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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Commission File Number 0-27517
GAIAM, INC.
(Exact name of registrant as specified in its charter)
COLORADO 84-1113527
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
360 INTERLOCKEN BLVD., SUITE 300
BROOMFIELD, CO 80021
(Address of principal executive offices)
(303) 464-3600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.0001 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in a definitive proxy or
information statement incorporated by reference to Part III of this Form
10-K or any amendment to this Form 10-K [ ___]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant was approximately $46,716,066 as of
March 24, 2000, based upon the closing price on the Nasdaq National Market
reported for such date. As of March 24, 2000, 5,441,537 shares of the
Registrant's $.0001 par value Class A common stock and 5,400,000 shares of
the Registrant's $.0001 par value Class B common stock were outstanding.
Shares of Common Stock held by each executive officer and director and by
each person who beneficially owns more than 5% of the outstanding Common
Stock have been excluded in that such person may, under certain
circumstances, be deemed to be affiliates. This determination for
executive officer or affiliate status is not necessarily a conclusive
determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or portions thereof) are incorporated by reference
into the Parts of this Form 10-K noted:
Part III incorporates by reference from the definitive proxy statement for
the registrant's 2000 Annual Meeting of Stockholders to be filed with the
Commission pursuant to Regulation 14A not later than 120 days after the end
of the fiscal year covered by this Form.
Gaiam, Inc.
-----------
Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1999
Part I
Item 1. Business..........................................................
Item 2. Properties........................................................
Item 3. Legal Proceedings.................................................
Item 4. Submission of Matters to a Vote of Security Holders...............
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...........................................................
Item 6. Selected Financial and Operating Data.............................
Item 7. Management's Discussion and Analysis..............................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........
Item 8. Financial Statements and Supplementary Data.......................
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.............................................
Part III
Item 10. Directors and Executive Officers of the Registrant.................
Item 11. Executive Compensation.............................................
Item 12. Security Ownership of Certain Beneficial Owners and Management.....
Item 13. Certain Relationships and Related Transactions.....................
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...
This report may contain forward-looking statements that involve risks and
uncertainties. When used in this discussion, the words "anticipate,"
"believe," "estimate," "expect," and similar expressions as they relate to
the Company or its management are intended to identify such forward-looking
statements. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of
certain factors set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Market Risk" and elsewhere
in this report. Risks and uncertainties that could cause actual results to
differ include, without limitation, competition, pricing, brand reputation,
aquisitions, our shift in emphasis to Internet sales, security and
information systems, consumer trends, customer interest in our products,
general economic conditions, and the effect of government regulation. 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 report. We undertake no obligation to update any forward-looking
information.
Part I
Item 1. Business
Gaiam
Gaiam, Inc. (the "Company" or "Gaiam") is a lifestyle company that markets to
customers who value the environment, healthy living, a sustainable economy and
personal development. The Company is dedicated to providing a broad selection of
high quality information, goods and services in an inviting and customer
friendly manner through catalogs, the internet, and 15,000 retail points as well
as TV broadcasters including leading names such as Discovery, Borders,
Musicland, Amazon.com and Target. We provide customers with natural and healthy
alternatives to traditional products for the home, the person and the planet.
We strive to serve consumers who live a liftstyle that places a high value on
promoting healthy living and personal development, contributing to the
sustainability of the Earth's natural resources and enhancing the quality of the
Earth's environment. In our view, these consumers make purchasing decisions for
goods and services based on these values, in addition to the traditional
criteria of price and performance. We believe that these consumers, whom we
refer to as "Cultural Creatives," are growing in number, as evidenced by the
growth of our customer base. Cultural Creatives tend to be well-educated
consumers, with a median age of 42, a 60/40 women-to-men ratio and an average
annual income of $52,000.
Our History
Gaiam was founded in Boulder, Colorado in 1988 to support "Conscious Commerce",
the practice of making purchasing decisions based on lifestyle and values. In
1995, we began to expand our business nationally. In 1996, Gaiam made a large
investment in infrastructure and operating systems to support rapid growth. In
1998, a team of key executives joined Gaiam to help facilitate future growth.
The LOHAS Industry
According to Natural Business Communications, the LOHAS (Lifestyles of Health
and Sustainability) industry will increase to $230 billion in sales in the year
2000 in the United States alone. Five sectors shape the industry: Sustainable
Economy, Healthy Living, Alternative Healthcare, Personal Development, and
Ecological Lifestyles.
The Sustainable Economy sector is comprised of environmental management
services, renewable energy, energy conservation, recycling and recycled goods,
sustainable manufacturing processes and related services and information.
The Healthy Living sector includes natural and organic foods, dietary
supplements, personal care products and related information and services.
Alternative Healthcare includes health and wellness solutions and alternative
health practices. The Journal of American Medical Association conducted a study
in 1998 that concluded 83 million Americans practiced some sort of alternative
healthcare in 1997 accounting for $27 billion, mostly out of pocket expense.
The Personal Development sector includes solutions, information, products and
experiences relating to mind, body and spiritual development. This sector is
being enhanced by the business-to-business component fueled by companies
offering yoga and other stress reducing fitness alternatives to their employees.
A survey by Wall Street Journal found that 23% of adults surveyed did yoga,
meditation or other similar practices.
Ecological Lifestyles include environmentally friendly cleaning and household
products, green and organic cotton bedding and clothing, and eco-tourism.
According to Natural Business Communication, this may be the fastest growing
segment of the industry as business-to-business industries and consumer services
such as the hospitality industry are pressured by consumers to incorporate these
products and services into their business offerings.
Gaiam participates in all five segments of the LOHAS industry.
Our Core Values
Gaiam's approach to business is based on our core values:
We emphasize integrity in all our relationships. We value the environment and
view all resources as precious assets. Living our beliefs is more than just the
right thing to do; it is the only path to take. 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 Core Competencies
We believe the following factors have contributed to our growth and success:
. Focus On Large Market
Gaiam believes that the expansion and fast growth of the LOHAS industry is being
fueled by Conscious Commerce, a trend of making purchasing decisions based on
Lifestyle and personal values, driven by a group called Cultural Creatives. A
study published by the Institute of Noetic Sciences in 1996 coined the term
"Cultural Creatives." Paul Ray, who authorized this study, has since agreed to
join our board of directors, authored this study. The article estimates that
this growing population segment, which has in common the values of environmental
awareness, healthy lifestyles and personal development, numbered 44 million
adults in the United States alone in 1996 and according to Paul Ray, grew to 50
million in 1998.
Gaiam targets Cultural Creatives and believes that its customer demographics
contribute significantly to its high average order value of $90 for the year
ended December 31, 1999 and $100 on Gaiam.com, as compared to a lower average
for the direct marketing industry and the e-commerce sector.
. Experienced Executive Team
Gaiam has an experienced team of corporate managers. Our founder and Chief
Executive Officer, Jirka Rysavy, was the founder and Chief Executive Officer of
Corporate Express, Inc., which he built to a Fortune 500 company, and founder
and CEO of Crystal Market, Inc., which was sold to become the first store of
Wild Oats Markets. Our President and Chief Operating Officer, Lynn Powers, has
over 15 years of senior management experience in the retail industry as a Senior
Vice President of Merchandising, Marketing and Strategic Planning of Miller's
Outpost, which she helped to grow from a $25 million startup to over $500
million in revenues. Our Chief Information Officer, Pavel Bouska, was a member
of the founding team and an officer of Corporate Express for over 10 years,
serving in various positions, including Chief Information Officer and Vice
President of Information Systems.
. Distinctive, Branded Products
Gaiam offers information, proprietary products and services under the Harmony,
InnerBalance and Living Arts brand names. These products appeal to Gaiam's well-
educated customers and are not widely available in conventional stores. These
products are designed to enhance customers' lifestyles and experiences and
provide healthy, natural solutions while being eco-friendly and promoting a
sustainable economy.
. Exceptional Customer Service
Gaiam maintains a customer-focused approach at all stages of its business to
build long-term customer relationships based on loyalty and trust. We ensure
that we have on hand inventory to support 93% of in-stock orders. It is our
practice to ship each order no later than the next business day. According to
Jupiter Communications, 90% of online customers prefer human interaction when
they require customer service. Our in-house customer service department includes
product specialists, who have specific product knowledge and assist customers in
selecting products and solutions that meet their needs, design, price and style
criteria. Gaiam also enhances its customer service through initiatives such as
extensive product training for customer service representatives and
unconditional return guarantees. We believe that, by offering exceptional
customer service, we encourage repeat purchases by our customers, enhance our
brand identity and reputation and build stronger relationships with our
customers.
. Established Infrastructure
Gaiam has invested in its physical facilities, technology and information
systems. In 1996, we established our 64,000 square foot fulfillment center in
Cincinnati, Ohio, a facility that is in the central United States and
conveniently located to hubs for major shipping companies. This location allows
us to achieve shipping cost efficiency to most locations across the Continental
United States. It is located within 30 minutes of both UPS and Airborne hubs. In
the same year, we installed our supply chain management information system to
support virtually all segments of our business, including merchandising,
customer database management and marketing, order processing, fulfillment,
inventory management, customer service and financial reporting. This investment
reduced our costs of fulfillment by providing an integrated system that reduces
labor costs and times needed to procure inventory and fill orders. This existing
infrastructure has also allowed us to integrate acquired businesses in an
efficient and cost-effective manner. Our existing infrastructure also gives us
an advantage over start up e-commerce companies, many of which will need to
devote substantial resources to the development of these capabilities. In order
to facilitate our growth, we are in the process of relocating to a 208,000
square foot distribution center approximately 2 miles from our current facility.
