AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 2001
REGISTRATION NO. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
360 INTERLOCKEN BLVD., SUITE 300
BROOMFIELD, COLORADO 80021
(303) 222-3600
(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) 222-3600
(name, address, including zip code, and telephone number, including area
code, of agent for service)
----------------
Copies to:
Thomas R. Stephens, Esq. Richard R.Plumridge, Esq.
Polly S. Swartzfager, Esq. John E. Hayes III, Esq.
Bartlit Beck Herman Palenchar & Scott Brobeck, Phleger & Harrison LLP
1899 Wynkoop Street, 8/th/ Floor 370 Interlocken Blvd. Suite 500
Denver, Colorado 80202 Broomfield, Colorado 80021
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [_]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
CALCULATION OF REGISTRATION FEE
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Title of Each Proposed Proposed
Class of Maximum Maximum
Securities to be Amount to be Offering Price Aggregate Amount of
Registered Registered (1) Per Share (2) Offering Price Registration Fee
---------------------------------------------------------------------------------------------------------
Class A common 2,530,000 shares $14.32 $36,229,600 $9,057.50
stock
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(1) Includes shares of class A common stock on which the underwriters have the
option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) of the Securities Act of 1933, as
amended, and based on the average of high and low sales prices of the Class
A Common Stock as reported on the Nasdaq National Market on June 15, 2001.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE 20, 2001
2,200,000 Shares of
Class A Common Stock
[Gaiam logo]
GAIAM
We are offering 2,200,000 shares of our class A common stock. Our class A common
stock is listed on the Nasdaq National Market under the symbol "GAIA." On June
15, 2001, the last reported sale price of our class A common stock on the Nasdaq
National Market as $14.17.
Investing in our common stock involves risks. See "Risk Factors" on page 5.
Per
Share Total
----- -----
Public offering price:............................ $ $
Underwriting discounts and commissions:........... $ $
Proceeds to Gaiam:................................ $ $
We have granted the underwriters a 30-day option to purchase up to 330,000
shares of our class A common stock for resale to the public at the $
offering price per share.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
Tucker Anthony Sutro Adams, Harkness & Hill, Inc.
Capital Markets
The date of this prospectus is June , 2001.
[Pictures of Gaiam products]
TABLE OF CONTENTS
Page
----
Prospectus Summary....................................... 1
Risk Factors............................................. 5
Forward-Looking Statements............................... 11
Use of Proceeds.......................................... 11
Price Range of Common Stock.............................. 12
Dividend Policy.......................................... 12
Capitalization........................................... 13
Selected Consolidated Financial Data..................... 14
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 16
Our Business............................................. 23
Management............................................... 31
Certain Relationships and Related Transactions........... 35
Principal Shareholders................................... 37
Description of Capital Stock............................. 39
Shares Eligible for Future Sale.......................... 41
Underwriting............................................. 43
Legal Matters............................................ 45
Experts.................................................. 45
Where You Can Find More Information...................... 45
Index to Financial Statements............................ F-1
You should rely only on the information contained in this prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted.
(i)
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. Because this is only a summary, it does not contain all the
information that you should consider before buying shares in this offering. You
should read the entire prospectus carefully, including our consolidated
financial statements and the related notes included elsewhere in this
prospectus.
Gaiam is a lifestyle company providing a broad selection of
information, products and services to customers who value natural health,
personal development and renewable energy. We offer our customers the ability to
make purchasing decisions based on these values while striving to provide
products at prices comparable to conventional alternatives. Our direct customer
base is 80% female and 70% college-educated, has a median age of 44 and has an
average annual household income of approximately $60,000.
The Gaiam lifestyle brand was built around our ability to continuously
develop content that establishes Gaiam as an authority in the Lifestyle Of
Health And Sustainability (LOHAS) market. Our content provides solutions that
improve quality of life, promote personal development and protect the
environment. It also forms the basis of our proprietary products, on which we
realize our highest margins, and drives demand for parallel product and service
offerings. We sell our content in the form of television broadcasts, on-demand
visual media programming, DVDs, videotapes, music CDs, books and other media. We
also provide content through our catalogs, on the internet, at point of purchase
and as part of the packaging for our products. Our content together with the
Gaiam brand creates barriers to entry for competitors.
We market our products and services direct-to-consumers and business-
to-business through five sales channels: our catalogs, the internet, retailers,
media and corporate accounts. Our products are sold by leading retailers
including lifestyle stores such as Discovery Channel Stores and The Walking
Company; women's beauty stores such as Ulta and Origins; sporting goods chains
such as Sports Authority and Big 5; home furnishing stores such as Bed, Bath and
Beyond; natural food stores such as Whole Foods Market; book stores such as
Borders and Barnes & Noble; music stores such as Musicland and Wherehouse Music;
sporting good stores such as Dick's and mass merchants such as Target, Kohl's
and Wal-Mart; and e-tailers such as Amazon.com. A number of our retailers
display our products in store-within-a-store Gaiam lifestyle shops. We believe
we have an opportunity to become the single source solution for LOHAS products
for our retail accounts. Our media channel includes television broadcast, on-
demand visual media programming coverage to more than 600,000 hotel rooms in
North America, video streaming, video tapes, DVDs and three music labels. Our
media partners include the Discovery Channel, Universal Studios and On Command.
Our corporate account customers include The White House, NASA, Disney, Sony,
AT&T, Mercedes Benz, the U.S. Departments of Energy and Defense and the
Government of Brazil. We distribute our products in each of these sales channels
from a single fulfillment center.
Gaiam has a highly centralized, scaleable business model. Gaiam's
operations are vertically integrated from content creation, through product
development and sourcing, to customer service and fulfillment.
The LOHAS market, which represented $227 billion in sales in 2000
according to Natural Business Communication, consists of five main sectors:
. Sustainable Economy. Renewable energy, energy conservation, recycled
goods, environmental management services, sustainable manufacturing
processes and related information and services.
. Healthy Living. Natural and organic foods, dietary supplements,
personal care products and related information and services.
. Alternative Healthcare. Health and wellness solutions and alternative
health practices.
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. Personal Development. Solutions, information, products and experiences
relating to mind, body and spiritual development.
. Ecological Lifestyles. Environmentally friendly cleaning and household
products, organic cotton clothing and bedding, and eco-tourism.
Gaiam provides lifestyle product solutions for all segments of the
LOHAS market. We offer solutions for a sustainable economy such as renewable
energy systems, energy efficient lighting and products made from recycled
materials; healthy living solutions such as nutrition content, air and water
filters and personal care items; alternative healthcare solutions such as back
and neck care products, stress relief and wellness information; personal
development solutions such as mind-body fitness information, fitness accessories
and performance wear; ecological lifestyle solutions such as natural cleaners,
organic cotton bedding and bath products and organic cotton clothing.
We intend to pursue the following strategic initiatives in order to
continue to grow our business and serve the LOHAS market:
. Strengthen Our Lifestyle Brand
. Capitalize on Our Multi-Channel Approach
. Expand Our Proprietary Product Selection
. Broaden Our Content Through Growth of Gaiam Media
. Complement Our Business with Selective Strategic Acquisitions
From 1996 to 2000, our revenues increased from $14.8 million to $60.6
million. Our direct customer file has increased from 300,000 at the end of 1996
to approximately 1.7 million at the end of May 2001. Our retailer channel grew
from its inception in 1998 to 25,500 stores at the end of May 2001.
The name Gaiam is a fusion of the words "Gaia," the name for Mother
Earth in ancient Greece, and "I am." Gaiam was founded in Boulder, Colorado and
organized as a Colorado corporation on July 7, 1988. Gaiam's principal office is
located at 360 Interlocken Blvd., Broomfield, Colorado 80021, and its telephone
number is (303) 222-3600.
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THE OFFERING
Class A common stock offered by Gaiam.................... 2,200,000 shares
Class A common stock outstanding after this offering..... 8,163,137 shares(1)
Class B common stock outstanding after this offering..... 5,400,000 shares
Total common stock outstanding after this offering....... 13,563,137 shares
Use of proceeds....................... Working capital and other general
corporate purposes, including
repayment of indebtedness,
expansion of sales channels, new
product launches and acquisitions.
See "Use of Proceeds" and "Our
Business."
Nasdaq National Market symbol......... GAIA
__________________
(1) Based on the number of shares outstanding on May 31, 2001. Excludes
1,494,318 shares issuable upon exercise of options and warrants outstanding as
of May 31, 2001, at an average exercise price of $7.72 per share. See
"Management."
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 not part
of this prospectus. References in this prospectus to "Gaiam," "we," "our" and
"us" refer to Gaiam, Inc. and our wholly- and majority-owned subsidiaries and
not to the persons who manage Gaiam or sit on its Board of Directors.
3
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following table summarizes the consolidated financial data of our
business. You should read the summary consolidated financial data below in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Three Months Ended
Year Ended December 31, March 31,
-------------------------------------------------------------------------------------
1998 1999 2000 2000 2001
(Unaudited)
Statement of Operations Data:
Net revenues $30,739 $45,725 $60,588 $12,558 $17,672
Gross profit 17,565 27,549 36,795 7,636 10,824
Other income (expense) 388 606 (283) (123) 68
Net income after minority interest/(1)/ 860 1,718 2,649 203 419
Net income per share
Basic $ 0.11 $ 0.20 $ 0.24 $ .02 $ .04
Diluted $ 0.11 $ 0.19 $ 0.23 $ .02 $ .04
Shares outstanding (basic) 8,073 8,785 10,858 10,846 11,206
Shares outstanding (diluted) 8,119 9,119 11,525 11,505 11,563
March 31, 2001
(Unaudited)
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Actual As Adjusted (2)
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Balance Sheet Data:
Cash............................................................ $ 6,374 $24,742
Working capital................................................. 11,312 33,161
Total assets.................................................... 59,118 77,486
Long-term debt ............................. ................... 6,780 261
Stockholders' equity............................................ 22,168 50,536
__________
(1) Net income after minority interest includes net income of consolidated Gaiam
operations, excluding that portion attributable to the minority shareholders'
interest in the net income or loss in the consolidated subsidiary, net of tax.
(2) Gives effect to the sale by Gaiam of 2,200,000 shares at an assumed public
offering price of $14.17 per share, after deducting the estimated underwriting
discount and offering expenses payable by Gaiam and application of the net
proceeds for repayment of $6.5 million of long-term debt (at March 31, 2001)
from the proceeds of this offering. (Gaiam intends to use an additional $3.5
million in proceeds from this offering to repay debt incurred subsequent to
March 31, 2001.) See "Use of Proceeds" and "Capitalization."
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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 our current and future
competitors.
Our goal is to establish ourselves as the market leader in the LOHAS market
industry. We believe that the LOHAS market has thousands of small, local and
regional businesses. Some smaller businesses may be able to more effectively
personalize their relationships with customers, thereby gaining a competitive
advantage. Although we believe that we do not compete directly with any single
company with respect to our entire range of merchandise, within each merchandise
category we have competitors and may face competition from new entrants. Some of
our competitors or 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 competitors.
Increased competition from these or other competitors could negatively impact
our business.
Changing consumer preferences and general economic conditions may have an
adverse effect on our business.
Our business is targeted at consumers who assign high value to healthy
lifestyles, personal development, renewable energy and the environment. A
decrease of consumer interest in purchasing goods and services that promote the
values we espouse would materially and adversely affect the growth of our
customer base and sales revenues and, accordingly, our financial prospects.
Further, consumer preferences are difficult to predict. Our future success
depends in part on our ability to anticipate and respond to changes in consumer
preferences and we may not respond in a timely or commercially appropriate
manner to such changes. Failure to anticipate and respond to changing consumer
preferences could lead to, among other things, lower sales of our products,
increased merchandise returns and lower margins, which would have a material
adverse effect on our business.
We may face quarterly and seasonal fluctuations that could harm our business.
Our revenue and results of operations have fluctuated and can be expected
to continue to fluctuate on a quarterly basis as a result of a number of
factors, including the timing of catalog offerings, recognition of costs or net
sales contributed by new merchandise and catalog offerings, fluctuations in
response rates, fluctuations in paper, production and postage costs and
expenses, merchandise returns, adverse weather conditions that affect
distribution or shipping, shifts in the timing of holidays and changes in our
merchandise mix. In addition, our net sales and profits have historically been
higher during the fourth quarter holiday season. We believe that this
seasonality will continue in the future. If, for any reason, our sales were to
fall below expectations during the fourth quarter holiday season, our financial
condition and results of operations would be adversely affected.
Some products and services we sell may put us at a competitive price
disadvantage.
Some environmentally friendly products are priced at a premium to products
that have similar uses but are not environmentally friendly. Our sales growth
assumes that consumers will sometimes be willing to pay higher prices in order
to enhance the environment, promote a sustainable economy and
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achieve healthy lifestyles and personal development or that, over time, we will
be able to reduce prices through volume purchases from our suppliers. If we are
unable to sustain price levels of these products, or to increase sales volume
to a level that would allow us to reduce our costs, our business will be
adversely affected.
If the protection of our internet domain names is inadequate, our brand
recognition could be impaired and we could lose customers.
We currently hold various internet 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.
Our success depends on the value of the Gaiam brand, and if the value of our
brand were to diminish, our revenues, results of operations and prospects would
be adversely affected.
Because we are increasing our sales of proprietary products, our success
increasingly depends on the Gaiam brand and its value in the LOHAS market.
Building and maintaining recognition of the Gaiam brand is important to
attracting and expanding our customer base. We cannot be certain that our
marketing efforts or brands will attract new customers, retain existing
customers or encourage repeat purchases.
Acquisitions may harm our financial results, cause our stock price to decline,
or dilute our shareholders' interests.
Acquisitions have been part of our growth and may continue to be part of
our growth in the future. In June 2000, Gaiam and Whole Foods Market, Inc., a
publicly-traded company, merged their internet properties into gaiam.com, Inc.
In January 2001, we acquired Real Goods Trading Corporation. We will
opportunistically evaluate acquisition opportunities and they may be part of our
growth in the future. These acquisitions may be of entire companies, controlling
interests in companies or of minority interests in companies where we intend to
invest as part of a strategic alliance. However, we may not succeed in
identifying attractive acquisitions or attractive acquisition candidates may not
be available at reasonable prices. We are also likely to face competition for
attractive acquisition candidates, which may increase the expense of completing
acquisitions. 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, we may have difficulties integrating the operations, products and
personnel of the companies we acquire. The presence of minority ownership
interests in any acquired company, and our strategy of allowing our subsidiaries
to retain some autonomy in their management and operation, could make
integration more difficult. The success of future acquisitions is dependent on
our ability to effectively integrate the acquired companies' operations and
brands, including our ability to recognize potentially available marketing
synergies and cost savings, some of which may involve operational changes. If we
are not successful in integrating companies that we may acquire, our business
could be materially and adversely affected.
The loss of the services of our key personnel could disrupt our business.
The services of our officers, Jirka Rysavy, Lynn Powers and Pavel Bouska,
are critical to our business. We do not carry any key-man life insurance. Our
strategy of allowing the management teams of acquired companies to continue to
exercise significant management responsibility for those companies makes it
especially important that we retain key employees, particularly the sales and
creative teams, of the companies we might acquire.
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Government regulation and legal uncertainties could add additional costs to
doing business on the internet.
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. 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.
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.
If we cannot maintain and continually update our information systems, our
business could suffer.
Information systems are critical to our business. These systems assist in
processing orders, managing inventory, purchasing and shipping merchandise on a
timely basis, responding to customer service inquiries, and gathering and
analyzing operating data by business segment, customer, and SKU (a specific
identifier for each different product). As our business grows we will need to
continually update these systems. Furthermore, if we acquire other companies, we
will need to integrate the acquired companies' systems with ours, a process that
could be time-consuming and costly. If our systems cannot accomodate our growth
or fail, we could incur substantial expenses.
Although we are a multi-channel company, the internet is an important sales
channel for us. The development of a website and other proprietary technology
entails significant technical, financial and business risks. We have spent
approximately $5.5 million in the development of our websites to date to
introduce several new website features. We intend to continue to invest
resources to enhance our websites and keep our systems up to date. In addition,
the adoption of new internet, networking or telecommunications technologies may
require us to devote substantial resources to modify and adapt our services. Our
success in e-commerce will depend upon our ability to continue to provide a
compelling and satisfying shopping experience. To remain competitive, we must
continue to enhance and improve the responsiveness, functionality and features
of our online technology.
A material security breach could cause us to lose sales, damage our reputation
or result in liability to us.
Our computer servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. We may need to expend significant
additional capital and other resources to protect against a security breach or
to alleviate problems caused by any breaches. Our relationships with our
customers may be adversely affected if the security measures that we use to
protect personal information, such as credit card numbers, are ineffective. We
currently rely on security and authentication technology that we license from
third parties. We may not be able to prevent all security breaches.
Our systems may fail or limit user traffic, which would cause us to lose sales.
We maintain a single call center in Broomfield, Colorado. We are dependent
on our ability to maintain our computer and telecommunications equipment in this
center in effective working order and to protect against damage from fire,
natural disaster, power loss, telecommunications failure or similar events. In
addition, growth of our customer base may strain or exceed the capacity of our
computer and telecommunications systems and lead to degradations in performance
or systems failure. We have
7
experienced capacity constraints and failure of information systems in the past
that have resulted in decreased levels of service delivery or interruptions in
service to customers for limited periods of time. Although we continually review
and seek to upgrade our technical infrastructure and provide for system
redundancies and backup power to limit the likelihood of systems overload or
failure, substantial damage to our systems or a systems failure that causes
interruptions for a number of days could adversely affect our business.
Additionally, if we are unsuccessful in updating and expanding our
infrastructure, including our call center, our ability to grow may be
constrained.
We may face legal liability for the content contained on our website
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 materials that we publish or distribute on our website. If we are
held liable for damages for the content on our website, our business may suffer.
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 with merchandise in a timely manner,
which could cause us to lose sales.
To successfully operate our business, we must receive timely delivery of
merchandise from our vendors and suppliers, many of which are small private
companies. As we grow, some of these vendors may not have sufficient capital,
resources, or personnel to increase their sales to us or to satisfy their
commitments to us. Any significant delay in the delivery of products by vendors
could result in a loss of sales, increased fulfillment expenses and damage to
our customer service reputation. The failure of third parties to provide an
adequate level of service could decrease our revenues and increase our costs.
Given our emphasis on customer service, the efficient and uninterrupted
operation of order-processing and fulfillment functions is critical to our
business. To maintain a high level of customer service, we rely heavily on a
number of different outside service providers, such as printers,
telecommunications companies and delivery companies. Any interruption in
services from our principal outside service providers, including delays or
disruptions resulting from labor disputes, power outages, human error, adverse
weather conditions or natural disasters, could materially adversely affect our
business.
Relying on our centralized fulfillment center could expose us to losing revenue.
Prompt and efficient fulfillment of our customers' orders is critical to
our business. Our facility in Cincinnati, Ohio handles our fulfillment functions
and some customer-service related operations, such as
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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. Because we recognize revenue only when we ship orders,
interruption of our shipping would diminish our revenues.
Our costs could be increased by overstocks and merchandise returns, as well as
by our strategy of offering 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 increase in our
merchandise returns will correspondingly reduce our revenues.
Our sales could be negatively affected if we are required to charge additional
taxes on purchases.
We generally collect sales taxes on our internet and catalog sales only
on sales to residents of the state of Colorado and where we have other
locations. We currently collect sales taxes on internet and catalog sales in
Colorado, California and Ohio. Federal laws currently limit the imposition of
state and local taxes on internet-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.
9
Postage and shipping costs may increase and therefore increase our expenses.
We ship our products, catalogs, and lifestyle publications to consumers and the
cost of shipping is a material expenditure. Postage and shipping prices increase
periodically and can be expected to increase in the future. Any inability to
secure suitable or commercially favorable prices or other terms for the delivery
of our merchandise and catalogs could have a material adverse effect on our
financial condition and results of operations.
Our founder and chief executive officer Jirka Rysavy controls Gaiam.
Mr. Rysavy holds 100% of Gaiam's 5,400,000 outstanding shares of Class B
common stock. The shares of Class B common stock are convertible into shares of
Class A common stock at any time. Each share of Class B common stock has ten
votes per share, and each share of Class A common stock has one vote per share,
although pursuant to a voting agreement between Gaiam and Mr. Rysavy, the Class
B common stock is limited to 49% of the total votes and all shares over this
percentage are voted proportionately with the Class A common stock. Mr. Rysavy
also owns 2,686,200 shares of Class A common stock and options to purchase
400,000 shares of Class A common stock (of which options to purchase 64,000
shares of common stock are exercisable within 60 days). After giving effect to
the issuance of Class A common stock in the offering, Mr. Rysavy will
beneficially own approximately 59.8% of the outstanding shares of Gaiam common
stock, assuming Mr. Rysavy's Class B common stock was converted into Class A
common stock. In addition, he will also have approximately 65.8% of the total
votes. As a result, Mr. Rysavy will be able to exert substantial influence over
Gaiam and to control matters requiring approval by the shareholders of Gaiam,
including the election of directors, increasing our authorized capital stock,
our dissolution, the merger or sale of our assets and the general affairs of
Gaiam. This control by Mr. Rysavy may discourage transactions involving a change
of control of Gaiam.
The price of our class A common stock may be subject to wide fluctuations and
may trade below the offering price.
The market price of our shares after the offering may vary from the
offering price and could be subject to wide fluctuations in response to factors
such as the future issuance of shares as well as the following factors that are
beyond our control:
-- quarterly variations in our operating results;
-- operating results that vary from the expectations of securities analysts
and investors;
-- changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
-- announcements by third parties of significant claims or proceedings
against us;
-- strategic moves by us or our competitors, such as acquisitions or
restructurings; 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 8,163,137 shares of class A common
stock and 5,400,000 shares of class B common stock (which are immediately
convertible into 5,400,000 shares of class A common stock) will be outstanding.
Of this number, approximately 4,500,000 shares will be freely tradeable, and
approximately 3,700,000 additional shares of class A common stock and all shares
of class
10
B common stock are eligible for sales under Rule 144 of the Securities Act.
Please see "Shares Eligible for Future Sale."
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements refer to our future plans, objectives,
expectations and intentions. We use words such as "anticipates," "believes,"
"plans," "estimates," "expects," "future," "intends," "strive" and similar
expressions to identify forward-looking statements. These forward-looking
statements involve risks and uncertainties. Gaiam's actual results could differ
materially from those anticipated in these forward-looking statements, as a
result of certain factors, as more fully described in "Risk Factors" and
elsewhere in this prospectus. We caution you that no forward-looking statement
is a guarantee of future performance, and you should not place undue reliance on
these forward-looking statements which reflect our management's view only as of
the date of this prospectus. We undertake no obligation to update any forward-
looking information.
USE OF PROCEEDS
The net proceeds to Gaiam from the sale of the shares in this offering are
estimated to be approximately $28.5 million, giving effect to the sale by Gaiam
of 2,200,000 shares at an assumed public offering price of $14.17 per share and
after deducting the estimated underwriting discounts and offering expenses
payable by Gaiam.
