<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission file number 0-21335
GARGOYLES, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1247269
(State of Incorporation) (I.R.S. Employer Identification Number)
5866 SOUTH 194TH STREET
KENT, WASHINGTON 98032
(253) 872-6100
(Address and telephone number of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of June 30, 1997 there were 7,428,215 outstanding shares of the registrant's
common stock, no par value, which is the only class of common or voting stock of
the registrant.
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<PAGE> 2
GARGOYLES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE(S)
PART 1 - FINANCIAL INFORMATION
<S> <C>
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED BALANCE SHEETS..................................................... 1
CONSOLIDATED STATEMENTS OF OPERATIONS........................................... 2
CONSOLIDATED STATEMENTS OF CASH FLOWS........................................... 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...................................... 4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................... 7
PART II - OTHER INFORMATION
ITEM 3: LEGAL PROCEEDINGS................................................................. 12
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................... 13
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.................................................. 13
</TABLE>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GARGOYLES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 390,432 $ 4,382,048
Trade receivables, less allowances for doubtful
accounts of $359,105 and $172,600 19,464,173 8,897,879
Inventories 14,486,420 5,881,884
Trade credits 305,900 624,295
Other current assets and prepaid expenses 5,754,505 1,542,802
------------ ------------
Total current assets 40,401,430 21,328,908
Property and equipment, net 3,752,052 2,811,935
Intangibles, net 20,103,499 2,961,110
Other assets 447,709 160,262
============ ============
Total assets $ 64,704,690 $ 27,262,215
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,841,717 $ 3,380,895
Accrued expenses and other current liabilities 5,581,870 2,347,738
Current maturities of long-term debt 3,480,000 --
------------ ------------
Total current liabilities 17,903,587 5,728,633
------------ ------------
Long-term debt 23,737,606 --
------------ ------------
Deferred license income 180,000 360,000
------------ ------------
Minority interest 235,070 270,198
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, authorized shares --
10,000,000, none issued -- --
Common stock, no par value, authorized shares --
40,000,000, issued and outstanding --
7,428,215 and 7,419,008 25,678,711 25,643,576
Retained earnings (deficit) (3,030,284) (4,740,192)
------------ ------------
Total shareholders' equity 22,648,427 20,903,384
------------ ------------
Total liabilities and shareholders' equity $ 64,704,690 $ 27,262,215
============ ============
</TABLE>
See accompanying notes.
1
<PAGE> 4
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 16,334,074 $ 10,632,523 $ 24,532,340 $ 17,626,816
Cost of sales 6,008,470 4,520,790 9,090,467 7,386,185
------------ ------------ ------------ ------------
Gross profit 10,325,604 6,111,733 15,441,873 10,240,631
License income 221,736 132,663 331,736 293,609
------------ ------------ ------------ ------------
10,547,340 6,244,396 15,773,609 10,534,240
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 5,396,833 2,617,767 8,186,038 4,985,350
General and administrative 1,600,820 1,108,618 2,757,821 2,077,552
Shipping and warehousing 1,045,387 792,181 1,454,417 1,070,638
Research and development 398,865 197,602 764,156 332,658
Stock compensation -- 3,503,640 -- 3,528,140
------------ ------------ ------------ ------------
Total operating expenses 8,441,905 8,219,808 13,162,432 11,994,338
------------ ------------ ------------ ------------
Income (loss) from operations 2,105,435 (1,975,412) 2,611,177 (1,460,098)
------------ ------------ ------------ ------------
Other income (expense):
Interest, net (500,060) (631,747) (473,269) (1,161,119)
Other -- 2,148 -- 282
------------ ------------ ------------ ------------
Total other income (expense) (500,060) (629,599) (473,269) (1,160,837)
------------ ------------ ------------ ------------
Income (loss) before income taxes 1,605,375 (2,605,011) 2,137,908 (2,620,935)
Income tax provision 321,000 -- 428,000 --
------------ ------------ ------------ ------------
Net income (loss) $ 1,284,375 ($ 2,605,011) $ 1,709,908 ($ 2,620,935)
============ ============ ============ ============
Net income (loss) per share $ 0.17 ($ 0.46) $ 0.22 ($ 0.46)
============ ============ ============ ============
Weighted average common
shares 7,689,283 5,712,078 7,686,083 5,710,896
============ ============ ============ ============
</TABLE>
See accompanying notes.
2
<PAGE> 5
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,709,908 ($ 2,620,935)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation 466,080 208,306
Amortization 195,158 57,346
Deferred license income (180,000) (90,000)
Minority interest (35,128) -
Stock compensation - 3,528,140
Changes in assets and liabilities net of effects from purchase of Sungold,
Private Eyes and Hobie:
Accounts receivable (7,311,915) (4,961,364)
Inventories (5,541,620) 123,531
Other current assets and other assets (3,501,258) (773,193)
Accounts payable, accrued expenses and other
current liabilities 3,803,933 1,871,189
------------ ------------
Net cash used in operating activities (10,394,842) (2,656,980)
------------ ------------
INVESTING ACTIVITIES
Acquisition of property and equipment (1,163,376) (398,450)
Purchase of Sungold (11,771,497) -
Purchase of Private Eyes (7,914,642) -
Purchase of Hobie - (3,974,900)
------------ ------------
Net cash used in investing activities (20,849,515) (4,373,350)
------------ ------------
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt 14,620,000 5,260,000
Principal payments on long-term debt (60,833) (386,332)
Net proceeds under revolving line of credit 12,658,439 2,123,142
Proceeds from stock issuance 35,135 -
Proceeds from warrant issuance - 56,000
------------ ------------
Net cash provided by financing activities 27,252,741 7,052,810
------------ ------------
Net increase (decrease) in cash and cash equivalents (3,991,616) 22,480
Cash and cash equivalents, beginning of period 4,382,048 900
------------ ------------
Cash and cash equivalents, end of period $ 390,432 $ 23,380
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 6
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Gargoyles, Inc.
and its subsidiaries ("Gargoyles" or the "Company") are unaudited and include,
in the opinion of management, all normal recurring adjustments necessary to
present fairly their consolidated financial position at June 30, 1997 and the
related consolidated results of operations and cash flows for the periods
presented. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. These condensed consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and the related notes thereto included in the
Company's Form 10-K filed with the Securities and Exchange Commission on March
31, 1997.
The Company's net sales are subject to seasonal variations.
Accordingly, the results of operations for the periods ended June 30, 1997 are
not necessarily indicative of the results that may be expected for the entire
year.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
June 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
Raw materials........................................................ $ 6,148,561 $ 4,503,054
Finished goods ....................................................... 8,337,859 1,378,830
----------- -----------
$14,486,420 $ 5,881,884
=========== ===========
</TABLE>
3. ACQUISITION OF SUNGOLD
On April 11, 1997, the Company purchased substantially all the assets
and assumed certain liabilities of Sungold Enterprises, LTD., a New York
corporation ("Sungold"). Sungold manufactured two principal lines of premium
sunglasses, Stussy EyeGear, a young men's fashion brand licensed to Sungold by
Stussy, Inc., a leading designer of streetwear apparel and accessories, and
Anarchy Eyewear, a cutting-edge brand popular with alternative sports
enthusiasts age 15 to 25.
The acquisition was accounted for using the purchase method of
accounting at the date of acquisition. Accordingly, the allocation of the
purchase price of $10,970,000 was based on the fair value of the assets acquired
and liabilities assumed. Costs in excess of the fair market value of assets
acquired and liabilities assumed are reflected as intangibles, the most
significant component of which is the Stussy license agreement, which is being
amortized over the remaining 15-year license term.
4
<PAGE> 7
Pro forma information, assuming the acquisition had occurred at the
beginning of the periods presented, is as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
----------- ------------
<S> <C> <C>
Sales..........................................................$28,793,527 $ 26,479,433
Gross profit................................................... 17,808,811 15,761,391
Net income (loss) ............................................. 1,854,271 (2,238,638)
Net income (loss) per share ...................................$ .24 $ (.39)
</TABLE>
4. ACQUISITION OF PRIVATE EYES
On May 14, 1997, the Company purchased substantially all the assets
and assumed certain liabilities of The Private Eyes Sunglass Corporation, a
Massachusetts corporation ("Private Eyes"). Private Eyes was the licensee for
Ellen Tracy eyewear which features a collection of high-quality, high-fashion
women's sunglasses, readers, optical frames and accessories in a variety of
designs ranging from traditional to fashion-forward. Private Eyes is also the
North American distributor for Emmanuelle Khanh Paris Eyewear and a manufacturer
of its own high-quality line of prescription frames and eyewear accessories.
The acquisition was accounted for using the purchase method of
accounting at the date of acquisition. Accordingly, the allocation of the
purchase price of $6,500,000 was based on the fair value of the assets acquired
and liabilities assumed. Costs in excess of the fair market value of assets
acquired and liabilities assumed are reflected as intangibles, the most
significant component of which is the Ellen Tracy license agreement, which is
being amortized over the remaining 15-year license term.
Pro forma information, assuming the acquisition had occurred at the
beginning of the periods presented, and reflecting the pro forma effect of the
Sungold acquisition, is as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Sales .........................................................$ 32,931,592 $ 31,288,896
Gross profit................................................... 20,095,356 17,890,997
Net income (loss) ............................................. 1,830,539 (2,415,131)
Net income (loss) per share ...................................$ .24 $ (.42)
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
In January 1997, the Company entered into a three-year agreement with
International Speedway Corporation to become the title sponsor of a NASCAR Busch
Series race at Daytona, Florida, the Gargoyles 300. In a related agreement with
CBS Television Network, the Company entered into three-year agreement for
network broadcast coverage of the Gargoyles 300 race. Since that time, the
Company has terminated the agreements. Termination fees associated with these
agreements were $100,000 to each of International Speedway Corporation and CBS
Television Network.
5
<PAGE> 8
6. GOLDEN BEAR LICENSING AGREEMENT
Effective January 1, 1997, the Company entered into an agreement with
Golden Bear Golf, Inc. ("Golden Bear") to develop a line of specialty eyewear
for golfers. The Company and Golden Bear will jointly create and develop the
golfing eyewear. The Company will manufacture and distribute the product. The
agreement requires the Company, as licensee, to make quarterly royalty payments
based on a percentage of net sales, with certain annual minimum payments. The
agreement expires June 30, 2002, with an option to renew for an additional five
years.
7. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, Earnings Per Share,
which is required to be adopted on December 31, 1997. At that time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating basic (primary) earnings per share, the dilutive effect of stock
options will be excluded. The impact of Statement No. 128 on the calculation of
earnings per share is not material for the three month and six month periods
ended June 30, 1997 and 1996, respectively.
8. INCOME TAXES
The Company recorded no income tax benefit relating to the net loss
for the three month and six month periods ended June 30, 1996, since a future
benefit was not assured. In 1997, the difference from the federal statutory
income tax rate of 34% resulted from a decrease in the reserve against certain
tax assets.
9. SUBSEQUENT EVENTS
Credit Agreement
Effective July 15, 1997, the Company negotiated an amendment to its
credit agreement with a bank to (1) temporarily increase the revolving loan
commitment to $17 million, (2) modify the borrowing base and (3) modify certain
covenants. The Company may borrow up to $17 million for the period from July 15,
1997 through December 31, 1997. At all other times during the commitment period,
the revolving loan commitment may not exceed $15 million. During the commitment
period, the non-revolving equipment line of credit may not exceed $4 million.
The credit agreement is secured by the assets of the Company and its
subsidiaries. The credit agreement expires on June 30, 1999.
Lease agreement
In July 1997, the Company entered into a ten year lease agreement
with Northwest Real Estate Carver, L.L.C., a Washington limited liability
company, for office and warehouse space located in Lynnwood, Washington. The
Company expects to consolidate its Washington operations into this new facility
in February 1998.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to, those discussed in the section of the
Company's 1996 Annual Report on Form 10-K entitled "Business--Factors Affecting
Future Results and Regarding Forward-Looking Statements." Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that may
be made to reflect events or circumstances after the date hereof or to reflect
the occurrences of unanticipated events.
