**United States**

**Securities and ExchangeCommission**

**Washington,D.C. 20549**

 

**Form 10-Q**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|---------------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended March 31, 2006**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**CommissionFile Number 0-27517**

 

**GAIAM, INC.**

(Exact nameof registrant as specified in its charter) 

 

| **COLORADO**                     | ** ** | **84-1113527**       |
|----------------------------------|------------|----------------------|
| (State or  other jurisdiction of |       | (I.R.S.  Employer    |
| incorporation  or organization)  |       | Identification  No.) |

 

**360INTERLOCKEN BLVD.,**

**BROOMFIELD,COLORADO 80021**

(Address ofprincipal executive offices) 

 

**(303)222-3600**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities and Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days. YES ý NO o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):Large accelerated filer o Accelerated Filer ý Non-accelerated filer o

 

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

 

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

 
| **Class**                                              | ** ** | **Shares outstanding as of May 3, 2006** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| Class A Common Stock ($.0001 par value) | ** ** | 15,560,378                                                             | ** ** | ** ** |
|                                                   |       |                                                                   |       |   |
| Class B  Common Stock                             |       | 5,400,000                                                              |       |   |

 

 

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**INDEXTO FORM 10-Q**

 
| PART I. FINANCIAL INFORMATION |
|------------------------------------|
|                               |
| Item 1.                            | Condensed Consolidated Financial Statements (Unaudited) |
|                               | Condensed  Consolidated Balance Sheets at March 31, 2006 and December 31, 2005 |
|                               | Condensed  Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005 |
|                               | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 |
|                               | Notes to Interim  Condensed Consolidated Financial Statements |
|                               |   |
| Item 2.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                               |   |
| Item  3.                           | Quantitative and  Qualitative Disclosures About Market  Risk |
|                               |   |
| Item 4.                            | Controls and Procedures |
|                               |   |
| PART II.                      | OTHER INFORMATION |
|                               |   |
| Item 1.                            | Legal Proceedings |
|                               |   |
| Item 1A.                           | Risk Factors |
|                               |   |
| Item 2.                            | Unregistered  Sales of Equity 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 |
|                               |   |
| SIGNATURES                         |   |

 

FORWARD-LOOKING STATEMENTS

This report may contain forward-looking statements that involverisks and uncertainties. When used in this discussion, the words “anticipate,” “believe,”“plan,” “estimate,” “expect,” “strive,” “future,” “intend” and similarexpressions as they relate to Gaiam or its management are intended to identifysuch forward-looking statements. Gaiam’s actual results could differ materiallyfrom the results anticipated in these forward-looking statements as a result ofcertain factors set forth under “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” and elsewhere in this report. Risksand uncertainties that could cause actual results to differ include, withoutlimitation, general economic conditions, competition, loss of key personnel,pricing, brand reputation, consumer trends, acquisitions, new initiativesundertaken by Gaiam, security and information systems, legal liability forwebsite content, merchandise supply problems, failure of third parties toprovide adequate service, our reliance on centralized customer service,overstocks and merchandise returns, our reliance on a centralized fulfillmentcenter, increases in postage and shipping costs, E-commerce trends, futureInternet related taxes, control of Gaiam by its founder, fluctuations inquarterly operating results, customer interest in our products, the effect ofgovernment regulation and other risks and uncertainties included in Gaiam’sfilings with the Securities and Exchange Commission. We caution you that noforward-looking statement is a guarantee of future performance, and you shouldnot place undue reliance on these forward-looking statements which reflect ourmanagement’s view only as of the date of this report. We undertake noobligation to update any forward-looking information.

 

2

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GAIAM, INC.

CONDENSEDCONSOLIDATED BALANCE SHEETS

(In thousands, except shareinformation)

 
| ** **                                                                                                                                                                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                             | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                                             | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                             | ** ** | ** **         | ** ** |
| **Assets**                                                                                                                                                                                             |       |               |       |                  |       |
| ** **                                                                                                                                                                                             |       |               |       |                  |       |
| Current assets:                                                                                                                                                                                   |       |               |       |                  |       |
| Cash and  cash equivalents                                                                                                                                                                             |       | $                  | 15,763     |                  | $          | 15,028 |   |
| Accounts  receivable, net                                                                                                                                                                              |       | 23,507             |       | 28,067                |       |
| Inventory,  less allowances                                                                                                                                                                            |       | 22,094             |       | 20,792                |       |
| Deferred  advertising costs                                                                                                                                                                            |       | 3,299              |       | 3,917                 |       |
| Deferred tax  assets                                                                                                                                                                                   |       | 3,176              |       | 3,627                 |       |
| Other  current assets                                                                                                                                                                                  |       | 6,189              |       | 4,838                 |       |
| Total  current assets                                                                                                                                                                                  |       | 74,028             |       | 76,269                |       |
|                                                                                                                                                                                                   |       |               |       |                  |       |
| Property and  equipment, net                                                                                                                                                                           |       | 9,313              |       | 9,428                 |       |
| Media  library, net                                                                                                                                                                                    |       | 37,236             |       | 38,339                |       |
| Goodwill and  other intangibles                                                                                                                                                                        |       | 17,578             |       | 17,541                |       |
| Non-current  deferred tax assets                                                                                                                                                                       |       | 8,301              |       | 7,282                 |       |
| Notes  receivable and other assets                                                                                                                                                                     |       | 4,123              |       | 7,242                 |       |
| Total assets                                                                                                                                                                                           |       | $                  | 150,579    |                  | $          | 156,101 |   |
|                                                                                                                                                                                                   |       |               |       |                  |       |
| **Liabilities  and stockholders’ equity**                                                                                                                                                         |       |               |       |                  |       |
| Current  liabilities:                                                                                                                                                                                  | ** ** | ** **         | ** ** | ** **            | ** ** |
| Accounts  payable                                                                                                                                                                                      |       | $                  | 19,656     |                  | $          | 25,843 |   |
| Accrued  liabilities                                                                                                                                                                                   |       | 10,863             |       | 12,649                |       |
| Other  current liabilities                                                                                                                                                                             |       | 440                |       | 561                   |       |
| Total  current liabilities                                                                                                                                                                             |       | 30,959             |       | 39,053                |       |
|                                                                                                                                                                                                   |       |               |       |                  |       |
| Long-term  liabilities                                                                                                                                                                                 |       | —             |       | 1,663                 |       |
| Total  liabilities                                                                                                                                                                                     |       | 30,959             |       | 40,716                |       |
|                                                                                                                                                                                                   |       |               |       |                  |       |
| Minority  interest                                                                                                                                                                                     |       | 8,233              |       | 8,099                 |       |
|                                                                                                                                                                                                   |       |               |       |                  |       |
| Commitments  and contingencies                                                                                                                                                                         |       |               |       |                  |       |
|                                                                                                                                                                                                   |       |               |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                            |       |               |       |                  |       |
| Class A  common stock, $.0001 par value, 150,000,000 shares authorized, 15,325,988 and  15,010,736 shares issued and outstanding at March 31, 2006 and December 31,  2005, respectively |       | 1                  |       | 1                     |       |
| Class B  common stock, $.0001 par value, 50,000,000 shares authorized, 5,400,000  issued and outstanding at March 31, 2006 and December 31, 2005                                        |       | 1                  |       | 1                     |       |
| Additional  paid-in capital                                                                                                                                                                            |       | 98,978             |       | 95,840                |       |
| Accumulated  other comprehensive income                                                                                                                                                                |       | 337                |       | 264                   |       |
| Retained  earnings                                                                                                                                                                                     |       | 12,070             |       | 11,180                |       |
| Total  stockholders’ equity                                                                                                                                                                       |       | 111,387            |       | 107,286               |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                       |       | $                  | 150,579    |                  | $          | 156,101 |   |

