<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
------------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21335
GARGOYLES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
WASHINGTON 91-1247269
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
</TABLE>
5866 SOUTH 194TH STREET
KENT, WASHINGTON 98032
(206) 872-6100
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
NONE
</TABLE>
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
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 [ ]
Indicated by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 28, 1997, 7,420,683 shares of the registrant's common stock,
no par value, were outstanding. The aggregate market value of the common stock
held by non-affiliates of the registrant on that date was $23,328,753 computed
at the closing price on that date.
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders of the Company
to be held May 22, 1997.
================================================================================
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I
Item 1. Business.................................................................. 1
Item 2. Properties................................................................ 16
Item 3. Legal Proceedings......................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders....................... 17
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters...... 17
Item 6. Selected Financial Data................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 18
Item 8. Financial Statements and Supplementary Data............................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures............................................................... 44
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 44
Item 11. Executive Compensation.................................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 46
Item 13. Certain Relationships and Related Transactions............................ 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 46
</TABLE>
i
<PAGE> 3
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
Certain statements within the following description of the business of
Gargoyles, Inc. ("Gargoyles" or the "Company") and elsewhere in this Form 10-K
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. 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 or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, the following: potential inability to
sustain and manage growth; relationships with, dependence upon and performance
of key retailers; dependence on new product introductions and market acceptance
and integration of new product lines; competition; uncertainty regarding patents
and proprietary rights; inability to successfully integrate acquisitions and
licensed products, seasonality, and dependence on key personnel. Forward looking
statements made herein shall be identified by reference to this section,
"Business -- Forward Looking Statements."
THE COMPANY
Gargoyles was incorporated under the laws of the state of Washington in
1983. References to Gargoyles and the Company in this report include the Company
and its subsidiaries. The Company succeeded to the sunglass business of Conquest
Sports, Inc., a Washington corporation f/k/a Pro-tec, Inc. ("Conquest"), an
affiliated company that transferred its sunglass business to the Company upon
the Company's formation in 1983, and references to Gargoyles and the Company
herein include the sunglass business of Conquest prior to 1983. Antone
Manufacturing, Inc. ("Antone"), an affiliated S corporation that provided
assembly operations for Gargoyles, was merged into the Company in March 1995,
and references to Gargoyles and the Company herein include the combined
operations of the Company and Antone, unless the context requires otherwise. In
February 1996, the Company acquired H.S.I., a California corporation d/b/a Hobie
Polarized Sunglasses which was later merged into the Company's wholly-owned
subsidiary H.S.C., Inc., a Washington corporation ("Hobie"). In May 1996, the
Company acquired a 70% interest in the kindling company, a California
corporation ("Kindling"), to develop products under the Timberland brand name.
OVERVIEW
Gargoyles designs, manufactures and markets a broad line of performance and
outdoor lifestyle-oriented sunglasses. The Company competes in the rapidly
growing premium sunglass market by offering a diverse line of products which in
1996 sold at suggested retail prices of $80 to $190. The Company seeks to
distinguish Gargoyles brand products in the marketplace by combining innovative
styling with its patented dual lens toric curve technology, which the Company
believes is the most advanced lens design currently available in wrap
sunglasses. The Company believes these features appeal not only to active sports
enthusiasts who favor the performance and comfort features of its products, but
also to consumers who appreciate Gargoyles' distinctive styling and innovative
designs. In addition, during 1996 the Company acquired the Hobie sunglass line,
a leading line of polarized sunglasses, which is one of the fastest emerging
categories within the premium sunglass market. The Company also offers a popular
line of protective eyewear focused primarily on the medical and dental market
segments. The Company believes that the diversity of its product lines, combined
with increasing awareness among consumers of the Gargoyles and Hobie brands and
their attributes, has positioned it to capitalize on the strong growth potential
in the domestic and international premium sunglass markets. The Company's
consolidated net sales have increased at a compounded annual growth rate of 51%
from 1992 through 1996.
The Company was founded to develop a sunglass style that not only would
cover and protect the eyes more effectively than traditional "flat" lens
designs, but also would minimize distortion. In 1983, the Company completed the
development of its patented dual lens toric curve technology. The complex
geometry of the
1
<PAGE> 4
proprietary toric curve lens minimizes refraction associated with other wrap
lens designs by allowing the transmission of light directly to the eye with
virtually no change in direction. This dual lens design provides each eye with
its own optical center of focus, permitting a wraparound design without
sacrificing overall optical clarity or introducing distortion. The Company
believes this proprietary technology offers the most advanced and optically
correct sunglass lens design available in wrap sunglasses and provides a
significant differential competitive advantage.
In 1983, the Company introduced its first product based on this proprietary
technology, the Gargoyles Classic. Until 1992, the Company was a successful
single-product company with relatively few resources devoted to expanding its
product line, and was dependent on independent manufacturers' representatives to
sell its products. In May 1992, the Company began installing a new management
team which has developed and implemented new operating and growth strategies
designed to exploit the patented dual lens toric curve technology and to
capitalize on the growth trends within the premium sunglass market. These
strategies included an aggressive, innovative new product development program
resulting in the introduction of numerous models, including 85s in 1993, Legends
in 1994, Helios and Legends II in 1995, and Paladin, Octane and Vortex in 1996.
In addition, the Company began investing in its own direct sales force in 1994
to expand distribution and gain more control over the sales process. The Company
also initiated a strategy to enhance the Gargoyles brand image and promote the
performance characteristics of its products by aggressively pursuing strategic
endorsements from professional athletes such as Dale Earnhardt, Ken Griffey,
Jr., Alexi Lalas and Scottie Pippen. The Company believes that these strategies
have contributed to its rapid sales growth and have created a platform for the
continued success of the Gargoyles brand.
The Company has also leveraged its infrastructure and direct sales force by
adding new brands through acquisitions and licensing arrangements that can
increase sales without commensurate increases in operating expenses. In
particular, the Company acquired Hobie's sunglass business in February 1996 (the
"Hobie Acquisition"), which broadened the Company's technology base to include
polarized sunglasses. Further, in May 1996, the Company, together with the
former president of Revo, Inc. ("Revo"), entered into a worldwide license
agreement (the "License Agreement") with The Timberland Company ("Timberland")
to design, manufacture and market sunglasses under the Timberland brand name.
The Company believes the worldwide appeal of the Timberland brand name will
assist the Company in further penetrating the outdoor-lifestyle market segment.
Management believes that the addition of these brands to the Company's portfolio
of products will provide incremental synergies in sales, marketing,
distribution, manufacturing and general and administrative expenses.
INDUSTRY OVERVIEW
According to the Sunglass Association of America, total retail sunglass
sales in the domestic sunglass market grew approximately 79% from $1.4 billion
in 1989 to $2.5 billion in 1996. The industry is generally divided into two
principal segments: the under $30 market and the over $30 premium market. The
premium sunglass market, the category in which the Company competes, showed an
increase in total retail sales of approximately 126% from $824 million in 1989
to $1.9 billion in 1996. The average retail price per unit for premium
sunglasses has increased during this period, contributing significantly to the
overall growth of the segment. The Company believes that the key factors driving
the historical growth in the premium sunglass market include increased consumer
awareness of the need for quality eye protection in response to heightened
health concerns, increased demand for technologically advanced, yet stylish
products, increased demand for specialized sunglasses for different sports and
activities, growing brand awareness among eyewear consumers and continuous
product replacement.
The Company believes that Oakley, Inc. ("Oakley") and Bausch & Lomb
Incorporated ("Bausch & Lomb") comprised approximately 50% of the domestic
premium sunglass market in 1996, with several companies, including Gargoyles,
having smaller but significant market shares. The remainder of the industry is
highly fragmented and comprised of numerous smaller companies. The Company
expects that as the sunglass industry continues to grow, a certain amount of
consolidation will occur. The Company believes such consolidation will enable
certain companies to achieve sufficient scale to invest increased amounts in
research and development, develop direct sales forces, market products
effectively in an increasingly competitive
2
<PAGE> 5
environment and maintain adequate inventory levels to deliver products on a
reliable basis to rapidly growing specialty retailers. Consolidation of smaller
manufacturers by larger, well-capitalized vendors is consistent with the desire
of large retail customers, notably Sunglass Hut International, Inc. ("Sunglass
Hut"), to do business with vendors who provide dependable, timely delivery and
adequate supply of products.
BUSINESS STRATEGIES
The Company's objective is to be one of the premier designers,
manufacturers and marketers of performance and outdoor lifestyle-oriented
premium sunglasses and protective eyewear. To achieve this goal, the Company has
developed and is implementing business strategies to capitalize on growth
opportunities within the premium sunglass market. Key elements of the Company's
business strategies are as follows:
Offer technologically superior products. The Company's products are
designed to capitalize on several unique technological features that
differentiate Gargoyles' products from those of its competitors. The
sophisticated geometry of the Company's patented lens design provides each eye
with its own optical center of focus, permitting a wraparound design with wide
coverage without sacrificing overall optical clarity or introducing distortion.
The Company's primary lens material is polycarbonate, which is significantly
stronger than safety glass, yet lightweight and able to provide protection from
damaging ultraviolet light. The Company also offers Hobie polarized sunglasses,
which are designed to block glare more effectively than regular sunglasses.
Additionally, the Company's patented interchangeable lens system used in its
Legends products allows the consumer to adopt multiple styles and functions
through the use of different lenses in the same frame.
Design innovative products. The Company continuously strives to
differentiate its products from those of competitors through new product
introductions. The Company positions its products to appeal to both active
sports enthusiasts who favor the performance features of its products and
consumers who appreciate Gargoyles' distinctive styling and innovative designs.
During 1996, the Company added the Vortex and Octane models for the sports
market segment, which the Company believes is currently one of the fastest
growing segments in the premium sunglass market. In addition, the 1996
introduction of the Paladin model has augmented the Company's strength in the
broader style-conscious market.
