<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
________________
Gaiam, Inc.
(exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Colorado 5961,7375 84-111-35-27
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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:
JAMES L. PALENCHAR, ESQ. KEVIN A. CUDNEY, ESQ.
BARTLIT BECK HERMAN PALENCHAR & SCOTT DORSEY & WHITNEY LLP
511 16TH STREET, SUITE 700 370 17TH STREET, SUITE 4400
DENVER, COLORADO 80202 DENVER, COLORADO 80202
TELEPHONE: 303-592-3100 TELEPHONE: 303-629-3400
FACSIMILE: 303-592-3140 FACSIMILE: 303-629-3450
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [_]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
CALCULATION OF REGISTRATION FEE
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of Each Class
of Securities to Be Amount to be Proposed Maximum Proposed Maximum Amount of
Registered Registered (1) Offering Price Per Share Aggregate Offering Price Registration Fee
- ------------------- -------------- ------------------------ ------------------------ ----------------
<S> <C> <C> <C> <C>
Class A Common Stock 2,300,000 $5.00 $11,500,000 $3,197
</TABLE>
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- --------------------------------------------------------------------------------
(1) Includes shares of class A common stock on which the underwriters have the
option to purchase to cover over-allotments, if any.
________________
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.
________________
<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, ____________, 1999
PROSPECTUS
__________, 1999
==============================================================================
2,000,000 Shares of Class A Common Stock
$5.00 per share
[LOGO OF GAIAM]
==============================================================================
Gaiam is offering 2,000,000 shares of its class A common stock in an
initial public offering at $5.00 per share. Gaiam provides information, goods
and services to customers who value the environment, a sustainable economy,
healthy lifestyles and personal development
This is our initial public offering. Currently, no public market for our
shares exists. We will apply for quotation of our shares on the Nasdaq National
Market under the symbol "GAIA."
We intend to allocate shares first to our customers and then to the general
public. Our customers will receive a 10% discount from the initial public
offering price (or a price of $4.50 per share) on up to 200 shares per customer.
The minimum order size in this offering is 50 shares.
- ------------------------------------------------------------------------------
See "Risk Factors" beginning on page __ to read about certain factors
you should consider before buying our shares.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- ------------
<S> <C> <C>
Public offering price: $ 5.00 $ 10,000,000
Underwriting discounts and commissions: $ ____ $ __________
Proceeds to Gaiam $ ____ $ __________
</TABLE>
The underwriters have an option to purchase an additional 300,000 shares
from Gaiam 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>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page Page
<S> <C> <C>
Prospectus Summary ............................... Our Business ...........................
Questions and Answers for Gaiam Customers ........ Management .............................
Risk Factors ..................................... Certain Transactions ...................
Use of Proceeds .................................. Gaiam Shareholders .....................
Capitalization ................................... Description of Capital Stock ...........
Dilution ......................................... Shares Eligible for Future Sales .......
Selected Financial Data .......................... Underwriting ...........................
Management's Discussion and Legal Matters ..........................
Analysis of Financial Condition Experts ................................
and Results of Operations .................... Additional Information .................
</TABLE>
<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. To understand concepts that are key to
Gaiam, please see the back cover of this prospectus.
[LOGO OF GAIAM APPEARS HERE]
Founded in Boulder, Colorado in 1988, Gaiam (pronounced "gi am") is a provider
of goods, services and information to customers who value the environment, a
sustainable economy, healthy lifestyles and personal development.
Our name, Gaiam, is a fusion of the words "Gaia" and "I am." On the Isle of
Crete in ancient Greece 4,000 years ago, the Minoan civilization honored Gaia,
mother Earth. 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. This view is shared by over 90% of an emerging group of individuals
called cultural creatives, /1/ the market segment identified by shared values of
authenticity, environmental awareness, healthy lifestyles and personal
development, numbering 50 million in the United States alone.
Our 800,000 customers, most of whom are cultural creatives, place a high value
on goods and services that promote healthy living and personal development,
contribute to the sustainability of the Earth's natural resources, and enhance
the quality of the environment. Our customers increasingly make purchasing
decisions based on these values, in addition to performance and price. We offer
our customers an opportunity to "vote with their dollars for their values" with
an interactive forum, as well as information, products and services aligned with
these values. We call this "conscious commerce."
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. Our growth is in
part the result of consumers, led by the emerging cultural creatives,
increasingly practicing conscious commerce.
_____________________________
/1/ The Integral Culture Survey, authored by Paul H. Ray, who has since agreed
to join our board of directors
3
<PAGE>
We believe the emergence of conscious commerce is defining a new industry. We
have named this industry "Lohas" -- an acronym for Lifestyles Of Health And
Sustainability. Five segments shape the Lohas industry:
Sustainable Economy. This segment 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 segment includes food supplements, vitamins and
minerals, natural and organic foods, and natural and personal body care and
information and services related to these products.
Alternative Healthcare. This segment includes natural health and wellness
solutions, information, products and services, including alternative,
noninvasive treatments, massage, chiropractic, acupuncture, acupressure,
biofeedback and aromatherapy.
Personal Development. This segment includes experiences, solutions,
products, information and services relating to mind-body-spirit fitness,
meditation, relaxation, spirituality, ancient religions, esoteric sciences
and realizing human potential.
Ecological Lifestyles. This segment includes information, products and
services that offer environment-friendly solutions, natural untreated fiber
products and eco-tourism.
We believe that we are the first company to recognize that these segments share
a common customer base and should be viewed collectively as one industry. We
believe that the annual sales of the Lohas industry may approach $200 billion in
the United States and $500 billion worldwide by 2000. This industry is
fragmented, with no market leader.
Gaiam seeks to establish itself as the leading authority, brand name and
information resource in the growing Lohas industry. 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 offerings in the Lohas industry.
Gaiam currently produces and markets information, goods and services in each
segment of the Lohas market. We are presently organized as three strategic
brands: Harmony targets the Sustainable Economy and Ecological Lifestyles market
segments, Living Arts targets the Personal Development segment, and InnerBalance
targets the Alternative Healthcare and Healthy Living market segments.
We are forming an online community of consumers who are concerned about personal
and planetary health and sustainability and want to use their purchasing
decisions to effect positive change. We view the Internet as an opportunity to
enhance our personal relationships with our customers and dramatically reduce
our consumption of natural resources. We are creating a community platform for
sharing information, solutions and experiences to promote interactive feedback.
We believe cultural creatives want advice from a trusted source. They desire a
personalized, concise and reliable view into the vast and inconsistant universe
of information.
We believe that we are in a unique position to provide this service because of
our customers' loyalty and participation. In an extensive customer survey, we
achieved a 52% response rate, in comparison with typical customer survey
response rates of less than 2%.
4
<PAGE>
We are positioned to provide information, products and services to all five
Lohas segments. See "Our Business," page __. We intend to pursue the following
strategies to benefit our customers:
. Focus on Our Online Presence
We are building an interactive online community for customers to share
experiences, access information and provide them with an opinion forum and
conscious commerce.
. Strengthen Our Brand
We intend to set the standards for the Lohas industry with a Gaiam approval
and recommendation process, based on independent research and customer
feedback.
. Pursue Strategic Acquisitions
We believe that the Lohas industry is highly fragmented, with no market
leader, and we seek to pursue acquisitions that meet our values, strategic
focus and economic criteria.
. Develop Business-to-Business Opportunities
Gaiam intends to allocate substantial resources to expand its business-to-
business segment to provide information, products and services that promote
personal and planetary health and economic sustainability.
We believe our current competitive strengths are:
. Focus on growing market segment
. Experienced management team
. Exceptional customer service
. Distinctive branded products
. Efficient operating model
. Multiple distribution channels
. Established infrastructure
. Acquisition experience
- --------------------------------------------------------------------------------
We believe customers should have special opportunities to invest in companies
they are helping create. In our offering, we will give preference in
allocating shares to our customers and a 10% discount
for purchases of up to 200 shares.
- --------------------------------------------------------------------------------
Corporate Overview
Gaiam was organized as a Colorado corporation on July 7, 1988. Gaiam's principal
office is located at 360 Interlocken Blvd., Suite 300, Broomfield, Colorado
80021, and its telephone number is (303) 464-3600.
The Offering
Class A common stock offered by Gaiam .................. 2,000,000 shares
Class A common stock outstanding after this offering ... 3,496,429 shares /(1)/
Class B common stock outstanding after this offering ... 7,035,000 shares
Total common stock outstanding after this offering ..... 10,531,429 shares
Use of proceeds ........................................ Working capital and
other general corporate
purposes, including the
repayment of debt and
acquisitions. See "Use
of Proceeds" and "Our
Business."
Proposed Nasdaq National Market symbol ................. GAIA
/(1)/ Based on the number of shares outstanding on June 30, 1999. Excludes
approximately 650,000 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."
5
<PAGE>
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 the 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.
6
<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. The first 200 shares purchased by each Gaiam customer will be discounted
10% and cost $4.50 per share, or a total of $900 for 200 shares. 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 you 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.
Q. Will Gaiam allocate shares on a first come, first served basis?
A. Yes. If we receive orders for more shares than we have available for
customers, we will take into account the time your check and paperwork were
received. As a result, you should return your paperwork as soon as
possible.
Q. What paperwork do I have to complete?
A. You must fill out an account application to open a brokerage account at
Tucker Anthony Cleary Gull. The application includes some necessary
questions, and a place for you to indicate how many shares you would like
to buy.
Q. When do I send a check?
A. As soon as possible, because timeliness of your check and paperwork is one
of the criteria we will use to allocate shares. You must send a check for
the total price of the shares you would like to buy, along with your
paperwork.
Q. What is the deadline for placing my order to buy shares?
A. The close of business on __________, __ 1999. By that date, your check and
your completed paperwork must be received by Tucker Anthony Cleary Gull, at
the address on the account application.
Q. Will I get my money back if I do not receive shares?
A. Yes. Funds not used to purchase shares will be sent back to you by check
promptly unless you direct Tucker Anthony Cleary Gull otherwise.
Q. Will I receive a stock certificate?
A. Yes. If you do not want a stock certificate, you can contact Tucker Anthony
Cleary Gull. All participants will automatically receive a stock
certificate for shares purchased at $4.50 per share.
Q. Whom do I call if I have questions?
A. Call Tucker Anthony Cleary Gull toll free at 1-877-IPO-GAIA (1-877-476-
4242).
7
<PAGE>
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 as of March 31, 1999 and for the three months
ended March 31, 1998 are unaudited.
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
----------------------- ---------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues....................... $14,801 $19,898 $30,739 $5,300 $9,495
Gross profit....................... 8,039 11,436 17,565 3,012 5,639
Other income (expense)............. 2,984 1,583 388 (60) 52
Net income after minority interest. $ 340 $ 654 $ 860 $ 24 $ 106
======= ======= ======= ====== ======
Net income per share (basic)....... $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.01
Shares outstanding................. 8,040 8,040 8,073 8,040 8,215
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------------------------------------------
PRO PRO FORMA,/(2)/
Actual FORMA/(1)/ AS ADJUSTED
------ ---------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash $ 421 $ 1,796 $ 7,846
Securities available-for-sale (/1)/ 1,375 1,375 1,375
Working capital 1,369 2,744 9,294
Total assets 14,991 16,366 22,416
Long-term debt (net of current maturities) 1,670 1,670 720
Stockholders' equity/(1)/ 3,686 5,061 12,061
</TABLE>
___________________________
/1)/ Gives effect to the private placement during the second quarter of 1999 of
$1,350,000 of debentures and 314,286 shares at $4.375 per share. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources."
/(2)/ Gives effect to the sale by Gaiam of 2,000,000 shares at an assumed
initial public offering price of $5.00 per share, after deducting the
estimated underwriting discount, customer discounts and offering expenses
payable by Gaiam. See "Use of Proceeds" and "Capitalization."
8
<PAGE>
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. The risks and uncertainties described below
are not the only ones we face. Some additional risks and uncertainties are ones
we do not currently think are material. Others are simply matters of which we
are not aware. 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.
The markets for the products and the services offered by Gaiam are competitive.
Gaiam believes that the Lohas market has thousands of small, local and regional
businesses, most of which have revenues of less than $20 million. Gaiam believes
that some smaller businesses may be able to more effectively personalize their
relationships with customers. To be competitive with these businesses, Gaiam
must develop the same trust with its customers that local businesses develop. We
may not be able to, and as a result our business may not succeed.
Many of the companies that are potential competitors of Gaiam are larger and
have substantially greater resources than Gaiam. Such competition could have a
material adverse effect on Gaiam's business, operating results and financial
condition. See "Our Business--Our Competitive Position."
We will rely on Internet domain names to establish our brand.
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 relevant
domain names 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 business.
We may not be able to make good acquisitions.
Completing acquisitions is one of the elements of our strategy, and Gaiam will
search for acquisition opportunities. However, there can be no assurance that
Gaiam will be successful in identifying attractive acquisitions in the Lohas
industry or that attractive acquisition candidates will be available at
reasonable prices. We are also likely to face competition for attractive
acquisition candidates, which may increase the expense of completing
acquisitions. Gaiam's shareholders generally will not have a chance to review
the business or financial statements of companies being acquired or to vote on
the acquisitions.
We depend upon our ability to integrate acquired companies.
Acquisitions have played an important role in building our business. Our
business may not succeed if we fail to integrate the operations of acquired
companies into our overall operations on a timely and economic basis. If we
complete an acquisition, we face a number of special risks, including the
diversion of management's attention, the possibility we may not be able to
integrate the operations, assets and personnel of the acquired companies, the
possibility of material adverse effects on reported
9
<PAGE>
operating results and material adverse tax consequences, the amortization of
acquired intangible assets and the loss of key employees. 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 services of key executives and employees are critical to 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 the key employees, particularly the e-commerce and creative teams, of
the companies we might acquire. Our success will also depend in significant part
on the ability to continue to attract and retain qualified personnel.
Competition for qualified personnel is intense, particularly given the scarcity
of qualified and experienced management in e-commerce and the direct marketing
industry. The loss of the services of certain key employees, or the inability to
continue to attract and retain qualified personnel, could materially adversely
affect our business. See "Our Business--Our Employees" and "Management."
We may need to change the manner in which we conduct our business if government
regulation increases.
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 access 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 is subject to a number of governmental regulations, including the
Mail or Telephone Order Merchandise Rule and related regulations promulgated by
the Federal Trade Commission and regulations promulgated by 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.
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, which may make it more difficult for Gaiam to obtain additional
names for its distribution lists, and restrict our ability to send unsolicited
electronic mail or printed catalogs. See "Our Business--Regulatory Matters."
Our growth may depend on the success of our e-commerce strategy.
The emergence of the Internet and the growing popularity of electronic commerce
provides a new channel for direct access to consumers. Both the e-commerce
market and the Lohas market are competitive. Since the introduction of e-
commerce to the Internet, the number of e-commerce websites competing for
customer attention has increased very rapidly. Gaiam expects future competition
to intensify given the relative ease with which new websites can be developed.
Gaiam believes that the
10
<PAGE>
primary competitive factors in e-commerce are brand recognition, reputation,
site content, ease of use, price, fulfillment speed, customer support and
reliability. Gaiam's success in e-commerce will depend heavily upon its ability
to continue to provide a compelling and satisfying shopping experience. Other
factors that will affect Gaiam's success include Gaiam's 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. See "Our
Business--Our Competitive Position."
To remain competitive, Gaiam must continue to enhance and improve the
responsiveness, functionality and features of its online technology. The
Internet and the e-commerce industry are subject to rapid technological change,
changes in user and customer requirements and preferences, 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 increasingly sophisticated and
varied needs of our existing and prospective customers and our ability to
respond to technological advances and emerging industry standards and practices
on a cost-effective and timely basis.
The development of a website and other proprietary technology entails
significant technical, financial and business risks. If Gaiam is unable, for
technical, legal, financial or other reasons, to adapt in a timely manner in
response to changing market conditions or customer requirements, our business
could be materially adversely affected. Further, the adoption of new Internet,
networking or telecommunications technologies may require us to devote
substantial resources to modify and adapt our services.
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. With this technology, we perform
real-time credit card authorization and verification with our bank. We cannot
predict whether events or developments will result in a compromise or breach of
the technology that we use to protect a customer's personal information. If, as
a result, we lose customers, our sales could decrease.
Although our historical sales have been predominantly through catalogs and
retailers, we are shifting our sales to the Internet and we intend to make the
Internet our primary channel of distribution. As a result of the factors
described above, it cannot be certain that our Internet business will succeed.
We depend on sophisticated management information systems.
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 we cannot maintain and continuously
update these systems, our business could suffer. See "Our Business--Information
Technology" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000."
Furthermore, 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
11
<PAGE>
protect against a security breach or to alleviate problems caused by any
breaches. We cannot assure that we can prevent all security breaches.
We are dependent on our ability to maintain our computer and telecommunications
equipment in effective working order and to protect against damage from fire,
natural disaster, power loss, telecommunications failure or similar events. In
addition, growth of our customer base may strain or exceed the capacity of our
computer and telecommunications systems and lead to degradations in performance
or systems failure. We have experienced capacity constraints and failure of
information systems in the past that have resulted in decreased levels of
service delivery or interruptions in service to customers. 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, any damage, failure or delay that causes interruptions in Gaiam's
operations could adversely affect our business.
Many of our suppliers are small businesses.
To successfully operate our business, we must receive timely delivery of
merchandise from our vendors and suppliers, many of which are small businesses.
These businesses 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 contractual and legal rights of minority equity holders may adversely affect
Gaiam.
Gaiam owns 67% of Living Arts, and the previous owners continue to own the
remaining 33%. Because of the fiduciary duties that Gaiam may owe to the
minority equity holders in Living Arts, and the contractual protections that
these equity holders have, Gaiam may not always be able to manage Living Arts in
the manner that is most advantageous to Gaiam and its shareholders. In addition,
we may have disputes with minority equity owners concerning management of the
business or contract provisions. We could also have similar issues arising in
future acquisitions in which Gaiam acquires less than the entire equity interest
in a company.
We are subject to the risks of a business marketing directly to individual
customers and to business customers.
Production and marketing of a particular product offering involves significant
expenses, which cannot be adjusted based upon the actual performance of the
offering. In addition, direct marketing operations involve relatively high
costs-such as costs for merchandise, order-processing, fulfillment, merchandise
returns and management information systems - which also are difficult to adjust
in a limited time period. Moreover, the successful operation of a direct
marketing business is dependent upon the timely and efficient preparation and
distribution of product offerings.
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.
12
<PAGE>
The success of our business relies on the operation of our centralized
fulfillment center.
Our facility in Cincinnati, Ohio handles all of our fulfillment functions and
other customer-service operations, such as returns processing. Approximately 90%
of our orders are filled and shipped from the Cincinnati facility. The balance
are shipped directly from suppliers. Because we rely on a single centralized
fulfillment center, our fulfillment functions could be severely impaired in the
event of fire, extended adverse weather conditions, or natural disasters.
Our business is exposed to changing consumer preferences and general economic
conditions.
Our success depends on our ability to anticipate and respond to changes in
customer preferences and to educate customers to accept our product offerings.
We may not be able to respond in a timely or commercially appropriate manner to
such changes.