We intend to use approximately $10 million of the net proceeds of the
offering to reduce the amount outstanding under our Wells Fargo Bank West N. A.
revolving line of credit and to repay debt we assumed in connection with the
Real Goods Trading Corporation merger. Our revolving line of credit extends
through June 30, 2003 and bears interest at the lower of prime rate less 0.5% or
LIBOR plus 2.75%.
We plan to use the remaining proceeds to fund expansion of our media
channel, launch new products and for working capital and general corporate
purposes. We may also use a portion of the net proceeds to make 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."
11
PRICE RANGE OF COMMON STOCK
Our shares have been quoted on the Nasdaq National Market under the symbol
"GAIA" since October 29, 1999. Prior to that time, there was no public market
for the shares. The following table sets forth, for the period indicated, the
high and low bid prices per share of the shares as reported on the Nasdaq
National Market:
High Low
------ ------
1999
----
Fourth Quarter (commencing October 29, 1999).......... $18.25 $ 5.38
2000
----
First Quarter......................................... $19.00 $13.92
Second Quarter........................................ $24.69 $14.00
Third Quarter......................................... $19.00 $15.00
Fourth Quarter........................................ $18.25 $14.63
2001
----
First Quarter......................................... $15.75 $ 9.38
Second Quarter (through June 15, 2001) ............... $16.00 $ 9.40
On June 15, 2001, the reported last sale price of the common stock on the
Nasdaq National Market was $14.17. As of May 31, 2001, there were approximately
9,100 stockholders of record of Gaiam's class A common stock and one stockholder
of record of Gaiam's class B common stock.
DIVIDEND POLICY
Gaiam has never declared or paid any cash dividends on its capital stock.
We currently intend to retain earnings, if any, to support our growth strategy
and do not anticipate paying cash dividends in the foreseeable future. In
addition, our bank credit agreement prohibits payment of any dividends to our
shareholders.
12
CAPITALIZATION
The following table sets forth the capitalization of Gaiam as of March 31,
2001 on an actual basis and as adjusted to reflect the sale by Gaiam of
2,200,000 shares in this offering at an assumed public offering price of $14.17
per share, less the underwriters' discounts and commissions and estimated
offering expenses, and the application of the estimated net proceeds therefrom.
See "Use of Proceeds."
You should read this information together with our consolidated financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
March 31, 2001
(Unaudited)
----------------------
Pro Forma
As
Actual Adjusted
------ --------
Long-term debt and capital leases, less current
portion (1).............................................. $ 6,780 $ 261
Stockholders' equity:
Class A Common Stock, $0.0001 par value;
150,000,000 shares authorized and
5,958,505(2) shares issued and outstanding
(actual); 8,158,505 (2) shares outstanding
(pro forma)............................................ 1 1
Class B Common Stock, $0.0001 par value;
50,000,000 shares authorized and 5,400,000
shares issued and outstanding (actual and pro
forma)................................................. - -
Additional paid-in capital.............................. 15,486 43,854
Deferred compensation................................... (405) (405)
Retained earnings....................................... 7,086 7,086
-------- --------
Total stockholders' equity............................ $ 22,168 $ 50,536
-------- --------
Total capitalization.................................. $ 28,948 $ 50,797
======== ========
___________
(1) Gives effect to the repayment of $6.5 million of long-term debt from the
proceeds of this offering, which was outstanding as of March 31, 2001. Gaiam has
incurred approximately $3.5 million of additional long-term debt as of May 31,
2001, which shall also be repaid with the proceeds from this offering.
(2) Excludes an aggregate of 1,494,318 shares issuable pursuant to options
and warrants outstanding as of May 31, 2001.
13
SELECTED CONSOLIDATED FINANCIAL DATA
The selected statement of operations for the years ended December 31, 1998,
1999 and 2000 and balance sheet data as of December 31, 1999 and 2000 set forth
below are derived from Gaiam's audited consolidated financial statements. The
audited consolidated financial statements include statements of operations for
the years ended December 31, 1998, 1999 and 2000, and balance sheets as of
December 31, 1999 and 2000. These financial statements appear elsewhere in this
prospectus. The selected statement of operations for the years ended December
31, 1996 and 1997 and balance sheet data as of December 31, 1996, 1997 and 1998
set forth below are derived from Gaiam's audited consolidated financial
statements. The selected balance sheet data as of March 31, 2001 and selected
statement of operations for the three-month periods ended March 31, 2000 and
2001 set forth below are derived from Gaiam's unaudited consolidated financial
statements as of March 31, 2001 and for the three-month periods ended March 31,
2000 and 2001, which appear elsewhere in this prospectus. In the opinion of
management, the unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring accruals and adjustments,
necessary for a fair presentation of the financial position and results of
operations for these unaudited periods. The historical operating results are not
necessarily indicative of the results to be expected for any other period. You
should read the following selected consolidated financial data 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.
14
SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
Three Months
Year Ended December 31, Ended March 31,
---------------------------------------------------------------------
1996 1997 1998 1999 2000 2000 2001
------- ------- ------- ------- ------- ------- -------
(Unaudited)
Statement of Operations
Data:
Net revenues................. $14,801 $19,898 $30,739 $45,725 $60,588 $12,558 $17,672
Costs of goods sold.......... 6,762 8,462 13,174 18,176 23,793 4,922 6,848
------- ------- ------- ------- ------- ------- -------
Gross profit................. 8,039 11,436 17,565 27,549 36,795 7,636 10,824
Expenses:
Selling and operating...... 9,253 10,427 14,186 22,338 27,310 6,064 8,539
Corporate, general and
administration............. 1,218 1,575 2,394 3,087 5,057 1,116 1,550
------- ------- ------- ------- ------- ------- -------
Total expenses............. 10,471 12,002 16,580 25,425 32,367 7,180 10,089
------- ------- ------- ------- ------- ------- -------
Operating income
(loss)..................... (2,432) (566) 985 2,124 4,428 456 735
Other income
(expense)/(1)/............. 2,984 1,583 388 606 (283) (123) 68
------- ------- ------- ------- ------- ------- -------
Income before income
taxes and minority
interest................... 552 1,017 1,373 2,730 4,145 333 803
Income taxes................. (212) (363) (251) (1,063) (1,556) (125) (301)
Minority interest............ -- -- (262) 51 60 (5) (83)
------- ------- ------- ------- ------- ------- -------
Net income................... $ 340 $ 654 $ 860 $ 1,718 $ 2,649 $ 203 $ 419
======= ======= ======= ======= ======= ======= =======
Net income per share
Basic...................... $ 0.04 $ 0.08 $ 0.11 $ 0.20 $ 0.24 $ 0.02 $ 0.04
======= ======= ======= ======= ======= ======= =======
Diluted.................... $ 0.04 $ 0.08 $ 0.11 $ 0.19 $ 0.23 $ 0.02 $ 0.04
======= ======= ======= ======= ======= ======= =======
Shares outstanding
Basic...................... 8,040 8,040 8,073 8,785 10,858 10,846 11,206
Diluted.................... 8,040 8,040 8,119 9,119 11,525 11,505 11,563
December 31, March 31,
---------------------------------------------------------------------
1996 1997 1998 1999 2000 2000 2001
---- ---- ---- ---- ---- ---- ----
(Unaudited)
Balance Sheet Data:
Cash......................... $ 380 $ 1,612 $ 1,410 $ 3,877 $ 8,579 $ 2,063 $ 6,374
Securities available-for-sale
/(2)/........................ 56 4,828 1,634 -- -- -- --
Working capital
(deficiency)............... (1,838) 5,226 (81) 5,911 15,269 2,290 11,312
Total assets................. 6,256 10,774 16,677 27,260 48,477 29,445 59,118
Long-term debt (net of
current maturities)........ 89 42 299 2,109 5,770 2,083 6,780
Stockholders' equity/(2)/.... 920 4,736 3,661 14,951 18,111 15,154 22,168
/(1)/ Other income in 1996, 1997, 1998 and 1999 primarily reflects income from
sale of securities available-for-sale.
/(2)/ Securities valued at fair market value in 1996, 1997 and 1998.
15
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 is a lifestyle company providing a broad selection of information,
products and services to customers who value natural health, personal
development and renewable energy. Gaiam was incorporated in Boulder, Colorado in
1988. In 1995, Gaiam began expanding nationally and making acquisitions. In
1996, Gaiam made a large investment in infrastructure and operating systems to
support its rapid growth. In 1998, a team of key executives joined Gaiam to help
facilitate future growth. From 1996 to 2000, our revenues increased from $14.8
million to $60.6 million.
Gaiam's business model is evolving as evidenced by the increase in the
percentage of our revenues attributable to our business-to-business segment and
the launch of our internet channel. During 1998, business-to-business revenues
accounted for approximately 13% of our revenues, while in 2000 this segment's
revenues increased to approximately 28% of total revenue. In addition, Gaiam's
gross margin continues to increase because we are developing more proprietary
merchandise, on which we have better margins, and negotiating better pricing
from our vendors due to volume discounts.
In June 2000, Whole Foods Market, Inc. and Gaiam merged their internet
properties into Gaiam.com, Inc. Gaiam owns 50.1% of Gaiam.com, Whole Foods
Market owns 35% and the remainder is owned by various venture capital funds.
Gaiam.com is the exclusive e-commerce site for both Gaiam and Whole Foods
Market. Whole Foods Market and Gaiam have also entered into a 10 year joint
marketing agreement to promote each other's business and share customer data.
The companies are presenting Gaiam's lifestyle products in a store-within-a-
store concept in Whole Foods Market's larger stores.
In January 2001, we acquired Real Goods Trading Corporation in a merger. In
the merger, each shareholder of Real Goods received one Class A share for each
10 shares of Real Goods held. We have already consolidated a majority of Real
Goods' operations into our infrastructure, significantly reducing operating
expenses. We have closed Real Goods' Santa Rosa headquarters, Ukiah distribution
center and call center. We have also improved the gross profit margin through
the introduction of our proprietary products, through our purchasing power and
by streamlining the Real Goods product offering.
Also in the first quarter of 2001, we acquired the Selfcare.com and
Gaia.com URLs, as well as selected inventory of Medical SelfCare from the
assignee for the benefit of its creditors.
16
Results of Operations
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated.
Three Months
Ended March
Year Ended December 31, 31,
------------------------------------ -------------
1996 1997 1998 1999 2000 2000 2001
---- ---- ---- ---- ---- ---- ----
Net revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of goods sold.................... 45.7 42.5 42.9 39.8 39.3 39.2 38.7
----- ----- ----- ----- ----- ----- -----
Gross profit........................... 54.3 57.5 57.1 60.2 60.7 60.8 61.3
Expenses:
Selling and operating................ 62.5 52.4 46.1 48.8 45.1 48.3 48.3
Corporate, general and
administrative...................... 8.2 7.9 7.8 6.7 8.3 8.9 8.8
----- ----- ----- ----- ----- ----- -----
Total expenses..................... 70.7 60.3 53.9 55.5 53.4 57.2 57.1
----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations............................ (16.4) (2.8) 3.2 4.7 7.3 3.6 4.2
Other income (expense), net............ 20.1 8.0 1.3 1.3 (0.4) (1.0) (0.3)
----- ----- ----- ----- ----- ----- -----
Income before income taxes and
minority interest..................... 3.7 5.2 4.5 6.0 6.9 2.6 4.5
Provision for income taxes............. (1.4) (1.8) (0.8) (2.3) (2.6) (1.0) (1.7)
Minority interest in net
income of consolidated
subsidiary, net of tax................ 0.0 0.0 (0.9) 0.1 0.1 0.0 (0.5)
----- ----- ----- ----- ----- ----- -----
Net income......................... 2.3% 3.4% 2.8% 3.8% 4.4% 1.6% 2.4%
===== ===== ===== ===== ===== ===== =====
Three months ended March 31, 2001 compared to three months ended March 31, 2000
Revenues increased 40.7% to $17.7 million for the three months ended March 31,
2001 from $12.6 million during the three months ended March 31, 2000. Gaiam's
internal growth rate was 21%, fueled primarily by the growth in sales of Gaiam's
proprietary products.
Gross profit, which consists of revenues less cost of sales (primarily
merchandise acquisition costs and in-bound freight) increased 41.7% to $10.8
million for the first quarter of 2001 from $7.6 million during the same period
in 2000. As a percentage of revenue, gross profit increased to 61.3% in the
first quarter of 2001 from 60.8% in the first quarter of 2000. This increase in
gross profit percentage was primarily the result of Gaiam's continuing efforts
to increase the number of proprietary products offered, on which Gaiam has
better margins than other products.
Selling and operating expenses, which consist primarily of sales and marketing
costs, commission and fulfillment expenses, increased 40.8%, consistent with the
revenue increase of 40.7%, to $8.5 million for the three months ended March 31,
2001 from $6.1 million for the same period in 2000. As a percentage
17
of revenues, selling and operating expenses were 48.3% for the comparable
periods in both 2001 and 2000.
Corporate, general and administrative expenses increased to $1.6 million during
the first quarter of 2001, from $1.1 million during 2000, primarily as a result
of Gaiam's growth. As a percentage of revenues, general and administrative
expenses decreased to 8.8% in the first quarter of 2001 from 8.9% for the same
period in 2000.
Operating income, as a result of the factors described above, increased 61.1% to
$735,365 for the three months ended March 31, 2001, from $456,359 for the
comparable period in 2000.
Gaiam recorded $67,698 in other income for the three months ended March 31, 2001
compared to $122,945 in other expense for the three month ended March 31, 2000.
Minority interest in net income of consolidated subsidiaries was $82,645 during
the first quarter of 2001, compared to $4,992 during the first quarter of 2000.
Income tax provision increased to $301,390 for the three months ended March 31,
2001 from $125,130 for the comparable period in 2000. The effective tax rate on
pre-tax income for both periods was 37.5%.
Net income, as a result of the factors described above, increased 106.1% to
$419,028 for the three months ended March 31, 2001, from $203,292 for the three
months ended March 31, 2000.
Year ended December 31, 2000 compared to year ended December 31, 1999:
Revenues increased 32.5% to $60.6 million in 2000 from $45.7 million in 1999.
Gaiam's internal growth rate was 24%, fueled primarily by sales to retail chains
and by our internet business. Business-to-business revenues grew 50.3% to $16.8
million in 2000 from $11.2 million in 1999.
Gross profit increased 33.6% to $36.8 million in 2000 from $27.5 million during
1999. As a percentage of revenue, gross profit increased to 60.7% in 2000 from
60.2% in 1999. This was primarily attributable to the growth of our proprietary
product offerings, on which we have better margins, which constituted 37% of
sales in 2000, up from 24% in 1999.
Selling and operating expenses increased 22.3%, which is less than the revenue
increase of 32.5%, to $27.3 million in 2000 from $22.3 million in 1999. As a
percentage of revenues, selling and operating expenses decreased to 45.1% in
2000 from 48.8% in 1999.
Corporate, general and administrative expenses increased to $5.1 million for
2000 from $3.1 million in 1999. As a percentage of revenues, general and
administrative expenses increased to 8.3% in 2000 from 6.7% in 1999, primarily
as a result of an increase in depreciation expense and the expenses associated
with being a public company.
Operating income, as a result of the factors described above, increased 108.4%
to $4.4 million in 2000 from $2.1 million in 1999.
Gaiam recorded $73,947 in other expense during 2000, compared to other income of
$971,159 in 1999. During 1999, Gaiam recognized gains on the sales of marketable
securities held by Gaiam of $2.5 million. Net interest expense declined to
$209,167 in 2000 from $365,294 in 1999, primarily as a result of interest income
generated in the third and fourth quarters of 2000.
18
Minority interest net income was $59,706 in 2000 and $50,858 during 1999.
Income tax provision increased to $1.6 million in 2000, an effective tax rate of
37.5% on pre-tax income, from $1.0 million in 1999.
Net income, as a result of the factors described above, increased 54.2% to $2.6
million in 2000 from $1.7 million during 1999.
Year ended December 31, 1999 compared to year ended December 31, 1998:
Revenues increased 48.8% to $45.7 million in 1999 from $30.7 million in 1998.
This revenue growth was primarily attributable to acquisitions. Gaiam's internal
growth rate was 18% for fiscal 1999. Business-to-business revenues grew 49.4% to
$11.2 million in 1999 compared to $7.5 million in 1998. The commencement of
internet sales in September 1999 resulted in $2.1 million of revenues, with $2.0
million recognized during the fourth quarter.
Gross profit increased 56.8% to $27.5 million in 1999 from $17.6 million in
1998. As a percentage of revenues, gross profit increased to 60.2% in 1999 from
57.1% in 1998. This was primarily attributable to increases in sales of
proprietary products, on which Gaiam has better margins than other products, and
continued better pricing from vendors due to increased volume.
Selling and operating expenses increased 57.5% to $22.3 million in 1999 compared
to $14.2 million in 1998. As a percentage of revenues, selling and operating
expenses increased to 48.8% in 1999 from 46.1% in 1998, as a result of the
increased emphasis on revenue growth, particularly in the business-to-business
and internet sectors, and the sourcing, development and branding of our
proprietary products.
Corporate, general and administrative expenses increased to $3.1 million in 1999
compared to $2.4 million in 1998. As a percentage of revenues, general and
administrative expenses decreased to 6.7% in 1999 from 7.8% in 1998.
Operating income, as a result of the factors described above, increased 115.7%
to $2.1 million in 1999 from $984,843 in 1998.
Other income, comprised primarily of gains on sales of marketable securities and
interest expense, increased to $605,865 in 1999 from $388,491 in 1998. This
change is primarily due to an increase in the number of securities sold during
1999, and was partially offset by higher interest expense due to borrowings and
other extraordinary expenses associated with our initial public offering, the
acquisition of the minority interest in Living Arts, and expenses associated
with moving our warehousing and distribution center.
Minority interest expense decreased to a negative $50,858 for 1999 compared to
$261,598 in 1998. The majority of this amount represents our former minority
partner's one-third interest in the Living Arts losses, net of tax. During 1998,
minority interest of $261,598 represented the 33% Living Arts minority interest,
net of tax, for the period September 14, 1998 through December 31, 1998.
Income tax provision grew to $1.0 million in 1999, as compared to $251,955 in
1998. The decrease in the effective tax rate to 18.4% of pre-tax net income for
1998 was primarily due to a one-time tax benefit related to the 1998 settlement
of a Living Arts legal judgment incurred prior to Gaiam's ownership.
19
Net income, as a result of the factors described above, increased 99.9% to $1.7
million for 1999 from $859,781 for 1998.
Selected Quarterly Operating Results
The following table sets forth our unaudited quarterly results of operations for
each of the quarters in 1999 and 2000 and the first quarter of 2001. In
management's opinion, this unaudited financial information includes all
adjustments, consisting solely of normal recurring accruals and adjustments,
necessary for a fair presentation of the results of operations for the quarters
presented. You should read this financial information in conjunction with our
consolidated financial statements and related notes included elsewhere in this
prospectus. The results of operations for any quarter are not necessarily
indicative of future results of operations.
Quarter Ended
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1999 1999 1999 1999 2000 2000 2000 2000 2001
---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands, except per share data)
Net revenue........... $9,495 $8,068 $10,288 $17,874 $12,558 $11,386 $13,630 $23,014 $17,672
Gross profit......... 5,639 4,849 6,222 10,839 7,636 6,730 8,129 14,300 10,824
Operating income
(loss)................ 110 (294) 393 1,915 456 295 982 2,695 735
Net income...... 106 72 551 989 203 201 579 1,666 419
Net income (loss)
per share............. $ 0.01 $ 0.01 $ 0.06 $ 0.10 $ 0.02 $ 0.02 $ 0.05 $ 0.14 $ 0.04
Weighted average
Shares
outstanding........... 8,215 8,420 8,826 10,633 11,505 11,552 11,538 11,506 11,563
Quarterly fluctuations in Gaiam's revenues and operating results are due to
a number of factors, including the timing of new product introductions and
mailings to customers, advertising, acquisitions (including costs of
acquisitions and expenses related to integration of acquisitions), competition,
pricing of products by vendors and expenditures on our systems and
infrastructure. The impact on revenue and operating results, due to the timing
and extent of these factors, can be significant. Our sales are also affected by
seasonal influences. On an aggregate basis, Gaiam experiences strongest revenues
and net income in the fourth quarter due to increased holiday spending.
Liquidity and Capital Resources
Gaiam's capital needs arise from working capital required to fund our
operations, capital expenditures related to expansions and improvements to
Gaiam's infrastructure, development of e-commerce, and funds required in
connection with the acquisitions of new businesses and Gaiam's anticipated
future growth. These capital requirements depend on numerous factors, including
the rate of market acceptance of Gaiam's product offerings, the ability to
expand Gaiam's customer base, the cost of ongoing upgrades to Gaiam's product
offerings, the level of expenditures for sales and marketing, the level of
investment in distribution and other factors. The timing and amount of these
capital requirements cannot accurately be predicted. Additionally, Gaiam
continues to evaluate possible investments in businesses, products and
technologies, and plans to expand sales and marketing programs and conduct more
aggressive brand promotions.
20
During the first six months of 1999, Gaiam raised $1.45 million from the
private placement of 331,429 shares of Class A common stock and $1.425 million
in debentures. The privately placed shares were sold at $4.375 per share, and
the 8% convertible debentures matured on the earlier of one year after the date
of the debenture or the closing date of the initial public offering. In October
1999, Gaiam repaid $500,000 of the convertible debentures and, simultaneous with
the closing of the initial public offering, converted the remaining $1.475
million in debentures to 295,000 shares of Class A common stock.
Gaiam's initial public offering of 1,705,000 shares of Class A common stock
at $5.00 per share was completed in October 1999. Simultaneous with this
offering, Gaiam converted $1.475 million in debentures to 295,000 shares of
common stock, resulting in a total issuance of 2,000,000 shares. The offering's
underwriters also exercised their overallotment option for 102,861 additional
shares during November 1999. Net proceeds to Gaiam, after deducting all
commissions and expenses associated with the offering, were $6.1 million.
During April 2001, Gaiam entered into a new loan agreement with Wells Fargo
increasing Gaiam's borrowing capacity from $6.5 million to $14.9 million. The
new revolving line of credit, which extends through June 30, 2003, allows
borrowings up to $10 million based upon the collateral value of Gaiam's accounts
receivable and inventory held for resale. Wells Fargo has also provided Gaiam
with a term loan in the amount of up to $4.9 million, which matures on July 1,
2006, and allowed a $537,228 term note assumed as part of the Real Goods merger
to remain outstanding. Borrowings under the agreement are secured by a pledge
of Gaiam's assets, and bear interest at the lower of prime rate less 50 basis
points or LIBOR plus 275 basis points. The Wells Fargo credit agreement contains
various financial covenants and also prohibits Gaiam from paying cash dividends
to shareholders.
Gaiam's operating activities provided net cash of $1.2 million for the
three months ended March 31, 2001, primarily as a result of an increase in cash
generated from net income and depreciation and amortization. Gaiam's operating
activities used net cash of $1.7 million and $4.6 million during 2000 and 1999,
respectively, and provided $904,245 of net cash in 1998. Gaiam's net cash used
in operating activities for 2000 arose primarily from increases in accounts
receivable of $4.1 million associated with growth in the business-to-business
segment, increased inventories of $1.7 million correlating to increased business
volumes, and $1.0 million to produce additional Living Arts video titles. These
uses were partially offset by net cash provided by operations of $4.8 million.