Increase brand name recognition. The Company seeks to heighten awareness of
its brands as high-quality, technology-based performance sunglasses. The
Company's unique styles and designs, featuring its dual lens toric curve
technology, differentiate its products from rival brands. To further strengthen
its brand image, the Company maintains strict control over the distribution of
its products and has implemented a marketing strategy focused on enhancing the
retail presentation of its products. This strategy includes training retail
salespersons to fully understand the benefits and features of the Company's
products and in-store education highlighting the style and technical features of
its products. In addition, the Company creates broad exposure for its products
through the endorsements by well-known professional athletes such as Dale
Earnhardt, Ken Griffey, Jr., Alexi Lalas and Scottie Pippen and through the use
of its protective eyewear products by, and tie-in promotions with, the actors on
the popular television series ER.
Expand distribution network. In 1994, the Company began investing in a
direct sales force to expand distribution and gain more control over the sales
process. The Company has recently augmented its distribution capabilities with
the addition of a number of optical distributors and sporting goods
manufacturers' representatives to supplement the Company's efforts to access the
underpenetrated sporting goods and optical stores markets. The Company believes
that the strategic expansion of its distribution network permits its direct
sales force to focus on the Company's existing customer base and add new
accounts. The Company anticipates that the addition of the Hobie and Timberland
product lines will allow for broadened distribution to new and existing
customers who desire these new products.
Implement vertical integration strategy. The Company currently depends on
multiple vendors in geographically diverse areas to perform its molding,
hard-coating, mirroring and cutting processes for its lenses. The Company
anticipates centralizing many of these processes by implementing a vertical
integration strategy. The Company's goals in implementing this strategy include
more efficient manufacturing, improvement in gross margins, manufacturing
products in accordance with its strict quality-control standards and
3
<PAGE> 6
increasing control over the timing and delivery of its products. Processes for
which vertical integration is not effective will continue to be contracted out
to vendors.
GROWTH STRATEGIES
Management believes that its strategies have positioned the Company to
achieve continued growth in revenues and earnings. Key elements of the Company's
growth strategies include the following:
Capitalize on growth in premium sunglass market. The Company will continue
to focus on increasing its penetration within the premium sunglass segment,
which has grown approximately 126% from 1989 to 1996. Management believes that
this segment will continue to experience rapid growth. The Company also expects
to benefit from increasing penetration of the premium sunglass market by the
Company's existing customers. The Company believes that as large sunglass
specialty retailers continue to grow, they will increasingly require
well-capitalized vendors which are able to provide adequate product supply on a
reliable basis.
Develop and introduce new products. The Company is committed to
capitalizing on its existing market position and proprietary technology by
developing new products and product line extensions that incorporate superior
performance and unique styling. To support its new product initiatives, the
Company maintains an active research and development effort, which has resulted
in the introduction of eight product lines between 1993 and 1996. In 1996, new
product introductions included the Paladin titanium frame for the style-
conscious market and the Octane and Vortex plastic frames for the sports market.
In 1997, the Company anticipates introducing five new Gargoyles product lines
and a number of new models of polarized sunglasses under the Hobie brand name to
capitalize on the growing awareness among consumers of the performance features
of polarized lenses. Further, in 1997 the Company anticipates introducing its
lifestyle-oriented Timberland brand product line.
Expand customer base. The Company is focused on expanding its customer base
both domestically and internationally. The strategies of adding a direct sales
force dedicated to selling the Company's products and adding additional
manufacturers' representatives and distributors have resulted in significant
growth in the number of accounts, including sunglass specialty, sporting goods,
department and optical stores. Since the addition of a direct sales force in
1994, the Company has added over 2,000 new accounts. At December 31, 1996, the
Company had approximately 4,100 accounts representing over 8,000 retail
locations or outlets. The Company believes there are still significant
opportunities to expand its customer base both in the United States and
internationally.
Focus on international expansion. The Company believes that international
expansion represents a significant growth opportunity. International sales
accounted for approximately 6% of the Company's net sales in 1996, a
significantly lower penetration than that of the Company's primary competitors.
The Company's international growth plans are based on developing international
distribution networks and investing in overseas operations, where appropriate.
In addition, the Company believes the worldwide appeal of the Timberland brand
name will facilitate introduction of the Company's products internationally.
Selectively pursue acquisition and licensing opportunities. The Company
seeks to acquire businesses or to create licensing arrangements with companies
having high-quality products, strong brand names and growth potential. The focus
of the Company's acquisition licensing efforts is to (i) augment the Company's
product lines, (ii) enhance the Company's distribution capabilities, (iii)
leverage the Company's operating infrastructure, and (iv) access new technology.
In particular, the Company's acquisition and integration of Hobie and its
license agreement with Timberland provide new brand names and a broader customer
base, and create distribution and operating synergies.
DUAL LENS TORIC CURVE TECHNOLOGY
The key technological feature of the Company's eyewear is its patented dual
lens toric curve design. This proprietary design offers a foundation for product
innovation that can overcome the optical deficiencies in competitive wrap
sunglasses, and permits the Company's sunglasses to match the contours of the
face without sacrificing overall optical clarity or introducing distortion. The
complex geometry of the Company's dual toric
4
<PAGE> 7
curve lens minimizes the refraction associated with other extreme wrap lens
designs by allowing the transmission of light directly to the eyes with
virtually no change in direction. Competitive spherical or unitary wrap lens
designs, which do not use the Company's dual toric curve lens, may cause light
refraction, resulting in distortion, which can cause eye fatigue and eye stress.
In addition, the Company's dual lens design provides separate optical
centers of focus for each eye, resulting in greater overall optical clarity and
less peripheral distortion. Competitive unitary wrap sunglasses have a single
optical center near the physical center of the lens located between the eyes,
which often introduces distortion that may cause eye fatigue and eye stress.
<TABLE>
<CAPTION>
LIGHT TRANSMISSION OF LIGHT TRANSMISSION
GARGOYLES' DUAL LENS OF COMPETITIVE
TORIC CURVE DESIGN UNITARY LENS DESIGN
<S> <C>
[PHOTO OF CURVE LENS] [PHOTO OF UNITARY LENS]
</TABLE>
The Company believes that its dual lens toric curve technology provides the
most advanced and optically correct lens design available in wrap sunglasses.
PRODUCTS
The Company markets its sunglass models under the Gargoyles and Hobie
brands, and is developing products to market under the Timberland brand
beginning in 1997 pursuant to the license agreement with Timberland. The Company
offers an extensive selection of high-quality sunglasses in the middle to upper
price points of the premium market ($80 to $190 retail), thereby allowing the
Company to market to a broad customer base.
GARGOYLES BRAND SUNGLASSES
At December 31, 1996 the Company offered nine product lines under the
Gargoyles brand name, all of which are available in a variety of colors and with
mirrored and nonmirrored lenses. Each Gargoyles product line, except for the
Legends lines, utilizes the Company's patented dual lens toric curve technology.
5
<PAGE> 8
<TABLE>
<CAPTION> Suggested
Retail
Product Line Introduction Description Price Points
- ------------ ------------ ----------- ------------
<S> <C> <C> <C>
Classic December 1983 Original dual lens toric curve design. $60-$175
856 May 1993 Same design as the Classic design but 15% $80-$175
smaller.
Legends March 1994 Utilizes a patented interchangeable lens $125-$165
system with 14 lens options.
Helios Full March 1995 Contemporary performance sunglass combining $120-$140
Frame the optically correct oval toric curve lens
with a sleek wrapback design.
Helios Anti- March 1995 Sleek, lightweight frameless design utilizing $90-$100
Frame dual lens options.
Legends II August 1995 Smaller, sleeker version of the Legends with $125-$145
six lens options.
Paladin March 1996 Lightweight, fashion/performance design $170-$190
featuring titanium frames.
Vortex April 1996 Lightweight, aerodynamic nylon frame designed $80-$85
for "extreme" sport use.
Octane May 1996 Lightweight, aerodynamic nylon composite $85-$95
frame designed for "mainstream" sport use.
[additional column containing diagrams of sunglasses]
</TABLE>
Classic. Introduced in December 1983, the Classic was the Company's first
sunglass. The uniqueness of the Classic style is based on several features,
including its polycarbonate dual lens toric curve and its wrap design, which
provide superior eye protection and optical clarity. The Classic was worn by
Arnold Schwarzenegger in The Terminator and Clint Eastwood in Sudden Impact.
85s. Introduced in May 1993, the 85s were designed to respond to increased
consumer demand for a smaller version of the Classic. The 85s style is 15%
smaller and is designed to fit a slimmer face.
Legends. Introduced in March 1994, the Legends line combines a classic
shape with the sports performance wrap sunglass of the 1990s. The Legends'
patented interchangeable lens system allows the wearer to adjust to changing
light and to adopt multiple styles and functions through the use of 14 different
lens combinations.
Helios Full Frame. Introduced in March 1995, the Helios Full Frame is
designed to meet the increasing market demand for high-quality, style-conscious
performance eyewear. This model, along with the Helios Anti-Frame line, is the
industry's first oval wrap sunglass designed with a dual lens toric curve. The
Helios Full
6
<PAGE> 9
Frame products also feature spring hinges and adjustable nose pads, which
produce a superior level of fit and comfort.
Helios Anti-Frame. Introduced in March 1995, the Helios Anti-Frame is a
contemporary performance sunglass featuring a sleek, lightweight frameless
design utilizing the dual lens toric curve.
Legends II. Introduced in August 1995, the Legends II line offers the same
interchangeable lens system and classic design of the Legends line in a smaller,
sleeker style. The Legends II line includes six combinations of interchangeable
lenses.
Paladin. Introduced in March 1996, the Paladin is a high-end,
style-conscious sunglass with a sports influence that features a titanium frame,
providing durability in a lightweight frame weighing only four-tenths of an
ounce. The Paladin line incorporates the dual lens toric curve and an
antireflective lens coating to reduce glare.
Vortex. Introduced in April 1996, the Vortex line features a lightweight,
aerodynamic design targeted for "extreme" sport use by the youth market. The
Vortex incorporates the polycarbonate dual lens toric curve with lightweight
nylon frames.
Octane. Introduced in May 1996 as a mainstream sports sunglass, the Octane
line features the dual lens toric curve and lightweight nylon composite frames.