 

*Seeaccompanying notes to the condensed consolidated financial statements.*

 

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GAIAM, INC.

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 (In thousands,except per share amounts)

 
| ** **                                                                | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                | ** ** | **March 31,**                                 | ** ** |
| ** **                                                                | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
|                                                                      |       |                                               |       |   |   |
| Net revenue                                                               |       | $                                                  | 51,752     |   | $ | 26,324 |   |
| Cost of  goods sold                                                       |       | 18,590                                             |       | 12,575 |   |
| Gross profit                                                              |       | 33,162                                             |       | 13,749 |   |
|                                                                      |       |                                               |       |   |   |
| Expenses:                                                                 |       |                                               |       |   |   |
| Selling and  operating                                                    |       | 28,906                                             |       | 11,690 |   |
| Corporate,  general and administration                                    |       | 3,246                                              |       | 1,772 |   |
| Total  expenses                                                           |       | 32,152                                             |       | 13,462 |   |
|                                                                      |       |                                               |       |   |   |
| Income from  operations                                                   |       | 1,010                                              |       | 287 |   |
|                                                                      |       |                                               |       |   |   |
| Other income                                                              |       | 534                                                |       | 91 |   |
| Interest  income                                                          |       | 43                                                 |       | 25 |   |
| Total other  income                                                       |       | 577                                                |       | 116 |   |
|                                                                      |       |                                               |       |   |   |
| Income  before income taxes and minority interest                         |       | 1,587                                              |       | 403 |   |
|                                                                      |       |                                               |       |   |   |
| Income tax  expense                                                       |       | 612                                                |       | 130 |   |
| Minority  interest in net income of consolidated subsidiaries, net of tax |       | (85                                                | )          | (157 | ) |
| Net income                                                                |       | $                                                  | 890        |   | $ | 116 |   |
|                                                                      |       |                                               |       |   |   |
| Net income  per share:                                                    |       |                                               |       |   |   |
| Basic                                                                     |       | $                                                  | 0.04       |   | $ | 0.01 |   |
| Diluted                                                                   |       | $                                                  | 0.04       |   | $ | 0.01 |   |
| Shares used  in computing net income per share:                           |       |                                               |       |   |   |
| Basic                                                                     |       | 20,435                                             |       | 14,820 |   |
| Diluted                                                                   |       | 20,795                                             |       | 14,914 |   |

 

*Seeaccompanying notes to the condensed consolidated financial statements.*

 

4

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GAIAM, INC.

CONDENSEDCONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited – In thousands)

