<PAGE>
As filed with the Securities and Exchange Commission on September 29, 1999
Registration No. 333-83283
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 3
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
GAIAM, INC.
(exact name of registrant as specified in its charter)
Colorado 5961, 7375 84-111-35-27
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
360 Interlocken Blvd., Suite 300
Broomfield, Colorado 80021
(303) 464-3600
(address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
JIRKA RYSAVY
Chief Executive Officer
Gaiam, Inc.
360 Interlocken Blvd, Suite 300
Broomfield, Colorado 80021
(303) 464-3600
(name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies To:
<TABLE>
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JAMES L. PALENCHAR, ESQ KEVIN A. CUDNEY, ESQ
BARTLIT BECK HERMAN PALENCHAR DORSEY & WHITNEY LLP
& SCOTT 370 17th Street, Suite 4400
511 16th Street, Suite 700 Denver, Colorado 80202
Denver, Colorado 80202 Telephone: 303-629-3400
Telephone: 303-592-3100 Facsimile: 303-629-3450
Facsimile: 303-592-3140
</TABLE>
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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. [_]
----------------
The Registrant Hereby Amends This Registration Statement On Such Date Or
Dates As May Be Necessary To Delay Its Effective Date Until The Registrant
Shall File A Further Amendment Which Specifically States That This
Registration Statement Shall Thereafter Become Effective In Accordance With
Section 8(a) Of The Securities Act Of 1933 Or Until The Registration Statement
Shall Become Effective On Such Date As The Commission, Acting Pursuant To Said
Section 8(a), May Determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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, SEPTEMBER 29, 1999
PROSPECTUS , 1999
2,000,000 Shares of Class A Common Stock
$5.00 per share
($4.50 per share for Gaiam customers, up to 200 shares per customer and a
maximum of 1,000,000 shares)
[Gaiam logo]
-----------
Gaiam produces and sells goods, services and information targeted to
customers who value the environment, a sustainable economy, healthy lifestyles
and personal development.
This is our initial public offering. We will apply for quotation of our
shares on the Nasdaq National Market under the symbol "GAIA."
We intend to allocate shares first to our customers and then to the general
public. Our customers will receive a 10% discount from the initial public
offering price (or a price of $4.50 per share) on up to 200 shares per customer
and a maximum of 1,000,000 shares. The minimum order size in this offering for
Gaiam customers and for the public is 50 shares. Up to 395,000 shares may be
sold to holders of our debentures in exchange for the outstanding principal
amount of the debentures at $5.00 per share.
-----------
See "Risk Factors" beginning on page 9 to read about material risks you should
consider before buying our shares.
-----------
<TABLE>
<CAPTION>
Per
Share Total Shares
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<S> <C> <C> <C>
Public offering price:............................ $5.00 $5,000,000* 1,000,000
Underwriting discounts and commissions:........... $0.50 $ 500,000*
Proceeds to Gaiam:................................ $4.50 $4,500,000*
Gaiam customer offering price
(up to 200 shares per customer and a maximum of
1,000,000 shares):............................... $4.50 $4,500,000* 1,000,000
Underwriting discounts and commissions:........... $0.45 $ 450,000*
Proceeds to Gaiam:................................ $4.05 $4,050,000*
Total Proceeds to Gaiam Total Shares.............. $8,550,000 2,000,000
</TABLE>
- -----
* We do not know how many of the shares offered will be purchased by our
customers at the $4.50 offering price, but the maximum available at that
price is 1,000,000 shares. The underwriters have an option to purchase an
additional 300,000 shares from Gaiam for resale to the public at the $5.00
offering price per share to cover any over-allotments. The closing of this
offering is expected to occur on or about October , 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
-----------
Tucker Anthony Cleary Gull Adams, Harkness & Hill, Inc.
<PAGE>
[Inside front cover]
[Pictures]
TABLE OF CONTENTS
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Page
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Prospectus Summary....................................................... 3
Questions and Answers for Gaiam Customers................................ 6
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Our Business............................................................. 28
Management............................................................... 40
Certain Transactions..................................................... 43
Our Shareholders......................................................... 44
Description of Capital Stock............................................. 46
Shares Eligible for Future Sale.......................................... 48
Underwriting ............................................................ 50
Legal Matters............................................................ 52
Experts.................................................................. 52
Additional Information................................................... 52
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary, together with the more detailed
information and Gaiam's consolidated financial statements and related notes
appearing elsewhere in this prospectus.
OUR BUSINESS
Founded in Boulder, Colorado in 1988, Gaiam (pronounced "gi am") produces
and sells goods, services and information targeted to customers who value the
environment, a sustainable economy, healthy lifestyles and personal
development. We reach our customers through catalogs, the Internet and
retailers.
We strive to provide our customers an opportunity to practice what we call
"conscious commerce." This term describes the practice of making purchasing
decisions based on the personal values and beliefs. We believe many of our
consumers are concerned about personal and planetary health and sustainability
and want to use their purchasing decisions to effect positive change. We call
this "voting for their values with their dollars."
Our name, Gaiam, is a fusion of the words "Gaia" and "I am." Gaia, mother
Earth, was honored on the Isle of Crete in ancient Greece 4,000 years ago by
the Minoan civilization. This civilization valued education, art, science,
recreation and the environment and believed that the Earth was directly
connected to their existence and daily life.
The concept of Gaia stems from this ancient philosophy that the Earth is a
living entity. At Gaiam, we believe that all of the Earth's living matter, air,
oceans and land form an interconnected system that can be seen as a single
entity. According to a 1996 study published by the Institute of Noetic
Sciences, "The Integral Culture Survey," this view is shared by over 90% of a
group called "cultural creatives." This study estimates that this demographic
group, which shares the values of environmental awareness, healthy lifestyles
and personal development, numbered 44 million in the United States in 1994. The
author of this study, Paul Ray, has agreed to join our board of directors upon
completion of this offering.
From 1996 to 1998, our revenues increased from $14.8 million to $30.7
million, representing a compound annual growth rate of approximately 44%. Our
number of unique individual customers increased from 300,000 at the end of
1996, to 685,000 at the end of 1998 and to 800,000 at June 30, 1999.
Although our historical sales have been predominantly through catalogs and
retailers, we are shifting our sales emphasis to the Internet and we intend to
make the Internet our primary channel of distribution. Engaging in sales on the
Internet, sometimes called "e-commerce," may subject us to risks and
uncertainties not historically associated with our business. These risks will
include incurring increased costs of enhancing and maintaining our websites and
acceptance of the Internet by consumers as a place to purchase our goods and
services.
3
<PAGE>
OUR MARKET OPPORTUNITY
We believe that several markets share a common customer base that we
believe practices conscious commerce. Because of this common customer base, we
believe these markets should be viewed collectively as one industry. We have
named this industry "Lohas" -an acronym for Lifestyles Of Health And
Sustainability, and we divide the Lohas industry into five markets that shape
the industry:
Sustainable Economy. This market includes environmental management
services and solutions, renewable energy, energy conservation products and
services, sustainable manufacturing processes, recycling and goods made
from recycled materials.
Healthy Living. This market includes food supplements, vitamins and
minerals, natural and organic foods, and natural personal body care and
information and services related to these products.
Alternative Healthcare. This market includes natural health and wellness
solutions, information, products and services, including alternative,
noninvasive treatments, massage, chiropractic, acupuncture, acupressure,
biofeedback and aromatherapy.
Personal Development. This market includes experiences, solutions,
products, information and services relating to mind, body and spiritual
development, such as yoga, meditation, relaxation, spirituality, ancient
religions, esoteric sciences and realizing human potential. The fitness
elements of this market are often referred to as "mind-body-spirit."
Ecological Lifestyles. This market includes information, products and
services that offer environment-friendly solutions, natural untreated fiber
products and eco-tourism.
Gaiam currently produces and sells information, goods and services in each
market of the Lohas industry under three brand names:
.Harmony targets the Sustainable Economy and Ecological Lifestyles markets;
.Living Arts targets the Personal Development market; and
.InnerBalance targets the Alternative Healthcare and Healthy Living
markets.
OUR STRATEGY
We are not aware of a dominant market leader for the entire Lohas industry
and we believe the industry is characterized by a fragmented supplier and
distribution network.
Gaiam seeks to establish itself as a brand name, information resource and
authority in the Lohas industry.
We view the Internet as an opportunity to enhance relationships with our
customers and reduce consumption of natural resources. Through our Internet
site, www.gaiam.com, we strive to create an online community where our
customers will share information, solutions and experiences and promote
interactive feedback. Our customer service representatives have learned from
our customers that many of them desire to acquire information from a trusted
source offering them a personalized, concise and reliable view into the vast
and inconsistent universe of information. We believe we are well positioned to
be a source such as this because of our customer participation, as evidenced
by a customer survey which drew a 50% response rate. However, because the
Internet and e-commerce industry are subject to technological changes, our
strategy to expand our presence online and create an online community has
additional costs and risks associated with it.
We intend to pursue the following strategies to benefit our customers:
.Focus on Our Online Presence
4
<PAGE>
.Strengthen Our Brand
.Offer Quality, Convenience and Wide Selection
.Develop Business-to-Business Opportunities
.Complement our Existing Business with Selective Strategic Acquisitions
We believe customers should have opportunities to invest in companies they
are helping create. In this offering, we will give preference to our customers
in allocating shares and give them a 10% discount for purchases of up to 200
shares. The maximum number of shares available at this price is 1,000,000.
Gaiam was organized as a Colorado corporation on July 7, 1988. Gaiam's
principal office is located at 360 Interlocken Blvd., Suite 300, Broomfield,
Colorado 80021, and its telephone number is (303) 464-3600.
The Offering
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<S> <C>
Class A common stock offered by 2,000,000 shares
Gaiam................................
Class A common stock outstanding after 3,496,429 shares (1)
this offering........................
Class B common stock outstanding after 7,035,000 shares
this offering........................
Total common stock outstanding after 10,531,429 shares
this offering........................
Use of proceeds....................... Working capital and other general
corporate purposes, including the
possible acquisition of the minority
interest in one of our subsidiaries,
other acquisitions and the repayment of
up to $2.725 million principal amount
of debt. See "Use of Proceeds" and
"Our Business."
Proposed Nasdaq National Market GAIA
symbol...............................
</TABLE>
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(1) Based on the number of shares outstanding on June 30, 1999. Excludes
approximately 675,000 shares issuable upon exercise of options outstanding
as of June 30, 1999, each at an exercise price of $4.375 per share. No
options are currently exercisable. See "Management."
The information in this prospectus assumes that Gaiam's proposed 1-for-2.5
reverse stock split has occurred and that the underwriters' over-allotment
option is not exercised. Except where specified, references to Gaiam's shares
refer to shares of its class A common stock. The information on our website,
including any online discussion forums, and in our catalogs and other marketing
materials is not part of this prospectus. References in this prospectus to
"Gaiam," "we," "our" and "us" refer to Gaiam, Inc., and not to the persons who
manage Gaiam or sit on its Board of Directors.
5
<PAGE>
QUESTIONS AND ANSWERS FOR GAIAM CUSTOMERS
This summary answers some questions about how the offering process will work
for Gaiam customers who wish to purchase shares. You should also carefully read
the rest of this prospectus for information about this offering, the shares and
Gaiam.
Q. What is the price of the shares for Gaiam customers?
A. Shares purchased by a Gaiam customer, up to the first 200, will be
discounted 10% and will cost $4.50 per share. Fifty shares, the minimum
order, will cost $225, and 200 shares will cost $900. No more than 1,000,000
shares will be sold at the discounted price, so it may not be possible to
give you the $4.50 price for all shares (up to 200) requested.
Customer purchases of additional shares over the initial 200 shares will
cost $5.00 per share. For example, an additional 100 shares will cost $500
(or $1,400 for all 300 shares).
Q. Is there a minimum number of shares I have to buy?
A. Yes. Orders for fewer than 50 shares will not be accepted.
Q. How many shares can I request?
A. There is no limit on the number of shares a customer may request, but we may
not have enough shares to meet your request.
Q. Is there a guarantee that I will be able to buy shares?
A. No, but Gaiam intends to prioritize the allocation process so that customers
who ask to buy shares and place orders early will be able to buy shares.
There is no guarantee, however, that this will be possible. We may need to
allocate shares if we receive orders for more shares than are offered by
this prospectus.
Q. How do I request shares?
A. On about September 30, 1999, we will send a preliminary prospectus to all
Gaiam customers
who had previously requested a prospectus. Accompanying the preliminary
prospectus will be a conditional offer form, a Federal income tax form W-9
and a limited account application to open an account at Tucker Anthony
Incorporated, an affiliate of Tucker Anthony Cleary Gull. The conditional
offer form includes a place for you to indicate how many shares you would
like to buy. If you have an interest in buying shares, send the account
form, the form W-9 and the conditional offer form back in the envelope
provided as soon as possible -- Tucker Anthony must receive all forms by
October 15, 1999. Customers can also obtain the conditional offer form and
the account application by calling Tucker Anthony Incorporated at the phone
number listed below.
Q. What is a conditional offer to purchase shares?
A. A conditional offer is your offer to purchase shares at the price described
above. Your offer to purchase shares is not binding until after Gaiam's
registration statement is declared effective by the Securities and Exchange
Commission, at which time you will receive a confirmation stating that your
offer has been accepted.
Q. If I make a conditional offer must I send a check?
A. Please do not send a check back with your conditional offer form. You will
need to send a check after Gaiam's registration statement is declared
effective by the Securities and Exchange Commission, but we will notify you
of when that occurs.
Q. How will Gaiam allocate shares that have been ordered by customers?
A. Our goal is to try to allocate shares to our best customers and to have as
many customers as possible become shareholders. If we have requests from
customers for a greater number of shares, we will allocate them to customers
in three ways:
6
<PAGE>
1. Up to 500,000 shares will be allocated to the first 1,000 customers on a
first come, first served basis, based on the date customers' account
application are received by Tucker Anthony.
If these first 1,000 customers request more than 500,000 shares in the
aggregate, we will allocate shares to customers in a way that will attempt
to make sure both that the greatest number of shares get allocated to the
customers who have the highest dollar value of purchases from Gaiam over
the past 12 months and that all 1,000 customers get to participate to some
degree in this allocation. We may not be able to achieve both results, but
we will use our discretion to try to do so.
2. A total of approximately 500,000 shares will be allocated to customers based
on the dollar volume of the customer's purchases from Gaiam over the past 12
months and to customers who are also Gaiam employees, consultants,
contractors or family members. Customers who received shares because they
were among the first 1,000 customers to return account applications, may
have additional shares allocated under this paragraph if the request was not
filled.
3. Finally, a total of approximately 200,000 shares will be allocated to
customers by lottery.
Q. How will the sales process work?
A. After completed account forms and conditional offer forms are received,
representatives of Tucker Anthony will contact you by telephone to inform
you of the maximum number of shares that have been allocated to you for
purchase and to confirm that you are interested in purchasing that number of
shares. When the registration statement covering the shares becomes
effective, Tucker Anthony will send you a confirmation of your purchase of
the shares allocated to you. We estimate that Tucker Anthony will send out
the confirmations on approximately October 18, 1999. Tucker Anthony's
delivery to you will include a final prospectus and a return envelope for
your convenience. Tucker Anthony will request that you return your check for
the shares allocated to you within three business days.
Q. Will I receive a stock certificate?
A. Yes. All customers buying stock in this offering will receive a stock
certificate for the shares purchased. In addition, customers who buy shares
will also receive a gift package, including a Gaiam t-shirt, cap, mug and
canvas shopping bag.
Q. Whom do I call if I have questions?
A. Call Tucker Anthony Incorporated toll free at 1-877-IPO-GAIA (1-877-476-
4242).
7
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SUMMARY FINANCIAL DATA
(Amounts in thousands, except per share data)
The following table summarizes the financial data of our business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The financial results for the six months ended June 30, 1998 and
1999 and as of June 30, 1999, are unaudited.
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
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1996 1997 1998 1998 1999
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Statement of Operations Data:
Net revenues......................... $14,801 $19,898 $30,739 $10,475 $17,563
Gross profit......................... 8,039 11,436 17,565 6,061 10,488
Other income (expense)............... 2,984 1,583 388 (114) 202
Net income after minority
interest(1)......................... 340 654 860 39 116
Net income per share (basic and
diluted)............................ $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.01
Shares outstanding (basic)........... 8,040 8,040 8,073 8,040 8,318
Shares outstanding (diluted)......... 8,040 8,040 8,119 8,040 8,318
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
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Actual Pro forma (2)
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Balance Sheet Data:
Cash................................................... $ 856 $ 7,606
Securities available-for-sale.......................... 1,505 1,505
Working capital........................................ 2,534 9,284
Total assets........................................... 15,839 22,589
Long-term debt (net of current maturities)............. 1,664 914(3)
Stockholders' equity................................... 5,216 12,716
</TABLE>
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(1) Net income after minority interest includes net income of consolidated
Gaiam operations excluding the portion attributable to the minority
shareholder of Healing Arts Publishing, LLC, a majority owned subsidiary of
Gaiam.
(2) Gives effect to the sale by Gaiam of 1,000,000 shares at an assumed initial
public offering price of $5.00 per share and 1,000,000 shares at an assumed
initial public offering price of $4.50 per share, after deducting the
estimated underwriting discount, customer discounts and offering expenses
payable by Gaiam. See "Use of Proceeds" and "Capitalization."
(3) Gives effect to the repayment of $750,000 of long-term debt from the
proceeds of this offering.
8
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RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
deciding to invest in our shares. If any of the following risks actually
occurs, our business could be harmed and the trading price of our shares could
decline. In that case, you might lose all or part of your investment.
We may not be able to compete successfully against current and future
competitors.
Our goal is to establish ourselves as the market leader in the Lohas
industry. We believe that the Lohas industry has thousands of small, local and
regional businesses. We believe that some smaller businesses may be able to
more effectively personalize their relationships with customers.
Our direct marketing business is evolving and competitive. We expect more
business to move to the Internet. As this happens, we expect competition to
intensify because barriers to entry are minimal and competitors can launch new
sites at a relatively low cost.
Some of our competitors have, and our potential competitors may have,
greater financial and marketing resources. In addition, larger, well-
established and well-financed entities may acquire, invest in or form joint
ventures with our online competitors as the use of the Internet and other
online services increases. Increased competition from these or other
competitors could negatively impact our revenue.
Our ability to grow our customer base and generate sales depends largely
upon the importance consumers place on environmental issues, promoting a
sustainable economy, healthy lifestyles and personal development.
Our business is targeted at a demographic group--the cultural creatives--
that assigns high value to environmental consciousness, promoting a sustainable
economy, healthy lifestyles and personal development. The success of our
business assumes that that we will be able to capture market share within this
group. Our success also depends upon the willingness of consumers to purchase
goods and services that promote the values we espouse. We cannot assure that
the demographic trends on which they are based will continue or that the
current levels of environmental consciousness or concerns about promoting a
sustainable economy, healthy lifestyles and personal development will be
sustained. The decrease of consumer interest in purchasing goods and services
that promote the values we espouse would materially and adversely affect the
growth of our customer base and sales revenues and, accordingly, our financial
prospects.
Some products and services we sell may put us at a competitive price
disadvantage.
Some environmentally friendly products are priced at a premium to products
that have similar uses but are not environmentally friendly. Our sales growth
assumes that consumers will sometimes be willing to pay higher prices in order
to enhance the environment, promote a sustainable economy and achieve healthy
lifestyles and personal development or that, over time, we will be able to
reduce prices through volume purchases from our suppliers.
If the protection of our Internet domain names are inadequate, our brand
recognition could be impaired and we could lose customers.
We currently hold various web domain names relating to our brand, including
www.gaiam.com. The acquisition and maintenance of domain names is regulated by
governmental agencies and their designees. The regulation of domain names in
the U.S. and in foreign countries is changing and is expected to continue to
change in the future. As a result, we may not be able to acquire or maintain
the domain names we want in all countries in which we seek to conduct business.
Furthermore, we may be unable to prevent third parties from acquiring domain
names whose similarity decreases the value of our trademarks and proprietary
rights. Loss of our Internet domain names could adversely affect our ability to
develop brand recognition.
9
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We may engage in future acquisitions that may harm our financial results, cause
our stock price to decline, or dilute our shareholders' interest if we do not
successfully execute them.
Acquisitions have been part of our growth. Living Arts and Inner Balance,
acquired in 1998, accounted for approximately one-third of our revenues for the
six months ended June 30, 1999. Even though our strategy does not depend on
making acquisitions, we expect to make them. These acquisitions may be of
entire companies, controlling interests in companies or of minority interests
in companies where we intend to invest as part of a strategic alliance.
However, we may not succeed in identifying attractive acquisitions or
attractive acquisition candidates may not be available at reasonable prices. We
are also likely to face competition for attractive acquisition candidates,
which may increase the expense of completing acquisitions. Making acquisitions
may harm our operating results or cause our stock price to decline because we
may:
- -- issue equity or equity-related securities that dilute our current
shareholders' percentage ownership or incur substantial debt or assume
liabilities of an acquired business;
- -- experience reduced earnings or adverse tax consequences by failing to
efficiently integrate the operations, assets and personnel of the
acquired companies in a timely manner, being required to amortize a
significant amount of intangible assets acquired in an acquisition, or
otherwise; and
-- divert management's attention from operating the business.
Moreover, the presence of minority ownership interests in any acquired company,
and our strategy of allowing our subsidiaries to retain some autonomy in their
management and operation, could make integration more difficult.
The loss of the services of our key personnel could disrupt our business.
The services of our officers, Jirka Rysavy, Lynn Powers, Pavel Bouska, Mark
Lipien and Linda West, are critical to our business. Our strategy of allowing
the management teams of acquired companies to continue to exercise significant
management responsibility for those companies makes it especially important
that we retain key employees, particularly the e-commerce and creative teams,
of the companies we might acquire. Competition for qualified personnel is
intense, particularly given the scarcity of qualified and experienced
management in the e-commerce and the direct marketing industries.
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. Due to the increasing popularity of the Internet, it is possible that
laws and regulations may be enacted with respect to the Internet, covering
issues such as user privacy, pricing, taxation, content, copyrights,
distribution, antitrust and quality of products and services. Additionally, the
rapid growth of e-commerce may trigger the development of tougher consumer
protection laws.
Our business could also be affected by regulations adopted in the future.
For example, a number of different bills are under consideration by Congress
and various state legislatures that would restrict disclosure of consumers'
personal information. If legislation of this type were enacted, it would make
it more difficult for us to obtain additional names for our distribution lists,
and restrict our ability to send unsolicited electronic mail or printed
catalogs. Both of which could slow the growth of our customer base.
Because of our recent shift of emphasis to the Internet, we cannot be certain
that our Internet business will succeed.
Although our historical sales have been predominantly through catalogs and
retailers, we are shifting our sales emphasis to the Internet. We intend to
make the Internet our primary channel of distribution.
10
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The development of a website and other proprietary technology entails
significant technical, financial and business risks. We have spent
approximately $500,000 during 1999 in the development of our websites and may
spend up to an additional $500,000 to introduce the website features we
describe in this prospectus under "Business." We intend to continue to invest
resources to enhance our websites and keep our systems up to date. In addition,
the adoption of new Internet, networking or telecommunications technologies may
require us to devote substantial resources to modify and adapt our services.
The success of our business depends on continued growth of e-commerce.
The emergence of the Internet and the growing popularity of e-commerce
provides a new channel for direct access to consumers. Since the introduction
of e-commerce to the Internet, the number of websites competing for customer
attention has increased very rapidly. We expect future competition to intensify
given the relative ease with which new websites can be developed. We believe
that the primary competitive factors in e-commerce are brand recognition,
reputation, site content, ease of use, price, fulfillment speed, customer
support and reliability. Our success in e-commerce will depend heavily upon our
ability to continue to provide a compelling and satisfying shopping experience.
Other factors that will affect our success include our continued ability to
attract and retain experienced marketing, technology, operations and management
talent. The nature of the Internet as an electronic marketplace (which may,
among other things, facilitate competitive entry and comparison shopping) may
render it inherently more competitive than traditional retailing formats.
Increased competitiveness among online retailers may result in reduced
operating margins, loss of market share and a diminished brand franchise.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our online technology. The
Internet and the e-commerce industry are subject to rapid technological change,
frequent new product and service introductions embodying new technologies, and
the emergence of new industry standards and practices that could render our
existing Internet strategy obsolete. Our success will depend, in part, on our
ability to license leading technologies useful in our business, enhance
existing services, develop new services and technology that address the needs
of our customers and our ability to respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
If we cannot maintain and continuously update our information systems, our
business could suffer.
Information systems are critical to our business. These systems assist in
processing orders, managing inventory, purchasing and shipping merchandise on a
timely basis, responding to customer service inquiries, and gathering and
analyzing operating data by business segment, customer, and SKU (a specific
identifier for each different product). If our systems should require
substantial updating or fail, we could incur substantial expenses.
A material security breach could cause us to lose sales, damage our reputation
or result in liability to us.
Our computer servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. We may need to expend significant
additional capital and other resources to protect against a security breach or
to alleviate problems caused by any breaches. Our relationships with our
customers may be adversely affected if the security measures that we use to
protect their personal information, such as credit card numbers, are
ineffective. We currently rely on security and authentication technology that
we license from third parties. We may not be able to prevent all security
breaches.
Our systems may fail or limit user traffic, which would cause us to lose sales.
We are dependent on our ability to maintain our computer and
telecommunications equipment in effective working order and to protect against
damage from fire, natural disaster, power loss, telecommunications failure or
similar events. In addition, growth of our customer base may strain or exceed
the capacity of our computer and telecommunications systems and lead to
degradations in performance or systems failure. We have
11
<PAGE>
experienced capacity constraints and failure of information systems in the past
that have resulted in decreased levels of service delivery or interruptions in
service to customers for limited periods of time. While we continually review
and seek to upgrade our technical infrastructure and provide for system
redundancies and backup power to limit the likelihood of systems overload or
failure, substantial damage to our systems or a systems failure that causes
interruptions for a number of days could adversely affect our business.
We may face legal liability for the content contained on our website or other
content that is accessed from our website.
We intend to keep increasing the amount of content on our website. We could
face legal liability for defamation, negligence, copyright, patent or trademark
infringement, personal injury or other claims based on the nature and content
of materials that we publish or distribute on our website. These types of
claims have been brought, sometimes successfully, against on-line services in
the past. We can be exposed to litigation for the content and services that are
accessible from our website through links to other websites or through content
and materials that may be posted by our users in chat rooms or bulletin boards.
If we are held liable for damages for the content on our website, our business
may suffer. Our insurance may not adequately protect us against these types of
claims. We do not currently offer health-related information on our website,
but we may do so in the future. This could increase our legal exposure.
Further, our business is based on establishing www.gaiam.com as a trustworthy
and dependable provider of information and services. Allegations of
impropriety, even if unfounded, could therefore have a material adverse effect
on our reputation and our business.
Our suppliers may not be able to supply us merchandise in a timely manner,
which could cause us to lose sales and harm our business.
To successfully operate our business, we must receive timely delivery of
merchandise from our vendors and suppliers. As we grow, some of these vendors
may not have sufficient capital, resources or personnel to satisfy their
commitments to us. Any significant delay in the delivery of products by vendors
could result in a loss of sales, increased fulfillment expenses and damage to
our customer service reputation.
The legal rights of Living Arts' minority equity holders may adversely affect
Gaiam.
Gaiam owns 67% of Living Arts, and the previous owners continue to own the
remaining 33%. Because Gaiam has certain fiduciary duties to the minority
equity holders, the minority owner may challenge Gaiam's management of Living
Arts. See "Legal Proceedings" for a description of recent disputes with the
minority owner of Living Arts. We could also have similar issues arising in
future acquisitions in which Gaiam acquires less than the entire equity
interest in a company.
The failure of third parties to provide an adequate level of service could
decrease our revenues and increase our costs.
Given our emphasis on customer service, the efficient and uninterrupted
operation of order-processing and fulfillment functions is critical to our
business. To maintain a high level of customer service, we rely heavily on a
number of different outside service providers, such as printers,
telecommunications companies and delivery companies. Any interruption in
services from outside service providers, including delays or disruptions
resulting from labor disputes, power outages, human error, adverse weather
conditions or natural disasters, could materially adversely affect our
business.
Relying on our centralized fulfillment center could expose us to losing
revenue.
Prompt and efficient fulfillment of our customers' orders is critical to our
business. Our facility in Cincinnati, Ohio handles our fulfillment functions
and some customer-service related operations, such as
12
<PAGE>
returns processing. Approximately 90% of our orders are filled and shipped from
the Cincinnati facility. The balance is shipped directly from suppliers.
Because we rely on a centralized fulfillment center, our fulfillment functions
could be severely impaired in the event of fire, extended adverse weather
conditions, or natural disasters. Since we charge customers' credit cards only
when we ship orders, interruption of our shipping would diminish our revenues.
Our costs could be increased by overstocks and merchandise returns, as well as
by our strategy to offer branded products.
An important part of our strategy is to feature "branded" products. These
products are sold under our brand names and are manufactured to our
specifications. We expect our reliance on branded merchandise to increase. To
be successful, we must periodically update and expand the product offerings for
our catalogs and websites. The use of branded merchandise requires us to incur
costs and risks relating to the design and purchase of products, including
submitting orders earlier and making longer initial purchase commitments.
In addition, the use of branded merchandise limits our ability to return
unsold products to vendors, which can result in higher markdowns in order to
sell excess inventory. Our commitment to customer service typically results in
more emphasis being placed on keeping a high level of merchandise in stock so
we can fill orders immediately. Consequently, we run the risk of having excess
inventory, which may also contribute to higher markdowns. Our failure to
successfully execute a branded merchandise strategy or to achieve anticipated
profit margins on these goods, or a higher than anticipated level of
overstocks, may materially adversely affect our revenues.
We offer our customers liberal merchandise return policies. Our financial
statements include a reserve for anticipated merchandise returns, which is
based on historical return rates. It is possible that actual returns may
increase as a result of factors such as the introduction of new merchandise,
new product offerings, changes in merchandise mix or other factors. Any
increase in our merchandise returns will correspondingly reduce our revenues.
Our sales could be negatively affected if we are required to charge additional
taxes on purchases.
We generally collect sales taxes only on sales to residents of the state of
Colorado and where we have other locations, currently California and Ohio.
Federal laws currently limit the imposition of state and local taxes on
Internet-related sales. However, there is a possibility that Congress may not
renew this legislation in 2001. If Congress chooses not to renew this
legislation, state and local governments would be free to impose taxes on
electronically purchased goods, which could adversely affect us. Due to the
high level of uncertainty regarding the imposition of taxes on electronic
commerce, a number of states, as well as a Congressional advisory commission,
are reviewing appropriate tax treatment for companies engaged in e-commerce.
Such proposals, if adopted, could substantially impair the growth of e-commerce
and could adversely affect our opportunity to derive financial benefit from
these activities.
Many states have attempted to require that out-of-state direct marketers
collect sales and use taxes on the sale of merchandise shipped to its
residents. If Congress enacts legislation permitting states to impose sales or
use tax obligations on out-of-state direct marketing companies, or if other
changes require us to collect additional sales or use taxes, these obligations
would make it more expensive to purchase our products and would increase our
administrative costs. Audits by state tax authorities could give rise to a
retroactive assessment for tax liabilities if it was determined we had
sufficient activities in that state. State sales tax laws typically provide for
a lengthy statute of limitations, and if we were retroactively assessed for
taxes, the assessment could adversely affect our business.
Our founder and Chief Executive Officer Jirka Rysavy will control Gaiam.
After this offering, Mr. Rysavy will hold 100% of the outstanding class B
common stock. The shares of class B common stock are convertible into class A
shares at any time. Each share of class B common stock has
13
<PAGE>
ten votes per share, and the class A shares have one vote per share. Assuming
Mr. Rysavy's planned purchase of an additional 100,000 shares in this
offering, he will beneficially own approximately 77% of the outstanding
shares, assuming Mr. Rysavy's class B common stock was converted into shares.
In addition, he will also have approximately 96.7% of the total votes. As a
result, Mr. Rysavy will be able to exert substantial influence over Gaiam and
to control matters requiring approval by the shareholders of Gaiam, including
the election of directors and preventing any change in control of Gaiam.
We may be adversely affected if the software, computer technology and other
systems we use are not year 2000 compliant.
If our important information management systems or those of our vendors are
not year 2000 compliant, our business could suffer. For example, we could have
difficulties in operating our website, taking product orders, making product
deliveries or conducting other fundamental parts of our business. We have been
assessing and are continuing to assess the year 2000 readiness of the
software, computer technology and other services that we use. We do not,
however, anticipate that we will devote extensive efforts to assess whether
our vendors or the Internet are year 2000 compliant. The cost of developing
and implementing any year 2000 related measures, if necessary, could be
material.
We also depend on the year 2000 compliance of the computer systems and
financial services used by consumers. A significant disruption in the ability
of consumers to access the Internet or portions of it or to use their credit
cards would have a material adverse effect on demand for our products and
services and would have a material adverse effect on us. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000."
Fluctuations in our quarterly operating results may negatively affect our
stock price.
Prior to this offering, you could not buy or sell our shares publicly. The
market price of our shares after the offering may vary from the initial public
offering price and could be subject to wide fluctuations in response to
factors such as the 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; and
-- stock market price and volume fluctuations.
