<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 19, 1996
REGISTRATION NO. 333-07573
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GARGOYLES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
WASHINGTON 3851 91-1247269
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
5866 SOUTH 194TH STREET
KENT, WASHINGTON 98032
(206) 872-6100
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STEVEN R. KINGMA
VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
SECRETARY AND TREASURER
GARGOYLES, INC.
5866 SOUTH 194TH STREET
KENT, WASHINGTON 98032
(206) 872-6100
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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STEWART M. LANDEFELD CYNTHIA L. POPE MICHAEL J. ERICKSON
L. MICHELLE WILSON 114 W. Magnolia Street LAURA A. BERTIN
Perkins Coie 4th Floor JONATHAN K. WRIGHT
1201 Third Avenue, 40th Floor Bellingham, Washington 98225 Heller, Ehrman, White & McAuliffe
Seattle, Washington 98101-3099 (360) 671-5939 6100 Columbia Center
(206) 583-8888 701 Fifth Avenue
Seattle, Washington 98104
(206) 447-0900
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
- ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
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Common Stock, no par value...... 3,066,667 shares $15.00 $46,000,005 $15,863
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</TABLE>
(1) Includes 400,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c).
(3) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
GARGOYLES, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEMS OF FORM S-1 LOCATION IN PROSPECTUS
- --------------------------------------------------- ----------------------------------------
<C> <S> <C>
Item 1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................ Outside Front Cover Page
Item 2. Inside Front and Outside Back Cover
Pages of Prospectus................... Inside Front and Outside Back Cover
Pages
Item 3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.... Prospectus Summary; Risk Factors
Item 4. Use of Proceeds......................... Use of Proceeds
Item 5. Determination of Offering Price......... Outside Front Cover Page; Risk Factors;
Underwriting
Item 6. Dilution................................ Risk Factors; Dilution
Item 7. Selling Security Holders................ Principal and Selling Shareholders
Item 8. Plan of Distribution.................... Outside and Inside Front Cover Pages;
Underwriting
Item 9. Description of Securities to Be
Registered............................ Description of Capital Stock
Item 10. Interests of Named Experts and
Counsel............................... Not Applicable
Item 11. Information With Respect to the
Registrant............................ Outside and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; The
Company; Dividend Policy;
Capitalization; Selected Financial
Data; Pro Forma Financial Information;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; Management;
Certain Transactions; Principal and
Selling Shareholders; Shares Eligible
for Future Sale; Legal Matters;
Experts; Additional Information;
Consolidated Financial Statements
Item 12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................... Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 19, 1996
PROSPECTUS
2,666,667 SHARES
GARGOYLES
COMMON STOCK
------------------
Of the 2,666,667 shares of Common Stock offered hereby (the "Offering"),
1,666,667 shares are being sold by Gargoyles, Inc. (the "Company" or
"Gargoyles") and 1,000,000 shares are being sold by certain shareholders (the
"Selling Shareholders"). See "Principal and Selling Shareholders." The Company
will not receive any of the proceeds from the sale of shares by the Selling
Shareholders.
Prior to the Offering, there has not been a public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $ and $ per share. See "Underwriting"
for information relating to the factors to be considered in determining the
initial public offering price. Application has been made to have the Common
Stock listed on the Nasdaq National Market under the symbol "GOYL."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
- -----------------------------------------------------------------------------------------------------
Per Share................... $ $ $ $
- -----------------------------------------------------------------------------------------------------
Total(3).................... $ $ $ $
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</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $850,000, of which $800,000 are
payable by the Company and $50,000 are payable by the Selling Shareholders.
(3) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to 400,000 additional shares of Common Stock
solely to cover over-allotments, if any. See "Underwriting." If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Shareholders will
be $ , $ , $ and $ , respectively.
------------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or
about , 1996, at the office of Smith Barney Inc., 333 West 34th
Street, New York, New York 10001.
------------------------
SMITH BARNEY INC. ROBERTSON, STEPHENS & COMPANY
, 1996
<PAGE> 4
[gatefold cover with three pages of photographs depicting Gargoyles
products and athletic endorsements]
------------------------
Gargoyles is a federally registered trademark of the Company. The Company
has applied for federal registration of the marks Legends, Helios, Paladin,
Vortex, Octane and the G design featured on the cover of this Prospectus. The
Company has common-law trademark rights in the marks Classic, 85s, Legends II
and Griffey Wrap. Timberland and the tree logo are registered trademarks of The
Timberland Company. All other trademarks or registered trademarks appearing in
this Prospectus are trademarks or registered trademarks of the respective
companies that utilize them.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL
MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Prospective investors should carefully
consider the information set forth under "Risk Factors." Unless otherwise
indicated, the information contained in this Prospectus assumes (i) a 5.86-to-1
split of the Common Stock to be effective prior to the closing of the Offering,
subject to certain conditions (see "Description of Capital Stock"), and (ii)
that the Underwriters' over-allotment option is not exercised. References herein
to Gargoyles and the Company include certain predecessors and subsidiaries. See
"The Company."
THE COMPANY
Gargoyles designs, manufactures and markets a broad line of performance and
lifestyle-oriented sunglasses. The Company competes in the rapidly growing
premium sunglass market by offering a diverse line of products at suggested
retail prices of $80 to $190. The Company seeks to distinguish Gargoyles brand
products in the marketplace by combining innovative styling with its patented
dual lens toric curve technology, which the Company believes is the most
advanced lens design currently available in wrap sunglasses. The Company
believes these features appeal not only to active sports enthusiasts who favor
the performance and comfort features of its products, but also to consumers who
appreciate Gargoyles' distinctive styling and innovative designs. In addition,
the Company recently acquired the Hobie sunglass line, a leading line of
polarized sunglasses, which is one of the fastest emerging categories within the
premium sunglass market. The Company also offers a popular line of protective
eyewear focused primarily on the medical and dental market segments. The Company
believes that the diversity of its product lines, combined with increasing
awareness among consumers of the Gargoyles and Hobie brands and their unique
attributes, has positioned it to capitalize on the strong growth potential in
the domestic and international premium sunglass markets. The Company's net sales
have increased at a compounded annual growth rate of 40% from 1992 through 1995.
For the first six months of 1996, the Company achieved growth in net sales of
93% compared to the same period in the prior year.
The Company was founded in 1979 to develop a sunglass style that not only
would cover and protect the eyes more effectively than traditional "flat" lens
designs, but also would minimize distortion. In 1983, the Company completed the
development of its patented dual lens toric curve technology. The complex
geometry of the proprietary toric curve lens minimizes distortion associated
with other wrap lens designs by allowing the transmission of light directly to
the eye with little refraction. The dual lens design provides each eye with its
own optical center of focus, resulting in greater overall optical clarity and
less peripheral distortion. The Company believes this proprietary technology
offers the most advanced and optically correct sunglass lens design available in
wrap sunglasses and provides a significant differential competitive advantage.
In 1983, the Company introduced its first product based on this proprietary
technology, the Gargoyles Classic. Until 1992, the Company was a successful
single-product company with relatively few resources devoted to expanding its
product line, and was dependent on independent manufacturers' representatives to
sell its products. In May 1992, the Company began installing a new management
team which has developed and implemented new operating and growth strategies
designed to exploit the patented dual lens toric curve technology and to
capitalize on the growth trends within the premium sunglass market. These
strategies included an aggressive, innovative new product development program
resulting in the introduction of numerous models, including 85s in 1993, Legends
in 1994, Helios and Legends II in 1995, and Paladin, Octane and Vortex in 1996.
In addition, the Company began investing in its own direct sales force in 1994
to expand distribution and gain more control over the sales process. The Company
also initiated a strategy to enhance the Gargoyles brand image and promote the
performance characteristics of its products by aggressively pursuing strategic
endorsements from professional athletes such as Dale Earnhardt, Ken Griffey,
Jr., Alexi Lalas and Scottie Pippen. The Company believes that these strategies
have contributed to its rapid sales growth and have created a platform for the
continued success of the Gargoyles brand.
3
<PAGE> 6
The Company has leveraged its infrastructure and direct sales force by
adding new brands through acquisitions and licensing arrangements that can
increase sales without commensurate increases in operating expenses. In
particular, the Company acquired Hobie's sunglass business in February 1996 (the
"Hobie Acquisition"), which broadened the Company's technology base to include
polarized sunglasses. Further, in May 1996, the Company, together with the
former president of Revo, Inc. ("Revo"), entered into a worldwide license
agreement with The Timberland Company ("Timberland") to design, manufacture and
market sunglasses under the Timberland brand name. The Company believes the
worldwide appeal of the Timberland brand name will assist the Company in further
penetrating the outdoor-lifestyle market segment. Management believes that the
addition of these brands to the Company's portfolio of products will provide
incremental synergies in sales, marketing, distribution, manufacturing and
general and administrative expenses.
Growth Strategies
The Company's goal is to be the premier designer, manufacturer and marketer
of performance and lifestyle-oriented premium sunglasses and protective eyewear.
Management believes that its strategies have positioned the Company to achieve
continued growth in revenues and earnings. Key elements of the Company's growth
strategies include the following:
- - Capitalize on growth in premium sunglass market. The Company will continue to
focus on increasing its penetration within the premium sunglass segment, which
has grown approximately 82% from 1989 to 1995. Management believes that this
segment will continue to experience rapid growth. The Company also expects to
benefit from increasing penetration of the premium sunglass market by the
Company's existing customers, including its largest customer, Sunglass Hut
International, Inc. ("Sunglass Hut"). The Company believes that as large
sunglass specialty retailers continue to grow, they will increasingly require
well-capitalized vendors which are able to provide adequate product supply on
a reliable basis.
- - Develop and introduce new products. The Company is committed to capitalizing
on its existing market position and proprietary technology by developing new
products and product line extensions that incorporate superior performance and
unique styling. To support its new product initiatives, the Company maintains
an active research and development effort, which has resulted in the
introduction of eight product lines since 1993, including the Paladin, Octane
and Vortex models in 1996. In 1997, the Company anticipates introducing a
number of new products, including its lifestyle-oriented Timberland brand
product line and several new Hobie brand polarized sunglass models.
- - Expand customer base. The Company is focused on expanding its customer base
both domestically and internationally. The strategies of adding a direct sales
force dedicated to selling the Company's products and adding manufacturers'
representatives and distributors to supplement service to the sporting goods
and optical store markets have resulted in significant growth in the number of
its accounts. Since the addition of a direct sales force in 1994, the Company
has added over 1,000 new accounts, and believes there are still significant
opportunities to expand its customer base.
- - Focus on international expansion. The Company believes that international
expansion represents a significant growth opportunity. International sales
accounted for approximately 6% of the Company's net sales in 1995, a
significantly lower penetration than that of the Company's primary
competitors. The Company's international growth plans are based on developing
international distribution networks and investing in overseas operations.
- - Selectively pursue acquisition and licensing opportunities. The Company seeks
to acquire businesses or to create licensing arrangements with companies
having high-quality products, strong brand names and growth potential. The
focus of the Company's acquisition and licensing efforts is to (i) augment the
Company's product lines, (ii) enhance the Company's distribution capabilities,
(iii) leverage the Company's operating infrastructure, and (iv) access new
technology. In particular, the Company's acquisition and integration of Hobie
and its license agreement with Timberland provide new brand names and a
broader customer base, and create distribution and operating synergies.
4
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered Hereby by:
The Company................................ 1,666,667 shares
The Selling Shareholders................... 1,000,000 shares
Common Stock to Be Outstanding After the
Offering................................... 7,542,304 shares(1)
Use of Proceeds.............................. To repay outstanding indebtedness; to fund
start-up costs for the Timberland product
line; and for working capital and other
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol....... "GOYL"
</TABLE>
- ---------------
(1) Excludes, as of June 30, 1996, 570,898 shares of Common Stock reserved for
issuance pursuant to the Company's benefit plan, of which options to
purchase 485,338 shares were outstanding with a weighted average exercise
price of $3.42 per share, and 41,020 shares of Common Stock reserved for
issuance pursuant to an outstanding warrant with an exercise price of $4.26
per share. See "Management -- Benefit Plan," "Description of Capital Stock"
and "Certain Transactions."
The Company was incorporated in 1983. The Company's headquarters are
located at 5866 South 194th Street, Kent, Washington 98032, and its telephone
number is (206) 872-6100.
This Prospectus contains certain forward-looking statements which involve
known and unknown risks, uncertainties and other factors which may cause actual
results, performance or achievements of the Company or industry trends to differ
materially from those expressed or implied by such forward-looking statements.
Such factors include, among others, those discussed in "Risk Factors" and
elsewhere in this Prospectus.
5
<PAGE> 8
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
SIX MONTHS ENDED
NOVEMBER 30, JUNE 30,
---------------------------------- DECEMBER 31, -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $6,371 $6,317 $8,242 $11,083 $ 17,138 $ 9,124 $17,627
Gross profit............................. 3,848 3,834 4,999 6,818 10,611 5,650 10,241
Total operating expenses(1).............. 3,119 3,360 4,314 6,333 10,281 4,847 11,995
------ ------ ------ ------- ------- ------ ------
Income (loss) from operations(2)......... 729 474 685 485 810 1,093 (1,460)
Interest expense, net.................... (60) (35) (55) (176) (1,043) (391) (1,161)
Other income (charges)(3)................ 5 87 2 -- (2,164) (569) --
------ ------ ------ ------- ------- ------ ------
Income (loss) before income taxes........ 674 526 632 309 (2,397) 133 (2,621)
Income tax provision (benefit)........... 87 107 40 10 (100) 5 --
------ ------ ------ ------- ------- ------ ------
Net income (loss)........................ $ 587 $ 419 $ 592 $ 299 $ (2,297) $ 128 $(2,621)
====== ====== ====== ======= ======= ====== ======
Pro forma net income (loss)(4)........... $ 424 $ 380 $ 415 $ 179 $ (2,343) $ 82 $(2,621)
====== ====== ====== ======= ======= ====== ======
Pro forma net income (loss) per
share(5)............................... $ 0.07 $ 0.06 $ 0.07 $ 0.03 $ (0.38) $ 0.01 $ (0.43)
Shares used in computing pro forma net
income (loss) per share(5)............. 6,138 6,138 6,138 6,138 6,138 6,138 6,142
SUPPLEMENTAL DATA:
Pro forma net sales(6)................... $14,774 $ 21,182 $11,446 $17,938
Adjusted pro forma net income(7)......... 616 1,981
Adjusted pro forma net income per
share(8)............................... $ 0.08 $ 0.25
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
BALANCE SHEET DATA: ACTUAL AS ADJUSTED(9)
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<S> <C> <C>
Working capital.............................................................. $(5,012) $ 11,310
Total assets................................................................. 21,458 23,831
Total debt................................................................... 19,777 --
Shareholders' equity (deficit)............................................... (6,160) 15,990
</TABLE>
- ---------------
(1) Includes a $312,000 loss on a discontinued distribution agreement for the
year ended December 31, 1995. Also includes stock compensation expense of
$250,000, $155,000 and $3.5 million for the year ended December 31, 1995 and
the six months ended June 30, 1995 and 1996, respectively.
(2) Includes license income of $480,000, $290,000 and $294,000 for the year
ended December 31, 1995 and the six months ended June 30, 1995 and 1996,
respectively.
(3) Includes nonrecurring charges for recapitalization expenses of $574,000 for
the year ended December 31, 1995 and the six months ended June 30, 1995 and
provision for loss on affiliate of $1.6 million for the year ended December
31, 1995.
(4) Antone Manufacturing, Inc., an affiliated company, had previously been taxed
as an S corporation. The pro forma net income amounts for all periods prior
to 1996 reflect adjustments for income taxes as if Antone Manufacturing,
Inc. had been taxed as a C corporation rather than an S corporation.
(5) See Note 1 to the Company's Consolidated Financial Statements for an
explanation of the number of shares used in computing pro forma net income
(loss) per share.
(6) Amounts give effect to the Hobie Acquisition as if such transaction had
occurred at the beginning of the respective periods.
(7) Amounts give effect to the Hobie Acquisition and the application of the
estimated net proceeds from the Offering as if such transactions had
occurred at the beginning of the respective periods (see "Pro Forma
Financial Information"), and reflect the elimination of certain nonrecurring
charges of $2.4 million for 1995 and $3.5 million for 1996 (see footnote 4
to the table in "Selected Financial Data").
(8) Adjusted pro forma net income per share amounts are computed based on the
number of shares determined in accordance with Note 1 to the Company's
Consolidated Financial Statements, adjusted for the number of shares issued
in connection with the Hobie Acquisition and the number of shares assumed to
be issued in connection with the Offering as if such transactions had
occurred at the beginning of the respective periods.
(9) Adjusted to reflect the application of the estimated net proceeds from the
Offering.
6
<PAGE> 9
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should consider
carefully the factors set forth below, as well as other information set forth in
this Prospectus, in evaluating an investment in the Common Stock.
ABILITY TO SUSTAIN AND MANAGE GROWTH
The Company has experienced significant growth in revenues in recent
periods. The continued growth of the Company's revenues and its ability to
generate profits will depend on, among other factors, the continued growth of
the premium sunglass market, the Company's ability to develop and introduce new
products, and the Company's efforts to broaden and increase sales through its
domestic and international sales and distribution channels.
If the Company continues to experience significant growth, its future
success will also depend on its ability to manage growth as it expands its
production and marketing capacities, which will place a significant strain on
the Company's employees and operations. To manage growth effectively, the
Company will be required to continue to implement changes in certain aspects of
its business, expand its operations and develop, train, manage and assimilate an
increasing number of management-level and other employees. The Company depends
on its management information systems to process orders, manage inventories and
receivables, track product through its expanding manufacturing operations and
otherwise maintain cost-efficient operations. As the Company grows, it will be
required to augment its management information systems from time to time, as a
result of which there can be no assurance that the Company will not experience
systems failures or interruptions. In addition, because the Company's existing
facilities will not be sufficient to support its growth plans, the Company
intends to relocate or expand its existing facilities in 1997, which could cause
delays or interruptions in the Company's operations. If management is unable to
manage growth effectively, the Company's business, prospects, financial
condition and operating results could be materially adversely affected.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS
The sustainability of the Company's growth will depend, in part, on its
continued ability to develop and introduce innovative products. Innovative
designs are often not successful, and successful product designs can be
displaced by other product designs introduced by competitors that shift market
preferences in their favor. The Company is introducing more lifestyle-oriented
sunglasses, which may have relatively short life cycles, thereby requiring the
Company to introduce new products more frequently. In addition, competitors may
follow the Company's introduction of successful products with similar product
offerings. The eyewear industry is subject to changing consumer preferences, and
the Company's sunglasses are likely to be susceptible to fashion trends. If the
Company misjudges the market for a particular product, the Company's sales may
be adversely affected and it may be faced with excess inventories and
underutilized manufacturing capacity. As a result of these and other factors,
there can be no assurance that the Company will successfully maintain or
increase its market share.
COMPETITION
The premium segment of the nonprescription sunglass market is highly
competitive. The Company competes with a number of established companies,
including Bausch & Lomb Incorporated ("Bausch & Lomb"), the marketer of the Ray
Ban, Killer Loop, Arnette and Revo brands, and Oakley, Inc. ("Oakley"), which
together control approximately 50% of the premium market segment, and with
several companies having smaller but significant market shares. Several of these
companies have substantially greater resources and better name recognition than
the Company and sell their products through broader and more diverse
distribution channels. The Company could also face competition from new
competitors, including established branded consumer products companies, such as
Nike, Inc., that also have greater financial and other resources than the
Company. In addition, as the Company expands internationally, it will face
substantial competition from companies that have already established their
products in international markets and consequently have
7
<PAGE> 10
significantly more experience in those markets than the Company. The major
competitive factors in the premium sunglass market include fashion trends, brand
recognition, method of distribution and the number and range of products
offered. In addition, to retain and increase its market share, the Company must
continue to be competitive in the areas of quality and performance, technology,
intellectual property protection and customer service. See
"Business -- Competition."
ABILITY TO SUCCESSFULLY INTEGRATE ACQUISITIONS AND LICENSED PRODUCTS
The integration and consolidation of the Hobie sunglass line, the
development of products under the Timberland brand and future acquisitions and
licensing arrangements will require substantial management, financial and other
resources and may pose risks with respect to the Company's business, prospects,
financial condition and operating results. There can be no assurance that the
Company's resources will be sufficient to accomplish the integration of the
Hobie and Timberland products and brands, or that the Company will not
experience difficulties with customers, personnel or others. In addition,
although the Company believes that its acquisitions and licensing arrangements
will enhance its competitive position and business prospects, there can be no
assurance that such benefits will be realized or that the combination of the
Company with other companies will be successful. The success of the Hobie
Acquisition will depend in part on the Company's ability to integrate the Hobie
manufacturing and inventory control systems with those used for the Company's
other products. The success of the Timberland license arrangement, the Company's
first effort to develop a new product line using a third-party brand, will
depend in part on the continuing strength of the Timberland brand and the
Company's ability to expand recognition and acceptance of the Timberland brand
into the sunglass market, and the Company's ability to expand its products from
a sports-oriented product line to include a lifestyle-oriented line for
Timberland. There can be no assurance that the Company's efforts will result in
significant sales or net income, if any. The Company may, if opportunities
arise, acquire or license other product lines or businesses.
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend to a significant extent on the efforts of
its senior management, particularly Douglas B. Hauff and G. Travis Worth. In
addition, the success of the Timberland license arrangement will depend in part
on the efforts of Douglas W. Lauer, who was hired to design and manage the
Timberland brand. Although the Company has entered into employment agreements
with Messrs. Hauff, Worth and Lauer, there can be no assurance that such
individuals will remain with the Company. The Company's operations could be
adversely affected if, for any reason, such key personnel do not continue to be
active in the Company's management. See "Management -- Employment and
Change-in-Control Agreements." In addition, if Mr. Lauer ceases to provide
active and full-time management services to the kindling company ("Kindling"),
the Company's majority-owned subsidiary formed to develop products under the
Timberland brand name, Timberland has the right to terminate the license
agreement. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Company History."
DEPENDENCE ON SUNGLASS HUT
Sales to Sunglass Hut, a sunglass specialty retail chain (including sales
to Sunsations, which was acquired by Sunglass Hut in July 1995), accounted for
approximately 33% and 37% of the Company's net sales for the year ended December
31, 1995 and the six months ended June 30, 1996, respectively. Historically,
Sunglass Hut has contributed significantly to the Company's overall growth. The
Company does not have a purchase agreement with Sunglass Hut and a substantial
decline in purchases of the Company's products by Sunglass Hut could have a
material adverse effect on the Company's business, prospects, financial
condition and operating results. In addition, the Company's ability to maintain
historical levels of gross profit will depend in part on its ability to continue
to sell sunglasses to Sunglass Hut at or near historical price levels.
RELIANCE ON LIMITED SOURCES OF SUPPLIES
The Company relies on a single source of supply for several of its
components, including several of its frames, although the Company is attempting
to establish multiple sources for more of its components. The effect on the
Company of the loss of any of such sources or of a disruption in their business
will depend
8
<PAGE> 11
primarily on the length of time necessary to find a suitable alternative source.
The loss of a source for a particular frame or any disruption in such source's
business or failure by it to meet the Company's product needs on a timely basis
could cause, at a minimum, temporary shortages in materials and could have a
material adverse effect on the Company's business, prospects, financial
condition and operating results. There can be no assurance that precautions
taken by the Company will be adequate or that alternative sources of supply can
be located or developed in a timely manner.
The Company's Classic lens, which is used in manufacturing most of the
other Gargoyles brand products, can be produced only from the Company's molds,
which are operated by the Company's suppliers. If a mold were to become damaged
or unavailable for an extended period, the Company could experience a shortage
of its Classic lens, which could adversely affect the Company's operating
results. Moreover, the Company currently depends on a complex array of multiple
vendors in geographically diverse areas to perform its lens molding,
hard-coating and mirroring processes. The Company generally places orders for
lens molding, hard-coating and mirroring three to nine months prior to
forecasted product sales. The loss of or a delay by any one of its vendors could
interrupt the Company's supply of lenses and could adversely affect the
Company's business, prospects, financial condition and operating results.
Polycarbonate, the material from which the Company's lenses are
constructed, is presently in limited supply in world markets and requires a long
lead time for orders by the Company's lens suppliers. If such shortage continues
beyond current expectations, or if the Company and its lens suppliers are unable
to accurately predict and order sufficient polycarbonate to support the
Company's needs, the Company's lens suppliers' ability to deliver sufficient
quantities of lenses to the Company could be adversely affected or the price of
such lenses to the Company could increase. See "Business -- Manufacturing."
RISKS ASSOCIATED WITH VERTICAL INTEGRATION STRATEGY
The Company, which currently assembles products manufactured primarily by a
network of outside suppliers, intends to vertically integrate and expand its
internal manufacturing capacity to centralize many of these processes. See
"Business -- Manufacturing." There can be no assurance that the Company's
efforts will be successful or will not entail some interruption in supply with
respect to certain products, which could have a material adverse effect on the
Company's business, prospects, financial condition and operating results.
Moreover, the Company's use of chemicals and other materials as it brings
certain manufacturing processes in-house will create some risk of environmental
liability and could lead to environmental compliance and cleanup costs by the
Company of a nature that the Company has not historically experienced.
PROTECTION OF PROPRIETARY RIGHTS
The Company relies, in part, on patent, trade secret, unfair competition,
trade dress, trademark and copyright laws to protect its rights to certain
aspects of its products and to protect its competitive position and its rights
to certain aspects of its products. There can be no assurance that any pending
trademark or patent application will result in the issuance of a registered
trademark or patent, that any trademark or patent granted will be effective in
discouraging competition or be held valid if subsequently challenged or that
others will not assert rights in, and ownership of, the patents and other
proprietary rights of the Company. In addition, there can be no assurance that
the actions taken by the Company to protect its proprietary rights will be
adequate to prevent imitation of its products, that the Company's proprietary
information will not become known to competitors, that the Company can
meaningfully protect its rights to unpatented proprietary information or that
others will not independently develop substantially equivalent or better
products that do not infringe on the Company's intellectual property rights. The
Company has in the past been, and is currently, involved in litigation
concerning its proprietary rights. In addition, the laws of certain foreign
countries do not protect proprietary rights to the same extent as do the laws of
the United States. See "Business -- Intellectual Property."
Consistent with the Company's strategy of vigorously defending its
intellectual property rights, the Company devotes substantial resources to the
enforcement of patents issued and trademarks granted to the Company, to the
protection of trade secrets, trade dress or other intellectual property rights
owned by the Company and to the determination of the scope or validity of the
proprietary rights of others that might be
9
<PAGE> 12
asserted against the Company. A substantial increase in the level of potentially
infringing activities by others could require the Company to increase
significantly the resources devoted to such efforts. In addition, an adverse
determination in litigation could subject the Company to the loss of its rights
to a particular patent, trademark, copyright or trade secret, could require the
Company to grant licenses to third parties, could prevent the Company from
manufacturing, selling or using certain aspects of its products or could subject
the Company to substantial liability, any of which could have a material adverse
effect on the Company's business, prospects, financial condition and operating
results.
RISKS RELATING TO INTERNATIONAL SUPPLIERS AND SALES
The Company imports many of its component parts and finished sunglasses
from international suppliers and, therefore, its prices for and supply of those
components or finished products may be adversely affected by changing economic
conditions in foreign countries and fluctuations in currency exchange rates. In
addition, the Company expects to increase its international sales, although
there can be no assurance that the Company will be able to do so. The Company's
international sales are subject to risks associated with economic conditions in
foreign countries, fluctuations in currency exchange rates, tariff regulations,
"local content" laws, political instability and trade restrictions. In addition,
there can be no assurance that the Company's brands and products will be as
popular internationally as they are in the United States, or that the Company
will be successful in preventing competitors from producing products using the
same or substantially similar technology for sale outside the United States.
ECONOMIC CONDITIONS; QUARTERLY FLUCTUATIONS; SEASONALITY
The success of the Company's business depends to a significant extent on a
number of factors relating to discretionary consumer spending, including general
economic conditions affecting disposable consumer income, such as employment,
business conditions, interest rates and taxation. The Company's business is also
affected by economic factors and seasonal consumer buying patterns. The
Company's quarterly results of operations have fluctuated in the past and may
continue to fluctuate as a result of a number of factors, including seasonal
cycles, the timing of new product introductions, the timing of orders by the
Company's customers, the mix of product sales and the effects of weather
conditions on consumer purchases. Historically, the Company's net sales, in the
aggregate, generally have been higher in the period from March to September. In
1994 and 1995, approximately 59% and 64%, respectively, of the Company's net
sales occurred during its second and third quarters. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality."
PRODUCT LIABILITY
Although the Company has not been subject to a significant product
liability claim to date, it may from time to time be subject to such lawsuits,
which generally seek damages for personal injuries allegedly sustained as a
result of defects in the Company's products. In addition, the Company could be
named as a defendant in cases involving products produced by Conquest Sports,
Inc. (formerly Pro-Tec, Inc., "Conquest"), which has been subject to numerous
claims and lawsuits from time to time. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Company History" and
"Certain Transactions." The Company maintains product liability, general
liability and excess liability insurance coverage, although there can be no
assurance that the Company's insurance will fully cover the damages and costs
associated with any particular claim.
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of Common Stock in the public
market following the Offering could adversely affect the market price for the
Common Stock. Of the 7,542,304 shares to be outstanding following the Offering,
the 2,666,667 shares offered hereby will be freely tradable and the remaining
4,875,637 shares will be "restricted securities" under Rule 144 promulgated
under the Securities Act of 1933, as amended (the "Securities Act"). Of such
restricted securities, approximately 1,170,000 shares will be eligible for sale
beginning 180 days after the date of this Prospectus upon the expiration of
lock-up agreements with
10
<PAGE> 13
the Representatives and subject to the provisions of Rule 144 and up to an
additional 1,172,000 restricted shares will be eligible for sale in March 1997.
The Company intends to file a registration statement on Form S-8 following the
date of this Prospectus to register the shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options. As of September 1,
1996, options to purchase approximately 107,000 shares will be vested, of which
approximately 43,000 such shares will be subject to the 180-day lock-up period
described above. See "Shares Eligible for Future Sale."
CONTROL BY MAJOR SHAREHOLDERS AND DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors, executive officers, 5% shareholders and their
affiliates will, in the aggregate, beneficially own approximately 60% of the
outstanding shares of Common Stock after the Offering (approximately 55% if the
Underwriters' over-allotment option is exercised in full). As a result, the
Company's directors, executive officers, 5% shareholders and their affiliates,
acting together, would be able to significantly influence or control many
matters requiring approval by the shareholders of the Company, including the
election of directors. See "Management" and "Principal and Selling
Shareholders."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has not been a public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained. The initial public offering price for the Common Stock offered
hereby will be determined by negotiations among the Company, the Selling
Shareholders and the Representatives of the Underwriters, and may not be
indicative of the market price for the Common Stock after the Offering. The
market price for shares of Common Stock may be volatile and may fluctuate based
on a number of factors, including, without limitation, business performance,
news announcements or changes in general market conditions. See "Underwriting."
DILUTION
The initial public offering price is substantially higher than the book
value per share of Common Stock. Investors purchasing shares of Common Stock in
the Offering will therefore incur immediate and substantial dilution. See
"Dilution."
ANTITAKEOVER CONSIDERATIONS
The Company's Board of Directors has the authority, without shareholder
approval, to issue up to 10,000,000 shares of Preferred Stock and to fix the
rights, preferences, privileges and restrictions of such shares without any
further vote or action by the Company's shareholders. This authority, together
with certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Restated Articles"), may have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from
attempting to acquire, control of the Company, even if shareholders purchasing
shares in the Offering may consider such a change in control to be in their best
interests. In addition, Washington law contains certain provisions that may have
the effect of delaying, deterring or preventing a hostile takeover of the
Company. See "Description of Capital Stock."
11
<PAGE> 14
THE COMPANY
References to Gargoyles and the Company in this Prospectus include the
Company and its subsidiaries. The Company succeeded to the sunglass business of
Conquest, an affiliated company that transferred its sunglass business to the
Company upon the Company's formation in 1983, and references to Gargoyles and
the Company herein include the sunglass business of Conquest prior to 1983.
Antone Manufacturing, Inc. ("Antone"), an affiliated S corporation that provided
assembly operations for Gargoyles, was merged into the Company in March 1995,
and references to Gargoyles and the Company herein include the combined
operations of the Company and Antone, unless the context requires otherwise. In
February 1996, the Company acquired H.S.I., a California corporation d/b/a Hobie
Sunglasses ("Hobie"). In May 1996, the Company acquired a 70% interest in
Kindling to develop products under the Timberland brand name.
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering, assuming
an initial public offering price of $15.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses, are
estimated to be approximately $22.4 million (approximately $24.6 million if the
Underwriters' over-allotment option is exercised in full). The Company intends
to use the net proceeds as follows: (i) to repay approximately $20 million of
indebtedness anticipated to be outstanding at the close of the Offering; (ii) to
fund start-up costs for the Timberland product line; and (iii) for working
capital and other general corporate purposes (including paying a bonus to an
executive officer as required by an employment agreement, paying obligations
with respect to the discontinued business of Conquest, increasing manufacturing
capacity and expanding international operations). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" for information regarding interest rates, maturities and use
of proceeds of indebtedness, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Company History" for information
concerning Timberland and payment of obligations of the discontinued business of
Conquest and "Management -- Employment and Change-in-Control Agreements" and
"Certain Transactions" for information regarding the bonus to the executive
officer. Pending such uses, the net proceeds will be invested in short-term,
interest-bearing investment grade securities. The Company will not receive any
proceeds from shares of Common Stock sold by the Selling Shareholders.
The Company may, when the opportunity arises, use an unspecified portion of
the net proceeds to acquire other businesses having product lines that are
compatible with the Company's business. In addition, any such acquisitions may
be financed with additional indebtedness and may involve the issuance of
significant amounts of the Company's capital stock. Such issuances of additional
capital stock could result in substantial dilution of ownership interests in the
Company. The Company has no specific arrangements with respect to any
acquisition at the present time, and there can be no assurance that any
acquisition will be made.
DIVIDEND POLICY
Except for distributions made prior to March 22, 1995 by Antone, which was
taxed as an S corporation, the Company has not declared or paid any cash
dividends on the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The Company expects to retain any future earnings to finance the
operation and expansion of its business. Future dividend payments will depend on
the results of operations, financial condition, capital expenditure plans and
other obligations of the Company and will be at the sole discretion of the
Company's Board of Directors. Under the Company's bank credit agreement, the
Company is prohibited from paying cash dividends without the bank's prior
written consent. The Company does not anticipate paying any cash dividends on
the Common Stock in the foreseeable future.
12
<PAGE> 15
CAPITALIZATION
The following table sets forth the Company's short-term indebtedness and
capitalization as of June 30, 1996, and as adjusted to give effect to the
Offering (after deducting underwriting discounts and commissions and estimated
offering expenses) and application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Short-term notes payable............................................ $ 12,536 $ --
Current maturities of long-term debt................................ 1,413 --
-------- -----------
Total short-term debt............................................ $ 13,949 $ --
======== =========
Long-term debt, less current maturities............................... $ 5,828 $ --
-------- -----------
Shareholders' equity (deficit):
Preferred Stock, no par value; 10,000,000 shares authorized; no --
shares outstanding actual or as adjusted......................... --
Common Stock, no par value; 40,000,000 shares authorized; 5,875,637 9,303
shares issued and outstanding actual; 7,542,304 shares issued and
outstanding as adjusted(1)....................................... 31,753
Repurchased shares.................................................. (10,896) (10,896)
Retained earnings (deficit)(2)...................................... (4,567) (4,867)
-------- -----------
Total shareholders' equity (deficit)............................. (6,160) 15,990
-------- -----------
Total capitalization........................................... $ (332) $ 15,990
======== =========
</TABLE>
- ---------------
(1) Excludes, as of June 30, 1996, 570,898 shares of Common Stock reserved for
issuance pursuant to the Company's benefit plan, of which options to
purchase 485,338 shares were outstanding with a weighted average exercise
price of $3.42 per share, and 41,020 shares of Common Stock reserved for
issuance pursuant to an outstanding warrant with an exercise price of $4.26
per share. See "Management -- Benefit Plan," "Description of Capital Stock"
and "Certain Transactions."