 
| ** **                                                                         | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| **Operating  activities**                                                          |       |                                                               |       |   |   |
| Net income                                                                         |       | $                                                                  | 890        |   | $ | 116 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                                                               |       |   |   |
| Depreciation                                                                       |       | 518                                                                |       | 574 |   |
| Amortization                                                                       |       | 1,164                                                              |       | 523 |   |
| Minority  interest in consolidated subsidiaries                                    |       | 85                                                                 |       | 157 |   |
| Non-cash  gain from equity investment                                              |       | (519                                                               | )          | — |   |
| Non-cash  gain compensation expense                                                |       | 84                                                                 |       | 191 |   |
| Deferred  income tax expense                                                       |       | 457                                                                |       |   |   |
| Changes in  operating assets and liabilities, net of effects from acquisitions:    |       |                                                               |       |   |   |
| Accounts  receivable                                                               |       | 5,364                                                              |       | 1,947 |   |
| Inventory                                                                          |       | (1,269                                                             | )          | (526 | ) |
| Deferred  advertising costs                                                        |       | 618                                                                |       | 569 |   |
| Other  current assets                                                              |       | (1,350                                                             | )          | (72 | ) |
| Other assets                                                                       |       | (113                                                               | )          | (48 | ) |
| Accounts  payable                                                                  |       | (6,188                                                             | )          | (1,834 | ) |
| Accrued  liabilities                                                               |       | (716                                                               | )          | (938 | ) |
| Income taxes  payable                                                              |       | (68                                                                | )          | (61 | ) |
| Net cash  provided by (used in) operating activities                               |       | (1,043                                                             | )          | 598 |   |
|                                                                               |       |                                                               |       |   |   |
| **Investing  activities**                                                          |       |                                                               |       |   |   |
| Purchase of  property, equipment and media rights                                  |       | (191                                                               | )          | (93 | ) |
| Net cash  used in investing activities                                             |       | (191                                                               | )          | (93 | ) |
|                                                                               |       |                                                               |       |   |   |
| **Financing  activities**                                                          |       |                                                               |       |   |   |
| Proceeds  from issuance of common stock                                            |       | 1,889                                                              |       | — |   |
| Net cash  provided by financing activities                                         |       | 1,889                                                              |       | — |   |
|                                                                               |       |                                                               |       |   |   |
| Effects of  exchange rates on cash and cash equivalents                            |       | 80                                                                 |       | (34 | ) |
| Net change  in cash and cash equivalents                                           |       | 735                                                                |       | 471 |   |
| Cash and  cash equivalents at beginning of period                                  |       | 15,028                                                             |       | 10,439 |   |
| Cash and  cash equivalents at end of period                                        |       | $                                                                  | 15,763     |   | $ | 10,910 |   |
|                                                                               |       |                                                               |       |   |   |
| **Supplemental  cash flow information**                                            |       |                                                               |       |   |   |
| Interest  paid                                                                     |       | $                                                                  | —     |   | $ | — |   |
| Income taxes  paid                                                                 |       | $                                                                  | 126        |   | $ | 189 |   |

 

*See accompanyingnotes to the condensed consolidated financial statements*

 

5

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Gaiam, Inc.

Notes toInterim Condensed Consolidated Financial Statements

(Unaudited)

March 31, 2006

 

1.               Interim Condensed Consolidated FinancialStatements

 

###### Organization and Nature of Operations

 

Gaiam, Inc. is a brandedlifestyle media company providing a broad selection of information, media,products and services to customers who value personal development, naturalhealth, and inspirational media. Gaiam was incorporated under the laws of theState of Colorado on July 7, 1988.

 

The accompanying condensedconsolidated financial statements include the accounts of Gaiam and itssubsidiaries in which Gaiam’s ownership is greater than 50% and the subsidiaryis considered to be under Gaiam’s control. All material intercompany accountsand transaction balances have been eliminated in consolidation.

 

Preparation of InterimCondensed Consolidated Financial Statements

 

The interim condensedconsolidated financial statements included herein have been prepared by themanagement of Gaiam pursuant to the rules and regulations of the UnitedStates 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 31,2006, the interim results of operations for the three months ended March 31,2006 and 2005, and cash flows for the three months ended March 31, 2006and 2005. These interim statements have not been audited. The balance sheet asof December 31, 2005 was derived from Gaiam’s audited consolidatedfinancial statements included in Gaiam’s annual report on Form 10-K.

 

The interim condensed consolidatedfinancial statements are prepared in conformity with accounting principlesgenerally accepted in the United States, which require management to makejudgments, estimates and assumptions that affect the amounts reported in Gaiam’sconsolidated financial statements and accompanying notes. The consolidatedfinancial statements contained herein should be read in conjunction with Gaiam’saudited financial statements, including the notes thereto, for the year ended December 31,2005. No changes were made to our significant policies during the three monthsended March 31, 2006, except for the adoption of Financial AccountingStandards Board’s (“FASB”) Statement No. 123 – revised 2004 (“SFAS 123R”),*“Share-Based Payment”*. See Summary ofSignificant Accounting Policies discussed below.

 

The consolidated financialposition, results of operations and cash flows for the interim periodsdisclosed in this report are not necessarily indicative of future financialresults.

 

Summary of SignificantAccounting Policies

 

Management believes the following to be critical accounting policieswhose application has a material impact on Gaiam’s financial presentation, andinvolve a higher degree of complexity, as they require management to makejudgments and estimates about matters that are inherently uncertain.

 

6

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*Provisions for Doubtful Accounts and Returns*

 

Gaiam records a provisionfor doubtful accounts for all receivables not expected to be collected. Gaiamgenerally does not require collateral. Gaiam evaluates the collectibility ofaccounts receivable based on a combination of factors. In circumstances inwhich Gaiam is aware of a specific customer’s inability to meet its financialobligations (e.g. bankruptcy filings). Gaiam records a specific reserve for baddebts against amounts due. For all other instances, Gaiam recognizes reservesbased on historical experience and review of individual accounts outstanding.

 

Gaiam records a provisionfor product returns to be received in future periods at the time the originalsale is recognized. The amount of the returns provision is based uponhistorical experience and future expectations.

 

*Inventory*

 

Inventory consists primarilyof finished goods held for sale and is stated at the lower of cost (first-in,first-out method) or market. Gaiam identifies the inventory items to be writtendown for obsolescence based on the item’s current sales status and condition. Ifthe item is discontinued or slow moving, it is written down based on an estimateof the markdown to retail price needed to sell through its current stock levelof the item.

 

*Goodwill*

 

Goodwill represents theexcess of the purchase consideration over the fair value of assets acquiredless liabilities assumed in a business acquisition. In accordance with SFAS No. 142,*“Goodwill and Other Intangible Assets,”*goodwill is no longer amortized but is reviewed for impairment annually or morefrequently if impairment indicators arise, on a reporting unit level. The fairvalue of a reporting unit is compared with its carrying amount, includinggoodwill. If the fair value of a reporting unit exceeds its carrying amount,goodwill of the reporting unit is considered not impaired.