Shares eligible for public sale after this offering could adversely affect our
stock price.
Sales of a substantial number of shares in the public market following this
offering, or the perception that sales could occur, could adversely affect the
market price for our shares and impair our ability to raise equity capital in
the future. Immediately after this offering 3,496,429 shares and 7,035,000
shares of class B common stock will be outstanding. Of this number, the
1,860,000 shares sold in this offering will be freely tradeable, and an
additional 1,145,000 shares and all shares of class B common stock will be
eligible for sales under Rule 144 of the Securities Act after 180 days. Please
see "Shares Eligible for Future Sale."
14
<PAGE>
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risk and
uncertainties. These statements refer to our future plans, objectives,
expectations and intentions. We use words such as "anticipates," "believes,"
"plans," "expects," "future," "intends," "strive" and similar expressions to
identify forward-looking statements. These forward-looking statements involve
risks and uncertainties. Gaiam's actual results could differ materially from
those anticipated in these forward-looking statements, as a result of certain
factors, as more fully described in "Risk Factors" and elsewhere in this
prospectus. We caution you that no forward-looking statement is a guarantee of
future performance, and you should not place undue reliance on these forward-
looking statements which reflect our management's view only as of the date of
this prospectus.
USE OF PROCEEDS
The net proceeds to Gaiam from the sale of the shares in this offering are
estimated to be $7.5 million, giving effect to the sale by Gaiam of 1,000,000
shares at an assumed initial public offering price of $5.00 per share and
1,000,000 shares at an assumed initial public offering price of $4.50 per
share, and after deducting the estimated underwriting discount, customer
discounts and offering expenses payable by Gaiam.
The principal purposes of this offering are to increase our working capital,
to create a public market for our common stock, to facilitate our future access
to the public capital markets, and to increase our visibility in the retail
marketplace.
We intend to use approximately $750,000 of the net proceeds of the offering
to reduce the amount outstanding under our Norwest Bank line of credit
agreements. These line of credit agreements extend through December 31, 2001,
and bear interest at the prime rate plus 1%. In connection with this offering,
we are extending to each of our eight debenture holders the option to purchase
shares for the outstanding principal amount of the debentures, excluding
interest at 8% per annum, at the offering price of $5.00 per share. These
debentures mature on the earlier of one year after the issuance date or the
closing of the initial public offering by Gaiam. We anticipate a total of
395,000 shares will be sold to these debenture holders in exchange for $1.975
million in debentures. To the extent any holder elects to receive cash, this
will represent a use of the proceeds of this offering.
We have no specific plans for the remaining proceeds. They will be used for
general corporate purposes and working capital. This allocation is only an
estimate, and we may adjust it as necessary to address our operational needs in
the future. We may also use a portion of the net proceeds to acquire the
minority interest in one of our subsidiaries, Healing Arts Publishing, LLC, or
to make other acquisitions or strategic minority interest investments. However,
we currently have no commitments or agreements and are not involved in
negotiations with respect to acquisitions. Pending these uses, we will invest
the net proceeds of this offering in short-term, interest-bearing, investment-
grade securities. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
15
<PAGE>
DIVIDEND POLICY
Gaiam has never declared or paid any cash dividends on its capital stock.
Gaiam currently intends to retain earnings, if any, to support its growth
strategy and does not anticipate paying cash dividends in the foreseeable
future. In addition, our bank credit agreement prohibits payment of any
dividends to our shareholders.
CAPITALIZATION
The following table sets forth the capitalization of Gaiam as of June 30,
1999, on a pro forma basis, as adjusted, to reflect:
. the sale by Gaiam of 1,000,000 shares in this offering at an initial
public offering price of $5.00 per share,
. the sale by Gaiam of 1,000,000 shares in this offering at the price to
customers (for up to 200 shares) of $4.50 per share, and
. deducting the estimated underwriting discount and offering expenses
payable by Gaiam.
You should read this information together with our consolidated financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
June 30, 1999
----------------
Actual Pro Forma
------ ---------
<S> <C> <C>
Long-term debt and capital leases, less current portion....... $1,664 $914(2)
Stockholders' equity:
Class A Common Stock, $0.0001 par value; 92,965,000 shares
authorized and 1,496,429(1) shares issued and outstanding
(actual); 3,496,429(1) shares outstanding (pro forma)...... -- --
Class B Common Stock, $.0001 par value; 7,035,000 shares
authorized and 7,035,000 shares issued and outstanding
(actual, pro forma)........................................ 1 1
Additional paid-in capital.................................. 1,828 9,328
Accumulated other comprehensive income...................... 910 910
Retained earnings........................................... 2,477 2,477
------ -------
Total stockholders' equity................................ 5,216 12,716
------ -------
Total capitalization...................................... $6,880 $13,630
====== =======
</TABLE>
- --------
(1) Excludes an aggregate of approximately 675,000 shares issuable pursuant to
options outstanding as of June 30, 1999.
(2) Gives effect to the repayment of $750,000 of long-term debt from the
proceeds this offering.
16
<PAGE>
DILUTION
The net tangible book value of Gaiam stock as of June 30, 1999 was $0.21 per
share. Net tangible book value represents the amount of Gaiam's total tangible
assets less total liabilities.
Pro forma net tangible book value per share is determined by dividing
Gaiam's pro forma net tangible book value by the number of shares outstanding
after this offering. Giving effect to the sale of 1,000,000 shares in the
offering at a price of $5.00 per share and 1,000,000 shares in the offering at
a price of $4.50 per share, after deducting the estimated underwriting discount
and offering expenses payable by Gaiam, pro forma net tangible book value per
share would have been $0.88 per share. This represents an immediate increase in
pro forma net tangible book value of $0.67 per share to existing shareholders
and an immediate dilution of $4.12 per share to new investors purchasing shares
in this offering. The following table illustrates the per share dilution:
<TABLE>
<S> <C>
Initial public offering price per share.............................. $5.00
Net tangible book value per common share before this offering...... $0.21
Increase per common share attributable to new investors............ 0.67
-----
Pro forma net tangible book value per common share after this
offering............................................................ 0.88
-----
Dilution per common share to new investors........................... $4.12
</TABLE>
The following table summarizes, on a pro forma basis at June 30, 1999 as
described above (giving effect to the issuance of the shares to be issued in
this offering but not the exercise of any outstanding stock options), the total
consideration paid and the average price per share of common stock paid by
existing shareholders (including both holders of class A shares and class B
common stock) and new investors in this offering. The price paid per share paid
by new investors is the initial public offering price of $5.00 per share
(before deducting the estimated underwriting discount, customer discount and
offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 8,531,429 81.0% $ 1,828,455 15.5% $0.21
New investors........... 2,000,000 19.0 10,000,000 84.5 $5.00
---------- ----- ----------- -----
Total................. 10,531,429 100.0% $11,828,034 100.0%
========== ===== =========== =====
</TABLE>
This discussion and table assumes no exercise of outstanding stock options
and warrant, and no issuance of shares reserved for future issuance under
Gaiam's option plans. As of August 30, 1999, there were options outstanding to
purchase a total of approximately 675,000 shares at a price of $4.375 per
share, and a warrant to purchase 24,000 shares at a price of $0.50 per share.
No options or warrants are currently exercisable. To the extent that any of
these options are exercised, there will be further dilution to new investors.
See "Capitalization."
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected statement of operations for the years ended December 31, 1996,
1997 and 1998 and balance sheet data as of December 31, 1996, 1997 and 1998 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, 1996, 1997 and 1998, and balance sheets as of
December 31, 1997 and 1998. These financial statements appear elsewhere in this
prospectus. The selected statement of operations for the year ended December
31, 1995 and balance sheet data as of December 31, 1995 set forth below are
derived from Gaiam's audited consolidated financial statements, and the
selected statement of operations for the year ended December 31, 1994 and
balance sheet data as of December 31, 1994 are derived from Gaiam's unaudited
consolidated financial statements. The selected balance sheet data as of June
30, 1999 and selected statement of operations for the six-month periods ended
June 30, 1998 and 1999 set forth below are derived from Gaiam's unaudited
consolidated financial statements as of June 30, 1999 and for the six-month
periods ended June 30, 1998 and 1999, which appear elsewhere in this
prospectus. In the opinion of management, the unaudited consolidated financial
statements include all adjustments, consisting only of normal recurring
accruals and adjustments, necessary for a fair presentation of the financial
position and results of operations for these unaudited periods. The historical
operating results are not necessarily indicative of the results to be expected
for any other period. The data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Gaiam's consolidated financial statements and related notes,
included elsewhere in this prospectus.
18
<PAGE>
SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
----------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 229 $6,696 $14,801 $19,898 $30,739 $10,475 $17,563
Costs of goods sold..... 179 2,943 6,762 8,462 13,174 4,414 7,075
------ ------ ------- ------- ------- ------- -------
Gross profit............ 50 3,753 8,039 11,436 17,565 6,061 10,488
Expenses:
Selling and operating.. 5 3,281 9,253 10,427 14,186 5,250 8,877
Corporate, general and
administration........ 15 876 1,218 1,575 2,394 635 1,796
------ ------ ------- ------- ------- ------- -------
Total expenses....... 20 4,157 10,471 12,002 16,580 5,885 10,673
------ ------ ------- ------- ------- ------- -------
Operating income
(loss)................. 30 (404) (2,432) (566) 985 175 (185)
Other income
(expense)(1)........... (2) 1,029 2,984 1,583 388 (114) 202
------ ------ ------- ------- ------- ------- -------
Income before income
taxes and minority
interest............... 28 625 552 1,017 1,373 61 17
Income taxes............ 6 238 212 363 251 22 6
Minority interest....... -- -- -- -- 262 -- (167)
------ ------ ------- ------- ------- ------- -------
Net income.............. $ 22 $ 387 $ 340 $ 654 $ 860 $ 39 $ 178
====== ====== ======= ======= ======= ======= =======
Net income per share
basic.................. $ 0.00 $ 0.05 $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.02
====== ====== ======= ======= ======= ======= =======
diluted................. $ 0.00 $ 0.05 $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.02
====== ====== ======= ======= ======= ======= =======
Shares outstanding
basic.................. 8,040 8,040 8,040 8,040 8,073 8,040 8,318
diluted................. 8,040 8,040 8,040 8,040 8,119 8,040 8,565
<CAPTION>
December 31, June 30,
----------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash.................... $ 16 $ 419 $ 380 $ 1,612 $ 1,410 $ 653 $ 856
Securities available-
for-sale(2)............ -- 71 56 4,828 1,634 38 1,505
Working capital
(deficiency)........... 22 192 (1,838) 436 (81) (60) 2,534
Total assets............ 81 2,476 6,256 10,774 16,677 5,479 15,839
Long-term debt (net of
current maturities).... -- -- 89 42 299 17 1,664
Stockholders'
equity(2).............. 59 580 920 4,736 3,661 1,613 5,216
</TABLE>
- --------
(1) Other income in 1995, 1996, 1997 and 1998 primarily reflects income from
sale of securities available-for-sale.
(2) Securities valued at cost in 1995, and at fair market value in 1996, 1997
and 1998. See Note 6 of notes to the consolidated financial statements.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of Gaiam's financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this prospectus.
Overview
Gaiam produces and sells goods, services and information marketed to
customers who value the environment, a sustainable economy, healthy lifestyles
and personal development. Gaiam was incorporated in Colorado in 1988 as a local
distributor of earth-friendly products. In 1995, Gaiam began to expand
nationally and make acquisitions. From 1996 to 1998, our revenues increased
from $14.8 million to $30.7 million, representing a compound annual growth rate
of approximately 44%, and our number of unique individual customers increased
from 300,000 to 685,000 over this period.
Gaiam's business model is evolving as evidenced by the increase in the
percentage of our revenues attributable to our business to business segment
from 13% in 1998 to 21% in 1999. In addition, Gaiam's gross margin continues to
increase because we are developing more private brand merchandise, on which we
have better margins, and negotiating better pricing from our venders due to
volume discounts. However, the competitive search engines available on the
Internet may force retail price reductions, and thus affect our gross margin.
During 1998, Gaiam completed two acquisitions. On September 14, 1998, we
obtained 67% of Healing Arts Publishing LLC, which does business as "Living
Arts," for approximately $2.5 million in cash. On October 1, 1998, we acquired
100% of Inner Balance, Inc. for a debenture with a principal amount of
approximately $530,000. Living Arts produces and sells yoga and other mind-
body-spirit informational videos and products, while InnerBalance is a direct
marketer of alternative health products and solutions. Acquisitions accounted
for approximately one third of our revenues during the first two quarters of
1999. We incurred expenses in the first six months of 1999, particularly in the
second quarter, to integrate these acquisitions, including relocation of Living
Arts' warehousing to our Ohio distribution center, customer service functions
to Colorado, and conversion of direct marketing operating system to Gaiam's
operating system. We do not anticipate further material integration expenses.
Although our historical sales have been predominantly through catalogs and
retailers, we are shifting our sales emphasis to the Internet. We intend to
make the Internet our primary channel of distribution. The development of a
website and other proprietary technology entails significant technical,
financial and business risks. We have spent approximately $500,000 during 1999
in the development of our websites and may spend up to an additional $500,000
to introduce the website features we describe in this prospectus under
"Business."
20
<PAGE>
Results of Operations
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated.
<TABLE>
<CAPTION>
Six Months
Ended June
Year Ended December 31, 30,
--------------------------------- ------------
1994 1995 1996 1997 1998 1998 1999
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of goods sold........... 78.2 44.0 45.7 42.5 42.9 42.1 40.3
----- ----- ----- ----- ----- ----- -----
Gross profit.................. 21.8 56.0 54.3 57.5 57.1 57.9 59.7
Expenses:
Selling and operating....... 2.2 49.0 62.5 52.4 46.1 50.1 50.5
Corporate, general and
administration............. 6.5 13.1 8.2 7.9 7.8 6.1 10.3
----- ----- ----- ----- ----- ----- -----
Total expenses............ 8.7 62.1 70.7 60.3 53.9 56.2 60.8
----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations................... 13.1 (6.1) (16.4) (2.8) 3.2 1.8 (1.1)
Other income (expense), net... (0.9) 15.4 20.1 8.0 1.3 (1.1) 1.2
----- ----- ----- ----- ----- ----- -----
Income before income taxes and
minority interest............ 12.2 9.3 3.7 5.2 4.5 0.7 1.1
Provision for income taxes.... 2.6 3.6 1.4 1.8 0.8 0.3 0.0
Minority interest in net
income of consolidated
subsidiary, net of tax....... 0.0 0.0 0.0 0.0 0.9 0.0 (1.0)
----- ----- ----- ----- ----- ----- -----
Net income................ 9.6% 5.7% 2.3% 3.4% 2.8% 0.4% 1.0%
===== ===== ===== ===== ===== ===== =====
</TABLE>
Six months ended June 30, 1999 compared to six months ended June 30, 1998
Revenues increased 67.7% from $10.5 million in the first six months of 1998
to $17.6 million in the first six months of 1999. 87% of the revenue growth is
attributable to revenues acquired in the Living Arts and InnerBalance
acquisitions, and 13% of the revenue growth was revenues generated by
increased purchases by current customers and growth in our customer base.
Gross profit, which consists of revenues less cost of sales (primarily
merchandise acquisition costs and in-bound freight) increased 73.1% from $6.1
million in the first six months of 1998 to $10.5 million in the first six
months of 1999. As a percentage of revenues, gross profit increased from 57.9%
to 59.7%. This was primarily attributable to increases in sales of private
branded products, on which we have better margins than other products, and
continued better pricing from vendors due to increased volume.
Selling and operating expenses, which consist primarily of sales and
marketing costs, commissions, and fulfillment expenses increased 69.1% from
$5.2 million in the first six months of 1998 to $8.9 million in the first six
months of 1999 primarily due to increased revenues. As a percentage of
revenues, selling and operating expenses increased from 50.1% to 50.5%. This
percentage increase was primarily due to additional costs associated with the
relocation of Living Arts' customer service function to Colorado, the transfer
of Living Arts' warehousing to our distribution center in Ohio, and the
conversion of Living Arts direct marketing operating system to Gaiam's
operating system.
Corporate, general and administrative expenses increased 182.5% from
$635,723 in the first six months of 1998 to $1.8 million in the first six
months of 1999. As a percentage of revenues, general and administrative
expenses increased from 6.1% to 10.3%, primarily attributable to expenses
associated with the acquisition of Living Arts and InnerBalance.
Other income, comprised primarily of gains on sales of marketable
securities and interest expense, increased from a net expense of $113,938 in
1998 to $201,762 of net income in 1999. This change was primarily due to gains
on the sale of marketable securities during the first six months of 1999,
which was partially offset by higher interest expense due to borrowings used
to fund acquisitions.
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<PAGE>
Minority interest of $166,822 for the first six months of 1999 was added to
our consolidated financial results to reflect the minority interest in Living
Arts' loss for the six months ended June 30, 1999. This amount represents our
minority partners' one-third interest in the Living Arts' loss, net of tax, for
the period.
Income tax provision represented 36.7% of our pre-tax net income in the
first six months of 1998, as compared to an income tax provision of 37.2% of
pre-tax income in the first six months of 1999.
Net income, as a result of the factors described above, increased from
$38,753, or 0.4% of revenues, in the first six months of 1998 to $177,630, or
1.0% of revenues, in the first six months of 1999.
Year ended December 31, 1998 compared to year ended December 31, 1997
Revenues increased 54.5% from $19.9 million in 1997 to $30.7 million in
1998. This revenue growth was primarily attributable to the acquisitions of
Living Arts and InnerBalance, which generated $6.9 million in revenue during
1998. Additionally, revenues generated by our Harmony brand increased 20% as a
result of additional purchases made by Harmony's current customers and growth
in its customer base.
Gross profit increased 53.6% from $11.4 million in 1997 to $17.6 million in
1998. As a percentage of revenues, gross profit decreased from 57.5% to 57.1%.
This reflects a change in sales mix due to the acquisition of Living Arts,
which had generally lower margin products than that of our other operations.
Selling and operating expenses increased 36.0% from $10.4 million in 1997 to
$14.2 million in 1998, due to increases in revenues. As a percentage of
revenues, selling and operating decreased from 52.4% to 46.1%. This decrease in
selling and operating expenses as a percentage of revenues was primarily due to
increased operating efficiencies.
Corporate, general and administration expenses increased 52% from $1.6
million in 1997 to $2.4 million in 1998, primarily as a result of initiatives
to support our growth. As a percentage of revenues, those expenses decreased
from 7.9% to 7.8% of revenues.
Other income, which is primarily comprised of gains on sales of marketable
securities and interest expense, decreased from $1.6 million in 1997 to
$388,491 in 1998, largely due to a decrease in the sales of marketable
securities during 1998 as compared to 1997.
Provision for income tax provision represented 35.7% of our pre-tax income
in 1997, as compared to 18.3% of its pre-tax income in 1998. The decrease in
our effective tax rate was primarily due to a one-time tax benefit related to
the 1998 settlement of a Living Arts legal judgment incurred prior to Gaiam's
ownership.
Minority interest of $261,598 for 1998 was deducted from our consolidated
financial results to account for the minority interest in Living Arts.
Net income, as a result of the factors described above, increased from
$654,312, or 3.4% of revenues, in 1997, to $859,781, or 2.8% of revenues, in
1998.
Year ended December 31, 1997 compared to year ended December 31, 1996
Revenues increased by 34.4% from $14.8 million in 1996 to $19.9 million in
1997. This increase is primarily attributable to growth of our Harmony brand
and an expansion of product offerings that resulted in an increase in average
transaction size.
Gross profit increased 42.3% from $8.0 million in 1996 to $11.4 million in
1997. As a percentage of revenues, gross profit increased from 54.3% to 57.5%
due to increases in sales of private branded products, on which we have better
margins than other products, and better pricing from vendors due to increased
volume.
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Selling and operating expenses increased 12.7% from $9.3 million in 1996 to
$10.4 million in 1997, due to increases in revenues. As a percentage of
revenues, selling and operating expenses decreased from 62.5% to 52.4%. This
decrease as a percentage of revenues was primarily due to increased
efficiencies due to higher average transaction size. In addition, our central
warehouse was opened in 1996, resulting in reductions in shipping costs and
other operational efficiencies.
Corporate, general and administrative expenses increased 29.3% from $1.2
million in 1996 to $1.6 million in 1997. As a percentage of revenues, general
and administrative expenses decreased from 8.2% to 7.9%. The overall dollar
increase in general and administrative expenses was due to various initiatives
undertaken to prepare for and support future growth.
Other income declined from $3.0 million in 1996 to $1.6 million in 1997,
primarily due to our decision to sell fewer securities that we held.
Income tax provision represented 38.4% of our pre-tax income in 1996, as
compared to 35.7% of our pre-tax income in 1997.
As a result of the factors described above, net income increased from
$339,700, or 2.3% of revenues, in 1996 to $654,312, or 3.4% of revenues, in
1997.
Selected Quarterly Operating Results
The following table sets forth our unaudited quarterly results of operations
for each of the quarters in 1997 and 1998 and the first two quarters of 1999.
In management's opinion, this unaudited financial information includes all
adjustments, consisting solely of normal recurring accruals and adjustments,
necessary for a fair presentation of the results of operations for the quarters
presented. This financial information should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this
prospectus. The results of operations for any quarter are not necessarily
indicative of future results of operations.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------------------
Dec.
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, 31, Mar. 31, June 30,
1997 1997 1997 1997 1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- -------- -------- --------- ------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $4,218 $4,426 $4,811 $6,443 $5,300 $5,175 $5,987 $14,277 $9,495 $8,068
Gross profit............ 2,454 2,554 2,645 3,783 3,012 3,049 3,538 7,966 5,639 4,849
Operating income
(loss)................. (317) (86) (137) (26) 98 77 200 610 110 (294)
Net income.............. (239) (104) (142) 1,139 24 15 395 426 106 72
Net income (loss) per
share.................. $(0.03) $(0.01) $(0.02) $ 0.14 $ 0.00 $ 0.00 $ 0.05 $ 0.05 $ 0.01 $ 0.01
Weighted average shares
outstanding............ 8,040 8,040 8,040 8,040 8,040 8,040 8,040 8,073 8,215 8,420
</TABLE>
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.
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Liquidity and Capital Resources
Gaiam's capital needs arise from working capital required to fund our
operations, capital expenditures related to expansions and improvements to
Gaiam's infrastructure, development of e-commerce and funds required in
connection with the acquisition of new businesses and its anticipated future
growth. These capital requirements depend on numerous factors, including the
rate of market acceptance of Gaiam's product offerings, the ability to expand
Gaiam's customer base, the cost of ongoing upgrades to its product offerings,
the level of expenditures for sales and marketing, the level of investment in
distribution and other factors. The timing and amount of these capital
requirements cannot accurately be predicted. Additionally, Gaiam will continue
to evaluate possible investments in businesses, products and technologies, and
plans to expand its sales and marketing programs and conduct more aggressive
brand promotions.
Gaiam has funded its operations and acquisitions primarily through bank
loans, private placements of shares and subordinated debentures, and sales of
marketable securities contributed to Gaiam by Gaiam's founder, Mr. Rysavy.
During 1996 and 1997, we had operating losses which were offset primarily by
sales of marketable securities contributed by Mr. Rysavy.
We raised approximately $1.2 million from private placements during 1998
($575,000 for 160,000 shares and $550,000 in debentures), $150,000 during the
first quarter of 1999 ($75,000 for 17,143 shares and $75,000 in debentures) and
$2.7 million during the second quarter of 1999 ($1.37 million for 314,286
shares and $1.35 million in debentures). The privately placed shares were sold
at $4.375 per share. The debentures described above bear interest at 8% per
annum, which is payable in cash at maturity. The debentures mature on the
earlier of one year after the date of the debenture or the closing of the
initial public offering by Gaiam. With the exception of Ms. Powers, the holders
of the debentures, who also acquired shares at the time of their investment in
the debentures, have certain registration rights requiring Gaiam to register
the shares obtained in the private placement. See the consolidated financial
statements of Gaiam for additional information relating to Gaiam's private
placements. In connection with this offering, we are extending to each of our
eight debenture holders the option to purchase shares for the outstanding
principal amount of the debentures (excluding interest) at the offering price
of $5.00 per share. We anticipate a total of 395,000 shares will be sold to
these debenture holders in exchange for $1.975 million in debentures. We will
pay the accrued interest, approximately $57,615 at June 30, 1999, in cash.
Gaiam is party to revolving line of credit agreements with Norwest Bank,
which extend through December 31, 2001. The credit agreements permit borrowings
up to $3 million (of which approximately $1.65 million was outstanding at June
30, 1999) based upon the collateral value of Gaiam's accounts receivable and
inventory held for resale. These borrowings are secured by a pledge of Gaiam's
assets. Principal repayment of amounts borrowed under these line of credit
agreements are due either when the collateral value of Gaiam's accounts
receivable and inventory drops below prescribed levels or upon maturity of the
agreements, whichever occurs first. Borrowings under the Norwest credit
agreements bear interest at the prime rate plus 1% (currently 7.75%). The
Norwest credit agreements contain various financial covenants and also prohibit
Gaiam from paying dividends to its shareholders, except that dividends by
Living Arts are permitted for 1998 taxes on minority interests. Mr. Rysavy
guarantees the Norwest credit agreements.
Gaiam has, from time to time, borrowed funds from BT Alex. Brown under a
margin loan agreement against securities held for sale. Gaiam had no
outstanding indebtedness to BT Alex. Brown as of June 30, 1999. Borrowings
under the BT Alex. Brown margin loan agreement bear interest at the call money
rate plus 3/4%.
Gaiam's operating activities used net cash of $2.7 million and $1.3 million
during 1996 and 1997, respectively, and provided $759,205 of net cash in 1998.
The use of cash in 1996 and 1997 was primarily attributable to increases in
inventories and prepaid costs associated with the increased sales volumes. Net
cash provided during 1998 was primarily a result of Gaiam's net income. Gaiam's
operating activities for the six months ended June 30, 1999 used net cash of
$4.6 million primarily to reduce the level of accounts payable and accrued
expenses, resulting from seasonal fluctuations and the Living Arts acquisition.
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<PAGE>
Gaiam's investing activities generated cash of $738,755 and $3.6 million
during 1996 and 1997, respectively, and used cash of $1.1 million during 1998.
In 1996 and 1997, the cash generated from investing activities resulted
primarily from sales of marketable securities and property and equipment.
During 1998, Gaiam used cash to purchase a majority interest in Living Arts.
Gaiam's investing activities generated $382,736 in net cash for the six months
ended June 30, 1999, resulting primarily from the sale of marketable
securities.
Gaiam's financing activities generated $1.9 million in net cash during 1996,
primarily from borrowings, which were partially repaid during 1997, resulting
in a use of cash of $1.1 million. During 1998, Gaiam's financing activities
generated $175,300, which resulted from the private placement of shares and
debentures, net of the reduction in other outstanding debt. Gaiam's financing
activities generated $3.7 million in net cash for the six months ended June 30,
1999, resulting from the private placement of shares and debentures, and
borrowings on its Norwest line of credit, net of reductions in other
outstanding debt.
During 1999, Gaiam anticipates that it will make capital expenditures of
approximately $1.3 million primarily for Gaiam's continuing development of e-
commerce.
We believe our available cash, cash expected to be generated from
operations, cash to be generated through the sale of marketable securities held
by Gaiam, and borrowings available under our bank credit agreements, will be
sufficient to fund our operations, as described in this prospectus, on both a
short-term and long-term basis. However, our projected cash needs may change as
a result of acquisitions, unforeseen operational difficulties or other factors.
In the normal course of our business, we investigate, evaluate, and discuss
acquisition, joint venture, minority investment, strategic relationship and
other business combination opportunities in the Lohas industry. In the event of
any future investment, acquisition or joint venture opportunities, we may
consider using then-available liquidity, issuing equity securities or incurring
additional indebtedness. However, we currently have no commitments or
agreements and are not involved in negotiations with respect to acquisitions.
Quantitative and Qualitative Disclosure About Market Risk
We do not believe that any of our financial instruments have significant
risk associated with market sensitivity.
Year 2000
The year 2000 issue relates to computer programs and systems that recognize
dates using two-digit year data rather than four-digit year data. As a result,
these programs and systems may fail or provide incorrect information when using
dates after December 31, 1999. If the year 2000 issue were to cause disruptions
to Gaiam's internal information technology systems or to the information
technology systems of entities with which Gaiam has commercial relationships,
material adverse effects to Gaiam's operations could result.
Gaiam's internal computer programs and operating systems consist of programs
and systems relating to virtually all segments of Gaiam's business, including
merchandising, customer database management and marketing, order-processing,
fulfillment, inventory management, customer service and financial reporting.
These programs and systems are primarily comprised of:
. ""Front-end" systems. These systems automate and manage business
functions such as order-taking and order-processing, inventory
management and financial reporting.
. Warehouse management systems. These systems manage and automate
fulfillment operations of Gaiam's companies. Currently Gaiam's internal
warehouse management system is integrated with its internal front-end
system.
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<PAGE>
. Customer database management systems. These systems facilitate the
storage of customer data for each Gaiam business. Each Gaiam customer
database management system is integrated with Gaiam's existing front-end
system.
. Telecommunications systems. These systems enable Gaiam's companies to
manage their order-taking and customer service functions.
. Office automation systems, personal computers and local area networks.
These systems are used for word processing and other administrative
tasks at individual Gaiam companies and at Gaiam's central office.
. Voicemail systems. These systems are used for receiving and storing
messages to employees at individual Gaiam companies and at Gaiam's
central office.
. Ancillary services systems. These include systems such as heating,
ventilation and air conditioning control systems and security systems.
To assess the potential impact of the year 2000 issue, Gaiam has completed
reviews of its internal front-end systems, its internal warehouse management
systems, its customer database management systems, its internal
telecommunications systems and its personal computers and local area networks.
These reviews were completed by Gaiam's existing workforce at no identifiable
incremental cost. Based upon these reviews, Gaiam believes that these systems
and equipment will operate correctly when processing data that include dates
after December 31, 1999, although no assurances can be given that these systems
and equipment will operate correctly. See "Our Business--Management Information
Systems."
The computer programs and operating systems used by entities with whom Gaiam
has commercial relationships also pose potential problems relating to the year
2000 issue, which may affect Gaiam's operations in a variety of ways. These
risks are more difficult to assess than those posed by internal programs and
systems, and Gaiam has not yet completed the process of assessing them. Gaiam
believes that the programs and operating systems used by entities with which it
has commercial relationships generally fall into two categories:
. First, Gaiam relies on communication and data processing programs and
systems used by organizations such as the United States Postal Service,
UPS, telephone companies and banks. Services provided by these entities
affect almost all facets of Gaiam's operations, including processing of
orders, printing and mailing of catalogs, shipping of goods and certain
financial services (e.g., credit card processing). Programs and services
in this category generally are not specific to Gaiam's business, and
disruptions in their availability would likely have a negative impact on
Gaiam, as well as most other enterprises within the direct marketing
industry, and on many enterprises outside the direct marketing industry.
Gaiam believes that the most serious potential disruptions to its
operations stemming from the year 2000 issue relate to programs and
systems in this category. Gaiam intends to include an evaluation of the
potential disruptions in its assessment of the programs and systems of
the entities with which it has commercial relationships.
. Second, Gaiam purchases goods from over 150 vendors (none of which
accounted for more than 10% of aggregate purchases for 1998). Each of
these vendors and service providers are dependent on programs and
systems that could be disrupted by year 2000 problems. We believe that
year 2000 risks relating to programs and systems used by our product
vendors are well-diversified because we use a large number of vendors.
We have assessed the risks posed by the programs and systems used by
entities who provide front-end and warehouse management services and
determined that these risks do not require remediation. We have received
or intends to seek assurances of year 2000 compliance from each product
vendor that accounts for more than approximately 1% of our aggregate
purchases on an annual basis and from other significant vendors and
service providers.
26
<PAGE>
Gaiam expects to complete its assessment of the programs and systems of the
entities with which it has commercial relationships and the identification of
potential problems by the end of the third quarter of fiscal 1999. Once this
identification has been completed, Gaiam intends to resolve any potential
problems identified by communicating further with the relevant vendors and
providers, by working internally to identify alternative sourcing and by
formulating contingency plans. Gaiam expects the resolution of these issues to
be an ongoing process until all year 2000 problems are satisfactorily resolved.
27
<PAGE>
OUR BUSINESS
Gaiam
Gaiam produces and sells goods, services and information targeted to
customers who value the environment, a sustainable economy, healthy lifestyles
and personal development.
Although our historical sales have been predominantly through catalogs and
retailers, we are shifting our sales emphasis to the Internet and we intend to
make the Internet our primary channel of distribution.
Under the umbrella brands of Gaiam and Gaiam.com, we use specific brands to
target related but distinct markets. We use the Harmony, Living Arts, and
InnerBalance brands to offer our products through direct marketing via catalogs
and the Internet and through business-to-business relationships. Our number of
unique individual customers increased from 300,000 at the end of 1996, to
685,000 at the end of 1998 and to 800,000 at June 30, 1999. Gaiam also sells to
leading retailers such as Target, Musicland, Book of the Month and Amazon.com.