In addition, our business is sensitive to changes in customers' spending and
discretionary income patterns which, in turn, are controlled to a large extent
by customer confidence and prevailing economic conditions. If we do not
anticipate and respond to changing customer preferences or adverse economic
conditions, our revenues would decrease, and we could experience significant
markdowns or write-offs of inventory, increased merchandise returns, and lower
margins, all of which would materially adversely affect our business.
We are subject to risks of overstocks and merchandise returns.
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. 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
higher initial purchase commitments. In addition, the use of branded merchandise
will limit 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, will materially adversely affect our business.
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 will increase as
a result of factors such as the introduction of new merchandise, new offerings,
changes in merchandise mix or other factors. Any significant increase in our
merchandise returns could materially adversely affect our business. See "Our
Business--Our Customer Service."
Collection of state sales taxes could affect our business.
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,
13
<PAGE>
as well as a Congressional advisory commission, are reviewing appropriate tax
treatment for companies engaged in e-commerce. Any additional laws or
regulations could adversely affect us.
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, such obligations would make
it more expensive to purchase our products and would increase our administrative
costs. These changes would materially adversely affect our business. In
addition, state tax authorities could choose to audit us. An audit 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. See "Our Business--
Regulatory Matters."
Existing shareholders will control Gaiam.
After this offering, Jirka Rysavy, Gaiam's Chairman, founder and Chief Executive
Officer, will hold 100% of the outstanding class B common stock The shares of
class B common stock are convertible into class A shares at any time. Each share
of class B common stock has ten votes per share, and the class A shares have one
vote per share. Assuming Mr. Rysavy's planned purchase of an additional 100,000
shares in this offering, he will beneficially own approximately 77% of the
outstanding shares, assuming Mr. Rysavy's class B common stock was converted
into shares. In addition, he will also have approximately 96.7% of the total
votes. As a result, Mr. Rysavy will be able to exert substantial influence over
Gaiam and to effectively control matters requiring approval by the shareholders
of Gaiam, including the election of directors and preventing a change in control
of Gaiam. See "Our Shareholders."
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, then 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."
14
<PAGE>
Fluctuations in our quarterly operating results may negatively affect our stock
price.
Quarter-to-quarter comparisons of our results of operations are not a reliable
indicator of our future performance. It is possible that in some future periods
our results of operations may be below the expectations of public market
analysts and investors. In this event, the price of our common stock may fall.
As a result, from time to time our future quarterly operating results may not
meet the expectations of securities analysts or investors, which may have a
material adverse effect on the market price of our stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Selected Quarterly Results."
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
prevailing market price for our shares and impair our ability to raise equity
capital in the future. Please see "Shares Eligible for Future Sale."
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risk and
uncertainties. These statements refer to our future plans, objectives,
expectations and intentions. We use words such as "anticipates," "believes,"
"plans," "expects," "future," "intends" 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. All forward-looking statements are based on current information we
have, and we assume no obligation to update any forward-looking statements.
USE OF PROCEEDS
The net proceeds to Gaiam from the sale of the shares in this offering are
estimated to be $7.5 million, after deducting the estimated underwriting
discount, customer discounts and offering expenses payable by Gaiam. We intend
to use the net proceeds of this offering for working capital and general
corporate purposes, including repayment of debt and acquisitions. A portion of
the net proceeds from this offering will be used to promote our brands and
expand our sales and marketing efforts. Please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Pending such uses,
we will invest the net proceeds of this offering in short-term, interest-
bearing, investment-grade securities.
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, Gaiam's bank credit agreement prohibits payment of any dividends to
Gaiam shareholders.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Gaiam as of March 31, 1999:
. On a pro forma basis giving effect to the private placement of
$1,350,000 of debentures and 314,286 shares completed during the second
quarter of 1999; and
. On a pro forma basis, as adjusted, to reflect the sale by Gaiam of
2,000,000 shares in this offering at an initial public offering price of
$5.00 per share, after deducting the estimated underwriting discount,
customer discount and offering expenses payable by Gaiam.
You should read this information together with Gaiam's consolidated financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
March 31, 1999
--------------
PRO
FORMA AS
ACTUAL PRO FORMA ADJUSTED
------ --------- --------
(in thousands)
<S> <C> <C> <C>
Long-term debt and capital leases, less
current portion $1,670 $1,670 $ 720
Stockholders' equity:
Class A Common Stock, $0.0001 par value;
92,965,000 shares authorized and
1,182,143 shares issued and outstanding
(actual); 1,496,429 shares outstanding
(pro forma); 3,496,429 shares
outstanding (pro forma as adjusted); 1 2 3
Class B Common Stock, $.0001 par value;
7,035,000 shares authorized and
7,035,000 shares issued and outstanding
(actual, pro forma, pro forma as
adjusted) 1 1 1
Additional paid-in capital 451 1,825 8,825
Accumulated other comprehensive income 827 827 827
Retained earnings 2,406 2,406 2,406
------ ------ -------
Total stockholders' equity 3,686 5,061 12,062
------ ------ -------
Total capitalization $5,356 $6,731 $12,782
====== ====== =======
</TABLE>
______________________
/(1)/ Excludes an aggregate of approximately 650,000 shares issuable pursuant to
options outstanding as of June 30, 1999.
16
<PAGE>
DILUTION
The net tangible book value of Gaiam stock as of March 31, 1999 was $0.02 per
share. Net tangible book value represents the amount of Gaiam's total tangible
assets less total liabilities. Giving effect to the completion of Gaiam's
private offering of $1,350,000 in debentures and 314,286 shares during the
second quarter of 1999, pro-forma tangible net book value was $0.03 per share.
Pro forma net tangible book value per share is determined by dividing Gaiam's
pro forma tangible net worth by the number of shares outstanding after this
offering. Giving effect to the sale of the shares in the offering at a price of
$5.00 per share and after deducting the estimated underwriting discount,
customer discounts and offering expenses payable by Gaiam, pro forma net
tangible book value per share would have been $0.81 per share. This represents
an immediate increase in pro forma net tangible book value of $0.63 per share to
existing shareholders and an immediate dilution of $4.19 per share to new
investors purchasing shares in this offering. The following table illustrates
the per share dilution:
<TABLE>
<CAPTION>
<S> <C>
Initial public offering price per share................................. $5.00
Net tangible book value per common share before this offering/(1)/... 0.18
Increase per common share attributable to new investors.............. 0.63
----
Pro forma net tangible book value per common share after this offering.. 0.81
----
Dilution per common share to new investors.............................. $4.19
</TABLE>
- -------------------------
/(1)/ After the private offering of $1,350,000 in debentures and 314,386 shares
but before this offering.
The following table summarizes, on a pro forma basis at March 31, 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 Per
---------------- ------------------- -----------------
Number Percent Amount Percent Share
------ ------- ------ ------- -----
<S> <C> <C> <C> <C> <C>
Existing
Shareholders 8,531,429 81.0% $ 1,828,043 15.5% $0.21
New Investors 2,000,000 19.0 $10,000,000 84.5 $5.00
---------- ----- ----------- -----
10,531,429 100.0% $11,828,034 100.0%
TOTAL ========== ===== =========== =====
</TABLE>
This discussion and table assumes no exercise of outstanding stock options and
warrants, and no issuance of shares reserved for future issuance under Gaiam's
option plans. As of June 30, 1999, there were options outstanding to purchase a
total of approximately 650,000 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, 1997 and 1998 set forth below
are derived from Gaiam's audited consolidated financial statements, which appear
elsewhere in this prospectus. The selected balance sheet data as of March 31,
1999 and selected statement of operations for the three-month periods ended
March 31, 1998 and 1999 set forth below are derived from Gaiam's unaudited
consolidated financial statements as of March 31, 1999 and for the three-month
periods ended March 31, 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>
Year Ended Three Months Ended
December 31 March 31
------------------------------------------------ ----------------------------
(unaudited)
Statement of
Operations Data: 1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............. $ 229 $6,696 $14,801 $19,898 $30,739 $5,300 $9,495
Costs of goods sold...... 179 2,943 6,762 8,462 13,174 2,288 3,856
------ ------ ------- ------- ------- ------ ------
Gross profit............. 50 3,753 8,039 11,436 17,565 $3,012 5,639
------ ------ ------- ------- ------- ------ ------
Operating expenses:
Selling and operating 5 3,281 9,253 10,427 14,186 2,629 4,576
Corporate, general and
administration......... 15 876 1,218 1,575 2,394 285 953
------ ------ ------- ------- ------- ------ ------
Total operating expenses 20 4,157 10,471 12,002 16,580 2,914 5,529
Operating income (loss) 30 (404) (2,432) (566) 985 98 110
Other income expense)/(1)/ (2) 1,029 2,984 1,583 388 (60) 52
------ ------ ------- ------- ------- ------ ------
Income before income
taxes and minority
interest................. 28 625 552 1,017 1,373 38 162
Income taxes............. 6 238 212 363 251 14 60
Minority interest........ -- -- -- -- 262 -- (4)
------ ------ ------- ------- ------- ------ ------
Net income............... $ 22 $ 387 $ 340 $ 654 $ 860 $ 24 $ 106
====== ====== ======= ======= ======= ====== ======
Net income per share -
basic.................... $ 0.00 $0.05 $0.04 $0.08 $0.11 $0.00 $0.01
====== ====== ======= ======= ======= ====== ======
Net income per share -
diluted.................. $ 0.00 $0.05 $0.04 $0.08 $0.11 $0.00 $0.01
====== ====== ======= ======= ======= ====== ======
Shares outstanding -
basic.................... 8,040 8,040 8,040 8,040 8,073 8,040 8,215
Shares outstanding -
diluted.................. 8,040 8,040 8,040 8,040 8,119 8,040 8,394
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
------------ ---------
Balance Sheet Data 1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Cash $ 16 $ 419 $ 380 $1,612 $ 1,410 $ 933 $ 421
Securities available-for-sale/(2)/ 71 56 38 1,634 38 1,375
Working capital (deficiency) 22 192 (1,838) 436 (81) 476 1,369
Total assets 81 2,476 6,256 5,985 16,677 5,659 14,991
Long-term debt (net of - - 89 42 299 30 1,670
current maturities)
Stockholder's equity/(2)/ 59 580 920 1,574 3,661/(1)/ 1,599 3,686
</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 1994, 1995, 1996 and 1997 and at fair market
value in 1998. See Note 6 to the 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. This section
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" 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. All forward-looking
statements are based on current information we have, and we assume no obligation
to update any forward-looking statement.
Overview
Gaiam provides information, goods and services 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.
During 1998, Gaiam completed two acquisitions. We acquired 67% of Healing Arts
Publishing LLC, which does business as Living Arts, on September 14, 1998, and
100% of Inner Balance, Inc. on October 1, 1998. These acquisitions accounted
for approximately 40% of our revenues during the first quarter of 1999. We
anticipate we will incur expenses in the second quarter of 1999 to integrate
these acquisitions, at which point the consolidation of these acquisitions will
be substantially complete.
20
<PAGE>
Results Of Operations
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
----------------------- ---------
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 43.2 40.6
----- ----- ----- ----- ----- ----- -----
Gross profit 21.8 56.0 54.3 57.5 57.1 56.8 59.4
Expenses:
Selling and operating 2.2 49.0 62.5 52.4 46.1 49.6 48.2
Corporate, general and
administration 6.5 13.1 8.2 7.9 7.8 5.4 10.0
----- ----- ----- ----- ----- ----- -----
Total expenses 8.7 62.1 70.7 60.3 53.9 55.0 58.2
----- ----- ----- ----- ----- ----- -----
Income (loss) from 13.1 (6.1) (16.4) (2.8) 3.2 1.8 1.2
operations
Other income (expense), net (0.9) 15.4 20.1 8.0 1.3 (1.1) 0.5
----- ----- ----- ----- ----- ----- -----
Income before income taxes
and minority interest 12.2 9.3 3.7 5.2 4.5 0.7 1.7
Provision for income taxes 2.6 3.6 1.4 1.8 0.8 0.3 0.6
Minority interest in net
income of consolidated
subsidiary, net of tax 0.0 0.0 0.0 0.0 0.9 0.0 0.0
----- ----- ----- ----- ----- ----- -----
Net income 9.6% 5.7% 2.3% 3.4% 2.8% 0.4% 1.1%
===== ===== ===== ===== ===== ===== =====
</TABLE>
Three months ended March 31, 1999 compared to three months ended March 31, 1998
- -------------------------------------------------------------------------------
Revenues increased 79.1% from $5.3 million in the first three months of 1998 to
$9.5 million in the first three months of 1999. This increase was primarily
attributable to the acquisitions of InnerBalance and Living Arts, which
represented approximately 40% of Gaiam's $9.5 million revenues during the first
three months of 1999. Internal growth was 29.1%, primarily attributable to
higher customer response rates and the introduction of new products.
Gross profit, which consists of revenues less cost of sales (primarily
merchandise acquisition costs and in-bound freight), increased 87.2% from $3.0
million in the first three months of 1998 to $5.6 million in the first three
months of 1999. As a percentage of revenues, gross profit increased from 56.8%
to 59.4%. This increase was primarily attributable to increases in sales of
private branded products, on which we have better margins than other products,
and better pricing from vendors due to increased volume.
Selling and operating expenses, which consist primarily of the cost of sales,
commissions, marketing expenses, developing and operating our website, and
fulfillment costs, increased 74.0% from $2.6 million in the first three months
of 1998 to $4.6 million in the first three months of 1999. As a percentage of
revenues, selling and operating expenses decreased from 49.6% to 48.2%. This
reduction as a percentage of revenues was primarily due to revenues increasing
at higher rates than certain fixed operating expenses.
21
<PAGE>
Corporate, general and administrative expenses increased 234.9% from $284,724 in
the first three months of 1998 to $953,565 in the first three months of 1999. As
a percentage of revenues, general and administrative expenses increased from
5.4% to 10.0%. The overall increase in general and administrative expenses was
due to various initiatives undertaken to prepare for and support our future
growth, including the hiring of additional personnel, the development of Gaiam's
website and e-commerce infrastructure, and the growth of Gaiam's business, both
internally and as a result of the acquisitions.
Other income, comprised primarily of gains on sales of marketable securities and
interest expense, increased from a $59,619 net expense in 1998 to a $52,622 net
income in 1999. This change was primarily due to the sale of marketable
securities in the first quarter 1999, which was partially offset by higher
interest expense due to borrowings used to fund acquisitions.
Minority interest of $4,253 for the first three months of 1999 was added to
Gaiam's consolidated financial results to account for the minority interest in
Living Arts' loss for the three months ended March 31, 1999.
Income tax provision represented 36.8% of Gaiam's pre-tax net income in the
first three months of 1998, as compared to an income tax provision representing
37.2% of our pre-tax net income in the first three months of 1999.
As a result of the factors described above, Gaiam's net income increased from
$24,447, or 0.4% of revenues, in the first three months of 1998 to $106,167, or
1.1% of revenues, in the first three months of 1999.
Year ended December 31, 1998 compared to year ended December 31, 1997
- ---------------------------------------------------------------------
Revenues increased 54.5% from $19.9 million in 1997 to $30.7 million in 1998.
This increase was primarily attributable to the acquisitions of Living Arts and
InnerBalance, which represented approximately $6.9 million of 1998 revenues.
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 margins than Gaiam's 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 sales. 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
efficiencies resulting from a higher average transaction size.
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
Gaiam's 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.
22
<PAGE>
Provision for income tax provision represented 35.7% of Gaiam's pre-tax income
in 1997, as compared to 18.3% of its pre-tax income in 1998. The decrease in
Gaiam's effective tax rate was primarily due to a one-time tax benefit related
to the settlement of a legal judgment in 1998.
Minority interest of $261,598 for 1998 was deducted from Gaiam's 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 34.4% from $14.8 million in 1996 to $19.9 million in 1997.
This increase was attributable to internal growth driven by improvements in
customer retention rate, transaction size and other operational improvements.
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 Gaiam has better
margins than other products, and better pricing from vendors due to increased
volume.
Selling and operating expenses increased 12.7% from $9.3 million in 1996 to
$10.4 million in 1997, due to increases in sales. 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, Gaiam's central warehouse was opened in
1996, resulting in reductions in shipping costs and other operational
efficiencies.
Corporate, general and administrative expenses increased 29.4% 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 its pre-tax income in 1996, as
compared to 35.7% of its 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 unaudited quarterly results of operations of
Gaiam for each of the quarters in 1997 and 1998 and the first quarter 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 Gaiam's
consolidated financial statements and related
23
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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
(In thousands, except per share data)
-------------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $4,218 $4,426 $4,811 $6,443 $5,300 $5,175 $5,987 $14,277 $9,495
Gross profit 2,454 2,554 2,645 3,783 3,012 3,049 3,538 7,966 5,639
Operating income (loss) (317) (86) (137) (26) 98 77 200 610 110
Net income (239) (104) (142) 1,139 24 15 395 426 106
Net income (loss) per share $(0.03) $(0.01) $(0.02) $ 0.14 $ 0.00 $ 0.00 $ 0.05 $ 0.05 $ 0.01
Weighted average shares
outstanding 8,040 8,040 8,040 8,040 8,040 8,040 8,040 8,073 8,215
</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 holiday spending.
Liquidity And Capital Resources
Gaiam's capital needs arise from working capital required to fund our
operations, capital expenditures related to expansions and improvements to
Gaiam's infrastructure, development of e-commerce and funds required in
connection with the acquisition of new businesses and its anticipated future
growth. These capital requirements depend on numerous factors, including the
rate of market acceptance of Gaiam's product offerings, the ability to expand
Gaiam's customer base, the cost of ongoing upgrades to its product offerings,
the level of expenditures for sales and marketing, the level of investment in
distribution and other factors. The timing and amount of such 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 internally
generated funds, 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
and may be prepaid at any time by Gaiam. With the exception of Ms. Powers, the
holders of the debentures, have certain registration rights requiring Gaiam to
register the shares obtained in the private placement. See the consolidated
financial statements of Gaiam for additional information relating to Gaiam's
private placements. In connection with this offering, we are offering 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
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share. We anticipate a total of 395,000 shares will be sold to these debenture
holders in exchange for $1.975 million in debentures.
Gaiam is party to a credit agreements with Norwest Bank, which extends through
December 31, 2001, and with BT Alex. Brown Inc. The credit agreements permit
borrowings of up to $4 million. Borrowings under the Norwest credit agreement
bear interest at the prime rate plus 1%, and borrowings under the BT Alex. Brown
credit agreement bear interest at the call money rate plus 3/4%. The credit
agreements are secured by a pledge of all of Gaiam's assets. 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 agreement.
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 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 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.
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 that the proceeds of this offering, together with our available cash,
cash expected to be generated from our operations and borrowings under our bank
credit agreement, will be sufficient to fund our operations as described in this
prospectus. However, our projected cash needs may change as a result of
acquisitions, unforeseen operational difficulties or other factors.
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,
such 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:
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<PAGE>
. "Front-end" systems. These systems automate and manage business functions
such as order-taking and order-processing, inventory management and
financial reporting.
. Warehouse management systems. These systems manage and automate
fulfillment operations of Gaiam's companies. Currently Gaiam's internal
warehouse management system is integrated with its internal front-end
system.
. Customer database management systems. These systems facilitate the
storage of customer data for each Gaiam business. Each Gaiam customer
database management system is integrated with Gaiam's existing front-end
system.
