 shares will be sold to the debenture holders,
assuming that each of the debenture holders elects to purchase shares in this
offering. In addition, we will offer Mr. Rysavy the opportunity to purchase
100,000 shares at the offering price of $5.00 per share. 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 shares sold by the underwriters 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
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 in the open market. These transactions may include over-allotment and
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. Short positions involve the sale by the underwriters
of a greater number of shares than they are required to purchase from Gaiam in
this offering. These activities may stabilize, maintain or otherwise affect the
market price of the shares, which may as a result be higher than the price that
might otherwise prevail in the open market. These transactions may be effected
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 and 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, and the consideration of the
above factors in relation to market valuations of companies in related
businesses.
We will apply to have the shares quoted for 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 will not a be a when issued market in the
shares prior to the closing of the offering.
We have agreed to indemnify the underwriters against or contribute to losses
arising out of certain liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
The validity of the shares of 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 & Whitney LLP,
Denver, Colorado.
EXPERTS
Ernest & Young LLP, independent auditors, have audited the consolidated
financial statements and schedule of Gaiam, Inc. at December 31, 1998 and 1997,
and for the years then ended and the financial statements of Healing Arts
Publishing, LLC at December 31, 1998 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 ended have
been audited by Wendell T. Walker and Associates, independent auditors as set
forth in their report. We've included the financial statements and schedule of
Gaiam, Inc. and the financial statements of Healing Arts Publishing, LLC in this
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's reports and Wendell T. Walker and Associates' reports, given on
their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
55
We have filed with the U.S. Securities and Exchange Commission 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, we intend to send to its 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.
56
INDEX TO FINANCIAL STATEMENTS
Gaiam, Inc. Page
Report of Independent Auditors - Ernst & Young LLP........................ F-1
Independent Auditors' Report -Wendell T. Walker & Associates.............. F-2
Consolidated Financial Statements at December 31, 1998
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Income.................................... F-4
Consolidated Statements of Stockholders' Equity...................... F-5
Consolidated Statements of Cash Flows................................ F-6
Notes to Consolidated Financial Statements........................... F-7
Unaudited Pro Forma 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-28
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Gaiam, Inc.
We have audited the accompanying consolidated balance sheets of Gaiam, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended. Our audits also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company'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 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 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, 1998 and 1997, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with 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.
/s/ ERNST & YOUNG 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, 1997
F-2
GAIAM, INC.
CONSOLIDATED BALANCE SHEETS
December 31 June 30
1997 1998 1999
-------------------------------------------------------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $1,611,793 $ 1,409,939 $ 856,045
Securities available-for-sale 38,333 1,633,905 1,505,000
Accounts receivable, net of allowance for
doubtful accounts of $31,000 in 1997
and $67,915 in 1998 111,424 2,579,927 1,088,054
Accounts receivable, other 109,957 13,995 42,608
Note receivable 154,391 9,351 100,481
Inventory, less allowances 1,648,083 3,393,712 3,914,887
Deferred advertising costs 1,028,680 1,757,845 1,746,613
Prepaid assets 76,894 68,367 474,729
Other current assets - 215,469 438,697
-------------------------------------------------------------
Total current assets 4,779,555 11,082,510 10,167,114
Property and equipment, net 1,096,888 1,079,694 992,029
Capitalized production costs, net - 672,438 824,607
Video library, net - 3,543,764 3,422,894
Other assets 108,124 298,106 432,114
-------------------------------------------------------------
Total assets $5,984,567 $16,676,512 $15,838,758
=============================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $2,152,739 $ 6,900,492 $ 3,185,557
Accrued liabilities 473,504 1,456,338 1,194,064
Accrued Royalties - 804,772 511,928
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
-------------------------------------------------------------
Total current liabilities 4,343,768 11,163,988 7,632,468
Deferred tax liability 24,113 59,809 -
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 - - 1,650,000
Minority interest - 1,492,941 1,326,119
Stockholders' equity:
Class A common stock, $.0001 par value,
92,965,000 shares authorized, 1,005,000
and 1,165,000 shares issued and
outstanding at December 31 1997 and
1998, respectively 101 117 149
Class B common stock, $.0001 par value,
7,035,000 shares authorized, issued and
outstanding at December 31 1997
and in 1998 704 704 704
Additional paid-in capital 133,833 377,634 1,827,602
Accumulated other comprehensive income - 983,126 910,279
Retained earnings 1,439,773 2,299,554 2,477,184
-------------------------------------------------------------
Total stockholders' equity 1,574,411 3,661,135 5,215,918
-------------------------------------------------------------
Total liabilities and stockholders' equity $5,984,567 $16,676,512 $15,838,758
=============================================================
See accompanying notes.