 

If the carrying amount of areporting unit exceeds its fair value, the goodwill impairment test isperformed to measure the amount of impairment loss. Gaiam has allocatedgoodwill to two reporting units, and uses a market value method for thepurposes of testing for potential impairment. The annual review requires extensiveuse of financial judgment and estimates. Application of alternative assumptionsand definitions, such as a change in the composition of a reporting unit, couldyield significantly different results.

 

*Investments*

 

Investments in corporationsover which Gaiam does not have the ability to exercise significant influence,and in which Gaiam has a less than twenty percent ownership interest, areaccounted for under the cost method. Under the cost method of accounting,investments in private companies are carried at cost and are adjusted only forother-than-temporary declines in fair value. Investments in limited liabilitycompanies in which Gaiam does not have the ability to exercise significantinfluence or control, and in which it holds a five percent or more membershipinterest, are accounted for under the equity method. Under the equity method,Gaiam records its share of the income or losses of the investment by increasingor decreasing the carrying value of its investment and recording the income orexpense through the consolidated statement of operations. Investments under thecost and equity methods are included on the accompanying consolidated balancesheet in “Notes Receivable and Other Assets”.

 

*Capitalized Production Costs andMedia Library*

 

Capitalized production costsinclude costs incurred to produce media products marketed by Gaiam to retailersand direct-mail and online customers. These costs are deferred for financialreporting purposes until the media is released, then amortized over succeedingperiods on the basis of estimated sales. Historical sales statistics are theprincipal factor used in estimating the amortization rate. Gaiam’s medialibrary consists of titles and content purchased or acquired. At acquisition,the fair market value of the library is established and is amortized oversucceeding periods on the basis of its estimated useful life.

 

7

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*Stock-Based Compensation*

 

Prior to January 1,2006, Gaiam accounted for its stock option program under the recognition andmeasurement provisions of APB Opinion No. 25*(“APB 25”)*,*Accounting for Stock Issued to Employees*,and related Interpretations, as permitted by FASB Statement No. 123 *(“SFAS 123”)*, *Accounting for Stock-BasedCompensation*. No stock based compensation cost was recognized in theStatement of Operations for the quarter ended March 31, 2005, as alloptions granted under the plan had an exercise price equal to the market valueof the underlying common stock on the date of grant.

 

During the first quarter offiscal 2006, Gaiam adopted the provisions of and accounted for stock-based compensationin accordance with the “SFAS 123R” which replaced SFAS 123 and supersedes APB25. Under the fair value recognition provisions of this statement, stock-basedcompensation cost is measured at the grant date based on the fair value of theaward and is recognized as expense on a straight-line basis over the requisiteservice period, which is the vesting period. Gaiam elected themodified-prospective method, under which prior periods are not revised forcomparative purposes. The valuation provisions of SFAS 123R apply to new grantsand to grants that were outstanding as of the effective date and aresubsequently modified. Estimated compensation for grants that were outstandingas of the effective date will be recognized over the remaining service periodsusing the compensation cost estimated for the SFAS 123 pro forma disclosures.

 

The adoption of SFAS No. 123Rdid not have a material impact on Gaiam’s consolidated financial position,results of operations and cash flows. See Note 4 for further informationregarding stock-based compensation assumptions and expenses, including proforma disclosures for the three months ended March 31, 2005 as if Gaiamhad recorded stock-based compensation expense.

 

Contractual Obligations

 

Gaiam has commitmentspursuant to lease and debt agreements, but does not have any outstandingcommitments pursuant to long-term debt obligations, capital lease obligationsor purchase obligations. The following table shows Gaiam’s commitments to makefuture payments under operating leases (in thousands):

 
| ** **                   | ** ** | **Total** | ** ** | **< 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **> 5 yrs** | ** ** |
|------------------------------|------------|-----------|------------|---------------------------|------------|--------------------|------------|--------------------|------------|--------------------------|------------|
| Operating  lease obligations |       | $         | 6,443      |                      | $          | 3,019              |       | $                  | 2,883      |                     | $          | 322 |   | $ | 219 |   |
|                              |            |           |            |                           |            |                    |            |                    |            |                          |            |  |  |  |  |  |

 

Off-Balance Sheet Arrangements

 

Gaiam does notparticipate in transactions that generate relationships with unconsolidatedentities or financial partnerships, such as special purpose entities (“SPEs”)or variable interest entities (“VIEs”), which have been established for thepurpose of facilitating off-balance sheet arrangements or otherlimited purposes. As of March 31, 2006, Gaiam is not involved in anyunconsolidated SPEs or VIEs.

 

Use of Estimates

 

The preparation of theconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets, liabilities,revenue and expenses and disclosure of contingent assets and liabilities at thedate of the consolidated financial statements. Actual results could differ fromthose estimates.

 

Reclassifications

 

Certain reclassificationshave been made to prior period amounts to conform to the current periodpresentations.

 

8

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Recent AccountingPronouncements

 

In November 2005, theFASB issued Staff Position 115-1 *“TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments,”*or FSP 115-1, that addresses the determination as towhen an investment is considered impaired, whether that impairment is otherthan temporary and the measurement of an impairment loss. FSP 115-1 alsoincludes accounting considerations subsequent to the recognition of another-than-temporary impairment and requires certain disclosures aboutunrealized losses that have not been recognized as other-than-temporaryimpairments. The guidance in FSP 115-1 amends SFAS 115 *“Accounting for Certain Investments in Debt andEquity Securities”*and APB Opinion No. 18, *“The Equity Method of Accounting for Investments inCommon Stock”.* The final FSP nullifies certain requirements of EITFIssue No. 03-1, *“The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments”,*andsupersedes EITF Topic No. D-44, *“Recognitionof Other-Than-Temporary Impairment upon the Planned Sale of a Security WhoseCost Exceeds Fair Value”.* The guidance in FSP 115-1 is effective forreporting periods beginning after December 15, 2005. The adoption of FSP 115-1did not have a material effect on our consolidated financial position, resultsof operations or cash flows.