. Operating Model
Our business structure is designed to enable each Gaiam brand under the Gaiam
lifestyle brand to achieve individual sales growth, while realizing cost savings
from the combined enterprise. The managers of our brands retain responsibility
for merchandising and creative presentation. Gaiam provides strategic direction,
technology, financial resources and administrative services, as well as
marketing, customer service, fulfillment, purchasing and sourcing, thus
leveraging our current infrastructure in a highly scaleable model.
Thus leveraging our current infrastructure in a highly scaleable model.
Our Operating Strategies
. Focus on our Online Presence
We have upgraded our website and technology systems to create a platform that
will expand our product offerings and take advantage of the unique
characteristics of online retailing. We currently have over 10,000 SKU's on our
website with capabilities to expand. We have an average order of $100 with a
gross profit margin over 50% making our on line business an attractive business
model. We are able to offer an expanded line of products and additional
information to help with purchasing decisions while maintaining high levels of
customer service for customers still preferring human interaction.
We are also developing an online community of consumers who are concerned about
personal and planetary health and want to use their purchase decisions to effect
positive change. We believe that the interactive environment available on the
Internet will make possible customer-to-customer and customer-to-company
communications that will increase the usefulness of our services to customers,
provide valuable feedback to us, and help us and our customers establish a
database of valuable information about environmental issues, natural health and
personal development. From this interaction and feedback, we believe that the
online community can grow.
Our goal is to grow this segment of our customers and to educate them about
their own ability to affect positive change through purchases that will result
in improvements to the environment and their well being -- and thereby
demonstrating to them that their choices can "make a difference."
. Strengthen Our Brand
We are establishing the Gaiam name as an authority in the LOHAS industry. Gaiam
and Gaiam.com will also function as the lifestyle umbrella brands for Harmony,
InnerBalance and Living Arts and any additional brands we may acquire or
develop. We plan to strengthen these brands by increasing marketing efforts,
strengthening relationships with traditional and e-commerce retailers and
increasing the breadth of our product and videotape and digital informational
offerings while maintaining our high level of customer service.
We believe that creating demand by consumers for eco-friendly and natural
products will permit us to obtain these products in greater volume and, in turn,
offer the products at lower prices than might otherwise be available. As we are
able to lower prices in this manner, we expect to attract additional customers.
. Offer Quality, Convenience and Selection
We intend to make purchasing quality, natural and healthy lifestyle products
from us more convenient than shopping in a physical store. We are open 24 hours
a day, and shopping for our products does not require a trip to a store. We ship
products directly to the customer's home or office. We believe that customers
may buy more natural and healthy lifestyle products from us because they can get
the information and advice they require, have more hours to shop, can act
immediately on a purchase impulse and can locate products that may be hard-to-
find. Because online and catalog shopping are not tied to a geographic location,
we can deliver a wide selection of natural and healthy lifestyle products to
customers in rural or other locations that cannot support a large-scale Lohas
products retail store.
. Develop Business-to-Business Opportunities
Gaiam is focused on increasing its sales to other businesses that have a need
for sustainable or natural and healthy lifestyle products and services. These
businesses include retailers, hospitality companies, spas and resorts, health
care providers, as well as industrial companies. We believe that the Gaiam
brands and product mix are well suited to these industries. As companies prepare
to market to this emerging culture, they will desire to partner with an
authority in the natural lifestyle world such as Gaiam. We believe that the
expertise and knowledge we have and can develop in the LOHAS industry will make
Gaiam the information source of choice for businesses that wish to service the
LOHAS industry. As a result, we believe that we can build a successful
consulting and "green audit" business. Part of our strategy is to set the
standard for the industry and then offer information, products and services
under Gaiam's approval or recommendation.
. Complement our Existing Business with Selective Strategic Acquisitions
Even though our strategy is not dependent on acquisitions, we will consider
strategic acquisitions in the Lohas industry that complement our existing
business. We believe that significant acquisition opportunities exist and our
willingness to retain existing operating management will make us an attractive
acquiring party. Gaiam generally allows the acquired company's management team
to retain responsibility for critical front-end business functions such as
merchandising, creative presentation and marketing, while consolidating
operational functions under the Gaiam organization to realize economies of
scale.
Our Channels of Distribution
We offer our products through three primary distribution channels: direct
marketing (catalogs and consumer advertising), business-to-business and e-
commerce.
Direct marketing
We continue to offer LOHAS products directly to the consumer through catalogs
and consumer lifestyle publications such as Self, Shape and Yoga Journal
magazine. We ensure that we have on-hand inventory to support 93% of in-stock
orders. It is our practice to ship each order no later than the next business
day. While this practice may result in higher costs, we believe that it enhances
customer satisfaction and loyalty. Our in-house customer service department
includes product specialists who are trained to have in-depth product knowledge
and assist customers in selecting products and solutions that meet their needs,
design, price and style criteria. For the benefit of our customers, we also
provide toll-free telephone ordering and unconditional return guarantees.
Business-to-Business
Gaiam targets the hospitality and spa industry, alternative healthcare
practitioners national and regional mass merchandisers, lifestyle stores,
specialty stores, sporting goods stores, bookstores, natural foods stores and
online retailers. We are in the process of expanding our range of products
produced and sold in the retail market, as well as creating an integrated
branded lifestyle retail display on the premises of a larger lifestyle
establishment in which we will offer customers a number of exclusive items. This
store within a store concept has been well received and is in roll out phase.
Gaiam is in the process of significantly increasing its sales to other
businesses that have a need for eco-friendly products and services, or natural
and healthy lifestyle products. Business-to-business revenues were 13% of 1998
revenues and 24% of revenues for 1999.
E-commerce
We believe that our business is particularly well suited to Internet commerce.
The use of many of our products is enhanced by extensive product education and
information that we are making available online. The online environment has
virtually unlimited shelf space, the capacity to present vast amounts of
consumer information and offers consumers the convenience of shopping online. In
addition, many of these products, services and information are not widely found
in conventional stores.
We believe that our demographics favor Internet usage. According to Forrester
Research, an independent media research firm, the number of U.S. households
using e-mail, the Internet or a consumer online service will grow from an
estimated 20.5 million households in 1996 to 55 million households, representing
over 50% of all U.S. households by the year 2002. Furthermore, the number of
U.S. households making at least one online purchase is expected to grow from
approximately 10 million at the end of 1998 to 36 million at the end of 2002. A
Jupiter Communications study showed that households with income over $50,000 had
a 46% usage on the internet. This is a favorable correlation with our
demographics as approximately 61% of our customers fall in this income bracket.
We believe the Internet will be our primary method of communication with our
customer. We have had favorable response including a growth from 2% to 20% of
our business from September to December and an average order size of $100.
We recently launched a business-to-business internet site to facilitate ease of
ordering for our business-to-business customers as well as to further expand our
range of customers in an efficient manner. By offering a direct marketing, e-
commerce and business-to-business approach to distribution, we believe that we
are maximizing our ability to reach our core customers as well as enhancing our
brand.
Our Intellectual Property
Gaiam, Gaiam.com, Harmony, InnerBalance and Living Arts and various product
names are subject to trademark or pending trademark applications, of Gaiam or a
Gaiam company. We also currently hold various web domain names relating to our
brand, including "www.gaiam.com."
Our Competitive Position
We believe that the Lohas industry is characterized by a fragmented supplier and
distribution network and we are not aware of a dominant leader. Gaiam's goal is
to establish itself as the industry leader.
We believe we compete favorably on all relevant factors in direct marketing and
selling to traditional retailers as evidenced by our sales growth. Many of our
competitors are larger, have longer operating histories and have greater
financial and marketing resources than we have.
Our Employees
As of December 31, 1999, Gaiam and the Gaiam companies employed approximately
150 persons. None of our employees is covered by a collective bargaining
agreement.
Item 2. Properties
Our principal executive offices are located in Boulder County, Colorado. Our
main fulfillment center is located in the Cincinnati, Ohio area. This facility
houses most of our fulfillment functions. We selected the Cincinnati site after
considering the availability and cost of facilities and labor, proximity to
major highways, air delivery hubs and support of local government of new
businesses. We also believe that Cincinnati is ideal for providing the lowest
cost shipping available from a single central point to a customer base that
conforms to the overall U.S. population. Approximately 90% of all orders are
filled and shipped from the Cincinnati facility. The balance is shipped directly
from suppliers.
The following table sets forth certain information relating to our facilities,
all of which are leased:
Location Size Use Lease Expiration
- ------------------ -------------- --------------------------------- ----------------
Boulder County, CO 25,000 sq. ft. Headquarters and customer service March 2002
Outlet center January 2002
Cincinnati, OH 64,000 sq. ft. Fulfillment center May 2000
Santa Monica, CA 5,000 sq. ft. Creative staff offices June 2000
We have options to renew our headquarters lease. We have, due to the growth of
our operations, entered into a new fulfillment center lease, which will expand
our facility to 208,100 sq. ft. This lease commences on March 1, 2000, and we
will be relocating our warehousing and distribution services group to this
facility. We believe our facilities, with the additional of the new fulfillment
center space, are adequate to meet our current needs and that suitable
additional facilities will be available for lease or purchase when, and as we
need it.