F-3
GAIAM, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended Six months
December 31 ended June 30
1996 1997 1998 1998 1999
--------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Net revenue $14,800,993 $19,897,690 $30,738,540 $10,474,976 $17,563,080
Cost of goods sold 6,762,500 8,462,151 13,173,536 4,414,408 7,074,663
--------------------------------------------------------------------------------------
Gross profit 8,038,493 11,435,539 17,565,004 6,060,568 10,488,417
Expenses:
Selling and operating 9,253,263 10,427,258 14,186,215 5,249,717 8,877,360
Corporate, general and
administration 1,217,436 1,574,770 2,393,946 635,723 1,795,610
--------------------------------------------------------------------------------------
Total expenses 10,470,699 12,002,028 16,580,161 5,885,440 10,672,970
--------------------------------------------------------------------------------------
Income (loss) from operations (2,432,206) (566,489) 984,843 175,128 (184,553)
Other income (expense):
Realized gain (loss) on sale of
securities and other 3,094,390 1,820,034 696,992 (25,266) 409,688
Interest expense (110,549) (236,699) (308,501) (88,672) (207,926)
--------------------------------------------------------------------------------------
Other income (expense), net 2,983,841 1,583,335 388,491 (113,938) 201,762
--------------------------------------------------------------------------------------
Income before income taxes and
minority interest 551,635 1,016,846 1,373,334 61,190 17,209
Provision for income taxes 211,935 362,534 251,955 22,437 6,401
Minority interest in net income
(loss) of consolidated
subsidiary, net of tax - - 261,598 - (166,822)
--------------------------------------------------------------------------------------
Net income $ 339,700 $ 654,312 $ 859,781 $ 38,753 $ 177,630
======================================================================================
Net income per share:
Basic $0.04 $0.08 $0.11 $0.00 $0.02
Diluted 0.04 0.08 0.11 $0.00 $0.02
Shares used in computing net income
per share:
Basic 8,040,000 8,040,000 8,072,877 8,040,000 8,317,822
Diluted 8,040,000 8,040,000 8,118,792 8,040,000 8,564,932
See accompanying notes.
F-4
GAIAM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Other
Class A Class B Additional Compre-
Common Stock Common Stock Paid-in hensive Retained
Shares Amount Shares Amount Capital Income Earnings Total
------------------- ----------------- ---------- -------------- ---------- ----------
Balance at January 1, 1996 1,005,000 $101 7,035,000 $704 $ 133,833 $ - $ 445,761 $ 580,399
Net income - - - - - - 339,700 339,700
------------------- ----------------- ----------- -------------- ---------- ----------
Balance at December 31 1996 1,005,000 101 7,035,000 704 133,833 - 785,461 920,099
Net income - - - - - - 654,312 654,312
------------------- ----------------- ----------- -------------- ---------- ----------
Balance at December 31, 1997 1,005,000 101 7,035,000 704 133,833 - 1,439,773 1,574,411
Issuance of common stock 160,000 16 - - 574,984 - - 575,000
Return of capital to shareholder
through Purchase of Inner
Balance Inc. - - - - (331,183) - - (331,183)
Comprehensive income:
Net income - - - - - - 859,781 859,781
Other comprehensive income:
Increase in fair market
value of securities
available for sale, net of
tax of $618,578 - - - - - 983,126 - 983,126
----------
Total comprehensive income 1,842,907
------------------- ----------------- ----------- -------------- ---------- ----------
Balance at December 31, 1998 1,165,000 117 7,035,000 704 377,634 983,126 2,299,554 3,661,135
Issuance of common stock 331,429 32 - - 1,449,968 - - 1,450,000
(unaudited)
Comprehensive income:
Net income (unaudited) - - - - - - 177,630 177,630
Other comprehensive income:
Increase in fair market value
of securities available
for sale, net of reclassification
adjustment (see disclosure),
net of tax of $ 572,743
(unaudited) - - - - - ( 72,847) - ( 72,847)
----------
Total comprehensive income
(unaudited) 104,783
------------------- ----------------- ----------- -------------- ---------- ----------
Balance at June 30, 1999
(unaudited) 1,496,429 $149 7,035,000 $704 $1,827,602 $ 910,279 $2,477,184 $5,215,918
=================== ================= =========== ============== ========== ==========
See accompanying notes.