GENERAL
Gargoyles, Inc., under its Gargoyles Performance Eyewear brand,
designs, manufactures and markets a broad line of performance sunglasses that
combine innovative styling with its patented dual lens toric curve technology.
The Company also designs, manufactures and markets the Hobie sunglass line, a
leading line of polarized sunglasses under license from Hobie Designs, Inc. In
the first quarter 1997, the Company introduced the Timberland line, a line of
outdoor lifestyle-oriented sunglasses under license from the Timberland Company.
In addition, early in the second quarter of 1997, the Company completed its
acquisition of Sungold and Private Eyes. Sungold manufactures the Stussy and
Anarchy sunglass lines and Private Eyes manufactures the Ellen Tracy sunglass
line.
RESULTS OF OPERATIONS
The following table sets forth results of operations, as a percentage
of net sales, for the periods indicated:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
------------- -------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales ................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ............... 36.8 42.5 37.1 41.9
----- ----- ----- -----
Gross profit ................ 63.2 57.5 62.9 58.1
License income .............. 1.4 1.2 1.4 1.7
Operating expenses:
Sales and marketing ....... 33.0 24.6 33.4 28.3
General and administrative 9.8 10.4 11.2 11.8
Shipping and warehousing .. 6.4 7.5 6.0 6.0
Research and development .. 2.4 1.9 3.1 1.9
Stock compensation ........ -- 33.0 -- 20.0
----- ----- ----- -----
Total operating expenses 51.6 77.4 53.7 68.0
----- ----- ----- -----
Income (loss) from operations 13.0% (18.7%) 10.6% (8.2%)
===== ===== ===== =====
</TABLE>
7
<PAGE> 10
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Net sales. Net sales increased to $16.3 million for the quarter ended
June 30, 1997 from $10.6 million for the quarter ended June 30, 1996. This
increase was primarily the result of (i) increased sales to retail channels
other than sunglass specialty (ii) sales of Timberland eyewear, introduced in
March 1997 and (iii) sales from the Company's Sungold and Private Eyes
acquisition in the 1997 second quarter. Sales from these new brands totaled $6.3
million. These increases were partially offset by significantly lower sales to
Sunglass Hut, the Company's largest customer.
Gross profit. Gross profit increased to $10.3 million for the quarter
ended June 30, 1997 from $6.1 million for the quarter ended June 30, 1996. Gross
margin increased to 63.2% in the 1997 quarter from 57.5% in the 1996 quarter.
The increase in gross margin in 1997 was attributable, in part, to achieving
cost efficiencies in the production process and improvements in pricing due to
the growth and popularity of the Company's brands. In addition, the gross margin
improvement was attributable to reduced purchases by Sunglass Hut, which
receives higher volume discounts than the Company's other accounts. The
Company's sales to Sunglass Hut decreased to approximately 19% of the Company's
net sales in the 1997 quarter from 34% in the 1996 quarter.
License income. License income increased to $222,000 for the quarter
ended June 30, 1997 from $133,000 for the quarter ended June 30, 1996. This
increase was the result of an increase in the sales of licensed product.
Operating expenses. Operating expenses increased to $8.4 million for
the quarter ended June 30, 1997 from $8.2 million for the quarter ended June 30,
1996. As a percentage of net sales, operating expenses decreased to 51.6% in the
1997 quarter from 77.4% in the 1996 quarter. Sales and marketing expenses
increased $2.8 million in the 1997 quarter, primarily as a result of the Sungold
and Private Eyes acquisitions and increased marketing expenditures to support
the Company's channel diversification strategy. As a percentage of net sales,
sales and marketing expenses increased to 33.0% in the 1997 quarter from 24.6%
in the 1996 quarter. General and administrative expenses increased $492,000 in
the 1997 quarter, primarily as a result of the Sungold and Private Eyes
acquisitions. As a percentage of net sales, general and administrative expenses
decreased to 9.8% in the 1997 quarter from 10.4% in the 1996 quarter. Shipping
and warehousing expenses increased $253,000 in the 1997 quarter, primarily as a
result of increased sales. As a percentage of net sales, shipping and
warehousing expenses decreased to 6.4% in the 1997 quarter from 7.5% in the 1996
quarter. Research and development expenses increased $201,000 in the 1997
quarter, primarily as a result of the Sungold and Private Eyes acquisitions, the
expansion of the Gargoyles and Hobie lines in 1997 and new Timberland products.
As a percentage of net sales, research and development expenses were 2.4% and
1.9% in the second quarters of 1997 and 1996, respectively. Operating expenses
for the quarter ended June 30, 1996 included a nonrecurring, noncash stock
compensation charge associated with a non-qualified stock option granted to an
officer of the Company.
Income from operations. The Company's income from operations
increased to $2.1 million for the quarter ended June 30, 1997 from a loss of
($2.0) million for the quarter ended June 30, 1996. As a percentage of net
sales, income from operations increased to 13.0% in the second quarter of 1997
from a loss of (18.7%) in the second quarter of 1996. Adjusted for the
nonrecurring, noncash stock compensation charge in the second quarter of 1996,
income from operations for the second quarter 1996 would have been $1.5 million
or 14.3% of net sales.
8
<PAGE> 11
Interest expense. Interest expense decreased to $500,000 for the
quarter ended June 30, 1997 from $632,000 for the quarter ended June 30, 1996.
The decrease resulted from the Company's use of the net proceeds from its
initial public offering in October 1996 to pay off outstanding debt during the
fourth quarter of 1996. During the first half of 1997, the Company has borrowed
$20 million to finance the acquisitions of Sungold and Private Eyes, and has
borrowed $7 million to support its seasonal cash flow needs.
Income tax provision. The Company's income tax provision was $321,000
for the quarter ended June 30, 1997 compared to an income tax benefit of zero
for the quarter ended June 30, 1996. Differences from the federal statutory
income tax rate of 34% resulted in 1997 from decreases in the reserve against
certain tax assets and in 1996 from increases in the reserve against certain tax
assets.
Net income. As a result of the items discussed above, the Company's
net income was $1.3 million or $.17 per share for the quarter ended June 30,
1997 compared to a net loss of ($2.6) million or ($.46) per share for the
quarter ended June 30, 1996.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Net sales. Net sales increased to $24.5 million for the six months
ended June 30, 1997 from $17.6 million for the six months ended June 30, 1996.
This increase was primarily the result of (i) increased sales to retail channels
other than sunglass specialty, (ii) sales of Timberland eyewear, introduced in
March 1997 (iii) and sales from the Company's Sungold and Private Eyes
acquisitions in the 1997 second quarter. Sales from these new brands totaled
$6.3 million. These increases were partially offset by significantly lower sales
to Sunglass Hut, the Company's largest customer.
Gross profit. Gross profit increased to $15.4 million for the six
months ended June 30, 1997 from $10.2 million for the six months ended June 30,
1996. Gross margin increased to 62.9% in the 1997 period from 58.1% in the 1996
period. The increase in gross margin in 1997 was attributable, in part, to
improvements in pricing due to the growth and popularity of the Company's
brands. In addition, the gross margin improvement was attributable to reduced
purchases by Sunglass Hut, which receives higher volume discounts than the
Company's other accounts. The Company's sales to Sunglass Hut decreased to
approximately 19% of the Company's net sales in 1997 from 37% in 1996.
License income. License income increased to $332,000 for the six
months ended June 30, 1997 from $294,000 for the six months ended June 30, 1996.
This increase was the result of an increase in the licensed related product
sales.
Operating expenses. Operating expenses increased to $13.2 million for
the six months ended June 30, 1997 from $12.0 million for the six months ended
June 30, 1996. As a percentage of net sales, operating expenses decreased to
53.7% in the 1997 period from 68.0% in the 1996 period. Sales and marketing
expenses increased $3.2 million in the 1997 period, primarily as a result of the
acquisitions of Sungold and Private Eyes and increased marketing expenditures to
support the Company's channel diversification strategy. As a percentage of net
sales, sales and marketing expense increased to 33.4% in the 1997 period from
28.3% in the 1996 period. General and administrative expenses increased $680,000
in the 1997 period, primarily as a result of the acquisitions of Sungold and
Private Eyes. As a percentage of net sales, general and administrative expenses
decreased to 11.2% in the 1997 period from 11.8% in the 1996 period. Shipping
and warehousing expenses increased $384,000 in the 1997 period, primarily as a
result of increased sales. As a percentage of net sales, shipping and
warehousing expenses remained consistent at 6.0% in the 1997 and 1996 periods.
Research and development expenses increased $431,000 in the 1997 period,
primarily as a result of the
9
<PAGE> 12
acquisitions of Sungold and Private Eyes, expanding the Gargoyles and Hobie
lines and new Timberland products. As a percentage of net sales, research and
development expenses increased to 3.1% in the 1997 period from 1.9% in the 1996
period. Stock compensation expense for the period ended June 30, 1996 included a
nonrecurring, noncash stock compensation charge associated with a non-qualified
stock option granted to an officer of the Company.
Income from operations. The Company's income from operations
increased to $2.6 million for the six months ended June 30, 1997 from a loss of
($1.5) million for the six months ended June 30, 1996. As a percentage of net
sales, income from operations increased to 10.6% in the 1997 period from a loss
of (8.2%) in the 1996 period. Adjusted for the nonrecurring, noncash stock
compensation charge in the second quarter of 1996, income from operations would
have been $2.1 million or 11.8% of net sales.
Interest expense. Net interest expense decreased to $473,000 for the
six months ended June 30, 1997 from $1.2 million for the six months ended June
30, 1996. The decrease resulted from the Company's use of the net proceeds from
its initial public offering in October 1996 to pay off outstanding debt during
the fourth quarter of 1996. During the first half of 1997, the Company has
borrowed $20 million to finance the acquisitions of Sungold and Private Eyes,
and has borrowed $7 million to support its seasonal cash flow needs.
Income tax provision. The Company's income tax provision was $428,000
for the six months ended June 30, 1997 compared to an income tax benefit of zero
for the six months ended June 30, 1996. Differences from the federal statutory
income tax rate of 34% resulted in 1997 from decreases in the reserve against
certain tax assets and in 1996 from increases in the reserve against certain tax
assets.
Net income. As a result of the items discussed above, the Company's
net income was $1.7 million or $.22 per share for the six months ended June 30,
1997 compared to a net loss of ($2.6) million or ($.46) per share for the six
months ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has relied primarily on cash from
operations and borrowings to finance its operations. Cash used in the Company's
operating activities, primarily to fund the growth in accounts receivable and
inventories, totaled $10.4 million and $2.7 million for the six months ended
June 30, 1997 and 1996, respectively. Cash used in the Company's investing
activities, primarily to fund acquisitions and capital expenditures, totaled
$20.8 million and $4.4 million for the six months ended June 30, 1997 and 1996,
respectively. Cash provided by the Company's financing activities, primarily
proceeds from bank debt totaled $27.3 million and $7.1 million for the six
months ended June 30, 1997 and 1996, respectively. As of June 30, 1997, the
Company had working capital of $22.5 million.
Effective July 15, 1997, the Company negotiated an amendment to its
credit agreement with a bank to (1) temporarily increase the revolving loan
commitment to $17 million (2) modify the borrowing base and (3) modify certain
covenants. The Company may borrow up to $17 million for the period from July 15,
1997 through December 31, 1997. At all other times during the commitment period,
the revolving loan commitment may not exceed $15 million. During the commitment
period, the non-revolving equipment line of credit may not exceed $4 million.
The credit agreement, which expires on June 30, 1999, is secured by the assets
of the Company and its subsidiaries.
10
<PAGE> 13
The Company regularly evaluates acquisitions, investments and other
business opportunities and the cash expenditures related to such activities and
to unanticipated expenses which could create a need for additional financing.
There can be no assurance, however, that if required such financing would be
available on acceptable terms or at all.
The Company's capital expenditures traditionally have included
optical molds and production and office equipment. Expenditures for the six
months ended June 30, 1997, totaled $1.2 million. The Company expects total
capital expenditures for 1997 to approximate $1.8 million. See "Forward-Looking
Statements."
