United States

Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

 

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934

 

 

 

For the Fiscal Quarter Ended March 31, 2003

 

 

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934

 

 

 

Commission File Number 0-27517

 

 

GAIAM, INC.

(Exact name of registrant as specified in its charter)

 

COLORADO

 

84-1113527

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

360 INTERLOCKEN BLVD.,
BROOMFIELD, COLORADO 80021

(Address of principal executive offices)

 

 

 

(303) 222-3600

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

YES   ý                  NO   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES   ý          NO   o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

 

Shares outstanding as of May 7, 2003

Class A Common Stock
($.0001 par value)

 

9,193,562

 

 

 

 

 

 

Class B Common Stock
($.0001 par value)

 

5,400,000

 

 



 

INDEX TO FORM 10-Q

 

PART I.

FINANCIAL INFORMATION

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

Condensed Consolidated Balance Sheets at March 31, 2003  and December 31, 2002

 

Condensed Consolidated Statements of Income for the three months ended March 31, 2003 and 2002

 

Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2003 and 2002

 

Notes to Interim Condensed Consolidated Financial Statements

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Item 3.

Critical Accounting Policies

 

 

Item 4.

Quantitative and Qualitative Disclosures About Market Risk

 

 

Item 5.

Controls and Procedures

 

 

PART II.

OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

 

Item 2.

Changes in Securities and Use of Proceeds

 

 

Item 3.

Defaults Upon Senior Securities

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

Item 5.

Other Information

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

This report may contain forward-looking statements that involve risks and uncertainties.  When used in this discussion, the words “anticipate,” “believe,” “plan,” “estimate,” “expect,” “strive,” “future,” “intend” and similar expressions as they relate to Gaiam or its management are intended to identify such forward-looking statements.  Gaiam’s actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Market Risk” and elsewhere in this report.  Risks and uncertainties that could cause actual results to differ include, without limitation, general economic conditions, competition, loss of key personnel, pricing, brand reputation, acquisitions, security and information systems, legal liability for website content, merchandise supply problems, failure of third parties to provide adequate service, reliance on centralized customer service, overstocks and merchandise returns, reliance on a centralized fulfillment center, increases in postage and shipping costs, e-commerce trends, future internet related taxes, control of Gaiam by its founder, fluctuations in quarterly operating results, consumer trends, customer interest in our products, the effect of government regulation and other risks and uncertainties included in Gaiam’s filings with the Securities and Exchange Commission.  We caution you that no forward-looking statement is a guarantee of future performance, and you should not place undue reliance on these forward-looking statements which reflect our management’s view only as of the date of this report.  We undertake no obligation to update any forward-looking information.

 

2



 

GAIAM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,
2003

 

December 31,
2002

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

8,347,681

 

$

11,422,435

 

Accounts receivable, net

 

15,643,384

 

21,455,744

 

Accounts and notes receivable, other

 

1,416,112

 

1,949,833

 

Inventory, less allowances

 

16,307,540

 

14,768,045

 

Deferred advertising costs

 

1,663,240

 

2,417,211

 

Other current assets

 

1,755,281

 

1,194,484

 

Total current assets

 

45,133,238

 

53,207,751

 

 

 

 

 

 

 

Property and equipment, net

 

11,141,631

 

9,543,231

 

Investments

 

7,865,192

 

7,865,192

 

Capitalized production costs, net

 

5,640,460

 

4,983,824

 

Video library, net

 

5,447,461

 

5,262,586

 

Goodwill, net

 

10,288,251 

 

7,522,495 

 

Deferred tax assets

 

2,519,244

 

2,519,244

 

Other assets

 

1,033,615

 

768,043

 

Total assets

 

$

89,069,092

 

$

91,672,366

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

8,913,140

 

$

11,998,087

 

Accrued liabilities

 

4,977,594

 

5,709,788

 

Income taxes payable

 

47,335

 

1,286,558

 

Capital lease obligations, current

 

250,583

 

269,290

 

Total current liabilities

 

14,188,652

 

19,263,723

 

 

 

 

 

 

 

Capital lease obligations, long-term

 

36,351

 

54,529

 

Deferred tax liability

 

848,653

 

848,653

 

Other liabilities

 

1,962,000

 