. Telecommunications systems. These systems enable Gaiam's companies to
manage their order-taking and customer service functions.
. Office automation systems, personal computers and local area networks.
These systems are used for word processing and other administrative tasks
at individual Gaiam companies and at Gaiam's central office.
. Voicemail systems. These systems are used for receiving and storing
messages to employees at individual Gaiam companies and at Gaiam's
central office.
. Ancillary services systems. These include such systems 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. 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 such 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 such
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
26
<PAGE>
dependent on programs and systems that could be disrupted by year 2000
problems. Year 2000 risks relating to programs and systems used by
product vendors are well diversified because we use a large number of
vendors. Gaiam has assessed the risks posed by the programs and systems
used by entities who provide front-end and warehouse management services
and determined that such risks do not require remediation. Gaiam has
received or intends to seek assurances of year 2000 compliance from each
product vendor that accounts for more than approximately 1% of the
aggregate purchases by Gaiam on an annual basis and from other
significant vendors and service providers.
Gaiam expects to complete its assessment of the programs and systems of the
entities with which it has commercial relationships and the identification of
potential problems by the end of the third quarter of fiscal 1999. Once such
identification has been completed, Gaiam intends to resolve any potential
problems identified by communicating further with the relevant vendors and
providers, by working internally to identify alternative sourcing and by
formulating contingency plans. Gaiam expects the resolution of these issues to
be an ongoing process until all year 2000 problems are satisfactorily resolved.
OUR BUSINESS
Gaiam
Gaiam is a provider of goods, services and information to customers who value
the environment, a sustainable economy, healthy lifestyles and personal
development.
Under the flagship brands Gaiam and Gaiam.com, we are using specific brands to
target related but distinct market segments. We use the Harmony, Living Arts,
and InnerBalance brands to offer our products through the consumer direct
marketing channel, using catalogs and the Internet, and through business-to-
business relationships. Gaiam has approximately 800,000 unique individual
customers in addition to leading retailers such as Target, Borders 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 are increasingly making
purchasing decisions for goods and services based on these values, in addition
to the traditional criteria of price and performance. We believe that these
consumers, whom we refer to as "cultural creatives," are growing in number as
evidenced by the growth of our customer base. Our number of unique individual
customers increased from 300,000 at the end of 1996, to 685,000 at the end of
1998 and to 800,000 at June 30, 1999. Cultural creatives are affluent and well-
educated consumers, with a median age of 42, a 60/40 women-to-men ratio and an
average annual income of $52,000.
Our Industry
We named the industry we serve "Lohas" -- an acronym for Lifestyles Of Health
And Sustainability. We divide the Lohas industry into five segments that shape
this market:
Sustainable Economy. This segment includes environmental management
services and solutions, renewable energy, energy conservation products and
services, sustainable manufacturing processes, recycling and goods made
from recycled materials.
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<PAGE>
Healthy Living. This segment includes food supplements, vitamins and
minerals, natural and organic foods and natural and personal body care.
Alternative Healthcare. This segment includes natural health and wellness
solutions, information, products and services, including alternative,
noninvasive treatments, massage, chiropractic, acupuncture, acupressure,
biofeedback and aromatherapy.
Personal Development. This segment includes experiences and solutions
concerning mind-body-spirit fitness, meditation, relaxation, spirituality,
ancient religions, esoteric sciences and realizing human potential.
Ecological Lifestyles. This segment includes environment friendly
solutions, natural untreated fiber products and eco-tourism.
We believe that we are the first company to recognize that these market segments
share a common customer base and should be viewed collectively as one industry.
Based on market research data, we believe that this industry will approach $200
billion in annual sales in the United States and $500 billion in annual sales
worldwide by the year 2000. We believe that, by serving all of these segments,
we can benefit our customers by providing them with a larger array of choices,
the convenience of one-stop shopping and access to a community of shared values.
The Internet
Although our historical sales have been predominantly through catalogs and
retailers, we are shifting our sales to the Internet and making the Internet our
primary channel of distribution. According to Jupiter Communications, 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 15.2 million
households in 1996 to 57 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.
We believe that our business is particularly well suited to Internet commerce.
Many of our products are not widely found in conventional stores. In addition,
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.
Our existing 800,000 loyal customers and our exceptional fulfillment and
customer service operations represent a distinct advantage for expanding our
online business.
Gaiam intends to become an authoritative and reliable source of data and
information for consumers.
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
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Living Arts, a producer and supplier of yoga and other mind-body-spirit
informational videos and products.
Our name, Gaiam, is a fusion of the words "Gaia" and "I am." The concept of Gaia
stems from an ancient philosophy that was based on the belief that the Earth is
a living entity. On the Isle of Crete in ancient Greece 4,000 years ago, the
Minoan civilization honored Gaia, mother Earth. 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 current Gaia
concept is based upon the premise that all of Earth's living matter, air, oceans
and land form an interconnected system which can be seen as a single entity with
the ability to generate and support life.
Our Core Values
Gaiam's approach to business is based on its core values:
We value the environment and view all resources as precious assets.
We emphasize integrity in all our relationships.
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 the leading 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 market segments. These specific market segment brands
share the following characteristics: high-quality merchandise offerings; an
affluent customer base; a strong brand identity; and enhancement of use through
extensive product education and information. The chart below illustrates the
market segment and examples of products offered under each of our brands.
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[LOGO OF GAIAM APPEARS HERE]
[CHART APPEARS HERE]
Our Competitive Strengths
We believe the following factors have contributed to our growth and success:
. Focus On Growing Market Segment
Gaiam targets the market segment of cultural creatives. A study published in
American Demographics in 1997/2/ coined the term "cultural creatives." This
group had grown to 50 million by 1998 and is the main source of Lohas industry
growth. Based on our own statistical sampling, we believe that the majority of
our 800,000 customers are cultural creatives. Gaiam believes that cultural
creatives are the driving force behind the Lohas industry. We believe annual
sales of the Lohas industry will approach $200 billion in the United States and
$500 billion worldwide by 2000.
Gaiam believes that the affluence and time-constrained lifestyles of cultural
creatives increase the likelihood that they will respond to the convenience,
efficiency and individuality offered by home shopping tailored for them by
Gaiam. 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 the direct marketing industry average of
less than $45.
. 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. With Mr. Rysavy as Chairman and Chief Executive Officer,
Corporate Express grew from $30 million in annual revenues to over $3 billion in
a five year period and completed a number of strategic acquisitions. 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. Our Chief Information Officer,
Pavel Bouska, was a member of the founding team and an officer of Corporate
Express for over 10 years, serving in various positions, including Chief
Information Officer and Vice President of Information Systems. Our executive
team also shares a strong desire to effect positive change on the planet. Each
joined Gaiam to combine their business acumen with their passion for making a
difference.
. Distinctive, Branded Products
Gaiam offers high-quality information, products and services under the Harmony,
InnerBalance and Living Arts brand names. These products appeal to Gaiam's
well-educated and affluent customers and
______________________
/2/ Authored by Paul Ray, who has since agreed to join our board of directors.
30
<PAGE>
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. Gaiam
devotes substantial resources to the development, design, testing and sourcing
of products that are consistent with and enhance the image of Gaiam's brands.
. 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. For example,
over 95% of in-stock orders are shipped within 24 hours from receipt of the
order. While prompt shipping may result in higher costs, Gaiam believes that it
enhances customer satisfaction and loyalty. 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 in-depth 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, we enhance our brand identity and
reputation and we build stronger relationships with our customers.
. Established Infrastructure
Gaiam has made substantial investments in its physical facilities, technology
and information systems. In 1996, we established our fulfillment center in
Cincinnati, Ohio, a 64,000 square foot facility that is strategically located in
the population center of gravity of the United States. 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. In addition to allowing us to provide
an exceptional level of service to our customers today, this investment reduces
our costs and provides us with a platform for future growth. 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 market segment brands retain responsibility for
merchandising and creative presentation. Gaiam provides strategic direction,
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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 sophisticated,
interactive commerce 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. Our
"make a difference" philosophy educates consumers about their own ability to
effect positive change through purchases that will result in improvements to the
environment and their well-being.
We believe that creating a large community of consumers of eco-friendly and
natural products will permit us to utilize the collective buying power of these
individual consumers to obtain and, in turn, offer Lohas products and services
at lower prices than might otherwise be available. As we are able to lower
prices in this manner, we expect to attract additional customers. Finally, we
believe that the interactive environment fostered by the Internet will make
possible customer-to-customer and customer-to-company communications that will
increase the usefulness of our services to customers, provide valuable feedback
to us, and help us and our customers establish a database of valuable
information about environmental issues, natural health and personal development.
. Strengthen Our Brand
We plan to establish the Gaiam name as the leading authority in the Lohas
industry. Gaiam will focus on the needs of cultural creatives by creating an
online environment that solves everyday problems quickly in those areas of life
most important to them, including natural health solutions, eco-friendly
alternatives and personal development. The customer's experience with Gaiam will
center on solving these problems in one destination through an interactive
community, access to experts, reliable information, practical online tools and
Lohas commerce opportunities. 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 established
retailers and e-tailers and increasing the breadth of our informational
offerings, while maintaining our high level of customer service.
. Pursue Strategic Acquisitions
Because our industry is highly fragmented with no market leaders, we believe
that significant acquisition opportunities exist and that our operating model
positions us as an attractive partner. We will consider strategic acquisitions
that satisfy our focused criteria, including high-quality offerings in the Lohas
market, strong brand identity, a talented and entrepreneurial management team,
high average transaction value, and substantial potential for improved
profitability through shared data bases.
. Offer Quality, Convenience and Selection
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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 our "store" has unlimited reach, it 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 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 developing synergistic relationships with these
industries. Currently, Gaiam supplies products to companies including Sheraton
Hotels, Hilton Hotels and American Health Specialties, an alternative healthcare
provider.
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 market. As a result, we believe that we can build a
successful consulting and "green audit" business.
Product Brands
While the product offerings of each Gaiam brand are different, reflecting the
needs of the different Lohas market segments, the underlying strategies are the
same:
. Offer the highest quality branded products and information.
Products and information, often created or developed
exclusively by or for Gaiam, are the leaders in their respective
market segments. We continue to incorporate innovations that add
value and differentiate our brands from the competition.
. Develop product and information offerings consistent with Gaiam's
mission. Our product and information mix is unique and is
intended to communicate and demonstrate that Gaiam is a reliable,
authoritative source for the Lohas industry.
. Establish key vendor partnerships to allow Gaiam to expand its
mix of Lohas products. Extensive research is completed on any
vendor before a relationship is formed. As part of our
philosophy, we seek to deal directly with our vendors and to
avoid intermediaries.
. Create distinctive visual presentations for each brand. Gaiam
believes that presenting merchandise in attractive and creative
settings is critical to reinforcing brand identity and to
stimulating interest in our products and information. Most of
this merchandising is handled in-house to enable Gaiam's creative
team to control the process as much as possible.
The merchandising and creative functions of Gaiam are presently organized as
three strategic brands: Harmony targets the industry's Sustainable Economy and
Ecological Lifestyles market segments, Living Arts targets the industry's
Personal Development market segment, and InnerBalance targets the
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<PAGE>
industry's Alternative Healthcare and Healthy Living market segments. Common
logistics, information systems, finance, legal, human resources and general
administrative functions support the entire organization. Gaiam is centralized
with most corporate functions located at our administrative headquarters in
Boulder County, Colorado and most inventory storage and fulfillment for our
brands located at our Cincinnati, Ohio fulfillment center.
Harmony
Harmony focuses on a broad spectrum of household products, that offer eco-
friendly options for the product categories found in mainstream supermarkets and
department stores.
Harmony buyers travel the world to source new products for our customers. We
participate directly with manufacturers to develop a "best of all worlds"
version to earn the Harmony label. We work with our vendors to ensure that
every component of production --- sourcing the ingredients, the processes
utilized and packaging materials --- are all eco-friendly and responsible. We
submit all products to a rigorous testing and approval process for both efficacy
and safety. Aside from this extensive internal scrutiny, we also send out items
to independent labs for additional testing and approval. Naturally, 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, USA Today, The Los Angeles Times,
Elle and Vogue.
Some of our Harmony customers have made automatic reorder arrangements whereby
Harmony regularly ships products in bulk on specific dates. Popular automatic
reorder products include paper towels, bathroom tissue and cleaning supplies.
[Harmony graphics appears here and includes the following text]
[Sustainable Economy Ecologoical Lifestyles
Energy-Efficient Lights Natural Fiber Clothing
(20,000 hour bulbs, fluorescents) (Hemp, Green/Organic Cotton)
Energy-Efficient Appliances Home Furnishings (Natural Fiber,
Recycled Paper Products Sustainably Harvested &
Reclaimed Woods)
SOLAR Recycled Plastic Products Natural Bed & Bath Products
PATH (Radios, Lights, Security System) (Hemp, Green/Organic Cotton
LIGHT & Jute - Beds, Sheets, Pillows,
Recycling & Composting Products Comforters, Blankets, Towels,
Shower Curtains & Rugs)
Recycled Plastic Products (Clothes
Hammocks, Blankets, Throws) Non-Toxic Cleaning Supplies
Battery Recharger & Non-Toxic Laundry Products
Rechargeable Batteries Natural Pest Repellents
Energy-Efficient Laundry Products
Outdoor/Garden Supplies
Conservation Information
& Products]
Living Arts
In September 1998, we acquired a majority interest in Living Arts. Living Arts
is a producer and supplier of videos and accessories aimed at the Personal
Development market segment.
Living Arts produces high quality mind-body-spirit fitness videos. All videos
are recorded on film or digital formats. Living Arts pioneered the 30-minute
fitness video for under $10.00, which has set the standard for the trade.
Living Arts markets its own video and audio tapes, as well as licensed video
titles, for sale to mass merchandisers, department stores, sporting goods
stores, and online retailers. Living Arts sells to companies such as Target,
Price-Costco, K-Mart, Sam's Club, Borders, Blockbuster, Amazon.com, Wild Oats
Markets and Whole Foods Market as well as abroad in Germany, Italy, Switzerland
and Australia.
Living Arts also sells directly to consumers through direct marketing efforts
including catalog, e-commerce and direct magazine advertising.
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<PAGE>
Living Arts partners with leading authorities in the mind-body-spirit arena such
as renowned yoga teachers and publications such as Yoga Journal to create
content.
[Livingarts graphic appears here and the following text]
[Personal Development
Meditation
Yoga
Tai Chi
YOGA PROPS Qi Gong
& CLOTHING Relaxation
Stress Reduction
(Information, Video, Audio, DVD, Clothing,
Accessories, Books)]
InnerBalance
InnerBalance offers a wide selection of 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 aimed at the Alternative Healthcare and Healthy Living market
segments. According to a Journal of the American Medical Association study, 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 the
primary channel of distribution. According to Cyber Dialogue, over 22 million
U.S. adults searched for health information on the Internet for the year ended
December 1998, and this number is estimated to increase by 50% during the next
year, to a total of 33 million.
[InnerBalance graphic appears here and the following text]
[Alternative Healthcare Healthy Living
Water & Air Filters Personal Care Products
Massage Therapy (Natural Body Products,
Allergy Solutions Oral Hygiene, Hair Care)
Light Therapy Natural Supplements
Magnetic Therapy Nutritional Products
SOY MILK MAKER Aromatherapy Products & & Information
Information Natural Beauty Products
Sound Therapy
Fitness Products & Information
Back Care
Natural Pain Relief
Detox Products & Information]
Our Channels of Distribution
We offer our products through two primary distribution channels consisting of
direct marketing (catalogs, the Internet and consumer advertising) and
business-to-business.
Direct marketing
We devote significant resources to ensuring that 95% of in-stock orders are
shipped within 24 hours after receipt of the order, unusual in the e-commerce
world. 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 have in-depth product knowledge and
assist customers in selecting products and solutions that meet their needs,
design, price and style criteria. We also enhance our customer service through
initiatives such as extensive training of customer service representatives,
toll-free telephone ordering and unconditional return guarantees. By offering
exceptional customer service experiences, we believe that we encourage repeat
purchases and enhance brand identity, as well as our reputation for integrity.
Business-to-Business
Gaiam markets certain products, principally videos featuring yoga and fitness,
to national and regional mass merchandisers, department stores, sporting goods
stores, bookstores, natural foods stores and online retailers. We are in the
process of expanding our range of products sold in the retail market, as well as
implementing branded "store-within-a-store" facilities, 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. We believe that the Gaiam brands and product mix
are suited to developing synergistic relationships with other businesses.
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<PAGE>
By offering both a direct marketing and business-to-business approach to
distribution, we are maximizing our ability to reach our core customers as well
as enhancing our brand.
Our Customer Service
Gaiam stands behind its 100% Money Back Guarantee. Customers may return
products any time for any reason and receive a full refund of the purchase
price. We believe that this guarantee, coupled with the quality of our customer
service personnel translates into greater customer loyalty and repeat sales.
Referral generated business is becoming an important driver of Gaiam's growth.
Our customer service staff accepts orders, product questions and other customer
service requests, 365 days per year via our dedicated toll free telephone
numbers, fax, mail and e-mail. Our sales representatives verify purchasing
history, order status, delivery dates, returns processing and account credits.
Our fully integrated computer system allows real time verification of in-stock
positions, credit card authorizations, stock moves and transfers. All printed
materials are 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.
Our staff is trained to "think for the benefit of the customer" and help them
choose among the best possible solutions. Our representatives, as part of our
extensive training program, test products and share their experiences with
customers. This feedback assures product quality throughout the organization.
Our service representatives have access to samples of all Gaiam products, as
well as complete 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, which makes for a highly
personalized customer service experience. Several representatives also have
personal 800 numbers so customers can call them directly and receive tailored
assistance with their requests. Dedicated product specialists assist our sales
representatives with technical questions and supplemental research by compiling
product-specific information packets accessible on Gaiam's company-wide e-mail
server.
Our customer service staff members receive hourly wages and commissions. Our
top performers are rewarded with incentive packages including trips and bonuses.
Because of our mission and our recognition programs, we believe that we attract
and retain a loyal and highly qualified customer service staff.
Gaiam also maintains an extensive research library stocked with books, videos
and audio tapes for its 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 processed using the same customer service standards that Gaiam applies
throughout its operations and are closely monitored to determine whether any
product quality issues exist. Returned merchandise is promptly inspected and
recycled to inventory unless damaged or worn.
Purchasing and Inventory Management
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<PAGE>
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 an 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 Website
Our website provides online purchasing capability for many products that we
offer. Following placement of an order, the customer will receive an e-mail
order confirmation that will summarize the purchase, the total amount of sale
and any shipping information including the anticipated delivery date. We are
currently in the process of enhancing our website for the convenience of our
customers.
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 might be searched
by topic, product and category. Visitors will have access to their complete
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 24-hour 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.
Our website will encourage visitors to register upon entering to receive a more
personalized site experience. The registration process will consist of a short
questionnaire that will gather information about the visitor's environmental
concerns, product and service interests and standard contact information.
Visitors will not be required to register in order to purchase products or
experience our complete website.
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 and
account balances, make payments, see how their purchases have contributed to
helping the environment and communicate with customer service to answer
questions or resolve problems.