Regulatory Matters
There are an increasing number of laws and regulations pertaining to the
Internet. In addition, a number of legislative and regulatory proposals are
under consideration by federal, state, local and foreign governments and
agencies. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, online content regulation, user privacy, taxation and quality of
products and services. Moreover, it may take years to determine whether and how
existing laws such as those governing issues such as intellectual property
ownership and infringement, privacy, libel, copyright, trade mark, trade secret,
obscenity, personal privacy, taxation, regulation of professional services,
regulation of medical devices and the regulation of the sale of other specified
goods and services apply to the Internet and Internet advertising. The
requirement that we comply with any new legislation or regulation, or any
unanticipated application or interpretation of existing laws, may decrease the
growth in the use of the Internet, which could in turn decrease the demand for
our products, information and services, increase our cost of doing business or
otherwise have a material adverse effect on our business, results of operations
and financial condition. The adoption of new laws or regulations could reduce
the rate of growth of the Internet, which could potentially decrease the usage
of our online stores or could otherwise materially adversely affect our
business. In addition, applicability to the Internet of existing laws governing
issues such as property ownership, copyrights and other intellectual property
issues, taxation, libel, obscenity and personal privacy is uncertain. The vast
majority of these laws were adopted prior to the advent of the Internet and
related technologies and, as a result, do not contemplate or address the unique
issues of the Internet and related technologies.
Further, several telecommunications carriers have requested the Federal
Communications Commission ("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.
A number of legislative proposals have been made at the federal, state and local
level, and by foreign governments, that would impose additional taxes on the
sale of goods and services over the Internet and certain states have taken
measures to tax Internet-related activities. Although Congress recently placed a
three-year moratorium on state and local taxes on Internet access or on
discriminatory taxes on electronic commerce, existing state or local laws were
expressly excepted from this moratorium. Further, once this moratorium is
lifted, some type of federal and/or state taxes may be imposed upon Internet
commerce. Legislation or other attempts at regulating commerce over the Internet
may substantially impair the growth of commerce on the Internet and, as a
result, adversely affect our opportunity to derive financial benefit from these
activities.
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
Item 3. Legal Proceedings
Gaiam is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
On October 24, 1999, at a special meeting of Gaiam shareholders conducted
prior to Gaiam's initial public offering, Gaiam's shareholders approved the
following matters:
1. Approval of Gaiam's Amended and Restated Articles of Incorporation
to, among other things, approve a 2.5 to 1 reverse stock split of
Gaiam's shares.
Votes for: 71,395,000 Against: 0 Abstaining: 0
2. Approval of Gaiam's 1999 Employee Stock Purchase Plan.
Votes for: 71,395,000 Against: 0 Abstaining: 0
3. Approval of amendments to Gaiam's 1999 Long-Term Incentive Plan.
Votes for: 71,395,000 Against: 0 Abstaining: 0
MANAGEMENT
Executive Officers And Directors
Our executive officers and directors, their respective ages as of December
31, 1999 and their positions are as follows:
NAME AGE POSITION
- -------------------------- --- ----------------------------------------
Jirka Rysavy (2) 45 Founder, Chairman of the Board and Chief
Executive Officer
Lynn Powers 50 President, Chief Operating Officer and
Director
Pavel Bouska 45 Executive Vice President and Chief
Information Officer
Barnet M. Feinblum (1) (2) 52 Director
Barbara Mowry (1) (2) 51 Director
Paul H. Ray (1) 60 Director
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
JIRKA RYSAVY - Founder, Chairman and Chief Executive Officer of Gaiam. He has
been Chairman since Gaiam's inception and became the full-time Chief Executive
Officer in December 1998. In 1986, Mr. Rysavy founded a corporate supplier he
named Corporate Express, and, as its Chairman and Chief Executive Officer until
September 1998 he grew it to $4 billion in revenues. Previously, he founded and
served as Chairman and Chief Executive Officer of Crystal Market, a health food
market, which was sold to Michael Gilliland in 1987 to become the first store of
Wild Oats Markets. Until January 2000, Mr. Rysavy was also a director of Whole
Foods Markets, Inc.
LYNN POWERS - President, Chief Operating Officer and a director of Gaiam since
February 1996. From 1992 to 1996, she was Chief Executive Officer of La Scelta,
an importer of natural fiber clothing products. Before that, Ms. Powers was
Senior Vice President Marketing/Strategic Development and Vice President
Merchandising of Miller's Outpost, a specialty retailer.
PAVEL BOUSKA - Executive Vice President and Chief Information Officer since
March 1999. He served as a director of Gaiam from 1991 until August 1999. Prior
to joining Gaiam, from June 1988 to March 1999, Mr. Bouska was an officer and
one of the founding members of Corporate Express, serving in various positions,
including Chief Information Officer and Vice President Information Systems,
responsible for system development, information technology, operations, systems
conversions and business consolidations. Prior to joining Corporate Express, he
was project leader for Software Design & Management, a German software company
subsequently acquired by Ernst & Young.
BARBARA MOWRY - Director since completion of the initial public offering in
October 1999. Since November 1997, Ms. Mowry has been the President and Chief
Executive Officer of Requisite Technology, a business-to-business e-commerce
company specializing in the creation and management of electronic content and
catalogs. Prior to joining Requisite Technology, Ms. Mowry had been an officer
of two Fortune 500 companies, Telecommunications, Inc. from 1995 to 1997, and
UAL, Inc. from 1983 to 1990. In 1990, Ms. Mowry founded, and until 1995 served
as Chief Executive Officer of, The Mowry Company, a relationship marketing firm
focusing on the development of customer relations for businesses. She has an MBA
from the University of Minnesota and a BA in Sociology from Miami University.
BARNET M. FEINBLUM - Director since completion of the initial public offering in
October 1999. Mr. Feinblum has served as the President and Chief Executive
Officer of Horizon Organic Dairy from May 1995 until January 2000, serves as a
director since May 1995. From July 1993 through March 1995, Mr. Feinblum was the
President of Natural Venture Partners, a private investment company. From August
1976 until August 1993, Mr. Feinblum held various positions at Celestial
Seasonings, Inc., including President, Chief Executive Officer, and Chairman of
the Board. Mr. Feinblum received a BS degree from Cornell University and a MBA
from the University of Colorado.
PAUL H. RAY - Director since completion of the initial public offering in
October 1999. Mr. Ray has been Executive Vice President of American LIVES, Inc.,
a market research and opinion polling firm since November 1986. Prior to joining
American LIVES, Mr. Ray was Chief of Policy Research on Energy Conservation at
the Department of Energy, Mines and Resources of the Government of Canada from
1981 to 1983. From 1973 to 1981, Mr. Ray was Associate Professor of Urban
Planning at the University of Michigan. Mr. Ray holds a B.A. (cum laude) in
anthropology from Yale University and a Ph.D. in sociology from the University
of Michigan. He is the author of The Integral Culture Survey, which first
identified the Cultural Creatives subculture.
Each director serves for a one-year term. Each officer serves at the discretion
of the Board of Directors. There are no family relationships among any of the
directors and officers of Gaiam.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Stock Price History
- -------------------
The Company's Class A common stock has been quoted on the NASDAQ under
the symbol "GAIA" since the Company's initial public offering on October 29,
1999. On March 24, 2000, the Company had 1,145 stockholders of record and
5,441,537 shares of $.0001 par value Class A common stock outstanding, and one
stockholder and 5,400,000 shares of $.0001 par value Class B common stock
outstanding.
The following table sets forth certain sales price and trading volume
data for the Company's Class A common stock for the period indicated:
Average
Daily
High Low Close Volume
------- ------ ------- -------
Fiscal 1999 - Fourth Quarter
Commencing October 29, 1999 $18 1/4 $5 3/8 $15 7/8 58,952
Dividend Policy
- ---------------
Gaiam has never declared or paid any cash dividends on its capital
stock. Gaiam currently intends to retain earnings, if any, to support its growth
strategy and does not anticipate paying cash dividends in the foreseeable
future. In addition, our bank credit agreement prohibits payment of any
dividends to our shareholders.
Item 6. Selected Financial and Operating Data
The selected statement of operations for the years ended December 31,
1997, 1998 and 1999 and balance sheet data as of December 31, 1997, 1998 and
1999 set forth below are derived from Gaiam's audited consolidated financial
statements. The audited consolidated financial statements include statements of
operations for the years ended December 31, 1997, 1998 and 1999, and balance
sheets as of December 31, 1998 and 1999. These financial statements appear
elsewhere in this Form 10-K. The selected statement of operations for the years
ended December 31, 1995 and 1996 and balance sheet data as of December 31, 1995
and 1996 set forth below are derived from Gaiam's audited consolidated financial
statements. 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 Form 10-K.
SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
Year Ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Statement of Operations Data
Net revenues $45,725 $30,739 $19,898 $14,801 $ 6,696
Cost of goods sold 18,176 13,174 8,462 6,762 2,943
------- ------- ------- ------- -------
Gross profit 27,549 17,565 11,436 8,039 3,753
Selling, operating, general
and administrative expenses 25,425 16,580 12,002 10,471 4,157
------- ------- ------- ------- -------
Operating income (loss) 2,124 985 (566) (2,432) (404)
Other income (loss) (1) 606 388 1,583 2,984 1,029
------- ------- ------- ------- -------
Income before income taxes and
minority interest 2,730 1,373 1,017 552 625
Income taxes 1,063 251 363 212 238
Minority interest (51) 262 - - -
------- ------- ------- ------- -------
Net income $ 1,718 $ 860 $ 654 $ 340 $ 387
======= ======= ======= ======= =======
Net income per share:
Basic $0.20 $0.11 $0.08 $0.04 $0.05
Diluted $0.19 $0.11 $0.08 $0.04 $0.05
======= ======= ======= ======= =======
Shares outstanding:
Basic 8,785 8,073 8,040 8,040 8,040
Diluted 9,119 8,119 8,040 8,040 8,040
December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Balance Sheet Data
Cash $ 3,877 $ 1,410 $ 1,612 $ 380 $ 419
Securities available-for-sale (2) - 1,634 4,828 56 71
Working capital (deficiency) 5,911 (81) 5,226 (1,838) 192
Total assets 27,260 16,677 10,774 6,256 2,476
Long-term debt (net of current maturities) 2,109 299 42 89 -
Stockholders' equity (2) 14,951 3,661 4,736 920 580
(1) Other income in 1995, 1996, 1997, 1998 and 1999 primarily reflects income
from sale of securities available-for-sale.
(2) Securities valued at cost in 1995, and at fair market value in 1996, 1997
and 1998.
Item 7. 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 document.
Overview
- --------
Gaiam is a lifestyle company, which caters to consumers who value the
environment, a sustainable economy, healthy lifestyles and personal development.
Gaiam was incorporated in Colorado in 1988 as a distributor of earth-friendly
products. In 1995, Gaiam began to expand nationally. From 1996 to 1999, our
revenues increased from $14.8 million to $45.7 million, representing a compound
annual growth rate of approximately 45.6%, including a 48.8% increase during the
last fiscal year.
Gaiam's business model is evolving as evidenced by the increase in the
percentage of our revenues attributable to our business-to-business segment and
the successful launch of our e-commerce site. During 1998, business-to-business
revenues accounted for approximately 13% of all revenues, while in 1999, this
segment's revenues increased to approximately 24% of total revenue. Since its
inception in September 1999, Gaiam's e-commerce site has generated approximately
$2.1 million in revenues. In addition, Gaiam's gross margin continues to
increase as a result of developing more private brand merchandise, on which we
have better margins, and negotiating better pricing from our vendors due to
volume discounts. However, the competitive nature of the Internet may cause
retail price reductions, and thus affect our gross margin in the future.
In 1998, we acquired 67% of Healing Arts Publishing, LLC, dba Living
Arts. Living Arts produces and sells yoga and other mind-body-spirit
informational videos and products. During 1999, Gaiam acquired the remaining 33%
interest in Living Arts.
Results of Operations
- ---------------------
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated:
For the Year Ended December 31,
1999 1998 1997
------ ------ ------
Net revenue 100.0% 100.0% 100.0%
Cost of goods sold 39.8% 42.9% 42.5%
------ ------ ------
Gross profit 60.2% 57.1% 57.5%
Expenses:
Selling and operating 48.8% 46.1% 52.4%
Corporate, general and administrative 6.7% 7.8% 7.9%
------ ------ ------
Total expenses 55.5% 53.9% 60.3%
------ ------ ------
Income (loss) from operations 4.7% 3.2% -2.8%
Other income (expense), net 1.3% 1.3% 8.0%
------ ------ ------
Income before income taxes and minority interest 6.0% 4.5% 5.2%
Provision for income taxes 2.3% 0.8% 1.8%
Minority interest in net income of consolidated
subsidiary, net of tax -0.1% 0.9% 0.0%
------ ------ ------
Net income 3.8% 2.8% 3.4%
====== ====== ======
Year ended December 31, 1999 compared to year ended December 31, 1998
- ---------------------------------------------------------------------
Revenues increased 48.8% to $45.7 million in 1999 from $30.7 million
in 1998. This revenue growth was primarily attributable to acquisitions. The
Company's internal growth rate was 18.1% for fiscal 1999. Business-to-business
revenues grew 49.4% to $11.2 million in 1999 compared to $7.5 million in 1998.
The commencement of e-commerce sales in September 1999 resulted in $2.1 million
of revenues, with $2.0 million recognized during the fourth quarter.
Gross profit, which consists of revenues less cost of sales (primarily
merchandise acquisition costs and in-bound freight), increased 56.8% to $27.5
million in 1999 from $17.6 million in 1998. As a percentage of revenues, gross
profit increased to 60.2% in 1999 from 57.1% in 1998. This was primarily
attributable to increases in sales of proprietary or private-labeled branded
products, on which Gaiam has better margins than other products, and continued
better pricing from vendors due to increased volume.
Selling and operating expenses, which consist primarily of sales and
marketing costs, commissions and fulfillment expenses increased 57.5% to $22.3
million in 1999 compared to $14.2 million in 1998. As a percentage of revenues,
selling and operating expenses increased to 48.8% in 1999 from 46.1% in 1998, as
a result of the increased emphasis on revenue growth, particularly in the
business-to-business and e-commerce sectors, and the sourcing, development and
branding of our proprietary products, which resulted in increased gross profit
percentages.
Corporate, general and administrative expenses increased to $3.1 million in
1999 compared to $2.4 million in 1998. As a percentage of revenues, general and
administrative expenses decreased to 6.7% in 1999 from 7.8% in 1998.
Operating income, as a result of the factors described above, increased
115.7% to $2.1 million for 1999 from $984,843 in 1998.
Other income, comprised primarily of gains on sales of marketable
securities and interest expense, increased to $605,865 in 1999 from $388,491 in
1998. This change is primarily due to an increase in the number of shares of
securities sold during 1999, and was partially offset by higher interest expense
due to borrowings, and other extraordinary expenses associated with the initial
public offering, the acquisition of the minority interest in Living Arts, and
expenses associated with moving its warehousing and distribution center.
Minority interest expense decreased to a negative $50,858 for 1999
compared to $261,598 in 1998. The majority of this amount represents our former
minority partner's one-third interest in the Living Arts losses, net of tax.
During 1998, minority interest of $261,598 represented the 33% Living Arts
minority interest, net of tax, for the period September 14, 1998 through
December 31, 1998.
Income tax provision grew to $1.0 million in 1999, as compared to
$251,955 in 1998. The decrease in the effective tax rate to 18.4% of pre-tax net
income for 1998 was primarily due to a one-time tax benefit related to the 1998
settlement of a Living Arts legal judgment incurred prior to Gaiam's ownership.
Net income, as a result of the factors described above, increased 99.9%
to $1.7 million for 1999 from $859,781 for 1998.
Year ended December 31, 1998 compared to year ended December 31, 1997
- ---------------------------------------------------------------------
Revenues increased 54.5% to $30.7 million in 1998 from $19.9 million
in 1997. This revenue growth was primarily attributable to the acquisitions of
Living Arts and InnerBalance. Additionally, internal growth of 20% resulted from
additional purchases made by Gaiam's current customers and growth in our
customer base.
Gross profit increased 53.6% to $17.6 million in 1998 from $11.4
million in 1997. As a percentage of revenues, gross profit decreased to 57.1% in
1998 from 57.5% in 1997. This reflects a
change in sales mix due to the acquisition of Living Arts, which had generally
lower margin products than that of our other operations.
Selling and operating expenses increased 36% to $14.2 million in 1998
from $10.4 million in 1997, due to increases in revenues. As a percentage of
revenues, selling and operating expenses decreased to 46.1% from 52.4%. This
decrease in selling and operating expenses as a percentage of revenues was
primarily due to increased operating efficiencies.
Corporate, general and administrative expenses increased 52% to $2.4
million in 1998 from $1.6 million in 1997, primarily as a result of initiatives
to support our growth. As a percentage of revenues, those expenses decreased to
7.8% from 7.9% of revenues.
Other income, which is primarily comprised of gains on sales of
marketable securities and interest expense, decreased to $388,491 in 1998 from
$1.6 million in 1997, largely due to a decrease in the sales of marketable
securities during 1998 as compared to 1997.
Provision for income tax provision represented 18.3% of our pre-tax
income in 1998, as compared to 35.7% in 1997. The decrease in the effective tax
rate was primarily due to a one-time tax benefit related to the 1998 settlement
of a Living Arts legal judgment incurred prior to Gaiam's ownership.
Minority interest of $261,598 for 1998 was deducted from the
consolidated financial results to account for the minority interest in Living
Arts.
Net income, as a result of the factors described above, increased
31.4% to $859,781 in 1998 compared to $654,312 in 1997.
Quarterly and Seasonal Fluctuations
- -----------------------------------
The following table sets forth our unaudited quarterly results of
operations for each of the of quarters in 1998 and 1999. In management's
opinion, this unaudited financial information includes all adjustments,
consisting solely of normal recurring accruals and adjustments, necessary for a
fair presentation of the results of operations for the quarters presented. This
financial information should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this Form10-K. The
results of operations for any quarter are not necessarily indicative of future
results of operations.
Fiscal 1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except for per share data)
Net revenue $9,495 $ 8,068 $10,288 $17,874
Gross profit 5,639 4,849 6,222 10,839
Operating income (loss) 110 (294) 393 1,915
Net income 106 72 551 989
Net income per share $ 0.01 $ 0.01 $ 0.06 $ 0.10
Weighted average shares outstanding 8,215 8,420 8,826 10,633
Fiscal 1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except for per share data)
Net revenue $ 5,300 $ 5,175 $ 5,987 $14,277
Gross profit 3,012 3,049 3,538 7,966
Operating income (loss) 98 77 200 610
Net income 24 15 395 426
Net income per share $ - $ - $ 0.05 $ 0.05
Weighted average shares outstanding 8,040 8,040 8,040 8,073
Note: The aggregate of certain of the above amounts differs from that reported
for the the full fiscal year due to the effects of rounding.