As a part of the Company's endorsement strategy, the Company uses the names
of athletes to broaden brand name recognition by creating "signature" series of
products. These products currently include The Griffey Wrap and Dale Earnhardt's
and Scottie Pippen's signature models. In addition, a number of the Company's
models are available with customized nosebridge decals and/or temples that can
tailor a product for specific corporate promotions.
HOBIE BRAND SUNGLASSES
In February 1996, the Company acquired Hobie, a leading manufacturer and
distributor of polarized sunglasses. Polarized lenses are designed to block
glare more effectively than regular lenses, thereby providing a technological
differentiation from other sunglasses. The Hobie Acquisition provides the
Company with access to the growing market for polarized sunglasses. The Company
believes this market growth is based on greater consumer recognition of the
benefits of polarized sunglasses, the relative ease of demonstrating the
technological differentiation of the lens and the increasing market acceptance
of the higher-priced polarized sunglasses. The Company also believes that its
strategy to aggressively market prescription polarized products will capitalize
on the demographics of aging consumers with active outdoor lifestyles.
At December 31, 1996 the Hobie sunglass collection was divided into three
product lines, Sport, Lites and Elites, each designed to appeal to a different
user group. Substantially all Hobie sunglasses are available with prescription
lenses.
<TABLE>
<CAPTION>
SUGGESTED
PRODUCT RETAIL
LINE DESCRIPTION PRICE POINTS
- ------- -------------------------------------------- ------------
<S> <C> <C>
Sport Classic polarized glass lens sunglass line $ 98 - $150
for sport use, including fishing.
Lites Contemporary polarized sunglass line for $ 78 - $128
active sports.
Elites Polarized glass lens sunglass line with $148 - $192
lifestyle-orientation.
</TABLE>
Sport. The Sport line consists of 12 models with nylon frames and polarized
glass lenses designed for sport use. The Sport line also includes a line of
products designed specifically for fishing. Selected styles in the fishing
series are available with plastic lenses.
Lites. The Lites line consists of 10 models designed for active sport use.
The Lites products feature plastic polarized lenses. These sunglasses utilize
lightweight, sturdy nylon, metal or carbon frames.
7
<PAGE> 10
Elite. The Elite line consists of eight models designed as a durable,
lifestyle-oriented sunglass featuring high-quality nylon or metal frames and
polarized glass lenses.
PROTECTIVE EYEWEAR
The Company established its Protective Eyewear division in 1994 to
capitalize on the growing demand for the Company's Arctic Clear product line, a
clear lens version of the Classic and 85s models. The Company's initial efforts
have focused on the medical and dental market segments, where the features and
benefits of Arctic Clear eyewear provide superior optical quality and comfort to
the healthcare professional. The Company believes that protective eyewear is
growing in importance as a market segment due primarily to increasing health
concerns in the medical and dental markets. Management believes that the
Company's Arctic Clear products appeal to users who regularly wear protective
eyewear for extended periods, therefore demanding glasses that are more
fashionable and comfortable.
The Company currently distributes its protective eyewear line through its
existing retail channels and through a number of medical and dental
distributors. The Company promotes retail sales of its Arctic Clear products
through product use by, and tie-in promotions with, the actors on the television
series ER. The Company expects to expand the market potential for its Arctic
Clear protective eyewear through the development and introduction of a
prescription insert for its Classic and 85s models that will fit inside the
glasses' lenses, enabling consumers to use these products as prescription
eyewear.
TIMBERLAND
In May 1996, the Company, together with the former president of Revo, and
Timberland, formed Kindling, a majority-owned subsidiary, to design, manufacture
and market sunglasses and, with Timberland's consent, ophthalmic frames under
the Timberland brand name. The Company, together with Kindling, acquired an
exclusive license from Timberland to use the Timberland and tree logo trademarks
on sunglasses, eyewear accessories and, with Timberland's consent, ophthalmic
frames. First sales of Timberland branded products began in March 1997. See
"-- Factors Affecting Future Results and Regarding Forward-Looking
Statements -- Potential Inability to Successfully Integrate Acquisitions and
Licensed Products."
ACCESSORIES
The Company's accessory line includes a variety of products, including hard
cases, replacement lenses and eyeglass retainers. This line is distributed in
conjunction with the Company's sunglass product lines.
PRODUCT DESIGN AND DEVELOPMENT
The Company strives to be an innovator in the development of new product
styles that incorporate the Company's patented technologies. The Company's
products are designed by internal research and development personnel with input
from the Company's sales and marketing departments and from consumer focus
groups. The development process commences with the conceptual design of
potential products, including design sketches, drawings and models. The design
team then uses state-of-the-art CAD/CAM equipment to develop three-dimensional
prototypes of new designs. In formulating its design concepts, the Company
strives to develop unique styles based on its patented dual lens toric curve
technology and focuses its efforts on producing performance eyewear products
that are among the most functional, fashionable and durable in the industry. As
a part of this strategy, the Company has successfully developed new products by
cutting different lens shapes and sizes from the Classic lens. These initiatives
have shortened the time associated with the concept, prototype and production
stages of the product development cycle.
The Company is now focused on the introduction of one to three new product
models per year. The Company expands its model lines by adding certain product
extensions, such as new lens and frame colors, new mirrors, interchangeable
lenses and soft nose pieces. The Company's strategy is to delay its line
extension until it is confident of consumer acceptance of the new model, which
has enabled the Company to avoid excess inventory and to manufacture and
assemble its products more effectively.
8
<PAGE> 11
MANUFACTURING
The Company currently sources its lenses, optical frames and components
from a diverse group of suppliers in the United States, Japan and Europe. Lenses
for Gargoyles' products are molded, hard-coated, mirrored and cut by a network
of suppliers in the United States and Japan. Frames for Gargoyles' products are
currently produced by a network of suppliers in Italy and Japan. Lenses and
frames for the Company's Hobie product line are sourced from Asia and Europe and
are assembled in the United States. Related components are generally purchased
from vendors in the United States. The Company has established strong
relationships with its major suppliers. The Company intends to vertically
integrate certain aspects of its manufacturing processes. Management believes
that such vertical integration will result in more efficient manufacturing and
improved gross margins, and will provide the Company with more control over the
timing and delivery of its products. Processes that are unlikely to add these
benefits through vertical integration will continue to be contracted out to
vendors. See "-- Forward-Looking Statements" and "-- Factors Affecting Future
Results and Regarding Forward-Looking Statements -- Reliance on Limited Sources
of Supply."
Gargoyles assembles the majority of its products at the Company's facility
located in Kent, Washington. Performing assembly functions in-house enables the
Company to control the production process and to maintain its strict
quality-control standards to reduce spoilage and improve product performance.
The Company owns and maintains most of its assembly equipment. With respect to
products assembled by the Company's suppliers, the products are delivered to the
Company for quality control, packaging and shipping.
The Company strives to maintain dual or multiple sources of supply for all
components and services for its sunglass product lines. The Company has also
established contingency plans and identified alternative sources of supply for
many of its components. However, the Company relies on a single source of supply
for several of its components, including its frames. The major raw material used
to produce the majority of the Company's lenses, custom lexan polycarbonate, is
in limited supply in world markets and is purchased on the Company's behalf by
its lens molders. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- Reliance on Limited Sources of Supply."
The optical molds used to develop the Company's toric curve-based lenses
are difficult to manufacture. Due to the precise optical geometry involved,
requiring unique curvatures of both the horizontal and vertical radii, as well
as the front and rear lens surfaces, the mold-polishing function is a
time-consuming, iterative process that must be finished by hand. The process
provides a degree of competitive protection to the Company because the design is
extremely difficult and costly to replicate. All optical molds used to
manufacture Gargoyles brand lenses are owned by the Company, contributing to a
consistent, dependable source of supply. See "-- Factors Affecting Future
Results and Regarding Forward-Looking Statements -- Reliance on Limited Sources
of Supply."
The Company manages its inventory for its Gargoyles products using an
automated inventory management system that assists in controlling reorder points
and minimum and maximum stock levels, thereby ensuring better in-stock
availability and a higher level of salable product. Other benefits of this
system include lowering average inventories and reducing associated carrying
costs.
For information concerning backlog and backorders, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Backlog and Backorders."
DISTRIBUTION
To preserve the integrity of the Company's brand names, the Company
selectively limits its distribution to retailers that market products consistent
with the Company's image and pricing strategy and that provide a high level of
customer service and technical expertise. Individual accounts are selected based
on their potential ability to positively represent the Company's brands and
technological benefits, reputation for advertising prices at or near the
manufacturer's suggested retail price, expected ability to display a wide
assortment of the Company's product selections and demonstrated commitment to
merchandising and product knowledge that will support the Company's brand image.
The Company currently sells Gargoyles and Hobie eyewear through approximately
4,100 accounts representing over 8,000 retail locations or outlets comprised
primarily of sunglass specialty stores, optical stores, department stores and
sporting goods stores.
9
<PAGE> 12
The Company believes that international distribution represents a
significant opportunity for increased product sales. Although the Company has
not historically focused on the international marketplace, it has achieved
recent international sales growth as a result of targeting existing distributors
for increased sales volume and developing new distributor relationships selling
into previously untapped international markets. The Company intends to focus its
expansion efforts in Europe through the establishment of an international
distribution network, and to leverage potential distribution synergies with the
Company's international manufacturing suppliers. Future plans potentially
involve a direct sales force in selected countries and the investment in
marketing and overseas operations where appropriate.
SALES
Prior to March 1994, Gargoyles' selling efforts were conducted principally
by manufacturers' representatives who were responsible for product lines from
multiple companies. In March 1994, the Company began investing in a direct sales
force, which had an immediate impact on revenue growth and has played a
significant role in positioning the Company for long-term sustainable revenue
growth. The direct sales force has grown from ten individuals in April 1994 to
28 individuals as of December 31, 1996. The sales force currently includes
territory sales managers, national accounts sales managers and sales associates,
as well as international and protective eyewear sales teams. The Company
believes that the benefits of its direct sales force include greater focus and
more effective control, direction, responsiveness and motivation throughout the
entire sales management process. Furthermore, the Company views its direct sales
force as a key asset and continuously seeks to add new products to leverage its
investment in its sales force. Examples of this strategy include the Hobie
Acquisition and the license agreement with Timberland, both of which allow the
Company to provide new products to its growing customer base through its
established sales force.