(2) Reflects a nonrecurring bonus to an executive officer, in connection with an
employment agreement, to be paid upon the closing of the Offering, which
will be expensed concurrently with the closing of the Offering.
13
<PAGE> 16
DILUTION
As of June 30, 1996, the Company's net tangible book value was
approximately ($8.9) million, or ($1.52) per share of Common Stock. Net tangible
book value per share represents the Company's total assets less intangible
assets and total liabilities divided by the number of shares of Common Stock
outstanding. Without taking into account any other changes in net tangible book
value after June 30, 1996, other than to give effect to the Offering at an
assumed initial public offering price of $15.00 per share and the receipt by the
Company of the estimated net proceeds therefrom, the pro forma net tangible book
value of the Company as of June 30, 1996 would have been approximately $13.5
million, or $1.80 per share. This represents an immediate increase in net
tangible book value of $3.32 per share to existing shareholders and an immediate
dilution of $13.20 per share to purchasers of shares of Common Stock in the
Offering, as illustrated by the following:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $15.00
Net tangible book value per share as of June 30, 1996............ $(1.52)
Increase per share attributable to new investors................. 3.32
------
Pro forma net tangible book value per share after the Offering..... 1.80
------
Dilution per share to new investors................................ $13.20
======
</TABLE>
The following table summarizes as of June 30, 1996, after giving effect to
the Offering, the differences between existing shareholders and purchasers of
shares of Common Stock in the Offering with respect to the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid:
<TABLE>
<CAPTION>
SHARES
PURCHASED(1)(2) TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............... 5,875,637 77.9% $ 5,924,110 19.2% $ 1.01
New investors....................... 1,666,667 22.1 25,000,000 80.8 $ 15.00
--------- ----- ----------- -----
Total............................. 7,542,304 100.0% $30,924,110 100.0%
========= ===== =========== =====
</TABLE>
- ------------------------
(1) Excludes, as of June 30, 1996, 570,898 shares of Common Stock reserved for
issuance pursuant to the Company's benefit plan, of which options to
purchase 485,338 shares were outstanding, and 41,020 shares of Common Stock
reserved for issuance pursuant to an outstanding warrant. See "Management --
Benefit Plan," "Description of Capital Stock" and "Certain Transactions."
(2) The above table is based on ownership as of June 30, 1996. Sales by the
Selling Shareholders in the Offering will reduce the number of shares held
by existing shareholders to 4,875,637 shares, or 64.6% (60.2% if the
Underwriters' over-allotment option is exercised in full) of the total
number of shares of Common Stock outstanding after the Offering, and will
increase the number of shares held by new investors to 2,666,667 shares, or
35.4% (39.8% if the Underwriters' over-allotment option is exercised in
full) of the total number of shares of Common Stock outstanding after the
Offering. See "Principal and Selling Shareholders."
14
<PAGE> 17
SELECTED FINANCIAL DATA
The following selected financial data as of November 30, 1994 and December
31, 1995 and for the years ended November 30, 1993 and 1994 and December 31,
1995 are derived from the consolidated financial statements of Gargoyles, Inc.,
which have been audited by Ernst & Young LLP, independent auditors, and are
included elsewhere in this Prospectus. The selected financial data as of
November 30, 1991, 1992 and 1993 and June 30, 1996, and for the years ended
November 30, 1991 and 1992 and for the six months ended June 30, 1995 and 1996
are derived from unaudited consolidated financial statements. In the Company's
opinion, the unaudited consolidated financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and
results of operations for these periods. Operating results for the six months
ended June 30, 1996 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1996. This data should be read
in conjunction with the consolidated financial statements, related notes and
other financial information included in this Prospectus. The results of
operations for the one-month period ended December 31, 1994 are presented in the
Company's consolidated financial statements and the related notes thereto, which
are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------- SIX MONTHS ENDED
NOVEMBER 30, JUNE 30,
---------------------------------- DECEMBER 31, -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................................... $6,371 $6,317 $8,242 $11,083 $ 17,138 $ 9,124 $17,627
Cost of sales..................................... 2,523 2,483 3,243 4,265 6,527 3,474 7,386
------ ------ ------ ------- ------- ------ ------
Gross profit...................................... 3,848 3,834 4,999 6,818 10,611 5,650 10,241
License income.................................... -- -- -- -- 480 290 294
Operating expenses:
Sales and marketing............................. 1,485 1,583 2,210 3,041 5,354 2,801 4,985
General and administrative...................... 1,238 1,256 1,453 2,558 3,030 1,335 2,078
Shipping and warehousing........................ 293 310 436 607 1,030 428 1,071
Research and development........................ 103 211 215 127 305 128 333
Loss on discontinued distribution agreement..... -- -- -- -- 312 -- --
Stock compensation.............................. -- -- -- -- 250 155 3,528
------ ------ ------ ------- ------- ------ ------
Total operating expenses...................... 3,119 3,360 4,314 6,333 10,281 4,847 11,995
------ ------ ------ ------- ------- ------ ------
Income (loss) from operations..................... 729 474 685 485 810 1,093 (1,460)
Other income (expense):
Interest expense, net........................... (60) (35) (55) (176) (1,043) (391) (1,161)
Recapitalization expenses....................... -- -- -- -- (574) (574) --
Provision for loss on affiliate................. -- -- -- -- (1,597) -- --
Other........................................... 5 87 2 -- 7 5 --
------ ------ ------ ------- ------- ------ ------
Total other income (expense).................. (55) 52 (53) (176) (3,207) (960) (1,161)
------ ------ ------ ------- ------- ------ ------
Income (loss) before income taxes................. 674 526 632 309 (2,397) 133 (2,621)
Income tax provision (benefit).................... 87 107 40 10 (100) 5 --
------ ------ ------ ------- ------- ------ ------
Net income (loss)................................. $ 587 $ 419 $ 592 $ 299 $ (2,297) $ 128 $(2,621)
====== ====== ====== ======= ======= ====== ======
Pro forma net income (loss)(1).................... $ 424 $ 380 $ 415 $ 179 $ (2,343) $ 82 $(2,621)
====== ====== ====== ======= ======= ====== ======
Pro forma net income (loss) per share(2).......... $ 0.07 $ 0.06 $ 0.07 $ 0.03 $ (0.38) $ 0.01 $ (0.43)
Shares used in computing pro forma net income
(loss) per share(2)............................. 6,138 6,138 6,138 6,138 6,138 6,138 6,142
SUPPLEMENTAL DATA (UNAUDITED):
Pro forma net sales(3)............................ $14,774 $ 21,182 $11,446 $17,938
Adjusted pro forma net income(4).................. 616 1,981
Adjusted pro forma net income per share(5)........ $ 0.08 $ 0.25
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------------------- DECEMBER 31, JUNE 30,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $1,314 $1,053 $1,042 $ (146) $ (2,872) $(5,012)
Total assets.......................................... 2,772 2,422 3,776 6,673 11,266 21,458
Total debt............................................ 903 306 1,062 2,557 12,780 19,777
Shareholders' equity (deficit)........................ 1,221 1,097 1,101 776 (7,204) (6,160)
</TABLE>
- ---------------
(1) Antone, an affiliated company, had previously been taxed as an S
corporation. The pro forma net income amounts for all periods prior to 1996
reflect adjustments for income taxes as if Antone had been taxed as a C
corporation rather than an S corporation.
(2) See Note 1 to the Company's Consolidated Financial Statements for an
explanation of the number of shares used in computing pro forma net income
(loss) per share.
(3) Amounts give effect to the Hobie Acquisition as if such transaction had
occurred at the beginning of the respective periods.
(4) Amounts give effect to the Hobie Acquisition and the application of the
estimated net proceeds from the Offering as if such transactions had
occurred at the beginning of the respective periods (see "Pro Forma
Financial Information"), and reflect the elimination of certain nonrecurring
charges as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Pro forma net income (loss) as adjusted........................................ $ (1,397) $ (1,547)
-------- ----
Add back:
Recapitalization expenses.................................................... 574 --
Provision for loss on affiliate.............................................. 1,597 --
Stock compensation........................................................... 250 3,528
-------- ----
Total adjustments........................................................ 2,421 3,528
Tax effect of adjustments...................................................... 408 --
-------- ----
Net adjustments.......................................................... 2,013 3,528
-------- ----
Adjusted pro forma net income.................................................. $ 616 $ 1,981
======== ====
</TABLE>
(5) Adjusted pro forma net income per share amounts are computed based on the
number of shares determined in accordance with Note 1 to the Company's
Consolidated Financial Statements, adjusted for the number of shares issued
in connection with the Hobie Acquisition and the number of shares assumed to
be issued in connection with the Offering as if such transactions had
occurred at the beginning of the respective periods.
16
<PAGE> 19
PRO FORMA FINANCIAL INFORMATION
The following Pro Forma Consolidated Statements of Operations for the year
ended December 31, 1995 and the six months ended June 30, 1996 are unaudited and
were prepared as if the Hobie Acquisition was effective as of January 1, 1995
and January 1, 1996, respectively. The Pro Forma Consolidated Statements of
Operations do not purport to represent what the Company's results of operations
would actually have been if the Hobie Acquisition had in fact occurred on such
dates or to project the Company's results of operations for any future period.
The Pro Forma Consolidated Statements of Operations are based on the historical
financial statements of the Company and Hobie and give effect to the Hobie
Acquisition under the purchase method of accounting. The Pro Forma Consolidated
Statements of Operations as adjusted for the year ended December 31, 1995 and
for the six months ended June 30, 1996 reflect the application of the estimated
net proceeds from the Offering as if it had occurred on January 1, 1995 and
January 1, 1996, respectively. The Pro Forma Consolidated Statements of
Operations should be read in conjunction with the financial statements and the
related notes thereto of Gargoyles and of Hobie, which are included elsewhere
herein.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS PRO FORMA
GARGOYLES HOBIE ADJUSTMENTS PRO FORMA FOR OFFERING(4) AS ADJUSTED
--------- ------ ----------- --------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................ $17,138 $4,044 $ -- $21,182 $ -- $21,182
Cost of sales.................... 6,527 1,992 -- 8,519 -- 8,519
--------- ------ ----------- --------- ------- -----------
Gross profit..................... 10,611 2,052 -- 12,663 -- 12,663
--------- ------ ----------- --------- ------- -----------
License income................... 480 -- -- 480 -- 480
--------- ------ ----------- --------- ------- -----------
Operating expenses:
Sales and marketing............ 5,354 1,176 -- 6,530 -- 6,530
General and administrative..... 3,030 679 233(1) 3,942 -- 3,942
Shipping and warehousing....... 1,030 35 -- 1,065 -- 1,065
Research and development....... 305 -- -- 305 -- 305
Loss on discontinued 312 -- -- 312 -- 312
distribution agreement.......
Stock compensation............. 250 -- -- 250 -- 250
--------- ------ ----------- --------- ------- -----------
Total operating expenses..... 10,281 1,890 233 12,404 -- 12,404
--------- ------ ----------- --------- ------- -----------
Income (loss) from operations.... 810 162 (233) 739 -- 739
--------- ------ ----------- --------- ------- -----------
Other income (expense):
Interest expense, net.......... (1,043) (131) (450)(2) (1,624) 1,624(5) --
Recapitalization expenses...... (574) -- -- (574) -- (574)
Provision for loss on (1,597) -- -- (1,597) -- (1,597)
affiliate....................
Other.......................... 7 (15) -- (8) -- (8)
--------- ------ ----------- --------- ------- -----------
Total other income (3,207) (146) (450) (3,803) 1,624 (2,179)
(expense)..................
--------- ------ ----------- --------- ------- -----------
Income (loss) before income (2,397) 16 (683) (3,064) 1,624 (1,440)
taxes..........................
Income tax provision (benefit)... (100) 11 46(3) (43) -- (43)
--------- ------ ----------- --------- ------- -----------
Net income (loss)................ $(2,297) $ 5 $(729) $(3,021) $ 1,624 $(1,397)
========== ====== ============ ========== =============== ===========
</TABLE>
17
<PAGE> 20
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
PRO FORMA FOR PRO FORMA
GARGOYLES HOBIE(6) ADJUSTMENTS PRO FORMA OFFERING(4) AS ADJUSTED
--------- -------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................ $17,627 $311 $ -- $17,938 $ -- $17,938
Cost of sales.................... 7,386 167 -- 7,553 -- 7,553
--------- -------- ----- --------- ----------- -----------
Gross profit..................... 10,241 144 -- 10,385 -- 10,385
--------- -------- ----- --------- ----------- -----------
License income................... 294 -- -- 294 -- 294
--------- -------- ----- --------- ----------- -----------
Operating expenses:
Sales and marketing............ 4,985 77 -- 5,062 -- 5,062
General and administrative..... 2,078 122 29(1) 2,229 -- 2,229
Shipping and warehousing....... 1,071 4 -- 1,075 -- 1,075
Research and development....... 333 -- -- 333 -- 333
Stock compensation............. 3,528 -- -- 3,528 -- 3,528
--------- -------- ----- --------- ----------- -----------
Total operating expenses..... 11,995 203 29 12,227 -- 12,227
--------- -------- ----- --------- ----------- -----------
Income (loss) from operations.... (1,460) (59) (29) (1,548) -- (1,548)
--------- -------- ----- --------- ----------- -----------
Other income (expense):
Interest expense, net.......... (1,161) (13) (57)(2) (1,231) 1,231(5) --
Other.......................... -- 1 -- 1 -- 1
--------- -------- ----- --------- ----------- -----------
Total other income (1,161) (12) (57) (1,230) 1,231 1
(expense)..................
--------- -------- ----- --------- ----------- -----------
Income (loss) before income (2,621) (71) (86) (2,778) 1,231 (1,547)
taxes..........................
Income tax provision (benefit)... -- (24) -- (24) 24(7) --
--------- -------- ----- --------- ----------- -----------
Net income (loss)................ $(2,621) $(47) $ (86) $(2,754) $ 1,207 $(1,547)
========== ========= ============ ========== ============ ===========
</TABLE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(1) To record the amortization of intangibles associated with the Hobie
Acquisition. For purposes of calculating goodwill and related amortization,
the allocation of the purchase price using the purchase method of accounting
is based on the fair value of the assets and liabilities of Hobie that were
acquired. The most significant component of intangibles is goodwill that is
being amortized over the remaining 27-year license period of the Hobie brand
name.
(2) To record interest expense for the period prior to the acquisition of debt
incurred in the Hobie Acquisition.
(3) Reflects adjustments for income taxes as if Antone had been taxed as a C
corporation rather than an S corporation.
(4) The adjustments for the Offering do not reflect a nonrecurring $300,000
bonus to be paid to an executive officer in connection with an employment
agreement, which will be expensed concurrently with the closing of the
Offering. See "Management -- Employment and Change-in-Control Agreements."
(5) Reflects the estimated reduction in interest expense on indebtedness
expected to be repaid from the estimated net proceeds of the Offering.
(6) Includes the results of operations for Hobie for the period January 1, 1996
through February 13, 1996, the date of acquisition.
(7) Reflects the additional taxes as a result of the adjustments for the
Offering.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with "Selected
Financial Data," "Pro Forma Financial Information" and the Company's and Hobie's
financial statements and the related notes thereto, which are included elsewhere
in this Prospectus.
In 1995, the Company changed its reporting period from a fiscal year ending
November 30 to a calendar year-end. In the following discussion, references to
1993, 1994 and 1995 are to the 12-month fiscal years ended November 30, 1993 and
1994 and December 31, 1995, respectively. The results of operations for the one-
month period ended December 31, 1994 are presented in the Company's consolidated
financial statements and the related notes thereto, which are included elsewhere
in this Prospectus.
COMPANY HISTORY
Background. The Company was founded in 1979 by Dennis L. Burns (the
"Founder") to develop a sunglass style that not only would cover and protect the
eyes more effectively than traditional "flat" lens designs, but also would
minimize distortion. In 1983, the Company completed its development of the
patented dual lens toric curve technology and introduced its first product, the
Gargoyles Classic. Until 1992, the Company was a successful single-product
company with relatively few resources devoted to expanding its product line, and
was dependent on independent manufacturers' representatives to sell its
products. In May 1992, the Company began installing a new management team. The
new management team (i) hired a number of experienced senior executives and
mid-level managers; (ii) focused on developing new products designed to exploit
the patented dual lens toric curve technology; (iii) pursued a growth strategy
centered around aggressive new product introductions; (iv) invested in its own
direct sales force to expand distribution; and (v) implemented a more focused
and aggressive marketing and advertising strategy to enhance the Gargoyles'
brand image. Primarily as a result of these initiatives, the Company has
achieved significant increases in sales.
Recapitalization. In a March 22, 1995 recapitalization (the
"Recapitalization"), an investor group (the "Investors") led by Trillium
Corporation ("Trillium") acquired a controlling interest in the Company. See
"Certain Transactions." In the Recapitalization, the Company (i) borrowed $6.0
million pursuant to a bank loan guaranteed by Trillium; (ii) sold approximately
3.5 million shares of its Common Stock to the Investors in exchange for $5.4
million, of which $900,000 was paid in cash and $4.5 million was paid in the
form of a promissory note from Trillium; and (iii) redeemed approximately 3.5
million shares of Common Stock from the Founder for $10.9 million, of which $6.4
million was paid in cash and $4.5 million was paid in the form of a promissory
note to the Founder. The $4.5 million note receivable and the $4.5 million note
payable and related interest have been offset for financial reporting purposes.
In January 1996, the obligations evidenced by the Company's note to the Founder
and Trillium's note to the Company were satisfied in full. In connection with
the Recapitalization, the Company recorded a charge of $574,000 relating to
severance, legal and other costs and recorded noncash deferred compensation of
$400,000 related to the amendment of an option agreement, which was amortized
over the vesting period. See "-- General" and "Certain Transactions --
Recapitalization Transaction."
Hobie Acquisition. In February 1996, the Company acquired the Hobie
sunglass business for $3.4 million. Hobie manufactures polarized sunglasses
under the Hobie brand name pursuant to a long-term license agreement from Hobie
Designs, Inc. In addition, as consideration for certain noncompetition
covenants, the Company agreed to pay an aggregate of $200,000 in 12 monthly
installments and issued an aggregate of 15,634 shares of its Common Stock to two
of Hobie's former shareholders. The Company also agreed to pay consulting
service fees of up to an aggregate of $300,000 to these two shareholders,
contingent upon the achievement by Hobie of certain sales objectives in 1996 and
1997. In addition, during 1998 these shareholders may require the Company to
repurchase their shares for an aggregate of $200,000 if the Company has not
completed a public offering by December 31, 1997. The Hobie Acquisition was
funded by proceeds of a bank loan, which Trillium guaranteed. See "Certain
Transactions -- Other Transactions." Following the Hobie Acquisition, the
Company relocated Hobie's operations to the Company's facility in Kent,
Washington.
19
<PAGE> 22
Timberland Transaction. In May 1996, the Company, together with Douglas W.
Lauer, former president of Revo, a subsidiary of Bausch & Lomb, formed Kindling,
a majority-owned subsidiary, to design, develop, manufacture and distribute
sunglasses and, with Timberland's consent, ophthalmic frames under the
Timberland brand name. Concurrently with Kindling's formation, the Company and
Kindling, jointly and severally, acquired an exclusive, worldwide (except for
Benelux, Cyprus, Israel and Scandinavia) license from Timberland to use the
Timberland trademark and tree logo on sunglasses, eyewear accessories and, with
Timberland's consent, ophthalmic frames. The Company contributed $1.2 million
for its 70% interest in Kindling. Of that amount, $100,000 was paid in cash and
$1.1 million by means of a non-interest-bearing promissory note that is payable
in installments through January 1997, a portion of which will be paid with the
net proceeds of the Offering. The license agreement with Timberland expires on
December 31, 2000 with options to renew by the Company assuming certain
conditions are met and subject to provisions for earlier termination. Under
certain circumstances, Timberland may require Kindling to repurchase all of
Timberland's 10% interest in Kindling. In addition, upon the achievement of
certain operating objectives, Mr. Lauer and certain other key employees of
Kindling may be granted up to an additional 10% of Kindling's common stock owned
by the Company. Trillium has agreed to make advances of up to $400,000 to fund
the Company's 1996 capital obligations to Kindling. To date, Trillium has
advanced $100,000 in each of June and July 1996, which are due, with interest at
12% per annum, on September 30, 1996 (the "Kindling Loan"). See "Certain
Transactions -- Other Transactions." The Company and Mr. Lauer are currently
formulating the strategy with respect to the Timberland product line; the
Company anticipates that sales of Timberland branded products will begin in
1997.
Conquest Asset Sale and Liquidation. Prior to the Recapitalization, both
the Company and Conquest were majority-owned by the Founder. Conquest's core
business has been the design, manufacture, distribution and sale of sports
helmets. At the time of the Recapitalization, shares of Conquest's common stock
were sold by the Founder to substantially the same investor group that purchased
Common Stock in the Recapitalization. See "Certain Transactions -- Conquest
Transactions." The Company has advanced funds to Conquest and has guaranteed
certain liabilities of Conquest. Management has concluded that it is likely that
Conquest will be unable to meet its obligations and, therefore, the Company has
recorded a provision in the fourth quarter of 1995 of $1.6 million representing
the write-off of the Company's receivable from Conquest and other potential
payments of Conquest liabilities, including Conquest indebtedness which
Gargoyles has guaranteed. In June 1996, Conquest sold certain of its assets for
a purchase price of approximately $600,000 plus the assumption of certain
liabilities. Conquest is in the process of liquidating its remaining assets.
GENERAL
The Company introduced its first product in December 1983. Since the
Company's new management was put in place in 1992, the Company's net sales have
grown significantly, from $6.3 million in 1992 to $17.1 million in 1995. For the
first six months of 1996, net sales increased 93% to $17.6 million compared to
the same period for 1995. The Company attributes its net sales growth primarily
to the introduction of new products, growth of sunglass specialty retailers
(principally Sunglass Hut), sales efforts focused on opening new accounts and
increased brand recognition. The Company's number of active accounts increased
from in excess of 1,800 in 1993 to approximately 2,800 in 1995. The Company's
annual net sales per active account increased at a compounded annual growth rate
of approximately 17% from $4,519 in 1993 to $6,160 in 1995.
In April 1995, the Company entered into a license agreement (the "License
Agreement") whereby it, as licensor, receives quarterly cash payments based on
the portion of the licensee's income from the sale of certain products. The
Company also received a $1.0 million payment at the inception of the License
Agreement. After deducting expenses associated with the License Agreement, the
$720,000 balance was recorded as deferred license income, and is being amortized
over a four-year term. The quarterly cash payments, and the amortization of
deferred license income, are reported as license income on the Company's
consolidated financial statements.
Hobie was acquired by the Company on February 13, 1996 and was accounted
for as a purchase. Results of Hobie are therefore included in the Company's
consolidated financial statements for the period ended June 30, 1996 only for
the period from February 14, 1996 to June 30, 1996. Results for the period from
20
<PAGE> 23
January 1, 1996 until the date of the Hobie Acquisition and results for Hobie
for 1995 and 1994 are also included in the financial statements contained in
this Prospectus.
Pursuant to an agreement dated January 5, 1994, among Gargoyles, the
Founder and Mr. Hauff, the Founder granted Mr. Hauff a nonqualified option to
purchase 10% of the Common Stock from the Founder. In connection with the
Recapitalization, the provisions of the option agreement were amended to
eliminate the option's expiration date, unless the Company closed an initial
public offering, in which case the option would immediately vest and expire. The
amended option was subsequently assumed by the Investors. See "Certain
Transactions--Other Transactions." As a result of the amendment, the Company was
required to recognize deferred compensation of $400,000, which was expensed over
the option vesting period. Also in connection with the Recapitalization, the
Investors granted Mr. Hauff an additional nonqualified option to purchase
146,500 shares of the Common Stock owned by the Investors at an exercise price
of $4.26 per share. In June 1996, in contemplation of the Offering, the
Investors further amended Mr. Hauff's option agreements to accelerate the
vesting and to extend the expiration date to June 28, 2006. As a result, the
remaining balance of $150,000 from the initial $400,000 deferred compensation
was expensed and Gargoyles recognized an additional nonrecurring, noncash stock
compensation charge of $3.4 million in the second quarter of 1996.
Antone provided assembly operations for Gargoyles prior to the
Recapitalization and was merged into Gargoyles in connection with the
Recapitalization. The merger was accounted for as a pooling-of-interests due to
common ownership. Prior to the Recapitalization, Antone was taxed as an S
corporation. Accordingly, Antone's taxable income included in the Company's
consolidated financial statements is treated as if it were distributed to the
Founder, who is responsible for payment of taxes thereon. The Company did not,
therefore, pay taxes on Antone's taxable income prior to the Recapitalization.
RESULTS OF OPERATIONS
The following table sets forth results of operations, as a percentage of
net sales, for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------- SIX MONTHS
ENDED
NOVEMBER 30, JUNE 30,
--------------- DECEMBER 31, ---------------
1993 1994 1995 1995 1996
----- ----- ------------ ----- -----
<S> <C> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 39.4 38.5 38.1 38.1 41.9
----- ----- ----- ----- -----
Gross profit.................................. 60.6 61.5 61.9 61.9 58.1
License income................................ -- -- 2.8 3.2 1.7
Operating expenses:
Sales and marketing......................... 26.8 27.4 31.2 30.7 28.3
General and administrative.................. 17.6 23.1 17.7 14.6 11.8
Shipping and warehousing.................... 5.3 5.5 6.0 4.7 6.0
Research and development.................... 2.6 1.1 1.8 1.4 1.9
Loss on discontinued distribution
agreement................................ -- -- 1.8 -- --
Stock compensation.......................... -- -- 1.5 1.7 20.0
----- ----- ----- ----- -----
Total operating expenses................. 52.3 57.1 60.0 53.1 68.0
----- ----- ----- ----- -----
Income (loss) from operations................. 8.3% 4.4% 4.7% 12.0% (8.2)%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Net sales. Net sales increased to $17.6 million for the six months ended
June 30, 1996 from $9.1 million for the six months ended June 30, 1995. This
increase was primarily the result of (i) new product introductions, including
the Helios models in March 1995 and the Paladin, Vortex and Octane models in
1996, (ii) sales increases in existing product lines, (iii) an increase in the
number of active accounts resulting from the Company's sales efforts, and (iv)
sale of Hobie products in the 1996 period, subsequent to the Hobie Acquisition,
totaling approximately $3.0 million. The change in the Company's product mix
associated with
21
<PAGE> 24
new product introductions and the inclusion of the Hobie product lines
contributed to a 3% increase in the total average selling price in the 1996
period on unit growth of 84%.
Gross profit. Gross profit increased to $10.2 million for the six months
ended June 30, 1996 from $5.6 million for the six months ended June 30, 1995.
Gross margin decreased to 58.1% in the 1996 period from 61.9% in the 1995
period. The decline in gross margin in 1996 was attributable, in part, to large
purchases by Sunglass Hut and growth in sales to new distributors, both of which
receive higher volume discounts than the Company's other accounts. The Company's
sales to Sunglass Hut totaled approximately 37% of the Company's net sales
compared to a historical level of approximately 33%. The Company anticipates
that its sales to Sunglass Hut for the remaining quarters of 1996 will more
closely approximate historical levels. In addition, the decrease in gross margin
in 1996 resulted from lower gross margin for Hobie. Hobie's lower gross margin
resulted primarily from sales pricing and component costs in place at the time
of the Hobie Acquisition in February 1996. The decrease in gross margin in 1996
also resulted from unanticipated cost increases from one frame supplier, which
led to a decrease in gross margin of approximately 1.5%. The Company is
replacing this supplier with a new, lower-cost supplier.
License income. License income increased to $294,000 for the six months
ended June 30, 1996 from $290,000 for the six months ended June 30, 1995.
Operating expenses. Operating expenses increased to $12.0 million for the
six months ended June 30, 1996 from $4.8 million for the six months ended June
30, 1995. As a percentage of net sales, operating expenses increased to 68.0% in
the 1996 period, which included stock compensation of $3.5 million or 20.0% of
net sales, from 53.1% in the 1995 period. Excluding this stock compensation,
operating expenses as a percentage of net sales decreased to 48.0% for the 1996
period. Sales and marketing expenses increased $2.2 million in the 1996 period,
primarily as a result of salaries and commissions associated with higher sales
levels and increases in marketing and warranty expenditures. As a percentage of
net sales, sales and marketing expenses decreased to 28.3% in the 1996 period
from 30.7% in the 1995 period due to the slower growth of these expenses
compared to net sales. General and administrative expenses increased $743,000 in
the 1996 period, as the Company continued to add personnel and the
infrastructure necessary to support its growth. As a percentage of net sales,
general and administrative expenses decreased to 11.8% in the 1996 period from
14.6% in the 1995 period, due to greater leverage of the Company's overhead.
Stock compensation increased to $3.5 million in the 1996 period from $155,000 in
the 1995 period. See "-- General."
Income (loss) from operations. The Company's loss from operations of
($1.5) million for the six months ended June 30, 1996 compared to income from
operations of $1.1 million for the six months ended June 30, 1995 primarily as a
result of the nonrecurring, noncash stock compensation charge in the 1996
period.
Interest expense, net. Net interest expense increased to $1.2 million for
the six months ended June 30, 1996 from $400,000 for the six months ended June
30, 1995. This increase resulted from substantially higher debt incurred in the
Recapitalization in March 1995 and the Hobie Acquisition in February 1996, and
increased borrowings to support operations.
Recapitalization expenses. In March 1995, the Company incurred $574,000 in
expenses relating to the Recapitalization for severance, legal and other costs.
See "-- Company History."
Income tax provision (benefit). The Company's income tax benefit was zero
for the six months ended June 30, 1996 compared to an income tax provision of
$5,000 for the six months ended June 30, 1995. Differences from the federal
statutory income tax rate of 34% resulted primarily in 1996 from increases in
the reserve against certain tax assets and, in 1995, the inclusion of Antone's
earnings in income (loss) before income taxes. The Company was not subject to
income tax on Antone's earnings because Antone was an S corporation.
Net income (loss). As a result of the items discussed above, the Company's
net loss was ($2.6) million for the six months ended June 30, 1996 compared to
net income of $128,000 for the six months ended June 30, 1995.
22
<PAGE> 25
Hobie. Net sales of Hobie sunglasses were $3.3 million for the six months
ended June 30, 1996 compared to $2.3 million for the six months ended June 30,
1995. Hobie's income from operations increased to $753,000 for the six months
ended June 30, 1996 from $172,000 for the six months ended June 30, 1995.
Hobie's operating expenses in the 1996 period included amortization of goodwill
and noncompete agreement costs totaling $33,500. Hobie's net loss for the period
from January 1 to February 13, 1996 was $47,000. This loss resulted primarily
from the seasonality of Hobie's business.
Year Ended December 31, 1995 Compared to Year Ended November 30, 1994
Change in fiscal year-end. In 1995, the Company changed its reporting
period from a fiscal year ending November 30 to a calendar year. The results of
operations for the one-month period ended December 31, 1994 are presented in the
Company's consolidated financial statements and the related notes. Because the
Company's business is seasonal, the results of operations for December are not
indicative of results for other months in the year.
Net sales. Net sales increased to $17.1 million for the year ended
December 31, 1995 from $11.1 million for the year ended November 30, 1994. This
increase was primarily the result of (i) new product introductions, including
the Helios models, (ii) sales increases in existing product lines, and (iii) an
increase in the number of active accounts resulting from the Company's sales
efforts. The change in the Company's product mix contributed to a 15% increase
in the total average selling price of eyewear in 1995 on unit growth of 38%.
Gross profit. Gross profit increased to $10.6 million for the year ended
December 31, 1995 from $6.8 million for the year ended November 30, 1994. Gross
margin increased to 61.9% in 1995 from 61.5% in 1994. This slight margin
improvement resulted from a reduction in the cost for certain key components,
partially offset by unanticipated cost increases from one frame supplier, which
led to a decrease in gross margin of approximately 1.5%. The Company is
replacing this supplier with a new, lower-cost supplier.
License income. The License Agreement was entered into in February 1995,
resulting in license income of $480,000 for 1995.
Operating expenses. Operating expenses increased to $10.3 million for the
year ended December 31, 1995 from $6.3 million for the year ended November 30,
1994. As a percentage of net sales, operating expenses increased to 60.0% in
1995 from 57.1% in 1994. Sales and marketing expenses increased $2.3 million in
1995, primarily as a result of salaries and commissions associated with higher
sales levels and increases in marketing and warranty expenditures. As a
percentage of net sales, sales and marketing expenses increased to 31.2% in 1995
from 27.4% in 1994, reflecting the Company's increased investment in its direct
sales force. General and administrative expenses increased $472,000 in 1995, as
the Company continued to add personnel and the infrastructure necessary to
support its growth. As a percentage of net sales, general and administrative
expenses decreased to 17.7% in 1995 from 23.1% in 1994. General and
administrative expenses in 1994 were impacted by several investments the Company
made, including the expenses associated with moving into a new facility and
investments in personnel and the infrastructure necessary to support its
anticipated growth. Additionally, during 1995 the Company incurred net expenses
of $312,000 associated with the discontinuance of a distribution agreement for
the sale of sunglasses produced by another manufacturer. Stock compensation
totaled $250,000 for 1995.
Income from operations. The Company's income from operations increased to
$810,000 for the year ended December 31, 1995 from $485,000 for the year ended
November 30, 1994. As a percentage of net sales, income from operations
increased to 4.7% in 1995 from 4.4% in 1994. This increase was the result of the
Company's net sales growth, gross margin improvement and license income,
partially offset by the increase in operating expenses.
Interest expense, net. Net interest expense increased to $1.0 million for
the year ended December 31, 1995 from $176,000 for the year ended November 30,
1994. This increase resulted from debt incurred in the Recapitalization and
increased borrowings to support operations.
23
<PAGE> 26
Recapitalization expenses. In March 1995, the Company incurred $574,000 in
expenses relating to the Recapitalization for severance, legal and other costs.
See "-- Company History."
Provision for loss on affiliate. During 1995, the Company recorded a $1.6
million provision for the loss on Conquest. Gargoyles has advanced funds to, and
guaranteed certain liabilities of, Conquest. This provision included the
write-off of the funds advanced, and the establishment of a liability for the
Company's potential payment of certain Conquest liabilities. See "-- Company
History" and "Certain Transactions -- Conquest Transactions."
Income tax provision (benefit). The Company's income tax benefit was
($100,000) for the year ended December 31, 1995, compared to an income tax
provision of $10,000 for the year ended November 30, 1994. Differences from the
federal statutory income tax rate of 34% resulted primarily from increases in
the reserve against certain tax assets and the inclusion of Antone's earnings in
income (loss) before income taxes. The Company was not subject to income tax on
Antone's earnings because Antone was an S corporation.
Net income (loss). The Company's net loss was $2.3 million for the year
ended December 31, 1995, compared to net income of $299,000 for the year ended
November 30, 1994. This decrease resulted principally from increased interest
expense and nonrecurring recapitalization expenses and nonrecurring provision
for loss on affiliate, partially offset by the increased income from operations.
Hobie. Net sales of Hobie sunglasses increased to $4.0 million for the
year ended December 31, 1995 from $3.7 million for the year ended December 31,
1994. Hobie's income from operations increased to $162,000 for the year ended
December 31, 1995 from $84,000 for the year ended December 31, 1994. This
increase was primarily the result of Hobie's net sales growth and gross margin
improvement partially offset by an increase in operating expenses.
Year Ended November 30, 1994 Compared to Year Ended November 30, 1993
Net sales. Net sales increased to $11.1 million for the year ended
November 30, 1994 from $8.2 million for the year ended November 30, 1993. This
increase was primarily the result of (i) new product introductions, including
the Legends model, (ii) sales increases in existing product lines, and (iii) an
increase in the number of active accounts resulting from the Company's sales
efforts. The change in the Company's product mix contributed to a 14% increase
in the total average selling price of eyewear in 1994 on unit growth of 18%.
Gross profit. Gross profit increased to $6.8 million for the year ended
November 30, 1994 from $5.0 million for the year ended November 30, 1993. Gross
margin increased to 61.5% in 1994 from 60.6% in 1993. This increase was
primarily the result of cost reductions obtained for certain key components.