We strive to serve consumers who place a high value on promoting healthy
living and personal development, contributing to the sustainability of the
Earth's natural resources and purchasing decisions that enhance the quality of
the Earth's environment. In our view, these consumers make purchasing decisions
for goods and services based on these values, in addition to the traditional
criteria of price and performance. We believe that these consumers, whom we
refer to as "cultural creatives," are growing in number, as evidenced by the
growth of our customer base. Cultural creatives tend to be well-educated
consumers, with a median age of 42, a 60/40 women-to-men ratio and an average
annual income of $52,000.
The following terms are important to understand our business:
. By "sustainable" we mean the ability of a product or service to reduce
the burden placed on living systems and to maintain productivity without
depleting natural resources or producing waste.
. By "natural" we mean the characteristic of a product that is organic
and/or otherwise produced without chemicals and additives.
. By "eco-friendly" or "green" we mean products that have low or minimal
impact upon the ecosystem in which the product is created or used.
. By "alternative health" we mean the natural and holistic approach to
healthcare typified by chiropractic care, nutrition, homeopathy,
naturopathic medicine, acupuncture, acupressure, massage, aromatherapy
and other holistic approaches.
. By "mind-body-spirit" we mean the portion of the personal development
market that incorporates physical and mental elements, such as yoga and
Tai Chi.
. By "conscious commerce" we mean the practice of making purchasing
decisions based on personal values and beliefs.
Our Industry
We have named the industry we serve "Lohas" -- an acronym for Lifestyles Of
Health And Sustainability. We divide the Lohas industry into five markets that
shape this industry:
Sustainable Economy. This market includes environmental management
services and solutions, renewable energy, energy conservation products and
services, sustainable manufacturing processes, recycling and goods made
from recycled materials.
Healthy Living. This market includes food supplements, vitamins and
minerals, natural and organic foods and natural and personal body care.
Alternative Healthcare. This market includes natural health and wellness
solutions, information, products and services, including alternative,
noninvasive treatments, massage, chiropractic, acupuncture, acupressure,
biofeedback and aromatherapy.
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<PAGE>
Personal Development. This market includes experiences, solutions,
products, information and services relating to mind, body and spiritual
development, such as yoga, meditation, relaxation, spirituality ancient
religions, esoteric sciences and realizing human potential. The fitness
elements of this market are often referred to as "mind-body-spirit."
Ecological Lifestyles. This market includes environment friendly
solutions, natural untreated fiber products and eco-tourism.
Because of a common customer base, we believe these five markets should be
viewed collectively as one industry. We believe that, by serving all of these
markets, we can benefit our customers by providing them with a larger array of
choices, the convenience of one-stop shopping and access to a online community
of shared values.
Our History
Gaiam was founded in Boulder, Colorado. In 1995, we began to expand our
business nationally through the acquisition of the direct marketing business of
Seventh Generation, Inc., a supplier of eco-friendly household products. This
business became the base of our Harmony brand. In 1998, we acquired
InnerBalance, a direct marketer of alternative health products and solutions,
and a majority interest in Living Arts, a producer and supplier of yoga and
other mind-body-spirit informational videos and products.
Our Core Values
Gaiam's approach to business is based on its core values:
We emphasize integrity in all our relationships.
We value the environment and view all resources as precious assets.
Living our beliefs is more than just the right thing to do; it is the
only path to take.
We believe we can motivate every person to make a positive difference in
their lives and in our world by the simple choices they make every day.
Our Brand
Gaiam plans to use its brand name to establish itself as an authority and
information resource in the Lohas industry. Under the Gaiam and Gaiam.com
umbrella brands, we use our Harmony, InnerBalance, and Living Arts brands to
target the industry's various markets. The chart below illustrates the market
and examples of products offered under each of our brands.
[Chart of Gaiam brands appears here]
Our Competitive Strengths
We believe the following factors have contributed to our growth and success:
Focus On Large Market. Gaiam targets cultural creatives. A study published
by the Institute of Noetic Sciences in 1996 coined the term "cultural
creatives." This study was authored by Paul Ray, who has since agreed to join
our board of directors. The article estimates that this demographic segment,
which has in common the values of environmental awareness, healthy lifestyles
and personal development, numbered 44 million in the United States alone in
1996.
Gaiam believes that its appealing customer demographics contribute
significantly to its high average order value in excess of $90 for the year
ended December 31, 1998, as compared to a lower average for the direct
marketing industry.
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<PAGE>
Experienced Executive Team. We have an experienced team of corporate
managers. Our founder and Chief Executive Officer, Jirka Rysavy, was the
founder and Chief Executive Officer of Corporate Express, Inc., which he built
to a Fortune 500 company, and founder and CEO of Crystal Market, Inc., which
was sold to become the first store of Wild Oats Markets. Our President and
Chief Operating Officer, Lynn Powers, has over 15 years of senior management
experience in the retail industry as a Senior Vice President of Merchandising,
Marketing and Strategic Planning of Miller's Outpost. Our Chief Information
Officer, Pavel Bouska, was a member of the founding team and an officer of
Corporate Express for over 10 years, serving in various positions, including
Chief Information Officer and Vice President of Information Systems.
Distinctive, Branded Products. Gaiam offers information, products and
services under the Harmony, InnerBalance and Living Arts brand names. These
products appeal to Gaiam's well-educated customers and are not widely available
in conventional stores. These products are designed to enhance customers'
lifestyles and experiences and provide healthy, natural solutions while being
eco-friendly and promoting a sustainable economy.
Exceptional Customer Service. Gaiam maintains a customer-focused approach at
all stages of its business to build long-term customer relationships based on
loyalty and trust. We ensure that we have on hand inventory to support 93% of
in-stock orders. It is our practice to ship each order no later than the next
business day. According to Jupiter Communications, 90% of online customers
prefer human interaction when they require customer service. Our in-house
customer service department includes product specialists, who have specific
product knowledge and assist customers in selecting products and solutions that
meet their needs, design, price and style criteria. Gaiam also enhances its
customer service through initiatives such as extensive training of customer
service representatives and unconditional return guarantees. We believe that,
by offering exceptional customer service, we encourage repeat purchases by our
customers, enhance our brand identity and reputation and build stronger
relationships with our customers.
Established Infrastructure. Gaiam has invested in its physical facilities,
technology and information systems. In 1996, we established our 64,000 square
foot fulfillment center in Cincinnati, Ohio, a facility that is in the central
United States and conveniently located to hubs for major shipping companies.
This location allows us to achieve shipping cost efficiency to most locations
across the Continental United States. It is located within 30 minutes of both
UPS and Airborne hubs. In the same year, we installed our supply chain
management information system to support virtually all segments of our
business, including merchandising, customer database management and marketing,
order processing, fulfillment, inventory management, customer service and
financial reporting. This investment reduced our costs of fulfillment by
providing an integrated system that reduces labor costs and times needed to
procure inventory and fill orders. This existing infrastructure has also
allowed us to integrate acquired businesses in an efficient and cost-effective
manner. Our existing infrastructure also gives us an advantage over start up e-
commerce companies, many of which will need to devote substantial resources to
the development of these capabilities.
Our Operating Model. Our business structure is designed to enable each Gaiam
brand to achieve individual sales growth, while realizing cost savings from the
combined enterprise. The managers of our brands retain responsibility for
merchandising and creative presentation. Gaiam provides strategic direction,
technology, financial resources and administrative services, as well as
marketing, customer service, fulfillment, purchasing and sourcing.
Our Strategies.
Focus on our Online Presence. We are upgrading our website and technology
systems to create a platform that will expand our product offerings and take
advantage of the unique characteristics of online retailing. We are developing
an online community of consumers who are concerned about personal and planetary
health and want to use their purchase decisions to effect positive change. We
believe that the interactive environment available on the Internet will make
possible customer- to-customer and customer-to-company communications that will
increase the usefulness of our services to customers, provide valuable
30
<PAGE>
feedback to us, and help us and our customers establish a database of valuable
information about environmental issues, natural health and personal
development. From this interaction and feedback, we believe that the online
community can grow.
Our goal is to grow this segment of our customers and to educate them about
their own ability to effect positive change through purchases that will result
in improvements to the environment and their well-being -- and thereby
demonstrating to them that their choices can "make a difference."
Strengthen Our Brand. We plan to establish the Gaiam name as an authority in
the Lohas industry. Gaiam and Gaiam.com will also function as the umbrella
brands for Harmony, InnerBalance and Living Arts and any additional brands we
may acquire or develop. We plan to strengthen these brands by increasing
marketing efforts, strengthening relationships with traditional and e-commerce
retailers and increasing the breadth of our videotape and digital informational
offerings while maintaining our high level of customer service.
We believe that creating demand by consumers for eco-friendly and natural
products will permit us to obtain these products in greater volume and, in
turn, offer the products at lower prices than might otherwise be available. As
we are able to lower prices in this manner, we expect to attract additional
customers.
Offer Quality, Convenience and Selection. We intend to make purchasing
quality, natural and healthy lifestyle products from us more convenient than
shopping in a physical store. We are open 24 hours a day, and shopping for our
products does not require a trip to a store. We ship products directly to the
customer's home or office. We believe that customers may buy more natural and
healthy lifestyle products from us because they can get the information and
advice they require, have more hours to shop, can act immediately on a purchase
impulse and can locate products that may be hard-to-find. Because catalog and
online shopping are not tied to a geographic location, we can deliver a wide
selection of natural and healthy lifestyle products to customers in rural or
other locations that cannot support a large- scale Lohas products retail store.
Develop Business-to-Business Opportunities. Gaiam is focusing on increasing
its sales to other businesses that have a need for sustainable or natural and
healthy lifestyle products and services. These businesses include retailers,
hospitality companies, spas and resorts, health care providers, as well as
industrial companies. We believe that the Gaiam brands and product mix are
well-suited to these industries.
We believe that the expertise and knowledge we have and can develop in the
Lohas industry will make Gaiam the information source of choice for businesses
that wish to service the Lohas industry. As a result, we believe that we can
build a successful consulting and "green audit" business. Part of our strategy
is to set the standard for the industry and then offer information, products
and services under Gaiam's approval or recommendation. The Gaiam approval can
be earned by companies, business lines and products in the Lohas industry.
Complement our Existing Business with Selective Strategic Acquisitions. Even
though our strategy is not dependent on acquisitions, we will consider
strategic acquisitions in the Lohas industry that complement our existing
business. We believe that significant acquisition opportunities exist and our
willingness to retain existing operating management will make us an attractive
acquiring party. Gaiam generally allows the acquired company's management team
to retain responsibility for critical front-end business functions such as
merchandising, creative presentation and marketing, while consolidating
operational functions under the Gaiam organization to realize economies of
scale. We will consider strategic acquisitions in product sales, customer and
product information data bases that can augment our own business.
Product Brands
We have organized our merchandising and creative functions under three
strategic brands:
. Harmony targets the industry's Sustainable Economy and Ecological
Lifestyles markets,
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<PAGE>
. Living Arts targets the industry's Personal Development market, and
. InnerBalance targets the industry's Alternative Healthcare and Healthy
Living market.
Common logistics, information systems, finance, legal, human resources and
general administrative functions support the entire organization. Most of our
corporate functions located at our administrative headquarters in Broomfield,
Colorado and most inventory storage and fulfillment for our brands originate
from our Cincinnati, Ohio fulfillment center.
Harmony
Harmony focuses on eco-friendly household products that offer alternatives
for the product categories found in mainstream supermarkets and department
stores.
We work with our vendors to ensure that the sourcing of ingredients, the
processes utilized and packaging materials--are all eco-friendly and
responsible. Where appropriate, we submit our products to a rigorous testing
and approval process for both efficacy and safety. We also send out items to
independent labs for additional testing and approval. We use no animals in our
testing process.
Our merchandising department remains committed to the ongoing expansion of
Harmony's exclusive lines to pioneer conscious alternatives for everyday
household products.
Because of the uniqueness of our products, Harmony has been featured in
editorial articles in the Wall Street Journal, Daily News, San Francisco
Chronicle, Elle and Vogue.
Some of our Harmony customers have made automatic reorder arrangements
whereby Harmony regularly ships products in bulk on specific dates. Popular
automatic reorder products include paper towels, bathroom tissue and cleaning
supplies.
[Harmony graphics appears here and includes the following text]
<TABLE>
<S> <C> <C>
[Sustainable Economy Ecological Lifestyles
Energy-Efficient Lights Natural Fiber Clothing
(20,000 hour bulbs, fluorescent bulbs) (Hemp, Green/Organic Cotton)
Energy-Efficient Appliances Home Furnishings (Natural Fiber,
Recycled Paper Products Sustainably Harvested &
Reclaimed Woods)
SOLAR PATH LIGHT Recycled Plastic Products Natural Bed & Bath Products
(Radios, Lights, Security System) (Hemp, Green/Organic Cotton)
& Jute Beds, Sheets, Pillows,
Recycling & Composting Products Comforters, Blankets, Towels,
Shower Curtains & Rugs
Recycled Plastic Products (Clothes Non-Toxic Cleaning Supplies
Hammocks, Blankets, Throws) Non-Toxic Laundry Products
Battery Recharger & Natural Pest Repellents
Rechargeable Batteries
Energy-Efficient Laundry Products Outdoor/Garden Supplies
Conservation Information & Products]
</TABLE>
Living Arts
In September 1998, we acquired a majority interest in Living Arts. Living
Arts is a producer and supplier of videos and accessories targeted to the
Personal Development market. The videos cover mind-body-spirit fitness
subjects, such as yoga exercises. All videos are recorded on film or digital
formats.
32
<PAGE>
Living Arts markets its own video and audio tapes, as well as licensed video
titles, for sale to mass merchandisers, specialty stores, sporting goods
stores, and online retailers. Living Arts sells to companies such as Target,
Price-Costco, K-Mart, Sam's Club, Musicland, Borders, and Amazon.com, as well
as abroad in Germany, Italy, Switzerland and Australia.
Living Arts also sells directly to consumers through direct marketing
efforts, including catalog, e-commerce and direct magazine advertising.
Living Arts has reciprocal relationships with authorities in the mind-body-
spirit arena such as yoga teachers and publications such as Yoga Journal to
create content for informational videotapes.
[Livingarts graphic appears here and the following text]
<TABLE>
<CAPTION>
[Personal Development
<C> <S>
Meditation
Yoga
Tai Chi
YOGA ACCESSORIES Qi Gong
& CLOTHING Relaxation
Stress Reduction
(Information, Video, Audio, DVD, Clothing
Accessories, Books)]
</TABLE>
InnerBalance
InnerBalance offers alternative health products and solutions focused on
enhancing the quality of life. Its principal products include air and water
filters, fitness accessories, herbal supplements and home spa accessories
targeted to the Alternative Healthcare and Healthy Living markets. According to
a Journal of the American Medical Association study published in 1998, 83
million Americans tried alternative health procedures in 1997, for a total of
629 million visits to practitioners.
At this time, we generate the majority of InnerBalance sales through our
catalog and other direct sales efforts; however, we intend to make the Internet
our primary channel of distribution. According to Cyber Dialogue, over 22
million U.S. adults searched for health information on the Internet for the
year ended December 1998, and this number is estimated to increase by 50%
during the next year, to a total of 33 million.
[InnerBalance graphic appears here and the following text]
<TABLE>
<S> <C> <C>
[Alternative Healthcare Healthy Living
Water & Air Filters Personal Care Products
Massage Therapy (Natural Body Products,
Allergy Solutions Oral Hygiene, Hair Care)
Light Therapy Natural Supplements
Magnetic Therapy Nutritional Products
SOY MILK MAKER Aromatherapy Products & & Information
Information Natural Beauty Products
Sound Therapy
Fitness products & Information
Back Care
Natural pain Relief
Detox Products & Information]
</TABLE>
Our Channels of Distribution
We offer our products through two primary distribution channels consisting
of direct marketing (catalogs, the Internet and consumer advertising) and
business-to-business.
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<PAGE>
Direct marketing
We ensure that we have on-hand inventory to support 93% of in-stock orders.
It is our practice to ship each order no later than the next business day.
While this practice may result in higher costs, we believe that it enhances
customer satisfaction and loyalty. Our in-house customer service department
includes product specialists who are trained to have in-depth product knowledge
and assist customers in selecting products and solutions that meet their needs,
design, price and style criteria. For the benefit of our customers, we also
provide toll-free telephone ordering and unconditional return guarantees.
Business-to-Business
Gaiam markets certain products, principally videos featuring yoga and
fitness, to national and regional mass merchandisers, specialty stores,
sporting goods stores, bookstores, natural foods stores and online retailers.
We are in the process of expanding our range of products produced and sold in
the retail market, as well as creating an integrated branded retail display on
the premises of a larger retail establishment in which we will offer customers
a number of exclusive items.
Gaiam is in the process of significantly increasing its sales to other
businesses that have a need for eco-friendly products and services, or natural
and healthy lifestyle products. Business-to-business revenues were 13% of 1998
revenues and 21% of revenues for the first six months of 1999.
By offering both a direct marketing and business-to-business approach to
distribution, we believe that we are maximizing our ability to reach our core
customers as well as enhancing our brand.
Our Customer Service
Gaiam stands by its advertised "no-risk guarantee" by providing its
customers a full refund of the purchase price for products that are returned
any time for any reason. We believe that this guarantee, coupled with the
quality of our customer service personnel, encourages greater customer loyalty
and repeat sales.
In addition to our e-commerce ordering systems, our customer service staff
accepts orders, product questions and other customer service requests, 362 days
per year (excluding Thanksgiving, Christmas Day and New Year's Day) via our
dedicated toll-free telephone numbers, fax, mail and e-mail. Sales
representatives are responsible for verifying purchasing history, order status,
delivery dates, returns processing and account credits. Our information system
allows real time verification of in-stock positions, credit card
authorizations, stock moves and transfers. Product information in printed form
is generally available to customers upon request, and questions from customers
are answered within 24 hours. Merchandise is delivered to customers through the
U.S. Postal Service, United Parcel Service and other common carriers.
We train our service representatives to "think for the benefit of the
customer" and help them choose among the best possible solutions. This training
includes providing to them samples of all products for their inspection and
use, and databases of specifications about these products. Many of our
representatives purchase our products and information and can speak to
customers about their personal experiences with them. We also encourage our
sales representatives to provide us with feedback about products to assure
quality and performance. Several representatives also have personal 800 numbers
so customers can call them directly and receive personal assistance with their
requests. We have also trained dedicated product specialists to assist sales
representatives with technical questions and supplemental research by compiling
product-specific information packets accessible on our company-wide server.
We also maintain a research library stocked with books, videos and audio
tapes for our employees' use. Customer service representatives are encouraged
to watch videos and research products so that they can respond to our
customers' questions.
We maintain a toll-free customer service telephone number, separate from the
telephone number for merchandise orders, to handle inquires relating to matters
such as order status, scheduled delivery dates and product inquiries. Returns
are closely monitored to determine whether any product quality issues exist.
Returned merchandise is promptly inspected and recycled to inventory unless
damaged or worn.
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<PAGE>
Purchasing and Inventory Management
We strive to develop long-term and close working relationships with certain
vendors, which we believe increases the quality and selection of merchandise
available to us and enables us to develop products which are not readily
available from other sources. Gaiam uses an automated inventory management
system to maximize fulfillment and to reach the proper balance between
inventory turn and optimal in-stock positions. Both inventory turn and in-stock
rates carry associated benefits and costs to a fulfillment operation. High in-
stock rates have a positive impact on sales and customer satisfaction, but
carry the potential risk of excess inventory and obsolescence. Gaiam utilizes
historical sales results, manufacturing and delivery lead times, volume
discounts, the experience of its employees and other related factors in an
integrated analysis model to determine optimum inventory levels.
Liquidations, sales of overstocks and end-of-season merchandise is disposed
of primarily through our outlet store, located in Boulder, Colorado, sales
inserts and website offerings. Cost recovery efforts for excess inventory are
continually monitored, and balance sheet reserves are adjusted accordingly.
Our Internet Business
We believe that our business is particularly well-suited to Internet
commerce. The use of many of our products is enhanced by extensive product
education and information that we will make available online. The online
environment has virtually unlimited shelf space, the capacity to present vast
amounts of consumer information and offers consumers the convenience of
shopping online. In addition, many of our products are not widely found in
conventional stores.
Although our historical sales have been predominantly through catalogs and
retailers, we are shifting our sales emphasis to the Internet and making the
Internet our primary channel of distribution. According to Forrester Research,
an independent media research firm, the number of U.S. households using e-mail,
the Internet or a consumer online service will grow from an estimated 20.5
million households in 1996 to 55 million households, representing over 50% of
all U.S. households by the year 2002. Furthermore, the number of U.S.
households making at least one online purchase is expected to grow from
approximately 10 million at the end of 1998 to 36 million at the end of 2002.
Our website provides online purchasing capability for many products that we
offer. Following placement of an order, the customer will receive an order
confirmation that will summarize the purchase, the total amount of sale and any
shipping information. We are currently in the process of adding incremental
features to our website for the convenience of our customers. These features
will be gradually introduced during the remainder of 1999.
The following forms of online customer service will be available:
. Visitors will be able to search for answers to their questions on our
website. Answers to frequently asked customer inquiries may be searched
by topic, product and category. Visitors will have access to their
account information and will be able to update their personal
information.
. Customers will be able to complete a form at our website or e-mail
questions or concerns directly to our customer support staff. An inquiry
will be acknowledged immediately, and we anticipate that a personalized
response will be delivered within 24 hours via e-mail.
. We will provide live customer service support through a toll-free
telephone number. Our customer service representatives will have
complete access to and familiarity with our website and applications.
Visitors may modify their online preferences or profile through this
channel, if necessary.
After registering, a visitor will be invited to create a personal profile
containing product information and content of particular interest to the
visitor. Once registered, visitors will be able to check order status, make
payments, and communicate with customer service
35
<PAGE>
Future Acquisitions
We will consider strategic acquisitions of companies with a strong brand
identity and with customer and product information data bases that augment our
data bases. It has been Gaiam's practice to allow the acquired company's
management team to retain responsibility for critical front-end business
functions such as merchandising, creative presentation and marketing, while
consolidating operational functions under the Gaiam organization to realize
economies of scale.
Information Technology
Gaiam uses modern computer systems to support merchandising, customer
management and marketing, order processing, fulfillment, inventory management,
customer service and financial reporting. We believe that these systems provide
us with the data needed to perform effective analysis about our business,
products and customers. Further, we believe that this analysis can improve
performance, customer loyalty and service by identifying current conditions and
trends in marketing, customer buying behavior, customer service and fulfillment
operations. We believe our current systems will accommodate Gaiam's operations
for the foreseeable future.
We are implementing new Internet software to automate online sales and
operations. The system is compatible with our existing systems. This new
Internet software links Internet merchandising, order taking, payment and
security, order management, warehousing and shipping, customer service,
inventory management and accounting with our existing system.
Gaiam also makes extensive use of company-wide e-mail and voice-mail systems
for internal communication, as well as communication with customers and
suppliers.
Our Competitive Position
We believe that the Lohas industry is characterized by a fragmented supplier
and distribution network and we not aware of a dominant leader. Gaiam's goal is
to establish itself as the industry leader.
The direct marketing business is evolving and competitive. We expect more
business to use the Internet. As this happens, we expect competition to
intensify because barriers to entry are minimal and competitors can launch new
sites at a relatively low cost. In addition, larger, well-established and well-
financed entities may acquire, invest in or form joint ventures with our online
competitors as the use of the Internet and other online services increases.
Increased competition from these or other competitors could reduce our revenue.
We believe that the principal competitive factors in the direct marketing
business in the Lohas industry for the goods and services we sell are:
. integrity
. product distinctiveness, quality and performance
. depth of knowledge and research made available to the consumer
. quality of personalized customer service
. creative presentation of product
. brand name recognition
. easy and satisfying shopping experience
Our principal competitors in the direct marketing of goods and services we
sell are:
. catalog retailers such as Feel Good Catalog and Real Goods Trading
Company
. online retailers such as mothernature.com and GreenMountain.com
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<PAGE>
. thousands of small, local and regional businesses
. product lines or items offered by large retailers, manufacturers,
publishers and video producers.
While we believe that we compare favorably with our competitors on the key
competitive factors, we have no control over how successful our competitors are
in addressing these same factors. In addition, the smaller businesses we
compete against may be able to more effectively personalize their relationships
with customers.
We expect industry consolidation to increase competition. As our competitors
grow, they may adopt aggressive pricing or inventory policies, which could
result in reduced operating margins, loss of market share and a diminished
brand franchise.
Some environmentally friendly products are priced at a premium to products
that have similar uses that are not environmentally friendly. Our sales growth
assumes that consumers will sometimes be willing to pay higher prices in order
to enhance the environment, promote a sustainable economy, and achieve healthy
lifestyles and personal development or that we will be able to reduce prices
over time through volume purchases.
Because Gaiam uses multiple distribution channels for our products, we also
compete with other producers of similar mind-body-spirit fitness products sold
to traditional retail stores. Our principal competitors are PPI Entertainment,
Sony Wonder and Goldhil Media.
We believe the principal competitive factors in this market are:
. distinctiveness of product
. authoritative information
. quality of product
. brand recognition
. price
We believe we compete favorably on all relevant factors in direct marketing
and selling to traditional retailers as evidenced by our sales growth. Many of
our competitors are larger, have longer operating histories and have greater
financial and marketing resources than we have.
Our success also depends upon the willingness of consumers to purchase goods
and services that promote the values we espouse. While we believe our business
plan and assumptions are reasonable, we cannot assure you that the demographic
trends on which they are based will continue or that the current levels of
environmental consciousness or concerns about promoting a sustainable economy,
healthy lifestyles and personal development will be sustained. The decrease of
consumer interest in purchasing
goods and services that promote the values we espouse would materially and
adversely affect the growth of our customer base and sales revenues and,
accordingly, our financial prospects.
Our Intellectual Property
Gaiam, Gaiam.com, Harmony, InnerBalance and Living Arts and various product
names are subject to trademark or pending trademark applications, of Gaiam or a
Gaiam company. We also currently hold various web domain names relating to our
brand, including "www.gaiam.com."
Our Employees
As of June 30, 1999, Gaiam and the Gaiam companies employed approximately
150 persons. None of our employees is covered by a collective bargaining
agreement.
Our Facilities
Our principal executive offices are located in Boulder County, Colorado. Our
main fulfillment center is located in the Cincinnati, Ohio area. This facility
houses most of our fulfillment functions. We selected the
37
<PAGE>
Cincinnati site after considering the availability and cost of facilities and
labor, proximity to major highways, air delivery hubs and support of local
government of new businesses. We also believe that Cincinnati is ideal for
providing the lowest cost shipping available from a single central point to a
customer base that conforms to the overall U.S. population. Approximately 90%
of all orders are filled and shipped from the Cincinnati facility. The balance
is shipped directly from suppliers.
The following table sets forth certain information relating to our
facilities, all of which are leased:
<TABLE>
<CAPTION>
Lease
Location Size Use Expiration
-------- ---- --- ----------
<S> <C> <C> <C>
Boulder
County, CO 25,000 sq. ft. Headquarters and customer service October 2001
Outlet center January 2000
Cincinnati,
OH 64,000 sq. ft. Fulfillment center October 2000
Santa
Monica, CA 5,000 sq. ft. Creative staff offices June 2000
</TABLE>
We have options to renew our headquarters and fulfillment center leases. We
believe our facilities are adequate to meet our current needs and that suitable
additional facilities will be available for lease or purchase when and as we
need.
Regulatory Matters
Our business is subject to a number of governmental regulations, including
the Mail or Telephone Order Merchandise Rule and related regulations of the
Federal Trade Commission. These regulations prohibit unfair methods of
competition and unfair or deceptive acts or practices in connection with mail
and telephone order sales and require sellers of mail and telephone order
merchandise to conform to certain rules of conduct with respect to shipping
dates and shipping delays. We are also subject to regulations of the U.S.
Postal Service and various state and local consumer protection agencies
relating to matters such as advertising, order solicitation, shipment deadlines
and customer refunds and returns. In addition, merchandise imported by Gaiam is
subject to import and customs duties and, in some cases, import quotas.
Gaiam's business could also be affected by regulations promulgated in the
future. For example, there are a number of different bills under consideration
by Congress and various state legislatures that would restrict disclosure of
consumers' personal information, which may make it more difficult for Gaiam to
generate additional names for its direct marketing, and restrict a company's
right to send unsolicited electronic mail or printed materials. Although Gaiam
believes it is generally in compliance with current laws and regulations and
that these laws and regulations have not had a significant impact on our
business to date, it is possible that existing or future regulatory
requirements will impose a significant burden on us.
There is an increasing number of laws and regulations pertaining to the
Internet. In addition, a number of legislative and regulatory proposals are
under consideration by federal, state, local and foreign governments and
agencies. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, online content regulation, user privacy, taxation and quality of
products and services. Moreover, it may take years to determine whether and how
existing laws such as those governing issues such as intellectual property
ownership and infringement, privacy, libel, copyright, trade mark, trade
secret, obscenity, personal privacy, taxation, regulation of professional
services, regulation of medical devices and the regulation of the sale of other
specified goods and services apply to the Internet and Internet advertising.
The requirement that we comply with any new legislation or regulation, or any
unanticipated application or interpretation of existing laws, may decrease the
growth in the use of the Internet, which could in turn decrease the demand for
our products, information and services, increase our cost of doing business or
otherwise have a material adverse effect on our business, results of operations
and financial condition. The adoption of new laws or regulations could reduce
the rate of growth of the Internet, which could potentially decrease the usage
of our online stores or could otherwise materially adversely affect our
business. In addition,
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applicability to the Internet of existing laws governing issues such as
property ownership, copyrights and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain. The vast majority
of these laws were adopted prior to the advent of the Internet and related
technologies and, as a result, do not contemplate or address the unique issues
of the Internet and related technologies.
Further, several telecommunications carriers have requested the Federal
Communications Commission ("FCC") to regulate telecommunications over the
Internet. Due to the increasing use of the Internet and the burden it has
placed on the current telecommunications infrastructure, telephone carriers
have requested the FCC to regulate Internet service providers and online
service providers and impose access fees on those providers. If the FCC imposes
access fees, the costs of using the Internet could increase dramatically. This
could result in the reduced use of the Internet as a medium for commerce, which
could materially adversely affect our business.
The Gaiam companies generally collect sales taxes only on sales to residents
of the state in which Gaiam is headquartered, where orders are fulfilled or
where Gaiam has a location, currently, California, Colorado and Ohio.
A number of legislative proposals have been made at the federal, state and
local level, and by foreign governments, that would impose additional taxes on
the sale of goods and services over the Internet and certain states have taken
measures to tax Internet-related activities. Although Congress recently placed
a three-year moratorium on state and local taxes on Internet access or on
discriminatory taxes on electronic commerce, existing state or local laws were
expressly excepted from this moratorium.
Further, once this moratorium is lifted, some type of federal and/or state
taxes may be imposed upon Internet commerce. Legislation or other attempts at
regulating commerce over the Internet may substantially impair the growth of
commerce on the Internet and, as a result, adversely affect our opportunity to
derive financial benefit from these activities.
Legal Proceedings
In 1998 we acquired a majority interest in Living Arts. Funds we provided to
Living Arts at the time included amounts necessary to satisfy cash flow
shortfalls from operating losses and a legal judgment that had been awarded in
a case brought for breach of contract damages against Living Arts and its
former employee and then half-owner. At the time we acquired the majority
interest in Living Arts, Living Arts continued to employ this person, who
continues to hold indirectly a 16.5% interest in Living Arts through a company
he owns with his wife. In early 1999, Living Arts terminated the employment of
this person for chronic absenteeism, misappropriation of funds, gross
negligence, lying, repeated emotional outbursts directed at employees and other
inappropriate acts. After unanswered requests for repayment of damages, a
subsidiary of Gaiam filed arbitration proceedings to resolve a number of claims
involving the former employee and the minority owner, seeking to recover monies
owed by the minority owner to Gaiam subsidiaries and damages for breach of
fiduciary responsibilities. Thereafter, the former employee, the minority owner
and the former employee's wife filed suit seeking damages and other relief
against Livings Arts, Gaiam and its subsidiary, and Gaiam's directors. Their
complaint, which has not been served, alleges that these parties have breached
various fiduciary duties to the minority owner by managing Living Arts in a
manner injurious to him, that we owe him an unspecified amount of money for
various reasons, that termination of the former employee's employment was
wrongful, that we have defamed the former employee, and that our purchase of
Living Arts should be rescinded. We believe the complaint is without merit and
we intend to seek dismissal of the litigation and an award of sanctions for the
filing of the suit. We believe that the arbitration procedures stipulated by
the agreements with the former owner are the only recourse for the claims
covered by them. Further litigation could result if the disputes cannot be
settled.
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<PAGE>
MANAGEMENT
Executive Officers And Directors
Our executive officers and directors, including directors who will join the
board upon conclusion of this offering, their respective ages as of August 30,
1999 and their positions are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Jirka Rysavy............ 45 Founder, Chairman of the Board and Chief Executive Officer
Lynn Powers............. 50 President, Chief Operating Officer and Director
Pavel Bouska............ 45 Executive Vice President and Chief Information Officer
Barnet M. Feinblum...... 51 Director*
Barbara Mowry........... 51 Director*
Paul H. Ray............. 60 Director*
</TABLE>
- --------
* Mr. Feinblum, Ms. Mowry and Mr. Ray will join the board upon completion of
this offering.
