-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EdPuOeMETvKlTYou2cJgCEYSGWrfZXtp/CV0ALgmOhI4sGJx7GDQE7mSOyHQQgBN 8WtuXqiSqXi2PrDYgYjH2A== 0000950109-99-003529.txt : 20000211 0000950109-99-003529.hdr.sgml : 20000211 ACCESSION NUMBER: 0000950109-99-003529 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19990929 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GAIAM INC CENTRAL INDEX KEY: 0001089872 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-83283 FILM NUMBER: 99719286 BUSINESS ADDRESS: STREET 1: 360 INTERLOCKEN BLVD #300 CITY: BROOMFIELD STATE: CO ZIP: 80021 MAIL ADDRESS: STREET 1: 360 INTERLOCKEN BLVD #300 CITY: BROOMFIELD STATE: CO ZIP: 80021 S-1/A 1 AMENDMENT #3 TO FORM S-1 FOR GAIAM, INC. As filed with the Securities and Exchange Commission on September 29, 1999 Registration No. 333-83283 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- AMENDMENT NO. 3 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- GAIAM, INC. (exact name of registrant as specified in its charter) Colorado 5961, 7375 84-111-35-27 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Classification Identification No.) incorporation or Code Number) organization) 360 Interlocken Blvd., Suite 300 Broomfield, Colorado 80021 (303) 464-3600 (address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ---------------- JIRKA RYSAVY Chief Executive Officer Gaiam, Inc. 360 Interlocken Blvd, Suite 300 Broomfield, Colorado 80021 (303) 464-3600 (name, address, including zip code, and telephone number, including area code, of agent for service) ---------------- Copies To: JAMES L. PALENCHAR, ESQ KEVIN A. CUDNEY, ESQ BARTLIT BECK HERMAN PALENCHAR DORSEY & WHITNEY LLP & SCOTT 370 17th Street, Suite 4400 511 16th Street, Suite 700 Denver, Colorado 80202 Denver, Colorado 80202 Telephone: 303-629-3400 Telephone: 303-592-3100 Facsimile: 303-629-3450 Facsimile: 303-592-3140
---------------- Approximate Date of Commencement of Proposed Sale to The Public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] ---------------- The Registrant Hereby Amends This Registration Statement On Such Date Or Dates As May Be Necessary To Delay Its Effective Date Until The Registrant Shall File A Further Amendment Which Specifically States That This Registration Statement Shall Thereafter Become Effective In Accordance With Section 8(a) Of The Securities Act Of 1933 Or Until The Registration Statement Shall Become Effective On Such Date As The Commission, Acting Pursuant To Said Section 8(a), May Determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, SEPTEMBER 29, 1999 PROSPECTUS , 1999 2,000,000 Shares of Class A Common Stock $5.00 per share ($4.50 per share for Gaiam customers, up to 200 shares per customer and a maximum of 1,000,000 shares) [Gaiam logo] ----------- Gaiam produces and sells goods, services and information targeted to customers who value the environment, a sustainable economy, healthy lifestyles and personal development. This is our initial public offering. We will apply for quotation of our shares on the Nasdaq National Market under the symbol "GAIA." We intend to allocate shares first to our customers and then to the general public. Our customers will receive a 10% discount from the initial public offering price (or a price of $4.50 per share) on up to 200 shares per customer and a maximum of 1,000,000 shares. The minimum order size in this offering for Gaiam customers and for the public is 50 shares. Up to 395,000 shares may be sold to holders of our debentures in exchange for the outstanding principal amount of the debentures at $5.00 per share. ----------- See "Risk Factors" beginning on page 9 to read about material risks you should consider before buying our shares. -----------
Per Share Total Shares ----- ----------- --------- Public offering price:............................ $5.00 $5,000,000* 1,000,000 Underwriting discounts and commissions:........... $0.50 $ 500,000* Proceeds to Gaiam:................................ $4.50 $4,500,000* Gaiam customer offering price (up to 200 shares per customer and a maximum of 1,000,000 shares):............................... $4.50 $4,500,000* 1,000,000 Underwriting discounts and commissions:........... $0.45 $ 450,000* Proceeds to Gaiam:................................ $4.05 $4,050,000* Total Proceeds to Gaiam Total Shares.............. $8,550,000 2,000,000
- ----- * We do not know how many of the shares offered will be purchased by our customers at the $4.50 offering price, but the maximum available at that price is 1,000,000 shares. The underwriters have an option to purchase an additional 300,000 shares from Gaiam for resale to the public at the $5.00 offering price per share to cover any over-allotments. The closing of this offering is expected to occur on or about October , 1999. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. ----------- Tucker Anthony Cleary Gull Adams, Harkness & Hill, Inc. [Inside front cover] [Pictures] TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 3 Questions and Answers for Gaiam Customers................................ 6 Risk Factors............................................................. 9 Use of Proceeds.......................................................... 15 Capitalization........................................................... 16 Dilution................................................................. 17 Selected Financial Data.................................................. 19 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 20 Our Business............................................................. 28 Management............................................................... 40 Certain Transactions..................................................... 43 Our Shareholders......................................................... 44 Description of Capital Stock............................................. 46 Shares Eligible for Future Sale.......................................... 48 Underwriting ............................................................ 50 Legal Matters............................................................ 52 Experts.................................................................. 52 Additional Information................................................... 52
2 PROSPECTUS SUMMARY You should read the following summary, together with the more detailed information and Gaiam's consolidated financial statements and related notes appearing elsewhere in this prospectus. OUR BUSINESS Founded in Boulder, Colorado in 1988, Gaiam (pronounced "gi am") produces and sells goods, services and information targeted to customers who value the environment, a sustainable economy, healthy lifestyles and personal development. We reach our customers through catalogs, the Internet and retailers. We strive to provide our customers an opportunity to practice what we call "conscious commerce." This term describes the practice of making purchasing decisions based on the personal values and beliefs. We believe many of our consumers are concerned about personal and planetary health and sustainability and want to use their purchasing decisions to effect positive change. We call this "voting for their values with their dollars." Our name, Gaiam, is a fusion of the words "Gaia" and "I am." Gaia, mother Earth, was honored on the Isle of Crete in ancient Greece 4,000 years ago by the Minoan civilization. This civilization valued education, art, science, recreation and the environment and believed that the Earth was directly connected to their existence and daily life. The concept of Gaia stems from this ancient philosophy that the Earth is a living entity. At Gaiam, we believe that all of the Earth's living matter, air, oceans and land form an interconnected system that can be seen as a single entity. According to a 1996 study published by the Institute of Noetic Sciences, "The Integral Culture Survey," this view is shared by over 90% of a group called "cultural creatives." This study estimates that this demographic group, which shares the values of environmental awareness, healthy lifestyles and personal development, numbered 44 million in the United States in 1994. The author of this study, Paul Ray, has agreed to join our board of directors upon completion of this offering. From 1996 to 1998, our revenues increased from $14.8 million to $30.7 million, representing a compound annual growth rate of approximately 44%. Our number of unique individual customers increased from 300,000 at the end of 1996, to 685,000 at the end of 1998 and to 800,000 at June 30, 1999. Although our historical sales have been predominantly through catalogs and retailers, we are shifting our sales emphasis to the Internet and we intend to make the Internet our primary channel of distribution. Engaging in sales on the Internet, sometimes called "e-commerce," may subject us to risks and uncertainties not historically associated with our business. These risks will include incurring increased costs of enhancing and maintaining our websites and acceptance of the Internet by consumers as a place to purchase our goods and services. 3 OUR MARKET OPPORTUNITY We believe that several markets share a common customer base that we believe practices conscious commerce. Because of this common customer base, we believe these markets should be viewed collectively as one industry. We have named this industry "Lohas" -an acronym for Lifestyles Of Health And Sustainability, and we divide the Lohas industry into five markets that shape the industry: Sustainable Economy. This market includes environmental management services and solutions, renewable energy, energy conservation products and services, sustainable manufacturing processes, recycling and goods made from recycled materials. Healthy Living. This market includes food supplements, vitamins and minerals, natural and organic foods, and natural personal body care and information and services related to these products. Alternative Healthcare. This market includes natural health and wellness solutions, information, products and services, including alternative, noninvasive treatments, massage, chiropractic, acupuncture, acupressure, biofeedback and aromatherapy. Personal Development. This market includes experiences, solutions, products, information and services relating to mind, body and spiritual development, such as yoga, meditation, relaxation, spirituality, ancient religions, esoteric sciences and realizing human potential. The fitness elements of this market are often referred to as "mind-body-spirit." Ecological Lifestyles. This market includes information, products and services that offer environment-friendly solutions, natural untreated fiber products and eco-tourism. Gaiam currently produces and sells information, goods and services in each market of the Lohas industry under three brand names: .Harmony targets the Sustainable Economy and Ecological Lifestyles markets; .Living Arts targets the Personal Development market; and .InnerBalance targets the Alternative Healthcare and Healthy Living markets. OUR STRATEGY We are not aware of a dominant market leader for the entire Lohas industry and we believe the industry is characterized by a fragmented supplier and distribution network. Gaiam seeks to establish itself as a brand name, information resource and authority in the Lohas industry. We view the Internet as an opportunity to enhance relationships with our customers and reduce consumption of natural resources. Through our Internet site, www.gaiam.com, we strive to create an online community where our customers will share information, solutions and experiences and promote interactive feedback. Our customer service representatives have learned from our customers that many of them desire to acquire information from a trusted source offering them a personalized, concise and reliable view into the vast and inconsistent universe of information. We believe we are well positioned to be a source such as this because of our customer participation, as evidenced by a customer survey which drew a 50% response rate. However, because the Internet and e-commerce industry are subject to technological changes, our strategy to expand our presence online and create an online community has additional costs and risks associated with it. We intend to pursue the following strategies to benefit our customers: .Focus on Our Online Presence 4 .Strengthen Our Brand .Offer Quality, Convenience and Wide Selection .Develop Business-to-Business Opportunities .Complement our Existing Business with Selective Strategic Acquisitions We believe customers should have opportunities to invest in companies they are helping create. In this offering, we will give preference to our customers in allocating shares and give them a 10% discount for purchases of up to 200 shares. The maximum number of shares available at this price is 1,000,000. Gaiam was organized as a Colorado corporation on July 7, 1988. Gaiam's principal office is located at 360 Interlocken Blvd., Suite 300, Broomfield, Colorado 80021, and its telephone number is (303) 464-3600. The Offering Class A common stock offered by 2,000,000 shares Gaiam................................ Class A common stock outstanding after 3,496,429 shares (1) this offering........................ Class B common stock outstanding after 7,035,000 shares this offering........................ Total common stock outstanding after 10,531,429 shares this offering........................ Use of proceeds....................... Working capital and other general corporate purposes, including the possible acquisition of the minority interest in one of our subsidiaries, other acquisitions and the repayment of up to $2.725 million principal amount of debt. See "Use of Proceeds" and "Our Business." Proposed Nasdaq National Market GAIA symbol...............................
- -------- (1) Based on the number of shares outstanding on June 30, 1999. Excludes approximately 675,000 shares issuable upon exercise of options outstanding as of June 30, 1999, each at an exercise price of $4.375 per share. No options are currently exercisable. See "Management." The information in this prospectus assumes that Gaiam's proposed 1-for-2.5 reverse stock split has occurred and that the underwriters' over-allotment option is not exercised. Except where specified, references to Gaiam's shares refer to shares of its class A common stock. The information on our website, including any online discussion forums, and in our catalogs and other marketing materials is not part of this prospectus. References in this prospectus to "Gaiam," "we," "our" and "us" refer to Gaiam, Inc., and not to the persons who manage Gaiam or sit on its Board of Directors. 5 QUESTIONS AND ANSWERS FOR GAIAM CUSTOMERS This summary answers some questions about how the offering process will work for Gaiam customers who wish to purchase shares. You should also carefully read the rest of this prospectus for information about this offering, the shares and Gaiam. Q. What is the price of the shares for Gaiam customers? A. Shares purchased by a Gaiam customer, up to the first 200, will be discounted 10% and will cost $4.50 per share. Fifty shares, the minimum order, will cost $225, and 200 shares will cost $900. No more than 1,000,000 shares will be sold at the discounted price, so it may not be possible to give you the $4.50 price for all shares (up to 200) requested. Customer purchases of additional shares over the initial 200 shares will cost $5.00 per share. For example, an additional 100 shares will cost $500 (or $1,400 for all 300 shares). Q. Is there a minimum number of shares I have to buy? A. Yes. Orders for fewer than 50 shares will not be accepted. Q. How many shares can I request? A. There is no limit on the number of shares a customer may request, but we may not have enough shares to meet your request. Q. Is there a guarantee that I will be able to buy shares? A. No, but Gaiam intends to prioritize the allocation process so that customers who ask to buy shares and place orders early will be able to buy shares. There is no guarantee, however, that this will be possible. We may need to allocate shares if we receive orders for more shares than are offered by this prospectus. Q. How do I request shares? A. On about September 30, 1999, we will send a preliminary prospectus to all Gaiam customers who had previously requested a prospectus. Accompanying the preliminary prospectus will be a conditional offer form, a Federal income tax form W-9 and a limited account application to open an account at Tucker Anthony Incorporated, an affiliate of Tucker Anthony Cleary Gull. The conditional offer form includes a place for you to indicate how many shares you would like to buy. If you have an interest in buying shares, send the account form, the form W-9 and the conditional offer form back in the envelope provided as soon as possible -- Tucker Anthony must receive all forms by October 15, 1999. Customers can also obtain the conditional offer form and the account application by calling Tucker Anthony Incorporated at the phone number listed below. Q. What is a conditional offer to purchase shares? A. A conditional offer is your offer to purchase shares at the price described above. Your offer to purchase shares is not binding until after Gaiam's registration statement is declared effective by the Securities and Exchange Commission, at which time you will receive a confirmation stating that your offer has been accepted. Q. If I make a conditional offer must I send a check? A. Please do not send a check back with your conditional offer form. You will need to send a check after Gaiam's registration statement is declared effective by the Securities and Exchange Commission, but we will notify you of when that occurs. Q. How will Gaiam allocate shares that have been ordered by customers? A. Our goal is to try to allocate shares to our best customers and to have as many customers as possible become shareholders. If we have requests from customers for a greater number of shares, we will allocate them to customers in three ways: 6 1. Up to 500,000 shares will be allocated to the first 1,000 customers on a first come, first served basis, based on the date customers' account application are received by Tucker Anthony. If these first 1,000 customers request more than 500,000 shares in the aggregate, we will allocate shares to customers in a way that will attempt to make sure both that the greatest number of shares get allocated to the customers who have the highest dollar value of purchases from Gaiam over the past 12 months and that all 1,000 customers get to participate to some degree in this allocation. We may not be able to achieve both results, but we will use our discretion to try to do so. 2. A total of approximately 500,000 shares will be allocated to customers based on the dollar volume of the customer's purchases from Gaiam over the past 12 months and to customers who are also Gaiam employees, consultants, contractors or family members. Customers who received shares because they were among the first 1,000 customers to return account applications, may have additional shares allocated under this paragraph if the request was not filled. 3. Finally, a total of approximately 200,000 shares will be allocated to customers by lottery. Q. How will the sales process work? A. After completed account forms and conditional offer forms are received, representatives of Tucker Anthony will contact you by telephone to inform you of the maximum number of shares that have been allocated to you for purchase and to confirm that you are interested in purchasing that number of shares. When the registration statement covering the shares becomes effective, Tucker Anthony will send you a confirmation of your purchase of the shares allocated to you. We estimate that Tucker Anthony will send out the confirmations on approximately October 18, 1999. Tucker Anthony's delivery to you will include a final prospectus and a return envelope for your convenience. Tucker Anthony will request that you return your check for the shares allocated to you within three business days. Q. Will I receive a stock certificate? A. Yes. All customers buying stock in this offering will receive a stock certificate for the shares purchased. In addition, customers who buy shares will also receive a gift package, including a Gaiam t-shirt, cap, mug and canvas shopping bag. Q. Whom do I call if I have questions? A. Call Tucker Anthony Incorporated toll free at 1-877-IPO-GAIA (1-877-476- 4242). 7 SUMMARY FINANCIAL DATA (Amounts in thousands, except per share data) The following table summarizes the financial data of our business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The financial results for the six months ended June 30, 1998 and 1999 and as of June 30, 1999, are unaudited.
Year Ended Six Months December 31, Ended June 30, ----------------------- ---------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- Statement of Operations Data: Net revenues......................... $14,801 $19,898 $30,739 $10,475 $17,563 Gross profit......................... 8,039 11,436 17,565 6,061 10,488 Other income (expense)............... 2,984 1,583 388 (114) 202 Net income after minority interest(1)......................... 340 654 860 39 116 Net income per share (basic and diluted)............................ $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.01 Shares outstanding (basic)........... 8,040 8,040 8,073 8,040 8,318 Shares outstanding (diluted)......... 8,040 8,040 8,119 8,040 8,318
June 30, 1999 --------------------- Actual Pro forma (2) ------- ------------- Balance Sheet Data: Cash................................................... $ 856 $ 7,606 Securities available-for-sale.......................... 1,505 1,505 Working capital........................................ 2,534 9,284 Total assets........................................... 15,839 22,589 Long-term debt (net of current maturities)............. 1,664 914(3) Stockholders' equity................................... 5,216 12,716
- -------- (1) Net income after minority interest includes net income of consolidated Gaiam operations excluding the portion attributable to the minority shareholder of Healing Arts Publishing, LLC, a majority owned subsidiary of Gaiam. (2) Gives effect to the sale by Gaiam of 1,000,000 shares at an assumed initial public offering price of $5.00 per share and 1,000,000 shares at an assumed initial public offering price of $4.50 per share, after deducting the estimated underwriting discount, customer discounts and offering expenses payable by Gaiam. See "Use of Proceeds" and "Capitalization." (3) Gives effect to the repayment of $750,000 of long-term debt from the proceeds of this offering. 8 RISK FACTORS This offering involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus before deciding to invest in our shares. If any of the following risks actually occurs, our business could be harmed and the trading price of our shares could decline. In that case, you might lose all or part of your investment. We may not be able to compete successfully against current and future competitors. Our goal is to establish ourselves as the market leader in the Lohas industry. We believe that the Lohas industry has thousands of small, local and regional businesses. We believe that some smaller businesses may be able to more effectively personalize their relationships with customers. Our direct marketing business is evolving and competitive. We expect more business to move to the Internet. As this happens, we expect competition to intensify because barriers to entry are minimal and competitors can launch new sites at a relatively low cost. Some of our competitors have, and our potential competitors may have, greater financial and marketing resources. In addition, larger, well- established and well-financed entities may acquire, invest in or form joint ventures with our online competitors as the use of the Internet and other online services increases. Increased competition from these or other competitors could negatively impact our revenue. Our ability to grow our customer base and generate sales depends largely upon the importance consumers place on environmental issues, promoting a sustainable economy, healthy lifestyles and personal development. Our business is targeted at a demographic group--the cultural creatives-- that assigns high value to environmental consciousness, promoting a sustainable economy, healthy lifestyles and personal development. The success of our business assumes that that we will be able to capture market share within this group. Our success also depends upon the willingness of consumers to purchase goods and services that promote the values we espouse. We cannot assure that the demographic trends on which they are based will continue or that the current levels of environmental consciousness or concerns about promoting a sustainable economy, healthy lifestyles and personal development will be sustained. The decrease of consumer interest in purchasing goods and services that promote the values we espouse would materially and adversely affect the growth of our customer base and sales revenues and, accordingly, our financial prospects. Some products and services we sell may put us at a competitive price disadvantage. Some environmentally friendly products are priced at a premium to products that have similar uses but are not environmentally friendly. Our sales growth assumes that consumers will sometimes be willing to pay higher prices in order to enhance the environment, promote a sustainable economy and achieve healthy lifestyles and personal development or that, over time, we will be able to reduce prices through volume purchases from our suppliers. If the protection of our Internet domain names are inadequate, our brand recognition could be impaired and we could lose customers. We currently hold various web domain names relating to our brand, including www.gaiam.com. The acquisition and maintenance of domain names is regulated by governmental agencies and their designees. The regulation of domain names in the U.S. and in foreign countries is changing and is expected to continue to change in the future. As a result, we may not be able to acquire or maintain the domain names we want in all countries in which we seek to conduct business. Furthermore, we may be unable to prevent third parties from acquiring domain names whose similarity decreases the value of our trademarks and proprietary rights. Loss of our Internet domain names could adversely affect our ability to develop brand recognition. 9 We may engage in future acquisitions that may harm our financial results, cause our stock price to decline, or dilute our shareholders' interest if we do not successfully execute them. Acquisitions have been part of our growth. Living Arts and Inner Balance, acquired in 1998, accounted for approximately one-third of our revenues for the six months ended June 30, 1999. Even though our strategy does not depend on making acquisitions, we expect to make them. These acquisitions may be of entire companies, controlling interests in companies or of minority interests in companies where we intend to invest as part of a strategic alliance. However, we may not succeed in identifying attractive acquisitions or attractive acquisition candidates may not be available at reasonable prices. We are also likely to face competition for attractive acquisition candidates, which may increase the expense of completing acquisitions. Making acquisitions may harm our operating results or cause our stock price to decline because we may: - -- issue equity or equity-related securities that dilute our current shareholders' percentage ownership or incur substantial debt or assume liabilities of an acquired business; - -- experience reduced earnings or adverse tax consequences by failing to efficiently integrate the operations, assets and personnel of the acquired companies in a timely manner, being required to amortize a significant amount of intangible assets acquired in an acquisition, or otherwise; and -- divert management's attention from operating the business. Moreover, the presence of minority ownership interests in any acquired company, and our strategy of allowing our subsidiaries to retain some autonomy in their management and operation, could make integration more difficult. The loss of the services of our key personnel could disrupt our business. The services of our officers, Jirka Rysavy, Lynn Powers, Pavel Bouska, Mark Lipien and Linda West, are critical to our business. Our strategy of allowing the management teams of acquired companies to continue to exercise significant management responsibility for those companies makes it especially important that we retain key employees, particularly the e-commerce and creative teams, of the companies we might acquire. Competition for qualified personnel is intense, particularly given the scarcity of qualified and experienced management in the e-commerce and the direct marketing industries. Government regulation and legal uncertainties could add additional costs to doing business on the Internet. E-commerce is new and rapidly changing. Federal and state regulation relating to the Internet and e-commerce is evolving. Currently, there are few laws or regulations directly applicable to the Internet or e-commerce on the Internet. Due to the increasing popularity of the Internet, it is possible that laws and regulations may be enacted with respect to the Internet, covering issues such as user privacy, pricing, taxation, content, copyrights, distribution, antitrust and quality of products and services. Additionally, the rapid growth of e-commerce may trigger the development of tougher consumer protection laws. Our business could also be affected by regulations adopted in the future. For example, a number of different bills are under consideration by Congress and various state legislatures that would restrict disclosure of consumers' personal information. If legislation of this type were enacted, it would make it more difficult for us to obtain additional names for our distribution lists, and restrict our ability to send unsolicited electronic mail or printed catalogs. Both of which could slow the growth of our customer base. Because of our recent shift of emphasis to the Internet, we cannot be certain that our Internet business will succeed. Although our historical sales have been predominantly through catalogs and retailers, we are shifting our sales emphasis to the Internet. We intend to make the Internet our primary channel of distribution. 10 The development of a website and other proprietary technology entails significant technical, financial and business risks. We have spent approximately $500,000 during 1999 in the development of our websites and may spend up to an additional $500,000 to introduce the website features we describe in this prospectus under "Business." We intend to continue to invest resources to enhance our websites and keep our systems up to date. In addition, the adoption of new Internet, networking or telecommunications technologies may require us to devote substantial resources to modify and adapt our services. The success of our business depends on continued growth of e-commerce. The emergence of the Internet and the growing popularity of e-commerce provides a new channel for direct access to consumers. Since the introduction of e-commerce to the Internet, the number of websites competing for customer attention has increased very rapidly. We expect future competition to intensify given the relative ease with which new websites can be developed. We believe that the primary competitive factors in e-commerce are brand recognition, reputation, site content, ease of use, price, fulfillment speed, customer support and reliability. Our success in e-commerce will depend heavily upon our ability to continue to provide a compelling and satisfying shopping experience. Other factors that will affect our success include our continued ability to attract and retain experienced marketing, technology, operations and management talent. The nature of the Internet as an electronic marketplace (which may, among other things, facilitate competitive entry and comparison shopping) may render it inherently more competitive than traditional retailing formats. Increased competitiveness among online retailers may result in reduced operating margins, loss of market share and a diminished brand franchise. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our online technology. The Internet and the e-commerce industry are subject to rapid technological change, frequent new product and service introductions embodying new technologies, and the emergence of new industry standards and practices that could render our existing Internet strategy obsolete. Our success will depend, in part, on our ability to license leading technologies useful in our business, enhance existing services, develop new services and technology that address the needs of our customers and our ability to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. If we cannot maintain and continuously update our information systems, our business could suffer. Information systems are critical to our business. These systems assist in processing orders, managing inventory, purchasing and shipping merchandise on a timely basis, responding to customer service inquiries, and gathering and analyzing operating data by business segment, customer, and SKU (a specific identifier for each different product). If our systems should require substantial updating or fail, we could incur substantial expenses. A material security breach could cause us to lose sales, damage our reputation or result in liability to us. Our computer servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. We may need to expend significant additional capital and other resources to protect against a security breach or to alleviate problems caused by any breaches. Our relationships with our customers may be adversely affected if the security measures that we use to protect their personal information, such as credit card numbers, are ineffective. We currently rely on security and authentication technology that we license from third parties. We may not be able to prevent all security breaches. Our systems may fail or limit user traffic, which would cause us to lose sales. We are dependent on our ability to maintain our computer and telecommunications equipment in effective working order and to protect against damage from fire, natural disaster, power loss, telecommunications failure or similar events. In addition, growth of our customer base may strain or exceed the capacity of our computer and telecommunications systems and lead to degradations in performance or systems failure. We have 11 experienced capacity constraints and failure of information systems in the past that have resulted in decreased levels of service delivery or interruptions in service to customers for limited periods of time. While we continually review and seek to upgrade our technical infrastructure and provide for system redundancies and backup power to limit the likelihood of systems overload or failure, substantial damage to our systems or a systems failure that causes interruptions for a number of days could adversely affect our business. We may face legal liability for the content contained on our website or other content that is accessed from our website. We intend to keep increasing the amount of content on our website. We could face legal liability for defamation, negligence, copyright, patent or trademark infringement, personal injury or other claims based on the nature and content of materials that we publish or distribute on our website. These types of claims have been brought, sometimes successfully, against on-line services in the past. We can be exposed to litigation for the content and services that are accessible from our website through links to other websites or through content and materials that may be posted by our users in chat rooms or bulletin boards. If we are held liable for damages for the content on our website, our business may suffer. Our insurance may not adequately protect us against these types of claims. We do not currently offer health-related information on our website, but we may do so in the future. This could increase our legal exposure. Further, our business is based on establishing www.gaiam.com as a trustworthy and dependable provider of information and services. Allegations of impropriety, even if unfounded, could therefore have a material adverse effect on our reputation and our business. Our suppliers may not be able to supply us merchandise in a timely manner, which could cause us to lose sales and harm our business. To successfully operate our business, we must receive timely delivery of merchandise from our vendors and suppliers. As we grow, some of these vendors may not have sufficient capital, resources or personnel to satisfy their commitments to us. Any significant delay in the delivery of products by vendors could result in a loss of sales, increased fulfillment expenses and damage to our customer service reputation. The legal rights of Living Arts' minority equity holders may adversely affect Gaiam. Gaiam owns 67% of Living Arts, and the previous owners continue to own the remaining 33%. Because Gaiam has certain fiduciary duties to the minority equity holders, the minority owner may challenge Gaiam's management of Living Arts. See "Legal Proceedings" for a description of recent disputes with the minority owner of Living Arts. We could also have similar issues arising in future acquisitions in which Gaiam acquires less than the entire equity interest in a company. The failure of third parties to provide an adequate level of service could decrease our revenues and increase our costs. Given our emphasis on customer service, the efficient and uninterrupted operation of order-processing and fulfillment functions is critical to our business. To maintain a high level of customer service, we rely heavily on a number of different outside service providers, such as printers, telecommunications companies and delivery companies. Any interruption in services from outside service providers, including delays or disruptions resulting from labor disputes, power outages, human error, adverse weather conditions or natural disasters, could materially adversely affect our business. Relying on our centralized fulfillment center could expose us to losing revenue. Prompt and efficient fulfillment of our customers' orders is critical to our business. Our facility in Cincinnati, Ohio handles our fulfillment functions and some customer-service related operations, such as 12 returns processing. Approximately 90% of our orders are filled and shipped from the Cincinnati facility. The balance is shipped directly from suppliers. Because we rely on a centralized fulfillment center, our fulfillment functions could be severely impaired in the event of fire, extended adverse weather conditions, or natural disasters. Since we charge customers' credit cards only when we ship orders, interruption of our shipping would diminish our revenues. Our costs could be increased by overstocks and merchandise returns, as well as by our strategy to offer branded products. An important part of our strategy is to feature "branded" products. These products are sold under our brand names and are manufactured to our specifications. We expect our reliance on branded merchandise to increase. To be successful, we must periodically update and expand the product offerings for our catalogs and websites. The use of branded merchandise requires us to incur costs and risks relating to the design and purchase of products, including submitting orders earlier and making longer initial purchase commitments. In addition, the use of branded merchandise limits our ability to return unsold products to vendors, which can result in higher markdowns in order to sell excess inventory. Our commitment to customer service typically results in more emphasis being placed on keeping a high level of merchandise in stock so we can fill orders immediately. Consequently, we run the risk of having excess inventory, which may also contribute to higher markdowns. Our failure to successfully execute a branded merchandise strategy or to achieve anticipated profit margins on these goods, or a higher than anticipated level of overstocks, may materially adversely affect our revenues. We offer our customers liberal merchandise return policies. Our financial statements include a reserve for anticipated merchandise returns, which is based on historical return rates. It is possible that actual returns may increase as a result of factors such as the introduction of new merchandise, new product offerings, changes in merchandise mix or other factors. Any increase in our merchandise returns will correspondingly reduce our revenues. Our sales could be negatively affected if we are required to charge additional taxes on purchases. We generally collect sales taxes only on sales to residents of the state of Colorado and where we have other locations, currently California and Ohio. Federal laws currently limit the imposition of state and local taxes on Internet-related sales. However, there is a possibility that Congress may not renew this legislation in 2001. If Congress chooses not to renew this legislation, state and local governments would be free to impose taxes on electronically purchased goods, which could adversely affect us. Due to the high level of uncertainty regarding the imposition of taxes on electronic commerce, a number of states, as well as a Congressional advisory commission, are reviewing appropriate tax treatment for companies engaged in e-commerce. Such proposals, if adopted, could substantially impair the growth of e-commerce and could adversely affect our opportunity to derive financial benefit from these activities. Many states have attempted to require that out-of-state direct marketers collect sales and use taxes on the sale of merchandise shipped to its residents. If Congress enacts legislation permitting states to impose sales or use tax obligations on out-of-state direct marketing companies, or if other changes require us to collect additional sales or use taxes, these obligations would make it more expensive to purchase our products and would increase our administrative costs. Audits by state tax authorities could give rise to a retroactive assessment for tax liabilities if it was determined we had sufficient activities in that state. State sales tax laws typically provide for a lengthy statute of limitations, and if we were retroactively assessed for taxes, the assessment could adversely affect our business. Our founder and Chief Executive Officer Jirka Rysavy will control Gaiam. After this offering, Mr. Rysavy will hold 100% of the outstanding class B common stock. The shares of class B common stock are convertible into class A shares at any time. Each share of class B common stock has 13 ten votes per share, and the class A shares have one vote per share. Assuming Mr. Rysavy's planned purchase of an additional 100,000 shares in this offering, he will beneficially own approximately 77% of the outstanding shares, assuming Mr. Rysavy's class B common stock was converted into shares. In addition, he will also have approximately 96.7% of the total votes. As a result, Mr. Rysavy will be able to exert substantial influence over Gaiam and to control matters requiring approval by the shareholders of Gaiam, including the election of directors and preventing any change in control of Gaiam. We may be adversely affected if the software, computer technology and other systems we use are not year 2000 compliant. If our important information management systems or those of our vendors are not year 2000 compliant, our business could suffer. For example, we could have difficulties in operating our website, taking product orders, making product deliveries or conducting other fundamental parts of our business. We have been assessing and are continuing to assess the year 2000 readiness of the software, computer technology and other services that we use. We do not, however, anticipate that we will devote extensive efforts to assess whether our vendors or the Internet are year 2000 compliant. The cost of developing and implementing any year 2000 related measures, if necessary, could be material. We also depend on the year 2000 compliance of the computer systems and financial services used by consumers. A significant disruption in the ability of consumers to access the Internet or portions of it or to use their credit cards would have a material adverse effect on demand for our products and services and would have a material adverse effect on us. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000." Fluctuations in our quarterly operating results may negatively affect our stock price. Prior to this offering, you could not buy or sell our shares publicly. The market price of our shares after the offering may vary from the initial public offering price and could be subject to wide fluctuations in response to factors such as the future issuance of shares as well as the following factors that are beyond our control: -- quarterly variations in our operating results; -- operating results that vary from the expectations of securities analysts and investors; -- changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; -- announcements by third parties of significant claims or proceedings against us; and -- stock market price and volume fluctuations. Shares eligible for public sale after this offering could adversely affect our stock price. Sales of a substantial number of shares in the public market following this offering, or the perception that sales could occur, could adversely affect the market price for our shares and impair our ability to raise equity capital in the future. Immediately after this offering 3,496,429 shares and 7,035,000 shares of class B common stock will be outstanding. Of this number, the 1,860,000 shares sold in this offering will be freely tradeable, and an additional 1,145,000 shares and all shares of class B common stock will be eligible for sales under Rule 144 of the Securities Act after 180 days. Please see "Shares Eligible for Future Sale." 14 FORWARD LOOKING STATEMENTS This prospectus contains forward-looking statements that involve risk and uncertainties. These statements refer to our future plans, objectives, expectations and intentions. We use words such as "anticipates," "believes," "plans," "expects," "future," "intends," "strive" and similar expressions to identify forward-looking statements. These forward-looking statements involve risks and uncertainties. Gaiam's actual results could differ materially from those anticipated in these forward-looking statements, as a result of certain factors, as more fully described in "Risk Factors" and elsewhere in this prospectus. We caution you that no forward-looking statement is a guarantee of future performance, and you should not place undue reliance on these forward- looking statements which reflect our management's view only as of the date of this prospectus. USE OF PROCEEDS The net proceeds to Gaiam from the sale of the shares in this offering are estimated to be $7.5 million, giving effect to the sale by Gaiam of 1,000,000 shares at an assumed initial public offering price of $5.00 per share and 1,000,000 shares at an assumed initial public offering price of $4.50 per share, and after deducting the estimated underwriting discount, customer discounts and offering expenses payable by Gaiam. The principal purposes of this offering are to increase our working capital, to create a public market for our common stock, to facilitate our future access to the public capital markets, and to increase our visibility in the retail marketplace. We intend to use approximately $750,000 of the net proceeds of the offering to reduce the amount outstanding under our Norwest Bank line of credit agreements. These line of credit agreements extend through December 31, 2001, and bear interest at the prime rate plus 1%. In connection with this offering, we are extending to each of our eight debenture holders the option to purchase shares for the outstanding principal amount of the debentures, excluding interest at 8% per annum, at the offering price of $5.00 per share. These debentures mature on the earlier of one year after the issuance date or the closing of the initial public offering by Gaiam. We anticipate a total of 395,000 shares will be sold to these debenture holders in exchange for $1.975 million in debentures. To the extent any holder elects to receive cash, this will represent a use of the proceeds of this offering. We have no specific plans for the remaining proceeds. They will be used for general corporate purposes and working capital. This allocation is only an estimate, and we may adjust it as necessary to address our operational needs in the future. We may also use a portion of the net proceeds to acquire the minority interest in one of our subsidiaries, Healing Arts Publishing, LLC, or to make other acquisitions or strategic minority interest investments. However, we currently have no commitments or agreements and are not involved in negotiations with respect to acquisitions. Pending these uses, we will invest the net proceeds of this offering in short-term, interest-bearing, investment- grade securities. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations." 15 DIVIDEND POLICY Gaiam has never declared or paid any cash dividends on its capital stock. Gaiam currently intends to retain earnings, if any, to support its growth strategy and does not anticipate paying cash dividends in the foreseeable future. In addition, our bank credit agreement prohibits payment of any dividends to our shareholders. CAPITALIZATION The following table sets forth the capitalization of Gaiam as of June 30, 1999, on a pro forma basis, as adjusted, to reflect: . the sale by Gaiam of 1,000,000 shares in this offering at an initial public offering price of $5.00 per share, . the sale by Gaiam of 1,000,000 shares in this offering at the price to customers (for up to 200 shares) of $4.50 per share, and . deducting the estimated underwriting discount and offering expenses payable by Gaiam. You should read this information together with our consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus.