F-5
GAIAM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended Six months ended
December 31 June 30
1996 1997 1998 1998 1999
------------------------------------------------------------------------
Operating activities (Unaudited) (Unaudited)
Net income $ 339,700 $ 654,312 $ 859,781 $ 38,753 $ 177,630
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 265,151 241,985 240,431 189,597 152,549
Amortization 1,062 2,785 85,466 - 120,870
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 - -
Realized gains on sale of securities and property and
equipment (3,621,047) (1,902,802) (691,137) - (482,692)
Deferred tax expense 52,493 50,832 9,684 - (45,835)
Changes in operating assets and liabilities, 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)
Deferred advertising costs (398,058) (371,840) (243,630) (378,429) 11,232
Capitalized production costs - - (212,361) - (152,169)
Prepaid assets 46,415 (55,982) 8,527 (36,819) (406,362)
Other assets - 1,839 (266,757) (406,950) (357,236)
Accounts payable 1,620,973 (267,316) 2,569,358 (190,802) (3,714,935)
Accrued liabilities (85,634) (133,528) 329,672 (84,717) (579,287)
Income taxes payable (261,762) 390,521 (69,784) (289,663) (108,599)
------------------------------------------------------------------------
Net cash provided by (used in) operating activities (2,701,094) (1,280,485) 759,205 (815,076) (4,602,160)
Investing activities
Purchase of property, equipment and other assets (2,829,179) (157,987) (134,378) (143,251) (64,884)
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 1,931,250 477,500 538,750
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)
------------------------------------------------------------------------
Net cash provided by (used in) investing activities 738,755 3,574,931 (1,136,359) (113,256) 382,736
Financing activities
Principal payments on capital leases - (40,989) (49,699) (30,130) (27,889)
Proceeds from sale of stock - - 575,000 - 1,450,000
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
------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,923,681 (1,062,864) 175,300 (30,130) 3,665,530
------------------------------------------------------------------------
Net change in cash and cash equivalents (38,658) 1,231,582 (201,854) (958,462) (553,894)
Cash and cash equivalents at beginning of year 418,869 380,211 1,611,793 1,611,793 1,409,939
------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 380,211 $ 1,611,793 $ 1,409,939 $ 653,331 856,045
========================================================================
Supplemental cash flow information
Interest paid $ 128,282 $ 237,147 $ 126,025 3,740 166,824
Income taxes paid 238,654 312,100 312,100 115,000
Note receivable in connection with the sale of property
and equipment - 154,391 - - -
See accompanying notes
F-6
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1998 is unaudited.)
1. Summary of Significant Accounting Policies
Organization
Gaiam, Inc. (the "Company") was incorporated under the laws of the State of
Colorado on July 7, 1988. The Company's primary business is providing
information, goods, and services to customers who value the environment, a
sustainable economy and healthy lifestyles.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company, its subsidiaries and partnerships in which ownership is 50% or greater
and considered to be under the control of the Company. All material
intercompany accounts and transaction balances have been eliminated in
consolidation.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents includes
demand deposit accounts with financial institutions and all highly liquid
investments with an original maturity of three months or less.
Securities Available-for-Sale
Securities available-for-sale consist of equity securities and are recorded at
market value for 1998 (see Note 6). All unrealized gains or losses, net of tax,
are recorded as a separate component of stockholders' equity.
Provision for Doubtful Accounts
The Company records a provision for doubtful accounts for all receivables not
expected to be collected.
Interim Financial Statements
The consolidated results as of June 30, 1999, and for the six months ended
June 30, 1998 and 1999 are unaudited, but included all adjustments (consisting
only of normal recurring accruals) that the Company considers necessary for a
fair presentation of its financial position as of such date and results of
operations and cash flows for such period. The results of operations for the
six months ended June 30, 1999 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.