JIRKA RYSAVY. Founder, Chairman and Chief Executive Officer of Gaiam. He has
been Chairman since Gaiam's inception and became the full-time Chief Executive
Officer in December 1998. Mr. Rysavy is also Chairman Emeritus and a director
of Corporate Express, Inc., a Fortune 500 company that supplies office and
computer products and services. Mr. Rysavy founded Corporate Express in 1986
and was its Chairman and Chief Executive Officer until September 1998.
Previously, he founded and served as Chairman and Chief Executive Officer of
Crystal Market, a health food market, which was sold to Michael Gilliland in
1987 to become the first store of Wild Oats Markets. Mr. Rysavy is also a
director of Whole Foods Markets, Inc.
LYNN POWERS. President, Chief Operating Officer and a director of Gaiam
since February 1996. From 1992 to 1996, she was Chief Executive Officer of La
Scelta, an importer of natural fiber clothing products. Before that, Ms. Powers
was Senior Vice President Marketing/Strategic Development and Vice President
Merchandising of Miller's Outpost, a specialty retailer.
PAVEL BOUSKA. Executive Vice President and Chief Information Officer since
March 1999. He served as a director of Gaiam from 1991 until August 1999. Prior
to joining Gaiam, from June 1988 to March 1999, Mr. Bouska was an officer and
one of the founding members of Corporate Express, serving in various positions,
including Chief Information Officer and Vice President Information Systems,
responsible for system development, information technology, operations, systems
conversions and business consolidations. Prior to joining Corporate Express, he
was project leader for Software Design & Management, a German software company
subsequently acquired by Ernst & Young.
BARBARA MOWRY. Will become a director of Gaiam at the conclusion of this
offering. Since November 1997, Ms. Mowry has been the President and Chief
Executive Officer of Requisite Technology, a business-to-business e-commerce
company specializing in the creation and management of electronic content and
catalogs. Prior to joining Requisite Technology, Ms. Mowry had been an officer
of two Fortune 500 companies, Telecommunications, Inc. from 1995 to 1997, and
UAL, Inc. from 1983 to 1990. In 1990, Ms. Mowry founded, and until 1995 served
as Chief Executive Officer of, The Mowry Company, a relationship marketing firm
focusing on the development of customer relations for businesses. She has an
MBA from the University of Minnesota and a BA in Sociology from Miami
University.
BARNET M. FEINBLUM. Will become a director of Gaiam at the conclusion of
this offering. Mr. Feinblum has served as the President, Chief Executive
Officer and a director of Horizon Organic Dairy since May 1995. 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 received a BS
degree from Cornell University and a MBA from the University of Colorado.
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<PAGE>
PAUL H. RAY. Will become a director of Gaiam at the conclusion of this
offering. Mr. Ray has been Executive Vice President of American LIVES, Inc., a
market research and opinion polling firm since November 1986. Prior to joining
American LIVES, Mr. Ray was Chief of Policy Research on Energy Conservation at
the Department of Energy, Mines and Resources of the Government of Canada from
1981 to 1983. From 1973 to 1981, Mr. Ray was Associate Professor of Urban
Planning at the University of Michigan. Mr. Ray holds a B.A. (cum laude) in
anthropology from Yale University and a Ph.D. in sociology from the University
of Michigan. He is the author of The Integral Culture Survey, which first
identified the cultural creative subculture.
Each director serves for a one-year term. Each officer serves at the
discretion of the Board of Directors. There are no family relationships among
any of the directors or officers of Gaiam.
Our Board of Directors currently has three vacancies that are expected to be
filled by the Board of Directors, by the appointment of Ms. Mowry, Mr. Feinblum
and Mr. Ray, upon conclusion of this offering.
Committees of the Board of Directors
Gaiam intends to establish an Audit Committee within 90 days following this
offering composed of at least two directors, which is required to maintain
Gaiam's listing on the Nasdaq National Market. The majority of the members of
the Audit Committee will not be employees of Gaiam. The Audit Committee will
report to the Board regarding the appointment of the independent public
accountants of Gaiam, the scope and fees of prospective annual audits and the
results thereof, compliance with Gaiam's accounting and financial policies and
management's procedures and policies relative to the adequacy of Gaiam's
internal accounting controls. Following this offering, we also intend to
establish a Compensation Committee, that we expect to be comprised entirely of
non-employee directors.
Director Compensation
Currently, directors of Gaiam do not receive any compensation for their
services as directors. Following consummation of this offering, Gaiam expects
to establish a compensation plan for non-employee directors.
Limitation of Liability and Indemnification Matters
Gaiam's charter provides indemnity to its directors and officers to the
extent permitted by Colorado law. The charter also includes provisions to
eliminate the personal liability of its directors and officers to Gaiam and its
shareholders to the fullest extent permitted by Colorado law. Under current
law, exculpation would cover an officer's or director's breaches of fiduciary
duty, except for:
. breaches of a person's duty of loyalty to Gaiam,
. those instances where a person is found not to have acted in good faith,
. those instances where a person received an improper personal benefit as
the result of the breach, and
. acts in violation of the Colorado Business Corporation Act.
Gaiam's bylaws provide that Gaiam will indemnify its directors, officers and
employees against judgments, fines, amounts paid in settlement and reasonable
expenses.
41
<PAGE>
Executive Compensation
The following table sets forth compensation, for the year ended December 31,
1998, of Gaiam's executive officers, Mr. Rysavy and Ms. Powers. Information is
also included with respect to 1998 Compensation for two of Gaiam's Vice
Presidents:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
All Other
Annual 1998 1998
Name and Principal Position Compensation Compensation
- --------------------------- ------------------- ------------
Salary Bonus
-------- -------
<S> <C> <C> <C>
Jirka Rysavy
Chairman and Chief Executive Officer.......... $ --(1) $ -- $-- (2)
Lynn Powers
President and Chief Operating Officer......... 110,009 -- -- (2)
Mark Lipien
Vice President Operations..................... 70,802 10,000 -- (2)
Linda West
Vice President Merchandising.................. 83,076 10,000 -- (2)
</TABLE>
- --------
(1) Gaiam began compensating Mr. Rysavy in January 1999. His annual salary is
currently $125,000.
(2) Until June 1, 1999, Gaiam did not make any restricted stock awards, grant
any stock appreciation rights, make any long-term incentive plan payouts or
grant any stock options.
Stock Plans
We recently adopted a long-term incentive plan and an employee stock
purchase plan. The incentive plan provides for the grant of stock options and
similar stock based compensation. We have reserved a total of 1,600,000 shares
for options and other grants under the incentive plan. Of that number, we have
granted approximately 675,000 options, all at a price of $4.375 per share. The
employee purchase plan will allow our employees to purchase shares at up to a
15% discount from market value, subject to restrictions. We have reserved a
total of 500,000 shares under the employee purchase plan.
Employment Agreements
Gaiam does not have any employment agreements with any of its executive
officers and does not typically enter into written employment agreements with
any employees. However, Gaiam directors, officers and managers are required to
sign a confidentiality agreement and, upon receiving a stock option grant, a
two-year non-compete agreement commencing with the date they leave Gaiam.
42
<PAGE>
CERTAIN TRANSACTIONS
On October 1, 1998, Mr. Rysavy sold InnerBalance to Gaiam for a $531,000
note carrying interest at 8% per annum, due June 30, 2001. A portion of the
note was repaid in 1998. On January 1, 1999, Gaiam issued a $289,000 8%
debenture to Mr. Rysavy for the balance. This debenture was repaid in full on
June 30, 1999.
On December 7, 1998, Ms. Powers exercised warrants she received in 1996 to
purchase 40,000 shares at $1.25 per share and also purchased $50,000 in
debentures issued by Gaiam. The debenture bears interest at 8% per annum and
may be prepaid at any time by Gaiam. In connection with this offering, Ms.
Powers has the right to purchase shares for the outstanding principal amount of
the debenture at the offering price of $5.00 per share. Accrued and unpaid
interest will be paid in cash.
All sales of securities available for resale made by Gaiam in 1998 and 1999
were made to a company wholly owned by Mr. Rysavy at prevailing market prices
based on NASDAQ quotations. The proceeds of these sales were $703,125 in 1998
and $538,750 in 1999. See note 6 of the notes to consolidated financial
statements. We obtained the securities by exercising options granted by Mr.
Rysavy to us in 1993.
On September 1, 1998, Ms. Powers loaned $100,000 to Gaiam on an unsecured
demand basis with interest at 7% per annum. Gaiam repaid this loan with
interest on September 30, 1998.
Gaiam subleases its fulfillment center in Cincinnati, Ohio from a subsidiary
of Corporate Express, Inc. at an annual rental rate of approximately $205,200,
which is the same rate as paid by Corporate Express, Inc. under its lease. Mr.
Rysavy is a director of Corporate Express and beneficially owns approximately
4.9% of the stock of Corporate Express, but does not control Corporate Express.
The lease expires in October 2000.
Michael Gilliland purchased $100,000 of shares and $100,000 in debentures
from us on May 7, 1999. Mr. Gilliland is the founder of the Wild Oats Markets.
In 1987, Mr. Rysavy sold a natural foods store in Boulder, Colorado, Crystal
Market, to Mr. Gilliland, and that store became the first Wild Oats Market
store. The shares purchased by Mr. Gilliland were sold at $4.375 per share, and
the debentures he purchased bear interest at 8% per annum and may be prepaid at
any time by Gaiam. Mr. Gilliland has certain registration rights requiring us
to register his shares. See our consolidated financial statements for
additional information relating to this private placement. In connection with
this offering, we are offering Mr. Gilliland the option to purchase shares for
the outstanding principal amount of the debentures (excluding interest) at the
offering price of $5.00 per share. We anticipate Mr. Gilliland will purchase
20,000 shares in exchange for his debenture.
Mr. Rysavy is a guarantor of Gaiam's line of credit with Norwest Bank. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
43
<PAGE>
OUR SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the class A and class B common stock of Gaiam by each of our
shareholders who beneficially owned shares on June 30, 1999, and as adjusted to
reflect the sale of the shares offered in this offering. Percentages are based
on the 3,496,429 shares to be outstanding after the offering, plus the
7,035,000 shares reserved for issuance upon conversion of class B common stock.
The address for each person, except as otherwise provided, is 360 Interlocken
Blvd., Broomfield, Colorado, 80021.
<TABLE>
<CAPTION>
Shares to be
Beneficially
Shares Beneficially Owned
Owned Prior to this After this
Offering(11) Offering(11)(12)
---------------------- ------------------
Number of Number of
Beneficial Owner Shares(13) Percent Shares(13) Percent
- ---------------- ------------ --------- --------- -------
<S> <C> <C> <C> <C>
Jirka Rysavy(1)................... 8,000,000 93.8% 8,100,000 77.0%
Lynn Powers(2).................... 40,000 .5% 70,000 .7%
Pavel Bouska(3)................... 40,000 .5% 90,000 .9%
James Argyropoulos/Argyropoulos
Investor G.P.(4)................. 120,000 1.4% 220,000 2.1%
Michael Gilliland(5).............. 22,857 .3% 42,857 .4%
Lennart Perlhagen(6).............. 57,143 .7% 107,143 1.0%
Mo Siegel(7)...................... 17,143 .2% 32,143 .3%
Herbert Simon(8).................. 57,143 .7% 107,143 1.0%
Edward Snider(9).................. 57,143 .7% 107,143 1.0%
Jeffrey Steiner(10)............... 120,000 1.4% 220,000 2.1%
All Executive Officers and
Directors (3 persons)............ 8,080,000 95.7% 8,260,000 78.4%
</TABLE>
- --------
(1) Mr. Rysavy owns 7,035,000 shares of class B common stock, which constitute
all of the issued and outstanding class B common stock and are convertible
into an equal number of shares. Mr. Rysavy also owns 965,000 shares.
Includes 100,000 shares Mr. Rysavy will purchase in this offering. See
"Description of Capital Stock--Shares" for a description of the voting
rights of the class B common stock.
(2) Includes 30,000 shares Ms. Powers will purchase in this offering.
(3) Includes 50,000 shares Mr. Bouska will purchase in this offering
(4) Mr. Argyropoulos is the general partner of Argyropoulos Investor G.P. He
is the founder, and, until 1989, was Chairman, of The Cherokee Group, and
currently is the founder and Chairman of The Walking Company. His address
is 9349 Oso Avenue, Chatsworth, California. Includes 100,000 shares
Mr. Argyropoulos or his entities will purchase in this offering.
(5) Mr. Gilliland is the founder, Chairman and Chief Executive Officer of Wild
Oats Markets. Includes 20,000 shares he will purchase in this offering.
(6) Mr. Perlhagen is the founder and Chairman of CrossPharma AB; and currently
Chairman of Meda Pharmaceuticals AB. Includes 50,000 shares he will
purchase in this offering.
(7) Mr. Siegel is co-founder and Chairman of Celestial Seasonings, Inc.
Includes 15,000 shares he will purchase in this offering.
(8) Mr. Simon is Chairman of Simon Property Group. Includes 50,000 shares he
will purchase in this offering.
(9) Mr. Snider is the founder and Chairman of Comcast Spectator. Includes
50,000 shares he will purchase in this offering.
(10) Mr. Steiner is the founder, Chairman and Chief Executive Officer of
Fairchild Industries. His address is 110 East 59th Street, New York, New
York 10022. Includes 100,000 shares he will purchase in this offering.
(11) Each shareholder possesses sole voting and investment power with respect
to the shares listed, except as provided by applicable community property
laws. In accordance with the rules of the Securities and Exchange
Commission, each shareholder is deemed to beneficially own any shares
obtainable upon the exercise of stock options or warrants which are
currently exercisable or which become exercisable within 60 days after
June 30, 1999, or the conversion of convertible securities that are
currently convertible or
44
<PAGE>
become convertible within 60 days after June 30, 1999. The inclusion in this
table of shares listed as beneficially owned does not constitute an
admission of beneficial ownership.
(12) The number and percentage of shares owned after this offering assumes none
of the listed shareholders will purchase additional shares in this
offering, except as otherwise indicated.
(13) The number of shares deemed outstanding includes shares outstanding as of
June 30, 1999 and any shares obtainable through the conversion of class B
common stock held by Mr. Rysavy. No options are exercisable within 60 days
of the date of this prospectus. Ownership percentages based solely on the
1,496,429 shares outstanding prior to this offering are Mr. Rysavy (965,000
shares) 64.5%; Ms. Powers and Mr. Bouska, 2.7% each; Argyropoulos Investor
G.P./Mr. Argyropoulos and Mr. Steiner, 8.0% each; Mr. Simon, Mr. Snider and
Mr. Perlhagen, 3.8% each; Mr. Gilliland, 1.5%; and Mr. Siegel, 1.2%.
Ownership percentages based solely on the 3,496,429 shares assumed to be
outstanding after this offering are Mr. Rysavy (1,065,000 shares) 30.5%; Ms.
Powers, 2.0%; Mr. Bouska, 2.6%; Argyropoulos Investor G.P./Mr. Argyropoulos
and Mr. Steiner, 6.3% each; Mr. Simon, Mr. Snider and Mr. Perlhagen, 3.1%
each; Mr. Gilliland, 1.2%; and Mr. Siegel, 0.9%.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
After the filing of Gaiam's Amended and Restated Articles of Incorporation
in connection with this offering, the authorized capital stock of Gaiam will
consist of 250,000,000 shares, consisting of 150,000,000 shares of Class A
common stock, $.0001 par value per share, 50,000,000 shares of class B common
stock, $.0001 par value per share, and 50,000,000 shares of preferred stock,
par value $.0001 per share. As of August 30, 1999, there were 1,496,429 shares
outstanding held by ten shareholders of record, options to purchase an
aggregate of approximately 675,000 shares, a warrant to purchase 24,000 shares
and 7,035,000 shares of class B common stock outstanding. There were no shares
of preferred stock outstanding.
Although Gaiam believes the following summary description of Gaiam's shares,
class B common stock, Preferred Stock, Amended and Restated Articles of
Incorporation and Amended and Restated Bylaws covers all material provisions
affecting the rights of holders of capital stock of Gaiam, this summary is not
intended to be complete and is qualified by reference to the provisions of
applicable law and to Gaiam's Amended and Restated Articles of Incorporation
and Amended and Restated Bylaws, both of which are included as exhibits to the
Registration Statement of which this prospectus is a part. See "Additional
Information."
Capital Stock
Each holder of shares is entitled to one vote for each share held on all
matters submitted to a vote of shareholders. Each share of class B common stock
is entitled to ten votes on all matters submitted to a vote of shareholders.
There are no cumulative voting rights. All holders of shares and shares of
class B common stock vote as a single group on all matters that are submitted
to the shareholders for a vote. Accordingly, holders of a majority of the votes
of the shares and shares of class B common stock entitled to vote in any
election of directors may elect all of the directors who stand for election.
Shares and class B common stock are entitled to dividends, if any, as may be
declared by the Board of Directors out of legally available funds. In the event
of a liquidation, dissolution or winding up of Gaiam, the shares and shares of
class B common stock would be entitled to share ratably in Gaiam's assets
remaining after the payment of all of Gaiam's debts and other liabilities.
Holders of shares and shares of class B common stock have no preemptive,
subscription or redemption rights, and there are no redemption or sinking fund
provisions applicable to the shares and class B common stock. The outstanding
shares and shares of class B common stock are, and the shares offered by Gaiam
in this offering will be, when issued and paid for, fully paid and non-
assessable.
The class B common stock may not be transferred unless converted into class
A shares, other than certain transfers to affiliates and family members. The
shares of class B common stock are convertible one-for-one into class A shares,
at the option of the holder of the shares of class B common stock.
Gaiam's Board of Directors is authorized, subject to any limitations
prescribed by Colorado law, to issue at any time up to 50,000,000 shares of
preferred stock. The Board may provide for the issuance of the preferred stock
in one or more series or classes with designations, preferences, limitations
and relative rights determined by the Board without any vote or action by the
shareholders, although the Board may not issue voting preferred stock without
the consent or approval of a majority of the Class B common stock. As a result,
the Board has the power to issue preferred stock with voting, conversion and
other rights and preferences that could adversely affect the voting power or
other rights of the holders of the shares. Although Gaiam has no current plans
to issue any preferred stock, the issuance of preferred stock or of rights to
purchase preferred stock could have the effect of making it more difficult for
a third party to acquire Gaiam, or of discouraging a third party from
attempting to acquire Gaiam. Such an issuance could also dilute your voting
power or other incidents of ownership as a holder of shares.
46
<PAGE>
Bylaws
The Bylaws provide, in accordance with Colorado law, that shareholders may
take action without a shareholders' meeting, provided that all shareholders
entitled to vote consent to do so in writing. The Bylaws also require advance
notice of any proposal to be brought before an annual meeting of shareholders
that relates to an amendment to the Articles of Incorporation, a merger, the
sale of all or substantially all of Gaiam's assets, the dissolution of Gaiam,
or any nomination for election of directors other than by the Gaiam board of
directors. These provisions could have the effect of delaying, deferring or
preventing a change of control of Gaiam.
Transfer Agent and Registrar
The transfer agent and registrar for the shares is American Securities
Transfer & Trust, Inc.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares in the public market following this
offering, or the perception that sales could occur, could adversely effect the
prevailing market price for our shares. Furthermore, since no shares will be
available for sale shortly after this offering because of the contractual and
legal restrictions on resale described below, sales of a substantial number of
shares in the public market after these restrictions lapse could adversely
affect the prevailing market price and impair our ability to raise equity
capital in the future.
Upon the closing of this offering, based upon the number of shares
outstanding as of June 30, 1999, there will be 3,496,429 shares and 7,035,000
shares of class B common stock outstanding. Of these shares, all 2,000,000
shares sold in this offering will be freely tradable without restriction or
further registration under the Securities Act, other than shares are purchased
by "affiliates" of Gaiam as that term is defined in Ruled 144 under the
Securities Act or the shares are purchased by holders who have entered into
lock-up arrangements with the underwriters for this offering. See "--Lock-up
Agreements" below. The remaining 1,496,429 shares and all 7,035,000 shares of
class B common stock will be "restricted securities" as that term is defined in
Rule 144 under the Securities Act. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144, or 144(k) under the Securities Act, which rules
are summarized below.
Following this offering, we intend to file a registration statement under
the Securities Act covering approximately 1,600,000 shares reserved for
issuance under our incentive plan and approximately 500,000 shares reserved
under our stock employee purchase plan. The registration statement would permit
persons acquiring shares under the plans (other than persons who have entered
into the lock-up agreements referred to below) to sell the shares in the public
market after the shares are purchased under the plans. The registration
statement covering these shares will become effective upon filing.
Securities Act Rules
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of:
. 1% of the then outstanding shares (approximately 35,000 shares
immediately after this offering), or the average weekly trading volume
of the shares on the Nasdaq National Market during the four calendar
weeks preceding the filing of a notice on Form 144 with respect to the
sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
In addition, under Rule 144(k), a person who is not one of our affiliates at
any time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years (including the holding period
of any prior owner other than an affiliate) is entitled to sell the shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, "144(k) shares" may be sold immediately upon the completion of this
offering.
Lock-up Agreements
All of our directors, officers and existing shareholders (who in the
aggregate hold 1,496,429 shares and shares of 7,035,000 class B common stock,
and who will acquire an additional 495,000 shares in this offering) are covered
by lock-up agreements under which they will not be permitted to transfer or
otherwise dispose of, directly or indirectly, any shares or any securities
convertible into or exercisable or exchangeable for shares, for a period of 180
days after the closing of the offering. Transfers or dispositions can be made
sooner:
. with the prior written consent of Tucker Anthony Cleary Gull;
48
<PAGE>
. in the case of certain transfers to affiliates;
. as a bona fide gift; or
. to a trust for the benefit of the transferor or immediate family members
of the transferor.
Upon expiration of the lock-up period, 180 days after the date of this
prospectus, 8,641,429 shares (including 7,035,000 shares of class B common
stock) will be available for resale to the public in accordance with Rule 144,
subject to the transfer restrictions described above.
In addition, Gaiam has agreed not to sell or otherwise dispose of, directly
or indirectly, any shares or any securities convertible into or exercisable or
exchangeable for shares, for a period of 180 days after the closing of the
offering, without the prior written consent of Tucker Anthony Cleary Gull,
except that we may:
. issue shares upon the exercise of outstanding options and grant options
to purchase shares under our incentive plan;
. issue shares under our stock employee purchase plan; and
. issue shares in connection with the acquisition of another company if
the terms of the issuance provide that the shares shall not be resold
prior to the expiration of the 180-day lock-up period described above.
Registration Rights
After our filing of the registration statement relating to this offering, we
are required to file a registration statement covering approximately 451,429
shares held by existing shareholders. The holders may not request the filing of
registration statements until after July 20, 2001. Gaiam generally is required
to bear all of the expenses of the registration, except underwriting discounts
and commissions. We have agreed with the underwriters that we will not permit
any of these holders to sell these shares for 180 days after the closing of the
offering. In addition, if these shares are not sold in a registered offering,
the holders will be required to comply with the provisions of Rule 144 as
described above.
49
<PAGE>
UNDERWRITING
The underwriting agreement, dated , 1999, 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:
<TABLE>
<CAPTION>
Number of
Underwriters: Shares
------------- ---------
<S> <C>
Tucker Anthony Cleary Gull...................................... 1,000,000
Adams, Harkness & Hill, Inc. ................................... 1,000,000
---------
Total......................................................... 2,000,000
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an over-allotment option to buy up to an
additional 300,000 shares from Gaiam at $5.00 per share to cover these sales.
They may exercise that option for 30 days after the initial purchase of the
shares by the underwriters. If any of these optioned shares are purchased, the
underwriters will purchase shares in approximately the same proportion as set
forth in the table above. The underwriters must purchase and accept delivery of
all the shares offered in this prospectus, other than those shares covered by
the over-allotment option, if any are purchased.
The following table shows the underwriting fees to be paid to the
underwriters by Gaiam in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares, and assuming that 1,000,000 and 1,300,000 shares,
respectively, are sold at the pubic offering price of $5.00 per share and
1,000,000 shares are sold at the customer discount price of $4.50 per share in
both cases.
<TABLE>
<CAPTION>
No
Exercise Full Exercise
---------- -------------
<S> <C> <C>
Per share (customer discount)....................... $ 0.45 $ 0.45
Per share........................................... $ 0.50 $ 0.50
Total............................................. $ 950,000 $1,110,000
If no shares are sold to Gaiam customers at a discount, then the
underwriting fees paid to underwriters would be as follows:
<CAPTION>
No
Exercise Full Exercise
---------- -------------
<S> <C> <C>
Per share........................................... $ 0.50 $ 0.50
Total............................................. $1,000,000 $1,150,000
</TABLE>
Gaiam will pay the expenses in connection with the opening of accounts for
Gaiam customers, estimated to be approximately $300,000. Gaiam estimates that
its share of the total expenses of this offering, excluding underwriting
discounts and commissions and including the expenses in connection with the
opening of the accounts, will be approximately $1.6 million. The compensation
to be paid to the underwriters and Gaiam's agreement to reimburse the
underwriters for expenses associated with opening accounts were determined
through negotiations between Gaiam and the underwriters.
In connection with this offering, we are offering each of our debenture
holders the option to purchase shares for the outstanding principal amount of
the debentures (excluding interest) at the offering price of $5.00 per share.
As a result, a total of 395,000 shares will be sold to the debenture holders,
assuming that each of the debenture holders elects to purchase shares in this
offering. The debenture holders are Ms. Powers, who is a director and executive
officer of the Company and may be deemed to be an affiliate of the Company, and
the persons named in notes (4) through (10) to the table under the caption "Our
Shareholders." In addition, we will offer Mr. Rysavy, Ms. Powers and Mr. Bouska
the opportunity to purchase 100,000 shares, 30,000 shares and 50,000 shares,
respectively, at the offering price of $5.00 per share. The result of these
offers is that 1,435,000 shares will be available for sale to Gaiam customers
and the public in this offering. Of the shares available for sale, Gaiam and
the underwriters intend to allocate at least 80%, or approximately 1,200,000
shares, to Gaiam customers and approximately 20%, or 300,000 shares, to persons
who are not Gaiam customers.
50
<PAGE>
If more requests for shares are received than Gaiam is offering, Gaiam and
the underwriters intend to prioritize the allocation process so that Gaiam
customers will be able to buy at least 50 shares, although it may not be
possible to allocate 50 shares to each customer who requests shares. Our
customers will receive a 10% discount from the initial public offering price
set forth on the cover of this prospectus (a discount of $.50 per share,
resulting in a purchase price of $4.50 per share) on the first 200 shares
purchased per customer. Gaiam employees may also take advantage of the customer
discount. Any shares not sold to customers and employees at the discounted
price will be offered by the underwriters to the public at $5.00 per share.
If more requests for shares are received than Gaiam and the underwriters
intend to make available to customers, shares will be allocated to customers in
three ways.
1. Up to 500,000 shares will be allocated to the first 1,000 customers on a
first come, first served basis, based on the date customer's account
applications are received by Tucker Anthony. If these first 1,000 customers
request more than 500,000 shares in the aggregate, we will allocate shares
to customers in a way that will attempt to make sure both that the greatest
number of shares get allocated to the customers who have the highest dollar
value of purchases from Gaiam over the past 12 months and that all 1,000
customers get to participate to some degree in this allocation. We may not
be able to achieve both results, but we will use our discretion to try to do
so.
2. A total of approximately 500,000 shares will be allocated to customers based
on the dollar volume of the customer's purchases from Gaiam over the past 12
months and to customers who are also Gaiam employees, consultants,
contractors or family members. Customers who received shares because they
were among the first 1,000 customers to return account applications, may
have additional shares allocated under this paragraph if the request was not
filled.
3. Finally, a total of approximately 200,000 shares will be allocated to
customers by lottery.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the $5.00 initial public offering price.
Any securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
$5.00 initial public offering price.
An electronic final prospectus will be available on Gaiam's website,
www.gaiam.com, and the underwriters' websites, www.tucker-anthony.com and
www.ahh.com.
Gaiam, its directors, officers and existing shareholders have agreed with
the underwriters not to dispose of any of their shares or securities
convertible into or exercisable or exchangeable for shares during the period
from the date of this prospectus continuing through the date 180 days after the
closing of the offering, except with the prior written consent of Tucker
Anthony Cleary Gull or in certain limited circumstances. Please see "Shares
Available for Future Sale" for a discussion of certain transfer restrictions.
The underwriters have informed us that they do not intend to confirm sales
to any account over which they exercise discretionary authority.
In connection with this offering, the underwriters may purchase and sell the
shares in the open market. These transactions may include over-allotment and
stabilizing transactions and purchases to cover short positions created in
connection with this offering. Stabilizing transactions consist of certain bids
or purchases made for the purpose of preventing or retarding a decline in the
market price of the shares. Short positions involve the sale by the
underwriters of a greater number of shares than they are required to purchase
from Gaiam in this offering. These activities may stabilize, maintain or
otherwise affect the market price of the shares, which may as a result be
higher than the price that might otherwise prevail in the open market. These
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market or otherwise, and may, if commenced, be discontinued at any
time.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be $5.00 per share. The initial public
offering price has been negotiated among Gaiam and the underwriters. In
51
<PAGE>
determining the initial public offering price of the shares, Gaiam and the
underwriters considered prevailing market conditions, Gaiam's historical
performance, estimates of Gaiam's business potential and earnings prospects, an
assessment of Gaiam's management and industry, and the consideration of the
above factors in relation to market valuations of companies in related
businesses.
We will apply to have the shares quoted for trading on the Nasdaq National
Market under the symbol "GAIA." We anticipate that the offering will close on
approximately October , 1999, at which point our shares will begin trading on
the Nasdaq National Market. There will not a be a when issued market in the
shares prior to the closing of the offering.
We have agreed to indemnify the underwriters against or contribute to losses
arising out of certain liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be
passed on for Gaiam by Bartlit Beck Herman Palenchar & Scott, Denver, Colorado.
Certain legal matters will be passed upon for the underwriters by Dorsey &
Whitney LLP, Denver, Colorado.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements and schedule of Gaiam, Inc. at December 31, 1998 and 1997,
and for the years then ended and the financial statements of Healing Arts
Publishing, Inc. at September 14, 1998 (acquisition date) and for the period
from January 1, 1998 through September 14, 1998, as set forth in their reports.
The consolidated statements of income, stockholders' equity and cash flows of
Gaiam, Inc. at December 31, 1996 and for the year then ended have been audited
by Wendell T. Walker and Associates, independent auditors as set forth in their
report. We've included the financial statements and schedule of Gaiam, Inc. and
the financial statements of Healing Arts Publishing, Inc. in this prospectus
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
reports and Wendell T. Walker and Associates' report, given on their authority
as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the U.S. Securities and Exchange Commission a
registration statement on Form S-1, including various exhibits and schedules,
under the Securities Act covering the shares to be sold in this offering. This
prospectus does not contain all of the information set forth in the
registration statement and the related exhibits and schedules. Whenever we make
reference in this prospectus to any of our contracts, agreements or other
documents, the references are intended to set forth the material information
regarding these contracts agreements or other documents. These references,
however, are not necessarily complete and you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document.
You may read without charge and copy at prescribed rates all or any portion
of Gaiam's registration statement or any reports, statements or other
information Gaiam files at the Commission's public reference room at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices located at Seven World Trade Center, 13th Floor,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. You can also request copies of these documents
upon payment of a duplicating fee, by writing to the Commission. Please call
the Commission at 1-800-SEC-0330 for further information on the operation of
the public reference rooms. Gaiam's Commission filings, including the
registration statement, will also be available to you on the Commission's
Internet site (www.sec.gov).
After this offering, we intend to send to its shareholders annual reports
containing audited consolidated financial statements and quarterly reports
containing unaudited consolidated financial statements for the first three
quarters of each fiscal year.
52
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Gaiam, Inc.
We have audited the accompanying consolidated balance sheets of Gaiam, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended. Our audits also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gaiam, Inc.
and subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Denver, Colorado
June 4, 1999,
except for Notes 1 and 11, as to
which the date is , 1999
The foregoing report is in the form that will be signed upon the effective
date of the Company's registration of Class A Common Stock in a registration
statement on Form S-1 and the concurrent 2.5 to 1 reverse stock split of the
Company's common shares.
/s/ Ernst & Young LLP
Denver, Colorado
, 1999
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Gaiam, Inc.
We have audited the accompanying consolidated statement of income of Gaiam,
Inc., and subsidiaries, and the related statement of stockholders' equity and
cash flows for the year ended December 31, 1996. These financial statements are
the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gaiam, Inc., and
subsidiaries, and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
/s/ Wendell T. Walker and
Associates, P.C.