Operating expenses. Operating expenses increased to $6.3 million for the
year ended November 30, 1994 from $4.3 million for the year ended November 30,
1993. Operating expenses as a percentage of net sales increased to 57.1% in 1994
from 52.3% in 1993. Sales and marketing expenses increased $831,000 in 1994,
primarily as a result of salaries and commissions associated with higher sales
levels and the establishment of the Company's direct sales force. As a
percentage of net sales, sales and marketing expenses increased to 27.4% in 1994
from 26.8% in 1993. General and administrative expenses increased $1.1 million
in 1994, as the Company moved into a new facility and invested in personnel and
the infrastructure necessary to support its growth. As a result, general and
administrative expenses, as a percentage of net sales, increased to 23.1% in
1994 from 17.6% in 1993.
Income from operations. The Company's income from operations decreased to
$485,000 for the year ended November 30, 1994 from $685,000 for the year ended
November 30, 1993. As a percentage of net sales, income from operations
decreased to 4.4% in 1994 from 8.3% in 1993. This decrease was the result of the
Company's increase in operating expenses, partially offset by the net sales
growth and gross margin improvement.
24
<PAGE> 27
Interest expense, net. Net interest expense increased to $176,000 for the
year ended November 30, 1994 from $55,000 for the year ended November 30, 1993.
This increase resulted primarily from increased borrowings to support
operations.
Income tax provision. The Company's income tax provision decreased to
$10,000 for the year ended November 30, 1994 from $40,000 for the year ended
November 30, 1993. Differences from the federal statutory income tax rate of 34%
primarily resulted from the inclusion of Antone's earnings in income (loss)
before income taxes. The Company was not subject to income tax on Antone's
earnings because Antone was an S corporation.
Net income. Net income decreased to $299,000 for the year ended November
30, 1994 from $592,000 for the year ended November 30, 1993. This decrease
resulted from the decreased income from operations and increased interest
expense.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has relied primarily on cash from operations and
borrowings to finance its operations. As described below, since March 1995,
Trillium has guaranteed certain of the Company's loans and from time to time has
made certain other loans to the Company. In addition, prior to the
Recapitalization, Antone, which was merged into the Company, made S corporation
distributions to the Founder from Antone's earnings. Cash provided by (used in)
the Company's operating activities, primarily to fund the growth in accounts
receivable and inventories, totaled $300,000 and ($400,000) for the years ended
November 30, 1993 and 1994, respectively, ($3.1) million for the year ended
December 31, 1995 and ($2.7) million for the six months ended June 30, 1996.
Cash provided by (used in) the Company's investing activities, primarily to fund
capital expenditures, and, in the six months ended June 30, 1996, to fund the
Hobie Acquisition, totaled ($200,000) and ($700,000) for the years ended
November 30, 1993 and 1994, respectively, ($1.3) million for the year ended
December 31, 1995 and ($4.4) million for the six months ended June 30, 1996.
Cash provided by (used in) the Company's financing activities, primarily
proceeds from bank debt and, in the year ended December 31, 1995, proceeds from
the stock issuance in the Recapitalization, totaled ($400,000) and $1.0 million
for the years ended November 30, 1993 and 1994, respectively, $4.3 million for
the year ended December 31, 1995 and $7.1 million for the six months ended June
30, 1996. As of June 30, 1996, the Company had a working capital deficit of $5.0
million, including $13.9 million of indebtedness to be repaid with a portion of
the net proceeds from the Offering.
Gargoyles has a revolving line of credit with a bank (the "Credit
Facility") that matures on March 22, 1997. Effective June 25, 1996, the Company
could borrow under the Credit Facility up to the lesser of (i) an amount that,
together with outstanding interest, does not exceed the total of 80% of eligible
accounts receivable and 50% of eligible inventories and (ii) $11.0 million.
Borrowings under the Credit Facility bear interest at the bank's prime rate plus
1.0% per annum (9.25% at June 30, 1996), payable monthly. Amounts borrowed under
the Credit Facility are secured by all tangible and intangible personal property
of the Company. Proceeds from borrowings under the Credit Facility were used by
the Company to support operations. As of June 30, 1996, the Company had
borrowings of $7.5 million under the Credit Facility. The Credit Facility
requires, among other things, that the Company maintain a minimum tangible net
worth and working capital and meet certain ratios relating to debt coverage. As
of June 30, 1996, the Company was in compliance with the covenants. The Company
will repay the balance outstanding under the Credit Facility with a portion of
the net proceeds from the Offering. At that time, the Credit Facility will be
replaced with a $10 million unsecured revolving line of credit with a more
favorable interest rate.
In connection with the Recapitalization, the Company borrowed $6.0 million
in an acquisition loan (the "Recapitalization Loan") from a bank. These funds
were used, along with the proceeds from the sale of Common Stock to the
Investors, to repurchase stock from the Founder. The Recapitalization Loan bears
interest at the bank's prime rate plus 1.50% per annum (9.75% at June 30, 1996),
payable monthly. Principal payments are payable quarterly in the amount of
$230,769 through March 2002. The Recapitalization Loan is guaranteed by
Trillium. As of June 30, 1996, the Company had borrowings of $5.5 million under
the Recapitalization Loan. Additionally, a note payable of $283,100 was issued
to the Founder, bearing interest at
25
<PAGE> 28
10% per annum. Gargoyles paid interest only on a monthly basis through September
1995. Beginning in October 1995, the note became payable in monthly installments
of principal and interest of $10,704 through March 1998.
In connection with the Hobie Acquisition, the Company borrowed $4.0 million
in an acquisition loan (the "Hobie Acquisition Loan") from a bank. These funds
were primarily used to purchase all the outstanding stock of Hobie. On June 26,
1996, the Company borrowed an additional $1.0 million under the Hobie
Acquisition Loan, the proceeds of which were used for general working capital.
The Hobie Acquisition Loan bears interest at the bank's prime rate plus 3.0% per
annum (11.25% at June 30, 1996), payable monthly. A $700,000 principal payment
is due September 30, 1996 and the $4.3 million balance is due December 31, 1996.
In addition, loan fees of (i) 1.0% of the then-outstanding principal balance is
due on September 30, 1996 and (ii) $212,000 is due on December 31, 1996. The
Hobie Acquisition Loan is guaranteed by Trillium. As of June 30, 1996, the
Company had borrowings of $5.0 million under the Hobie Acquisition Loan. If the
Company does not repay the Hobie Acquisition Loan on or before December 31,
1996, it must pay an additional loan fee of $5.0 million or issue a warrant to
purchase that number of shares of the Company's Common Stock that would
constitute 25% of the Common Stock on a fully diluted basis at a purchase price
of $.01 per share (subject to certain antidilution adjustments). If issued, the
warrant would be exercisable by the bank at any time after March 31, 1997 and,
until June 30, 1997, the Company would have the right to redeem the warrant for
an aggregate redemption price of $5.0 million. If the bank were to exercise the
warrant, the bank would have the right, subject to certain limitations, to
require the Company to register its shares of Common Stock.
The Company has also borrowed a total of $1.2 million from a bank, bearing
interest at the bank's prime rate plus 1.25% per annum (9.50% at June 30, 1996),
with interest payable monthly and principal payable quarterly through 2000 (the
"Equipment Loan"). The Equipment Loan was used to finance the purchase of
equipment and is secured by such equipment. As of June 30, 1996, a total of $1.2
million was outstanding under the Equipment Loan.
The Company intends to repay the Credit Facility, the Recapitalization
Loan, the Hobie Acquisition Loan, the Kindling Loan, the Equipment Loan, the
Settlement Note (see "Certain Transactions -- Recapitalization Transaction") and
certain other indebtedness with a portion of the net proceeds of the Offering.
See "Use of Proceeds" and Note 5 to the Company's Consolidated Financial
Statements.
Antone historically made distributions to the Founder to pay income taxes
on Antone's earnings included in the Founder's taxable income and as a return on
his investment. Antone paid distributions to the Founder of $587,000, $625,000
and $261,000 for the years ended November 30, 1993 and 1994 and December 31,
1995, respectively.
Capital expenditures totaled $1.3 million for the year ended December 31,
1995. The Company anticipates that capital expenditures will total approximately
$1.0 million for the year ending December 31, 1996. Capital expenditures during
1995 and 1996 are primarily for optical molds and production and office
equipment.
The Company believes that cash flow from operations, the net proceeds of
the Offering and available borrowings will be sufficient to meet its operating
needs and capital expenditures for the foreseeable future.
SEASONALITY
The following table sets forth certain unaudited quarterly data for the
periods shown:
<TABLE>
<CAPTION>
1994 QUARTER ENDED 1995 QUARTER ENDED 1996 QUARTER ENDED
------------------------------------ -------------------------------------- -------------------
FEB. 28 MAY 31 AUG. 31 NOV. 30 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
------- ------ ------- ------- ------- ------- -------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....... $ 1.5 $3.3 $ 3.2 $ 3.1 $ 3.3 $ 5.8 $5.2 $ 2.8 $ 7.0 $10.6
Gross profit.... 0.9 2.0 2.0 1.9 2.0 3.6 3.3 1.7 4.1 6.1
</TABLE>
26
<PAGE> 29
The Company's net sales generally have been higher in the period from March
to September, the period during which sunglass purchases are highest. As a
result, operating income is typically lower in the first and fourth quarters as
fixed operating costs are spread over lower sales volume. In anticipation of
seasonal increases in demand, the Company typically builds inventories in the
fourth quarter, when net sales have historically been lower. The Company's
quarterly results of operations have fluctuated in the past and may continue to
fluctuate as a result of a number of factors, including seasonal cycles, the
timing of new product introductions, the timing of orders by the Company's
customers, the mix of product sales and the effects of weather conditions on
consumer purchases. See "Risk Factors -- Economic Conditions; Quarterly
Fluctuations; Seasonality."
BACKLOG AND BACKORDERS
Since mid-1994, the Company has experienced a significant increase in
backlog (which represents all unshipped orders, regardless of the scheduled
shipping date) and occasional increases in backorders (which represent orders
for merchandise remaining unshipped beyond its scheduled shipping date). As of
June 30, 1996, the Company's backlog was approximately $1.8 million,
approximately $1.0 million of which represented backorders.
The occasional increases in backorders have been due to increases in the
market demand for Gargoyles products, which have temporarily exceeded either the
capacity of the Company's lens and frame suppliers or the Company's internal
production capacity. Prior to the Recapitalization, the Company did not have
sufficient capital to maintain an adequate supply of certain key components,
which resulted in an increase in backorders in the months preceding and
immediately following the Recapitalization. The Recapitalization increased the
Company's access to capital, thereby allowing it to reduce backorders and
further develop adequate inventory levels. The Company has been taking actions
since the Recapitalization to reduce the potential of future backorders. In
particular, Gargoyles has worked with its suppliers to increase the level of
production of Gargoyles products, has added new suppliers and has increased its
own production capacity through the addition of personnel and equipment. In
addition, in late 1995 the Company refocused its product offerings on the most
popular frame and lens color combinations, allowing the Company to narrow the
stock-keeping units offered, thereby reducing the potential for future
backorders. See "-- Liquidity and Capital Resources," "Risk Factors -- Ability
to Sustain and Manage Growth" and "-- Reliance on Limited Sources of Supplies,"
"Business -- Manufacturing" and "Use of Proceeds."
27
<PAGE> 30
BUSINESS
INTRODUCTION
Gargoyles designs, manufactures and markets a broad line of performance and
lifestyle-oriented sunglasses. The Company competes in the rapidly growing
premium sunglass market by offering a diverse line of products at suggested
retail prices of $80 to $190. The Company seeks to distinguish Gargoyles brand
products in the marketplace by combining innovative styling with its patented
dual lens toric curve technology, which the Company believes is the most
advanced lens design currently available in wrap sunglasses. The Company
believes these features appeal not only to active sports enthusiasts who favor
the performance and comfort features of its products, but also to consumers who
appreciate Gargoyles' distinctive styling and innovative designs. In addition,
the Company recently acquired the Hobie sunglass line, a leading line of
polarized sunglasses, which is one of the fastest emerging categories within the
premium sunglass market. The Company also offers a popular line of protective
eyewear focused primarily on the medical and dental market segments. The Company
believes that the diversity of its product lines, combined with increasing
awareness among consumers of the Gargoyles and Hobie brands and their unique
attributes, has positioned it to capitalize on the strong growth potential in
the domestic and international premium sunglass markets. The Company's net sales
have increased at a compounded annual growth rate of 40% from 1992 through 1995.
For the first six months of 1996, the Company achieved growth in net sales of
93% compared to the same period in the prior year.
The Company was founded in 1979 to develop a sunglass style that not only
would cover and protect the eyes more effectively than traditional "flat" lens
designs, but also would minimize distortion. In 1983, the Company completed the
development of its patented dual lens toric curve technology. The complex
geometry of the proprietary toric curve lens minimizes distortion associated
with other wrap lens designs by allowing the transmission of light directly to
the eye with little refraction. The dual lens design provides each eye with its
own optical center of focus, resulting in greater overall optical clarity and
less peripheral distortion. The Company believes this proprietary technology
offers the most advanced and optically correct sunglass lens design available in
wrap sunglasses and provides a significant differential competitive advantage.
In 1983, the Company introduced its first product based on this proprietary
technology, the Gargoyles Classic. Until 1992, the Company was a successful
single-product company with relatively few resources devoted to expanding its
product line, and was dependent on independent manufacturers' representatives to
sell its products. In May 1992, the Company began installing a new management
team which has developed and implemented new operating and growth strategies
designed to exploit the patented dual lens toric curve technology and to
capitalize on the growth trends within the premium sunglass market. These
strategies included an aggressive, innovative new product development program
resulting in the introduction of numerous models, including 85s in 1993, Legends
in 1994, Helios and Legends II in 1995, and Paladin, Octane and Vortex in 1996.
In addition, the Company began investing in its own direct sales force in 1994
to expand distribution and gain more control over the sales process. The Company
also initiated a strategy to enhance the Gargoyles brand image and promote the
performance characteristics of its products by aggressively pursuing strategic
endorsements from professional athletes such as Dale Earnhardt, Ken Griffey,
Jr., Alexi Lalas and Scottie Pippen. The Company believes that these strategies
have contributed to its rapid sales growth and have created a platform for the
continued success of the Gargoyles brand.
The Company has also leveraged its infrastructure and direct sales force by
adding new brands through acquisitions and licensing arrangements that can
increase sales without commensurate increases in operating expenses. In
particular, the Company acquired Hobie's sunglass business in February 1996,
which broadened the Company's technology base to include polarized sunglasses.
Further, in May 1996, the Company, together with the former president of Revo,
entered into a worldwide license agreement with Timberland to design,
manufacture and market sunglasses under the Timberland brand name. The Company
believes the worldwide appeal of the Timberland brand name will assist the
Company in further penetrating the outdoor-lifestyle market segment. Management
believes that the addition of these brands to the Company's portfolio of
products will provide incremental synergies in sales, marketing, distribution,
manufacturing and general and administrative expenses.
28
<PAGE> 31
INDUSTRY OVERVIEW
According to industry sources, total retail sunglass sales in the domestic
sunglass market grew approximately 64% from $1.4 billion in 1989 to $2.3 billion
in 1995. The industry is generally divided into two principal segments: the
under $30 market and the over $30 premium market. The premium sunglass market,
the category in which the Company competes, showed an increase in total retail
sales of approximately 82% from $824 million in 1989 to $1.5 billion in 1995.
The average retail price per unit for premium sunglasses has increased during
this period, contributing significantly to the overall growth of the segment.
The Company believes that the key factors driving the historical growth in
the premium sunglass market include increased consumer awareness of the need for
quality eye protection in response to heightened health concerns, increased
demand for technologically advanced, yet stylish products, increased demand for
specialized sunglasses for different sports and activities, growing brand
awareness among eyewear consumers and continuous product replacement.
The Company believes that an additional factor affecting the growth of the
premium sunglass market is the growth of sunglass specialty retailers, primarily
Sunglass Hut, the industry's largest sunglass specialty retailer. Sunglass Hut
has grown rapidly through internal expansion and acquisitions, increasing from
156 stores at February 1, 1988 to 1,726 locations at February 3, 1996. In
addition to growing its store base, Sunglass Hut's comparable store net sales
increased 10.3% and 13.5% for its 1995 and 1994 fiscal years, respectively. The
Company also believes that the percentage of sales through the sunglass
specialty channel, its primary channel, is increasing relative to other
channels. Based on information provided by Sunglass Hut, the Company believes
that sales of sunglasses through sunglass specialty retailers increased from
approximately 31% of total domestic sunglasses sales in 1994 to approximately
37% in 1995.
The Company believes that Oakley and Bausch & Lomb comprised approximately
50% of the domestic premium sunglass market in 1995, with several companies,
including Gargoyles, having smaller but significant market shares. The remainder
of the industry is highly fragmented and comprised of numerous smaller
companies. The Company expects that as the sunglass industry continues to grow,
a certain amount of consolidation will occur. The Company believes such
consolidation will enable certain companies to achieve sufficient scale to
invest increased amounts in research and development, develop direct sales
forces, market products effectively in an increasingly competitive environment
and maintain adequate inventory levels to deliver products on a reliable basis
to rapidly growing specialty retailers. Consolidation of smaller manufacturers
by larger, well-capitalized vendors is consistent with the desire of large
retail customers, notably Sunglass Hut, to do business with vendors who provide
dependable, timely delivery and adequate supply of products.
BUSINESS STRATEGIES
The Company's goal is to be the premier designer, manufacturer and marketer
of performance and lifestyle-oriented premium sunglasses and protective eyewear.
To achieve this goal, the Company has developed and is implementing business
strategies to capitalize on growth opportunities within the premium sunglass
market. Key elements of the Company's business strategies are as follows:
Offer technologically superior products. The Company's products are
designed to capitalize on several unique technological features that
differentiate Gargoyles' products from those of its competitors. The
sophisticated geometry of the Company's patented lens design directs light rays
to converge properly on the retina. The Company's dual lens toric curve
technology provides each eye with its own optical center of focus, resulting in
greater overall optical clarity and less peripheral distortion. The Company's
primary lens material is polycarbonate, which is significantly stronger than
safety glass, yet lightweight and able to provide protection from damaging
ultraviolet light. The Company also offers Hobie polarized sunglasses, which are
designed to block glare more effectively than regular sunglasses. Additionally,
the Company's patented interchangeable lens system used in its Legends products
allows the consumer to adopt multiple styles and functions through the use of
different lenses in the same frame.
Design innovative products. The Company continuously strives to
differentiate its products from those of competitors through new product
introductions. The Company positions its products to appeal to both
29
<PAGE> 32
active sports enthusiasts who favor the performance features of its products and
consumers who appreciate Gargoyles' distinctive styling and innovative designs.
The Company has recently added the Vortex and Octane models for the sports
market segment, which the Company believes is currently one of the fastest
growing segments in the premium sunglass market. In addition, the recent
introduction of the Paladin model has augmented the Company's strength in the
broader style-conscious market.
Increase brand name recognition. The Company seeks to heighten awareness
of its brands as high-quality, technology-based performance sunglasses. The
Company's unique styles and designs, featuring its dual lens toric curve
technology, differentiate its products from rival brands. To further strengthen
its brand image, the Company maintains strict control over the distribution of
its products and has implemented a marketing strategy focused on enhancing the
retail presentation of its products. This strategy includes training retail
salespersons to fully understand the benefits and features of the Company's
products and in-store education highlighting the style and technical features of
its products. In addition, the Company creates broad exposure for its products
through the endorsements by well-known professional athletes such as Dale
Earnhardt, Ken Griffey Jr., Alexi Lalas and Scottie Pippen and through the use
of its protective eyewear products by, and tie-in promotions with, the actors on
the popular television series ER.
Expand distribution network. In 1994, the Company began investing in a
direct sales force to expand distribution and gain more control over the sales
process. The Company has recently augmented its distribution capabilities with
the addition of a number of optical distributors and sporting goods
manufacturers' representatives to supplement the Company's efforts to access the
underpenetrated sporting goods and optical stores markets. The Company believes
that the strategic expansion of its distribution network permits its direct
sales force to focus on the Company's existing customer base and add new
accounts. The Company anticipates that the addition of the Hobie and Timberland
product lines will allow for broadened distribution to new and existing
customers who desire these new products.
Implement vertical integration strategy. The Company currently depends on
multiple vendors in geographically diverse areas to perform its molding,
hard-coating and mirroring processes for its lenses. The Company anticipates
centralizing many of these processes by implementing a vertical integration
strategy. The Company's goals in implementing this strategy include more
efficient manufacturing, improvement in gross margins, manufacturing products in
accordance with its strict quality-control standards and increasing control over
the timing and delivery of its products. Processes for which vertical
integration is not effective will continue to be contracted out to vendors.
GROWTH STRATEGIES
Management believes that its strategies have positioned the Company to
achieve continued growth in revenues and earnings. Key elements of the Company's
growth strategies include the following:
Capitalize on growth in premium sunglass market. The Company will continue
to focus on increasing its penetration within the premium sunglass segment,
which has grown approximately 82% from 1989 to 1995. Management believes that
this segment will continue to experience rapid growth. The Company also expects
to benefit from increasing penetration of the premium sunglass market by the
Company's existing customers, including its largest customer, Sunglass Hut. The
Company believes that as large sunglass specialty retailers continue to grow,
they will increasingly require well-capitalized vendors which are able to
provide adequate product supply on a reliable basis.
Develop and introduce new products. The Company is committed to
capitalizing on its existing market position and proprietary technology by
developing new products and product line extensions that incorporate superior
performance and unique styling. To support its new product initiatives, the
Company maintains an active research and development effort, which has resulted
in the introduction of eight product lines since 1993. In 1996, new product
introductions included the Paladin titanium frame for the style-conscious market
and the Octane and Vortex plastic frames for the sports market. In 1997, the
Company anticipates introducing a number of new models of polarized sunglasses
under the Hobie brand name to capitalize on the growing awareness among
consumers of the performance features of polarized lenses. Further, in 1997 the
Company anticipates introducing its lifestyle-oriented Timberland brand product
line.
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<PAGE> 33
Expand customer base. The Company is focused on expanding its customer
base both domestically and internationally. The strategies of adding a direct
sales force dedicated to selling the Company's products and adding additional
manufacturers' representatives and distributors have resulted in significant
growth in the number of accounts, including sunglass specialty, sporting goods,
department and optical stores. Since the addition of a direct sales force in
1994, the Company has added over 1,000 new accounts. The Company now has
approximately 3,100 accounts representing over 7,000 retail locations or
outlets. The Company believes there is still significant opportunity to expand
its customer base both in the United States and internationally.
Focus on international expansion. The Company believes that international
expansion represents a significant growth opportunity. International sales
accounted for approximately 6% of the Company's net sales in 1995, a
significantly lower penetration than that of the Company's primary competitors.
The Company's international growth plans are based on developing international
distribution networks and investing in overseas operations, where appropriate.
In addition, the Company believes the worldwide appeal of the Timberland brand
name will facilitate introduction of the Company's products internationally.
Management also expects the international expansion of Sunglass Hut will assist
in increasing the Company's international presence.
Selectively pursue acquisition and licensing opportunities. The Company
seeks to acquire businesses or to create licensing arrangements with companies
having high-quality products, strong brand names and growth potential. The focus
of the Company's acquisition licensing efforts is to (i) augment the Company's
product lines, (ii) enhance the Company's distribution capabilities, (iii)
leverage the Company's operating infrastructure, and (iv) access new technology.
In particular, the Company's acquisition and integration of Hobie and its
license agreement with Timberland provide new brand names and a broader customer
base, and create distribution and operating synergies.
DUAL LENS TORIC CURVE TECHNOLOGY
The key technological feature of the Company's eyewear is its patented dual
lens toric curve design. This proprietary design offers a foundation for product
innovation that can overcome the optical deficiencies in competitive wrap
sunglasses and provides superior optics and less distortion compared to
competitive wrap designs. The Company's toric curve lens design is achieved
through the use of complex lens geometry that incorporates different horizontal
and vertical curvatures, as well as variable material thickness throughout the
lens surface. The lens geometry directs light rays to converge properly on the
retina, minimizing distortion as well as eye fatigue and eye stress. Competitive
spherical or unitary wrap lens designs, which do not use the sophisticated
geometry of the Company's dual toric curve lens, may cause light rays to
converge improperly on the retina, causing distortion, eye fatigue and eye
stress.
<TABLE>
<CAPTION>
LIGHT CONVERGENCE LIGHT CONVERGENCE
OF GARGOYLES' OF STANDARD WRAP
TORIC CURVE LENS SUNGLASS LENS
----------------------------------- -----------------------------------
<S> <C>
[Diagram of light convergence on [Diagram of light convergence on
human eye through Gargoyles lens] human eye through competitive lens]
</TABLE>
In addition, the Company's dual lens design provides separate optical
centers of focus for each eye, resulting in greater overall optical clarity and
less peripheral distortion. Competitive unitary wrap sunglasses have an optical
center near the physical center of the lens, which is located between the eyes,
which may result in greater eye fatigue as the eye muscles attempt to adjust the
shape of the eye to focus properly.
<TABLE>
<CAPTION>
LIGHT TRANSMISSION OF LIGHT TRANSMISSION
GARGOYLES' DUAL LENS OF COMPETITIVE
TORIC CURVE DESIGN UNITARY LENS DESIGN
----------------------------------- -----------------------------------
<S> <C>
[Diagram depicting light [Diagram depicting light
transmission through dual toric transmission through competitive
curve lens] lens]
Dual optical center Single optical center
</TABLE>
31
<PAGE> 34
The Company believes that its dual lens toric curve technology provides the
most advanced and optically correct lens design available in wrap sunglasses.
PRODUCTS
The Company markets its sunglass models under the Gargoyles and Hobie
brands, and is developing products to market under the Timberland brand
beginning in 1997 pursuant to the license agreement with Timberland. The Company
offers an extensive selection of high-quality sunglasses in the middle to upper
price points of the premium market ($80 to $190 retail), thereby allowing the
Company to market to a broad customer base.
GARGOYLES BRAND SUNGLASSES
The Company currently offers nine product lines under the Gargoyles brand
name, all of which are available in a variety of colors and with mirrored and
nonmirrored lenses. Each Gargoyles product line, except for the Legends lines,
utilizes the Company's patented dual lens toric curve technology.
<TABLE>
<CAPTION>
SUGGESTED
RETAIL
PRODUCT LINE INTRODUCTION DESCRIPTION PRICE POINTS
- --------------------- --------------- -------------------------------------------- ------------
<S> <C> <C> <C>
Classic December 1983 Original dual lens toric curve design. $80-$175
85s May 1993 Same design as the Classic design but 15% $80-$175
smaller.
Legends March 1994 Utilizes a patented interchangeable lens $125-$165
system with 14 lens options.
Helios Full Frame March 1995 Contemporary performance sunglass combining $120-$140
the optically correct oval toric curve lens
with a sleek wrapback design.
Helios Anti-Frame March 1995 Sleek, lightweight frameless design $90-$100
utilizing dual lens toric curve wrap.
Legends II August 1995 Smaller, sleeker version of the Legends with $125-$145
six lens options.
Paladin March 1996 Lightweight, fashion/performance design $170-$190
featuring titanium frames.
Vortex April 1996 Lightweight, aerodynamic nylon frame $80-$95
designed for "extreme" sport use.
Octane May 1996 Lightweight, aerodynamic nylon composite $85-$95
frame designed for "mainstream" sport use.
</TABLE>
[additional column containing diagrams of sunglasses]
Classic. Introduced in December 1983, the Classic was the Company's first
sunglass. The uniqueness of the Classic style is based on several features,
including its polycarbonate dual lens toric curve and its wrap design, which
provide superior eye protection and optical clarity. The Classic was popularized
through its use by Arnold Schwarzenegger in The Terminator and Clint Eastwood in
Sudden Impact.
85s. Introduced in May 1993, the 85s were designed to respond to increased
consumer demand for a smaller version of the Classic. The 85s style is 15%
smaller and is designed to fit a slimmer face.
Legends. Introduced in March 1994, the Legends line combines a classic
shape with the sports performance wrap sunglass of the 1990s. The Legends'
patented interchangeable lens system allows the wearer to adjust to changing
light and to adopt multiple styles and functions through the use of 14 different
lens combinations.
Helios Full Frame. Introduced in March 1995, the Helios Full Frame is
designed to meet the increasing market demand for high-quality, style-conscious
performance eyewear. This model, along with the Helios Anti-Frame line, is the
industry's first oval wrap sunglass designed with a dual lens toric curve. The
Helios Full Frame products also feature spring hinges and adjustable nose pads,
which produce a superior level of fit and comfort.
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<PAGE> 35
Helios Anti-Frame. Introduced in March 1995, the Helios Anti-Frame is a
contemporary performance sunglass featuring a sleek, lightweight frameless
design utilizing the dual lens toric curve.
Legends II. Introduced in August 1995, the Legends II line offers the same
interchangeable lens system and classic design of the Legends line in a smaller,
sleeker style. The Legends II line includes six combinations of interchangeable
lenses.
Paladin. Introduced in March 1996, the Paladin is a high-end,
style-conscious sunglass with a sports influence that features a titanium frame,
providing durability in a lightweight frame weighing only four-tenths of an
ounce. The Paladin line incorporates the dual lens toric curve and an
antireflective lens coating to reduce glare.
Vortex. Introduced in April 1996, the Vortex line features a lightweight,
aerodynamic design targeted for "extreme" sport use by the youth market. The
Vortex incorporates the polycarbonate dual lens toric curve with lightweight
nylon frames.
Octane. Introduced in May 1996 as a mainstream sports sunglass, the Octane
line features the dual lens toric curve and lightweight nylon composite frames.
As a part of the Company's endorsement strategy, the Company uses the names
of athletes to broaden brand name recognition by creating "signature" series of
products. These products currently include The Griffey Wrap and Dale Earnhardt's
signature models. In addition, a number of the Company's models are available
with customized nosebridge decals and/or temples that can tailor a product for
specific corporate promotions.
HOBIE BRAND SUNGLASSES
In February 1996, the Company acquired Hobie, a leading manufacturer and
distributor of polarized sunglasses. Polarized lenses are designed to block
glare more effectively than regular lenses, thereby providing a technological
differentiation from other sunglasses. The Hobie Acquisition provides the
Company with access to the growing market for polarized sunglasses. The Company
believes this market growth is based on greater consumer recognition of the
benefits of polarized sunglasses, the relative ease of demonstrating the
technological differentiation of the lens and the increasing market acceptance
of the higher-priced polarized sunglasses. The Company also believes that its
strategy to aggressively market prescription polarized products will capitalize
on the demographics of aging consumers with active outdoor lifestyles.
The Hobie sunglass collection is divided into three product lines, Sport,
Lites and Elites, each designed to appeal to a different user group.
Substantially all Hobie sunglasses are available with prescription lenses.
<TABLE>
<CAPTION>
SUGGESTED
PRODUCT RETAIL
LINE DESCRIPTION PRICE POINTS
- ------- ------------------------------------------------------------------------------ ------------
<S> <C> <C>
Sport Classic polarized glass lens sunglass line for sport use, including fishing. $100-$150
Lites Contemporary polarized sunglass line for active sports. $80-$130
Elites Polarized glass lens sunglass line with lifestyle-orientation. $150-$185
</TABLE>
Sport. The Sport line consists of 12 models with nylon frames and polarized
glass lenses designed for sport use. The Sport line also includes a line of
products designed specifically for fishing. Selected styles in the fishing
series are available with plastic lenses.
Lites. The Lites line consists of 11 models designed for active sport use.
The Lites products feature plastic polarized lenses. These sunglasses utilize
lightweight, sturdy nylon, metal or carbon frames.
Elite. The Elite line consists of eight models designed as a durable,
lifestyle-oriented sunglass featuring high-quality nylon or metal frames and
polarized glass lenses.
PROTECTIVE EYEWEAR
The Company established its Protective Eyewear division in 1994 to
capitalize on the growing demand for the Company's Arctic Clear product line, a
clear lens version of the Classic and 85s models. The Company's
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<PAGE> 36
initial efforts have focused on the medical and dental market segments, where
the features and benefits of Arctic Clear eyewear provide superior optical
quality and comfort to the healthcare professional. The Company believes that
protective eyewear is growing in importance as a market segment due primarily to
increasing health concerns in the medical and dental markets. Management
believes that the Company's Arctic Clear products appeal to users who regularly
wear protective eyewear for extended periods, therefore demanding glasses that
are more fashionable and comfortable.
The Company currently distributes its protective eyewear line through its
existing retail channels and through a number of medical and dental
distributors. The Company promotes retail sales of its Arctic Clear products
through product use by, and tie-in promotions with, the actors on the television
series ER. The Company expects to benefit from the introduction of a
prescription insert for its Classic and 85s models that will expand the market
potential for the Company's Arctic Clear protective eyewear.
TIMBERLAND
In May 1996, the Company, together with the former president of Revo,
formed Kindling, a majority-owned subsidiary, to design, manufacture and market
sunglasses and, with Timberland's consent, ophthalmic frames under the
Timberland brand name. The Company, together with Kindling, acquired an
exclusive license from Timberland to use the Timberland and tree logo trademarks
on sunglasses, eyewear accessories and, with Timberland's consent, ophthalmic
frames. The Company and Mr. Lauer are currently formulating the strategy with
respect to the Timberland product line; the Company anticipates that sales of
Timberland branded products will begin in 1997. See "Risk Factors -- Ability to
Successfully Integrate Acquisitions and Licensed Products."
ACCESSORIES
The Company's accessory line includes a variety of products, including hard
cases, replacement lenses and eyeglass retainers. This line is distributed in
conjunction with the Company's sunglass product lines.
PRODUCT DESIGN AND DEVELOPMENT
The Company strives to be an innovator in the development of new product
styles that incorporate the Company's patented technologies. The Company's
products are designed by internal research and development personnel with input
from the Company's sales and marketing departments and from consumer focus
groups. The development process commences with the conceptual design of
potential products, including design sketches, drawings and models. The design
team then uses state-of-the-art CAD/CAM equipment to develop three-dimensional
prototypes of new designs. In formulating its design concepts, the Company
strives to develop unique styles based on its patented dual lens toric curve
technology and focuses its efforts on producing performance eyewear products
that are among the most functional, fashionable and durable in the industry. As
a part of this strategy, the Company has successfully developed new products by
cutting different lens shapes and sizes from the Classic lens. These initiatives
have shortened the time associated with the concept, prototype and production
stages of the product development cycle.
The Company is now focused on the introduction of one to three new product
models per year. The Company expands its model lines by adding certain product
extensions, such as new lens and frame colors, new mirrors, interchangeable
lenses and soft nose pieces. The Company's strategy is to delay its line
extension until it is confident of consumer acceptance of the new model, which
has enabled the Company to avoid excess inventory and to manufacture and
assemble its products more effectively.
MANUFACTURING
The Company currently sources its lenses, optical frames and components
from a diverse group of suppliers in the United States, Japan and Europe. Lenses
for Gargoyles products are molded, hard-coated and mirrored by a network of
suppliers in the United States and Japan. Frames for Gargoyles' products are
currently produced by a network of suppliers in Italy and Japan. Lenses and
frames for the Company's Hobie product line are sourced from Asia and Europe and
are assembled in the United States. Related components
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<PAGE> 37
are generally purchased from vendors in the United States. The Company has
established strong relationships with its major suppliers. The Company intends
to vertically integrate certain aspects of its manufacturing processes.
Management believes that such vertical integration will result in more efficient
manufacturing and improved gross margins, and will provide the Company with more
control over the timing and delivery of its products. Processes that are
unlikely to add these benefits through vertical manufacturing will continue to
be contracted out to vendors. See "-- Business Strategies -- Implement Vertical
Integration Strategy" and "Risk Factors -- Reliance on Limited Sources of
Supplies" and "-- Risks Associated With Vertical Integration Strategy."
Gargoyles assembles the majority of its products at the Company's facility
located in Kent, Washington. Performing assembly functions in-house enables the
Company to control the production process and to maintain its strict
quality-control standards to reduce spoilage and improve product performance.