Net cash used during 1999 was primarily a result of increases in accounts
receivable and inventories associated with business-to-business growth. Net cash
provided during 1998 was primarily a result of Gaiam's net income.
Gaiam's investing and acquisition activities used cash of $3.9 million for
the three months ended March 31, 2001. During the first quarter of 2001, Gaiam
acquired all of the stock and net assets of Earthlings, Inc. and Self Care, Inc.
for a total combined purchase price for both companies of $3.8 million, and
completed its merger with Real Goods Trading Corporation. Gaiam's investing
activities provided net cash of $2.9 million during 2000 and used cash of $2.4
and $1.1 million during 1999 and 1998, respectively. In June 2000, Gaiam sold
6,000 shares of Redeemable Class A preferred stock in Gaiam.com, Inc. at a price
of $1,000 per share for an aggregate price of $6 million. On June 30, 2000,
Gaiam and Whole Foods Market, Inc. merged their internet businesses into
Gaiam.com, Inc. Gaiam owns 50.1% of Gaiam.com, Whole Foods Market currently owns
35% and the remainder is owned by various venture capital funds. As part of this
transaction, Whole Foods Market, through its subsidiary, contributed $6 million
in cash plus other assets to Gaiam.com. During 2000, Gaiam used approximately
$8.7 million primarily for the Gaiam.com website, the purchase of a 160 acre
conference resort in Paulden, Arizona (Gaiam Yoga Center), and additional
infrastructure improvements to support Gaiam's growth. During 1999, Gaiam
generated $2.5 million from the sale of marketable securities and used $2.7
million primarily for its acquisitions. Gaiam also used $2.2 million primarily
to expand and upgrade the
21
internet, computer and telecommunications systems. During 1998, Gaiam used cash
to purchase a majority interest in Living Arts.
During the three months ended March 31, 2001, Gaiam's financing activities
provided $490,290 in cash, as borrowing under Gaiam's line of credit agreement
increased $500,000. Gaiam's financing activities provided net cash of $3.5
million during 2000, primarily from increased borrowings on Gaiam's line of
credit. During 1999, Gaiam's financing activities generated $9.5 million in net
cash, primarily from the initial public offering. During 1998, Gaiam's
financing activities generated $175,300, which resulted from the private
placement of shares and debentures, net of the reduction in other outstanding
debt.
We believe our available cash, cash expected to be generated from
operations, and borrowing capabilities will be sufficient to fund our operations
on both a short-term and long-term basis. However, our projected cash needs may
change as a result of acquisitions, unforeseen operational difficulties or other
factors.
In the normal course of our business, we investigate, evaluate and discuss
acquisition, joint venture, majority and minority investment, strategic
relationship and other business combination opportunities in the LOHAS market.
In the event of any future investment, acquisition or joint venture
opportunities, we may consider using then-available liquidity, issuing equity
securities or incurring additional indebtedness.
Quantitative and Qualitative Disclosure About Market Risk
We do not believe that any of our financial instruments have significant
risk associated with market sensitivity. We are not exposed to financial market
risks from changes in foreign currency exchange rates and are only minimally
impacted by changes in interest rates. Borrowings under our bank credit facility
are at a variable rate of interest, and based on the current level of
borrowings, we experience only modest changes in interest expense when market
interest rates change. However, in the future, we may enter into transactions
denominated in non-U.S. currencies or increase the level of our borrowings,
which could increase our exposure to these market risks. We have not used, and
currently do not contemplate using, any derivative financial instruments.
22
OUR BUSINESS
Gaiam
Gaiam is a lifestyle company providing a broad selection of information,
products and services to customers who value natural health, personal
development and renewable energy. We offer our customers the ability to make
purchasing decisions based on these values while striving to provide products at
prices comparable to conventional alternatives. Our direct customer base is 80%
female and 70% college-educated, has a median age of 44 and has an average
annual household income of approximately $60,000.
Gaiam has established itself as a leading lifestyle brand, information
resource and authority in the LOHAS market and seeks to become a unifying symbol
of the emerging LOHAS lifestyle. Our lifestyle brand is built around our ability
to develop and offer content, products and solutions to consumers in the LOHAS
market. Our content forms the basis of our proprietary products, which yield
our highest margins, and drives demand for parallel product and service
offerings. We market our products and services direct-to-consumers and business-
to-business through five sales channels: our catalogs, the internet, retailers,
media and corporate accounts. We distribute our products in each of these sales
channels from a single fulfillment center. Gaiam's operations are vertically
integrated from content creation, through product development and sourcing, to
customer service and fulfillment.
The LOHAS Market
The LOHAS market, which represented $227 billion in sales in 2000 according
to Natural Business Communication, consists of five main sectors:
. Sustainable Economy. Renewable energy, energy conservation, recycled goods,
environmental management services, sustainable manufacturing processes and
related information and services.
. Healthy Living. Natural and organic foods, dietary supplements, personal
care products and related information and services.
. Alternative Healthcare. Health and wellness solutions and alternative
health practices.
. Personal Development. Solutions, information, products and experiences
relating to mind, body and spiritual development.
. Ecological Lifestyles. Environmentally friendly cleaning and household
products, organic cotton clothing and bedding, and eco-tourism.
Gaiam participates in all five sectors of the LOHAS industry.
23
Our Products
We currently stock over 7,000 SKUs. Our best selling products, by LOHAS
sector, are as follows:
-----------------------------------------------------------------------------------------------------------
Sustainable Healthy Living Alternative Personal Ecological
Economy Healthcare Development Lifestyles
-----------------------------------------------------------------------------------------------------------
Solar Panels and Air Filters Natural Lighting Yoga Information Natural Cleaners
Accessories and Accessories
-----------------------------------------------------------------------------------------------------------
Energy Systems Water Filters Back and Neck Care Pilates Information Organic Cotton
Products and Accessories Bedding
-----------------------------------------------------------------------------------------------------------
Energy Efficient Personal Air Supply Massage Accessories Meditation Organic Cotton
Lighting Information and Towels
Accessories
-----------------------------------------------------------------------------------------------------------
Energy Information EMF Filters Stress Relief Fitness Equipment Organic Cotton
Clothing
-----------------------------------------------------------------------------------------------------------
Evaporative Coolers Personal Care Allergy and Pain Recycled Household
Products Relief Performance Wear Paper Products
-----------------------------------------------------------------------------------------------------------
Intertie Systems Natural Beauty Sleep Enhancers Personal Growth Natural Garden
Products Information Products
-----------------------------------------------------------------------------------------------------------
Composters Whole Foods Brand Wellness Information Kids Fitness Non-Toxic Pest
Supplements Products and Control
Information
-----------------------------------------------------------------------------------------------------------
Air Dryers Natural Pet Care Aroma Therapy Relaxation Music Green Cotton Home
Accessories
-----------------------------------------------------------------------------------------------------------
Our Sales Channels
We conduct our direct-to-consumer business through our catalogs, the
internet and media. Our business-to-business customers are primarily retailers,
corporate accounts and the media.
. Catalogs
Gaiam offers a variety of LOHAS products directly to the consumer through
our catalogs and through consumer lifestyle publications such as Natural Home,
Self, Shape and Yoga Journal. We produce catalogs in all sectors of LOHAS, using
our sub-brands Gaiam Harmony (ecological lifestyles and healthy living), Gaiam
Living Arts (personal development), Gaiam Innerbalance (alternative healthcare
and healthy living), and Gaiam Real Goods (sustainable economy). Our direct
customer file has grown from approximately 300,000 as of December 31, 1996 to
over 1.7 million as of the end of May 2001.
. Internet
We use the internet to sell our products and to provide information on the
LOHAS lifestyle. We currently offer over 7,000 SKUs on our website,
www.gaiam.com. We promote our website through our visual media, catalogs, print
-------------
publications, and product packaging. A key component of our internet approach
is to provide customer support for internet sales from our in-house call center.
According to a Jupiter Communications study, 90% of on-line customers prefer
human interaction when they require
24
customer service. This is particularly important for Gaiam because the use of
many of our products is enhanced by the extensive product education and
information that we make available online and through customer service.
. Retailers
Since the inception of our retailer channel in 1998, we have increased
its breadth and diversity, expanding our coverage to over 23,000 stores in the
United States as of the end of May 2001. Gaiam products currently are sold in a
variety of leading retailers, including lifestyle stores such as Discovery
Channel Stores and The Walking Company; women's beauty stores such as Ulta and
Origins; Sporting Goods Chains such as Sports Authority and Big 5 home
furnishing stores such as Bed, Bath and Beyond; natural food stores such as
Whole Foods Market; sporting goods stores such as Dick's and Galyan's; book
stores such as Borders and Barnes & Noble; music stores such as Musicland and
Wherehouse Music; mass merchants such as Target, Kohl's and Wal-Mart; and e-
tailers such as Amazon.com. A number of these retailers display our products in
store-within-a-store Gaiam lifestyle shops. We believe we have an opportunity to
become the single source solution for Lohas products for retail accounts.In
addition, since entering the Canadian market in May of 2000, we have expanded to
over 2,500 stores as of the end of May 2001.
. Media
Gaiam produces information and programming targeted to consumers who
value natural health, personal development and renewable energy. Currently,
thirteen of our programs are broadcast in the United States and five are
broadcast internationally. Our programs are also available in approximately
600,000 hotel rooms in North America through on-demand visual media programming
available in such hotels as Four Seasons, Hyatt, InterContinental, Sheraton and
Westin. Our media partners include the Discovery Channel, Universal Studios and
On Command. Gaiam also publishes print media on personal development,
alternative healthcare and sustainable living and operates three music labels
with approximately 150 titles.
. Corporate Accounts
Gaiam provides products and services to businesses that are considering
renewable energy solutions or desire healthy and natural alternatives to
traditional products or processes. Such products and services include
environmental reviews, organic cotton robes and bedding, and solar-powered
safety and security systems. In addition, we have developed a line of
promotional products in organic cotton that includes t-shirts, sweatshirts, caps
and bags and other similar products for customers such as Mercedes Benz and
Aveda.
We have a design and consulting service for corporate accounts that
assesses their energy needs and makes recommendations for more efficient
solutions. We have provided our consulting services to clients including The
White House, NASA, Disney, Sony, Fetzer Winery, AT&T, the U.S. Departments of
Energy and Defense and the Government of Brazil. We expect increased demand for
this service because of national energy policy concerns and the ongoing energy
crisis in California.
Our Strategy
. Strengthen Our Lifestyle Brand
Our goal is to maintain the Gaiam brand as an authority in the LOHAS market
and to establish Gaiam as a unifying symbol of the emerging LOHAS lifestyle. We
plan to strengthen the Gaiam brand by growing our media channel, increasing our
marketing efforts, strengthening relationships with retailers, and increasing
the breadth of our proprietary product and audio, video and print media
25
offerings. We intend to maintain our commitment to a high level of customer
service. We maintain a "no-risk guarantee" policy, whereby a customer is
provided a full refund for products that are returned at any time, for any
reason. Our products, services and information generally bear the Gaiam symbol.
. Capitalize on Our Multi-channel Approach
Our multi-channel approach makes purchasing our lifestyle products
convenient regardless of the channel customers prefer. In our direct-to-
consumer business we are open 24 hours a day, offering our entire selection of
products on our internet site.
In our business-to-business segment, we are expanding our retail presence.
We have expanded to 25,500 current retail points and we are building store-
within-a-store Gaiam lifestyle shops in a variety of stores, including Whole
Foods Markets, Discovery Channel Stores, Dick's and Galyan's. We are expanding
into women's beauty stores such as Ulta and Origins, sporting goods chains such
as Big 5, home furnishing stores such as Bed, Bath and Beyond and mass merchants
such as Target and Wal-Mart. Our Gaiam Organix line is being launched in August
2001 in department and specialty stores such as Jacobsons and Fred Segal.
Our media channel, especially television broadcast and on-demand cable
programming, enables us to reach customers who might not be familiar with Gaiam
through our other sales channels.
. Expand Our Proprietary Product Selection
Our proprietary products, which we introduced in 1997, represented 40% of
our revenues in the first quarter of 2001. These products carry a higher margin
and distinguish us from many of our competitors. We now offer over 2,000 SKUs of
proprietary products that range from media products to organic cotton baby
clothes. We are expanding our supply chain with overseas suppliers in Europe
and South America and are continuing to develop and source new products in each
of the five LOHAS sectors.
Based on our success with bedding and bath products, infant clothing and
performance wear, we are planning to offer these products into our business-to-
business segment under the Gaiam Organix brand. We believe the demand for
naturally processed organic cotton clothing and home furnishing is increasing,
and we have an opportunity to increase our brand presence in our current
retailers as well as add new retailers with this initiative. We plan to use our
existing store-within-a-store lifestyle presence to support this initiative.
. Broaden Our Content Through Growth of Gaiam Media
Our media channel introduces customers to Gaiam and helps to establish
Gaiam as an authority in the LOHAS market. Our visual media programs are
currently broadcast both domestically and internationally, are shown in
approximately 600,000 hotel rooms in North America and are packaged as videos,
DVDs and CDs. Our print media becomes content for national publications,
catalogs, the internet and books.
We intend to continue to expand our media content. We will add visual
media programming on wellness, longevity and sustainable living, as well as
specialty programs on pregnancy and childcare. We expect to expand
international distribution of our visual media. We also plan to develop or
acquire additional media properties in music, magazines and book publishing.
. Complement our Existing Business with Selective Strategic Acquisitions
26
Even though our strategy is not dependent on acquisitions, we will consider
strategic acquisitions in the LOHAS industry that complement our existing
business, especially companies with a strong brand identity and with customer
and product information databases that augment ours. Gaiam generally allows the
acquired company's management team to retain responsibility for front-end
business functions such as creative presentation and marketing, while
consolidating operational functions under the Gaiam organization to realize
economies of scale.
Our Operations
Gaiam's brand is built around a vertically integrated business strategy,
which enables us to develop content, products and solutions for our LOHAS market
consumers. From our strong focus on new content creation, we establish a basis
from which to develop additional proprietary product lines and extend our
content-based merchandise for distribution through our five sales channels from
our single fulfillment center.
. Content Creation
We have in-house production and creative services terms that designs all of
our content, packaging, branding, media and marketing pieces, as well as our
website. After identifying a topic or solution of interest to our customers, our
creative team researches an idea and identifies an expert, where appropriate, to
develop our content. We use written materials to create print media, internet
content, packaging and magazine and catalog editorials. Using our own production
capabilities and editing facilities, we produce high quality visual media
content that we distribute by broadcast, on-demand cable programming, videotape
or DVD. We develop and maintain a library of lifestyle photography that we use
primarily for our print media, website, catalogs and packaging. We either
develop or purchase our audio titles, which are comprised primarily of
relaxation music that we sell in CD form, and background music for our visual
media content.
. Product Development and Sourcing
Gaiam branded products, are sold in our five sales channels. Non-
proprietary products are only available through our catalogs and over the
internet where we initially test products before branding them and distributing
them through our other sales channels. Proprietary product sales have increased
as a percentage of our revenue from 2% in 1997 to approximately 40% in the first
quarter of 2001. We are able to leverage our product development costs across
our multiple sales channels.
Our proprietary products are designed by our product development team,
sourced both domestically and internationally by our merchandisers and produced
by our suppliers to our specifications. Our suppliers are screened for their
environmental and social responsibility before contracts are awarded. In order
to minimize risk, we have identified an alternate supplier in a separate
location for most products. No single supplier is responsible for more than 3%
of our business except our video duplication, which is done with only one
supplier to minimize production costs. However, duplicate masters of each
program are maintained in an off-site vault allowing us to be able to switch to
a new duplicator with minimal down time.
. Customer Service
Gaiam focuses on building and maintaining customer relationships that
thrive on loyalty and trust. We maintain a "no-risk guarantee" policy, whereby
a customer is provided a full refund for
27
products that are returned at any time, for any reason. Our in-house customer
service department includes product specialists who have specific product
knowledge and assist customers in selecting products and solutions that meet
their needs. We employ telephone routing software that directs each call to the
appropriate representative. Our policy is to ship orders no later than the next
business day, which we accomplish by stocking inventory that supports over 90%
of our orders. We believe that by offering exceptional customer service we
encourage repeat purchases by our customers, enhance our brand identity and
reputation and build stronger relationships with our customers.
. Fulfillment
During 2000, we moved from our 64,000 square foot facility into our new
208,000 square foot fulfillment center near Cincinnati, Ohio, which provides
significant capacity to support the growth of our business. This central United
States location allows us to achieve shipping cost efficiencies to most
locations. The center is also located within 30 minutes of several major
shipping company hubs. We use a supply chain management system that supports
our entire operation, including fulfillment, inventory management, and customer
service. Our fulfillment center is connected to our other facilities by a
state-of-the art voice-over-IP telecom network that allows us to maintain a high
degree of connectivity within our organization.
. Executive Team
Gaiam has an experienced team of corporate managers. Our founder and Chief
Executive Officer, Jirka Rysavy, was the founder and Chief Executive Officer of
Corporate Express, Inc., which he built to a Fortune 500 company. He was also
the founder and Chief Executive Officer of Crystal Market, Inc., which was sold
to become the first Wild Oats Markets store. Our President and Chief Operating
Officer, Lynn Powers, has over 15 years of senior management experience in the
retail industry as a Senior Vice President of Merchandising, Marketing and
Strategic Planning of Miller's Outpost, which she helped to grow from a $25
million startup to over $500 million in revenues. Our Chief Information
Officer, Pavel Bouska, was a member of the founding team and an officer of
Corporate Express for over 10 years, serving in various positions, including
Chief Information Officer and Vice President of Information Systems.
Our Business Segments
We separate our business into two business segments: direct-to-consumer and
business-to-business. Business-to-business revenues as a percentage of total
revenues increased to 40.4% in the first quarter of 2001 from 12.5% in 1998.
See Note 12 to our consolidated financial statements included in this prospectus
for further information on our segments.
Our Intellectual Property
Gaiam, Gaiam.com and various product names are subject to trademark or
pending trademark applications filed or hold by Gaiam or one of our wholly- or
majority-owned subsidiaries. We also currently hold various internet domain
names relating to our brand, including gaiam.com and gaia.com. We believe these
trademarks and domain names are significant assets to our business.
Our Competitive Position
We believe that the LOHAS market is characterized by fragmented supplier
and distribution networks, and we are not aware of a dominant leader. Gaiam's
goal is to establish itself as the market leader.
28
Our business is evolving and competitive. Larger and better established
entities may acquire, invest in or form joint ventures with our competitors.
Many of these entities have longer operating histories and have greater
financial and marketing resources than we have. Increased competition from
these or other competitors could reduce our revenue and profits. In addition,
the smaller businesses we compete against may be able to more effectively
personalize their relationships with customers.
Because Gaiam uses multi-channel distribution for our products, we compete
with various producers of similar products and services. Our competitors include
PPI Entertainment, Goldhil Media, Greenmarketplace.com, thousands of small,
local and regional businesses, and product lines or items that are offered by
large retailers, manufacturers, publishers and media producers.
We believe the principal competitive factors in the LOHAS market are
authenticity of information, distinctiveness of products and services, quality
of product, brand recognition and price. We believe we compete favorably on all
these relevant factors.
We expect industry consolidation to increase competition. As our
competitors grow, they may adopt aggressive pricing or inventory policies, which
could result in reduced operating margins, loss of market share and a diminished
brand franchise.
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 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 revenues and, accordingly, our
financial prospects.
Our Employees
As of May 31, 2001, Gaiam, together with our wholly-owned and majority-
owned subsidiaries, employed approximately 247 persons. None of our employees
is covered by a collective bargaining agreement.
Our Facilities
The following table sets forth information relating to our principal
facilities:
Lease
Location Size Use Expiration
-------- ---- --- ----------
Boulder County, CO 32,000 sq. ft. Headquarters and customer service March 2002
Cincinnati, OH 208,100 sq. ft. Fulfillment center March 2006
Venice, CA 9,000 sq. ft. Creative staff offices July 2005
Hopland, CA 12 acres Renewable Energy Demo Site Owned
We have options to renew our headquarters lease. We believe our facilities
are adequate to meet our current needs and that suitable additional facilities
will be available for lease or purchase when, and as, we need them.
Regulatory Matters
29
There are a number of different bills under consideration by Congress and
various state legislatures that would restrict disclosure of consumers' personal
information, which may make it more difficult for Gaiam to generate additional
names for its direct marketing, and restrict a company's right to send
unsolicited electronic mail or printed materials. Although Gaiam believes it is
generally in compliance with current laws and regulations and that these laws
and regulations have not had a significant impact on our business to date, it is
possible that existing or future regulatory requirements will impose a
significant burden on us.
We generally collect internet and catalog sales taxes only on sales to
residents of the state in which Gaiam is headquartered, where orders are
fulfilled or where Gaiam has a location. Currently, Gaiam collects sales taxes
in California, Colorado and Ohio. A number of legislative proposals have been
made at the federal, state and local level, and by foreign governments, that
would impose additional taxes on the sale of goods and services over the
internet and certain states have taken measures to tax internet-related
activities. Although Congress placed a moratorium on state and local taxes on
internet access or on discriminatory taxes on electronic commerce, existing
state or local laws were expressly excepted from this moratorium. Further, once
this moratorium is lifted, some type of federal and/or state taxes may be
imposed upon internet commerce.
Our business is also subject to a number of other governmental regulations,
including the Mail or Telephone Order Merchandise Rule and related regulations
of the Federal Trade Commission. These regulations prohibit unfair methods of
competition and unfair or deceptive acts or practices in connection with mail
and telephone order sales and require sellers of mail and telephone order
merchandise to conform to certain rules of conduct with respect to shipping
dates and shipping delays. We are also subject to regulations of the U.S. Postal
Service and various state and local consumer protection agencies relating to
matters such as advertising, order solicitation, shipment deadlines and customer
refunds and returns. In addition, merchandise imported by Gaiam is subject to
import and customs duties and, in some cases, import quotas.
Legal Proceedings
We are subject to non-material legal proceedings arising in the ordinary
course of our business. We do not believe that any of these proceedings will
materially adversely affect our business.
30
MANAGEMENT
Executive Officers And Directors
Our executive officers and directors, their respective ages as of June 20,
2001 and their positions are as follows:
Name Age Position
---- --- --------
Jirka Rysavy............. 47 Founder, Chairman of the Board and Chief Executive Officer
Lynn Powers.............. 52 President, Chief Operating Officer and Director
Pavel Bouska............. 47 Executive Vice President and Chief Information Officer
Barnet M. Feinblum....... 53 Director
John Mackey.............. 47 Director
Barbara Mowry............ 53 Director
Paul H. Ray.............. 61 Director
JIRKA RYSAVY. Founder, Chairman and Chief Executive Officer of Gaiam. He
has been Chairman since Gaiam's inception and became the full-time Chief
Executive Officer in December 1998. In 1986, Mr. Rysavy founded Corporate
Express, Inc., which, under his leadership, grew to become a Fortune 500 company
supplying office and computer products and services. He was its Chairman and
Chief Executive Officer until September 1998. Mr. Rysavy also founded and served
as Chairman and Chief Executive Officer of Crystal Market, Inc., a health foods
market, which was sold in 1987 and became the first Wild Oats Markets store. Mr.