Boulder, Colorado
September 12, 1997
<PAGE>
GAIAM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------------- June 30
1997 1998 1999
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 1,611,793 $ 1,409,939 $ 856,045
Securities available-for-sale............ 4,828,125 1,633,905 1,505,000
Accounts receivable, net of allowance for
doubtful accounts of $31,000 in 1997 and
$67,915 in 1998......................... 111,424 2,579,927 1,088,054
Accounts receivable, other............... 109,957 13,995 42,608
Note receivable.......................... 154,391 9,351 100,481
Inventory, less allowances............... 1,648,083 3,393,712 3,914,887
Deferred advertising costs............... 1,028,680 1,757,845 1,746,613
Prepaid assets........................... 76,894 68,367 474,729
Other current assets..................... -- 215,469 438,697
----------- ----------- -----------
Total current assets.................... 9,569,347 11,082,510 10,167,114
Property and equipment, net................ 1,096,888 1,079,694 992,029
Capitalized production costs, net.......... -- 672,438 824,607
Video library, net......................... -- 3,543,764 3,422,894
Other assets............................... 108,124 298,106 432,114
----------- ----------- -----------
Total assets............................ $10,774,359 $16,676,512 $15,838,758
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 2,152,739 $ 6,900,492 $ 3,185,557
Accrued liabilities...................... 473,504 1,456,338 1,194,064
Accrued royalties........................ -- 804,772 511,928
Capital lease obligations, current....... 46,693 42,261 25,707
Margin loan payable...................... 1,359,130 575,288 --
Convertible debentures (see Note 4)...... -- 550,000 1,975,000
Income taxes payable..................... 311,702 242,271 133,672
Deferred tax liability................... -- 592,566 606,540
----------- ----------- -----------
Total current liabilities............... 4,343,768 11,163,988 7,632,468
Deferred tax liability..................... 1,652,642 59,809 --
Capital lease obligations, long-term....... 42,275 25,588 14,253
Convertible debentures and other
borrowings, related party................. -- 273,051 --
Line of credit............................. -- -- 1,650,000
Minority interest.......................... -- 1,492,941 1,326,119
Stockholders' equity:
Class A common stock, $.0001 par value,
92,965,000 shares authorized, 1,005,000
and 1,165,000 shares issued and
outstanding at December 31 1997 and
1998, respectively...................... 101 117 149
Class B common stock, $.0001 par value,
7,035,000 shares authorized, issued and
outstanding at December 31 1997 and in
1998.................................... 704 704 704
Additional paid-in capital............... 133,833 377,634 1,827,602
Accumulated other comprehensive income... 3,161,263 983,126 910,279
Retained earnings........................ 1,439,773 2,299,554 2,477,184
----------- ----------- -----------
Total stockholders' equity.............. 4,735,674 3,661,135 5,215,918
----------- ----------- -----------
Total liabilities and stockholders'
equity................................. $10,774,359 $16,676,512 $15,838,758
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
GAIAM, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended Six months
December 31 ended June 30
----------------------------------- -----------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue............. 14,800,993 19,897,690 $30,738,540 $10,474,976 17,563,080
Cost of goods sold...... 6,762,500 8,462,151 13,173,536 4,414,408 7,074,663
---------- ---------- ----------- ----------- ----------
Gross profit............ 8,038,493 11,435,539 17,565,004 6,060,568 10,488,417
Expenses:
Selling and
operating............ 9,253,263 10,427,258 4,186,215 5,249,717 8,877,360
Corporate, general and
administration....... 1,217,436 1,574,770 2,393,946 635,723 1,795,610
---------- ---------- ----------- ----------- ----------
Total expenses...... 10,470,699 12,002,028 16,580,161 5,885,440 10,672,970
---------- ---------- ----------- ----------- ----------
Income (loss) from
operations............. (2,432,206) (566,489) 984,843 175,128 (184,553)
Other income (expense):
Realized gain (loss)
on sale of securities
and other, (See Note
6)................... 3,094,390 1,820,034 696,992 (25,266) 409,688
Interest expense...... (110,549) (236,699) (308,501) (88,672) (207,926)
---------- ---------- ----------- ----------- ----------
Other income (expense),
net.................... 2,983,841 1,583,335 388,491 (113,938) 201,762
---------- ---------- ----------- ----------- ----------
Income before income
taxes and minority
interest............... 551,635 1,016,846 1,373,334 61,190 17,209
Provision for income
taxes.................. 211,935 362,534 251,955 22,437 6,401
Minority interest in net
income(loss) of
consolidated
subsidiary, net of
tax.................... -- -- 261,598 -- (166,822)
---------- ---------- ----------- ----------- ----------
Net income............ $ 339,700 $ 654,312 $ 859,781 $ 38,753 $ 177,630
========== ========== =========== =========== ==========
Net income per share:
Basic................. $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.02
Diluted............... 0.04 0.08 0.11 $ 0.00 $ 0.02
Shares used in computing
net income per share:
Basic................. 8,040,000 8,040,000 8,072,877 8,040,000 8,317,822
Diluted............... 8,040,000 8,040,000 8,118,792 8,040,000 8,564,932
</TABLE>
See accompanying notes.
F-4
<PAGE>
GAIAM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Class A Class B Other
Common Stock Common Stock Additional Compre-
---------------- ---------------- Paid-in hensive Retained
Shares Amount Shares Amount Capital Income Earnings Total
--------- ------ --------- ------ ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... 1,005,000 $101 7,035,000 $704 $ 133,833 $ -- $ 445,761 580,399
Comprehensive income:
Net income............. -- -- -- -- -- -- 339,700 339,700
Other comprehensive in-
come
(loss):
increase in fair market
value of securities
available for sale,
net of tax of
$3,484,875............ -- -- -- -- -- 6,764,758 -- 6,764,758
----------
Total comprehensive
income (loss)........ 7,104,458
--------- ---- --------- ---- ---------- ---------- ---------- ----------
Balance at December 31
1996................... 1,005,000 101 7,035,000 704 133,833 6,764,758 785,461 7,684,857
Comprehensive income:
Net income............. -- -- -- -- -- -- 654,312 654,312
Other comprehensive in-
come (loss)
Decrease in fair market
value of securities
available for sale,
net of reclassifica-
tion adjustment (see
Note 1), net of tax of
$1,628,529............ -- -- -- -- -- (3,603,495) -- (3,603,495)
----------
Total comprehensive
loss................. -- -- -- -- -- -- -- (2,949,183)
--------- ---- --------- ---- ---------- ---------- ---------- ----------
Balance at December 31,
1997................... 1,005,000 101 7,035,000 704 133,833 3,161,263 1,439,773 4,735,674
Issuance of common
stock.................. 160,000 16 -- -- 574,984 -- -- 575,000
Return of capital to
shareholder through
Purchase of Inner
Balance Inc............ -- -- -- -- (331,183) -- -- (331,183)
Comprehensive income:
Net income............. -- -- -- -- -- -- 859,781 859,781
Other comprehensive in-
come (loss):
Decrease in fair market
value of securities
available for sale,
net of reclassifica-
tion adjustment (see
Note 1), net of tax of
$618,578.............. -- -- -- -- -- (2,178,137) -- (2,178,137)
----------
Total comprehensive
loss................. (1,318,356)
--------- ---- --------- ---- ---------- ---------- ---------- ----------
Balance at December 31,
1998................... 1,165,000 117 7,035,000 704 377,634 983,126 2,299,554 3,661,135
Issuance of common stock
(unaudited)............ 331,429 32 -- -- 1,449,968 -- -- 1,450,000
Comprehensive income:
Net income (unau-
dited)................ -- -- -- -- -- -- 177,630 177,630
Other comprehensive in-
come (loss):
Decrease in fair market
value of securities
available for sale,
net of reclassifica-
tion adjustment (see
Note 1), net of tax of
$ 572,743 (unau-
dited)................ -- -- -- -- -- (72,847) -- (72,847)
----------
Total comprehensive
income (unaudited) -- -- -- -- -- -- -- 104,783
--------- ---- --------- ---- ---------- ---------- ---------- ----------
Balance at June 30, 1999
(unaudited)............ 1,496,429 $149 7,035,000 $704 $1,827,602 $ 910,279 $2,477,184 $5,215,918
========= ==== ========= ==== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
GAIAM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended Six months ended
December 31 June 30
------------------------------------ ------------------------
1996 1997 1998 1998 1999
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating activities (Unaudited) (Unaudited)
Net income.............. $ 339,700 $ 654,312 $ 859,781 $ 38,753 $ 177,630
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation........... 265,151 241,985 240,431 189,597 152,549
Amortization........... 1,062 2,785 85,466 -- 120,870
Interest expense added
to principal of margin
loan.................. -- 175,562 116,158 51,106 7,411
Minority interest in
consolidated
subsidiary............ -- -- 261,598 -- (166,822)
Provision for doubtful
accounts.............. -- -- 258,993 -- --
Realized gains on sale
of securities and
property and
equipment............. (3,621,047) (1,902,802) (691,137) -- (482,692)
Deferred tax expense... 52,493 50,832 9,684 -- (45,835)
Changes in operating
assets and
liabilities, net of
effects from
acquisitions:
Accounts receivable.... 11,633 (62,317) (1,905,275) 85,457 1,463,260
Inventory.............. (672,020) (4,536) (591,519) 207,391 (521,175)
Deferred advertising
costs................. (398,058) (371,840) (243,630) (378,429) 11,232
Capitalized production
costs................. -- -- (212,361) -- (152,169)
Prepaid assets......... 46,415 (55,982) 8,527 (36,819) (406,362)
Other assets........... -- 1,839 (266,757) (406,950) (357,236)
Accounts payable....... 1,620,973 (267,316) 2,569,358 (190,802) (3,714,935)
Accrued liabilities.... (85,634) (133,528) 329,672 (84,717) (579,287)
Income taxes payable... (261,762) 390,521 (69,784) (289,663) (108,599)
----------- ----------- ---------- ----------- -----------
Net cash provided by
(used in) operating
activities............. (2,701,094) (1,280,485) 759,205 (815,076) (4,602,160)
Investing activities
Purchase of property,
equipment and other
assets................. (2,829,179) (157,987) (134,378) (143,251) (64,884)
Proceeds from the sale
of property and
equipment.............. -- 1,440,409 32,090 32,090 --
Proceeds from the sale
of securities
available-for-sale 3,800,000 1,931,250 477,500 538,750
Payments for
acquisitions, net of
cash acquired.......... -- -- (1,656,611) -- --
Payments (borrowings) on
notes receivable....... (232,066) 361,259 145,040 (2,095) (91,130)
----------- ----------- ---------- ----------- -----------
Net cash provided by
(used in) investing
activities............. 738,755 3,574,931 (1,136,359) (113,256) 382,736
Financing activities
Principal payments on
capital leases......... -- (40,989) (49,699) (30,130) (27,889)
Proceeds from sale of
stock.................. -- -- 575,000 -- 1,450,000
Proceeds from
convertible debt....... -- -- 549,999 -- 1,151,949
Net proceeds from
(payments on)
borrowings, net........ 1,923,681 (1,021,875) (900,000) -- 1,091,470
----------- ----------- ---------- ----------- -----------
Net cash provided by
(used in) financing
activities............. 1,923,681 (1,062,864) 175,300 (30,130) 3,665,530
----------- ----------- ---------- ----------- -----------
Net change in cash and
cash equivalents....... (38,658) 1,231,582 (201,854) (958,462) (553,894)
Cash and cash
equivalents at
beginning of year...... 418,869 380,211 1,611,793 1,611,793 1,409,939
----------- ----------- ---------- ----------- -----------
Cash and cash
equivalents at end of
year................... $ 380,211 $ 1,611,793 $1,409,939 $ 653,331 856,045
=========== =========== ========== =========== ===========
Supplemental cash flow
information
Interest paid.......... $ 128,282 $ 237,147 $ 126,025 3,740 166,824
Income taxes paid....... 238,654 312,100 312,100 115,000
Note receivable in
connection with the
sale of property and
equipment.............. -- 154,391 -- -- --
</TABLE>
See accompanying notes
F-6
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information subsequent to December 31, 1998 is unaudited.)
1. Summary of Significant Accounting Policies
Organization
Gaiam, Inc. (the "Company") was incorporated under the laws of the State of
Colorado on July 7, 1988. The Company's primary business is providing
information, goods, and services to customers who value the environment, a
sustainable economy and healthy lifestyles.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company, its subsidiaries and partnerships in which ownership is 50% or
greater and considered to be under the control of the Company. All material
intercompany accounts and transaction balances have been eliminated in
consolidation.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents
includes demand deposit accounts with financial institutions and all highly
liquid investments with an original maturity of three months or less.
Securities Available-for-Sale
Securities available-for-sale consist of equity securities and are 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
The Company records a provision for doubtful accounts for all receivables
not expected to be collected.
Interim Financial Statements
The consolidated results as of June 30, 1999, and for the six months ended
June 30, 1998 and 1999 are unaudited, but included all adjustments (consisting
only of normal recurring accruals) that the Company considers necessary for a
fair presentation of its financial position as of such date and results of
operations and cash flows for such period. The results of operations for the
six months ended June 30, 1999 are not necessarily indicative of results for a
full year.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share (Statement No.
128). Statement No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options. Diluted earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for all
periods have been presented and conform to the Statement No. 128 requirements.
F-7
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information subsequent to December 31, 1998 is unaudited.)
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
June 30,
---------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Numerator for basic
earnings per share..... $ 339,700 $ 654,312 $ 859,781 $ 38,753 $ 177,630
Effect of Dilutive
Securities:
8% convertible
debentures........... -- -- 19,234 -- 24,245
---------- ---------- ---------- ---------- ----------
Numerator for diluted
earnings
per share............ $ 339,700 $ 654,312 $ 879,015 $ 38,753 $ 201,875
========== ========== ========== ========== ==========
Denominator:
Weighted average
shares for basic
earnings per share... 8,040,000 8,040,000 8,072,877 8,040,000 8,317,822
Effect of Dilutive
Securities:
Convertible
debentures........... -- -- 41,153 -- 247,110
Stock warrants........ -- -- 4,762 -- --
---------- ---------- ---------- ---------- ----------
Denominators for diluted
earnings per share--
adjusted weighted
average
shares and assumed
conversion............. 8,040,000 8,040,000 8,118,792 8,040,000 8,564,932
========== ========== ========== ========== ==========
Net income per share--
basic.................. $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.02
Net income per share--
diluted................ $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.02
</TABLE>
In 1998, basic earnings per share data was computed by dividing net income
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share was adjusted for the assumed conversion of all
potentially dilutive securities including warrants to purchase common stock. In
1997 and 1996, the computations do not reflect the warrants as there is no
dilutive effect.
Inventory
Inventory, consisting of finished goods, net of valuation allowances of
$79,016 and $198,744 at December 31, 1997 and 1998, is stated at the lower of
cost (first-in, first-out method) or market.
Depreciation and Amortization
Depreciation of property and equipment, including amortization recorded
under capital leases, is computed on the straight-line method over estimated
useful lives of five to seven years for furniture and equipment and ten years
for leasehold improvements.
Capitalized Production Costs
Capitalized production costs include costs incurred to produce instructional
videos marketed by the Company to retail and direct-mail customers. These costs
are deferred for financial reporting purposes until the videos are released,
then amortized over succeeding periods on the basis of estimated sales.
Historical sales statistics are the principal factor used in estimating the
amortization rate. Accumulated amortization at December 31, 1998 was $927,331.
F-8
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information subsequent to December 31, 1998 is unaudited.)
Long-Lived Assets
The carrying values of intangible and other long-lived assets are reviewed
quarterly to determine if any impairment indicators are present. If it is
determined that such indicators are present and the review indicates that the
assets will not be recoverable, based on undiscounted estimated cash flows over
the remaining amortization and depreciation period, their carrying values are
reduced to estimated fair market value. Impairment indicators include, among
other conditions, cash flow deficits, an historic or anticipated decline in
revenue or operating profit, adverse legal or regulatory developments,
accumulation of costs significantly in excess of amounts originally expected to
acquire the asset and a material decrease in the fair value of some or all of
the assets. Assets are grouped at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows
generated by other asset groups.
Deferred Advertising Costs
Deferred costs primarily relate to preparation, printing and distribution of
catalogs. Such costs are deferred for financial reporting purposes until the
catalogs are distributed, then amortized over succeeding periods (not to exceed
seven months) on the basis of estimated sales. Historical sales statistics are
the principal factor used in estimating the amortization rate. Other
advertising and promotional costs are expensed as incurred. Advertising costs
incurred were $3,019,320, $4,866,223 and $7,121,648 for the years ended
December 31, 1996, 1997, and 1998, respectively.
Accrued Royalties
The Company has various royalty agreements with instructors and artists
requiring royalty payments of specified product sales based upon unit sales.
Payments are made quarterly and semi-annually. Royalty expense under these
agreements totaled $842,761 in 1998.
Revenues
The Company recognizes revenue at the time merchandise is shipped to the
customer. Amounts billed to customers for postage and handling charges, which
approximate $1.2 million for 1996, $1.7 million for 1997 and $2.2 million for
1998, are recognized as revenue at the time that the revenues on the product
shipments are recognized. The company provides a reserve for expected future
returns at the time the sale is recorded based upon historical experience.
The Company's sales are attributable mainly to sales within the U.S., with a
very small percentage, less than 1% of sales, to international customers. No
customer represented more than 10% of sales for either the years ended December
31, 1996, 1997 and 1998. The Company generally does not require collateral.
Realized gain on sale of securities and other for the year ended December
31, 1996 includes $782,053 of expenses relating to the May 1995 acquisition of
the catalog sales division of Seventh Generation. The terms of the acquisition
required the Company to enter into a licensing agreement for the use of the
Seventh Generation name, an operating agreement and a supply agreement. The
supply agreement required the Company to purchase a specified dollar amount of
products at a specified markup. The Company also incurred costs related to the
abandonment of acquired equipment and facilities and relocation expenses for
warehouse and office operations.
F-9
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information subsequent to December 31, 1998 is unaudited.)
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
securities available-for-sale, accounts receivable, payables and debt
obligations. The carrying values of these financial instruments as reported in
the accompanying balance sheets are assumed to approximate their fair value.
Income Taxes
The Company provides for income taxes pursuant to the liability method as
prescribed in Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. The liability method requires recognition of deferred income
taxes based on temporary differences between financial reporting and income tax
bases of assets and liabilities, using currently enacted income tax rates and
regulations.
Reclassifications
Certain reclassifications have been made to the December 31, 1996 financial
statements to conform to the December 31, 1997 and 1998 financial statement
presentation. Such reclassifications have had no effect on net income
previously reported.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. Actual results could differ from those estimates.
Reporting Comprehensive Income
During 1998, the Company adopted the Financial Accounting Standards Board
("FASB") issued Statement No. 130, Reporting on Comprehensive Income
("Statement No. 130"). Statement No. 130 establishes standards for reporting
and display of comprehensive income and its components in the financial
statements.
During 1998, the Company adopted Statement of Financial Accounting Standard
No. 131, Disclosures About Segments of an Enterprise and Related Information,
("Statement No. 131") which requires reporting of summarized financial results
for operating segments and establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company
evaluates performance based on two different operating segments: direct-to-
customer and business-to-business operations. For 1996 and 1997, direct-to-
customer operations was the only significant operating segment.
The reclassification adjustment for gains and losses included in net income
for 1996 net of tax of $3,484,875 include unrealized losses of $5,990,494 and
unrealized gains of $3,784,667. The reclassification adjustment for gains and
losses included in net income for 1997, net of tax of $1,628,529 include
unrealized losses of $5,507,737 and realized gains of $1,904,242. The
reclassification adjustment for gains included in net income for 1998, net of
tax of $618,578 include unrealized losses of $2,655,637 and realized gains of
$477,500. The reclassification adjustment for gains and losses included in net
income for the six months ended June 30, 1999, net of tax of $572,743 include
unrealized gains of $239,257 and realized gains of $312,104.
F-10
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information subsequent to December 31, 1998 is unaudited.)
2. Property and Equipment
At December 31, 1997 and 1998, property and equipment, stated at cost,
consists of the following:
<TABLE>
<CAPTION>
December 31
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Furniture and equipment.............................. $ 424,196 $ 614,804
Leasehold improvements............................... 270,937 288,324
Computer equipment................................... 754,000 965,449
Warehouse equipment.................................. 210,026 210,033
---------- ----------
1,659,159 2,078,610
Accumulated depreciation and amortization............ (562,271) (998,916)
---------- ----------
$1,096,888 $1,079,694
========== ==========
</TABLE>
3. Margin Loan Payable
The Company has a margin loan agreement with a brokerage firm that is due on
demand. The Company has pledged 265,000 shares of its securities available-for-
sale (see Note 6) as collateral for the loan. The interest rate charged on the
loan varies depending on market rates and was 7.0% at December 31, 1998.
Interest incurred on the balance of the loan is added to the outstanding
balance payable.
4. Convertible Debentures
As of December 31, 1998, the Company had $823,051 issued in 8% convertible
debentures to three individuals. Of the total outstanding, $323,051 was issued
to two officers of the Company, the President and the Chief Executive Officer
of the Company. The debentures are payable on the earlier of September 30, 1999
or the closing of an initial public offering. The debentures are automatically
converted to shares of Class A common stock at the initial public offering per
share price. The debenture payable to the Chief Executive Officer of the
Company is due December 31, 2000. The debenture is convertible, at the option
of the officer, upon the closing of the initial public offering by the Company,
into shares of common stock at the initial public offering per share price.
5. Leases
At December 31, 1997 and 1998, the Company's property held under capital
leases consisted of the following, which is included in property and equipment:
<TABLE>
<CAPTION>
December 31
------------------
1997 1998
-------- --------
<S> <C> <C>
Warehouse equipment...................................... $ 40,229 $ 40,229
Computer equipment....................................... 130,822 130,822
-------- --------
171,051 171,051
Accumulated amortization................................. (47,867) (79,777)
-------- --------
$123,184 $ 91,274
======== ========
</TABLE>
F-11
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information subsequent to December 31, 1998 is unaudited.)
The Company leases equipment and office, retail, and warehouse space through
capital and operating leases. The following schedule represents the annual
future minimum payments, as of December 31, 1998:
<TABLE>
<CAPTION>
Capital Operating
-------- ----------
<S> <C> <C>
1999................................................... $ 46,012 $ 621,601
2000................................................... 22,680 419,038
2001................................................... 4,212 142,566
2002................................................... -- 3,540
-------- ----------
Total minimum lease payments........................... 72,904 $1,186,745
==========
Less portion related to interest....................... (5,055)
--------
Present value of future minimum lease payments......... 67,849
Less current portion................................... (42,261)
--------
$ 25,588
========
</TABLE>
The Company incurred rent expense of $652,974, $508,590 and $646,886 for the
years ended December 31, 1996, 1997, and 1998, respectively.
6. Securities Available-for-Sale
Securities available-for-sale consist of 315,000 shares of common stock from
one issuer. At December 31, 1998 the cost and fair value of the securities were
$32,200 and $1,633,905, respectively. At December 31, 1997, the cost and fair
value of the securities were $38,333 and $4,828,125, respectively. The fair
market value of the shares was determined by using the closing NASDAQ price of
the common stock at December 31, 1998 and 1997.
During 1996, the Company sold 100,000 shares at a market value of $3,800,000
to a non-related party, and recognized a gain of $3,784,667 on the sale. During
1997, the Company sold 150,000 shares at a market value of $1,932,000 to a
related party and recognized a gain of $1,804,242 on the sale. During 1998, the
Company sold 60,000 shares at a market value of $703,125 to a related party,
and recognized a gain of $696,992 on the sale.
7. Income Taxes
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
December 31
--------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................ $139,308 $269,919 $197,142
State.......................................... 20,134 41,783 45,129
-------- -------- --------
159,442 311,702 242,271
Deferred:
Federal........................................ 45,456 34,420 25,852
State.......................................... 7,037 16,412 (16,168)
-------- -------- --------
52,493 50,832 9,684
-------- -------- --------
Total........................................ $211,935 $362,534 $251,955
======== ======== ========
</TABLE>
F-12
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information subsequent to December 31, 1998 is unaudited.)
Variations from the federal statutory rate are as follows:
<TABLE>
<CAPTION>
December 31
---------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Expected federal income tax expense at statutory
rate of 34%..................................... $187,556 $345,728 $466,934
Effect of legal judgment--permanent difference... -- -- (251,609)
Effect of other permanent differences............ 2,172 (16,983) 20,276
State income tax expense, net of federal
benefit......................................... 22,207 33,789 16,354
-------- -------- --------
Income tax expense............................... $211,935 $362,534 $251,955
======== ======== ========
</TABLE>
The legal judgment was a liability acquired in the purchase of a 67%
interest in Healing Arts Publishing. This $740,000 liability paid by the
Company in 1998 resulted in a permanent tax benefit.
Deferred income taxes reflect net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
net accumulated deferred income tax liability as of December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
December 31
---------------------------
1997 1998
----------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Reserve for bad debts............................. $ 13,428 $ 26,012
Deferred tax liabilities:
Securities available-for-sale..................... (1,628,529) (618,578)
Amortization...................................... (1,956) (2,435)
Depreciation...................................... (35,585) (57,374)
----------- ---------
(1,666,070) (678,387)
----------- ---------
Deferred tax liability, net......................... (1,652,642) $(652,375)
=========== =========
</TABLE>
8. Stockholders' Equity
The Company had warrant certificates outstanding that entitled the holder to
five warrants to purchase 40,000 shares of common stock at $1.25 per share. The
warrants were held by the Company's President and were exercised in December
1998 for $50,000
The Company had warrant certificates outstanding during the year and at
December 31, 1998 that entitled the holder to purchase 24,000 shares of Class A
common stock at $.50 per share. The warrants are exercisable in a two year
period beginning January 20, 2002 and ending January 9, 2004.
During 1998, the Company's shareholders voted to increase the authorized
shares of stock, create two classes of common stock and split the existing
outstanding shares on a 20,000-to-1 basis. These changes have been reflected
retroactively in the Company's consolidated financial statements. The Class B
common stock is owned entirely by the Company's founder and Chief Executive
Officer and is restricted as to its sale or transfer. Each share of Class A
common stock is entitled to one vote, while each share of Class B common stock
is entitled to 10 votes.
F-13
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information subsequent to December 31, 1998 is unaudited.)
9. Business Acquisitions
On September 14, 1998, the Company contributed $1.7 million in exchange for
a 67% membership in a newly formed entity, Healing Arts Publishing, LLC
("LLC"). Healing Arts Publishing, Inc., which produced and distributed exercise
and relaxation videos and sold environmentally oriented products through its
mail order catalogs and through direct sales to third-party retailers,
contributed the majority of its assets and certain liabilities in exchange for
a 33% membership interest. The Company contributed an additional $700,000 to
LLC during the first quarter of 1999, once certain contractual obligations were
met, and compensated the LLC's President $100,000 for its non-compete agreement
with LLC. This transaction was accounted for by using the purchase method and
the results from operations for the LLC for the period from the acquisition
through December 31, 1998 are included in the consolidated financial statements
of the Company. As part of the purchase, in addition to tangible assets, the
Company acquired a video library which is being amortized using the straight
line method over a period of 15 years.
On October 1, 1998, the Company acquired all of the stock and net assets of
InnerBalance Health, Inc. from a related party who is the founder and Chief
Executive Officer of the Company. The acquired entity provides similar services
as the Company. As these were companies under common control, the Company
accounted for the purchase using historical cost. Therefore, the excess of the
purchase price of $523,677 over the value of net assets was accounted for as a
return of capital to the primary shareholder. The payment was made partially
through a transfer of stock and a subordinated debenture with the related
party. Results of operations for the InnerBalance Health entity for the period
from the acquisition date through December 31, 1998 are included in the
consolidated financial statements of the Company.
The following represents the unaudited pro forma results of operations as if
the above noted acquisitions had occurred as of January 1, 1998 and at the
beginning of the immediately preceding period:
<TABLE>
<CAPTION>
Years ended December 31
-----------------------
1997 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Revenues............................................ $27,222,601 $38,063,794
Net income.......................................... 625,257 34,128
Net income per common share......................... 0.08 0.00
</TABLE>
The December 31, 1997 pro forma results exclude a $975,000 unusual legal
settlement that occurred during 1997.
10. Related Party Transactions
In 1997, the Company entered into separate fulfillment agreements with
InnerBalance Health (which was acquired by the Company during 1998, see Note 9)
and Explorations Video Catalog, Inc. (related parties under common ownership
with the owner and Chief Executive Officer of the Company) whereby the Company
provides customer sales, service, warehousing and distribution services. The
agreements are for a two-year period but may be terminated by either party with
30 days notice. During 1998, the Company billed a total of $372,039, consisting
of $272,637 to Explorations Video Catalog, Inc. and $99,402 to InnerBalance
Health.
11. Subsequent Events
The Company entered into a revolving line of credit agreement with a
financial institution in January 1999 in the amount of $1 million. The
Company's accounts receivable and finished goods inventory are collateral for
the line of credit.
F-14
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information subsequent to December 31, 1998 is unaudited.)
In June 1999, the Company completed a private placement whereby 331,428
shares of Class A common stock were issued at $4.375 per share. Additionally,
$1,275,000 convertible debentures with stated interest rate of 8% were issued.
These debentures are convertible automatically upon the closing of the initial
public offering into Class A common stock at the initial public offering per
share price.
In connection with the purchase of Healing Arts Publishing, the Company
entered into a royalty agreement with an actor to produce a series of videos.
The agreement was entered into during January 1999. The Company has agreed to
pay a minimum royalty of $225,000 to the individual for his services in
relation to the video production, and in exchange for marketing activities that
he may participate in. The royalty agreement also requires the Company to pay
certain amounts above and beyond the minimum once video sales exceed a certain
level.
In June 1999, the Company adopted an employee stock option plan (the "Plan")
that will serve as a long-term incentive plan for individuals who contribute
significantly to the strategic and long-term incentive performance objectives
and growth of the Company. Under the Plan, the Company may issue an aggregate
of not more than 1,600,000 common shares to eligible individuals.
In 1999, the Company amended the convertible debentures issued to all
subscribers to remove the automatic conversion of the securities.
On , 1999, the Company's Board approved a reverse stock split of 2.5 to
1.
12. Segment Information
The Company has two business segments: Direct to Consumers and Direct to
Businesses; both of which sell products, services and information produced
and/or purchased from other suppliers and shipped directly to either the end
user or reseller. Although the customer bases do not overlap to any extent, the
purchase and delivery processes overlap in some areas. The Company does not
accumulate the balance sheet by segment for purposes of management review.
Each of the two segments qualifies as such because each is more than 10% of
the combined revenue. Contribution margin is defined as net sales, less cost of
goods sold and direct expenses. Financial information for the Company's
business segments was as follows:
<TABLE>
<CAPTION>
Six months ended June
Year Ended December 31, 30,
------------------------ -----------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue:
Direct to consumer........ $19,897,690 $26,897,236 $10,474,976 $13,771,675
Direct to business........ -- 3,841,304 -- 3,791,405
Consolidated net revenue.... 19,897,690 30,738,540 10,474,976 17,563,080
Contribution margin:
Direct to consumer........ (566,490) 128,691 175,128 (448,539)
Direct to business........ -- 856,152 -- 263,986
----------- ----------- ----------- -----------
Consolidated contribution
margin..................... $ (566,490) $ 984,843 $ 175,128 $ (184,553)
</TABLE>
F-15
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information subsequent to December 31, 1998 is unaudited.)
<TABLE>
<CAPTION>
Year Ended Six months ended
December 31, June 30,
------------------ ------------------
1997 1998 1998 1999
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Reconciliation of Contribution margin
to net income:
Other income........................... 1,583,336 388,491 (113,938) 201,762
Income tax expense..................... 362,534 251,955 22,437 6,401
Minority interest expense.............. -- 261,598 -- (166,822)
--------- -------- -------- --------
Net income............................. $ 654,312 $859,781 $ 38,753 $177,630
========= ======== ======== ========
</TABLE>
F-16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Healing Arts Publishing, Inc.
We have audited the accompanying balance sheet of Healing Arts Publishing,
Inc. as of September 14, 1998 (acquisition date), and the related statements of
operations, stockholders' deficit and cash flows for the period from January 1,
1998 through September 14, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Healing Arts Publishing,
Inc. at September 14, 1998, and the results of its operations and its cash
flows for the period from January 1, 1998 through September 14, 1998 in
conformity with generally accepted accounting principles.
Denver, Colorado
June 25, 1999
F-17
<PAGE>
HEALING ARTS PUBLISHING, INC.
BALANCE SHEET
September 14, 1998
<TABLE>
<S> <C>
ASSETS
Current assets
Accounts receivable, net of allowance for doubtful accounts of
$126,580........................................................ $ 706,420
Inventory, net................................................... 836,571
Deferred advertising costs....................................... 274,106
Prepaid and other current assets................................. 99,444
----------
Total current assets........................................... 1,916,541
Property and equipment, net........................................ 126,173
Capitalized production costs, net.................................. 460,077
Other assets....................................................... 59,879
----------
Total assets................................................... $2,562,670
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................................. $1,707,983
Accrued liabilities.............................................. 892,281
Notes payable and other.......................................... 1,824,644
----------
Total current liabilities...................................... 4,424,908
Capital lease obligations, long-term............................... 12,949
----------
Total liabilities.............................................. 4,437,857
Stockholders' deficit:
Common stock, no par value, 10,000 shares authorized, 100 shares
issued.......................................................... 10
Accumulated deficit.............................................. (1,875,197)
----------
Total stockholders' deficit.................................... (1,875,187)
----------
Total liabilities and stockholders' deficit.................... $2,562,670
==========
</TABLE>
See accompanying notes.
F-18
<PAGE>
HEALING ARTS PUBLISHING, INC.
STATEMENT OF OPERATIONS
For the period from January 1, 1998 through September 14, 1998
<TABLE>
<S> <C>
Net revenue........................................................ $5,990,059
Cost of goods sold................................................. 2,678,344
----------
Gross profit....................................................... 3,311,715
Expenses:
Selling and operating............................................ 2,999,499
Corporate, general and administrative............................ 736,867
----------
Total expenses................................................. 3,736,366
----------
Loss from operations............................................... (424,651)
Interest expense and other......................................... (61,160)
----------
Net loss........................................................... $ (485,811)
==========
</TABLE>
See accompanying notes.