The Company presently believes that cash flow from operations and
available borrowings under its Credit Facility will be sufficient to meet its
operating needs and capital expenditures for the foreseeable future. See
"Forward-Looking Statements."
SEASONALITY
The following table sets forth certain unaudited quarterly data for
the periods show:
<TABLE>
<CAPTION>
1997 Quarter Ended 1996 Quarter Ended
(in millions) (in millions)
----------------- ----------------------------------
Mar. 31 June 30 Mar. 31 June 30 Sept.30 Dec. 31
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales .. $ 8.2 $ 16.3 $ 7.0 $ 10.6 $ 8.9 $ 6.6
Gross profit 5.1 10.3 4.1 6.1 5.2 4.0
</TABLE>
The Company's net sales generally have been higher in the period from
March to September, the period during which sunglass demands 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
first and fourth quarters, when net sales have historically been lower. The
Company also experiences higher accounts receivable during March through
September as a result of higher sales during this period. To date, this increase
in accounts receivable has not had a significant effect on the Company's
liquidity due to the Company's ability to borrow against these receivables under
its credit facilities. There can, however, be no assurance that this will
continue to be the case. See "Forward-Looking Statements." 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 "Forward-Looking Statements."
11
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
The Company was a party to a lawsuit filed on February 24, 1997, by
adidas America, Inc. ("Adidas") in the United States District Court for the
District of Oregon under Case Number CV-P7-239-JE, in which Adidas claimed
amounts in excess of $603,950 from the Company related to shipments of Adidas
product to Axcent Sports, Inc., a corporation which distributed Adidas bicycling
products from its headquarters in Boulder, Colorado. Defense of this lawsuit had
been tendered by the Company to Trillium Corporation ("Trillium") and the
Company's President, Douglas B. Hauff, pursuant to the terms of an indemnity
agreement. The lawsuit has been settled, and a settlement agreement was executed
by all parties to the litigation on July 14, 1997. Under the terms of the
settlement agreement, (i) Adidas released all claims against all defendants and
agreed to dismiss the lawsuit with prejudice, (ii) Trillium and Mr. Hauff,
jointly and severally, agreed to pay to Adidas the sum of $200,000, and (iii)
Adidas, the Company and defendant Conquest Sports, Inc. each assigned to
Trillium and Mr. Hauff their rights and claims against Axcent. The resolution of
this matter did not result in a charge to the Company in excess of amounts
reserved.
On July 31, 1997, Michele J. Maulden and David B. Maulden, wife and
husband and their marital community, filed a lawsuit against the Company in the
Superior Court of Washington, for King County under Case No. 97-2-18776-1 KNT.
Ms Maulden is a former employee of the Company. In the lawsuit, Plaintiffs
allege wrongful termination, intentional and negligent infliction of emotional
distress and discrimination under various Washington laws and seek unspecified
amounts in damages. The Company has retained counsel to investigate the
allegations and intends to defend vigorously the employee's claim. Although this
matter is in its early stages, the Company presently believes the employee's
claims are not supported by the facts and circumstances of the employee's
employment or termination. The Company believes that the ultimate resolution of
this matter will not have a material adverse effect on its results of operations
or financial position. See "Forward-Looking Statements."
On November 22, 1996, the Company filed an action in the United
States District Court for the District of Massachusetts, under Case No.
96-12344RLC, against AEARO Corp., a Delaware corporation, alleging infringement
of the Company's toric curve lens patents in connection with a line of
protective eyewear being manufactured and sold by AEARO. AEARO has denied the
Company's allegations. The case is expected to be tried in November, 1997. The
Company's protective eyewear is currently sold primarily in the health-care
market and has recently been introduced in the industrial market. The Company
understands that AEARO's protective eyewear products are currently being sold
primarily in the industrial markets and have recently been introduced in the
health-care market. AEARO's protective eyewear products are currently sold at
prices significantly lower than the prices for the Company's protective eyewear
products. Because of AEARO's lower prices and its established distribution
network, if the Company loses its lawsuit against AEARO, the Company may not be
able to compete with AEARO's protective eyewear products. Net sales attributable
to the Company's protective eyewear division for the six months ended June 30,
1997, were $710,872 or 2.9% of net sales for that period.
12
<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 22, 1997.
At the annual meeting and in accordance with the Company's Articles of
Incorporation, the Company established three classes of Directors and elected
six directors. The following summarizes all matters voted on at the meeting:
<TABLE>
<CAPTION>
Election of Directors For Abstain
--------- -------
<S> <C> <C>
Class 3 Directors: Elected to serve until
the 2000 annual meeting
Erik J. Anderson 7,071,122 16,625
Douglas B. Hauff 7,071,066 16,681
Class 2 Directors: Elected to serve until
the 1999 annual meeting
Paul Shipman 7,071,422 16,325
William D. Ruckelshaus 7,071,422 15,325
Class 1 Directors: Elected to serve until
the 1998 annual meeting
Walter F. Walker 7,071,422 16,325
Timothy C. Potts 7,071,122 16,625
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
(A) EXHIBITS
<S> <C>
Exhibit 10.1 Second Amended and Restated Credit Agreement dated
July 15, 1997, between U.S. Bank of Washington, National
Association, and Gargoyles, Inc.
Exhibit 10.2 Lease agreement dated July 22, 1997, between Northwest
Real Estate Carver, L.L.C., and Gargoyles, Inc.
Exhibit 11.1 Computation of Earnings Per Share
Exhibit 27.1 Financial Data Schedule
</TABLE>
(B) REPORTS ON FORM 8-K
Form 8-K with respect to the Company's acquisition of Sungold
Enterprises, LTD., was filed with the Securities and Exchange Commission on
April 28, 1997.
Form 8-K with respect to the Company's acquisition of The Private
Eyes Sunglass Corporation, was filed with the Securities and Exchange Commission
on May 28, 1997.
Form 8-K/A with respect to the Company's acquisition of Sungold
Enterprises, LTD., was filed with the Securities and Exchange Commission on June
26, 1997.
Form 8-K/A with respect to the Company's acquisition of The Private
Eyes Sunglass Corporation, was filed with the Securities and Exchange Commission
on July 28, 1997.
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Gargoyles, Inc.
(Registrant)
August 14, 1997 /s/ Steven R. Kingma
-------------------------------------
Steven R. Kingma
Vice-President, Chief Financial Officer
Secretary and Treasurer
14
<PAGE> 17
INDEX TO THE EXHIBITS
<TABLE>
EXHIBITS
- ------------
<S> <C>
Exhibit 10.1 Second Amended and Restated Credit Agreement dated July 15, 1997, between
U.S. Bank of Washington, National Association, and Gargoyles, Inc.
Exhibit 10.2 Lease agreement dated July 22, 1997, between Northwest Real Estate Carver,
L.L.C., and Gargoyles, Inc.
Exhibit 11.1 Computation of Earnings Per Share
Exhibit 27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDMENT TO FIRST AMENDED AND RESTATED
CREDIT AGREEMENT
This first amendment to first amended and restated credit agreement
("Amendment") is made and entered into as of July 15, 1997, by and among U. S.
BANK, a national banking association ("U. S. Bank"), and GARGOYLES, INC., a
Washington corporation ("Borrower").
R E C I T A L S:
A. On or about April 7, 1997, U. S. Bank and Borrower entered into that
certain first amended and restated credit agreement (together with all
amendments, supplements, exhibits, and modifications thereto, the "Credit
Agreement") whereby U. S. Bank agreed to extend certain credit facilities to
Borrower.
B. Borrower has requested U. S. Bank to (1) temporarily increase the
Revolving Loan commitment to $17,000,000, (2) modify the Borrowing Base, and (3)
modify the Senior Debt Ratio. The purpose of this Amendment is to set forth the
terms and conditions upon which U. S. Bank will grant Borrower's requests.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
set forth herein, the parties agree as follows:
ARTICLE I. AMENDMENT
The Credit Agreement, as well as all of the other Loan Documents, are
hereby amended as set forth herein. Except as specifically provided for herein,
all of the terms and conditions of the Credit Agreement and each of the other
Loan Documents shall remain in full force and effect throughout the terms of the
Loans, as well as any extensions or renewals thereof.
ARTICLE II. DEFINITIONS
As used herein, capitalized terms shall have the meanings given to them
in the Credit Agreement, except as otherwise defined herein, or as the context
otherwise requires. Section 1.1 of the Credit Agreement is hereby amended to
modify or add (as the case may be) the following definitions:
"Eligible Accounts Receivable" means the accounts receivable of
Borrower and the Subsidiaries excluding the following: (a) accounts receivable
that have been
<PAGE> 2
outstanding in excess of 90 days from the date of invoice, (b) all accounts
receivable from any single customer of Borrower or any of the Subsidiaries if 10
percent or more of such customer's accounts owed to Borrower or any of the
Subsidiaries are ineligible for any reason, (c) accounts receivable due from
officers, employees, or Affiliates of Borrower, (d) accounts receivable that are
partially or wholly subject to the right of setoff, (e) accounts receivable
resulting from COD sales, finance charges, and consignments, (f) accounts
receivable due from the federal government, (g) accounts receivable that
constitute any retainage, (h) accounts receivable that constitute dated billings
other than approved by U. S. Bank in writing, (i) accounts receivable in which
any Person other than U. S. Bank has a security interest, (j) all accounts
receivable from any single customer of Borrower or any of the Subsidiaries in
excess of 10 percent of the aggregate amount of Eligible Accounts Receivable,
except (i) as otherwise approved in writing by U. S. Bank, and (ii) the
limitation set forth in this clause (j) does not apply to accounts receivable
from Sunglass Hut International, and (k) all accounts receivable from Sunglass
Hut International in excess of the lesser of (i) $3,500,000, or (ii) an amount
equal to 35 percent of the aggregate amount of Eligible Accounts Receivable;
provided that such percentage may be reduced to not less than 10 percent by U.
S. Bank, upon not less than 60 days prior written notice from U. S. Bank to
Borrower. Notwithstanding the foregoing, "Eligible Accounts Receivable" shall
not include any accounts receivable unless and until U. S. Bank holds a first,
valid, binding, and perfected security interest in any such accounts receivable.
"Eligible Foreign Accounts Receivable" means the accounts receivable of
Borrower and the Subsidiaries due from Persons not residents of the United
States, excluding the following: (a) accounts receivable that have been
outstanding in excess of 90 days from the date of invoice, (b) all accounts
receivable from any single customer of Borrower or any of the Subsidiaries if 10
percent or more of such customer's accounts owed to Borrower or any of the
Subsidiaries are ineligible for any reason, (c) accounts receivable due from
officers, employees, or Affiliates of Borrower, (d) accounts receivable that are
partially or wholly subject to the right of setoff, (e) accounts receivable
resulting from COD sales, finance charges, and consignments, (f) accounts
receivable that constitute any retainage, (g) accounts receivable that
constitute dated billings other than approved by U. S. Bank in writing, (h)
accounts receivable in which any Person other than U. S. Bank has a security
interest, and (i) all accounts receivable from any single customer of Borrower
or any of the Subsidiaries in excess of 10 percent of the aggregate amount of
Eligible Accounts Receivable. Notwithstanding the foregoing, "Eligible Foreign
Accounts Receivable" shall not include any accounts receivable unless and until
U. S. Bank holds a first, valid, binding, and perfected security interest in any
such accounts
-2-
<PAGE> 3
receivable. There shall be no duplication between Eligible Foreign Accounts
Receivable and Eligible Accounts Receivable.
ARTICLE III. MODIFICATION OF REVOLVING LOAN
3.1 TEMPORARY INCREASE
Section 2.1 of the Credit Agreement is hereby deleted in its entirety
and replaced with the following:
2.1 LOAN COMMITMENT
Subject to and upon the terms and conditions set forth herein
and in reliance upon the representations, warranties, and covenants of
Borrower contained herein or made pursuant hereto, U. S. Bank will make
Fundings to Borrower from time to time during the period ending June
30, 1999 ("Commitment Period"), but such Fundings (together with any
outstanding Letters of Credit) shall not exceed, in the aggregate
principal amount at any one time outstanding, (a) $17,000,000 during
the period commencing July 15, 1997, and ending December 31, 1997, and
(b) $15,000,000 at all other times during the Commitment Period (the
"Revolving Loan"). Borrower may borrow, repay, and reborrow hereunder
either the full amount of the Revolving Loan or any lesser sum.