 

2.               Notes Receivable and Other Assets

 

Notes receivable and other assetsas of March 31, 2006 consisted of $1.4 million of investments, $0.5 millionof other long-term assets, and $2.2 million in notes receivable. As of January 5,2006, Gaiam entered into an agreement with Alps Communications LLC and LifeBalance Media Holdings LLC (“LIME”), to sell 19,968 Series A PreferredUnits of LIME. The purchase price per unit was equal to the amount Gaiam paidfor its investment. Alps Communications assumed all unpaid Series ACapital Contribution commitments from Gaiam and executed a promissory note inthe principal amount of $2,250,000. After the closing of this transaction,Gaiam owns 4,876 units, or less than 4%, of LIME. This transaction resulted ina gain of $0.5 million shown as Other Income on the Condensed ConsolidatedStatement of Operations for the three-months ended March 31, 2006. Notesreceivable and other assets as of December 31, 2005 consisted of $6.8million of investments and $0.4 million of other assets.

 

3.               Stockholders’ Equity

 

During the first quarter of2006, Gaiam issued a total of 5,412 shares of Class A common stock toGaiam’s independent directors, in lieu of cash compensation, for servicesrendered in 2005 and 2006. In addition, for the three months ended March 31,2006, Gaiam issued 309,840 shares of Class A common stock upon exercise ofoptions granted under Gaiam’s 1999 Long-Term Incentive Plan.

 

4.               Stock-Based Compensation

 

Gaiam’s stock option programis a long-term retention program that is intended to attract, retain andprovide incentives for talented employees, officers, and directors, and toalign stockholder and employee interests. Gaiam grants options from the 1999Long-Term Incentive Plan (the “Plan”), which provides for the granting ofoptions to purchase up to 2.1 million shares of Gaiam’s Class A common stock. Bothincentive stock options and non-qualified stock options may be issuedunder the provisions of the Plan. Employees of Gaiam and its affiliates,members of the Board of Directors, consultants and certain key advisors areeligible to participate in the plan, which terminates no later than June 1,2009. Options granted under the Plan generally vest and become exercisable at2% per month for the 50 months beginning in the eleventh month after date ofgrant. Grants generally expire seven years from the date of grant.

 

 Gaiam uses the Black-Scholes option pricing modelto determine the fair value of stock options. The determination of fair valuestock-based payment awards on the date of grant using an option-pricing modelis affected by Gaiam’s stock price as well as assumptions regarding a number ofcomplex and subjective variables. These variables include Gaiam’s expectedstock price volatility over the term of the awards, actual and projectedemployee stock option exercise behaviors, risk-free interest rate and expecteddividends.

 

9

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Gaiam estimates the expectedterm of options by taking the actual vesting term of the option. Expectedvolatilities are based on historical realized volatility of Gaiam’s stock. Gaiam’suse of historical realized volatility is based upon the expectation that futurevolatility over the expected term is not likely to differ from historicalresults. The risk-free interest rate used in the option valuation model isbased on U.S. Treasury zero-coupon issues with remaining terms similar to theexpected term on the options. Gaiam does not anticipate paying any cashdividends in the foreseeable future and therefore an expected dividend yield ofzero is used in the option valuation model. In accordance with SFAS 123R, Gaiamis required to estimate forfeitures at the time of grant and revise thoseestimates in subsequent periods if actual forfeitures differ from thoseestimates. Historical data is used to estimate pre-vesting option forfeituresand record stock-based compensation expense only for those awards that areexpected to vest. All stock-based payment awards are amortized on astraight-line basis over the requisite service periods of the awards, which aregenerally the vesting periods.

 

Total stock-basedcompensation recognized was $0.1 million and is shown in corporate, general,and administration expenses on Gaiam’s condensed consolidated financialstatements for the quarter ended March 31, 2006.

 

The following table setforth the pro forma amounts of net income and net income per share, forthe three months ended March 31, 2005, that would have resulted if Gaiamhad accounted for its stock-based compensation plan under the fair valuerecognition provisions of SFAS 123 (in thousands, except per share data):

 
| ** **                                                                                                                            | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                            | ** ** | **March 31, 2005**     | ** ** |
| Net income  as reported                                                                                                               |       | $                                | 116        |   |
| Deduct:  Total stock-based compensation expenses determined under fair value based  method for all awards, net of related tax effects |       | (80                              | )          |
| Pro forma                                                                                                                             |       | $                                | 36         |   |
| Net income  per common share                                                                                                          |       |                             |       |
| As reported                                                                                                                           |       | $                                | 0.01       |   |
| Pro forma                                                                                                                             |       | $                                | —     |   |
| Fully  diluted net income per common share                                                                                            |       |                             |       |
| As reported                                                                                                                           |       | $                                | 0.01       |   |
| Pro forma                                                                                                                             |       | $                                | —     |   |

 

5.               Comprehensive Income 

 

Gaiam’s comprehensive incomeis comprised of net income and foreign currency translation adjustment, net ofincome taxes. Comprehensive income, net of related tax effects, was as follows(in thousands):

 
| ** **                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Net income                                    |       | $                                                | 890        |   | $ | 116 |   |
| Foreign  currency translation adjustment, net |       | 85                                               |       | (65 | ) |
| Comprehensive  income net of taxes            |       | $                                                | 975        |   | $ | 51 |   |

 

6.               Earnings per Share

 

Basic earnings per shareexclude any dilutive effects of options, warrants and dilutive securities. Basicearnings per share is computed using the weighted average number of commonshares outstanding during the period. Diluted earnings per share is computedusing the weighted average number of common and common stock equivalent sharesoutstanding during the period.

