13.11.02

13.11.2002: Gaiam Inc.: 3. Quarterly Report (engl.)

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 September 30, 2002 compared to three months ended September 30, 2001

Revenues increased to $25.8 million for the three months ended September 30, 2002 from $23.9 million during the three months ended September 30, 2001. The closure of some catalog operations and the multi-store retail operation we acquired in connection with the Real Goods transaction lowers our year over year sales growth comparison. Sales growth in the business segment coupled with increased sales of proprietary products contributed to the internal growth rate of 13%.

Gross profit, which consists of revenues less cost of sales (primarily merchandise acquisition costs and in-bound freight) increased to $15.0 million for the third quarter of 2002 from $14.2 million during the same period in 2001. As a percentage of revenue, gross profit declined to 58.3% in 2002 from 59.4% in 2001. This was primarily attributable to increased sales contribution from the business segment, which carries lower gross margin but also lower operating expenses. Gaiam continues to pursue growth of its proprietary product offerings and increase 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, increased to $10.7 million for the three months ended September 30, 2002 from $10.5 million for the same period in 2001. As a percentage of revenues, selling and operating expenses decreased to 41.5% in 2002 from 43.7% in 2001 primarily due to the increased percentage of sales from our business segment.

Corporate, general and administrative expenses increased to $2.1 million during the third quarter of 2002, from $2.0 million during 2001. As a percentage of revenues, general and administrative expenses decreased marginally to 8.1% in 2002 from 8.2% in 2001.

Operating income, as a result of the factors described above, increased 25.3% to $2.2 million for the three months ended September 30, 2002, from $1.8 million for the comparable period in 2001. As a percentage of revenues operating income increased 120 basis points to 8.7% in the third quarter ended September 30, 2002 up from 7.5% for the like period in 2001.
Gaiam recorded $120,023 in other expense for the three months ended September 30, 2002 compared to other income of $131,574 for the three month ended September 30, 2001. Minority interest was $23,744 during the third quarter of 2002, compared to ($282,979) during the third quarter of 2001. Minority interest changed year-over-year due to Gaiam"s purchase of the remaining minority interests in our organic clothing and two renewable energy businesses.
Income tax provision was $754,607 for the three months ended September 30, 2002 compared to $671,434 for the prior year period.

Net income, as a result of the factors described above, increased 43.9% to $1,394,792 for the three months ended September 30, 2002 from $969,464 for the three months ended September 30, 2001.

Nine months ended September 30, 2002 compared to nine months ended September 30,

Revenues increased to $74.1 million for the nine months ended September 30, 2002 from $63.6 million during the nine months ended September 30, 2001. Sales growth in the business segment coupled with increased sales of proprietary products contributed to the internal growth rate of 24%.
Gross profit increased to $43.5 million for the nine months ended September 30, 2002 from $38.3 million during the same period in 2001. As a percentage of revenue, gross profit declined to 58.6% in 2002 from 60.2% in 2001. This was primarily attributable to increased sales contribution from the business segment, which carries lower gross margin but also lower operating expenses.

Selling and operating expenses increased to $31.7 million for the nine months ended September 30, 2002 from $28.9 million for the same period in 2001. As a percentage of revenues, selling and operating expenses decreased to 42.8% in 2002 from 45.4% in 2001 primarily due to increases percentage of sales from our business segment.

Corporate, general and administrative expenses increased to $6.3 million for the nine months ended September 30, 2002, compared to $5.3 million for the corresponding period in 2001 primarily to support the Company"s growth. As a percentage of revenues, general and administrative expenses increased to 8.5% in 2002 from 8.4% in 2001.

A non-recurring one-time charge of $375,953 was taken in the first quarter of 2002. The charge was for severance and relocation costs associated with the consolidation of our finance and creative staff from California into our Colorado headquarters.

Operating income, as a result of the factors described above, increased 25.1% to $5.1 million for the nine months ended September 30, 2002 from $4.1 million for the comparable period in 2001. Excluding the accrued one-time charge (described above) operating income increased 34.3% to $5.5 million or 7.4% of sales in 2002 compared to $4.1 million or 6.4% of sales in 2001.

Gaiam recorded $259,484 in other expense during the nine months ended September 30, 2002, compared to other income of $240,342 for the comparable period in 2001. This was partly attributable to the loss of $181,708 associated with the sales commission and other expenses paid on the sale of the Gaiam Yoga Center. Minority interest was $12,947 for the nine months ended September 30, 2002 compared to ($806,166) for the prior year period. Minority interest changed year-over-year due to Gaiam"s purchase of the remaining minority interests in our organic clothing and two renewable energy businesses.

Income tax provision increased to $1,717,702 for the nine months ended September 30, 2002 from $1,569,353 for the comparable period in 2001.

Net income, as a result of the factors described above, increased 61.5% to $3,133,842 for the nine months ended September 30, 2002 from $1,940,895 for the comparable period in 2001.

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 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 used net cash of $6.0 million and $4.7 million for the nine months ended September 30, 2002 and 2001, respectively. Gaiam"s net cash used by operating activities for nine months ended September 30, 2002 arose primarily from an increase in accounts receivable associated with the growth in our business segment and increased sales to major national retailers that typically require longer payment terms, and a decrease in accrued liabilities. Gaiam"s net cash used by operating activities for 2001 arose primarily from an increase in inventories in order to support additional revenue growth, including store-within-store rollouts.
Gaiam"s investing and acquisition activities provided net cash of $860,878 for the nine months ended September 30, 2002 and used cash of $4.8 million for the comparable period in 2001. The cash provided by investing activities in 2002 primarily arose from the sale of the Gaiam Yoga Center for net proceeds of $2.7 million. During third quarter 2002, Gaiam acquired a majority interest in a catalog company for $600,000. This acquisition was accounted for using the purchase method, and, since this company had negative net worth (liabilities exceeded assets), Gaiam recorded $2.9 million of goodwill. The cash used in investing activities in 2001 primarily arose from Gaiam"s merger with Real Goods Trading Corporation, and also the acquisition of the stock and net assets of Earthlings, Inc. and Self Care, Inc. for a total combined purchase price for both companies of $3.8 million.
During the nine months ended September 30, 2002, Gaiam"s financing activities provided $20,666 in cash. During the nine months ended September 30, 2001, Gaiam"s financing activities provided $26.1 million in cash, primarily resulting from the completion of Gaiam"s secondary offering, net of loan repayments.

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.

Corporate Headquarters:
360 Interlocken Blvd., Suite 300
Broomfield, Colorado 80021
Phone: 303-222-3600
Fax: 303-222-3700
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