Rysavy is also a director of Whole Foods Market, 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.
BARNET M. FEINBLUM. Director since October 1999. Mr. Feinblum is a director
of Horizon Organic Dairy and served as the President and Chief Executive Officer
of Horizon from May 1995 to January 2000. From July 1993 through March 1995, Mr.
Feinblum was the President of Natural Venture Partners, a private investment
company. From August 1976 until August 1993, Mr. Feinblum held various positions
at Celestial Seasonings, Inc., including President, Chief Executive Officer, and
Chairman of the Board. Mr. Feinblum is also a director of Seventh Generation,
Inc.
JOHN MACKEY. Director since September 2000. Mr. Mackey has been the
Chairman and Chief Executive Officer of Whole Foods Market, Inc., the world's
largest natural food retailer, since he co-founded the company 20 years ago. Mr.
Mackey is also a director of Jamba Juice.
BARBARA MOWRY. Director since October 1999. From November 1997 until
February 2001, Ms. Mowry was the President and Chief Executive Officer of
Requisite Technology, a business-to-
31
business e-commerce company specializing in the creation and management of
electronic content and catalogs. Prior to joining Requisite Technology, Ms.
Mowry was an officer of Telecommunications, Inc. (cable television) from 1995 to
1997. In 1990, Ms. Mowry founded, and until 1995 served as Chief Executive
Officer of, The Mowry Company, a relationship marketing firm focusing on the
development of customer relations for businesses.
PAUL H. RAY. Director since October 1999. Mr. Ray is a senior partner in
Integral Partnership, a consulting firm specializing in Cultural Creative
topics. From November 1986 to December 2000, he was Executive Vice President of
American LIVES, Inc., a market research and opinion polling firm. Prior to
joining American LIVES, Mr. Ray was Chief of Policy Research on Energy
Conservation at the Department of Energy, Mines and Resources of the Government
of Canada from 1981 to 1983. From 1973 to 1981, Mr. Ray was Associate Professor
of Urban Planning at the University of Michigan. He is the author of "The
Integral Culture Survey," which first identified the Cultural Creatives
subculture.
Each director serves for a one-year term. Each officer serves at the
discretion of the Board of Directors. There are no family relationships among
any of the directors or officers of Gaiam.
Committees of the Board of Directors
Our board has standing audit and compensation committees. We have adopted
written charters for both committees.
Audit Committee. Our audit committee consists of Messrs. Feinblum and Ray
and Ms. Mowry, and each member of the committee is independent within the
meaning of applicable NASDAQ rules. Ms. Mowry serves as chairperson of the audit
committee. The audit committee oversees (a) management's maintenance of the
reliability and integrity of our accounting policies and financial reporting and
disclosure practices; (b) management's establishment and maintenance of
processes to assure that an adequate system of internal control is functioning;
and (c) management's establishment and maintenance of processes to assure our
compliance with all laws, regulations and company policies relating to financial
reporting. The audit committee held one meeting during fiscal 2000.
Compensation Committee. Our compensation committee consists of Messrs.
Feinblum and Ray and Ms. Mowry. Mr. Feinblum serves as chairperson of the
compensation committee. The compensation committee establishes compensation
amounts and policies applicable to executive officers and establishes salaries,
bonuses and other compensation plans and matters for executive officers of Gaiam
and administers Gaiam's stock option plans and employee stock purchase plan. The
compensation committee held four meetings during fiscal 2000.
We do not have a nominating committee, and nominations for directors are
made by our board. Our bylaws set forth certain procedures that are required to
be followed by shareholders in nominating persons for election to our board.
Generally, written notice of a proposed nomination must be received by the
Secretary of the Corporation not later than the 45/th/ day nor earlier than the
70/th/ day prior to the anniversary of the mailing of the preceding year's proxy
materials.
Compensation Committee Interlocks and Insider Participation
The compensation committee consisted of Messrs. Feinblum and Ray and Ms.
Mowry during fiscal 2000. None of the members of the compensation committee is
currently, or has ever been at any time since our formation, one of our officers
or employees or an officer or employee of any of our subsidiaries. During 2000,
no executive officer of Gaiam served as a member of the board of directors or
32
compensation committee of any entity that had one or more executive officers
serving as a member of our Board of Directors or compensation committee.
Director Compensation
Directors who are not employees of Gaiam or its affiliates are paid a fee
of $3,000 for each meeting of our board that they attend, and a fee of $1,000
for each telephonic meeting attended. In addition, non-employee directors are
paid a fee of $500 for attendance at each committee meeting and non-employee
chairpersons of each standing committee receive an annual fee of $1,000. All
directors have elected to receive their compensation in Gaiam shares.
During 1999, each non-employee director received a stock option to acquire
10,000 shares of class A common stock at an exercise price of $5, which was the
offering price in our initial public offering. Mr. Mackey received a stock
option to acquire 10,000 shares of Class A Common Stock at an exercise price of
$16.375 when he joined the Board in September 2000.
Limitation of Liability and Indemnification Matters
Gaiam's charter provides indemnity to its directors and officers to the
extent permitted by Colorado law. The charter also includes provisions to
eliminate the personal liability of its directors to Gaiam and its shareholders
to the fullest extent permitted by Colorado law. Under current law, exculpation
would cover a director's breaches of fiduciary duty, except for:
. breaches of a person's duty of loyalty to Gaiam,
. instances where a person is found not to have acted in good faith,
. instances where a person received an improper personal benefit as the
result of the breach, and
. acts in violation of the Colorado Business Corporation Act.
Gaiam's bylaws provide that Gaiam will indemnify its directors, officers
and employees against judgments, fines, amounts paid in settlement and
reasonable expenses.
Executive Compensation
The following table sets forth the compensation, for the years ended
December 31, 1998, 1999 and 2000, of Gaiam's executive officers, Mr. Rysavy and
Ms. Powers. Information is also included with respect to compensation for three
of Gaiam's Vice Presidents for 1998, 1999 and 2000:
33
SUMMARY COMPENSATION TABLE
Name and Principal Position Year Annual Long Term
Compensation Compensation(1)
--------------------------- ---- -------------------------- -----------
Securities
Underlying
Salary Bonus Options
------------ --------- -----------
Jirka Rysavy
Chairman and Chief Executive
Officer 2000 $140,385 -- --
1999 125,000 -- 200,000
1998 --(2) -- --
Lynn Powers
President and Chief
Operating Officer 2000 140,385 $100,000 90,000
1999 125,000 -- 160,000
1998 110,009 -- --
Pavel Bouska
Chief Information Officer 2000 134,231 20,000 --
1999 100,632 -- 80,000
1998 -- -- --
Janet Mathews
Chief Financial Officer 2000 116,724 30,000 --
1999 104,592 -- 20,000
1998 102,686 10,000 --
Linda West
Vice President Merchandising 2000 96,154 15,000 --
1999 88,077 -- 20,000
1998 83,076 10,000 --
________________________
(1) See table below regarding stock option grants.
(2) Gaiam began compensating Mr. Rysavy in January 1999.
Stock Option Grants
The following table provides information with respect to the individual
stock option grants to the named officers under the 1999 Long-Term Incentive
Plan during fiscal year 2000. Options under the plan vest at 2% per month during
the 11/th/ through the 60/th/ month after the grant.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Rates of Stock
Underlying Granted to Exercise or Appreciation for
Options Employees in Base Price Expiration Option Term(1)
--------------------------
Name Granted(#) Fiscal Year ($/Share) Date 5%($) 10%($)
---- ---------- ------------- ----------- ---------- ----------- ------------
Lynn Powers............. 90,000 30.8% $ 15.25 December 6, 2007 558,745 1,302,114
_____________________
(1) The 5% and 10% assumed annual rates of compound stock price appreciation
over the term of the options are computed in accordance with the rules and
regulations of the Securities and Exchange Commission and do not represent
Gaiam's estimate of stock price appreciation or a projection by Gaiam of future
stock prices.
34
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table provides information, with respect to the named
officers, concerning the value of unexercised stock options exercisable for
Gaiam Class A Common Stock held as of December 31, 2000. In 2000, no named
officer exercised any stock options.
Number of Shares
Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
December 31, 2000 (#) at December 31, 2000 (1)
-------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Jirka Rysavy......... 32,000 168,000 354,000 1,858,500
Lynn Powers.......... 25,600 224,400 283,200 1,503,675
Pavel Bouska......... 12,800 67,200 141,600 743,400
Janet Mathews........ 2,000 18,000 21,875 193,125
Linda West........... 2,000 18,000 21,875 193,125
_____________
(1) The value of unexercised in-the-money options is based on the difference
between the exercise price of the individual stock options and the closing price
of $15 7/16 as reported on the NASDAQ exchange on December 31, 2000.
Employment Agreements
Gaiam does not have any employment agreements with any of its executive
officers and does not typically enter into written employment agreements with
any employees. However, Gaiam's directors, officers and managers are required to
sign a confidentiality agreement and, upon receiving a stock option grant, a
two-year non-compete agreement commencing with the date they leave Gaiam.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 1, 1998, Mr. Rysavy sold InnerBalance to Gaiam for a $531,000
note carrying interest at 8% per annum, due June 30, 2001. A portion of the note
was repaid in 1998. On January 1, 1999, Gaiam issued a $289,000 8% debenture to
Mr. Rysavy for the balance. This debenture was repaid in full on June 30, 1999.
On December 7, 1998, Ms. Powers exercised warrants she received in 1996 to
purchase 40,000 shares at $1.25 per share and also purchased $50,000 in
debentures issued by Gaiam. The debenture was subject to mandatory conversion
into shares simultaneous with the closing of Gaiam's initial public offering at
the initial offering price and bore interest at 8% per annum. Simultaneous with
the closing of Gaiam's initial public offering in October 1999, Ms. Powers'
debentures were automatically converted into 10,000 shares, which are restricted
securities as defined in Rule 144 under the Securities Act. Accrued and unpaid
interest was paid in cash.
Certain sales of securities available for resale made by Gaiam in 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 $538,750 in 1999. Gaiam
obtained the securities by exercising options granted by Mr. Rysavy to Gaiam in
1993.
During 1999 and until April 2000, Gaiam subleased its fulfillment center in
Cincinnati, Ohio from a subsidiary of Corporate Express, Inc. at an annual
rental rate of approximately $205,200, which was the same rate as paid by
Corporate Express, Inc. under its lease. During 1999, Mr. Rysavy was a director
of Corporate Express and beneficially owned approximately 4.9% of the stock of
Corporate Express but did not control Corporate Express. The lease was
terminated in April 2000 in connection with Gaiam's lease of a new 208,000 sq.
ft. distribution center.
35
Until October 1999, Mr. Rysavy guaranteed Gaiam's line of credit with Wells
Fargo Bank (formerly Norwest Bank). The credit agreement permitted borrowings
up to $3 million (of which $1.9 million was outstanding at December 31, 1999)
based upon the collateral value of Gaiam's accounts receivable and inventory
held for resale. These borrowings were secured by a pledge of Gaiam's assets and
bore interest at the prime rate plus 1%.
In 1999, Gaiam engaged the services of ccplanet.com, Inc. to develop and
implement a new web site design using the latest technology for Gaiam's direct-
to-consumer operations. Mr. Rysavy owns a majority of ccplanet's stock. Gaiam
paid ccplanet $1.2 million for work performed on the project through December
31, 1999 and an additional $3.3 million in 2000 (the new site was placed into
service during March, 2000). Gaiam made its customer database and certain visual
media available to ccplanet in exchange for fees totaling $600,000 during 1999
and $1.4 million during 2000.
In 2000, Mr. Rysavy advanced funds to Gaiam to purchase a 70% interest in
an organic clothing manufacturer. These advances, plus applicable interest, were
repaid in December 2000. Additionally, Gaiam purchased approximately $300,000 in
inventory from Earthlings, Inc. (a related party under common ownership with Mr.
Rysavy) at Earthlings' cost. On January 5, 2001, Gaiam purchased Earthlings for
$47,509.
On June 30, 2000, Whole Foods Market, Inc., a publicly traded company, and
Gaiam merged their Internet properties into Gaiam.com, Inc. Gaiam owns 50.1% of
Gaiam.com, Inc., Whole Foods Market owns 35% and the remainder is owned by
various venture capital funds. Gaiam is the exclusive internet site for both
Gaiam and Whole Foods Market. Whole Foods Market and Gaiam have also entered
into a 10 year joint marketing agreement to promote each other's business and
share customer data. The companies are currently testing a store-within-a-store
concept, presenting Gaiam's lifestyle products, in 21 of Whole Foods Market's
larger stores. During 2000, a subsidiary of Whole Foods Market engaged the
services of ccplanet for total consideration of $ 1.5 million, and Infocenter,
Inc., a company formed by Mr. Rysavy, assumed certain liabilities of the Whole
Foods Market subsidiary and received funding ($500,000 in cash and a note in the
principal amount of $3,000,000) to satisfy such liabilities.
On December 29, 2000, Self Care Holdings, Inc., a corporation owned by Mr.
Rysavy, purchased certain inventory and other assets of Medical SelfCare, Inc.
in an auction conducted in connection with an assignment for the benefit of
creditors of Medical SelfCare. On February 1, 2001, Gaiam acquired substantially
all of the inventory and assets from Self Care Holdings by acquiring Self Care
Inc., a wholly-owned subsidiary of Self Care Holdings, for $3.9 million, an
amount equal to Self Care Holdings' purchase price for the purchased inventory
and assets plus related transaction costs.
36
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of the class A and class B common stock of Gaiam by each of our
directors, executive officers and 5% shareholders who beneficially owned shares
on June 20, 2001, and as adjusted to reflect the sale of the shares offered in
this offering. The address for each person, except as otherwise provided, is 360
Interlocken Blvd., Broomfield, Colorado, 80021.
Shares to be
Beneficially
Shares Beneficially Owned
Owned Prior to this After this
Offering(7) Offering(7)(8)
------------------------------ -------------------------------
Number of Number of
Beneficial Owner Shares(9) Percent(9) Shares Percent(10)
---------------- ------------- -------------- ------------- ---------------
Jirka Rysavy(1)..................... 8,150,200 71.32% 8,150,200 59.8%
Lynn Powers(2)...................... 142,200 2.36% 142,200 1.7%
Pavel Bouska(3)..................... 119,520 2.00% 119,520 1.5%
Barnet Feinblum(4).................. 13,304 * 13,304 *
John Mackey ........................ 85,300 1.43% 85,300 1.0*
Barbara Mowry(5).................... 7,304 * 7,304 *
Paul Ray(6)......................... 7,168 * 7,168 *
All Executive Officers and
Directors (7 persons).............. 8,524,966 73.99% 8,524,966 62.1%
________
* Less than one percent
(1) Includes options held by Mr. Rysavy to acquire a total of 64,000 shares
which options have vested or will vest within 60 days of the date of this
prospectus. Mr. Rysavy, our Chairman and Chief Executive Officer, holds
all 5,400,000 outstanding shares of class B common stock and 2,686,200
shares of the class A common stock (or approximately 45% of the
outstanding shares of class A common stock). The shares of class B common
stock vote ten votes per share. Pursuant to a voting agreement between Mr.
Rysavy and Gaiam, Mr. Rysavy has agreed to limit the number of shares of
class B common stock that he votes to 49% of the combined votes of the
class B common stock and class A common stock. His remaining shares of
Class B Common Stock are voted in proportion to the votes of the Class A
Common Stock. See "Description of Capital Stock--Shares" for a description
of the voting rights of the class B common stock.
(2) Includes options held by Ms. Powers to acquire a total of 51,200 shares
which options have vested or will vest within 60 days of the date of this
prospectus.
(3) Includes options held by Mr. Bouska to acquire a total of 25,600 shares
which options have vested or will vest within 60 days of the date of this
prospectus, and 1,100 shares and 2,720 in options to acquire shares, which
options have vested or will vest within 60 days of the date of this
prospectus, held by Mr. Bouska's spouse, an employee of Gaiam.
(4) Includes options held by Mr. Feinblum to acquire a total of 5,000 shares,
which options have vested or will vest within 60 days of the date of this
prospectus, and 1,000 shares held by Mr. Feinblum's spouse.
(5) Includes options held by Ms. Mowry to acquire a total of 5,000 shares, which
options have vested or will vest within 60 days of the date of this
prospectus.
(6) Includes options held by Mr. Ray to acquire a total of 5,000 shares, which
options have vested or will vest within 60 days of the date of this
prospectus.
(7) Each shareholder possesses sole voting and investment power with respect to
the shares listed, except as provided by applicable community property
laws or as otherwise noted. In accordance with the rules of the Securities
and Exchange Commission, each shareholder is deemed to beneficially own
any shares obtainable by him or her upon the exercise of stock options or
warrants which are currently exercisable or which become exercisable
within 60 days after June 20, 2001, or the conversion of convertible
securities that are currently convertible or become convertible within 60
days after June 20, 2001. The inclusion in this table of shares listed as
beneficially owned does not constitute an admission of beneficial
ownership.
(8) The number and percentage of shares owned after this offering assumes none
of the listed shareholders will purchase additional shares in this
offering, except as otherwise indicated.
(9) The number of shares deemed outstanding prior to this offering includes all
shares of class A common stock outstanding as of June 20, 2001. In
addition, the number of shared deemed outstanding for each shareholder
includes any shares obtainable by such shareholder through the conversion
of class B common stock or through the exercise of options to purchase
shares that are exercisable within 60 days of the date of this prospectus.
37
(10) The number of shares deemed outstanding after this offering includes all
shares of class A common stock outstanding as of the date of this
prospectus including the shares offered pursuant to this prospectus. In
addition, for each shareholder, such number of deemed outstanding includes
any shares obtainable by such shareholder through the conversion of class B
common stock or through the exercise of options to purchase shares that are
exercisable within 60 days of the date of this prospectus.
38
DESCRIPTION OF CAPITAL STOCK
General
The authorized capital stock of Gaiam is 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 May 31,
2001, there were 5,963,137 shares of class A common stock outstanding held by
9,115 shareholders of record, options to purchase an aggregate of 1,470,318
shares, a warrant to purchase 24,000 shares and 5,400,000 shares of class B
common stock outstanding. There were no shares of preferred stock outstanding.
Although Gaiam believes the following summary description of Gaiam's
shares, class B common stock, preferred stock, Amended and Restated Articles of
Incorporation, and Amended and Restated Bylaws covers all material provisions
affecting the rights of holders of capital stock of Gaiam, this summary is not
intended to be complete and is qualified by reference to the provisions of
applicable law and to Gaiam's Amended and Restated Articles of Incorporation and
Amended and Restated Bylaws, both of which are included as exhibits to the
Registration Statement of which this prospectus is a part. See "Additional
Information."
Capital Stock
Each holder of shares of class A common stock is entitled to one vote for
each share held on all matters submitted to a vote of shareholders. Each share
of class B common stock is entitled to ten votes on all matters submitted to a
vote of shareholders. There are no cumulative voting rights. All holders of
shares of class A common stock and shares of class B common stock vote as a
single group on all matters that are submitted to the shareholders for a vote.
Accordingly, holders of a majority of the votes of the shares of class A common
stock and shares of class B common stock entitled to vote in any election of
directors may elect all of the directors who stand for election.
Shares of class A common stock and shares of class B common stock are
entitled to equal dividends, if any, as may be declared by the Board of
Directors out of legally available funds. In the event of a liquidation,
dissolution or winding up of Gaiam, the shares of class A common stock and
shares of class B common stock would be entitled to share ratably in Gaiam's
assets remaining after the payment of all of Gaiam's debts and other
liabilities. Holders of shares of class A common stock and shares of class B
common stock have no preemptive, subscription or redemption rights, and there
are no redemption or sinking fund provisions applicable to the shares of class A
common stock and class B common stock. The outstanding shares of class A common
stock and shares of class B common stock are, and the shares of class A common
stock offered by Gaiam in this offering will be, when issued and paid for, fully
paid and non-assessable.
The class B common stock may not be transferred unless converted into
shares of class A common stock, other than certain transfers to affiliates and
family members. The shares of class B common stock are convertible one-for-one
into shares of class A common stock, at the option of the holder of the shares
of class B common stock.
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
39
or of rights to purchase preferred stock could have the effect of making it more
difficult for a third party to acquire Gaiam, or of discouraging a third party
from attempting to acquire Gaiam. Such an issuance could also dilute your voting
power.
Bylaws
The Bylaws provide that shareholders may not take action without a
shareholders' meeting. The Bylaws also require advance notice of any proposal
to be brought before an annual meeting of shareholders that relates to an
amendment to the Articles of Incorporation, a merger, the sale of all or
substantially all of Gaiam's assets, the dissolution of Gaiam, or any nomination
for election of directors other than by the Gaiam board of directors. These
provisions could have the effect of delaying, deferring or preventing a change
of control of Gaiam.
Voting Agreement
Mr. Rysavy, our Chairman and Chief Executive Officer, holds all 5,400,000
outstanding shares of class B common stock and 2,686,200 shares of the class A
common stock (or approximately 45% of the outstanding shares of class A common
stock). The shares of class B common stock vote ten votes per share. Pursuant
to a voting agreement between Mr. Rysavy and Gaiam, Mr. Rysavy has agreed to
limit the number of shares of class B common stock that he votes to 49% of the
combined votes of the class B common stock and class A common stock. His
remaining shares of class B common stock are voted in proportion to the votes of
the class A common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the shares is Computershare Trust
Company, Inc.
40
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares in the public market following this
offering, or the perception that sales could occur, could adversely affect the
prevailing market price for our shares. Furthermore, because 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 May 31, 2001, there will be 8,163,137 shares of class A common
stock (including the 2,200,000 shares sold in this offering but assuming no
exercise of the underwriters' over-allotment option) and 5,400,000 shares of
class B common stock outstanding. Of these shares, approximately 4,500,000
shares of class A common stock (including the 2,200,000 shares sold in this
offering) will be freely tradable without restriction or further registration
under the Securities Act, other than shares that are purchased by affiliates of
Gaiam as defined in Rule 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. Of the
remaining shares, approximately 3,700,000 shares of class A common stock and all
5,400,000 shares of class B common stock will be restricted securities as
defined in Rule 144 under the Securities Act or shares held by affiliates of
Gaiam. Restricted securities and shares held by affiliates may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rule 144 under the Securities Act, which rules are summarized
below.
Securities Act Rules
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned
restricted shares for at least one year, or any affiliate, is entitled to sell,
within any three-month period a number of shares that does not exceed the
greater of:
. 1% of the then outstanding shares (approximately 82,000 shares immediately
after this offering); or
. the average weekly trading volume of the shares on the Nasdaq National
Market during the four calendar weeks preceding the filing of a notice on
Form 144 with respect to the sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
In addition, under Rule 144(k), a person who is not one of our affiliates
at any time during the 90 days preceding a sale and who has beneficially owned
the restricted shares proposed to be sold for at least two years (including the
holding period of any prior owner other than an affiliate) is entitled to sell
the shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, such shares may be sold at any time.