The Company owns and maintains most of its assembly equipment. With respect to
products assembled by the Company's suppliers, the products are delivered to the
Company for quality control, packaging and shipping.
The Company strives to maintain dual or multiple sources of supply for all
components and services for its sunglass product lines. The Company has also
established contingency plans and identified alternative sources of supply for
many of its components. However, the Company relies on a single source of supply
for several of its components, including its frames. The major raw material used
to produce the majority of the Company's lenses, custom lexan polycarbonate, is
in limited supply in world markets and is purchased on the Company's behalf by
its lens molders. See "Risk Factors -- Reliance on Limited Sources of Supplies."
The optical molds used to develop the Company's toric curve-based lenses
are difficult to manufacture. Due to the precise optical geometry involved,
requiring unique curvatures of both the horizontal and vertical radii, as well
as the front and rear lens surfaces, the mold-polishing function is a
time-consuming, iterative process that must be finished by hand. The process
provides a degree of competitive protection to the Company because the design is
extremely difficult and costly to replicate. All optical molds used to
manufacture Gargoyles brand lenses are owned by the Company, contributing to a
consistent, dependable source of supply.
The Company manages its inventory for its Gargoyles products using an
automated inventory management system that assists in controlling reorder points
and minimum and maximum stock levels, thereby ensuring better in-stock
availability and a higher level of salable product. Other benefits of this
system include lowering average inventories and reducing associated carrying
costs. The Company is in the process of integrating its Hobie products into the
automated inventory management system.
For information concerning backlog and backorders, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Backlog and Backorders."
DISTRIBUTION
To preserve the integrity of the Company's brand names, the Company
selectively limits its distribution to retailers that market products consistent
with the Company's image and pricing strategy and that provide a high level of
customer service and technical expertise. Individual accounts are selected based
on their potential ability to positively represent the Company's brands and
technological benefits, reputation for advertising prices at or near the
manufacturer's suggested retail price, expected ability to display a wide
assortment of the Company's product selections and demonstrated commitment to
merchandising and product knowledge that will support the Company's brand image.
The Company believes that sunglass specialty retailers represent the largest and
fastest growing distribution channel for sunglasses, and expects significant
growth in sunglass sales by sunglass specialty stores. The Company currently
sells Gargoyles and Hobie eyewear through approximately 3,100 accounts
representing over 7,000 locations or outlets comprised primarily of sunglass
specialty stores, optical stores, department stores and sporting goods stores.
The Company believes that international distribution represents a
significant opportunity for increased product sales. Although the Company has
not historically focused on the international marketplace, it has achieved
recent international sales growth as a result of targeting existing distributors
for increased sales
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<PAGE> 38
volume and developing new distributor relationships selling into previously
untapped international markets. The Company intends to focus its expansion
efforts in Europe through the establishment of an international distribution
network, and to leverage potential distribution synergies with the Company's
international manufacturing suppliers. Future plans potentially involve a direct
sales force in selected countries and the investment in marketing and overseas
operations where appropriate. The Company also expects the worldwide growth of
Sunglass Hut to assist in its international expansion.
SALES
Prior to March 1994, Gargoyles' selling efforts were conducted principally
by manufacturers' representatives who were responsible for product lines from
multiple companies. In March 1994, the Company invested in a direct sales force,
which had an immediate impact on revenue growth and has played a significant
role in positioning the Company for long-term sustainable revenue growth. The
direct sales force has grown from ten individuals in April 1994 to 30
individuals as of May 1, 1996. The sales force currently includes territory
sales managers, national accounts sales managers and sales associates, as well
as international and protective eyewear sales teams. The Company believes that
the benefits of its direct sales force include greater focus and more effective
control, direction, responsiveness and motivation throughout the entire sales
management process. Furthermore, the Company views its direct sales force as a
key asset and continuously seeks to add new products to leverage its investment
in its sales force. Examples of this strategy include the Hobie Acquisition and
the license agreement with Timberland, both of which allow the Company to
provide new products to its growing customer base through its established sales
force.
The Company's direct sales force is responsible for managing all sales
activities and executing the Company's sales, marketing and promotional
strategies. Sales personnel directly call on sunglass specialty retailers,
department stores and large optical chains. Sales force functions include daily
sales calls focused on increasing business with existing accounts and opening
new accounts. This includes educating and training retailers and their employees
to effectively communicate the key features and benefits of the Company's
products and to execute strategic merchandising programs. Sales personnel are
compensated based on a combination of base salary and bonus.
In January 1996, the Company made the strategic decision to expand its
distribution network to include key optical distributors and sporting goods
manufacturers' representatives to supplement the Company's efforts to access the
underpenetrated optical stores and sporting goods markets. These distributors
and manufacturers' representatives represent both Gargoyles and Hobie product
lines. The Company believes that the strategic expansion of its distribution
network will provide its direct sales force with greater ability to increase its
focus on the Company's existing customer base and to achieve greater account
penetration.
MARKETING AND PROMOTION
Prior to the Recapitalization, the Company devoted few resources to
marketing and promotion. Over the past year, the Company has significantly
increased its marketing efforts, with increased marketing expenditures, new
personnel and new promotional programs. The Company's marketing department
develops all aspects of advertising, marketing and promoting the Company's
products. In addition, the marketing team participates in the new product
development process.
The Company believes that marketing programs developed in cooperation with
its key customers, including Sunglass Hut, are a critical part of the Company's
success. The Company's marketing professionals work with these customers to
design distinctive retail presentations and promotions and to develop marketing
materials to educate store employees as to the features and benefits of the
Company's products. In addition, the Company provides its customers with product
and video presentations that feature the Company's latest products.
The Company uses endorsements by professional athletes to promote its
products and brand image by highlighting the sports efficacy of its designs. The
Company's athlete endorsement strategy focuses on selecting athletes who are
highly acclaimed in their respective sports to wear and promote the Company's
sunglasses. Athletes work in partnership with the Company to contribute to the
successful development and
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<PAGE> 39
marketing of the Company's products. Athletes currently under contract include
such well-known names as seven-time NASCAR champion Dale Earnhardt, baseball
superstar and "presidential candidate" Ken Griffey, Jr., international soccer
superstar Alexi Lalas, Olympic gold-medalist skier Tommy Moe, NBA superstar
Scottie Pippen and world champion snowboarders Michael Jacoby and Michele
Taggart. In key situations, the Company uses the names of athletes to increase
brand recognition by creating a "signature" series of products. These products
currently include The Griffey Wrap and Dale Earnhardt's signature models. The
Company's strategy also includes the use of the Company's protective eyewear on
the popular television series ER, which it promotes through an endorsement
contract providing for tie-in promotions with the ER actors.
CUSTOMER SERVICE
The Company's management is committed to achieving customer satisfaction
and encouraging repeat business by providing a high level of knowledgeable,
attentive and personalized customer service. The Company has implemented
extensive employee training designed to ensure that its customer service
representatives, and other key personnel who interface with the Company's
customers, are thoroughly familiar with the technical, lifestyle and functional
elements of the Company's product offerings. Management believes that the
Company's responsive customer service effort has created significant goodwill
and loyalty among its customers and, as a result, is a leading contributor to
the strength of Gargoyles' excellent reputation in the marketplace.
PRINCIPAL CUSTOMERS
Net sales to the Company's 10 largest customers during the year ended
December 31, 1995 and the six months ended June 30, 1996 accounted for
approximately 57% and 54% of net sales, respectively. Sunglass Hut, the
Company's largest customer, accounted for approximately 33% and 37% of the
Company's net sales for the same periods (including sales to Sunsations, which
was acquired by Sunglass Hut in July 1995). As of May 31, 1996, the Company's
products are sold in more than 1,650 Sunglass Hut locations throughout the
United States. While the Company does not have a purchase agreement with
Sunglass Hut, the Company believes that its relations with this customer are
good. Each year the Company and Sunglass Hut develop a joint plan for
promotional, marketing and sales objectives. See "Risk Factors -- Dependence on
Sunglass Hut."
INTELLECTUAL PROPERTY
The Company aggressively asserts its rights under patent, trade secret,
unfair competition, trade dress, trademark and copyright laws to protect its
intellectual property, including product designs, proprietary manufacturing
processes and technologies, product research and concepts and recognized
trademarks. These rights are protected through the acquisition of patents and
trademark registrations, the maintenance of trade secrets, the development of
trade dress and, where appropriate, litigation against those who are, in the
Company's opinion, infringing its rights.
Patents and Trademarks. As of May 15, 1996, the Company had been issued
three U.S. utility patents and one U.S. design patent relating to eyewear,
including patents directed to the dual lens toric curve technology. As of May
15, 1996, the Company had three utility patent applications and three design
patent application pending in the United States and one utility patent
application pending internationally. The Company intends to file additional
patent applications, when appropriate, relating to improvements in its
technology and other specific products and processes developed by the Company.
As of May 15, 1996, the Company had registered four U.S. trademarks and
three international trademarks relating primarily to the name Gargoyles. In
addition, the Company has licensed the right to use the Hobie and the Timberland
and tree logo trademarks for use on eyewear products pursuant to the terms of
the license agreements with Hobie and Timberland. Due to the Company's strict
quality-control standards and the desire to protect its proprietary technology
and prevent overexposure of its trademarks, the Company has not licensed its
trademarks for use by other parties for the manufacture and sale of sunglass
products.
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While there can be no assurance that the Company's patents or trademarks
protect its proprietary information and technologies, the Company intends to
continue to assert its intellectual property rights against any infringer.
Although the Company's assertion of its rights could result in substantial cost
to, and diversion of effort by, the Company, management believes that protection
of the Company's intellectual property rights is a key component of the
Company's business strategy. The Company is currently a party in litigation
matters concerning certain of its intellectual property rights. See
"-- Litigation" and "Risk Factors -- Protection of Proprietary Rights."
Trade Secrets. The Company also relies on unpatented trade secrets for the
protection of certain intellectual property rights. The Company protects its
trade secrets by requiring its employees, consultants and other agents and
advisors to execute confidentiality agreements upon the commencement of
employment or other relationship with the Company. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Company's proprietary information or adequate remedies in the event of
unauthorized use or disclosure of such information. In addition, there can be no
assurance that others will not independently develop substantially equivalent
proprietary information and technologies, or otherwise gain access to the
Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its rights to unpatented trade secrets.
COMPETITION
The Company competes primarily in the premium segment of the
nonprescription sunglass market, which is fragmented and highly competitive. The
Company competes with a number of established companies, including Bausch &
Lomb, the marketer of the Ray Ban, Killer Loop, Arnette and Revo brands, and
Oakley, which together control approximately 50% of the premium market segment,
as well as Luxottica Group S.P.A., Safilo USA Inc. and Bolle America, Inc. In
the polarized sunglass segment, the Company competes against Maui Jim and Costa
del Mar brands, as well as the polarized products sold by other sunglass
manufacturers. The Company also competes in the market for premium protective
eyewear, primarily against Bolle America, Inc., and against lower-priced
products produced by Uvex Safety, Inc. and Titmus Optical, Inc. Several of these
companies in the premium sunglass and protective eyewear markets have
substantially greater resources and better name recognition than the Company and
sell their products through broader and more diverse distribution channels. The
Company could also face competition from new competitors, including established
branded consumer products companies that also have greater financial and other
resources than the Company. In addition, as the Company expands internationally,
it will face substantial competition from companies that have already
established their products in international markets and consequently have
significantly more experience in those markets than the Company.
The premium sunglass market is susceptible to rapid changes in consumer
preferences that could affect acceptance and sales of the Company's products.
The major competitive factors include fashion trends, brand recognition, methods
of distribution and the number and range of products offered. In addition, to
retain its market share, the Company must continue to be competitive in the
areas of quality, performance, technology, intellectual property protection and
customer service. See "Risk Factors -- Competition."
EMPLOYEES
As of May 31, 1996, the Company had 221 employees, of which 71 were
full-time salaried, 103 were full-time hourly and 47 were part-time hourly. The
Company is not a party to any labor agreement and none of its employees is
represented by a labor union. The Company considers its relationship with its
employees to be excellent, and has never experienced a work stoppage.
PROPERTIES
The Company's corporate headquarters and its production, warehousing and
distribution facilities are located in Kent, Washington and consist of two
leased buildings totaling approximately 31,000 square feet of space. See
"Certain Transactions."
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Management believes that the Company's facilities are currently operating
near maximum capacity and that such facilities will not be sufficient to meet
the Company's future operating needs. The Company anticipates that all or a
portion of its operations will be relocated in 1997 to a larger facility. As a
result, any delays or interruptions in the Company's manufacturing processes or
other operations could have a material adverse effect on the Company. See "Risk
Factors -- Ability to Sustain and Manage Growth."
LITIGATION
In February 1996, the Company filed an action in the United States District
Court for the Western District of Washington against Peter and Jane Doe LaHaye,
LaHaye Laboratories, Inc. and NEOPTX, Inc. relating to the potential
infringement of the Company's patent for an adhesive magnification insert to
eyewear products. In April 1996, the defendants counterclaimed seeking a
declaration that the patent is not valid and not infringed. While it is too
early to determine the outcome of this litigation, the Company believes that
such litigation will not have a material adverse effect on its operations or
financial position.
In May 1996, a notice of opposition was filed against the Company in the
United States Patent and Trademark Office by Mobil Oil Corporation seeking the
denial of the Company's trademark application to use the Gargoyles mark for
souvenir products. While it is too early to determine the outcome of this
action, the Company believes that this notice of opposition would not affect the
Company's existing trademark registration for the Gargoyles mark.
The Company also is a party to various other claims, complaints and legal
actions that have arisen in the ordinary course of business from time to time.
The Company believes that the outcome of all such pending legal proceedings, in
the aggregate, will not have a material adverse effect on its operations or
financial position.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company, and
their ages as of June 30, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Executive Officers and
Directors
Douglas B. Hauff(1)........ 43 President, Chief Executive Officer and Director
G. Travis Worth............ 50 Chief Operating Officer
David W. Jobe.............. 36 Senior Vice President, Sales
Steven R. Kingma........... 39 Vice President, Chief Financial Officer, Secretary and
Treasurer
Douglas W. Lauer........... 42 President and Chief Executive Officer, Kindling
Erik J. Anderson(1)(2)..... 37 Chairman of the Board
Timothy C. Potts(1)(2)..... 47 Director
Paul S. Shipman............ 43 Director
Walter F. Walker(2)........ 41 Director
Key Employees
Charles A. Bernheiser...... 57 Vice President, Design, Research and Development
Janice D. Gaub............. 34 Vice President, Marketing
</TABLE>
- ---------------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
All the current directors of the Company, except Messrs. Shipman and
Walker, were elected to the Board of Directors pursuant to a shareholders
agreement entered into in connection with the Recapitalization. See "Certain
Transactions." Upon the effective date of the Offering, the shareholders
agreement will automatically terminate.
The Company's Board of Directors will be divided into three classes at the
first annual meeting of shareholders following the Offering. After a
transitional period, each director will serve for a three-year term and one
class will be elected each year by the Company's shareholders. Directors hold
office until their terms expire and their successors are elected and qualified.
Executive officers of the Company are appointed by, and serve at the direction
of, the Board of Directors. There are no family relationships between any of the
directors or executive officers of the Company.
Douglas B. Hauff has been President, Chief Executive Officer and a Director
of the Company since June 1996. Between his joining the Company in May 1992 and
June 1996, Mr. Hauff was the Company's President and a Director. Mr. Hauff has
also been President and a director of Conquest since May 1992. From September
1990 to April 1992, Mr. Hauff was Senior Vice President of Frederick & Nelson
Inc. ("Frederick & Nelson"), a department store chain operator. Mr. Hauff was a
Senior Vice President and Division President of McCaw Cellular Communications, a
telecommunications company, between August 1986 and July 1988, President of
Interstate Mobile Phone d/b/a Cellular One, a telecommunications company,
between October 1984 and July 1986 and President of Executone, a Northwest
telecommunications firm, between September 1981 and September 1984.
G. Travis Worth has been Chief Operating Officer of the Company since June
1996. From October 1995 until June 1996, Mr. Worth was the Company's Senior Vice
President. From August 1989 to October 1995, Mr. Worth was the Vice President,
Sales for the Ray-Ban Eyewear Division of Bausch & Lomb. From 1981 to 1989, Mr.
Worth was Vice President, Sales and Marketing of Technica USA Ski Boot Company,
a manufacturer of ski equipment.
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<PAGE> 43
David W. Jobe, Senior Vice President, Sales, joined the Company in February
1994. From May 1988 to January 1994, Mr. Jobe was employed by MEDI-TECH, Inc., a
subsidiary of Boston Scientific Corporation, a medical device company, initially
as Denver territory manager, then as a regional manager from June 1990 to
December 1992 and as Western Division Manager from January 1993 to January 1994.
From January 1985 through April 1988, Mr. Jobe was employed by The Procter &
Gamble Company in a number of sales management capacities.
Steven R. Kingma, Vice President, Chief Financial Officer, Secretary and
Treasurer, joined the Company in September 1994. From September 1993 to
September 1994, Mr. Kingma was employed at Jay Jacobs, Inc., the operator of a
chain of specialty retail apparel stores, in various financial positions, most
recently as its Senior Vice President, Chief Financial Officer and Treasurer
from May 1994 to September 1994. From August 1992 to September 1993, Mr. Kingma
owned and operated Pacific Financial Management, a financial and professional
consulting services business. From January 1990 to July 1992, Mr. Kingma was
employed by Frederick & Nelson as Director of Finance. From September 1979 to
January 1990, Mr. Kingma was employed by Price Waterhouse, a public accounting
firm.
Douglas W. Lauer, President and Chief Executive Officer of Kindling, joined
the Company in June 1996 in connection with the license agreement with
Timberland. Previously, Mr. Lauer was President of Revo, a subsidiary of Bausch
& Lomb, from July 1989 to May 1996. Mr. Lauer formerly served in a number of
management capacities for Polo Ralph Lauren Corporation.
Erik J. Anderson has been a Director of the Company since March 1995 and
was named Chairman of the Board in July 1995. Mr. Anderson has been Chief
Executive Officer of Trillium, a corporation with investments primarily in
timber and real estate, since January 1996, was its Co-President from January
1995 to January 1996 and its Executive Vice President from February 1994 to
January 1995. From March 1992 to January 1994, Mr. Anderson was a partner of
Frazier & Company, a merchant bank. From October 1990 to March 1992, Mr.
Anderson was a Vice President of Service Group of America, a food distribution
and insurance company. Mr. Anderson is also a director of Smart Modular
Technologies, Inc.
Timothy C. Potts has been a Director of the Company since March 1995. Mr.
Potts has been Senior Vice President -- Finance of Trillium since July 1994.
From April 1987 to July 1994, Mr. Potts was the Chief Financial Officer of
Trillium.
Paul S. Shipman has been a Director of the Company since June 1996. Mr.
Shipman has been President since September 1981, Chairman of the Board since
November 1992 and Chief Executive Officer since June 1993 of Redhook Ale
Brewery, Incorporated ("Redhook"), a brewer of craft beers.
Walter F. Walker has been a Director of the Company since December 1995.
Since September 1994, Mr. Walker has been the President of the Seattle
Supersonics National Basketball Association basketball team, owned by a
subsidiary of Ackerley Communications, Inc. From March to September 1994, he was
President of Walker Capital, Inc., a money management firm. From July 1987 to
March 1994, Mr. Walker was a Vice President of Goldman, Sachs & Co., a
registered broker-dealer. From 1976 to 1985, Mr. Walker was a professional
basketball player in the National Basketball Association. Mr. Walker is also a
director of Redhook and Interpoint Corporation.
Charles A. Bernheiser, Vice President, Design, Research and Development,
joined the Company in April 1992. Mr. Bernheiser has been associated with the
optical industry for more than 30 years in many capacities, including extensive
experience with Corning Incorporated, American Optical Corp. and Liberty
Optical. Mr. Bernheiser also designed, established and managed the initial
Gargoyles production facility as an independent contractor prior to joining the
Company in 1992.
Janice D. Gaub, Vice President, Marketing, joined the Company in September
1995. From October 1993 to May 1995, Ms. Gaub was Director of Marketing and
Customer Service for Nile Spice Foods, Inc., a manufacturer of spices and food
products. From August 1989 to October 1993, she was a Product Manager at Paragon
Trade Brands, Inc., a manufacturer of private label disposable diapers.
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Frederick & Nelson, a company for which Mr. Hauff served as Senior Vice
President and Mr. Kingma served as Director of Finance, filed a voluntary
petition for Chapter 11 bankruptcy in September 1991 and was liquidated by order
of the bankruptcy court in 1992. Jay Jacobs, Inc., a company for which Mr.
Kingma was employed in various financial positions, filed a voluntary petition
for Chapter 11 bankruptcy protection in May 1994 and emerged therefrom in
November 1995.
BOARD COMMITTEES AND DIRECTOR COMPENSATION
The Company has two standing committees of the Board of Directors: an Audit
Committee and a Compensation Committee. The Audit Committee reviews the
functions of the Company's management and independent auditors pertaining to the
Company's financial statements and performs such other related duties and
functions as are deemed appropriate by the Audit Committee and the Board of
Directors. The Compensation Committee determines officer and director
compensation and administers the Company's stock option plans.
Each nonemployee director of the Company who does not beneficially own 5%
or more of the Company's outstanding voting securities and who is not an
officer, director or employee of any entity that beneficially owns 5% or more of
the Company's outstanding voting securities receives an annual retainer of
$4,000, and $250 for attending each committee meeting of the Board. For
information concerning a warrant to purchase shares of Common Stock granted to
Walter F. Walker in December 1995, see "Certain Transactions." In January 1996,
Mr. Walker also received a stock option to purchase 2,344 shares of Common Stock
at an exercise price of $4.26 per share. In July 1996, the Company intends to
grant to Paul S. Shipman an option to purchase 2,344 shares of Common Stock at
an exercise price of $6.82 per share. In the future, as compensation for their
services, the Company intends to grant to each of its outside directors, both on
initial appointment to the Board and on an annual basis thereafter, an option to
purchase approximately 2,344 shares of Common Stock at exercise prices equal to
the fair market value of the Common Stock at the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Hauff, the Company's President and Chief Executive Officer, is a member
of the Compensation Committee of the Company's Board of Directors. Mr. Hauff
also served as a director, President and a member of the Compensation Committee
of Conquest during fiscal 1995. For information concerning certain transactions
between Mr. Hauff and the Company, see "Certain Transactions."
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<PAGE> 45
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information with respect to
compensation paid by the Company in the fiscal year ended December 31, 1995 to
the Company's Chief Executive Officer and the other executive officers who
earned in excess of $100,000 in salary and bonus during fiscal 1995 (the "Named
Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION AWARDS
COMPENSATION -------------------
------------------ SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- --------------------------------------------- -------- ------- ------------------- ------------
<S> <C> <C> <C> <C>
Douglas B. Hauff, President and Chief
Executive Officer(1)....................... $225,000 $50,000 0 $ 14,229(2)
David W. Jobe, Senior Vice President,
Sales...................................... 83,750 32,500 107,952 8,504(3)
Steven R. Kingma, Vice President and Chief
Financial Officer.......................... 93,750 25,000 46,264 7,871(4)
</TABLE>
- ---------------
(1 Mr. Hauff was named Chief Executive Officer in June 1996. During 1995, no
executive officer of the Company held the title of Chief Executive Officer.
(2) Represents (i) $5,171 in matching 401(k) plan contributions by the Company,
(ii) $3,696 for life insurance and disability premiums, and (iii) $5,362
for dependent health insurance premiums.
(3) Represents (i) $2,993 in matching 401(k) plan contributions by the Company,
(ii) $149 for disability insurance premiums, and (iii) $5,362 for dependent
health insurance premiums.
(4) Represents (i) $2,369 in matching 401(k) plan contributions by the Company,
(ii) $162 for disability insurance premiums, and (iii) $5,340 for dependent
health insurance premiums.
Option Grants in Last Fiscal Year
The following table sets forth certain information regarding stock options
granted to the Named Executive Officers during the fiscal year ended December
31, 1995. No stock options were granted by the Company to Mr. Hauff during
fiscal 1995.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------ ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -------------------
NAME GRANTED(1) FISCAL YEAR(2) PRICE DATE 5% 10%
- ------------------------------ ---------- -------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
David W. Jobe................. 61,682(4) 12.8% $ 3.24 03/22/05 $125,684 $318,509
46,270(5) 9.6 3.24 12/08/05 94,281 238,926
Steven R. Kingma.............. 30,841(4) 6.4 3.24 03/22/05 62,842 159,254
15,423(4) 3.2 3.24 12/08/05 31,426 79,640
</TABLE>
- ---------------
(1) All options were granted at fair market value at the date of grant.
(2) Based on a total of 481,013 options granted to employees in fiscal 1995.
(3) The assumed rates of appreciation are prescribed by the Securities and
Exchange Commission (the "Commission") for illustrative purposes only and
are not intended to forecast or predict future stock prices.
(4) These options vest monthly over a four-year period.
(5) These options vest monthly over a four-year period upon the achievement of
certain operating objectives or at the end of five years.
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<PAGE> 46
1995 Year-End Option Values
No stock options were exercised by the Named Executive Officers during the
fiscal year ended December 31, 1995. The following table sets forth certain
information regarding unexercised stock options held by each of the Named
Executive Officers as of December 31, 1995. Mr. Hauff held no stock options
granted by the Company as of December 31, 1995. For a discussion of certain
options granted to Mr. Hauff by certain shareholders of the Company, see
"Certain Transactions."
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David W. Jobe.................................... 11,565 96,387 $ 136,005 $ 1,133,511
Steven R. Kingma................................. 5,782 40,482 67,996 476,068
</TABLE>
- ---------------
(1) Calculated on the basis of the assumed initial public offering price of
$15.00 per share, less the exercise price.
BENEFIT PLAN
The purpose of the 1995 Amended and Restated Stock Incentive Compensation
Plan (the "1995 Plan") is to enhance the long-term shareholder value of the
Company by offering opportunities to employees, directors, officers,
consultants, agents, advisors and independent contractors of the Company and its
subsidiaries to participate in the Company's growth and success, and to
encourage them to remain in the service of the Company and its subsidiaries and
acquire and maintain stock ownership in the Company. The 1995 Plan includes
stock option, stock appreciation right ("SAR"), stock award (including
restricted stock), performance award, other stock-based award and dividend
equivalent right features. The 1995 Plan is a long-term incentive compensation
plan and is designed to provide a competitive and balanced incentive reward
program for participants. A maximum of 879,000 shares of Common Stock will be
available for issuance under the 1995 Plan. A maximum of 293,000 shares may be
granted under the 1995 Plan as stock awards and performance awards and a maximum
of 58,600 shares may be granted under the 1995 Plan to any individual in any one
fiscal year of the Company, except that the Company may make additional one-time
grants to newly hired employees of up to 175,800 shares per each such employee.
As of June 30, 1996, options for 485,338 shares were outstanding under the 1995
Plan.
Stock Option Grants. Each of the Board of Directors and the Compensation
Committee of the Board of Directors (the "Plan Administrator") has the authority
to select individuals who are to receive options under the 1995 Plan and to
specify the terms and conditions of each option so granted (incentive or
nonqualified), the exercise price (which must be at least equal to the fair
market value of the Common Stock on the date of grant with respect to incentive
stock options), the vesting provisions and the option term. Following the
Offering, for purposes of the 1995 Plan, fair market value means the closing
price as reported by the Nasdaq National Market on the date of grant. Unless
otherwise provided by the Plan Administrator, an option granted under the 1995
Plan expires 10 years from the date of grant or, if earlier, three months after
the optionee's termination of service, other than termination for cause, or one
year after the optionee's death or disability.
Stock Appreciation Rights. The Plan Administrator may grant SARs
separately or in tandem with a stock option award. A SAR is an incentive award
that permits the holder to receive, for each share covered by the SAR, the
amount by which the fair market value of a share of Common Stock on the date of
exercise exceeds the exercise price of such share (the "base price"). A SAR
granted in tandem with a related option will generally have the same terms and
provisions as the related option with respect to exercisability, and the base
price of such SAR will generally be equal to the option price under the related
option. A SAR granted separately will have such terms as the Plan Administrator
may determine, except that, unless otherwise established by the Plan
Administrator, a stand-alone SAR will have a 10-year term and will be subject to
the same provisions relating to termination of employment as options.
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<PAGE> 47
Stock Awards. The Plan Administrator is authorized under the 1995 Plan to
issue shares of Common Stock to eligible participants on such terms and
conditions and subject to such restrictions, if any, as the Plan Administrator
may determine. Such restrictions may be based on continuous service with the
Company or the achievement of performance goals relating to sales, gross
margins, operating profits or profit, growth in sales, gross margins, operating
profits or profit, return ratios related to sales, gross margins, operating
profits or profit, cash flow, asset management (including inventory management)
or total shareholder return (together, the "Performance Goals"), where such
goals may be stated in absolute terms or relative to comparison companies, as
the Plan Administrator may determine.
Performance Awards. The Plan Administrator is authorized under the 1995
Plan to grant performance awards that may be denominated in cash, shares of
Common Stock, or any combination thereof, to eligible participants on such terms
and conditions as the Plan Administrator may determine. Performance objectives
may vary among participants and may be based on the Performance Goals, where
such goals may be stated in absolute terms or relative to comparison companies,
as the Plan Administrator may determine. No performance awards denominated in
cash having an aggregate value in excess of $250,000 may be granted to any
individual in any one fiscal year of the Company.
Other Stock-Based Awards. The Plan Administrator may grant other
stock-based awards under the 1995 Plan pursuant to which shares of Common Stock
are or may in the future be acquired, or awards denominated in stock units,
including awards valued using measures other than market value. Such other
stock-based awards may be granted alone or in addition to or in tandem with any
award of any type granted under the 1995 Plan and must be consistent with the
1995 Plan's purpose.
Dividend Equivalent Rights. Any awards under the 1995 Plan may, in the
Plan Administrator's discretion, earn dividend equivalent rights that entitle
the holder to be credited with an amount equal to the cash or stock dividends or
other distributions that would have been paid on the shares of Common Stock
covered by such award had such covered shares been issued and outstanding on
such dividend record date. The Plan Administrator may establish such rules and
procedures governing the crediting of dividend equivalent rights, including the
timing, form of payment and payment contingencies, as it deems appropriate or
necessary.
EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS
Employment Agreements. In March 1995, the Company entered into a four-year
employment agreement with Douglas B. Hauff and two-year employment agreements
with each of Steven R. Kingma and David W. Jobe and, in November 1995, a
two-year employment agreement with G. Travis Worth. After expiration of the
initial term, each such employment agreement continues on a quarterly basis
until terminated by either party on 90 days' notice. Pursuant to these
agreements, the Company agreed to pay Messrs. Hauff, Kingma, Jobe and Worth
annual base salaries of $225,000, $95,000, $85,000 and $135,000, respectively,
subject to such annual increases as may be determined by the Company's Board of
Directors. Mr. Hauff and Mr. Kingma are eligible to receive an annual incentive
bonus of up to $60,000 and up to $30,000, respectively, subject to and based on
the achievement by the Company of specified annual operating income objectives.
Mr. Jobe is eligible to receive annual incentive bonuses of (i) up to $22,500,
subject to and based on the achievement by the Company of specified annual
operating income objectives, (ii) up to $20,000, subject to and based on the
achievement by the Company of specified annual sales objectives, and (iii) up to
$15,000, subject to and based on the achievement by the Company of specified
annual sales objectives for its Protective Eyewear division. If the Company does
not achieve specified minimum annual operating, sales or Protective Eyewear
division sales objectives, as applicable, no annual incentive bonus based on the
applicable objective is payable under the employment agreements of such
executives. The agreement with Mr. Hauff also provides that Mr. Hauff will
receive a $300,000 bonus if the Company sells substantially all of its assets or
stock or raises operating capital through an initial public offering of its
securities. This bonus will be paid in connection with the closing of the
Offering. Beginning in 1996, Mr. Worth is entitled to participate in incentive
compensation programs established for management, under which bonus amounts will
range between 25% and 50% of Mr. Worth's base salary. In addition, Messrs.
Kingma, Jobe and Worth were granted incentive stock options to purchase 30,841,
61,682 and 123,365 shares of Common Stock, respectively. The employment
45
<PAGE> 48
agreements provide the executives with certain fringe benefits relating to
benefit plans, as well as benefits upon termination due to disability. The
employment agreements also provide that if the executive is terminated other
than for cause or resigns for good reason, such executive is entitled to receive
an amount equal to the lesser of (i) two years' base salary in the case of Mr.
Hauff and six months' base salary in the case of Messrs. Kingma, Jobe and Worth
and (ii) the executive's base salary payable for the remaining period of the
initial term, less any amounts received under disability insurance policies
provided by the Company or as compensation or benefits from employment during
such time, together with certain other benefits. Each of the employment
agreements with Messrs. Hauff, Kingma and Jobe contains a noncompetition
provision effective for (i) a period equal to the longer of five years from the
date of termination of employment and the end of the employment period if the
executive is terminated for cause or voluntarily resigns or (ii) a period of one
year from the date of termination of employment in the case of any other
termination. The employment agreement with Mr. Worth contains a noncompetition
provision effective for (i) a period of three years from the date of termination
of employment if Mr. Worth is terminated for cause or voluntarily resigns or
(ii) a period of six months from the date of termination of employment in the
case of any other termination.
1995 Plan. In the event of certain mergers, consolidations, acquisitions
of property or stock, separations, reorganizations or liquidations of the
Company, outstanding options, SARs and restricted stock under the 1995 Plan will
become fully exercisable, subject to certain exceptions. In addition, the
Compensation Committee of the Board of Directors may take such further action as
it deems necessary or advisable, and fair to participants, with respect to
outstanding awards under the 1995 Plan.
46
<PAGE> 49
CERTAIN TRANSACTIONS
RECAPITALIZATION TRANSACTION
In March 1995, the Company implemented the Recapitalization, in which (i)
Antone merged into the Company, (ii) the Common Stock was split 13,888.89-for-1,
(iii) approximately 3.5 million shares of Common Stock were redeemed from the
Founder (who was until then the majority shareholder) for $10.9 million (paid as
described below), and (iv) the Investors purchased approximately 3.5 million
shares, or 60% of the outstanding Common Stock, for $5.4 million. Of the shares
sold to the Investors, 2,930,000 shares were sold to Trillium for a $4.5 million
promissory note; 87,900 shares were sold to Mr. Hauff, then President and a
director of the Company, for $134,687; 58,600 shares were sold to Mr. Kingma,
Vice President, Chief Financial Officer, Secretary and Treasurer of the Company,
for $89,791; 58,600 shares were sold to Mr. Jobe, Senior Vice President, Sales
of the Company, for $89,791; 111,340 shares were sold to Gary Waterman, a
Manager of Workshops L.L.C., an affiliate of Trillium, for $170,605; and 14,650
shares were sold to Robert Manne, President of Savia International Inc., an
affiliate of Trillium, for $22,448. Trillium made interest payments of $250,555
to the Company for 1995.
The $10.9 million payment to the Founder was made in part pursuant to a 7%,
$4.5 million promissory note. The Company made interest payments of $250,555 to
the Founder for 1995. The note to the Founder was backed by an irrevocable
standby letter of credit issued on behalf of Trillium; the obligations evidenced
by the Company's note to the Founder and Trillium's note to the Company were
satisfied in full on January 2, 1996. An additional $6.0 million of the
redemption price was paid out of the proceeds of the Recapitalization Loan and
the balance from cash on hand. Trillium guaranteed the payment of all amounts
due under the Recapitalization Loan and pledged its shares of the Company's
Common Stock to secure its guaranty. The Company agreed to pay Trillium an
annual guaranty fee equal to 1% of the outstanding principal amount of the
Recapitalization Loan, and has subsequently paid Trillium fees of $60,000 and
$55,000 for 1995 and 1996, respectively. As of June 30, 1996, $5.5 million was
outstanding under the Recapitalization Loan.