1,962,000

 

Total liabilities

 

17,035,656

 

22,128,905

 

 

 

 

 

 

 

Minority interest

 

2,555,766

 

172,481

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Class A common stock, $.0001 par value, 150,000,000 shares authorized,  9,193,380 and 9,134,098 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively

 

919

 

913

 

Class B common stock, $.0001 par value, 50,000,000 shares authorized, 5,400,000 issued and outstanding at March 31, 2003 and December 31, 2002, respectively

 

540

 

540

 

Additional paid-in capital

 

53,784,277

 

53,343,046

 

Deferred compensation

 

(125,865

)

(143,865

)

Retained earnings

 

15,817,799

 

16,170,346

 

Total stockholders’ equity

 

69,477,670

 

69,370,980

 

Total liabilities and stockholders’ equity

 

$

89,069,092

 

$

91,672,366

 

 

See accompanying notes.

 

3



 

GAIAM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

For the Three Months Ended
March 31,

 

 

 

2003

 

2002

 

 

 

 

 

 

 

Net revenue

 

$

23,368,238

 

$

24,283,540

 

Cost of goods sold

 

10,747,500

 

10,014,628

 

Gross profit

 

12,620,738

 

14,268,912

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Selling and operating

 

10,606,173

 

10,591,253

 

Corporate, general and administration

 

2,414,610

 

2,502,445

 

Total expenses

 

13,020,783

 

13,093,698

 

 

 

 

 

 

 

Income (loss) from operations

 

(400,045

)

1,175,214

 

 

 

 

 

 

 

Other income (expense)

 

(85,459

)

(86,522

)

Interest income

 

14,676

 

55,965

 

Total other income (expense)

 

(70,783

)

(30,557

)

 

 

 

 

 

 

Income (loss) before income taxes and minority Interest

 

(470,828

)

1,144,657

 

 

 

 

 

 

 

Provision for income taxes

 

(198,558

)

406,353

 

Minority interest in net (income) loss of consolidated subsidiary, net of tax

 

(80,278

)

(2,662

)

Net income (loss)

 

$

(352,548

)

$

735,642

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

Basic

 

$

(0.02

)

$

0.05

 

Diluted

 

$

(0.02

)

$

0.05

 

Shares used in computing net income (loss) per share:

 

 

 

 

 

Basic

 

14,578,501

 

14,005,480

 

Diluted

 

14,578,501

 

14,532,351

 

 

See accompanying notes.

 

4



 

GAIAM, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

 

 

For the Three Months
Ended March 31,

 

 

 

2003

 

2002

 

Operating activities

 

 

 

 

 

Net income (loss)

 

$

(352,548

)

$

735,642

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation

 

642,174

 

447,594

 

Amortization

 

211,726

 

86,298

 

Stock compensation

 

18,000

 

18,000

 

Minority interest in consolidated subsidiary

 

80,278

 

2,662

 

 

 

 

 

 

 

Changes in operating assets and liabilities, net of effects from acquisitions:

 

 

 

 

 

Accounts receivable

 

8,040,047

 

(2,924,621

)

Inventory

 

(270,681

)

938,222

 

Deferred advertising costs

 

753,971

 

211,742

 

Capitalized production costs

 

(656,637

)

(545,723

)

Other current assets

 

(465,562

)

(602,040

)

Other assets

 

(265,573

)

(53,896

)

Accounts payable

 

(3,596,330

)

(1,765,387

)

Accrued liabilities

 

(1,299,856

)

(142,680

)

Income taxes payable

 

(1,232,768

)

(1,291,028

)

Net cash (used in) provided by operating activities

 

1,606,241

 

(4,885,215

)

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchase of property and equipment, and media rights

 

(896,500

)

(430,513

)

Payments for acquisitions, net of cash acquired

 

(3,787,301

)

 

 

Net cash (used in) by investing activities

 

(4,683,801

)

(430,513

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Principal payments on capital leases

 

(84,476

)

(50,490

)

Proceeds from issuance of common stock

 

87,282

 

108,913

 

Net proceeds from borrowings

 

 

 

Net cash provided by financing activities

 

2,806

 

58,423

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(3,074,754

)

(5,257,305

)

Cash and cash equivalents at beginning of period

 

11,422,435

 

22,243,647

 

Cash and cash equivalents at end of period

 

$

8,347,681

 

$

16,986,342

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Interest paid

 

$

18,501

 

$

12,829

 

Common stock issued for acquisitions

 

347,500

 

 

Income taxes paid

 

1,033,400

 

2,367,469

 

See accompanying notes.