Lock-up Agreements
All of our directors and officers (who in the aggregate hold 2,966,476
shares of class A common stock and 5,400,000 shares of class B common stock)
will be covered by lock-up agreements under which they will not be permitted to
transfer or otherwise dispose of, directly or indirectly, any shares or any
securities convertible into or exercisable or exchangeable for shares, for a
period of 180 days after the closing of the offering. Transfers or dispositions
can be made sooner:
41
. with the prior written consent of Tucker Anthony Sutro Capital Markets;
. in the case of certain transfers to affiliates;
. as a bona fide gift; or
. to a trust for the benefit of the transferor or immediate family members of
the transferor.
Upon expiration of the lock-up period, approximately 9,100,000 shares
shares (including 5,400,000 shares of class B common stock) will be available
for resale to the public in accordance with Rule 144, subject to the transfer
restrictions described above.
In addition, Gaiam has agreed not to sell or otherwise dispose of, directly
or indirectly, any shares or any securities convertible into or exercisable or
exchangeable for shares, for a period of 180 days after the closing of the
offering, without the prior written consent of Tucker Anthony Sutro Capital
Markets, except that we may:
. issue shares upon the exercise of outstanding options and grant options to
purchase shares under our 1999 Long-term Incentive Plan;
. issue shares under our employee stock 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
We may be required to file one or more registration statements covering up
to approximately 451,429 shares held by existing shareholders. The holders may
not request the filing of registration statements until after July 20, 2001.
Gaiam generally is required to bear all of the expenses of the registrations,
except underwriting discounts and commissions. In addition, if these shares are
not sold in a registered offering, the holders will be required to comply with
the provisions of Rule 144 as described above.
42
UNDERWRITING
The underwriting agreement, which is filed as an exhibit to the registration
statement relating to this prospectus, provides that 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:
Number of
Underwriters: Shares
------------- ------
Tucker Anthony Sutro Capital Markets....................
Adams, Harkness & Hill, Inc............................. _________
Total.................................................. _________
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of class A common stock in the offering if any are
purchased, other than those covered by the over-allotment option described
below. Tucker Anthony Sutro Capital Markets and Adams, Harkness & Hill, Inc., on
behalf of the underwriters, expect to deliver the shares on or about , 2001.
We have granted the underwriters a 30 day option after the date of the
underwriting agreement to purchase, from time to time, up to 330,000 shares at
the public offering price less underwriting discounts and commissions. The
option may be exercised to cover over-allotments, if any, made in connection
with the offering. To the extent that this option is exercised, each
underwriter will be obligated, subject to certain conditions, to purchase its
pro rata portion of these additional shares based on the underwriter's
percentage underwriting commitment in the offering as indicated in the preceding
table.
The representatives of the underwriters have advised us that the
underwriters propose to offer shares of class A common stock directly to the
public at the public offering price on the cover of this prospectus and to
selected dealers, who may include the underwriters, at this public offering
price less a selling concession not in excess of $ per share. The
underwriters may allow, and the selected dealers may re-allow, a discount from
the concession not in excess of $ per share to other dealers. After the
completion of the offering, the representatives may change the public offering
price and other selling terms.
The following table summarizes the underwriting discounts and commissions
we will pay to the underwriters. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase 330,000
additional shares. The underwriting fee is the difference between the initial
price to the public and the amount the underwriters pay to Gaiam for the shares.
No Exercise Full Exercise
of Over- of Over-
allotment allotment
Option Option
--------- -----------
Per share........................................... $ $
Total.............................................. $________ $________
We estimate that the total expense of this offering, excluding the
underwriting discounts and commissions, will be approximately $___________.
Our class A common stock is quoted on the NASDAQ National Market under the
symbol "GAIA."
43
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act and liabilities incurred in
connection with the directed share program referred to below, and to contribute
to payments that the underwriters may be required to make for these liabilities.
The representatives of the underwriters may engage in over-allotment,
stabilizing transactions, syndicate covering transactions, and penalty bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
class A common stock, in accordance with Regulation M under the Securities
Exchange Act.
. Over-allotment involves syndicate sales in excess of the offering
size, which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specific
maximum.
. Syndicate covering transactions involve purchases of the class A
common stock in the open market after the distribution has been
completed.
. Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
syndicate covering transaction to cover syndicate short
positions.
The underwriters may purchase and sell shares of class A common stock in
the open market. These transactions may include short sales, stabilizing
transactions and purchases to cover positions created by short sales. Short
sales involve the sale by the underwriters of a greater number of shares than
they are required to purchase in the offering. Covered short sales are sales
made in an amount not greater than the underwriters' option to purchase
additional shares from the issuer in the offering. The underwriters may close
out any covered short position by either exercising their option to purchase
additional shares or purchasing shares in the open market. In determining the
source of shares to close out the covered short position, the underwriters will
consider, among other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase shares through
the over-allotment option. Naked short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the class A common stock in the open market after pricing that could
adversely affect investors who purchase in the offering. Stabilizing
transactions consist of various bids for or purchases of class A common stock
made by the underwriters in the open market prior to the completion of th e
offering.
Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the class A common stock or preventing or retarding a
decline in the market price of the class A common stock. As a result, the price
of the class A common stock may be higher than the price that might otherwise
exist in the open market.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the class A common stock. In addition,
neither we nor any of the underwriters make any representation that the
representatives will engage in these stabilizing transactions or that any
transaction, once commenced, will not be discontinued without notice.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed 5% of the total number of shares offered
by them.
We, our directors, officers and stockholders that hold over 5% of our
securities will agree not to offer to sell, sell or otherwise dispose of,
directly or indirectly, any shares of capital stock or any
44
securities that may be converted into or exchanged for any shares of our capital
stock for a period of 180 days from the date of the prospectus without the prior
written consent of Tucker Anthony Sutro Capital Markets, except that we may:
. issue and grant options to purchase shares of common stock under our 1999
Long Term Incentive Plan.
. issue shares under our employee stock purchase plan; and
. issue shares in 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.
See "Shares Eligible for Future Sale."
An electronic final prospectus will be available on Tucker Anthony Sutro
Capital Markets' website at www.tascm.com.
Purchasers of the shares of class A common stock offered in this prospectus
may be required to pay stamp taxes and other charges under the laws and
practices of the county of purchase, in addition to the offering price listed on
the cover of this prospectus.
LEGAL MATTERS
The validity of the shares of class A common stock being offered hereby
will be passed on for Gaiam by Bartlit Beck Herman Palenchar & Scott, Denver,
Colorado. Certain legal matters will be passed upon for the underwriters by
Brobeck, Phleger and Harrison LLP, Broomfield, Colorado.
EXPERTS
The consolidated financial statements of Gaiam, Inc. at December 31, 2000
and 1999, and for each of the three years in the period ended December 31, 2000,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
The financial statements of Real Goods Trading Corporation for the year
ended March 31, 2000 included in this prospectus have been audited by Moss Adams
LLP, independent auditors, as stated in their report and have been given upon
their authority as experts in accounting and auditing.
The financial statements of Real Goods Trading Corporation as of March 31,
1999 and for the year then ended included in this prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein, and have been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Gaiam files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission (SEC). You may
read and copy any reports, statements or other information we file at the SEC's
public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms.
Gaiam's SEC filings, including the registration statement, are also
available to the public from commercial document retrieval services and at the
web site maintained by the SEC at www.sec.gov. You may also obtain additional
information at Gaiam's web site at www.gaiam.com.
We have filed with the SEC 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.
We intend to send to our 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.
45
INDEX TO FINANCIAL STATEMENTS
Page
----
Index to Gaiam's Financial Statements:
Report of Independent Auditors.................................................................. F-2
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
Index to Real Goods' Financial Statements:
Independent Auditors' Report--Moss Adams, LLP................................................... F-21
Independent Auditors' Report--Deloitte & Touche, LLP............................................ F-22
Balance Sheets.................................................................................. F-23
Statements of Operations........................................................................ F-24
Statements of Cash Flows........................................................................ F-25
Statements of Shareowners' Equity............................................................... F-26
Notes to Financial Statements.................................................................. F-27
Real Goods Condensed Statements of Operations................................................... F-35
Real Goods Condensed Statements of Cash Flows................................................... F-36
Notes to Condensed Financial Statements......................................................... F-37
Gaiam Unaudited Pro Forma Consolidated Statement of Operations.................................. F-39
F-1
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Gaiam, Inc.
We have audited the accompanying consolidated balance sheets of Gaiam,
Inc. and subsidiaries as of December 31, 1999 and 2000, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of Gaiam's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Gaiam,
Inc. and subsidiaries at December 31, 1999 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Denver, Colorado
February 27, 2001,
F-2
GAIAM, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1999 2000 2001
-------------------------------------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,877,465 $ 8,578,668 $ 6,374,022
Accounts receivable, net of allowance for
doubtful accounts of $158,292 in 1999 and
$301,539 in 2000 4,326,594 8,472,828 8,407,739
Accounts and notes receivable, other 755,924 1,097,390 755,110
Inventory, less allowances 4,555,436 6,361,046 10,332,540
Deferred advertising costs 2,176,325 1,625,285 1,587,663
Other current assets 393,330 1,307,416 _1,492,794
Total current assets ----------- ----------- -------------
16,085,074 27,442,633 $ 28,949,868
Property and equipment, net 3,168,183 10,797,501 15,098,313
Capitalized production costs, net 1,636,706 2,656,666 2,634,363
Video library, net 4,792,456 4,631,140 4,555,481
Goodwill, net 1,239,507 2,379,861 6,032,943
Deferred tax assets 87,163 146,132 1,285,132
Other assets 317,837 450,409 562,004
----------- ----------- -------------
Total assets $27,326,926 $48,504,342 $ 59,118,104
=========== =========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 7,618,344 $ 8,091,569 $ 11,150,709
Accrued liabilities 1,734,310 2,109,036 4,416,092
Accrued royalties 725,541 867,667 1,136,738
Income taxes payable -- 790,267 591,832
Capital lease obligations, current 95,844 147,649 160,705
Other current liabilities -- 167,349 181,888
----------- ----------- -------------
Total current liabilities 10,174,039 12,173,537 17,637,964
Capital lease obligations, long-term 209,074 270,171 260,614
Deferred tax liability 67,241 412,001 412,001
Long term debt 1,900,000 5,500,000 6,518,887
----------- ----------- -------------
Total long-term liabilities 2,176,315 6,182,172 7,191,502
Minority interest 26,030 6,037,868 6,120,513
Redeemable Class A preferred stock
in subsidiary -- 6,000,000 6,000,000
Stockholders' equity:
Class A common stock, $.0001 par value,
150,000,000 shares authorized, 5,441,537, 5,473,184
and 5,958,505 shares issued and outstanding at
December 31, 1999 and 2000 and
March 31, 2001 respectively 544 547 596
Class B common stock, $.0001 par value,
50,000,000 shares authorized, 5,400,000
issued and outstanding at December 31,
1999 and 2000, and March 31, 2001 540 540 540
Additional paid-in capital 11,038,551 11,865,734 15,486,392
Deferred compensation (106,992) (422,826) (405,201)
Retained earnings 4,017,899 6,666,770 7,085,798
----------- ----------- -------------
Total stockholders' equity 14,950,542 18,110,765 22,168,125
----------- ----------- -------------
Total liabilities and stockholders' equity $27,326,926 $48,504,342 $ 59,118,104
=========== =========== =============
See accompanying notes.
F-3
GAIAM, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended Three months
December 31, ended March 31,
1998 1999 2000 2000 2001
---- ---- ---- ---- ----
(Unaudited)
Net revenue $30,738,540 $45,724,662 $60,588,018 $12,558,437 $17,671,513
Cost of goods sold 13,173,536 18,175,787 23,793,492 4,922,311 6,847,590
----------- ----------- ----------- ----------- -----------
Gross profit 17,565,004 27,548,875 36,794,526 7,636,126 10,823,923
Expenses:
Selling and operating 14,186,215 22,337,950 27,309,857 6,063,790 8,538,352
Corporate, general and
administration 2,393,946 3,086,514 5,056,903 1,115,977 1,550,206
----------- ----------- ----------- ----------- -----------
Total expenses 16,580,161 25,424,464 32,366,760 7,179,767 10,088,558
----------- ----------- ----------- ----------- -----------
Income from operations 984,843 2,124,411 4,427,766 456,359 735,365
Other income (expense):
Realized gain (loss) on sale of
securities and other, (see Note 3) 696,992 971,159 (73,947) (76,295) 184,615
Interest expense (308,501) (365,294) (209,167) (46,650) (116,917)
----------- ----------- ----------- ----------- -----------
Other income (expense), net 388,491 605,865 (283,114) (122,945) 67,698
----------- ----------- ----------- ----------- -----------
Income before income taxes and
minority interest 1,373,334 2,730,276 4,144,652 333,414 803,063
Provision for income taxes (251,955) (1,062,789) (1,555,487) (125,130) (301,390)
Minority interest in net (income)
loss of consolidated subsidiary,
net of tax (261,598) 50,858 59,706 (4,992) (82,645)
----------- ----------- ----------- ----------- -----------
Net income $ 859,781 $ 1,718,345 $ 2,648,871 $ 203,292 $ 419,028
=========== =========== =========== =========== ===========
Net income per share:
Basic $0.11 $0.20 $0.24 $0.02 $0.04
Diluted $0.11 $0.19 $0.23 $0.02 $0.04
Shares used in computing net
income per share:
Basic 8,072,877 8,785,205 10,858,139 10,846,460 11,205,844
Diluted 8,118,792 9,119,108 11,525,120 11,504,973 11,563,172
See accompanying notes.
F-4
GAIAM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Class A Class B Additional
Common Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
--------------------- --------------------- ----------
Balance at January 1, 1998 1,005,000 $ 101 7,035,000 $ 704 $ 133,833
Issuance of common stock 160,000 16 - - 574,984
Return of capital to shareholder through
purchase of Inner Balance, Inc. - - - - (331,183)
Comprehensive income (loss):
Net income - - - - -
Decrease in fair market value of
securities available for sale, net of
reclassification adjustment (see
Note 1), net of tax of $618,578 - - - - -
Total comprehensive loss
--------------------- --------------------- ----------
Balance at December 31, 1998 1,165,000 117 7,035,000 704 377,634
Issuance of common stock 331,429 32 - 1,449,968
Shares issued in connection with IPO,
including the underwriter's overallotment 1,807,861 181 - - 6,142,007
Issuance of common stock in conjunction
with acquisitions and share conversion 1,842,247 185 (1,635,000) (164) 1,593,971
Shares issued in connection with conversion
of debt 295,000 29 - - 1,474,971
Comprehensive income (loss):
Net income - - - - -
Decrease in fair market value of
available for sale securities,
net of reclassification
(see Note 1) - - - - -
--------------------- --------------------- ----------
Total comprehensive income --------------------- --------------------- ----------
Balance at December 31, 1999 5,441,537 544 5,400,000 540 11,038,551
Issuance of common stock in conjunction
with acquisitions and compensation 31,647 3 827,183
Net income and comprehensive income
--------------------------------------------------------------
Balance at December 31, 2000 5,473,184 $ 547 5,400,000 $ 540 $ 11,865,734
Return of Capital to shareholder through purchase
of Earthlings, Inc. and Selfcare, Inc.
(unaudited) (3,620,658)
Issuance of common stock in conjunction
with acquisitions and compensation (unaudited) 485,321 49 6,693,719
Net income and comprehensive income --------------------------------------------------------------
Balance at March 31, 2001 (unaudited) 5,958,505 $ 596 5,400,000 $ 540 $ 15,486,392
==============================================================
Accumulated
Other
Deferred Comprehensive Retained
Compensation Income Earning
-------------- ------------- --------
Balance at January 1, 1998 $ - $ 3,161,263 $ 1,439,773 $ 4,735,674
Issuance of common stock - - - 575,000
Return of capital to shareholder through
purchase of Inner Balance, Inc. - - - (331,183)
Comprehensive income (loss):
Net income - - 859,781 859,781
Decrease in fair market value of
securities available for sale, net of
reclassification adjustment (see
Note 1), net of tax of $618,578 - (2,178,137) - (2,178,137)
Total comprehensive loss (1,318,356)
-------------- ------------- ----------- ------------
Balance at December 31, 1998 - 983,126 2,299,554 3,661,135
Issuance of common stock - - - 1,450,000
Shares issued in connection with IPO,
including the underwriter's overallotment - - - 6,142,188
Issuance of common stock in conjunction
with acquisitions and share conversion (106,992) - - 1,487,000
Shares issued in connection with conversion
of debt - - - 1,475,000
Comprehensive income (loss):
Net income - - 1,718,345 1,718,345
Decrease in fair market value of
available for sale securities,
net of reclassification
(see Note 1) - (983,126) - (983,126)
-------------- ------------- ----------- ------------
Total comprehensive income
-------------- ------------- ----------- ------------
Balance at December 31, 1999 (106,992) - 4,017,899 14,950,542
Issuance of common stock in conjunction
with acquisitions and compensation (315,834) 511,352
Net income and comprehensive income 2,648,871 2,648,871
------------------------------------------------------------------------------
Balance at December 31, 2000 $ (422,826) - $ 6,666,770 $ 18,110,765
Return of capital to
shareholder through purchase
of Earthlings, Inc. and
SelfCare, Inc. (unaudited) (3,073,061)
Issuance of common stock in conjunction
with acquisitions and compensation (unaudited) 17,625 6,711,393
Net income and comprehensive income (unaudited) 419,028 419,028
------------------------------------------------------------------------------
Balance at March 31, 2001 (unaudited) $ (405,201) - $ 7,085,798 $ 22,168,125
==============================================================================
See accompanying notes.
F-5
GAIAM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
Years Ended December 31, March 31,
1998 1999 2000 2000 2001
---- ---- ---- ---- ----
(Unaudited)
Operating activities:
Net income $ 859,781 $ 1,718,345 $ 2,648,871 $ 203,292 $ 419,028
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation 240,431 391,000 1,245,155 185,070 846,832
Amortization 85,466 293,315 414,695 102,357 148,738
Stock compensation -- -- 147,492 -- 17,625
Interest expense added to principal of margin
loan
Minority interest in consolidated subsidiary 116,158 16,513 -- -- --
Realized gain on the sale of securities 261,598 (50,858) (59,706) 4,992 82,645
Deferred tax expense (691,137) (2,516,110) -- -- --
Changes in operating assets and liabilities, 9,684 (53,718) 384,968 13,891 --
net of effects from acquisitions:
Accounts receivable
Inventory (1,501,242) (2,296,771) (4,127,458) 840,603 311,406
Deferred advertising costs (591,519) (1,161,724) (1,739,231) (1,347,842) (1,601,314)
Capitalized production costs (243,630) (418,480) 551,040 240,324 146,269
Prepaid assets (212,361) (964,268) (1,019,960) (196,877) 22,303
Other assets 8,527 (109,494) (914,086) (40,774) (338,722)
Accounts payable (266,757) 41,615 (229,295) 19,662 (31,153)
Accrued liabilities 2,569,358 717,852 (8,730) 2,405,494 1,999,746
Income taxes payable 329,672 198,741 167,310 (406,344) (661,410)
(69,784) (424,745) 805,123 111,239 (188,610)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities 904,245 (4,618,787) (1,733,812) 2,135,087 1,173,383
----------- ----------- ----------- ----------- -----------
Investing activities:
Purchase of property and equipment (134,378) (2,212,961) (8,735,390) (3,926,934) (467,656)
Proceeds from sale of property and equipment 32,090 -- -- -- --
Proceeds from sale of securities available-for-
sale 477,500 2,548,310 -- -- --
Proceeds from sale of stock in subsidiary -- -- 11,959,923 -- --
Payments for acquisitions, net of cash acquired (1,656,611) (2,740,703) (305,773) -- (3,400,663)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities (1,281,399) (2,405,354) 2,918,760 (3,926,934) (3,868,319)
----------- ----------- ----------- ----------- -----------
Financing activities:
Principal payments on capital leases (49,699) (60,671) (99,617) (22,405) (28,819)
Proceeds from issuance of common stock 575,000 2,875,002 15,872 -- 19,109
Net proceeds from initial public offering -- 6,142,188 -- -- --
Proceeds from convertible debt 549,999 -- -- -- --
Net proceeds from (payments on) borrowings (900,000) 535,148 3,600,000 -- 500,000
----------- ----------- ----------- ----------- -----------
Net cash provided (used in) financing activities 175,300 9,491,667 3,516,255 (22,405) 490,290
----------- ----------- ----------- ----------- -----------
Net change in cash and cash equivalents (201,854) 2,467,526 4,701,203 (1,814,252) (2,204,646)
Cash and cash equivalents at beginning of year 1,611,793 1,409,939 3,877,465 3,877,465 8,578,668
----------- ----------- ----------- ----------- -----------
$ 1,409,939 $ 3,877,465 $ 8,578,668 $ 2,063,213 $ 6,374,022
Cash and cash equivalents at end of period =========== =========== =========== =========== ===========
Supplemental cash flow information:
Interest paid $ 126,025 $ 348,580 $ 287,080 $ 48,609 $ 98,592
Income taxes paid 312,100 1,541,253 82,099 -- 490,000
Common stock issued for acquisitions 1,487,000 333,131
Common stock issued for convertible debt 1,425,000 --
Fixed assets acquired under capital lease 297,740 212,519
See accompanying notes.
F-6
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 2000 is unaudited.)
1. Summary of Significant Accounting Policies
Organization
Gaiam, Inc. ("Gaiam") was incorporated under the laws of the State of
Colorado on July 7, 1988. Gaiam is a multi-channel lifestyle company providing
information, goods and services to customers who value personal development,
healthy lifestyles and the environment.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
Gaiam, its subsidiaries and partnerships in which ownership is 50% or greater
and considered to be under the control of Gaiam. All material intercompany
accounts and transaction balances have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents
includes demand deposit accounts with financial institutions and all highly
liquid investments, which mature within three months of date of purchase.
Securities Available-for-Sale
Securities available-for-sale consist of equity securities and are stated
at market value. All unrealized gains or losses, net of tax, are recorded as a
separate component of stockholders' equity.
Provision for Doubtful Accounts
Gaiam records a provision for doubtful accounts for all receivables not
expected to be collected.
Interim Financial Statements
The interim consolidated financial statements included herein have been
prepared by the management of Gaiam, Inc. pursuant to the rules and regulations
of the United States Securities and Exchange Commission, and, in the opinion of
management, contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly Gaiam's consolidated financial position
as of March 31, 2001 and the interim results of operations and cash flows for
the three months ended March 31, 2000 and 2001. These interim statements have
not been audited. The consolidated financial position, results of operations and
cash flows for the interim periods disclosed within this report are not
necessarily indicative of future financial results.
Inventory
Inventory, consisting primarily of finished goods, is stated at the lower
of cost (first-in, first-out method) or market.
Deferred Advertising Costs
Deferred costs primarily relate to preparation, printing and distribution
of catalogs. Such costs are deferred for financial reporting purposes until the
catalogs are distributed, then amortized over succeeding
F-7
periods (not to exceed seven months) on the basis of estimated sales. Historical
sales statistics are the principal factor used in estimating the amortization
rate. Other advertising and promotional costs are expensed as incurred.