In connection with the Recapitalization, in addition to agreeing to redeem
shares of the Founder's Common Stock, the Company made certain other
distributions to and agreements with the Founder, including:
(a) As severance expenses and settlement of certain claims and obligations
among the Company, the Founder and Supreme Corq Inc. ("Supreme Corq"), which is
majority-owned by the Founder, the Company issued to the Founder, and Conquest
guaranteed, a 10%, $283,100 promissory note (the "Settlement Note") requiring
monthly payments of $10,704 until maturity on March 15, 1998. During the year
ended December 31, 1995, and the six months ended June 30, 1996, the Company
paid $46,152 and $64,226, respectively, for principal and interest on the
Settlement Note. As of June 30, 1996, $205,455 was outstanding under the
Settlement Note.
(b) Supreme Corq agreed to assume (and the Founder agreed to guarantee its
performance of) all lessee obligations under the Company's lease of commercial
space used by Supreme Corq since February 1994 (the "Previously Leased Space").
Supreme Corq, which makes rental payments to the Company equal to the Company's
lease payments, paid the Company, $83,781 and $62,335 in 1995 and the six months
ended June 30, 1996, respectively. The Company received the benefit of $92,000
in lease payments owed for 1994 in the calculation of the Settlement Note.
(c) The Company, Trillium, the Founder, Mr. Hauff and all other
shareholders of the Company entered into a shareholders agreement (which will
automatically terminate upon the effective date of the Offering) relating to the
election of directors, preemptive rights and certain other matters, including
assisting Trillium in effecting the Offering. The Company, Conquest and Antone
agreed, in a Nondisclosure, Noncompetition and Indemnity Agreement, to indemnify
the Founder for all losses that he incurs from his involvement with the Company,
Conquest and Antone, including losses arising out of acts or omissions that
occur at any time, either before or after the date of the agreement. The Founder
agreed to maintain the confidentiality of the indemnitor companies' proprietary
information and not to compete with any of them, directly or indirectly, through
March 22, 2000.
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<PAGE> 50
CONQUEST TRANSACTIONS
The Founder founded both Conquest and the Company, and the two entities
have been closely related, sharing the following officers and directors: the
Founder (who, from Conquest's founding in 1973 until 1995, was the sole or
majority shareholder of both Conquest and the Company); Mr. Hauff (who, since
1992, has been President, Chief Executive Officer, a director and a shareholder
of the Company, as well as President and a director and, since January 1994, a
shareholder of Conquest); Mr. Kingma (who is the Vice President, Chief Financial
Officer, Secretary and Treasurer of both Conquest and the Company); and Messrs.
Anderson and Potts (who, since March 22, 1995, have been directors of the
Company and of Conquest).
Concurrently with the Recapitalization, Conquest, in its own
recapitalization, issued shares of its common stock to the Investors, and
formalized previously undocumented loans from the Founder by issuing a 10%,
$133,400 promissory note to the Founder due March 15, 1998 and guaranteed by the
Company. Conquest made payments to the Founder under this note of $21,747 in
fiscal 1995 and $30,264 in the six months ended June 30, 1996. As of June 30,
1996, $96,813 was outstanding under the note.
Prior to February 1994, Conquest, Antone and the Company shared space in
the Previously Leased Space now occupied by Supreme Corq, and the Company made
all required lease payments. From February 1994 through July 1996, Conquest used
what the Company estimates to be less than 5% of the Company's current leased
premises and certain Company employees performed services for Conquest without
reimbursement to the Company, which together had an estimated cost to the
Company during the year ended December 31, 1995 of $210,000. Reimbursement for
the use of facilities will be made by the Purchaser of Conquest's assets for the
period from June 1996 until such use terminates on July 31, 1996.
The Company, which has guaranteed obligations of Conquest from time to
time, guaranteed repayment of a March 1995 10%, $75,000 Trillium loan to
Conquest. As of June 30, 1996, the outstanding balance owed by Conquest to
Trillium was $84,000. In July 1995, as amended in June 1996, the Company
guaranteed Conquest's indebtedness to a commercial bank (the "Bank") and agreed
to subordinate its Conquest indebtedness and present and future indebtedness of
Conquest to the Bank. As of June 17, 1996, the outstanding balance owed by
Conquest to the Bank was $769,785. In January 1996, the Company guaranteed
payment of all of Conquest's obligations under a promissory note in the
principal amount of $129,661 to a former distributor of Conquest. In January
1996, the Company and Conquest reached a severance understanding with a former
officer of both companies. In connection with the severance understanding,
Conquest agreed to make severance payments of $8,333.33 per month for six
months, the Company agreed to make a single payment of $50,000 and the former
officer's right to exercise vested stock options granted by each company was
extended until January 31, 1998.
On June 17, 1996, substantially all the assets of Conquest were sold for a
$598,259 promissory note bearing interest at the prime rate plus 1%, with an
initial principal payment of $168,922 due in July 1996 and maturing in June
1998, to an entity formed by Conquest's former general manager. Pursuant to a
series of advances between the Company and Conquest, the Company, in fiscal
1993, made advances to Conquest that exceeded repayments by Conquest to the
Company by $563,988. Subsequently, the Company made advances to Conquest of
$442,331, $1,007,580 and $44,475 during the fiscal years ended November 30, 1994
and December 31, 1995 and the six months ended June 30, 1996, respectively, and
Conquest made repayments of $612,400 and $562,583 during the fiscal years ended
November 30, 1994 and December 31, 1995, respectively. As of June 30, 1996,
Conquest's outstanding payable to the Company was $953,366. The Company recorded
a provision in the fourth quarter of 1995 of $1.6 million, representing the
write-off of the receivable from Conquest and a reserve for other potential
Conquest obligations, including the Conquest indebtedness which Gargoyles has
guaranteed. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Company History."
OTHER TRANSACTIONS
From the time it was founded in July 1987 until March 22, 1995, when it was
merged into the Company, Antone, a corporation of which the Founder was the sole
shareholder, assembled the Company's eyewear
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<PAGE> 51
products. Antone derived revenues from the Company of $1,115,120, $896,279 and
$284,027 during the fiscal years ended November 30, 1993, November 30, 1994 and
December 31, 1995, respectively.
In December 1993, the Company entered into a lease with DB&D Partnership,
of which the Founder and Mr. Hauff were then the sole partners, for the
Company's principal facility in Kent, Washington. In March 1995, Mr. Hauff's
interest in the partnership was transferred to the Founder. The lease, as
amended in March 1995, currently provides for lease payments by the Company of
$18,746 per month (increasing on April 1 of 1997, 1998 and 1999 to $19,496,
$20,276 and $21,087 per month, respectively). The Company paid DB&D Partnership
lease payments of $210,000, $214,725 and $110,313 for the fiscal years ended
November 30, 1994 and December 31, 1995 and the six months ended June 30, 1996,
respectively.
In January 1996, in exchange for a cash payment of $56,000, the Company
issued to Walter F. Walker, a director of the Company, a warrant to purchase
41,020 shares of the Company's Common Stock at an exercise price of $4.26 per
share. The warrant is also convertible by Mr. Walker in certain circumstances
into shares of Common Stock. The warrant was immediately exercisable in full and
expires in December 2005.
In January 1994, the Company, the Founder and Mr. Hauff entered into an
employment agreement pursuant to which the Founder, then the sole shareholder of
the Company, granted Mr. Hauff an initial option to purchase 5% of the Company's
Common Stock for $250,000, subject to a reduction of $40,000 in certain
circumstances, and a further option to purchase an additional 10% of such shares
owned by the Founder. Mr. Hauff exercised the initial option in February 1994.
In connection with the Recapitalization, (i) the 1994 employment agreement was
terminated and the parties thereto entered into an option agreement pursuant to
which the Founder granted Mr. Hauff an option to purchase 586,000 shares of the
Company's Common Stock then owned by the Founder at an exercise price of $0.85
per share, (ii) the Founder sold to the Investors the shares subject to the
option, and (iii) the Founder assigned to the Investors, and the Investors
assumed, the option agreement. In addition, the Investors granted Mr. Hauff an
additional option to purchase 146,500 shares of Common Stock owned by them at an
exercise price of $4.26 per share. Both options were to fully vest on the
closing of the Offering and, if not then exercised, to terminate. On June 28,
1996, the option agreements were amended to cause all options to fully vest on
June 28, 1996, and to terminate, if unexercised, on June 28, 2006.
On June 9, 1988, the Company and Conquest, as plaintiffs, filed a lawsuit
against the U.S. government for infringement of certain patent rights jointly
owned by the Company and Conquest. The Company and Conquest entered into an
agreement with the Founder regarding management of the lawsuit, the Founder's
right to certain proceeds, if any, arising from the claim prior to a final
judgment and the Founder's responsibility for costs and fees for the lawsuit for
periods after March 24, 1995. The agreement provided a value of the rights and
obligations received by the Founder of $100,000. The Company and Conquest
prevailed on liability, and have appealed the court's determination with respect
to the amount of damages. The government has cross appealed as to liability and
damages. The Company incurred legal expenses associated with the damage hearing
totaling $171,000 through the quarter ended March 31, 1995, which the Company
recorded as an expense of the Recapitalization.
In February 1995, Mr. Hauff made a 9.25%, $50,000 loan to the Company which
was repaid in full with interest in March 1995. In January 1996, Mr. Hauff made
a 12%, $50,000 loan to the Company which was repaid in full with interest in
April 1996. In February 1995, Mr. Kingma made a 9.25%, $50,000 loan to the
Company which was repaid in full with interest in March 1995. In January 1996,
Mr. Kingma made a 12%, $40,000 loan to the Company which was repaid in full with
interest in April 1996. In January 1996, Trillium made two loans to the Company,
each in the principal amount of $100,000, with interest accruing at the rate of
12% per annum. The first loan was repaid in full with interest in February 1996
and the second loan was repaid in full with interest in March 1996.
In February 1996, Trillium guaranteed payment of all amounts due under the
Hobie Acquisition Loan in the principal amount of $4.0 million. The Hobie
Acquisition Loan was increased to $5.0 million on June 26, 1996. To secure the
guaranty, Trillium Investors II, L.L.C, an affiliate of Trillium to which
Trillium transferred most of its shares of Common Stock in February 1996,
pledged its shares of Common Stock. In consideration of the guaranty, the
Company paid Trillium a guarantee fee of $50,000 and agreed to indemnify
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<PAGE> 52
Trillium for any losses relating to the guaranty. In January 1996, Mr. Hauff
guaranteed the Company's obligation to pay liquidated damages of $100,000 in the
event that the Hobie Acquisition was not consummated; the transaction was
consummated without cost to Mr. Hauff.
In May 1996, the Company, together with Douglas W. Lauer and Timberland,
formed Kindling, a majority-owned subsidiary of the Company. The Company
contributed $1.2 million for its 70% interest in Kindling, while Mr. Lauer owns
a 20% interest in Kindling and Timberland owns the remaining 10% interest. Of
the $1.2 million, $100,000 was paid in cash and $1.1 million by means of a
non-interest-bearing promissory note (the "Kindling Note") payable in
installments of $100,000 each on June 3, July 3, September 3, October 3 and
December 3, 1996 and $600,000 on January 3, 1997. Between January 3, 1997 and
January 1, 2000, Kindling, Mr. Lauer or Timberland may require the Company to
contribute an additional $300,000 to Kindling. From 1999 to 2003, Timberland may
require Kindling to repurchase all of Timberland's 10% interest in Kindling
under certain circumstances. The Company further agreed that Mr. Lauer, and
certain key employees of Kindling, may be granted up to an aggregate of 10%
(2.5% for each year, 1997 to 2000) of Kindling's common stock owned by the
Company upon the achievement of certain operating objectives. Trillium has
agreed to make advances that aggregate up to $400,000 to fund the Company's
installments under the Kindling Note. To date, Trillium has advanced $100,000 in
each of June and July 1996, which are due, with interest at 12% per annum, on
September 30, 1996.
50
<PAGE> 53
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of July 3, 1996, certain information with
respect to the beneficial ownership of the Common Stock by (i) each person known
by the Company to beneficially own more than 5% of the Common Stock, (ii) each
director of the Company, (iii) each of the Named Executive Officers, (iv) each
of the Selling Shareholders, and (v) all of the Company's directors and
executive officers as a group. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock listed below, based on
information furnished by such owners, have sole voting and investment power with
respect to such shares.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP NUMBER OF BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING SHARES AFTER THE OFFERING(1)
------------------------ OFFERED ------------------------
NAME AND ADDRESS SHARES PERCENTAGE HEREBY SHARES PERCENTAGE
- ------------------------------------ --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Erik J. Anderson(2)(3).............. 3,418,330 58.2% 409,000 3,009,330 39.9%
c/o Trillium Corporation
4350 Cordata Parkway
Bellingham, Washington 98226
Douglas B. Hauff(4)................. 1,109,731 16.8% 0 1,109,731 13.4%
c/o Gargoyles, Inc.
5866 South 194th Street
Kent, Washington 98032
David W. Jobe(5).................... 90,213 1.5% 0 90,213 1.2%
Steven R. Kingma(6)................. 81,860 1.4% 0 81,860 1.1%
Timothy C. Potts(3)(7).............. 3,418,330 58.2% 409,000 3,009,330 39.9%
c/o Trillium Corporation
4350 Cordata Parkway
Bellingham, Washington 98226
Paul S. Shipman..................... 0 -- 0 0 --
Walter F. Walker(8)................. 43,364 * 0 43,364 *
Dennis L. Burns(9).................. 1,465,000 24.9% 591,000 874,000 11.6%
c/o Supreme Corq Inc.
19039 62nd Avenue S.
Kent, Washington 98032
Trillium Corporation(3)(10)......... 3,418,330 58.2% 409,000 3,009,330 39.9%
4350 Cordata Parkway
Bellingham, Washington 98226
All directors and executive officers
as a
group(11) (9 persons)............. 4,113,804 68.1% 409,000 3,704,804 48.1%
</TABLE>
- ---------------
* Less than 1%.
(1) If the Underwriters' over-allotment option is exercised in full, Trillium
Investors II, L.L.C. ("Trillium Investors") and Dennis L. Burns will sell
an additional 101,000 and 141,500 shares, respectively, which will reduce
the number of shares beneficially owned by such persons to 2,908,330 (or
37.8%) and 732,500 (or 9.5%), respectively.
(2) Consists of 610,412 shares held by Trillium and 2,807,918 shares held by
Trillium Investors. Mr. Anderson is Chief Executive Officer of Trillium. In
addition, Trillium owns an 80.0% interest and Mr. Anderson owns a 10.0%
interest in Trillium Investors. Mr. Anderson is Chairman of the Board of
the Company.
(3) Of these shares, 610,412 are subject to an option granted by Trillium to
Douglas B. Hauff.
51
<PAGE> 54
(4) Includes 714,181 shares subject to an option granted to Mr. Hauff by
certain shareholders of the Company, including Steven R. Kingma (with
respect to 12,211 shares), David W. Jobe (with respect to 12,211 shares)
and Trillium (with respect to 610,412 shares).
(5) Of these shares, 12,211 are subject to an option granted by Mr. Jobe to
Douglas B. Hauff. Also includes 21,845 shares subject to an option
exercisable within 60 days.
(6) Of these shares, 12,211 are subject to an option granted by Mr. Kingma to
Douglas B. Hauff. Also includes 13,492 shares subject to an option
exercisable within 60 days and 2,344 shares held by Mr. Kingma's minor
daughter.
(7) Consists of 610,412 shares held by Trillium and 2,807,918 shares held by
Trillium Investors. Mr. Potts is Senior Vice President -- Finance of
Trillium. In addition, Trillium owns an 80.0% interest and Mr. Potts owns a
3.4% interest in Trillium Investors. Mr. Potts is a director of the
Company.
(8) Consists of 41,020 shares subject to a warrant and 2,344 shares subject to
an option, both of which are currently exercisable.
(9) For additional information describing Mr. Burns' historical relationships
with the Company, see "Certain Transactions."
(10) Includes 2,807,918 shares held by Trillium Investors. Trillium owns an
80.0% interest in Trillium Investors and may be deemed the beneficial
owner of such shares as a result of such ownership. In connection with the
Company's credit facility, Trillium and Trillium Investors pledged these
shares in support of Trillium's guarantee of certain of the Company's
obligations under the Hobie Acquisition Loan. In the event of a default by
the Company of its obligations under the Hobie Acquisition Loan and a
failure by Trillium to otherwise satisfy the guaranty, such shares would
be transferred to the bank.
(11) See footnotes (1), (2), (3), (4), (5), (6), (7) and (8). Also includes
5,140 shares subject to an option exercisable within 60 days.
52
<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares
of Common Stock, no par value, and 10,000,000 shares of Preferred Stock, no par
value. The following summary description of the Company's capital stock is
qualified in its entirety by reference to the Restated Articles and the Bylaws
of the Company, copies of which are filed as exhibits to the Registration
Statement of which this Prospectus forms a part.
COMMON STOCK
On June 30, 1996, there were 5,875,637 shares of Common Stock outstanding,
held of record by 21 shareholders. Holders of Common Stock are entitled to one
vote per share on all matters submitted to a vote of shareholders. There are no
cumulative voting rights for the election of directors. Holders of Common Stock
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor, subject to preferences
that may be applicable to any outstanding Preferred Stock. In the event of the
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. All outstanding shares of Common Stock are, and all shares of
Common Stock to be outstanding upon completion of the Offering will be, fully
paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors has the authority to issue 10,000,000
shares of Preferred Stock in one or more series and to fix the powers,
designations, rights, preferences and restrictions thereof, including dividend
rights, conversion rights, voting rights, redemption terms, liquidation
preferences and the number of shares constituting each such series, without any
further vote or action by the Company's shareholders. Upon the closing of the
Offering, no shares of Preferred Stock will be outstanding. The issuance of
Preferred Stock in certain circumstances may delay, deter or prevent a change in
control of the Company, may discourage bids for the Company's Common Stock at a
premium over the market price of the Common Stock and may adversely affect the
market price of, and the voting and other rights of the holders of, the Common
Stock. The Company currently has no plans to issue any Preferred Stock.
STOCK DIVIDEND; AMENDMENTS TO RESTATED ARTICLES OF INCORPORATION
On June 28, 1996, the Company's Board of Directors approved a stock
dividend in the amount of 4.86 shares for every one share of Common Stock
outstanding, thereby giving effect to a 5.86-to-1 stock split to be payable on
or before the closing of the Offering. The payment of such dividend is subject
to approval by the Company's Board of Directors and shareholders of the Restated
Articles of Incorporation to increase the number of authorized shares. The
information in this Prospectus assumes that such dividend has been paid and such
amendments have been made.
WARRANT
On June 30, 1996, there was one warrant outstanding to purchase 41,020
shares of Common Stock at an exercise price of $4.26 per share.
WASHINGTON ANTITAKEOVER STATUTE
Washington law contains certain provisions that may have the effect of
delaying or discouraging a hostile takeover of the Company. In addition, Chapter
23B.19 of the Washington Business Corporations Act prohibits a corporation, with
certain exceptions, from engaging in certain significant business transactions
with an "Acquiring Entity" (defined as a person who acquires 10% or more of the
corporation's voting securities without the prior approval of the corporation's
board of directors) for a period of five years after such acquisition. The
prohibited transactions include, among others, a merger with, disposition of
assets to, or issuance or redemption of stock to or from, the Acquiring Entity,
or allowing the Acquiring Entity to receive
53
<PAGE> 56
any disproportionate benefit as a shareholder. An Acquiring Entity is further
prohibited from engaging in significant business transactions with the target
corporation unless the per share consideration paid to holders of outstanding
shares of Common Stock and other classes of stock of the target corporation meet
certain minimum criteria. These provisions may have the effect of delaying,
deterring or preventing a change in control of the Company.
CERTAIN PROVISIONS IN RESTATED ARTICLES
Effective with the first annual meeting of shareholders following the
Offering, the Restated Articles provide for the division of the Company's Board
of Directors into three classes, as nearly equal in number as possible, each for
a three-year term, with one class being elected each year by the Company's
shareholders. See "Management -- Directors, Executive Officers and Key
Employees." Directors may be removed only for cause and only by a vote of not
less than two-thirds of the shares of the Company's capital stock entitled to
vote on an election of the director whose removal is sought.
The Restated Articles require that certain business combinations (including
a merger, share exchange or the sale, lease, exchange, mortgage, pledge,
transfer or other disposition of a substantial part of the Company's assets) be
approved by the holders of not less than two-thirds of the outstanding shares,
unless such business combination shall have been approved by a majority of
Continuing Directors (defined as those individuals who were members of the Board
of Directors on July 1, 1996 or were elected thereafter on the recommendation of
a majority of the Continuing Directors), in which case the affirmative vote
required shall be a majority of the outstanding shares.
Under the Restated Articles, the shareholders may call a special meeting
only upon the request of holders of at least 25% of the outstanding shares. The
Restated Articles also provide that changes to certain provisions of the
Articles of Incorporation, including those regarding amendment of certain
provisions of the Bylaws or Restated Articles, the classified Board of
Directors, special voting provisions for business combinations and special
meetings of shareholders, must be approved by the holders of not less than
two-thirds of the outstanding shares.
It is possible that the provisions discussed above may delay, deter or
prevent a change in control of the Company.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
The Restated Articles include a provision permitted by Washington law that
limits the liability of the Company's directors. Under the provision, no
director shall be personally liable to the Company or its shareholders for
monetary damages for conduct as a director, excluding, however, liability for
acts or omissions involving intentional misconduct or knowing violations of law,
illegal distributions or transactions from which the director receives benefits
to which the director is not legally entitled. In addition, Washington law
provides for broad indemnification by the Company of its officers and directors.
The Company's Bylaws and indemnification agreements entered into between the
Company and its directors implement this indemnification to the fullest extent
permitted by law. Insofar as the indemnity for liabilities arising under the
Securities Act may be permitted to directors or officers of the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Commission such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is First
National Bank of Boston.
54
<PAGE> 57
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 7,542,304 shares of
Common Stock outstanding (7,699,804 shares if the Underwriters' over-allotment
option is exercised in full), assuming no exercise of outstanding options under
the Company's benefit plan. The shares sold in the Offering will be freely
tradable without restriction or limitation under the Securities Act, except for
any such shares held by "affiliates" of the Company, as such term is defined
under Rule 144 of the Securities Act, which shares will be subject to the resale
limitations under Rule 144. The remaining 4,875,637 shares are "restricted
securities" within the meaning of Rule 144 and were issued and sold by the
Company in private transactions and may be publicly sold only if registered
under the Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144. The Company, all executive officers, directors
and shareholders of the Company have agreed with the Representatives not to
sell, directly or indirectly, any shares owned by them for a period of 180 days
after the date of this Prospectus without the prior written consent of Smith
Barney Inc. Upon the expiration of this 180-day lock-up period (or earlier upon
the consent of Smith Barney Inc.), approximately 1,170,000 of these restricted
shares (plus shares issuable upon exercise of then-vested outstanding options
and warrants) will become eligible for sale subject to the restrictions of Rule
144, none of which will be freely tradable in reliance on Rule 144(k). In March
1997, approximately an additional 458,000 restricted shares will become eligible
for sale subject to the restrictions of Rule 144. In addition, approximately an
additional 715,000 shares are subject to an option granted by certain
shareholders of the Company to Douglas B. Hauff and have been placed in escrow.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General." If this escrow arrangement were to terminate for any
reason, these shares would become eligible for sale beginning in March 1997. If
Mr. Hauff should exercise this option, approximately 80,000 of such shares would
be eligible for sale beginning in March 1997.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years, including an affiliate of the Company, would be entitled to sell, within
any three-month period, that number of shares that does not exceed the greater
of 1% of the then outstanding shares of Common Stock (approximately 75,400
shares) and the average weekly trading volume in the Common Stock during the
four calendar weeks immediately preceding the date on which the notice of sale
is filed with the Commission, provided certain manner of sale and notice
requirements and requirements as to the availability of current public
information about the Company are satisfied. In addition, affiliates of the
Company must comply with the restrictions and requirements of Rule 144, other
than the two-year holding period requirement, in order to sell shares of Common
Stock. As defined in Rule 144, an "affiliate" of an issuer is a person who
directly or indirectly through the use of one or more intermediaries controls,
or is controlled by, or is under common control with, such issuer. Under Rule
144(k), a holder of "restricted securities" who is not deemed an affiliate of
the issuer and who has beneficially owned shares for at least three years would
be entitled to sell shares under Rule 144(k) without regard to the limitations
described above.
The Company intends to file a registration statement under the Securities
Act following the date of this Prospectus to register the future issuance of up
to 879,000 shares of Common Stock under the 1995 Plan. Shares issued under the
1995 Plan after the effective date of such registration statement will be freely
tradable in the open market, subject to the lock-up agreements with the
Representatives described above and, in the case of sales by affiliates, to
certain requirements of Rule 144. As of September 1, 1996, options to purchase
approximately 107,000 shares of Common Stock will be vested, of which
approximately 43,000 such shares will be subject to the 180-day lock-up period
described above. See "Management -- Benefit Plan." In addition, a warrant to
purchase 41,020 shares of Common Stock is currently outstanding and subject to
the lock-up agreement described above.
The Company is unable to estimate the number of shares that may be sold in
the future by its existing shareholders or the effect, if any, that sales of
shares by such shareholders will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock, or
the prospect of such sales, could adversely affect the market price of the
Common Stock.
55
<PAGE> 58
UNDERWRITING
Upon the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company and the Selling Shareholders have agreed to
sell to such Underwriter, the number of shares of Common Stock set forth
opposite the name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NAME COMMON STOCK
- ------------------------------------------------------------------------------- ------------
<S> <C>
Smith Barney Inc...............................................................
Robertson, Stephens & Company LLC..............................................
---------
Total................................................................ 2,666,667
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option described
below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc. and Robertson, Stephens &
Company LLC are acting as Representatives, propose to offer part of the shares
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and part of the shares to certain dealers at a
price that represents a concession not in excess of $ per share under
the initial public offering price. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to certain other
dealers. The Representatives of the Underwriters have advised the Company that
the Underwriters do not intend to confirm any sales to any accounts over which
they exercise discretionary authority.
The Company and the Selling Shareholders have granted the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase up
to 400,000 additional shares of Common Stock at the initial public offering
price set forth on the cover page of this Prospectus, minus the underwriting
discounts and commissions. The Underwriters may exercise such option solely for
the purpose of covering over-allotments, if any, in connection with the
Offering. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
each Underwriter's name above bears to the total number of shares listed above.
The Company, as well as its executive officers and directors, the Selling
Shareholders and all other shareholders of the Company have agreed that, for a
period of 180 days from the date of this Prospectus, they will not, without the
prior written consent of Smith Barney Inc., offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into, or exercisable or exchangeable for, Common Stock, other than in a
transaction in which the transferee pays no value and agrees to be subject to
the same restrictions on transfer.
Prior to the Offering, there has not been a public market for the Common
Stock. Consequently, the initial public offering price for the shares included
in the Offering will be determined by negotiations among the Company, the
Selling Shareholders and the Representatives. Among the factors considered in
determining such price will be the history of and prospects for the Company's
business and the industry in which it competes, an assessment of the Company's
management and the present state of the Company's development, the Company's
past and present revenues and earnings, the prospects for growth of the
Company's revenues and earnings, the current state of the U.S. economy and the
current level of economic activity in the industry
56
<PAGE> 59
in which the Company competes and in related or comparable industries, and
currently prevailing conditions in the securities markets, including current
valuations of publicly traded companies which are comparable to the Company.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
Certain legal matters will be passed on for the Company and one of the
Selling Shareholders by Perkins Coie, Seattle, Washington. Certain legal matters
will be passed on for the Underwriters by Heller, Ehrman, White & McAuliffe,
Seattle, Washington. Certain legal matters will be passed on for one of the
Selling Shareholders by Bogle & Gates P.L.L.C.
EXPERTS
The consolidated financial statements of Gargoyles, Inc. at November 30,
1994 and December 31, 1995 and for each of the years ended November 30, 1993,
November 30, 1994 and December 31, 1995, and the one month ended December 31,
1994 appearing in this Prospectus and the Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
Effective July 13, 1995, the Company's Board of Directors retained Ernst &
Young LLP as the independent accountants for the Company. There were no
disagreements with McClinton, Workman & Associates, P.S., the Company's former
independent accountants, regarding accounting principles or practices, financial
statement disclosure, or auditing scope or procedure. The former accountants'
reports for the fiscal years ended November 30, 1991, 1992, 1993 and 1994, which
reports are not included herein, did not contain an adverse opinion or a
disclaimer of an opinion or qualifications as to uncertainty, audit scope or
accounting principles. Prior to retaining Ernst & Young LLP, the Company had not
consulted with Ernst & Young LLP regarding the application of accounting
principles, the type of audit opinion that might be rendered on the Company's
consolidated financial statements, or any event that was either a reportable
event or the subject of a disagreement.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby
(the "Registration Statement"). This Prospectus, which constitutes part of the
Registration Statement, omits certain information contained in the Registration
Statement and the exhibits thereto on file with the Commission pursuant to the
Securities Act and the rules and regulations of the Commission thereunder. The
Registration Statement, including the exhibits thereto, may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's
Regional Offices at 7 World Trade Center, Suite 1300, New York, New York 10048,
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies may
be obtained at the prescribed rates from the Public Reference Section of the
Commission at its principal office in Washington, D.C.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract, agreement or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
The Company intends to furnish its shareholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by independent auditors and may furnish its shareholders with
quarterly reports for the first three quarters of each fiscal year containing
unaudited summary financial information.
57
<PAGE> 60
GARGOYLES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Gargoyles, Inc. Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors................................... F-2
Consolidated Balance Sheets......................................................... F-3
Consolidated Statements of Operations............................................... F-4
Consolidated Statements of Shareholders' Equity..................................... F-5
Consolidated Statements of Cash Flows............................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
H.S.I. d/b/a Hobie Sunglasses
Report of Ernst & Young LLP, Independent Auditors................................... F-17
Balance Sheets...................................................................... F-18
Statements of Operations and Retained Earnings...................................... F-19
Statements of Cash Flows............................................................ F-20
Notes to Financial Statements....................................................... F-21
</TABLE>
F-1
<PAGE> 61
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Gargoyles, Inc.
We have audited the accompanying consolidated balance sheets of Gargoyles,
Inc. as of November 30, 1994 and December 31, 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
ended November 30, 1993 and 1994, the one month ended December 31, 1994, and the
year ended December 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gargoyles, Inc.
at November 30, 1994 and December 31, 1995, and the related consolidated results
of its operations and its cash flows for the years ended November 30, 1993 and
1994, the one month ended December 31, 1994, and the year ended December 31,
1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
June 14, 1996, except for the second
paragraph of Note 13,
as to which the date is , 1996
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the stock dividend described in Note 13 to the consolidated financial
statements.