Inventory
Inventory, consisting of finished goods, net of valuation allowances of $79,016
and $198,744 at December 31, 1997 and 1998, is stated at the lower of cost
(first-in, first-out method) or market.
Depreciation and Amortization
Depreciation of property and equipment, including amortization recorded under
capital leases, is computed on the straight-line method over estimated useful
lives of five to seven years for furniture and equipment and ten years for
leasehold improvements.
Capitalized Production Costs
Capitalized production costs include costs incurred to produce instructional
videos marketed by the Company to retail and direct-mail customers. These costs
are deferred for financial reporting purposes until the videos are released,
then amortized over succeeding periods on the basis of estimated sales.
Historical sales statistics are the principal factor used in estimating the
amortization rate. Accumulated amortization at December 31, 1998 was $927,331.
Long-Lived Assets
The carrying values of intangible and other long-lived assets are reviewed
quarterly to determine if any impairment indicators are present. If it is
determined that such indicators are present and the review indicates that the
assets will not be recoverable, based on undiscounted estimated cash flows over
the remaining amortization and depreciation period, their carrying values are
reduced to estimated fair market value. Impairment indicators include, among
other conditions, cash flow deficits, an historic or anticipated decline in
revenue or operating profit, adverse legal or regulatory developments,
accumulation of costs significantly in excess of amounts originally expected to
acquire the asset and a material decrease in the fair value of some or 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. Historical sales statistics are
the principal factor used in estimating the amortization rate. Other
advertising and promotional costs are expensed as incurred. Advertising costs
incurred were $3,019,320, $4,866,223 and $7,121,648 for the years ended December
31, 1996, 1997, and 1998, respectively.
Revenues
The Company recognizes revenue at the time merchandise is shipped to the
customer. Amounts billed to customers for postage and handling charges, which
approximate $1.2 million for 1996, $1.7 million for 1997 and $2.2 million for
1998, are recognized as revenue at the time that the revenues on the product
shipments are recognized. The company provides a reserve for expected future
returns at the time the sale is recorded based upon historical experience.
The Company's sales are attributable mainly to sales within the U.S., with a
very small percentage, less than 1% of sales, to international customers. No
customer represented more than 10% of sales for either the years ended December
31, 1996, 1997 and 1998. The Company generally does not require collateral.
Realized gain on sale of securities and other for the year ended December 31,
1996 includes $782,053 of expenses relating to the May 1995 acquisition of the
catalog sales division of Seventh Generation. The terms of the acquisition
required the Company to enter into a licensing agreement for the use of the
Seventh Generation name, an operating agreement and a supply agreement. The
supply agreement required the Company to purchase a specified dollar amount of
products at a specified markup. The Company also incurred costs related to the
abandonment of acquired equipment and facilities and relocation expenses for
warehouse and office operations.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
securities available-for-sale, accounts receivable, payables and debt
obligations. The carrying values of these financial instruments as reported in
the accompanying balance sheets are assumed to approximate their fair value.
F-10
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
1. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company provides for income taxes pursuant to the liability method as
prescribed in Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. The liability method requires recognition of deferred income
taxes based on temporary differences between financial reporting and income tax
bases of assets and liabilities, using currently enacted income tax rates and
regulations.
Reclassifications
Certain reclassifications have been made to the December 31, 1996 financial
statements to conform to the December 31, 1997 and 1998 financial statement
presentation. Such reclassifications have had no effect on net income
previously reported.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
Actual results could differ from those estimates.
Reporting Comprehensive Income
During 1998, the Company adopted the Financial Accounting Standards Board
("FASB") issued Statement No. 130, Reporting on Comprehensive Income ("Statement
No. 130"). Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
During 1998, the Company adopted Statement 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 based on two different operating segments: direct-to-
customer and business-to-business operations. For 1996 and 1997, direct-to-
customer operations was the only significant operating segment.
The reclassification adjustment for gains included in net income, net of tax of
$572,743 include unrealized gains of $239,257 and realized gains of $312,104.