Quarterly fluctuations in Gaiam's revenues and operating results are
due to a number of factors, including the timing of new product introductions
and mailings to customers, advertising, acquisitions (including costs of
acquisitions and expenses related to integration of acquisitions), competition,
pricing of products by vendors and expenditures on our systems and
infrastructure. The impact on revenue and operating results, due to the timing
and extent of these factors, can be significant. Our sales are also affected by
seasonal influences. On an aggregate basis, Gaiam experiences strongest revenues
and net income in the fourth quarter due to increased holiday spending.
Liquidity and Capital Resources
- -------------------------------
Gaiam's capital needs arise from workings capital required to fund our
operations, capital expenditures related to expansions and improvements to
Gaiam's infrastructure, development of e-commerce, and funds required in
connection with the acquisitions of new businesses and its anticipated future
growth. These capital requirements depend on numerous factors, including the
rate of market acceptance of Gaiam's product offerings, the ability to expand
Gaiam's customer base, the cost of ongoing upgrades to its product offerings,
the level of expenditures for sales and marketing, the level of investment in
distribution and other factors. The timing and amount of these capital
requirements cannot accurately be predicted. Additionally, Gaiam will continue
to evaluate possible investments in businesses, products and technologies, and
plans to expand its sales and marketing programs and conduct more aggressive
brand promotions.
Prior to our initial public offering, Gaiam had funded its operations
and acquisitions primarily through bank loans, private placements of shares and
subordinated debentures, and sales of marketable securities contributed to Gaiam
by Gaiam's founder, Mr. Rysavy. During 1996 and 1997, we had operating losses,
which were offset primarily by sales of the marketable securities contributed by
Mr. Rysavy.
During 1998, we raised approximately $1.2 million from private
placements ($575,000 for 160,000 shares and $550,000 in debentures). During the
first six months of 1999, Gaiam raised an additional $1.45 million from the
private placement of 331,429 shares of Class A common stock and $1.425 million
in debentures. The privately placed shares were sold at $4.375 per share, and
the 8% convertible debentures matured on the earlier of one year after the date
of the debenture or the closing date of the initial public offering. In October
1999, we repaid $500,000 of the convertible debentures and, simultaneous with
the closing of the initial public offering, converted the remaining $1.475
million in debentures to 295,000 shares of Class A common stock.
Gaiam's initial public offering of 1,705,000 shares of Class A common
stock at $5.00 per share was completed in October 1999. Simultaneous with this
offering, Gaiam converted $1.475 million in debentures to 295,000 shares of
common stock, resulting in a total issuance of 2,000,000 shares. The offering's
underwriters also exercised their overallotment option for 102,861 additional
shares during
November 1999. Net proceeds to Gaiam, after deducting all commissions and
expenses associated with the offering, were $6.1 million.
Gaiam is party to revolving line of credit agreements with Norwest
Bank, which extend through December 31, 2001. The credit agreements permit
borrowing up to $3 million based upon the collateral value of Gaiam's accounts
receivable and inventory held for resale. These borrowings are secured by a
pledge of Gaiam's assets. Principal repayment of amounts borrowed under these
line of credit agreements are due either when the collateral value of Gaiam's
accounts receivable and inventory drops below prescribed levels or upon maturity
of the agreements, whichever occurs first. Borrowings under the Norwest credit
agreements bear interest at the prime rate plus 1%. The Norwest credit
agreements contain various financial covenants and also prohibit Gaiam from
paying dividends to its shareholders.
Gaiam's operating activities used net cash of $4.4 million during
1999 and provided $759,205 of net cash in 1998. Gaiam's net cash used in
operating activities for 1999 arose primarily from increases in accounts
receivable ($2.1 million) associated with growth in the business-to-business
segment, increased inventories of $1.2 million correlating to increased business
volumes, and $1.3 million to produce additional Living Arts video titles. Net
cash provided during 1998 was primarily a result of Gaiam's net income.
Gaiam's investing activities used cash of $2.6 and $1.1 million during
1999 and 1998, respectively. During 1999, Gaiam generated $2.5 million from the
sale of marketable securities and used $2.7 million primarily for its
acquisitions. Gaiam also used $2.2 million primarily to expand and upgrade the
e-commerce, computer and telecommunications systems. During 1998, Gaiam used
cash to purchase a majority interest in Living Arts.
During 1999, Gaiam's financing activities generated $9.5 million in
net cash, primarily from the initial public offering. During 1998, Gaiam's
financing activities generated $175,300, which resulted from the private
placement of shares and debentures, net of the reduction in other outstanding
debt.
As Gaiam continues to expand its both its direct-to-consumer and
business-to-business e-commerce presence, we anticipate making additional,
significant investments in web site design and technology, and, with additional
planned business growth, will be investing in additional distribution capacity.
We believe our available cash, cash expected to be generated from
operations, and borrowing capabilities will be sufficient to fund our operations
on both a short-term and long-term basis. However, our projected cash needs may
change as a result of acquisitions, unforeseen operational difficulties or other
factors.
In the normal course of our business, we investigate, evaluate and
discuss acquisition, joint venture, minority investment, strategic relationship
and other business combination opportunities in the Lohas industry. In the event
of any future investment, acquisition or joint venture opportunities, we may
consider using then-available liquidity, issuing equity securities or incurring
additional indebtedness.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We do not believe that any of our financial instruments have
significant risk associated with market sensitivity.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Report of Independent Auditors................... 1
Consolidated Financial Statements
Consolidated Balance Sheets...................... 2
Consolidated Statements of Income................ 3
Consolidated Statements of Stockholders' Equity.. 4
Consolidated Statements of Cash Flows............ 5
Notes to Consolidated Financial Statements....... 6
REPORT OF INDEPENDENT AUDITORS
Stockholders and
Board of Directors
Gaiam, Inc.
We have audited the accompanying consolidated balance sheets of Gaiam, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Gaiam, Inc. and
subsidiaries at December 31, 1999 and 1998 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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.
---------------------
/s/ Ernst & Young LLP
Denver, Colorado
March 3, 2000
GAIAM, INC.
CONSOLIDATED BALANCE SHEETS
December 31
Assets 1999 1998
---------------------------------
Current assets:
Cash and cash equivalents $ 3,877,465 $ 1,409,939
Securities available-for-sale - 1,633,905
Accounts receivable, net of allowance for
doubtful accounts of $158,292 in 1999
and $67,915 in 1998 4,326,594 2,579,927
Accounts and notes receivable, other 573,450 23,346
Inventory, less allowances 4,555,436 3,393,712
Income tax receivable 182,474 -
Deferred advertising costs 2,176,325 1,757,845
Other current assets 393,330 283,836
---------------------------------
Total current assets 16,085,074 11,082,510
Property and equipment, net 3,168,183 1,079,694
Capitalized production costs, net 1,636,706 672,438
Video library, net 4,792,456 3,543,764
Goodwill, net 1,239,507 36,585
Other assets 337,759 261,521
---------------------------------
Total assets $27,259,685 $16,676,512
=================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 7,618,344 $ 6,900,492
Accrued liabilities 1,734,310 1,456,338
Accrued royalties 725,541 804,772
Capital lease obligations, current 95,844 42,261
Margin loan payable - 575,288
Convertible debentures - 550,000
Income taxes payable - 242,271
Deferred tax liability - 592,566
---------------------------------
Total current liabilities 10,174,039 11,163,988
Deferred tax liability - 59,809
Capital lease obligations, long-term 209,074 25,588
Convertible debenture - 273,051
Line of credit 1,900,000 -
Minority interest 26,030 1,492,941
Stockholders' equity:
Class A common stock, $.0001 par value,
92,965,000 shares authorized, 5,441,537
and 1,165,000 shares issued and outstanding
at December 31, 1999 and 1998, respectively 544 117
Class B common stock, $.0001 par value,
7,035,000 shares authorized, 5,400,000
and 7,035,000 shares issued and
outstanding at December 31, 1999
and 1998, respectively 540 704
Additional paid-in capital 11,038,551 377,634
Deferred compensation (106,992) -
Accumulated other comprehensive income - 983,126
Retained earnings 4,017,899 2,299,554
---------------------------------
Total stockholders' equity 14,950,542 3,661,135
---------------------------------
Total liabilities and stockholders' equity $27,259,685 $16,676,512
=================================
See accompanying notes.
GAIAM, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31
1999 1998 1997
-----------------------------------------------------------
Net revenue $45,724,662 $30,738,540 $19,897,690
Cost of goods sold 18,175,787 13,173,536 8,462,151
-----------------------------------------------------------
Gross profit 27,548,875 17,565,004 11,435,539
Expenses:
Selling and operating 22,337,950 14,186,215 10,427,258
Corporate, general and administration 3,086,514 2,393,946 1,574,770
-----------------------------------------------------------
Total expenses 25,424,464 16,580,161 12,002,028
-----------------------------------------------------------
Income (loss) from operations 2,124,411 984,843 (566,489)
Other income (expense):
Realized gains on sales of securities
and other (see Note 3) 971,159 696,992 1,820,034
Interest expense (365,294) (308,501) (236,699)
-----------------------------------------------------------
Other income (expense) 605,865 388,491 1,583,335
-----------------------------------------------------------
Income before income taxes and minority
interest 2,730,276 1,373,334 1,016,846
Provision for income taxes 1,062,789 251,955 362,534
Minority interest in net income (loss) of
consolidated subsidiary, net of tax (50,858) 261,598 -
-----------------------------------------------------------
Net income $ 1,718,345 $ 859,781 $ 654,312
===========================================================
Net income per share:
Basic $0.20 $0.11 $0.08
Diluted $0.19 $0.11 $0.08
Shares used in computing net income per share:
Basic 8,785,205 8,072,877 8,040,000
Diluted 9,119,108 8,118,791 8,040,000
See accompanying notes.