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<PAGE>
Future Acquisitions
We intend to continue to pursue attractive strategic acquisitions that meet our
strict criteria, and fit into the Gaiam objectives of shaping and leading the
Lohas industry. Gaiam continuously monitors acquisition opportunities. 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.
Information Technology
Gaiam uses supply chain management information systems to support virtually all
segments of its business, including merchandising, customer database management
and marketing, order-processing, fulfillment, inventory management, customer
service and financial reporting. We believe that the ability to analyze
information efficiently about our business, products and customers can improve
performance, customer loyalty and service. We believe our current systems will
accommodate at least two years of future growth.
We are implementing a real-time Internet commerce solution designed to
completely automate its online sales and operations. The system offers dynamic
personalization of merchandise offerings, order taking, payment and security,
order management, warehousing and shipping, customer service, real-time
inventory management and accounting as well as comprehensive marketing and
operations reporting and analysis.
The back-end of this e-commerce system is optimized for high volume, real-time
transaction processing utilizing Hewlett Packard's Precision Architecture RISC
systems. The front-end is integrated into our website using e-commerce shopping
paradigms and real-time interfaces to the back-end enterprise data. Online
customers access their accounts, place orders and check order status utilizing
the same back-end enterprise databases as our customer service representatives.
Gaiam operates enterprise-wide e-mail and voice-mail systems integrated into its
internal operations, as well as customer and supplier communications. Our
knowledge library databases are updated and accessed through enterprise-wide
office automation tools.
Our Competitive Position
The markets for the products, information and services offered by Gaiam are
highly fragmented and are characterized by thousands of small and often
undercapitalized businesses. We believe that we compete on the basis of
integrity, the distinctiveness, quality and performance of offerings, depth of
knowledge and research, customer service, creative presentations and brand name
recognition.
Gaiam believes that the primary competitive factors in e-commerce are brand
recognition, site content, ease of use, price, fulfillment speed, customer
support, reliability and integrity. Gaiam's success will depend heavily upon its
ability to provide a compelling and satisfying shopping experience.
Our Intellectual Property
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<PAGE>
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 in the United States. We also currently hold various web domain
names relating to our brand, including "www.gaiam.com."
Our Employees
As of June 30, 1999, Gaiam and the Gaiam companies employed approximately 150
persons. None of our employees is covered by a collective bargaining agreement.
Our Facilities
Our principal executive offices are located in Boulder County, Colorado. Our
main fulfillment center is located in the Cincinnati, Ohio area. This facility
houses most of our fulfillment functions. We selected the Cincinnati site after
considering the availability and cost of facilities and labor, proximity to
major highways, air delivery hubs and support of local government of new
businesses. We also believe that Cincinnati is ideal for providing the lowest
cost shipping available from a single central point to a customer base that
conforms to the overall U.S. population. Approximately 90% of all orders are
filled and shipped from the Cincinnati facility. The balance is shipped
directly from suppliers.
The following table sets forth certain information relating to our facilities,
all of which are leased:
<TABLE>
<CAPTION>
Location Size Use Lease 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 key 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
39
<PAGE>
electronic mail or printed materials. Although Gaiam believes it is generally in
compliance with current laws and regulations and that such 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, on-line 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 such laws or regulations could reduce
the rate of growth of the Internet, which could potentially decrease the usage
of our online stores or could otherwise materially adversely affect our
business. In addition, applicability to the Internet of existing laws governing
issues such as property ownership, copyrights and other intellectual property
issues, taxation, libel, obscenity and personal privacy is uncertain. The vast
majority of such 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 such
activities.
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<PAGE>
Legal Proceedings
Gaiam is not a party to any material legal proceedings.
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 June 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
Paul H. Ray 60 Director*
</TABLE>
*Mr. Ray will join the board upon conclusion 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 $4 billion corporate supplier of non-production
goods. Mr. Rysavy founded Corporate Express in 1986 and until September 1998 was
its Chairman and Chief Executive Officer. Previously he founded and served as
Chairman and Chief Executive Officer of Crystal Market, a health food market,
which in 1987 became 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 which she helped grow
from $25 million to $575 million in annual revenues.
PAVEL BOUSKA - Executive Vice President and Chief Information Officer since
March 1999. He served as a director of Gaiam from 1991 until 1999. Prior to
joining Gaiam, from June 1988 to March 1999, Mr. Bouska was an officer and one
of the founding members of Corporate Express, serving in various positions,
including Chief Information Officer and Vice President Information Systems,
responsible for system development, information technology, operations, systems
conversions and business consolidations. Prior to joining Corporate Express, he
was project leader for Software Design & Management, a German software company
subsequently acquired by Ernst & Young.
PAUL H. RAY - Will become a director of Gaiam at the conclusion of this
offering. Mr. Ray has been Executive Vice President of American LIVES, Inc., a
market research and opinion polling firm since November 1986. Prior to joining
American LIVES, Mr. Ray was Chief of Policy Research on Energy Conservation at
the Department of Energy, Mines and Resources of the Government of Canada from
1981 to 1983. From 1973 to 1981, Mr. Ray was Associate Professor of Urban
Planning at the University of Michigan. Mr. Ray holds a BA, cum laude, in
anthropology from Yale
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University and a Ph.D. in sociology from the University of Michigan. He is the
author of The Integral Culture Survey, which first identified and named 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, which may be filled by the
Board of Directors. In addition to Mr. Ray, upon conclusion of this offering
the Board of Directors intends to appoint two directors who are not officers or
employees of Gaiam. To maintain Gaiam's listing on the Nasdaq National Market,
we are required to add at least one director, in addition to Mr. Ray, who is not
an officer or employee of Gaiam. If we do not make this addition within 90 days
following this offering, our shares could be delisted from the Nasdaq National
Market, which could have an adverse effect on the liquidity and price of the
shares.
Committees of the Board of Directors
Gaiam intends to establish an Audit Committee within 90 days following this
offering composed of at least two directors, which is required to maintain
Gaiam's listing on the Nasdaq National Market. The majority of the members of
the Audit Committee will not be employees of Gaiam. The Audit Committee will
report to the Board regarding the appointment of the independent public
accountants of Gaiam, the 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 intends to
establish a Compensation Committee, which we expect to be comprised 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, such
exculpation would cover an officer's or director's breaches of fiduciary duty,
except for:
. breaches of such person's duty of loyalty,
. those instances where such person is found not to have acted in good
faith,
. those instances where such person received an improper personal benefit as
the result of such 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.
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Executive Compensation
The following table sets forth certain information regarding the compensation
for the year ended December 31, 1998 of Gaiam's executive officers, Mr. Rysauy
and Ms. Powers. Information is also included with respect to 1998 Compensation
for two of Gaiam's Vice Presidents:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Principal Position Annual 1998 All Other 1998
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 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 650,000 options, all at a price of $4.375 per share. The
employee purchase plan will allow our employees to purchase shares at 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, upon joining Gaiam directors, officers and managers are
required to sign a confidentiality agreement and, upon receiving a stock option
grant, a two year non-compete agreement commencing with the date they leave
Gaiam.
CERTAIN TRANSACTIONS
On October 1, 1998, Mr. Rysavy sold InnerBalance to Gaiam for a $531,000 note
carrying interest at 8% per annum, due June 30, 2001. A portion of the note was
repaid in 1998, and on January 1, 1999, Gaiam issued a $289,000 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.
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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. See note 6 of the notes to consolidated financial
statements.
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 we believe to be a market rate. Mr. Rysavy is a director of Corporate
Express. The lease expires in October 2000.
Mr. Rysavy is a guarantor of Gaiam's line of credit with Norwest Bank. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
OUR SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the class A and class B common stock of Gaiam by each of our
shareholders who beneficially owned shares on June 30, 1999, and as adjusted to
reflect the sale of the shares offered in this offering. Percentages are based
on the 3,496,429 shares to be outstanding after the offering plus the 7,035,000
shares reserved for issuance upon conversion of class B common stock. The
address for each person, except as otherwise provided, is 360 Interlocken Blvd.,
Broomfield, Colorado, 80021.
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares to be Beneficially Owned
Prior to this Offering/11/ After this Offering/11//12/
-------------------------- -------------------------------
Beneficial Owner Number of Shares/13/ Percent Number of Shares/13/ Percent
<S> <C> <C> <C> <C>
Jirka Rysavy/1/ 8,000,000 93.8% 8,100,000 77.0%
Lynn Powers/2/ 40,000 .5% 60,000 .6%
Pavel Bouska/3/ 40,000 .5% 60,000 .6%
James Argyropoulos/
Argyropoulos Investor G.P./4/ 120,000 1.4% 220,000 2.1%
Michael Gilliland/5/ 22,857 .3% 42,857 .4%
Lennart Perlhagen/6/ 57,143 .7% 107,143 1.0%
Mo Siegel/7/ 17,143 .2% 32,143 .3%
Herbert Simon/8/ 57,143 .7% 107,143 1.0%
Edward Snider/9/ 57,143 .7% 107,143 1.0%
Jeffrey Steiner/10/ 120,000 1.4% 220,000 2.1%
All Executive Officers
and Directors 8,080,000 95.7% 8,220,000 78.2%
</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 20,000 shares Ms. Powers will purchase in this offering.
/3/ Includes 20,000 shares Mr. Bouska will purchase in this offering
/4/ Mr. Argyropoulos is the general partner of Argyropoulos Investor G.P. He is
the founder, and until 1989 was Chairman, of The Cherokee Group, and
currently is the founder and Chairman of The Walking Company. His
address is 9349 Oso Avenue, Chatsworth, California. Includes 100,000
shares Mr. Argyropoulos or his entities will purchase in this offering.
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<PAGE>
/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 59/th/ Street, New York,
New York 10022. Includes 100,000 shares he will purchase in this
offering.
/11/ Each shareholder possesses sole voting and investment power with respect to
the shares listed, except as provided by applicable community property
laws. In accordance with the rules of the Securities and Exchange
Commission, each shareholder is deemed to beneficially own any shares
obtainable upon the exercise of stock options or warrants which are
currently exercisable or which become exercisable within 60 days after
June 30, 1999, or the conversion of convertible securities that are
currently convertible or become convertible within 60 days after June
30, 1999. The inclusion in this table of shares listed as beneficially
owned does not constitute an admission of beneficial ownership.
/12/ The number and percentage of shares owned after this offering assumes none
of the listed shareholders will purchase additional shares in this
offering, except as otherwise indicated.
/13/ The number of shares deemed outstanding includes shares outstanding as of
June 30, 1999 and any shares obtainable through the conversion of class
B common stock held by Mr. Rysavy. No options are exercisable within 60
days of the date of this prospectus. Ownership percentages based solely
on the 1,496,429 shares outstanding prior to this offering are Mr.
Rysavy (965,000 shares) 64.5%; Ms. Powers and Mr. Bouska, 2.7% each;
Argyropoulos Investor G.P./Mr. Argyropoulos and Mr. Steiner, 8.0% each;
Mr. Simon, Mr. Snider and Mr. Perlhagen, 3.8% each; Mr. Gilliland,
1.5%; and Mr. Siegel, 1.2%. Ownership percentages based solely on the
3,496,429 shares assumed to be outstanding after this offering are Mr.
Rysavy (1,065,000 shares) 30.5%; Ms. Powers and Mr. Bouska, 1.7% each;
Argyropoulos Investor G.P./Mr. Argyropoulos and Mr. Steiner, 6.3% each;
Mr. Simon, Mr. Snider and Mr. Perlhagen, 3.1% each; Mr. Gilliland,
1.2%; and Mr. Siegel, 0.9%.
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 92,965,000 shares, $.0001 par value per share, and 7,035,000 shares
of class B common stock, $.0001 par value per share. As of June 30, 1999, there
were 1,496,429 shares outstanding held by ten shareholders of record, options to
purchase an aggregate of approximately 650,000 shares, a warrant to purchase
24,000 shares and 7,035,000 shares of class B common stock outstanding.
Although Gaiam believes the following summary description of Gaiam's shares,
class B common 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."
45
<PAGE>
Shares
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, only if any
other class of stock have also received dividends of an equal or greater amount.
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.
The rights, preferences and privileges of holders of the shares and the class B
common stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock that Gaiam may authorize,
designate and issue in the future.
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 other
matter for which a statement of purpose is required by the Colorado Business
Corporation Act. 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 __________.
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.
46
<PAGE>
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, unless either such 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, which would permit persons acquiring such shares
(other than persons who have entered into the lock-up agreements referred to
below) to sell such shares in the public market as the options vest. 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 such 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 such 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) have signed lock-up
agreements under which they agreed not 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 date
of this prospectus. Transfers or dispositions can be made sooner:
47
<PAGE>
. with the prior written consent of Tucker Anthony Cleary Gull;
. in the case of certain transfers to affiliates;
. as a bona fide gift; or
. to a trust.
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 date of this
prospectus, 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 such issuance provide that such 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 such
registration statements until after July __, 2001. Gaiam generally is required
to bear all of the expenses of such registration, except underwriting discounts
and commissions.
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 to cover such sales. They may exercise that
option for 30 days. 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.
48
<PAGE>
The underwriting agreement provides that the obligations of the underwriters to
purchase and accept delivery of the shares offered in this prospectus are
subject to approval by their counsel of certain legal matters and to certain
other conditions. 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.
<TABLE>
<CAPTION>
No Exercise Full Exercise
<S> <C> <C>
Per share............... $ $
Total................... $ $
</TABLE>
Gaiam will pay offering expenses, estimated to be $______.
In connection with this offering, we are offering each of our debenture holders
the option to purchase shares for the outstanding principal amount of the
debentures (excluding interest) at the offering price of $5.00 per share. As a
result, a total of 395,000 shares will be sold to the debenture holders,
assuming that each of the debenture holders elects to purchase shares in this
offering. In addition, we will offer Mr. Rysavy the opportunity to purchase
100,000 shares at the offering price of $5.00 per share.
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. 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. 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 such 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.tuckeranthony.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 date of this
prospectus, 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
49
<PAGE>
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. Among the factors
considered in determining the initial public offering price of the shares, in
addition to prevailing market conditions, are Gaiam's historical performance,
estimates of Gaiam's business potential and earnings prospects, an assessment of
Gaiam's management 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 have agreed to indemnify the underwriters against or contribute to losses
arising out of certain liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be passed
on for Gaiam by Bartlit Beck Herman Palenchar & Scott, Denver, Colorado. Certain
legal matters will be passed upon for the underwriters by Dorsey & Whitney LLP,
Denver, Colorado.
EXPERTS
Ernest & Young LLP, independent auditors, have audited the consolidated
financial statements and schedule of Gaiam, Inc. at December 31, 1998 and 1997,
and for the years then ended and the financial statements of Healing Arts
Publishing, Inc. at September 30, 1998 and for the nine month period then ended,
as set forth in their reports. The consolidated financial statements 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' reports, 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.
50
<PAGE>
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.
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Gaiam, Inc. Page
<S> <C>
Report of Independent Auditors - Ernst & Young LLP........................ F-1
Independent Auditors' Report -Wendell T. Walker & Associates.............. F-2
Consolidated Financial Statements at December 31, 1998
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Income.................................... F-4
Consolidated Statements of Stockholders' Equity...................... F-5
Consolidated Statements of Cash Flows................................ F-6
Notes to Consolidated Financial Statements........................... F-7
Unaudited Pro Forma Statement of Operations............................... F-20
</TABLE>
<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
July ________, 1999
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Gaiam, Inc.
We have audited the accompanying balance sheet of Gaiam, Inc., and subsidiaries,
as of December 31, 1996, and the related statements of Income and retained
earnings, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gaiam, Inc., and subsidiaries,
and the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ WENDELL T. WALKER AND ASSOCIATES
Boulder, Colorado
September 12, 1997
F-2
<PAGE>
GAIAM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 March 31
1997 1998 1999
-------------------------------------------------------------
Assets (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $1,611,793 $ 1,409,939 $ 420,609
Securities available-for-sale 38,333 1,633,905 1,374,555
Accounts receivable, net of allowance for
doubtful accounts of $31,000 in 1997
and $67,915 in 1998 111,424 2,579,927/a/ 2,017,736
Accounts receivable, other 109,957 13,995 18,345
Note receivable 154,391 9,351 85,401
Inventory, less allowances 1,648,083 3,393,712 3,546,074
Deferred advertising costs 1,028,680 1,757,845 1,798,283
Prepaid assets 76,894 68,367 233,636
Other current assets - 215,469 21,109
-------------------------------------------------------------
Total current assets 4,779,555 11,082,510 9,515,748
Property and equipment, net 1,096,888 1,079,694 1,021,218
Capitalized production costs, net - 672,438 620,455
Video library, net - 3,543,764 3,483,329
Other assets 108,124 298,106 350,248
-------------------------------------------------------------
Total assets $5,984,567 $16,676,512 $14,990,998
=============================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $2,152,739 $ 6,900,492 $ 4,436,542
Accrued liabilities 473,504 2,261,110 1,794,820
Capital lease obligations, current 46,693 42,261 29,654
Margin loan payable 1,359,130 575,288 503,857
Convertible debentures, related party - 550,000 625,000
Income taxes payable 311,702 242,271 202,640
Deferred tax liability - 592,566 553,791
-------------------------------------------------------------
Total current liabilities 4,343,768 11,163,988 8,146,304
Deferred tax liability 24,113 59,809 -
Capital lease obligations, long-term 42,275 25,588 18,467
Convertible debentures and other borrowings, related party - 273,051 273,052
Note payable, related party 428,236
Line of credit - - 950,000
Minority interest - 1,492,941 1,488,688
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 101 117 118
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 133,833 377,634 452,633
Accumulated other comprehensive income - 983,126 827,075
Retained earnings 1,439,773 2,299,554 2,405,721
-------------------------------------------------------------
Total stockholders' equity 1,574,411 3,661,135 3,686,251
-------------------------------------------------------------
Total liabilities and stockholders' equity $5,984,567 $16,676,512 $14,990,998
=============================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
GAIAM, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended Three months
December 31 ended March 31
1996 1997 1998 1998 1999
--------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue $14,800,993 $19,897,690 $30,738,540 $5,300,458 $9,495,011
Cost of goods sold 6,762,500 8,462,151 13,173,536 2,288,279 3,855,660
--------------------------------------------------------------------------------------
Gross profit 8,038,493 11,435,539 17,565,004 3,012,179 5,639,351
Expenses:
Selling and operating 9,253,263 10,427,258 14,186,215 2,629,235 4,576,125
Corporate, general and
administration 1,217,436 1,574,770 2,393,946 284,724 953,565
--------------------------------------------------------------------------------------
Total expenses 10,470,699 12,002,028 16,580,161 2,913,959 5,529,690
--------------------------------------------------------------------------------------
Income (loss) from operations (2,432,206) (566,489) 984,843 98,220 109,661
Other income (expense):
Realized gain on sale of securities
and other 3,094,390 1,820,034 696,992 - 147,748
Interest expense (110,549) (236,699) (308,501) (59,619) (95,126)
--------------------------------------------------------------------------------------
Other income (expense), net 2,983,841 1,583,335 388,491 (59,619) 52,622
--------------------------------------------------------------------------------------
Income before income taxes and
minority interest 551,635 1,016,846 1,373,334 38,601 162,283
Provision for income taxes 211,935 362,534 251,955 14,154 60,369
Minority interest in net income
(loss) of consolidated
subsidiary, net of tax - - 261,598 - (4,253)
--------------------------------------------------------------------------------------
Net income $ 339,700 $ 654,312 $ 859,781 $ 24,447 $ 106,167
======================================================================================
Net income per share:
Basic $0.04 $0.08 $0.11 $0.00 $0.01
Diluted 0.04 0.08 0.11 $0.00 $0.01
Shares used in computing net income
per share:
Basic 8,040,000 8,040,000 8,072,877 8,040,000 8,214,857
Diluted 8,040,000 8,040,000 8,118,791 8,040,000 8,394,468
</TABLE>
See accompanying notes.