3.2 RENEWAL REVOLVING NOTE
Concurrently with the execution of this Amendment, Borrower shall
execute and deliver to U. S. Bank a renewal promissory note in the form attached
hereto as Exhibit A ("Renewal Revolving Note") which shall be in substitution
for, but not in payment of, the Revolving Note and any previous renewals
thereof, all of which shall be marked "renewed" and retained by U. S. Bank until
the Revolving Loan has been repaid in full and U. S. Bank's commitments under
the Credit Agreement are terminated.
3.3 MODIFICATION OF BORROWING BASE
Section 2.8(a) of the Credit Agreement is hereby deleted in its
entirety and replaced with the following:
(a) The outstanding balance of principal and interest on the
Revolving Loan (including outstanding Letters of Credit) shall at no
time exceed an amount equal to:
-3-
<PAGE> 4
(i) 80 percent of Eligible Accounts Receivable, plus
(ii) 65 percent of Eligible Foreign Accounts Receivable;
provided that the maximum advance based upon Eligible Foreign Accounts
Receivable is limited to $1,000,000, plus
(iii) 50 percent of Eligible Inventory; provided that the
maximum advance based upon Eligible Inventory is limited to $6,000,000
("Borrowing Base").
ARTICLE IV. MODIFICATION OF EQUIPMENT LINE
Section 4.1 of the Credit Agreement is hereby deleted in its entirety
and replaced with the following:
4.1 LOAN COMMITMENT
Subject to and upon the terms and conditions set forth herein
and in reliance upon the representations, warranties, and covenants of
Borrower contained herein or made pursuant hereto, U. S. Bank will make
available to Borrower a $4,000,000 nonrevolving equipment line of
credit during the Commitment Period (the "Equipment Line"). Each
individual Funding under the Equipment Line shall constitute a separate
loan ("Equipment Loan"). The aggregate principal amount of all
Equipment Loans shall not exceed $4,000,000.
ARTICLE V. SENIOR DEBT RATIO
5.1 MODIFICATION OF SENIOR DEBT RATIO
Effective as of June 30, 1997, Section 8.18 of the Credit Agreement is
hereby deleted in its entirety and replaced with the following:
8.18 SENIOR DEBT RATIO
Permit the Senior Debt Ratio to be greater than (a) 4.0:1.0 as
of June 30, 1997, for the trailing four quarters then ended, (b)
3.5:1.0 as of September 30, 1997, for the trailing four quarters then
ended, or (c) 2.5:1.0 as of the last day of any fiscal quarter of
Borrower thereafter for the trailing four quarters then ended.
-4-
<PAGE> 5
5.2 COVENANT FEE
Within 30 days after the end of Borrower's fiscal quarters ending June
30, 1997, and September 30, 1997, Borrower shall pay U. S. Bank a nonrefundable
fee in an amount equal to $100 for each full .01 that the Senior Debt Ratio
(calculated on a trailing four-quarter basis) exceeds 3.0:1.0 as of each such
date.
ARTICLE VI. CONDITIONS PRECEDENT
The modifications set forth in this Amendment shall not be effective
unless and until the following conditions have been fulfilled to U. S. Bank's
satisfaction:
(a) U. S. Bank shall have received this Amendment and the Renewal
Revolving Note duly executed and delivered by the parties thereto.
(b) Borrower shall have paid to U. S. Bank a nonrefundable fee for
the increase in the Revolving Loan in the amount of $5,000.
(c) There shall not exist any Default or Event of Default under
the Credit Agreement or any other Loan Document.
(d) All representations and warranties of Borrower contained in
the Credit Agreement or otherwise made in writing in connection therewith or
herewith shall be true and correct and in all material respects have the same
effect as though such representations and warranties had been made on and as of
the date of this Amendment.
(e) U. S. Bank shall have received a certified resolution of the
board of directors of each of the Borrower in the forms attached hereto as
Exhibit B.
ARTICLE VII. LOAN FEES
Sections 2.6 and 3.6 of the Credit Agreement are hereby amended to
reflect that the $200,000 in unpaid commitment fees earned by U. S. Bank in
connection with the Credit Agreement shall be due and payable on or before
December 31, 1997, as opposed to on or before September 30, 1997.
-5-
<PAGE> 6
ARTICLE VIII. GENERAL PROVISIONS
8.1 REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to U. S. Bank that as of the
date of this Amendment, there exists no Default or Event of Default. All
representations and warranties of Borrower contained in the Credit Agreement and
the Loan Documents, or otherwise made in writing in connection therewith, are
true and correct as of the date of this Amendment. Borrower acknowledges and
agrees that all of Borrower's Indebtedness to U. S. Bank is payable without
offset, defense, or counterclaim.
8.2 SECURITY
All Loan Documents evidencing U. S. Bank's security interest in the
Collateral shall remain in full force and effect, and shall continue to secure,
without change in priority, the payment and performance of the Loans, as amended
herein, and any other Indebtedness owing from Borrower to U. S. Bank.
8.3 GUARANTIES
The parties hereto agree that the Guaranties shall remain in full force
and effect and continue to guarantee the repayment of the Loans to U. S. Bank as
set forth in such Guaranties.
8.4 PAYMENT OF EXPENSES
Borrower shall pay on demand all costs and expenses of U. S. Bank
incurred in connection with the preparation, negotiation, execution, and
delivery of this Amendment, including, without limitation, attorneys' fees
incurred by U. S. Bank.
8.5 SURVIVAL OF CREDIT AGREEMENT
The terms and conditions of the Credit Agreement and each of the other
Loan Documents shall survive until all of Borrower's obligations under the
Credit Agreement have been satisfied in full.
8.6 COUNTERPARTS
This Amendment may be executed in one or more counterparts, each of
which shall constitute an original agreement, but all of which together shall
constitute one and the same agreement.
-6-
<PAGE> 7
8.7 STATUTORY NOTICE
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.
IN WITNESS WHEREOF, U. S. Bank and Borrower have caused this Amendment
to be duly executed by their respective duly authorized signatories as of the
date first above written.
GARGOYLES, INC., a Washington corporation
By /s/ Stephen R. Kingma
---------------------------------------
Title VP-CFO
------------------------------------
By /s/ Travis Worth
---------------------------------------
Title SVP-COO
------------------------------------
U.S. BANK
By /s/ Gerald L. Sorensen
--------------------------------------
Gerald L. Sorensen,
Senior Vice President
-7-
<PAGE> 8
Each of the undersigned Guarantors hereby (i) reaffirms its Guaranty
and its Security Agreement, (ii) agrees that its Guaranty guarantees the
repayment of the Loans, as amended herein, (iii) agrees that its respective
Security Agreement and related collateral documents secures the payment and
performance of the Secured Obligations described in such Security Agreement, and
(iv) acknowledges that its obligations pursuant to its Guaranty and Security
Agreement are enforceable without defense, offset, or counterclaim.
H.S.C., a Washington corporation
By /s/ Douglas B. Hauff
---------------------------------------
Title President and CEO
------------------------------------
SUNGOLD EYEWEAR, INC.,
a Washington corporation
By /s/ Douglas B. Hauff
---------------------------------------
Title Chief Executive Officer
------------------------------------
PRIVATE EYES SUNGLASS CORPORATION,
a Washington corporation
By /s/ Douglas B. Hauff
---------------------------------------
Title Chief Executive Officer
------------------------------------
-8-
<PAGE> 9
EXHIBIT A
RENEWAL REVOLVING NOTE
$17,000,000 July 15, 1997
For value received, the undersigned, GARGOYLES, INC. ("Borrower"),
promises to pay to the order of U. S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
("U. S. Bank"), at its principal place of business, 1420 Fifth Avenue, Seattle,
Washington 98101, or such other place or places as, the holder hereof may
designate in writing, the principal sum of Seventeen Million Dollars
($17,000,000) or so much thereof as advanced by U. S. Bank in lawful,
immediately available money of the United States of America, in accordance with
the terms and conditions of that certain first amended and restated credit
agreement dated as April 7, 1997, as amended, including that certain first
amendment to first amended and restated credit agreement of even date herewith
(the "First Amendment"), by and between Borrower and U. S. Bank (together with
the First Amendment, all supplements, exhibits, amendments and modifications
thereto, the "Credit Agreement"). Borrower also promises to pay interest on the
unpaid principal balance hereof, commencing as of the first date of an advance
hereunder, in like money in accordance with the terms and conditions, and at the
rate or rates provided for in the Credit Agreement. All principal, interest, and
other charges are due and payable in full on June 30, 1999.
Borrower and all endorsers, sureties, and guarantors hereof jointly and
severally waive presentment for payment, demand, notice of nonpayment, notice of
protest, and protest of this Note, and all other notices in connection with the
delivery, acceptance, performance, default, dishonor, or enforcement of the
payment of this Note except such notices as are specifically required by this
Note or by the Credit Agreement, and they agree that the liability of each of
them shall be unconditional without regard to the liability of any other party
and shall not be in any manner affected by any indulgence, extension of time,
renewal, waiver, or modification granted or consented to by U. S. Bank. Borrower
and all endorsers, sureties, and guarantors hereof (1) consent to any and all
extensions of time, renewals, waivers, or modifications that may be granted by
U. S. Bank with respect to the payment or other provisions of this Note and the
Credit Agreement; (2) consent to the release of any property now or hereafter
securing this Note with or without substitution; and
<PAGE> 10
(3) agree that additional makers, endorsers, guarantors, or sureties may become
parties hereto without notice to them and without affecting their liability
hereunder.
This Note is the Renewal Revolving Note referred to in the First
Amendment and as such is entitled to all of the benefits and obligations
specified in the Credit Agreement, including but not limited to any Collateral
and any conditions to making advances hereunder. Terms defined in the Credit
Agreement are used herein with the same meanings. Reference is made to the
Credit Agreement for provisions for the repayment of this Note and the
acceleration of the maturity hereof.
GARGOYLES, INC., a Washington corporation
By:
---------------------------------------
Title:
------------------------------------
<PAGE> 1
EXHIBIT 10.2
SINGLE TENANT INDUSTRIAL LEASE
THIS LEASE AGREEMENT made this 18th day of July, 1997, by and BETWEEN NORTHWEST
REAL ESTATE-CARVER, L.L.C., a Washington limited liability company (the
"Lessor") and GARGOYLES, INC., a Washington Corporation (the "Lessee").
1. PREMISES. Lessor does hereby lease to Lessee those certain premises, to
wit: The building containing approximately 73,936 square feet of space,
which will be increased in size to no less than 95,000 square feet,
located at 20121 48th Avenue West in Lynnwood Washington, as outlined on
Exhibit A attached hereto (hereinafter called "Premises"). See Legal
Description attached as Exhibit B.
2. TERM. This Lease shall be for a term of ten years commencing January 1,
1998 (the "Commencement Date") and terminating December 31, 2007.
Notwithstanding the foregoing, Lessee agrees to diligently pursue the
application and receipt of all permits and approvals of whatever kind
from all authorities as may be required to construct Lessee's Work (as
such term is defined in Exhibit C Hereto) in the configuration as shown
on Exhibit A hereto. If, after such diligent pursuit Lessee is unable to
obtain such permits and approvals this Lease shall automatically
terminate and be of no further force or effect.
3. RENT. Lessee covenants and agrees to pay Lessor at 1001 Fourth Avenue,
Suite 4700, Seattle, WA 98154, or to such other party or at such other
place as Lessor may hereafter designate, monthly rent in advance without
offset or deduction, on or before the first (1st) day of each month of
the Lease term in the amounts as follows: $58,333.33.