June 30, 1999 ---------------- Actual Pro Forma ------ --------- Long-term debt and capital leases, less current portion....... $1,664 $914(2) Stockholders' equity: Class A Common Stock, $0.0001 par value; 92,965,000 shares authorized and 1,496,429(1) shares issued and outstanding (actual); 3,496,429(1) shares outstanding (pro forma)...... -- -- Class B Common Stock, $.0001 par value; 7,035,000 shares authorized and 7,035,000 shares issued and outstanding (actual, pro forma)........................................ 1 1 Additional paid-in capital.................................. 1,828 9,328 Accumulated other comprehensive income...................... 910 910 Retained earnings........................................... 2,477 2,477 ------ ------- Total stockholders' equity................................ 5,216 12,716 ------ ------- Total capitalization...................................... $6,880 $13,630 ====== =======
- -------- (1) Excludes an aggregate of approximately 675,000 shares issuable pursuant to options outstanding as of June 30, 1999. (2) Gives effect to the repayment of $750,000 of long-term debt from the proceeds this offering. 16 DILUTION The net tangible book value of Gaiam stock as of June 30, 1999 was $0.21 per share. Net tangible book value represents the amount of Gaiam's total tangible assets less total liabilities. Pro forma net tangible book value per share is determined by dividing Gaiam's pro forma net tangible book value by the number of shares outstanding after this offering. Giving effect to the sale of 1,000,000 shares in the offering at a price of $5.00 per share and 1,000,000 shares in the offering at a price of $4.50 per share, after deducting the estimated underwriting discount and offering expenses payable by Gaiam, pro forma net tangible book value per share would have been $0.88 per share. This represents an immediate increase in pro forma net tangible book value of $0.67 per share to existing shareholders and an immediate dilution of $4.12 per share to new investors purchasing shares in this offering. The following table illustrates the per share dilution: Initial public offering price per share.............................. $5.00 Net tangible book value per common share before this offering...... $0.21 Increase per common share attributable to new investors............ 0.67 ----- Pro forma net tangible book value per common share after this offering............................................................ 0.88 ----- Dilution per common share to new investors........................... $4.12
The following table summarizes, on a pro forma basis at June 30, 1999 as described above (giving effect to the issuance of the shares to be issued in this offering but not the exercise of any outstanding stock options), the total consideration paid and the average price per share of common stock paid by existing shareholders (including both holders of class A shares and class B common stock) and new investors in this offering. The price paid per share paid by new investors is the initial public offering price of $5.00 per share (before deducting the estimated underwriting discount, customer discount and offering expenses):
Shares Purchased Total Consideration ------------------ ------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- ------------- Existing shareholders... 8,531,429 81.0% $ 1,828,455 15.5% $0.21 New investors........... 2,000,000 19.0 10,000,000 84.5 $5.00 ---------- ----- ----------- ----- Total................. 10,531,429 100.0% $11,828,034 100.0% ========== ===== =========== =====
This discussion and table assumes no exercise of outstanding stock options and warrant, and no issuance of shares reserved for future issuance under Gaiam's option plans. As of August 30, 1999, there were options outstanding to purchase a total of approximately 675,000 shares at a price of $4.375 per share, and a warrant to purchase 24,000 shares at a price of $0.50 per share. No options or warrants are currently exercisable. To the extent that any of these options are exercised, there will be further dilution to new investors. See "Capitalization." 17 SELECTED CONSOLIDATED FINANCIAL DATA The selected statement of operations for the years ended December 31, 1996, 1997 and 1998 and balance sheet data as of December 31, 1996, 1997 and 1998 set forth below are derived from Gaiam's audited consolidated financial statements. The audited consolidated financial statements include statements of operations for the years ended December 31, 1996, 1997 and 1998, and balance sheets as of December 31, 1997 and 1998. These financial statements appear elsewhere in this prospectus. The selected statement of operations for the year ended December 31, 1995 and balance sheet data as of December 31, 1995 set forth below are derived from Gaiam's audited consolidated financial statements, and the selected statement of operations for the year ended December 31, 1994 and balance sheet data as of December 31, 1994 are derived from Gaiam's unaudited consolidated financial statements. The selected balance sheet data as of June 30, 1999 and selected statement of operations for the six-month periods ended June 30, 1998 and 1999 set forth below are derived from Gaiam's unaudited consolidated financial statements as of June 30, 1999 and for the six-month periods ended June 30, 1998 and 1999, which appear elsewhere in this prospectus. In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting only of normal recurring accruals and adjustments, necessary for a fair presentation of the financial position and results of operations for these unaudited periods. The historical operating results are not necessarily indicative of the results to be expected for any other period. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Gaiam's consolidated financial statements and related notes, included elsewhere in this prospectus. 18 SELECTED FINANCIAL DATA (Amounts in thousands, except per share data)
Six Months Year Ended December 31, Ended June 30, ----------------------------------------- ---------------- 1994 1995 1996 1997 1998 1998 1999 ------ ------ ------- ------- ------- ------- ------- (unaudited) Statement of Operations Data: Net revenues............ $ 229 $6,696 $14,801 $19,898 $30,739 $10,475 $17,563 Costs of goods sold..... 179 2,943 6,762 8,462 13,174 4,414 7,075 ------ ------ ------- ------- ------- ------- ------- Gross profit............ 50 3,753 8,039 11,436 17,565 6,061 10,488 Expenses: Selling and operating.. 5 3,281 9,253 10,427 14,186 5,250 8,877 Corporate, general and administration........ 15 876 1,218 1,575 2,394 635 1,796 ------ ------ ------- ------- ------- ------- ------- Total expenses....... 20 4,157 10,471 12,002 16,580 5,885 10,673 ------ ------ ------- ------- ------- ------- ------- Operating income (loss)................. 30 (404) (2,432) (566) 985 175 (185) Other income (expense)(1)........... (2) 1,029 2,984 1,583 388 (114) 202 ------ ------ ------- ------- ------- ------- ------- Income before income taxes and minority interest............... 28 625 552 1,017 1,373 61 17 Income taxes............ 6 238 212 363 251 22 6 Minority interest....... -- -- -- -- 262 -- (167) ------ ------ ------- ------- ------- ------- ------- Net income.............. $ 22 $ 387 $ 340 $ 654 $ 860 $ 39 $ 178 ====== ====== ======= ======= ======= ======= ======= Net income per share basic.................. $ 0.00 $ 0.05 $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.02 ====== ====== ======= ======= ======= ======= ======= diluted................. $ 0.00 $ 0.05 $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.02 ====== ====== ======= ======= ======= ======= ======= Shares outstanding basic.................. 8,040 8,040 8,040 8,040 8,073 8,040 8,318 diluted................. 8,040 8,040 8,040 8,040 8,119 8,040 8,565 December 31, June 30, ----------------------------------------- ---------------- 1994 1995 1996 1997 1998 1998 1999 ------ ------ ------- ------- ------- ------- ------- Balance Sheet Data Cash.................... $ 16 $ 419 $ 380 $ 1,612 $ 1,410 $ 653 $ 856 Securities available- for-sale(2)............ -- 71 56 4,828 1,634 38 1,505 Working capital (deficiency)........... 22 192 (1,838) 436 (81) (60) 2,534 Total assets............ 81 2,476 6,256 10,774 16,677 5,479 15,839 Long-term debt (net of current maturities).... -- -- 89 42 299 17 1,664 Stockholders' equity(2).............. 59 580 920 4,736 3,661 1,613 5,216
- -------- (1) Other income in 1995, 1996, 1997 and 1998 primarily reflects income from sale of securities available-for-sale. (2) Securities valued at cost in 1995, and at fair market value in 1996, 1997 and 1998. See Note 6 of notes to the consolidated financial statements. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of Gaiam's financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus. Overview Gaiam produces and sells goods, services and information marketed to customers who value the environment, a sustainable economy, healthy lifestyles and personal development. Gaiam was incorporated in Colorado in 1988 as a local distributor of earth-friendly products. In 1995, Gaiam began to expand nationally and make acquisitions. From 1996 to 1998, our revenues increased from $14.8 million to $30.7 million, representing a compound annual growth rate of approximately 44%, and our number of unique individual customers increased from 300,000 to 685,000 over this period. Gaiam's business model is evolving as evidenced by the increase in the percentage of our revenues attributable to our business to business segment from 13% in 1998 to 21% in 1999. In addition, Gaiam's gross margin continues to increase because we are developing more private brand merchandise, on which we have better margins, and negotiating better pricing from our venders due to volume discounts. However, the competitive search engines available on the Internet may force retail price reductions, and thus affect our gross margin. During 1998, Gaiam completed two acquisitions. On September 14, 1998, we obtained 67% of Healing Arts Publishing LLC, which does business as "Living Arts," for approximately $2.5 million in cash. On October 1, 1998, we acquired 100% of Inner Balance, Inc. for a debenture with a principal amount of approximately $530,000. Living Arts produces and sells yoga and other mind- body-spirit informational videos and products, while InnerBalance is a direct marketer of alternative health products and solutions. Acquisitions accounted for approximately one third of our revenues during the first two quarters of 1999. We incurred expenses in the first six months of 1999, particularly in the second quarter, to integrate these acquisitions, including relocation of Living Arts' warehousing to our Ohio distribution center, customer service functions to Colorado, and conversion of direct marketing operating system to Gaiam's operating system. We do not anticipate further material integration expenses. Although our historical sales have been predominantly through catalogs and retailers, we are shifting our sales emphasis to the Internet. We intend to make the Internet our primary channel of distribution. The development of a website and other proprietary technology entails significant technical, financial and business risks. We have spent approximately $500,000 during 1999 in the development of our websites and may spend up to an additional $500,000 to introduce the website features we describe in this prospectus under "Business." 20 Results of Operations The following table sets forth certain financial data as a percentage of revenues for the periods indicated.
Six Months Ended June Year Ended December 31, 30, --------------------------------- ------------ 1994 1995 1996 1997 1998 1998 1999 ----- ----- ----- ----- ----- ----- ----- Net revenues.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Costs of goods sold........... 78.2 44.0 45.7 42.5 42.9 42.1 40.3 ----- ----- ----- ----- ----- ----- ----- Gross profit.................. 21.8 56.0 54.3 57.5 57.1 57.9 59.7 Expenses: Selling and operating....... 2.2 49.0 62.5 52.4 46.1 50.1 50.5 Corporate, general and administration............. 6.5 13.1 8.2 7.9 7.8 6.1 10.3 ----- ----- ----- ----- ----- ----- ----- Total expenses............ 8.7 62.1 70.7 60.3 53.9 56.2 60.8 ----- ----- ----- ----- ----- ----- ----- Income (loss) from operations................... 13.1 (6.1) (16.4) (2.8) 3.2 1.8 (1.1) Other income (expense), net... (0.9) 15.4 20.1 8.0 1.3 (1.1) 1.2 ----- ----- ----- ----- ----- ----- ----- Income before income taxes and minority interest............ 12.2 9.3 3.7 5.2 4.5 0.7 1.1 Provision for income taxes.... 2.6 3.6 1.4 1.8 0.8 0.3 0.0 Minority interest in net income of consolidated subsidiary, net of tax....... 0.0 0.0 0.0 0.0 0.9 0.0 (1.0) ----- ----- ----- ----- ----- ----- ----- Net income................ 9.6% 5.7% 2.3% 3.4% 2.8% 0.4% 1.0% ===== ===== ===== ===== ===== ===== =====
Six months ended June 30, 1999 compared to six months ended June 30, 1998 Revenues increased 67.7% from $10.5 million in the first six months of 1998 to $17.6 million in the first six months of 1999. 87% of the revenue growth is attributable to revenues acquired in the Living Arts and InnerBalance acquisitions, and 13% of the revenue growth was revenues generated by increased purchases by current customers and growth in our customer base. Gross profit, which consists of revenues less cost of sales (primarily merchandise acquisition costs and in-bound freight) increased 73.1% from $6.1 million in the first six months of 1998 to $10.5 million in the first six months of 1999. As a percentage of revenues, gross profit increased from 57.9% to 59.7%. This was primarily attributable to increases in sales of private branded products, on which we have better margins than other products, and continued better pricing from vendors due to increased volume. Selling and operating expenses, which consist primarily of sales and marketing costs, commissions, and fulfillment expenses increased 69.1% from $5.2 million in the first six months of 1998 to $8.9 million in the first six months of 1999 primarily due to increased revenues. As a percentage of revenues, selling and operating expenses increased from 50.1% to 50.5%. This percentage increase was primarily due to additional costs associated with the relocation of Living Arts' customer service function to Colorado, the transfer of Living Arts' warehousing to our distribution center in Ohio, and the conversion of Living Arts direct marketing operating system to Gaiam's operating system. Corporate, general and administrative expenses increased 182.5% from $635,723 in the first six months of 1998 to $1.8 million in the first six months of 1999. As a percentage of revenues, general and administrative expenses increased from 6.1% to 10.3%, primarily attributable to expenses associated with the acquisition of Living Arts and InnerBalance. Other income, comprised primarily of gains on sales of marketable securities and interest expense, increased from a net expense of $113,938 in 1998 to $201,762 of net income in 1999. This change was primarily due to gains on the sale of marketable securities during the first six months of 1999, which was partially offset by higher interest expense due to borrowings used to fund acquisitions. 21 Minority interest of $166,822 for the first six months of 1999 was added to our consolidated financial results to reflect the minority interest in Living Arts' loss for the six months ended June 30, 1999. This amount represents our minority partners' one-third interest in the Living Arts' loss, net of tax, for the period. Income tax provision represented 36.7% of our pre-tax net income in the first six months of 1998, as compared to an income tax provision of 37.2% of pre-tax income in the first six months of 1999. Net income, as a result of the factors described above, increased from $38,753, or 0.4% of revenues, in the first six months of 1998 to $177,630, or 1.0% of revenues, in the first six months of 1999. Year ended December 31, 1998 compared to year ended December 31, 1997 Revenues increased 54.5% from $19.9 million in 1997 to $30.7 million in 1998. This revenue growth was primarily attributable to the acquisitions of Living Arts and InnerBalance, which generated $6.9 million in revenue during 1998. Additionally, revenues generated by our Harmony brand increased 20% as a result of additional purchases made by Harmony's current customers and growth in its customer base. Gross profit increased 53.6% from $11.4 million in 1997 to $17.6 million in 1998. As a percentage of revenues, gross profit decreased from 57.5% to 57.1%. This reflects a change in sales mix due to the acquisition of Living Arts, which had generally lower margin products than that of our other operations. Selling and operating expenses increased 36.0% from $10.4 million in 1997 to $14.2 million in 1998, due to increases in revenues. As a percentage of revenues, selling and operating decreased from 52.4% to 46.1%. This decrease in selling and operating expenses as a percentage of revenues was primarily due to increased operating efficiencies. Corporate, general and administration expenses increased 52% from $1.6 million in 1997 to $2.4 million in 1998, primarily as a result of initiatives to support our growth. As a percentage of revenues, those expenses decreased from 7.9% to 7.8% of revenues. Other income, which is primarily comprised of gains on sales of marketable securities and interest expense, decreased from $1.6 million in 1997 to $388,491 in 1998, largely due to a decrease in the sales of marketable securities during 1998 as compared to 1997. Provision for income tax provision represented 35.7% of our pre-tax income in 1997, as compared to 18.3% of its pre-tax income in 1998. The decrease in our effective tax rate was primarily due to a one-time tax benefit related to the 1998 settlement of a Living Arts legal judgment incurred prior to Gaiam's ownership. Minority interest of $261,598 for 1998 was deducted from our consolidated financial results to account for the minority interest in Living Arts. Net income, as a result of the factors described above, increased from $654,312, or 3.4% of revenues, in 1997, to $859,781, or 2.8% of revenues, in 1998. Year ended December 31, 1997 compared to year ended December 31, 1996 Revenues increased by 34.4% from $14.8 million in 1996 to $19.9 million in 1997. This increase is primarily attributable to growth of our Harmony brand and an expansion of product offerings that resulted in an increase in average transaction size. Gross profit increased 42.3% from $8.0 million in 1996 to $11.4 million in 1997. As a percentage of revenues, gross profit increased from 54.3% to 57.5% due to increases in sales of private branded products, on which we have better margins than other products, and better pricing from vendors due to increased volume. 22 Selling and operating expenses increased 12.7% from $9.3 million in 1996 to $10.4 million in 1997, due to increases in revenues. As a percentage of revenues, selling and operating expenses decreased from 62.5% to 52.4%. This decrease as a percentage of revenues was primarily due to increased efficiencies due to higher average transaction size. In addition, our central warehouse was opened in 1996, resulting in reductions in shipping costs and other operational efficiencies. Corporate, general and administrative expenses increased 29.3% from $1.2 million in 1996 to $1.6 million in 1997. As a percentage of revenues, general and administrative expenses decreased from 8.2% to 7.9%. The overall dollar increase in general and administrative expenses was due to various initiatives undertaken to prepare for and support future growth. Other income declined from $3.0 million in 1996 to $1.6 million in 1997, primarily due to our decision to sell fewer securities that we held. Income tax provision represented 38.4% of our pre-tax income in 1996, as compared to 35.7% of our pre-tax income in 1997. As a result of the factors described above, net income increased from $339,700, or 2.3% of revenues, in 1996 to $654,312, or 3.4% of revenues, in 1997. Selected Quarterly Operating Results The following table sets forth our unaudited quarterly results of operations for each of the quarters in 1997 and 1998 and the first two quarters of 1999. In management's opinion, this unaudited financial information includes all adjustments, consisting solely of normal recurring accruals and adjustments, necessary for a fair presentation of the results of operations for the quarters presented. This financial information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. The results of operations for any quarter are not necessarily indicative of future results of operations.