GAIAM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Class A Class B Additional Other
Common Stock Common Stock Paid-in Deferred Comprehensive Retained
Shares Amount Shares Amount Capital Compensation Income Earnings Total
----------------- ----------------- ------------ ------------ -------------- ----------- -----------
Balance at December 31, 1996 1,005,000 $101 7,035,000 $ 704 $ 133,833 $ - $ 6,764,758 $ 785,461 $ 7,684,857
Comprehensive income (loss):
Net income - - - - - - - 654,312 654,312
Decrease in fair
market value of
securities available
for sale, net of
reclassification
adjustment (see
Note 1), net of tax
of $1,628,529 - - - - - - (3,603,495) - (3,603,495)
-----------
Total comprehensive loss - - - - - - - - (2,949,183)
----------------- ----------------- ------------ ------------ -------------- ----------- -----------
Balance at December 31, 1997 1,005,000 $101 7,035,000 $704 $ 133,833 - $ 3,161,263 $ 1,439,773 $ 4,735,674
Issuance of common stock 160,000 16 - - 574,984 - - - 575,000
Return of capital to
shareholder through
purchase of Inner
Balance, Inc. - - - - (331,183) - - - (331,183)
Comprehensive income (loss):
Net income - - - - - - - 859,781 859,781
Decrease in fair
market value of
securities available
for sale, net of
reclassification
adjustment (see
Note 1), net of tax
of $618,578 - - - - - - (2,178,137) - (2,178,137)
-----------
Total comprehensive loss (1,318,356)
----------------- ----------------- ------------ ------------ -------------- ----------- -----------
Balance at December 31, 1998 1,165,000 117 7,035,000 704 377,634 - 983,126 2,299,554 3,661,135
Issuance of common stock 331,429 32 - 1,449,968 - - - 1,450,000
Shares issued in
connection with IPO,
including the
underwriter's
overallotment 1,807,861 181 - - 6,142,007 - - - 6,142,188
Issuance of common stock
in conjunction
with acquisitions and
share conversion 1,842,247 185 (1,635,000) (164) 1,593,971 (106,992) - - 1,487,000
Shares issued in
connection with
conversion
of debt 295,000 29 - - 1,474,971 - - - 1,475,000
Comprehensive
income (loss):
Net income 1,718,345 1,718,345
Decrease in fair market value
of available for sale
securities, net of
reclassification
(see Note 1) - - - - - (983,126) - (983,126)
-----------
Total comprehensive inome 735,219
----------------- ----------------- ------------ ------------ -------------- ----------- -----------
Balance at December 31, 1999 5,441,537 $544 5,400,000 540 $ 11,038,551 $(106,992) $ - $ 4,017,899 $14,950,542
================= ================= ============ ============ ============== =========== ===========
See accompanying notes.
GAIAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
1999 1998 1997
----------------------------------------------------
Operating activities
Net income $ 1,718,345 $ 859,781 $ 654,312
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 391,000 240,431 241,985
Amortization 671,992 85,466 2,785
Interest expense added to principal of margin loan 16,513 116,158 175,562
Minority interest in consolidated subsidiary (50,858) 261,598 -
Realized gains on sales of securities and property and
equipment (2,516,110) (691,137) (1,902,802)
Deferred tax expense (53,718) 9,684 50,832
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable (2,116,421) (1,646,282) (62,317)
Inventory (1,161,724) (591,519) (4,536)
Deferred advertising costs (418,480) (243,630) (371,840)
Capitalized production costs (1,342,945) (212,361) -
Prepaid asset (109,494) 8,527 (55,982)
Other assets 41,615 (266,757) 1,839
Accounts payable 717,852 2,569,358 (267,316)
Accrued liabilities 198,741 329,672 (133,528)
Income taxes payable (424,745) (69,784) 390,521
----------------------------------------------------
Net cash provided by (used in) operating activities (4,438,437) 759,205 (1,280,485)
----------------------------------------------------
Investing activities
Purchase of property, equipment and other assets (2,212,961) (134,378) (157,987)
Proceeds from the sale of property and equipment - 32,090 1,440,409
Proceeds from the sale of securities available-for-sale 2,548,310 477,500 1,931,250
Payments for acquisitions, net of assets acquired (2,740,703) (1,656,611) -
Payments (borrowings) on notes receivable (180,350) 145,040 361,259
----------------------------------------------------
Net cash provided by (used in) investing activities (2,585,704) (1,136,359) 3,574,931
----------------------------------------------------
Financing activities
Principal payments on capital leases (60,671) (49,699) (40,989)
Proceeds from issuance of common stock 2,875,002 575,000 -
Net proceeds from initial public offering 6,142,188 - -
Proceeds from convertible debt - 549,999 -
Net proceeds from (payments on) borrowings 535,148 (900,000) (1,021,875)
----------------------------------------------------
Net cash provided by (used in) financing activities 9,491,667 175,300 (1,062,864)
----------------------------------------------------
Net change in cash and cash equivalents 2,467,526 (201,854) 1,231,582
Cash and cash equivalents at beginning of year 1,409,939 1,611,793 380,211
Cash and cash equivalents at end of year $ 3,877,465 $ 1,409,939 $ 1,611,793
====================================================
Supplemental cash flow information
Interest paid $ 348,580 $ 126,025 $ 237,147
Income taxes paid 1,541,253 312,100
Common stock issued for acquisitions $ 1,487,000 - -
Common stock issued for convertible debt 1,425,000 - -
Fixed assets acquired under capital lease 297,740 - -
See accompanying notes.
20
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Gaiam is a lifestyle company 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 greater than
50% 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 include
demand deposit accounts with financial institutions and all highly liquid
investments.
Securities Available-for-Sale
Securities available-for-sale consist of equity securities and are recorded at
market value. All unrealized gains or losses, net of tax, are recorded as a
separate component of stockholders' equity.
Provision for Doubtful Accounts
The Company records a provision for doubtful accounts for all receivables not
expected to be collected.
Inventory
Inventory, consisting of finished goods is stated at the lower of cost (first-
in, first-out method) or market.
Deferred Advertising Costs
Deferred costs primarily relate to preparation, printing and distribution of
catalogs. Such costs are deferred for financial reporting purposes until the
catalogs are distributed, then amortized over succeeding 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
$10.1 million, $7.1 million and $4.9 million for the years ended December 31,
1999, 1998 and 1997, respectively.
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization, which includes the amortization of assets recorded under
capital leases.
Depreciation of property and equipment is computed on the straight-line
method over estimated useful lives (generally five to ten years). Property
and equipment purchased under capital leases are amortized on a straight-
line basis over the lesser of the estimated useful life of the asset or the
lease term.
Capitalized Production Costs
Capitalized production costs include costs incurred to produce
informational videos marketed by the Company to retail marketers and
direct-mail customers. These costs are deferred for financial reporting
purposes until the videos are released, then amortized over succeeding
periods on the basis of estimated sales. Historical sales statistics are
the principal factor used in estimating the amortization rate. Accumulated
amortization at December 31, 1999 and 1998 was $1.3 million and $927,331,
respectively.
Long-Lived Assets
The carrying values of intangible and other long-lived assets are reviewed
quarterly to determine if any impairment indicators are present. To date,
no such impairment has been indicated. If it is determined that such
indicators are present and the review indicates that the assets will not be
recoverable, based on undiscounted estimated cash flows over the remaining
amortization and depreciation period, their carrying values are reduced to
estimated fair market value.
Accrued Royalties
The Company has various royalty agreements with instructors and artists
requiring royalty payments of specified product sales based upon unit
sales, or upon a specified minimum royalty amount. Payments are made
quarterly and semi-annually.
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.
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 $3.0 million for 1999, $2.2 million for 1998, and $1.7 million for
1997, 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 5% of sales for any of the years ended
December 31, 1999, 1998 and 1997. The Company generally does not require
collateral.
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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.
Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements under
the provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB No. 25") and related interpretations.
In 1995, Financial Accounting Standards Board Statement No. 123, Accounting
for Stock-Based Compensation ("FASB No. 123"), was issued, whereby
companies may elect to account for stock-based compensation using a fair
value based method or continue measuring compensation expense using the
intrinsic value method prescribed in APB No. 25. FASB No. 123 requires the
companies electing to continue to use the intrinsic value method make pro
forma disclosure of net income and net income per share as if the fair
value based method of accounting had been applied.
Defined Contribution Plan
In 1999, the Company adopted a defined contribution retirement plan under
Section 401(k) of the Internal Revenue Code, which covers substantially all
employees. Eligible employees may contribute amounts to the plan, via
payroll withholding, subject to certain limitations. The 401(k) plan
permits, but does not require, additional matching contributions to the
401(k) plan by the Company on behalf of all participants in the 401(k)
plan. To date, the Company has not made any matching contributions to the
401(k) plan.