 

5



 

Gaiam, Inc.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

March 31, 2003

 

1.             Interim Condensed Consolidated Financial Statements

 

Organization and Nature of Operations

 

Gaiam, Inc., is a multi-channel lifestyle company providing a broad selection of information, products and services to customers who value natural health, personal development, and renewable energy.  Gaiam was incorporated under the laws of the State of Colorado on July 7, 1988.

 

The accompanying consolidated financial statements include the accounts of Gaiam, its subsidiaries and partnerships in which ownership is greater than 50% and considered to be under the control of Gaiam.  All material intercompany accounts and transaction balances have been eliminated in consolidation.

 

Preparation of Interim Condensed Consolidated Financial Statements

 

The interim condensed consolidated financial statements included herein have been prepared by the management of Gaiam pursuant to the rules and regulations of the United States Securities and Exchange Commission, and, in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly Gaiam’s consolidated financial position as of March 31, 2003, the interim results of operations for the three months ended March 31, 2003 and 2002, and cash flows for the three months ended March 31, 2003 and 2002.  These interim statements have not been audited.  The balance sheet as of December 31, 2002 was derived from Gaiam’s audited consolidated financial statements included in Gaiam’s annual report on Form 10-K.

 

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principals have been condensed or omitted pursuant to such rules and regulations.  Accounting policies followed by Gaiam are described in Note 1 to the audited financial statements for the fiscal year ended December 31, 2002 included in Gaiam’s annual report on Form 10-K.  The consolidated financial statements contained herein should be read in conjunction with the audited financial statements, including the notes thereto, for the year ended December 31, 2002.

 

The consolidated financial position, results of operations and cash flows for the interim periods disclosed within this report are not necessarily indicative of future financial results.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities at the date of the consolidated financial statements.  Actual results could differ from those estimates.

 

6



 

Adoption of Accounting Standards

 

In June 2001, the FASB issued statement No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”), which sets forth the financial accounting and reporting to be followed for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made.  The associated asset retirement costs are to be capitalized as part of the carrying amount of the long-lived asset.  Subsequently, the recorded liability will be accreted to its present value and the capitalized costs will be depreciated.  Gaiam adopted SFAS No. 143 in its consolidated financial statements for the first quarter of 2003.  The adoption of SFAS No. 143 did not have a material impact on Gaiam's consolidated financial statements.

 

In May 2002, the FASB issued statement No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS No. 145”).  The statement rescinds FASB No. 4, “Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that statement, FASB No. 64, “Extinguishments of Debt Made to Satisfy Sinking Fund Requirements.”  As a result, gains and losses from extinguishments of debt will no longer be aggregated and classified as an extraordinary item, net of related income tax effect, on the statement of earnings.  SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with earlier application encouraged.  Gaiam has adopted SFAS No. 145, as required, in its consolidated financial statements effective the first quarter of 2003.  The adoption of SFAS No. 145 did not have a material impact on Gaiam's consolidated financial statements.

 

 

In July 2002, the FASB issued statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”).  SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity is recognized at fair value when the liability is incurred rather than at the date of a commitment to an exit or disposal plan.  SFAS No. 146 is effective for exit or disposal activities, which are initiated after December 31, 2002.  Gaiam has adopted SFAS No. 146 effective the first quarter of 2003.  The adoption of SFAS No. 146 did not have a material impact on Gaiam's consolidated financial statements.

 

 

In December 2002, the FASB issued statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an Amendment of FASB Statement No. 123” (“SFAS No. 148”).  SFAS No. 148 amends FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“Statement 123’) to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  Gaiam has elected to use the intrinsic value method of accounting for stock compensation for options granted to employees and directors in accordance with APB 25.  In addition, SFAS No. 148 amends the disclosure requirements of Statement 123 to require prominent disclosure in both annual and interim March 31, 2003 financial statements about the method of accounting for stock-based employee compensation and the effect of the method of accounting used on reported results. Gaiam has adopted SFAS No. 148 in its fiscal year reporting effective December 31, 2002 and its interim reporting as of the first quarter of 2003.