Advertising costs incurred were $7.1 million, $10.1 million and $10.5 million
for the years ended December 31, 1998, 1999 and 2000, respectively.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization, which includes the amortization of assets recorded under capital
leases. Included in property and equipment is the cost of internal-use software,
including software used in connection with Gaiam's websites. Gaiam expenses all
costs related to the development of internal-use software other than those
incurred during the application development stage. Costs incurred during the
application development stage are capitalized and amortized over the estimated
useful life of the software (generally five years).
Depreciation of property and equipment is computed on the straight-line
method over estimated useful lives (generally five to ten years). Property and
equipment purchased under capital leases are amortized on a straight-line basis
over the lesser of the estimated useful life of the asset or the lease term.
Capitalized Production Costs
Capitalized production costs include costs incurred to produce
informational videos marketed by Gaiam to retail marketers and direct-mail
customers. These costs are deferred for financial reporting purposes until the
videos are released, then amortized over succeeding periods on the basis of
estimated sales. Historical sales statistics are the principal factor used in
estimating the amortization rate. Accumulated amortization at December 31, 1999
and 2000 was $1.3 million and $1.7 million, respectively.
Video Library
The video library asset represents the cost of the library of produced
videos acquired through a business combination. The video library is presented
net of accumulated amortization of $332,401 and $674,059 at December 31, 1999
and 2000 and is being amortized over a 15-year life.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
assets acquired in business acquisitions accounted for under the purchase
method. Goodwill is presented net of related accumulated amortization of $15,884
and $88,922 at December 31, 1999 and 2000, and is being amortized over lives
ranging from 10 to 20 years.
Long-Lived Assets
The carrying values of intangible and other long-lived assets are reviewed
quarterly to determine if any impairment indicators are present. To date, no
such impairment has been indicated. If it is determined that such indicators are
present and the review indicates that the assets will not be recoverable, based
on undiscounted estimated cash flows over the remaining amortization and
depreciation period, their carrying values are reduced to estimated fair market
value.
Accrued Royalties
Gaiam has various royalty agreements with instructors and artists requiring
royalty payments of specified product sales based upon unit sales, or upon a
specified minimum royalty amount. Payments are made quarterly and semi-annually.
F-8
Income Taxes
Gaiam provides for income taxes pursuant to the liability method as
prescribed in Statement of Financial Accounting Standards SFAS) No. 109,
Accounting for Income Taxes. The liability method requires recognition of
deferred income taxes based on temporary differences between financial reporting
and income tax bases of assets and liabilities, using currently enacted income
tax rates and regulations.
Revenues
Gaiam recognizes revenue at the time merchandise is shipped to the
customer. Amounts billed to customers for postage and handling charges, which
approximate $2.2 million for 1998, $3.0 million for 1999, and $3.5 million for
2000, are recognized as revenue at the time that the revenues on the product
shipments are recognized. Postage and handling costs, which approximate $2.1
million for 1998, $3.0 million for 1999, and $3.3 million for 2000, are included
in selling and operating expense along with other fulfillment costs incurred to
warehouse, package and deliver products to customers. Gaiam provides a reserve
for expected future returns at the time the sale is recorded based upon
historical experience.
Gaiam's sales are attributable mainly to sales within the U.S., with a very
small percentage, less than 1% of sales, to international customers. No customer
represented more than 5% of sales for any of the years ended December 31, 1998,
1999 and 2000. Gaiam generally does not require collateral.
Fair Value of Financial Instruments
Gaiam's financial instruments consist of cash and cash equivalents,
accounts receivable, payables and debt obligations. The carrying values of these
financial instruments as reported in the accompanying balance sheets are assumed
to approximate their fair value.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in Gaiam's financial statements
and accompanying notes, including the valuation of stated accounts receivable
and inventory balances. Actual results could differ from those estimates.
Stock-Based Compensation
Gaiam accounts for its stock-based compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB No. 25") and related interpretations, including FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, rather than the alternative fair value accounting allowed by SFAS
No. 123, Accounting for Stock Based Compensation.
Defined Contribution Plan
In 1999, Gaiam adopted a defined contribution retirement plan under Section
401(k) of the Internal Revenue Code, which covers substantially all employees.
Eligible employees may contribute amounts to the plan, via payroll withholding,
subject to certain limitations. The 401(k) plan permits, but does not require,
additional matching contributions to the 401(k) plan by Gaiam on behalf of all
participants in the 401(k) plan. To date, Gaiam has not made any matching
contributions to the 401(k) plan.
Reporting Comprehensive Income
F-9
On January 1, 1998, Gaiam adopted the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, Reporting on Comprehensive Income ("SFAS No.
130"). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements. The only
item of comprehensive income that Gaiam has is unrealized gains (losses) on
securities available-for-sale.
The reclassification adjustment for gains and losses included in net income
for 1998, net of tax of $618,578, include unrealized losses of $1.8 million and
net realized gains of $427,813. The reclassification adjustment for gains and
losses included in net income for 1999 include unrealized losses of $2.6 million
and net realized gains of $1.6 million. As of December 1999, all available-for-
sale securities were sold.
Adoption of Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by Statements 137 and 138 in June
1999 and June 2000, respectively. SFAS No. 133 is effective for Gaiam's fiscal
year beginning on January 1, 2001. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designed as part of a
hedge transaction and, if it is, the type of hedge transaction. The adoption of
SFAS No. 133, effective January 1, 2001, did not have any impact on Gaiam's
consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the 2000 financial statements
to conform to 2001 presentation.
Earnings Per Share
Basic earnings per share excludes any dilutive effects of options, warrants
and dilutive securities. Basic earnings per share is computed using the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed using the weighted average number of common and common
stock equivalent shares outstanding during the period. Common equivalent shares
are excluded from the computation if their effect is antidilutive. All earnings
per share amounts for all periods have been presented and conform to the SFAS
No. 128, Earnings per Share, requirements.
F-10
The following table sets forth the computation of basic and diluted earnings per
share:
December 31, March 31,
----------------------------------------------------------------------------------------------------------------
1998 1999 2000 2000 2001
------------- ---------- ----------- ----------- -----------
(Unaudited)
Numerator for basic
earnings per share......... $ 859,781 $1,718,345 $ 2,648,871 $ 203,292 $ 419,028
Effect of Dilutive
Securities:
8% convertible
debentures............... 19,234 56,401 -- -- --
------------- ---------- ----------- ----------- -----------
Numerator for diluted
earnings per share....... $ 879,015 $1,774,746 $ 2,648,871 $ 203,292 $ 419,028
============= ========== =========== =========== ===========
Denominator:
Weighted average
shares for basic
earnings per share....... 8,072,877 8,785,205 10,858,139 10,846,460 11,205,844
Effect of Dilutive
Securities:
Weighted average of
Common stock, stock
options warrants and
convertible debentures.... 45,915 333,903 666,981 658,513 357,328
------------- ---------- ----------- ----------- -----------
Denominators for diluted
earnings per share......... 8,118,792 9,119,108 11,525,120 11,504,973 11,563,172
Net income per share--
basic..................... $ 0.11 $ 0.20 $ 0.24 $ 0.02 $ 0.04
Net income per share--
diluted................... $ 0.11 $ 0.19 $ 0.23 $ 0.02 $ 0.04
2. Mergers and Acquisitions
In September 1998, Gaiam acquired a 67% ownership in a newly formed entity,
Healing Arts Publishing, LLC (dba Living Arts) for $2.5 million in cash. Healing
Arts Publishing, Inc., which produced and distributed exercise and relaxation
videos and sold environmentally oriented products through its mail order
catalogs and through sales to retailers, contributed the majority of its assets
and certain liabilities to Living Arts in exchange for a 33% membership
interest. Effective July 1999, Gaiam acquired the remaining 33% minority
interest in Living Arts. Additionally, effective November 1999, Gaiam acquired a
50.1% controlling interest in an environmental products provider. Total
consideration paid by Gaiam for the 1999 acquisitions was $2.3 million in cash
and 207,247 shares of Gaiam's Class A common stock.
On June 30, 2000, Gaiam, Inc. and Whole Foods Market, Inc. merged their
Internet businesses into Gaiam.com, Inc. Gaiam owns 50.1% of Gaiam.com. Whole
Foods Market currently owns 35% of Gaiam.com, and the remainder is owned by
various venture capital funds. As part of the transaction, Whole Foods Market,
through its subsidiary, contributed $6 million in cash plus other assets to
Gaiam.com. On June 19, 2000, Gaiam sold 6,000 shares of Redeemable Class A
preferred stock in Gaiam.com, Inc. at a price of $1,000 per share for an
aggregate price of $6,000,000. This stock doesn't carry any dividend rights and
is redeemable only upon the consummation of an offering by Gaiam.com of its
equity securities to the public pursuant to an effective registration statement
with the Securities and Exchange Commission.
F-11
Additionally, in 2000, Gaiam acquired a yoga props company and a 70%
interest in an organic clothing manufacturer. Total consideration paid by Gaiam
for these acquisitions was approximately $315,000 in cash and 21,243 shares of
Class A common stock. These acquisitions were accounted for using the purchase
method and the results of operations are included in the consolidated financial
statements of Gaiam from the effective acquisition dates. Goodwill associated
with these acquisitions totaled approximately $1.2 million, and is being
amortized on a straight line basis over a period of 20 years.
On January 29, 2001, Gaiam completed its merger with Real Goods Trading
Corporation. In the tax-free stock-for-stock transaction, Real Goods
shareholders received one share of Gaiam Class A common stock in exchange for
each ten shares of Real Goods stock owned. Gaiam issued 481,424 shares of Class
A common stock at an approximate value of $6.7 million to complete the merger.
The merger was accounted for using the purchase method and the results of
operations are included in the consolidated financial statements of Gaiam from
the effective acquisition date.
On January 5, 2001 and February 1, 2001, respectively, Gaiam acquired all
of the stock of Earthlings, Inc. and Self Care, Inc. (companies under common
ownership with the Chief Executive Officer of Gaiam) at his company's net
investment cost plus transaction expenses. As these companies were under common
control, the purchase was accounted for using historical costs, similar to a
pooling transaction. Therefore, the difference between the purchase price and
the value of net assets acquired was accounted for as a reduction to additional
paid-in capital. The total combined purchase price for both companies was
$3,848,014.
3. Securities Available-for-Sale
Securities available-for-sale consisted of shares of common stock from one
issuer. During 1998, Gaiam sold 60,000 shares of this common stock at market
value for $703,125 to a related party and recognized a gain of $696,992 on the
sale. During the first and second quarters of 1999, Gaiam sold 100,000 shares of
the common stock at market value for $538,750 to a related party, and recognized
a gain of $528,528 on the sale. During the third and fourth quarters of 1999,
Gaiam sold its remaining 215,000 shares of common stock for $2.0 million to a
non-related party and recognized a gain of $2.0 million on the sale.
4. Property and Equipment
Property and equipment, stated at cost, consists of the following:
December 31,
1999 2000
--------------------------
Land -- $ 1,100,000
Buildings -- 1,800,000
Furniture, fixtures and equipment $ 805,182 1,295,030
Leasehold improvements 333,747 714,460
Website development (including
construction-in-process costs) 1,600,728 5,391,243
Computer/telephone equipment 1,632,065 2,571,033
Warehouse equipment 222,329 567,667
--------------------------------------------------------------
4,594,051 13,439,433
Accumulated depreciation and
amortization (1,425,868) (2,641,932)
--------------------------------------------------------------
$ 3,168,183 $10,797,501
==============================================================
F-12
5. Commitments
At December 31, 1999 and 2000, Gaiam's property held under capital leases
consisted of the following, which is included in property and equipment:
December 31,
1999 2000
-----------------------
Warehouse equipment $ 40,229 $ 40,229
Computer/telephone equipment 365,545 578,064
--------------------------------------------------------------------
405,774 618,293
Accumulated amortization (99,189) (181,085)
-------- ---------
$306,585 $ 437,208
====================================================================
Gaiam leases equipment and office, retail, and warehouse space through
capital and operating leases. The following schedule represents the annual
future minimum payments, as of December 31, 2000:
Capital Operating
-----------------------------------------------------------------------------
2001 $ 155,692 $1,100,818
2002 147,379 1,081,874
2003 125,412 1,039,092
2004 55,458 1,039,092
-----------------------------------------------------------------------------
Total minimum lease payments $ 483,941 $4,260,876
=============================================================================
Less portion related to interest (66,121)
Present value of future minimum lease
payments 417,820
Less current portion (147,649)
----------
$ 270,171
=============================================================================
Gaiam incurred rent expense of $646,886, $790,393 and $1,084,071 for the years
ended December 31, 1998, 1999 and 2000, respectively.
6. Line of Credit
Gaiam was a party to revolving line of credit agreements, which extended
through January 31, 2003. The credit agreements permitted borrowings up to $6.5
million based upon the collateral value of Gaiam's accounts receivable and
inventory. Borrowings under these agreements bear interest at the prime rate,
which was 9.5% at December 31, 2000. These borrowings were secured by a pledge
of Gaiam's assets, and contained various financial covenants, including
prohibiting the payment of cash dividends to its shareholders and requiring the
maintenance of certain financial ratios. At December 31, 2000, Gaiam was in
compliance with all the financial covenants.
During April 2001, Gaiam entered into new credit agreements with Wells
Fargo Bank West N.A. These agreements increase Gaiam's borrowing capacity from
$6.5 million to $14.9 million. Under a revolving line of credit, Gaiam has
availability of up to $10 million with a maturity date of June 30, 2003, and
under a term loan, Gaiam may borrow up to $4.9 million, with a maturity of July
1, 2006. Borrowings under these agreements bear interest at the lower of prime
rate less 50 basis points or LIBOR plus 275 basis points. These borrowings are
secured by a pledge of Gaiam's assets, and contain various
F-13
financial covenants, including prohibiting the payment of cash dividends to
Gaiam's shareholders and requiring the maintenance of certain financial ratios.
7. Income Taxes
The provision for income taxes is comprised of the following:
December 31,
1998 1999 2000
-----------------------------------------------------------------------------
Current:
Federal $ 197,142 $1,006,008 $1,117,823
State 45,129 156,426 155,954
-----------------------------------------------------------------------------
242,271 1,162,434 1,273,777
Deferred:
Federal 25,852 (37,610) 322,798
State (16,168) (62,035) (41,088)
-----------------------------------------------------------------------------
9,684 (99,645) (281,710)
-----------------------------------------------------------------------------
Total $ 251,955 $1,062,789 $1,555,487
=================================================
Variations from the federal statutory rate are as follows:
December 31,
1998 1999 2000
------------------------------------------------------
Expected federal income tax
expense at statutory rate
of 34% $ 466,934 $ 928,294 $1,409,182
Effect of legal judgment -
permanent difference (251,609) -- --
Effect of other permanent
differences 20,276 40,104 27,359
State income tax expense,
net of federal benefit 16,354 94,391 118,946
------------------------------------------------------------------------------------------------------
Income tax expense $ 251,955 $1,062,789 1,555,487
======================================================================================================
The legal judgment was a liability acquired in the purchase of a 67%
interest in Healing Arts Publishing. This $740,000 liability paid by Gaiam in
1998 resulted in a permanent tax benefit.
Deferred income taxes reflect net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
net accumulated deferred income tax asset or liability as of December 31, 1999
and 2000 are as follows:
F-14
December 31,
1999 2000
---------------
Deferred tax assets:
Reserve for bad debts $ 57,386 $ 113,373
Capitalized inventory 29,777 30,165
Amortization -- 2,594
-------- ---------
87,163 146,132
Deferred tax liabilities:
Amortization (66,060) --
Prepaid catalog costs -- (24,439)
Depreciation (1,181) (387,562)
-------- ---------
(67,241) (412,001)
-------- ---------
Deferred tax asset (liability), net $ 19,922 $(265,869)
======== =========
8. Stockholders' Equity
Gaiam has warrant certificates outstanding during the year and at December
31, 2000 that entitled the holder to purchase 24,000 shares of Class A common
stock at $.50 per share. The warrant is exercisable during a two-year period
beginning January 20, 2002 and ending January 9, 2004.
In June 1999, Gaiam completed a private placement whereby 331,429 shares of
Class A common stock were issued at $4.375 per share. A total of $2.0 million in
convertible debentures with a stated interest rate of 8% were issued during 1998
and the first six months of 1999. These debentures were convertible
automatically upon the closing of the initial public offering into Class A
common stock at the initial public offering per share price. A total of $1.5
million of these debentures were converted into 295,000 shares of Class A common
stock, and a $500,000 debenture was repaid in cash.
Gaiam's initial public offering of 1,705,000 shares of Class A common stock
at $5.00 per share was completed in October 1999. The underwriters also
exercised their overallotment option for 102,861 additional shares during
November 1999. Net proceeds to Gaiam, after deducting all commissions and
expenses associated with the offering, were $6.1 million.
In 1999, Gaiam issued 207,247 shares of Class A common stock in lieu of
cash payments for acquisitions, and Gaiam's Chief Executive Officer converted
1,635,000 shares of Class B common stock into 1,635,000 shares of Class A common
stock.
During 2000, Gaiam issued 21,243 shares of Class A common stock for two
acquisitions, 6,776 shares of Class A common stock to three directors, in lieu
of cash compensation, and 3,628 shares of Class A common stock upon exercise of
options granted under the 1999 Long-Term Incentive Plan.
As of December 31, 2000, Gaiam had the following Class A common shares
reserved for future issuance:
Awards under the 1999 Long-Term Incentive Plan 1,127,562
Shares reserved for warrant exercise 24,000
---------
Total shares reserved for future issuance 1,151,562
=========
F-15
During the first quarter of 2001, Gaiam agreed to issue approximately
481,424 shares of Class A common stock in conjunction with its merger with Real
Goods, and issued 3,897 shares of Class A common stock upon exercise of options
granted under the 1999 Long-Term Incentive Plan.
9. Stock Option Plans
On June 1, 1999, Gaiam adopted the 1999 Long-Term Incentive Plan ("the
Plan"), which provides for the granting of options to purchase up to 1.6 million
shares of Gaiam's common stock. Both incentive stock options and non-qualified
stock options may be issued under the provisions of the Plan. Employees of
Gaiam and its affiliates, members of the Board of Directors, consultants and
certain key advisors are eligible to participate in the plan, which shall
terminate no later than June 1, 2009. These options granted under the Plan
generally vest and become exercisable at 2% per month for the 50 months
beginning in the eleventh month after the date of grant. All grants expire 7
years from the date of grant.
Gaiam recorded deferred compensation of $106,992 and $413,320 in 1999 and
2000, respectively. In 2000, deferred compensation was recorded in connection
with: acquisitions made by Gaiam in which options were issued to employees of an
acquired company; options issued to employees whereby the grant price differed
from the deemed fair value of Gaiam's common stock; and options issued to non-
employees for services to be provided over the related terms of their respective
agreements. The amounts recorded in 1999 represent the difference between the
grant price and the deemed fair value of Gaiam's common stock for shares subject
to options granted in 1999. The amortization of deferred compensation is charged
to operations over the service period of the options, which is typically 5
years. Total amortization expense recognized in 1999 and 2000 related to
deferred compensation was $0 and $97,486, respectively.
A summary of stock option activity and weighted average exercise prices for the
years ended December 31, 1999 and 2000 follows:
1999 2000
------------------------ --------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------ -------------------------
Outstanding at beginning of year -- $ -- 890,900 $ 6.10
Granted:
Price equal to fair value 851,200 4.51 253,500 15.96
Price less than fair value 39,700 7.18 39,000 15.28
Exercised -- -- (3,628) 4.38
Forfeited -- -- (52,210) 6.52
--------------------- ------------------------
Outstanding at end of year 890,900 $ 6.10 1,127,562 $ 7.45
-- $ -- 128,552 $ 4.47
Exercisable at end of year
Shares available on December 31,
for options that may be granted 709,100 472,438
F-16
A summary of stock options outstanding as of December 31, 2000 follows:
Outstanding Stock Options Exercisable Stock Options
-------------------------------------------------------------------------------- -------------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Shares Remaining Exercise Exercise
Exercise Prices Outstanding Life (Years) Price Shares Price
--------------------------------------------------------------------------------- -------------------------------------
$ 4.00 - $ 4.99 637,712 5.4 $ 4.38 102,128 $ 4.38
$ 5.00 - $ 5.99 171,500 5.8 $ 5.00 24,950 $ 5.00
$ 7.00 - $ 7.99 33,350 5.9 $ 7.18 1,334 $ 7.18
$15.00 - $15.99 193,000 6.8 $15.28 140 $15.50
$16.00 - $16.99 15,000 6.6 $16.34 - -
$17.00 - $17.99 77,000 6.7 $17.18 - -
------------------------------------------------------------------------ -------------------------------------
$ 4.00 - $17.99 1,127,562 5.9 $ 7.46 128,552 $ 4.54
Had compensation cost for Gaiam's stock-based compensation plan
been determined under the fair value methodology for determining compensation
cost under SFAS No. 123, Gaiam's net income and income per share for the years
ended December 31, 2000 and 1999, would have been as follows:
For the Years Ended
December 31,
----------------------
1999 2000
----------------------
Net income
As reported $1,718,345 $2,648,871
Pro forma 1,599,102 2,258,005
Net income per common share
As reported $ 0.20 $ 0.24
Pro forma $ 0.18 $ 0.21
Fully diluted net income per common share:
As reported $ 0.19 $ 0.23
Pro forma $ 0.18 $ 0.20
In estimating the pro forma compensation expense for each equity award
granted during the year, Gaiam used the Black Scholes option pricing model, with
the following weighted-average assumptions used for grants in 1999 and 2000,
respectively: risk-free interest rates in a range of 5.78% and 6.00%, expected
dividend yield of zero; expected option lives of 5 years, and expected
volatility of 1.29 and 0.48. Options granted prior to Gaiam's initial public
offering were valued using the minimum value method and, therefore, volatility
was not applicable.
1999 2000
---- ----
Weighted-average fair value of options
granted during the year:
Price equal to fair value $ 1.85 $11.85
Price less than fair value $11.21 $11.38
F-17
10. Related Party Transactions
In 1997, Gaiam entered into a fulfillment agreement with InnerBalance
Health, publisher of a natural health catalog, (a related party under common
ownership with the Chief Executive Officer of Gaiam) to provide customer sales,
service, warehousing and distribution services. On October 1, 1998, Gaiam
acquired all of the stock and net assets of InnerBalance Health, Inc. As these
were companies under common control, Gaiam accounted for the purchase using
historical cost. Therefore, the excess of the purchase price of $523,677 over
the value of net assets was accounted for as a reduction to additional paid-in
capital.
In 1999, Gaiam engaged the services of ccplanet.com, Inc. (a related party
under common ownership with the Chief Executive Officer of Gaiam) to develop and
implement a new web site design utilizing the latest technology for its direct
to consumer operations. Gaiam paid ccplanet a total of $4.5 million for work
performed on this project during 1999 and 2000, and the new Gaiam.com website
was placed into service in March 2000. Gaiam has made its customer database and
certain visual media available to ccplanet in exchange for additional fees
totaling $600,000 during 1999 and $1.4 million in 2000.