The base monthly rent will be adjusted during the term as follows:
On every third anniversary (1/1/01, 1/1/04, 1/1/07) during the Term of
this Lease (each such date is herein called a "Rental Adjustment Date"),
the base monthly rental shall be adjusted to equal the product obtained
by multiplying the base monthly rent immediately preceding the Rental
Adjustment Date by a fraction, the numerator of which is the Consumer
Price Index for All Urban Consumers - All Items (Reference Base
1982-84=100) published for Seattle-Tacoma, Washington by the United
States Department of Labor, Bureau of Labor Statistics ("CPI") for the
latest period for which a CPI has been published prior to the applicable
Rental Adjustment Date, and the denominator of which is the CPI for the
last published index three years preceding the numerator CPI index. In
no event will the application of the rental adjustment formula result in
a rent reduction. In the event the CPI is discontinued for
Seattle-Tacoma, Washington, such index for the entire United States
(currently the All Cities Average) shall be used for the purposes of the
preceding calculation, and in the event no such index is then published,
its successor index shall be used for such purposes. If there is no such
successor index, Landlord shall select for the purposes of such
calculation such other available index or other data as shall reasonably
reflect the cost-of-living changes in Seattle, Washington during the
appropriate period.
4. SECURITY DEPOSIT. Lessee has deposited with Lessor on the date hereof
$58,333.33. Said sum shall be held by Lessor as security for the
faithful performance by Lessee of all the terms, covenants and
conditions of this Lease to be kept and performed by Lessee during the
entire Term hereof. If Lessee defaults with respect to any provision of
this Lease, including, but not limited to, the provisions relating to
the payment of Minimum Rent, Adjustments or other charges or sums due
under this Lease, Lessor may (but shall not be required to) use, apply
or retain all or any part of the security deposit for the payment of any
Minimum Rent, Adjustments or other charges or sums due under this Lease
or any sum in default, or for the payment of any amount which
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Lessor may spend or become obligated to spend by reason of Lessee's
default, or to compensate Lessor for any other loss, damage, cost or
expense (including attorneys' fees) which Lessor may suffer or incur by
reason of Lessee's default. If any portion of said security deposit is
so used or applied, Lessee shall, within five (5) days after written
demand therefor, deposit a certified or cashier's check with Lessor in
an amount sufficient to restore the security deposit to its original
amount and Lessee's failure to do so shall be a default under this
Lease. Lessor shall not be required to keep the security deposit
separate from its general funds and Lessee shall not be entitled to
interest on such deposit. If Lessee shall fully and faithfully perform
every provision of this Lease to be performed by it, the security
deposit or any balance thereof after deduction hereunder by Lessor shall
be returned to Lessee (or, at Lessor's option, to the last assignee of
Lessee's interest hereunder) within thirty (30) days following
expiration of the Lease Term; provided, that in the event this Lease
shall be terminated upon the default of the Lessee, the security deposit
shall be applied against the damages suffered by Lessor by reason of the
Lessee's default and the balance shall be returned to Lessee. In the
event of termination of Lessor's interest in this Lease, Lessor shall
transfer said deposit to Lessor's successor in interest. On each Rental
Adjustment Date, Lessee will deposit with Lessor an amount equal to the
incremental monthly increase in rent so that the amount of the Security
Deposit will be equal to one month of base rent.
5. USE. Lessee shall use the Premises for the purposes of light
manufacturing, assembly, storage, distribution, and related office uses
and for no other purposes, without prior written consent of Lessor, and
shall comply with all governmental laws, ordinances, regulations, orders
and directives and insurance requirements applicable to Lessee's use of
the Premises.
6. RULES AND REGULATIONS. Lessee agrees to comply with any Rules and
Regulations attached hereto, as well as such other reasonable rules and
regulations as may from time to time be adopted by Lessor for the
management, good order and safety of the building. Lessee shall be
responsible for the compliance with such rules and regulations by its
employees, agents and invitees. Lessor's failure to enforce any of such
rules and regulations against Lessee shall not be deemed to be a waiver
of same.
7. MAINTENANCE. Lessee agrees by taking possession that the Premises are in
tenantable and good condition. Lessee has leased the Premises in as-is
condition (except that Lessor will remove the existing VAT which
contains asbestos) and prior to occupancy plans significant
renovation/expansion. Lessee shall at its expense and at all times keep,
maintain, repair and replace the Premises, including but not limited to
storefronts, exterior doors and windows, roof, exterior walls,
foundations, landscaping and mechanical, electrical, sprinkler and other
utility systems, together with connections to utility distribution
systems, in good condition, repair and order and in accordance with
applicable laws, ordinances, rules, regulations and requirements of
government authorities and insurance rating bureaus. Lessee agrees to
maintain a preventative maintenance contract providing for the regular
inspection and maintenance of the heating and air conditioning systems
with a licensed mechanical contractor and containing terms and
specifications acceptable to Lessor. Lessee shall further keep the
Premises and adjoining areas in a neat, clean, safe and sanitary
condition; protect water, drain, gas and other pipes to prevent freezing
or clogging and repair all leaks and damage caused thereby; replace all
glass and panels in windows and doors of the Premises which become
cracked, broken or damaged; and remove ice and snow from entries and
areas immediately adjacent to the Premises.
8. UTILITIES, REAL ESTATE TAXES AND FEES. Lessee agrees to pay promptly
when due all charges for real estate taxes and assessments, light, heat,
water, sewer, garbage, fire protection and other utilities and services
to the Premises, and all license fees and other governmental charges
levied on Lessee's property and the operation of Lessee's business on
the Premises. Lessor shall not be liable for any injury or damages
suffered as a result of the interruption of utilities or services by
fire, or other casualty, strike, riot, vandalism, the making of
necessary repairs or improvements, or other causes beyond Lessor's
control. Lessee shall provide Lessor with
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evidence of payment of those costs and expenses referred to in this
paragraph prior to any such expense becoming delinquent.
9. OPERATING EXPENSES. Lessee shall pay as additional rent all expenses
incurred by Lessor for operation and management of the Project during
the term hereof, including but not limited to:
a) The costs of insurance provided for under Paragraph 16 C below which
amount will be paid to Lessor as provided below in this paragraph 9.
c) A Management fee equal to one and one half percent (1 1/2%) of Lessee's
monthly base rent which amount will be payable monthly
Upon receipt of its invoice from its insurance carrier or within
thirty (30) days of the policy renewal date, Lessor will deliver an
invoice to Lessee for the insurance premium required to be maintained by
Lessor hereunder. Such amount shall be paid to Lessor by Lessee prior to
the later of fifteen (15) days after the date of Lessor's statement or
ten (10) days prior to the policy renewal date. Lessor's records showing
expenditures made for expenses incurred directly for the Premises shall
be available for Lessee's inspection at any reasonable time
10. LESSOR'S RESERVATIONS. Lessor reserves the right without liability to
Lessee: (a) to inspect the Premises, to show them to prospective
Lessees, and if they are vacated, to prepare them for re-occupancy; (b)
to retain at all times and to use in appropriate instances keys to doors
within and into the Premises; (c) to make any repairs, alterations,
additions or improvements, whether structural or otherwise, in or about
the building which are the responsibility of Lessor under this Lease, if
any, and for such purposes to enter upon the Premises and during the
continuance of any work, to interrupt or temporarily suspend building
services and facilities, all without affecting any of Lessee's
obligations hereunder, so long as the Premises are reasonably
accessible; and (d) generally to perform any act relating to the safety,
protection and preservation of the Premises or building.
11. POSSESSION. If Lessor does not deliver possession of the Premises at the
Commencement Date of the term of this Lease, Lessee may give Lessor
written notice of its intention to cancel this Lease if possession is
not delivered within ninety (90) days after receipt of such notice by
Lessor. Lessor shall not be liable for any damages caused by failure to
deliver possession of the Premises and Lessee shall not be liable for
any rent until such time as Lessor delivers possession. A delay of
possession shall not extend the termination date. If Lessor offers
possession of the Premises or any portion thereof prior to the
Commencement Date of the term of this Lease, and if Lessee accepts such
early possession, then both parties shall be bound by all of the
covenants and terms contained herein during such period of early
possession including the payment of rent which shall be pro-rated
accordingly and for the number of days of such early possession.
12. ASSIGNMENT AND SUBLETTING. Lessee shall not either voluntarily or by
operation of law assign, transfer, convey or encumber this Lease or any
interest under it, or sublet to occupy or use the Premises without
Lessor's prior written consent which consent shall not be unreasonably
withheld, conditioned or delayed. Lessor reserves the right to recapture
the Premises or applicable portion thereof in lieu of giving its consent
by notice given to Lessee within twenty (20) days after receipt of
Lessee's written request for assignment or subletting. Such recapture
shall terminate this Lease as to the applicable space effective on the
prospective date of assignment or subletting, which shall be the last
day of a calendar month and not earlier than sixty (60) days after
receipt of Lessee's request hereunder. In the event that Lessor shall
not elect to recapture and shall thereafter give its consent, Lessee
shall pay Lessor a reasonable fee, not to exceed One Thousand
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And No/100 Dollars ($1,000.00) to reimburse Lessor for processing costs
incurred in connection with such consent. Lessor's consent shall not
release or discharge Lessee from future liability under this Lease and
shall not waive Lessor's right to consent to any future assignment or
sublease. Any assignment or subletting without Lessor's consent shall be
void and shall, at Lessor's option, constitute a default under this
Lease. A transfer by the present majority shareholders of ownership or
control of a majority of the voting stock of a corporate Lessee shall be
deemed an assignment.
13. ALTERATIONS. After obtaining the prior written consent of Lessor which
consent shall not be unreasonably withheld, conditioned or delayed,
Lessee may make non structural alterations, additions and improvements
in said Premises at its sole cost and expense. Lessee agrees to save
Lessor harmless from any damage, loss, or expense arising therefrom and
to comply with all laws, ordinances, rules and regulations. Upon
termination of this Lease, all alterations, additions and improvements
made in, to or on the Premises (including without limitation all
electrical, lighting, plumbing, heating, air conditioning, and
communications equipment and systems, doors, windows, partitions,
drapery, carpeting, shelving, counters, and physically attached fixtures
unless excluded by written agreement annexed hereto), shall remain upon
and be surrendered as a part of the Premises [For additional terms
related to the initial improvements to the Premises see the Work Letter
attached as Exhibit C.]
14. LIENS. Lessee shall keep the Premises free from any liens arising out of
any work performed, materials furnished, equipment supplied, or
obligations incurred by or on behalf of Lessee. No work performed,
material furnished, equipment supplied or obligations incurred by or on
behalf of Lessee shall be deemed to be for the immediate use and benefit
of Lessor so that no mechanic's lien or other lien shall be allowed
against Lessor's estate in the premises. Lessee shall provide, at
Lessee's own cost, a waiver of lien signed by any party (including the
Lessee) who commences to perform work, furnish materials, or supply
equipment to the Premises. Lessor does not authorize or consent to the
performance of any work, furnishing of material or supply of equipment
incurred by or on behalf of Lessee prior to Lessee providing Lessor with
the signed waiver of lien referred to above. Lessor may require, at
Lessee's sole cost and expense, a lien release and completion bond in an
amount equal to either the actual contract price or one and one-half
times the estimated cost of any improvements, additions or alterations
in the Premises which Lessee desires to make, to insure Lessor against
any liability for lien and to insure completion of the work.
15. SIGNS. Prior to termination of this Lease, Lessee will remove all signs
placed by it upon the Premises, and will repair any damages caused by
such removal.
16. INSURANCE.
A. Lessee shall pay for and maintain, during the entire Lease Term, the
following policies of insurance:
(i) Commercial general liability insurance, including products,
completed operations coverage and auto liability insurance covering
Lessee's operations and the Premises including but not limited to
coverage for personal injuries with limits of not less than $2,000,000
combined single limit for death, personal injury, and property damage,
per occurrence, including Lessor as an additional insured. Such policies
shall be endorsed to provide contractual liability insurance covering
all liability assumed by Lessee under the provisions of this Lease
subject to the terms, conditions and endorsements of the policy for such
insurance and a certificate of insurance and a copy of the Additional
Insured Endorsement will be delivered to Lessor prior to commencement of
the Term.