 

7



 

2.             Mergers and Acquisitions

 

In January 2003, Gaiam acquired a 50.1% interest in Leisure Systems International Ltd., a U.K. based distributor and marketer of lifestyle products for approximately $4.3 million in cash and 50,000 shares of Gaiam Class A common stock.  This acquisition was accounted for using the purchase method and approximately $2.8 million of goodwill was recorded.  The results of operations of Leisure Systems International are included in the consolidated financial statements of Gaiam from the effective acquisition date of January 1, 2003.  The revenue generated by this acquisition during the first quarter (which is historically a strong quarter) totaled approximately $3.69 million.

 

3.             Stockholders’ Equity

 

During the first quarter of 2003, Gaiam issued 50,000 shares of Class A common stock in conjunction with the acquisition of 50.1% of Leisure Systems International 3,750 shares of Class A common stock to four directors in lieu of cash compensation, and 5,532 shares of Class A common stock upon exercise of options granted under the 1999 Long-Term Incentive Plan.

 

4.             Earnings per Share

 

Basic earnings per share exclude any dilutive effects of options and dilutive securities.  Basic earnings per share is computed using the weighted average number of common shares outstanding during the period.  Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period.  Common equivalent shares are excluded from the computation if their effect is antidilutive.  All earnings per share amounts for all periods have been presented and conform to the Statement No. 128 requirements.

 

The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

Three Months Ended
March 31,

 

 

 

2003

 

2002

 

 

 

 

 

 

 

Net income (loss)

 

$

(352,548

)

$

735,642

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted average shares for basic earnings per share

 

14,578,501

 

14,005,480

 

 

 

 

 

 

 

Effect of Dilutive Securities:

 

 

 

 

 

Weighted average of common stock and stock options

 

 

526,871

 

Denominator for diluted earnings per share

 

14,578,501

 

14,532,351

 

Net income (loss) per share – basic

 

$

(0.02

)

$

0.05

 

Net income (loss) per share – diluted

 

$

(0.02

)

$

0.05

 

 

8



 

5.             Stock Based Compensation

 

As required by Statement of Financial Accounting Standards (“SFAS”) Nos. 123 and 148, we have determined pro forma net income and net income per common share as if compensation costs had been determined based on the fair value of the options granted and then recognized ratably over the vesting period. The fair value of stock option grants has been estimated at the date of grant using the Black-Scholes option pricing model.  Had compensation cost for Gaiam’s stock-based compensation plan been determined under the fair value methodology for determining compensation cost under SFAS No. 123, Gaiam’s net income (loss) and income (loss) per share would have been as follows:

 

 

 

For the Months Ended
March 31,

 

 

 

2003

 

2002

 

Net income (loss) as reported

 

$

(352,548

)

$

735,642

 

Deduct:  Total stock-based compensation expenses determined under fair value based method for all awards net of related tax effects

 

(179,382

)

(194,252

)

Pro forma

 

$

(531,930

)

$

541,390

 

Net income (loss) per common share

 

 

 

 

 

As reported

 

$

(0.02

)

$

0.05

 

Pro forma

 

$

(0.04

)

$

0.04

 

Fully diluted net income (loss) per common share:

 

 

 

 

 

As reported

 

$

(0.02

)

$

0.05

 

Pro forma

 

$

(0.04

)

$

0.04

 

 

9



 

6.             Segment Information

 

Gaiam has two business segments:  Direct to Consumer and Business. Both segments sell products, services and information produced or purchased from other suppliers.  Although the customer bases do not overlap to any significant extent, the production, purchase and delivery processes overlap in some areas.  Gaiam does not accumulate the balance sheet by segment for purposes of management review.