F-4
<PAGE>
GAIAM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Class A Class B Additional Compre-
Common Stock Common Stock 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
Net income - - - - - - 339,700 339,700
------------------- ----------------- ----------- -------------- ---------- ----------
Balance at December 31 1996 1,005,000 101 7,035,000 704 133,833 - 785,461 920,099
Net income - - - - - - 654,312 654,312
------------------- ----------------- ----------- -------------- ---------- ----------
Balance at December 31, 1997 1,005,000 101 7,035,000 704 133,833 - 1,439,773 1,574,411
Issuance of common stock 160,000 16 - - 574,984 - - 575,000
Dividend to shareholder - - - - (331,183) - - (331,183)
Comprehensive income:
Net income - - - - - - 859,781 859,781
Other comprehensive income:
Increase in fair market
value of securities
available for sale, net of
tax of $618,578 - - - - - 983,126 - 983,126
------------------- ----------------- ----------- -------------- ---------- ----------
Total comprehensive income 1,842,907
------------------- ----------------- ----------- -------------- ---------- ----------
Balance at December 31, 1998 1,165,000 117 7,035,000 704 377,634 983,126 2,299,554 3,661,135
Issuance of common stock 17,143 1 - - 74,999 - - 75,000
(unaudited)
Comprehensive income:
Net income (unaudited) - - - - - - 106,167 106,167
Other comprehensive income:
Reclassification adjustment
for gains included
in net income,
net of tax benefit of
$520,391(unaudited - - - - - (156,051) - (156,051)
------------------- ----------------- ----------- -------------- ---------- ----------
Total comprehensive loss
(unaudited) (49,884)
------------------- ----------------- ----------- -------------- ---------- ----------
Balance at March 31, 1999 1,182,143 $118 7,035,000 $704 $ 452,633 $ 827,075 $2,405,721 $3,686,251
=================== ================= =========== ============== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
GAIAM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended Three months ended
December 31 March 31
1996 1997 1998 1998 1999
------------------------------------------------------------------------
Operating activities (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net income $ 339,700 $ 654,312 $ 859,781 $ 24,447 $ 106,167
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 265,151 241,985 240,431 46,723 73,141
Amortization 1,062 2,785 85,466 - 60,435
Interest expense added to principal of margin loan - 175,562 116,158 23,541 7,411
Minority interest in consolidated subsidiary - - 261,598 - (4,253)
Provision for doubtful accounts - - 258,993 - -
Realized gains on sale of securities and property and
equipment (3,621,047) (1,902,802) (691,137) - 31,225
Deferred tax expense 52,493 50,832 9,684 - (98,584)
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable 11,633 (62,317) (1,905,275) (167,011) 557,841
Inventory (672,020) (4,536) (591,519) (16,916) (152,362)
Deferred advertising costs (398,058) (371,840) (243,630) (264,461) (40,438)
Capitalized production costs - - (212,361) - 51,983
Prepaid assets 46,415 (55,982) 8,527 32,395 (165,269)
Other assets - 1,839 (266,757) (2,499) 142,218
Accounts payable 1,620,973 (267,316) 2,569,358 37,552 (2,463,950)
Accrued liabilities (85,634) (133,528) 329,672 (96,175) (466,290)
Income taxes payable (261,762) 390,521 (69,784) (297,946) (195,682)
------------------------------------------------------------------------
Net cash provided by (used in) operating activities (2,701,094) (1,280,485) 759,205 (680,350) (2,556,407)
Investing activities
Purchase of property, equipment and other assets (2,829,179) (157,987) (134,378) (80,890) (14,665)
Proceeds from the sale of property and equipment - 1,440,409 32,090 65,315 -
Proceeds from the sale of securities available-for-sale 3,800,000 1,931,250 477,500 228,125
Payments for acquisitions, net of cash acquired - - (1,656,611) - -
Payments (borrowings) on notes receivable (232,066) 361,259 145,040 34,044 (76,050)
------------------------------------------------------------------------
Net cash provided by (used in) investing activities 738,755 3,574,931 (1,136,359) 18,469 137,410
Financing activities
Principal payments on capital leases - (40,989) (49,699) (16,698) (19,728)
Proceeds from sale of stock - - 575,000 - 75,000
Proceeds from convertible debt - - 549,999 - 75,000
Net proceeds from (payments on) borrowings, net 1,923,681 (1,021,875) (900,000) - 1,299,395
------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,923,681 (1,062,864) 175,300 (16,698) 1,429,667
------------------------------------------------------------------------
Net change in cash and cash equivalents (38,658) 1,231,582 (201,854) (678,579) (989,330)
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 $ 933,214 420,609
========================================================================
Supplemental cash flow information
Interest paid $ 128,282 $ 237,147 $ 126,025 - -
Income taxes paid 238,654 312,100 312,100 100,000
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
(Information subsequent to December 31, 1998 is unaudited.)
1. Summary of Significant Accounting Policies
Organization
Gaiam, Inc. (the "Company") was incorporated under the laws of the State of
Colorado on July 7, 1988. The Company's primary business is providing
information, goods, and services to customers who value the environment, a
sustainable economy and healthy lifestyles.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company, its subsidiaries and partnerships in which ownership is 50% or greater
and considered to be under the control of the Company. All material
intercompany accounts and transaction balances have been eliminated in
consolidation.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents includes
demand deposit accounts with financial institutions and all highly liquid
investments with an original maturity of three months or less.
Securities Available-for-Sale
Securities available-for-sale consist of equity securities and are recorded at
market value for 1998 (see Note 6). All unrealized gains or losses, net of tax,
are recorded as a separate component of stockholders' equity.
Provision for Doubtful Accounts
The Company records a provision for doubtful accounts for all receivables not
expected to be collected.
Interim Financial Statements
The consolidated results as of March 31, 1999, and for the three months ended
March 31, 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
three months ended March 31, 1999 are not necessarily indicative of results for
a full year.
F-7
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
1. Summary of Significant Accounting Policies (continued)
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share (Statement No. 128). Statement
No. 128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented and conform to the Statement No. 128 requirements.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
March 31, March 31,
1996 1997 1998 1998 1999
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Numerator for basic earnings per share $ 339,700 $ 654,312 $ 859,781 $ 24,447 $ 106,167
Effect of Dilutive Securities:
8% convertible debentures - - 19,234 - 10,104
--------------------------------------------------------------
Numerator for diluted earnings per share $ 339,700 $ 654,312 $ 879,015 $ 24,447 $ 116,271
==============================================================
Denominator:
Weighted average shares for basic
earnings per share 8,040,000 8,040,000 8,072,877 8,040,000 8,214,857
Effect of Dilutive Securities:
Convertible debentures - - 41,153 - 179,610
Stock warrants - - 4,762 - -
--------------------------------------------------------------
Denominators for diluted earnings per
share--adjusted weighted average
shares and assumed conversion 8,040,000 8,040,000 8,118,791 8,040,000 8,394,467
==============================================================
Net income per share--basic $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.01
Net income per share--diluted $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.01
</TABLE>
F-8
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
1. Summary of Significant Accounting Policies (continued)
In 1998, basic earnings per share data was computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share was adjusted for the assumed conversion of all
potentially dilutive securities including warrants to purchase common stock. In
1997 and 1996, the computations do not reflect the warrants as there is no
dilutive effect.
Inventory
Inventory, consisting of finished goods, net of valuation allowances of $79,016
and $198,744 at December 31, 1997 and 1998, is stated at the lower of cost
(first-in, first-out method) or market.
Depreciation and Amortization
Depreciation of property and equipment, including amortization recorded under
capital leases, is computed on the straight-line method over estimated useful
lives of five to seven years for furniture and equipment and ten years for
leasehold improvements.
Capitalized Production Costs
Capitalized production costs include costs incurred to produce instructional
videos marketed by the Company to retail and direct-mail customers. These costs
are deferred for financial reporting purposes until the videos are released,
then amortized over succeeding periods on the basis of estimated sales.
Historical sales statistics are the principal factor used in estimating the
amortization rate. Accumulated amortization at December 31, 1998 was $927,331.
Long-Lived Assets
The carrying values of intangible and other long-lived assets are reviewed
quarterly to determine if any impairment indicators are present. If it is
determined that such indicators are present and the review indicates that the
assets will not be recoverable, based on undiscounted estimated cash flows over
the remaining amortization and depreciation period, their carrying values are
reduced to estimated fair market value. Impairment indicators include, among
other conditions, cash flow deficits, an historic or anticipated decline in
revenue or operating profit, adverse legal or regulatory developments,
accumulation of costs significantly in excess of amounts originally expected to
acquire the asset and a material decrease in the fair value of some or all of
the assets. Assets are grouped at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows generated
by other asset groups.
F-9
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
1. Summary of Significant Accounting Policies (continued)
Deferred Advertising Costs
Deferred costs primarily relate to preparation, printing and distribution of
catalogs. Such costs are deferred for financial reporting purposes until the
catalogs are distributed, then amortized over succeeding periods (not to exceed
seven months) on the basis of estimated sales. Historical sales statistics are
the principal factor used in estimating the amortization rate. Other
advertising and promotional costs are expensed as incurred. Advertising costs
incurred were $3,019,320, $4,866,223 and $7,121,648 for the years ended December
31, 1996, 1997, and 1998, respectively.
Revenues
The Company recognizes revenue at the time merchandise is shipped to the
customer. Amounts billed to customers for postage and handling charges, which
approximate $1.2 million for 1996, $1.7 million for 1997 and $2.2 million for
1998, are recognized as revenue at the time that the revenues on the product
shipments are recognized. The company provides a reserve for expected future
returns at the time the sale is recorded based upon historical experience.
The Company's sales are attributable mainly to sales within the U.S., with a
very small percentage, less than 1% of sales, to international customers. No
customer represented more than 10% of sales for either the years ended December
31, 1996, 1997 and 1998. The Company generally does not require collateral.
Realized gain on sale of securities and other for the year ended December 31,
1996 includes $782,053 of expenses relating to the May 1995 acquisition of the
catalog sales division of Seventh Generation. The terms of the acquisition
required the Company to enter into a licensing agreement for the use of the
Seventh Generation name, an operating agreement and a supply agreement. The
supply agreement required the Company to purchase a specified dollar amount of
products at a specified markup. The Company also incurred costs related to the
abandonment of acquired equipment and facilities and relocation expenses for
warehouse and office operations.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
securities available-for-sale, accounts receivable, payables and debt
obligations. The carrying values of these financial instruments as reported in
the accompanying balance sheets are assumed to approximate their fair value.
F-10
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
1. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company provides for income taxes pursuant to the liability method as
prescribed in Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. The liability method requires recognition of deferred income
taxes based on temporary differences between financial reporting and income tax
bases of assets and liabilities, using currently enacted income tax rates and
regulations.
Reclassifications
Certain reclassifications have been made to the December 31, 1996 financial
statements to conform to the December 31, 1997 and 1998 financial statement
presentation. Such reclassifications have had no effect on net income
previously reported.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
Actual results could differ from those estimates.
Reporting Comprehensive Income
During 1998, the Company adopted the Financial Accounting Standards Board
("FASB") issued Statement No. 130, Reporting on Comprehensive Income ("Statement
No. 130"). Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
During 1998, the Company adopted Statement of Financial Accounting Standard No.
131, Disclosures About Segments of an Enterprise and Related Information,
("Statement No. 131") which requires reporting of summarized financial results
for operating segments and establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company
evaluates performance based on two different operating segments: direct-to-
customer and business-to-business operations. For 1996 and 1997, direct-to-
customer operations was the only significant operating segment.
F-11
<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.
F-12
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
5. Leases
At December 31, 1997 and 1998, the Company's property held under capital leases
consisted of the following, which is included in property and equipment:
<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>
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. The cost and fair value of the securities at December 31, 1998 were
$32,200 and $1,633,905, respectively. The fair market value of the shares was
determined by using the closing NASDAQ price of the common stock at December 31,
1998.
F-13
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
6. Securities Available-for-Sale (continued)
For the year ended December 31, 1997, the securities were considered restricted
as a related party, controlled by the majority owner and chief executive officer
of the Company, had the right to require the Company to donate any and all
unsold shares to a not-for-profit organization. This requirement could be made
at the sole discretion of the third party and expired in fiscal 1998. Given
this restriction, the Company had recorded the restricted securities at cost.
The Company did not believe it could attribute a fair market value to the
securities in 1997 as a result of the restriction. However, if unrestricted,
the fair market value would be $4,828,125 based on quoted market prices. During
1997, the Company sold 150,000 shares at a market value of $1,932,000 to a
related party, and recognized a gain of $1,904,242 on the sale.
For the year ended December 31, 1998, the securities were no longer restricted
and were recorded at fair market value. The fair market value of the shares was
$1,633,905, which was determined by using the closing NASDAQ price of the common
stock on
December 31, 1998. During 1998, the Company sold 60,000 shares at a market
value of $703,125 to a related party, and recognized a gain of $696,992 on the
sale.
7. Income Taxes
The provision for income taxes is comprised of the following:
<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-14
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
7. Income Taxes (continued)
Variations from the federal statutory rate are as follows:
<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>
Deferred tax assets:
Reserve for bad debts $ 13,428 $ 26,012
Deferred tax liabilities:
Securities available-for-sale - (618,578)
Amortization (1,956) (2,435)
Depreciation (35,585) (57,374)
----------------------------------
(37,541) (678,387)
----------------------------------
Deferred tax liability, net $(24,113) $(652,375)
==================================
</TABLE>
F-15
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
8. Stockholders' Equity
The Company had warrant certificates outstanding that entitled the holder to
five warrants to purchase 40,000 shares of common stock at $1.25 per share. The
warrants were held by the Company's President and were exercised in December
1998 for $50,000
The Company had warrant certificates outstanding during the year and at December
31, 1998 that entitled the holder to purchase 24,000 shares of Class A common
stock at $.50 per share. The warrants are exercisable in a two year period
beginning January 20, 2002 and ending January 9, 2004.
During 1998, the Company's shareholders voted to increase the authorized shares
of stock, create two classes of common stock and split the existing outstanding
shares on a 20,000-to-1 basis. These changes have been reflected retroactively
in the Company's consolidated financial statements. The Class B common stock is
owned entirely by the Company's founder and Chief Executive Officer and is
restricted as to its sale or transfer. Each share of Class A common stock is
entitled to one vote, while each share of Class B common stock is entitled to 10
votes.
9. Business Acquisitions
On September 14, 1998, the Company acquired a 67% ownership in Healing Arts
Publishing. The acquired company produces videos that are informational and
fitness oriented. The acquisition was accounted for using the purchase method
of accounting for a total consideration of approximately $2.5 million. Results
of operations for the Healing Arts entity for the period from the acquisition
date through December 31, 1998 are included in the consolidated financial
statements of the Company. As part of the purchase, in addition to tangible
assets, the Company acquired a video library which is being amortized using the
straight line method over a period of 15 years.
On October 1, 1998, the Company acquired all of the stock and net assets of
InnerBalance Health, Inc. from a related party who is the founder and Chief
Executive Officer of the Company. The acquired entity provides similar services
as the Company. As these were companies under common control, the Company
accounted for the purchase using historical cost. Therefore, the excess of the
purchase price of $523,677 over the value of net assets was accounted for as a
return of capital to the primary shareholder. The payment was made partially
through a transfer of stock and a subordinated debenture with the related party.
Results of operations for the InnerBalance Health entity for the period from the
acquisition date through December 31, 1998 are included in the consolidated
financial statements of the Company.
The following represents the unaudited pro forma results of operations as if the
above noted acquisitions had occurred as of January 1, 1998 and at the beginning
of the immediately preceding period:
<TABLE>
<CAPTION>
Years ended December 31
1997 1998
-----------------------------------
(Unaudited)
<S> <C> <C>
Revenues $27,222,601 $38,063,794
Net income 625,257 625,257
Net income per common share 0.08 0.08
</TABLE>
F-16
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
9. Business Acquisitions (continued)
The December 31, 1997 pro forma results exclude a $975,000 unusual legal
settlement that occurred during 1997.
10. Related Party Transactions
In 1997, the Company entered into separate fulfillment agreements with
InnerBalance Health (which was acquired by the Company during 1998, see Note 9)
and Explorations Video Catalog, Inc. (related parties under common ownership
with the owner and Chief Executive Officer of the Company) whereby the Company
provides customer sales, service, warehousing and distribution services. The
agreements are for a two-year period but may be terminated by either party with
30 days notice. During 1998, the Company billed a total of $372,039, consisting
of $272,637 to Explorations Video Catalog, Inc. and $99,402 to InnerBalance
Health.
11. Subsequent Events
The Company entered into a revolving line of credit agreement with a financial
institution in January 1999 in the amount of $1 million. The Company's accounts
receivable and finished goods inventory are collateral for the line of credit.
In June 1999, the Company completed a private placement whereby 331,428 shares
of Class A common stock were issued at $4.375 per share. Additionally,
$1,275,000 convertible debentures with stated interest rate of 8% were issued.
These debentures are convertible automatically upon the closing of the initial
public offering into Class A common stock at the initial public offering per
share price.
In connection with the purchase of Healing Arts Publishing, the Company entered
into a royalty agreement with an actor to produce a series of videos. The
agreement was entered into during January 1999. The Company has agreed to pay a
minimum royalty of $225,000 to the individual for his services in relation to
the video production, and in exchange for marketing activities that he may
participate in. The royalty agreement also requires the Company to pay certain
amounts above and beyond the minimum once video sales exceed a certain level.
In June 1999, the Company adopted an employee stock option plan (the "Plan")
that will serve as a long-term incentive plan for individuals who contribute
significantly to the strategic and long-term incentive performance objectives
and growth of the Company. Under the Plan, the Company may issue an aggregate of
not more than 1,600,000 common shares to eligible individuals.
F-17
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
11. Subsequent Events (continued)
In ________ 1999, the Company amended the convertible debentures issued to all
subscribers to remove the automatic conversion of the securities.
On _________, 1999, the Company's Board approved a reverse stock split of 2.5 to
1.
12. Segment Information
The Company has two business segments: Direct to Consumers and Direct to
Businesses; both of which sell products, services and information produced
and/or purchased from other suppliers and shipped directly to either the end
user or reseller. Although the customer bases do not overlap to any extent, the
purchase and delivery processes overlap in some areas.
Each of the two segments qualifies as such because each is more than 10% of the
combined revenue. Contribution margin is defined as net sales, less cost of
goods sold and direct expenses. Financial information for the Company's business
segments was as follows:
Year Ended December 31,
1997 1998
-------------------------------
Net revenue:
Direct to consumer $19,897,690 $26,897,236
Direct to business - 3,841,304
Consolidated net revenue 19,897,690 30,738,540
Contribution margin:
Direct to consumer (566,490) 128,691
Direct to business - 856,152
-------------------------------
Consolidated contribution margin $ (566,490) $ 984,843
F-18
<PAGE>
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Information subsequent to December 31, 1998 is unaudited.)