ERNST & YOUNG LLP
Seattle, Washington
July 19, 1996
F-2
<PAGE> 62
GARGOYLES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1996
NOVEMBER 30, DECEMBER 31, ------------
1994 1995
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 2,282 $ 900 $ 23,380
Trade receivables, less allowances for doubtful
accounts of $10,000, $10,355 and $78,833..... 2,231,539 2,514,489 7,770,473
Inventories..................................... 2,613,084 5,473,692 6,448,505
Trade credits................................... 305,015 497,587 491,228
Other current assets and prepaid expenses....... 249,420 732,984 1,594,780
------------ ------------- -------------
Total current assets.............................. 5,401,340 9,219,652 16,328,366
Receivable from affiliate......................... 418,845 -- --
Property and equipment, net....................... 853,225 1,900,603 2,165,626
Intangibles....................................... -- -- 2,748,124
Other assets...................................... -- 145,979 216,251
------------ ------------- -------------
Total assets...................................... $6,673,410 $ 11,266,234 $ 21,458,367
============ ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank under revolving line of
credit....................................... $2,067,841 $ 5,412,916 $ 7,536,058
Note payable to bank............................ -- -- 5,000,000
Accounts payable................................ 2,908,204 3,572,739 3,299,104
Accrued expenses and other current
liabilities.................................. 432,255 1,577,048 4,092,761
Current maturities of long-term debt............ 138,900 1,349,333 1,412,717
------------ ------------- -------------
Total current liabilities......................... 5,547,200 11,912,036 21,340,640
------------ ------------- -------------
Deferred license income........................... -- 540,000 450,000
------------ ------------- -------------
Long-term debt.................................... 350,593 6,017,812 5,828,096
------------ ------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value................... -- -- --
Common stock, no par value...................... 572 5,788,070 9,302,250
Repurchased shares.............................. -- (10,895,500) (10,895,500)
Retained earnings (deficit)..................... 775,045 (1,946,184) (4,567,119)
Deferred compensation........................... -- (150,000) --
------------ ------------- -------------
Total shareholders' equity........................ 775,617 (7,203,614) (6,160,369)
------------ ------------- -------------
Total liabilities and shareholders' equity........ $6,673,410 $ 11,266,234 $ 21,458,367
============ ============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE> 63
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED ONE MONTH YEAR ENDED SIX MONTHS ENDED
NOVEMBER 30, ENDED DECEMBER JUNE 30,
------------------------ DECEMBER 31, 31, ------------------------
1993 1994 1994 1995 1995 1996
---------- ----------- ----------------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales................... $8,242,051 $11,082,986 $ 574,831 $17,137,902 $9,123,832 $17,626,816
Cost of sales............... 3,243,525 4,265,002 237,785 6,526,804 3,473,734 7,386,185
---------- ----------- --------- ----------- ---------- ----------
Gross profit................ 4,998,526 6,817,984 337,046 10,611,098 5,650,098 10,240,631
License income.............. -- -- -- 480,000 290,000 293,609
---------- ----------- --------- ----------- ---------- ----------
4,998,526 6,817,984 337,046 11,091,098 5,940,098 10,534,240
---------- ----------- --------- ----------- ---------- ----------
Operating expenses:
Sales and marketing....... 2,210,271 3,041,008 208,849 5,354,241 2,800,660 4,985,350
General and
administrative......... 1,452,815 2,558,002 235,639 3,029,638 1,334,906 2,077,552
Shipping and
warehousing............ 436,329 607,058 42,619 1,030,070 428,477 1,070,638
Research and
development............ 214,676 127,226 6,639 305,592 128,442 332,658
Loss on discontinued
distribution
agreement.............. -- -- -- 311,917 -- --
Stock compensation........ -- -- -- 250,000 155,000 3,528,140
---------- ----------- --------- ----------- ---------- ----------
Total operating expenses.... 4,314,091 6,333,294 493,746 10,281,458 4,847,485 11,994,338
---------- ----------- --------- ----------- ---------- ----------
Income (loss) from
operations................ 684,435 484,690 (156,700) 809,640 1,092,613 (1,460,098)
---------- ----------- --------- ----------- ---------- ----------
Other income (expense):
Interest expense, net..... (55,140) (175,486) (20,975) (1,042,523) (390,930) (1,161,119)
Recapitalization
expenses............... -- -- -- (573,710) (573,710) --
Provision for loss on
affiliate.............. -- -- -- (1,597,051) -- --
Other..................... 2,423 158 1,194 6,829 5,385 282
---------- ----------- --------- ----------- ---------- ----------
Total other income
(expense)................. (52,717) (175,328) (19,781) (3,206,455) (959,255) (1,160,837)
---------- ----------- --------- ----------- ---------- ----------
Income (loss) before income
taxes..................... 631,718 309,362 (176,481) (2,396,815) 133,358 (2,620,935)
Income tax provision
(benefit)................. 40,000 10,500 (65,000) (100,000) 5,000 --
---------- ----------- --------- ----------- ---------- ----------
Net income (loss)........... $ 591,718 $ 298,862 $ (111,481) $(2,296,815) $ 128,358 $(2,620,935)
========== =========== ========= =========== ========== ==========
Pro forma data (unaudited):
Historical income (loss)
before income tax
provision (benefit).... $ 631,718 $ 309,362 $ (176,481) $(2,396,815) $ 133,358 $(2,620,935)
Pro forma income tax
provision (benefit).... 216,400 130,800 (59,300) (54,300) 50,700 --
---------- ----------- --------- ----------- ---------- ----------
Pro forma net income
(loss)................. $ 415,318 $ 178,562 $ (117,181) $(2,342,515) $ 82,658 $(2,620,935)
========== =========== ========= =========== ========== ==========
Pro forma net income
(loss) per share....... $ 0.07 $ 0.03 $ (0.02) $ (0.38) $ 0.01 $ (0.43)
========== =========== ========= =========== ========== ==========
Weighted average common
shares used in the
calculation of pro
forma net income (loss)
per share.............. 6,138,260 6,138,260 6,138,260 6,138,260 6,138,260 6,141,836
========== =========== ========= =========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 64
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
----------------------- REPURCHASED EARNINGS DEFERRED
SHARES AMOUNT STOCK (DEFICIT) COMPENSATION TOTAL
---------- ---------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at November 30, 1992...... 5,860,000 $ 572 $ -- $ 1,095,965 $ -- $ 1,096,537
Net income for the year ended
November 30, 1993............. -- -- -- 591,718 -- 591,718
Distributions to former majority
shareholder................... -- -- -- (587,000) -- (587,000)
----------- ---------- ------------ ----------- --------- ------------
Balance at November 30, 1993...... 5,860,000 572 0 1,100,683 0 1,101,255
Net income for the year ended
November 30, 1994............. -- -- -- 298,862 -- 298,862
Distributions to former majority
shareholder................... -- -- -- (624,500) -- (624,500)
----------- ---------- ------------ ----------- --------- ------------
Balance at November 30, 1994...... 5,860,000 572 0 775,045 0 775,617
Net loss for the month ended
December 31, 1994............. -- -- -- (111,481) -- (111,481)
Distributions to former majority
shareholder................... -- -- -- (51,786) -- (51,786)
----------- ---------- ------------ ----------- --------- ------------
Balance at December 31, 1994...... 5,860,000 572 0 611,778 0 612,350
Stock redemption from former
majority shareholder.......... (3,516,000) -- (10,895,500) -- -- (10,895,500)
Stock issued for cash........... 3,516,003 5,387,498 -- -- 5,387,498
Deferred compensation related to
amendment of stock options.... -- 400,000 -- -- (400,000 ) 0
Stock compensation.............. -- -- -- -- 250,000 250,000
Distributions to former majority
shareholder................... -- -- -- (261,147) -- (261,147)
Net loss for the year ended
December 31, 1995............. -- -- -- (2,296,815) -- (2,296,815)
----------- ---------- ------------ ----------- --------- ------------
Balance at December 31, 1995...... 5,860,003 5,788,070 (10,895,500) (1,946,184) (150,000 ) (7,203,614)
Sale of warrant (unaudited)..... -- 56,000 -- -- -- 56,000
Stock issued in connection with
acquisition (unaudited)....... 15,634 80,040 -- -- -- 80,040
Deferred compensation related to
amendment of stock options
(unaudited)................... -- 3,378,140 -- -- (3,378,140 ) --
Stock compensation
(unaudited)................... -- -- -- -- 3,528,140 3,528,140
Net loss for the six months
ended June 30, 1996
(unaudited)................... -- -- -- (2,620,935) -- (2,620,935)
----------- ---------- ------------ ----------- --------- ------------
Balance at June 30, 1996
(unaudited)..................... 5,875,637 $9,302,250 $(10,895,500) $(4,567,119) $ -- $ (6,160,369)
=========== ========== ============ =========== ========= ============
Authorized shares................. 40,000,000
===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 65
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED ONE MONTH SIX MONTHS ENDED
NOVEMBER 30, ENDED YEAR ENDED JUNE 30,
---------------------- DECEMBER 31, DECEMBER 31, --------------------------
1993 1994 1994 1995 1995 1996
--------- ---------- ------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................... $ 591,718 $ 298,862 $ (111,481) $ (2,296,815) $ 128,358 $(2,620,935)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization..... 49,876 127,827 7,266 234,054 76,335 265,652
Stock compensation................ -- -- -- 250,000 155,000 3,528,140
Deferred license income........... -- -- -- 540,000 630,000 (90,000)
Changes in assets and liabilities
net of effects from purchase of
Hobie:
Accounts receivable............. (525,180) (795,403) 163,486 (446,436) (1,732,919) (4,961,364)
Inventories..................... (328,541) (1,288,041) (10,219) (2,850,389) (326,075) 123,531
Other current assets and other
assets........................ (73,207) (458,655) (41,364) (780,751) (934,370) (773,193)
Accounts payable, accrued
expenses and other current
liabilities................... 592,831 1,728,069 (469,565) 2,278,893 445,949 1,871,189
--------- ---------- --------- ------------ ------------ ------------
Net cash provided by (used in)
operating activities.............. 307,497 (387,341) (461,877) (3,071,444) (1,557,722) (2,656,980)
--------- ---------- --------- ------------ ------------ ------------
INVESTING ACTIVITIES
Acquisition of property and
equipment......................... (157,198) (659,020) (19,097) (1,269,601) (424,634) (398,450)
Purchase of Hobie................... -- -- -- -- -- (3,974,900)
--------- ---------- --------- ------------ ------------ ------------
Net cash used in investing
activities........................ (157,198) (659,020) (19,097) (1,269,601) (424,634) (4,373,350)
--------- ---------- --------- ------------ ------------ ------------
FINANCING ACTIVITIES
Net proceeds from revolving line of
credit............................ 664,534 1,256,801 598,631 2,746,444 1,091,107 2,123,142
Proceeds from issuance of note
payable to bank and long-term
debt.............................. 162,876 371,339 -- 7,283,100 6,610,000 5,260,000
Principal payments on long-term
debt.............................. (71,541) (133,036) (15,074) (390,374) (80,390) (386,332)
Payments for stock repurchase....... -- -- -- (6,405,920) (6,405,920) --
Proceeds from stock issuance........ -- -- -- 897,918 897,918 --
Proceeds from warrant issuance...... -- -- -- -- -- 56,000
Distributions to shareholder........ (587,000) (624,500) (51,786) (261,147) (261,147) --
Net (payments) proceeds on affiliate
accounts.......................... (563,988) 170,069 (45,049) 463,894 123,548 --
--------- ---------- --------- ------------ ------------ ------------
Net cash provided by (used in)
financing activities.............. (395,119) 1,040,673 486,722 4,333,915 1,975,116 7,052,810
--------- ---------- --------- ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................. (244,820) (5,688) 5,748 (7,130) (7,240) 22,480
Cash and cash equivalents, beginning
of period......................... 252,790 7,970 2,282 8,030 8,030 900
--------- ---------- --------- ------------ ------------ ------------
Cash and cash equivalents, end of
period............................ $ 7,970 $ 2,282 $ 8,030 $ 900 $ 790 $ 23,380
========= ========== ========= ============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 66
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Principal Industry
Gargoyles, Inc. ("Gargoyles" or the "Company") designs, manufactures and
markets a broad line of technology-based performance and lifestyle-oriented
sunglasses. The Company's products are mainly sold through sunglass specialty,
sporting goods, department and optical stores. The Company subcontracts certain
of its manufacturing processes. Management believes there are adequate
alternative sources for these services should an existing subcontractor be
unable to perform. Its headquarters and main warehouse are located in Kent,
Washington.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany balances have
been eliminated in consolidation. Related minority interests are not material.
Fiscal Year
In 1995, the Company changed its reporting period from a fiscal year ending
November 30 to a calendar year. Accordingly, results of operations for the one
month ended December 31, 1994 are separately presented herein.
Interim Financial Information
The financial information at June 30, 1996 and for the six months ended
June 30, 1995 and 1996 is unaudited, but includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of the financial position at such date and the operating
results and cash flows for those periods. The Company's net sales are subject to
seasonal variations. Accordingly, operating results for the June 30, 1996 period
are not necessarily indicative of the results that may be expected for the
entire year.
Recapitalization
In connection with a change in control of the Company, on March 22, 1995,
the Company sold 3,516,003 shares to a group of new investors, including certain
members of the Company's senior management. Proceeds from the sale were
$5,387,498. On the same date, 3,516,000 previously issued and outstanding shares
were repurchased by the Company from the former majority shareholder for
$10,895,500. The redemption was funded with the proceeds from the stock issuance
and bank financing of $6,000,000. Proceeds in excess of redemption requirements
provided additional working capital. In connection with this recapitalization,
the Company recorded a charge of $573,710 relating primarily to severance, legal
and other costs.
In connection with the recapitalization of Gargoyles, Antone Manufacturing,
Inc. ("Antone") was merged into Gargoyles. Antone was wholly owned by the former
majority owner of Gargoyles. Antone provided assembly operations for Gargoyles.
The merger has been accounted for as a pooling of interests due to common
ownership, and financial statements for all periods prior to the
recapitalization have been restated to reflect the pooling.
F-7
<PAGE> 67
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
Revenue Recognition
Revenue is recognized when merchandise is shipped to a customer. The
Company records sales net of volume and cash discounts.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Significant additions and improvements are capitalized.
Maintenance and repairs are expensed as incurred. The Company provides for
depreciation and amortization using the straight-line method which recognizes
the cost over the estimated useful lives of the respective assets or, as to
leasehold improvements, the term of the related lease, if less than the
estimated useful life.
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
$264,330, $407,422, $258,419 and $276,922 in advertising costs during the years
ended November 30, 1993 and 1994 and December 31, 1995 and the six months ended
June 30, 1996, respectively.
Income Taxes
The Company accounts for income taxes under the liability method, whereby
deferred taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities. These
deferred tax assets and liabilities are measured under the provisions of
currently enacted tax laws.
Prior to the recapitalization in March 1995, Antone had elected to be taxed
as an S corporation under the provisions of the Internal Revenue Code.
Accordingly, Antone's taxable income included in the financial statements,
through the date of the recapitalization, is treated as if it were distributed
to the shareholder, who was responsible for payment of taxes thereon.
Pro Forma Data
Pro forma income tax provision (benefit) and net income (loss) data is
included to present the results of operations as if Antone's earnings had been
taxed as a C corporation rather than an S corporation. The difference between
the pro forma income tax rate and the federal statutory rate of 34% relates
primarily to net operating loss carryforwards and other deferred tax assets
which have been reserved due to the uncertainty of the Company's ability to
recover such amounts.
Pro forma net income (loss) per share is computed based on the weighted
average number of common and common equivalent shares outstanding using the
treasury stock method. In accordance with the Securities and Exchange Commission
requirements, common and common equivalent shares issued during the 12-month
period prior to the filing of the Company's proposed initial public offering
have been included in the calculation as if they were outstanding for all
periods presented using the treasury stock method and an assumed initial public
offering price of $15 per share.
F-8
<PAGE> 68
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
License Agreement
During the first quarter of 1995, the Company entered into an agreement to
license the name "Gargoyles" for use on certain nonsunglass products, whereby
the Company, as licensor, receives quarterly cash payments based on a portion of
the licensee's income from the sale of certain products.
The Company received a payment of $1,000,000 at the inception of the
agreement. After deducting expenses associated with the license agreement, the
$720,000 balance was recorded as deferred license income and is being amortized
over the four-year estimated term of the license agreement.
Concentration of Credit Risk and Financial Instruments
The Company sells its products to local and national companies throughout
the United States. Net sales to the Company's largest customer represented 34%,
34%, 33% and 37% of net sales for the years ended November 30, 1993 and 1994 and
December 31, 1995 and the six months ended June 30, 1996, respectively. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. The Company maintains an allowance for doubtful accounts
at a level which management believes is sufficient to cover potential credit
losses.
The carrying value of financial instruments, which include cash,
receivables, payables and debt, approximates market value at December 31, 1995
and June 30, 1996.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Statement No. 123 is effective for fiscal years beginning after
December 15, 1995. Under Statement No. 123, stock-based compensation expense is
measured using either the intrinsic value method, as prescribed by Accounting
Principles Board Opinion No. 25, or the fair value method described in Statement
No. 123. Companies choosing the intrinsic value method will be required to
disclose the pro forma impact of the fair value method on net income and
earnings per share. The Company implemented Statement No. 123 in 1996 using the
intrinsic value method. Accordingly, the adoption of Statement No. 123 had no
impact on the Company's financial statements.
Impairment of Long-Lived Assets
In March 1995, the FASB issued Statement No. 121 regarding accounting for
the impairment of long-lived assets. The Company adopted Statement No. 121 in
1995. The effect of the adoption had no material impact on the Company's
financial condition or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-9
<PAGE> 69
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ ----------
<S> <C> <C> <C>
Raw materials................................. $1,327,453 $4,804,323 $4,729,319
Finished goods................................ 1,285,631 669,369 1,719,186
------------ ------------ ------------
$2,613,084 $5,473,692 $6,448,505
============ ============ ============
</TABLE>
3. OTHER CURRENT ASSETS AND PREPAID EXPENSES
Other current assets and prepaid expenses consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ ----------
<S> <C> <C> <C>
Income tax refund receivable.................. $ -- $191,742 $ 191,742
Receivable on discontinued distribution
agreement................................... -- 126,913 --
Other receivables............................. 119,454 188,640 293,118
Prepaid expenses.............................. 73,592 117,332 840,280
Deposits...................................... -- 56,466 81,716
Other......................................... 56,374 51,891 187,924
----------- ---------- - ------------
$249,420 $732,984 $1,594,780
=========== =========== ============
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ ----------
<S> <C> <C> <C>
Molds and production equipment................ $ 442,023 $1,037,936 $1,343,082
Office furniture and equipment................ 549,317 1,024,908 1,235,711
Exhibit and marketing equipment............... 118,017 308,418 333,540
Transportation equipment...................... 76,537 24,718 24,718
Leasehold improvements........................ 143,092 179,570 210,575
---------- ---------- ----------
1,328,986 2,575,550 3,147,626
Less accumulated depreciation and
amortization................................ (475,761) (674,947) (982,000)
---------- ---------- ----------
Furniture and equipment, net.................. $ 853,225 $1,900,603 $2,165,626
========== ========== ==========
</TABLE>
5. DEBT
Gargoyles has a revolving line of credit with a bank which matures on March
22, 1997. At December 31, 1995, the Company could borrow up to the lesser of 80%
of eligible accounts receivable and 50% of eligible inventories or $6,000,000.
Effective February 13, 1996, the limit on borrowings under this line of credit
was increased to $10,000,000. Borrowings under the line of credit bear interest
at the bank's prime rate plus 1% per annum (9.50% at December 31, 1995), payable
monthly. Amounts borrowed under the line of credit are secured by all tangible
and intangible personal property of the Company.
F-10
<PAGE> 70
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
Note payable to bank, bearing interest at prime
rate plus 1.5% (10% at December 31, 1995),
interest payable monthly, principal payable
quarterly at $230,769 through March 2002...... $ -- $ 5,769,231 $ 5,538,462
Notes payable to bank, bearing interest at prime
rate plus 1.25%, interest payable monthly,
principal payable quarterly through 2000,
secured by equipment with a net book value of
approximately $1,125,000 at December 31,
1995.......................................... -- 996,750 1,196,750
Note payable to shareholder, bearing interest at
10%, payable in $10,704 monthly installments
of principal and interest through March
1998.......................................... -- 257,836 205,455
Other notes payable at various interest rates,
secured by equipment and other assets, with
maturities through 2000....................... 489,493 343,328 300,146
--------- ----------- -----------
Total long-term debt............................ 489,493 7,367,145 7,240,813
Less current maturities......................... (138,900) (1,349,333) (1,412,717)
--------- ----------- -----------
Long-term debt, less current maturities......... $ 350,593 $ 6,017,812 $ 5,828,096
========= =========== ===========
</TABLE>
Annual principal payments required on long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
---------------------------------
<S> <C>
1996........................... $1,349,333
1997........................... 1,372,725
1998........................... 1,248,920
1999........................... 1,188,321
2000........................... 1,053,995
Thereafter..................... 1,153,851
----------
$7,367,145
==========
</TABLE>
The note payable to bank of $5,769,231 at December 31, 1995 was incurred in
connection with the recapitalization of Gargoyles in March 1995 and is
guaranteed by the majority shareholder. Included in other assets are capitalized
loan fees with a net unamortized balance of $133,935 at December 31, 1995, which
is being amortized over the life of the related loan.
In connection with the recapitalization of Gargoyles in March 1995, a
redemption note payable was incurred in the amount of $4,489,580 payable to the
previous majority owner. This note required interest-only payments at a rate of
7% per annum, payable monthly through January 2, 1996. The Company had an
offsetting note receivable from the current majority shareholder in the same
principal amount with the same interest terms. The note payable and note
receivable, which were secured by a letter of credit, and associated interest
have been offset for financial reporting purposes. On January 2, 1996, the
obligations evidenced by the note receivable and the note payable were satisfied
in full.
The credit agreements require, among other things, that the Company
maintain a minimum tangible net worth and working capital and meet certain
ratios relating to debt coverage, and place restrictions on the payment of
dividends. At December 31, 1995, the Company was not in compliance with certain
of the covenants, for which the bank has provided a waiver.
F-11
<PAGE> 71
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the acquisition, Gargoyles borrowed $4,000,000 from an
existing lender. The loan bears interest at the bank's prime rate plus 3% per
annum (11.25% at June 30, 1996), payable monthly. A principal payment of
$700,000 is due on September 30, 1996, with the balance due on December 31,
1996. If this loan is not repaid by December 31, 1996, the Company must pay an
additional loan fee of $5.0 million or issue a warrant to purchase that number
of shares of common stock that would constitute 25% of the Company's common
stock on a fully diluted basis at a purchase price of $0.01 per share. Such
warrant would be exercisable any time after March 31, 1997 through June 30,
1997. The new agreement contains interest requirements and covenants similar to
those in existing debt agreements. The net proceeds from this acquisition loan
in excess of the stock purchase price were used to provide working capital for
Gargoyles and its subsidiaries.
In February 1995, two of the Company's officers made loans to the Company
totalling $100,000 and bearing interest at an average rate of 9.25%. The loans
were repaid in full with interest in March 1995.
In January 1996, the Company borrowed $290,000 at 12% per annum from
officers and shareholders. The loans were repaid in full with interest as of
April 1996.
The Company made interest payments totaling $46,975, $164,802, $1,014,565
and $901,939 during the years ended November 30, 1993 and 1994 and December 31,
1995 and the six months ended June 30, 1996, respectively.
6. INCOME TAXES
The difference between the income tax provision (benefit), all of which is
current, based upon the federal statutory income tax rate and the income tax
provision (benefit) recorded in the financial statements is attributable to the
following:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30, YEAR ENDED
--------------------- DECEMBER 31,
1993 1994 1995
--------- --------- ------------
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory
rate (34%)....................................... $ 215,000 $ 105,000 $ (815,000)
Change in deferred tax valuation allowance......... -- 19,500 737,900
Antone S corporation earnings...................... (176,400) (120,300) (45,700)
Other.............................................. 1,400 6,300 22,800
--------- --------- ---------
$ 40,000 $ 10,500 $ (100,000)
========= ========= =========
</TABLE>
F-12
<PAGE> 72
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the bases of assets and liabilities for financial reporting purposes and
the bases used for income tax return purposes. Significant components of the
Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation................................. $ (28,800) $ (54,300)
--------- ---------
Deferred tax assets:
Deferred license income.................................... -- 251,000
Accrued liabilities of affiliate........................... -- 225,100
Deferred compensation...................................... 151,300
---
Net operating loss carryforwards........................... -- 112,200
Sales return allowance..................................... 47,600 71,400
Inventory valuation allowance.............................. 34,000 34,000
Warranty reserves.......................................... 34,000 34,000
Accrued vacation........................................... 16,000 16,000
--------- ---------
Total deferred tax assets.................................... 131,600 895,000
--------- ---------
Net deferred taxes........................................... $ 102,800 $ 840,700
========= =========
Valuation allowance.......................................... $ (102,800) $ (840,700)
========= =========
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $300,000. These carryforwards expire in 2010.
The Company made income tax payments totaling $44,120 and $65,122 during
the years ended November 30, 1993 and 1994, respectively. No income tax payments
were made during the year ended December 31, 1995 and the six months ended June
30, 1996.
7. COMMITMENTS AND CONTINGENCIES
Since 1994, the Company has been leasing its primary operating and office
premises under a noncancelable operating lease, expiring in March 2000. Terms of
this lease include 4% annual rental payment increases. The owner of these
premises is a current shareholder and the former majority owner of Gargoyles.
Rent expense under this lease totaled $210,000 and $214,725 for the years ended
November 30, 1994 and December 31, 1995, respectively.
Late in 1995, the Company leased additional office space under a
noncancelable operating lease, expiring in October 1997. Terms of this lease
include monthly rental payments of $3,066.
Minimum future lease payments under noncancelable operating leases as of
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------------------------------------------
<S> <C>
1996........................................... $ 259,585
1997........................................... 262,362
1998........................................... 240,972
1999........................................... 250,611
2000........................................... 63,261
-----------
$1,076,791
===========
</TABLE>
F-13
<PAGE> 73
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company enters into endorsement contracts from time to time with
certain athletes and others to promote the Company's products. Minimum annual
payments under these agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
--------------------------------------------------
<S> <C>
1996............................................ $178,500
1997............................................ 138,500
1998............................................ 113,500
------
$430,500
======
</TABLE>
The Company is currently involved in litigation incidental to the Company's
business. In the opinion of management, the ultimate resolution of such
litigation will not have a significant effect on the accompanying financial
statements.
8. EMPLOYEE BENEFIT PLAN
In March 1995, the Company introduced a 401(k) savings plan for all
full-time employees age 21 or older with one year of service. The maximum
employee contribution is 15% of the participant's compensation. The Company
matches 50% of each dollar contributed by a participant, with a maximum matching
contribution of 3% of a participant's earnings. The Company's contributions to
the plan vest over six years and totaled $37,949 and $34,159 for the year ended
December 31, 1995 and the six months ended June 30, 1996, respectively.
9. SHAREHOLDERS' EQUITY
The Company has 10,000,000 authorized shares of preferred stock.
In March 1995, the Company established the 1995 Stock Option Plan that
provided for the granting of incentive and nonqualified options to purchase up
to 308,423 shares of common stock. In December 1995, the Company amended the
plan to provide for the granting of options to purchase up to 570,898 shares of
common stock. Generally, options granted vest over a four-year period. Certain
options require acceleration of vesting if specific operational goals are
achieved. Options under this plan have been granted at estimated fair value on
the date of grant and expire after ten years. The plan expires in 2005.
Stock option activity and option price information for the year ended
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Granted................................................... 516,173 $3.24-$5.11
Canceled.................................................. (30,835) $ 3.24
------
Balance, December 31, 1995 and June 30, 1996.............. 485,338 $3.24-$5.11
======
</TABLE>
In January 1996, an outside member of the Company's Board of Directors
purchased a warrant for $56,000. The warrant provides for the issuance of 41,020
shares of common stock at a price of $4.26 per share. The warrant can be
exercised any time prior to December 2005.
At December 31, 1995, 34,175 options were exercisable and 85,560 shares
were available for future grant. At June 30, 1996, 99,589 options were
exercisable and 85,560 shares were available for future grant.
Prior to the recapitalization of the Company, the President held an option
to purchase up to 10% of the outstanding shares of Gargoyles stock from the
former majority shareholder. In connection with the recapitalization, the new
shareholders of the Company assumed the option and amended certain provisions of
the option agreement. As a result of the amendments, the Company recorded
deferred compensation of
F-14
<PAGE> 74
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$400,000, equal to the difference between the estimated fair market value of the
stock at the date of the recapitalization, and the option price of $0.85 per
share. The amount is being amortized over the option vesting period.
Also in connection with the recapitalization, the new shareholders granted
the President an additional nonqualified option to purchase 146,500 shares of
common stock owned by the new shareholders at an exercise price of $4.26 per
share. In June 1996, in contemplation of the Company's initial public offering,
the options were further amended to accelerate the vesting and to extend the
expiration date to June 28, 2006. As a result, the remaining balance of $150,000
from the initial $400,000 deferred compensation was expensed and Gargoyles
recognized an additional nonrecurring, noncash stock compensation charge in the
second quarter of 1996 of $3.4 million. Total stock compensation expense related
to these agreements of $3.5 million is reflected as a component of operating
expenses in the six months ended June 30, 1996.
10. RECEIVABLE FROM AFFILIATE
The Company has advanced funds to Conquest Sports, Inc. ("Conquest,"
formerly Pro-Tec, Inc.), an affiliate with similar shareholders as the Company.
In addition, the Company has guaranteed certain liabilities of Conquest.
Conquest has incurred losses in its last two fiscal years and Company management
has concluded that it is likely Conquest will be unable to meet its unsecured
obligations. Accordingly, in the fourth quarter of 1995, the Company recorded a
provision related to Conquest in the amount of $1,597,051.
11. DISCONTINUED DISTRIBUTION AGREEMENT
During late 1994, Gargoyles entered into a nonexclusive agreement (the
"Agreement") to distribute a line of sunglasses produced by another
manufacturer. These sunglasses were produced with the name of a major
manufacturer of athletic shoes and apparel under a license agreement. Gargoyles
had no significant sales under the Agreement prior to 1995.
During the fourth quarter of 1995, both parties agreed to terminate the
Agreement. In connection with the termination of the Agreement, the sales, cost
of sales, and operating expenses associated with this distribution agreement
have been eliminated from the results of operations for Gargoyles. The net
financial results have been reported as a loss on discontinued distribution
agreement for the year ended December 31, 1995.
12. ACQUISITION OF HOBIE
On February 13, 1996, Gargoyles purchased all of the issued and outstanding
stock of H.S.I. ("Hobie"). Hobie was the manufacturer of Hobie Polarized
Sunglasses under an exclusive license agreement for use of the name Hobie on
sunglasses.
The acquisition has been accounted for using the purchase method of
accounting. Accordingly, the allocation of the purchase price of $3,974,900, of
which $3,380,014 was paid in cash, has been based on the fair value of the
assets acquired and liabilities assumed. Included in the purchase price are
consulting service fees of up to an aggregate of $300,000 to two of Hobie's
former shareholders. As consideration for certain noncompetition covenants, the
Company agreed to pay an aggregate of $200,000 in 12 monthly installments and
issue an aggregate of 15,634 shares of its common stock to two of Hobie's former
shareholders. Costs in excess of the fair market value of assets and liabilities
acquired are reflected as intangibles, the most significant component of which
is goodwill that is being amortized over the remaining 27-year license period of
the Hobie brand name.
F-15
<PAGE> 75
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma information, assuming the acquisition had occurred at the
beginning of the periods presented, is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
<S> <C> <C>
Sales................................................... $21,182,000 $17,938,000
Gross profit............................................ 12,663,000 10,385,000
Net loss................................................ (3,021,000 ) (2,754,000)
</TABLE>
13. SUBSEQUENT EVENTS
Investment in the kindling company
In May 1996, the Company formed a majority-owned subsidiary, the kindling
company ("Kindling"), to design, develop, manufacture and distribute sunglasses
and, with The Timberland Company's consent, ophthalmic frames under the
Timberland brand name. The Company contributed $1,200,000 for its 70% interest
in Kindling. Of that amount, $100,000 was paid in cash and $1,100,000 by means
of a non-interest-bearing promissory note that is due in installments through
January 1997. Between January 3, 1997 and January 1, 2000, the Company may also
be required to contribute an additional $300,000 to Kindling's capital if
Kindling deems such additional amount necessary and makes a demand.
Stock Dividend
On June 28, 1996, the Company's Board of Directors approved a stock
dividend in the amount of 4.86 shares for every one share of common stock
outstanding, thereby giving effect to a 5.86-to-1 stock split to be payable on
or before the closing of the Company's initial public offering. The payment of
such dividend is subject to approval by the Board of Directors and shareholders
of the Restated Articles of Incorporation to increase the number of authorized
shares. The accompanying financial statements have been restated to give effect
to the stock dividend.
F-16
<PAGE> 76
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Gargoyles, Inc.
We have audited the accompanying balance sheets of H.S.I. d/b/a Hobie
Sunglasses as of December 31, 1994 and 1995, and the related statements of
operations and retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of H.S.I. d/b/a Hobie
Sunglasses at December 31, 1994 and 1995, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
June 14, 1996
F-17
<PAGE> 77
H.S.I.
D/B/A HOBIE SUNGLASSES
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY
------------------------- 13,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 83,229 $ 30,972 $ 556
Trade receivables, less allowances for doubtful
accounts
of $50,000........................................ 352,056 346,445 356,217
Inventories.......................................... 771,252 1,199,632 1,249,466
Other current assets and prepaid expenses............ 1,310 10,879 38,636
------- ------- -------
Total current assets................................... 1,207,847 1,587,928 1,644,875
Property and equipment, net............................ 77,471 86,983 94,879
Other assets........................................... 14,250 28,250 18,200
------- ------- -------
Total assets........................................... $1,299,568 $1,703,161 $1,757,954
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank................................. $ 424,317 $ 630,000 $ 580,000
Note payable to shareholder.......................... 285,000 470,000 540,000
Convertible note payable to shareholder.............. 200,000 200,000 200,000
Accounts payable..................................... 30,027 49,191 126,393
Accrued expenses..................................... 34,687 23,615 27,829
------- ------- -------
Total current liabilities.............................. 974,031 1,372,806 1,474,222
------- ------- -------
Shareholders' equity:
Common stock, no par value
Authorized shares -- 10,000,000
Issued and outstanding shares -- 365,000.......... 322,330 322,330 322,330
Retained earnings (deficit).......................... 3,207 8,025 (38,598)
------- ------- -------
Total shareholders' equity............................. 325,537 330,355 283,732
------- ------- -------
Total liabilities and shareholders' equity............. $1,299,568 $1,703,161 $1,757,954
======= ======= =======
</TABLE>
See accompanying notes.
F-18
<PAGE> 78
H.S.I.
D/B/A HOBIE SUNGLASSES
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------- JANUARY 1 TO
1994 1995 FEBRUARY 13,
---------- ---------- 1996
------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales.............................................. $3,690,701 $4,043,617 $310,953
Cost of sales.......................................... 1,906,805 1,992,181 166,904
---------- ---------- --------
Gross profit........................................... 1,783,896 2,051,436 144,049
---------- ---------- --------
Operating expenses:
Sales and marketing.................................. 984,217 1,175,825 77,486
General and administrative........................... 672,745 679,036 121,816
Shipping and warehousing............................. 43,068 35,066 3,500
---------- ---------- --------
Total operating expenses............................... 1,700,030 1,889,927 202,802
---------- ---------- --------
Income (loss) from operations.......................... 83,866 161,509 (58,753)
---------- ---------- --------
Other income (expense):
Interest expense, net................................ (85,630) (131,090) (12,517)
Other................................................ 13,385 (14,902) 629
---------- ---------- --------
Total other income (expense)........................... (72,245) (145,992) (11,888)
---------- ---------- --------
Income (loss) before income taxes...................... 11,621 15,517 (70,641)
Income tax provision (benefit)......................... 4,087 10,699 (24,018)
---------- ---------- --------
Net income (loss)...................................... 7,534 4,818 (46,623)
Retained earnings (deficit), beginning of period....... (4,327) 3,207 8,025
---------- ---------- --------
Retained earnings (deficit), end of period............. $ 3,207 $ 8,025 $(38,598)
========== ========== ========
</TABLE>
See accompanying notes.
F-19
<PAGE> 79
H.S.I.
D/B/A HOBIE SUNGLASSES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
----------------------- JANUARY 1 TO
1994 1995 FEBRUARY 13,
--------- --------- 1996
------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $ 7,534 $ 4,818 $ (46,623)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization........................... 20,796 24,566 3,247
Changes in assets and liabilities:
Accounts receivable.................................. (89,475) 5,611 (9,772)
Inventories.......................................... (269,904) (428,380) (49,834)
Other current assets and other assets................ 20,965 (24,569) (17,707)
Accounts payable..................................... (7,383) 19,164 77,202
Accrued expenses..................................... 20,049 (11,072) 4,214
------ ------ ------
Net cash used in operating activities..................... (297,418) (409,862) (39,273)
------ ------ ------
INVESTING ACTIVITY -- acquisition of property and
equipment............................................... (39,550) (33,078) (11,143)
------ ------ ------
FINANCING ACTIVITIES
Net proceeds (repayments) under bank note payable......... 303,291 205,683 (50,000)
Proceeds from issuance of shareholder note................ 345,000 385,000 270,000
Payments of shareholder note.............................. (260,000) (200,000) (200,000)
------ ------ ------
Net cash provided by financing activities................. 388,291 390,683 20,000
------ ------ ------
Net increase (decrease) in cash and cash equivalents...... 51,323 (52,257) (30,416)
Cash and cash equivalents, beginning of period............ 31,906 83,229 30,972
------ ------ ------
Cash and cash equivalents, end of period.................. $ 83,229 $ 30,972 $ 556
====== ====== ======
</TABLE>
See accompanying notes.
F-20
<PAGE> 80
H.S.I.
D/B/A HOBIE SUNGLASSES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF FEBRUARY 13, 1996 AND FOR THE PERIOD
JANUARY 1, 1996 TO FEBRUARY 13, 1996 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Principal Industry and Sale of Company to Gargoyles
H.S.I. d/b/a Hobie Sunglasses ("Hobie" or "the Company"), a California
corporation formed in March 1989, is primarily involved in the manufacture and
wholesale distribution of Hobie eyewear products. The Company's products are
primarily sold through independent manufacturers' representatives. The Company
subcontracts several of its manufacturing processes. Management believes there
are adequate alternative sources for these services should an existing
subcontractor be unable to perform.
On February 13, 1996, the Company was sold to, and became a wholly owned
subsidiary of, Gargoyles, Inc., another manufacturer of sunglasses. In
connection with the sale, all vested stock options were exercised and all notes
payable were paid. Unaudited information as of February 13, 1996 and for the
period January 1, 1996 to February 13, 1996 reflects the Company's financial
position and results of operations and cash flows up to the date of the sale and
includes all adjustments that the Company considers necessary for a fair
presentation of the financial position at such date and the operating results
and cash flows for that period.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
Revenue Recognition
Revenue is recognized when merchandise is shipped to a customer.
Inventories
Inventories are stated at the lower of weighted-average cost or market.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Significant additions and improvements are capitalized.
Maintenance and repairs are expensed as incurred. The Company provides for
depreciation and amortization using the straight-line method which recognizes
the cost over the estimated useful lives of the respective assets or, as to
leasehold improvements, the term of the related lease if less than the estimated
useful life.
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
$84,718 and $107,730 in advertising costs during 1994 and 1995, respectively.
Income Taxes
The Company accounts for income taxes under the liability method, whereby
deferred taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities. These
deferred tax assets and liabilities are measured under the provisions of
currently enacted tax laws.
F-21
<PAGE> 81
H.S.I.
D/B/A HOBIE SUNGLASSES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
License Agreement
The Company purchased the exclusive right to manufacture and sell
sunglasses and related accessories bearing the "Hobie" trademark. The original
term of the license expires December 31, 2008; however, the Company has three
five-year extension options available. The Company is amortizing the cost of the
license agreement on a straight-line basis over the original term. At December
31, 1994 and 1995, the balance was $14,250 and $13,250, respectively, net of
accumulated amortization of $5,750 and $6,750, respectively. Amortization
expense was $1,000 during 1994 and 1995.
Royalties under the agreement accrue at 2% of net sales, subject to a
minimum annual royalty of $15,000. The Company incurred royalty expense of
$66,065 and $75,146 in 1994 and 1995, respectively.
Concentration of Credit Risk and Financial Instruments
The Company sells its products to local and national companies throughout
the United States. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains an
allowance for doubtful accounts at a level which management believes is
sufficient to cover potential credit losses.
The carrying value of financial instruments, which include cash,
receivables, payables and debt, approximates market value at December 31, 1995.
Stock-Based Compensation
The Company granted stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with the
intrinsic value method of accounting, and, accordingly, recognizes no
compensation expense for the stock option grants.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121 regarding accounting for the impairment of long-lived assets. The
Company adopted Statement No. 121, and the effect of the adoption had no
material impact on the Company's financial condition or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY
----------------------- 13,
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Raw materials................................... $610,437 $ 717,958 $ 776,239
Finished goods.................................. 160,815 481,674 473,227
------ ------- -------
$771,252 $1,199,632 $1,249,466
====== ======= =======
</TABLE>
F-22
<PAGE> 82
H.S.I.