The Company's direct sales force is responsible for managing all sales
activities and executing the Company's sales, marketing and promotional
strategies. Sales personnel directly call on sunglass specialty retailers,
department stores and large optical chains. Sales force functions include daily
sales calls focused on increasing business with existing accounts and opening
new accounts. This includes educating and training retailers and their employees
to effectively communicate the key features and benefits of the Company's
products and to execute strategic merchandising programs. Sales personnel are
compensated based on a combination of base salary and bonus.
In January 1996, the Company made the strategic decision to expand its
distribution network to include key optical distributors and sporting goods
manufacturers' representatives to supplement the Company's efforts to access the
underpenetrated optical stores and sporting goods markets. These distributors
and manufacturers' representatives represent both Gargoyles and Hobie product
lines. The Company believes that the strategic expansion of its distribution
network will provide its direct sales force with greater ability to increase its
focus on the Company's existing customer base and to achieve greater account
penetration.
MARKETING AND PROMOTION
Before March 1995, the Company devoted few resources to marketing and
promotion. Over the past two years, the Company has significantly increased its
marketing efforts, with increased marketing expenditures, new personnel and new
promotional programs. The Company's marketing department develops all aspects of
advertising, marketing and promoting the Company's products. In addition, the
marketing team participates in the new product development process.
The Company believes that marketing programs developed in cooperation with
its key customers, including Sunglass Hut, are a critical part of the Company's
success. The Company's marketing professionals work with these customers to
design distinctive retail presentations and promotions and to develop marketing
materials to educate store employees as to the features and benefits of the
Company's products. In addition, the Company provides its customers with product
and video presentations that feature the Company's latest products.
The Company uses endorsements by professional athletes to promote its
products and brand image by highlighting the sports efficacy of its designs. The
Company's athlete endorsement strategy focuses on
10
<PAGE> 13
selecting athletes who are highly acclaimed in their respective sports to wear
and promote the Company's sunglasses. Athletes work in partnership with the
Company to contribute to the successful development and marketing of the
Company's products. Athletes currently under contract include such well-known
names as seven-time NASCAR champion Dale Earnhardt, baseball superstar Ken
Griffey, Jr., international soccer superstar Alexi Lalas, Olympic gold-medalist
skier Tommy Moe, NBA superstar Scottie Pippen and world champion snowboarders
Michael Jacoby and Michele Taggart. In key situations, the Company uses the
names of athletes to increase brand recognition by creating a "signature" series
of products. These products currently include The Griffey Wrap and Dale
Earnhardt's and Scottie Pippen's signature models. The Company's strategy also
includes the use of the Company's protective eyewear on the popular television
series ER, which it promotes through an endorsement contract providing for
tie-in promotions with the ER actors.
CUSTOMER SERVICE
The Company's management is committed to achieving customer satisfaction
and encouraging repeat business by providing a high level of knowledgeable,
attentive and personalized customer service. The Company has implemented
extensive employee training designed to ensure that its customer service
representatives, and other key personnel who interface with the Company's
customers, are thoroughly familiar with the technical, lifestyle and functional
elements of the Company's product offerings. Management believes that the
Company's responsive customer service effort has created goodwill and loyalty
among its customers and, as a result, contributes to the strength of Gargoyles'
reputation in the marketplace.
PRINCIPAL CUSTOMERS
Net sales to the Company's 10 largest customers during the years ended
December 31, 1996 and 1995 accounted for approximately 56% and 54%,
respectively. Sunglass Hut, the Company's largest customer, accounted for
approximately 30% and 32% of the Company's consolidated net sales for the same
periods. As of December 31, 1996, the Company's products are sold in more than
1,770 Sunglass Hut locations throughout the United States. While the Company
does not have a purchase agreement with Sunglass Hut, the Company believes that
its relations with this customer are good. Each year the Company and Sunglass
Hut develop a joint plan for promotional, marketing and sales objectives. See
"-- Forward-Looking Statements" and "-- Factors Affecting Future Results and
Regarding Forward-Looking Statements -- Dependence on Sunglass Hut."
INTELLECTUAL PROPERTY
The Company aggressively asserts its rights under patent, trade secret,
unfair competition, trade dress, trademark and copyright laws to protect its
intellectual property, including product designs, proprietary manufacturing
processes and technologies, product research and concepts and recognized
trademarks. These rights are protected through the acquisition of patents and
trademark registrations, the maintenance of trade secrets, the development of
trade dress (the "look and feel" of a product) and, where appropriate,
litigation against those who are, in the Company's opinion, infringing its
rights.
Patents and Trademarks. As of December 31, 1996, the Company had been
issued four U.S. utility patents and one U.S. design patent relating to eyewear,
including patents directed to the dual lens toric curve technology. As of
December 31, 1996, the Company had three utility patent applications and three
design patent application pending in the United States and one utility patent
application pending internationally. The Company intends to file additional
patent applications, when appropriate, relating to improvements in its
technology and other specific products and processes developed by the Company.
As of December 31, 1996, the Company had registered five U.S. trademarks
and four international trademarks relating primarily to the name Gargoyles. In
addition, the Company has licensed the right to use the Hobie, the Timberland
and Timberland tree logo trademarks for use on eyewear products pursuant to the
terms of the license agreements with Hobie and Timberland. Due to the Company's
strict quality-control standards and the desire to protect its proprietary
technology and prevent overexposure of its trademarks, the Company has not
licensed its trademarks for use by other parties for the manufacture and sale of
sunglass products. See "-- Factors Affecting Future Results and Regarding
Forward-Looking Statements -- Uncertain Protection of Intellectual Property
Rights."
11
<PAGE> 14
While there can be no assurance that the Company's patents or trademarks
protect its proprietary information and technologies, the Company intends to
continue to assert its intellectual property rights against any infringer.
Although the Company's assertion of its rights could result in substantial cost
to, and diversion of effort by, the Company, management believes that protection
of the Company's intellectual property rights is a key component of the
Company's business strategy. See "-- Forward Looking Statements" and "Legal
Proceedings." The Company is currently a party in litigation matters concerning
certain of its intellectual property rights.
In February 1996, the Company filed an action in the United States District
Court for the Western District of Washington against Peter and Jane Doe LaHaye,
LaHaye Laboratories, Inc. and NEOPTX, Inc. relating to the potential
infringement of the Company's patent for an adhesive magnification insert to
eyewear products. In April 1996, the defendants counterclaimed seeking a
declaration that the patent is not valid and not infringed.
In May 1996, a notice of opposition was filed against the Company in the
United States Patent and Trademark Office by Mobil Oil Corporation ("Mobil")
seeking the denial of the Company's trademark application to use the Gargoyles
mark for souvenir products. In February 1996, the Company and Mobil reached a
settlement of their dispute, and Mobil's opposition was dismissed. Under the
terms of the settlement, Mobil agreed not to use the words Gargoyle or
Gargoyles, or any colorable variation thereof, in connection with eyewear or
eyewear-related accessories, and the Company agreed to use the word Gargoyles in
connection with souvenirs and sportswear only when such goods are sold or
offered for sale in proximity with the sale of Gargoyles' eyewear products.
On November 22, 1996, the Company filed an action in the United States
District Court for the District of Massachusetts, under Case No. 96-12344RCL,
against AEARO Corp., a Delaware corporation, alleging infringement of the
Company's toric curve lens utility patent. Defendant AEARO has denied the
allegation.
Trade Secrets. The Company also relies on unpatented trade secrets for the
protection of certain intellectual property rights. The Company protects its
trade secrets by requiring its employees, consultants and other agents and
advisors to execute confidentiality agreements upon the commencement of
employment or other relationship with the Company. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Company's proprietary information or adequate remedies in the event of
unauthorized use or disclosure of such information. In addition, there can be no
assurance that others will not independently develop substantially equivalent
proprietary information and technologies, or otherwise gain access to the
Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its rights to unpatented trade secrets. See "-- Forward
Looking Statements."
COMPETITION
The Company competes primarily in the premium segment of the
nonprescription sunglass market, which is fragmented and highly competitive. The
Company competes with a number of established companies, including Bausch &
Lomb, the marketer of the Ray Ban, Killer Loop, Arnette and Revo brands, and
Oakley, which together control approximately 50% of the premium market segment,
as well as Luxottica Group S.P.A., Safilo USA Inc. and Bolle America, Inc. In
the polarized sunglass segment, the Company competes against Maui Jim and Costa
del Mar brands, as well as the polarized products sold by other sunglass
manufacturers. The Company also competes in the market for premium protective
eyewear, primarily against Bolle America, Inc., and against lower-priced
products produced by Uvex Safety, Inc. and Titmus Optical, Inc. Several of these
companies in the premium sunglass and protective eyewear markets have
substantially greater resources and better name recognition than the Company and
sell their products through broader and more diverse distribution channels. The
Company could also face competition from new competitors, including established
branded consumer products companies, such as Nike, Inc. ("Nike"), that also have
greater financial and other resources than the Company. In addition, as the
Company expands internationally, it will face substantial competition from
companies that have already established their products in international markets
and consequently have significantly more experience in those markets than the
Company.
12
<PAGE> 15
The premium sunglass market is susceptible to rapid changes in consumer
preferences that could affect acceptance and sales of the Company's products.
The major competitive factors include fashion trends, brand recognition, methods
of distribution and the number and range of products offered. In addition, to
retain and increase its market share, the Company must continue to be
competitive in the areas of quality, performance, technology, intellectual
property protection and customer service. See "-- Forward-Looking Statements"
and "-- Factors Affecting Future Results and Regarding Forward-Looking
Statements -- Highly Competitive Market."