F-19
<PAGE>
HEALING ARTS PUBLISHING, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
For the period from January 1, 1998 through September 14, 1998
<TABLE>
<CAPTION>
Common Accumulated
Stock Deficit Total
------ ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1997.................. $10 $(1,191,696) $(1,191,686)
Distributions paid to stockholder............. -- (197,690) (197,690)
Net loss...................................... -- (485,811) (485,811)
--- ----------- -----------
Balance at September 14, 1998................. $10 $(1,875,197) $(1,875,187)
=== =========== ===========
</TABLE>
See accompanying notes.
F-20
<PAGE>
HEALING ARTS PUBLISHING, INC.
STATEMENT OF CASH FLOWS
For the period from January 1, 1998 through September 14, 1998
<TABLE>
<S> <C>
Operating activities
Net loss........................................................... $(485,811)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation..................................................... 35,236
Changes in operating assets and liabilities:
Accounts receivable.............................................. 431,682
Inventory........................................................ 125,131
Deferred advertising............................................. (117,370)
Prepaid assets................................................... (25,832)
Capitalized production costs..................................... (61,340)
Other assets..................................................... (25,269)
Accounts payable................................................. (340,825)
Accrued liabilities.............................................. (476,727)
---------
Net cash used by operating activities.............................. (941,125)
Investing activities
Purchase of property and equipment................................. (26,101)
---------
Net cash used by investing activities.............................. (26,101)
Financing activities
Principal payments on capital leases............................... (14,487)
Principal payments on notes payable................................ (529,610)
Proceeds from notes payable........................................ 1,709,013
Distributions to stockholder....................................... (197,690)
---------
Net cash provided by financing activities.......................... 967,226
---------
Net change in cash and cash equivalents............................ --
Cash and cash equivalents at January 1, 1998....................... --
---------
Cash and cash equivalents at September 14, 1998.................... $ --
=========
</TABLE>
See accompanying notes.
F-21
<PAGE>
HEALING ARTS PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS
September 14, 1998
1. Summary of Significant Accounting Policies
Organization
Healing Arts Publishing, Inc. (the "Company") produces and distributes
informational videos and sells environmentally oriented products through mail
order catalogs and direct sales. The Company was organized in January 1992.
Effective September 14, 1998 (acquisition date), the Company contributed the
majority of its assets and certain liabilities to a newly formed entity,
Healing Arts Publishing, LLC ("LLC") for a 33% membership interest.
Concurrently, Gaiam Inc., a Colorado-based provider of services and products to
customers who value the environment, a sustainable economy and healthy
lifestyles, contributed $1.7 million in exchange for a 67% membership interest
in LLC. Gaiam contributed an additional $700,000 to LLC during the first
quarter of 1999, once certain contractual obligations were met, and compensated
the Company's President $100,000 for its non-compete agreement with LLC.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventory
Inventory, consisting of finished goods, net of valuation allowances of
$29,000 is stated at the lower of cost (first-in, first-out method) or market.
Depreciation and Amortization
Depreciation of property and equipment, including amortization recorded
under capital leases, is computed on the straight-line method over estimated
useful lives of approximately five to seven years.
Deferred Advertising Costs
Deferred costs primarily relate to preparation, printing and distribution of
catalogs. Such costs are deferred for financial reporting purposes until the
catalogs are distributed, then amortized over succeeding periods (not to exceed
seven months) on the basis of estimated sales. Historical sales statistics are
the principal factor used in estimating the amortization rate. Other
advertising and promotional costs are expensed as incurred. Advertising costs
incurred were $493,992 for the period ended September 14, 1998.
Capitalized Production Costs
Capitalized production costs relate to the preparation, filming and copying
of exercise videos produced by the Company. Such costs are deferred for
financial reporting purposes until the videos are distributed, then amortized
over succeeding periods on the basis of estimated sales. Historical sales
statistics are the principal factor used in estimating the amortization rate.
Video production costs incurred were $105,824 for the period ended September
14, 1998.
F-22
<PAGE>
HEALING ARTS PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenues
The Company recognizes revenue at the time merchandise is shipped to the
customer. Amounts billed to customers for postage and handling charges which
approximate $214,000 are recognized as revenue at the time that the revenues on
the product shipments are recognized. The Company provides a reserve for
expected future returns at the time the sale is recorded based upon historical
experience.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company's accounts receivable are derived from revenue earned from
customers located in the U.S. The Company maintains an allowance for doubtful
accounts receivable based upon the expected collectibility of accounts
receivable. During the period from January 1, 1998 through September 14, 1998,
the Company's three largest trade customers comprised approximately 28% of the
accounts receivable balance.
2. Property and Equipment
At September 14, 1998, property and equipment, stated at cost, consists of
the following:
<TABLE>
<S> <C>
Furniture and equipment........................................... $ 224,482
Computer equipment................................................ 96,689
---------
321,171
Accumulated depreciation.......................................... (194,998)
---------
$ 126,173
=========
</TABLE>
3. Notes Payable
In conjunction with the purchase agreement signed between the Company and
Gaiam, Inc., Gaiam, Inc. advanced to the Company, $1.7 million in the form of
two promissory notes for $640,000 and $490,000, respectively, and assumed a
line of credit agreement between the Company and Wells Fargo Bank, N.A., the
outstanding amount of which was approximately $560,000. Interest on this
advance is stated at 3.5% above prime rate or 12% at September 14, 1998. Under
the terms of the purchase agreement, this advance, exclusive of the accrued
interest, will be canceled and contributed to the limited liability company
owned jointly by the Company and Gaiam, Inc. upon final closing of the
purchase.
At September 14, 1998, the Company had a $100,000 note payable with a
vendor, Goldhil Home Media. Principal and interest of $5,000 was paid in full
on October 15, 1998.
F-23
<PAGE>
HEALING ARTS PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Leases
As of September 14, 1998, the Company's principal operating lease
commitments are for equipment, office and warehouse space. The Company's future
minimum lease payments under noncancelable operating lease agreements are as
follows:
<TABLE>
<S> <C>
1998................................ $ 86,704
1999................................ 11,551
2000................................ 3,540
2001................................ 885
--------
$102,680
========
</TABLE>
The Company incurred rent expense of $109,843 for the period ended September
14, 1998.
5. Income Taxes
The Company is a Subchapter S corporation under the Internal Revenue Code,
and, accordingly, is not taxed as a separate entity. The Company's taxable
income or loss is allocated to each stockholder and recognized as taxable
income or loss on their individual tax returns.
6. Contingencies
The Company is involved in legal actions in the normal course of business,
some of which may seek substantial monetary damages, including claims for
punitive damages which may not be covered by insurance. After review, including
consultation with legal counsel, management believes the ultimate liability in
excess of any amounts accrued which could arise from these actions would not
materially affect the Company's financial position or results of operations.
F-24
<PAGE>
GAIAM INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma consolidated statement of operations for
the year ended December 31, 1998 is derived from the historical consolidated
statements of operations of Gaiam, Inc. and Healing Arts Publishing, Inc. and
InnerBalance Health, Inc., adjusted to give effect to their consolidation using
the purchase method of accounting for business combinations.
The unaudited pro forma consolidated statement of operations for the twelve
months ended December 31, 1998 assumes that the Acquisitions occurred as of
January 1, 1998.
The pro forma consolidated statement of operations is provided for
illustrative purposes only and should be read in conjunction with the
accompanying notes thereto, and the audited consolidated financial statements
and notes thereto of Gaiam, Inc. as of and for the year ended December 31, 1998
and the audited financial statements and the notes thereto of Healing Arts
Publishing, Inc. as of September 14, 1998 and for the period from January 1,
1998 through September 14, 1998. The pro forma data is not necessarily
indicative of the operating results or financial position that would have been
achieved had the Acquisitions been consummated at the dates indicated, nor is
it necessarily indicative of future operating results and financial condition.
F-25
<PAGE>
GAIAM, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31, 1998
<TABLE>
<CAPTION>
Healing Arts InnerBalance Total
Gaiam, Inc. Publishing, Inc. (c) Health, Inc. (d) Adjustments Pro Forma
----------- -------------------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenue.................... $30,738,540 $5,990,059 $1,339,947 (5,738) (b) $38,062,808
Cost of goods sold............. 13,173,536 2,678,344 569,645 (2,525) (b) 16,419,000
----------- ---------- ---------- -------- -----------
Gross profit................... 17,565,004 3,311,715 770,302 (3,213) 21,643,808
Expenses:
Selling and operating........ 14,186,215 2,999,499 1,017,415 168,871 (a) 18,372,000
Corporate, general and
administration.............. 2,393,946 736,867 -- -- 3,130,814
----------- ---------- ---------- -------- -----------
Total expenses............. 16,580,161 3,736,366 1,017,415 168,871 21,502,814
----------- ---------- ---------- -------- -----------
Income (loss) from operations.. 984,843 (424,651) (247,113) (172,084) 140,994
Other income (expense):
Realized gain on sale of
securities and other........ 696,992 -- -- -- 696,992
Interest expense............. (308,501) (61,160) (17,312) -- (386,974)
----------- ---------- ---------- -------- -----------
Total other income
(expense)................. 388,491 (61,160) (17,312) -- 310,018
----------- ---------- ---------- -------- -----------
Income (loss) before taxes and
minority interest............. 1,373,334 (485,811) (264,425) (172,084) 451,012
Provision for income taxes..... 251,955 -- -- -- 251,955
Minority interest in net income
of
consolidated subsidiary, net of
tax........................... (261,598) -- -- 93,456 (e) (168,142)
----------- ---------- ---------- -------- -----------
Net income (loss).............. $ 859,781 $ (485,811) $ (264,425) $(78,628) $ 30,915
=========== ========== ========== ======== ===========
Net income:
Basic........................ $ 0.11 $ 0.00
Diluted...................... 0.11 $ 0.00
Shares used in computing net
income per share:
Basic........................ 8,072,877 8,072,877
Diluted...................... 8,263,677 8,263,677
</TABLE>
See accompanying notes.
F-26
<PAGE>
GAIAM, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS--(Continued)
Notes to Unaudited Pro Forma consolidated Statement of Operations:
(a) The statement of operations has been adjusted to reflect the additional
amortization of the video library had the Company acquired Healing Arts
Publishing, Inc. on January 1, 1998.
<TABLE>
<S> <C>
Intangible Asset................. $ 3,576,100
Amortization Life................ 15 years
Additional Period................ 8.5 months
-----------
Adjustment....................... $ 168,871
===========
</TABLE>
(b) The statement of operations has been adjusted to reflect the effect of
intercompany sales and cost of goods sold between Healing Arts Publishing,
Inc. and Gaiam, Inc. for the period from January 1, 1998 through September
19, 1998.
(c) Represents the results of operations of Healing Arts Publishing, Inc. from
January 1, 1998 through September 14, 1998.
(d) Represents the results of operations of Inner Balance Health from January
1, 1998 through September 30, 1998. The Company accounted for the
acquisition of Inner Balance Health at historical cost as the acquisition
was considered a transfer of interest under common control.
(e) Represents the adjustment to minority interest to reflect ownership of
Healing Arts Publishing, Inc. for the entire year.
F-27
<PAGE>
[Inside Back cover]
[Pictures]
<PAGE>
[Back cover]
[Pictures]
Until , 1999, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
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.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 3,197
NASD filing fee.................................................. 5,000
NASDAQ National Market listing fee............................... 48,750
Printing and engraving expenses.................................. 150,000
Accounting fees and expenses..................................... 200,000
Legal fees and expenses.......................................... 320,000
Blue Sky fees and expenses (including legal fees)................ 5,000
Transfer agent's and registrar fees and expenses................. 20,000
Miscellaneous.................................................... 850,000
----------
Total............................................................ $1,601,947
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Colorado law provides for indemnification of directors, officers and other
employees in certain circumstances (C.R.S. (S) 7-108-102 (1994)) and for the
elimination or limitation of the personal liability for monetary damages of
directors under certain circumstances (C.R.S. (S) 7-108-402 (1994)). The
Amended and Restated Articles of Incorporation of Gaiam eliminates the personal
liability for monetary damages of directors under certain circumstances and
provides indemnification to directors and officers of Gaiam to the fullest
extent permitted by the Colorado Business Corporation Act. Among other things,
these provisions provide indemnification for officers and directors against
liabilities for judgments in and settlements of lawsuits and other proceedings
and for the advance and payment of fees and expenses reasonably incurred by the
director or officer in defense of the lawsuit or proceeding.
Gaiam intends to obtain directors and officers insurance providing insurance
indemnifying certain of Gaiam's directors, officers and employees for certain
liabilities.
II-1
<PAGE>
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:
<TABLE>
<CAPTION>
Number of
Shares of
Class A Debentures/ Warrants/ Exemption(s)
Date Purchaser Common Stock Notes Options Consideration Claimed*
---- ------------------------- ------------ ----------- --------- ------------- --------------------------
<C> <C> <C> <C> <C> <S> <C>
September 30, 1998 James Argyopoulos/ 120,000 $500,000 -- $ 1,025,000 privately negotiated sale
Argyopoulos Investor G.P. under Section 4 (2) of the
Securities Act.
October 1, 1998 Jirka Rysavy -- $531,000 -- Stock of privately negotiated sale
InnerBalance under Section 4(2) of the
Securities Act.
December 7, 1998 Lynn Powers 40,000 $ 50,000 -- $ 100,000 privately negotiated sale
under Section 4(2) of the
Securities Act.
January 7, 1999 Mo Siegel 17,143 $ 75,000 -- $ 150,000 privately negotiated sale
under Section 4(2) of the
Securities Act.
April 20, 1999 Jeffrey Steiner 120,000 $500,000 -- $ 1,025,000 privately negotiated sale
under Section 4(2) of the
Securities Act.
May 6, 1999 Edward Snider 57,143 $250,000 -- $ 500,000 privately negotiated sale
under Section 4(2) of the
Securities Act.
May 6, 1999 Herbert Simon 57,143 $250,000 -- $ 500,000 privately negotiated sale
under Section 4(2) of the
Securities Act.
May 7, 1999 Mike Gilliland 22,857 $100,000 -- $ 200,000 privately negotiated sale
under Section 4(2) of the
Securities Act.
May 6, 1999 and Lennart Perlhagen 57,143 $250,000 -- $ 500,000 privately negotiated sale
June 8, 1999 under Section 4(2) of the
Securities Act.
June 1, 1999** Gaiam employees and -- -- 674,800 Services N/A
service providers
</TABLE>
- -------
* We believe that exemptions in addition to those specified above may exist
with respect to the listed transactions.
** Options are exercisable at $4.375 per share and vest in monthly increments
of 2% per month, commencing 10 months after the date of grant. The options
expire 10 years after the date of the grant.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
EXHIBITS:
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
1.1 Form of Underwriting Agreement
2.1* Purchase Agreement dated September 14, 1998 among Gaiam Holdings, Inc., Healing Arts
Publishing, LLC, Steven P. Adams, Healing Arts Publishing, Inc., and Gaiam, Inc
3.1* Amended and Restated Articles of Incorporation of Gaiam, Inc.
3.2* Bylaws of Gaiam, Inc.
4.1* Form of Gaiam, Inc. Stock Certificate
5.1 Opinion of Bartlit Beck Herman Palenchar & Scott
10.1* Gaiam, Inc.1999 Long-Term Incentive Plan
10.2* Operating Agreement of Healing Arts Publishing, LLC dated September 14, 1998
10.3* Sublease dated September 16, 1998 between Corporate Express Office Products, Inc. and Gaiam, Inc.
10.4* Lease Agreement dated December 18, 1997 between Orix Prime West Broomfield
Venture and Gaiam, Inc.
21.1* Subsidiaries of Gaiam, Inc.
23.1 Consent of Ernst & Young
23.2 Consent of Wendell T. Walker & Associates
23.3 Consent of Bartlit Beck Herman Palenchar & Scott (included in Exhibit 5.1)
23.4* Consent of Paul H. Ray
23.5 Consent of Barbara Mowry
23.6 Consent of Barnet M. Feinblum
24.1* Power of Attorney
27.1* Financial Data Schedule
</TABLE>
- --------
* Previously filed
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities begin registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(c) Gaiam hereby undertakes that for purposes of determining any liability
under the Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared effective.
(d) Gaiam hereby undertakes that for the purpose of determining any
liability under the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE>
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 September 28, 1999.
GAIAM, INC.
/s/ Jirka Rysavy
By: _________________________________
Jirka Rysavy
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated opposite their names.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jirka Rysavy Chairman of the Board and September 28, 1999
_____________________________________ Chief Executive Officer
Jirka Rysav
/s/ Lynn Powers* President, Chief Operating September 28, 1999
_____________________________________ Officer and director
Lynn Powers
/s/ Pavel Bouska* Executive Vice President and September 28, 1999
_____________________________________ Chief Information Officer
Pavel Bouska
/s/ Janet Mathews * Controller and September 28, 1999
_____________________________________ principal financial officer
Janet Mathews
</TABLE>
/s/ Jirka Rysavy
* By: ___________________________
Jirka Rysavy
Attorney-in-fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
2.1* Purchase Agreement dated September 14, 1998 among Gaiam Holdings,
Inc., Healing
Arts Publishing, LLC, Steven P. Adams, Healing Arts Publishing,
Inc., and Gaiam, Inc.
3.1* Amended and Restated Articles of Incorporation of Gaiam, Inc.
3.2* Bylaws of Gaiam, Inc.
4.1* Form of Gaiam, Inc. Stock Certificate
5.1 Opinion of Bartlit Beck Herman Palenchar & Scott
10.1* Gaiam, Inc.1999 Long-Term Incentive Plan
10.2* Operating Agreement of Healing Arts Publishing, LLC dated
September 14, 1998
10.3* Sublease dated September 16, 1998 between Corporate Express Office
Products, Inc. and Gaiam, Inc.
10.4* Lease Agreement dated December 18, 1997 between Orix Prime West
Broomfield
Venture and Gaiam, Inc.
21.1* Subsidiaries of Gaiam, Inc.
23.1 Consent of Ernst & Young
23.2 Consent of Wendell T. Walker & Associates
23.3 Consent of Bartlit Beck Herman Palenchar & Scott (included in
Exhibit 5.1)
23.4* Consent of Paul H. Ray
23.5 Consent of Barbara Mowry
23.6 Consent of Barnet M. Feinblum
24.1* Power of Attorney, included on signature page
27.1* Financial Data Schedule
</TABLE>
- --------
* Previously filed.
<PAGE>
GAIAM, INC.
2,000,000 SHARES OF CLASS A COMMON STOCK
UNDERWRITING AGREEMENT
October ____, 1999
Tucker Anthony Cleary Gull
As Representative of the Underwriters
Identified in Schedule I Annexed Hereto
100 East Milwaukee Avenue
Milwaukee, Wisconsin 53202
Ladies and Gentlemen:
SECTION 1. INTRODUCTION. Gaiam, Inc., a Colorado corporation (the
------------
"Company"), proposes to sell a total of 2,000,000 shares (the "Firm Shares") of
Class A common stock, $.0001 par value per share (the "Class A Common Stock" and
together with the Company's Class B common stock, $.0001 par value per share,
the "Common Stock"), to the several underwriters identified in Schedule I
annexed hereto (the "Underwriters"), who are acting severally and not jointly.
In addition, the Company has agreed to grant to the Underwriters an option to
purchase up to 300,000 additional shares of Class A Common Stock (the "Optional
Shares") as provided in Section 5 hereof. The Firm Shares and, to the extent
such option is exercised, the Optional Shares are hereinafter collectively
referred to as the "Shares."
You, as representative of the Underwriters (the "Representative"), have
advised the Company that the Underwriters propose to make a public offering of
the Shares as soon hereafter as in your judgment is advisable and that the
public offering price of the Shares initially will be $4.50 per Share for the
first 200 Shares allocated and sold to each customer of the Company that
purchases shares in the public offering of the Shares and $5.00 per Share for
all other Shares ( the "Offering Prices"). It is hereby acknowledged and agreed
that the determination of "customers of the Company" and the allocation of the
Shares to "customers of the Company" shall be made by the Company in its sole
discretion.
The Company hereby confirms its agreements with the Underwriters as
follows:
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
---------------------------------------------
represents and warrants to, and agrees with, the several Underwriters, and shall
be deemed
- -------------------
/*/ Plus an option to acquire up to 300,000 additional shares of Class A Common
Stock from the Company solely to cover over-allotments.
<PAGE>
to represent and warrant to the several Underwriters on each Closing
Date (as hereinafter defined), that:
(a) The Company and each of the subsidiaries of the Company, the
significant of which subsidiaries are listed on Exhibit 21.1 of the
Registration Statement (as hereinafter defined) (individually, a
"Subsidiary" and collectively, the "Subsidiaries"), has been duly
incorporated or formed and is validly existing as a entity in good standing
under the laws of its jurisdiction of incorporation or formation, with full
power and authority to own, lease and operate its properties and to conduct
its business as presently conducted and described in the Prospectus (as
hereinafter defined) and the Registration Statement; each of the Company
and the Subsidiaries is duly registered and qualified to do business as a
foreign corporation or other entity under the laws of, and is in good
standing as such in, each jurisdiction in which such registration or
qualification is required, except where the failure to so register or
qualify would not be reasonably expected to have or result in a material
adverse effect on the financial condition, business, property or results of
operations of the Company and the Subsidiaries, taken as a whole (a
"Material Adverse Effect"); and, to the Company's knowledge, no proceeding
has been instituted in any such jurisdiction revoking, limiting or
curtailing, or seeking to revoke, limit or curtail, such power and
authority or qualification. Complete and correct copies of the certificate
of incorporation, articles of incorporation, or other organizational
documents, as amended or restated (collectively, the "Articles of
Incorporation"), and by-laws, as amended or restated ("By-laws"), of the
Company and each of the Subsidiaries or the equivalent documents to the
Articles of Incorporation and By-laws for those Subsidiaries that are
entities other than corporations or that have been formed in jurisdictions
in which Articles of Incorporation and By-laws are not applicable, as in
effect on the date hereof, have been delivered to the Representative, and
no changes thereto will be made on or subsequent to the date hereof and
prior to each Closing Date, except as contemplated by the Registration
Statement.
(b) The shares of Common Stock issued and outstanding immediately
prior to the issuance and sale of the Shares hereunder as set forth in the
Prospectus have been duly authorized and validly issued, are fully paid and
nonassessable and conform to the description thereof contained in the
Prospectus and the Registration Statement. There are no preemptive rights
to subscribe for or purchase any shares of Common Stock (including the
Shares). The Shares have been duly authorized and, when issued, delivered
and paid for pursuant to this Agreement, will be validly issued, fully paid
and nonassessable and will conform to the description thereof contained in
the Prospectus and the Registration Statement. The delivery of
certificates for the Shares to be issued and sold hereunder and payment
therefor pursuant to the terms of this Agreement will pass valid title to
such Shares to the Underwriters, free and clear of any lien, claim,
encumbrance or defect in title. Except as described in the Prospectus,
there are no outstanding options, warrants or other rights of any
description, contractual or otherwise, entitling any person to be issued
any class of security by the Company or any Subsidiary, and there are no
holders of Common Stock or other securities of the Company or any
Subsidiary, or of securities that are convertible or
-2-
<PAGE>
exchangeable into Common Stock or other securities of the Company or any
Subsidiary, that have rights to the registration of such Common Stock or
securities under the Securities Act of 1933, as amended, and the
regulations thereunder (together, the "Act") or the securities laws or
regulations of any of the states (the "Blue Sky Laws").
(c) Except for the Subsidiaries, the Company has no subsidiaries and
does not own any equity interest in or control, directly or indirectly, any
other corporation, limited liability company, partnership, joint venture,
association, trust or other business organization. Except as set forth in
the Registration Statement, the Company owns directly or indirectly all of
the issued and outstanding capital stock of each Subsidiary or other equity
interests of any subsidiary that is not a corporation, free and clear of
any and all liens, claims, encumbrances or security interests, other than
liens, claims, encumbrances or security interests in favor of Norwest Bank,
N.A. in respect of amounts owed to Norwest Bank, N.A. under the Company's
revolving credit arrangement with such bank, and all such capital stock or
other equity interest has been duly authorized and validly issued and is
fully paid and nonassessable and was issued free and clear of preemptive
rights. There are no outstanding options, warrants or other rights of any
description, contractual or otherwise, entitling any person to subscribe
for or purchase any shares of capital stock of any Subsidiary.
(d) The Company has the corporate power and authority to enter into
and perform this Agreement, and the execution and delivery by the Company
of this Agreement and the performance by the Company of its obligations
hereunder and the consummation of the transactions described herein, have
been duly authorized with respect to the Company by all necessary corporate
action and will not: (i) violate any provisions of the Articles of
Incorporation or By-laws (or their equivalents) of the Company or any
Subsidiary; (ii) violate any provisions of, or result in the breach,
modification or termination of, or constitute a default under, any
provision of any agreement, lease, franchise, license, indenture, permit,
mortgage, deed of trust, evidence of indebtedness or other instrument to
which the Company or any Subsidiary is a party, other than any violation,
breach, modification, termination or default which would be reasonably
expected to have or result in a Material Adverse Effect; (iii) violate any
statute, ordinance, rule or regulation applicable to the Company or any
Subsidiary, or order or decree of any court, regulatory or governmental
body, arbitrator, administrative agency or instrumentality of the United
States or the States of California, Colorado or Ohio or having jurisdiction
over the Company or any Subsidiary; or (iv) result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Company or any Subsidiary. No consent, approval, authorization or
other order of any court, regulatory or governmental body, arbitrator,
administrative agency or instrumentality of the United States or the States
of California, Colorado and Ohio is required for the execution and delivery
of this Agreement by the Company, the performance of its obligations
hereunder or the consummation of the transactions contemplated hereby,
except for compliance with the Act, the Securities Exchange Act of 1934, as
amended, and the regulations thereunder (together, the "Exchange Act"), the
Blue Sky Laws applicable to the public offering of the Shares by the
Underwriters and the clearance of such offering and the
-3-
<PAGE>
underwriting arrangements evidenced hereby with the National Association of
Securities Dealers, Inc. (the "NASD"). This Agreement has been duly
authorized, executed and delivered by and on behalf of the Company and is a
valid and binding agreement of the Company enforceable against the Company
in accordance with its terms.
(e) A registration statement on Form S-1 (Reg. No. 333-83283) with
respect to the Shares, including a preliminary form of prospectus, has been
prepared by the Company and complies in all material respects with the
requirements of the Act and Form S-1 promulgated thereunder and has been
filed with the Securities and Exchange Commission (the "Commission"). Such
registration statement, as finally amended and revised at the time such
registration statement was or is declared effective by the Commission
(including the information contained in the form of final prospectus, if
any, filed with the Commission pursuant to Rule 424(b) and Rule 430A under
the Act and deemed to be part of the registration statement if the
registration statement has been declared effective pursuant to Rule
430A(b)) and as thereafter amended by post-effective amendment, if any, is
herein referred to as the "Registration Statement." The related final
prospectus in the form first filed with the Commission pursuant to Rule
424(b) or, if no such filing is required, as included in the Registration
Statement, or any supplement thereto, is herein referred to as the
"Prospectus." The prospectus, subject to completion in the form included
in the Registration Statement at the time of the initial filing of the
Registration Statement with the Commission, and each such prospectus as
amended from time to time until the date of the Prospectus, is referred to
herein as the "Preliminary Prospectus." Each Preliminary Prospectus filed
as part of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the Act, complied
when so filed in all material respects with the Act. The Company has
prepared and filed such amendments to the Registration Statement since its
initial filing with the Commission, if any, as may have been required to
the date hereof, and will file such additional amendments thereto as may
hereafter be required. There have been delivered to the Representative two
(2) signed copies of the Registration Statement and each amendment thereto,
if any, together with one copy of each exhibit filed therewith or
incorporated by reference therein, and such number of conformed copies for
each of the Underwriters of the Registration Statement and each amendment
thereto, if any (but without exhibits), and of each Preliminary Prospectus
and of the Prospectus as the Representative has requested. All material
information concerning the offering and the Company (excluding information
about specific products and services) that was made available to customers
of the Company prior to providing such customers with a Prospectus is
included in the Prospectus provided to those customers.
(f) Neither the Commission nor any state securities commission has
issued any order preventing or suspending the use of any Preliminary
Prospectus, nor, to the knowledge of the Company, have any proceedings for
that purpose been initiated or threatened, and each Preliminary Prospectus
filed with the Commission as part of the Registration Statement as
originally filed or as part of any amendment or supplement thereto complied
in all material respects when so filed with the requirements of the Act
and, as of its date, did not include
-4-
<PAGE>
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading. As of the effective date of the Registration Statement, and
at all times subsequent thereto up to each Closing Date, the Registration
Statement and the Prospectus contained or will contain all statements that
are required to be stated therein in accordance with the Act and conformed
or will conform in all material respects with the requirements of the Act,
and neither the Registration Statement nor the Prospectus included or will
include any untrue statement of a material fact or omitted or will omit to
state a material fact required to be stated therein or necessary to make
the statements therein, not misleading. Neither the Company, nor, to the
Company's knowledge, any person that controls, is controlled by (including
the Subsidiaries) or is under common control with the Company, has
distributed or will distribute prior to each Closing Date any offering
material in connection with the offering and sale of the Shares other than
the Prospectus, the Registration Statement or other materials permitted by
the Act and provided to the Representative. There has not occurred any
material adverse change, or any development involving a prospective
material adverse change, in the financial condition, or in the earnings,
business, prospects or operations of the Company, from that set forth in
the Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement).
(g) Each of Ernst & Young LLP and Wendell T. Walker and Associates,
P.C., who have expressed their opinions with respect to the audited
consolidated financial statements filed with the Commission or incorporated
by reference and included as a part of each Preliminary Prospectus, the
Prospectus or the Registration Statement, are independent accountants as
required by the Act.
(h) The consolidated financial statements and the related notes
thereto included in each Preliminary Prospectus, the Prospectus and the
Registration Statement present fairly the financial position, results of
operations and cash flows of the Company as of their respective dates or
for the respective periods covered thereby, all in conformity with
generally accepted accounting principles consistently applied throughout
the periods involved. The financial statement schedules, if any, included
in the Registration Statement present fairly the information required to be
stated therein on a basis consistent with the consolidated financial
statements of the Company contained therein. The Company had an
outstanding capitalization as set forth in the Registration Statement and
under "Capitalization" in the Prospectus as of the date indicated therein,
and there has been no material change thereto since such date except as
disclosed in the Prospectus. The financial and statistical information and
data relating to the Company in each Preliminary Prospectus, the Prospectus
and the Registration Statement are accurately and fairly presented and
prepared on a basis consistent with the audited consolidated financial
statements and books and records of the Company. The consolidated financial
statements and schedules and the related notes thereto included in each
Preliminary Prospectus, the Prospectus or the Registration Statement are
the only such financial statements and schedules required under the Act to
be set forth therein.
-5-
<PAGE>
(i) Neither the Company nor any Subsidiary is, nor with the giving of
notice or passage of time or both, would be, in violation or in breach of:
(i) its respective Articles of Incorporation or By-laws (or
their equivalents);
(ii) any statute, ordinance, order, rule or regulation
applicable to the Company or such Subsidiary;
(iii) any order or decree of any court, regulatory body,
arbitrator, administrative agency or other instrumentality of the
United States or other country or jurisdiction having
jurisdiction over the Company or such Subsidiary; or
(iv) any provision of any agreement, lease, franchise, license,
indenture, permit, mortgage, deed of trust, evidence of
indebtedness or other instrument to which the Company or such
Subsidiary is a party or by which any property owned or leased by
the Company or such Subsidiary is bound or affected, except for
any such violation or breach that would not be reasonably
expected to have or result in a Material Adverse Effect.
(j) Neither the Company nor any Subsidiary has received notice of any
violation of any applicable statute, ordinance, order, rule or regulation
applicable to the Company or any Subsidiary. The Company and each
Subsidiary have obtained and hold, and are in compliance with, all permits,
certificates, licenses, approvals, registrations, franchises, consents and
authorizations of governmental or regulatory authorities required under all
laws, rules and regulations in connection with their businesses
(hereinafter "permit" or "permits") except where the failure to obtain and
hold any such permit would not be reasonably expected to have or result in
a Material Adverse Effect, and all of such permits are in full force and
effect; and the Company and each Subsidiary have fulfilled and performed
all of their respective obligations with respect to each such permit, and
no event has occurred which would result in, or after notice or lapse of
time would result in, revocation or termination of any such permit or
result in any other impairment of the rights of the holder of such permit
which would be reasonably expected to have or result in a Material Adverse
Effect. Neither the Company nor any Subsidiary is or has been (by virtue
of any action, omission to act, contract to which it is a party or other
occurrence) in violation of any applicable foreign, federal, state,
municipal or local statutes, laws, ordinances, rules, regulations or orders
(including those relating to environmental protection, occupational safety
and health and equal employment practices) heretofore or currently in
effect, the violation of which would be reasonably expected to have a
Material Adverse Effect.