D/B/A HOBIE SUNGLASSES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- FEBRUARY 13,
1994 1995 1996
-------- --------- ------------
<S> <C> <C> <C>
Molds and production equipment................ $ 14,913 $ 45,163 $ 56,306
Office and computer equipment................. 81,566 84,394 84,394
Leasehold improvements........................ 33,577 33,577 33,577
------ ------ ------
130,056 163,134 174,277
Less accumulated depreciation and
amortization................................ (52,585) (76,151) (79,398)
------ ------ ------
Furniture and equipment, net.................. $ 77,471 $ 86,983 $ 94,879
====== ====== ======
</TABLE>
4. DEBT
Note Payable to Bank Under Revolving Line of Credit
Under line of credit arrangements for short-term debt with a bank, the
Company may borrow up to $650,000. These arrangements expire August 31, 1996. At
December 31, 1995, the unused portion of the credit line was $20,000. Borrowings
under the arrangements bear interest at the bank's reference rate plus 2% (10.5%
at December 31, 1995), payable monthly. Amounts borrowed under the arrangements
are secured by substantially all accounts receivable, inventories, and
equipment. The arrangements are guaranteed by the majority shareholder.
The credit arrangements require, among other things, that the Company
maintain a minimum tangible net worth and working capital. At December 31, 1995,
the Company was not in compliance with certain of the covenants. The related
balances were fully paid in February 1996 after the acquisition by Gargoyles.
Note Payable to Shareholder
The note payable to shareholder represents working capital advances from
the majority shareholder and from affiliates of this shareholder. These advances
mature on December 31, 1996. Borrowings under the advances bear interest of
11.5%, payable monthly.
Convertible Note Payable to Shareholder
Shareholders and an affiliate of the majority shareholder hold subordinated
convertible notes payable. These notes may be converted into common stock, at
the option of the holder, through maturity at December 1, 1996. The notes
convert at the rate of one common share for each $1.25 in principal and accrued
interest outstanding. Borrowings bear interest at 8%, payable quarterly. At
December 31, 1995, 160,000 shares of common stock were restricted for these
notes.
The Company made interest payments totaling $78,003 and $122,130 during the
years ended December 31, 1994 and 1995, respectively.
F-23
<PAGE> 83
H.S.I.
D/B/A HOBIE SUNGLASSES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1994 1995
------ -------
<S> <C> <C>
Current:
Federal......................................................... $2,740 $ 5,160
State........................................................... 800 2,940
---- -----
3,540 8,100
Deferred:
Federal......................................................... 1,287 1,135
State........................................................... (740) 1,464
---- -----
547 2,599
---- -----
Income tax provision.............................................. $4,087 $10,699
==== =====
</TABLE>
The difference between the income tax provision based upon the federal
statutory income tax rate and the income tax provision recorded in the financial
statements is attributable to graduated income tax rates and certain expenses
not deductible for tax purposes.
The Company made income tax payments totaling $800 and $0 during the years
ended December 31, 1994 and 1995, respectively.
6. SHAREHOLDERS' EQUITY
The Company has stock option agreements with certain key employees and
consultants. Stock option activity and price information for these agreements
are as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Balance, January 1, 1994.................................. 70,000 $1.00-$1.25
Granted................................................. 35,000 $1.50
------
Balance, December 31, 1994 and 1995....................... 105,000 $1.00-$1.50
======
</TABLE>
At December 31, 1995, 85,000 options were exercisable under these
agreements.
7. COMMITMENTS AND CONTINGENCIES
The Company leases its primary operating and office premises under a
noncancelable operating lease expiring March 1996. Terms of this agreement
include fixed annual rental payment increases. Rent expense under this lease
totaled $30,000 and $52,300 for the years ended December 31, 1994 and 1995,
respectively.
Minimum future lease payments due under noncancelable operating leases are
$11,100 for the year ending December 31, 1996.
F-24
<PAGE> 84
[Photographs of products and store displays]
<PAGE> 85
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING SHAREHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS
AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
The Company........................... 12
Use of Proceeds....................... 12
Dividend Policy....................... 12
Capitalization........................ 13
Dilution.............................. 14
Selected Financial Data............... 15
Pro Forma Financial Information....... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 28
Management............................ 40
Certain Transactions.................. 47
Principal and Selling Shareholders.... 51
Description of Capital Stock.......... 53
Shares Eligible for Future Sale....... 55
Underwriting.......................... 56
Legal Matters......................... 57
Experts............................... 57
Additional Information................ 57
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,666,667 SHARES
[LOGO]
GARGOYLES, INC.
COMMON STOCK
------------
PROSPECTUS
, 1996
------------
SMITH BARNEY INC.
ROBERTSON, STEPHENS & COMPANY
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 86
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant and the
selling shareholders in connection with the sale of the Common Stock being
registered hereby. All amounts shown are estimates, except the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee....................... $ 15,863
NASD filing fee........................................................... 5,100
Nasdaq National Market listing fee........................................ 36,356
Blue Sky fees and expenses................................................ 10,000
Printing and engraving expenses........................................... 75,000
Legal fees and expenses................................................... 320,000
Accounting fees and expenses.............................................. 250,000
Directors and officers insurance.......................................... 122,682
Transfer Agent and Registrar fees......................................... 10,000
Miscellaneous expenses.................................................... 4,999
--------
Total........................................................... $850,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporations Act authorize a court to award, or a corporation's board of
directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Section 10 of the registrant's Bylaws (Exhibit 3.2 hereto)
provides for indemnification of the registrant's directors, officers, employees
and agents to the maximum extent permitted by Washington law. Certain of the
directors of the registrant, who are affiliated with principal shareholders of
the registrant, also may be indemnified by such shareholders against liability
they may incur in their capacities as directors of the registrant, including
pursuant to a liability insurance policy maintained by the registrant for such
purpose.
Section 23B.08.320 of the Washington Business Corporations Act authorizes a
corporation to limit a director's liability to the corporation or its
shareholders for monetary damages for acts or omissions as a director, except in
certain circumstances involving intentional misconduct, knowing violations of
law or illegal corporate loans or distributions, or any transaction from which
the director personally receives a benefit in money, property or services to
which the director is not legally entitled. Article 8 of the registrant's
Amended and Restated Articles of Incorporation (Exhibit 3.1 hereto) contains
provisions implementing, to the fullest extent permitted by Washington law, such
limitations on a director's liability to the registrant and its shareholders.
The registrant has entered into an indemnification agreement with each of
its directors in which the registrant agrees to hold harmless and indemnify the
director to the fullest extent permitted by Washington law. The registrant
agrees to indemnify the director against any and all losses, claims, damages,
liabilities or expenses incurred in connection with any actual, pending or
threatened action, suit, claim or proceeding, whether civil, criminal,
administrative or investigative and whether formal or informal, in which the
director is, was or becomes involved by reason of the fact that the director is
or was a director, officer, employee, trustee or agent of the registrant or any
related company, partnership, joint venture, trust or enterprise, including
service with respect to an employee benefit plan, whether the basis of such
proceeding is alleged action (or inaction) by the director in an official
capacity or in any other capacity while serving as a director, officer,
II-1
<PAGE> 87
employee, trustee or agent, other than an action, suit, claim or proceeding
instituted by or at the direction of the officer or director unless such action,
suit, claim or proceeding is or was authorized by the registrant's Board of
Directors. No indemnity pursuant to the indemnification agreements shall be
provided by the registrant on account of any suit in which a final, unappealable
judgment is rendered against the officer or director for an accounting of
profits made from the purchase or sale by the officer or director of securities
of the registrant in violation of the provisions of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and amendments thereto, or for
damages that have been paid directly to the officer or director by an insurance
carrier under a policy of directors' and officers' liability insurance
maintained by the registrant.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the registrant and its executive officers
and directors, and by the registrant of the Underwriters, for certain
liabilities, including liabilities arising under the Securities Act, in
connection with matters specifically provided in writing by the Underwriters for
inclusion in this Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 15, 1993, the registrant has issued and sold the following
unregistered securities:
1. On March 22, 1995, the registrant issued an aggregate of 3,516,003
shares of Common Stock to 15 investors for a consideration of $1.53 per
share or an aggregate of $5,387,498.
2. On January 12, 1996, in exchange for $56,000, the registrant issued
a warrant to purchase 41,020 shares of Common Stock exercisable at $4.26
per share to one investor. The expiration date for the warrant is December
8, 2005.
3. On February 13, 1996, the registrant issued an aggregate of 15,634
shares of Common Stock to two investors in consideration for certain
confidentiality and noncompetition convenants.
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act principally
by virtue of Sections 3(b) and 4(2) thereof as transactions not involving any
public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement
3.1(a) Amended and Restated Articles of Incorporation of the registrant currently
in effect
3.1(b) Form of Amended and Restated Articles of Incorporation of the registrant
to become effective prior to the closing of the Offering
3.2(a) Bylaws of the registrant currently in effect
3.2(b) Form of Bylaws of the registrant to become effective prior to the closing
of the Offering
5.1* Opinion of Perkins Coie regarding legality of shares
10.1+ Stock Purchase Agreement, dated as of March 14, 1995, among Gargoyles and
certain other parties
10.2 Indemnity Agreement, dated as of March 22, 1995, by Gargoyles, Inc., in
favor of Trillium Corporation
10.3 Amended and Restated Promissory Note, dated as of March 17, 1995, made by
Gargoyles, Inc. to Dennis Burns (the "Founder")
10.4 Guaranty, dated March 17, 1995, by Conquest Sports, Inc. (formerly
Pro-Tec, Inc.) for the benefit of the Founder
10.5 Guaranty by Gargoyles, Inc. for the benefit of the Founder
10.6 Nondisclosure, Noncompetition and Indemnity Agreement, dated as of March
22, 1995, among Gargoyles, Inc., Conquest Sports, Inc., Antone
Manufacturing, Inc. and the Founder
10.7 Credit Agreement, dated as of March 22, 1995, between U.S. Bank of
Washington, National Association and Gargoyles, Inc.
</TABLE>
II-2
<PAGE> 88
<TABLE>
<S> <C>
10.8 Revolving Note, dated March 22, 1995, made by Gargoyles, Inc. to U.S. Bank
of Washington, National Association
10.9 Term Note, dated March 22, 1995, made by Gargoyles, Inc. to U.S. Bank of
Washington, National Association
10.10 Security Agreement, dated March 22, 1995, between U.S. Bank of Washington,
National Association and Gargoyles, Inc.
10.11 Limited Guaranty, dated March 22, 1995, by Trillium Corporation for the
benefit of U.S. Bank of Washington, National Association
10.12 Third Party Pledge Agreement, dated March 22, 1995, by Trillium
Corporation for the benefit of U.S. Bank of Washington, National
Association
10.13 First Amendment to Credit Agreement, dated as of August 17, 1995, between
U.S. Bank of Washington, National Association and Gargoyles, Inc.
10.14 Renewal Revolving Note, dated August 17, 1995, made by Gargoyles, Inc. to
U.S. Bank of Washington, National Association
10.15 Second Amendment to Credit Agreement, dated as of December 15, 1995,
between U.S. Bank of Washington, National Association and Gargoyles, Inc.
10.16 Renewal Revolving Note, dated December 15, 1995, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association
10.17 Third Amendment to Credit Agreement, dated as of February 13, 1996,
between U.S. Bank of Washington, National Association and Gargoyles, Inc.
10.18 Renewal Revolving Note, dated February 13, 1996, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association
10.19 Acquisition Note, dated February 13, 1996, made by Gargoyles, Inc. to U.S.
Bank of Washington, National Association
10.20 Amended and Restated Limited Guaranty, dated as of February 13, 1996, by
Trillium Corporation for the benefit of U.S. Bank of Washington, National
Association
10.21 Pledge Agreement, dated as of February 13, 1996, by Gargoyles, Inc. for
the benefit of U.S. Bank of Washington, National Association
10.22 Third Party Pledge Agreement, dated as of February 13, 1996, by Trillium
Investors II, L.L.C. for the benefit of U.S. Bank of Washington, National
Association
10.23 Indemnity Agreement, dated as of February 13, 1996, by Gargoyles, Inc. and
Trillium Corporation
10.24 Stock Purchase Agreement, dated as of January 25, 1996, among Gargoyles,
Inc., H.S.C., Inc., Douglas B. Hauff, H.S.I., a California corporation,
dba Hobie Sunglasses and the Sellers listed therein
10.25 Industrial Real Estate Lease (Multi-Tenant Facility), dated October 12,
1995, between Gargoyles, Inc. and Cascade Investors
10.26 Industrial Real Estate Lease (Single Tenant Facility), dated December 16,
1993, between Gargoyles, Inc. and DB&D Partnership
10.27 Lease Amendment, dated as of March 17, 1995, between Gargoyles, Inc. and
DB&D Partnership
10.28 Agreement, dated April 5, 1996, between Gargoyles, Inc. and Master Sports
Equipment GmbH
10.29 Shareholders Agreement, dated as of March 22, 1995, among Gargoyles, Inc.,
Trillium Corporation, the Founder, Douglas Hauff and the other
Shareholders listed therein
10.30 Amendment to Shareholders Agreement, dated as of December 8, 1995, among
Gargoyles, Inc. and the Shareholders listed therein
10.31 Amendment to Shareholders Agreement, dated as of December 8, 1995, among
Gargoyles, Inc. and the Shareholders listed therein
10.32 Gargoyles, Inc. Common Stock Purchase Warrant, dated January 1996, between
Gargoyles, Inc. and Wally Walker
10.33 Amended and Restated Option Agreement, dated as of March 17, 1995, among
Gargoyles, Inc., the Founder and Douglas B. Hauff
10.34 Assignment and Assumption of Amended and Restated Option Agreement, dated
as of March 22, 1995, between the Founder and the Investors listed therein
</TABLE>
II-3
<PAGE> 89
<TABLE>
<S> <C>
10.35 Option Agreement, dated as of March 22, 1995, between Douglas Hauff and
the Investors listed therein
10.36+ Agreement, dated as of July 14, 1994, as amended by Amendment No. 1 dated
as of November 3, 1995, between Gargoyles, Inc. and Dale Earnhardt
10.37+ License Agreement, dated as of October 1995, as amended as of October 18,
1995, between Gargoyles, Inc. and Ken Griffey, Jr.
10.38 Employment Agreement, dated as of March 22, 1995, between Gargoyles, Inc.
and Douglas B. Hauff
10.39 Employment Agreement, dated as of March 22, 1995, between Gargoyles, Inc.
and Steven R. Kingma
10.40 Employment Agreement, dated as of November 1, 1995, between Gargoyles,
Inc. and G. Travis Worth
10.41 Employment Agreement, dated as of March 22, 1995, between Gargoyles, Inc.
and David W. Jobe
10.42 Form of Indemnity Agreement between Gargoyles, Inc. and each of its
directors
10.43** 1995 Amended and Restated Stock Incentive Compensation Plan
10.44 Form of Equipment Note made by Gargoyles, Inc. to U.S. Bank of Washington,
National Association
10.45 Guaranty, dated as of March 7, 1995, by Gargoyles, Inc. to and for the
benefit of Trillium Corporation
10.46 Retail License Agreement, dated August 7, 1995, between Warner Bros.
Division of Time Warner Entertainment Company L.P. and Gargoyles, Inc., as
amended
10.47 Amended and Restated Agreement Regarding Claim Rights, dated July 3, 1996,
by and between the Founder, Gargoyles, Inc. and Conquest Sports, Inc.
10.48+ Settlement Agreement and General Release, dated as of April 12, 1995
10.49+ Trademark License Agreement dated as of April 12, 1995
10.50 Agreement for Purchase of Common Stock, dated as of May 17, 1996, among
Gargoyles, Inc., The Timberland Company, Douglas W. Lauer and the kindling
company (formerly The D.W. Lauer Company)
10.51 Promissory Note, dated May 17, 1996, made by Gargoyles, Inc. to the
kindling company
10.52 Contingent Demand Note, dated May 17, 1996, made by Gargoyles, Inc. to the
kindling company
10.53 Employment Agreement, effective as of May 17, 1996, between Douglas W.
Lauer and the kindling company
10.54 Investor Rights Agreement, dated as of May 17, 1996, among The D.W. Lauer
Company, Douglas W. Lauer, Gargoyles, Inc. and The Timberland Company
10.55+ License Agreement, dated as of May 17, 1996, among The Timberland Company,
Gargoyles, Inc. and the kindling company
10.56 Incentive Pool Agreement, effective as of May 17, 1996, between Gargoyles,
Inc. and Douglas W. Lauer
10.57 License Agreement, effective January 1, 1989, between Hobie Designs, Inc.
and H.S.I.
10.58+ License Agreement, dated as of June 1996, between Scottie Pippen and
Gargoyles, Inc.
10.59+ License Agreement, dated as of May 31, 1996, among Ixela, Inc., Alexi
Lalas and Gargoyles, Inc.
10.60 Fourth Amendment to Credit Agreement, dated as of March 15, 1996, between
U.S. Bank of Washington, National Association and Gargoyles, Inc.
10.61 Promissory Note, dated June 5, 1996, made by Gargoyles, Inc. to Trillium
Corporation
10.62 Fifth Amendment to Credit Agreement, dated as of June 25, 1996, between
U.S. Bank of Washington, National Association and Gargoyles, Inc.
10.63 Renewal Revolving Note, dated June 25, 1996, made by Gargoyles, Inc. to
U.S. Bank of Washington, National Association
10.64 Renewal Acquisition Note, dated June 25, 1996, made by Gargoyles, Inc. to
U.S. Bank of Washington, National Association
11.1** Computation of pro forma net income (loss) per share
</TABLE>
II-4
<PAGE> 90
<TABLE>
<S> <C>
16.1 Letter regarding change in accountants
21.1 Subsidiaries of the registrant
23.1** Consent of Ernst & Young LLP, Independent Accountants (contained on page
II-7)
23.2* Consent of Perkins Coie (contained in the opinion filed as Exhibit 5.1
hereto)
24.1 Power of Attorney
27.1** Financial Data Schedule
</TABLE>
- ---------------
+ Confidential Treatment Requested.
* To be filed by Amendment.
**Filed herewith.
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the requested
information is shown in the consolidated financial statements of the registrant
or related notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Seattle, State of Washington, on the 19th day of July, 1996.
GARGOYLES, INC.
By: DOUGLAS B. HAUFF
DOUGLAS B. HAUFF
------------------------------------
Douglas B. Hauff, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed by the following
persons in the capacities indicated below on the 19th day of July, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
DOUGLAS B. HAUFF President, Chief Executive Officer and
- --------------------------------------------- Director (Principal Executive Officer)
Douglas B. Hauff
STEVEN R. KINGMA Vice President, Chief Financial Officer,
- --------------------------------------------- Secretary and Treasurer (Principal Financial
Steven R. Kingma and Accounting Officer)
*ERIK J. ANDERSON Chairman of the Board
- ---------------------------------------------
Erik J. Anderson
*TIMOTHY C. POTTS Director
- ---------------------------------------------
Timothy C. Potts
*PAUL S. SHIPMAN Director
- ---------------------------------------------
Paul S. Shipman
*WALTER F. WALKER Director
- ---------------------------------------------
Walter F. Walker
*By DOUGLAS B. HAUFF
- ---------------------------------------------
Douglas B. Hauff
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 92
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our reports dated June 14, 1996,
except for the second paragraph of Note 13, as to which the date is
, 1996 with respect to Gargoyles, Inc. and June 14, 1996 with
respect to H.S.I. d/b/a Hobie Sunglasses in the Registration Statement (Form
S-1) and related Prospectus of Gargoyles, Inc. for the registration of 3,066,667
shares of its Common Stock.
ERNST & YOUNG LLP
Seattle, Washington
, 1996
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the
completion of the stock dividend described in Note 13 to the consolidated
financial statements.
ERNST & YOUNG LLP
Seattle, Washington
July 19, 1996
II-7
<PAGE> 93
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBITS DESCRIPTION PAGE
- -------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement..........................................
3.1(a) Amended and Restated Articles of Incorporation of the registrant
currently in effect.....................................................
3.1(b) Form of Amended and Restated Articles of Incorporation of the registrant
to become effective prior to the closing of the Offering................
3.2(a) Bylaws of the registrant currently in effect............................
3.2(b) Form of Bylaws of the registrant to become effective prior to the
closing of the Offering.................................................
5.1* Opinion of Perkins Coie regarding legality of shares....................
10.1+ Stock Purchase Agreement, dated as of March 14, 1995, among Gargoyles
and certain other parties...............................................
10.2 Indemnity Agreement, dated as of March 22, 1995, by Gargoyles, Inc., in
favor of Trillium Corporation...........................................
10.3 Amended and Restated Promissory Note, dated as of March 17, 1995, made
by Gargoyles, Inc. to Dennis Burns (the "Founder")......................
10.4 Guaranty, dated March 17, 1995, by Conquest Sports, Inc. (formerly
Pro-Tec, Inc.) for the benefit of the Founder...........................
10.5 Guaranty by Gargoyles, Inc. for the benefit of the Founder..............
10.6 Nondisclosure, Noncompetition and Indemnity Agreement, dated as of March
22, 1995, among Gargoyles, Inc., Conquest Sports, Inc., Antone
Manufacturing, Inc. and the Founder.....................................
10.7 Credit Agreement, dated as of March 22, 1995, between U.S. Bank of
Washington, National Association and Gargoyles, Inc. ...................
10.8 Revolving Note, dated March 22, 1995, made by Gargoyles, Inc. to U.S.
Bank of Washington, National Association................................
10.9 Term Note, dated March 22, 1995, made by Gargoyles, Inc. to U.S. Bank of
Washington, National Association........................................
10.10 Security Agreement, dated March 22, 1995, between U.S. Bank of
Washington, National Association and Gargoyles, Inc. ...................
10.11 Limited Guaranty, dated March 22, 1995, by Trillium Corporation for the
benefit of U.S. Bank of Washington, National Association................
10.12 Third Party Pledge Agreement, dated March 22, 1995, by Trillium
Corporation for the benefit of U.S. Bank of Washington, National
Association.............................................................
10.13 First Amendment to Credit Agreement, dated as of August 17, 1995,
between U.S. Bank of Washington, National Association and Gargoyles,
Inc. ...................................................................
10.14 Renewal Revolving Note, dated August 17, 1995, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association........................
10.15 Second Amendment to Credit Agreement, dated as of December 15, 1995,
between U.S. Bank of Washington, National Association and Gargoyles,
Inc. ...................................................................
10.16 Renewal Revolving Note, dated December 15, 1995, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association........................
10.17 Third Amendment to Credit Agreement, dated as of February 13, 1996,
between U.S. Bank of Washington, National Association and Gargoyles,
Inc. ...................................................................
</TABLE>
<PAGE> 94
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBITS DESCRIPTION PAGE
- -------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
10.18 Renewal Revolving Note, dated February 13, 1996, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association........................
10.19 Acquisition Note, dated February 13, 1996, made by Gargoyles, Inc. to
U.S. Bank of Washington, National Association...........................
10.20 Amended and Restated Limited Guaranty, dated as of February 13, 1996, by
Trillium Corporation for the benefit of U.S. Bank of Washington,
National Association....................................................
10.21 Pledge Agreement, dated as of February 13, 1996, by Gargoyles, Inc. for
the benefit of U.S. Bank of Washington, National Association............
10.22 Third Party Pledge Agreement, dated as of February 13, 1996, by Trillium
Investors II, L.L.C. for the benefit of U.S. Bank of Washington,
National Association....................................................
10.23 Indemnity Agreement, dated as of February 13, 1996, by Gargoyles, Inc.
and Trillium Corporation................................................
10.24 Stock Purchase Agreement, dated as of January 25, 1996, among Gargoyles,
Inc., H.S.C., Inc., Douglas B. Hauff, H.S.I., a California corporation,
dba Hobie Sunglasses and the Sellers listed therein.....................
10.25 Industrial Real Estate Lease (Multi-Tenant Facility), dated October 12,
1995, between Gargoyles, Inc. and Cascade Investors.....................
10.26 Industrial Real Estate Lease (Single Tenant Facility), dated December
16, 1993, between Gargoyles, Inc. and DB&D Partnership..................
10.27 Lease Amendment, dated as of March 17, 1995, between Gargoyles, Inc. and
DB&D Partnership........................................................
10.28 Agreement, dated April 5, 1996, between Gargoyles, Inc. and Master
Sports Equipment GmbH...................................................
10.29 Shareholders Agreement, dated as of March 22, 1995, among Gargoyles,
Inc., Trillium Corporation, the Founder, Douglas Hauff and the other
Shareholders listed therein.............................................
10.30 Amendment to Shareholders Agreement, dated as of December 8, 1995, among
Gargoyles, Inc. and the Shareholders listed therein.....................
10.31 Amendment to Shareholders Agreement, dated as of December 8, 1995, among
Gargoyles, Inc. and the Shareholders listed therein.....................
10.32 Gargoyles, Inc. Common Stock Purchase Warrant, dated January 1996,
between Gargoyles, Inc. and Wally Walker................................
10.33 Amended and Restated Option Agreement, dated as of March 17, 1995, among
Gargoyles, Inc., the Founder and Douglas B. Hauff.......................
10.34 Assignment and Assumption of Amended and Restated Option Agreement,
dated as of March 22, 1995, between the Founder and the Investors listed
therein.................................................................
10.35 Option Agreement, dated as of March 22, 1995, between Douglas Hauff and
the Investors listed therein............................................
10.36+ Agreement, dated as of July 14, 1994, as amended by Amendment No. 1
dated as of November 3, 1995, between Gargoyles, Inc. and Dale
Earnhardt...............................................................
10.37+ License Agreement, dated as of October 1995, as amended as of October
18, 1995, between Gargoyles, Inc. and Ken Griffey, Jr. .................
</TABLE>
<PAGE> 95
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBITS DESCRIPTION PAGE
- -------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
10.38 Employment Agreement, dated as of March 22, 1995, between Gargoyles,
Inc. and Douglas B. Hauff...............................................
10.39 Employment Agreement, dated as of March 22, 1995, between Gargoyles,
Inc. and Steven R. Kingma...............................................
10.40 Employment Agreement, dated as of November 1, 1995, between Gargoyles,
Inc. and G. Travis Worth................................................
10.41 Employment Agreement, dated as of March 22, 1995, between Gargoyles,
Inc. and David W. Jobe..................................................
10.42 Form of Indemnity Agreement between Gargoyles, Inc. and each of its
directors...............................................................
10.43** 1995 Amended and Restated Stock Incentive Compensation Plan.............
10.44 Form of Equipment Note made by Gargoyles, Inc. to U.S. Bank of
Washington, National Association........................................
10.45 Guaranty, dated as of March 7, 1995, by Gargoyles, Inc. to and for the
benefit of Trillium Corporation.........................................
10.46 Retail License Agreement, dated August 7, 1995, between Warner Bros.
Division of Time Warner Entertainment Company L.P. and Gargoyles, Inc.,
as amended..............................................................
10.47 Amended and Restated Agreement Regarding Claim Rights, dated July 3,
1996, by and between the Founder, Gargoyles, Inc. and Conquest Sports,
Inc. ...................................................................
10.48+ Settlement Agreement and General Release, dated as of April 12, 1995....
10.49+ Trademark License Agreement dated as of April 12, 1995..................
10.50 Agreement for Purchase of Common Stock, dated as of May 17, 1996, among
Gargoyles, Inc., The Timberland Company, Douglas W. Lauer and the
kindling company (formerly The D.W. Lauer Company)......................
10.51 Promissory Note, dated May 17, 1996, made by Gargoyles, Inc. to the
kindling company........................................................
10.52 Contingent Demand Note, dated May 17, 1996, made by Gargoyles, Inc. to
the kindling company....................................................
10.53 Employment Agreement, effective as of May 17, 1996, between Douglas W.
Lauer and the kindling company..........................................
10.54 Investor Rights Agreement, dated as of May 17, 1996, among The D.W.
Lauer Company, Douglas W. Lauer, Gargoyles, Inc. and The Timberland
Company.................................................................
10.55+ License Agreement, dated as of May 17, 1996, among The Timberland
Company, Gargoyles, Inc. and the kindling company.......................
10.56 Incentive Pool Agreement, effective as of May 17, 1996, between
Gargoyles, Inc. and Douglas W. Lauer....................................
10.57 License Agreement, effective January 1, 1989, between Hobie Designs,
Inc. and H.S.I. ........................................................
10.58+ License Agreement, dated as of June 1996, between Scottie Pippen and
Gargoyles, Inc. ........................................................
10.59+ License Agreement, dated as of May 31, 1996, among Ixela, Inc., Alexi
Lalas and Gargoyles, Inc. ..............................................
10.60 Fourth Amendment to Credit Agreement, dated as of March 15, 1996,
between U.S. Bank of Washington, National Association and Gargoyles,
Inc. ...................................................................
</TABLE>
<PAGE> 96
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBITS DESCRIPTION PAGE
- -------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
10.61 Promissory Note, dated June 5, 1996, made by Gargoyles, Inc. to Trillium
Corporation.............................................................
10.62 Fifth Amendment to Credit Agreement, dated as of June 25, 1996, between
U.S. Bank of Washington, National Association and Gargoyles, Inc. ......
10.63 Renewal Revolving Note, dated June 25, 1996, made by Gargoyles, Inc. to
U.S. Bank of Washington, National Association...........................
10.64 Renewal Acquisition Note, dated June 25, 1996, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association........................
11.1** Computation of pro forma net income (loss) per share....................
16.1 Letter regarding change in accountants..................................
21.1 Subsidiaries of the registrant..........................................
23.1** Consent of Ernst & Young LLP, Independent Accountants (contained on
page II-7)..............................................................
23.2* Consent of Perkins Coie (contained in the opinion filed as Exhibit 5.1
hereto).................................................................
24.1 Power of Attorney.......................................................
27.1** Financial Data Schedule.................................................
</TABLE>
- ---------------
+ Confidential Treatment Requested.
* To be filed by Amendment.
**Filed herewith.
<PAGE> 1
Exhibit 10.43
GARGOYLES, INC.
1995 STOCK INCENTIVE COMPENSATION PLAN
AS AMENDED AND RESTATED ON ______________________, 1996
SECTION 1. PURPOSE
The purpose of the Gargoyles, Inc. 1995 Stock Incentive Compensation
Plan (the "Plan") is to enhance the long-term shareholder value of Gargoyles,
Inc., a Washington corporation (the "Company"), by offering opportunities to
employees, directors, officers, consultants, agents, advisors and independent
contractors of the Company and its Subsidiaries (as defined in Section 2) to
participate in the Company's growth and success, and to encourage them to remain
in the service of the Company and its Subsidiaries and to acquire and maintain
stock ownership in the Company.
SECTION 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set
forth below:
2.1 AWARD
"Award" means an award or grant made to a Participant pursuant to the
Plan, including, without limitation, awards or grants of Options, Stock
Appreciation Rights, Stock Awards, Performance Awards, Other Stock-Based Awards
or any combination of the foregoing (including any Dividend Equivalent Rights
granted in connection with such Awards).
2.2 BOARD
"Board" means the Board of Directors of the Company.
2.3 CAUSE
"Cause" means dishonesty, fraud, misconduct, or disclosure of
confidential information, or conviction or confession of a crime (except minor
violations), in each case as determined by the Plan Administrator, and its
determination shall be conclusive and binding.
2.4 CODE
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
2.5 COMMON STOCK
"Common Stock" means the common stock of the Company.
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<PAGE> 2
2.6 DISABILITY
"Disability" means a mental or physical impairment of the Holder which
is expected to result in death or which has lasted or is expected to last for a
continuous period of 12 months or more and which causes the Holder to be unable,
in the opinion of the Company and two independent physicians, to perform his or
her duties for the Company and to be engaged in any substantial gainful
activity. Disability shall be deemed to have occurred on the first day after the
Company and the two independent physicians have furnished their opinion of
Disability to the Plan Administrator.
2.7 DIVIDEND EQUIVALENT RIGHT
"Dividend Equivalent Right" means an Award granted under Section 13.
2.8 EXCHANGE ACT
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.9 FAIR MARKET VALUE
"Fair Market Value" shall be as established in good faith by the Plan
Administrator or (a) if the Common Stock is listed on the Nasdaq National
Market, the closing selling price for the Common Stock as reported by the Nasdaq
National Market for a single trading day or (b) if the Common Stock is listed on
the New York Stock Exchange or the American Stock Exchange, the closing selling
price for the Common Stock as such price is officially quoted in the composite
tape of transactions on such exchange for a single trading day. If there is no
such reported price for the Common Stock for the date in question, then such
price on the last preceding date for which such price exists shall be
determinative of Fair Market Value.
2.10 GRANT DATE
"Grant Date" means the date the Plan Administrator adopted the granting
resolution or a later date designated in a resolution of the Plan Administrator
as the date an Award is to be granted.
2.11 HOLDER
"Holder" means the Participant to whom an Award is granted or the
personal representative of a Holder who has died.
2.12 INCENTIVE STOCK OPTION
"Incentive Stock Option" means an Option to purchase Common Stock
granted under Section 7 with the intention that it qualify as an "incentive
stock option" as that term is defined in Section 422 of the Code.
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<PAGE> 3
2.13 NONQUALIFIED STOCK OPTION
"Nonqualified Stock Option" means an Option to purchase Common Stock
granted under Section 7 other than an Incentive Stock Option.
2.14 OPTION
"Option" means the right to purchase Common Stock granted under
Section 7.
2.15 OTHER STOCK-BASED AWARD
"Other Stock-Based Award" means an Award granted under Section 12.
2.16 PARTICIPANT
"Participant" means an individual who is a Holder of an Award or, as
the context may require, any employee, director, officer, consultant, agent,
advisor or independent contractor of the Company or a Subsidiary who has been
designated by the Plan Administrator as eligible to participate in the Plan.
2.17 PERFORMANCE AWARD
"Performance Award" means an Award granted under Section 11, the payout
of which is subject to achievement through a performance period of performance
goals prescribed by the Plan Administrator.
2.18 PLAN ADMINISTRATOR
"Plan Administrator" means the Board or any committee of the Board
designated to administer the Plan under Section 3.1.
2.19 RESTRICTED STOCK
"Restricted Stock" means shares of Common Stock granted under Section
10, the rights of ownership of which are subject to restrictions prescribed by
the Plan Administrator.
2.20 SECURITIES ACT
"Securities Act" means the Securities Act of 1933, as amended.
2.21 STOCK APPRECIATION RIGHT
"Stock Appreciation Right" means an Award granted under Section 9.
2.22 STOCK AWARD
"Stock Award" means an Award granted under Section 10.
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<PAGE> 4
2.23 SUBSIDIARY
"Subsidiary," except as expressly provided otherwise, means any entity
that is directly or indirectly controlled by the Company or in which the Company
has a significant ownership interest, as determined by the Plan Administrator,
and any entity that may become a direct or indirect parent of the Company.
2.24 SUCCESSOR CORPORATION
"Successor Corporation" has the meaning set forth under Section 16.2.
SECTION 3. ADMINISTRATION
3.1 PLAN ADMINISTRATOR
The Plan shall be administered by the Board or a committee or
committees (which term includes subcommittees) appointed by, and consisting of
two or more members of, the Board. If and so long as the Common Stock is
required to be registered under Section 12(b) or 12(g) of the Exchange Act, the
Board shall consider in selecting the Plan Administrator and the membership of
any committee acting as Plan Administrator for any persons subject or likely to
become subject to Section 16 under the Exchange Act the provisions regarding (a)
"outside directors" as contemplated by Section 162(m) of the Code and (b)
"nonemployee directors" as contemplated by Rule 16b-3 under the Exchange Act.
The Board may delegate the responsibility for administering the Plan with
respect to designated classes of eligible Participants to different committees,
subject to such limitations as the Board deems appropriate. Committee members
shall serve for such term as the Board may determine, subject to removal by the
Board at any time.
3.2 ADMINISTRATION AND INTERPRETATION BY THE PLAN ADMINISTRATOR
Except for the terms and conditions explicitly set forth in the Plan,
the Plan Administrator shall have exclusive authority, in its discretion, to
determine all matters relating to Awards under the Plan, including the selection
of individuals to be granted Awards, the type of Awards, the number of shares of
Common Stock subject to an Award, all terms, conditions, restrictions and
limitations, if any, of an Award and the terms of any instrument that evidences
the Award. The Plan Administrator shall also have exclusive authority to
interpret the Plan and may from time to time adopt, and change, rules and
regulations of general application for the Plan's administration. The Plan
Administrator's interpretation of the Plan and its rules and regulations, and
all actions taken and determinations made by the Plan Administrator pursuant to
the Plan, shall be conclusive and binding on all parties involved or affected.