Because of Whole Foods Market's investments in Gaiam.com, Whole Foods
Market may be considered a related party. Whole Foods Market and Gaiam have
also entered into a 10-year joint marketing agreement to promote each other's
businesses and share customer data. The companies are installing a store-
within-store concept, presenting Gaiam's lifestyle products in Whole Goods
Market's larger stores.
In 2000, the Chief Executive Officer advanced funds to purchase a 70%
interest in an organic clothing manufacturer. These advances, plus applicable
interest, were repaid in December 2000. Additionally, Gaiam purchased
approximately $300,000 in inventory from Earthlings, Inc. (a related party under
common ownership with the Chief Executive Officer of Gaiam) at Earthling's cost.
On January 5, 2001 and February 1, 2001, respectively, Gaiam acquired all
of the Stock of Earthlings, Inc. and Self Care, Inc. (companies under common
ownership with the Chief Executive Officer of Gaiam) at his company's net
investment plus transaction expenses. As these companies were under common
control, the purchase was accounted for using historical costs, similar to a
pooling transaction. Therefore, the difference between the purchase price and
the value of net assets acquired was accounted for as reduction to additional
paid-in capital. The total combined purchase price for both companies was
$3,848,014.
11. Subsequent Events
During April 2001, Gaiam entered into new credit agreements with Wells
Fargo Bank West N.A. These agreements increase Gaiam's borrowing capacity from
$6.5 million to $14.9 million. Under a revolving line of credit Gaiam has
availability of up to $10 million with a maturity date of June 30, 2003, and
under a term loan Gaiam may borrow up to $4.9 million, with a maturity of July
1, 2006. Borrowings under these agreements bear interest at the lower of prime
rate less 50 basis points or LIBOR plus 275 basis points. These borrowings are
secured by a pledge of Gaiam's assets, and contain various financial
F-18
covenants, including prohibiting the payment of cash dividends to Gaiam's
shareholders and requiring the maintenance of certain financial ratios.
12. Segment Information
Gaiam has two business segments: Direct to Consumer and Business to
Business; both of which sell products, services and information produced or
purchased from other suppliers. Although the customer bases do not overlap to
any extent, the production, purchase and delivery processes overlap in some
areas. Gaiam does not accumulate the balance sheet by segment for purposes of
management review.
Each of the two segments qualifies as such because each is more than 10% of
combined revenue. Contribution margin is defined as net sales, less cost of
goods sold and direct expenses. Financial information for Gaiam's business
segments was as follows:
F-19
Year Ended December 31, Three Months Ended March 31
1998 1999 2000 2000 2001
(Unaudited)
-----------------------------------------------------------------
Net revenue:
Direct to consumer $26,897,236 $34,573,540 $43,823,460 $ 9,809,655 $10,536,386
Business to business 3,841,304 11,151,122 16,764,558 2,748,782 7,135,127
---------------------------------------------------------------------
Consolidated net revenue 30,738,540 $45,724,662 60,588,018 12,558,437 17,671,513
Contribution margin:
Direct to consumer 128,691 (243,949) 841,351 44,376 97,736
Business to business 856,152 2,368,360 3,586,415 411,983 637,629
---------------------------------------------------------------------
Consolidated contribution margin 984,843 2,124,411 4,427,766 456,359 735,365
Reconciliation of Contribution margin
to net income:
Other income (expense) 388,491 605,865 283,114 (122,945) 67,698
Income tax expense 251,955 1,062,789 1,555,487 125,130 301,390
Minority interest expense 261,598 (50,858) (59,706) 4,992 82,645
---------------------------------------------------------------------
Net income $ 859,781 1,718,345 $ 2,648,871 $ 203,292 $ 419,028
=====================================================================
F-20
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Real Goods Trading Corporation
We have audited the accompanying balance sheet of Real Goods Trading
Corporation as of March 31, 2000, and the related statements of operations,
shareholders' 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 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 Real Goods Trading
Corporation as of March 31, 2000, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
/s/ Moss Adams LLP
-------------------------------
Moss Adams LLP
Santa Rosa, California
May 24, 2000
F-21
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareowners
Real Goods Trading Corporation:
We have audited the accompanying balance sheet of Real Goods Trading
Corporation (the "Company") as of March 31, 1999 and the related statements of
operations, shareowners' equity and cash flows for the year then 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respect, the financial position of Real Goods Trading Corporation as of March
31, 1999, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
-------------------------------
Deloitte & Touche LLP
Oakland, CA
May 21, 1999
F-22
REAL GOODS TRADING CORPORATION
BALANCE SHEETS
March 31, 2000 and 1999
(In thousands except share data)
2000 1999
------- ------
ASSETS
------
Current assets:
Cash........................................................ $ 876 $2,048
Marketable securities....................................... 1,568 --
Accounts receivable, net of allowance of $6 in 2000 and
1999....................................................... 152 240
Note receivable............................................. -- 20
Inventories, net............................................ 3,165 2,080
Deferred catalog costs, net................................. 381 272
Prepaid expenses............................................ 150 266
Deferred income taxes....................................... 34 89
------- ------
Total current assets...................................... 6,326 5,015
Property, equipment and improvements, net..................... 4,063 3,553
Other assets.................................................. 253 198
Property held for sale........................................ 78 78
Note receivable--affiliate, net of allowance of $259 in 2000.. 60 196
Deferred income taxes......................................... 664 39
------- ------
Total assets.............................................. $11,444 $9,079
======= ======
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
Current liabilities:
Accounts payable............................................ $ 1,374 $ 873
Accrued expenses............................................ 309 620
Deposits.................................................... 55 138
Current maturities of long-term debt........................ 17 16
Other taxes payable......................................... 39 57
Total current liabilities................................. 1,794 1,704
Long-term debt, less current maturities....................... 534 552
------- ------
Total liabilities......................................... 2,328 2,256
------- ------
Shareowners' equity:
Common stock, without par value:
Authorized 10,000,000 shares; issued and outstanding,
4,881,742 and 4,080,742 shares, respectively............... 10,771 7,188
Accumulated deficit........................................... (1,655) (365)
------- ------
Total shareowners' equity................................. 9,116 6,823
------- ------
Total liabilities and shareowners' equity............... $11,444 $9,079
======= ======
See notes to financial statements
F-23
REAL GOODS TRADING CORPORATION
STATEMENTS OF OPERATIONS
Years Ended March 31, 2000 and 1999
(In thousands except share and per share data)
2000 1999
---------- ----------
Net Sales............................................. $ 18,979 $ 18,736
Cost of sales......................................... 11,145 10,904
Gross profit........................................ 7,834 7,832
Selling, general and administrative expenses.......... 9,402 8,497
Loss from operations................................ (1,568) (665)
Interest income, net.................................. 63 42
Loss on disposition of assets......................... (354) (9)
Loss before income taxes............................ (1,859) (632)
Income tax benefit.................................... 569 150
---------- ----------
Net loss............................................ $ (1,290) $ (482)
========== ==========
Net loss per share, basic and diluted................. $ (0.29) $ (0.12)
Weighted average shares outstanding, basic and
diluted.............................................. 4,384,887 4,004,286
See notes to financial statements
F-24
REAL GOODS TRADING CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended March 31, 2000 and 1999
(In Thousands)
2000 1999
------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................... $(1,290) $ (482)
Adjustments to reconcile net loss to net cash from operating
activities:
Depreciation and amortization.............................. 452 344
Loss/writedown on disposition of assets.................... 252 9
Deferred income taxes...................................... (570) (151)
Other...................................................... (18) 14
Changes in assets and liabilities:
Accounts receivable........................................ 88 (30)
Note receivable............................................ 20 (20)
Inventories................................................ (1,085) 256
Deferred catalog costs, net................................ (109) 167
Prepaid expenses........................................... 116 (52)
Income taxes receivable.................................... -- 167
Accounts payable........................................... 501 147
Accrued expenses and other................................. (311) 298
Deposits................................................... (83) (296)
------- ------
NET CASH FROM OPERATING ACTIVITIES........................... (2,037) 371
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, and construction in progress........ (962) (514)
Investments in marketable securities....................... (3,093) --
Maturities of marketable securities........................ 1,525 --
Purchase of other assets................................... (55) (45)
Proceeds from sale of equipment and other assets........... -- 25
Note receivable--affiliate................................. (116) (196)
------- ------
NET CASH FROM INVESTING ACTIVITIES........................... (2,701) (730)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net................ 3,586 1,138
Repayment of debt.......................................... (17) (17)
Purchase of common stock................................... (3) (15)
------- ------
NET CASH FROM FINANCING ACTIVITIES........................... 3,566 1,106
------- ------
NET INCREASE (DECREASE) IN CASH.............................. (1,172) 747
CASH AT BEGINNING OF PERIOD.................................. 2,048 1,301
------- ------
CASH AT END OF PERIOD........................................ $ 876 $2,048
======= ======
Other cash flow information:
Interest paid.............................................. $ 47 $ 48
Income taxes paid.......................................... 1 1
See notes to financial statements
F-25
REAL GOODS TRADING CORPORATION
STATEMENTS OF SHAREOWNERS' EQUITY
Years Ended March 31, 2000 and 1999
(In thousands)
Common Stock
---------------------
Number Retained Total
of Earnings Shareowners
Shares Amount (Deficit) Equity
------ ------- --------- -----------
BALANCE, MARCH 31, 1998................ 3,857 $ 6,065 $ 117 $ 6,182
Issuance of common stock in direct
public offering, net of offering costs
of $99................................ 228 1,138 -- 1,138
Shares repurchased..................... (4) (15) -- (15)
Net loss............................... -- -- (482) (482)
-----------------------------------------------
BALANCE, MARCH 31, 1999................ 4,081 7,188 (365) 6,823
Issuance of common stock, net of issue
costs of $22.......................... 800 3,578 -- 3,578
Exercise of common stock options under
option plan........................... 2 8 -- 8
Shares repurchased..................... (1) (3) -- (3)
Net loss............................... -- -- (1,290) (1,290)
-----------------------------------------------
BALANCE, MARCH 31, 2000................ 4,882 $10,771 $ (1,655) $ 9,116
===============================================
See notes to financial statements
F-26
REAL GOODS TRADING CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--Real Goods Trading Corporation (the "Company") was organized on
July 1, 1990 and sells primarily environmentally related, "healthy living" and
renewable energy products through mail order catalogs, four retail stores, the
Internet, and direct sales from its renewable energy department.
USE OF ESTIMATES--The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CHANGE IN PRESENTATION--Included in net sales for fiscal years 2000 and 1999
are shipping and handling fees collected from customers of $1,388,000 and
$1,516,000, respectively. Included in cost of sales for fiscal years 2000 and
1999 are freight out expenses of $1,118,000 and $1,152,000 respectively.
Previously, these amounts were presented as a net amount in selling, general and
administrative expenses. Such sales and cost of sales have been reclassified
into net sales and cost of sales for the periods presented because management
believes this more accurately represents the Company's true sales and cost of
sales amounts.
CASH AND MARKETABLE SECURITIES--Marketable securities are classified as
available-for-sale and are available to support current operations or to take
advantage of other investment opportunities. Marketable securities are stated at
estimated fair value based upon market quotes and consist of bonds, commercial
paper and Federal agency securities. As of March 31, 2000, fair value
approximated cost and no unrealized gain or loss was included in retained
earnings. Realized gains and losses are included in other income. Interest
earned is included in interest income. The Company has deposits in money funds
in excess of federally insured levels. These deposits are placed with quality
financial institutions.
INVENTORIES are stated at the lower of cost (first-in/first-out method) or
market. Inventories include expenses associated with acquiring the inventory.
DEFERRED CATALOG COSTS--The Company capitalizes the direct cost of producing
and distributing its mail order catalogs. Deferred catalog costs are amortized
based on the estimated sales lives of the catalogs, generally eighteen weeks.
PROPERTY, EQUIPMENT AND IMPROVEMENTS are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, which range from 5 to 40 years.
INTERNET SITE COSTS are capitalized in accordance with AICPA Statement of
Position (SOP) 98-1 and EITF 00-2 in connection with construction of Internet
site.
PROPERTY HELD FOR SALE--The building and land which were the former Snow Belt
Store are currently held for sale.
NOTE RECEIVABLE--AFFILIATE--The note receivable represents net funds advanced
to the Real Goods Institute for Solar Living ("ISL") and bears interest at 5.25%
per year. Interest only is payable until the ISL becomes self-funding.
PRE-OPENING COSTS for retail stores are expensed as incurred.
INCOME TAXES--The Company accounts for its income taxes using an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events
F-27
REAL GOODS TRADING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
that have been recognized in the Company's financial statements or tax returns.
In estimating future tax consequences, the Company generally considers all
expected future events other than changes in tax laws.
LOSS PER SHARE--Basic loss per share is computed by dividing net loss by the
weighted average number of shares outstanding for the period. Diluted loss per
share reflects the potential dilution that could occur if contracts to issue
common stock were exercised or converted to common stock. Dilutive stock options
were not included for the fiscal years ended March 31, 2000 and 1999, as the
Company incurred a net loss in each year and the effect would be antidilutive.
RECLASSIFICATION--The 1999 financial statements have been reclassified in
order to conform to the March 31, 2000 presentation.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS--Statement of Financial
Accounting Standard ("SFAS") No. 107, "Disclosures About Fair Value of Financial
Instruments" requires disclosure of the estimated fair value of financial
instruments. The carrying values of cash, marketable securities, accounts
receivable, accounts payable, and long-term debt approximates their estimated
fair values.
STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
COMPREHENSIVE INCOME--Comprehensive loss and net loss are the same.
2. MARKETABLE SECURITIES
During the year ended March 31, 2000, the Company purchased marketable
securities consisting of bonds and commercial paper. The following is a summary
of short-term investments included in marketable securities (in thousands):
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Loses Value
------- ---------- ---------- ---------
March 31, 2000:
Corporate Bonds.................... $ 411 $ -- $ -- $ 411
Federal agency securities.......... 579 -- -- 579
Commercial Paper................... 578 -- -- 578
------- ------ ------ ------
$ 1,568 $ -- $ -- $1,568
======= ====== ====== ======
All short-term investments mature within one year of March 31, 2000.
F-28
REAL GOODS TRADING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following at March 31 (in
thousands):
2000 1999
------- -------
Land....................................................... $ 480 $ 480
Land improvements.......................................... 783 783
Buildings and leasehold improvements....................... 1,821 1,551
Equipment, furniture and fixtures.......................... 2,219 1,732
Internet site costs........................................ 139 --
Construction in progress................................... 84 15
------- -------
Total.................................................... 5,526 4,561
Less accumulated depreciation.............................. (1,463) (1,008)
------- -------
Property, equipment and improvements, net.................. $ 4,063 $ 3,553
======= =======
4. LINE OF CREDIT
The Company has a line of credit agreement for $1,500,000 with National Bank
of the Redwoods (the "Bank"), which expires on February 28, 2001. Borrowings
bear interest at 1.5% over the prime rate, payable in monthly installments. At
March 31, 2000 and 1999, no amounts were outstanding on the Company's line of
credit.
The line of credit agreement contains restrictive covenants including debt to
net worth and current ratios, restrictions on capital expenditures, positive
cash flow at a certain point in the fiscal year and prohibitions on payment of
cash dividends without the Bank's approval. The line is collateralized by
substantially all of the Company's assets, including inventory, accounts
receivable and mailing lists as well as a key person life insurance policy on
the life of the Company's Chairman and largest shareowner.
5. DEBT
Long term debt consists of the following at March 31 (in thousands):
2000 1999
---- ----
Small Business Administration term loan, interest at 7.77%,
payable through September 2016, secured by land and building in
Hopland, California............................................. $551 $568
Less: current portion............................................ 17 16
Long-term portion................................................ $534 $552
Principal payments on long-term debt are as follows (in thousands):
Fiscal Year ending March 31:
2001................................................................ $ 17
2002................................................................ 19
2003................................................................ 20
2004................................................................ 22
2005................................................................ 23
Thereafter.......................................................... 450
----
Total............................................................. $551
====
F-29
REAL GOODS TRADING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. ASSET HELD FOR SALE
The Company owns land and buildings in Amherst, Wisconsin which it is seeking
to sell. At March 31, 1999 and 2000, the land and building had a net book value
of $78,000 and was rented out while it is being offered for sale.
7. LEASES
The Company has operating leases for its offices, warehouse facilities, the
Eugene and Berkeley stores and certain equipment, which expire from October 2000
through March 2010. Rental expense for the years ended March 31, 2000 and 1999
was $403,000 and $308,000 respectively.
Future minimum annual lease payments under operating leases are as follows
(in thousands):
Fiscal Year ending March 31:
2001.............................................................. $ 533
2002.............................................................. 525
2003.............................................................. 463
2004.............................................................. 456
2005.............................................................. 193
Thereafter........................................................ 631
------
Total........................................................... $2,801
======
8. INCOME TAXES
Income tax benefits consist of the following for the years ended March 31 (in
thousands):
2000 1999
----- -----
Current:
Federal...................................................... $ -- $ --
State........................................................ 1 1
----- -----
Total...................................................... 1 1
Deferred--federal............................................ (570) (151)
----- -----
Total benefit.............................................. $(569) $(150)
===== =====
The income tax benefit for financial reporting purposes are different from
the tax provision computed by applying the statutory federal income tax rate.
The differences for each year are reconciled as follows (in thousands):
2000 1999
----- -----
Federal income taxes at statutory income tax rate (34%)....... $(632) $(215)
State taxes net of federal tax benefit........................ (112) (14)
Effect of permanent differences............................... 6 8
Valuation allowance........................................... 100 107
Other......................................................... 69 (36)
----- -----
Benefit....................................................... $(569) $(150)
===== =====
F-30
REAL GOODS TRADING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The components of the net deferred tax asset (liability) at year-end are as
follows (in thousands):
2000 1999
----- -----
Deferred tax assets:
Benefit of net operating loss carryforwards.................. $ 792 $ 183
Allowance for doubtful accounts.............................. 110 --
Stock option compensation.................................... 14 14
Reduction in cost of property................................ 30 15
Other........................................................ 1 10
947 222
Less valuation allowance....................................... (283) (183)
----- -----
Non-current deferred tax asset................................. 664 39
----- -----
Deferred tax assets (liabilities):
Inventory reserves........................................... 47 99
Catalog costs................................................ (22) (37)
Accruals..................................................... 24 32
Other........................................................ 3 (5)
----- -----
Current deferred tax assets................................ 52 89
Less valuation allowance....................................... (18) --
----- -----
Current deferred tax asset..................................... 34 89
----- -----
Net deferred tax asset......................................... $ 698 $ 128
===== =====
Because of the uncertain nature of their ultimate utilization, a partial
valuation allowance is recorded against the deferred tax assets associated with
the net operating losses. At March 31, 2000, the Company has net operating
losses available for carryforward of approximately $1,950,000 and $1,536,000 for
federal and state purposes, respectively. The federal net operating loss and
$430,000 of the state net operating losses will expire in 2013 through 2020. The
remaining state net operating losses expire through 2005. The Company intends to
use various tax planning strategies to fully utilize the loss carryforwards
prior to expiration.
9. SHAREOWNER AGREEMENTS
The Chairman of the Board, founder and largest shareowner has a renewable
one-year employment agreement with the Company which provides for an annual
salary of $125,000. As of April 1, 2000 the Chairman voluntarily agreed to a
reduction in such salary to $110,000 on a month to month basis.
The Company also has a split dollar life insurance agreement with this
individual whereby the Company pays the premiums. The Company has been granted a
security interest in the cash value and death benefit of the policy, and certain
shares of the Company stock owned by the Chairman of the Board have been pledged
as additional collateral during the period in which the premiums exceed the cash
surrender value. The net cash surrender value at March 31, 2000 was $215,000 and
is included in other assets.
10. SHAREOWNERS' EQUITY
On August 11, 1997 the Company commenced a direct public offering of up to
1,000,000 shares of newly issued stock and 300,000 shares offered by a selling
shareholder at $5.50 per share. The offering closed on June 30, 1998.
Through March 31, 1999, the Company had issued 676,641 new shares of common
stock, generating gross proceeds of $3,620,000, and had incurred costs of
$697,000 related to the direct public offering.
F-31
REAL GOODS TRADING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
In August 1998, the Company was authorized to repurchase up to $100,000 of
common stock in open market and private transactions. In fiscal 1999, 3,900
shares were repurchased for $14,850. In fiscal 2000, 800 shares were repurchased
for $2,750. Through March 31, 2000, a total of 13,884 shares had been
repurchased for $66,643.
On September 23, 1999 WholePeople.com purchased 800,000 shares of common
stock for $3,578,000, net of issuance costs of $22,000.
Subsequent to year-end, in April 2000, the Company repurchased 50,000 shares
for $100,000.
11. BENEFIT PLANS AND STOCK OPTIONS
The Company sponsors a 401(k) retirement plan. The plan does not require
matching funds from the Company, and the Company has made no contributions to
the plan.
Under the Company's Third Amended and Restated Fiscal 1993 Stock Incentive
Plan ("Employee Plan") the Company can grant incentive and non-qualified options
to purchase 1,200,000 shares of common stock. Incentive Stock Options can be
granted at prices not less than 100% of the fair market value of the common
shares (85% for non-qualified options) on the date the option is granted, and
normally vest over a period not exceeding five years from the date of grant.
Options expire ten years from date of grant. As of March 31, 2000, options to
purchase 1,110,550 shares were outstanding.
In September 1998 the Board of Directors revised the exercise price of all
outstanding Employee Plan options to $4.50 per share.
The Company has reserved 100,000 shares of common stock for its Non-Employee
Directors' Stock Option Plan ("Director's Plan"). As of March 31, 2000, options
to purchase 75,000 shares were outstanding and none have been exercised.
Weighted
Average
Number of Exercise
Shares Price
-------------- --------
(in thousands)
Outstanding at March 31, 1998................... 344 $ 5.37
Granted......................................... 448 4.50
Forfeited....................................... (125) 5.37
Terminated as a result of option repricing...... (341) 5.39
Issued as a result of option repricing.......... 341 4.50
------ ------
Outstanding at March 31, 1999................... 667 4.59
Granted......................................... 838 4.50
Forfeited....................................... (317) (4.52)
Exercised....................................... (2) (4.50)
------ ------
Outstanding at March 31, 2000................... 1,186 $ 4.57
====== ======
Shares exercisable at March 31, 2000............ 194 $ 4.54
Shares available for grant at March 31, 2000.... 114
Range of exercise prices........................ $3.38 to $7.12
Weighted average remaining contractual life at
March 31, 2000 7.5 years
F-32
REAL GOODS TRADING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board No.25, "Accounting for Stock Issued to Employees" and its related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements in fiscal 1999 or 1998.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation", (SFAS 123) requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of the option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: Expected life, 120 months following
vesting in fiscal 2000 and fiscal 1999, stock volatility, 32% in fiscal 1999 and
55% in fiscal 2000; risk free interest rate 5.50% in fiscal 1999 and 5.65% in
fiscal 2000; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are calculated at a 50% rate, based on the Company's historical experience. If
the computed fair values of the fiscal 2000 and fiscal 1999 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
would have been $569,000 or $.14 per share in fiscal 1999, and the pro forma net
loss would have been $1,549,000 or $.35 per share in fiscal 2000.