EMPLOYEES
As of December 31, 1996, the Company had 201 employees, of which 76 were
full-time salaried, 104 were full-time hourly and 21 were part-time hourly. The
Company is not a party to any labor agreement and none of its employees is
represented by a labor union. The Company considers its relationship with its
employees to be excellent, and has never experienced a work stoppage.
FACTORS AFFECTING FUTURE RESULTS AND REGARDING FORWARD-LOOKING STATEMENTS
The Company's business, results of operations and financial condition are
subject to many risks, including those set forth below. In addition, the
following important factors, among other, could cause the Company's actual
results to differ materially from those expressed in the Company's
forward-looking statements in this report and presented elsewhere by management
from time to time. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date of this report or to reflect the occurrence of
unanticipated events.
POTENTIAL INABILITY TO SUSTAIN AND MANAGE GROWTH
The Company has experienced significant growth in revenues in recent
periods. The continued growth of the Company's revenues and its ability to
generate profits will depend on, among other factors, the continued growth of
the premium sunglass market, the Company's ability to develop and introduce new
products, and the Company's efforts to broaden and increase sales through its
domestic and international sales and distribution channels.
If the Company continues to experience significant growth, its future
success will also depend on its ability to manage growth as it expands its
production and marketing capacities, which will place a significant strain on
the Company's employees and operations. To manage growth effectively, the
Company will be required to continue to implement changes in certain aspects of
its business, expand its operations and develop, train, manage and assimilate an
increasing number of management-level and other employees. The Company depends
on its management information systems to process orders, manage inventories and
receivables, track product through its expanding manufacturing operations and
otherwise maintain cost-efficient operations. As the Company grows, it will be
required to augment its management information systems from time to time, as a
result of which there can be no assurance that the Company will not experience
systems failures or interruptions. In addition, because the Company's existing
facilities will not be sufficient to support its growth plans, the Company
intends to relocate or expand its existing facilities in 1998, which could cause
delays or interruptions in the Company's operations. If management is unable to
manage growth effectively, the Company's business, prospects, financial
condition and operating results could be materially adversely affected.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS
The sustainability of the Company's growth will depend, in part, on its
continued ability to develop and introduce innovative products. Innovative
designs are often not successful, and successful product designs can be
displaced by other product designs introduced by competitors that shift market
preferences in their favor. The Company is introducing more lifestyle-oriented
sunglasses, which may have relatively short life cycles,
13
<PAGE> 16
thereby requiring the Company to introduce new products more frequently. In
addition, competitors may follow the Company's introduction of successful
products with similar product offerings. The eyewear industry is subject to
changing consumer preferences, and the Company's sunglasses are likely to be
susceptible to fashion trends. If the Company misjudges the market for a
particular product, the Company's sales may be adversely affected and it may be
faced with excess inventories and underutilized manufacturing capacity. As a
result of these and other factors, there can be no assurance that the Company
will successfully maintain or increase its market share.
HIGHLY COMPETITIVE MARKET
The premium segment of the nonprescription sunglass market is highly
competitive. The Company competes with a number of established companies,
including Bausch & Lomb, the marketer of Ray Ban, Killer Loop, Arnette and Revo
brands, and Oakley, which together control approximately 50% of the premium
market segment, and with several companies having smaller but significant market
shares. Several of these companies have substantially greater resources and
better name recognition than the Company and sell their products through broader
and more diverse distribution channels. The Company could also face competition
from new competitors, including established branded consumer products companies,
such as Nike that also have greater financial and other resources than the
Company. In addition, as the Company expands internationally, it will face
substantial competition from companies that have already established their
products in international markets and consequently have significantly more
experience in those markets than the Company. The major competitive factors in
the premium sunglass market include fashion trends, brand recognition, method of
distribution and the number and range of products offered. In addition, to
retain and increase its market share, the Company must continue to be
competitive in the areas of quality and performance, technology, intellectual
property protection and customer service. See "-- Competition."
POTENTIAL INABILITY TO SUCCESSFULLY INTEGRATE ACQUISITIONS AND LICENSED
PRODUCTS
The integration and consolidation of future acquisitions and licensing
arrangements will require substantial management, financial and other resources
and may pose risks with respect to the Company's business, prospects, financial
condition and operating results. There can be no assurance that the Company's
resources will be sufficient to accomplish the integration of such products and
or that the Company will not experience difficulties with customers, personnel
or others. In addition, although the Company believes that its acquisitions and
licensing arrangements will enhance its competitive position and business
prospects, there can be no assurance that such benefits will be realized or that
the combination of the Company with other companies will be successful. The
success of the Timberland license arrangement, the Company's first effort to
develop a new product line using a third-party brand, will depend in part on the
continuing strength of the Timberland brand and the Company's ability to expand
recognition and acceptance of the Timberland brand into the sunglass market, and
the Company's ability to expand its products from a sports-oriented product line
to include a lifestyle-oriented line for Timberland. There can be no assurance
that the Company's efforts will result in significant sales or net income, if
any. The Company may, if opportunities arise, acquire or license other product
lines or businesses.
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend to a significant extent on the efforts of
its senior management, particularly Douglas B. Hauff and G. Travis Worth. In
addition, the success of the Timberland license arrangement will depend in part
on the efforts of Douglas W. Lauer, who was hired to design and manage the
Timberland brand. Although the Company has entered into employment agreements
with Messrs. Hauff, Worth and Lauer, there can be no assurance that such
individuals will remain with the Company. The Company's operations could be
adversely affected if, for any reason, such key personnel do not continue to be
active in the Company's management.
14
<PAGE> 17
DEPENDENCE ON SUNGLASS HUT
Sales to Sunglass Hut, a sunglass specialty retail chain (including sales
to Sunsations, which was acquired by Sunglass Hut in July 1995), accounted for
approximately 32% and 30% of the Company's net sales for the years ended
December 31, 1995 and 1996, respectively. Historically, Sunglass Hut has
contributed significantly to the Company's overall growth. The Company does not
have a purchase agreement with Sunglass Hut and a substantial decline in
purchases of the Company's products by Sunglass Hut could have a material
adverse effect on the Company's business, prospects, financial condition and
operating results. In addition, the Company's ability to maintain historical
levels of gross profit will depend in part on its ability to continue to sell
sunglasses to Sunglass Hut at or near historical price levels.
RELIANCE ON LIMITED SOURCES OF SUPPLIES
The Company relies on a single source of supply for several of its
components, including several of its frames, although the Company is attempting
to establish multiple sources for more of its components. The effect on the
Company of the loss of any of such sources or of a disruption in their business
will depend primarily on the length of time necessary to find a suitable
alternative source. The loss of a source for a particular frame or any
disruption in such source's business or failure by it to meet the Company's
product needs on a timely basis could cause, at a minimum, temporary shortages
in materials and could have a material adverse effect on the Company's business,
prospects, financial condition and operating results. There can be no assurance
that precautions taken by the Company will be adequate or that alternative
sources of supply can be located or developed in a timely manner.
The Company's Classic lens, which is used in manufacturing most of the
other Gargoyles brand products, can be produced only from the Company's molds,
which are operated by the Company's suppliers. If a mold were to become damaged
or unavailable for an extended period, the Company could experience a shortage
of its Classic lens, which could adversely affect the Company's operating
results. Moreover, the Company currently depends on a complex array of multiple
vendors in geographically diverse areas to perform its lens molding,
hard-coating and mirroring processes. The Company generally places orders for
lens molding, hard-coating and mirroring three to nine months prior to
forecasted product sales. The loss of or a delay by any one of its vendors could
interrupt the Company's supply of lenses and could adversely affect the
Company's business, prospects, financial condition and operating results.
Polycarbonate, the material from which the Company's lenses are
constructed, is presently in limited supply in world markets and requires a long
lead time for orders by the Company's lens suppliers. If such shortage continues
beyond current expectations, or if the Company and its lens suppliers are unable
to accurately predict and order sufficient polycarbonate to support the
Company's needs, the Company's lens suppliers' ability to deliver sufficient
quantities of lenses to the Company could be adversely affected or the price of
such lenses to the Company could increase. See "-- Manufacturing."
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The Company relies, in part, on patent, trade secret, unfair competition,
trade dress, trademark and copyright laws to protect its rights to certain
aspects of its products and to protect its competitive position and its rights
to certain aspects of its products. There can be no assurance that any pending
trademark or patent application will result in the issuance of a registered
trademark or patent, that any trademark or patent granted will be effective in
discouraging competition or be held valid if subsequently challenged or that
others will not assert rights in, and ownership of, the patents and other
proprietary rights of the Company. In addition, there can be no assurance that
the actions taken by the Company to protect its proprietary rights will be
adequate to prevent imitation of its products, that the Company's proprietary
information will not become known to competitors, that the Company can
meaningfully protect its rights to unpatented proprietary information or that
others will not independently develop substantially equivalent or better
products that do not infringe on the Company's intellectual property rights. The
Company has in the past been, and is currently, involved in litigation
concerning its proprietary rights. In addition, the laws of certain foreign
countries do not protect proprietary rights to the same extent as do the laws of
the United States. See "-- Intellectual Property."
15
<PAGE> 18
Consistent with the Company's strategy of vigorously defending its
intellectual property rights, the Company devotes substantial resources to the
enforcement of patents issued and trademarks granted to the Company, to the
protection of trade secrets, trade dress or other intellectual property rights
owned by the Company and to the determination of the scope or validity of the
proprietary rights of others that might be asserted against the Company. A
substantial increase in the level of potentially infringing activities by others
could require the Company to increase significantly the resources devoted to
such efforts. In addition, an adverse determination in litigation could subject
the Company to the loss of its rights to a particular patent, trademark,
copyright or trade secret, could require the Company to grant licenses to third
parties, could prevent the Company from manufacturing, selling or using certain
aspects of its products or could subject the Company to substantial liability,
any of which could have a material adverse effect on the Company's business,
prospects, financial condition and operating results.
SEASONALITY OF BUSINESS
The Company's business is affected by economic factors and seasonal
consumer buying patterns. The Company's quarterly results of operations have
fluctuated in the past and may continue to fluctuate as a result of a number of
factors, including seasonal cycles, the timing of new product introductions, the
timing of orders by the Company's customers, the mix of product sales and the
effects of weather conditions on consumer purchases. Historically, the Company's
net sales, in the aggregate, generally have been higher in the period from March
to September. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Seasonality."