F-11
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
2. Property and Equipment
At December 31, 1997 and 1998, property 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 President and the Chief Executive Officer of
the Company. The debentures are payable on the earlier of September 30, 1999 or
the closing of an initial public offering. The debentures are automatically
converted to shares of Class A common stock at the initial public offering per
share price. The debenture payable to the Chief Executive Officer of the
Company is due December 31, 2000. The debenture is convertible, at the option
of the officer, upon the closing of the initial public offering by the Company,
into shares of common stock at the initial public offering per share price.
F-12
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
5. Leases
At December 31, 1997 and 1998, the Company's property held under capital leases
consisted of the following, which is included in property and equipment:
December 31
1997 1998
---------------------------------
Warehouse equipment $ 40,229 $ 40,229
Computer equipment 130,822 130,822
---------------------------------
171,051 171,051
Accumulated amortization (47,867) (79,777)
---------------------------------
$123,184 $ 91,274
=================================
The Company leases equipment and office, retail, and warehouse space through
capital and operating leases. The following schedule represents the annual
future minimum payments, as of December 31, 1998:
Capital Operating
------------------------------
1999 $ 46,012 $ 621,601
2000 22,680 419,038
2001 4,212 142,566
2002 - 3,540
------------------------------
Total minimum lease payments 72,904 $1,186,745
==============
Less portion related to interest (5,055)
-------------
Present value of future minimum lease payments 67,849
Less current portion (42,261)
-------------
$ 25,588
=============
The Company incurred rent expense of $652,974, $508,590 and $646,886 for the
years ended December 31, 1996, 1997, and 1998, respectively.
6. Securities Available-for-Sale
Securities available-for-sale consist of 315,000 shares of common stock from one
issuer. The cost and fair value of the securities at December 31, 1998 were
$32,200 and $1,633,905, respectively. The fair market value of the shares was
determined by using the closing NASDAQ price of the common stock at December 31,
1998.
F-13
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
6. Securities Available-for-Sale (continued)
For the year ended December 31, 1997, the securities were considered restricted
as a related party, controlled by the majority owner and chief executive officer
of the Company, had the right to require the Company to donate any and all
unsold shares to a not-for-profit organization. This requirement could be made
at the sole discretion of the third party and expired in fiscal 1998. Given
this restriction, the Company had recorded the restricted securities at cost.
The Company did not believe it could attribute a fair market value to the
securities in 1997 as a result of the restriction. However, if unrestricted,
the fair market value would be $4,828,125 based on quoted market prices. During
1997, the Company sold 150,000 shares at a market value of $1,932,000 to a
related party, and recognized a gain of $1,904,242 on the sale.
For the year ended December 31, 1998, the securities were no longer restricted
and were recorded at fair market value. The fair market value of the shares was
$1,633,905, which was determined by using the closing NASDAQ price of the common
stock on
December 31, 1998. During 1998, the Company sold 60,000 shares at a market
value of $703,125 to a related party, and recognized a gain of $696,992 on the
sale.
7. Income Taxes
The provision for income taxes is comprised of the following:
December 31
1996 1997 1998
--------------------------------------------------
Current:
Federal $139,308 $269,919 $197,142
State 20,134 41,783 45,129
--------------------------------------------------
159,442 311,702 242,271
Deferred:
Federal 45,456 34,420 25,852
State 7,037 16,412 (16,168)
--------------------------------------------------
52,493 50,832 9,684
--------------------------------------------------
Total $211,935 $362,534 $251,955
==================================================
F-14
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
7. Income Taxes (continued)
Variations from the federal statutory rate are as follows:
December 31
1996 1997 1998
----------------------------------------------------
Expected federal income tax expense at
statutory rate of 34% $187,556 $345,728 $ 466,934
Effect of legal judgment - permanent
difference - - (251,609)
Effect of other permanent differences 2,172 (16,983) 20,276
State income tax expense, net of federal
benefit 22,207 33,789 16,354
----------------------------------------------------
Income tax expense $211,935 $362,534 $ 251,955
====================================================
The legal judgment was a liability acquired in the purchase of a 67% interest in
Healing Arts Publishing. This $740,000 liability paid by the Company in 1998
resulted in a permanent tax benefit.