Quarter Ended ------------------------------------------------------------------------------------------ Dec. Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, 31, Mar. 31, June 30, 1997 1997 1997 1997 1998 1998 1998 1998 1999 1999 -------- -------- --------- -------- -------- -------- --------- ------- -------- -------- (In thousands, except per share data) Net revenues............ $4,218 $4,426 $4,811 $6,443 $5,300 $5,175 $5,987 $14,277 $9,495 $8,068 Gross profit............ 2,454 2,554 2,645 3,783 3,012 3,049 3,538 7,966 5,639 4,849 Operating income (loss)................. (317) (86) (137) (26) 98 77 200 610 110 (294) Net income.............. (239) (104) (142) 1,139 24 15 395 426 106 72 Net income (loss) per share.................. $(0.03) $(0.01) $(0.02) $ 0.14 $ 0.00 $ 0.00 $ 0.05 $ 0.05 $ 0.01 $ 0.01 Weighted average shares outstanding............ 8,040 8,040 8,040 8,040 8,040 8,040 8,040 8,073 8,215 8,420
Quarterly fluctuations in Gaiam's revenues and operating results are due to a number of factors, including the timing of new product introductions and mailings to customers, advertising, acquisitions (including costs of acquisitions and expenses related to integration of acquisitions), competition, pricing of products by vendors and expenditures on our systems and infrastructure. The impact on revenue and operating results, due to the timing and extent of these factors, can be significant. Our sales are also affected by seasonal influences. On an aggregate basis, Gaiam experiences strongest revenues and net income in the fourth quarter due to increased holiday spending. 23 Liquidity and Capital Resources Gaiam's capital needs arise from working capital required to fund our operations, capital expenditures related to expansions and improvements to Gaiam's infrastructure, development of e-commerce and funds required in connection with the acquisition of new businesses and its anticipated future growth. These capital requirements depend on numerous factors, including the rate of market acceptance of Gaiam's product offerings, the ability to expand Gaiam's customer base, the cost of ongoing upgrades to its product offerings, the level of expenditures for sales and marketing, the level of investment in distribution and other factors. The timing and amount of these capital requirements cannot accurately be predicted. Additionally, Gaiam will continue to evaluate possible investments in businesses, products and technologies, and plans to expand its sales and marketing programs and conduct more aggressive brand promotions. Gaiam has funded its operations and acquisitions primarily through bank loans, private placements of shares and subordinated debentures, and sales of marketable securities contributed to Gaiam by Gaiam's founder, Mr. Rysavy. During 1996 and 1997, we had operating losses which were offset primarily by sales of marketable securities contributed by Mr. Rysavy. We raised approximately $1.2 million from private placements during 1998 ($575,000 for 160,000 shares and $550,000 in debentures), $150,000 during the first quarter of 1999 ($75,000 for 17,143 shares and $75,000 in debentures) and $2.7 million during the second quarter of 1999 ($1.37 million for 314,286 shares and $1.35 million in debentures). The privately placed shares were sold at $4.375 per share. The debentures described above bear interest at 8% per annum, which is payable in cash at maturity. The debentures mature on the earlier of one year after the date of the debenture or the closing of the initial public offering by Gaiam. With the exception of Ms. Powers, the holders of the debentures, who also acquired shares at the time of their investment in the debentures, have certain registration rights requiring Gaiam to register the shares obtained in the private placement. See the consolidated financial statements of Gaiam for additional information relating to Gaiam's private placements. In connection with this offering, we are extending to each of our eight debenture holders the option to purchase shares for the outstanding principal amount of the debentures (excluding interest) at the offering price of $5.00 per share. We anticipate a total of 395,000 shares will be sold to these debenture holders in exchange for $1.975 million in debentures. We will pay the accrued interest, approximately $57,615 at June 30, 1999, in cash. Gaiam is party to revolving line of credit agreements with Norwest Bank, which extend through December 31, 2001. The credit agreements permit borrowings up to $3 million (of which approximately $1.65 million was outstanding at June 30, 1999) based upon the collateral value of Gaiam's accounts receivable and inventory held for resale. These borrowings are secured by a pledge of Gaiam's assets. Principal repayment of amounts borrowed under these line of credit agreements are due either when the collateral value of Gaiam's accounts receivable and inventory drops below prescribed levels or upon maturity of the agreements, whichever occurs first. Borrowings under the Norwest credit agreements bear interest at the prime rate plus 1% (currently 7.75%). The Norwest credit agreements contain various financial covenants and also prohibit Gaiam from paying dividends to its shareholders, except that dividends by Living Arts are permitted for 1998 taxes on minority interests. Mr. Rysavy guarantees the Norwest credit agreements. Gaiam has, from time to time, borrowed funds from BT Alex. Brown under a margin loan agreement against securities held for sale. Gaiam had no outstanding indebtedness to BT Alex. Brown as of June 30, 1999. Borrowings under the BT Alex. Brown margin loan agreement bear interest at the call money rate plus 3/4%. Gaiam's operating activities used net cash of $2.7 million and $1.3 million during 1996 and 1997, respectively, and provided $759,205 of net cash in 1998. The use of cash in 1996 and 1997 was primarily attributable to increases in inventories and prepaid costs associated with the increased sales volumes. Net cash provided during 1998 was primarily a result of Gaiam's net income. Gaiam's operating activities for the six months ended June 30, 1999 used net cash of $4.6 million primarily to reduce the level of accounts payable and accrued expenses, resulting from seasonal fluctuations and the Living Arts acquisition. 24 Gaiam's investing activities generated cash of $738,755 and $3.6 million during 1996 and 1997, respectively, and used cash of $1.1 million during 1998. In 1996 and 1997, the cash generated from investing activities resulted primarily from sales of marketable securities and property and equipment. During 1998, Gaiam used cash to purchase a majority interest in Living Arts. Gaiam's investing activities generated $382,736 in net cash for the six months ended June 30, 1999, resulting primarily from the sale of marketable securities. Gaiam's financing activities generated $1.9 million in net cash during 1996, primarily from borrowings, which were partially repaid during 1997, resulting in a use of cash of $1.1 million. During 1998, Gaiam's financing activities generated $175,300, which resulted from the private placement of shares and debentures, net of the reduction in other outstanding debt. Gaiam's financing activities generated $3.7 million in net cash for the six months ended June 30, 1999, resulting from the private placement of shares and debentures, and borrowings on its Norwest line of credit, net of reductions in other outstanding debt. During 1999, Gaiam anticipates that it will make capital expenditures of approximately $1.3 million primarily for Gaiam's continuing development of e- commerce. We believe our available cash, cash expected to be generated from operations, cash to be generated through the sale of marketable securities held by Gaiam, and borrowings available under our bank credit agreements, will be sufficient to fund our operations, as described in this prospectus, on both a short-term and long-term basis. However, our projected cash needs may change as a result of acquisitions, unforeseen operational difficulties or other factors. In the normal course of our business, we investigate, evaluate, and discuss acquisition, joint venture, minority investment, strategic relationship and other business combination opportunities in the Lohas industry. In the event of any future investment, acquisition or joint venture opportunities, we may consider using then-available liquidity, issuing equity securities or incurring additional indebtedness. However, we currently have no commitments or agreements and are not involved in negotiations with respect to acquisitions. Quantitative and Qualitative Disclosure About Market Risk We do not believe that any of our financial instruments have significant risk associated with market sensitivity. Year 2000 The year 2000 issue relates to computer programs and systems that recognize dates using two-digit year data rather than four-digit year data. As a result, these programs and systems may fail or provide incorrect information when using dates after December 31, 1999. If the year 2000 issue were to cause disruptions to Gaiam's internal information technology systems or to the information technology systems of entities with which Gaiam has commercial relationships, material adverse effects to Gaiam's operations could result. Gaiam's internal computer programs and operating systems consist of programs and systems relating to virtually all segments of Gaiam's business, including merchandising, customer database management and marketing, order-processing, fulfillment, inventory management, customer service and financial reporting. These programs and systems are primarily comprised of: . ""Front-end" systems. These systems automate and manage business functions such as order-taking and order-processing, inventory management and financial reporting. . Warehouse management systems. These systems manage and automate fulfillment operations of Gaiam's companies. Currently Gaiam's internal warehouse management system is integrated with its internal front-end system. 25 . Customer database management systems. These systems facilitate the storage of customer data for each Gaiam business. Each Gaiam customer database management system is integrated with Gaiam's existing front-end system. . Telecommunications systems. These systems enable Gaiam's companies to manage their order-taking and customer service functions. . Office automation systems, personal computers and local area networks. These systems are used for word processing and other administrative tasks at individual Gaiam companies and at Gaiam's central office. . Voicemail systems. These systems are used for receiving and storing messages to employees at individual Gaiam companies and at Gaiam's central office. . Ancillary services systems. These include systems such as heating, ventilation and air conditioning control systems and security systems. To assess the potential impact of the year 2000 issue, Gaiam has completed reviews of its internal front-end systems, its internal warehouse management systems, its customer database management systems, its internal telecommunications systems and its personal computers and local area networks. These reviews were completed by Gaiam's existing workforce at no identifiable incremental cost. Based upon these reviews, Gaiam believes that these systems and equipment will operate correctly when processing data that include dates after December 31, 1999, although no assurances can be given that these systems and equipment will operate correctly. See "Our Business--Management Information Systems." The computer programs and operating systems used by entities with whom Gaiam has commercial relationships also pose potential problems relating to the year 2000 issue, which may affect Gaiam's operations in a variety of ways. These risks are more difficult to assess than those posed by internal programs and systems, and Gaiam has not yet completed the process of assessing them. Gaiam believes that the programs and operating systems used by entities with which it has commercial relationships generally fall into two categories: . First, Gaiam relies on communication and data processing programs and systems used by organizations such as the United States Postal Service, UPS, telephone companies and banks. Services provided by these entities affect almost all facets of Gaiam's operations, including processing of orders, printing and mailing of catalogs, shipping of goods and certain financial services (e.g., credit card processing). Programs and services in this category generally are not specific to Gaiam's business, and disruptions in their availability would likely have a negative impact on Gaiam, as well as most other enterprises within the direct marketing industry, and on many enterprises outside the direct marketing industry. Gaiam believes that the most serious potential disruptions to its operations stemming from the year 2000 issue relate to programs and systems in this category. Gaiam intends to include an evaluation of the potential disruptions in its assessment of the programs and systems of the entities with which it has commercial relationships. . Second, Gaiam purchases goods from over 150 vendors (none of which accounted for more than 10% of aggregate purchases for 1998). Each of these vendors and service providers are dependent on programs and systems that could be disrupted by year 2000 problems. We believe that year 2000 risks relating to programs and systems used by our product vendors are well-diversified because we use a large number of vendors. We have assessed the risks posed by the programs and systems used by entities who provide front-end and warehouse management services and determined that these risks do not require remediation. We have received or intends to seek assurances of year 2000 compliance from each product vendor that accounts for more than approximately 1% of our aggregate purchases on an annual basis and from other significant vendors and service providers. 26 Gaiam expects to complete its assessment of the programs and systems of the entities with which it has commercial relationships and the identification of potential problems by the end of the third quarter of fiscal 1999. Once this identification has been completed, Gaiam intends to resolve any potential problems identified by communicating further with the relevant vendors and providers, by working internally to identify alternative sourcing and by formulating contingency plans. Gaiam expects the resolution of these issues to be an ongoing process until all year 2000 problems are satisfactorily resolved. 27 OUR BUSINESS Gaiam Gaiam produces and sells goods, services and information targeted to customers who value the environment, a sustainable economy, healthy lifestyles and personal development. Although our historical sales have been predominantly through catalogs and retailers, we are shifting our sales emphasis to the Internet and we intend to make the Internet our primary channel of distribution. Under the umbrella brands of Gaiam and Gaiam.com, we use specific brands to target related but distinct markets. We use the Harmony, Living Arts, and InnerBalance brands to offer our products through direct marketing via catalogs and the Internet and through business-to-business relationships. Our number of unique individual customers increased from 300,000 at the end of 1996, to 685,000 at the end of 1998 and to 800,000 at June 30, 1999. Gaiam also sells to leading retailers such as Target, Musicland, Book of the Month and Amazon.com. We strive to serve consumers who place a high value on promoting healthy living and personal development, contributing to the sustainability of the Earth's natural resources and purchasing decisions that enhance the quality of the Earth's environment. In our view, these consumers make purchasing decisions for goods and services based on these values, in addition to the traditional criteria of price and performance. We believe that these consumers, whom we refer to as "cultural creatives," are growing in number, as evidenced by the growth of our customer base. Cultural creatives tend to be well-educated consumers, with a median age of 42, a 60/40 women-to-men ratio and an average annual income of $52,000. The following terms are important to understand our business: . By "sustainable" we mean the ability of a product or service to reduce the burden placed on living systems and to maintain productivity without depleting natural resources or producing waste. . By "natural" we mean the characteristic of a product that is organic and/or otherwise produced without chemicals and additives. . By "eco-friendly" or "green" we mean products that have low or minimal impact upon the ecosystem in which the product is created or used. . By "alternative health" we mean the natural and holistic approach to healthcare typified by chiropractic care, nutrition, homeopathy, naturopathic medicine, acupuncture, acupressure, massage, aromatherapy and other holistic approaches. . By "mind-body-spirit" we mean the portion of the personal development market that incorporates physical and mental elements, such as yoga and Tai Chi. . By "conscious commerce" we mean the practice of making purchasing decisions based on personal values and beliefs. Our Industry We have named the industry we serve "Lohas" -- an acronym for Lifestyles Of Health And Sustainability. We divide the Lohas industry into five markets that shape this industry: Sustainable Economy. This market includes environmental management services and solutions, renewable energy, energy conservation products and services, sustainable manufacturing processes, recycling and goods made from recycled materials. Healthy Living. This market includes food supplements, vitamins and minerals, natural and organic foods and natural and personal body care. Alternative Healthcare. This market includes natural health and wellness solutions, information, products and services, including alternative, noninvasive treatments, massage, chiropractic, acupuncture, acupressure, biofeedback and aromatherapy. 28 Personal Development. This market includes experiences, solutions, products, information and services relating to mind, body and spiritual development, such as yoga, meditation, relaxation, spirituality ancient religions, esoteric sciences and realizing human potential. The fitness elements of this market are often referred to as "mind-body-spirit." Ecological Lifestyles. This market includes environment friendly solutions, natural untreated fiber products and eco-tourism. Because of a common customer base, we believe these five markets should be viewed collectively as one industry. We believe that, by serving all of these markets, we can benefit our customers by providing them with a larger array of choices, the convenience of one-stop shopping and access to a online community of shared values. Our History Gaiam was founded in Boulder, Colorado. In 1995, we began to expand our business nationally through the acquisition of the direct marketing business of Seventh Generation, Inc., a supplier of eco-friendly household products. This business became the base of our Harmony brand. In 1998, we acquired InnerBalance, a direct marketer of alternative health products and solutions, and a majority interest in Living Arts, a producer and supplier of yoga and other mind-body-spirit informational videos and products. Our Core Values Gaiam's approach to business is based on its core values: We emphasize integrity in all our relationships. We value the environment and view all resources as precious assets. Living our beliefs is more than just the right thing to do; it is the only path to take. We believe we can motivate every person to make a positive difference in their lives and in our world by the simple choices they make every day. Our Brand Gaiam plans to use its brand name to establish itself as an authority and information resource in the Lohas industry. Under the Gaiam and Gaiam.com umbrella brands, we use our Harmony, InnerBalance, and Living Arts brands to target the industry's various markets. The chart below illustrates the market and examples of products offered under each of our brands. [Chart of Gaiam brands appears here] Our Competitive Strengths We believe the following factors have contributed to our growth and success: Focus On Large Market. Gaiam targets cultural creatives. A study published by the Institute of Noetic Sciences in 1996 coined the term "cultural creatives." This study was authored by Paul Ray, who has since agreed to join our board of directors. The article estimates that this demographic segment, which has in common the values of environmental awareness, healthy lifestyles and personal development, numbered 44 million in the United States alone in 1996. Gaiam believes that its appealing customer demographics contribute significantly to its high average order value in excess of $90 for the year ended December 31, 1998, as compared to a lower average for the direct marketing industry. 29 Experienced Executive Team. We have an experienced team of corporate managers. Our founder and Chief Executive Officer, Jirka Rysavy, was the founder and Chief Executive Officer of Corporate Express, Inc., which he built to a Fortune 500 company, and founder and CEO of Crystal Market, Inc., which was sold to become the first store of Wild Oats Markets. Our President and Chief Operating Officer, Lynn Powers, has over 15 years of senior management experience in the retail industry as a Senior Vice President of Merchandising, Marketing and Strategic Planning of Miller's Outpost. Our Chief Information Officer, Pavel Bouska, was a member of the founding team and an officer of Corporate Express for over 10 years, serving in various positions, including Chief Information Officer and Vice President of Information Systems. Distinctive, Branded Products. Gaiam offers information, products and services under the Harmony, InnerBalance and Living Arts brand names. These products appeal to Gaiam's well-educated customers and are not widely available in conventional stores. These products are designed to enhance customers' lifestyles and experiences and provide healthy, natural solutions while being eco-friendly and promoting a sustainable economy. Exceptional Customer Service. Gaiam maintains a customer-focused approach at all stages of its business to build long-term customer relationships based on loyalty and trust. We ensure that we have on hand inventory to support 93% of in-stock orders. It is our practice to ship each order no later than the next business day. According to Jupiter Communications, 90% of online customers prefer human interaction when they require customer service. Our in-house customer service department includes product specialists, who have specific product knowledge and assist customers in selecting products and solutions that meet their needs, design, price and style criteria. Gaiam also enhances its customer service through initiatives such as extensive training of customer service representatives and unconditional return guarantees. We believe that, by offering exceptional customer service, we encourage repeat purchases by our customers, enhance our brand identity and reputation and build stronger relationships with our customers. Established Infrastructure. Gaiam has invested in its physical facilities, technology and information systems. In 1996, we established our 64,000 square foot fulfillment center in Cincinnati, Ohio, a facility that is in the central United States and conveniently located to hubs for major shipping companies. This location allows us to achieve shipping cost efficiency to most locations across the Continental United States. It is located within 30 minutes of both UPS and Airborne hubs. In the same year, we installed our supply chain management information system to support virtually all segments of our business, including merchandising, customer database management and marketing, order processing, fulfillment, inventory management, customer service and financial reporting. This investment reduced our costs of fulfillment by providing an integrated system that reduces labor costs and times needed to procure inventory and fill orders. This existing infrastructure has also allowed us to integrate acquired businesses in an efficient and cost-effective manner. Our existing infrastructure also gives us an advantage over start up e- commerce companies, many of which will need to devote substantial resources to the development of these capabilities. Our Operating Model. Our business structure is designed to enable each Gaiam brand to achieve individual sales growth, while realizing cost savings from the combined enterprise. The managers of our brands retain responsibility for merchandising and creative presentation. Gaiam provides strategic direction, technology, financial resources and administrative services, as well as marketing, customer service, fulfillment, purchasing and sourcing. Our Strategies. Focus on our Online Presence. We are upgrading our website and technology systems to create a platform that will expand our product offerings and take advantage of the unique characteristics of online retailing. We are developing an online community of consumers who are concerned about personal and planetary health and want to use their purchase decisions to effect positive change. We believe that the interactive environment available on the Internet will make possible customer- to-customer and customer-to-company communications that will increase the usefulness of our services to customers, provide valuable 30 feedback to us, and help us and our customers establish a database of valuable information about environmental issues, natural health and personal development. From this interaction and feedback, we believe that the online community can grow. Our goal is to grow this segment of our customers and to educate them about their own ability to effect positive change through purchases that will result in improvements to the environment and their well-being -- and thereby demonstrating to them that their choices can "make a difference." Strengthen Our Brand. We plan to establish the Gaiam name as an authority in the Lohas industry. Gaiam and Gaiam.com will also function as the umbrella brands for Harmony, InnerBalance and Living Arts and any additional brands we may acquire or develop. We plan to strengthen these brands by increasing marketing efforts, strengthening relationships with traditional and e-commerce retailers and increasing the breadth of our videotape and digital informational offerings while maintaining our high level of customer service. We believe that creating demand by consumers for eco-friendly and natural products will permit us to obtain these products in greater volume and, in turn, offer the products at lower prices than might otherwise be available. As we are able to lower prices in this manner, we expect to attract additional customers. Offer Quality, Convenience and Selection. We intend to make purchasing quality, natural and healthy lifestyle products from us more convenient than shopping in a physical store. We are open 24 hours a day, and shopping for our products does not require a trip to a store. We ship products directly to the customer's home or office. We believe that customers may buy more natural and healthy lifestyle products from us because they can get the information and advice they require, have more hours to shop, can act immediately on a purchase impulse and can locate products that may be hard-to-find. Because catalog and online shopping are not tied to a geographic location, we can deliver a wide selection of natural and healthy lifestyle products to customers in rural or other locations that cannot support a large- scale Lohas products retail store. Develop Business-to-Business Opportunities. Gaiam is focusing on increasing its sales to other businesses that have a need for sustainable or natural and healthy lifestyle products and services. These businesses include retailers, hospitality companies, spas and resorts, health care providers, as well as industrial companies. We believe that the Gaiam brands and product mix are well-suited to these industries. We believe that the expertise and knowledge we have and can develop in the Lohas industry will make Gaiam the information source of choice for businesses that wish to service the Lohas industry. As a result, we believe that we can build a successful consulting and "green audit" business. Part of our strategy is to set the standard for the industry and then offer information, products and services under Gaiam's approval or recommendation. The Gaiam approval can be earned by companies, business lines and products in the Lohas industry. Complement our Existing Business with Selective Strategic Acquisitions. Even though our strategy is not dependent on acquisitions, we will consider strategic acquisitions in the Lohas industry that complement our existing business. We believe that significant acquisition opportunities exist and our willingness to retain existing operating management will make us an attractive acquiring party. Gaiam generally allows the acquired company's management team to retain responsibility for critical front-end business functions such as merchandising, creative presentation and marketing, while consolidating operational functions under the Gaiam organization to realize economies of scale. We will consider strategic acquisitions in product sales, customer and product information data bases that can augment our own business. Product Brands We have organized our merchandising and creative functions under three strategic brands: . Harmony targets the industry's Sustainable Economy and Ecological Lifestyles markets, 31 . Living Arts targets the industry's Personal Development market, and . InnerBalance targets the industry's Alternative Healthcare and Healthy Living market. Common logistics, information systems, finance, legal, human resources and general administrative functions support the entire organization. Most of our corporate functions located at our administrative headquarters in Broomfield, Colorado and most inventory storage and fulfillment for our brands originate from our Cincinnati, Ohio fulfillment center. Harmony Harmony focuses on eco-friendly household products that offer alternatives for the product categories found in mainstream supermarkets and department stores. We work with our vendors to ensure that the sourcing of ingredients, the processes utilized and packaging materials--are all eco-friendly and responsible. Where appropriate, we submit our products to a rigorous testing and approval process for both efficacy and safety. We also send out items to independent labs for additional testing and approval. We use no animals in our testing process. Our merchandising department remains committed to the ongoing expansion of Harmony's exclusive lines to pioneer conscious alternatives for everyday household products. Because of the uniqueness of our products, Harmony has been featured in editorial articles in the Wall Street Journal, Daily News, San Francisco Chronicle, Elle and Vogue. Some of our Harmony customers have made automatic reorder arrangements whereby Harmony regularly ships products in bulk on specific dates. Popular automatic reorder products include paper towels, bathroom tissue and cleaning supplies. [Harmony graphics appears here and includes the following text] [Sustainable Economy Ecological Lifestyles Energy-Efficient Lights Natural Fiber Clothing (20,000 hour bulbs, fluorescent bulbs) (Hemp, Green/Organic Cotton) Energy-Efficient Appliances Home Furnishings (Natural Fiber, Recycled Paper Products Sustainably Harvested & Reclaimed Woods) SOLAR PATH LIGHT Recycled Plastic Products Natural Bed & Bath Products (Radios, Lights, Security System) (Hemp, Green/Organic Cotton) & Jute Beds, Sheets, Pillows, Recycling & Composting Products Comforters, Blankets, Towels, Shower Curtains & Rugs Recycled Plastic Products (Clothes Non-Toxic Cleaning Supplies Hammocks, Blankets, Throws) Non-Toxic Laundry Products Battery Recharger & Natural Pest Repellents Rechargeable Batteries Energy-Efficient Laundry Products Outdoor/Garden Supplies Conservation Information & Products]
Living Arts In September 1998, we acquired a majority interest in Living Arts. Living Arts is a producer and supplier of videos and accessories targeted to the Personal Development market. The videos cover mind-body-spirit fitness subjects, such as yoga exercises. All videos are recorded on film or digital formats. 32 Living Arts markets its own video and audio tapes, as well as licensed video titles, for sale to mass merchandisers, specialty stores, sporting goods stores, and online retailers. Living Arts sells to companies such as Target, Price-Costco, K-Mart, Sam's Club, Musicland, Borders, and Amazon.com, as well as abroad in Germany, Italy, Switzerland and Australia. Living Arts also sells directly to consumers through direct marketing efforts, including catalog, e-commerce and direct magazine advertising. Living Arts has reciprocal relationships with authorities in the mind-body- spirit arena such as yoga teachers and publications such as Yoga Journal to create content for informational videotapes. [Livingarts graphic appears here and the following text]
[Personal Development Meditation Yoga Tai Chi YOGA ACCESSORIES Qi Gong & CLOTHING Relaxation Stress Reduction (Information, Video, Audio, DVD, Clothing Accessories, Books)]
InnerBalance InnerBalance offers alternative health products and solutions focused on enhancing the quality of life. Its principal products include air and water filters, fitness accessories, herbal supplements and home spa accessories targeted to the Alternative Healthcare and Healthy Living markets. According to a Journal of the American Medical Association study published in 1998, 83 million Americans tried alternative health procedures in 1997, for a total of 629 million visits to practitioners. At this time, we generate the majority of InnerBalance sales through our catalog and other direct sales efforts; however, we intend to make the Internet our primary channel of distribution. According to Cyber Dialogue, over 22 million U.S. adults searched for health information on the Internet for the year ended December 1998, and this number is estimated to increase by 50% during the next year, to a total of 33 million. [InnerBalance graphic appears here and the following text] [Alternative Healthcare Healthy Living Water & Air Filters Personal Care Products Massage Therapy (Natural Body Products, Allergy Solutions Oral Hygiene, Hair Care) Light Therapy Natural Supplements Magnetic Therapy Nutritional Products SOY MILK MAKER Aromatherapy Products & & Information Information Natural Beauty Products Sound Therapy Fitness products & Information Back Care Natural pain Relief Detox Products & Information]
Our Channels of Distribution We offer our products through two primary distribution channels consisting of direct marketing (catalogs, the Internet and consumer advertising) and business-to-business. 33 Direct marketing We ensure that we have on-hand inventory to support 93% of in-stock orders. It is our practice to ship each order no later than the next business day. While this practice may result in higher costs, we believe that it enhances customer satisfaction and loyalty. Our in-house customer service department includes product specialists who are trained to have in-depth product knowledge and assist customers in selecting products and solutions that meet their needs, design, price and style criteria. For the benefit of our customers, we also provide toll-free telephone ordering and unconditional return guarantees. Business-to-Business Gaiam markets certain products, principally videos featuring yoga and fitness, to national and regional mass merchandisers, specialty stores, sporting goods stores, bookstores, natural foods stores and online retailers. We are in the process of expanding our range of products produced and sold in the retail market, as well as creating an integrated branded retail display on the premises of a larger retail establishment in which we will offer customers a number of exclusive items. Gaiam is in the process of significantly increasing its sales to other businesses that have a need for eco-friendly products and services, or natural and healthy lifestyle products. Business-to-business revenues were 13% of 1998 revenues and 21% of revenues for the first six months of 1999. By offering both a direct marketing and business-to-business approach to distribution, we believe that we are maximizing our ability to reach our core customers as well as enhancing our brand. Our Customer Service Gaiam stands by its advertised "no-risk guarantee" by providing its customers a full refund of the purchase price for products that are returned any time for any reason. We believe that this guarantee, coupled with the quality of our customer service personnel, encourages greater customer loyalty and repeat sales. In addition to our e-commerce ordering systems, our customer service staff accepts orders, product questions and other customer service requests, 362 days per year (excluding Thanksgiving, Christmas Day and New Year's Day) via our dedicated toll-free telephone numbers, fax, mail and e-mail. Sales representatives are responsible for verifying purchasing history, order status, delivery dates, returns processing and account credits. Our information system allows real time verification of in-stock positions, credit card authorizations, stock moves and transfers. Product information in printed form is generally available to customers upon request, and questions from customers are answered within 24 hours. Merchandise is delivered to customers through the U.S. Postal Service, United Parcel Service and other common carriers. We train our service representatives to "think for the benefit of the customer" and help them choose among the best possible solutions. This training includes providing to them samples of all products for their inspection and use, and databases of specifications about these products. Many of our representatives purchase our products and information and can speak to customers about their personal experiences with them. We also encourage our sales representatives to provide us with feedback about products to assure quality and performance. Several representatives also have personal 800 numbers so customers can call them directly and receive personal assistance with their requests. We have also trained dedicated product specialists to assist sales representatives with technical questions and supplemental research by compiling product-specific information packets accessible on our company-wide server. We also maintain a research library stocked with books, videos and audio tapes for our employees' use. Customer service representatives are encouraged to watch videos and research products so that they can respond to our customers' questions. We maintain a toll-free customer service telephone number, separate from the telephone number for merchandise orders, to handle inquires relating to matters such as order status, scheduled delivery dates and product inquiries. Returns are closely monitored to determine whether any product quality issues exist. Returned merchandise is promptly inspected and recycled to inventory unless damaged or worn. 34 Purchasing and Inventory Management We strive to develop long-term and close working relationships with certain vendors, which we believe increases the quality and selection of merchandise available to us and enables us to develop products which are not readily available from other sources. Gaiam uses an automated inventory management system to maximize fulfillment and to reach the proper balance between inventory turn and optimal in-stock positions. Both inventory turn and in-stock rates carry associated benefits and costs to a fulfillment operation. High in- stock rates have a positive impact on sales and customer satisfaction, but carry the potential risk of excess inventory and obsolescence. Gaiam utilizes historical sales results, manufacturing and delivery lead times, volume discounts, the experience of its employees and other related factors in an integrated analysis model to determine optimum inventory levels. Liquidations, sales of overstocks and end-of-season merchandise is disposed of primarily through our outlet store, located in Boulder, Colorado, sales inserts and website offerings. Cost recovery efforts for excess inventory are continually monitored, and balance sheet reserves are adjusted accordingly. Our Internet Business We believe that our business is particularly well-suited to Internet commerce. The use of many of our products is enhanced by extensive product education and information that we will make available online. The online environment has virtually unlimited shelf space, the capacity to present vast amounts of consumer information and offers consumers the convenience of shopping online. In addition, many of our products are not widely found in conventional stores. Although our historical sales have been predominantly through catalogs and retailers, we are shifting our sales emphasis to the Internet and making the Internet our primary channel of distribution. According to Forrester Research, an independent media research firm, the number of U.S. households using e-mail, the Internet or a consumer online service will grow from an estimated 20.5 million households in 1996 to 55 million households, representing over 50% of all U.S. households by the year 2002. Furthermore, the number of U.S. households making at least one online purchase is expected to grow from approximately 10 million at the end of 1998 to 36 million at the end of 2002. Our website provides online purchasing capability for many products that we offer. Following placement of an order, the customer will receive an order confirmation that will summarize the purchase, the total amount of sale and any shipping information. We are currently in the process of adding incremental features to our website for the convenience of our customers. These features will be gradually introduced during the remainder of 1999. The following forms of online customer service will be available: . Visitors will be able to search for answers to their questions on our website. Answers to frequently asked customer inquiries may be searched by topic, product and category. Visitors will have access to their account information and will be able to update their personal information. . Customers will be able to complete a form at our website or e-mail questions or concerns directly to our customer support staff. An inquiry will be acknowledged immediately, and we anticipate that a personalized response will be delivered within 24 hours via e-mail. . We will provide live customer service support through a toll-free telephone number. Our customer service representatives will have complete access to and familiarity with our website