F-33
REAL GOODS TRADING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
12. SEGMENT INFORMATION
The Company has three divisions (Catalog, Retail and Renewables), all of
which sell products purchased from other suppliers for sale directly to
customers. The customer bases of all three divisions overlap to some extent, and
the purchases and delivery processes to customers overlap as well.
Each of the three divisions qualifies as a reportable segment because each is
more than 10% of the combined revenue of all operating segments. Contribution is
defined as net sales less cost of goods sold and direct expenses. Financial
information for the Company's business segments was as follows:
FY 2000 FY 1999
------- -------
Net Sales:
Catalog Division.......................................... $11,699 $11,914
Retail Division........................................... 4,046 3,743
Renewables Division....................................... 3,234 3,079
------- -------
Consolidated Net Sales.................................... $18,979 $18,736
======= =======
Contribution:
Catalog Division............................................ $ 5,327 $ 5,459
Retail Division............................................. 1,519 1,400
Renewables Division....................................... 988 973
------- -------
Consolidated Contribution................................. $ 7,834 $ 7,832
======= =======
Reconciliation of Contribution to net loss:
Selling, general & administrative expenses
Catalog Division.......................................... $ 5,757 $ 5,687
Retail Division........................................... 2,267 1,748
Renewables Division....................................... 1,351 1,032
Solar Living Center....................................... 27 30
------- -------
Consolidated S G & A expenses............................... 9,402 8,497
Interest (income) expense................................... (63) (42)
Loss on sales of assets..................................... 354 9
Income tax benefit.......................................... (569) (150)
------- -------
Net Loss................................................ $(1,290) $ (482)
======= =======
F-34
REAL GOODS TRADING CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except share and per share data)
Six Months Ended
----------------------
Sept. 23, Sept. 25,
2000 1999
---------- ----------
Net sales..................... $ 6,679 $ 8,101
Cost of sales................. 4,148 4,822
Gross profit.................. 2,531 3,279
Selling, general and
administrative expenses.... 4,033 3,807
Loss from operations.......... (1,502) (528)
Interest income, net of
interest expense............. 42 8
Loss before income taxes...... (1,460) (520)
Income tax benefit............ 365 182
---------- ----------
Net loss.................. $ (1,095) $ (338)
========== ==========
Net loss per share, basic
and diluted.............. $ (0.23) $ (0.08)
Weighted average shares
outstanding, basic and
diluted...................... 4,824,354 4,081,339
See notes to condensed financial statements
F-35
REAL GOODS TRADING CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
------------------
Sept.
23, Sept. 25,
2000 1999
------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $(1,095) $ (338)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization............................ 259 204
Deferred income taxes.................................... (365) (182)
Changes in assets and liabilities:
Receivables.............................................. (38) (77)
Inventory................................................ 520 (1,087)
Deferred catalog costs................................... 51 --
Prepaid expenses......................................... (40) 36
Other.................................................... -- 11
Accounts payable......................................... (532) (136)
Accrued expenses......................................... (36) (122)
Customer deposits........................................ 56 (29)
Other taxes payable...................................... 16 (30)
------- -------
Net cash from operating activities..................... (1,204) (1,750)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, improvements, and construction in
progress................................................ (372) (188)
Note and interest receivable from affiliate.............. (4) (95)
Marketable Securities.................................... 1,568 --
------- -------
Net cash from investing activities..................... 1,192 (283)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of stock...................................... (147) (3)
Repayment of debt........................................ (8) (8)
Proceeds from issuance of common stock, net of issue
costs................................................... -- 3,587
------- -------
Net cash from financing activities..................... (155) 3,576
------- -------
Net increase (decrease) in cash............................ (167) 1,543
Cash at beginning of period................................ 876 2,048
------- -------
Cash at end of period...................................... $ 709 $ 3,591
======= =======
See notes to condensed financial statements
F-36
REAL GOODS TRADING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended September 23, 2000
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
from the records of the Company and, in the opinion of management, include all
adjustments (consisting of only normal recurring accruals) necessary to present
fairly the financial position as of September 23, 2000 and the interim results
of operations and cash flows for the six months ended September 23, 2000 and
September 25, 1999. Accounting policies followed by the Company are described in
Note 1 to the audited financial statements for the fiscal year ended March 31,
2000 included in the Company's fiscal 2000 Annual Report to Shareowners. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted for purposes of the condensed financial statements. The
condensed financial statements should be read in conjunction with the audited
financial statements, including notes thereto, for the year ended March 31,
2000. The results of operations for the six month periods herein presented are
not necessarily indicative of the results to be expected for the full year.
NOTE 2--PRESENTATION OF SHIPPING AND HANDLING FEES
Included in net sales for the six month periods ended September 23, 2000 and
September 25, 1999 are shipping and handling fees collected from customers of
$226,000 and $438,000 in fiscal 2001 and $259,000 and $536,000 in fiscal 2000,
respectively. Included in cost of sales for the six month periods ended
September 23, 2000 and September 25, 1999 are freight out expenses of $225,000
and $424,000 in fiscal 2001 and $184,000 and $432,000 in fiscal 2000,
respectively.
NOTE 3--LINE OF CREDIT
The Company has a line of credit agreement for $1,500,000 with National Bank
of the Redwoods (the "Bank") which expires on February 28, 2001. Borrowings
bear interest at 1.5% over the prime rate, payable in monthly installments. The
line of credit agreement contains restrictive covenants including debt to net
worth, current ratios, restrictions on capital expenditures, and prohibitions
on payment of cash dividends without the Bank's approval. The line is
collateralized by substantially all of the Company's assets, including
inventory, accounts receivable and mailing lists as well as a key person life
insurance policy on the life of the Company's Chairman and largest shareowner.
As of September 23, 2000, no amounts were outstanding on the Company's line of
credit.
NOTE 4--SHAREOWNERS' EQUITY
In two separate resolutions in August 1998 and April 2000, the Board of
Directors authorized the Company to purchase up to a total of $200,000 of
common stock in open market and private transactions. During the first six
months of fiscal 2001 the Company repurchased 67,500 shares at an average cost
of $2.17 per share.
NOTE 5--SEGMENT INFORMATION
The Company has four divisions (Catalog, Internet, Retail and Renewables),
all of which sell products purchased from other suppliers directly to
customers. The customer bases of all four divisions overlap to some extent, and
the purchase and delivery processes to customers overlap as well.
F-37
REAL GOODS TRADING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Each of the four divisions qualifies as a reportable segment because each is
more than 10% of the combined revenue of all operating segments. Financial
information for the Company's business segments for the six months ended
September 23, 2000 and September 25, 1999 was as follows:
Sept.
23, Sept. 25,
2000 1999
------- ---------
Net Sales:
Catalog Division.................................... $ 2,624 $4,066
Internet Division................................... 833 445
Retail Division..................................... 2,083 1,701
Renewables Division................................. 1,059 1,889
Other............................................... 80
------- ------
Consolidated Net Sales.............................. 6,679 8,101
Gross Profit:
Catalog Division.................................... 1,115 1,840
Internet Division................................... 343 200
Retail Division..................................... 773 656
Renewables Division................................. 270 583
Other............................................... 30 --
Consolidated Gross Profit........................... 2,531 3,279
Reconciliation of Gross Profit to Net Loss:
Selling, general & administrative expenses:
Catalog Division.................................. 1,678 1,979
Internet Division................................. 482 141
Retail Division................................... 1,326 921
Renewables Division............................... 472 753
Other............................................. 75 13
Consolidated S G & A expenses..................... 4,033 3,807
Interest income....................................... 65 31
Interest expense...................................... (23) (23)
Gain on sale of assets................................ -- --
Income tax benefit.................................... 365 182
Net Loss............................................ $(1,095) $ (338)
NOTE 6--SUBSEQUENT EVENT
On October 13, 2000, the Company signed an agreement to merge the Company
with a subsidiary of Gaiam, Inc. subject to Real Goods shareholder approval and
other customary conditions. Details about this agreement can be found by
examining the Company's press releases and the Form 8-K filed on October 31,
2000.
F-38
Gaiam, Inc.
Unaudited Pro Forma Combined Condensed Statement of Operations
The fiscal years for Gaiam and Real Goods differ. The following
unaudited pro forma combined condensed statements of operations for the year
ended December 31, 2000 and the three months ended March 31, 2001 are derived
from the historical consolidated condensed statements of operations of Gaiam,
Inc. and the historical condensed statements of operations of Real Goods Trading
Corporation for the twelve month period ended December 31, 2000 and the three
months ended March 31, 2000, adjusted to give effect to their consolidation
using the purchase method of accounting for business combinations.
The unaudited pro forma combined condensed statement of operations for
the twelve months ended December 31, 2000 assumes that the merger occurred on
January 1, 2000, while the unaudited pro forma combined condensed statement of
operations for the three months ended March 31, 2001 assumes that the merger
occurred on January 1, 2001.
The pro forma combined condensed statements of operations are provided
for illustrative purposes only and should be read in conjunction with the
accompanying notes thereto, and the audited consolidated financial statements
and notes thereto of Gaiam, Inc. as of and the for year ended December 31, 2000
and the unaudited consolidated financial statements of Gaiam, Inc. as of and for
the three months ended March 31, 2001, and the audited financial statements and
the notes thereto of Real Goods Trading Corporation for the year ended March 31,
2000. The pro forma data is not necessarily indicative of the operating results
or financial position that would have been achieved had the merger been
consummated at the dates indicated, nor is it necessarily indicative of future
operating results and financial condition.
F-39
Gaiam, Inc.
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Year Ended December 31, 2000
(Unaudited)
Historical
-------------------------------------------
Real Goods Total
Gaiam, Inc. Trading Corp. (a) Pro Forma combined
-------------- --------------------- ------------------
Net revenue $60,588,018 $15,897,599 $76,485,617
Cost of goods sold 23,793,492 9,710,211 33,503,703
------------- ------------ ------------
Gross profit 36,794,526 6,187,388 42,981,914
Selling, general and administrative 32,366,760 9,291,494 41,658,254
------------- ------------ ------------
Income (loss) from operations 4,427,766 (3,104,106) 1,323,660
Other income (expense) (73,947) (354,460) (428,407)
Interest income (expense) - net (209,167) 53,095 (156,072)
------------- ------------ ------------
Other income (expense) (283,114) (301,365) (584,479)
Profit (loss) before income taxes 4,144,652 (3,405,471) 739,181
Provision for income taxes (1,555,487) 943,139 (612,348)
Minority interest in net (income) loss of
consolidated subsidiary, net of tax 59,706 - 59,706
------------- ------------ ------------
Net income (loss) $ 2,648,871 ($2,462,332) $ 186,539
============= ============ ============
Net income per share:
- Basic $ 0.24 $ 0.02
- Diluted $ 0.23 $ 0.02
Shares used in computing net
income per share (b):
- Basic 10,858,139 11,339,563
- Diluted 11,525,120 12,006,544
See accompanying notes.
F-40
Gaiam, Inc.
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Three Months Ended March 31, 2001
(Unaudited)
Historical
-------------------------------------------
Real Goods Total
Gaiam, Inc. Trading Corp. (c) Pro Forma Combined
--------------- --------------------- ------------------
Net revenue $17,671,513 $1,416,077 $19,087,590
Cost of goods sold 6,847,590 961,432 7,809,022
------------- ------------ ------------
Gross profit 10,823,923 454,645 11,278,568
Selling, general and administrative 10,088,558 1,133,017 11,221,575
------------- ------------ ------------
Income (loss) from operations 735,365 (678,372) 56,993
Other income (expense) 184,615 - 184,615
Interest income (expense) - net (116,917) 2,369 (114,548)
------------- ------------ ------------
Other income (expense) 67,698 2,369 70,067
Profit (loss) before income taxes 803,063 (676,003) 127,060
Provision for income taxes (301,390) 169,271 (132,119)
Minority interest in net (income) loss of
consolidated subsidiary, net of tax (82,645) - (82,645)
------------- ------------ ------------
Net income (loss) $ 419,028 ($506,732) ($87,704)
============= ============ ============
Net income per share:
- Basic $ 0.04 $ (0.01)
- Diluted $ 0.04 $ (0.01)
Shares used in computing net
income per share (b):
- Basic 11,205,844 11,355,651
- Diluted 11,563,172 11,712,979
See accompanying notes.
F-41
Gaiam, Inc.
Unaudited Pro Forma Combined Condensed Statement of Operations
Notes to Unaudited Pro Forma Combined Condensed Statements of Operations:
------------------------------------------------------------------------
(a) Represents the results of operations of Real Goods Trading Corporation from
January 1, 2000 through December 31, 2000, and was calculated by taking the
results of operations for the year ended March 31, 2000 as reported,
subtracting the results of operations for the nine month period ending
December 31, 1999, and adding the results of operations for the nine month
period ended December 31, 2000.
(b) Adjusted to reflect the issuance of 481,424 shares of Gaiam, Inc. Class A
common stock to Real Goods shareholders as of January 1, 2000 and 2001,
respectively.
(c) Represents the results of operations of Real Goods Trading Corporation from
January 1, 2001 through January 29, 2001 (the date of acquisition).
F-42
[Inside Back cover]
[Pictures]
Dealer Prospectus Delivery Obligation. Until ______________, 2001, all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The registrant's expenses in connection with the offering described in this
registration statement are set forth below. All amounts except the Securities
and Exchange Commission registration fee, the NASD filing fee and the listing
fee are estimated.
Securities and Exchange Commission registration fee............... $9,057.50
NASD filing fee................................................... 4,122.96
NASDAQ National Market listing fee................................ *
Printing and engraving expenses................................... *
Accounting fees and expenses...................................... *
Legal fees and expenses........................................... *
Blue Sky fees and expenses (including legal fees)................. *
Transfer agent's and registrar fees and expenses.................. *
Miscellaneous..................................................... *
________
Total............................................................. $
========
________
* To be completed by amendment.
Item 14. Indemnification of Directors and Officers.
Colorado law provides for indemnification of directors, officers and other
employees in certain circumstances (C.R.S. (S) 7-109-101 et. seq. (1994)) and
for the elimination or limitation of the personal liability for monetary damages
of directors under certain circumstances (C.R.S. (S) 7-108-402 (1994)). The
Amended and Restated Articles of Incorporation of Gaiam eliminate the personal
liability for monetary damages of directors under certain circumstances and
provide 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 maintains a $5,000,000 directors and officers insurance policy providing
insurance indemnifying Gaiam's directors and executive officers for certain
liabilities. This insurance policy insures the past, present and future
directors and officers of Gaiam, with certain exceptions, from claims arising
out of any error, misstatement, misleading statement, act, omission, neglect or
breach of duty by any of the directors while acting in their capacities as such.
Claims include claims arising from sales and purchases of Gaiam securities and
shareholder derivative actions.
Item 15. Recent Sales of Unregistered Securities.
The following table summarizes securities issued or sold by Gaiam within the
past three years that were not sold pursuant to registered offerings:
------------------------------------------------------------------------------------------------------------------------------------
Date Purchaser Number of Debentures/ Warrants/ Consideration Exemption(s)
Shares of Notes Options Claimed*
Class A
Common Stock
------------------------------------------------------------------------------------------------------------------------------------
privately
September 30, James 120,000 $500,000 -- $1,025,000 negotiated
1998 Argyopoulos/ sale under
Argyopoulos Section 4(2)
Investor G.P. of the
Securities Act.
------------------------------------------------------------------------------------------------------------------------------------
privately
October 1, Jirka Rysavy -- $531,000 -- Stock of InnerBalance negotiated
1998 sale under
Section 4(2)
of the
Securities Act.
------------------------------------------------------------------------------------------------------------------------------------
privately
December 7, Lynn Powers 40,000 $ 50,000 -- $ 100,000 negotiated
1998 sale under
Section 4(2)
of the
Securities Act.
------------------------------------------------------------------------------------------------------------------------------------
privately
January 7, Mo Siegel 17,143 $ 75,000 -- $ 150,000 negotiated
1999 sale under
Section 4(2)
of the
Securities Act.
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Date Purchaser Number of Debentures/ Warrants/ Consideration Exemption(s)
Shares of Notes Options Claimed*
Class A
Common Stock
------------------------------------------------------------------------------------------------------------------------------------
privately
April 20, 1999 Jeffrey Steiner 120,000 $500,000 -- $1,025,000 negotiated
sale under
Section 4(2)
of the
Securities Act.
------------------------------------------------------------------------------------------------------------------------------------
privately
May 6, 1999 Edward Snider 57,143 $250,000 -- $ 500,000 negotiated
sale under
Section 4(2)
of the
Securities Act.
------------------------------------------------------------------------------------------------------------------------------------
privately
May 6, 1999 Herbert Simon 57,143 $250,000 -- $ 500,000 negotiated
sale under
Section 4(2)
of the
Securities Act.
------------------------------------------------------------------------------------------------------------------------------------
privately
May 7, 1999 Mike Gilliland 22,857 $100,000 -- $ 200,000 negotiated
sale under
Section 4(2)
of the
Securities Act.
------------------------------------------------------------------------------------------------------------------------------------
privately
May 6, 1999 Lennart Perlhagen 57,143 $250,000 -- $ 500,000 negotiated
and June 8, sale under
1999 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
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
of the
Securities Act.
------------------------------------------------------------------------------------------------------------------------------------
privately
November Steve Troy 167,247 -- -- Stock of negotiated
1999 Jade Mountain, Inc. sale under
and Section 4(2)
jademountain.com, of the
Inc. Securities Act.
------------------------------------------------------------------------------------------------------------------------------------
November Steven P. and 40,000 -- -- Interest in Healing Arts privately
1999 Elizabeth Adams Publishing, LLC negotiated
(dba Living Arts) sale under
Section 4(2)
of the
Securities Act.
------------------------------------------------------------------------------------------------------------------------------------
Privately
February 29, Daniel and 14,000 -- -- Option to purchase negotiated
2000 Marylou stock of sale under
Sanders EcoSport, Inc. Section 4(2)
of the
Securities Act.
------------------------------------------------------------------------------------------------------------------------------------
Privately
June 20, 2000 Sharon Conroy 7,243 -- -- Stock of Fish Crane, negotiated
Inc. sale under
Section 4(2)
of the
Securities Act.
------------------------------------------------------------------------------------------------------------------------------------
* We believe that exemptions in addition to those specified above may exist
with respect to the listed transactions.
Item 16. Exhibits and Financial Statement Schedules.
EXHIBITS:
-----------------------------------------------------------------------------------------------------------------------------------
Exhibit No. Description
-----------------------------------------------------------------------------------------------------------------------------------
1.1* Form of Underwriting Agreement
-----------------------------------------------------------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of Gaiam, Inc.
(incorporated by reference to Exhibit 3.1 of Gaiam's Registration
Statement on Form S-1 (No. 333-83283)).
-----------------------------------------------------------------------------------------------------------------------------------
3.2 Bylaws of Gaiam, Inc. (incorporated by reference to Exhibit 3.2 of
Gaiam's Registration Statement on Form S-1 (No. 333-83283)).
-----------------------------------------------------------------------------------------------------------------------------------
4.1 Form of Gaiam, Inc. Stock Certificate (incorporated by reference to Exhibit 4.1
of Gaiam's Registration Statement on Form S-1 (No. 333-83283)).
-----------------------------------------------------------------------------------------------------------------------------------
5.1* Opinion of Bartlit Beck Herman Palenchar & Scott
-----------------------------------------------------------------------------------------------------------------------------------
10.1 Loan Agreement, dated as of April 16, 2001, between Gaiam, Inc. and
Wells Fargo Bank West, N.A.
-----------------------------------------------------------------------------------------------------------------------------------
10.2 Gaiam, Inc. 1999 Long-Term Incentive Plan (incorporated by reference to
Exhibit 10.1 of Gaiam's Registration Statement on Form S-1 (No. 333-83283)).
-----------------------------------------------------------------------------------------------------------------------------------
10.3 Lease, dated December 16, 1999, between Gaiam, Inc. and Duke-Weeks Realty
Limited Partnership (incorporated by reference to Exhibit 10.2 of Gaiam's
Registration Statement on Form S-4 (No. 333-505-60)).
-----------------------------------------------------------------------------------------------------------------------------------
10.4 Lease, dated December 18, 1997, between Gaiam, Inc. and Orix Prime West
Broomfield Venture (incorporated by reference to Exhibit 10.4 of
Gaiam's Registration Statement on Form S-1 (No. 333-83283)).
-----------------------------------------------------------------------------------------------------------------------------------
21.1 Subsidiaries of Gaiam, Inc.
-----------------------------------------------------------------------------------------------------------------------------------
23.1 Consent of Ernst & Young LLP, independent auditors of
Gaiam, Inc.
-----------------------------------------------------------------------------------------------------------------------------------
23.2* Consent of Bartlit Beck Herman Palenchar & Scott (included in the
opinion filed as Exhibit 5.1)
-----------------------------------------------------------------------------------------------------------------------------------
23.3 Consent of Moss Adams LLP
-----------------------------------------------------------------------------------------------------------------------------------
23.4 Consent of Deloitte & Touche LLP
-----------------------------------------------------------------------------------------------------------------------------------
24.1 Power of Attorney (included in signature page to this Registration Statement).
-----------------------------------------------------------------------------------------------------------------------------------
* To be filed by amendment.
Item 17. Undertakings.
(a) 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.
(b) Gaiam hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared effective.
(c) Gaiam hereby undertakes that, for the purpose of determining any
liability under the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
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 June 20, 2001.
Gaiam, Inc.
By: /s/ Jirka Rysavy
------------------------------------------
Jirka Rysavy, Chief Executive Officer
POWER OF ATTORNEY
KNOW BY ALL MEN THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jirka Rysavy and Lynn Powers, and each of them,
his or her true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him or her and in his or her name, place and
stead, in any and all capacities to sign any and all amendments (including post-
effective amendments) to this Registration Statement, and to file the same, with
all exhibits thereto, and other documents in connection therewith, including,
without limitation, any registration statement filed pursuant to Rule 462 under
the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that each of said attorneys-in-fact and agents or any of them
or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated opposite their names.
--------------------------------------------------------------------------------------------------------
Signature Title Date
--------------------------------------------------------------------------------------------------------
Jirka Rysavy, Chairman of the Board and Chief
/s/ Jirka Rysavy Executive Officer June 20, 2001
--------------------------------------------------------------------------------------------------------
Lynn Powers, President, Chief Operating
/s/ Lynn Powers Officer and director June 20, 2001
--------------------------------------------------------------------------------------------------------
/s/ Barnet M. Feinblum Barnet M. Feinblum, director May 24, 2001
--------------------------------------------------------------------------------------------------------
/s/ John Mackey John Mackey, director May 24, 2001
--------------------------------------------------------------------------------------------------------
/s/ Barbara Mowry Barbara Mowry, director May 24, 2001
--------------------------------------------------------------------------------------------------------
/s/ Paul Ray Paul H. Ray, director May 24, 2001
--------------------------------------------------------------------------------------------------------
Janet Mathews,
/s/ Janet Mathews Chief Financial Officer June 20, 2001
--------------------------------------------------------------------------------------------------------