 

10

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The following table sets forth the computation ofbasic and diluted earnings per share (in thousands, except per share data):

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                    | ** ** | **March 31,**               | ** ** |
| ** **                                                    | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Numerator  for basic and diluted                              |       |                             |       |   |   |
| Earnings per  share                                           |       | $                                | 890        |   | $ | 116 |   |
| Denominator:                                                  |       |                             |       |   |   |
| Weighted  average shares for basis earnings per share         |       | 20,435                           |       | 14,820 |   |
| Effect of  dilutive securities:                               |       |                             |       |   |   |
| Weighted  average of common stock, stock options and warrants |       | 360                              |       | 94 |   |
|                                                          |       |                             |       |   |   |
| Denominators  for diluted earnings per share                  |       | 20,795                           |       | 14,914 |   |
|                                                          |       |                             |       |   |   |
| Net income  per share – basic                            |       | $                                | 0.04       |   | $ | 0.01 |   |
| Net income  per share - diluted                               |       | $                                | 0.04       |   | $ | 0.01 |   |

 

7.               Segment Information

 

Gaiam manages its business and aggregates itsoperational and financial information in accordance with two reportablesegments. The business segment comprises sales to businesses, retailers,corporate accounts, and media outlets, while the direct to consumer segment includescatalog, print advertising, e-commerce channels, DRTY, and subscription clubs.

 

Although Gaiam is able to track revenue bysales channel, management, allocation of resources and analysis and reportingof expenses is solely on a combined basis, at the reportable segment level.

 

Contribution margin is defined as net sales,less cost of goods sold and direct expenses. Financial information for Gaiam’sbusiness segments was as follows (in thousands):

 
| ** **                                                                | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                | ** ** | **March 31,**               | ** ** |
| ** **                                                                | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Net revenue:                                                              |       |                             |       |   |   |
| Direct to consumer                                                        |       | $                                | 26,110     |   | $ | 13,313 |   |
| Business                                                                  |       | 25,642                           |       | 13,011 |   |
| Consolidated net revenue                                                  |       | 51,752                           |       | 26,324 |   |
| Contribution  margin (loss):                                              |       |                             |       |   |   |
| Direct to consumer                                                        |       | (619                             | )          | 166 |   |
| Business                                                                  |       | 1,629                            |       | 121 |   |
| Consolidated contribution margin                                          |       | $                                | 1,010      |   | $ | 287 |   |
| Reconciliation  of contribution margin to net income:                     |       |                             |       |   |   |
| Other income                                                              |       | 577                              |       | 116 |   |
| Income tax expense                                                        |       | 612                              |       | 130 |   |
| Minority interest in net income of consolidated subsidiaries, net of  tax |       | (85                              | )          | (157 | ) |
| Net income                                                                |       | $                                | 890        |   | $ | 116 |   |

 

11

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# **Item 2.                    Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

# The following discussion and analysis of Gaiam’sfinancial condition and results of operations should be read in conjunctionwith the condensed consolidated financial statements and related notes includedelsewhere in this document.

 

#### Overview and Outlook

 

Gaiam is a branded lifestyle media company providinga broad selection of information, media, products and services to customers whovalue personal development, natural health, and inspirational media. Gaiam’smedia brand is built around its ability to develop and offer media content,products and lifestyle solutions to consumers in the Lifestyle of Health andSustainability (“LOHAS”) and the emerging Media that Matters (“MTM”) markets.

 

Gaiam offers its customers the ability to makepurchasing decision based on these values while providing quality offerings ata price comparable to mainstream alternatives. Gaiam markets its media andproducts through a multi-channel approach including traditional media channels,direct to consumers via the Internet, subscription clubs, catalog, broadband,and through national retailers and corporate accounts. As of March 31,2006, its home media was carried by more than 58,000 retail stores in theUnited States alone, and it had approximately 7 million direct buyers.

 

Gaiam’s content forms the basis of its proprietaryofferings, which then drive demand for parallel product and service offerings. Itsoperations are vertically integrated from content creations, through productdevelopment and sourcing, to customer service and distribution. Gaiam marketsits products and services across two segments, business and direct-to-consumer.Products are distributed in each of these sales segments from a singlefulfillment center.

 

OnSeptember 13, 2005, Gaiam acquired substantially all of the assets ofGoodTimes Entertainment and certain of its affiliates. GoodTimes Entertainment’sassets included entertainment programming and home video products distributedthrough various channels, including television, theatres, retailers and theInternet. GoodTimes Entertainment’s library contained wellness franchises suchas The Firm and Tae Bo, children classics and theatrical releases.

 

Duringthe three-months ended March 31, 2006, both reportable segmentscontributed roughly equal revenue with the business segment generating revenueof $25.6 million, and the direct-to-consumer segment generating revenue of $26.1 million.Gaiam expects to generate over $200 million in annual revenues in 2006.

 

12

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#### Results of Operations

####  

The following table sets forth certain financial data as a percentageof revenue for the periods indicated:

 
| ** **                                                                | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| Net revenue                                                               |       | 100.0                                                              | %          | 100.0 | % |
| Cost of  goods sold                                                       |       | 35.9                                                               | %          | 47.8 | % |
| Gross profit                                                              |       | 64.1                                                               | %          | 52.2 | % |
| Expenses:                                                                 |       |                                                               |       |   |   |
| Selling and operating                                                     |       | 55.8                                                               | %          | 44.4 | % |
| Corporate, general and administrative                                     |       | 6.3                                                                | %          | 6.7 | % |
| Total  expenses                                                           |       | 62.1                                                               | %          | 51.1 | % |
| Income from  operations                                                   |       | 2.0                                                                | %          | 1.1 | % |
| Other  income, net                                                        |       | 1.1                                                                | %          | 0.4 | % |
| Income before  income taxes and minority interest                         |       | 3.1                                                                | %          | 1.5 | % |
| Income tax  expense                                                       |       | 1.2                                                                | %          | 0.5 | % |
| Minority  interest in net income of consolidated subsidiaries, net of tax |       | -0.2                                                               | %          | -0.6 | % |
| Net income                                                                |       | 1.7                                                                | %          | 0.4 | % |

####  

#### Three months ended March 31, 2006 versus threemonths ended March 31, 2005

####  

Revenueof $51.8 million for the three months ended March 31, 2006 increased 96.6%from $26.3 million for the three months ended March 31, 2005. Gaiam’sincrease in revenue was equally divided between the direct to consumer segment,in which revenue increased 96.1% to $26.1 million, and the business segment, inwhich revenue increased 97.1% to $25.6 million. The combination of internalrevenue growth of 27.8% coupled with sales of media titles acquired fromGoodTimes Entertainment primarily accounted for the increase in revenues.