Reporting Comprehensive Income
On January 1, 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. The only item of comprehensive income that the
Company has is unrealized gains (losses) on securities available-for-sale.
The reclassification adjustment for gains included in net income for 1997
net of tax of $1.6 million include unrealized gains of $2.3 million and net
realized gains of $1.3 million. The reclassification adjustment for gains
and losses included in net income for 1998, net of tax of $618,578 include
unrealized losses of $1.8 million and net realized gains of $427,813. The
reclassification adjustment for gains and losses included in net income for
1999 include unrealized losses of $2.6 million and net realized gains of
$1.6 million.
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Earnings Per Share
Basic earnings per share excludes any dilutive effects of options, warrants
and dilutive securities. Basic earnings per share is computed using the
weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed using the weighted average number of
common and common stock equivalent shares outstanding during the period.
Common equivalent shares are excluded from the computation if their effect
is antidilutive. All earnings per share amounts for all periods have been
presented and conform to the Statement No. 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
1999 1998 1997
---------------------------------------------------------
Numerator for basic earnings per share $1,718,345 $ 859,781 $ 654,313
Effect of Dilutive Securities:
8% convertible debentures 56,401 19,234 -
---------------------------------------------------------
Numerator for diluted earnings per share $1,774,746 $ 879,015 $ 654,313
=========================================================
Denominator:
Weighted average shares for basic
earnings per share 8,785,205 8,072,877 8,040,000
Effect of Dilutive Securities:
Weighted average of common stock, stock
options, warrants and convertible debentures 333,903 45,915 -
---------------------------------------------------------
Denominators for diluted earnings per share 9,119,108 8,118,792 8,040,000
=========================================================
Net income per share--basic $ 0.20 $ 0.11 $ 0.08
Net income per share--diluted $ 0.19 $ 0.11 $ 0.08
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000. SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction and, if it is, the
type of hedge transaction. The Company does not expect that the adoption
of SFAS No. 133 will have a material impact on its financial statements
because it does not currently hold any derivative instruments.
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Acquisitions
In September 1998, the Company acquired a 67% ownership in a newly formed
entity, Healing Arts Publishing, LLC (dba Living Arts) for $2.5 million in cash.
Healing Arts Publishing, Inc., which produced and distributed exercise and
relaxation videos and sold environmentally oriented products through its mail
order catalogs and through sales to retailers, contributed the majority of its
assets and certain liabilities to Living Arts in exchange for a 33% membership
interest. During 1999, the Company acquired the remaining 33% minority interest
in Living Arts (effective July 1999) and a 50.1% majority interest in an
environmental products provider (effective November 1999) for a total of $2.3
million in cash and 207,247 shares of the Company's Class A common stock. These
acquisitions were accounted for using the purchase method and the results from
operations for the environmental products provider are included in the
consolidated financial statements of the Company from the effective acquisition
date. The Living Arts video library, which was acquired by the Company as part
of these transactions, is being amortized using the straight-line method over a
period of 15 years. Goodwill, which represents the excess of the purchase price
over the fair value of tangible assets acquired, is being amortized on a
straight-line basis over a period of 20 years.
3. Securities Available-for-Sale
Securities available-for-sale consisted of shares of common stock from one
issuer. At December 31, 1998, the cost and fair value of these securities were
$32,200 and $1.6 million, respectively. The fair market value of the shares was
determined by using the closing NASDAQ price of the common stock at December 31,
1998. The Company liquidated its portfolio during 1999.
During 1997, the Company sold 150,000 shares of the common stock for $1.9
million to a non-related party, and recognized a gain of $1.9 million on the
sale. During 1998, the Company sold 60,000 shares at a market value of $703,125
to a related party and recognized a gain of $696,992 on the sale. During the
first and second quarters of 1999, the Company sold 100,000 shares of the common
stock for $538,750 to a related party, and recognized a gain of $528,528 on the
sale. During the third and fourth quarters of 1999, the Company sold its
remaining 215,000 shares of the common stock for $2.5 million to a non-related
party and recognized a gain of $2.5 million on the sale.
4. Property and Equipment
Property and equipment, stated at cost, consists of the following:
Deember 31,
1999 1998
---------------------------------
Furniture, fixtures and equipment $ 805,182 $ 614,804
Leasehold improvements 333,747 288,324
Website development (including construction-
in-process costs) 1,600,728 -
Computer/telephone equipment 1,632,065 965,449
Warehouse equipment 222,329 210,033
----------------------------------
4,594,051 2,078,610
Accumulated depreciation and amortization (1,425,868) (998,916)
----------------------------------
$ 3,168,183 $1,079,694
==================================
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has included $1.3 million in web development costs expended for
development of a new direct-to-consumer site. These costs are accounted for
-----------------------------
in accordance with SOP 98-1, Accounting for the Costs of Computer Software
- --------------------------------------------------------------------------
Developed or Obtained for Internal Use.
- ---------------------------------------
5. Commitments
At December 31, 1999 and 1998, the Company's property held under capital leases
consisted of the following, which is included in property and equipment:
December 31,
1999 1998
-------------------------------------------
Warehouse equipment $ 40,229 $ 40,229
Computer/telephone equipment 365,545 130,822
-------------------------------------------
405,774 171,051
Accumulated amortization (99,189) (79,777)
$306,585 $ 91,274
===========================================
The Company leases equipment and office, retail, and warehouse space
through capital and operating leases. The following schedule represents
the annual future minimum payments, as of December 31, 1999:
Capital Operating
----------------------------
2000 $ 101,385 $ 580,502
2001 90,560 313,226
2002 82,248 70,167
2003 60,280 -
---------------------------
Total minimum lease payments 334,473 $ 963,895
===========================
Less portion related to interest (29,555)
---------
Present value of future minimum lease payments 304,918
Less current portion (95,844)
$ 209,074
=========
The Company incurred rent expense of $790,393, $646,886 and $508,590 for the
years ended December 31, 1999, 1998 and 1997, respectively.
6. Line of Credit
Gaiam is party to revolving line of credit agreements, which extend through
December 31, 2001. The credit agreements permit borrowings up to $3 million
based upon the collateral value of Gaiam's accounts receivable and inventory
held for resale. Borrowings under these agreements bear interest at the prime
rate plus 1% which was 9.50% at December 31, 1999. These borrowings are secured
by a pledge of Gaiam's assets, and contain various financial covenants,
including prohibiting the payment of cash dividends to its shareholders and
requiring the maintenance of certain financial ratios.
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. 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 the President and Chief Executive Officer of the Company. The debentures were
payable on the earlier of specified dates or the closing of an initial public
offering. Two of the debentures, totaling $773,051 were repaid during 1999, and
$50,000 was converted at the initial public offering date and price in to 10,000
shares of Class A common stock.
During 1999, Gaiam issued an additional $1,425,000 in 8% convertible
debentures. These debentures were converted at the initial public offering
date and price into 285,000 shares of Class A common stock.
8. Income Taxes
The provision for income taxes is comprised of the following:
December 31,
1999 1998 1997
-----------------------------------------------------------------
Current:
Federal $1,006,008 $197,142 $269,919
State 156,426 45,129 41,783
-----------------------------------------------------------------
1,162,434 242,271 311,702
Deferred:
Federal (37,610) 25,852 34,420
State (62,035) (16,168) 16,412
-----------------------------------------------------------------
(99,645) 9,684 50,832
-----------------------------------------------------------------
Total $1,062,789 $251,955 $362,534
=================================================================
Variations from the federal statutory rate are as follows:
December 31,
1999 1998 1997
-----------------------------------------------------------------
Expected federal income tax expense at
statutory rate of 34% $ 928,294 $ 466,934 $345,728
Effect of legal judgment - permanent difference - (251,609) -
Effect of other permanent differences 40,104 20,276 (16,983)
State income tax expense, net of federal benefit 94,391 16,354 33,789
-----------------------------------------------------------------
Income tax expense $1,062,789 $ 251,955 $362,534
=================================================================
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.
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 1999 and 1998 are as follows:
December 31,
1999 1998
-----------------------------------------
Deferred tax assets:
Reserve for bad debts $ 57,386 $ 26,012
Capitalized inventory 29,777 -
-------- --------
87,163 26,012
Deferred tax liabilities:
Securities available-for-sale - (618,578)
Amortization (1,181) (2,435)
Depreciation (66,060) (57,374)
-------- --------
(67,241) (678,387)
-------- --------
Deferred tax asset (liability), net $ 19,922 $(652,375)
======== =========
9. Stockholders' Equity
The Company had warrant certificates outstanding that entitled the holder to
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 has 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 warrant is exercisable during a two-year period
beginning January 20, 2002 and ending January 9, 2004.
On September 19, 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. 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. On October 26, 1999, the Company effected a 2.5-for-1 common stock split.
The Company's consolidated financial statements have been restated to reflect
these stock splits.
In June 1999, the Company completed a private placement whereby 331,429
shares of Class A common stock were issued at $4.375 per share. A total of
$2.0 million in convertible debentures with a stated interest rate of 8%
were issued during 1998 and the first six months of 1999. These debentures
were convertible automatically upon the closing of the initial public
offering into Class A common stock at the initial public offering per share
price. A total of $1.5 million of these debentures were converted into
295,000 shares of Class A common stock, and a $500,000 debenture was repaid
in cash.