Year Ended December 31,
1997 1998
----------------------------
Reconciliation of Contribution
margin to net income:
Other income 1,583,336 388,491
Income tax expense 362,534 251,955
Minority interest expense - 261,598
----------------------------
Net income $ 654,312 $859,781
============================
F-19
<PAGE>
GAIAM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF
OPERATIONS
The following unaudited pro forma combined statement of operations for the year
ended December 31, 1998 is derived from the historical consolidated statements
of operations of Gaiam, Inc. and Healing Arts Publishing and InnerBalance Health
(the "Acquisitions"), adjusted to give effect to the Mergers using the purchase
method of accounting for business combinations.
The unaudited pro forma combined statement of operations for the twelve months
ended December 31, 1998 assumes that the Acquisitions occurred as of January 1,
1998.
The pro forma combined statement of operations is provided for illustrative
purposes only and should be read in conjunction with the accompanying notes
thereto, and the audited consolidated financial statements and notes thereto of
Gaiam, Inc. for the year ended December 31, 1998 and the audited financial
statements and the notes thereto of Healing Arts Publishing as of and for the
nine months ended September 30, 1998. The pro forma data is not necessarily
indicative of the operating results or financial position that would have been
achieved had the Acquisitions been consummated at the dates indicated, nor is it
necessarily indicative of future operating results and financial condition.
F-20
<PAGE>
GAIAM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF
OPERATIONS
Year ended December 31, 1998
<TABLE>
<CAPTION>
Healing Arts InnerBalance Total
Gaiam, Inc. Publishing (c) Health (d) Adjustments Pro Forma
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue $30,738,540 $6,513,679 $1,339,947 $(523,620)(e) $38,063,794
(4,752)(b)
Cost of goods sold 13,173,536 2,868,696 569,645 (190,352)(e) 16,416,773
(4,752)(b)
---------------------------------------------------------------------------
Gross profit 17,565,004 3,644,983 770,302 (333,268) 21,647,021
Expenses:
Selling and operating 14,186,215 3,056,626 1,017,415 94,420 (a) 18,701,466
Corporate, general and
administration 2,393,946 810,398 - (73,530)(e) 2,784,023
---------------------------------------------------------------------------
Total expenses 16,580,161 3,867,023 1,017,415 20,890 21,485,489
---------------------------------------------------------------------------
Income (loss) from operations 984,843 (222,040) (247,113) (354,158) 161,532
Other income (expense):
Realized gain on sale of
securities and other 696,992 - - - 696,992
Interest expense (308,501) (61,161) (17,312) (386,974)
---------------------------------------------------------------------------
Total other income (expense) 388,491 (61,161) (17,312) - 310,018
---------------------------------------------------------------------------
Income (loss) before taxes and
minority interest 1,373,334 (283,201) (264,425) (354,158) 471,550
Provision for income taxes 251,955 - - - 251,955
Minority interest in net income of
consolidated subsidiary, net of
tax (261,598) - - 93,456 (f) (168,142)
---------------------------------------------------------------------------
Net income (loss) $ 859,781 $ (283,201) $ (264,425) $(260,702) $ 51,453
===========================================================================
Net income:
Basic $ 0.11 $ 0.01
Diluted 0.11 $ 0.01
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-21
<PAGE>
GAIAM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF
OPERATIONS
Notes to Unaudited Pro Forma Combined Statement of Operations:
(a) The statement of operations has been adjusted to reflect the additional
amortization of the video library had the Company. acquired Healing Arts
Publishing, Inc. on January 1, 1998.
<TABLE>
<S> <C>
Intangible Asset $3,209,000
Amortization Life 15 years
Additional Period 8.5 months
----------
Adjustment $ 151,547
==========
</TABLE>
(b) The statement of operations has been adjusted to reflect the effect of
intercompany sales between Healing Arts Publishing, Inc. and Gaiam, Inc.
for the nine months prior to the merger.
(c) Represents the results of operations of Healing Arts Publishing, Inc. from
January 1, 1998 through September 30, 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) As the Company has recorded the acquisition of Healing Arts Publishing,
Inc. on the acquisition date, September 14, 1998 and the audited financial
statements of Healing Arts Publishing, Inc. including the report of
operations for the nine months ended September 30, 1998. This adjustment
eliminates the 16 days of activity which are included in both the financial
statements of the Company and those of Healing Arts Publishing, Inc.
(f) Represents the adjustment to minority interest to reflect ownership of
Healing Arts Publishing, Inc. for the entire year.
F-22
<PAGE>
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description of Period Expenses Accounts Deductions Period
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts on
accounts receivable $ 31,000 $ 258,993 (2) $126,580 (1) (348,658)(3) $ 67,915
Reserve for obsolescence on
inventory balance $ 79,016 182,643 29,000 (1) (122,463)(3) $ 168,744
Year ended December 31, 1997
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts on
accounts receivable $ 28,531 2,469 - - $ 31,000
Reserve for obsolescence on
inventory balance 84,240 83,871 (89,095) $ 79,016
Year ended December 31, 1996
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts on
accounts receivable 5,000 23,531 $ 28,531
Reserve for obsolescence on
inventory balance 143,890 255,467 (315,117) 84,240
</TABLE>
(1) Acquired in conjunction with acquisition of majority owned subsidiaries.
(2) Provision for doubful accounts
(3) Actual amounts written off against the allowance or reserve.
<PAGE>
Our Core Values
Our approach to business is based on important core values.
We value the environment and view all resources as precious assets not to be
wasted.
We emphasize integrity in all our relationships.
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.
---------------------------------------------------------------------------
Understanding Us
. 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," we mean low or minimal impact upon the ecosystem in
which the product is created or used.
. By "green," we mean an attribute of products that have a less harmful
effect on the environment than other products available to consumers
having the same or a similar use.
. By "alternative health," we mean the approach to healthcare typified by
chiropractic care, nutrition, homeopathy, naturopathic medicine,
acupuncture, acupressure, massage, aromatherapy and other holistic
approaches.
---------------------------------------------------------------------------
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........................................................................
NASDAQ National Market listing fee.....................................................
Printing and engraving expenses........................................................
Accounting fees and expenses...........................................................
Legal fees and expenses................................................................
Blue Sky fees and expenses (including legal fees)......................................
Transfer agent's and registrar fees and expenses [Indemnification Premiums]............
Miscellaneous.......................................................................... 700,000
----------
Total..................................................................................
==========
</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 any such 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.
<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>
- -----------------------------------------------------------------------------------------------------------------
Date Purchaser Number of Debentures/ Warrants Consideration Exemption(s)
Shares of Notes Claimed*
Class A
Common Stock
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
privately
September30, James 120,000 $500,000 -- $1,025,000 negotiated sale
1998 Argyopoulos/ under Section
Argyopoulos 4(2) of the
Investor G.P. Securities Act.
- -----------------------------------------------------------------------------------------------------------------
privately
October 1, Jirka Rysavy -- $531,000 -- Stock of negotiated sale
1998 InnerBalance under Section
4(2) of the
Securities Act.
- -----------------------------------------------------------------------------------------------------------------
privately
December 7, Lynn Powers 40,000 $ 50,000 -- $ 100,000 negotiated sale
1998 under Section
4(2) of the
Securities Act.
- -----------------------------------------------------------------------------------------------------------------
privately
January 7, Mo Siegel 17,143 $ 75,000 -- $ 150,000 negotiated sale
1999 under Section
4(2) of the
Securities Act.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Date Purchaser Number of Debentures/ Warrants Consideration Exemption(s)
Shares of Notes Claimed*
Class A
Common Stock
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
April 20, 1999 Jeffrey Steiner 120,000 $500,000 -- $1,025,000 privately
negotiated sale
under Section
4(2) of the
Securities Act.
- -----------------------------------------------------------------------------------------------------------------
privately
May 6, 1999 Edward Snider 57,143 $250,000 -- $ 500,000 negotiated sale
under Section
4(2) of the
Securities Act.
- -----------------------------------------------------------------------------------------------------------------
privately
May 6, 1999 Herbert Simon 57,143 $250,000 -- $ 500,000 negotiated sale
under Section
4(2) of the
Securities Act.
- -----------------------------------------------------------------------------------------------------------------
privately
May 7, 1999 Mike Gilliand 22,857 $100,000 -- $ 200,000 negotiated sale
under Section
4(2) of the
Securities Act.
- -----------------------------------------------------------------------------------------------------------------
privately
May 6, 1999 Lennart 57,143 $250,000 -- $ 500,000 negotiated sale
and June 8, Perlhagen under Section
1999 4(2) of the
Securities Act.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* We believe that exemptions in addition to those specified above may exist
with respect to the listed transactions.
<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 Ernest & Young
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Exhibit No. Description
- --------------------------------------------------------------------------------
<S> <C>
23.2 Consent of Wendell T. Walker & Associates
- --------------------------------------------------------------------------------
23.3* Consent of Bartlit Beck Herman Palenchar & Scott (included
in Exhibit 5.1)
- --------------------------------------------------------------------------------
24.1 Power of Attorney, included on signature page
- --------------------------------------------------------------------------------
27.1 Financial Data Schedule
- --------------------------------------------------------------------------------
99.1 Financial Statements of Healing Arts Publishing, Inc.
- --------------------------------------------------------------------------------
</TABLE>
* To be filed by amendment.
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.
<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 July 19, 1999.
Gaiam, Inc.
By: /s/ Jirka Rysavy
____________________________
Jirka Rysavy
Chief Executive Officer
POWER OF ATTORNEY
KNOW BY ALL MEN THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Jirka Rysavy and Lynn Powers, and each of them, his
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, including, without limitation, any
registration statement filed pursuant to Rule 462 under the Securities Act of
1933, as amended, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents or any of them or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated opposite their names.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Signature Title Date
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Jirka Rysavy , Chairman of the Board and Chief July 19, 1999
Executive Officer
- -----------------------------------------------------------------------------------------------------------------------
Lynn Powers, President, Chief Operating Officer July 19, 1999
and director
- -----------------------------------------------------------------------------------------------------------------------
Pavel Bouska, Executive Vice President and July 19, 1999
Chief Information Officer
- -----------------------------------------------------------------------------------------------------------------------
Janet Mathews, Controller and July 19, 1999
principal financial officer
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT INDEX
<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 Ernest & Young
- ----------------------------------------------------------------------------------------------------------------------
23.2 Consent of Wendell T. Walker & Associates
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Exhibit No. Description
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
23.3* Consent of Bartlit Beck Herman Palenchar & Scott (included in Exhibit 5.1)
- ----------------------------------------------------------------------------------------------------------------------
24.1 Power of Attorney, included on signature page
- ----------------------------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule
- ----------------------------------------------------------------------------------------------------------------------
99.1 Financial Statements of Healing Arts Publishing, Inc.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* To be filed by amendment.
<PAGE>
Exhibit 10.1
Gaiam, Inc.
1999 Long-Term Incentive Plan
Section 1. Purpose. The purpose of this Plan is to advance the interests
of Gaiam and its shareholders by providing incentives to certain Eligible
Persons (as defined below) who contribute significantly to the strategic and
long-term performance objectives and growth of the Company.
Section 2. Definitions. The definitions applicable to this Plan are
provided in Appendix A.
Section 3. Administration. The Committee shall administer this Plan and
shall have all the powers vested in it by the terms of this Plan, such powers to
include exclusive authority to select the Eligible Persons to be granted Awards
under this Plan, to determine the type, size and terms of the Award to be made
to each Eligible Person selected, to modify the terms of any Award that has been
granted, to determine the time when Awards will be granted, to establish
performance objectives, to make any adjustments necessary or desirable as a
result of the granting of Awards to Eligible Persons located outside the United
States and to prescribe the form of the agreements evidencing Awards made under
this Plan. The Committee is authorized to interpret this Plan and the Awards
granted under this Plan, to establish, amend and rescind any rules and
regulations relating to this Plan, and to make any other determinations that it
deems necessary or desirable for the administration of this Plan. The Committee
may correct any defect or supply any omission or reconcile any inconsistency in
this Plan or in any Award in the manner and to the extent the Committee deems
necessary or desirable to carry it into effect. Any decision of the Committee in
the interpretation and administration of this Plan, as described this Plan,
shall lie within its sole and absolute discretion and shall be final, conclusive
and binding on all parties concerned. The Committee may act only by a majority
of its members in office, except that the members thereof may authorize any one
or more of their members or any officer of the Company to execute and deliver
documents or to take any other ministerial action on behalf of the Committee
with respect to Awards made or to be made to Participants.
No member of the Committee and no officer of the Company shall be liable
for anything done or omitted to be done by him, by any other member of the
Committee or by any officer of the Company in connection with the performance of
duties under this Plan, except for his own willful misconduct or as expressly
provided by statute. In addition to all other rights of indemnification and
reimbursement to which a member of the Committee and an officer of the Company
may be entitled, the Company shall indemnify and hold harmless each such member
or officer who was or is a party or is threatened to be made a party to any
threatened, pending or completed proceeding or suit in connection with the
performance of duties under this Plan against expenses (including reasonable
attorneys' fees), judgments, fines, liabilities, losses and amounts paid in
settlement actually and reasonably incurred by him in connection with such
proceeding or suit, except for his own willful misconduct or as expressly
provided otherwise by statute. Expenses (including reasonable attorneys' fees)
incurred by a such a member or officer in defending any such proceeding or suit
shall be paid by the Company in advance of the final disposition of such
proceeding or suit upon receipt of a written affirmation by such member or
officer of his good faith belief that he has met the standard of conduct
necessary for indemnification and a written undertaking by or on behalf of such
member or officer to repay such amount if it shall ultimately be determined that
he is not entitled to be indemnified by the Company as authorized in this
Section.
Section 4. Participation. Consistent with the purposes of this Plan, the
Committee shall have exclusive power to select the Eligible Persons who may
participate in this Plan and be granted Awards under this Plan. Eligible Persons
may be selected individually or by groups or categories, as determined by the
Committee in its discretion.
<PAGE>
Section 5. Awards under this Plan.
(a) Types of Awards. Awards under this Plan may include, but need not
be limited to, one or more of the following types, either alone or in any
combination thereof: (i) Stock Options, (ii) Stock Appreciation Rights,
(iii) Restricted Stock, (iv) Performance Grants and (v) any other type of
Award deemed by the Committee in its discretion to be consistent with the
purposes of this Plan (including, but not limited to, Awards of or options
or similar rights granted with respect to unbundled stock units or
components thereof, and Awards to be made to Participants who are foreign
nationals or are employed or performing services outside the United
States).
(b) Maximum Number of Shares that May be Issued. There may be issued
under this Plan (as Restricted Stock, in payment of Performance Grants,
pursuant to the exercise of Stock Options or Stock Appreciation Rights or
in payment of or pursuant to the exercise of such other Awards as the
Committee, in its discretion, may determine) an aggregate of not more than
4,000,000 Common Shares, subject to adjustment as provided in Section 15.
No Eligible Person may receive Awards under this Plan for more than
1,000,000 Common Shares in any one fiscal year of Gaiam, subject to
adjustment as provided in Section 15. Common Shares issued pursuant to this
Plan may be either authorized but unissued shares, treasury shares,
reacquired shares or any combination thereof. If any Common Shares issued
as Restricted Stock or otherwise subject to repurchase or forfeiture rights
are reacquired by the Company pursuant to such rights or, if any Award is
canceled, terminates or expires unexercised, any Common Shares that would
otherwise have been issuable pursuant thereto will be available for
issuance under new Awards.
(c) Rights with Respect to Common Shares and Other Securities. Except
as provided in subsection 8(c) with respect to Awards of Restricted Stock
and unless otherwise determined by the Committee in its discretion, a
Participant to whom an Award is made (and any person succeeding to such a
Participant's rights pursuant to this Plan) shall have no rights as a
shareholder with respect to any Common Shares or as a holder with respect
to other securities, if any, issuable pursuant to any such Award until the
date of the issuance of a stock certificate to him for such Common Shares
or other instrument of ownership, if any. Except as provided in Section 15,
no adjustment shall be made for dividends, distributions or other rights
(whether ordinary or extraordinary, and whether in cash, securities, other
property or other forms of consideration, or any combination thereof) for
which the record date is prior to the date such stock certificate or other
instrument of ownership, if any, is required to be issued based upon the
date any Award was exercised. In all events, a Participant with whom an
Award agreement is made to issue Common Shares in the future, shall have no
rights as a shareholder with respect to Common Shares related to such
agreement until issuance to him of a stock certificate representing such
shares.
Section 6. Stock Options. The Committee may sell Purchased Options or
grant other Stock Options either alone, or in conjunction with Associated
Awards, either at the time of grant or by amendment thereafter; provided that an
Incentive Stock Option may be granted only to Eligible Persons who are employees
of the Company and who have Associated Awards only to the extent that such
Associated Awards do not disqualify the Incentive Stock Option's status as such
under the Code. Each Stock Option granted or sold under this Plan shall be
evidenced by an agreement in such form as the Committee shall prescribe from
time to time in accordance with this Plan and shall comply with the applicable
terms and conditions of this Section and this Plan, and with such other terms
and conditions, including, but not limited to, restrictions upon the Stock
Option or the Common Shares issuable upon exercise thereof, as the Committee, in
its discretion, shall establish.
-2-
<PAGE>
(a) The exercise price of a Stock Option may be less than, equal to,
or greater than, the Fair Market Value of the Common Shares subject to such
Stock Option at the time the Stock Option is granted, as determined by the
Committee; provided, however, that in the case of an Incentive Stock Option
granted to an employee of the Company, the exercise price shall not be less
than the Fair Market Value of the Common Shares subject to such Stock
Option at the time the Stock Option is granted, or if granted to a Ten
Percent Employee, such exercise price shall not be less than 110% of such
Fair Market Value at the time the Stock Option is granted. In no event,
however, will the exercise price per share of a Stock Option be less than
the par value per share of a Common Share.
(b) The Committee shall determine the number of Common Shares to be
subject to each Stock Option. In the case of a Stock Option awarded in
conjunction with an Associated Award, the number of Common Shares subject
to an outstanding Stock Option may be reduced on an appropriate basis to
the extent that the Associated Award has been exercised, paid to or
otherwise received by the Participant, as determined by the Committee.
(c) Any Stock Option may be exercised during its term only at such
time or times and in such installments as the Committee may establish.
(d) A Stock Option shall not be exercisable:
(i) in the case of any Incentive Stock Option granted to a Ten
Percent Employee, after the expiration of five years from the date it
is granted, and, in the case of any other Stock Option, after the
expiration of ten years from the date it is granted; and
(ii) unless payment in full is made for the shares being acquired
thereunder at the time of exercise as provided in subsection 6(i).
(e) The Committee shall determine in its discretion and specify in
each agreement evidencing a Stock Option the effect, if any, the
termination of the Participant's employment with or performance of services
for the Company shall have on the exercisability of the Stock Option;
provided, however, that an Incentive Stock Option shall not be exercisable
at a time that is beyond the time an Incentive Stock Option may be
exercised in order to qualify as such under the Code.