 

Grossprofit, which consists of revenue less cost of sales (primarily merchandiseacquisition costs and in-bound freight), increased to $33.2 million for thefirst quarter of 2006 from $13.7 million during the same period in 2005. As apercentage of revenue, gross profit for the first quarter of 2006 increased to64.1% in 2006 from 52.2% in the first quarter of 2005. The increase wasprimarily due to strong media sales, which generate higher margins, the leverageon purchasing discounts associated with higher DVD sales volume and theelimination of fees previously paid for third party distribution.

 

Sellingand operating expenses (which consist primarily of sales and marketing costs,commission and fulfillment expenses) increased to $28.9 million for the threemonths ended March 31, 2006 as compared to $11.7 million in the sameperiod of 2005, primarily resulting from the GoodTimes asset acquisition. As apercentage of revenue, selling and operating expenses increased to 55.8 % in2006 from 44.4% in 2005 reflecting GoodTimes acquisition transition costs and achange in revenue mix toward increased media which carries higher selling andoperating expenses including merchandising fees and advertising costs.

 

Corporate,general and administration expenses increased to $3.2 million for the firstquarter of 2006 compared to $1.8 million for the same 2005 period, primarilydue to Gaiam’s planned investments to support the increased revenue base. As apercentage of revenue, corporate, general and administration expenses decreasedto 6.3% in the first quarter of 2006 from 6.7% in the comparable 2005 period, asa result of economies of scale achieved on the increased revenue base.

 

Operatingincome was $1.0 million for the three months ended March 31, 2006 comparedto $0.3 million for the three months ended March 31, 2005, primarily reflectinghigher gross profit margin, partially offset by the related increase in sellingand operating expenses.

 

13

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Gaiam recorded $0.6 million and $0.1 million inother income for the three months ended March 31, 2006 and 2005,respectively. The increase in 2006 primarily consists of the gain from the LIMEtransaction. The share of net income associated with minority interest was $0.1million during the first quarter of 2006, compared to the share of net incomeof $0.2 million for the comparable 2005 period.

 

Gaiam recorded income tax expense of $0.6 millionfor the three months ended March 31, 2006 compared to $0.1 million for thethree months ended March 31, 2005. Gaiam’s consolidated effective tax ratefluctuates based upon the distribution of earnings/losses between its domesticand foreign operations.

 

As a result of the factors described above, Gaiam’snet income was $0.9 million, or $0.04 per share, for the three months ended March 31,2006, as compared to $0.1 million, or $0.01 per share, for the three monthsended March 31, 2005.

 

Liquidity and Capital Resources

 

Gaiam’s capital needs arise from working capital required to fund ouroperations, capital expenditures related to acquisition and development ofmedia content, development of Internet and new products, acquisitions of newbusinesses, replacements, expansions and improvements to Gaiam’sinfrastructure, and future growth. These capital requirements depend onnumerous factors, including the rate of market acceptance of Gaiam’s productofferings, the ability to expand Gaiam’s customer base, the cost of ongoingupgrades to Gaiam’s product offerings, the level of expenditures for sales andmarketing, the level of investment in distribution systems and facilities andother factors. The timing and amount of these capital requirements are variableand cannot accurately be predicted. Additionally, Gaiam will continue to pursueopportunities to expand its media libraries, evaluate possible investments inbusinesses, products and technologies, and increase its sales and marketingprograms and brand promotions as needed.

 

Gaiam has a credit agreement with Wells Fargo, which permits borrowingsof up to $15 million based upon the collateral value of Gaiam’s accountsreceivable and inventory. At March 31, 2006, Gaiam had no amountsoutstanding under this agreement and complied with all of the financial covenants.This credit agreement expires on July 31, 2007. Should Gaiam choose toborrow under the credit agreement, outstanding advances bear interest at thelower of prime rate less 50 basis points or LIBOR plus 275 basis points. Borrowingsare secured by a pledge of Gaiam’s assets, and the agreement contains variousfinancial covenants, including covenants prohibiting the payment of cashdividends to Gaiam shareholders and requiring compliance with certain financialratios.

 

Gaiam’s operating activities used net cash of $1.0 million for thethree-months ended March 31, 2006, primarily reflecting the use of fundsto reduce accounts payable of $6.2 million and an increase in other currentassets of $1.4 million including advances in media production and acquiredmedia programming. This use of funds was partially offset by a decrease inaccounts receivable of $5.4 million, and non-cash charges to net income of $1.7million. During the three-months ended March 31, 2005, Gaiam’s operatingactivities generated $0.6 million reflecting a decrease in accounts receivableof $1.9 million and non-cash charges to net income of $1.4 million, partiallyoffset by the use of funds to reduce accounts payable of $1.8 million.

 

Gaiam’s investing and acquisition activities used net cash of $0.2million and $0.1 million for the purchase of property, equipment and mediarights during the first three months of 2006 and 2005, respectively.