 

Each of the two segments qualifies as such because each accounts for more than 10% of combined revenue.  Contribution margin is defined as net sales, less cost of goods sold and direct expenses. Financial information for Gaiam’s business segments was as follows:

 

 

 

For the Three Months
Ended March 31,

 

 

 

2003

 

2002

 

Net revenue:

 

 

 

 

 

Direct to consumer

 

$

11,017,144

 

$

11,382,935

 

Business

 

12,351,094

 

12,900,605

 

Consolidated net revenue

 

23,368,238

 

24,283,540

 

Contribution margin:

 

 

 

 

 

Direct to consumer

 

4,585

 

126,703

 

Business

 

(404,630

)

1,048,511

 

Consolidated contribution margin (loss)

 

(400,045

)

1,175,214

 

Reconciliation of contribution margin (loss) to net income (loss):

 

 

 

 

 

Other income (expense)

 

(70,783

)

(30,557

)

Income tax (benefit) expense

 

(198,558

)

406,353

 

Minority interest expense

 

80,278

 

2,662

 

Net income (loss)

 

$

(352,548

)

$

735,642

 

 

10



 

Item 2.            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 condensed consolidated financial statements included elsewhere in this document.

 

Three months ended March 31, 2003 compared to three months ended March 31, 2002

 

Revenues of $23.4 million for the three months ended March 31, 2003 declined 3.8% from $24.3 million for the three months ended March 31, 2002.  Gaiam’s internal growth rate was a negative 20.2% primarily due to lower sales into our retailer channel.  We were also negatively impacted by the retail merger of The Sports Authority with Gart Sports and our transition of Bed Bath and Beyond from a distributor relationship to direct sales.

 

Gross profit, which consists of revenues less cost of sales (primarily merchandise acquisition costs and in-bound freight) decreased 11.6% to $12.6 million for the first quarter of 2003 from $14.3 million during the same period in 2002.  As a percentage of revenue, gross profit declined to 54% in 2003 from 58.8% in 2002.  This was primarily attributable to increased sales contribution from our acquisitions which carry lower margins and from margin contraction in our retailer channel.  Strategically, Gaiam continues to pursue growth of its proprietary product offerings and to increase its focus on media products, on which Gaiam has better margins.

 

Selling and operating expenses (which consist primarily of sales and marketing costs, commission and fulfillment expenses) of $10.6 million for the three months ended March 31, 2003 were flat when compared to the same period of 2002.  As a percentage of revenues, selling and operating expenses increased to 45.4% in 2003 from 43.6% in 2002 due to lower sales.

 

Corporate, general and administrative expenses decreased to $2.4 million during the first quarter of 2003, from $2.5 million during 2002.  As a percentage of revenues, general and administrative expenses were 10.3% for the comparable periods in both 2003 and 2002.

 

Operating loss, as a result of the factors described above, was $400,045 for the three months ended March 31, 2003 compared to an operating profit of $1,175,214 for the three months ended March 31, 2002 primarily due to lower sales and gross profit.

 

Gaiam recorded $70,783 in other expense for the three months ended March 31, 2003 compared to $30,557 recorded in the prior year period. The share of net income associated with minority interest was $80,278 during the first quarter of 2003, compared to $2,662 during the first quarter of 2002.   Minority interest changed year-over-year primarily due to Gaiam’s purchase in first quarter 2003 of a majority interest in Leisure Systems International, a distributor of wellness products based in the U.K.

 

Gaiam recorded an income tax benefit of $198,558 for the three months ended March 31, 2003 compared to an income tax provision of $406,353 for the three months ended March 31, 2002.

 

Gaiam reported a net loss of $352,548 for the three month ended March 31, 2003 as a result of the factors described above compared to net income of $735,642 recorded for the three months ended March 31, 2002.

 

11



 

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, capital transactions such as stock repurchases, and funds required in connection with the acquisitions of new businesses and Gaiam’s anticipated future growth.  These capital requirements depend on numerous factors, including the rate of market acceptance of Gaiam’s product offerings, the ability to expand Gaiam’s customer base, the cost of ongoing upgrades to Gaiam’s product offerings, the level of expenditures for sales and marketing, the level of investment in distribution and other factors.  The timing and amount of these capital requirements cannot accurately be predicted.  Additionally, Gaiam will continue to evaluate possible investments in businesses, products and technologies, and plans to expand sales and marketing programs and conduct more aggressive brand promotions.