(f) In the case of an Incentive Stock Option, the amount of the
aggregate Fair Market Value of Common Shares (determined at the time of
grant of the Stock Option) with respect to which incentive stock options
are exercisable for the first time by an employee of the Company during any
calendar year (under all such plans of his employer corporation and its
parent and subsidiary corporations) shall not exceed $100,000 or such other
amount as is specified in the Code.
(g) It is the intent of Gaiam that Nonqualified Stock Options granted
under this Plan not be classified as Incentive Stock Options, that the
Incentive Stock Options granted under this Plan be consistent with and
contain or be deemed to contain all provisions required under Section 422
and the other appropriate provisions of the Code and any implementing
regulations (and any successor provisions thereof), and that any
ambiguities in construction shall be interpreted in order to effectuate
such intent.
(h) A Purchased Option may contain such additional terms not
inconsistent with this Plan, including but not limited to the circumstances
under which the purchase price of such
-3-
<PAGE>
Purchased Option may be returned to the holder of the Purchased Option, as
the Committee may determine in its sole discretion.
(i) For purposes of payments made to exercise Stock Options, such
payment shall be made in such form (including, but not limited to, cash,
Common Shares, the surrender of another outstanding Award under this Plan
or any combination thereof) as the Committee may determine in its
discretion; provided, however, that, unless the Committee determines
otherwise, for purposes of making such payment in Common Shares, such
shares shall be valued at their Fair Market Value on the day of exercise
and shall have been held by the Participant for a period of at least six
(6) months.
Section 7. Stock Appreciation Rights. The Committee may grant Stock
Appreciation Rights either alone, or in conjunction with Associated Awards,
either at the time of grant or by amendment thereafter. Each Award of Stock
Appreciation Rights granted under this Plan shall be evidenced by an agreement
in such form as the Committee shall prescribe from time to time in accordance
with this Plan and shall comply with the applicable terms and conditions of this
Section and this Plan, and with such other terms and conditions, including, but
not limited to, restrictions upon the Award of Stock Appreciation Rights or the
Common Shares issuable upon exercise thereof, as the Committee, in its
discretion, shall establish.
(a) The Committee shall determine the number of Common Shares to be
subject to each Award of Stock Appreciation Rights. In the case of an Award
of Stock Appreciation Rights awarded in conjunction with an Associated
Award, the number of Common Shares subject to an outstanding Award of Stock
Appreciation Rights may be reduced on an appropriate basis to the extent
that the Associated Award has been exercised, paid to or otherwise received
by the Participant, as determined by the Committee.
(b) The Award of Stock Appreciation Rights shall not be exercisable:
(i) unless the Associated Award, if any, is at the time
exercisable;
(ii) if the Associated Award is a Stock Option and the Fair
Market Value per share of the Common Shares on the exercise date does
not exceed the exercise price per share of such Stock Option; and
(iii) if the Associated Award is an Incentive Stock Option and
the exercise of the Award of Stock Appreciation Rights would
disqualify the Incentive Stock Option as such under the Code.
(c) The Committee shall determine in its discretion and specify in
each agreement evidencing an Award of Stock Appreciation Rights the effect,
if any, the termination of the Participant's employment with or performance
of services for the Company shall have on the exercisability of the Award
of Stock Appreciation Rights.
(d) An Award of Stock Appreciation Rights shall entitle the holder to
exercise such Award or to surrender unexercised an Associated Award (or any
portion of such Associated Award) to Gaiam and to receive from Gaiam in
exchange thereof, without payment to Gaiam, that number of Common Shares
having an aggregate value equal to (or, in the discretion of the Committee,
less than) the excess of the Fair Market Value of one share, at the time of
such exercise, over the exercise price, times the number of shares subject
to the Award or the Associated Award, or portion thereof, that is so
exercised or surrendered, as the case may be. The
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Committee shall be entitled in its discretion to elect to settle the
obligation arising out of the exercise of a Stock Appreciation Right by the
payment of cash or Other Gaiam Securities or property, or other forms of
payment or any combination thereof, as determined by the Committee, equal
to the aggregate value of the Common Shares it would otherwise be obligated
to deliver. Any such election by the Committee shall be made as soon as
practicable after the receipt by the Committee of written notice of the
exercise of the Stock Appreciation Right.
(e) A Stock Appreciation Right may provide that it shall be deemed to
have been exercised at the close of business on the business day preceding
the expiration date of the Stock Appreciation Right or of the related Stock
Option (or other Award), or such other date as specified by the Committee,
if at such time such Stock Appreciation Right has a positive value. Such
deemed exercise shall be settled or paid in the same manner as a regular
exercise thereof as provided in subsection 7(d) of this Agreement.
Section 8. Restricted Stock. The Committee may grant Awards of Restricted
Stock either alone, or in conjunction with Associated Awards, either at the time
of grant or by amendment thereafter. Each Award of Restricted Stock under this
Plan shall be evidenced by an agreement in such form as the Committee shall
prescribe from time to time in accordance with this Plan and shall comply with
the applicable terms and conditions of this Section and this Plan, and with such
other terms and conditions as the Committee, in its discretion, shall establish.
(a) The Committee shall determine the number of Common Shares to be
issued to a Participant pursuant to the Award of Restricted Stock, and the
extent, if any, to which they shall be issued in exchange for cash, other
consideration, or both.
(b) Until the expiration of such period as the Committee shall
determine from the date on which the Award is granted and subject to such
other terms and conditions as the Committee in its discretion shall
establish (the "Restricted Period"), a Participant to whom an Award of
Restricted Stock is made shall be issued, but shall not be entitled to the
delivery of, a stock certificate representing the Common Shares subject to
such Award.
(c) Unless otherwise determined by the Committee in its discretion, a
Participant to whom an Award of Restricted Stock has been made (and any
person succeeding to such a participant's rights pursuant to this Plan)
shall have, after issuance of a certificate for the number of Common Shares
awarded and prior to the expiration of the Restricted Period, ownership of
such Common Shares, including the right to vote such Common Shares and to
receive dividends or other distributions made or paid with respect to such
Common Shares (provided that such Common Shares, and any new, additional or
different shares, or Other Gaiam Securities or property, or other forms of
consideration that the Participant may be entitled to receive with respect
to such Common Shares as a result of a stock split, stock dividend or any
other change in the corporation or capital structure of Gaiam, shall be
subject to the restrictions set forth in this Plan as determined by the
Committee in its discretion), subject, however, to the options,
restrictions and limitations imposed thereon pursuant to this Plan.
(d) The Committee shall determine in its discretion and specify in
each agreement evidencing an Award of Restricted Stock the effect, if any,
the termination of the Participant's employment with or performance of
services for the Company during the Restricted Period shall have on such
Award of Restricted Stock.
Section 9. Performance Grants. The Committee may grant Awards of
Performance Grants either alone, or in conjunction with Associated Awards,
either at the time of grant or by amendment
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thereafter. The Award of a Performance Grant to a Participant will entitle him
to receive a specified amount determined by the Committee (the "Actual Value"),
if the terms and conditions specified in this Plan and in the Award are
satisfied. Each Award of a Performance Grant shall be subject to the applicable
terms and conditions of this Section and this Plan, and to such other terms and
conditions, including but not limited to, restrictions upon any cash, Common
Shares, Other Gaiam Securities or property, or other forms of payment, or any
combination thereof, issued with respect to the Performance Grant, as the
Committee, in its discretion, shall establish, and shall be embodied in an
agreement in such form and substance as is determined by the Committee.
(a) The Committee shall determine the value or range of values of a
Performance Grant to be awarded to each Participant selected for an Award
and whether or not such a Performance Grant is granted in conjunction with
an Associated Award. As determined by the Committee, the maximum value of
each Performance Grant (the "Maximum Value") shall be: (i) an amount fixed
by the Committee at the time the Award is made or amended thereafter, (ii)
an amount that varies from time to time based in whole or in part on the
then current value of the Common Shares, Other Gaiam Securities or
property, or other securities or property, or any combination thereof or
(iii) an amount that is determinable from criteria specified by the
Committee. Performance Grants may be issued in different classes or series
having different names, terms and conditions. In the case of a Performance
Grant awarded in conjunction with an Associated Award, the Performance
Grant may be reduced on an appropriate basis to the extent that the
Associated Award has been exercised, paid to or otherwise received by the
Participant, as determined by the Committee.
(b) The award period ("Award Period") related to any Performance Grant
shall be a period determined by the Committee. At the time each Award is
made, the Committee shall establish performance objectives to be attained
within the Award Period as the means of determining the Actual Value of
such a Performance Grant. The performance objectives shall be based on such
measure or measures of performance, which may include, but need not be
limited to, the performance of the Participant, the Company or one or more
of its divisions or units, or any combination of the foregoing, as the
Committee shall determine, and may be applied on an absolute basis or be
relative to industry or other indices or any combination thereof. The
Actual Value of a Performance Grant shall be equal to its Maximum Value
only if the performance objectives are attained in full, but the Committee
shall specify the manner in which the Actual Value of Performance Grants
shall be determined if the performance objectives are met in part. Such
performance measures, the Actual Value or the Maximum Value, or any
combination thereof, may be adjusted in any manner by the Committee in its
discretion at any time and from time to time during or as soon as
practicable after the Award Period, if it determines that such performance
measures, the Actual Value or the Maximum Value, or any combination
thereof, are not appropriate under the circumstances.
(c) The Committee shall determine in its discretion and specify in
each agreement evidencing a Performance Grant the effect, if any, the
termination of the Participant's employment with or performance of services
for the Company during the Award Period shall have on such Performance
Grant.
(d) The Committee shall determine whether the conditions of a
Performance Grant have been met and, if so, shall ascertain the Actual
Value of the Performance Grant. If the Performance Grant has no Actual
Value, the Award and such Performance Grant shall be deemed to have been
canceled and the Associated Award, if any, may be canceled or permitted to
continue in effect in accordance with its terms. If the Performance Grant
has any Actual Value and:
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(i) was not awarded in conjunction with an Associated Award, the
Committee shall cause an amount equal to the Actual Value of the
Performance Grant earned by the Participant to be paid to him or his
permitted assignee or Beneficiary; or
(ii) was awarded in conjunction with an Associated Award, the
Committee shall determine, in accordance with criteria specified by
the Committee (A) to cancel the Performance Grant, in which event no
amount with respect thereto shall be paid to the Participant or his
permitted assignee or Beneficiary, and the Associated Award may be
permitted to continue in effect in accordance with its terms, (B) to
pay the Actual Value of the Performance Grant to the Participant or
his permitted assignee or Beneficiary as provided below, in which
event the Associated Award may be canceled or (C) to pay to the
Participant or his Beneficiary, the Actual Value of only a portion of
the Performance Grants, in which event all or a portion of the
Associated Award may be permitted to continue in effect in accordance
with its terms or be canceled, as determined by the Committee.
Such determination by the Committee shall be made as promptly as
practicable following the end of the Award Period or upon the earlier
termination of employment or performance of services, or at such other time
or times as the Committee shall determine, and shall be made pursuant to
criteria specified by the Committee.
(e) Payment of any amount with respect to the Performance Grants that
the Committee determines to pay as provided above shall be made by Gaiam as
promptly as practicable after the end of the Award Period or at such other
time or times as the Committee shall determine, and may be made in cash,
Common Shares, Other Gaiam Securities or property, or other forms of
payment, or any combination thereof or in such other manner, as determined
by the Committee in its discretion. Notwithstanding anything in this
Section to the contrary, the Committee may, in its discretion, determine
and pay out the Actual Value of the Performance Grants at any time during
the Award Period.
Section 10. Deferral of Compensation. The Committee shall determine
whether or not an Award shall be made in conjunction with the deferral of the
Participant's salary, bonus or other compensation, or any combination thereof,
and whether or not such deferred amounts may be:
(a) forfeited to the Company or to other Participants or any
combination thereof, under certain circumstances (which may include, but
need not be limited to, certain types of termination of employment or
performance of services for the Company);
(b) subject to increase or decrease in value based upon the attainment
of or failure to attain, respectively, certain performance measures; and/or
(c) credited with income equivalents (which may include, but need not
be limited to, interest, dividends or other rates of return) until the date
or dates of payment of the Award, if any.
Section 11. Deferred Payment of Awards. The Committee may specify that
the payment of all or any portion of cash, Common Shares, Other Gaiam Securities
or property, or any other form of payment, or any combination thereof, under an
Award shall be deferred until a later date. Deferrals shall be for such periods
or until the occurrence of such events, and upon such terms, as the Committee
shall determine in its discretion. Deferred payments of Awards may be made by
undertaking to make payment in the future based upon the performance of certain
investment equivalents (which may include, but need
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not be limited to, government securities, Common Shares, other securities,
property or consideration, or any combination thereof), together with such
additional amounts of income equivalents (which may be compounded and may
include, but need not be limited to, interest, dividends or other rates of
return or any combination thereof) as may accrue thereon until the date or dates
of payment, such investment equivalents and such additional amounts of income
equivalents to be determined by the Committee in its discretion.
Section 12. Transferability of Awards. A Participant's rights and
interest under this Plan or any Award may not be assigned or transferred,
hypothecated or encumbered in whole or in part either directly or by operation
of law or otherwise, including, but not by way of limitation, execution, levy,
garnishment, attachment, pledge, bankruptcy or in any other manner; provided,
however, the Committee may permit such transfer to a Permitted Transferee; and
provided, further, that, unless otherwise permitted by the Code, any Incentive
Stock Option granted pursuant to this Plan shall not be transferable other than
by will, by the laws of descent and distribution, or by a gift or through a
domestic relations order to a Permitted Transferee, and shall be exercisable
during the Participant's lifetime only by Participant or by such Permitted
Transferee who has acquired any Incentive Stock Option from Participant through
a gift or a domestic relations order.
Section 13. Amendment or Substitution of Awards under this Plan. The
terms of any outstanding Award under this Plan may be amended or modified from
time to time by the Committee in its discretion in any manner that it deems
appropriate (including, but not limited to, acceleration of the date of exercise
of any Award and/or payments thereunder) if the Committee could grant such
amended or modified Award under the terms of this Plan at the time of such
amendment or modification; provided that no such amendment or modification shall
adversely affect in a material manner any right of a Participant under the Award
without his written consent, unless the Committee determines in its discretion
that there have occurred or are about to occur significant changes in the
Participant's position, duties or responsibilities, or significant changes in
economic, legislative, regulatory, tax, accounting or cost/benefit conditions
that are determined by the Committee in its discretion to have or to be expected
to have a substantial effect on the performance of the Company, or any
affiliate, division or department thereof, on this Plan or on any Award under
this Plan. The Committee may, in its discretion, permit holders of Awards under
this Plan to surrender outstanding Awards in order to exercise or realize the
rights under other Awards, or in exchange for the grant of new Awards, or
require holders of Awards to surrender outstanding Awards as a condition
precedent to the grant of new Awards under this Plan.
Section 14. Termination of a Participant. For all purposes under this
Plan, the Committee shall determine whether a Participant has terminated
employment with, or the performance of services for, the Company; provided,
however, an absence or leave approved by the Company, to the extent permitted by
applicable provisions of the Code, shall not be considered an interruption of
employment or performance of services for any purpose under this Plan.
Section 15. Dilution and Other Adjustments. If any change in the
outstanding Common Shares of the Company occurs by reason of any stock split of
or stock dividend on the Common Shares, then, except as otherwise determined by
the Committee, the terms of any outstanding Awards shall be equitably adjusted.
If any change in the outstanding Common Shares occurs by reason of any split-up,
split-off, spin-off, recapitalization, merger, consolidation, rights offering,
reorganization, combination or exchange of shares, sale by the Company of all of
its assets, distribution to shareholders (other than a stock dividend or a
normal cash dividend on the Common Shares), or other extraordinary or unusual
event (other than a stock split of the Common Stock as provided above), then the
Committee may determine, in its discretion, to terminate all outstanding Awards
immediately prior to the consummation of any such event, or make an equitable
adjustment in the terms of any outstanding Award and/or the number of Common
Shares available for Awards. Any such termination or adjustment made by the
Committee and
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shall be final, conclusive and binding for all purposes of the Plan. Unless
otherwise provided by the Committee, all outstanding Awards shall terminate
immediately prior to the consummation of any dissolution or liquidation of the
Company.
Section 16. Designation of Beneficiary by Participant. A Participant may
name a beneficiary to receive any payment to which he may be entitled with
respect to any Award under this Plan in the event of his death, on a written
form to be provided by and filed with the Committee, and in a manner determined
by the Committee in its discretion (a "Beneficiary"). The Committee reserves the
right to review and approve Beneficiary designations. A Participant may change
his Beneficiary from time to time in the same manner, unless such Participant
has made an irrevocable designation. Any designation of a Beneficiary under this
Plan (to the extent it is valid and enforceable under applicable law) shall be
controlling over any other disposition, testamentary or otherwise, as determined
by the Committee in its discretion. If no designated Beneficiary survives the
Participant and is living on the date on which any amount becomes payable to
such a Participant's Beneficiary, such payment will be made to the legal
representatives of the Participant's estate, and the term "Beneficiary" as used
in this Plan shall be deemed to include such person or persons. If there are any
questions as to the legal right of any Beneficiary to receive a distribution
under this Plan, the Committee in its discretion may determine that the amount
in question be paid to the legal representatives of the estate of the
Participant, in which event the Company, the Board, the Committee, the
Designated Administrator (if any), and the members thereof, will have no further
liability to anyone with respect to such amount.
Section 17. Financial Assistance. If the Committee determines that such
action is advisable, the Company may assist any Participant in obtaining
financing from the Company (or under any program of the Company approved
pursuant to applicable law), or from a bank or other third party, on such terms
as are determined by the Committee, and in such amount as is required to
accomplish the purposes of this Plan, including, but not limited to, to permit
the exercise of an Award, the participation therein, and/or the payment of any
taxes with respect thereto. Such assistance may take any form that the Committee
deems appropriate, including, but not limited to, a direct loan from the
Company, a guarantee of the obligation by the Company or the maintenance by the
Company of deposits with such bank or third party.
Section 18. Miscellaneous Provisions.
(a) Any proceeds from Awards shall constitute general funds of Gaiam .
(b) No fractional shares may be delivered under an Award, but in lieu
thereof a cash or other adjustment may be made as determined by the
Committee in its discretion.
(c) No Eligible Person or other person shall have any claim or
right to be granted an Award under this Plan. Determinations made by the
Committee under this Plan need not be uniform and may be made selectively
among Eligible Persons under this Plan, whether or not such Eligible
Persons are similarly situated. Neither this Plan nor any action taken
hereunder shall be construed as giving any Eligible Person any right to
continue to be employed by or perform services for the Company, and the
right to terminate the employment of or performance of services by Eligible
Persons at any time and for any reason is specifically reserved.
(d) No Participant or other person shall have any right with
respect to this Plan, the Common Shares reserved for issuance under this
Plan or in any Award, contingent or otherwise, until written evidence of
the Award shall have been delivered to the recipient and all the terms,
conditions and provisions of this Plan and the Award applicable to such
recipient (and each person claiming under or through him) have been met.
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(e) No Common Shares, Other Gaiam Securities or property, other
securities or property or other forms of payment shall be issued hereunder
with respect to any Award unless counsel for Gaiam shall be satisfied that
such issuance will be in compliance with applicable law and any applicable
rules of any stock exchange or other market quotation system on which
Common Shares are listed.