and applications. Visitors may modify their online preferences or profile through this channel, if necessary. After registering, a visitor will be invited to create a personal profile containing product information and content of particular interest to the visitor. Once registered, visitors will be able to check order status, make payments, and communicate with customer service 35 Future Acquisitions We will consider strategic acquisitions of companies with a strong brand identity and with customer and product information data bases that augment our data bases. It has been Gaiam's practice to allow the acquired company's management team to retain responsibility for critical front-end business functions such as merchandising, creative presentation and marketing, while consolidating operational functions under the Gaiam organization to realize economies of scale. Information Technology Gaiam uses modern computer systems to support merchandising, customer management and marketing, order processing, fulfillment, inventory management, customer service and financial reporting. We believe that these systems provide us with the data needed to perform effective analysis about our business, products and customers. Further, we believe that this analysis can improve performance, customer loyalty and service by identifying current conditions and trends in marketing, customer buying behavior, customer service and fulfillment operations. We believe our current systems will accommodate Gaiam's operations for the foreseeable future. We are implementing new Internet software to automate online sales and operations. The system is compatible with our existing systems. This new Internet software links Internet merchandising, order taking, payment and security, order management, warehousing and shipping, customer service, inventory management and accounting with our existing system. Gaiam also makes extensive use of company-wide e-mail and voice-mail systems for internal communication, as well as communication with customers and suppliers. Our Competitive Position We believe that the Lohas industry is characterized by a fragmented supplier and distribution network and we not aware of a dominant leader. Gaiam's goal is to establish itself as the industry leader. The direct marketing business is evolving and competitive. We expect more business to use the Internet. As this happens, we expect competition to intensify because barriers to entry are minimal and competitors can launch new sites at a relatively low cost. In addition, larger, well-established and well- financed entities may acquire, invest in or form joint ventures with our online competitors as the use of the Internet and other online services increases. Increased competition from these or other competitors could reduce our revenue. We believe that the principal competitive factors in the direct marketing business in the Lohas industry for the goods and services we sell are: . integrity . product distinctiveness, quality and performance . depth of knowledge and research made available to the consumer . quality of personalized customer service . creative presentation of product . brand name recognition . easy and satisfying shopping experience Our principal competitors in the direct marketing of goods and services we sell are: . catalog retailers such as Feel Good Catalog and Real Goods Trading Company . online retailers such as mothernature.com and GreenMountain.com 36 . thousands of small, local and regional businesses . product lines or items offered by large retailers, manufacturers, publishers and video producers. While we believe that we compare favorably with our competitors on the key competitive factors, we have no control over how successful our competitors are in addressing these same factors. In addition, the smaller businesses we compete against may be able to more effectively personalize their relationships with customers. We expect industry consolidation to increase competition. As our competitors grow, they may adopt aggressive pricing or inventory policies, which could result in reduced operating margins, loss of market share and a diminished brand franchise. Some environmentally friendly products are priced at a premium to products that have similar uses that are not environmentally friendly. Our sales growth assumes that consumers will sometimes be willing to pay higher prices in order to enhance the environment, promote a sustainable economy, and achieve healthy lifestyles and personal development or that we will be able to reduce prices over time through volume purchases. Because Gaiam uses multiple distribution channels for our products, we also compete with other producers of similar mind-body-spirit fitness products sold to traditional retail stores. Our principal competitors are PPI Entertainment, Sony Wonder and Goldhil Media. We believe the principal competitive factors in this market are: . distinctiveness of product . authoritative information . quality of product . brand recognition . price We believe we compete favorably on all relevant factors in direct marketing and selling to traditional retailers as evidenced by our sales growth. Many of our competitors are larger, have longer operating histories and have greater financial and marketing resources than we have. Our success also depends upon the willingness of consumers to purchase goods and services that promote the values we espouse. While we believe our business plan and assumptions are reasonable, we cannot assure you that the demographic trends on which they are based will continue or that the current levels of environmental consciousness or concerns about promoting a sustainable economy, healthy lifestyles and personal development will be sustained. The decrease of consumer interest in purchasing goods and services that promote the values we espouse would materially and adversely affect the growth of our customer base and sales revenues and, accordingly, our financial prospects. Our Intellectual Property Gaiam, Gaiam.com, Harmony, InnerBalance and Living Arts and various product names are subject to trademark or pending trademark applications, of Gaiam or a Gaiam company. We also currently hold various web domain names relating to our brand, including "www.gaiam.com." Our Employees As of June 30, 1999, Gaiam and the Gaiam companies employed approximately 150 persons. None of our employees is covered by a collective bargaining agreement. Our Facilities Our principal executive offices are located in Boulder County, Colorado. Our main fulfillment center is located in the Cincinnati, Ohio area. This facility houses most of our fulfillment functions. We selected the 37 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:
Lease Location Size Use Expiration -------- ---- --- ---------- Boulder County, CO 25,000 sq. ft. Headquarters and customer service October 2001 Outlet center January 2000 Cincinnati, OH 64,000 sq. ft. Fulfillment center October 2000 Santa Monica, CA 5,000 sq. ft. Creative staff offices June 2000
We have options to renew our headquarters and fulfillment center leases. We believe our facilities are adequate to meet our current needs and that suitable additional facilities will be available for lease or purchase when and as we need. Regulatory Matters Our business is subject to a number of governmental regulations, including the Mail or Telephone Order Merchandise Rule and related regulations of the Federal Trade Commission. These regulations prohibit unfair methods of competition and unfair or deceptive acts or practices in connection with mail and telephone order sales and require sellers of mail and telephone order merchandise to conform to certain rules of conduct with respect to shipping dates and shipping delays. We are also subject to regulations of the U.S. Postal Service and various state and local consumer protection agencies relating to matters such as advertising, order solicitation, shipment deadlines and customer refunds and returns. In addition, merchandise imported by Gaiam is subject to import and customs duties and, in some cases, import quotas. Gaiam's business could also be affected by regulations promulgated in the future. For example, there are a number of different bills under consideration by Congress and various state legislatures that would restrict disclosure of consumers' personal information, which may make it more difficult for Gaiam to generate additional names for its direct marketing, and restrict a company's right to send unsolicited electronic mail or printed materials. Although Gaiam believes it is generally in compliance with current laws and regulations and that these laws and regulations have not had a significant impact on our business to date, it is possible that existing or future regulatory requirements will impose a significant burden on us. There is an increasing number of laws and regulations pertaining to the Internet. In addition, a number of legislative and regulatory proposals are under consideration by federal, state, local and foreign governments and agencies. Laws or regulations may be adopted with respect to the Internet relating to liability for information retrieved from or transmitted over the Internet, online content regulation, user privacy, taxation and quality of products and services. Moreover, it may take years to determine whether and how existing laws such as those governing issues such as intellectual property ownership and infringement, privacy, libel, copyright, trade mark, trade secret, obscenity, personal privacy, taxation, regulation of professional services, regulation of medical devices and the regulation of the sale of other specified goods and services apply to the Internet and Internet advertising. The requirement that we comply with any new legislation or regulation, or any unanticipated application or interpretation of existing laws, may decrease the growth in the use of the Internet, which could in turn decrease the demand for our products, information and services, increase our cost of doing business or otherwise have a material adverse effect on our business, results of operations and financial condition. The adoption of new laws or regulations could reduce the rate of growth of the Internet, which could potentially decrease the usage of our online stores or could otherwise materially adversely affect our business. In addition, 38 applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy is uncertain. The vast majority of these laws were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Further, several telecommunications carriers have requested the Federal Communications Commission ("FCC") to regulate telecommunications over the Internet. Due to the increasing use of the Internet and the burden it has placed on the current telecommunications infrastructure, telephone carriers have requested the FCC to regulate Internet service providers and online service providers and impose access fees on those providers. If the FCC imposes access fees, the costs of using the Internet could increase dramatically. This could result in the reduced use of the Internet as a medium for commerce, which could materially adversely affect our business. The Gaiam companies generally collect sales taxes only on sales to residents of the state in which Gaiam is headquartered, where orders are fulfilled or where Gaiam has a location, currently, California, Colorado and Ohio. A number of legislative proposals have been made at the federal, state and local level, and by foreign governments, that would impose additional taxes on the sale of goods and services over the Internet and certain states have taken measures to tax Internet-related activities. Although Congress recently placed a three-year moratorium on state and local taxes on Internet access or on discriminatory taxes on electronic commerce, existing state or local laws were expressly excepted from this moratorium. Further, once this moratorium is lifted, some type of federal and/or state taxes may be imposed upon Internet commerce. Legislation or other attempts at regulating commerce over the Internet may substantially impair the growth of commerce on the Internet and, as a result, adversely affect our opportunity to derive financial benefit from these activities. Legal Proceedings In 1998 we acquired a majority interest in Living Arts. Funds we provided to Living Arts at the time included amounts necessary to satisfy cash flow shortfalls from operating losses and a legal judgment that had been awarded in a case brought for breach of contract damages against Living Arts and its former employee and then half-owner. At the time we acquired the majority interest in Living Arts, Living Arts continued to employ this person, who continues to hold indirectly a 16.5% interest in Living Arts through a company he owns with his wife. In early 1999, Living Arts terminated the employment of this person for chronic absenteeism, misappropriation of funds, gross negligence, lying, repeated emotional outbursts directed at employees and other inappropriate acts. After unanswered requests for repayment of damages, a subsidiary of Gaiam filed arbitration proceedings to resolve a number of claims involving the former employee and the minority owner, seeking to recover monies owed by the minority owner to Gaiam subsidiaries and damages for breach of fiduciary responsibilities. Thereafter, the former employee, the minority owner and the former employee's wife filed suit seeking damages and other relief against Livings Arts, Gaiam and its subsidiary, and Gaiam's directors. Their complaint, which has not been served, alleges that these parties have breached various fiduciary duties to the minority owner by managing Living Arts in a manner injurious to him, that we owe him an unspecified amount of money for various reasons, that termination of the former employee's employment was wrongful, that we have defamed the former employee, and that our purchase of Living Arts should be rescinded. We believe the complaint is without merit and we intend to seek dismissal of the litigation and an award of sanctions for the filing of the suit. We believe that the arbitration procedures stipulated by the agreements with the former owner are the only recourse for the claims covered by them. Further litigation could result if the disputes cannot be settled. 39 MANAGEMENT Executive Officers And Directors Our executive officers and directors, including directors who will join the board upon conclusion of this offering, their respective ages as of August 30, 1999 and their positions are as follows:
Name Age Position - ---- --- -------- Jirka Rysavy............ 45 Founder, Chairman of the Board and Chief Executive Officer Lynn Powers............. 50 President, Chief Operating Officer and Director Pavel Bouska............ 45 Executive Vice President and Chief Information Officer Barnet M. Feinblum...... 51 Director* Barbara Mowry........... 51 Director* Paul H. Ray............. 60 Director*
- -------- * Mr. Feinblum, Ms. Mowry and Mr. Ray will join the board upon completion of this offering. JIRKA RYSAVY. Founder, Chairman and Chief Executive Officer of Gaiam. He has been Chairman since Gaiam's inception and became the full-time Chief Executive Officer in December 1998. Mr. Rysavy is also Chairman Emeritus and a director of Corporate Express, Inc., a Fortune 500 company that supplies office and computer products and services. Mr. Rysavy founded Corporate Express in 1986 and was its Chairman and Chief Executive Officer until September 1998. Previously, he founded and served as Chairman and Chief Executive Officer of Crystal Market, a health food market, which was sold to Michael Gilliland in 1987 to become the first store of Wild Oats Markets. Mr. Rysavy is also a director of Whole Foods Markets, Inc. LYNN POWERS. President, Chief Operating Officer and a director of Gaiam since February 1996. From 1992 to 1996, she was Chief Executive Officer of La Scelta, an importer of natural fiber clothing products. Before that, Ms. Powers was Senior Vice President Marketing/Strategic Development and Vice President Merchandising of Miller's Outpost, a specialty retailer. PAVEL BOUSKA. Executive Vice President and Chief Information Officer since March 1999. He served as a director of Gaiam from 1991 until August 1999. Prior to joining Gaiam, from June 1988 to March 1999, Mr. Bouska was an officer and one of the founding members of Corporate Express, serving in various positions, including Chief Information Officer and Vice President Information Systems, responsible for system development, information technology, operations, systems conversions and business consolidations. Prior to joining Corporate Express, he was project leader for Software Design & Management, a German software company subsequently acquired by Ernst & Young. BARBARA MOWRY. Will become a director of Gaiam at the conclusion of this offering. Since November 1997, Ms. Mowry has been the President and Chief Executive Officer of Requisite Technology, a business-to-business e-commerce company specializing in the creation and management of electronic content and catalogs. Prior to joining Requisite Technology, Ms. Mowry had been an officer of two Fortune 500 companies, Telecommunications, Inc. from 1995 to 1997, and UAL, Inc. from 1983 to 1990. In 1990, Ms. Mowry founded, and until 1995 served as Chief Executive Officer of, The Mowry Company, a relationship marketing firm focusing on the development of customer relations for businesses. She has an MBA from the University of Minnesota and a BA in Sociology from Miami University. BARNET M. FEINBLUM. Will become a director of Gaiam at the conclusion of this offering. Mr. Feinblum has served as the President, Chief Executive Officer and a director of Horizon Organic Dairy since May 1995. From July 1993 through March 1995, Mr. Feinblum was the President of Natural Venture Partners, a private investment company. From August 1976 until August 1993, Mr. Feinblum held various positions at Celestial Seasonings, Inc., including President, Chief Executive Officer, and Chairman of the Board. Mr. Feinblum received a BS degree from Cornell University and a MBA from the University of Colorado. 40 PAUL H. RAY. Will become a director of Gaiam at the conclusion of this offering. Mr. Ray has been Executive Vice President of American LIVES, Inc., a market research and opinion polling firm since November 1986. Prior to joining American LIVES, Mr. Ray was Chief of Policy Research on Energy Conservation at the Department of Energy, Mines and Resources of the Government of Canada from 1981 to 1983. From 1973 to 1981, Mr. Ray was Associate Professor of Urban Planning at the University of Michigan. Mr. Ray holds a B.A. (cum laude) in anthropology from Yale University and a Ph.D. in sociology from the University of Michigan. He is the author of The Integral Culture Survey, which first identified the cultural creative subculture. Each director serves for a one-year term. Each officer serves at the discretion of the Board of Directors. There are no family relationships among any of the directors or officers of Gaiam. Our Board of Directors currently has three vacancies that are expected to be filled by the Board of Directors, by the appointment of Ms. Mowry, Mr. Feinblum and Mr. Ray, upon conclusion of this offering. Committees of the Board of Directors Gaiam intends to establish an Audit Committee within 90 days following this offering composed of at least two directors, which is required to maintain Gaiam's listing on the Nasdaq National Market. The majority of the members of the Audit Committee will not be employees of Gaiam. The Audit Committee will report to the Board regarding the appointment of the independent public accountants of Gaiam, the scope and fees of prospective annual audits and the results thereof, compliance with Gaiam's accounting and financial policies and management's procedures and policies relative to the adequacy of Gaiam's internal accounting controls. Following this offering, we also intend to establish a Compensation Committee, that we expect to be comprised entirely of non-employee directors. Director Compensation Currently, directors of Gaiam do not receive any compensation for their services as directors. Following consummation of this offering, Gaiam expects to establish a compensation plan for non-employee directors. Limitation of Liability and Indemnification Matters Gaiam's charter provides indemnity to its directors and officers to the extent permitted by Colorado law. The charter also includes provisions to eliminate the personal liability of its directors and officers to Gaiam and its shareholders to the fullest extent permitted by Colorado law. Under current law, exculpation would cover an officer's or director's breaches of fiduciary duty, except for: . breaches of a person's duty of loyalty to Gaiam, . those instances where a person is found not to have acted in good faith, . those instances where a person received an improper personal benefit as the result of the breach, and . acts in violation of the Colorado Business Corporation Act. Gaiam's bylaws provide that Gaiam will indemnify its directors, officers and employees against judgments, fines, amounts paid in settlement and reasonable expenses. 41 Executive Compensation The following table sets forth compensation, for the year ended December 31, 1998, of Gaiam's executive officers, Mr. Rysavy and Ms. Powers. Information is also included with respect to 1998 Compensation for two of Gaiam's Vice Presidents: SUMMARY COMPENSATION TABLE
All Other Annual 1998 1998 Name and Principal Position Compensation Compensation - --------------------------- ------------------- ------------ Salary Bonus -------- ------- Jirka Rysavy Chairman and Chief Executive Officer.......... $ --(1) $ -- $-- (2) Lynn Powers President and Chief Operating Officer......... 110,009 -- -- (2) Mark Lipien Vice President Operations..................... 70,802 10,000 -- (2) Linda West Vice President Merchandising.................. 83,076 10,000 -- (2)
- -------- (1) Gaiam began compensating Mr. Rysavy in January 1999. His annual salary is currently $125,000. (2) Until June 1, 1999, Gaiam did not make any restricted stock awards, grant any stock appreciation rights, make any long-term incentive plan payouts or grant any stock options. Stock Plans We recently adopted a long-term incentive plan and an employee stock purchase plan. The incentive plan provides for the grant of stock options and similar stock based compensation. We have reserved a total of 1,600,000 shares for options and other grants under the incentive plan. Of that number, we have granted approximately 675,000 options, all at a price of $4.375 per share. The employee purchase plan will allow our employees to purchase shares at up to a 15% discount from market value, subject to restrictions. We have reserved a total of 500,000 shares under the employee purchase plan. Employment Agreements Gaiam does not have any employment agreements with any of its executive officers and does not typically enter into written employment agreements with any employees. However, Gaiam directors, officers and managers are required to sign a confidentiality agreement and, upon receiving a stock option grant, a two-year non-compete agreement commencing with the date they leave Gaiam. 42 CERTAIN TRANSACTIONS On October 1, 1998, Mr. Rysavy sold InnerBalance to Gaiam for a $531,000 note carrying interest at 8% per annum, due June 30, 2001. A portion of the note was repaid in 1998. On January 1, 1999, Gaiam issued a $289,000 8% debenture to Mr. Rysavy for the balance. This debenture was repaid in full on June 30, 1999. On December 7, 1998, Ms. Powers exercised warrants she received in 1996 to purchase 40,000 shares at $1.25 per share and also purchased $50,000 in debentures issued by Gaiam. The debenture bears interest at 8% per annum and may be prepaid at any time by Gaiam. In connection with this offering, Ms. Powers has the right to purchase shares for the outstanding principal amount of the debenture at the offering price of $5.00 per share. Accrued and unpaid interest will be paid in cash. All sales of securities available for resale made by Gaiam in 1998 and 1999 were made to a company wholly owned by Mr. Rysavy at prevailing market prices based on NASDAQ quotations. The proceeds of these sales were $703,125 in 1998 and $538,750 in 1999. See note 6 of the notes to consolidated financial statements. We obtained the securities by exercising options granted by Mr. Rysavy to us in 1993. On September 1, 1998, Ms. Powers loaned $100,000 to Gaiam on an unsecured demand basis with interest at 7% per annum. Gaiam repaid this loan with interest on September 30, 1998. Gaiam subleases its fulfillment center in Cincinnati, Ohio from a subsidiary of Corporate Express, Inc. at an annual rental rate of approximately $205,200, which is the same rate as paid by Corporate Express, Inc. under its lease. Mr. Rysavy is a director of Corporate Express and beneficially owns approximately 4.9% of the stock of Corporate Express, but does not control Corporate Express. The lease expires in October 2000. Michael Gilliland purchased $100,000 of shares and $100,000 in debentures from us on May 7, 1999. Mr. Gilliland is the founder of the Wild Oats Markets. In 1987, Mr. Rysavy sold a natural foods store in Boulder, Colorado, Crystal Market, to Mr. Gilliland, and that store became the first Wild Oats Market store. The shares purchased by Mr. Gilliland were sold at $4.375 per share, and the debentures he purchased bear interest at 8% per annum and may be prepaid at any time by Gaiam. Mr. Gilliland has certain registration rights requiring us to register his shares. See our consolidated financial statements for additional information relating to this private placement. In connection with this offering, we are offering Mr. Gilliland the option to purchase shares for the outstanding principal amount of the debentures (excluding interest) at the offering price of $5.00 per share. We anticipate Mr. Gilliland will purchase 20,000 shares in exchange for his debenture. Mr. Rysavy is a guarantor of Gaiam's line of credit with Norwest Bank. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 43 OUR SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the class A and class B common stock of Gaiam by each of our shareholders who beneficially owned shares on June 30, 1999, and as adjusted to reflect the sale of the shares offered in this offering. Percentages are based on the 3,496,429 shares to be outstanding after the offering, plus the 7,035,000 shares reserved for issuance upon conversion of class B common stock. The address for each person, except as otherwise provided, is 360 Interlocken Blvd., Broomfield, Colorado, 80021.
Shares to be Beneficially Shares Beneficially Owned Owned Prior to this After this Offering(11) Offering(11)(12) ---------------------- ------------------ Number of Number of Beneficial Owner Shares(13) Percent Shares(13) Percent - ---------------- ------------ --------- --------- ------- Jirka Rysavy(1)................... 8,000,000 93.8% 8,100,000 77.0% Lynn Powers(2).................... 40,000 .5% 70,000 .7% Pavel Bouska(3)................... 40,000 .5% 90,000 .9% James Argyropoulos/Argyropoulos Investor G.P.(4)................. 120,000 1.4% 220,000 2.1% Michael Gilliland(5).............. 22,857 .3% 42,857 .4% Lennart Perlhagen(6).............. 57,143 .7% 107,143 1.0% Mo Siegel(7)...................... 17,143 .2% 32,143 .3% Herbert Simon(8).................. 57,143 .7% 107,143 1.0% Edward Snider(9).................. 57,143 .7% 107,143 1.0% Jeffrey Steiner(10)............... 120,000 1.4% 220,000 2.1% All Executive Officers and Directors (3 persons)............ 8,080,000 95.7% 8,260,000 78.4%
- -------- (1) Mr. Rysavy owns 7,035,000 shares of class B common stock, which constitute all of the issued and outstanding class B common stock and are convertible into an equal number of shares. Mr. Rysavy also owns 965,000 shares. Includes 100,000 shares Mr. Rysavy will purchase in this offering. See "Description of Capital Stock--Shares" for a description of the voting rights of the class B common stock. (2) Includes 30,000 shares Ms. Powers will purchase in this offering. (3) Includes 50,000 shares Mr. Bouska will purchase in this offering (4) Mr. Argyropoulos is the general partner of Argyropoulos Investor G.P. He is the founder, and, until 1989, was Chairman, of The Cherokee Group, and currently is the founder and Chairman of The Walking Company. His address is 9349 Oso Avenue, Chatsworth, California. Includes 100,000 shares Mr. Argyropoulos or his entities will purchase in this offering. (5) Mr. Gilliland is the founder, Chairman and Chief Executive Officer of Wild Oats Markets. Includes 20,000 shares he will purchase in this offering. (6) Mr. Perlhagen is the founder and Chairman of CrossPharma AB; and currently Chairman of Meda Pharmaceuticals AB. Includes 50,000 shares he will purchase in this offering. (7) Mr. Siegel is co-founder and Chairman of Celestial Seasonings, Inc. Includes 15,000 shares he will purchase in this offering. (8) Mr. Simon is Chairman of Simon Property Group. Includes 50,000 shares he will purchase in this offering. (9) Mr. Snider is the founder and Chairman of Comcast Spectator. Includes 50,000 shares he will purchase in this offering. (10) Mr. Steiner is the founder, Chairman and Chief Executive Officer of Fairchild Industries. His address is 110 East 59th Street, New York, New York 10022. Includes 100,000 shares he will purchase in this offering. (11) Each shareholder possesses sole voting and investment power with respect to the shares listed, except as provided by applicable community property laws. In accordance with the rules of the Securities and Exchange Commission, each shareholder is deemed to beneficially own any shares obtainable upon the exercise of stock options or warrants which are currently exercisable or which become exercisable within 60 days after June 30, 1999, or the conversion of convertible securities that are currently convertible or 44 become convertible within 60 days after June 30, 1999. The inclusion in this table of shares listed as beneficially owned does not constitute an admission of beneficial ownership. (12) The number and percentage of shares owned after this offering assumes none of the listed shareholders will purchase additional shares in this offering, except as otherwise indicated. (13) The number of shares deemed outstanding includes shares outstanding as of June 30, 1999 and any shares obtainable through the conversion of class B common stock held by Mr. Rysavy. No options are exercisable within 60 days of the date of this prospectus. Ownership percentages based solely on the 1,496,429 shares outstanding prior to this offering are Mr. Rysavy (965,000 shares) 64.5%; Ms. Powers and Mr. Bouska, 2.7% each; Argyropoulos Investor G.P./Mr. Argyropoulos and Mr. Steiner, 8.0% each; Mr. Simon, Mr. Snider and Mr. Perlhagen, 3.8% each; Mr. Gilliland, 1.5%; and Mr. Siegel, 1.2%. Ownership percentages based solely on the 3,496,429 shares assumed to be outstanding after this offering are Mr. Rysavy (1,065,000 shares) 30.5%; Ms. Powers, 2.0%; Mr. Bouska, 2.6%; Argyropoulos Investor G.P./Mr. Argyropoulos and Mr. Steiner, 6.3% each; Mr. Simon, Mr. Snider and Mr. Perlhagen, 3.1% each; Mr. Gilliland, 1.2%; and Mr. Siegel, 0.9%. 45 DESCRIPTION OF CAPITAL STOCK General After the filing of Gaiam's Amended and Restated Articles of Incorporation in connection with this offering, the authorized capital stock of Gaiam will consist of 250,000,000 shares, consisting of 150,000,000 shares of Class A common stock, $.0001 par value per share, 50,000,000 shares of class B common stock, $.0001 par value per share, and 50,000,000 shares of preferred stock, par value $.0001 per share. As of August 30, 1999, there were 1,496,429 shares outstanding held by ten shareholders of record, options to purchase an aggregate of approximately 675,000 shares, a warrant to purchase 24,000 shares and 7,035,000 shares of class B common stock outstanding. There were no shares of preferred stock outstanding. Although Gaiam believes the following summary description of Gaiam's shares, class B common stock, Preferred Stock, Amended and Restated Articles of Incorporation and Amended and Restated Bylaws covers all material provisions affecting the rights of holders of capital stock of Gaiam, this summary is not intended to be complete and is qualified by reference to the provisions of applicable law and to Gaiam's Amended and Restated Articles of Incorporation and Amended and Restated Bylaws, both of which are included as exhibits to the Registration Statement of which this prospectus is a part. See "Additional Information." Capital Stock Each holder of shares is entitled to one vote for each share held on all matters submitted to a vote of shareholders. Each share of class B common stock is entitled to ten votes on all matters submitted to a vote of shareholders. There are no cumulative voting rights. All holders of shares and shares of class B common stock vote as a single group on all matters that are submitted to the shareholders for a vote. Accordingly, holders of a majority of the votes of the shares and shares of class B common stock entitled to vote in any election of directors may elect all of the directors who stand for election. Shares and class B common stock are entitled to dividends, if any, as may be declared by the Board of Directors out of legally available funds. In the event of a liquidation, dissolution or winding up of Gaiam, the shares and shares of class B common stock would be entitled to share ratably in Gaiam's assets remaining after the payment of all of Gaiam's debts and other liabilities. Holders of shares and shares of class B common stock have no preemptive, subscription or redemption rights, and there are no redemption or sinking fund provisions applicable to the shares and class B common stock. The outstanding shares and shares of class B common stock are, and the shares offered by Gaiam in this offering will be, when issued and paid for, fully paid and non- assessable. The class B common stock may not be transferred unless converted into class A shares, other than certain transfers to affiliates and family members. The shares of class B common stock are convertible one-for-one into class A shares, at the option of the holder of the shares of class B common stock. Gaiam's Board of Directors is authorized, subject to any limitations prescribed by Colorado law, to issue at any time up to 50,000,000 shares of preferred stock. The Board may provide for the issuance of the preferred stock in one or more series or classes with designations, preferences, limitations and relative rights determined by the Board without any vote or action by the shareholders, although the Board may not issue voting preferred stock without the consent or approval of a majority of the Class B common stock. As a result, the Board has the power to issue preferred stock with voting, conversion and other rights and preferences that could adversely affect the voting power or other rights of the holders of the shares. Although Gaiam has no current plans to issue any preferred stock, the issuance of preferred stock or of rights to purchase preferred stock could have the effect of making it more difficult for a third party to acquire Gaiam, or of discouraging a third party from attempting to acquire Gaiam. Such an issuance could also dilute your voting power or other incidents of ownership as a holder of shares. 46 Bylaws The Bylaws provide, in accordance with Colorado law, that shareholders may take action without a shareholders' meeting, provided that all shareholders entitled to vote consent to do so in writing. The Bylaws also require advance notice of any proposal to be brought before an annual meeting of shareholders that relates to an amendment to the Articles of Incorporation, a merger, the sale of all or substantially all of Gaiam's assets, the dissolution of Gaiam, or any nomination for election of directors other than by the Gaiam board of directors. These provisions could have the effect of delaying, deferring or preventing a change of control of Gaiam. Transfer Agent and Registrar The transfer agent and registrar for the shares is American Securities Transfer & Trust, Inc. 47 SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares in the public market following this offering, or the perception that sales could occur, could adversely effect the prevailing market price for our shares. Furthermore, since no shares will be available for sale shortly after this offering because of the contractual and legal restrictions on resale described below, sales of a substantial number of shares in the public market after these restrictions lapse could adversely affect the prevailing market price and impair our ability to raise equity capital in the future. Upon the closing of this offering, based upon the number of shares outstanding as of June 30, 1999, there will be 3,496,429 shares and 7,035,000 shares of class B common stock outstanding. Of these shares, all 2,000,000 shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, other than shares are purchased by "affiliates" of Gaiam as that term is defined in Ruled 144 under the Securities Act or the shares are purchased by holders who have entered into lock-up arrangements with the underwriters for this offering. See "--Lock-up Agreements" below. The remaining 1,496,429 shares and all 7,035,000 shares of class B common stock will be "restricted securities" as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, or 144(k) under the Securities Act, which rules are summarized below. Following this offering, we intend to file a registration statement under the Securities Act covering approximately 1,600,000 shares reserved for issuance under our incentive plan and approximately 500,000 shares reserved under our stock employee purchase plan. The registration statement would permit persons acquiring shares under the plans (other than persons who have entered into the lock-up agreements referred to below) to sell the shares in the public market after the shares are purchased under the plans. The registration statement covering these shares will become effective upon filing. Securities Act Rules In general, under Rule 144 as currently in effect, a person (or persons whose shares are required to be aggregated), including an affiliate, who has beneficially owned shares for at least one year is entitled to sell, within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of: . 1% of the then outstanding shares (approximately 35,000 shares immediately after this offering), or the average weekly trading volume of the shares on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. In addition, under Rule 144(k), a person who is not one of our affiliates at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner other than an affiliate) is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. Lock-up Agreements All of our directors, officers and existing shareholders (who in the aggregate hold 1,496,429 shares and shares of 7,035,000 class B common stock, and who will acquire an additional 495,000 shares in this offering) are covered by lock-up agreements under which they will not be permitted to transfer or otherwise dispose of, directly or indirectly, any shares or any securities convertible into or exercisable or exchangeable for shares, for a period of 180 days after the closing of the offering. Transfers or dispositions can be made sooner: . with the prior written consent of Tucker Anthony Cleary Gull; 48 . in the case of certain transfers to affiliates; . as a bona fide gift; or . to a trust for the benefit of the transferor or immediate family members of the transferor. Upon expiration of the lock-up period, 180 days after the date of this prospectus, 8,641,429 shares (including 7,035,000 shares of class B common stock) will be available for resale to the public in accordance with Rule 144, subject to the transfer restrictions described above. In addition, Gaiam has agreed not to sell or otherwise dispose of, directly or indirectly, any shares or any securities convertible into or exercisable or exchangeable for shares, for a period of 180 days after the closing of the offering, without the prior written consent of Tucker Anthony Cleary Gull, except that we may: . issue shares upon the exercise of outstanding options and grant options to purchase shares under our incentive plan; . issue shares under our stock employee purchase plan; and . issue shares in connection with the acquisition of another company if the terms of the issuance provide that the shares shall not be resold prior to the expiration of the 180-day lock-up period described above. Registration Rights After our filing of the registration statement relating to this offering, we are required to file a registration statement covering approximately 451,429 shares held by existing shareholders. The holders may not request the filing of registration statements until after July 20, 2001. Gaiam generally is required to bear all of the expenses of the registration, except underwriting discounts and commissions. We have agreed with the underwriters that we will not permit any of these holders to sell these shares for 180 days after the closing of the offering. In addition, if these shares are not sold in a registered offering, the holders will be required to comply with the provisions of Rule 144 as described above. 49 UNDERWRITING The underwriting agreement, dated , 1999, provides that Gaiam has agreed to sell to each of the underwriters named below, and each of these underwriters has agreed to purchase from Gaiam, the respective number of shares set forth opposite their names below:
Number of Underwriters: Shares ------------- --------- Tucker Anthony Cleary Gull...................................... 1,000,000 Adams, Harkness & Hill, Inc. ................................... 1,000,000 --------- Total......................................................... 2,000,000
If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an over-allotment option to buy up to an additional 300,000 shares from Gaiam at $5.00 per share to cover these sales. They may exercise that option for 30 days after the initial purchase of the shares by the underwriters. If any of these optioned shares are purchased, the underwriters will purchase shares in approximately the same proportion as set forth in the table above. The underwriters must purchase and accept delivery of all the shares offered in this prospectus, other than those shares covered by the over-allotment option, if any are purchased. The following table shows the underwriting fees to be paid to the underwriters by Gaiam in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares, and assuming that 1,000,000 and 1,300,000 shares, respectively, are sold at the pubic offering price of $5.00 per share and 1,000,000 shares are sold at the customer discount price of $4.50 per share in both cases.