(ii) Special cause of loss or "all risk" perils property
insurance upon Lessee's property, including but not limited to Fire and
Extended Coverage, Vandalism and Malicious Mischief, in
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the amount of one hundred percent (100%) full replacement cost,
including Lessor as an additional insured, as its interests may appear,
with a loss payable clause in favor of Lessor to the extent of Lessor's
interest in property damaged, except to the extent proceeds are required
to be paid to holders of mortgages or trust deeds.
B. Each policy provided by Lessee shall expressly provide that it shall not
be subject to cancellation or material change without at least thirty
(30) days prior written notice to the Lessor. Lessee shall furnish
Lessor, prior to commencement of the Term, with insurance certificates
and, upon request, copies of such policies required to be maintained
hereunder.
C. Lessor shall pay for and maintain special extended coverage and
earthquake property insurance covering the building during the entire
Lease term. Such insurance shall be in the amount of one hundred percent
(100%) full replacement value of the Building and improvements.
17. INDEMNITY AGAINST LIABILITY FOR LOSS OR DAMAGE BY LESSEE.
A. Lessee assumes all liability for and shall indemnify, hold harmless
and defend Lessor from and against all loss, damage or expense which the
Lessor may sustain or incur, and against any and all claims, demands,
suits and actions whatsoever, including expense of investigation and
litigation, on account of injury to or death of persons, including
without limitation employees of Lessor, employees of Lessee or its
affiliated companies or on account of damage to or destruction of
property, including without limitation property owned by and property in
the care, custody or control of Lessor during the Term, due to or
arising in any manner from:
(i) The acts or negligence of Lessee or any contractor, subcontractor,
or agent of Lessee or their respective employees;
(ii) The condition, use or operation of the Premises and/or materials or
substances used by Lessee or any of its contractors, subcontractors or
agents of Lessee or by their respective employees, regardless of whether
or not furnished by Lessor under this Lease or otherwise;
(iii) Any damage or injury to persons or property arising out of
Lessee's breach or this Lease, including, but not limited to,
obligations of Lessee under Section 7, Maintenance.
B. Lessor shall have no liability to Lessee as a result of loss or
damage to Lessee's property or for death or bodily injury caused by the
acts or omissions by third parties (including criminal acts).
C. It is mutually understood and agreed that the assumption of
liabilities and indemnification provided for in this Section shall
survive any termination of this Lease.
18. DAMAGE OR DESTRUCTION. If any substantial part of the Premises, or a
substantial part of the building in which the Premises are located,
shall be damaged or destroyed by fire or other insured casualty, and
repair of the damage can not be completed within one hundred twenty
(120) days, Lessor shall have the option either (a) to repair or rebuild
within a reasonable time utilizing the insurance proceeds to effect such
repair, or (b) not to repair or rebuild, and to cancel this Lease on
thirty (30) days notice. If damage or destruction of the Premises is not
substantial and no substantial part of the Building is involved, Lessee
shall have the right, within five (5) days following Lessor's election
to cancel this Lease to override such Cancellation by agreeing to (i)
pay full rent due hereunder while repairs are being performed, and (ii)
agreeing to pay all uninsured repairs. If Lessor fails to give Lessee
written notice of its election within thirty (30) days from the date of
damage, or if the restoration of the Premises cannot be completed within
one hundred twenty (120) days from date of notice, Lessee may cancel
this Lease at its option on thirty (30) days notice. During the period
of untenantability, rent shall abate in the same ratio as
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the portion of the Premises rendered untenantable, bears to the whole of
the Premises; provided that if the damage is due to the fault or neglect
of Lessee, there shall be no abatement of rent.
If the Premises or the building in which the Premises are located shall
be damaged or destroyed by fire or other insured casualty, and repair of
the damage can be completed within one hundred twenty (120) days, Lessor
shall repair or rebuild within a reasonable time utilizing the insurance
proceeds to effect such repair.
If any part of the Premises or the building in which the Premises are
located shall be damaged or destroyed by an uninsured casualty Lessor
shall have the option either (a) to repair or rebuild within a
reasonable time, or (b) not to repair or rebuild, and to cancel this
Lease on thirty (30) days notice. In the event of cancellation by Lessor
as a result of an uninsured casualty, Lessee shall have the right,
within five (5) days following Lessor's notice of cancellation, to
override such cancellation by agreeing to repair the damage at Lessee's
sole cost and expense. In such event, the Lessee shall repair or rebuild
within a reasonable time following the damage or destruction. During the
period of repairs, if such repairs are performed by Lessor, rent shall
abate as provided in this Section 18 above.
19. EMINENT DOMAIN. If the whole of the Premises shall be taken by any
public authority under the power of eminent domain, or purchased by the
condemnor in lieu thereof, then the term of this Lease shall cease as of
the date possession is taken by such public authority. If only part of
the Premises shall be so taken, the Lease shall terminate only as to the
portion taken, and shall continue in full force and effect as to the
remainder of said Premises, and the monthly rent shall be reduced
proportionately; provided, however, if the remainder of the Premises
cannot be made tenantable for the purposes for which Lessee has been
using the Premises or if more than twenty-five percent (25%) of the
rentable square footage of the Premises shall be so taken, then either
party, by written notice to the other, given at least thirty (30) days
prior to the date that possession must be surrendered to the public
authority, may terminate this Lease effective as of such surrender of
possession. In the event of any taking, whether whole or partial, Lessor
shall be entitled to all awards, settlements, or compensation which may
be given for the land and buildings. Lessee shall have no claim against
Lessor for the value of any unexpired term of this Lease, but may
initiate a separate condemnation action for the sole purpose of seeking
damages for moving expenses and other similar losses of Lessee.
20. INSOLVENCY. If Lessee shall be declared insolvent or bankrupt, or if
Lessee's leasehold interest herein shall be levied upon or seized under
writ of any court of law, or if a trustee, receiver or assignee be
appointed for the property of Lessee, whether under operation of State
or Federal statutes, then Lessor may, at its option, immediately,
without notice (notice being expressly waived), terminate this Lease and
take possession of said Premises, without, however, terminating Lessee's
obligations under this Lease.
21. DEFAULT AND RE-ENTRY. If Lessee fails to keep or perform any of the
covenants and agreements herein contained, then the same shall
constitute a breach hereof, and if Lessee has not remedied such breach
within ten (10) days after written notice thereof from Lessor if the
breach is non-payment of rent or other charges, or commence to cure the
breach of any other covenant within thirty (30) days after written
notice thereof from Lessor, with Lessee continuing to pursue such remedy
with good faith and diligently to a cure, then Lessor may, at its
option, without further notice or demand:
(a) Cure such breach for the account and at the expense of Lessee
and such expense shall be deemed additional rent due on the first of the
following month; or
(b) Re-enter the Premises, remove all persons therefrom, take
possession of the Premises and remove all personal property therein at
Lessee's risk and expense and (1) terminate this Lease,
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or (2) without terminating the Lease or in any way affecting the rights
and remedies of Lessor or the obligations of Lessee, re-let the whole or
any part of the Premises as agent for Lessee, upon such terms and
conditions as Lessor may deem advisable. In either event, any moneys
received from Lessee and any deposit or other amounts held by Lessor may
first be applied by Lessor to any damages suffered by Lessor as a result
of such default, including without limitation, costs and expenses
incurred on re-entry and re-letting, any unamortized tenant improvements
and commissions, cleaning, necessary repairs, restoration and
alteration, and any commissions incurred on re-letting, and the balance
of such amounts may be applied toward payment of other sums due to
Lessor hereunder. In the event the Premises are re-let for Lessee's
account, Lessee shall pay to Lessor monthly any deficiency; however,
Lessor shall not be required to pay any excess to Lessee. Upon
termination of this Lease or of Lessee's right to possession, Lessor has
the right to recover from Lessee: (1) The worth of the unpaid rent that
had been earned at the time of such termination; (2) The worth of the
amount of the unpaid rent that would have been earned after the date of
such termination; and (3) Any other amount, including court, attorney
and collection costs, necessary to compensate Lessor. "The Worth," as
used in Section (1) is to be allowing interest at 18% per year. "The
worth" as used for Section (2) is to be computed by discounting the
amount at the discount rate of the Federal Reserve Bank of San Francisco
at the time of termination. The above remedies of Lessor are cumulative
and in addition to any other remedies now or hereafter allowed by law or
elsewhere provided for in this Lease.
22. REMOVAL OF PROPERTY. Any property of Lessee removed by Lessor in
accordance with Section 21 above may be stored by Lessor or may be
deposited on any area adjacent to the building at the sole risk and
expense of Lessee and without any further responsibility of Lessor, and
Lessor may at its sole discretion without or after removing said
property, without obligation to do so and without notice to Lessee, sell
or dispose of the same at public or private sale for the account of
Lessee, in which event the proceeds therefrom may be applied by Lessor
upon any indebtedness due from Lessee to Lessor. Lessee waives all
claims for damages that may be caused by Lessor re-entering the Premises
and removing or disposing of said property as herein provided.
23. COSTS AND ATTORNEYS' FEES. In the event either party shall commence
legal action to enforce any provision of this Lease, the court shall
award to the prevailing party all reasonable attorneys' fees and all
costs incurred in connection therewith, including fees and costs on
appeal. Any action relating to this Lease shall be brought in the County
in which the Premises are located or, at Lessor's election, in King
County, Washington.
24. SUBROGATION WAIVER. Lessor and Lessee each herewith and hereby release
and relieve the other and waive its entire right of recovery against the
other for loss or damage arising out of or incident to the perils of
fire, explosion or any other perils described in the "all risk"
insurance endorsement approved for use in the state in which the
Premises are situated which occurs in, on or about the Premises, whether
due to the negligence of either party, their agents, employees or
otherwise.
25. HOLDING OVER. If Lessee, with the express consent of Lessor, shall hold
over after the expiration of the term of this Lease, Lessee shall remain
bound by all the covenants and agreements herein, except that (a) the
tenancy shall be from month-to-month and (b) the monthly rent to be paid
by Lessee shall be determined by multiplying the monthly rent in effect
immediately preceding such expiration times 150%. If Lessee holds
possession of the Demised Premises after the expiration of the Lease
without the express written consent of Lessor, Lessee shall remain bound
by all the covenants and agreements herein, except that (a) the tenancy
shall be from month-to-month and (b) the monthly rent to be paid by
Lessee shall be determined by multiplying the monthly rent in effect
immediately preceding such expiration times 200%. Any such tenancy may
be terminated as provided by Washington State law.
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26. SUBORDINATION AND ATTORNMENT; MORTGAGE PROTECTION
A. SUBORDINATION-NOTICE TO MORTGAGEE. At the request of Lessor, Lessee
shall promptly execute, acknowledge and deliver, all instruments which
may be required to subordinate this Lease to any existing or future
mortgages, deeds of trust and/or other security documents on or
encumbering the Premises or on the leasehold interest held by Lessor,
and to any extensions, renewals, or replacements thereof, provided that
the mortgagee or beneficiary, as the case may be, shall agree to
recognize this Lease in the event of foreclosure if Lessee is not in
default at such time.
B. LESSEE'S CERTIFICATE. Lessee shall at any time and from time to time
upon not less than three (3) days prior written notice from Lessor
execute, acknowledge and deliver to Lessor a statement in writing (a)
certifying that this Lease is unmodified and in full force and effect
(or, if modified, stating the nature of such modification and certifying
that this Lease as so modified is in full force and effect), and the
date to which the rental and other charges are paid in advance, if any;
and (b) acknowledging that there are not, to Lessee's knowledge, any
uncured defaults on the part of the Lessor or Lessee hereunder, or
specifying such defaults if any are claimed; and (c) setting forth the
date of commencement of rents and expiration of the Lease Term hereof.
Any such statement may be relied upon by any prospective purchaser on
encumbrancer of all or any portion of the Premises of which the Premises
are a part.