(k) There are no legal or governmental proceedings or investigations
pending or, to the Company's knowledge, threatened, to which the Company
or any Subsidiary is or may be a party or to which any property owned or
leased by the Company or any Subsidiary is or may be subject, including,
without limitation, any such proceedings that are related to
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<PAGE>
environmental or employment discrimination matters, which are required to
be described in the Registration Statement or the Prospectus which are not
so described, or which question the validity of this Agreement or any
action taken or to be taken pursuant hereto. Except as described in the
Registration Statement or the Prospectus, neither the Company nor any
Subsidiary: (i) is in violation of any statute, ordinance, rule or
regulation, or any decision, order or decree of any court, regulatory body,
arbitrator, administrative agency or other instrumentality of the United
States or other country or jurisdiction having jurisdiction over the
Company or such Subsidiary relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or restoration
of the environmental or human exposure to "Hazardous" Materials (as
hereinafter defined) (collectively, "environmental laws"); (ii) owns,
operates or occupies any real property contaminated, to the Company's
knowledge, with any Hazardous Material that is subject to any environmental
laws; (iii) is, to the Company's knowledge, liable for any off-site
disposal or contamination pursuant to any environmental laws; or (iv) is
subject to any claim relating to any environmental laws; which violation,
contamination, liability or claim identified in (i) through (iv) above
would be reasonably expected to have or result in a Material Adverse
Effect. For purposes of this Agreement, "Hazardous Materials(s)" shall mean
(i) any substance, the presence in a quantity of which requires
investigation or remediation under any environmental laws; (ii) any toxic,
explosive, corrosive, flammable, infectious, radioactive, carcinogenic,
mutagenic or otherwise hazardous substance present in a quantity such that
it is regulated by any environmental laws; (iii) any substance in a
quantity the presence of which poses a hazard to the health or safety of
persons on or about the real property owned, operated or occupied by the
Company or any of its Subsidiaries; and (iv) urea-formaldehyde, PCBs,
asbestos or asbestos-containing materials and radon.
(l) There is no transaction, relationship, obligation, agreement or
other document required to be described in the Registration Statement or
the Prospectus or to be filed or deemed to be filed as an exhibit to the
Registration Statement by the Act, which has not been described or filed as
required. All contracts or agreements filed as an exhibit to the
Registration Statement to which the Company or any Subsidiary is a party
have been duly authorized, executed and delivered by the Company or such
Subsidiary, are in full force and effect, constitute valid and binding
agreements of the Company or such Subsidiary, and are enforceable by and
against the Company or such Subsidiary, in accordance with the respective
terms thereof, subject to bankruptcy, insolvency, and moratorium laws,
fraudulent transfer and other laws affecting creditors' rights generally
and other principles of equity. None of such contracts or instruments has
been assigned by the Company; and the Company knows of no default or breach
by any party to any such contract or instrument or of any present situation
or condition or fact which would prevent compliance by the parties with the
terms of such contracts or instruments as amended to date. Except for
amendments or modifications of such contracts or instruments in the
ordinary course of business, the Company has no intention of exercising any
right which would cause any other party to the contract to cancel any of
their obligations under any of such contracts or instruments, and, except
as described in the Registration Statement, the Company has no knowledge
that any
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<PAGE>
other party to any of such contracts or instruments is in material breach
or violation of any such contact or agreement or has any intention not to
render full performance thereunder.
(m) The Company or a Subsidiary has good and valid title to all
property and assets reflected as owned by the Company or such Subsidiary in
the Company's consolidated financial statements included in the
Registration Statement (or the Prospectus), free and clear of all liens,
claims, mortgages, security interests or other encumbrance of any kind or
nature whatsoever except those, if any, reflected in such financial
statements (or elsewhere in the Registration Statement or the Prospectus).
All property (real and personal) held or used by the Company or a
Subsidiary under leases, licenses, franchises or other agreements is held
by the Company or such Subsidiary under valid, subsisting, binding and
enforceable leases, franchises, licenses or other agreements, and the
Company or such Subsidiary, as the case is in full compliance with each
such lease, license, franchise or other agreements and the Company has no
knowledge that any other party thereto is not in full compliance with each
such lease, license, franchise or other agreements, except in either case
where the failure to be in compliance would not be reasonably expected to
have or result in a Material Adverse Effect. The Company has no knowledge
that any other party thereto is not in material compliance with each such
lease, license, franchise or other agreement.
(n) Neither the Company nor, to the Company's knowledge, any person
that controls, is controlled by (including the Subsidiaries) or is under
common control with the Company has taken or will take, directly or
indirectly, any action designed to cause or result in, or which
constituted, or which could cause or result in, stabilization or
manipulation, under the Exchange Act or otherwise, of the price of any
security of the Company to facilitate the sale or resale of the Common
Stock.
(o) Except as described in the Registration Statement or the
Prospectus, since the respective dates as of which information is given in
the Registration Statement or the Prospectus and prior to each Closing
Date:
(i) neither the Company nor any Subsidiary has or will have
incurred any liability or obligation, direct or contingent, or
entered into any transaction, in each case, that is material to
the Company, except in the ordinary course of business;
(ii) the Company has not and will not have paid or declared any
dividend or other distribution with respect to its capital stock
and neither the Company nor any Subsidiary is or will be
delinquent in the payment of principal or interest on any
outstanding debt obligation; and
(iii) there has not been and will not have been any change in the
capital stock, any material change in the indebtedness of the
Company or any Subsidiary, or any change or development involving
or which would be reasonably expected
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<PAGE>
to have or result in a Material Adverse Effect, whether or not
arising from transactions in the ordinary course of business.
(p) Neither the Company nor any person that controls, is controlled
by (including the Subsidiaries) or is under common control with the Company
has, directly or indirectly:
(i) made any unlawful contribution to any candidate for
political office, or failed to disclose fully any contribution in
violation of law; or
(ii) made any payment to any federal, state or foreign
governmental officer or official, or other person charged with
similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any
jurisdiction thereof or applicable foreign jurisdictions.
(q) The Company or a Subsidiary owns or possesses adequate rights to
use all patents, patent applications, trademarks, service marks, trade
names, trademark registrations, service mark registrations, copyrights and
licenses presently used in or necessary for the conduct of its business or
ownership of its properties, and neither the Company nor any Subsidiary has
violated or infringed upon the rights of others, or received any notice of
conflict with the asserted rights of others, in respect thereof, which
violation or infringement would be reasonably expected to have or result in
a Material Adverse Effect.
(r) Neither the Company nor any Subsidiary has been refused any
insurance coverage sought or applied for; and, except as described in the
Prospectus, neither the Company nor any Subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage
as and when such coverage expires or to obtain similar coverage from
insurers of similar standing as may be necessary to continue its business
at a cost that would not have or result in a Material Adverse Effect.
(s) No labor dispute with the employees of the Company or any
Subsidiary, which dispute would reasonably be expected to have or result in
a Material Adverse Effect, exists or, to the knowledge of the Company, is
imminent, and neither the Company nor any Subsidiary, except as disclosed
in the Registration Statement, is a party to any collective bargaining
agreement and, to the knowledge of the Company, no union organizational
attempts are pending. There has been no change in the relationship of the
Company or any Subsidiary with any of its suppliers, manufacturers,
contractors or customers resulting in or that would reasonably be expected
to have or result in a Material Adverse Effect.
(t) Neither the Company nor any Subsidiary is an "investment
company", an "affiliated person" of, or "promoter" or "principal
underwriter" for, an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended.
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<PAGE>
(u) All federal, state and local tax returns required to be filed by
or on behalf of the Company or any Subsidiary have been filed (or are the
subject of valid extension) with the appropriate federal, state and local
authorities, and all such tax returns, as filed, are accurate in all
material respects; all federal, state and local taxes (including estimated
tax payments) required to be shown on all such tax returns or claimed to be
due from or with respect to the business of the Company or such Subsidiary
have been paid or reflected as a liability on the financial statements of
the Company or such Subsidiary for all appropriate periods; all
deficiencies asserted as a result of any federal, state or local tax audits
have been paid or finally settled, and no issue has been raised in any such
audit which, by application of the same or similar principles, would be
reasonably expected to result in a proposed material deficiency for any
other period not so audited; no state of facts exist (or has existed with
respect to any period for which a taxing authority may lawfully assess the
Company for any penalty, interest assessment or other charges) which would
reasonably be expected to constitute grounds for the assessment of any tax
liability with respect to the periods which have not heretofore been
audited by appropriate federal, state or local authorities; there are no
outstanding agreements or waivers extending the statutory period of
limitation applicable to any federal, state or local tax return of any
period; and neither the Company nor any Subsidiary has ever been a member
of an affiliated group of corporations filing consolidated federal income
tax returns, other than a group of which the Company is and has been the
common parent.
(v) Neither the Company nor any Subsidiary is a participating employer
or plan sponsor with respect to any employee pension benefit plan as
defined in Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), including, without limitation, any multi-
employer pension plan. The Company is in material compliance with all
applicable laws and regulations, including ERISA and the Code.
(w) The Company and each Subsidiary maintain a system of internal
accounting controls sufficient to provide reasonable assurances that:
(i) transactions are executed in accordance with management's
general or specific authorizations;
(ii) transactions are recorded as necessary to permit
preparation of consolidated financial statements in conformity
with generally accepted accounting principles and to maintain
accountability for assets;
(iii) access to assets is permitted only in accordance with
management's general or specific authorizations; and
(iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
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<PAGE>
(x) None of the Company, any Subsidiary, any officer or director of
the Company or any Subsidiary, or, to the Company's knowledge, any person
who owns, of record or beneficially, any class of securities issued by the
Company is: (i) an officer, director or partner of any brokerage firm,
broker or dealer that is a member of the NASD ("NASD Member"); or (ii)
directly or indirectly, a "person associated with" an NASD member or an
"affiliate", of an NASD member, as such terms are used in the NASD Rules of
the Association.
(y) The Class A Common Stock has been registered pursuant to Section
12(g) of the Exchange Act. The Company has prepared and filed with the
Commission a registration statement for the Class A Common Stock pursuant
to Section 12(g) of the Exchange Act. Such registration statement either
has been declared effective by the Commission under the Exchange Act or
will be declared effective by the Commission prior to or concurrently with
the commencement of the public offering of the Shares. The Class A Common
Stock (including the Shares) has been approved for designation upon notice
of issuance as a Nasdaq National Market security on The Nasdaq Stock Market
("Nasdaq") concurrently with the execution and delivery of this Agreement.
(z) All offers and sales of the securities of the Company and each
Subsidiary prior to the date hereof were made in compliance with the Act,
the Blue Sky Laws and all other applicable state and federal laws or
regulations.
(aa) The Company has obtained for the benefit of the Underwriters an
agreement (a "Lock-Up Agreement"), enforceable by the Representative,
executed and delivered by each of the persons listed on Schedule II hereof,
who owns of record the number of shares of Common Stock set forth on
Schedule II opposite such shareholder's name, that for a period of 180 days
after the First Closing Date, such persons will not, without the prior
written consent of the Representative, directly or indirectly, offer, sell,
transfer, or pledge, contract to sell, transfer or pledge, or cause or in
any way permit to be sold, transferred, pledged, or otherwise disposed of,
any:
(i) shares of Common Stock;
(ii) rights to purchase shares of Common Stock (including,
without limitation, shares of Common Stock that may be deemed to
be beneficially owned by any such shareholder in accordance with
the applicable regulations of the Commission and shares of Common
Stock that may be issued upon the exercise of a stock option,
warrant or other convertible security); or
(iii) securities that are convertible or exchangeable into shares
of Common Stock.
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<PAGE>
In addition, each person listed in the Registration Statement under the
caption "Our Shareholders" from whom the Company has not obtained a Lock-Up
Agreement owns his or her respective shares of Common Stock subject to
subscription, or similar agreements containing restrictions on transfers
that are no less restrictive than a Lock-Up Agreement, are as of the date
hereof specifically enforceable against such persons and will be
continuously specifically enforceable against each such person for the
period from the date hereof through and including 180 days after the First
Closing Date. The Company has heretofore delivered to the Representative a
true copy of each such subscription or similar agreement.
(bb) The Company has complied with all provisions of Section 517.075
of the Florida Statutes, relating to doing business with the government of
Cuba or with any person or affiliate located in Cuba.
(cc) The Company represents that no finder's fee has been or will be
paid in connection herewith. It is understood that, should a claim be made
for any finder's fee in connection with the sale of the Shares and based
upon any agreement by the Company, the Company will indemnify the
Underwriters with respect to any such claim.
(dd) All documents and other information relating to the Company's
affairs shall be made available upon request to the Representative and
counsel to the Underwriters at the Company's office, and copies of any such
documents shall be furnished upon request to the Representative or counsel
to the Underwriters. Included within the documents to be made available
are the Company's articles of incorporation, as amended, and related
charter documents, bylaws and amendments thereto, minutes of all meetings
and other actions taken by the Company's incorporators, directors and
shareholders, all financial statements, correct copies of any material
contracts, licenses, leases or agreements to which the Company is a party
or by which it or its property is bound, including contracts for the sale
of products or services in the normal course of business, excluding
purchase orders made in the normal course of business, and including any
employee (including officers and/or directors) incentive plans and any
other type of fringe benefit plan, of whatever nature, and copies of all
patents, patent applications, trademarks and trademark applications in
which the Company may have an interest.
(ee) A certificate signed by any officer of the Company and delivered
to the Representative or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to the Underwriters as to the
matters covered thereby. A certificate delivered by the Company to its
counsel for purposes of enabling such counsel to render the opinion
referred to in Section 8(d) will also be furnished to the Representative
and counsel for the Underwriters and shall be deemed to be additional
representations and warranties to the Underwriters by the Company as to the
matters covered thereby.
SECTION 3. REPRESENTATION OF UNDERWRITERS. The Representative will act as
------------------------------
the Representative for the several Underwriters in connection with the public
offering of the
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<PAGE>
Shares, and any action under or in respect of this Agreement
taken by the Representative will be binding upon all of the Underwriters.
SECTION 4. INFORMATION FURNISHED BY THE UNDERWRITERS. The information set
-----------------------------------------
forth on the outside front cover page of the Prospectus concerning the terms of
the offering by the Underwriters, and the information appearing under the
caption "Underwriting" in the Prospectus constitute all of the information
furnished to the Company by and on behalf of the Underwriters for use in
connection with the preparation of the Registration Statement and the
Prospectus, as such information is referred to in this Agreement.
SECTION 5. PURCHASE, SALE AND DELIVERY OF SHARES.
-------------------------------------
(a) Subject to Section 5(b), on the basis of the representations,
warranties and agreements herein contained, and subject to the terms and
conditions herein set forth, the Company agrees to sell to the Underwriters
identified in Schedule I annexed hereto 2,000,000 Firm Shares, and each of
the Underwriters agrees, severally and not jointly, to purchase from the
Company the number of Firm Shares as hereinafter set forth at the price per
share of $4.05 per Share for the first 200 Shares allocated and sold to
each customer of the Company that purchases shares in the public offering
of the Shares and $4.50 per Share for the remaining Shares purchased. The
obligation of each Underwriter to the Company shall be to purchase from the
Company that number of full Firm Shares which (as nearly as practicable in
full shares as determined by the Representative) bears the same proportion
to the number of Firm Shares to be sold by the Company as the number of
shares set forth opposite the name of such Underwriter in Schedule I
annexed hereto bears to the total number of Firm Shares to be purchased by
all of the Underwriters under this Agreement.
(b) Notwithstanding anything herein to the contrary, the Underwriters
agree to sell Shares to each of the holders of the Company's 8% Debentures
(the "Debentures") at a price of $5.00 per Share (the "Debenture
Exchange"), provided that the holders of the Debentures shall pay such
price by delivery of the Debentures and not in cash, with the Debentures to
be valued for such purpose at their principal amount, without regard to any
accrued and unpaid interest thereon. In consideration for the Debenture
Exchange, the Company hereby irrevocably agrees to purchase from the
Underwriters any and all Debentures delivered to the Underwriters in
connection with the Debenture Exchange for a purchase price equal to the
principal amount of the Debentures, without regard to any accrued and
unpaid interest thereon, which purchase price will be paid to the
Underwriters in immediately available funds on the First Closing Date
against delivery of the Debentures on the First Closing Date.
(c) On the First Closing Date (as hereinafter defined), the Company
will deliver to the Representative, at the offices of the Representative,
1225 Seventeenth Street, Denver, Colorado 80202, or through the facilities
of The Depository Trust Company, for the accounts of the several
Underwriters, a master certificate representing the all Firm Shares to be
sold
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<PAGE>
by them to "customers of the Company" (as determined by the Company)
buying Firm Shares, and shall make appropriate book entries to evidence
ownership of Shares by all other purchasers, against payment of the
aggregate purchase price therefor by wire transfer of immediately available
funds to the account specified by the Company. As referred to in this
Agreement, the "First Closing Date" shall be on the third or fourth
business day (as permitted under Rule 15c6-1 under the Exchange Act),
following the date of the effectiveness of the Registration Statement , at
9:00 a.m., Denver, Colorado time. The master certificate for the Firm
Shares to be so delivered, and the evidence of book entry ownership, will
be in denominations and registered in such names as the Representative
reasonably requests by notice to the Company prior to the First Closing
Date.
(d) In addition, on the basis of the representations, warranties and
agreements herein contained, and subject to the terms and conditions herein
set forth, the Company hereby agrees to sell to the Underwriters, and the
Underwriters, severally and not jointly, shall have the right at any time
within thirty (30) days after the First Closing Date to purchase up to
300,000 Optional Shares from the Company at the price of $4.50 per share,
for use solely in covering any over-allotments made by the Underwriters in
the sale and distribution of the Firm Shares. The option granted hereunder
may be exercised in full or in part upon notice by the Representative to
the Company within thirty (30) days after the First Closing Date setting
forth the aggregate number of Optional Shares to be purchased by the
Underwriters and sold by the Company, and the names and denominations in
which the certificates for such Optional Shares are to be registered (or
similar information for purchasers whose ownership of Optional Shares is to
be evidenced by book entry only). Such date of delivery (the "Second
Closing Date") shall be determined by the Representative, provided that the
Second Closing Date, which may be the same as the First Closing Date, shall
not be earlier than the First Closing Date and, if after the First Closing
Date, shall not be earlier than three (3) nor later than ten (10) full
business days after delivery of such notice to exercise. Any certificates
for Optional Shares will be made available for checking and packaging at
9:00 a.m., Denver, Colorado time, on the first full business day preceding
the Second Closing Date at a location to be designated by the
Representative. The manner of payment for and delivery of (including the
denominations of and the names in which certificates are to be registered
or book entries are to be made) the Optional Shares shall be the same as
for the Firm Shares.
(e) The Representative has advised the Company that each Underwriter
has authorized the Representative to accept delivery of the Shares and to
make payment therefor. It is understood that the Representative,
individually and not as representative of the Underwriters, may (but shall
not be obligated to) make payment for any Shares to be purchased by any
Underwriter whose funds shall not have been received by the Representative
by the First Closing Date or the Second Closing Date, as the case may be,
for the account of such Underwriter, but any such payment shall not relieve
such Underwriter from any obligation under this Agreement. As referred to
in this Agreement, "Closing Date" shall mean either the First Closing Date
or the Second Closing Date.
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<PAGE>
(f) The parties represent and warrant that as of the date hereof and
as of the Closing Date, the representations and warranties herein contained
and the statements contained in all certificates delivered by any party to
another pursuant to this Agreement shall in all material respects be true
and correct.
SECTION 6. COVENANTS OF THE COMPANY. The Company covenants and agrees
------------------------
with the several Underwriters that:
(a) If the effective time of the Registration Statement is not prior
to the execution and delivery of this Agreement, the Company will use its
best efforts to cause the Registration Statement to become effective at the
earliest possible time and, upon notification from the Commission that the
Registration Statement has become effective, will so advise the
Representative and counsel to the Underwriters promptly. The Company will
advise the Representative and counsel to the Underwriters promptly of the
issuance by the Commission or any state securities commission of any stop
order suspending the effectiveness of the Registration Statement or of the
institution of any proceedings for purposes, or of any notification of the
suspension of qualification of the Shares for sale in any jurisdiction, or
any issue regarding denial or suspension of Nasdaq listing or the
initiation or threatening of any proceedings for any of those purposes, and
will also advise the Representative and counsel to the Underwriters
promptly of any request of the Commission for amendment or supplement of
the Registration Statement or of the Prospectus, or for additional
information, and the Company will not file any amendment or supplement to
the Registration Statement (either before or after it becomes effective) or
to the Prospectus (including a prospectus filed pursuant to Rule 424(b)),
or file any document under the Exchange Act in the time period from the
execution of this Agreement through the First Closing Date with respect to
the Firm Shares, or from the time of notice by the Representative
exercising the option to purchase the Optional Shares through the Second
Closing Date with respect to the Optional Shares, without first providing
the Underwriters with a copy prior to such filing (with a reasonable
opportunity to review such amendment or supplement) or if the
Representative objects to such filing.
(b) If, at any time when a prospectus relating to the Shares is
required by law to be delivered in connection with sales by an Underwriter
or dealer, any event occurs as a result of which the Prospectus would
include an untrue statement of a material fact, or would omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to supplement the
Prospectus to comply with the Act, the Company promptly will advise the
Representative and counsel to the Underwriters thereof and will promptly
prepare and file with the Commission, at its expense, an amendment to the
Registration Statement which will correct such statement or omission or an
amendment which will effect such compliance; and, if any Underwriter is
required to deliver a prospectus after the effective date of the
Registration Statement, the Company, upon request of the Representative,
will prepare promptly such prospectus or prospectuses as may be necessary
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<PAGE>
to permit compliance with the requirements of Section 10(a)(3) of the Act.
The Company consents to the use, in accordance with the provisions of the
Act and with the Blue Sky Laws of the jurisdictions in which the Shares are
offered by the several Underwriters and by dealers, of each Preliminary
Prospectus.
(c) Neither the Company nor any Subsidiary will, prior to the Second
Closing Date, if any, incur any liability or obligation, direct or
contingent, or enter into any material transaction, other than in the
ordinary course of business, or enter into any transaction with an
"affiliate," as defined in Rule 405 under the Act, which is required to be
described in the Prospectus pursuant to Item 404 of Regulation S-K under
the Act, except as described in the Prospectus.
(d) Neither the Company nor any Subsidiary will, prior to the Second
Closing Date, if any, acquire any of the Common Stock nor will the Company
declare or pay any dividend or make any other distribution upon its Common
Stock payable to shareholders of record on a date prior to such earlier
date, except as described in the Prospectus.
(e) The Company will make generally available to its security holders
and the Representative an earnings statement as soon as practicable, but in
no event later than sixty (60) days after the end of its fiscal quarter in
which the first anniversary of the effective date of the Registration
Statement occurs, covering a period of twelve (12) consecutive calendar
months beginning after the effective date of the Registration Statement,
which will satisfy the provisions of the last paragraph of Section 11(a) of
the Act and Rule 158 promulgated thereunder.
(f) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the Company
will furnish to the Representative, at the expense of the Company, copies
of the Registration Statement, the Prospectus, and all amendments and
supplements to any such documents, including any document filed under the
Exchange Act and deemed to be incorporated by reference in the Registration
Statement, in each case as soon as available and in such quantities as the
Representative may reasonably request.
(g) The Company will apply the net proceeds from the sale of the
Shares to be sold by it hereunder for the purposes set forth in the
Prospectus.
(h) The Company will cooperate with the Representative and counsel to
the Underwriters in qualifying or registering the Shares for sale under the
Blue Sky Laws of such jurisdictions as the Representative designates, and
will continue such qualifications or registrations in effect so long as
reasonably requested by the Representative to effect the distribution of
the Shares. The Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any such
jurisdiction where it is not presently qualified. In each jurisdiction
where any of the Shares shall have been
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<PAGE>
qualified as provided above, the Company will file such reports and
statements as may be required to continue such qualification for a period
of not less than one year from the date of the Prospectus. The Company
shall promptly prepare and file with the Commission, from time to time,
such reports as may be required to be filed by the Act and the Exchange
Act, and the Company shall comply in all respects with the undertakings
given by the Company in connection with the qualification or registration
of the Shares for offering and sale under the Blue Sky Laws.
(i) During the period of three (3) years from the date of the
Prospectus, the Company will furnish to each of the Representative and to
each of the other Underwriters who may so request, as soon as available,
each report, statement or other document of the Company or its Board of
Directors mailed to its shareholders or filed with the Commission, and such
other information concerning the Company as the Representative may
reasonably request.
(j) The Company shall deliver the requisite notice of issuance to
Nasdaq and shall take all necessary or appropriate action within its power
to maintain the authorization for trading of the Class A Common Stock as a
Nasdaq National Market security, or take such action to authorize the Class
A Common Stock for listing on the New York Stock Exchange or the American
Stock Exchange, for a period of at least thirty-six (36) months after the
date of the Prospectus.
(k) Except for (i) the issuance and sale by the Company of Common
Stock upon exercise of presently existing outstanding stock options, (ii)
the sale or exchange of Common Stock in settlement of any threatened
litigation by the holder of the minority interest in Healing Arts
Publishing, L.L.C. or the sale of Common Stock to purchase the minority
interest in Healing Arts Publishing, L.L.C., and (iii) the sale of the
Shares to be sold by the Company pursuant to this Agreement, the Company
shall not, for a period of one hundred eighty (180) days after the First
Closing Date without the prior written consent of the Representative,
directly or indirectly, offer, sell or otherwise dispose of, contract to
sell or otherwise dispose of, or cause or in any way permit to be sold or
otherwise disposed of, any: (i) shares of Common Stock; (ii) rights to
purchase shares of Common Stock exercisable within such 180-day period; or
(iii) securities that are convertible or exchangeable into shares of Common
Stock within such 180-day period.
(l) The Company will maintain a transfer agent and, if required by law
or the rules of The Nasdaq Stock Market or any national securities exchange
on which the Class A Common Stock is listed, a registrar (which, if
permitted by applicable laws and rules, may be the same entity as the
transfer agent) for its Class A Common Stock.
(m) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act, any rumor, publication or event
relating to of affecting the Company shall occur as a result of which, in
the opinion of the Representative, the market price of the
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Class A Common Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to the Prospectus), the Company will, after written notice from
the Representative advising the Company of any of the matters set forth
above, promptly consult with the Representative concerning the advisability
and substance of, and, if the Company and the Representative jointly
determine that it is appropriate, disseminate, a press release or other
public statement responding to or commenting on, such rumor, publication or
event.
(n) The Company will use its reasonable best efforts to comply or
cause to be complied with the conditions to the obligations of the
Underwriters in Section 8 hereof and will take no action or omit to take
any action that would reasonably be expected to prevent the Underwriter's
compliance or satisfaction with the conditions to the obligations of the
Underwriter in Section 8 hereof.
(o) The Company shall issue at the Closing irrevocable instructions to
the transfer agent to provide the Representative for a period of 180 days
after the Closing Date, for its confidential use and at the Company's
expense, reasonable access to its daily transfer sheets (provided such
access does not result in expense to the Company) and, annually upon
request of the Representative to the transfer agent therefor (but more
frequently in the event of an investigation requiring the same or inquiry
therefor by the Commission or other government body or agency or by the
NASD), with lists of shareholders of the Company, all for a period of three
(3) years after the Closing Date. As a condition to providing any
information under this Section 6(o), the Company may require the
Representative to enter into a non-disclosure or confidentiality agreement
providing reasonable restrictions against disclosure of such information.
(p) The Company shall deliver to the Representative the documents
described in Section 2(dd). In addition, at Closing, the Company shall
deliver to the Representative or counsel to the Underwriters, certificates
of good standing in each state where the Company does business,
certificates as to tax status, incumbency or any other certificate or
document which the Representative may reasonably require prior to Closing.
(q) Prior to the Closing Date, the Company shall cooperate with the
Representative in such reasonable investigation as the Representative may
make or cause to be made of all the properties, business and operations of
the Company in connection with the sale of the Shares, and the Company
shall make its officers and directors available to the Representative for
interrogation, without cost or expense, in connection therewith, and the
Company shall make available such information in its possession as the
Representative may reasonably request.
(r) If applicable, the Company shall file with the Commission all
required reports in accordance with the provisions of Rule 463 of
Regulation C under the Act and shall provide a copy of each such report to
the Representative and counsel to the Underwriters.
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<PAGE>
(s) The Company shall supply to each of the Representative and
counsel to the Underwriters, at the Company's cost, two (2) sets of bound
transcripts each containing all of the Closing materials within a
reasonable time after the Closing Date.
SECTION 7. PAYMENT OF EXPENSES. Whether or not the transactions
-------------------
contemplated hereunder are consummated or this Agreement becomes effective, or
if this Agreement becomes effective and is thereafter terminated for any
reason, the Company will pay the costs, fees and expenses incurred in connection
with the proposed public offering of the Shares as hereinafter provided. Such
costs, fees and expenses to be paid by the Company will include, without
limitation:
(a) All costs, fees and expenses (excluding the expenses incurred by
the Underwriters except as otherwise set forth in subsections (b), (c) and
(d) below) incurred in connection with the performance of the Company's
obligations hereunder, including, without limiting the generality of the
foregoing: the registration fees related to the filing of the Registration
Statement with the Commission; the fees and expenses related to the
quotation of the Shares on Nasdaq or other national securities exchange;
the fees and expenses of the Company's counsel, accountants, transfer agent
and registrar; the costs and expenses incurred in connection with the
preparation, printing, shipping, and delivery of the Registration Statement
and the Prospectus (including all exhibits and financial statements) and
all agreements and supplements provided for herein, this Agreement,
including, without limitation, shipping expenses via overnight delivery
and/or courier service to comply with applicable prospectus delivery
requirements; and the costs and expenses associated with the production of
materials related to, and travel expenses incurred by the management of the
Company in connection with, the various meetings to be held between the
Company's management and prospective investors.
(b) All registration fees and expenses, including filings under the
Blue Sky Laws and the clearing of the public offering and the underwriting
arrangements evidenced hereby with the NASD and legal fees and
disbursements of counsel to the Underwriters incurred in connection with
qualifying or registering all or any part of the Shares for offer and sale
under the Blue Sky Laws.
(c) All accountable costs, fees and expenses of the Underwriters
incurred in connection with the proposed sale of the Shares, as described
in the last sentence of this subsection (c), excluding (i) the costs, fees
and expenses of counsel to the Underwriters (except as set forth in
subsection (d) below) (ii) the costs, fees and expenses incurred by the
Underwriters in connection with the marketing and advertising of the
transactions contemplated hereunder, and (iii) the Underwriters' travel and
promotional expenses incurred in connection with the offering. At the First
Closing and, if applicable, on the Second Closing Date, the Company shall
pay to each Underwriter a sum equal to the accountable expenses incurred by
such Underwriter in connection with the preferential allocation of shares
to customers of the Company, including, but not limited to, travel
expenses, postage
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<PAGE>
expenses, duplication expenses, long distance telephone expenses,
additional staffing and other administrative or "back office" expenses.
(d) In the event that the transactions contemplated hereunder are not
consummated by December 31, 1999, due to the action or inaction of the
Company, or if this Agreement is terminated by the Company at any time
prior to that date for any reason, the Company will promptly pay, upon the
request of the Underwriters, the out-of-pocket expenses incurred in
connection with this Agreement, including costs, fees and expenses of
counsel to the Underwriters.
(e) All fees and expenses related to printing of the certificates for
the Shares, and all transfer taxes, if any, with respect to the sale and
delivery of the Shares to the Underwriters.
(f) The Company shall also pay all expenses incurred in connection
with the placement of a "tombstone" advertisement after the closing in such
publications and containing such information as the Company and the
Representative may agree, after Closing of the offering.
SECTION 8. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The
-------------------------------------------------
obligations of the several Underwriters under this Agreement shall be subject to
the accuracy of the representations and warranties on the part of the Company
herein set forth as of the date hereof and as of each Closing Date, to the
accuracy of the statements of the Company's officers made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, and to the following additional conditions, unless waived in writing
by the Representative:
(a) The Registration Statement shall have been declared effective by
the Commission; all filings required by Rules 424(b) and 430A under the Act
shall have been timely made; no stop order suspending the effectiveness of
the Registration Statement shall have been issued by the Commission or any
state securities commission nor, to the knowledge of the Company, shall any
proceedings for that purpose have been initiated or threatened; and any
request of the Commission or any state securities commission for inclusion
of additional information in the Registration Statement, or otherwise,
shall have been complied with to the reasonable satisfaction of the
Representative.
(b) Since the dates as of which information is given in the
Registration Statement: (i) there shall not have occurred any change or
development involving, or which would be reasonably expected to involve, a
Material Adverse Effect, whether or not arising from transactions in the
ordinary course of business; and (ii) the Company shall not have sustained
any material loss or interference from any labor dispute, strike, fire,
flood, windstorm, accident or other calamity (whether or not insured) or
from any court or governmental action, order or decree, the effect of which
on the Company, in any such case described in clause (i) or (ii) above, is,
in the sole discretion of the Representative, so material and adverse as to
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make it impracticable or inadvisable to proceed with the public offering or
the delivery of the Shares on the terms and in the manner contemplated in
the Registration Statement and the Prospectus.
(c) The Representative shall not have been advised that the
Registration Statement or the Prospectus contains an untrue statement of
fact that, in the opinion of the Representative or counsel to the
Underwriters, is material, or omits to state a fact that, in the opinion of
the Representative or such counsel, is material and is required to be
stated therein or necessary to make the statements therein not
misleading.