No Exercise Full Exercise ---------- ------------- Per share (customer discount)....................... $ 0.45 $ 0.45 Per share........................................... $ 0.50 $ 0.50 Total............................................. $ 950,000 $1,110,000 If no shares are sold to Gaiam customers at a discount, then the underwriting fees paid to underwriters would be as follows: No Exercise Full Exercise ---------- ------------- Per share........................................... $ 0.50 $ 0.50 Total............................................. $1,000,000 $1,150,000
Gaiam will pay the expenses in connection with the opening of accounts for Gaiam customers, estimated to be approximately $300,000. Gaiam estimates that its share of the total expenses of this offering, excluding underwriting discounts and commissions and including the expenses in connection with the opening of the accounts, will be approximately $1.6 million. The compensation to be paid to the underwriters and Gaiam's agreement to reimburse the underwriters for expenses associated with opening accounts were determined through negotiations between Gaiam and the underwriters. In connection with this offering, we are offering each of our debenture holders the option to purchase shares for the outstanding principal amount of the debentures (excluding interest) at the offering price of $5.00 per share. As a result, a total of 395,000 shares will be sold to the debenture holders, assuming that each of the debenture holders elects to purchase shares in this offering. The debenture holders are Ms. Powers, who is a director and executive officer of the Company and may be deemed to be an affiliate of the Company, and the persons named in notes (4) through (10) to the table under the caption "Our Shareholders." In addition, we will offer Mr. Rysavy, Ms. Powers and Mr. Bouska the opportunity to purchase 100,000 shares, 30,000 shares and 50,000 shares, respectively, at the offering price of $5.00 per share. The result of these offers is that 1,435,000 shares will be available for sale to Gaiam customers and the public in this offering. Of the shares available for sale, Gaiam and the underwriters intend to allocate at least 80%, or approximately 1,200,000 shares, to Gaiam customers and approximately 20%, or 300,000 shares, to persons who are not Gaiam customers. 50 If more requests for shares are received than Gaiam is offering, Gaiam and the underwriters intend to prioritize the allocation process so that Gaiam customers will be able to buy at least 50 shares, although it may not be possible to allocate 50 shares to each customer who requests shares. Our customers will receive a 10% discount from the initial public offering price set forth on the cover of this prospectus (a discount of $.50 per share, resulting in a purchase price of $4.50 per share) on the first 200 shares purchased per customer. Gaiam employees may also take advantage of the customer discount. Any shares not sold to customers and employees at the discounted price will be offered by the underwriters to the public at $5.00 per share. If more requests for shares are received than Gaiam and the underwriters intend to make available to customers, shares will be allocated to customers in three ways. 1. Up to 500,000 shares will be allocated to the first 1,000 customers on a first come, first served basis, based on the date customer's account applications are received by Tucker Anthony. If these first 1,000 customers request more than 500,000 shares in the aggregate, we will allocate shares to customers in a way that will attempt to make sure both that the greatest number of shares get allocated to the customers who have the highest dollar value of purchases from Gaiam over the past 12 months and that all 1,000 customers get to participate to some degree in this allocation. We may not be able to achieve both results, but we will use our discretion to try to do so. 2. A total of approximately 500,000 shares will be allocated to customers based on the dollar volume of the customer's purchases from Gaiam over the past 12 months and to customers who are also Gaiam employees, consultants, contractors or family members. Customers who received shares because they were among the first 1,000 customers to return account applications, may have additional shares allocated under this paragraph if the request was not filled. 3. Finally, a total of approximately 200,000 shares will be allocated to customers by lottery. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the $5.00 initial public offering price. Any securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $ per share from the $5.00 initial public offering price. An electronic final prospectus will be available on Gaiam's website, www.gaiam.com, and the underwriters' websites, www.tucker-anthony.com and www.ahh.com. Gaiam, its directors, officers and existing shareholders have agreed with the underwriters not to dispose of any of their shares or securities convertible into or exercisable or exchangeable for shares during the period from the date of this prospectus continuing through the date 180 days after the closing of the offering, except with the prior written consent of Tucker Anthony Cleary Gull or in certain limited circumstances. Please see "Shares Available for Future Sale" for a discussion of certain transfer restrictions. The underwriters have informed us that they do not intend to confirm sales to any account over which they exercise discretionary authority. In connection with this offering, the underwriters may purchase and sell the shares in the open market. These transactions may include over-allotment and stabilizing transactions and purchases to cover short positions created in connection with this offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the shares. Short positions involve the sale by the underwriters of a greater number of shares than they are required to purchase from Gaiam in this offering. These activities may stabilize, maintain or otherwise affect the market price of the shares, which may as a result be higher than the price that might otherwise prevail in the open market. These transactions may be effected on the Nasdaq National Market, in the over-the- counter market or otherwise, and may, if commenced, be discontinued at any time. Prior to this offering, there has been no public market for the shares. The initial public offering price will be $5.00 per share. The initial public offering price has been negotiated among Gaiam and the underwriters. In 51 determining the initial public offering price of the shares, Gaiam and the underwriters considered prevailing market conditions, Gaiam's historical performance, estimates of Gaiam's business potential and earnings prospects, an assessment of Gaiam's management and industry, and the consideration of the above factors in relation to market valuations of companies in related businesses. We will apply to have the shares quoted for trading on the Nasdaq National Market under the symbol "GAIA." We anticipate that the offering will close on approximately October , 1999, at which point our shares will begin trading on the Nasdaq National Market. There will not a be a when issued market in the shares prior to the closing of the offering. We have agreed to indemnify the underwriters against or contribute to losses arising out of certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS The validity of the shares of common stock being offered hereby will be passed on for Gaiam by Bartlit Beck Herman Palenchar & Scott, Denver, Colorado. Certain legal matters will be passed upon for the underwriters by Dorsey & Whitney LLP, Denver, Colorado. EXPERTS Ernst & Young LLP, independent auditors, have audited the consolidated financial statements and schedule of Gaiam, Inc. at December 31, 1998 and 1997, and for the years then ended and the financial statements of Healing Arts Publishing, Inc. at September 14, 1998 (acquisition date) and for the period from January 1, 1998 through September 14, 1998, as set forth in their reports. The consolidated statements of income, stockholders' equity and cash flows of Gaiam, Inc. at December 31, 1996 and for the year then ended have been audited by Wendell T. Walker and Associates, independent auditors as set forth in their report. We've included the financial statements and schedule of Gaiam, Inc. and the financial statements of Healing Arts Publishing, Inc. in this prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's reports and Wendell T. Walker and Associates' report, given on their authority as experts in accounting and auditing. ADDITIONAL INFORMATION We have filed with the U.S. Securities and Exchange Commission a registration statement on Form S-1, including various exhibits and schedules, under the Securities Act covering the shares to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement and the related exhibits and schedules. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are intended to set forth the material information regarding these contracts agreements or other documents. These references, however, are not necessarily complete and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreement or other document. You may read without charge and copy at prescribed rates all or any portion of Gaiam's registration statement or any reports, statements or other information Gaiam files at the Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can also request copies of these documents upon payment of a duplicating fee, by writing to the Commission. Please call the Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Gaiam's Commission filings, including the registration statement, will also be available to you on the Commission's Internet site (www.sec.gov). After this offering, we intend to send to its shareholders annual reports containing audited consolidated financial statements and quarterly reports containing unaudited consolidated financial statements for the first three quarters of each fiscal year. 52 REPORT OF INDEPENDENT AUDITORS Board of Directors Gaiam, Inc. We have audited the accompanying consolidated balance sheets of Gaiam, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gaiam, Inc. and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Denver, Colorado June 4, 1999, except for Notes 1 and 11, as to which the date is , 1999 The foregoing report is in the form that will be signed upon the effective date of the Company's registration of Class A Common Stock in a registration statement on Form S-1 and the concurrent 2.5 to 1 reverse stock split of the Company's common shares. /s/ Ernst & Young LLP Denver, Colorado , 1999 INDEPENDENT AUDITORS' REPORT Board of Directors Gaiam, Inc. We have audited the accompanying consolidated statement of income of Gaiam, Inc., and subsidiaries, and the related statement of stockholders' equity and cash flows for the year ended December 31, 1996. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gaiam, Inc., and subsidiaries, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Wendell T. Walker and Associates, P.C. Boulder, Colorado September 12, 1997 GAIAM, INC. CONSOLIDATED BALANCE SHEETS
December 31 ----------------------- June 30 1997 1998 1999 ----------- ----------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents................ $ 1,611,793 $ 1,409,939 $ 856,045 Securities available-for-sale............ 4,828,125 1,633,905 1,505,000 Accounts receivable, net of allowance for doubtful accounts of $31,000 in 1997 and $67,915 in 1998......................... 111,424 2,579,927 1,088,054 Accounts receivable, other............... 109,957 13,995 42,608 Note receivable.......................... 154,391 9,351 100,481 Inventory, less allowances............... 1,648,083 3,393,712 3,914,887 Deferred advertising costs............... 1,028,680 1,757,845 1,746,613 Prepaid assets........................... 76,894 68,367 474,729 Other current assets..................... -- 215,469 438,697 ----------- ----------- ----------- Total current assets.................... 9,569,347 11,082,510 10,167,114 Property and equipment, net................ 1,096,888 1,079,694 992,029 Capitalized production costs, net.......... -- 672,438 824,607 Video library, net......................... -- 3,543,764 3,422,894 Other assets............................... 108,124 298,106 432,114 ----------- ----------- ----------- Total assets............................ $10,774,359 $16,676,512 $15,838,758 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable......................... $ 2,152,739 $ 6,900,492 $ 3,185,557 Accrued liabilities...................... 473,504 1,456,338 1,194,064 Accrued royalties........................ -- 804,772 511,928 Capital lease obligations, current....... 46,693 42,261 25,707 Margin loan payable...................... 1,359,130 575,288 -- Convertible debentures (see Note 4)...... -- 550,000 1,975,000 Income taxes payable..................... 311,702 242,271 133,672 Deferred tax liability................... -- 592,566 606,540 ----------- ----------- ----------- Total current liabilities............... 4,343,768 11,163,988 7,632,468 Deferred tax liability..................... 1,652,642 59,809 -- Capital lease obligations, long-term....... 42,275 25,588 14,253 Convertible debentures and other borrowings, related party................. -- 273,051 -- Line of credit............................. -- -- 1,650,000 Minority interest.......................... -- 1,492,941 1,326,119 Stockholders' equity: Class A common stock, $.0001 par value, 92,965,000 shares authorized, 1,005,000 and 1,165,000 shares issued and outstanding at December 31 1997 and 1998, respectively...................... 101 117 149 Class B common stock, $.0001 par value, 7,035,000 shares authorized, issued and outstanding at December 31 1997 and in 1998.................................... 704 704 704 Additional paid-in capital............... 133,833 377,634 1,827,602 Accumulated other comprehensive income... 3,161,263 983,126 910,279 Retained earnings........................ 1,439,773 2,299,554 2,477,184 ----------- ----------- ----------- Total stockholders' equity.............. 4,735,674 3,661,135 5,215,918 ----------- ----------- ----------- Total liabilities and stockholders' equity................................. $10,774,359 $16,676,512 $15,838,758 =========== =========== ===========
See accompanying notes. F-3 GAIAM, INC. CONSOLIDATED STATEMENTS OF INCOME
Years ended Six months December 31 ended June 30 ----------------------------------- ----------------------- 1996 1997 1998 1998 1999 ---------- ---------- ----------- ----------- ---------- (Unaudited) (Unaudited) Net revenue............. 14,800,993 19,897,690 $30,738,540 $10,474,976 17,563,080 Cost of goods sold...... 6,762,500 8,462,151 13,173,536 4,414,408 7,074,663 ---------- ---------- ----------- ----------- ---------- Gross profit............ 8,038,493 11,435,539 17,565,004 6,060,568 10,488,417 Expenses: Selling and operating............ 9,253,263 10,427,258 4,186,215 5,249,717 8,877,360 Corporate, general and administration....... 1,217,436 1,574,770 2,393,946 635,723 1,795,610 ---------- ---------- ----------- ----------- ---------- Total expenses...... 10,470,699 12,002,028 16,580,161 5,885,440 10,672,970 ---------- ---------- ----------- ----------- ---------- Income (loss) from operations............. (2,432,206) (566,489) 984,843 175,128 (184,553) Other income (expense): Realized gain (loss) on sale of securities and other, (See Note 6)................... 3,094,390 1,820,034 696,992 (25,266) 409,688 Interest expense...... (110,549) (236,699) (308,501) (88,672) (207,926) ---------- ---------- ----------- ----------- ---------- Other income (expense), net.................... 2,983,841 1,583,335 388,491 (113,938) 201,762 ---------- ---------- ----------- ----------- ---------- Income before income taxes and minority interest............... 551,635 1,016,846 1,373,334 61,190 17,209 Provision for income taxes.................. 211,935 362,534 251,955 22,437 6,401 Minority interest in net income(loss) of consolidated subsidiary, net of tax.................... -- -- 261,598 -- (166,822) ---------- ---------- ----------- ----------- ---------- Net income............ $ 339,700 $ 654,312 $ 859,781 $ 38,753 $ 177,630 ========== ========== =========== =========== ========== Net income per share: Basic................. $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.02 Diluted............... 0.04 0.08 0.11 $ 0.00 $ 0.02 Shares used in computing net income per share: Basic................. 8,040,000 8,040,000 8,072,877 8,040,000 8,317,822 Diluted............... 8,040,000 8,040,000 8,118,792 8,040,000 8,564,932
See accompanying notes. F-4 GAIAM, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Class A Class B Other Common Stock Common Stock Additional Compre- ---------------- ---------------- Paid-in hensive Retained Shares Amount Shares Amount Capital Income Earnings Total --------- ------ --------- ------ ---------- ----------- ---------- ---------- Balance at January 1, 1996................... 1,005,000 $101 7,035,000 $704 $ 133,833 $ -- $ 445,761 580,399 Comprehensive income: Net income............. -- -- -- -- -- -- 339,700 339,700 Other comprehensive in- come (loss): increase in fair market value of securities available for sale, net of tax of $3,484,875............ -- -- -- -- -- 6,764,758 -- 6,764,758 ---------- Total comprehensive income (loss)........ 7,104,458 --------- ---- --------- ---- ---------- ---------- ---------- ---------- Balance at December 31 1996................... 1,005,000 101 7,035,000 704 133,833 6,764,758 785,461 7,684,857 Comprehensive income: Net income............. -- -- -- -- -- -- 654,312 654,312 Other comprehensive in- come (loss) Decrease in fair market value of securities available for sale, net of reclassifica- tion adjustment (see Note 1), net of tax of $1,628,529............ -- -- -- -- -- (3,603,495) -- (3,603,495) ---------- Total comprehensive loss................. -- -- -- -- -- -- -- (2,949,183) --------- ---- --------- ---- ---------- ---------- ---------- ---------- Balance at December 31, 1997................... 1,005,000 101 7,035,000 704 133,833 3,161,263 1,439,773 4,735,674 Issuance of common stock.................. 160,000 16 -- -- 574,984 -- -- 575,000 Return of capital to shareholder through Purchase of Inner Balance Inc............ -- -- -- -- (331,183) -- -- (331,183) Comprehensive income: Net income............. -- -- -- -- -- -- 859,781 859,781 Other comprehensive in- come (loss): Decrease in fair market value of securities available for sale, net of reclassifica- tion adjustment (see Note 1), net of tax of $618,578.............. -- -- -- -- -- (2,178,137) -- (2,178,137) ---------- Total comprehensive loss................. (1,318,356) --------- ---- --------- ---- ---------- ---------- ---------- ---------- Balance at December 31, 1998................... 1,165,000 117 7,035,000 704 377,634 983,126 2,299,554 3,661,135 Issuance of common stock (unaudited)............ 331,429 32 -- -- 1,449,968 -- -- 1,450,000 Comprehensive income: Net income (unau- dited)................ -- -- -- -- -- -- 177,630 177,630 Other comprehensive in- come (loss): Decrease in fair market value of securities available for sale, net of reclassifica- tion adjustment (see Note 1), net of tax of $ 572,743 (unau- dited)................ -- -- -- -- -- (72,847) -- (72,847) ---------- Total comprehensive income (unaudited) -- -- -- -- -- -- -- 104,783 --------- ---- --------- ---- ---------- ---------- ---------- ---------- Balance at June 30, 1999 (unaudited)............ 1,496,429 $149 7,035,000 $704 $1,827,602 $ 910,279 $2,477,184 $5,215,918 ========= ==== ========= ==== ========== ========== ========== ==========
See accompanying notes. F-5 GAIAM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended Six months ended December 31 June 30 ------------------------------------ ------------------------ 1996 1997 1998 1998 1999 ----------- ----------- ---------- ----------- ----------- Operating activities (Unaudited) (Unaudited) Net income.............. $ 339,700 $ 654,312 $ 859,781 $ 38,753 $ 177,630 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation........... 265,151 241,985 240,431 189,597 152,549 Amortization........... 1,062 2,785 85,466 -- 120,870 Interest expense added to principal of margin loan.................. -- 175,562 116,158 51,106 7,411 Minority interest in consolidated subsidiary............ -- -- 261,598 -- (166,822) Provision for doubtful accounts.............. -- -- 258,993 -- -- Realized gains on sale of securities and property and equipment............. (3,621,047) (1,902,802) (691,137) -- (482,692) Deferred tax expense... 52,493 50,832 9,684 -- (45,835) Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable.... 11,633 (62,317) (1,905,275) 85,457 1,463,260 Inventory.............. (672,020) (4,536) (591,519) 207,391 (521,175) Deferred advertising costs................. (398,058) (371,840) (243,630) (378,429) 11,232 Capitalized production costs................. -- -- (212,361) -- (152,169) Prepaid assets......... 46,415 (55,982) 8,527 (36,819) (406,362) Other assets........... -- 1,839 (266,757) (406,950) (357,236) Accounts payable....... 1,620,973 (267,316) 2,569,358 (190,802) (3,714,935) Accrued liabilities.... (85,634) (133,528) 329,672 (84,717) (579,287) Income taxes payable... (261,762) 390,521 (69,784) (289,663) (108,599) ----------- ----------- ---------- ----------- ----------- Net cash provided by (used in) operating activities............. (2,701,094) (1,280,485) 759,205 (815,076) (4,602,160) Investing activities Purchase of property, equipment and other assets................. (2,829,179) (157,987) (134,378) (143,251) (64,884) Proceeds from the sale of property and equipment.............. -- 1,440,409 32,090 32,090 -- Proceeds from the sale of securities available-for-sale 3,800,000 1,931,250 477,500 538,750 Payments for acquisitions, net of cash acquired.......... -- -- (1,656,611) -- -- Payments (borrowings) on notes receivable....... (232,066) 361,259 145,040 (2,095) (91,130) ----------- ----------- ---------- ----------- ----------- Net cash provided by (used in) investing activities............. 738,755 3,574,931 (1,136,359) (113,256) 382,736 Financing activities Principal payments on capital leases......... -- (40,989) (49,699) (30,130) (27,889) Proceeds from sale of stock.................. -- -- 575,000 -- 1,450,000 Proceeds from convertible debt....... -- -- 549,999 -- 1,151,949 Net proceeds from (payments on) borrowings, net........ 1,923,681 (1,021,875) (900,000) -- 1,091,470 ----------- ----------- ---------- ----------- ----------- Net cash provided by (used in) financing activities............. 1,923,681 (1,062,864) 175,300 (30,130) 3,665,530 ----------- ----------- ---------- ----------- ----------- Net change in cash and cash equivalents....... (38,658) 1,231,582 (201,854) (958,462) (553,894) Cash and cash equivalents at beginning of year...... 418,869 380,211 1,611,793 1,611,793 1,409,939 ----------- ----------- ---------- ----------- ----------- Cash and cash equivalents at end of year................... $ 380,211 $ 1,611,793 $1,409,939 $ 653,331 856,045 =========== =========== ========== =========== =========== Supplemental cash flow information Interest paid.......... $ 128,282 $ 237,147 $ 126,025 3,740 166,824 Income taxes paid....... 238,654 312,100 312,100 115,000 Note receivable in connection with the sale of property and equipment.............. -- 154,391 -- -- --
See accompanying notes F-6 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information subsequent to December 31, 1998 is unaudited.) 1. Summary of Significant Accounting Policies Organization Gaiam, Inc. (the "Company") was incorporated under the laws of the State of Colorado on July 7, 1988. The Company's primary business is providing information, goods, and services to customers who value the environment, a sustainable economy and healthy lifestyles. Basis of Consolidation The accompanying consolidated financial statements include the accounts of the Company, its subsidiaries and partnerships in which ownership is 50% or greater and considered to be under the control of the Company. All material intercompany accounts and transaction balances have been eliminated in consolidation. Cash and Cash Equivalents For purposes of the statement of cash flows, cash and cash equivalents includes demand deposit accounts with financial institutions and all highly liquid investments with an original maturity of three months or less. Securities Available-for-Sale Securities available-for-sale consist of equity securities and are stated at market value. All unrealized gains or losses, net of tax, are recorded as a separate component of stockholders' equity. Provision for Doubtful Accounts The Company records a provision for doubtful accounts for all receivables not expected to be collected. Interim Financial Statements The consolidated results as of June 30, 1999, and for the six months ended June 30, 1998 and 1999 are unaudited, but included all adjustments (consisting only of normal recurring accruals) that the Company considers necessary for a fair presentation of its financial position as of such date and results of operations and cash flows for such period. The results of operations for the six months ended June 30, 1999 are not necessarily indicative of results for a full year. Earnings Per Share In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (Statement No. 128). Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and conform to the Statement No. 128 requirements. F-7 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information subsequent to December 31, 1998 is unaudited.) The following table sets forth the computation of basic and diluted earnings per share:
June 30, --------------------- 1996 1997 1998 1998 1999 ---------- ---------- ---------- ---------- ---------- Numerator for basic earnings per share..... $ 339,700 $ 654,312 $ 859,781 $ 38,753 $ 177,630 Effect of Dilutive Securities: 8% convertible debentures........... -- -- 19,234 -- 24,245 ---------- ---------- ---------- ---------- ---------- Numerator for diluted earnings per share............ $ 339,700 $ 654,312 $ 879,015 $ 38,753 $ 201,875 ========== ========== ========== ========== ========== Denominator: Weighted average shares for basic earnings per share... 8,040,000 8,040,000 8,072,877 8,040,000 8,317,822 Effect of Dilutive Securities: Convertible debentures........... -- -- 41,153 -- 247,110 Stock warrants........ -- -- 4,762 -- -- ---------- ---------- ---------- ---------- ---------- Denominators for diluted earnings per share-- adjusted weighted average shares and assumed conversion............. 8,040,000 8,040,000 8,118,792 8,040,000 8,564,932 ========== ========== ========== ========== ========== Net income per share-- basic.................. $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.02 Net income per share-- diluted................ $ 0.04 $ 0.08 $ 0.11 $ 0.00 $ 0.02
In 1998, basic earnings per share data was computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share was adjusted for the assumed conversion of all potentially dilutive securities including warrants to purchase common stock. In 1997 and 1996, the computations do not reflect the warrants as there is no dilutive effect. Inventory Inventory, consisting of finished goods, net of valuation allowances of $79,016 and $198,744 at December 31, 1997 and 1998, is stated at the lower of cost (first-in, first-out method) or market. Depreciation and Amortization Depreciation of property and equipment, including amortization recorded under capital leases, is computed on the straight-line method over estimated useful lives of five to seven years for furniture and equipment and ten years for leasehold improvements. Capitalized Production Costs Capitalized production costs include costs incurred to produce instructional videos marketed by the Company to retail and direct-mail customers. These costs are deferred for financial reporting purposes until the videos are released, then amortized over succeeding periods on the basis of estimated sales. Historical sales statistics are the principal factor used in estimating the amortization rate. Accumulated amortization at December 31, 1998 was $927,331. F-8 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information subsequent to December 31, 1998 is unaudited.) Long-Lived Assets The carrying values of intangible and other long-lived assets are reviewed quarterly to determine if any impairment indicators are present. If it is determined that such indicators are present and the review indicates that the assets will not be recoverable, based on undiscounted estimated cash flows over the remaining amortization and depreciation period, their carrying values are reduced to estimated fair market value. Impairment indicators include, among other conditions, cash flow deficits, an historic or anticipated decline in revenue or operating profit, adverse legal or regulatory developments, accumulation of costs significantly in excess of amounts originally expected to acquire the asset and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Deferred Advertising Costs Deferred costs primarily relate to preparation, printing and distribution of catalogs. Such costs are deferred for financial reporting purposes until the catalogs are distributed, then amortized over succeeding periods (not to exceed seven months) on the basis of estimated sales. Historical sales statistics are the principal factor used in estimating the amortization rate. Other advertising and promotional costs are expensed as incurred. Advertising costs incurred were $3,019,320, $4,866,223 and $7,121,648 for the years ended December 31, 1996, 1997, and 1998, respectively. Accrued Royalties The Company has various royalty agreements with instructors and artists requiring royalty payments of specified product sales based upon unit sales. Payments are made quarterly and semi-annually. Royalty expense under these agreements totaled $842,761 in 1998. Revenues The Company recognizes revenue at the time merchandise is shipped to the customer. Amounts billed to customers for postage and handling charges, which approximate $1.2 million for 1996, $1.7 million for 1997 and $2.2 million for 1998, are recognized as revenue at the time that the revenues on the product shipments are recognized. The company provides a reserve for expected future returns at the time the sale is recorded based upon historical experience. The Company's sales are attributable mainly to sales within the U.S., with a very small percentage, less than 1% of sales, to international customers. No customer represented more than 10% of sales for either the years ended December 31, 1996, 1997 and 1998. The Company generally does not require collateral. Realized gain on sale of securities and other for the year ended December 31, 1996 includes $782,053 of expenses relating to the May 1995 acquisition of the catalog sales division of Seventh Generation. The terms of the acquisition required the Company to enter into a licensing agreement for the use of the Seventh Generation name, an operating agreement and a supply agreement. The supply agreement required the Company to purchase a specified dollar amount of products at a specified markup. The Company also incurred costs related to the abandonment of acquired equipment and facilities and relocation expenses for warehouse and office operations. F-9 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information subsequent to December 31, 1998 is unaudited.) Fair Value of Financial Instruments The Company's financial instruments consist of cash and cash equivalents, securities available-for-sale, accounts receivable, payables and debt obligations. The carrying values of these financial instruments as reported in the accompanying balance sheets are assumed to approximate their fair value. Income Taxes The Company provides for income taxes pursuant to the liability method as prescribed in Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The liability method requires recognition of deferred income taxes based on temporary differences between financial reporting and income tax bases of assets and liabilities, using currently enacted income tax rates and regulations. Reclassifications Certain reclassifications have been made to the December 31, 1996 financial statements to conform to the December 31, 1997 and 1998 financial statement presentation. Such reclassifications have had no effect on net income previously reported. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. Actual results could differ from those estimates. Reporting Comprehensive Income During 1998, the Company adopted the Financial Accounting Standards Board ("FASB") issued Statement No. 130, Reporting on Comprehensive Income ("Statement No. 130"). Statement No. 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements. During 1998, the Company adopted Statement of Financial Accounting Standard No. 131, Disclosures About Segments of an Enterprise and Related Information, ("Statement No. 131") which requires reporting of summarized financial results for operating segments and establishes standards for related disclosures about products and services, geographic areas and major customers. The Company evaluates performance based on two different operating segments: direct-to- customer and business-to-business operations. For 1996 and 1997, direct-to- customer operations was the only significant operating segment. The reclassification adjustment for gains and losses included in net income for 1996 net of tax of $3,484,875 include unrealized losses of $5,990,494 and unrealized gains of $3,784,667. The reclassification adjustment for gains and losses included in net income for 1997, net of tax of $1,628,529 include unrealized losses of $5,507,737 and realized gains of $1,904,242. The reclassification adjustment for gains included in net income for 1998, net of tax of $618,578 include unrealized losses of $2,655,637 and realized gains of $477,500. The reclassification adjustment for gains and losses included in net income for the six months ended June 30, 1999, net of tax of $572,743 include unrealized gains of $239,257 and realized gains of $312,104. F-10 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information subsequent to December 31, 1998 is unaudited.) 2. Property and Equipment At December 31, 1997 and 1998, property and equipment, stated at cost, consists of the following:
December 31 ---------------------- 1997 1998 ---------- ---------- Furniture and equipment.............................. $ 424,196 $ 614,804 Leasehold improvements............................... 270,937 288,324 Computer equipment................................... 754,000 965,449 Warehouse equipment.................................. 210,026 210,033 ---------- ---------- 1,659,159 2,078,610 Accumulated depreciation and amortization............ (562,271) (998,916) ---------- ---------- $1,096,888 $1,079,694 ========== ==========
3. Margin Loan Payable The Company has a margin loan agreement with a brokerage firm that is due on demand. The Company has pledged 265,000 shares of its securities available-for- sale (see Note 6) as collateral for the loan. The interest rate charged on the loan varies depending on market rates and was 7.0% at December 31, 1998. Interest incurred on the balance of the loan is added to the outstanding balance payable. 4. Convertible Debentures As of December 31, 1998, the Company had $823,051 issued in 8% convertible debentures to three individuals. Of the total outstanding, $323,051 was issued to two officers of the Company, the President and the Chief Executive Officer of the Company. The debentures are payable on the earlier of September 30, 1999 or the closing of an initial public offering. The debentures are automatically converted to shares of Class A common stock at the initial public offering per share price. The debenture payable to the Chief Executive Officer of the Company is due December 31, 2000. The debenture is convertible, at the option of the officer, upon the closing of the initial public offering by the Company, into shares of common stock at the initial public offering per share price. 5. Leases At December 31, 1997 and 1998, the Company's property held under capital leases consisted of the following, which is included in property and equipment:
December 31 ------------------ 1997 1998 -------- -------- Warehouse equipment...................................... $ 40,229 $ 40,229 Computer equipment....................................... 130,822 130,822 -------- -------- 171,051 171,051 Accumulated amortization................................. (47,867) (79,777) -------- -------- $123,184 $ 91,274 ======== ========
F-11 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information subsequent to December 31, 1998 is unaudited.) The Company leases equipment and office, retail, and warehouse space through capital and operating leases. The following schedule represents the annual future minimum payments, as of December 31, 1998:
Capital Operating -------- ---------- 1999................................................... $ 46,012 $ 621,601 2000................................................... 22,680 419,038 2001................................................... 4,212 142,566 2002................................................... -- 3,540 -------- ---------- Total minimum lease payments........................... 72,904 $1,186,745 ========== Less portion related to interest....................... (5,055) -------- Present value of future minimum lease payments......... 67,849 Less current portion................................... (42,261) -------- $ 25,588 ========
The Company incurred rent expense of $652,974, $508,590 and $646,886 for the years ended December 31, 1996, 1997, and 1998, respectively. 6. Securities Available-for-Sale Securities available-for-sale consist of 315,000 shares of common stock from one issuer. At December 31, 1998 the cost and fair value of the securities were $32,200 and $1,633,905, respectively. At December 31, 1997, the cost and fair value of the securities were $38,333 and $4,828,125, respectively. The fair market value of the shares was determined by using the closing NASDAQ price of the common stock at December 31, 1998 and 1997. During 1996, the Company sold 100,000 shares at a market value of $3,800,000 to a non-related party, and recognized a gain of $3,784,667 on the sale. During 1997, the Company sold 150,000 shares at a market value of $1,932,000 to a related party and recognized a gain of $1,804,242 on the sale. During 1998, the Company sold 60,000 shares at a market value of $703,125 to a related party, and recognized a gain of $696,992 on the sale. 7. Income Taxes The provision for income taxes is comprised of the following:
December 31 -------------------------- 1996 1997 1998 -------- -------- -------- Current: Federal........................................ $139,308 $269,919 $197,142 State.......................................... 20,134 41,783 45,129 -------- -------- -------- 159,442 311,702 242,271 Deferred: Federal........................................ 45,456 34,420 25,852 State.......................................... 7,037 16,412 (16,168) -------- -------- -------- 52,493 50,832 9,684 -------- -------- -------- Total........................................ $211,935 $362,534 $251,955 ======== ======== ========
F-12 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information subsequent to December 31, 1998 is unaudited.) Variations from the federal statutory rate are as follows:
December 31 --------------------------- 1996 1997 1998 -------- -------- -------- Expected federal income tax expense at statutory rate of 34%..................................... $187,556 $345,728 $466,934 Effect of legal judgment--permanent difference... -- -- (251,609) Effect of other permanent differences............ 2,172 (16,983) 20,276 State income tax expense, net of federal benefit......................................... 22,207 33,789 16,354 -------- -------- -------- Income tax expense............................... $211,935 $362,534 $251,955 ======== ======== ========
The legal judgment was a liability acquired in the purchase of a 67% interest in Healing Arts Publishing. This $740,000 liability paid by the Company in 1998 resulted in a permanent tax benefit. Deferred income taxes reflect net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the net accumulated deferred income tax liability as of December 31, 1998 and 1997 are as follows:
December 31 --------------------------- 1997 1998 ----------- --------- Deferred tax assets: Reserve for bad debts............................. $ 13,428 $ 26,012 Deferred tax liabilities: Securities available-for-sale..................... (1,628,529) (618,578) Amortization...................................... (1,956) (2,435) Depreciation...................................... (35,585) (57,374) ----------- --------- (1,666,070) (678,387) ----------- --------- Deferred tax liability, net......................... (1,652,642) $(652,375) =========== =========
8. Stockholders' Equity The Company had warrant certificates outstanding that entitled the holder to five warrants to purchase 40,000 shares of common stock at $1.25 per share. The warrants were held by the Company's President and were exercised in December 1998 for $50,000 The Company had warrant certificates outstanding during the year and at December 31, 1998 that entitled the holder to purchase 24,000 shares of Class A common stock at $.50 per share. The warrants are exercisable in a two year period beginning January 20, 2002 and ending January 9, 2004. During 1998, the Company's shareholders voted to increase the authorized shares of stock, create two classes of common stock and split the existing outstanding shares on a 20,000-to-1 basis. These changes have been reflected retroactively in the Company's consolidated financial statements. The Class B common stock is owned entirely by the Company's founder and Chief Executive Officer and is restricted as to its sale or transfer. Each share of Class A common stock is entitled to one vote, while each share of Class B common stock is entitled to 10 votes. F-13 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information subsequent to December 31, 1998 is unaudited.) 9. Business Acquisitions On September 14, 1998, the Company contributed $1.7 million in exchange for a 67% membership in a newly formed entity, Healing Arts Publishing, LLC ("LLC"). Healing Arts Publishing, Inc., which produced and distributed exercise and relaxation videos and sold environmentally oriented products through its mail order catalogs and through direct sales to third-party retailers, contributed the majority of its assets and certain liabilities in exchange for a 33% membership interest. The Company contributed an additional $700,000 to LLC during the first quarter of 1999, once certain contractual obligations were met, and compensated the LLC's President $100,000 for its non-compete agreement with LLC. This transaction was accounted for by using the purchase method and the results from operations for the LLC for the period from the acquisition through December 31, 1998 are included in the consolidated financial statements of the Company. As part of the purchase, in addition to tangible assets, the Company acquired a video library which is being amortized using the straight line method over a period of 15 years. On October 1, 1998, the Company acquired all of the stock and net assets of InnerBalance Health, Inc. from a related party who is the founder and Chief Executive Officer of the Company. The acquired entity provides similar services as the Company. As these were companies under common control, the Company accounted for the purchase using historical cost. Therefore, the excess of the purchase price of $523,677 over the value of net assets was accounted for as a return of capital to the primary shareholder. The payment was made partially through a transfer of stock and a subordinated debenture with the related party. Results of operations for the InnerBalance Health entity for the period from the acquisition date through December 31, 1998 are included in the consolidated financial statements of the Company. The following represents the unaudited pro forma results of operations as if the above noted acquisitions had occurred as of January 1, 1998 and at the beginning of the immediately preceding period:
Years ended December 31 ----------------------- 1997 1998 ----------- ----------- (Unaudited) Revenues............................................ $27,222,601 $38,063,794 Net income.......................................... 625,257 34,128 Net income per common share......................... 0.08 0.00
The December 31, 1997 pro forma results exclude a $975,000 unusual legal settlement that occurred during 1997. 10. Related Party Transactions In 1997, the Company entered into separate fulfillment agreements with InnerBalance Health (which was acquired by the Company during 1998, see Note 9) and Explorations Video Catalog, Inc. (related parties under common ownership with the owner and Chief Executive Officer of the Company) whereby the Company provides customer sales, service, warehousing and distribution services. The agreements are for a two-year period but may be terminated by either party with 30 days notice. During 1998, the Company billed a total of $372,039, consisting of $272,637 to Explorations Video Catalog, Inc. and $99,402 to InnerBalance Health. 11. Subsequent Events The Company entered into a revolving line of credit agreement with a financial institution in January 1999 in the amount of $1 million. The Company's accounts receivable and finished goods inventory are collateral for the line of credit. F-14 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information subsequent to December 31, 1998 is unaudited.) In June 1999, the Company completed a private placement whereby 331,428 shares of Class A common stock were issued at $4.375 per share. Additionally, $1,275,000 convertible debentures with stated interest rate of 8% were issued. These debentures are convertible automatically upon the closing of the initial public offering into Class A common stock at the initial public offering per share price. In connection with the purchase of Healing Arts Publishing, the Company entered into a royalty agreement with an actor to produce a series of videos. The agreement was entered into during January 1999. The Company has agreed to pay a minimum royalty of $225,000 to the individual for his services in relation to the video production, and in exchange for marketing activities that he may participate in. The royalty agreement also requires the Company to pay certain amounts above and beyond the minimum once video sales exceed a certain level. In June 1999, the Company adopted an employee stock option plan (the "Plan") that will serve as a long-term incentive plan for individuals who contribute significantly to the strategic and long-term incentive performance objectives and growth of the Company. Under the Plan, the Company may issue an aggregate of not more than 1,600,000 common shares to eligible individuals. In 1999, the Company amended the convertible debentures issued to all subscribers to remove the automatic conversion of the securities. On , 1999, the Company's Board approved a reverse stock split of 2.5 to 1. 12. Segment Information The Company has two business segments: Direct to Consumers and Direct to Businesses; both of which sell products, services and information produced and/or purchased from other suppliers and shipped directly to either the end user or reseller. Although the customer bases do not overlap to any extent, the purchase and delivery processes overlap in some areas. The Company does not accumulate the balance sheet by segment for purposes of management review. Each of the two segments qualifies as such because each is more than 10% of the combined revenue. Contribution margin is defined as net sales, less cost of goods sold and direct expenses. Financial information for the Company's business segments was as follows:
Six months ended June Year Ended December 31, 30, ------------------------ ----------------------- 1997 1998 1998 1999 ----------- ----------- ----------- ----------- Net revenue: Direct to consumer........ $19,897,690 $26,897,236 $10,474,976 $13,771,675 Direct to business........ -- 3,841,304 -- 3,791,405 Consolidated net revenue.... 19,897,690 30,738,540 10,474,976 17,563,080 Contribution margin: Direct to consumer........ (566,490) 128,691 175,128 (448,539) Direct to business........ -- 856,152 -- 263,986 ----------- ----------- ----------- ----------- Consolidated contribution margin..................... $ (566,490) $ 984,843 $ 175,128 $ (184,553)
F-15 GAIAM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information subsequent to December 31, 1998 is unaudited.)