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gaiam's initial public offering of 1,705,000 shares of Class A common stock at
$5.00 per share was completed in October 1999. The underwriters also exercised
their overallotment option for 102,861 additional shares during November 1999.
Net proceeds to Gaiam, after deducting all commissions and expenses associated
with the offering, were $6.1 million.
In November 1999, Gaiam issued 207,247 shares of Class A common stock in lieu of
cash payment for acquisitions.
In December 1999, Gaiam's Chief Executive Officer converted 1,635,000 shares of
Class B common stock into 1,635,000 shares of Class A common stock.
As of December 31, 1999, the Company had the following Class A common shares
reserved for future issuance:
Awards under the 1999 Long-Term Incentive Plan 890,900
Shares reserved for warrant exercise 24,000
-----------------------
Total shares reserved for future issuance 914,900
=======================
10. Stock Option Plans
On June 1, 1999, the Company adopted the 1999 Long-Term Incentive Plan ("the
Plan"), which provides for the granting of options to purchase up to 1.6 million
shares of the Company's common stock. Both incentive stock options and non-
qualified stock options may be issued under the provisions of the Plan.
Employees of the Company and its affiliates, members of the Board of Directors,
consultants and certain key advisors are eligible to participate in the plan,
which shall terminate no later than June 1, 2009. These option grants vest,
starting in month eleven, at 2% each month over a fifty-month period. Options
outstanding under the Company's plan have been granted at prices, which were
either equal to the market value of the stock on the date of grant. The Company
allows non-employees to participate in the Plan. The accounting for the options
granted to these individuals is in accordance with SFAS No. 123.
A summary of stock option activity and weighted average exercise prices for the
year ended December 31, 1999 follows:
Weighted
Average
Exercise
Options Price
--------------- ---------------
Outstanding at beginning of year -- --
Granted:
Price equal to fair value 851,200 $ 4.51
Price less than fair value 39,700 $ 7.18
Exercised -- --
Forfeited -- --
---------------------------------
Outstanding at end of year 890,900 $ 6.10
Exercisable at end of year -- --
Weighted-average fair value of options
granted during the year:
Price equal to fair value $ 1.85
Price less than fair value $11.21
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As the Company implemented this stock option plan during 1999, no options were
vested as of December 31, 1999. Therefore, the Company did not have any stock
exercisable at the end of the year. A summary of stock options outstanding as of
December 31, 1999, follows:
Weighted
average Weighted
Range of Number remaining average
exercise prices outstanding life (years) exercise price
- --------------- ----------- ------------ --------------
$4.00 - $4.99 676,700 6.42 $4.38
$5.00 - $5.99 174,500 6.81 $5.00
$7.00 - $7.99 39,700 6.90 $7.18
The maximum number of shares reserved for use in all company restricted stock
and stock incentive plans totals approximately 1.6 million. No stock options
have expired to date.
The Company applies Accounting Principles Board Opinion No. 25 (APB No. 25) in
accounting for its plan. Accordingly, no compensation cost has been recognized
in the Consolidated Statements of Income from options issued under the company's
stock option plan. Had compensation cost for the Company's stock-based
compensation plans been determined under the fair value methodology for
determining compensation cost under SFAS No. 123, the Company's net earnings and
earnings per share for the year ended December 31, 1999, would have been as
follows:
Net earnings:
As reported $1,718,345
Pro forma $1,599,102
Net earnings per common share:
As reported $ 0.20
Pro forma $ 0.18
Fully diluted net earnings per common share:
As reported $ 0.19
Pro forma $ 0.18
In estimating the pro forma compensation expense for each equity award granted
during the year, the Company used the Black Scholes option pricing model, a
risk-free interest rate in a range of 5.78% to 6.24%, expected dividend yield of
zero, expected option lives of 4 years, and expected volatility of 1.29. The
estimated pro forma compensation cost resulting in the pro forma net income and
earnings per share may not be representative of actual results had the Company
accounted for equity awards using the fair-value-based method.
The Company recorded aggregate deferred compensation of $106,992 in 1999. The
amounts recorded represent the difference between the grant price and the deemed
fair value of the Company's common stock for shares subject to options granted
during 1999. Options granted below fair market value and the associated weighted
average exercise price per share were 39,700 and $6.11 during the year ended
December 31, 1999. The amortization of deferred compensation is charged to
operations over the vesting period of the options, which is typically four
years. No amortization was recognized in 1999.
GAIAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Related Party Transactions
In 1997, the Company entered into a fulfillment agreement with InnerBalance
Health, publisher of a natural health catalog, (a related party under common
ownership with the Chief Executive Officer of the Company) to provide customer
sales, service, warehousing and distribution services. The Company billed
$99,402 and $33,066 under this contract for 1998 and 1997, respectively. On
October 1, 1998, the Company acquired all of the stock and net assets of
InnerBalance Health, Inc. 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.
In 1999, the Company engaged the services of ccplanet.com, Inc. (a related party
under common ownership with the Chief Executive Officer of the Company) to
develop and implement a new web site design utilizing the latest technology for
its direct to consumer operations. The Company paid ccplanet $1.2 million for
work performed on said project through December 31, 1999 (the new site was
placed into service during March, 2000). The Company has made its customer
database and certain visual media available to ccplanet in exchange for
additional fees totaling $600,000 during 1999.
12. Subsequent Events
The Company has entered into a six-year contract with Duke-Weeks Realty Limited
Partnership to lease approximately 208,100 square feet of warehousing and
distribution space in Cincinnati, Ohio, commencing March 1, 2000. The Company
will relocate its warehousing and distribution services group to this facility.
13. Segment Information
The Company has two business segments: Direct to Consumer and Business to
Business; both of which sell products, services and information produced or
purchased from other suppliers. Although the customer bases do not overlap to
any extent, the production, purchase and delivery processes overlap in some
areas. The Company does not accumulate the balance sheet by segment for purposes
of management review.
Each of the two segments qualifies as such because each is more than 10% of
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,
1999 1998 1997
--------------------------------------------------------------
Net revenue:
Direct to consumer $34,573,540 $26,897,236 $19,897,690
Business to business 11,151,122 3,841,304 -
--------------------------------------------------------------
Consolidated net revenue 45,724,662 30,738,540 $19,897,690
Contribution margin:
Direct to consumer (243,949) 128,691 (566,490)
Business to business 2,368,360 856,152 -
--------------------------------------------------------------
Consolidated contribution margin 2,124,411 984,843 (566,490)
Reconciliation of Contribution margin to net income:
Other income 605,865 388,491 1,583,336
Income tax expense 1,062,789 251,955 362,534
Minority interest expense (50,858) 261,598 -
--------------------------------------------------------------
Net income $ 1,718,345 $ 859,781 654,312
==============================================================
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
For information with respect to the executive officers of the
Registrant, See Item 4 - "Directors and Executive Officers" at the end of Part I
of this report. The information required by this Item concerning the Directors
of the Company is incorporated herein by reference to the Company's Proxy
Statement for its Annual Meeting of Stockholders, to be held on June 8, 2000, to
be filed with the Commission pursuant to Regulation 14A.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by
reference to the Company's Proxy Statement for its Annual Meeting of
Stockholders, to be held on June 8, 2000, to be filed with the Commission
pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated herein by
reference to the Company's Proxy Statement for its Annual Meeting of
Stockholders to be held on June 8, 2000, to be filed with the Commission
pursuant to Regulation 14A.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated herein by
reference to the Company's Proxy Statement for its Annual Meeting of
Stockholders to be held on June 8, 2000, to be filed with the Commission
pursuant to Regulation 14A.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(A) Documents filed as part of this report are as follows:
1. Financial Statements.
See listing of Financial Statements included as part of this
Form 10-K in Item 8 of Part II.
2. Financial Statement Schedules.
None required.
(B) No reports on Form 8-K were filed during the last quarter of the
period covered by this Form 10-K.
(C) Exhibits:
1. The following exhibits are incorporated by reference:
Exhibit No. Description
----------- -----------
3.1 * Amended and Restated Articles of Incorporation
3.2 * Bylaws of Gaiam, Inc.
4.1 * Form of Gaiam, Inc. Stock Certificate
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.
24.1 * Power of Attorney (included on signature page to S-1)
27.1 Financial Data Schedule
* Previously filed
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Broomfield, State of Colorado, on this 28th day of March, 2000.
GAIAM, INC.
By: /s/ Jirka Rysavy
-------------------
Jirka Rysavy
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
/s/ Jirka Rysavy Chairman of the Board and March 28, 2000
- -----------------------
Jirka Rysavy Chief Executive Officer
/s/ Lynn Powers President, Chief Operating March 28, 2000
- -----------------------
Lynn Powers Officer, Secretary and Director
/s/ Barnet M. Feinblum Director March 28, 2000
- -----------------------
Barnet M. Feinblum
Director March 28, 2000
- -----------------------
Barbara Mowry
/s/ Paul H. Ray Director March 28, 2000
- -----------------------
Paul H. Ray
/s/ Janet Mathews Chief Financial Officer (Principal March 28, 2000
- ----------------------- Financial and Accounting Officer)
Janet Mathews
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 * Amended and Restated Articles of Incorporation
3.2 * Bylaws of Gaiam, Inc.
4.1 * Form of Gaiam, Inc. Stock Certificate
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.
24.1 * Power of Attorney (included on signature page to S-1)
27.1 Financial Data Schedule
* Previously filed