Deferred income taxes reflect net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The components of the net
accumulated deferred income tax liability as of December 31, 1998 and 1997 are
as follows:
December 31
1997 1998
----------------------------------
Deferred tax assets:
Reserve for bad debts $ 13,428 $ 26,012
Deferred tax liabilities:
Securities available-for-sale - (618,578)
Amortization (1,956) (2,435)
Depreciation (35,585) (57,374)
----------------------------------
(37,541) (678,387)
----------------------------------
Deferred tax liability, net $(24,113) $(652,375)
==================================
F-15
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
8. Stockholders' Equity
The Company had warrant certificates outstanding that entitled the holder to
five warrants to purchase 40,000 shares of common stock at $1.25 per share. The
warrants were held by the Company's President and were exercised in December
1998 for $50,000
The Company had warrant certificates outstanding during the year and at December
31, 1998 that entitled the holder to purchase 24,000 shares of Class A common
stock at $.50 per share. The warrants are exercisable in a two year period
beginning January 20, 2002 and ending January 9, 2004.
During 1998, the Company's shareholders voted to increase the authorized shares
of stock, create two classes of common stock and split the existing outstanding
shares on a 20,000-to-1 basis. These 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
entitled to one vote, while each share of Class B common stock is entitled to 10
votes.
9. Business Acquisitions
On September 14, 1998, the Company acquired a 67% ownership in Healing Arts
Publishing. The acquired company produces videos that are informational and
fitness oriented. The acquisition was accounted for using the purchase method
of accounting for a total consideration of approximately $2.5 million. Results
of operations for the Healing Arts entity for the period from the acquisition
date through December 31, 1998 are included in the consolidated financial
statements of the Company. As part of the purchase, in addition to tangible
assets, the Company acquired a video library which is being amortized using the
straight line method over a period of 15 years.
On October 1, 1998, the Company acquired all of the stock and net assets of
InnerBalance Health, Inc. from a related party who is the founder and Chief
Executive Officer of the Company. The acquired entity provides similar services
as the Company. As these were companies under common control, the Company
accounted for the purchase using historical cost. Therefore, the excess of the
purchase price of $523,677 over the value of net assets was accounted for as a
return of capital to the primary shareholder. The payment was made partially
through a transfer of stock and a subordinated debenture with the related party.
Results of operations for the InnerBalance Health entity for the period from the
acquisition date through December 31, 1998 are included in the consolidated
financial statements of the Company.
The following represents the unaudited pro forma results of operations as if the
above noted acquisitions had occurred as of January 1, 1998 and at the beginning
of 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 parties under common ownership
with the owner and Chief Executive Officer of the Company) whereby the Company
provides customer sales, service, warehousing and distribution services. The
agreements are for a two-year period but may be terminated by either party with
30 days notice. During 1998, the Company billed a total of $372,039, consisting
of $272,637 to Explorations Video Catalog, Inc. and $99,402 to InnerBalance
Health.
11. Subsequent Events
The Company entered into a revolving line of credit agreement with a financial
institution in January 1999 in the amount of $1 million. The Company's accounts
receivable and finished goods inventory are collateral for the line of credit.
In June 1999, the Company completed a private placement whereby 331,428 shares
of Class A common stock were issued at $4.375 per share. Additionally,
$1,275,000 convertible debentures with stated interest rate of 8% were issued.
These debentures are convertible automatically upon the closing of the initial
public offering into Class A common stock at the initial public offering per
share price.
In connection with the purchase of Healing Arts Publishing, the Company entered
into a royalty agreement with an actor to produce a series of videos. The
agreement was entered into during January 1999. 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.
12. Segment Information
The Company has two business segments: Direct to Consumers and Direct to
Businesses; both of which sell products, services and information produced
and/or purchased from other suppliers and shipped directly to either the end
user or reseller. Although the customer bases do not overlap to any extent, the
purchase and delivery processes overlap in some areas.