(f) It is the intent of Gaiam that this Plan comply in all respects
with Rule 16b-3 and Section 162(m) with respect to Awards granted to
executive officers of Gaiam, that any ambiguities or inconsistencies in
construction of this Plan be interpreted to give effect to such intention
and that if any provision of this Plan is found not to be in compliance
with Rule 16b-3 or Section 162(m), such provision shall be deemed null and
void with respect to Awards granted to executive officers of Gaiam to the
extent required to permit such Awards to comply with Rule 16b-3 and Section
162(m). It is also the intent of Gaiam that this Plan comply in all
respects with the provisions of the Code providing favorable treatment to
Incentive Stock Options, that any ambiguities or inconsistencies in
construction of this Plan be interpreted to give effect to such intention
and that if any provision of this Plan is found not to be in compliance
with the Incentive Stock Option provisions of the Code, such provision
shall be deemed null and void with respect to Incentive Stock Options
granted to employees of the Company to the extent required to permit such
Incentive Stock Options to receive favorable treatment under the Code.
(g) The Company shall have the right to deduct from any payment made
under this Plan any federal, state, local or foreign income or other taxes
required by law to be withheld with respect to such payment. It shall be a
condition to the obligation of Gaiam to issue Common Shares, Other Gaiam
Securities or property, other securities or property, or other forms of
payment, or any combination thereof, upon exercise, settlement or payment
of any Award under this Plan, that the Participant (or any Beneficiary or
person entitled to act) pay to Gaiam, upon its demand, such amount as may
be required by the Company for the purpose of satisfying any liability to
withhold federal, state, local or foreign income or other taxes. If the
amount requested is not paid, Gaiam may refuse to issue Common Shares,
Other Gaiam Securities or property, other securities or property, or other
forms of payment, or any combination thereof. Notwithstanding anything in
this Plan to the contrary, the Committee may, in its discretion, permit an
Eligible Person (or any Beneficiary or person entitled to act) to elect to
pay a portion or all of the amount requested by the Company for such taxes
with respect to such Award, at such time and in such manner as the
Committee shall deem to be appropriate (including, but not limited to, by
authorizing Gaiam to withhold, or agreeing to surrender to Gaiam on or
about the date such tax liability is determinable, Common Shares, Other
Gaiam Securities or property, other securities or property, or other forms
of payment, or any combination thereof, owned by such person or a portion
of such forms of payment that would otherwise be distributed, or have been
distributed, as the case may be, pursuant to such Award to such person,
having a Fair Market Value equal to the amount of such taxes).
(h) The expenses of this Plan shall be borne by the Company; provided,
however, the Company may recover from a Participant or his Beneficiary,
heirs or assigns any and all damages, fees, expenses and costs incurred by
the Company arising out of any actions taken by a Participant in breach of
this Plan or any agreement evidencing such Participant's Award.
(i) This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Award under this Plan, and rights to
the payment of Awards shall be no greater than the rights of the Company's
general creditors.
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(j) By accepting any Award or other benefit under this Plan, each
Participant and each person claiming under or through him shall be
conclusively deemed to have indicated his acceptance and ratification of,
and consent to, any action taken under this Plan by the Company, the Board,
the Committee or the Designated Administrator (if applicable).
(k) The appropriate officers of the Company shall cause to be filed
any reports, returns or other information regarding Awards hereunder of any
Common Shares issued pursuant hereto as may be required by applicable law
and any applicable rules of any stock exchange or other market quotation
system on which Common Shares are listed.
(l) The validity, construction, interpretation, administration and
effect of this Plan, and of its rules and regulations, and rights relating
to this Plan and to Awards granted under this Plan, shall be governed by
the substantive laws, but not the choice of law rules, of the State of
Colorado.
(m) Records of the Company shall be conclusive for all purposes under
this Plan or any Award, unless determined by the Committee to be incorrect.
(n) If any provision of this Plan or any Award is held to be illegal
or invalid for any reason, the illegality or invalidity shall not affect
the remaining provisions of this Plan or any Award, but such provision
shall be fully severable, and this Plan or Award, as applicable, shall be
construed and enforced as if the illegal or invalid provision had never
been included in this Plan or Award, as applicable.
(o) The terms of this Plan shall govern all Awards under this Plan and
in no event shall the Committee have the power to grant any Award under
this Plan that is contrary to any of the provisions of this Plan.
(p) For purposes of interpretation of this Plan, the masculine pronoun
includes the feminine and the singular includes the plural wherever
appropriate.
Section 19. Plan Amendment or Suspension. This Plan may be amended or
suspended in whole or in part at any time from time to time by the Board. No
amendment of this Plan shall adversely affect in a material manner any right of
any Participant with respect to any Award previously granted without such
Participant's written consent, except as permitted under Section 13.
Section 20. Plan Termination. This Plan shall terminate upon the earlier
of the following dates or events to occur:
(a) upon the adoption of a resolution of the Board terminating this
Plan; or
(b) the tenth anniversary of the Effective Date; provided, however,
that the Board may, prior to such date, extend the term of this Plan for an
additional period of up to five years for the grant of Awards other than
Incentive Stock Options. No termination of this Plan shall materially alter
or impair any of the rights or obligations of any person, without his
consent, under any Award previously granted under this Plan, except that
subsequent to termination of this Plan, the Committee may make amendments
or modifications permitted under Section 13.
Section 21. Effective Date. This Plan shall be effective, and Awards may
be granted under this Plan, on or after the Effective Date.
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ADOPTED BY THE BOARD: ___________, 1999
EFFECTIVE DATE: ___________, 1999
EXECUTED to evidence this Gaiam, Inc. 1999 Long-Term Incentive Plan adopted
by the Board on __________, 1999.
GAIAM, INC.
By:
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APPENDIX A
The following terms shall have the meaning indicated:
(a) "Actual Value" has the meaning set forth in Section 9.
(b) "Associated Award" shall mean an Award granted concurrently or
subsequently in conjunction with another Award.
(c) "Award" shall mean an award of rights to an Eligible Person under
this Plan.
(d) "Award Period" has the meaning set forth in subsection 9(b).
(e) "Beneficiary" has the meaning set forth in Section 16.
(f) "Board" shall mean the board of directors of Gaiam.
(g) "Code" shall mean the Internal Revenue Code of 1986, as it now
exists or may be amended from time to time, and the rules and regulations
promulgated thereunder, as they may exist or may be amended from time to
time.
(h) "Committee" shall mean the person or persons responsible for
administering the Plan. The Board shall constitute the Committee until the
Board appoints a Board Committee, after which time the Board Committee
shall constitute the Committee, provided, however, that at any time the
Board may designate itself as the Committee or designate itself to
administer certain of the Committee's authority under the Plan, including
administering certain Awards under the Plan. The Board or the Board
Committee may designate a Designated Administrator to constitute the
Committee or to administer certain of the Committee's authority under the
Plan, including administering certain Awards under the Plan, subject to the
right of the Board or the Board Committee, as applicable, to revoke its
designation at any time and to make such designation on such terms and
conditions as it may determine in its discretion. For purposes of this
definition, the "Board Committee" shall mean a committee of the Board
designated by the Board to administer this Plan. Except as otherwise
determined by the Board, the Board Committee (i) shall be comprised of not
fewer than two directors, (ii) shall meet any applicable requirements under
Rule 16b-3, including any requirement that the Board Committee consist of
"nonemployee directors" (as defined in Rule 16b-3), (iii) shall meet any
applicable requirements under Section 162(m), including any requirement
that the Board Committee consist of "outside directors" (as defined in
Treasury Regulation (S)1.162-27(e)(3)(i) or any successor regulation), and
(iv) shall meet any applicable requirements of any stock exchange or other
market quotation system on which Common Shares are listed. For purposes of
this definition, the "Designated Administrator" shall mean a person or
person designated by the Board or a Board Committee to act as a Designated
Administrator pursuant to this Plan. Except as otherwise determined by the
Board, a Designated Administrator shall only be appointed if Rule 16b-3
permits such appointment and the exercise of any authority without
adversely affecting the ability of Awards to officers of Gaiam to comply
with the conditions for Rule 16b-3 or Section 162(m).
(i) "Company" shall mean Gaiam and any parent or subsidiary of Gaiam.
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(j) "Common Shares" shall mean shares of Class A common stock, par
value $0.0001 per share, of Gaiam and stock of any other class into which
such shares may thereafter be changed.
(k) "Effective Date" shall mean the date the Board adopts this Plan.
(l) "Eligible Person(s)" shall mean those persons who are full or
part-time employees of the Company or other individuals who perform
services for the Company, including, without limitation, directors who are
not employees of the Company and consultants and independent contractors
who perform services for the Company.
(m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
it now exists or may be amended from time to time, and the rules
promulgated thereunder, as they may exist or may be amended from time to
time.
(n) "Fair Market Value" shall mean such value rounded up to the
nearest cent as determined by the Committee in accordance with applicable
law.
(o) "Incentive Stock Option" shall mean a Stock Option that is an
incentive stock option as defined in Section 422 of the Code. Incentive
Stock Options are subject, in part, to the terms, conditions and
restrictions described in Section 6.
(p) "Maximum Value" has the meaning set forth in subsection 9(a).
(q) "Gaiam" shall mean Gaiam, Inc., a Colorado corporation.
(r) "Nonqualified Stock Option" shall mean a Stock Option that is not
an incentive stock option as defined in Section 422 of the Code.
Nonqualified Stock Options are subject, in part, to the terms, conditions
and restrictions described in Section 6.
(s) "Other Gaiam Securities" shall mean Gaiam securities (which may
include, but need not be limited to, unbundled stock units or components
thereof, debentures, preferred stock, warrants, securities convertible into
Common Shares or other property) other than Common Shares.
(t) "Participant" shall mean an Eligible Person to whom an Award has
been granted under this Plan.
(u) "Performance Grant" shall mean an Award subject, in part, to the
terms, conditions and restrictions described in Section 9, pursuant to
which the recipient may become entitled to receive cash, Common Shares,
Other Gaiam Securities or property, or other forms of payment, or any
combination thereof, as determined by the Committee.
(v) "Permitted Transferee" means (i) any person defined as an employee
in the Instructions to Registration Statement Form S-8 promulgated by the
Securities and Exchange Commission, as such Form may be amended from time
to time, which persons include, as of the date of adoption of the Plan, (a)
executors, administrators or beneficiaries of the estates of deceased
Participants, guardians or members of a committee for incompetent former
Participants, or similar persons duly authorized by law to administer the
estate or assets of former Participants, and (b) Participants' family
members who acquire Awards from the Participant other than for value,
through a gift or a domestic relations order. For purposes of this
definition, "family
-14-
<PAGE>
member" includes any child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, former spouse, sibling, niece, exercised or
surrendered, as the case may be. The nephew, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-nin-law, or sister-in-law, including
adoptive relationships, any person sharing the Participant's household
(other than a tenant or employee), a trust in which these persons have more
than fifty percent of the beneficial interest, a foundation in which these
persons (or the Participant) control the management of assets, and any
other entity in which these persons (or the Participant) own more than
fifty percent of the voting interests. For purposes of this definition,
neither (i) a transfer under a domestic relations order in settlement of
marital property rights; nor (ii) a transfer to an entity in which more
than fifty percent of the voting interests are owned by family members (or
the Participant) in exchange for an interest in that entity is considered a
transfer for "value".
(w) "Plan" shall mean this Gaiam, Inc. 1999 Long-Term Incentive Plan.
(x) "Purchased Option" shall mean a Stock Option that is sold to an
Eligible Person at a price determined by the Committee. Purchased Options
are subject, in part, to the terms, conditions and restrictions described
in Section 6.
(y) "Restricted Period" has the meaning set forth in subsection 8(b).
(z) "Restricted Stock" shall mean an Award of Common Shares that are
issued subject, in part, to the terms, conditions and restrictions
described in Section 8.
(aa) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities
and Exchange Commission under the Exchange Act and any successor rule.
(bb) "Section 162(m)" shall mean (S)162(m) of the Code, any rules or
regulations promulgated thereunder, as they may exist or may be amended
from time to time, or any successor to such section.
(cc) "Stock Appreciation Right" shall mean an Award of a right to
receive (without payment to Gaiam) cash, Common Shares, Other Gaiam
Securities or property, or other forms of payment, or any combination
thereof, as determined by the Committee, based on the increase in the value
of the number of Common Shares specified in the Stock Appreciation Right.
Stock Appreciation Rights are subject, in part, to the terms, conditions
and restrictions described in Section 7.
(dd) "Stock Option" shall mean an Award of a right to purchase Common
Shares. The term Stock Option shall include Nonqualified Stock Options,
Incentive Stock Options and Purchased Options.
(ee) "Ten Percent Employee" shall mean an employee of the Company who
owns stock representing more than ten percent of the voting power of all
classes of stock of Gaiam or any parent or subsidiary of Gaiam.
(ff) "Treasury Regulation" shall mean a final, proposed or temporary
regulation of the Department of Treasury under the Code and any successor
regulation.
-15-
<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, 8 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 use of our report dated June 23, 1999, on the financial
statements of Healing Arts Publishing, Inc. as of and for the nine month period
ended September 30, 1998, 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
July 19, 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
July 19, 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
July 19,1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1998
<PERIOD-END> JAN-01-1998 JAN-01-1997
<CASH> 1,409,939 1,611,793
<SECURITIES> 1,633,905 38,333
<RECEIVABLES> 2,671,188 406,772
<ALLOWANCES> 67,915 31,000
<INVENTORY> 3,393,712 1,648,083
<CURRENT-ASSETS> 11,082,510 4,779,555
<PP&E> 2,078,610 1,659,159
<DEPRECIATION> 998,916 562,271
<TOTAL-ASSETS> 16,676,512 5,984,567
<CURRENT-LIABILITIES> 11,163,987 4,343,768
<BONDS> 0 0
0 0
0 0
<COMMON> 821 805
<OTHER-SE> 3,660,314 1,573,606
<TOTAL-LIABILITY-AND-EQUITY> 16,676,512 5,984,567
<SALES> 30,738,540 19,897,690
<TOTAL-REVENUES> 30,738,540 19,897,690
<CGS> 13,173,536 8,462,151
<TOTAL-COSTS> 16,580,161 12,002,028
<OTHER-EXPENSES> (696,992) (1,820,034)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 308,501 236,699
<INCOME-PRETAX> 1,373,334 1,016,846
<INCOME-TAX> 251,955 362,534
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 261,598 0
<CHANGES> 0 0
<NET-INCOME> 859,781 654,312
<EPS-BASIC> .11 .08
<EPS-DILUTED> .11 .08
</TABLE>
<PAGE>
Exhibit 99.1
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 30, 1998, and the related statements of operations,
stockholders' deficit and cash flows for the nine month period then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Healing Arts Publishing, Inc.
at September 30, 1998, and the results of its operations and its cash flows for
the nine month period then ended in conformity with generally accepted
accounting principles.
Denver, Colorado
June 25, 1999
<PAGE>
HEALING ARTS PUBLISHING, INC.
BALANCE SHEET
September 30, 1998
<TABLE>
<S> <C>
Assets
Current assets:
Accounts receivable, net of allowance for doubtful
accounts of $126,580 $ 1,230,040
Inventory, net 646,219
Deferred advertising costs 274,106
Prepaid and other current assets 99,444
-----------
Total current assets 2,249,809
Property and equipment, net 126,173
Capitalized production costs, net 460,077
Other assets 59,879
-----------
Total assets $ 2,895,938
===========
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 1,757,629
Accrued liabilities 973,293
Notes payable and other 1,837,593
-----------
Total current liabilities 4,568,515
Stockholders' deficit:
Common stock, no par value, 10,000 shares
authorized, 100 shares issued 10
Accumulated deficit (1,672,587)
-----------
Total stockholders' deficit (1,672,577)
-----------
Total liabilities and stockholders' deficit $ 2,895,938
===========
</TABLE>
See accompanying notes.
<PAGE>
HEALING ARTS PUBLISHING, INC.
STATEMENT OF OPERATIONS
Nine months ended September 30, 1998
Net revenue $6,513,679
Cost of goods sold 2,868,696
----------
Gross profit 3,644,983
Expenses:
Selling and operating 3,056,626
Corporate, general and administrative 810,398
----------
Total expenses 3,867,024
----------
Loss from operations (222,041)
Interest expense and other (61,160)
----------
Net loss $ (283,201)
==========
See accompanying notes.
<PAGE>
HEALING ARTS PUBLISHING, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
Nine months ended September 30, 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 - (283,201) (283,201)
-------- ----------- -----------
Balance at September 30, 1998 $10 $(1,672,587) $(1,672,577)
======== =========== ===========
</TABLE>
See accompanying notes.
<PAGE>
HEALING ARTS PUBLISHING, INC.
STATEMENT OF CASH FLOWS
Nine months ended September 30, 1998
<TABLE>
<S> <C>
Operating activities
Net loss $ (283,201)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 35,236
Changes in operating assets and liabilities:
Accounts receivable (91,938)
Inventory 315,483
Deferred advertising costs (117,370)
Prepaid assets (25,832)
Capitalized production costs (61,340)
Other assets (25,269)
Accounts payable (291,179)
Accrued liabilities (410,202)
----------
Net cash used by operating activities (955,612)
Investing activities
Purchase of property and equipment (26,101)
----------
Net cash used by investing activities (26,101)
Financing activities
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 981,713
----------
Net change in cash and cash equivalents -
Cash and cash equivalents at beginning of year -
----------
Cash and cash equivalents at end of year $ -
==========
</TABLE>
See accompanying notes.
<PAGE>
HEALING ARTS PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 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.
In September 1998, the Company contributed the net assets and liabilities of the
Company to Healing Arts Publishing, LLC for a 33% ownership interest in LLC,
valued at $1.3 million. Gaiam, Inc., a Colorado based provider of services and
products to customers who value the environment, a sustainable economy and
healthy lifestyles, acquired a 67% ownership of the LLC for approximately $2.5
million in consideration, including $100k paid to the Company's sole
shareholder for a covenant not to compete. Prior to the acquisition which was
closed in _____, 1998, Gaiam, Inc. advanced $1.7 million in the form of two
promissory notes and assumed a line of credit agreement (see Note 3).
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.
<PAGE>
HEALING ARTS PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
1. Summary of Significant Accounting Policies (continued)
Deferred Advertising Costs
Deferred costs primarily relate to preparation, printing and distribution of
catalogs. Such costs are deferred for financial reporting purposes until the
catalogs are distributed, then amortized over succeeding periods (not to exceed
seven months) on the basis of estimated sales. Historical sales statistics are
the principal factor used in estimating the amortization rate. Other
advertising and promotional costs are expensed as incurred. Advertising costs
incurred were $493,992 for the period ended September 30, 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 30, 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 $214,000 for the period ended September 30, 1999 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.
<PAGE>
HEALING ARTS PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
1. Summary of Significant Accounting Policies (continued)
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. For
the period ended September 30, 1998, the Company's three largest trade customers
comprised approximately 28% of the accounts receivable balance.
2. Property and Equipment
At September 30, 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 30, 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 30, 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.
<PAGE>
HEALING ARTS PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
4. Leases
As of September 30, 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 30,
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.