 

Gaiam’s operating activities provided net cash of $1.6 million for the three months ended March 31, 2003 compared to cash usage of $4.9 million for the three months ended March 31, 2002.  Gaiam’s net cash provided by operating activities in 2003 was primarily due to a significant reduction in accounts receivables during the first quarter.   Gaiam’s net cash used by operating activities in the first quarter of 2002 was primarily caused by a decrease in accounts payable as we took advantage of early payment terms with our vendors, an increase in accounts receivable associated with the growth in our business segment and the payment of income taxes for the prior year.

 

Gaiam’s investing and acquisition activities used cash of $4,683,801 and $430,513 for the three months ended March 31, 2003 and 2002, respectively.  In January 2003 Gaiam acquired a 50.1% interest in Leisure Systems International, a distributor of wellness products based in the U.K.  Total consideration for the acquisition was approximately $4,300,000 in cash and 50,000 shares of Gaiam Class A common stock.

 

Gaiam’s financing activities provided cash of $2,806 and $58,423 for the three months ended March 31, 2003 and 2002, respectively.

 

We believe our available cash, cash expected to be generated from operations, and borrowing capabilities of $15 million (unused line of credit) will be sufficient to fund our operations on both a short-term and long-term basis.  However, our projected cash needs may change as a result of acquisitions, unforeseen operational difficulties or other factors.

 

In the normal course of our business, we investigate, evaluate and discuss acquisition, joint venture, minority investment, strategic relationship and other business combination opportunities in the LOHAS (Lifestyles of Health and Sustainability) market.  In the event of any future investment, acquisition or joint venture opportunities, we may consider using then-available liquidity, issuing equity securities or incurring additional indebtedness.

 

Item 3.            Critical Accounting Policies

 

We have not had any significant change in our critical accounting policies from the previously reported 10K.

 

Item 4.            Quantitative and Qualitative Disclosures About Market Risk

 

We do not believe that any of our financial instruments have significant risk associated with market sensitivity.  We are not exposed to material financial market risks from changes in foreign exchange rates and are only minimally impacted by changes in interest rates.

 

12



 

In the future, we may enter into transactions denominated in non-U.S. currencies, which could increase our exposure to these market risks.  We have not used, and currently do not contemplate using, any derivative financial instruments.

 

Item 5.          Controls and Procedures

 

Based on their evaluation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this quarterly report, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

 

PART II.      OTHER INFORMATION

 

Item 1.            Legal Proceedings

 

No legal proceedings became reportable during the first quarter of 2003 and there were no material developments in any previously reported legal proceedings.

 

Item 2.            Changes in Securities and Use of Proceeds

 

None.

 

Item 3.            Defaults Upon Senior Securities

 

None.

 

Item 4.            Submission of Matters to a Vote of Security Holders.

 

None.

 

Item 5.            Other Information.

 

None.

 

Item 6.            Exhibits and Reports on Form 8-K.

 

a)         Exhibits

 

Exhibit No.

 

Description

 

 

 

99.1

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

99.2

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

b)          Reports on Form 8-K.

 

             On May 6, 2003, Gaiam filed a report on Form 8-K relating to its
earnings press release for first quarter 2003.

 

13



 

Signatures

 

In accordance with the requirements of the Securities and Exchange Act, the registrant caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized.

 

 

Gaiam, Inc.

 

 

(Registrant)

 

 

May 9, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By:

/s/ Jirka Rysavy

 

 

 

 Jirka Rysavy

 

 

 

 Chief Executive Officer

 

 

 

 

 

 

 

/s/ Yudhister Bahl

 

 

 

 Yudhister Bahl

 

 

 

 Chief Financial Officer

 

 

14



 

CERTIFICATIONS

 

I, Jirka Rysavy, certify that:

 

1.  I have reviewed this quarterly report on Form 10-Q of Gaiam, Inc.;

 

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.  The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent

 

15



 

evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date: May 9, 2003

 

 

/s/ Jirka Rysavy

 

 

Jirka Rysavy

 

 

Chairman and Chief Executive Officer

 

 

16



 

CERTIFICATIONS

 

I, Yudhister Bahl, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Gaiam, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent

 

17



 

evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date: May 9, 2003

 

 

 

 

 

 

 

 

/s/  Yudhister Bahl

 

 

Yudhister Bahl

 

 

Chief Financial Officer

 

 

 

18