ITEM 2. PROPERTIES
The Company's corporate headquarters and its production, warehousing and
distribution facilities are located in Kent, Washington and consist of three
leased buildings totaling approximately 54,000 square feet of space.
Management believes that the Company's facilities are currently operating
near maximum capacity and that such facilities will not be sufficient to meet
the Company's future operating needs. The Company anticipates that all or a
portion of its operations will be relocated in 1998 to a larger facility. As a
result, any delays or interruptions in the Company's manufacturing processes or
other operations could have a material adverse effect on the Company. See
"Business -- Forward-Looking Statements" and "Business -- Factors Affecting
Future Results and Regarding Forward-Looking Statements -- Potential Inability
to Sustain and Manage Growth."
ITEM 3. LEGAL PROCEEDINGS
The Company has advanced funds to Axcent Sports, Inc. ("Axcent"), a
corporation of record in the state of Washington, which had operations in
Boulder, Colorado, that distributed bicycling products produced by adidas
America, Inc. ("Adidas"). On February 24, 1996, Adidas filed a lawsuit in the
United States District Court for the District of Oregon under Case Number
CV-P7-239-JE. In this lawsuit, Adidas claims $603,904.56 plus prejudgment
interest and incidental damages, against the Company, Axcent, and Conquest for
product shipped to Axcent by Adidas and for product ordered by Axcent and held
in Adidas warehouse facilities. Adidas claims that the Company is liable to it
on the theory that Axcent was a division of the Company. Adidas also asserts
claims against the Company based on piercing of the corporate form of Axcent and
based on promoter liability, alleging that the Company failed to adequately
capitalize and/or incorporate Axcent. The Company denies the allegations of
Adidas and intends to defend vigorously the claims of Adidas against the
Company. Trillium Corporation ("Trillium") and the Company's President, Douglas
B. Hauff, jointly and severally and on an unlimited basis, have agreed to
indemnify, defend and hold harmless the Company from and against all losses,
liabilities, deficiencies, claims and expenses (including but not limited to,
costs of defense and reasonable attorneys' fees) incurred by the Company arising
from the lawsuit. The Company has tendered defense of the Adidas lawsuit to
Trillium and Mr. Hauff, and they have accepted such defense. The parties have
reached a settlement of this matter and are currently drafting settlement
documents. The Company believes that the settlement and ultimate resolution of
this matter will not result in a charge to
16
<PAGE> 19
the Company in excess of amounts reserved. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Conquest Asset Sale
and Liquidation."
In March 1997, the Company terminated an employee, and at the time of
termination, the Company offered the employee a severance package. The employee
has rejected the severance package and has proposed an alternative severance
package totaling $850,000, alleging, among other things, wrongful termination,
and discrimination in violation of applicable law. The employee has not yet,
however, filed suit against the Company. 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 and the Company's
investigation is not complete, the Company presently believes the employee's
damage claim is excessive and is not supported by the facts and circumstances of
the employee's employment and 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
"Business -- Forward-Looking Statements."
The Company also is a party to various other legal actions related to the
defense of its intellectual property rights. The Company believes that the
outcome of all such pending legal proceedings, in the aggregate, will not have a
material adverse effect on its results of operations or financial position. See
"Business -- Intellectual Property" and "Business -- Forward-Looking
Statements."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its security holders
during the fourth quarter of its fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company effected its initial public offering of Common Stock on
September 27, 1996, at a price to the public of $16.00 per share. Since that
date the Company's Common Stock has traded on the NASDAQ National Market. The
table below sets forth for the fiscal quarters indicated the reported high and
low sale prices of the Company's Common Stock, as reported on the NASDAQ
National Market.
<TABLE>
<CAPTION>
1996 HIGH LOW
----------------------------------------------------------- ------ ------
<S> <C> <C>
Third quarter (from September 27, 1996).................... $23.50 $19.75
Fourth quarter............................................. $21.25 $ 8.00
</TABLE>
As of March 26, 1997, there were 65 record holders of Common Stock. The
Company believes that the number of beneficial owners of its Common Stock is
approximately 3000. On March 26, 1997, the Company's Common Stock traded at a
high of $8.25 and a low of $7.75.
The Company anticipates that for the foreseeable future, all earnings, if
any, will be retained for the operation and expansion of its business and that
it will not pay cash dividends. The payment of dividends, if any, in the future
will be at the discretion of the Board of Directors and will depend upon, among
other things, future earnings, capital requirements, restrictions in future
financing agreements, the general financial condition of the Company and general
business conditions.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1996 and
1995 and November 30, 1994 and for the years ended December 31, 1996 and 1995
and November 30, 1994 and 1993 are derived from the consolidated financial
statements of Gargoyles, Inc., which have been audited by Ernst & Young LLP,
independent auditors. The selected financial data as of November 30, 1993 and
1992 and for the year ended November 30, 1992 are derived from unaudited
consolidated financial statements. In the Company's opinion, the unaudited
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and results of operations for these
periods. This data should be read in conjunction with the Company's consolidated
17
<PAGE> 20
financial statements and the related notes thereto, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this form.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------
DECEMBER 31, NOVEMBER 30,
----------------- -------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................................... $33,094 $17,896 $11,083 $8,242 $6,317
Cost of sales...................................... 13,743 7,017 4,265 3,243 2,483
------- ------- ---- ---- ----
Gross profit....................................... 19,351 10,879 6,818 4,999 3,834
License income..................................... 480 480 -- -- --
Operating expenses:
Sales and marketing.............................. 9,481 5,934 3,041 2,210 1,583
General and administrative....................... 4,399 3,030 2,558 1,453 1,256
Shipping and warehousing......................... 1,977 1,030 607 436 310
Research and development......................... 947 305 127 215 211
Stock compensation and IPO bonus................. 3,833 250 -- -- --
------- ------- ---- ---- ----
Total operating expenses................. 20,637 10,549 6,333 4,314 3,360
------- ------- ---- ---- ----
Income (loss) from operations...................... (806) 810 485 685 474
Other income (expense):
Interest expense, net............................ (1,988) (1,043) (176) (55) (35)
Recapitalization expenses........................ -- (574) -- -- --
Provision for loss on affiliate.................. -- (1,597) -- -- --
Other............................................ -- 7 -- 2 87
------- ------- ---- ---- ----
Total other income (expense)............. (1,988) (3,207) (176) (53) 52
------- ------- ---- ---- ----
Income (loss) before income taxes.................. (2,794) (2,397) 309 632 526
Income tax provision (benefit)..................... -- (100) 10 40 107
Net income (loss).................................. $(2,794) $(2,297) $ 299 $ 592 $ 419
======= ======= ==== ==== ====
Pro forma net income (loss)(1)..................... $(2,794) $(2,343) $ 179 $ 415 $ 380
======= ======= ==== ==== ====
Pro forma net income (loss) per share(2)........... $ (0.45) $ (0.41) $ 0.03 $ 0.07 $ 0.07
Shares used in computing pro forma net income
(loss) per share(2).............................. 6,218 5,707 5,707 5,707 5,707
BALANCE SHEET DATA (END OF PERIOD):
Working capital.................................. $15,600 $(2,692) $ (146) $1,042 $1,053
Total assets..................................... 27,262 11,266 6,673 3,776 2,422
Short-term debt.................................. -- 5,413 2,068 811 147
Long-term debt, including current maturities..... -- 7,367 489 251 159
Shareholders' equity (deficit)................... 20,903 (7,204) 776 1,101 1,097
</TABLE>
- ---------------
(1) Antone, an affiliated company, had previously been taxed as an S
corporation. The pro forma net income amounts for all periods prior to 1996
reflect adjustments for income taxes as if Antone had been taxed as a C
corporation rather than an S corporation.
(2) See Note 1 to the Company's Consolidated Financial Statements for an
explanation of the number of shares used in computing pro forma net income
(loss) per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPANY HISTORY
Background. The Company was founded by Dennis L. Burns (the "Founder") to
develop a sunglass style that not only would cover and protect the eyes more
effectively than traditional "flat" lens designs, but also would minimize
distortion. In 1983, the Company completed its development of the patented dual
lens toric curve technology and introduced its first product, the Gargoyles
Classic. Until 1992, the Company was a
18
<PAGE> 21
successful single-product company with relatively few resources devoted to
expanding its product line, and was dependent on independent manufacturers'
representatives to sell its products. In May 1992, the Company began installing
a new management team. The new management team (i) hired a number of experienced
senior executives and mid-level managers; (ii) focused on developing new
products designed to exploit the patented dual lens toric curve technology;
(iii) pursued a growth strategy centered around aggressive new product
introductions; (iv) began investing in its own direct sales force to expand
distribution; and (v) implemented a more focused and aggressive marketing and
advertising strategy to enhance the Gargoyles' brand image. Primarily as a
result of these initiatives, the Company has achieved significant increases in
sales.
Recapitalization. In a March 22, 1995 recapitalization (the
"Recapitalization"), an investor group (the "Investors") led by Trillium
acquired a controlling interest in the Company. In the Recapitalization, the
Company (i) borrowed $6.0 million pursuant to a bank loan guaranteed by
Trillium; (ii) sold approximately 3.3 million shares of its Common Stock to the
Investors in exchange for $5.4 million, of which $900,000 was paid in cash and
$4.5 million was paid in the form of a promissory note from Trillium; and (iii)
redeemed approximately 3.3 million shares of Common Stock from the Founder for
$10.9 million, of which $6.4 million was paid in cash and $4.5 million was paid
in the form of a promissory note to the Founder. The $4.5 million note
receivable and the $4.5 million note payable and related interest have been
offset for financial reporting purposes. In January 1996, the obligations
evidenced by the Company's note to the Founder and Trillium's note to the
Company were satisfied in full. In connection with the Recapitalization, the
Company recorded a charge of $574,000 relating to severance, legal and other
costs and recorded noncash deferred compensation of $400,000 related to the
amendment of an option agreement, which was amortized over the vesting period.