The Plan Administrator may delegate administrative duties to such of the
Company's officers as it so determines.
SECTION 4. STOCK SUBJECT TO THE PLAN
4.1 AUTHORIZED NUMBER OF SHARES
Subject to adjustment from time to time as provided in Section 16.1, a
maximum of 150,000 shares of Common Stock shall be available for issuance under
the Plan; provided that
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<PAGE> 5
52,577 of such shares shall become available for issuance only upon the
effectiveness of the Company's registration statement relating to the initial
public offering of the Common Stock. Shares issued under the Plan shall be drawn
from authorized and unissued shares.
4.2 LIMITATIONS
(a) Subject to adjustment from time to time as provided in Section
16.1, not more than an aggregate of 50,000 shares shall be available for
issuance pursuant to grants of Stock Awards, Performance Awards or Other
Stock-Based Awards under the Plan.
(b) Subject to adjustment from time to time as provided in Section
16.1, not more than 10,000 shares of Common Stock may be made subject to Awards
under the Plan to any individual Participant in the aggregate in any one fiscal
year of the Company, except that the Company may make additional one-time grants
to newly hired Participants of up to 30,000 shares per such Participant; such
limitation shall be applied in a manner consistent with the requirements of, and
only to the extent required for compliance with, the exclusion from the
limitation on deductibility of compensation under Section 162(m) of the Code.
4.3 REUSE OF SHARES
Any shares of Common Stock that have been made subject to an Award that
cease to be subject to the Award (other than by reason of exercise or payment of
the Award to the extent it is exercised for or settled in shares), shall again
be available for issuance in connection with future grants of Awards under the
Plan; provided, however, that any such shares shall be counted in accordance
with the requirements of Section 162(m) of the Code. Shares that are subject to
tandem Awards shall be counted only once.
SECTION 5. ELIGIBILITY
Awards may be granted under the Plan to those officers, directors and
key employees of the Company and its Subsidiaries as the Plan Administrator from
time to time selects. Awards may also be made to consultants, agents, advisors
and independent contractors who provide services to the Company and its
Subsidiaries.
SECTION 6. AWARDS
6.1 FORM AND GRANT OF AWARDS
The Plan Administrator shall have the authority, in its sole
discretion, to determine the type or types of Awards to be made under the Plan.
Such Awards may include, but are not limited to, Incentive Stock Options,
Nonqualified Stock Options, Stock Appreciation Rights, Stock Awards, Performance
Awards, Other Stock-Based Awards and Dividend Equivalent Rights. Awards may be
granted singly, in combination or in tandem so that the settlement or payment of
one automatically reduces or cancels the other. Awards may also be made in
combination or in tandem with, in replacement of, as alternatives to, or as the
payment form for, grants or rights under any other employee or compensation plan
of the Company.
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<PAGE> 6
6.2 ACQUIRED COMPANY AWARDS
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator may grant Awards under the Plan in substitution for awards issued
under other plans, or assume under the Plan awards issued under other plans, if
the other plans are or were plans of other acquired entities ("Acquired
Entities") (or the parent of the Acquired Entity) and the new Award is
substituted, or the old award is assumed, by reason of a merger, consolidation,
acquisition of property or of stock, reorganization or liquidation (the
"Acquisition Transaction"). In the event that a written agreement pursuant to
which the Acquisition Transaction is completed is approved by the Board and said
agreement sets forth the terms and conditions of the substitution for or
assumption of outstanding awards of the Acquired Entity, said terms and
conditions shall be deemed to be the action of the Plan Administrator without
any further action by the Plan Administrator, except as may be required for
compliance with Rule 16b-3 under the Exchange Act, and the persons holding such
Awards shall be deemed to be Participants and Holders.
SECTION 7. AWARDS OF OPTIONS
7.1 GRANT OF OPTIONS
The Plan Administrator is authorized under the Plan, in its sole
discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock
Options, which shall be appropriately designated.
7.2 OPTION EXERCISE PRICE
The exercise price for shares purchased under an Option shall be as
determined by the Plan Administrator, but shall not be less than 100% of the
Fair Market Value of the Common Stock on the Grant Date with respect to
Incentive Stock Options and not less than 85% of the Fair Market Value on the
Grant Date with respect to Nonqualified Stock Options.
7.3 TERM OF OPTIONS
The term of each Option shall be as established by the Plan
Administrator or, if not so established, shall be 10 years from the Grant Date.
7.4 EXERCISE OF OPTIONS
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option the time at which or the installments in which the
Option shall become exercisable, which provisions may be waived or modified by
the Plan Administrator at any time. If not so established in the instrument
evidencing the Option, the Option will become exercisable according to the
following schedule, which may be waived or modified by the Plan Administrator at
any time:
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<PAGE> 7
Period of Holder's Continuous Employment or
Service With the Company or Its Subsidiaries Percent of Total Option
From the Option Grant Date That Is Exercisable
After 1 year 25%
After 2 years 50%
After 3 years 75%
After 4 years 100%
To the extent that the right to purchase shares has accrued thereunder,
an Option may be exercised from time to time by written notice to the Company,
in accordance with procedures established by the Plan Administrator, setting
forth the number of shares with respect to which the Option is being exercised
and accompanied by payment in full as described in Section 7.5. An Option may
not be exercised as to less than 100 shares at any one time (or the lesser
number of remaining shares covered by the Option).
7.5 PAYMENT OF EXERCISE PRICE
The exercise price for shares purchased under an Option shall be paid
in full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or check (unless, at the time of exercise, the Plan
Administrator determines not to accept a personal check), except that the Plan
Administrator, in its sole discretion, may, either at the time the Option is
granted or at any time before it is exercised and subject to such limitations as
the Plan Administrator may determine, authorize payment in cash and/or one or
more of the following alternative forms: (a) tendering (either actually or, if
and so long as the Common Stock is registered under Section 12(b) or 12(g) of
the Exchange Act, by attestation) Common Stock already owned by the Holder for
at least six months (or any shorter period necessary to avoid a charge to the
Company's earnings for financial reporting purposes) having a Fair Market Value
on the day prior to the exercise date equal to the aggregate Option exercise
price; (b) a promissory note delivered pursuant to Section 14; (c) if and so
long as the Common Stock is registered under Section 12(b) or 12(g) of the
Exchange Act, delivery of a properly executed exercise notice, together with
irrevocable instructions, to (i) a brokerage firm designated by the Company to
deliver promptly to the Company the aggregate amount of sale or loan proceeds to
pay the Option exercise price and any withholding tax obligations that may arise
in connection with the exercise and (ii) the Company to deliver the certificates
for such purchased shares directly to such brokerage firm, all in accordance
with the regulations of the Federal Reserve Board; or (d) such other
consideration as the Plan Administrator may permit.
7.6 POST-TERMINATION EXERCISES
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option whether the Option will continue to be exercisable, and
the terms and conditions of such exercise, if a Holder ceases to be employed by,
or to provide services to, the Company or its Subsidiaries, which provisions may
be waived or modified by the Plan Administrator at any time.
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<PAGE> 8
If not so established in the instrument evidencing the Option, the Option will
be exercisable according to the following terms and conditions, which may be
waived or modified by the Plan Administrator at any time.
In case of termination of the Holder's employment or services other
than by reason of death or Cause, the Option shall be exercisable, to the extent
of the number of shares purchasable by the Holder at the date of such
termination, only (a) within one year if the termination of the Holder's
employment or services are coincident with Disability or (b) within three months
after the date the Holder ceases to be an employee, director, officer,
consultant, agent, advisor or independent contractor of the Company or a
Subsidiary if termination of the Holder's employment or services is for any
reason other than death or Disability, but in no event later than the remaining
term of the Option. Any Option exercisable at the time of the Holder's death may
be exercised, to the extent of the number of shares purchasable by the Holder at
the date of the Holder's death, by the personal representative of the Holder's
estate entitled thereto at any time or from time to time within one year after
the date of death, but in no event later than the remaining term of the Option.
In case of termination of the Holder's employment or services for Cause, the
Option shall automatically terminate upon first discovery by the Company of any
reason for such termination and the Holder shall have no right to purchase any
Shares pursuant to such Option, unless the Plan Administrator determines
otherwise. If a Holder's employment or services with the Company are suspended
pending an investigation of whether the Holder shall be terminated for Cause,
all the Holder's rights under any Option likewise shall be suspended during the
period of investigation.
A transfer of employment or services between or among the Company and
its Subsidiaries shall not be considered a termination of employment or
services. The effect of a Company-approved leave of absence on the terms and
conditions of an Option shall be determined by the Plan Administrator, in its
sole discretion.
SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock
Options shall be subject to the following additional terms and conditions:
8.1 DOLLAR LIMITATION
To the extent the aggregate Fair Market Value (determined as of the
Grant Date) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time during any calendar year (under the Plan and all
other stock option plans of the Company) exceeds $100,000, such portion in
excess of $100,000 shall be treated as a Nonqualified Stock Option. In the event
the Participant holds two or more such Options that become exercisable for the
first time in the same calendar year, such limitation shall be applied on the
basis of the order in which such Options are granted.
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<PAGE> 9
8.2 10% SHAREHOLDERS
If a Participant owns more than 10% of the total voting power of all
classes of the Company's stock, then the exercise price per share of an
Incentive Stock Option shall not be less than 110% of the Fair Market Value of
the Common Stock on the Grant Date and the Option term shall not exceed five
years. The determination of 10% ownership shall be made in accordance with
Section 422 of the Code.
8.3 ELIGIBLE EMPLOYEES
Individuals who are not employees of the Company or one of its parent
corporations or subsidiary corporations may not be granted Incentive Stock
Options. For purposes of this Section 8.3, "parent corporation" and "subsidiary
corporation" shall have the meanings attributed to those terms for purposes of
Section 422 of the Code.
8.4 TERM
The term of an Incentive Stock Option shall not exceed 10 years.
8.5 EXERCISABILITY
To qualify for Incentive Stock Option tax treatment, an Option
designated as an Incentive Stock Option must be exercised within three months
after termination of employment for reasons other than death, except that, in
the case of termination of employment due to total disability, such Option must
be exercised within one year after such termination. Employment shall not be
deemed to continue beyond the first 90 days of a leave of absence unless the
Participant's reemployment rights are guaranteed by statute or contract. For
purposes of this Section 8.5, "total disability" shall mean a mental or physical
impairment of the Participant which is expected to result in death or which has
lasted or is expected to last for a continuous period of 12 months or more and
which causes the Participant to be unable, in the opinion of the Company and two
independent physicians, to perform his or her duties for the Company and to be
engaged in any substantial gainful activity. Total disability shall be deemed to
have occurred on the first day after the Company and the two independent
physicians have furnished their opinion of total disability to the Plan
Administrator.
8.6 TAXATION OF INCENTIVE STOCK OPTIONS
In order to obtain certain tax benefits afforded to Incentive Stock
Options under Section 422 of the Code, the Participant must hold the shares
issued upon the exercise of an Incentive Stock Option for two years after the
Grant Date of the Incentive Stock Option and one year from the date of exercise.
A Participant may be subject to the alternative minimum tax at the time of
exercise of an Incentive Stock Option. The Participant shall give the Company
prompt notice of any disposition of shares acquired by the exercise of an
Incentive Stock Option prior to the expiration of such holding periods.
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<PAGE> 10
8.7 PROMISSORY NOTES
The amount of any promissory note delivered pursuant to Section 14 in
connection with an Incentive Stock Option shall bear interest at a rate
specified by the Plan Administrator but in no case less than the rate required
to avoid imputation of interest (taking into account any exceptions to the
imputed interest rules) for federal income tax purposes.
SECTION 9. STOCK APPRECIATION RIGHTS
9.1 GRANT OF STOCK APPRECIATION RIGHTS
The Plan Administrator may grant a Stock Appreciation Right separately
or in tandem with a related Option.
9.2 TANDEM STOCK APPRECIATION RIGHTS
A Stock Appreciation Right granted in tandem with a related Option will
give the Holder the right to surrender to the Company all or a portion of the
related Option and to receive an appreciation distribution (in shares of Common
Stock or cash or any combination of shares and cash, as the Plan Administrator,
in its sole discretion, shall determine at any time) in an amount equal to the
excess of the Fair Market Value for the date the Stock Appreciation Right is
exercised over the exercise price per share of the right, which shall be the
same as the exercise price of the related Option. A tandem Stock Appreciation
Right will have the same other terms and provisions as the related Option. Upon
and to the extent a tandem Stock Appreciation Right is exercised, the related
Option will terminate.
9.3 STAND-ALONE STOCK APPRECIATION RIGHTS
A Stock Appreciation Right granted separately and not in tandem with an
Option will give the Holder the right to receive an appreciation distribution in
an amount equal to the excess of the Fair Market Value for the date the Stock
Appreciation Right is exercised over the exercise price per share of the right.
A stand-alone Stock Appreciation Right will have such terms as the Plan
Administrator may determine, except that the exercise price per share of the
right must be at least equal to 85% of the Fair Market Value on the Grant Date
and the term of the right, if not otherwise established by the Plan
Administrator, shall be 10 years from the Grant Date.
9.4 EXERCISE OF STOCK APPRECIATION RIGHTS
Unless otherwise provided by the Plan Administrator in the instrument
that evidences the Stock Appreciation Right, the provisions of Section 7.6
relating to the termination of a Holder's employment or services shall apply
equally, to the extent applicable, to the Holder of a Stock Appreciation Right.
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<PAGE> 11
SECTION 10. STOCK AWARDS
10.1 GRANT OF STOCK AWARDS
The Plan Administrator is authorized to make Awards of Common Stock to
Participants on such terms and conditions and subject to such restrictions, if
any (which may be based on continuous service with the Company or the
achievement of performance goals related to (i) sales, gross margin, operating
profits or profits, (ii) growth in sales, gross margin operating profit or
profit, (iii) return ratios related to sales, gross margin operating profit or
profit, (iv) cash flow, (v) asset management (including inventory management),
or (vi) total shareholder return, where such goals may be stated in absolute
terms or relative to comparison companies), as the Plan Administrator shall
determine, in its sole discretion, which terms, conditions and restrictions
shall be set forth in the instrument evidencing the Award. The terms, conditions
and restrictions that the Plan Administrator shall have the power to determine
shall include, without limitation, the manner in which shares subject to Stock
Awards are held during the periods they are subject to restrictions and the
circumstances under which forfeiture of Restricted Stock shall occur by reason
of termination of the Holder's services.
10.2 ISSUANCE OF SHARES
Upon the satisfaction of any terms, conditions and restrictions
prescribed in respect to a Stock Award, or upon the Holder's release from any
terms, conditions and restrictions of a Stock Award, as determined by the Plan
Administrator, the Company shall deliver, as soon as practicable, to the Holder
or, in the case of the Holder's death, to the personal representative of the
Holder's estate or as the appropriate court directs, a stock certificate for the
appropriate number of shares of Common Stock.
10.3 WAIVER OF RESTRICTIONS
Notwithstanding any other provisions of the Plan, the Plan
Administrator may, in its sole discretion, waive the forfeiture period and any
other terms, conditions or restrictions on any Restricted Stock under such
circumstances and subject to such terms and conditions as the Plan Administrator
shall deem appropriate.
SECTION 11. PERFORMANCE AWARDS
11.1 PLAN ADMINISTRATOR AUTHORITY
Performance Awards may be denominated in cash, shares of Common Stock
or any combination thereof. The Plan Administrator is authorized to grant
Performance Awards and shall determine the nature, length and starting date of
the performance period for each Performance Award and the performance objectives
to be used in valuing Performance Awards and determining the extent to which
such Performance Awards have been earned. Performance objectives and other terms
may vary from Participant to Participant and between groups of Participants.
Performance objectives shall be based on (i) sales, gross margin, operating
profits or profits, (ii) growth in sales, gross margin operating profit or
profit, (iii) return ratios related to sales, gross margin operating profit or
profit, (iv) cash flow, (v) asset management (including
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<PAGE> 12
inventory management) or (vi) total shareholder return, where such goals may be
stated in absolute terms or relative to comparison companies, as the Plan
Administrator shall determine, in its sole discretion. Additional performance
measures may be used to the extent their use would comply with the exclusion
from the limitation on deductibility of compensation under Section 162(m) of the
Code. Performance periods may overlap and Participants may participate
simultaneously with respect to Performance Awards that are subject to different
performance periods and different performance factors and criteria.
The Plan Administrator shall determine for each Performance Award the
range of dollar values or number of shares of Common Stock (which may, but need
not, be shares of Restricted Stock pursuant to Section 10), or a combination
thereof, to be received by the Participant at the end of the performance period
if and to the extent that the relevant measures of performance for such
Performance Awards are met. No Performance Awards having an aggregate maximum
dollar value in excess of $250,000 shall be granted to any individual
Participant in any one fiscal year of the Company, such limitations to be
applied in a manner consistent with the requirements of, and to the extent
required for compliance with, the exclusion from the limitation on deductibility
of compensation under Section 162(m) of the Code. The earned portion of a
Performance Award may be paid currently or on a deferred basis with such
interest or earnings equivalent as may be determined by the Plan Administrator.
Payment shall be made in the form of cash, whole shares of Common Stock (which
may, but need not, be shares of Restricted Stock pursuant to Section 10),
Options or any combination thereof, either in a single payment or in annual
installments, all as the Plan Administrator shall determine.
11.2 ADJUSTMENT OF AWARDS
The Plan Administrator may adjust the performance goals and
measurements applicable to Performance Awards to take into account changes in
law and accounting and tax rules and to make such adjustments as the Plan
Administrator deems necessary or appropriate to reflect the inclusion or
exclusion of the impact of extraordinary or unusual items, events or
circumstances, except that, to the extent required for compliance with the
exclusion from the limitation on deductibility of compensation under Section
162(m) of the Code, no adjustment shall be made that would result in an increase
in the compensation of any Participant whose compensation is subject to the
limitation on deductibility under Section 162(m) of the Code for the applicable
year. The Plan Administrator also may adjust the performance goals and
measurements applicable to Performance Awards and thereby reduce the amount to
be received by any Participant pursuant to such Awards if and to the extent that
the Plan Administrator deems it appropriate.
11.3 PAYOUT UPON TERMINATION
The Plan Administrator shall establish and set forth in each instrument
that evidences a Performance Award whether the Award will be payable, and the
terms and conditions of such payment, if a Holder ceases to be employed by, or
to provide services to, the Company or its Subsidiaries, which provisions may be
waived or modified by the Plan Administrator at any time. If not so established
in the instrument evidencing the Performance Award, the Award will be payable
according to the following terms and conditions, which may be waived or modified
by the Plan Administrator at any time. If during a performance period a
Participant's employment or
-12-
<PAGE> 13
services with the Company terminate by reason of the Participant's Retirement,
Early Retirement at the Company's request, Disability or death, such Participant
shall be entitled to a payment with respect to each outstanding Performance
Award at the end of the applicable performance period (i) based, to the extent
relevant under the terms of the Award, on the Participant's performance for the
portion of such performance period ending on the date of termination and (ii)
prorated for the portion of the performance period during which the Participant
was employed by the Company, all as determined by the Plan Administrator. The
Plan Administrator may provide for an earlier payment in settlement of such
Performance Award discounted at a reasonable interest rate and otherwise in such
amount and under such terms and conditions as the Plan Administrator deems
appropriate.
Except as otherwise provided in Section 16 or in the instrument
evidencing the Performance Award, if during a performance period a Participant's
employment or services with the Company terminate other than by reason of the
Participant's Retirement, Early Retirement at the Company's request, Disability
or death, then such Participant shall not be entitled to any payment with
respect to the Performance Awards relating to such performance period, unless
the Plan Administrator shall otherwise determine. The provisions of Section 7.6
regarding leaves of absence and termination for Cause shall apply to Performance
Awards.
SECTION 12. OTHER STOCK-BASED AWARDS
The Plan Administrator may grant other Awards under the Plan pursuant
to which shares of Common Stock (which may, but need not, be shares of
Restricted Stock pursuant to Section 10) are or may in the future be acquired,
or Awards denominated in stock units, including ones valued using measures other
than market value. Such Other Stock-Based Awards may be granted alone or in
addition to or in tandem with any Award of any type granted under the Plan and
must be consistent with the Plan's purpose.
SECTION 13. DIVIDEND EQUIVALENT RIGHTS
Any Awards under the Plan may, in the Plan Administrator's discretion,
earn Dividend Equivalent Rights. In respect of any Award that is outstanding on
the dividend record date for Common Stock, the Participant may be credited with
an amount equal to the cash or stock dividends or other distributions that would
have been paid on the shares of Common Stock covered by such Award had such
covered shares been issued and outstanding on such dividend record date. The
Plan Administrator shall establish such rules and procedures governing the
crediting of Dividend Equivalent Rights, including the timing, form of payment
and payment contingencies of such Dividend Equivalent Rights, as it deems are
appropriate or necessary.
SECTION 14. LOANS, INSTALLMENT PAYMENTS AND LOAN
GUARANTEES
To assist a Holder (including a Holder who is an officer or director of
the Company) in acquiring shares of Common Stock pursuant to an Award granted
under the Plan, the Plan Administrator, in its sole discretion, may authorize,
either at the Grant Date or at any time before the acquisition of Common Stock
pursuant to the Award, (a) the extension of a loan to the Holder
-13-
<PAGE> 14
by the Company, (b) the payment by the Holder of the purchase price, if any, of
the Common Stock in installments, or (c) the guarantee by the Company of a loan
obtained by the grantee from a third party. The terms of any loans, installment
payments or loan guarantees, including the interest rate and terms of and
security for repayment, will be subject to the Plan Administrator's discretion;
provided, however, that repayment of any Company loan to the Holder shall be
secured by delivery of a full-recourse promissory note for the loan amount
executed by the Holder, together with any other form of security determined by
the Plan Administrator. The maximum credit available is the purchase price, if
any, of the Common Stock acquired, plus the maximum federal and state income and
employment tax liability that may be incurred in connection with the
acquisition.
SECTION 15. ASSIGNABILITY
No Option, Stock Appreciation Right, Performance Award, Other
Stock-Based Award or Dividend Equivalent Right granted under the Plan may be
assigned, pledged or transferred by the Holder other than by will or by the laws
of descent and distribution, and during the Holder's lifetime, such Awards may
be exercised only by the Holder. Notwithstanding the foregoing, and to the
extent permitted by Section 422 of the Code, the Plan Administrator, in its sole
discretion, may permit such assignment, transfer and exercisability and may
permit a Holder of such Awards to designate a beneficiary who may exercise the
Award or receive compensation under the Award after the Holder's death;
provided, however, that any Award so assigned or transferred shall be subject to
all the same terms and conditions contained in the instrument evidencing the
Award.
SECTION 16. ADJUSTMENTS
16.1 ADJUSTMENT OF SHARES
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to shareholders other than a normal cash
dividend, or other change in the Company's corporate or capital structure
results in (a) the outstanding shares, or any securities exchanged therefor or
received in their place, being exchanged for a different number or class of
securities of the Company or of any other corporation or (b) new, different or
additional securities of the Company or of any other corporation being received
by the holders of shares of Common Stock of the Company, then the Plan
Administrator, in its sole discretion, shall make such equitable adjustments as
it shall deem appropriate in the circumstances in (i) the maximum number and
class of securities subject to the Plan as set forth in Section 4.1, (ii) the
maximum number and class of securities that may be made subject to Awards to any
individual Participant as set forth in Section 4.2, and (iii) the number and
class of securities that are subject to any outstanding Award and the per share
price of such securities, without any change in the aggregate price to be paid
therefor. The determination by the Plan Administrator as to the terms of any of
the foregoing adjustments shall be conclusive and binding.
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<PAGE> 15
16.2 CORPORATE TRANSACTION
Upon a merger (other than a merger of the Company in which the holders
of shares of Common Stock immediately prior to the merger have the same
proportionate ownership of shares of Common Stock in the surviving corporation
immediately after the merger), consolidation, acquisition of property or stock,
separation, reorganization (other than a mere reincorporation or the creation of
a holding company) or liquidation of the Company, as a result of which the
shareholders of the Company receive cash, stock or other property in exchange
for or in connection with their shares of Common Stock, any Option, Stock
Appreciation Right or restricted Stock Award granted hereunder shall terminate,
but the Holder shall have the right immediately prior to any such merger,
consolidation, acquisition of property or stock, separation, reorganization or
liquidation to exercise such Holder's Award in whole or in part whether or not
the vesting requirements set forth in the Award agreement have been satisfied;
provided, that such acceleration will not occur if it would render unavailable
"pooling of interests" accounting treatment for any reorganization, merger or
consolidation of the Company.
If the shareholders of the Company receive capital stock of another
corporation ("Exchange Stock") in exchange for their shares of Common Stock in
any transaction involving a merger (other than a merger of the Company in which
the holders of Common Stock immediately prior to the merger have the same
proportionate ownership of Common Stock in the surviving corporation immediately
after the merger), consolidation, acquisition of property or stock, separation
or reorganization (other than a mere reincorporation or the creation of a
holding company), all Options, Stock Appreciation Rights and Restricted Stock
Awards granted hereunder shall be converted into Awards for shares of Exchange
Stock unless the Company and the corporation issuing the Exchange Stock, in
their sole discretion, determine that any or all such Awards granted hereunder
shall not be converted into Awards for shares of Exchange Stock but instead
shall terminate in accordance with the provisions set forth above. The amount
and price of converted Awards shall be determined by adjusting the amount and
price of the Awards granted hereunder in the same proportion as used for
determining the number of shares of Exchange Stock the holders of the shares of
Common Stock receive in such merger, consolidation, acquisition of property or
stock, separation or reorganization. The converted Awards shall be fully vested
whether or not the vesting requirements set forth in the Award agreement have
been satisfied; provided, that such acceleration will not occur if it would
render unavailable "pooling of interests" accounting treatment for any
reorganization, merger or consolidation of the Company.
16.3 FURTHER ADJUSTMENT OF AWARDS
Subject to the preceding Section 16.2, and subject to the limitations
set forth in Section 11, the Plan Administrator shall have the discretion,
exercisable at any time before a sale, merger, consolidation, reorganization,
liquidation or change in control of the Company, as defined by the Plan
Administrator, to take such further action as it determines to be necessary or
advisable, and fair and equitable to Participants, with respect to Awards. Such
authorized action may include (but shall not be limited to) establishing,
amending or waiving the type, terms, conditions or duration of, or restrictions
on, Awards so as to provide for earlier, later, extended or additional time for
exercise, payment or settlement or lifting restrictions, differing methods for
-15-
<PAGE> 16
calculating payments or settlements, alternate forms and amounts of payments and
settlements and other modifications, and the Plan Administrator may take such
actions with respect to all Participants, to certain categories of Participants
or only to individual Participants. The Plan Administrator may take such actions
before or after granting Awards to which the action relates and before or after
any public announcement with respect to such sale, merger, consolidation,
reorganization, liquidation or change in control that is the reason for such
action.
16.4 LIMITATIONS
The grant of Awards will in no way affect the Company's right to
adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
16.5 FRACTIONAL SHARES
In the event of any adjustment in the number of shares covered by any
Option, any fractional shares resulting from such adjustment shall be
disregarded and each such Option shall cover only the number of full shares
resulting from such adjustment.
SECTION 17. WITHHOLDING
The Company may require the Holder to pay to the Company the amount of
any withholding taxes that the Company is required to withhold with respect to
the grant, exercise, payment or settlement of any Award. In such instances, the
Plan Administrator may, in its discretion and subject to the Plan and applicable
law, permit the Holder to satisfy withholding obligations, in whole or in part,
by paying cash, by electing to have the Company withhold shares of Common Stock
or by transferring shares of Common Stock to the Company, in such amounts as are
equivalent to the Fair Market Value of the withholding obligation. The Company
shall have the right to withhold from any Award or any shares of Common Stock
issuable pursuant to an Award or from any cash amounts otherwise due or to
become due from the Company to the Participant an amount equal to such taxes.
The Company may also deduct from any Award any other amounts due from the
Participant to the Company or a Subsidiary.
SECTION 18. AMENDMENT AND TERMINATION OF PLAN
18.1 AMENDMENT OF PLAN
The Plan may be amended by the shareholders of the Company. The Board
may also amend the Plan in such respects as it shall deem advisable; however, to
the extent required for compliance with Section 422 of the Code or any
applicable law or regulation, shareholder approval will be required for any
amendment that will (a) increase the aggregate number of shares as to which
Incentive Stock Options may be granted, (b) modify the employees or class of
employees eligible to receive Incentive Stock Options, or (c) otherwise require
shareholder approval under any applicable law or regulation. Amendments made to
the Plan which would constitute "modifications" to Incentive Stock Options
outstanding on the date of such Amendments shall not be applicable to such
outstanding Incentive Stock Options but shall have prospective effect only.
-16-
<PAGE> 17
18.2 TERMINATION OF PLAN
The Company's shareholders or the Board may suspend or terminate the
Plan at any time. The Plan will have no fixed expiration date; provided,
however, that no Incentive Stock Options may be granted more than 10 years after
the earlier of the Plan's adoption by the Board or approval by the shareholders.
18.3 CONSENT OF HOLDER
The amendment or termination of the Plan shall not, without the consent
of the Holder of any Award under the Plan, alter or impair any rights or
obligations under any Award theretofore granted under the Plan.
SECTION 19. GENERAL
19.1 AWARD AGREEMENTS
Awards granted under the Plan shall be evidenced by a written agreement
which shall contain such terms, conditions, limitations and restrictions as the
Plan Administrator shall deem advisable and which are not inconsistent with the
Plan.
19.2 CONTINUED EMPLOYMENT OR SERVICES; RIGHTS IN AWARDS
None of the Plan, participation in the Plan as a Participant or any
action of the Plan Administrator taken under the Plan shall be construed as
giving any Participant or employee of the Company any right to be retained in
the employ of the Company or limit the Company's right to terminate the
employment or services of the Participant.
19.3 REGISTRATION; CERTIFICATES FOR SHARES
The Company shall be under no obligation to any Participant to register
for offering or resale or to qualify for exemption under the Securities Act, or
to register or qualify under state securities laws, any shares of Common Stock,
security or interest in a security paid or issued under, or created by, the
Plan, or to continue in effect any such registrations or qualifications if made.
The Company may issue certificates for shares with such legends and subject to
such restrictions on transfer and stop-transfer instructions as counsel for the
Company deems necessary or desirable for compliance by the Company with federal
and state securities laws.
Inability of the Company to obtain, from any regulatory body having
jurisdiction, the authority deemed by the Company's counsel to be necessary for
the lawful issuance and sale of any shares hereunder or the unavailability of an
exemption from registration for the issuance and sale of any shares hereunder
shall relieve the Company of any liability in respect of the nonissuance or sale
of such shares as to which such requisite authority shall not have been
obtained.
-17-
<PAGE> 18
19.4 NO RIGHTS AS A SHAREHOLDER
No Option, Stock Appreciation Right, Performance Award or Other
Stock-Based Award shall entitle the Holder to any cash dividend (except to the
extent provided in an Award of Dividend Equivalent Rights), voting or other
right of a shareholder unless and until the date of issuance under the Plan of
the shares that are the subject of such Award, free of all applicable
restrictions.
19.5 COMPLIANCE WITH LAWS AND REGULATIONS
It is the Company's intention that, if and so long as any of the
Company's equity securities are registered pursuant to Section 12(b) or 12(g) of
the Exchange Act, the Plan shall comply in all respects with Rule 16b-3 under
the Exchange Act and, if any Plan provision is later found not to be in
compliance with such Rule 16b-3, the provision shall be deemed null and void,
and in all events the Plan shall be construed in favor of its meeting the
requirements of Rule 16b-3. Notwithstanding anything in the Plan to the
contrary, the Board, in its sole discretion, may bifurcate the Plan so as to
restrict, limit or condition the use of any provision of the Plan to
Participants who are officers or directors subject to Section 16 of the Exchange
Act without so restricting, limiting or conditioning the Plan with respect to
other Participants. Additionally, in interpreting and applying the provisions of
the Plan, any Option granted as an Incentive Stock Option pursuant to the Plan
shall, to the extent permitted by law, be construed as an "incentive stock
option" within the meaning of Section 422 of the Code.
19.6 NO TRUST OR FUND
The Plan is intended to constitute an "unfunded" plan. Nothing
contained herein shall require the Company to segregate any monies or other
property, or shares of Common Stock, or to create any trusts, or to make any
special deposits for any immediate or deferred amounts payable to any
Participant, and no Participant shall have any rights that are greater than
those of a general unsecured creditor of the Company.
19.7 SEVERABILITY
If any provision of the Plan or any Award is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Award under any law deemed applicable by the Plan
Administrator, such provision shall be construed or deemed amended to conform to
applicable laws, or, if it cannot be so construed or deemed amended without, in
the Plan Administrator's determination, materially altering the intent of the
Plan or the Award, such provision shall be stricken as to such jurisdiction,
person or Award, and the remainder of the Plan and any such Award shall remain
in full force and effect.
SECTION 20. EFFECTIVE DATE
The Plan's effective date is the date on which it is adopted by the
Board, so long as it is approved by the Company's shareholders at any time
within 12 months of such adoption or, if earlier, and to the extent required for
compliance with Rule 16b-3 under the Exchange Act, at the next annual meeting of
the Company's shareholders after adoption of the Plan by the Board.
-18-
<PAGE> 19
Original Plan adopted by the Board on __________, 199__ and approved by
the Company's shareholders on __________, 199__.
-19-
<PAGE> 20
PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
Date of
Adoption/
Amendment/ Date of Shareholder
Adjustment Section Effect of Amendment Approval
-1-
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF PRO FORMA NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995(1) JUNE 30, 1996
-------------------- ------------------
<S> <C> <C>
Weighted average number of
common stock outstanding ................... 5,861,003 5,872,444
Common stock and common stock equivalents
issued during the twelve month period
prior to the filing of the Company's
initial public offering, using the
treasury stock method and an assumed
initial public offering price of $15.00..... 277,257 269,392
--------- ---------
6,138,260 6,141,836
========= =========
</TABLE>
- ------------------
(1) Number of shares apply to all periods prior to 1996.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Net Income Net Income
(Loss) (Loss) Per Share
----------- ----------------
<S> <C> <C>
Year Ended November 30, 1993 ................. $ 415,318 $ 0.07
Year Ended November 30, 1994 ................. 178,562 0.03
One Month Ended December 31, 1994 ............ (117,181) (0.02)
Year Ended December 31, 1995 ................. (2,342,515) (0.38)
Six Months Ended June 30, 1995 ............... 82,658 0.01
Six Months Ended June 30, 1996 ............... (2,620,935) (0.43)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 900 23,380
<SECURITIES> 0 0
<RECEIVABLES> 2,524,844 7,849,306
<ALLOWANCES> 10,355 78,833
<INVENTORY> 5,473,692 6,448,505
<CURRENT-ASSETS> 9,219,652 16,328,366
<PP&E> 2,575,550 3,147,626
<DEPRECIATION> 674,947 982,000
<TOTAL-ASSETS> 11,266,234 21,458,367
<CURRENT-LIABILITIES> 12,092,036 21,340,640
<BONDS> 0 0
0 0
0 0
<COMMON> 5,788,070 9,302,250
<OTHER-SE> (12,991,684) (15,462,619)
<TOTAL-LIABILITY-AND-EQUITY> 11,266,234 21,458,367
<SALES> 17,137,902 17,626,816
<TOTAL-REVENUES> 17,617,902 17,920,425
<CGS> 6,526,804 7,386,185
<TOTAL-COSTS> 10,281,458 11,994,338
<OTHER-EXPENSES> 3,206,455 1,160,837
<LOSS-PROVISION> 1,597,051 0
<INTEREST-EXPENSE> 1,042,523 1,161,119
<INCOME-PRETAX> (2,396,815) (2,620,935)
<INCOME-TAX> (100,000) 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,296,815) (2,620,935)
<EPS-PRIMARY> (0.38) (0.43)
<EPS-DILUTED> (0.38) (0.43)
</TABLE>