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's business
segments was as follows:
Year Ended December 31, Six months ended June 30,
1997 1998 1998 1999
-----------------------------------------------------------------
Net revenue:
Direct to consumer $19,897,690 $26,897,236 $10,474,976 $13,771,675
Direct to business - 3,841,304 - 3,791,405
Consolidated net revenue 19,897,690 30,738,540 10,474,976 17,563,080
Contribution margin:
Direct to consumer (566,490) 128,691 175,128 (448,539)
Direct to business - 856,152 - 263,986
-----------------------------------------------------------------
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
----------------------------------------------------------
Reconciliation of Contribution
margin to net income:
Other income 1,583,336 388,491 (113,938) 201,762
Income tax expense 362,534 251,955 22,437 6,401
Minority interest expense - 261,598 - (166,822)
-----------------------------------------------------------
Net income $ 654,312 $859,781 $ 38,753 $ 177,630
===========================================================
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 reflect 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, LLC
We have audited the accompanying balance sheet of Healing Arts Publishing, LLC
(successor to Healing Arts Publishing, Inc.) as of December 31, 1998, and the
related statement of operations, stockholders' deficit and members equity, and
cash flows for the year then ended on a basis as described in Note 1. 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
December 31, 1998, and the results of operations and cash flows for the year
then ended on a basis as described in Note 1 in conformity with generally
accepted accounting principles.
Denver, Colorado
June 25, 1999
/s/ Ernst & Young LLP
F-23
HEALING ARTS PUBLISHING, LLC
BALANCE SHEET
December 31, 1998
Assets
Current assets:
Accounts receivable, net 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 Deficit Equity Total
---------------------------------------------------------------------------
(See Note 1)
Balance at January 1, 1998 for Healing Arts
Publishing, Inc. (predecessor) $ 10 $(1,191,696) $ - $(1,191,686)
Distributions paid to stockholder - (197,690) - (197,690)
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, 1998
of Healing Arts Publishing, Inc. (predecessor) $ - $ - $ - $ -
===========================================================================
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
===========================================================================
See accompanying notes.
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, LLC
NOTES TO FINANCIAL STATEMENTS
(Information subsequent to December 31, 1998 is unaudited)
1. Organization
Healing Arts Publishing, LLC (the "Company" or "successor"), a limited liability
company that was formed September 14, 1998, produces and distributes exercise
and relaxation videos and sells personal development products through mail order
catalogs and direct sales.
The Company was formed from the contributed net assets, liabilities and
operations 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.
Actual results could differ from those estimates.
Financial Instruments
Financial instruments consist of accounts receivable and certain current
liabilities. The carrying amounts reported in the balance sheet for these
financial instruments approximate fair value.
Interim Financial Statements
The financial results for the six months ended June 30, 1999 are unaudited, but
include all adjustments (consisting only of normal recurring accounts) that the
Company considers necessary for a fair presentation of its results of operations
and cash flows for such period. The results of operations for the six months
ended June 30, 1999 are not necessarily indicative of results for a full year.
F-30
Healing Arts Publishing, LLC
Notes to Financial Statements (continued)
3. Property and Equipment
At December 31, 1998, property and equipment, stated at cost, consists of the
following:
Furniture and equipment $ 238,305
Computer equipment 106,062
-------------------
344,367
Accumulated depreciation and amortization (204,831)
-------------------
$ 139,536
===================
4. Leases
As of December 31, 1998, the Company's principal operating lease commitments are
for equipment and office space. The Company's future minimum lease payments
under noncancelable operating lease agreements are as follows:
1999 $ 89,995
2000 17,140
2001 4,383
2002 3,540
------------------
$115,058
==================
The Company incurred rent expense, on a combined basis, of $212,451 for the year
ended December 31, 1998.
5. Income Taxes
No provision has been made in the accompanying statements for income taxes as
the income is taxable to each member based upon its pro rata ownership 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's financial position or results of operations.
F-31
Healing Arts Publishing, LLC
Notes to Financial Statements (continued)
7. Subsequent Events
The Company entered into a revolving line of credit agreement with a financial
institution in May 1999 in the amount of $1 million. The Company's accounts
receivable and inventory are collateral for the line of credit.
In June 1999, the Company entered into a three-year exclusive royalty agreement
with an instructor to produce a series of videos. The Company has agreed to pay
a minimum annual royalty of $225,000 to 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. Impact of Year 2000 (Unaudited)
Until recently, computer programs were written to store only two digits 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 review 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-32
[Inside Back cover]
[Pictures]
[Back cover]
[Pictures]
Until ____, 1999, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The registrant's expenses in connection with the offering described in this
registration statement are set forth below. All amounts except the Securities
and Exchange Commission registration fee, the NASD filing fee and the listing
fee are estimated.
Securities and Exchange Commission registration fee.................................... $ 3,197
NASD filing fee........................................................................ 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..................................................................................