Hobie Acquisition. In February 1996, the Company acquired the Hobie
sunglass business for $3.4 million. Hobie manufactures polarized sunglasses
under the Hobie brand name pursuant to a long-term license agreement from Hobie
Designs, Inc. In addition, as consideration for certain noncompetition
covenants, the Company agreed to pay an aggregate of $200,000 in 12 monthly
installments and issued an aggregate of 14,540 shares of its Common Stock to two
of Hobie's former shareholders. The Company also agreed to pay consulting
service fees of up to an aggregate of $300,000 to these two shareholders,
contingent upon the achievement by Hobie of certain sales objectives in 1996 and
1997. The Hobie Acquisition was funded by proceeds of a bank loan, which
Trillium guaranteed. The Hobie Acquisition loan was repaid with net proceeds of
the Company's initial public offering.
Timberland Transaction. In May 1996, the Company, together with Douglas W.
Lauer, former president of Revo, a subsidiary of Bausch & Lomb, and Timberland,
formed Kindling, a majority-owned subsidiary of the Company, to design, develop,
manufacture and distribute sunglasses and, with Timberland's consent, ophthalmic
frames under the Timberland brand name. Concurrently with Kindling's formation,
the Company and Kindling, jointly and severally, acquired an exclusive,
worldwide (except for Benelux, Cyprus, Israel and Scandinavia) license from
Timberland to use the Timberland and tree logo trademarks on sunglasses, eyewear
accessories and, with Timberland's consent, ophthalmic frames. The Company
contributed $1.2 million for its 70% interest in Kindling. Of that amount,
$100,000 was paid in cash and $1.1 million by means of a non-interest-bearing
promissory note that was payable in installments through January 1997, a portion
of which was paid with the net proceeds of the Company's initial public
offering. The license agreement with Timberland expires on December 31, 2000
with options to renew by the Company, assuming certain conditions are met and
subject to provisions for earlier termination. Under certain circumstances,
Timberland may require Kindling to repurchase all of Timberland's 10% interest
in Kindling. In addition, upon the achievement of certain operating objectives,
Mr. Lauer and certain other key employees of Kindling may be granted up to an
aggregate of 10% of Kindling's common stock owned by the Company.
Conquest Asset Sale and Liquidation. Prior to the Recapitalization, both
the Company and Conquest were majority-owned by the Founder. Conquest's core
business has been the design, manufacture, distribution and sale of sports
helmets. At the time of the Recapitalization, shares of Conquest's common stock
were sold by the Founder to substantially the same investor group that purchased
Common Stock in the Recapitalization. The Company had advanced funds to Conquest
and had guaranteed certain liabilities of Conquest. Management concluded that it
is likely that Conquest will be unable to meet its obligations and, therefore,
the Company recorded a provision in the fourth quarter of 1995 of $1.6 million
representing the write-off of the
19
<PAGE> 22
Company's receivable from Conquest and a reserve for other potential payments of
Conquest liabilities, including certain Conquest indebtedness which Gargoyles
has guaranteed. In June 1996, Conquest sold certain of its assets for a purchase
price of approximately $600,000 plus the assumption of certain liabilities.
Conquest is in the process of liquidating its remaining assets.
In addition, the Company had advanced approximately $190,000 to Axcent.
Based on circumstances that came to the Company's attention in September 1996,
management concluded that Axcent may be unable to meet its obligations, and as
of December 31, 1996 the Company has fully reserved for the Axcent advances.
Discontinued Distribution Agreement. During late 1994, the Company entered
into a nonexclusive agreement to distribute a line of sunglasses produced by
another manufacturer. These sunglasses were produced under a license agreement
with a major manufacturer of athletic shoes and apparel. The Company had no
significant sales under this agreement prior to 1995. The Company's results of
operations for 1995 include net sales of $758,066, cost of sales of $490,011 and
sales and marketing expenses of $579,972 related to this agreement. During the
fourth quarter of 1995, both parties agreed to terminate this agreement.
GENERAL
The Company introduced its first product in December 1983. Since the
Company's new management was put in place in 1992, the Company's net sales have
grown significantly, from $6.3 million in 1992 to $33.1 million in 1996. This
represents a compound annual growth rate of 51%. The Company attributes its net
sales growth primarily to the introduction of new products, growth of premium
sunglass retailers, sales efforts focused on opening new accounts and increased
brand recognition. The Company's number of active accounts increased from in
excess of 1,800 in 1993 to approximately 4,100 in 1996.
In April 1995, the Company entered into a license agreement (the "License
Agreement") whereby it, as licensor, receives quarterly cash payments based on
the portion of the licensee's income from the sale of certain products. The
Company also received a $1.0 million payment at the inception of the License
Agreement. After deducting expenses associated with the License Agreement, the
$720,000 balance was recorded as deferred license income, and is being amortized
over a four-year term. The quarterly cash payments, and the amortization of
deferred license income, are reported as license income on the Company's
consolidated financial statements.
Hobie was acquired by the Company on February 13, 1996 and was accounted
for as a purchase. Results of Hobie are therefore included in the Company's
consolidated financial statements for the year ended December 31, 1996 only for
the period from February 14, 1996 to December 31, 1996.
Pursuant to an agreement dated January 5, 1994, among Gargoyles, the
Founder and Mr. Hauff, the Founder granted Mr. Hauff a nonqualified option to
purchase 10% of the Common Stock from the Founder. In connection with the
Recapitalization, the provisions of the option agreement were amended to
eliminate the option's expiration date, unless the Company closed an initial
public offering, in which case the option would immediately vest and expire. The
amended option was subsequently assumed by the Investors. As a result of the
amendment, the Company was required to recognize deferred compensation of
$400,000, which was expensed over the option vesting period. Also in connection
with the Recapitalization, the Investors granted Mr. Hauff an additional
nonqualified option to purchase 136,250 shares of the Common Stock owned by the
Investors at an exercise price of $4.58 per share. In June 1996, in
contemplation of the Company's initial public offering, the Investors further
amended Mr. Hauff's option agreements to accelerate the vesting and to extend
the expiration date to June 28, 2006. As a result, the remaining balance of
$150,000 from the initial $400,000 deferred compensation was expensed and
Gargoyles recognized an additional nonrecurring, noncash stock compensation
charge of $3.4 million in the second quarter of 1996. On March 7, 1997, Mr.
Hauff gave written notice of his intent to exercise his option to purchase all
the Common Stock subject to the option agreements.
Antone provided assembly operations for Gargoyles prior to the
Recapitalization and was merged into Gargoyles in connection with the
Recapitalization. The merger was accounted for as a pooling-of-interests due to
common ownership. Prior to the Recapitalization, Antone was taxed as an S
corporation. Accordingly,
20
<PAGE> 23
Antone's taxable income included in the Company's consolidated financial
statements is treated as if it were distributed to the Founder, who is
responsible for payment of taxes thereon. The Company did not, therefore, pay
taxes on Antone's taxable income prior to the Recapitalization.
A nonrecurring $300,000 bonus to an executive officer, in connection with
an employment agreement, to be paid upon the closing of the Company's initial
public offering, was expensed concurrently with the closing of the offering. In
addition, unamortized loan fees of $205,000, associated with debt retired with a
portion of the net proceeds of the Offering, were expensed concurrently with the
repayment of the debt immediately after the closing of the Offering.
On October 2, 1996, the Company concluded its initial public offering in
which 1,954,465 new shares of common stock were issued at a price of $16 per
share. The initial public offering raised $27 million in net proceeds for the
Company. A portion of these net proceeds were used to repay $19 million of debt
in early October.
RECENT DEVELOPMENTS
In January 1997, the Company entered into an agreement with Golden Bear
Golf, Inc. ("Golden Bear") to design, manufacture and market a line of
sunglasses to be worn on the golf course. The Company will collaborate with
Golden Bear Chairman Jack Nicklaus on the design of the sunglasses and Mr.
Nicklaus will endorse a signature series of products.
To support and enhance the Gargoyles brand with NASCAR fans, who have long
shown their loyalty to the Gargoyles brand, in February 1997, the Company
sponsored a NASCAR Busch Series race at Daytona, Florida, the Gargoyles 300. As
part of the Gargoyles 300 sponsorship, Gargoyles became the "official premium
sunglass" of the Daytona International Speedway, and the race received national
broadcast coverage by CBS Sports. Gargoyles' agreement with the International
Speedway Corporation provides for race sponsorship by Gargoyles again in 1998
and 1999. Under the terms of the sponsorship agreement over the three-year term
of the agreement, the Company will be required to pay $1,050,000 plus a portion
of the Company's license income from the sale of Gargoyles 300 souvenirs. The
Company has the right to terminate the agreement upon the payment of a $100,000
termination fee. In a related agreement with CBS Television Network, the Company
has agreed to pay CBS $850,000 over the three-year term of that agreement for
network broadcast coverage of the Gargoyles 300 race.
The Company has reached a preliminary agreement to acquire the assets of
Sungold Enterprises, Ltd., a New York corporation ("Sungold"). The transaction
is subject to several conditions to closing. In connection with the Sungold
transaction, the Company is negotiating an amendment to its Credit Facility
which would include an increase in its credit facility and an acquisition
facility. See "-- Liquidity and Capital Resources." If all closing conditions
are satisfied, the purchase transaction is expected to close in April 1997.
Sungold manufactures 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 featuring styles that reflect
everything from easy California living to the grit of inner city culture, and
Anarchy Eyewear, a cutting-edge brand popular with alternative sports
enthusiasts aged 15 to 25. Stussy EyeGear offers a number of products which are
sold at suggested retail prices ranging from $60 to $120. Anarchy Eyewear offers
styles which reflect the brand's "Altercation with the Norm" tag line and are
sold at suggested retail prices ranging from $40 to $70.