(d) The Representative shall have received an opinion of Bartlit Beck
Herman Palenchar & Scott, counsel for the Company, addressed to the
Representative, in its capacity as the Representative of the Underwriters,
and dated the First Closing Date or the Second Closing Date, as the case
may be, to the effect that, subject to customary qualifications and
assumptions:
(i) The Company is validly existing as a corporation and in
good standing under the laws of its jurisdiction of
incorporation, with full corporate power and authority to own,
lease and operate its properties and conduct its business as
presently conducted and as described in the Prospectus and the
Registration Statement;
(ii) the Company is duly registered and qualified to do business
as a foreign corporation under the laws of, and is in good
standing as such in the States of Ohio and California;
(iii) the authorized capital stock of the Company consists of
150,000,000 shares of Class A Common Stock, par value $0.0001 per
share, and 50,000,000 shares of Class B Common Stock, par value
$0.0001 per share, and 50,000,000 shares of preferred stock, par
value $0.0001 per Share, and all such stock conforms in all
material respects to the descriptions thereof in the Prospectus
and the Registration Statement;
(iv) the issued and outstanding shares of capital stock of the
Company immediately prior to the issuance and sale of the Shares
to be sold by the Company hereunder have been duly authorized and
validly issued, are fully paid and nonassessable, and there are
no preemptive rights to subscribe for or purchase any shares of
capital stock of the Company, and no shares of capital stock of
the Company have been issued in violation of such rights;
(v) to such counsel's knowledge, except for the Subsidiaries,
the Company has no significant subsidiaries, and the Company does
not own any equity interest in or control, directly or
indirectly, any other corporation, limited liability
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<PAGE>
company, partnership, joint venture, association, trust or other
business organization except as described in the Prospectus and
the Registration Statement; each Subsidiary is validly existing
in good standing under the laws of its jurisdiction of
incorporation or formation, with full power and authority to own,
lease and operate its properties and to conduct its business as
presently conducted and as described in the Prospectus and the
Registration Statement; Gaiam Catalog, Inc. is duly registered or
qualified to do business as a foreign entity under the laws of,
and is in good standing as such in the State of Ohio; the issued
and outstanding shares of the capital stock or other equity of
each Subsidiary have been duly authorized and validly issued, are
fully paid and nonassessable and there are no preemptive rights
to subscribe for or purchase any shares of capital stock of or
other equity interest in any Subsidiary, and no shares of capital
stock or other equity interest of any Subsidiary have been issued
in violation of such rights; the Company owns directly and
beneficially all of the issued and outstanding capital stock or
other equity of each Subsidiary except as otherwise described in
the Registration Statement, free and clear of any and all liens,
claims, encumbrances and security interests except as described
in the Registration Statement;
(vi) the certificates for the Shares to be delivered hereunder
are in due and proper form and conform to the requirements of
applicable law, and, when duly countersigned by the Company's
transfer agent, and delivered to the Representative or upon the
order of the Representative against payment of the agreed
consideration therefor in accordance with the provisions of this
Agreement, the Shares to be sold by the Company represented
thereby will be duly authorized and validly issued, fully paid
and nonassessable, and free of any preemptive rights to subscribe
for or purchase shares of Common Stock;
(vii) the Registration Statement has become effective under the
Act, and, to such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been initiated or are
threatened under the Act or any Blue Sky Laws; the Registration
Statement and the Prospectus and any amendment or supplement
thereto (except for the financial statements and other
statistical or financial data included therein, as to which such
counsel need express no opinion), comply as to form in all
material respects with the requirements of the Act, including
Form S-1 promulgated under the Act;
(viii) the Company has the corporate power and authority to enter
into and perform this Agreement; the performance of the Company's
obligations hereunder and the consummation of the transactions
described herein have been duly authorized by the Company by all
necessary corporate action, and this Agreement has been duly
executed and delivered by and on behalf of the
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<PAGE>
Company, and is a legal, valid and binding agreement of the
Company enforceable against the Company in accordance with its
terms; no consent, approval, authorization or other order or
decree of any court, regulatory or governmental body, arbitrator,
administrative agency or other instrumentality of the United
States or of the State of Colorado is required for the execution
and delivery of this Agreement or the consummation of the
transactions contemplated by this Agreement (except for
compliance with the Act, the Exchange Act, applicable Blue Sky
Laws and the clearance of the underwriting arrangements by the
NASD);
(ix) the execution, delivery and performance of this Agreement
by the Company will not: (A) violate any provisions of the
Articles of Incorporation or By-laws (or equivalents thereto) of
the Company or any Subsidiary; (B) or result in the breach,
modification or termination of, or constitute a default under,
any agreement, lease, franchise, license, indenture, permit,
mortgage, deed of trust, other evidence of indebtedness or other
instrument to which the Company or any Subsidiary is a party or
by which the Company or such Subsidiary, or any of their
respective owned or leased property is bound, and which is filed
as an exhibit to the Registration Statement; or (C) violate any
statute, ordinance, rule, or regulation of any regulatory or
governmental body, or to such counsel's knowledge, any order or
decree of any court, arbitrator, administrative agency or other
instrumentality of the United States or of the State of Colorado
(assuming compliance with all applicable federal and state
securities laws);
(x) to such counsel's knowledge, except as described in the
Prospectus, there are no holders of Common Stock or other
securities of the Company, or securities that are convertible or
exchangeable into Common Stock or other securities of the
Company, that have rights to the registration of such securities;
(xi) the Class A Common Stock (including the Shares) has been
designated for inclusion as a National Market security on The
Nasdaq Stock Market and is registered under the Exchange Act;
(xii) neither the Company nor any Subsidiary is, nor with the
giving of notice or passage of time or both would be, in
violation of its respective Articles of Incorporation or By-laws
(or their equivalents) or, to such counsel's knowledge, in
default in any material respect in the performance of any
agreement, lease, franchise, license, permit, mortgage, deed of
trust, evidence of indebtedness or other instrument, or any other
document in each case that is filed as an exhibit to or
incorporated by reference in the Registration Statement, to which
the Company or any Subsidiary is subject or bound;
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<PAGE>
(xii) neither the Company nor any Subsidiary is an "investment
company", an "affiliated person" of, or "promoter" or "principal
underwriter" for, an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended, and,
upon its receipt of any proceeds from the sale of the Shares, the
Company will not become or be deemed to be an "investment
company" thereunder;
(xiv) the description in the Registration Statement and the
Prospectus of legal matters, statutes, documents, regulations,
legal and governmental proceedings, and contracts and other legal
documents described therein fairly and correctly present, in all
material respects, the information required to be included
therein by the Act and fairly summarize the matters referred to
therein;
(xv) nothing has come to such counsel's attention to lead them
to believe that all offers and sales by the Company of its
capital stock before the date hereof were not at all relevant
times duly registered under or were exempt from the registration
requirements of the Act; and
Such opinion may incorporate exclusions and such qualifications reasonably
acceptable to the Representative and may, with respect to paragraphs (iv), (v)
and (xv), be based on written representations and certifications of the Company
and respective offerees and purchasers of Shares. Any written representations
and certifications on which such opinion may rely shall be provided to the
Representative and shall be reasonably acceptable to the Representative.
(e) The Representative shall also have received a letter from Bartlit
Beck Herman Palenchar & Scott, special counsel for the Company, addressed
to the Representative, in its capacity as the Representative of the
Underwriters, and dated the First Closing Date or the Second Closing Date,
as the case may be, to the effect that (i) no facts have come to the
attention of such counsel which lead it to believe that either the
Registration Statement or the Prospectus or any amendment or supplement
thereto contains any untrue statement of a material fact or omitted or will
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus, as of
the First Closing Date or the Second Closing Date, as the case may be,
contained any untrue statement of a material fact or omitted or will omit
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading in light of the circumstances under
which they were made (except for the financial statements and other
financial data included therein, as to which such counsel need express no
opinion), and (ii) without limiting the generality of the foregoing, no
facts have come to the attention of counsel which lead it to believe that
there are legal or governmental proceedings pending or threatened against
the Company, including, without limitation, any such proceedings that are
related to environmental, employee benefit or employment discrimination
matters, required to be described in the Registration Statement or the
Prospectus which are not so described or
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<PAGE>
which question the validity of this Agreement or any action taken or to be
taken pursuant to this Agreement, nor is there any transaction,
relationship, agreement, contract or other document of a character required
to be described in the Registration Statement or the Prospectus or to be
filed as an exhibit to or incorporated by reference in the Registration
Statement by the Act, which is not described, filed or incorporated by
reference as required. Such letter may incorporate exclusions and such
qualifications reasonably acceptable to the Representatives.
(f) The Representative shall have received an opinion of Dorsey &
Whitney LLP, counsel to the Underwriters, dated the First Closing Date or
the Second Closing Date, as the case may be, with respect to the issuance
and sale of the Shares by the Company, the Registration Statement and other
related matters as the Representative may require, and the Company shall
have furnished to such counsel such documents and shall have exhibited to
them such papers and records as they request for the purpose of enabling
them to pass upon such matters.
(g) The Representative shall have received on each Closing Date, a
certificate of Jirka Rysavy, Chief Executive Officer, and Lynn Powers,
President of the Company, to the effect that:
(i) The representations and warranties of the Company set
forth in Section 2 hereof are true and correct as of the date of
this Agreement and as of the date of such certificate, and the
Company has complied in all material respects with all the
agreements and satisfied all the conditions to be performed or
satisfied in all material respects by it at or prior to the date
of such certificate;
(ii) the Commission has not issued an order preventing or
suspending the use of the Prospectus or any Preliminary
Prospectus or any amendment or supplement thereto; no stop order
suspending the effectiveness of the Registration Statement has
been issued; and to the knowledge of the respective signatories,
no proceedings for that purpose have been initiated or are
pending or contemplated under the Act or under the Blue Sky Laws
of any jurisdiction;
(iii) each of the respective signatories has examined the
Registration Statement and the Prospectus, and any amendment or
supplement thereto, including any documents filed under the
Exchange Act and deemed to be incorporated by reference in the
Registration Statement, and such documents contain all statements
required to be stated therein, and do not include any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and, since the date on which the
Registration Statement was initially filed, no event has occurred
that was required to be set forth in an amended or supplemented
prospectus or in an amendment to the Registration Statement that
has not been so set forth; and
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<PAGE>
(iv) since the date on which the Registration Statement was
initially filed with the Commission, there shall not have
occurred any change or development involving, or which could be
expected to involve, a Material Adverse Effect, whether or not
arising from transactions in the ordinary course of business,
except as disclosed in the Prospectus and the Registration
Statement as heretofore amended or as disclosed in an amendment
or supplement thereto filed with the Commission and delivered to
the Representative after the execution of this Agreement; since
such date and except as so disclosed or in the ordinary course of
business, the Company has not incurred any liability or
obligation, direct or indirect, or entered into any transaction
which is material to the Company other than in the ordinary
course of business; since such date and except as so disclosed,
there has not been any change in the outstanding capital stock of
the Company, or any change that is material to the Company in the
short-term debt or long-term debt of the Company; since such date
and except as so disclosed or as contemplated in this Agreement,
the Company has not acquired any of the Common Stock or other
capital stock of the Company nor has the Company declared or paid
any dividend, or made any other distribution, upon its
outstanding Common Stock payable to shareholders of record on a
date prior to such Closing Date; since such date and except as so
disclosed, the Company has not incurred any material contingent
obligations, and no material litigation is pending or threatened
against the Company; and, since such date and except as so
disclosed, the Company has not sustained any material loss or
interference from any strike, fire, flood, windstorm, accident or
other calamity (whether or not insured) or from any court or
governmental action, order or decree.
The delivery of the certificate provided for in this subsection (g)
shall be and constitute a representation and warranty of the Company as to
the facts required in the immediately foregoing clauses (i), (ii), (iii)
and (iv) to be set forth in said certificate.
(h) At the time this Agreement is executed and also on each Closing
Date, there shall be delivered to the Representative a letter addressed to
the Representative, in its capacity as the representative of the
Underwriters, from each of Ernst & Young LLP and Wendell T. Walker and
Associates, P.C., the Company's independent accountants, the first letters
to be dated the date of this Agreement, the second letters to be dated the
First Closing Date and the third letters (if applicable) to be dated the
Second Closing Date, which shall be in form and substance satisfactory to
the Representative and shall contain information as of a date within five
(5) days of the date of such letter. There shall not have been any change
or decrease set forth in any of the letters referred to in this subsection
(g) which makes it impracticable or inadvisable, in the sole discretion of
the Representative, to proceed with the public offering or purchase of the
Shares as contemplated hereby.
(i) The Shares shall have been qualified or registered for sale under
the Blue Sky Laws of such jurisdictions as shall have been specified by the
Representative, the
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underwriting terms and arrangements for the offering shall have been
cleared by the NASD, and the Class A Common Stock (including the Shares)
shall have been designated for inclusion as a Nasdaq National Market
security on the Nasdaq Stock Market and shall have been registered under
the Exchange Act.
(j) Such further certificates and documents as the Representative may
reasonably request (including certificates of officers of the Company).
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to the
Representative and to Dorsey & Whitney LLP, counsel to the Underwriters.
The Company shall furnish the Representative with such manually signed or
conformed copies of such opinions, certificates, letters and documents as
the Representative may reasonably request.
(k) All the Shares being offered by the Company shall be tendered for
delivery in accordance with the terms and provisions of this Agreement.
If any condition to the Underwriters' obligations hereunder to be satisfied
prior to or at either Closing Date is not so satisfied, this Agreement at the
election of the Representative will terminate upon notification to the Company,
without liability on the part of any Underwriter, including the Representative
or the Company, except for the provisions of Section 6(n) hereof, the expenses
to be paid or reimbursed by the Company pursuant to Section 7 hereof and except
to the extent provided in Section 10 hereof.
SECTION 9. MAINTAIN EFFECTIVENESS OF REGISTRATION STATEMENT. The Company
------------------------------------------------
will use its best efforts to prevent the issuance of any stop order suspending
the effectiveness of the Registration Statement, and, if such stop order is
issued, to obtain as soon as possible the lifting and permanent suspension or
termination thereof.
SECTION 10. INDEMNIFICATION.
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(a) The Company, subject to the last paragraph of this Section 10,
agrees to indemnify and hold harmless each Underwriter and each person, if
any, who controls any Underwriter within the meaning of the Act or the
Exchange Act, from and against any losses, claims, damages, expenses,
liabilities or actions in respect thereof ("Claims"), joint or several, to
which such Underwriter or each such controlling person may become subject
under the Act, the Exchange Act, Blue Sky Laws or other federal or state
statutory laws or regulations, at common law or otherwise (including
payments made in settlement of any litigation), insofar as such Claims
arise out of or are based upon any breach of any representation, warranty
or covenant made by the Company in this Agreement, or any untrue statement
or alleged untrue statement of any material fact contained in the
Registration Statement, the Prospectus or any amendment or supplement
thereto, or in any application filed with Nasdaq or under any Blue Sky Law
or other document executed by the Company for that purpose or based upon
written information furnished by the Company and filed in any state or
other jurisdiction to qualify any or all of the Shares under the securities
laws
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thereof (any such document, application or information being hereinafter
called a "Blue Sky Application") or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading, or arise out of establishment of the administrative or "back
office" practices, procedures and policies enacted by the Underwriters, or
the implementation thereof, in order to facilitate the preferential
allocation of shares to customers of the Company described in Section 1 of
this Agreement (other than the negligent establishment or implementation of
such practices, procedures or policies, for which the Underwriters shall
not be entitled to indemnification under this Section 9(a)). The Company,
subject to the last paragraph of this Section 10, agrees to reimburse each
Underwriter and each such controlling person for any legal fees or other
expenses incurred by such Underwriter or any such controlling person in
connection with investigating, defending or settling any such Claim;
provided, however, that the Company will not be liable in any such case to
the extent that any such Claim arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made
in the Registration Statement, any Preliminary Prospectus, the Prospectus
or supplement thereto or in any Blue Sky Application in reliance upon and
in conformity with the written information furnished to the Company by the
Underwriters pursuant to Section 4 of this Agreement. The indemnification
obligations of the Company as provided above are in addition to and in no
way limit any liabilities the Company may otherwise have.
(b) Each Underwriter, severally and not jointly, will indemnify and
hold harmless the Company, each of its directors and each of its officers
who signs the Registration Statement, and each person, if any, who controls
the Company within the meaning of the Act or the Exchange Act against any
Claim to which the Company, or any such director, officer, controlling
person may become subject under the Act, the Exchange Act, Blue Sky Laws or
other federal or state statutory laws or regulations, at common law or
otherwise (including payments made in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter and the
Representative), insofar as such Claim arises out of or is based upon any
untrue or alleged untrue statement of any material fact contained in the
Registration Statement, the Prospectus, or any amendment or supplement
thereto, or in any Blue Sky Application, or arises out of or is based upon
any untrue or alleged untrue statement of any material fact contained in
the Registration Statement, the Prospectus, or any amendment or supplement
thereto, or in any Blue Sky Application, or arises out of or is based upon
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, the Prospectus, or any
amendment or supplement thereto, or in any Blue Sky Application, in
reliance solely upon and in conformity with the information set forth in
the Registration Statement on the front cover of the Prospectus and under
the caption "Underwriting," which is the only written information furnished
by the Representative to the Company pursuant to Section 4 of this
Agreement. Each Underwriter will severally reimburse any legal fees or
other expenses incurred by the Company, or any such director, officer or
controlling person in connection
-28-
<PAGE>
with investigating or defending any such Claim, and from any and all Claims
solely resulting from failure of an Underwriter to deliver a Prospectus, if
the person asserting such Claim purchased Shares from such Underwriter and
a copy of the Prospectus (as then amended if the Company shall have
furnished any amendments thereto) was not sent or given by or on behalf of
such Underwriter to such person, at or prior to the written confirmation of
the sale of the Shares to such person, and if the Prospectus (as so
amended) would have cured the defect giving rise to such Claim. The
indemnification obligations of each Underwriter as provided above are in
addition to any liabilities any such Underwriter may otherwise have.
Notwithstanding the provisions of this section, no Underwriter shall be
required to indemnify or reimburse the Company, or any officer, director or
controlling person in an aggregate amount in excess of the amount by which
the underwriting discount applicable to the Shares purchased by such
Underwriter exceeds the amount of damages which such Underwriter has been
otherwise required to pay.
(c) Promptly after receipt by an indemnified party under this section
of notice of the commencement of any action in respect of a Claim, such
indemnified party will, if a Claim in respect thereof is to be made against
an indemnifying party under this section, notify the indemnifying party in
writing of the commencement thereof, but the omission so to notify the
indemnifying party will not relieve an indemnifying party from any
liability it may have to any indemnified party under this section or
otherwise, except to the extent that the failure to so notify the
indemnifying party causes such party prejudice. In case any such action is
brought against any indemnified party, and such indemnified party notifies
an indemnifying party of the commencement thereof, the indemnifying party
will be entitled to participate in and, to the extent that he, she or it
may wish, jointly with all other indemnifying parties, similarly notified,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and any indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to the indemnified party and/or other indemnified
parties which are different from or additional to those available to any
indemnifying party, the indemnified party or parties shall have the right
to select one separate counsel to assume such legal defenses and to
otherwise participate in the defense of such action on behalf of such
indemnified party or parties.
(d) Upon receipt of notice from the indemnifying party to such
indemnified party of the indemnifying party's election to assume the
defense of such action and upon approval by the indemnified party of
counsel selected by the indemnifying party, the indemnifying party will not
be liable to such indemnified party under this section for any legal fees
or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof, unless:
(i) the indemnified party shall have employed separate counsel
in connection with the assumption of legal defenses in accordance
with the proviso to the last sentence of subsection (e) of this
section (it being understood, however, that the indemnifying
party shall not be liable for the legal fees and expenses of more
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<PAGE>
than one separate counsel, approved by the Representative, if one
or more of the Underwriters or their controlling persons are the
indemnified parties);
(ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after the indemnified
party's notice to the indemnifying party of commencement of the
action; or
(iii) the indemnifying party has authorized the employment of
counsel at the expense of the indemnifying party.
(e) If the indemnification provided for in this section is
unavailable to an indemnified party under subsection (a) or (b) hereof in
respect of any Claim referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall, subject to the
limitations hereinafter set forth, contribute to the amount paid or payable
by such indemnified party as a result of such Claim:
(i) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Underwriters
from the offering of the Shares; or
(ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause
(i) above, but also the relative fault of the Company and the
Underwriters in connection with the statements or omissions which
resulted in such Claim, as well as any other relevant equitable
considerations.
The relative benefits received by each of the Company and the
Underwriters shall be deemed to be in such proportion so that the
Underwriters are responsible for that portion represented by the percentage
that the amount of the underwriting discounts and commissions per share
appearing on the cover page of the Prospectus bears to the public offering
price per share appearing thereon, and the Company is responsible for the
remaining portion. The relative fault of the Company and the Underwriters
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission. The amount paid or payable by a party as a result of the
Claims referred to above shall be deemed to include, subject to the
limitations set forth in subsections (c) and (d) of this section, any legal
or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any action or claim.
(f) The Company and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this section were determined by
pro rata or per capita allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method
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<PAGE>
or allocation which does not take into account the equitable considerations
referred to in subsection (e) of this section. Notwithstanding the other
provisions of this section, no Underwriter shall be required to contribute
any amount in excess of the amount by which the underwriting discount
applicable to the Shares purchased by such Underwriter exceeds the amount
of damages which such Underwriter has been otherwise required to pay. No
person guilty of fraudulent misrepresentation (within the meaning of
section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this section are several in
proportion to their respective underwriting commitments and not joint.
SECTION 11. DEFAULT OF UNDERWRITERS. It shall be a condition to the
-----------------------
obligations of each Underwriter to purchase the Shares in the manner as
described herein, that, except as hereinafter provided in this section, each of
the Underwriters shall purchase and pay for all the Shares agreed to be
purchased by such Underwriter hereunder upon tender to the Representative of all
such Shares in accordance with the terms hereof. If any Underwriter or
Underwriters default in their obligations to purchase Shares hereunder on either
the First Closing Date or the Second Closing Date and the aggregate number of
Shares which such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed ten percent (10%) of the total number of Shares which
the Underwriters are obligated to purchase on such Closing Date, the
Representative may make arrangements for the purchase of such Shares by other
persons, including any of the Underwriters, but if no such arrangements are made
by such Closing Date the nondefaulting Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Shares which such defaulting Underwriters agreed but failed to purchase on
such Closing Date. If any Underwriter or Underwriters so default and the
aggregate number of Shares with respect to which such default or defaults occur
is greater than ten percent (10%) of the total number of Shares which the
Underwriters are obligated to purchase on such Closing Date, and arrangements
satisfactory to the Representative for the purchase of such Shares by other
persons are not made within thirty-six (36) hours after such default, this
Agreement will terminate without liability on the part of any nondefaulting
Underwriter and the Company except to the extent provided in section 10 hereof.
In the event that Shares to which a default relates are to be purchased by
the nondefaulting Underwriters or by another party or parties, the
Representative shall have the right to postpone the First Closing Date or the
Second Closing Date, as the case may be, for not more than seven (7) business
days in order that the necessary changes in the Registration Statement,
Prospectus and any other documents, as well as any other arrangements, may be
effected. As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this section. Nothing herein will relieve a
defaulting Underwriter from liability for its default.
SECTION 12. EFFECTIVE DATE. This Agreement shall become effective the
--------------
date and time that this Agreement is executed and delivered by the parties
hereto.
SECTION 13. TERMINATION
-----------
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<PAGE>
(a) This Agreement may be terminated by the Representative by notice
to the Company in the event the Company shall have failed or been unable to
comply with any of the terms, conditions, representations, warranties,
covenants or other provisions of this Agreement on the part of the Company
to be performed, complied with or fulfilled within the respective times
herein provided for, unless compliance therewith or performance or
satisfaction thereof shall have been expressly waived by the Representative
in writing.
(b) This Agreement may be terminated by the Representative by notice
to the Company at any time if, in the sole discretion of the
Representative, payment for and delivery of the Shares is rendered
impracticable or inadvisable because of: (a) material adverse changes in
the Company's business, business prospects, management, earnings,
properties or financial condition; (b) any action, suit or proceedings,
threatened or pending, at law or equity against the Company, or by any
federal, state or other commissions, board or agency wherein any
unfavorable result or decision could materially adversely affect the
business, business prospects, properties, financial condition, income or
earnings of the Company; (c) additional material governmental restrictions
not in force and effect on the date hereof shall have been imposed upon the
trading in securities generally, or minimum or maximum prices shall have
been generally established on a registered securities exchange, or trading
in securities generally on any such exchange shall have been suspended, or
a general moratorium shall have been established by federal or state
authorities; (d) substantial and material changes in the condition of the
market beyond normal fluctuations are such that it would be undesirable,
impracticable or inadvisable, in the sole discretion of the Representative,
to proceed with this Agreement or with the offering; (e) any outbreak or
escalation of major hostilities in which the United States is involved, any
declaration of war by Congress or any other substantial national or
international calamity or emergency if, in the judgment of the
Representative, the effect of any such outbreak, escalation, declaration,
calamity or emergency makes it impractical or inadvisable to proceed with
completion of the sale of and payment for the Shares; (f) The Nasdaq Stock
Market notifies the Company that the Shares will not be listed for trading
on The Nasdaq National Market as required under this Agreement; or (g) any
suspension of trading in the Class A Common Stock of the Company in the
over-the-counter market or the interruption or termination of quotations of
the Shares on the NASDAQ System.
(c) Any termination of this Agreement under Section 13(a) or (b)
shall be without liability of any nature whatsoever (including, but not
limited to, loss of anticipated profits or consequential damages) on the
part of either party hereto, except that the Company shall remain obligated
to pay the costs and expenses provided to be paid or reimbursed by the
Company pursuant to Section 7 hereof; and the Company and the
Representative shall be obligated to pay, respectively, all losses, claims,
demands, liabilities and expenses under Section 10.
(d) It is understood that the Company and the Representative will
each advise the other party immediately and confirm in writing the receipt
of any threat of or the initiation of any steps or procedures which would
impair or prevent the right to offer any of the
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<PAGE>
Company's Shares or the issuance of any "suspension orders" or other
prohibitions preventing or impairing the proposed offering by the
Commission or other regulatory authority.
SECTION 14. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
---------------------------------------------------
respective indemnities, agreements, representations, warranties, covenants and
other statements of the Company, of its officers or directors and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation made by or on behalf of any
Underwriter or the Company or any of its or their partners, officers, directors
or any controlling person, as the case may be, and will survive delivery of and
payment for the Shares sold hereunder.
SECTION 15. NOTICES. All notices, demands or requests required or
-------
authorized hereunder shall only be deemed given sufficiently if in writing and
hand delivered by messenger or courier service or sent by registered mail or
certified mail, return receipt requested and postage prepaid, in the case of the
Representative:
Tucker Anthony Cleary Gull
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Attention: Joseph F. Hickey, Jr., Managing Director
with a copy to:
Dorsey & Whitney LLP
370 Seventeenth Street, Suite 4400
Denver, Colorado 80202
Attention: Kevin A. Cudney, Esq.
and, in the case of the Company:
Gaiam, Inc.
360 Interlocken Blvd., Suite 300
Broomfield, Colorado 80021
Attention: Lynn Powers, President
with a copy to:
Bartlit Beck Herman Palenchar & Scott
511 Sixteenth Street, Suite 700
Denver, Colorado 80202
Attention: James L. Palenchar, Esq.
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<PAGE>
Any such notice shall be deemed effectively given on the earlier of the
date of actual receipt or the second business day after delivered, telecopied,
or deposit of the notice with the United States Postal Service.
SECTION 16. SUCCESSORS. This Agreement will inure to the benefit of and
----------
be binding upon the parties hereto and their respective successors, personal
representative and assigns, and to the benefit of the officers and directors and
controlling persons referred to in Section 12 hereof and no other person will
have any right or obligation hereunder. The term "successors" shall not include
any purchaser of the Shares as such from any of the Underwriters merely by
reason of such purchase.
SECTION 17. PARTIAL UNENFORCEABILITY. If any section, paragraph, clause
------------------------
or provision of this Agreement is for any reason determined to be invalid or
unenforceable, such determination shall not affect the validity or
enforceability of any other section, paragraph clause or provision hereof.
SECTION 18. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be
----------------------------
governed by and construed in accordance with the internal laws of the State of
New York without reference to conflict of law principles thereunder. This
Agreement may be signed in various counterparts which together shall constitute
one and the same instrument, and shall be effective when at least one
counterpart hereof shall have been executed by or on behalf of each party
hereto.
-34-
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters, including the Representative, all in accordance with its terms.
Very truly yours,
GAIAM, INC.
By:
-----------------------------------
Its:
-----------------------------------
The foregoing Underwriting Agreement is hereby confirmed and accepted as of
the date first above written.
TUCKER ANTHONY CLEARY GULL
Acting as Representative of the several Underwriters (including themselves)
identified in Schedule I annexed hereto.
TUCKER ANTHONY CLEARY GULL
By:
--------------------------------
Authorized Representative
Date:
--------------------------------
-35-
<PAGE>
GAIAM, INC.
Schedule I
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Name of Underwriter Number of Firm Shares to be Purchased
- -------------------------------------------------------------------------------
<S> <C>
Tucker Anthony Cleary Gull
- -------------------------------------------------------------------------------
Tucker Anthony Incorporated
- -------------------------------------------------------------------------------
Adams Harkness & Hill, Inc.
- -------------------------------------------------------------------------------
Total
- -------------------------------------------------------------------------------
</TABLE>
-36-
<PAGE>
GAIAM, INC.
Schedule II
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Name of Shareholder Number of Shares Owned
<S> <C>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
-37-
<PAGE>
GAIAM, INC.
Schedule 2(c)
Subsidiaries:
-38-
<PAGE>
EXHIBIT 5.1
Bartlit Beck Herman Palenchar & Scott
511 Sixteenth Street, Suite 700
Denver, Colorado 80202
[October [*]], 1999
Gaiam, Inc.
360 Interlocken Blvd., Suite 300
Broomfield, Colorado 80021
Re: Common Stock of Gaiam, Inc.
---------------------------
Ladies and Gentlemen:
We have examined Registration Statement on Form S-1 No. 333-83283
together with all amendments thereto (the "Registration Statement"), filed by
Gaiam, Inc. (the "Company") with the Securities and Exchange Commission (the
"Commission") in connection with the registration under the Securities Act of
1933, as amended (the "Securities Act"), of 2,000,000 shares (2,300,000 shares
if the underwriters' over-allotment option is exercised in full) of the
Company's Class A common stock, $.0001 par value per share (the "Shares"). We
are familiar with the proceedings taken by the Company in connection with the
authorization, issuance and sale of the Shares.
Based upon the foregoing, we are of the opinion that: when, as and if
(i) the Registration Statement shall have become effective pursuant to the
provisions of the Securities Act, (ii) the Company shall have received payment
in full for the Shares, and (iii) the Shares shall have been issued in the form
and containing the terms described in the Registration Statement, the Shares
will, when sold, be legally issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the
Registration Statement and to the use of our name under the heading "Legal
Matters" in the Registration Statement.
Very truly yours,
TRS/s
[* To be dated on or before the effective date of the registration statement.]
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated June 4, 1999, except for Notes 1 and 11 as to which the
date is __________ 1999, in the Registration Statement (Form S-1) and related
prospectus of Gaiam, Inc. for the registration of 2,300,000 shares of its Class
A Common Stock.
We also consent to the reference to our firm under the caption "Experts" and the
use of our report dated June 25, 1999, on the financial statements of Healing
Arts Publishing, Inc. as of and for the period from January 1, 1998 through
September 14, 1998 (acquisition date) in the Registration Statement (Form S-1)
and related Prospectus of Gaiam, Inc. for the registration of 2,300,000 shares
of Gaiam, Inc.'s Class A Common Stock.
Denver, Colorado
September 27, 1999
The foregoing consent is in the form that will be signed upon the effective date
of Gaiam, Inc.'s registration of Class A Common Stock in this registration
statement and the concurrent 2.5 to 1 reverse stock split of the Gaiam, Inc.'s
common shares.
/s/ ERNST & YOUNG LLP
Denver, Colorado
September 27, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated September 12, 1997 with respect to the financial
statements of Gaiam, Inc. included in the Registration Statement (Form S-1) and
related Prospectus of Gaiam, Inc. for the registration of 2,300,000 shares of
Class A Common Stock.
/s/ Wendell T. Walker and Associates, P.C.
Boulder, Colorado
September 27, 1999
<PAGE>
EXHIBIT 23.5
I hereby consent to the use of my name in the Registration Statement on
form S-1 No. 333-83283, together with all amendments thereto, filed by Gaiam,
Inc. with the Securities and Exchange Commission in connection with Gaiam's
registration under the Securities Act of 1933, as amended, of shares of Gaiam's
Class A common stock, $.0001 par value per share.
/s/ Barbara Mowry
------------------------
Barbara Mowry
Dated: September 16, 1999
<PAGE>
EXHIBIT 23.6
I hereby consent to the use of my name in the Registration Statement on
form S-1 No. 333-83283, together with all amendments thereto, filed by Gaiam,
Inc. with the Securities and Exchange Commission in connection with Gaiam's
registration under the Securities Act of 1933, as amended, of shares of Gaiam's
Class A common stock, $.0001 par value per share.
/s/ Barnet M. Feinblum
--------------------------
Barnet M. Feinblum
Dated: September 20, 1999