Year Ended Six months ended December 31, June 30, ------------------ ------------------ 1997 1998 1998 1999 --------- -------- -------- -------- Reconciliation of Contribution margin to net income: Other income........................... 1,583,336 388,491 (113,938) 201,762 Income tax expense..................... 362,534 251,955 22,437 6,401 Minority interest expense.............. -- 261,598 -- (166,822) --------- -------- -------- -------- Net income............................. $ 654,312 $859,781 $ 38,753 $177,630 ========= ======== ======== ========
F-16 REPORT OF INDEPENDENT AUDITORS Board of Directors Healing Arts Publishing, Inc. We have audited the accompanying balance sheet of Healing Arts Publishing, Inc. as of September 14, 1998 (acquisition date), and the related statements of operations, stockholders' deficit and cash flows for the period from January 1, 1998 through September 14, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Healing Arts Publishing, Inc. at September 14, 1998, and the results of its operations and its cash flows for the period from January 1, 1998 through September 14, 1998 in conformity with generally accepted accounting principles. Denver, Colorado June 25, 1999 F-17 HEALING ARTS PUBLISHING, INC. BALANCE SHEET September 14, 1998 ASSETS Current assets Accounts receivable, net of allowance for doubtful accounts of $126,580........................................................ $ 706,420 Inventory, net................................................... 836,571 Deferred advertising costs....................................... 274,106 Prepaid and other current assets................................. 99,444 ---------- Total current assets........................................... 1,916,541 Property and equipment, net........................................ 126,173 Capitalized production costs, net.................................. 460,077 Other assets....................................................... 59,879 ---------- Total assets................................................... $2,562,670 ========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable................................................. $1,707,983 Accrued liabilities.............................................. 892,281 Notes payable and other.......................................... 1,824,644 ---------- Total current liabilities...................................... 4,424,908 Capital lease obligations, long-term............................... 12,949 ---------- Total liabilities.............................................. 4,437,857 Stockholders' deficit: Common stock, no par value, 10,000 shares authorized, 100 shares issued.......................................................... 10 Accumulated deficit.............................................. (1,875,197) ---------- Total stockholders' deficit.................................... (1,875,187) ---------- Total liabilities and stockholders' deficit.................... $2,562,670 ==========
See accompanying notes. F-18 HEALING ARTS PUBLISHING, INC. STATEMENT OF OPERATIONS For the period from January 1, 1998 through September 14, 1998 Net revenue........................................................ $5,990,059 Cost of goods sold................................................. 2,678,344 ---------- Gross profit....................................................... 3,311,715 Expenses: Selling and operating............................................ 2,999,499 Corporate, general and administrative............................ 736,867 ---------- Total expenses................................................. 3,736,366 ---------- Loss from operations............................................... (424,651) Interest expense and other......................................... (61,160) ---------- Net loss........................................................... $ (485,811) ==========
See accompanying notes. F-19 HEALING ARTS PUBLISHING, INC. STATEMENT OF STOCKHOLDERS' DEFICIT For the period from January 1, 1998 through September 14, 1998
Common Accumulated Stock Deficit Total ------ ----------- ----------- Balance at December 31, 1997.................. $10 $(1,191,696) $(1,191,686) Distributions paid to stockholder............. -- (197,690) (197,690) Net loss...................................... -- (485,811) (485,811) --- ----------- ----------- Balance at September 14, 1998................. $10 $(1,875,197) $(1,875,187) === =========== ===========
See accompanying notes. F-20 HEALING ARTS PUBLISHING, INC. STATEMENT OF CASH FLOWS For the period from January 1, 1998 through September 14, 1998 Operating activities Net loss........................................................... $(485,811) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation..................................................... 35,236 Changes in operating assets and liabilities: Accounts receivable.............................................. 431,682 Inventory........................................................ 125,131 Deferred advertising............................................. (117,370) Prepaid assets................................................... (25,832) Capitalized production costs..................................... (61,340) Other assets..................................................... (25,269) Accounts payable................................................. (340,825) Accrued liabilities.............................................. (476,727) --------- Net cash used by operating activities.............................. (941,125) Investing activities Purchase of property and equipment................................. (26,101) --------- Net cash used by investing activities.............................. (26,101) Financing activities Principal payments on capital leases............................... (14,487) Principal payments on notes payable................................ (529,610) Proceeds from notes payable........................................ 1,709,013 Distributions to stockholder....................................... (197,690) --------- Net cash provided by financing activities.......................... 967,226 --------- Net change in cash and cash equivalents............................ -- Cash and cash equivalents at January 1, 1998....................... -- --------- Cash and cash equivalents at September 14, 1998.................... $ -- =========
See accompanying notes. F-21 HEALING ARTS PUBLISHING, INC. NOTES TO FINANCIAL STATEMENTS September 14, 1998 1. Summary of Significant Accounting Policies Organization Healing Arts Publishing, Inc. (the "Company") produces and distributes informational videos and sells environmentally oriented products through mail order catalogs and direct sales. The Company was organized in January 1992. Effective September 14, 1998 (acquisition date), the Company contributed the majority of its assets and certain liabilities to a newly formed entity, Healing Arts Publishing, LLC ("LLC") for a 33% membership interest. Concurrently, Gaiam Inc., a Colorado-based provider of services and products to customers who value the environment, a sustainable economy and healthy lifestyles, contributed $1.7 million in exchange for a 67% membership interest in LLC. Gaiam contributed an additional $700,000 to LLC during the first quarter of 1999, once certain contractual obligations were met, and compensated the Company's President $100,000 for its non-compete agreement with LLC. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Inventory Inventory, consisting of finished goods, net of valuation allowances of $29,000 is stated at the lower of cost (first-in, first-out method) or market. Depreciation and Amortization Depreciation of property and equipment, including amortization recorded under capital leases, is computed on the straight-line method over estimated useful lives of approximately five to seven years. Deferred Advertising Costs Deferred costs primarily relate to preparation, printing and distribution of catalogs. Such costs are deferred for financial reporting purposes until the catalogs are distributed, then amortized over succeeding periods (not to exceed seven months) on the basis of estimated sales. Historical sales statistics are the principal factor used in estimating the amortization rate. Other advertising and promotional costs are expensed as incurred. Advertising costs incurred were $493,992 for the period ended September 14, 1998. Capitalized Production Costs Capitalized production costs relate to the preparation, filming and copying of exercise videos produced by the Company. Such costs are deferred for financial reporting purposes until the videos are distributed, then amortized over succeeding periods on the basis of estimated sales. Historical sales statistics are the principal factor used in estimating the amortization rate. Video production costs incurred were $105,824 for the period ended September 14, 1998. F-22 HEALING ARTS PUBLISHING, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Revenues The Company recognizes revenue at the time merchandise is shipped to the customer. Amounts billed to customers for postage and handling charges which approximate $214,000 are recognized as revenue at the time that the revenues on the product shipments are recognized. The Company provides a reserve for expected future returns at the time the sale is recorded based upon historical experience. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. Actual results could differ from those estimates. Concentration of Credit Risk The Company's accounts receivable are derived from revenue earned from customers located in the U.S. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of accounts receivable. During the period from January 1, 1998 through September 14, 1998, the Company's three largest trade customers comprised approximately 28% of the accounts receivable balance. 2. Property and Equipment At September 14, 1998, property and equipment, stated at cost, consists of the following: Furniture and equipment........................................... $ 224,482 Computer equipment................................................ 96,689 --------- 321,171 Accumulated depreciation.......................................... (194,998) --------- $ 126,173 =========
3. Notes Payable In conjunction with the purchase agreement signed between the Company and Gaiam, Inc., Gaiam, Inc. advanced to the Company, $1.7 million in the form of two promissory notes for $640,000 and $490,000, respectively, and assumed a line of credit agreement between the Company and Wells Fargo Bank, N.A., the outstanding amount of which was approximately $560,000. Interest on this advance is stated at 3.5% above prime rate or 12% at September 14, 1998. Under the terms of the purchase agreement, this advance, exclusive of the accrued interest, will be canceled and contributed to the limited liability company owned jointly by the Company and Gaiam, Inc. upon final closing of the purchase. At September 14, 1998, the Company had a $100,000 note payable with a vendor, Goldhil Home Media. Principal and interest of $5,000 was paid in full on October 15, 1998. F-23 HEALING ARTS PUBLISHING, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 4. Leases As of September 14, 1998, the Company's principal operating lease commitments are for equipment, office and warehouse space. The Company's future minimum lease payments under noncancelable operating lease agreements are as follows: 1998................................ $ 86,704 1999................................ 11,551 2000................................ 3,540 2001................................ 885 -------- $102,680 ========
The Company incurred rent expense of $109,843 for the period ended September 14, 1998. 5. Income Taxes The Company is a Subchapter S corporation under the Internal Revenue Code, and, accordingly, is not taxed as a separate entity. The Company's taxable income or loss is allocated to each stockholder and recognized as taxable income or loss on their individual tax returns. 6. Contingencies The Company is involved in legal actions in the normal course of business, some of which may seek substantial monetary damages, including claims for punitive damages which may not be covered by insurance. After review, including consultation with legal counsel, management believes the ultimate liability in excess of any amounts accrued which could arise from these actions would not materially affect the Company's financial position or results of operations. F-24 GAIAM INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS The following unaudited pro forma consolidated statement of operations for the year ended December 31, 1998 is derived from the historical consolidated statements of operations of Gaiam, Inc. and Healing Arts Publishing, Inc. and InnerBalance Health, Inc., adjusted to give effect to their consolidation using the purchase method of accounting for business combinations. The unaudited pro forma consolidated statement of operations for the twelve months ended December 31, 1998 assumes that the Acquisitions occurred as of January 1, 1998. The pro forma consolidated statement of operations is provided for illustrative purposes only and should be read in conjunction with the accompanying notes thereto, and the audited consolidated financial statements and notes thereto of Gaiam, Inc. as of and for the year ended December 31, 1998 and the audited financial statements and the notes thereto of Healing Arts Publishing, Inc. as of September 14, 1998 and for the period from January 1, 1998 through September 14, 1998. The pro forma data is not necessarily indicative of the operating results or financial position that would have been achieved had the Acquisitions been consummated at the dates indicated, nor is it necessarily indicative of future operating results and financial condition. F-25 GAIAM, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS Year ended December 31, 1998
Healing Arts InnerBalance Total Gaiam, Inc. Publishing, Inc. (c) Health, Inc. (d) Adjustments Pro Forma ----------- -------------------- ---------------- ----------- ----------- Net revenue.................... $30,738,540 $5,990,059 $1,339,947 (5,738) (b) $38,062,808 Cost of goods sold............. 13,173,536 2,678,344 569,645 (2,525) (b) 16,419,000 ----------- ---------- ---------- -------- ----------- Gross profit................... 17,565,004 3,311,715 770,302 (3,213) 21,643,808 Expenses: Selling and operating........ 14,186,215 2,999,499 1,017,415 168,871 (a) 18,372,000 Corporate, general and administration.............. 2,393,946 736,867 -- -- 3,130,814 ----------- ---------- ---------- -------- ----------- Total expenses............. 16,580,161 3,736,366 1,017,415 168,871 21,502,814 ----------- ---------- ---------- -------- ----------- Income (loss) from operations.. 984,843 (424,651) (247,113) (172,084) 140,994 Other income (expense): Realized gain on sale of securities and other........ 696,992 -- -- -- 696,992 Interest expense............. (308,501) (61,160) (17,312) -- (386,974) ----------- ---------- ---------- -------- ----------- Total other income (expense)................. 388,491 (61,160) (17,312) -- 310,018 ----------- ---------- ---------- -------- ----------- Income (loss) before taxes and minority interest............. 1,373,334 (485,811) (264,425) (172,084) 451,012 Provision for income taxes..... 251,955 -- -- -- 251,955 Minority interest in net income of consolidated subsidiary, net of tax........................... (261,598) -- -- 93,456 (e) (168,142) ----------- ---------- ---------- -------- ----------- Net income (loss).............. $ 859,781 $ (485,811) $ (264,425) $(78,628) $ 30,915 =========== ========== ========== ======== =========== Net income: Basic........................ $ 0.11 $ 0.00 Diluted...................... 0.11 $ 0.00 Shares used in computing net income per share: Basic........................ 8,072,877 8,072,877 Diluted...................... 8,263,677 8,263,677
See accompanying notes. F-26 GAIAM, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS--(Continued) Notes to Unaudited Pro Forma consolidated Statement of Operations: (a) The statement of operations has been adjusted to reflect the additional amortization of the video library had the Company acquired Healing Arts Publishing, Inc. on January 1, 1998. Intangible Asset................. $ 3,576,100 Amortization Life................ 15 years Additional Period................ 8.5 months ----------- Adjustment....................... $ 168,871 ===========
(b) The statement of operations has been adjusted to reflect the effect of intercompany sales and cost of goods sold between Healing Arts Publishing, Inc. and Gaiam, Inc. for the period from January 1, 1998 through September 19, 1998. (c) Represents the results of operations of Healing Arts Publishing, Inc. from January 1, 1998 through September 14, 1998. (d) Represents the results of operations of Inner Balance Health from January 1, 1998 through September 30, 1998. The Company accounted for the acquisition of Inner Balance Health at historical cost as the acquisition was considered a transfer of interest under common control. (e) Represents the adjustment to minority interest to reflect ownership of Healing Arts Publishing, Inc. for the entire year. F-27 [Inside Back cover] [Pictures] [Back cover] [Pictures] Until , 1999, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The registrant's expenses in connection with the offering described in this registration statement are set forth below. All amounts except the Securities and Exchange Commission registration fee, the NASD filing fee and the listing fee are estimated. Securities and Exchange Commission registration fee.............. $ 3,197 NASD filing fee.................................................. 5,000 NASDAQ National Market listing fee............................... 48,750 Printing and engraving expenses.................................. 150,000 Accounting fees and expenses..................................... 200,000 Legal fees and expenses.......................................... 320,000 Blue Sky fees and expenses (including legal fees)................ 5,000 Transfer agent's and registrar fees and expenses................. 20,000 Miscellaneous.................................................... 850,000 ---------- Total............................................................ $1,601,947 ==========
Item 14. Indemnification of Directors and Officers. Colorado law provides for indemnification of directors, officers and other employees in certain circumstances (C.R.S. (S) 7-108-102 (1994)) and for the elimination or limitation of the personal liability for monetary damages of directors under certain circumstances (C.R.S. (S) 7-108-402 (1994)). The Amended and Restated Articles of Incorporation of Gaiam eliminates the personal liability for monetary damages of directors under certain circumstances and provides indemnification to directors and officers of Gaiam to the fullest extent permitted by the Colorado Business Corporation Act. Among other things, these provisions provide indemnification for officers and directors against liabilities for judgments in and settlements of lawsuits and other proceedings and for the advance and payment of fees and expenses reasonably incurred by the director or officer in defense of the lawsuit or proceeding. Gaiam intends to obtain directors and officers insurance providing insurance indemnifying certain of Gaiam's directors, officers and employees for certain liabilities. II-1 Item 15. Recent Sales of Unregistered Securities. The following table summarizes securities issued or sold by Gaiam within the past three years that were not sold pursuant to registered offerings:
Number of Shares of Class A Debentures/ Warrants/ Exemption(s) Date Purchaser Common Stock Notes Options Consideration Claimed* ---- ------------------------- ------------ ----------- --------- ------------- -------------------------- September 30, 1998 James Argyopoulos/ 120,000 $500,000 -- $ 1,025,000 privately negotiated sale Argyopoulos Investor G.P. under Section 4 (2) of the Securities Act. October 1, 1998 Jirka Rysavy -- $531,000 -- Stock of privately negotiated sale InnerBalance under Section 4(2) of the Securities Act. December 7, 1998 Lynn Powers 40,000 $ 50,000 -- $ 100,000 privately negotiated sale under Section 4(2) of the Securities Act. January 7, 1999 Mo Siegel 17,143 $ 75,000 -- $ 150,000 privately negotiated sale under Section 4(2) of the Securities Act. April 20, 1999 Jeffrey Steiner 120,000 $500,000 -- $ 1,025,000 privately negotiated sale under Section 4(2) of the Securities Act. May 6, 1999 Edward Snider 57,143 $250,000 -- $ 500,000 privately negotiated sale under Section 4(2) of the Securities Act. May 6, 1999 Herbert Simon 57,143 $250,000 -- $ 500,000 privately negotiated sale under Section 4(2) of the Securities Act. May 7, 1999 Mike Gilliland 22,857 $100,000 -- $ 200,000 privately negotiated sale under Section 4(2) of the Securities Act. May 6, 1999 and Lennart Perlhagen 57,143 $250,000 -- $ 500,000 privately negotiated sale June 8, 1999 under Section 4(2) of the Securities Act. June 1, 1999** Gaiam employees and -- -- 674,800 Services N/A service providers
- ------- * We believe that exemptions in addition to those specified above may exist with respect to the listed transactions. ** Options are exercisable at $4.375 per share and vest in monthly increments of 2% per month, commencing 10 months after the date of grant. The options expire 10 years after the date of the grant. II-2 Item 16. Exhibits and Financial Statement Schedules. EXHIBITS:
Exhibit No. Description - ----------- ----------- 1.1 Form of Underwriting Agreement 2.1* Purchase Agreement dated September 14, 1998 among Gaiam Holdings, Inc., Healing Arts Publishing, LLC, Steven P. Adams, Healing Arts Publishing, Inc., and Gaiam, Inc 3.1* Amended and Restated Articles of Incorporation of Gaiam, Inc. 3.2* Bylaws of Gaiam, Inc. 4.1* Form of Gaiam, Inc. Stock Certificate 5.1 Opinion of Bartlit Beck Herman Palenchar & Scott 10.1* Gaiam, Inc.1999 Long-Term Incentive Plan 10.2* Operating Agreement of Healing Arts Publishing, LLC dated September 14, 1998 10.3* Sublease dated September 16, 1998 between Corporate Express Office Products, Inc. and Gaiam, Inc. 10.4* Lease Agreement dated December 18, 1997 between Orix Prime West Broomfield Venture and Gaiam, Inc. 21.1* Subsidiaries of Gaiam, Inc. 23.1 Consent of Ernst & Young 23.2 Consent of Wendell T. Walker & Associates 23.3 Consent of Bartlit Beck Herman Palenchar & Scott (included in Exhibit 5.1) 23.4* Consent of Paul H. Ray 23.5 Consent of Barbara Mowry 23.6 Consent of Barnet M. Feinblum 24.1* Power of Attorney 27.1* Financial Data Schedule
- -------- * Previously filed Item 17. Undertakings. (a) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities begin registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) Gaiam hereby undertakes that for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (d) Gaiam hereby undertakes that for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Broomfield, State of Colorado, on September 28, 1999. GAIAM, INC. /s/ Jirka Rysavy By: _________________________________ Jirka Rysavy Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated opposite their names.
Signature Title Date --------- ----- ---- /s/ Jirka Rysavy Chairman of the Board and September 28, 1999 _____________________________________ Chief Executive Officer Jirka Rysav /s/ Lynn Powers* President, Chief Operating September 28, 1999 _____________________________________ Officer and director Lynn Powers /s/ Pavel Bouska* Executive Vice President and September 28, 1999 _____________________________________ Chief Information Officer Pavel Bouska /s/ Janet Mathews * Controller and September 28, 1999 _____________________________________ principal financial officer Janet Mathews
/s/ Jirka Rysavy * By: ___________________________ Jirka Rysavy Attorney-in-fact II-4 EXHIBIT INDEX
Exhibit No. Description ----------- ----------- 1.1 Form of Underwriting Agreement 2.1* Purchase Agreement dated September 14, 1998 among Gaiam Holdings, Inc., Healing Arts Publishing, LLC, Steven P. Adams, Healing Arts Publishing, Inc., and Gaiam, Inc. 3.1* Amended and Restated Articles of Incorporation of Gaiam, Inc. 3.2* Bylaws of Gaiam, Inc. 4.1* Form of Gaiam, Inc. Stock Certificate 5.1 Opinion of Bartlit Beck Herman Palenchar & Scott 10.1* Gaiam, Inc.1999 Long-Term Incentive Plan 10.2* Operating Agreement of Healing Arts Publishing, LLC dated September 14, 1998 10.3* Sublease dated September 16, 1998 between Corporate Express Office Products, Inc. and Gaiam, Inc. 10.4* Lease Agreement dated December 18, 1997 between Orix Prime West Broomfield Venture and Gaiam, Inc. 21.1* Subsidiaries of Gaiam, Inc. 23.1 Consent of Ernst & Young 23.2 Consent of Wendell T. Walker & Associates 23.3 Consent of Bartlit Beck Herman Palenchar & Scott (included in Exhibit 5.1) 23.4* Consent of Paul H. Ray 23.5 Consent of Barbara Mowry 23.6 Consent of Barnet M. Feinblum 24.1* Power of Attorney, included on signature page 27.1* Financial Data Schedule
- -------- * Previously filed. EX-1.1 2 UNDERWRITERS AGREEMENT GAIAM, INC. 2,000,000 SHARES OF CLASS A COMMON STOCK UNDERWRITING AGREEMENT October ____, 1999 Tucker Anthony Cleary Gull As Representative of the Underwriters Identified in Schedule I Annexed Hereto 100 East Milwaukee Avenue Milwaukee, Wisconsin 53202 Ladies and Gentlemen: SECTION 1. INTRODUCTION. Gaiam, Inc., a Colorado corporation (the ------------ "Company"), proposes to sell a total of 2,000,000 shares (the "Firm Shares") of Class A common stock, $.0001 par value per share (the "Class A Common Stock" and together with the Company's Class B common stock, $.0001 par value per share, the "Common Stock"), to the several underwriters identified in Schedule I annexed hereto (the "Underwriters"), who are acting severally and not jointly. In addition, the Company has agreed to grant to the Underwriters an option to purchase up to 300,000 additional shares of Class A Common Stock (the "Optional Shares") as provided in Section 5 hereof. The Firm Shares and, to the extent such option is exercised, the Optional Shares are hereinafter collectively referred to as the "Shares." You, as representative of the Underwriters (the "Representative"), have advised the Company that the Underwriters propose to make a public offering of the Shares as soon hereafter as in your judgment is advisable and that the public offering price of the Shares initially will be $4.50 per Share for the first 200 Shares allocated and sold to each customer of the Company that purchases shares in the public offering of the Shares and $5.00 per Share for all other Shares ( the "Offering Prices"). It is hereby acknowledged and agreed that the determination of "customers of the Company" and the allocation of the Shares to "customers of the Company" shall be made by the Company in its sole discretion. The Company hereby confirms its agreements with the Underwriters as follows: SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company --------------------------------------------- represents and warrants to, and agrees with, the several Underwriters, and shall be deemed - ------------------- /*/ Plus an option to acquire up to 300,000 additional shares of Class A Common Stock from the Company solely to cover over-allotments. to represent and warrant to the several Underwriters on each Closing Date (as hereinafter defined), that: (a) The Company and each of the subsidiaries of the Company, the significant of which subsidiaries are listed on Exhibit 21.1 of the Registration Statement (as hereinafter defined) (individually, a "Subsidiary" and collectively, the "Subsidiaries"), has been duly incorporated or formed and is validly existing as a entity in good standing under the laws of its jurisdiction of incorporation or formation, with full power and authority to own, lease and operate its properties and to conduct its business as presently conducted and described in the Prospectus (as hereinafter defined) and the Registration Statement; each of the Company and the Subsidiaries is duly registered and qualified to do business as a foreign corporation or other entity under the laws of, and is in good standing as such in, each jurisdiction in which such registration or qualification is required, except where the failure to so register or qualify would not be reasonably expected to have or result in a material adverse effect on the financial condition, business, property or results of operations of the Company and the Subsidiaries, taken as a whole (a "Material Adverse Effect"); and, to the Company's knowledge, no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. Complete and correct copies of the certificate of incorporation, articles of incorporation, or other organizational documents, as amended or restated (collectively, the "Articles of Incorporation"), and by-laws, as amended or restated ("By-laws"), of the Company and each of the Subsidiaries or the equivalent documents to the Articles of Incorporation and By-laws for those Subsidiaries that are entities other than corporations or that have been formed in jurisdictions in which Articles of Incorporation and By-laws are not applicable, as in effect on the date hereof, have been delivered to the Representative, and no changes thereto will be made on or subsequent to the date hereof and prior to each Closing Date, except as contemplated by the Registration Statement. (b) The shares of Common Stock issued and outstanding immediately prior to the issuance and sale of the Shares hereunder as set forth in the Prospectus have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description thereof contained in the Prospectus and the Registration Statement. There are no preemptive rights to subscribe for or purchase any shares of Common Stock (including the Shares). The Shares have been duly authorized and, when issued, delivered and paid for pursuant to this Agreement, will be validly issued, fully paid and nonassessable and will conform to the description thereof contained in the Prospectus and the Registration Statement. The delivery of certificates for the Shares to be issued and sold hereunder and payment therefor pursuant to the terms of this Agreement will pass valid title to such Shares to the Underwriters, free and clear of any lien, claim, encumbrance or defect in title. Except as described in the Prospectus, there are no outstanding options, warrants or other rights of any description, contractual or otherwise, entitling any person to be issued any class of security by the Company or any Subsidiary, and there are no holders of Common Stock or other securities of the Company or any Subsidiary, or of securities that are convertible or -2- exchangeable into Common Stock or other securities of the Company or any Subsidiary, that have rights to the registration of such Common Stock or securities under the Securities Act of 1933, as amended, and the regulations thereunder (together, the "Act") or the securities laws or regulations of any of the states (the "Blue Sky Laws"). (c) Except for the Subsidiaries, the Company has no subsidiaries and does not own any equity interest in or control, directly or indirectly, any other corporation, limited liability company, partnership, joint venture, association, trust or other business organization. Except as set forth in the Registration Statement, the Company owns directly or indirectly all of the issued and outstanding capital stock of each Subsidiary or other equity interests of any subsidiary that is not a corporation, free and clear of any and all liens, claims, encumbrances or security interests, other than liens, claims, encumbrances or security interests in favor of Norwest Bank, N.A. in respect of amounts owed to Norwest Bank, N.A. under the Company's revolving credit arrangement with such bank, and all such capital stock or other equity interest has been duly authorized and validly issued and is fully paid and nonassessable and was issued free and clear of preemptive rights. There are no outstanding options, warrants or other rights of any description, contractual or otherwise, entitling any person to subscribe for or purchase any shares of capital stock of any Subsidiary. (d) The Company has the corporate power and authority to enter into and perform this Agreement, and the execution and delivery by the Company of this Agreement and the performance by the Company of its obligations hereunder and the consummation of the transactions described herein, have been duly authorized with respect to the Company by all necessary corporate action and will not: (i) violate any provisions of the Articles of Incorporation or By-laws (or their equivalents) of the Company or any Subsidiary; (ii) violate any provisions of, or result in the breach, modification or termination of, or constitute a default under, any provision of any agreement, lease, franchise, license, indenture, permit, mortgage, deed of trust, evidence of indebtedness or other instrument to which the Company or any Subsidiary is a party, other than any violation, breach, modification, termination or default which would be reasonably expected to have or result in a Material Adverse Effect; (iii) violate any statute, ordinance, rule or regulation applicable to the Company or any Subsidiary, or order or decree of any court, regulatory or governmental body, arbitrator, administrative agency or instrumentality of the United States or the States of California, Colorado or Ohio or having jurisdiction over the Company or any Subsidiary; or (iv) result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary. No consent, approval, authorization or other order of any court, regulatory or governmental body, arbitrator, administrative agency or instrumentality of the United States or the States of California, Colorado and Ohio is required for the execution and delivery of this Agreement by the Company, the performance of its obligations hereunder or the consummation of the transactions contemplated hereby, except for compliance with the Act, the Securities Exchange Act of 1934, as amended, and the regulations thereunder (together, the "Exchange Act"), the Blue Sky Laws applicable to the public offering of the Shares by the Underwriters and the clearance of such offering and the -3- underwriting arrangements evidenced hereby with the National Association of Securities Dealers, Inc. (the "NASD"). This Agreement has been duly authorized, executed and delivered by and on behalf of the Company and is a valid and binding agreement of the Company enforceable against the Company in accordance with its terms. (e) A registration statement on Form S-1 (Reg. No. 333-83283) with respect to the Shares, including a preliminary form of prospectus, has been prepared by the Company and complies in all material respects with the requirements of the Act and Form S-1 promulgated thereunder and has been filed with the Securities and Exchange Commission (the "Commission"). Such registration statement, as finally amended and revised at the time such registration statement was or is declared effective by the Commission (including the information contained in the form of final prospectus, if any, filed with the Commission pursuant to Rule 424(b) and Rule 430A under the Act and deemed to be part of the registration statement if the registration statement has been declared effective pursuant to Rule 430A(b)) and as thereafter amended by post-effective amendment, if any, is herein referred to as the "Registration Statement." The related final prospectus in the form first filed with the Commission pursuant to Rule 424(b) or, if no such filing is required, as included in the Registration Statement, or any supplement thereto, is herein referred to as the "Prospectus." The prospectus, subject to completion in the form included in the Registration Statement at the time of the initial filing of the Registration Statement with the Commission, and each such prospectus as amended from time to time until the date of the Prospectus, is referred to herein as the "Preliminary Prospectus." Each Preliminary Prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the Act. The Company has prepared and filed such amendments to the Registration Statement since its initial filing with the Commission, if any, as may have been required to the date hereof, and will file such additional amendments thereto as may hereafter be required. There have been delivered to the Representative two (2) signed copies of the Registration Statement and each amendment thereto, if any, together with one copy of each exhibit filed therewith or incorporated by reference therein, and such number of conformed copies for each of the Underwriters of the Registration Statement and each amendment thereto, if any (but without exhibits), and of each Preliminary Prospectus and of the Prospectus as the Representative has requested. All material information concerning the offering and the Company (excluding information about specific products and services) that was made available to customers of the Company prior to providing such customers with a Prospectus is included in the Prospectus provided to those customers. (f) Neither the Commission nor any state securities commission has issued any order preventing or suspending the use of any Preliminary Prospectus, nor, to the knowledge of the Company, have any proceedings for that purpose been initiated or threatened, and each Preliminary Prospectus filed with the Commission as part of the Registration Statement as originally filed or as part of any amendment or supplement thereto complied in all material respects when so filed with the requirements of the Act and, as of its date, did not include -4- any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As of the effective date of the Registration Statement, and at all times subsequent thereto up to each Closing Date, the Registration Statement and the Prospectus contained or will contain all statements that are required to be stated therein in accordance with the Act and conformed or will conform in all material respects with the requirements of the Act, and neither the Registration Statement nor the Prospectus included or will include any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary to make the statements therein, not misleading. Neither the Company, nor, to the Company's knowledge, any person that controls, is controlled by (including the Subsidiaries) or is under common control with the Company, has distributed or will distribute prior to each Closing Date any offering material in connection with the offering and sale of the Shares other than the Prospectus, the Registration Statement or other materials permitted by the Act and provided to the Representative. There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the financial condition, or in the earnings, business, prospects or operations of the Company, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement). (g) Each of Ernst & Young LLP and Wendell T. Walker and Associates, P.C., who have expressed their opinions with respect to the audited consolidated financial statements filed with the Commission or incorporated by reference and included as a part of each Preliminary Prospectus, the Prospectus or the Registration Statement, are independent accountants as required by the Act. (h) The consolidated financial statements and the related notes thereto included in each Preliminary Prospectus, the Prospectus and the Registration Statement present fairly the financial position, results of operations and cash flows of the Company as of their respective dates or for the respective periods covered thereby, all in conformity with generally accepted accounting principles consistently applied throughout the periods involved. The financial statement schedules, if any, included in the Registration Statement present fairly the information required to be stated therein on a basis consistent with the consolidated financial statements of the Company contained therein. The Company had an outstanding capitalization as set forth in the Registration Statement and under "Capitalization" in the Prospectus as of the date indicated therein, and there has been no material change thereto since such date except as disclosed in the Prospectus. The financial and statistical information and data relating to the Company in each Preliminary Prospectus, the Prospectus and the Registration Statement are accurately and fairly presented and prepared on a basis consistent with the audited consolidated financial statements and books and records of the Company. The consolidated financial statements and schedules and the related notes thereto included in each Preliminary Prospectus, the Prospectus or the Registration Statement are the only such financial statements and schedules required under the Act to be set forth therein. -5- (i) Neither the Company nor any Subsidiary is, nor with the giving of notice or passage of time or both, would be, in violation or in breach of: (i) its respective Articles of Incorporation or By-laws (or their equivalents); (ii) any statute, ordinance, order, rule or regulation applicable to the Company or such Subsidiary; (iii) any order or decree of any court, regulatory body, arbitrator, administrative agency or other instrumentality of the United States or other country or jurisdiction having jurisdiction over the Company or such Subsidiary; or (iv) any provision of any agreement, lease, franchise, license, indenture, permit, mortgage, deed of trust, evidence of indebtedness or other instrument to which the Company or such Subsidiary is a party or by which any property owned or leased by the Company or such Subsidiary is bound or affected, except for any such violation or breach that would not be reasonably expected to have or result in a Material Adverse Effect. (j) Neither the Company nor any Subsidiary has received notice of any violation of any applicable statute, ordinance, order, rule or regulation applicable to the Company or any Subsidiary. The Company and each Subsidiary have obtained and hold, and are in compliance with, all permits, certificates, licenses, approvals, registrations, franchises, consents and authorizations of governmental or regulatory authorities required under all laws, rules and regulations in connection with their businesses (hereinafter "permit" or "permits") except where the failure to obtain and hold any such permit would not be reasonably expected to have or result in a Material