C. MORTGAGEE PROTECTION CLAUSE. Lessee agrees to notify any mortgagee
and/or trust deed holders, by registered mail, with a copy of any notice
of default served upon the Lessor, provided that prior to such notice
Lessee has been notified in writing (by way of Notice of Assignment of
Rents and Lease, or otherwise) of the addresses of such mortgagees
and/or trust deed holders. Lessee further agrees that if Lessor shall
have failed to cure such default, then the mortgagees and/or trust deed
holders have thirty (30) days within which to cure such default or if
such default cannot be cured within that time, then such additional
times as may be necessary if within such thirty (30) days any mortgagee
and/or trust deed holder has commenced and is diligently pursuing the
remedies necessary to cure such default (including but not limited to
commencement of foreclosure proceedings if necessary to affect such
cure), in which event this Lease shall not be terminated if such
remedies are being so diligently pursued.
27. SURRENDER OF POSSESSION. Lessee shall, prior to the termination of this
Lease or of Lessee's right to possession, remove from the Premises all
personal property which Lessee is entitled to remove and those
alterations, additions, improvements or signs which may be required by
Lessor to be removed, pursuant to Sections 13 and 15 above, and shall
repair or pay for all damage to the Premises caused by such removal. All
such property remaining and every interest of Lessee in the same shall
be conclusively presumed to have been conveyed by Lessee to Lessor under
this Lease as a bill of sale, without compensation, allowance, or credit
to Lessee. Lessee shall upon termination of this Lease or of Lessee's
right of possession, deliver all keys to Lessor and peacefully quit and
surrender the Premises without notice, neat and clean, and in as good
condition as when Lessee initially completed Lessee's work pursuant to
the Work Letter, except for reasonable wear and tear as determined by
Lessor.
28. LATE PAYMENT AND INTEREST. If any amount due from Lessee is not received
in the office of Lessor on or before the third (3rd) day following the
date upon which such amount is due and payable, a late charge of five
percent (5%) of said amount shall become immediately due and payable,
which late charge Lessor and Lessee agree represents a fair and
reasonable estimate of the processing and accounting costs that Lessor
will incur by reason of such late payment. All past due amounts owing to
Lessor under this Lease, including rent, shall be assessed interest at
an annual percentage rate of eighteen percent (18%) from the date due or
date of invoice, whichever is earlier, until paid. Notwithstanding the
foregoing Lessor agrees to waive any fee payable under this Paragraph 28
once per calendar year if the Lessee makes any such late payment within
ten
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(10) days following written notice by Lessor to Lessee. If, however,
during the same calendar year as a previously waived late payment was
made by Lessee, Lessee is again more than three (3) days delinquent in
the payment of any amount due under this Lease both the then current and
the previously waived fees due under this paragraph will be immediately
due and payable by Lessee to Lessor.
29. NOTICE. Any notice required to be given by either party to the other
pursuant to the provisions of this Lease or any law, present or future,
shall be in writing, and shall be deemed to have been duly given or sent
if either delivered personally or deposited in the United States Mail,
postage prepaid, registered or certified, return receipt requested,
addressed to the Lessor at the address specified for the payment of rent
under paragraph 3 of this Lease or to Lessee at the Premises or to such
other address as either party may designate to the other in writing from
time to time.
30. NO WAIVER OR COVENANTS. Time is of the essence of this Lease. Any waiver
by either party of any breach hereof by the other shall not be
considered a waiver of any future similar or other breach.
31. ENTIRE AGREEMENT. It is expressly understood and agreed by Lessor and
Lessee that there are no promises, agreements, conditions,
understandings, inducements, warranties, or representations, oral or
written, express or implied, between them, other than as herein set
forth and that this Lease shall not be modified in any manner except by
an instrument in writing executed by the parties.
32. BINDING ON HEIRS, SUCCESSORS AND ASSIGNS. The covenants and agreements
of this Lease shall be binding upon the heirs, executors,
administrators, successors and assigns of both parties hereto, except as
hereinabove provided.
33. LESSOR'S ASSIGNMENT. It is fully understood that Lessor shall have the
full right to assign this Lease, without any notice to Lessee, thereby
relieving Lessor from all and any liabilities; provided however, that
the assignee assumes all Lessor's responsibilities as set forth in this
Lease.
34. ENVIRONMENTAL. See Rider One attached.
LESSOR: LESSEE:
NORTHWEST REAL ESTATE-CARVER, L.L.C. GARGOYLES, INC.
/S/ LARRY R. BENAROYA By: /S/ DOUGLAS B. HAUFF
By: Larry R. Benaroya
Its: Manager Its: PRESIDENT
Date: 7/21/97 Date: 7/18/97
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STATE OF WASHINGTON ]
] ss.
COUNTY OF KING ]
I certify that I know or have satisfactory evidence that Larry R. Benaroya
is the person who appeared before me, a Notary Public in and for the State of
Washington duly commissioned and sworn, and acknowledged that he is the Manager
of Northwest Real Estate-Carver, L.L.C., a Washington limited liability company,
who executed the within and foregoing instrument, and acknowledged the
instrument to be the free and voluntary act and deed of said company for the
uses and purposes therein mentioned, and on oath stated that affiant is
authorized to execute said instrument on behalf of said company.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my official seal the
day and year first above written.
-------------------------------------
Notary Public in and for the
State of_____________________________
residing at__________________________
Commission expires___________________
Print Name___________________________
STATE OF WASHINGTON ]
] ss.
COUNTY OF KING ]
I certify that I know or have satisfactory evidence that _____________ is
the person who appeared before me, a Notary Public in and for the State of
Washington duly commissioned and sworn, and acknowledged that he/she is the
_________________, of _________________________, a _________________________ who
executed the within and foregoing instrument, and acknowledged the instrument to
be the free and voluntary act and deed of said corporation for the uses and
purposes therein mentioned, and on oath stated that affiant is authorized to
execute said instrument on behalf of said corporation.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my official seal the
day and year first above written.
-------------------------------------
Notary Public in and for the
State of_____________________________
residing at__________________________
Commission expires___________________
Print Name___________________________
10
<PAGE> 11
RIDER ONE
EMISSIONS; STORAGE, USE AND DISPOSAL OF WASTE
a. EMISSIONS. Lessee shall not (i) discharge, emit or permit to be
discharged or emitted, any liquid, solid or gaseous matter, or any combination
thereof, into the atmosphere, the ground or any body of water, which does or may
pollute or contaminate the same, or does or may adversely affect the health or
safety of persons, or the use or enjoyment of the Premises; nor (ii) transmit,
receive or permit to be transmitted or received, any electromagnetic, microwave
or other radiation in, on or about the Premises unless it is required by
Lessee's business and so long as it complies with applicable laws.
b. STORAGE. If, with or without violation of this Lease, Lessee
possesses at the Premises any matter described in Section A above or any
Hazardous Substances (as defined below), Lessee shall store the same in
appropriate leak proof containers and/or areas which comply with all laws and
all prudent practices.
c. DISPOSAL OF WASTE. Lessee shall not keep any trash, garbage, waste or
other refuse on the Premises except in sanitary containers and shall regularly
and frequently remove same from the Premises. Lessee shall keep all such
containers in a clean and sanitary condition. Lessee shall properly dispose of
all sanitary sewage and shall not use the sewage system for the disposal of
anything except sanitary sewage, nor in excess of capacity. Lessee shall not
cause any obstruction in the sewage disposal system.
d. COMPLIANCE OF LAW. Notwithstanding any other provision in the Lease
to the contrary, Lessee shall comply with all Laws in complying with its
obligations under this Lease, and in particular, Laws relating to the storage,
use and disposal of Hazardous Substances (as defined below).
e. INDEMNIFICATION FOR BREACH. Lessee shall defend, indemnify and hold
Lessor, the Project and the holder of a trust deed or mortgage on the Project
harmless from any loss, claim, liability or expense, including, without
limitation, attorneys fees and costs, at trial and/or on appeal and review,
arising out of or in connection with its failure to observe or comply with the
provisions of this Rider. This indemnity shall survive the expiration or earlier
termination of the term of the Lease or the termination of Lessee's right of
possession and be fully enforceable thereafter.
f. INDEMNIFICATION REGARDING HAZARDOUS SUBSTANCES. In addition to the
indemnity obligations contained elsewhere herein, Lessee shall indemnify, defend
and hold harmless Lessor, the Premises, the Project, and the holder of a trust
deed or mortgage on the Project, from and against all claims, losses, damages,
monitoring costs, response costs, liabilities, and other costs expenses caused
by, arising out of, or in connection with, the generation, release, handling,
storage, discharge, transportation, deposit or disposal in, on, under or about
the Premises by Lessee or any of Lessee's agents of the following (collectively
referred to as "Hazardous Substances"): hazardous materials, hazardous
substances, toxic wastes, toxic substances, pollutants, petroleum products,
underground tanks, oils, pollution, asbestos, PCB's, radioactive materials, or
contaminants, as those terms are commonly used or as defined by federal, state,
and/or local law or regulation related to protection of health or the
environment as any of same may be amended from time to time, and/or by any rules
and regulations promulgated thereunder. Such damages, costs, liability and
expenses shall include such as are claimed by any regulating and/or
administering agency, any ground lessor or master lessor of the Project, the
holder of any Mortgage or Deed of Trust on the Project, and/or any successor of
the Lessor named herein. This indemnity shall include (i) claims of third
parties, including governmental agencies, for damages, fines, penalties,
response costs, monitoring costs, injunctive or other relief; (ii) the costs,
expenses or losses resulting from any injunctive relief, including preliminary
or temporary injunctive relief; (iii) the expenses, including fees of attorneys
and experts, of report the existence of Hazardous Substances to an agency of the
State of which the Premises is located or of the United States as required by
applicable laws and regulations; and (iv) any and all expenses or obligations,
including attorney's fees, incurred at, before and after any administrational
proceeding, trial, appeal and review. This indemnity shall survive the
expiration or earlier termination of the term of the Lease
11
<PAGE> 12
or the termination of Lessee's right of possession and shall remain fully
enforceable thereafter.
LESSOR REPRESENTS AND WARRANTS TO LESSEE THAT LESSOR HAS NO ACTUAL KNOWLEDGE
OF THE EXISTENCE OF ANY HAZARDOUS ENVIRONMENTAL CONDITION AFFECTING THE
PROPERTY OTHER THAN THE VAT FLOOR COVERING WHICH LESSOR HAS AGREED TO REMOVE
OR AS MAY HAVE BEEN DISCLOSED BY THE PHASE 1 ENVIRONMENTAL SITE ASSESSMENT
DATED MARCH 1997 PREPARED BY AGRA EARTH & ENVIRONMENTAL, INC. A COPY OF
WHICH HAS BEEN PROVIDED TO LESSEE
g. INFORMATION. Lessee shall give prior written notice to Lessor of any
use, whether incidental or otherwise, of Hazardous Substances on the Premises,
and shall immediately deliver to Lessor a copy of any notice of any violation of
any Law with respect to such use. Lessee shall also provide to Lessor, upon
request, with any and all information regarding Hazardous Substances in the
Premises, including contemporaneous copies of all filings and reports to
governmental entities, and any other information requested by Lessor. In the
event of any accident, spill or other incident involving Hazardous Substances,
Lessee shall immediately report the same to Lessor and supply Lessor with all
information and reports with respect to the same. All information described
herein shall be provided to Lessor regardless of any claim by Lessee that it is
confidential or privileged.
12
<PAGE> 13
EXHIBIT A
PREMISES
13
Sketch of building floor plan.
<PAGE> 14
RULES AND REGULATIONS
1. Lessee shall not place a load upon any floor of the Premises which
exceeds the load per square foot which such floor was designed to carry and
which is allowed by Law. Lessor shall have the right to prescribe the weight,
size and position of all equipment, materials, furniture or other property
brought into the Building. Heavy objects shall, if considered necessary by
Lessor, stand on such platforms as determined by Lessor to be necessary to
properly distribute the weight, which platforms shall be provided at Lessee's
expense. Business machines and mechanical equipment belonging to Lessee which
cause noise or vibration that may be transmitted to the structure of the
Building or to any space therein shall be placed and maintained by Lessee, at
Lessee's expense, on vibration eliminators, or other devices sufficient to
eliminate noise or vibration. Lessor will not be responsible for loss of, or
damage to, any such equipment or other property from any cause, and all damage
done to the building by maintaining or moving such equipment or other property
shall be repaired at the expense of Lessee.