 

Gaiam’s financing activitiesprovided net cash of $1.9 million for the three months ended March 31,2006 reflecting the exercise of stock options during the quarter.

 

On April 7, 2006, Gaiam filed a shelfregistration statement on Form S-3 with respect to an offering of up to$100,000,000 of Class A Common Stock, par value $.0001. However, Gaiam myelect not to sell any shares under the registration statement and consequentlyno funds may be raised.

 

Gaiam believes its available cash, cash expected tobe generated from operations, cash generated by the future sale of unregisteredClass A common stock, and borrowing capabilities, should be sufficient tofund its operations on both a short-term and long-term basis. However, Gaiam’sprojected cash needs may change as a result of acquisitions, productdevelopment, unforeseen operational difficulties or other factors.

 

14

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In the normal course of our business, Gaiaminvestigates, evaluates and discusses acquisition, joint venture, minorityinvestment, strategic relationship and other business combination opportunitiesin the LOHAS and MTM markets. For any future investment, acquisition or jointventure opportunities, Gaiam may consider using then-available liquidity,issuing equity securities or incurring additional indebtedness.

 

##### **Item 3.**           Quantitative and Qualitative Disclosures About Market Risk

#####  

Gaiam is exposed to market risks, which includechanges in U.S. interest rates and foreign exchange rates. Gaiam does notengage in financial transactions for trading or speculative purposes.

 

Any borrowings Gaiam might make under its bankcredit facility would bear interest at the lower of prime rate less 50 basispoints or LIBOR plus 275 basis points. Gaiam does not have any amountsoutstanding under its credit facility, so any unfavorable change in interestrates would not have a material impact on Gaiam’s results from operations orcash flows unless Gaiam makes borrowings in the future.

 

Gaiam purchases a significant amount of inventoryfrom vendors outside of the U.S. in transactions that are primarily U.S. dollardenominated transactions. Because the percentage of Gaiam’s internationalpurchases denominated in currencies other than the U.S. dollar is small, anycurrency risks related to these transactions are immaterial to Gaiam. A declinein the relative value of the U.S. dollar to other foreign currencies could,however, lead to increased purchasing costs. In order to mitigate thisexposure, Gaiam makes virtually all of its purchase commitments in U.S.dollars.

 

In 2003, Gaiam purchased a 50.1% interest in Gaiam Limited,a U.K. based distributor. Because Gaiam Limited’s revenue is primarilydenominated in foreign currencies, this investment exposes Gaiam to accountingrisk associated with foreign currency exchange rate fluctuations. However, Gaiamhas determined that no material market risk exposure to its consolidatedfinancial position, results of operations or cash flows existed as of March 31,2006.

 

**Item 4.****                                                          ****Controls and Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

Gaiam’s chief executive officer and chief financialofficer conducted an evaluation of the effectiveness of the design andoperation of Gaiam’s disclosure controls and procedures, as defined in Rules 13a-15(e) andRule 15d-15(e) under the Exchange Act. Based upon their evaluation asof March 31, 2006, Gaiam’s chief executive officer and chief financialofficer have concluded that those disclosure controls and procedures areeffective.

 

**Changes in Internal Control over Financial Reporting**

 

No changes in Gaiam’s internal control over financialreporting occurred during the quarter ended March 31, 2006 that havematerially affected, or are reasonably likely to materially affect, Gaiam’sinternal control over financial reporting.

##  

| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                                                                                                                                            |
|-------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **        | ** ** | ** **                                                                                                                                                                                                                       |
| **Item 1.**       | ** ** | **Legal Proceedings**                                                                                                                                                                                                            |
| ** **        | ** ** | ** **                                                                                                                                                                                                                       |
|              |       | From time to time, Gaiam is involved in  legal proceedings that it considers to be in the normal course of business.  Gaiam does not believe that any of these proceedings will have a material  adverse effect on its business. |
|              |       |                                                                                                                                                                                                                             |
| **Item 1A.**      | ** ** | **Risk Factors**                                                                                                                                                                                                                 |
| ** **        | ** ** | ** **                                                                                                                                                                                                                       |
|              |       | No material changes                                                                                                                                                                                                              |
|              |       |                                                                                                                                                                                                                             |
| **Item 2.**       | ** ** | **Unregistered Sales of  Equity Securities and Use of Proceeds**                                                                                                                                                                 |
| ** **        | ** ** | ** **                                                                                                                                                                                                                       |
|              |       | None.                                                                                                                                                                                                                            |

 

15

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| **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**                                             |
| ** **  | ** ** | ** **                                               |
|        | a)         |                                                     | Exhibits |
|        |       |
| ** **  | ** ** | **Exhibit No.**                                     | ** ** | **Description** |
|        |       | 10.1                                                     |   | Executive Officer  Compensation |
|        |       | 31.1                                                     |   | Certification of the Chief  Executive Officer pursuant to Rule 13a-14(a) under the Securities  Exchange Act of 1934 (filed herewith). |
|        |       | 31.2                                                     |   | Certification of the Chief  Financial Officer pursuant to Rule 13a-14(a) under the Securities  Exchange Act of 1934 (filed herewith). |
|        |       | 32.1                                                     |   | Certification of the Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished  herewith). |
|        |       | 32.2                                                     |   | Certification of the Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
|             |            |                                                          |  |  |  |  |  |

 

16

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### **Signatures**

### ** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf, by the undersigned,thereunto duly authorized.

 

 
|   | Gaiam, Inc. |
|--------|------------------|
|   | (Registrant)     |
|   | May 4, 2006 |
|   |             |
|   | By:              | /s/ | Jirka Rysavy |   |
|   |             | Jirka Rysavy |
|   |             | Chief Executive Officer |
|   |             |   |
|   | By:              | /s/ | Vilia Valentine |   |
|   |             | Vilia Valentine |
|   |             | Chief Financial Officer |
|        |                  |  |  |  |  |  |

 

----