Adverse Effect, and all of such permits are in full force and effect; and the Company and each Subsidiary have fulfilled and performed all of their respective obligations with respect to each such permit, and no event has occurred which would result in, or after notice or lapse of time would result in, revocation or termination of any such permit or result in any other impairment of the rights of the holder of such permit which would be reasonably expected to have or result in a Material Adverse Effect. Neither the Company nor any Subsidiary is or has been (by virtue of any action, omission to act, contract to which it is a party or other occurrence) in violation of any applicable foreign, federal, state, municipal or local statutes, laws, ordinances, rules, regulations or orders (including those relating to environmental protection, occupational safety and health and equal employment practices) heretofore or currently in effect, the violation of which would be reasonably expected to have a Material Adverse Effect. (k) There are no legal or governmental proceedings or investigations pending or, to the Company's knowledge, threatened, to which the Company or any Subsidiary is or may be a party or to which any property owned or leased by the Company or any Subsidiary is or may be subject, including, without limitation, any such proceedings that are related to -6- environmental or employment discrimination matters, which are required to be described in the Registration Statement or the Prospectus which are not so described, or which question the validity of this Agreement or any action taken or to be taken pursuant hereto. Except as described in the Registration Statement or the Prospectus, neither the Company nor any Subsidiary: (i) is in violation of any statute, ordinance, rule or regulation, or any decision, order or decree of any court, regulatory body, arbitrator, administrative agency or other instrumentality of the United States or other country or jurisdiction having jurisdiction over the Company or such Subsidiary relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environmental or human exposure to "Hazardous" Materials (as hereinafter defined) (collectively, "environmental laws"); (ii) owns, operates or occupies any real property contaminated, to the Company's knowledge, with any Hazardous Material that is subject to any environmental laws; (iii) is, to the Company's knowledge, liable for any off-site disposal or contamination pursuant to any environmental laws; or (iv) is subject to any claim relating to any environmental laws; which violation, contamination, liability or claim identified in (i) through (iv) above would be reasonably expected to have or result in a Material Adverse Effect. For purposes of this Agreement, "Hazardous Materials(s)" shall mean (i) any substance, the presence in a quantity of which requires investigation or remediation under any environmental laws; (ii) any toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous substance present in a quantity such that it is regulated by any environmental laws; (iii) any substance in a quantity the presence of which poses a hazard to the health or safety of persons on or about the real property owned, operated or occupied by the Company or any of its Subsidiaries; and (iv) urea-formaldehyde, PCBs, asbestos or asbestos-containing materials and radon. (l) There is no transaction, relationship, obligation, agreement or other document required to be described in the Registration Statement or the Prospectus or to be filed or deemed to be filed as an exhibit to the Registration Statement by the Act, which has not been described or filed as required. All contracts or agreements filed as an exhibit to the Registration Statement to which the Company or any Subsidiary is a party have been duly authorized, executed and delivered by the Company or such Subsidiary, are in full force and effect, constitute valid and binding agreements of the Company or such Subsidiary, and are enforceable by and against the Company or such Subsidiary, in accordance with the respective terms thereof, subject to bankruptcy, insolvency, and moratorium laws, fraudulent transfer and other laws affecting creditors' rights generally and other principles of equity. None of such contracts or instruments has been assigned by the Company; and the Company knows of no default or breach by any party to any such contract or instrument or of any present situation or condition or fact which would prevent compliance by the parties with the terms of such contracts or instruments as amended to date. Except for amendments or modifications of such contracts or instruments in the ordinary course of business, the Company has no intention of exercising any right which would cause any other party to the contract to cancel any of their obligations under any of such contracts or instruments, and, except as described in the Registration Statement, the Company has no knowledge that any -7- other party to any of such contracts or instruments is in material breach or violation of any such contact or agreement or has any intention not to render full performance thereunder. (m) The Company or a Subsidiary has good and valid title to all property and assets reflected as owned by the Company or such Subsidiary in the Company's consolidated financial statements included in the Registration Statement (or the Prospectus), free and clear of all liens, claims, mortgages, security interests or other encumbrance of any kind or nature whatsoever except those, if any, reflected in such financial statements (or elsewhere in the Registration Statement or the Prospectus). All property (real and personal) held or used by the Company or a Subsidiary under leases, licenses, franchises or other agreements is held by the Company or such Subsidiary under valid, subsisting, binding and enforceable leases, franchises, licenses or other agreements, and the Company or such Subsidiary, as the case is in full compliance with each such lease, license, franchise or other agreements and the Company has no knowledge that any other party thereto is not in full compliance with each such lease, license, franchise or other agreements, except in either case where the failure to be in compliance would not be reasonably expected to have or result in a Material Adverse Effect. The Company has no knowledge that any other party thereto is not in material compliance with each such lease, license, franchise or other agreement. (n) Neither the Company nor, to the Company's knowledge, any person that controls, is controlled by (including the Subsidiaries) or is under common control with the Company has taken or will take, directly or indirectly, any action designed to cause or result in, or which constituted, or which could cause or result in, stabilization or manipulation, under the Exchange Act or otherwise, of the price of any security of the Company to facilitate the sale or resale of the Common Stock. (o) Except as described in the Registration Statement or the Prospectus, since the respective dates as of which information is given in the Registration Statement or the Prospectus and prior to each Closing Date: (i) neither the Company nor any Subsidiary has or will have incurred any liability or obligation, direct or contingent, or entered into any transaction, in each case, that is material to the Company, except in the ordinary course of business; (ii) the Company has not and will not have paid or declared any dividend or other distribution with respect to its capital stock and neither the Company nor any Subsidiary is or will be delinquent in the payment of principal or interest on any outstanding debt obligation; and (iii) there has not been and will not have been any change in the capital stock, any material change in the indebtedness of the Company or any Subsidiary, or any change or development involving or which would be reasonably expected -8- to have or result in a Material Adverse Effect, whether or not arising from transactions in the ordinary course of business. (p) Neither the Company nor any person that controls, is controlled by (including the Subsidiaries) or is under common control with the Company has, directly or indirectly: (i) made any unlawful contribution to any candidate for political office, or failed to disclose fully any contribution in violation of law; or (ii) made any payment to any federal, state or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof or applicable foreign jurisdictions. (q) The Company or a Subsidiary owns or possesses adequate rights to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights and licenses presently used in or necessary for the conduct of its business or ownership of its properties, and neither the Company nor any Subsidiary has violated or infringed upon the rights of others, or received any notice of conflict with the asserted rights of others, in respect thereof, which violation or infringement would be reasonably expected to have or result in a Material Adverse Effect. (r) Neither the Company nor any Subsidiary has been refused any insurance coverage sought or applied for; and, except as described in the Prospectus, neither the Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from insurers of similar standing as may be necessary to continue its business at a cost that would not have or result in a Material Adverse Effect. (s) No labor dispute with the employees of the Company or any Subsidiary, which dispute would reasonably be expected to have or result in a Material Adverse Effect, exists or, to the knowledge of the Company, is imminent, and neither the Company nor any Subsidiary, except as disclosed in the Registration Statement, is a party to any collective bargaining agreement and, to the knowledge of the Company, no union organizational attempts are pending. There has been no change in the relationship of the Company or any Subsidiary with any of its suppliers, manufacturers, contractors or customers resulting in or that would reasonably be expected to have or result in a Material Adverse Effect. (t) Neither the Company nor any Subsidiary is an "investment company", an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended. -9- (u) All federal, state and local tax returns required to be filed by or on behalf of the Company or any Subsidiary have been filed (or are the subject of valid extension) with the appropriate federal, state and local authorities, and all such tax returns, as filed, are accurate in all material respects; all federal, state and local taxes (including estimated tax payments) required to be shown on all such tax returns or claimed to be due from or with respect to the business of the Company or such Subsidiary have been paid or reflected as a liability on the financial statements of the Company or such Subsidiary for all appropriate periods; all deficiencies asserted as a result of any federal, state or local tax audits have been paid or finally settled, and no issue has been raised in any such audit which, by application of the same or similar principles, would be reasonably expected to result in a proposed material deficiency for any other period not so audited; no state of facts exist (or has existed with respect to any period for which a taxing authority may lawfully assess the Company for any penalty, interest assessment or other charges) which would reasonably be expected to constitute grounds for the assessment of any tax liability with respect to the periods which have not heretofore been audited by appropriate federal, state or local authorities; there are no outstanding agreements or waivers extending the statutory period of limitation applicable to any federal, state or local tax return of any period; and neither the Company nor any Subsidiary has ever been a member of an affiliated group of corporations filing consolidated federal income tax returns, other than a group of which the Company is and has been the common parent. (v) Neither the Company nor any Subsidiary is a participating employer or plan sponsor with respect to any employee pension benefit plan as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), including, without limitation, any multi- employer pension plan. The Company is in material compliance with all applicable laws and regulations, including ERISA and the Code. (w) The Company and each Subsidiary maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of consolidated financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorizations; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. -10- (x) None of the Company, any Subsidiary, any officer or director of the Company or any Subsidiary, or, to the Company's knowledge, any person who owns, of record or beneficially, any class of securities issued by the Company is: (i) an officer, director or partner of any brokerage firm, broker or dealer that is a member of the NASD ("NASD Member"); or (ii) directly or indirectly, a "person associated with" an NASD member or an "affiliate", of an NASD member, as such terms are used in the NASD Rules of the Association. (y) The Class A Common Stock has been registered pursuant to Section 12(g) of the Exchange Act. The Company has prepared and filed with the Commission a registration statement for the Class A Common Stock pursuant to Section 12(g) of the Exchange Act. Such registration statement either has been declared effective by the Commission under the Exchange Act or will be declared effective by the Commission prior to or concurrently with the commencement of the public offering of the Shares. The Class A Common Stock (including the Shares) has been approved for designation upon notice of issuance as a Nasdaq National Market security on The Nasdaq Stock Market ("Nasdaq") concurrently with the execution and delivery of this Agreement. (z) All offers and sales of the securities of the Company and each Subsidiary prior to the date hereof were made in compliance with the Act, the Blue Sky Laws and all other applicable state and federal laws or regulations. (aa) The Company has obtained for the benefit of the Underwriters an agreement (a "Lock-Up Agreement"), enforceable by the Representative, executed and delivered by each of the persons listed on Schedule II hereof, who owns of record the number of shares of Common Stock set forth on Schedule II opposite such shareholder's name, that for a period of 180 days after the First Closing Date, such persons will not, without the prior written consent of the Representative, directly or indirectly, offer, sell, transfer, or pledge, contract to sell, transfer or pledge, or cause or in any way permit to be sold, transferred, pledged, or otherwise disposed of, any: (i) shares of Common Stock; (ii) rights to purchase shares of Common Stock (including, without limitation, shares of Common Stock that may be deemed to be beneficially owned by any such shareholder in accordance with the applicable regulations of the Commission and shares of Common Stock that may be issued upon the exercise of a stock option, warrant or other convertible security); or (iii) securities that are convertible or exchangeable into shares of Common Stock. -11- In addition, each person listed in the Registration Statement under the caption "Our Shareholders" from whom the Company has not obtained a Lock-Up Agreement owns his or her respective shares of Common Stock subject to subscription, or similar agreements containing restrictions on transfers that are no less restrictive than a Lock-Up Agreement, are as of the date hereof specifically enforceable against such persons and will be continuously specifically enforceable against each such person for the period from the date hereof through and including 180 days after the First Closing Date. The Company has heretofore delivered to the Representative a true copy of each such subscription or similar agreement. (bb) The Company has complied with all provisions of Section 517.075 of the Florida Statutes, relating to doing business with the government of Cuba or with any person or affiliate located in Cuba. (cc) The Company represents that no finder's fee has been or will be paid in connection herewith. It is understood that, should a claim be made for any finder's fee in connection with the sale of the Shares and based upon any agreement by the Company, the Company will indemnify the Underwriters with respect to any such claim. (dd) All documents and other information relating to the Company's affairs shall be made available upon request to the Representative and counsel to the Underwriters at the Company's office, and copies of any such documents shall be furnished upon request to the Representative or counsel to the Underwriters. Included within the documents to be made available are the Company's articles of incorporation, as amended, and related charter documents, bylaws and amendments thereto, minutes of all meetings and other actions taken by the Company's incorporators, directors and shareholders, all financial statements, correct copies of any material contracts, licenses, leases or agreements to which the Company is a party or by which it or its property is bound, including contracts for the sale of products or services in the normal course of business, excluding purchase orders made in the normal course of business, and including any employee (including officers and/or directors) incentive plans and any other type of fringe benefit plan, of whatever nature, and copies of all patents, patent applications, trademarks and trademark applications in which the Company may have an interest. (ee) A certificate signed by any officer of the Company and delivered to the Representative or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby. A certificate delivered by the Company to its counsel for purposes of enabling such counsel to render the opinion referred to in Section 8(d) will also be furnished to the Representative and counsel for the Underwriters and shall be deemed to be additional representations and warranties to the Underwriters by the Company as to the matters covered thereby. SECTION 3. REPRESENTATION OF UNDERWRITERS. The Representative will act as ------------------------------ the Representative for the several Underwriters in connection with the public offering of the -12- Shares, and any action under or in respect of this Agreement taken by the Representative will be binding upon all of the Underwriters. SECTION 4. INFORMATION FURNISHED BY THE UNDERWRITERS. The information set ----------------------------------------- forth on the outside front cover page of the Prospectus concerning the terms of the offering by the Underwriters, and the information appearing under the caption "Underwriting" in the Prospectus constitute all of the information furnished to the Company by and on behalf of the Underwriters for use in connection with the preparation of the Registration Statement and the Prospectus, as such information is referred to in this Agreement. SECTION 5. PURCHASE, SALE AND DELIVERY OF SHARES. ------------------------------------- (a) Subject to Section 5(b), on the basis of the representations, warranties and agreements herein contained, and subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters identified in Schedule I annexed hereto 2,000,000 Firm Shares, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company the number of Firm Shares as hereinafter set forth at the price per share of $4.05 per Share for the first 200 Shares allocated and sold to each customer of the Company that purchases shares in the public offering of the Shares and $4.50 per Share for the remaining Shares purchased. The obligation of each Underwriter to the Company shall be to purchase from the Company that number of full Firm Shares which (as nearly as practicable in full shares as determined by the Representative) bears the same proportion to the number of Firm Shares to be sold by the Company as the number of shares set forth opposite the name of such Underwriter in Schedule I annexed hereto bears to the total number of Firm Shares to be purchased by all of the Underwriters under this Agreement. (b) Notwithstanding anything herein to the contrary, the Underwriters agree to sell Shares to each of the holders of the Company's 8% Debentures (the "Debentures") at a price of $5.00 per Share (the "Debenture Exchange"), provided that the holders of the Debentures shall pay such price by delivery of the Debentures and not in cash, with the Debentures to be valued for such purpose at their principal amount, without regard to any accrued and unpaid interest thereon. In consideration for the Debenture Exchange, the Company hereby irrevocably agrees to purchase from the Underwriters any and all Debentures delivered to the Underwriters in connection with the Debenture Exchange for a purchase price equal to the principal amount of the Debentures, without regard to any accrued and unpaid interest thereon, which purchase price will be paid to the Underwriters in immediately available funds on the First Closing Date against delivery of the Debentures on the First Closing Date. (c) On the First Closing Date (as hereinafter defined), the Company will deliver to the Representative, at the offices of the Representative, 1225 Seventeenth Street, Denver, Colorado 80202, or through the facilities of The Depository Trust Company, for the accounts of the several Underwriters, a master certificate representing the all Firm Shares to be sold -13- by them to "customers of the Company" (as determined by the Company) buying Firm Shares, and shall make appropriate book entries to evidence ownership of Shares by all other purchasers, against payment of the aggregate purchase price therefor by wire transfer of immediately available funds to the account specified by the Company. As referred to in this Agreement, the "First Closing Date" shall be on the third or fourth business day (as permitted under Rule 15c6-1 under the Exchange Act), following the date of the effectiveness of the Registration Statement , at 9:00 a.m., Denver, Colorado time. The master certificate for the Firm Shares to be so delivered, and the evidence of book entry ownership, will be in denominations and registered in such names as the Representative reasonably requests by notice to the Company prior to the First Closing Date. (d) In addition, on the basis of the representations, warranties and agreements herein contained, and subject to the terms and conditions herein set forth, the Company hereby agrees to sell to the Underwriters, and the Underwriters, severally and not jointly, shall have the right at any time within thirty (30) days after the First Closing Date to purchase up to 300,000 Optional Shares from the Company at the price of $4.50 per share, for use solely in covering any over-allotments made by the Underwriters in the sale and distribution of the Firm Shares. The option granted hereunder may be exercised in full or in part upon notice by the Representative to the Company within thirty (30) days after the First Closing Date setting forth the aggregate number of Optional Shares to be purchased by the Underwriters and sold by the Company, and the names and denominations in which the certificates for such Optional Shares are to be registered (or similar information for purchasers whose ownership of Optional Shares is to be evidenced by book entry only). Such date of delivery (the "Second Closing Date") shall be determined by the Representative, provided that the Second Closing Date, which may be the same as the First Closing Date, shall not be earlier than the First Closing Date and, if after the First Closing Date, shall not be earlier than three (3) nor later than ten (10) full business days after delivery of such notice to exercise. Any certificates for Optional Shares will be made available for checking and packaging at 9:00 a.m., Denver, Colorado time, on the first full business day preceding the Second Closing Date at a location to be designated by the Representative. The manner of payment for and delivery of (including the denominations of and the names in which certificates are to be registered or book entries are to be made) the Optional Shares shall be the same as for the Firm Shares. (e) The Representative has advised the Company that each Underwriter has authorized the Representative to accept delivery of the Shares and to make payment therefor. It is understood that the Representative, individually and not as representative of the Underwriters, may (but shall not be obligated to) make payment for any Shares to be purchased by any Underwriter whose funds shall not have been received by the Representative by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any obligation under this Agreement. As referred to in this Agreement, "Closing Date" shall mean either the First Closing Date or the Second Closing Date. -14- (f) The parties represent and warrant that as of the date hereof and as of the Closing Date, the representations and warranties herein contained and the statements contained in all certificates delivered by any party to another pursuant to this Agreement shall in all material respects be true and correct. SECTION 6. COVENANTS OF THE COMPANY. The Company covenants and agrees ------------------------ with the several Underwriters that: (a) If the effective time of the Registration Statement is not prior to the execution and delivery of this Agreement, the Company will use its best efforts to cause the Registration Statement to become effective at the earliest possible time and, upon notification from the Commission that the Registration Statement has become effective, will so advise the Representative and counsel to the Underwriters promptly. The Company will advise the Representative and counsel to the Underwriters promptly of the issuance by the Commission or any state securities commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for purposes, or of any notification of the suspension of qualification of the Shares for sale in any jurisdiction, or any issue regarding denial or suspension of Nasdaq listing or the initiation or threatening of any proceedings for any of those purposes, and will also advise the Representative and counsel to the Underwriters promptly of any request of the Commission for amendment or supplement of the Registration Statement or of the Prospectus, or for additional information, and the Company will not file any amendment or supplement to the Registration Statement (either before or after it becomes effective) or to the Prospectus (including a prospectus filed pursuant to Rule 424(b)), or file any document under the Exchange Act in the time period from the execution of this Agreement through the First Closing Date with respect to the Firm Shares, or from the time of notice by the Representative exercising the option to purchase the Optional Shares through the Second Closing Date with respect to the Optional Shares, without first providing the Underwriters with a copy prior to such filing (with a reasonable opportunity to review such amendment or supplement) or if the Representative objects to such filing. (b) If, at any time when a prospectus relating to the Shares is required by law to be delivered in connection with sales by an Underwriter or dealer, any event occurs as a result of which the Prospectus would include an untrue statement of a material fact, or would omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to supplement the Prospectus to comply with the Act, the Company promptly will advise the Representative and counsel to the Underwriters thereof and will promptly prepare and file with the Commission, at its expense, an amendment to the Registration Statement which will correct such statement or omission or an amendment which will effect such compliance; and, if any Underwriter is required to deliver a prospectus after the effective date of the Registration Statement, the Company, upon request of the Representative, will prepare promptly such prospectus or prospectuses as may be necessary -15- to permit compliance with the requirements of Section 10(a)(3) of the Act. The Company consents to the use, in accordance with the provisions of the Act and with the Blue Sky Laws of the jurisdictions in which the Shares are offered by the several Underwriters and by dealers, of each Preliminary Prospectus. (c) Neither the Company nor any Subsidiary will, prior to the Second Closing Date, if any, incur any liability or obligation, direct or contingent, or enter into any material transaction, other than in the ordinary course of business, or enter into any transaction with an "affiliate," as defined in Rule 405 under the Act, which is required to be described in the Prospectus pursuant to Item 404 of Regulation S-K under the Act, except as described in the Prospectus. (d) Neither the Company nor any Subsidiary will, prior to the Second Closing Date, if any, acquire any of the Common Stock nor will the Company declare or pay any dividend or make any other distribution upon its Common Stock payable to shareholders of record on a date prior to such earlier date, except as described in the Prospectus. (e) The Company will make generally available to its security holders and the Representative an earnings statement as soon as practicable, but in no event later than sixty (60) days after the end of its fiscal quarter in which the first anniversary of the effective date of the Registration Statement occurs, covering a period of twelve (12) consecutive calendar months beginning after the effective date of the Registration Statement, which will satisfy the provisions of the last paragraph of Section 11(a) of the Act and Rule 158 promulgated thereunder. (f) During such period as a prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, the Company will furnish to the Representative, at the expense of the Company, copies of the Registration Statement, the Prospectus, and all amendments and supplements to any such documents, including any document filed under the Exchange Act and deemed to be incorporated by reference in the Registration Statement, in each case as soon as available and in such quantities as the Representative may reasonably request. (g) The Company will apply the net proceeds from the sale of the Shares to be sold by it hereunder for the purposes set forth in the Prospectus. (h) The Company will cooperate with the Representative and counsel to the Underwriters in qualifying or registering the Shares for sale under the Blue Sky Laws of such jurisdictions as the Representative designates, and will continue such qualifications or registrations in effect so long as reasonably requested by the Representative to effect the distribution of the Shares. The Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any such jurisdiction where it is not presently qualified. In each jurisdiction where any of the Shares shall have been -16- qualified as provided above, the Company will file such reports and statements as may be required to continue such qualification for a period of not less than one year from the date of the Prospectus. The Company shall promptly prepare and file with the Commission, from time to time, such reports as may be required to be filed by the Act and the Exchange Act, and the Company shall comply in all respects with the undertakings given by the Company in connection with the qualification or registration of the Shares for offering and sale under the Blue Sky Laws. (i) During the period of three (3) years from the date of the Prospectus, the Company will furnish to each of the Representative and to each of the other Underwriters who may so request, as soon as available, each report, statement or other document of the Company or its Board of Directors mailed to its shareholders or filed with the Commission, and such other information concerning the Company as the Representative may reasonably request. (j) The Company shall deliver the requisite notice of issuance to Nasdaq and shall take all necessary or appropriate action within its power to maintain the authorization for trading of the Class A Common Stock as a Nasdaq National Market security, or take such action to authorize the Class A Common Stock for listing on the New York Stock Exchange or the American Stock Exchange, for a period of at least thirty-six (36) months after the date of the Prospectus. (k) Except for (i) the issuance and sale by the Company of Common Stock upon exercise of presently existing outstanding stock options, (ii) the sale or exchange of Common Stock in settlement of any threatened litigation by the holder of the minority interest in Healing Arts Publishing, L.L.C. or the sale of Common Stock to purchase the minority interest in Healing Arts Publishing, L.L.C., and (iii) the sale of the Shares to be sold by the Company pursuant to this Agreement, the Company shall not, for a period of one hundred eighty (180) days after the First Closing Date without the prior written consent of the Representative, directly or indirectly, offer, sell or otherwise dispose of, contract to sell or otherwise dispose of, or cause or in any way permit to be sold or otherwise disposed of, any: (i) shares of Common Stock; (ii) rights to purchase shares of Common Stock exercisable within such 180-day period; or (iii) securities that are convertible or exchangeable into shares of Common Stock within such 180-day period. (l) The Company will maintain a transfer agent and, if required by law or the rules of The Nasdaq Stock Market or any national securities exchange on which the Class A Common Stock is listed, a registrar (which, if permitted by applicable laws and rules, may be the same entity as the transfer agent) for its Class A Common Stock. (m) If at any time when a prospectus relating to the Shares is required to be delivered under the Act, any rumor, publication or event relating to of affecting the Company shall occur as a result of which, in the opinion of the Representative, the market price of the -17- Class A Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to the Prospectus), the Company will, after written notice from the Representative advising the Company of any of the matters set forth above, promptly consult with the Representative concerning the advisability and substance of, and, if the Company and the Representative jointly determine that it is appropriate, disseminate, a press release or other public statement responding to or commenting on, such rumor, publication or event. (n) The Company will use its reasonable best efforts to comply or cause to be complied with the conditions to the obligations of the Underwriters in Section 8 hereof and will take no action or omit to take any action that would reasonably be expected to prevent the Underwriter's compliance or satisfaction with the conditions to the obligations of the Underwriter in Section 8 hereof. (o) The Company shall issue at the Closing irrevocable instructions to the transfer agent to provide the Representative for a period of 180 days after the Closing Date, for its confidential use and at the Company's expense, reasonable access to its daily transfer sheets (provided such access does not result in expense to the Company) and, annually upon request of the Representative to the transfer agent therefor (but more frequently in the event of an investigation requiring the same or inquiry therefor by the Commission or other government body or agency or by the NASD), with lists of shareholders of the Company, all for a period of three (3) years after the Closing Date. As a condition to providing any information under this Section 6(o), the Company may require the Representative to enter into a non-disclosure or confidentiality agreement providing reasonable restrictions against disclosure of such information. (p) The Company shall deliver to the Representative the documents described in Section 2(dd). In addition, at Closing, the Company shall deliver to the Representative or counsel to the Underwriters, certificates of good standing in each state where the Company does business, certificates as to tax status, incumbency or any other certificate or document which the Representative may reasonably require prior to Closing. (q) Prior to the Closing Date, the Company shall cooperate with the Representative in such reasonable investigation as the Representative may make or cause to be made of all the properties, business and operations of the Company in connection with the sale of the Shares, and the Company shall make its officers and directors available to the Representative for interrogation, without cost or expense, in connection therewith, and the Company shall make available such information in its possession as the Representative may reasonably request. (r) If applicable, the Company shall file with the Commission all required reports in accordance with the provisions of Rule 463 of Regulation C under the Act and shall provide a copy of each such report to the Representative and counsel to the Underwriters. -18- (s) The Company shall supply to each of the Representative and counsel to the Underwriters, at the Company's cost, two (2) sets of bound transcripts each containing all of the Closing materials within a reasonable time after the Closing Date. SECTION 7. PAYMENT OF EXPENSES. Whether or not the transactions ------------------- contemplated hereunder are consummated or this Agreement becomes effective, or if this Agreement becomes effective and is thereafter terminated for any reason, the Company will pay the costs, fees and expenses incurred in connection with the proposed public offering of the Shares as hereinafter provided. Such costs, fees and expenses to be paid by the Company will include, without limitation: (a) All costs, fees and expenses (excluding the expenses incurred by the Underwriters except as otherwise set forth in subsections (b), (c) and (d) below) incurred in connection with the performance of the Company's obligations hereunder, including, without limiting the generality of the foregoing: the registration fees related to the filing of the Registration Statement with the Commission; the fees and expenses related to the quotation of the Shares on Nasdaq or other national securities exchange; the fees and expenses of the Company's counsel, accountants, transfer agent and registrar; the costs and expenses incurred in connection with the preparation, printing, shipping, and delivery of the Registration Statement and the Prospectus (including all exhibits and financial statements) and all agreements and supplements provided for herein, this Agreement, including, without limitation, shipping expenses via overnight delivery and/or courier service to comply with applicable prospectus delivery requirements; and the costs and expenses associated with the production of materials related to, and travel expenses incurred by the management of the Company in connection with, the various meetings to be held between the Company's management and prospective investors. (b) All registration fees and expenses, including filings under the Blue Sky Laws and the clearing of the public offering and the underwriting arrangements evidenced hereby with the NASD and legal fees and disbursements of counsel to the Underwriters incurred in connection with qualifying or registering all or any part of the Shares for offer and sale under the Blue Sky Laws. (c) All accountable costs, fees and expenses of the Underwriters incurred in connection with the proposed sale of the Shares, as described in the last sentence of this subsection (c), excluding (i) the costs, fees and expenses of counsel to the Underwriters (except as set forth in subsection (d) below) (ii) the costs, fees and expenses incurred by the Underwriters in connection with the marketing and advertising of the transactions contemplated hereunder, and (iii) the Underwriters' travel and promotional expenses incurred in connection with the offering. At the First Closing and, if applicable, on the Second Closing Date, the Company shall pay to each Underwriter a sum equal to the accountable expenses incurred by such Underwriter in connection with the preferential allocation of shares to customers of the Company, including, but not limited to, travel expenses, postage -19- expenses, duplication expenses, long distance telephone expenses, additional staffing and other administrative or "back office" expenses. (d) In the event that the transactions contemplated hereunder are not consummated by December 31, 1999, due to the action or inaction of the Company, or if this Agreement is terminated by the Company at any time prior to that date for any reason, the Company will promptly pay, upon the request of the Underwriters, the out-of-pocket expenses incurred in connection with this Agreement, including costs, fees and expenses of counsel to the Underwriters. (e) All fees and expenses related to printing of the certificates for the Shares, and all transfer taxes, if any, with respect to the sale and delivery of the Shares to the Underwriters. (f) The Company shall also pay all expenses incurred in connection with the placement of a "tombstone" advertisement after the closing in such publications and containing such information as the Company and the Representative may agree, after Closing of the offering. SECTION 8. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The ------------------------------------------------- obligations of the several Underwriters under this Agreement shall be subject to the accuracy of the representations and warranties on the part of the Company herein set forth as of the date hereof and as of each Closing Date, to the accuracy of the statements of the Company's officers made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder, and to the following additional conditions, unless waived in writing by the Representative: (a) The Registration Statement shall have been declared effective by the Commission; all filings required by Rules 424(b) and 430A under the Act shall have been timely made; no stop order suspending the effectiveness of the Registration Statement shall have been issued by the Commission or any state securities commission nor, to the knowledge of the Company, shall any proceedings for that purpose have been initiated or threatened; and any request of the Commission or any state securities commission for inclusion of additional information in the Registration Statement, or otherwise, shall have been complied with to the reasonable satisfaction of the Representative. (b) Since the dates as of which information is given in the Registration Statement: (i) there shall not have occurred any change or development involving, or which would be reasonably expected to involve, a Material Adverse Effect, whether or not arising from transactions in the ordinary course of business; and (ii) the Company shall not have sustained any material loss or interference from any labor dispute, strike, fire, flood, windstorm, accident or other calamity (whether or not insured) or from any court or governmental action, order or decree, the effect of which on the Company, in any such case described in clause (i) or (ii) above, is, in the sole discretion of the Representative, so material and adverse as to -20- make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares on the terms and in the manner contemplated in the Registration Statement and the Prospectus. (c) The Representative shall not have been advised that the Registration Statement or the Prospectus contains an untrue statement of fact that, in the opinion of the Representative or counsel to the Underwriters, is material, or omits to state a fact that, in the opinion of the Representative or such counsel, is material and is required to be stated therein or necessary to make the statements therein not misleading. (d) The Representative shall have received an opinion of Bartlit Beck Herman Palenchar & Scott, counsel for the Company, addressed to the Representative, in its capacity as the Representative of the Underwriters, and dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that, subject to customary qualifications and assumptions: (i) The Company is validly existing as a corporation and in good standing under the laws of its jurisdiction of incorporation, with full corporate power and authority to own, lease and operate its properties and conduct its business as presently conducted and as described in the Prospectus and the Registration Statement; (ii) the Company is duly registered and qualified to do business as a foreign corporation under the laws of, and is in good standing as such in the States of Ohio and California; (iii) the authorized capital stock of the Company consists of 150,000,000 shares of Class A Common Stock, par value $0.0001 per share, and 50,000,000 shares of Class B Common Stock, par value $0.0001 per share, and 50,000,000 shares of preferred stock, par value $0.0001 per Share, and all such stock conforms in all material respects to the descriptions thereof in the Prospectus and the Registration Statement; (iv) the issued and outstanding shares of capital stock of the Company immediately prior to the issuance and sale of the Shares to be sold by the Company hereunder have been duly authorized and validly issued, are fully paid and nonassessable, and there are no preemptive rights to subscribe for or purchase any shares of capital stock of the Company, and no shares of capital stock of the Company have been issued in violation of such rights; (v) to such counsel's knowledge, except for the Subsidiaries, the Company has no significant subsidiaries, and the Company does not own any equity interest in or control, directly or indirectly, any other corporation, limited liability -21- company, partnership, joint venture, association, trust or other business organization except as described in the Prospectus and the Registration Statement; each Subsidiary is validly existing in good standing under the laws of its jurisdiction of incorporation or formation, with full power and authority to own, lease and operate its properties and to conduct its business as presently conducted and as described in the Prospectus and the Registration Statement; Gaiam Catalog, Inc. is duly registered or qualified to do business as a foreign entity under the laws of, and is in good standing as such in the State of Ohio; the issued and outstanding shares of the capital stock or other equity of each Subsidiary have been duly authorized and validly issued, are fully paid and nonassessable and there are no preemptive rights to subscribe for or purchase any shares of capital stock of or other equity interest in any Subsidiary, and no shares of capital stock or other equity interest of any Subsidiary have been issued in violation of such rights; the Company owns directly and beneficially all of the issued and outstanding capital stock or other equity of each Subsidiary except as otherwise described in the Registration Statement, free and clear of any and all liens, claims, encumbrances and security interests except as described in the Registration Statement; (vi) the certificates for the Shares to be delivered hereunder are in due and proper form and conform to the requirements of applicable law, and, when duly countersigned by the Company's transfer agent, and delivered to the Representative or upon the order of the Representative against payment of the agreed consideration therefor in accordance with the provisions of this Agreement, the Shares to be sold by the Company represented thereby will be duly authorized and validly issued, fully paid and nonassessable, and free of any preemptive rights to subscribe for or purchase shares of Common Stock; (vii) the Registration Statement has become effective under the Act, and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or are threatened under the Act or any Blue Sky Laws; the Registration Statement and the Prospectus and any amendment or supplement thereto (except for the financial statements and other statistical or financial data included therein, as to which such counsel need express no opinion), comply as to form in all material respects with the requirements of the Act, including Form S-1 promulgated under the Act; (viii) the Company has the corporate power and authority to enter into and perform this Agreement; the performance of the Company's obligations hereunder and the consummation of the transactions described herein have been duly authorized by the Company by all necessary corporate action, and this Agreement has been duly executed and delivered by and on behalf of the -22- Company, and is a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms; no consent, approval, authorization or other order or decree of any court, regulatory or governmental body, arbitrator, administrative agency or other instrumentality of the United States or of the State of Colorado is required for the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement (except for compliance with the Act, the Exchange Act, applicable Blue Sky Laws and the clearance of the underwriting arrangements by the NASD); (ix) the execution, delivery and performance of this Agreement by the Company will not: (A) violate any provisions of the Articles of Incorporation or By-laws (or equivalents thereto) of the Company or any Subsidiary; (B) or result in the breach, modification or termination of, or constitute a default under, any agreement, lease, franchise, license, indenture, permit, mortgage, deed of trust, other evidence of indebtedness or other instrument to which the Company or any Subsidiary is a party or by which the Company or such Subsidiary, or any of their respective owned or leased property is bound, and which is filed as an exhibit to the Registration Statement; or (C) violate any statute, ordinance, rule, or regulation of any regulatory or governmental body, or to such counsel's knowledge, any order or decree of any court, arbitrator, administrative agency or other instrumentality of the United States or of the State of Colorado (assuming compliance with all applicable federal and state securities laws); (x) to such counsel's knowledge, except as described in the Prospectus, there are no holders of Common Stock or other securities of the Company, or securities that are convertible or exchangeable into Common Stock or other securities of the Company, that have rights to the registration of such securities; (xi) the Class A Common Stock (including the Shares) has been designated for inclusion as a National Market security on The Nasdaq Stock Market and is registered under the Exchange Act; (xii) neither the Company nor any Subsidiary is, nor with the giving of notice or passage of time or both would be, in violation of its respective Articles of Incorporation or By-laws (or their equivalents) or, to such counsel's knowledge, in default in any material respect in the performance of any agreement, lease, franchise, license, permit, mortgage, deed of trust, evidence of indebtedness or other instrument, or any other document in each case that is filed as an exhibit to or incorporated by reference in the Registration Statement, to which the Company or any Subsidiary is subject or bound; -23- (xii) neither the Company nor any Subsidiary is an "investment company", an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended, and, upon its receipt of any proceeds from the sale of the Shares, the Company will not become or be deemed to be an "investment company" thereunder; (xiv) the description in the Registration Statement and the Prospectus of legal matters, statutes, documents, regulations, legal and governmental proceedings, and contracts and other legal documents described therein fairly and correctly present, in all material respects, the information required to be included therein by the Act and fairly summarize the matters referred to therein; (xv) nothing has come to such counsel's attention to lead them to believe that all offers and sales by the Company of its capital stock before the date hereof were not at all relevant times duly registered under or were exempt from the registration requirements of the Act; and Such opinion may incorporate exclusions and such qualifications reasonably acceptable to the Representative and may, with respect to paragraphs (iv), (v) and (xv), be based on written representations and certifications of the Company and respective offerees and purchasers of Shares. Any written representations and certifications on which such opinion may rely shall be provided to the Representative and shall be reasonably acceptable to the Representative. (e) The Representative shall also have received a letter from Bartlit Beck Herman Palenchar & Scott, special counsel for the Company, addressed to the Representative, in its capacity as the Representative of the Underwriters, and dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that (i) no facts have come to the attention of such counsel which lead it to believe that either the Registration Statement or the Prospectus or any amendment or supplement thereto contains any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of the First Closing Date or the Second Closing Date, as the case may be, contained any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made (except for the financial statements and other financial data included therein, as to which such counsel need express no opinion), and (ii) without limiting the generality of the foregoing, no facts have come to the attention of counsel which lead it to believe that there are legal or governmental proceedings pending or threatened against the Company, including, without limitation, any such proceedings that are related to environmental, employee benefit or employment discrimination matters, required to be described in the Registration Statement or the Prospectus which are not so described or -24- which question the validity of this Agreement or any action taken or to be taken pursuant to this Agreement, nor is there any transaction, relationship, agreement, contract or other document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to or incorporated by reference in the Registration Statement by the Act, which is not described, filed or incorporated by reference as required. Such letter may incorporate exclusions and such qualifications reasonably acceptable to the Representatives. (f) The Representative shall have received an opinion of Dorsey & Whitney LLP, counsel to the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, with respect to the issuance and sale of the Shares by the Company, the Registration Statement and other related matters as the Representative may require, and the Company shall have furnished to such counsel such documents and shall have exhibited to them such papers and records as they request for the purpose of enabling them to pass upon such matters. (g) The Representative shall have received on each Closing Date, a certificate of Jirka Rysavy, Chief Executive Officer, and Lynn Powers, President of the Company, to the effect that: (i) The representations and warranties of the Company set forth in Section 2 hereof are true and correct as of the date of this Agreement and as of the date of such certificate, and the Company has complied in all material respects with all the agreements and satisfied all the conditions to be performed or satisfied in all material respects by it at or prior to the date of such certificate; (ii) the Commission has not issued an order preventing or suspending the use of the Prospectus or any Preliminary Prospectus or any amendment or supplement thereto; no stop order suspending the effectiveness of the Registration Statement has been issued; and to the knowledge of the respective signatories, no proceedings for that purpose have been initiated or are pending or contemplated under the Act or under the Blue Sky Laws of any jurisdiction; (iii) each of the respective signatories has examined the Registration Statement and the Prospectus, and any amendment or supplement thereto, including any documents filed under the Exchange Act and deemed to be incorporated by reference in the Registration Statement, and such documents contain all statements required to be stated therein, and do not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and, since the date on which the Registration Statement was initially filed, no event has occurred that was required to be set forth in an amended or supplemented prospectus or in an amendment to the Registration Statement that has not been so set forth; and -25- (iv) since the date on which the Registration Statement was initially filed with the Commission, there shall not have occurred any change or development involving, or which could be expected to involve, a Material Adverse Effect, whether or not arising from transactions in the ordinary course of business, except as disclosed in the Prospectus and the Registration Statement as heretofore amended or as disclosed in an amendment or supplement thereto filed with the Commission and delivered to the Representative after the execution of this Agreement; since such date and except as so disclosed or in the ordinary course of business, the Company has not incurred any liability or obligation, direct or indirect, or entered into any transaction which is material to the Company other than in the ordinary course of business; since such date and except as so disclosed, there has not been any change in the outstanding capital stock of the Company, or any change that is material to the Company in the short-term debt or long-term debt of the Company; since such date and except as so disclosed or as contemplated in this Agreement, the Company has not acquired any of the Common Stock or other capital stock of the Company nor has the Company declared or paid any dividend, or made any other distribution, upon its outstanding Common Stock payable to shareholders of record on a date prior to such Closing Date; since such date and except as so disclosed, the Company has not incurred any material contingent obligations, and no material litigation is pending or threatened against the Company; and, since such date and except as so disclosed, the Company has not sustained any material loss or interference from any strike, fire, flood, windstorm, accident or other calamity (whether or not insured) or from any court or governmental action, order or decree. The delivery of the certificate provided for in this subsection (g) shall be and constitute a representation and warranty of the Company as to the facts required in the immediately foregoing clauses (i), (ii), (iii) and (iv) to be set forth in said certificate. (h) At the time this Agreement is executed and also on each Closing Date, there shall be delivered to the Representative a letter addressed to the Representative, in its capacity as the representative of the Underwriters, from each of Ernst & Young LLP and Wendell T. Walker and Associates, P.C., the Company's independent accountants, the first letters to be dated the date of this Agreement, the second letters to be dated the First Closing Date and the third letters (if applicable) to be dated the Second Closing Date, which shall be in form and substance satisfactory to the Representative and shall contain information as of a date within five (5) days of the date of such letter. There shall not have been any change or decrease set forth in any of the letters referred to in this subsection (g) which makes it impracticable or inadvisable, in the sole discretion of the Representative, to proceed with the public offering or purchase of the Shares as contemplated hereby. (i) The Shares shall have been qualified or registered for sale under the Blue Sky Laws of such jurisdictions as shall have been specified by the Representative, the -26- underwriting terms and arrangements for the offering shall have been cleared by the NASD, and the Class A Common Stock (including the Shares) shall have been designated for inclusion as a Nasdaq National Market security on the Nasdaq Stock Market and shall have been registered under the Exchange Act. (j) Such further certificates and documents as the Representative may reasonably request (including certificates of officers of the Company). All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are satisfactory to the Representative and to Dorsey & Whitney LLP, counsel to the Underwriters. The Company shall furnish the Representative with such manually signed or conformed copies of such opinions, certificates, letters and documents as the Representative may reasonably request. (k) All the Shares being offered by the Company shall be tendered for delivery in accordance with the terms and provisions of this Agreement. If any condition to the Underwriters' obligations hereunder to be satisfied prior to or at either Closing Date is not so satisfied, this Agreement at the election of the Representative will terminate upon notification to the Company, without liability on the part of any Underwriter, including the Representative or the Company, except for the provisions of Section 6(n) hereof, the expenses to be paid or reimbursed by the Company pursuant to Section 7 hereof and except to the extent provided in Section 10 hereof. SECTION 9. MAINTAIN EFFECTIVENESS OF REGISTRATION STATEMENT. The Company ------------------------------------------------ will use its best efforts to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement, and, if such stop order is issued, to obtain as soon as possible the lifting and permanent suspension or termination thereof. SECTION 10. INDEMNIFICATION. --------------- (a) The Company, subject to the last paragraph of this Section 10, agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act, from and against any losses, claims, damages, expenses, liabilities or actions in respect thereof ("Claims"), joint or several, to which such Underwriter or each such controlling person may become subject under the Act, the Exchange Act, Blue Sky Laws or other federal or state statutory laws or regulations, at common law or otherwise (including payments made in settlement of any litigation), insofar as such Claims arise out of or are based upon any breach of any representation, warranty or covenant made by the Company in this Agreement, or any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, the Prospectus or any amendment or supplement thereto, or in any application filed with Nasdaq or under any Blue Sky Law or other document executed by the Company for that purpose or based upon written information furnished by the Company and filed in any state or other jurisdiction to qualify any or all of the Shares under the securities laws -27- thereof (any such document, application or information being hereinafter called a "Blue Sky Application") or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or arise out of establishment of the administrative or "back office" practices, procedures and policies enacted by the Underwriters, or the implementation thereof, in order to facilitate the preferential allocation of shares to customers of the Company described in Section 1 of this Agreement (other than the negligent establishment or implementation of such practices, procedures or policies, for which the Underwriters shall not be entitled to indemnification under this Section 9(a)). The Company, subject to the last paragraph of this Section 10, agrees to reimburse each Underwriter and each such controlling person for any legal fees or other expenses incurred by such Underwriter or any such controlling person in connection with investigating, defending or settling any such Claim; provided, however, that the Company will not be liable in any such case to the extent that any such Claim arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus or supplement thereto or in any Blue Sky Application in reliance upon and in conformity with the written information furnished to the Company by the Underwriters pursuant to Section 4 of this Agreement. The indemnification obligations of the Company as provided above are in addition to and in no way limit any liabilities the Company may otherwise have. (b) Each Underwriter, severally and not jointly, will indemnify and hold harmless the Company, each of its directors and each of its officers who signs the Registration Statement, and each person, if any, who controls the Company within the meaning of the Act or the Exchange Act against any Claim to which the Company, or any such director, officer, controlling person may become subject under the Act, the Exchange Act, Blue Sky Laws or other federal or state statutory laws or regulations, at common law or otherwise (including payments made in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter and the Representative), insofar as such Claim arises out of or is based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, the Prospectus, or any amendment or supplement thereto, or in any Blue Sky Application, or arises out of or is based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, the Prospectus, or any amendment or supplement thereto, or in any Blue Sky Application, or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, the Prospectus, or any amendment or supplement thereto, or in any Blue Sky Application, in reliance solely upon and in conformity with the information set forth in the Registration Statement on the front cover of the Prospectus and under the caption "Underwriting," which is the only written information furnished by the Representative to the Company pursuant to Section 4 of this Agreement. Each Underwriter will severally reimburse any legal fees or other expenses incurred by the Company, or any such director, officer or controlling person in connection -28- with investigating or defending any such Claim, and from any and all Claims solely resulting from failure of an Underwriter to deliver a Prospectus, if the person asserting such Claim purchased Shares from such Underwriter and a copy of the Prospectus (as then amended if the Company shall have furnished any amendments thereto) was not sent or given by or on behalf of such Underwriter to such person, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended) would have cured the defect giving rise to such Claim. The indemnification obligations of each Underwriter as provided above are in addition to any liabilities any such Underwriter may otherwise have. Notwithstanding the provisions of this section, no Underwriter shall be required to indemnify or reimburse the Company, or any officer, director or controlling person in an aggregate amount in excess of the amount by which the underwriting discount applicable to the Shares purchased by such Underwriter exceeds the amount of damages which such Underwriter has been otherwise required to pay. (c) Promptly after receipt by an indemnified party under this section of notice of the commencement of any action in respect of a Claim, such indemnified party will, if a Claim in respect thereof is to be made against an indemnifying party under this section, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve an indemnifying party from any liability it may have to any indemnified party under this section or otherwise, except to the extent that the failure to so notify the indemnifying party causes such party prejudice. In case any such action is brought against any indemnified party, and such indemnified party notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in and, to the extent that he, she or it may wish, jointly with all other indemnifying parties, similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and any indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to the indemnified party and/or other indemnified parties which are different from or additional to those available to any indemnifying party, the indemnified party or parties shall have the right to select one separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. (d) Upon receipt of notice from the indemnifying party to such indemnified party of the indemnifying party's election to assume the defense of such action and upon approval by the indemnified party of counsel selected by the indemnifying party, the indemnifying party will not be liable to such indemnified party under this section for any legal fees or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, unless: (i) the indemnified party shall have employed separate counsel in connection with the assumption of legal defenses in accordance with the proviso to the last sentence of subsection (e) of this section (it being understood, however, that the indemnifying party shall not be liable for the legal fees and expenses of more -29- than one separate counsel, approved by the Representative, if one or more of the Underwriters or their controlling persons are the indemnified parties); (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the indemnified party's notice to the indemnifying party of commencement of the action; or (iii) the indemnifying party has authorized the employment of counsel at the expense of the indemnifying party. (e) If the indemnification provided for in this section is unavailable to an indemnified party under subsection (a) or (b) hereof in respect of any Claim referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall, subject to the limitations hereinafter set forth, contribute to the amount paid or payable by such indemnified party as a result of such Claim: (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Underwriters from the offering of the Shares; or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above, but also the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such Claim, as well as any other relevant equitable considerations. The relative benefits received by each of the Company and the Underwriters shall be deemed to be in such proportion so that the Underwriters are responsible for that portion represented by the percentage that the amount of the underwriting discounts and commissions per share appearing on the cover page of the Prospectus bears to the public offering price per share appearing thereon, and the Company is responsible for the remaining portion. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the Claims referred to above shall be deemed to include, subject to the limitations set forth in subsections (c) and (d) of this section, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. (f) The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this section were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method -30- or allocation which does not take into account the equitable considerations referred to in subsection (e) of this section. Notwithstanding the other provisions of this section, no Underwriter shall be required to contribute any amount in excess of the amount by which the underwriting discount applicable to the Shares purchased by such Underwriter exceeds the amount of damages which such Underwriter has been otherwise required to pay. No person guilty of fraudulent misrepresentation (within the meaning of section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this section are several in proportion to their respective underwriting commitments and not joint. SECTION 11. DEFAULT OF UNDERWRITERS. It shall be a condition to the ----------------------- obligations of each Underwriter to purchase the Shares in the manner as described herein, that, except as hereinafter provided in this section, each of the Underwriters shall purchase and pay for all the Shares agreed to be purchased by such Underwriter hereunder upon tender to the Representative of all such Shares in accordance with the terms hereof. If any Underwriter or Underwriters default in their obligations to purchase Shares hereunder on either the First Closing Date or the Second Closing Date and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed ten percent (10%) of the total number of Shares which the Underwriters are obligated to purchase on such Closing Date, the Representative may make arrangements for the purchase of such Shares by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date the nondefaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Shares which such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of Shares with respect to which such default or defaults occur is greater than ten percent (10%) of the total number of Shares which the Underwriters are obligated to purchase on such Closing Date, and arrangements satisfactory to the Representative for the purchase of such Shares by other persons are not made within thirty-six (36) hours after such default, this Agreement will terminate without liability on the part of any nondefaulting Underwriter and the Company except to the extent provided in section 10 hereof. In the event that Shares to which a default relates are to be purchased by the nondefaulting Underwriters or by another party or parties, the Representative shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, for not more than seven (7) business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be effected. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this section. Nothing herein will relieve a defaulting Underwriter from liability for its default. SECTION 12. EFFECTIVE DATE. This Agreement shall become effective the -------------- date and time that this Agreement is executed and delivered by the parties hereto. SECTION 13. TERMINATION ----------- -31- (a) This Agreement may be terminated by the Representative by notice to the Company in the event the Company shall have failed or been unable to comply with any of the terms, conditions, representations, warranties, covenants or other provisions of this Agreement on the part of the Company to be performed, complied with or fulfilled within the respective times herein provided for, unless compliance therewith or performance or satisfaction thereof shall have been expressly waived by the Representative in writing. (b) This Agreement may be terminated by the Representative by notice to the Company at any time if, in the sole discretion of the Representative, payment for and delivery of the Shares is rendered impracticable or inadvisable because of: (a) material adverse changes in the Company's business, business prospects, management, earnings, properties or financial condition; (b) any action, suit or proceedings, threatened or pending, at law or equity against the Company, or by any federal, state or other commissions, board or agency wherein any unfavorable result or decision could materially adversely affect the business, business prospects, properties, financial condition, income or earnings of the Company; (c) additional material governmental restrictions not in force and effect on the date hereof shall have been imposed upon the trading in securities generally, or minimum or maximum prices shall have been generally established on a registered securities exchange, or trading in securities generally on any such exchange shall have been suspended, or a general moratorium shall have been established by federal or state authorities; (d) substantial and material changes in the condition of the market beyond normal fluctuations are such that it would be undesirable, impracticable or inadvisable, in the sole discretion of the Representative, to proceed with this Agreement or with the offering; (e) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency if, in the judgment of the Representative, the effect of any such outbreak, escalation, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the sale of and payment for the Shares; (f) The Nasdaq Stock Market notifies the Company that the Shares will not be listed for trading on The Nasdaq National Market as required under this Agreement; or (g) any suspension of trading in the Class A Common Stock of the Company in the over-the-counter market or the interruption or termination of quotations of the Shares on the NASDAQ System. (c) Any termination of this Agreement under Section 13(a) or (b) shall be without liability of any nature whatsoever (including, but not limited to, loss of anticipated profits or consequential damages) on the part of either party hereto, except that the Company shall remain obligated to pay the costs and expenses provided to be paid or reimbursed by the Company pursuant to Section 7 hereof; and the Company and the Representative shall be obligated to pay, respectively, all losses, claims, demands, liabilities and expenses under Section 10. (d) It is understood that the Company and the Representative will each advise the other party immediately and confirm in writing the receipt of any threat of or the initiation of any steps or procedures which would impair or prevent the right to offer any of the -32- Company's Shares or the issuance of any "suspension orders" or other prohibitions preventing or impairing the proposed offering by the Commission or other regulatory authority. SECTION 14. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The --------------------------------------------------- respective indemnities, agreements, representations, warranties, covenants and other statements of the Company, of its officers or directors and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers, directors or any controlling person, as the case may be, and will survive delivery of and payment for the Shares sold hereunder. SECTION 15. NOTICES. All notices, demands or requests required or ------- authorized hereunder shall only be deemed given sufficiently if in writing and hand delivered by messenger or courier service or sent by registered mail or certified mail, return receipt requested and postage prepaid, in the case of the Representative: Tucker Anthony Cleary Gull 100 East Wisconsin Avenue Milwaukee, Wisconsin 53202 Attention: Joseph F. Hickey, Jr., Managing Director with a copy to: Dorsey & Whitney LLP 370 Seventeenth Street, Suite 4400 Denver, Colorado 80202 Attention: Kevin A. Cudney, Esq. and, in the case of the Company: Gaiam, Inc. 360 Interlocken Blvd., Suite 300 Broomfield, Colorado 80021 Attention: Lynn Powers, President with a copy to: Bartlit Beck Herman Palenchar & Scott 511 Sixteenth Street, Suite 700 Denver, Colorado 80202 Attention: James L. Palenchar, Esq. -33- Any such notice shall be deemed effectively given on the earlier of the date of actual receipt or the second business day after delivered, telecopied, or deposit of the notice with the United States Postal Service. SECTION 16. SUCCESSORS. This Agreement will inure to the benefit of and ---------- be binding upon the parties hereto and their respective successors, personal representative and assigns, and to the benefit of the officers and directors and controlling persons referred to in Section 12 hereof and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 17. PARTIAL UNENFORCEABILITY. If any section, paragraph, clause ------------------------ or provision of this Agreement is for any reason determined to be invalid or unenforceable, such determination shall not affect the validity or enforceability of any other section, paragraph clause or provision hereof. SECTION 18. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be ---------------------------- governed by and construed in accordance with the internal laws of the State of New York without reference to conflict of law principles thereunder. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument, and shall be effective when at least one counterpart hereof shall have been executed by or on behalf of each party hereto. -34- If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters, including the Representative, all in accordance with its terms. Very truly yours, GAIAM, INC. By: ----------------------------------- Its: ----------------------------------- The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. TUCKER ANTHONY CLEARY GULL Acting as Representative of the several Underwriters (including themselves) identified in Schedule I annexed hereto. TUCKER ANTHONY CLEARY GULL By: -------------------------------- Authorized Representative Date: -------------------------------- -35- GAIAM, INC. Schedule I
- ------------------------------------------------------------------------------- Name of Underwriter Number of Firm Shares to be Purchased - ------------------------------------------------------------------------------- Tucker Anthony Cleary Gull - ------------------------------------------------------------------------------- Tucker Anthony Incorporated - ------------------------------------------------------------------------------- Adams Harkness & Hill, Inc. - ------------------------------------------------------------------------------- Total - -------------------------------------------------------------------------------
-36- GAIAM, INC. Schedule II
- ------------------------------------------------------------------------------ Name of Shareholder Number of Shares Owned - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
-37- GAIAM, INC. Schedule 2(c) Subsidiaries: -38- EX-5.1 3 OPINION OF BARTLETT BECK HERMAN PALENCHAR & SCOTT EXHIBIT 5.1 Bartlit Beck Herman Palenchar & Scott 511 Sixteenth Street, Suite 700 Denver, Colorado 80202 [October [*]], 1999 Gaiam, Inc. 360 Interlocken Blvd., Suite 300 Broomfield, Colorado 80021 Re: Common Stock of Gaiam, Inc. --------------------------- Ladies and Gentlemen: We have examined Registration Statement on Form S-1 No. 333-83283 together with all amendments thereto (the "Registration Statement"), filed by Gaiam, Inc. (the "Company") with the Securities and Exchange Commission (the "Commission") in connection with the registration under the Securities Act of 1933, as amended (the "Securities Act"), of 2,000,000 shares (2,300,000 shares if the underwriters' over-allotment option is exercised in full) of the Company's Class A common stock, $.0001 par value per share (the "Shares"). We are familiar with the proceedings taken by the Company in connection with the authorization, issuance and sale of the Shares. Based upon the foregoing, we are of the opinion that: when, as and if (i) the Registration Statement shall have become effective pursuant to the provisions of the Securities Act, (ii) the Company shall have received payment in full for the Shares, and (iii) the Shares shall have been issued in the form and containing the terms described in the Registration Statement, the Shares will, when sold, be legally issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and to the use of our name under the heading "Legal Matters" in the Registration Statement. Very truly yours, TRS/s [* To be dated on or before the effective date of the registration statement.] EX-23.1 4 CONSENT OF ERNST & YOUNG EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated June 4, 1999, except for Notes 1 and 11 as to which the date is __________ 1999, in the Registration Statement (Form S-1) and related prospectus of Gaiam, Inc. for the registration of 2,300,000 shares of its Class A Common Stock. We also consent to the reference to our firm under the caption "Experts" and the use of our report dated June 25, 1999, on the financial statements of Healing Arts Publishing, Inc. as of and for the period from January 1, 1998 through September 14, 1998 (acquisition date) in the Registration Statement (Form S-1) and related Prospectus of Gaiam, Inc. for the registration of 2,300,000 shares of Gaiam, Inc.'s Class A Common Stock. Denver, Colorado September 27, 1999 The foregoing consent is in the form that will be signed upon the effective date of Gaiam, Inc.'s registration of Class A Common Stock in this registration statement and the concurrent 2.5 to 1 reverse stock split of the Gaiam, Inc.'s common shares. /s/ ERNST & YOUNG LLP Denver, Colorado September 27, 1999 EX-23.2 5 CONSENT OF WENDELL T. WALKER & ASSOCIATES EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated September 12, 1997 with respect to the financial statements of Gaiam, Inc. included in the Registration Statement (Form S-1) and related Prospectus of Gaiam, Inc. for the registration of 2,300,000 shares of Class A Common Stock. /s/ Wendell T. Walker and Associates, P.C. Boulder, Colorado September 27, 1999 EX-23.5 6 CONSENT OF BARBARA MOWRY EXHIBIT 23.5 I hereby consent to the use of my name in the Registration Statement on form S-1 No. 333-83283, together with all amendments thereto, filed by Gaiam, Inc. with the Securities and Exchange Commission in connection with Gaiam's registration under the Securities Act of 1933, as amended, of shares of Gaiam's Class A common stock, $.0001 par value per share. /s/ Barbara Mowry ------------------------ Barbara Mowry Dated: September 16, 1999 EX-23.6 7 CONSENT OF BARNET M. FEINBLUM EXHIBIT 23.6 I hereby consent to the use of my name in the Registration Statement on form S-1 No. 333-83283, together with all amendments thereto, filed by Gaiam, Inc. with the Securities and Exchange Commission in connection with Gaiam's registration under the Securities Act of 1933, as amended, of shares of Gaiam's Class A common stock, $.0001 par value per share. /s/ Barnet M. Feinblum -------------------------- Barnet M. Feinblum Dated: September 20, 1999 -----END PRIVACY-ENHANCED MESSAGE-----