A LIFESTYLE COMPANY

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A summary of stock options outstanding as of December 31, 2000 follows: Outstanding Stock Options Exercisable Stock Options Weighted Weighted Weighted Average Average Average Range of Shares Remaining Exercise Exercise Exercise Prices Outstanding Life (Years) Price Shares Price $4.00 – $4.99 637,712 5.4 $4.38 102,128 $4.38 $5.00 – $5.99 171,500 5.8 $5.00 24,950 $5.00 $7.00 – $7.99 33,350 5.9 $7.18 1,334 $7.18 $15.00 – $15.99 193,000 6.8 $15.28 140 $15.50 $16.00 – $16.99 15,000 6.6 $16.34 – – $17.00 – $17.99 77,000 6.7 $17.18 – – $4.00 – $17.99 1,127,562 5.9 $7.46 128,552 $4.54 Had compensation cost for the Company’s stock-based compensation plan been determined under the fair value methodology for determining compensation cost under SFAS No. 123, the Company’s net income and income per share for the years ended December 31, 2000 and 1999, would have been as follows: PART II 2000 1999 Net income As reported $2,648,871 $1,718,345 Pro forma 2,258,005 1,599,102 Net income per common share As reported $0.24 $0.20 Pro forma $0.21 $0.18 Fully diluted net income per common share: As reported $0.23 $0.19 Pro forma $0.20 $0.18 In estimating the pro forma compensation expense for each equity award granted during the year, the Company used the Black Scholes option pricing model, with the following weighted-average assumptions used for grants in 2000 and 1999, respectively: risk-free interest rates in a range of 6.00% and 5.78%, expected dividend yield of zero; expected option lives of 5 years, and expected volatility of 0.48 and 1.29. Options granted prior to the Company’s initial public offering were valued using the minimum value method and, therefore, volatility was not applicable. 2000 1999 Weighted-average fair value of options granted during the year: Price equal to fair value $11.85 $1.85 Price less than fair value $11.38 $11.21 10. RELATED PARTY TRANSACTIONS In 1997, the Company entered into a fulfillment agreement with InnerBalance Health, publisher of a natural health catalog, (a related party under common ownership with the Chief Executive Officer of the Company) to provide customer sales, service, warehousing and distribution services. On October 1, 1998, the Company acquired all of the stock and net assets of InnerBalance Health, Inc. As these were companies under common control, the Company accounted for the purchase using historical cost. Therefore, the excess of the purchase price of $523,677 over the value of net assets was accounted for as a reduction to additional paid-in capital. 48
In 1999, the Company engaged the services of ccplanet.com, Inc. (a related party under common ownership with the Chief Executive Officer of the Company) to develop and implement a new web site design utilizing the latest technology for its direct to consumer operations. The Company paid ccplanet a total of $4.5 million for work performed on said project during 1999 and 2000, and the new Gaiam.com website was placed into service in March 2000. The Company has made its customer database and certain visual media available to ccplanet in exchange for fees totaling $600,000 during 1999, and $1.4 million in 2000. Because of Whole Foods Market’s investments in Gaiam.com, Whole Foods Market may be considered a related party. Whole Foods Market and Gaiam have also entered into a 10-year joint marketing agreement to promote each other’s businesses and share customer data. The companies are testing a store-within-a-store concept, presenting Gaiam’s lifestyle products in Whole Foods Market’s larger stores. In 2000, the Chief Executive Officer advanced funds to purchase a 70% interest in an organic clothing manufacturer. These advances, plus applicable interest, were repaid in December 2000. Additionally, the Company purchased approximately $300,000 in inventory from Earthlings, Inc. (a related party under common ownership with the Chief Executive Officer of the Company) at Earthlings’ cost. 11. SUBSEQUENT EVENTS On October 13, 2000, the Company entered into a Merger Agreement with Real Goods Trading Corporation, Inc. (Real Goods) pursuant to which the Company acquired 100% of the Real Goods issued and outstanding common stock in exchange for shares of Gaiam Class A common stock. The merger was subject to approval by the Real Goods shareholders and certain other conditions described in the merger agreement, which were satisfied in January 2001. In the tax-free, stock-for-stock exchange, Real Goods shareholders received one share of Gaiam Class A common stock in exchange for each ten shares of Real Goods stock owned. The merger was completed on January 29, 2001, and 481,424 shares of Class A common stock were issued. The merger was accounted for using the purchase method. 12. SEGMENT INFORMATION The Company has two business segments: Direct to Consumer and Business to Business; both of which sell products, services and information produced or purchased from other suppliers. Although the customer bases do not overlap to any extent, the production, purchase and delivery processes overlap in some areas. The Company does not accumulate the balance sheet by segment for purposes of management review. PART II Each of the two segments qualifies as such because each is more than 10% of combined revenue. Contribution margin is defined as net sales, less cost of goods sold and direct expenses. Financial information for the Company’s business segments was as follows: For the years ended December 31 2000 1999 1998 Net revenue: Direct to consumer $43,823,460 $34,573,540 $26,897,236 Business to business 16,764,558 11,151,122 3,841,304 Consolidated net revenue 60,588,018 45,724,662 30,738,540 Contribution margin: Direct to consumer 841,351 (243,949) 128,691 Business to business 3,586,415 2,368,360 856,152 Consolidated contribution margin 4,427,766 2,124,411 984,843 Reconciliation of contribution margin to net income: Other income (expense) (283,114) 605,865 388,491 Income tax expense 1,555,487 1,062,789 251,955 Minority interest (income) expense (59,706) (50,858) 261,598 Net income $2,648,871 $1,718,345 $859,781 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 49
Page 1 and 2: ® A LIFESTYLE COMPANY
Page 3: GAIAM was created as a multi-channe
Page 6 and 7: LETTER TO THE SHAREHOLDERS We recog
Page 8 and 9: LOHAS INDUSTRY l ifestyle o f h eal
Page 10 and 11: DISTRIBUTION CHANNELS media
Page 12 and 13: DISTRIBUTION CHANNELS retailers and
Page 14 and 15: DISTRIBUTION CHANNELS catalogs and
Page 16 and 17: CENTRAL OPERATIONS infrastructure O
Page 18 and 19: NEW ADDITIONS expansion
Page 20 and 21: PEOPLE corporate culture and commun
Page 22 and 23: ® A LIFESTYLE COMPANY
Page 24 and 25: ITEM 1. BUSINESS GAIAM Gaiam is a m
Page 26 and 27: OUR COMPETITIVE STRENGTHS We believ
Page 28 and 29: • Offer Quality, Convenience and
Page 30 and 31: SEASONALITY See the Quarterly and S
Page 32 and 33: ITEM 5. MARKET FOR REGISTRANT’S C
Page 34 and 35: ITEM 7. MANAGEMENT’S DISCUSSION A
Page 36 and 37: QUARTERLY AND SEASONAL FLUCTUATIONS
Page 38 and 39: ITEM 8. FINANCIAL STATEMENTS AND SU
Page 40 and 41: GAIAM, INC. CONSOLIDATED STATEMENTS
Page 42 and 43: GAIAM, INC. CONSOLIDATED STATEMENTS
Page 44 and 45: Goodwill, Net Goodwill, net represe
Page 46 and 47: On June 30, 2000, Gaiam, Inc. and W
Page 48 and 49: 7. INCOME TAXES The provision for i
Page 52 and 53: ITEM 10. DIRECTORS AND EXECUTIVE OF
Page 54 and 55: “In our every deliberation we mus
Page 56: “Never doubt that a small group o

A LIFESTYLE COMPANY

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