========
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) 7-108-102 (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 eliminates the personal
liability for monetary damages of directors under certain circumstances and
provides 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 obtain directors and officers insurance providing insurance
indemnifying certain of Gaiam's directors, officers and employees for certain
liabilities.
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 sale
Argyopoulos under Section 4(2)
Investor G.P. of the Securities
Act.
- ------------------------------------------------------------------------------------------------------------------------------------
privately
October 1, 1998 Jirka Rysavy -- $531,000 -- Stock of negotiated sale
InnerBalance under Section 4(2)
of the Securities
Act.
- ------------------------------------------------------------------------------------------------------------------------------------
privately
December 7, 1998 Lynn Powers 40,000 $ 50,000 -- $ 100,000 negotiated sale
under Section 4(2)
of the Securities
Act.
- ------------------------------------------------------------------------------------------------------------------------------------
privately
January 7, 1999 Mo Siegel 17,143 $ 75,000 -- $ 150,000 negotiated 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
- ------------------------------------------------------------------------------------------------------------------------------------
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, under 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 -- -- 674,800 Services N/A
and service
providers
- ------------------------------------------------------------------------------------------------------------------------------------
* 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.
- -----------------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
II-5
- -----------------------------------------------------------------------------------------------------------------------------------
Exhibit No. Description
- -----------------------------------------------------------------------------------------------------------------------------------
23.2 Consent of Wendell T. Walker & Associates
- -----------------------------------------------------------------------------------------------------------------------------------
23.3 Consent of Bartlit Beck Herman Palenchar & Scott (included in Exhibit 5.1)
- -----------------------------------------------------------------------------------------------------------------------------------
23.4 Consent of Paul H. Ray
- -----------------------------------------------------------------------------------------------------------------------------------
24.1** Power of Attorney
- -----------------------------------------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule
- -----------------------------------------------------------------------------------------------------------------------------------
* To be filed by amendment
** Previously filed
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) 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) 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.
Gaiam, Inc.
By: /s/ Jirka Rysavy
---------------------
Jirka Rysavy
Chief Executive Officer
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.
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Signature Title Date
- ---------------------------------------------------------------------------------------------------------------------------
/s/ Jirka Rysavy Jirka Rysavy , Chairman of the Board and Chief August 30, 1999
Executive Officer
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/s/ Lynn Powers* Lynn Powers, President, Chief Operating Officer August 30, 1999
and director
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/s/ Pavel Bouska* Pavel Bouska, Executive Vice President and August 30, 1999
Chief Information Officer
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/s/ Janet Mathews* Janet Mathews, Controller and August 30, 1999
principal financial officer
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*By /s/ Jirka Rysavy
Jirka Rysavy, Attorney-in-fact
II-8
EXHIBIT INDEX
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Exhibit No. Description
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1.1* Form of Underwriting Agreement
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2.1 Purchase Agreement dated September 14, 1998 among Gaiam Holdings, Inc., Healing
Arts Publishing, LLC, Steven P. Adams, Healing Arts Publishing, Inc., and Gaiam,
Inc.
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3.1 Amended and Restated Articles of Incorporation of Gaiam, Inc.
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3.2* Bylaws of Gaiam, Inc.
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4.1 Form of Gaiam, Inc. Stock Certificate
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5.1 Opinion of Bartlit Beck Herman Palenchar & Scott
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10.1 Gaiam, Inc. 1999 Long-Term Incentive Plan
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10.2 Operating Agreement of Healing Arts Publishing, LLC dated September 14, 1998
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10.3 Sublease dated September 16, 1998 between Corporate Express Office Products, Inc.
and Gaiam, Inc.
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10.4 Lease Agreement dated December 18, 1997 between Orix Prime West Broomfield
Venture and Gaiam, Inc.
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21.1 Subsidiaries of Gaiam, Inc.
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23.1 Consent of Ernest & Young
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23.2 Consent of Wendell T. Walker & Associates
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Exhibit No. Description
- ---------------------------------------------------------------------------------------------------------------
23.3 Consent of Bartlit Beck Herman Palenchar & Scott (included in Exhibit 5.1)
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23.4 Consent of Paul H. Ray
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24.1** Power of Attorney, included on signature page
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27.1 Financial Data Schedule
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* To be filed by amendment
** Previously filed.