2. Lessee shall not use or keep in the Premises any kerosene, gasoline
or inflammable or combustible fluid or material other than those limited
quantities necessary for the operation of Lessee's business or the operation or
maintenance of Lessee's equipment. Lessee shall not use or permit to be used in
the Premises any foul or noxious gas or substance, or permit or allow the
Premises to be occupied or used in manner offensive or objectionable to Lessor
or other occupants of the building by reason of noise, odors or vibrations, nor
shall Lessee bring into or keep in or about the Premises any birds or animals.
3. Lessee shall not use any method of heating or air conditioning other
than that supplied by Lessor.
4. Lessee shall not waste electricity, water or air conditioning and
agrees to cooperate fully with Lessor to assure the most effective operation of
the Building's heating and air conditioning and to comply with any governmental
energy-saving rules, laws or regulations of which Lessee has actual notice.
5. Lessee shall entirely shut off any water faucets or other water
apparatus, and electricity, gas or air outlets before Lessee and its employees
leave the Premises. Lessee shall be responsible for any damage or injuries
sustained by Lessor for noncompliance with this rule.
6. The toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein.
7. Lessee shall not use the Premises for any business or activity other
than that specifically provided for in Lessee's Lease.
8. Lessee shall not install any, loudspeaker or other devices on the
roof(s) or exterior walls of the Building or Project.
9. Lessee shall not in any way deface the Premises or any part thereof,
except in accordance with the provisions of the Lease pertaining to alterations.
Lessor reserves the right to direct electricians as to where and how telephone
and telegraph wires are to be introduced to the Premises. Lessee shall not cut
or bore holes for wires. Lessee shall not affix any floor covering to the floor
of the Premises in any manner except as approved by Lessor. Lessee shall repair
any damage resulting from noncompliance with this rule.
10. Lessee shall store all its trash and garbage within its Premises or
in other facilities provided for the Premises. Lessee shall not place in any
trash box or receptacle any material which cannot be disposed of in the ordinary
and customary manner of trash and garbage disposal.
14
<PAGE> 15
11. The Premises shall not be used for the storage of merchandise held
for sale to the general public, or for lodging, nor shall the Premises be used
for any improper, immoral or objectionable purpose.
12. Lessee shall comply with all safety, fire protection and evacuation
procedures and regulations established by Lessor or any governmental agency.
13. Lessee assumes any and all responsibility for protecting its
Premises from theft, robbery and pilferage, which includes keeping doors locked
and other means of entry to the Premises closed.
14. Lessor may waive any one or more of these Rules and Regulations for
the benefit of Lessee, but no such waiver by Lessor shall be construed as a
waiver of such Rules and Regulations in favor of Lessee, nor prevent Lessor from
thereafter enforcing any such Rules and Regulations against Lessee.
15. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of the Lease.
16. Lessor reserves the right to make such other and reasonable Rules
and Regulations as, in its judgment, may from time to time be needed for safety
and security, for care and cleanliness of the Project and for the preservation
of good order therein. Lessee agrees to abide by all such Rules and Regulations
hereinabove stated and any additional rules and regulations which are adopted.
17. Lessee shall be responsible for the observance of all of the
foregoing rules by Lessee's employees, agents, clients, customers, invitees and
guests.
15
<PAGE> 16
EXHIBIT B
LEGAL DESCRIPTION
16
Lot 8, Block 6, Alderwood Manor, according to the plat recorded in Volume 9 of
Plats, Page 71, records of Snohomish County, Washington.
Except the East 30 feet for road conveyed to the City of Lynnwood by deed under
Auditor's File No. 2308132.
<PAGE> 17
EXHIBIT C
WORK LETTER AGREEMENT
To Lease made on this 18th day of July, 1997, between NORTHWEST REAL
ESTATE-CARVER, LLC, a Washington limited liability company (the "Lessor") and
GARGOYLES, INC., a Washington corporation (the "Lessee").
1. Lessee shall complete the improvements to the Premises as described and
delineated in the site plan and outline specifications, attached hereto and
designated "Lessee's Work". Lessee shall cause to be prepared final drawings
(including architectural, mechanical, electrical and structural hereafter
referred to as "Construction Drawings") for the Lessee's Work that are
consistent with and are logical evolutions of the attached plans. As soon as
such Construction Drawings are completed, Lessee shall deliver the same to
Lessor for approval. Lessor shall promptly review and approve the
Construction Drawings within two (2) days after the date of receipt thereof
and shall initial two (2) copies of the Construction Drawings as indication
of its approval thereof. Lessor's approval of the Construction Drawings
shall constitute Lessee's authorization to complete the Lessee's Work in
accordance with such Construction Drawings. If Lessee shall make any change
in the Construction Drawings, Lessee shall promptly notify Lessor in writing
of the change and Lessor shall have two (2) days to approve or reject the
requested change.
2. Lessee's general contractor shall be subject to the approval of Lessor and
such general contractor shall coordinate the construction of the Lessee's
Work with Lessor. Lessee's general contractor shall maintain a liability
insurance policy in the minimum amount of $2,000,000.00 and shall name
Lessor and Lessee as additional insureds as their interest may appear.
3. Lessee is responsible for the suitability of the design and function of the
Lessee Improvements for Lessee's needs and business. Lessee shall also be
responsible for procuring or installing in the Premises any trade fixtures,
equipment, furniture, furnishings, telephone equipment or other personal
property (collectively, "Personal Property") to be used in the Premises by
Lessee, and the cost of such Personal Property shall be paid by Lessee.
Lessee shall be subject to any and all rules of the site during construction
of the Lessee's work.
4. Lessee hereby indemnifies and agrees to protect, defend and hold Lessor, any
mortgagee, ground lessor or beneficiary of a mortgage, ground lease or deed
of trust related to the Premises or the Building harmless from and against
any and all suits, claims, actions, losses, costs or expenses (including
claims for worker's compensation) for any nature whatsoever, together with
reasonable attorney fees for counsel of Lessor's choice, arising out of or
in connection with the construction of Lessee's Work, the installation of
Lessee's Personal Property or equipment (including, but not limited to,
claims for breach of warranty, personal injury or property damage).
5. Lessee shall construct or cause to be constructed the Lessee's Work in
accordance with the approved Construction Drawings and with each of the
following requirements:
(a) Lessee shall submit to Lessor the name of Lessee's proposed
contractor, documents evidencing the financial capability of the
proposed contractor, a copy of the construction contract between Lessee
and its contractor, and a certificate of public liability and property
damage insurance carried by Lessee's contractor and subcontractors
naming Lessor as an additional insured at least fifteen (15) Business
Days before the date Lessee wishes to commence construction of Lessee
Improvements. The contractor's policy of insurance shall contain an
endorsement providing that the insurance cannot be canceled or modified
unless Lessor has received a thirty (30) day written notice in advance
of such cancellation or modification. Lessee shall provide to Lessor a
certificate of insurance showing
17
<PAGE> 18
the coverage required herein.
(b) Prior to the commencement of construction, Lessee shall obtain
Lessor's written approval of the proposed contractor and subcontractors,
the construction contract, and the insurance carried by the proposed
contractor.
(c) Prior to the commencement of construction, Lessee shall obtain all
appropriate government approvals and all applicable permits and
authorizations, and shall furnish satisfactory evidence of the same to
Lessor.
(d) Lessee shall cause Lessees' general contractor and all
subcontractors to provide Lessor a release of liens in connection with
Lessee's Work.
(e) All improvements shall be completed with due diligence in compliance
with all applicable laws, the Construction Drawings, and the
construction contract approved by Lessor by the contractor approved by
Lessor.
(f) All debris, trash, refuse and waste materials shall be stored only
within the Lessee's Premises and shall be regularly removed therefrom by
Lessee at its cost.
(g) Lessee's contractors and subcontractors shall abide by the Rules and
Regulations provided in this Lease.
(h) Lessee shall supply Lessor one complete set of as-built drawings
upon completion of Improvements.
6. Lessee Improvement Allowance. It is understood that the Lessee's Work will
include, but not be limited to, the construction of an addition to the building
increasing the size of the building area to approximately 95,886 square feet.
Lessee is leasing the building in an as-is condition except that Lessor will
remove the existing VAT containing asbestos.
Lessor agrees to pay Two Million, Five Hundred Sixty Thousand and No/100 Dollars
($2,560,000.00) (which amount includes Washington State sales tax) towards the
construction of Lessee's Work (the "Lessee Improvement Allowance"). Lessee will
pay all costs associated with Lessee's work in excess of the Lessee Improvement
Allowance, if any, or at Lessee's option may require Lessor to amortize
additional costs of up to $400,000 over the term of the Lease at 10-1/2%
interest. If the total cost of the Lessee's Work is less than the Lessee
Improvement Allowance (a"Savings"), then the monthly base rent will be reduced
by an amount equal to the Savings times 10-1/2% divided by 12.
The costs associated with Lessee's Work up the amount of the Lessee Improvement
Allowance will be paid by Lessor to Lessee upon receipt of appropriate Draw
Requests, signed by both the architect and the contractor, together with lien
waivers from the contractor related to all of Lessee's Work, conditioned only
upon the payment of the contractor's payment request. Subject to Lessor's review
and approval of the payment request and Lessor's satisfactory inspection of the
work, Lessor will deliver to Lessee a dual payee check in the amount of the
payment request, made payable to both Lessee and Lessee's contractor, consultant
or vendor. Upon request for final payment to the contractor Lessee will deliver
to Lessor a fully executed Certificate of Substantial Completion along with an
unconditional lien waiver from Lessee's contractor.
18
<PAGE> 19
NORTHWEST REAL ESTATE-CARVER, L.L.C. GARGOYLES, INC.
/s/ LARRY R. BENAROYA /s/ DOUGLAS B. HAUFF
- ---------------------------------------- ------------------------------
By: Larry R. Benaroya By: Douglas B. Hauff
Its: Manager Its: President
19
<PAGE> 1
Exhibit 11.1
GARGOYLES, INC.
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, 1997 1996
------------ ------------
<S> <C> <C>
Shares outstanding at beginning of period 7,420,683 5,464,543
Weighted average number of shares issued
during the period 2,510 -
Net shares issued for options and warrant -
treasury stock method 266,090 247,535
------------ ------------
Weighted average number of shares and
equivalents of common stock outstanding 7,689,283 5,712,078
============ ============
Net income (loss) $ 1,284,375 ($ 2,605,011)
============ ============
Net income (loss) per share $ 0.17 ($ 0.46)
============ ============
SIX MONTHS ENDED JUNE 30,
Weighted average number of shares and
equivalents of common stock outstanding:
First quarter 7,682,882 5,709,714
Second quarter 7,689,283 5,712,078
------------ ------------
15,372,165 11,421,792
============ ============
Average for period 7,686,083 5,710,896
============ ============
Net income (loss) $ 1,709,908 ($ 2,620,935)
============ ============
Net income (loss) per share $ 0.22 ($ 0.46)
============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 390,432
<SECURITIES> 0
<RECEIVABLES> 19,464,173
<ALLOWANCES> (359,105)
<INVENTORY> 14,486,420
<CURRENT-ASSETS> 40,401,430
<PP&E> 5,686,286
<DEPRECIATION> (1,934,234)
<TOTAL-ASSETS> 64,704,690
<CURRENT-LIABILITIES> 17,903,587
<BONDS> 0
0
0
<COMMON> 25,678,711
<OTHER-SE> (3,030,284)
<TOTAL-LIABILITY-AND-EQUITY> 64,704,690
<SALES> 24,532,340
<TOTAL-REVENUES> 24,864,076
<CGS> 9,090,467
<TOTAL-COSTS> 9,090,467
<OTHER-EXPENSES> 13,162,432
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 473,269
<INCOME-PRETAX> 2,137,908
<INCOME-TAX> 428,000
<INCOME-CONTINUING> 1,709,908
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,709,908
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0
</TABLE>