21
<PAGE> 24
RESULTS OF OPERATIONS
The following table sets forth results of operations, as a percentage of
net sales, for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------
DECEMBER 31,
--------------- NOVEMBER 30,
1996 1995 1994
----- ----- -------------
<S> <C> <C> <C>
Net sales.............................................. 100.0% 100.0% 100.0%
Cost of sales.......................................... 41.5 39.2 38.5
----- ----- -----
Gross profit........................................... 58.5 60.8 61.5
License income......................................... 1.5 2.7 --
Operating expenses:
Sales and marketing.................................. 28.6 33.2 27.4
General and administrative........................... 13.3 16.9 23.1
Shipping and warehousing............................. 6.0 5.8 5.5
Research and development............................. 2.9 1.7 1.1
Stock compensation and IPO bonus..................... 11.6 1.4 --
----- ----- -----
Total operating expenses.......................... 62.4 59.0 57.1
----- ----- -----
Income (loss) from operations.......................... (2.4)% 4.5% 4.4%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales. Net sales increased to $33.1 million for the year ended December
31, 1996 from $17.9 million for the year ended December 31, 1995. This increase
was primarily the result of (i) new product introductions, including the
Paladin, Vortex and Octane models in 1996, (ii) sales increases in most existing
product lines, (iii) an increase in the number of active accounts resulting from
the Company's sales efforts, and (iv) sale of Hobie products in the 1996 period,
subsequent to the Hobie Acquisition, totaling approximately $6.1 million. The
change in the Company's product mix associated with new product introductions
and inclusion of the Hobie product lines contributed to a 3% increase in the
total average selling price in the 1996 period on unit growth of 85%.
Gross profit. Gross profit increased to $19.4 million for the year ended
December 31, 1996 from $10.9 million for the year ended December 31, 1995. Gross
margin decreased to 58.5% in 1996 from 60.8% in 1995. The decline in gross
margin in 1996 was attributable, in part, to growth in sales to new
distributors, which receive higher volume discounts than the Company's other
accounts. In addition, the decrease in gross margin in 1996 resulted from lower
gross margin for Hobie. Hobie's lower gross margin resulted primarily from sales
pricing and component costs in place at the time of the Hobie Acquisition in
February 1996. The decrease in gross margin in 1996 also resulted from
unanticipated cost increases from one frame supplier and resulting increases in
production costs at the Company. The Company has replaced this supplier with a
new, lower-cost supplier.
License income. License income was $480,000 for the years ended December
31, 1996 and 1995.
Operating expenses. Operating expenses increased to $20.6 million for the
year ended December 31, 1996 from $10.5 million for the year ended December 31,
1995. As a percentage of net sales, operating expenses increased to 62.4% in
1996, which included stock compensation and a bonus paid in connection with the
Company's initial public offering ("IPO bonus") of $3.8 million or 11.6% of net
sales, from 59.0% in 1995. Excluding this stock compensation and IPO bonus,
operating expenses as a percentage of net sales decreased to 50.8% from 59.0%
for the 1996 period. Sales and marketing expenses increased $3.5 million in
1996, primarily as a result of salaries and commissions associated with higher
sales levels and increases in marketing and warranty expenditures. As a
percentage of net sales, sales and marketing expenses decreased to 28.6% in 1996
from 33.2% in 1995 due to the slower growth of these expenses compared to net
sales. General and administrative expenses increased $1.4 million in 1996, as
the Company continued to add personnel and the infrastructure necessary to
support its growth. As a percentage of net sales, general and administrative
22
<PAGE> 25
expenses decreased to 13.3% in 1996 from 16.9% in 1995, due to greater leverage
of the Company's overhead. Research and development costs increased $642,000 in
1996, as the Company added personnel to develop new products for the Gargoyles
and Hobie lines, as well as the new Timberland eyewear line scheduled for launch
in early 1997. Stock compensation and IPO bonus increased to $3.8 million in
1996 from $250,000 in 1995. See "-- General."
Income (loss) from operations. The Company's loss from operations of
($806,000) for the year ended December 31, 1996 compared to income from
operations of $810,000 for the year ended December 31, 1995 primarily as a
result of the $3.8 million nonrecurring stock compensation and IPO bonus in
1996.
Interest expense, net. Net interest expense increased to $2.0 million for
the year ended December 31, 1996 from $1.0 million for the year ended December
31, 1995. This increase resulted from substantially higher debt incurred in the
Recapitalization in March 1995 and the Hobie Acquisition in February 1996, and
increased borrowings to support operations.
Recapitalization expenses. In March 1995, the Company incurred $574,000 in
expenses relating to the Recapitalization for severance, legal and other costs.
See "-- Company History"
Provision for loss on affiliate. During 1995, the Company recorded a $1.6
million provision for the loss on Conquest. Gargoyles had advanced funds to, and
guaranteed certain liabilities of, Conquest. This provision included the
write-off of the funds advanced, and the establishment of a liability for the
Company's potential payment of certain Conquest liabilities. See "-- Company
History."
Income tax provision (benefit). The Company's income tax benefit was zero
for the year ended December 31, 1996 compared to an income tax benefit of
$100,000 for the year ended December 31, 1995. Differences from the federal
statutory income tax rate of 34% resulted primarily in 1996 and 1995 from
increases in the reserve against certain tax assets and, in 1995, the inclusion
of Antone's earnings in income (loss) before income taxes. The Company was not
subject to income tax on Antone's earnings because Antone was an S corporation.
Net income (loss). As a result of the items discussed above, the Company's
net loss was ($2.8) million or ($0.45) per share for the year ended December 31,
1996 compared to a net loss of ($2.3) million or ($0.40) per share for the year
ended December 31, 1995.
Hobie. Net sales of Hobie sunglasses were $6.1 million for the year ended
December 31, 1996 compared to $4.0 million for the year ended December 31, 1995.
Hobie's income from operations increased to $1.5 million for the year ended
December 31, 1996 from $162,000 for the year ended December 31, 1995. Hobie's
operating expenses in the 1996 period included amortization of intangibles
totaling $204,000.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED NOVEMBER 30, 1994
Change in fiscal year-end. In 1995, the Company changed its reporting
period from a fiscal year ending November 30 to a calendar year. The results of
operations for the one-month period ended December 31, 1994 are presented in the
footnotes to the Company's Consolidated Financial Statements. Because the
Company's business is seasonal, the results of operations for December are not
indicative of results for other months in the year.
Net sales. Net sales increased to $17.9 million for the year ended December
31, 1995 from $11.1 million for the year ended November 30, 1994. This increase
was primarily the result of (i) new product introductions, including the Helios
models, (ii) sales increases in most existing product lines, and (iii) an
increase in the number of active accounts resulting from the Company's sales
efforts. The change in the Company's product mix contributed to a 15% increase
in the total average selling price of Gargoyles eyewear in 1995 on unit growth
of 38%.
Gross Profit. Gross profit increased to $10.9 million for the year ended
December 31, 1995 from $6.8 million for the year ended November 30, 1994. Gross
margin decreased to 60.8% in 1995 from 61.5% in 1994. This margin decrease
resulted in part from unanticipated cost increases from one frame supplier and
resulting increases in production costs at the Company in the 1995 period. The
decrease in gross margin also
23
<PAGE> 26
resulted in part from the inclusion in the 1995 period of sales of $758,066
under the discontinued distribution agreement which has a gross margin of 35%.
These decreases in gross margin were partially offset by a reduction in the cost
for certain other key components, including temples and nosebridges for its
Classic and 85s models. The Company is replacing the frame supplier with a new,
lower-cost supplier.
License Income. The Licensing Agreement was entered into in February 1995,
resulting in license income of $480,000 for 1995.
Operating Expenses. Operating expenses increase to $10.5 million for the
year ended December 31, 1995 from $6.3 million for the year ended November 30,
1994. As a percentage of net sales, operating expenses increased to 59.0% in
1995 from 57.1% in 1994. Sales and marketing expenses increased $2.9 million in
1995, primarily as a result of salaries and commissions associated with higher
sales levels and increased marketing and warranty expenditures. As a percentage
of net sales, sales and marketing expenses increased to 33.2% in 1995 from 27.4%
in 1994, reflecting the Company's increased investment in its direct sales
force. General and administrative expenses increased $472,000 in 1995, as the
Company continued to add personnel and the infrastructure necessary to support
its growth. As a percentage of net sales, general and administrative expenses
decreased to 16.9% in 1995 from 23.1% in 1994. General and administrative
expenses in 1994 were impacted by several investments the Company made,
including the expenses associated with moving into a new facility and
investments in personnel and the infrastructure necessary to support its
anticipated growth. Stock compensation totaled $250,000 for 1995.
Income from operations. The Company's income from operations increased to
$810,000 for the year ended December 31, 1995 from $485,000 for the year ended
November 30, 1994. As a percentage of net sales, income from operations
increased to 4.5% in 1995 from 4.4% in 1994. This increase was the result of the
Company's net sales growth and license income, partially offset by the decrease
in gross margin and the increase in operating expenses.
Interest expense, net. Net interest expense increased to $1.0 million for
the year ended December 31, 1995 from $176,000 for the year ended November 30,
1994. This increase resulted from debt incurred in the Recapitalization for
severance, legal and other costs.
Recapitalization expenses. In March 1995, the Company incurred $574,000 in
expenses relating to the Recapitalization for severance, legal and other costs.
See "-- Company History."
Provision for loss on affiliate. During 1995, the Company recorded a $1.6
million provision for the loss on Conquest. Gargoyles has advanced funds to, and
guaranteed certain liabilities of, Conquest. This provision included the
write-off of the funds advanced, and the establishment of a liability for the
Company's potential payment of certain Conquest liabilities. See "-- Company
History."
Income tax provision (benefit). The Company's income tax benefit was
($100,000) for the year ended December 31, 1995, compared to an income tax
provision of $10,000 for the year ended November 30, 1994. Differences from the
federal statutory income tax rate of 34% resulted primarily from increase in the
reserve against certain tax assets and the inclusion of Antone's earnings in
income (loss) before income taxes. The company was not subject to income tax on
Antone's earnings because Antone was an S corporation.
Net income (loss). The Company's net loss was $2.3 million for the year
ended December 31, 1995, compared to net income of $299,000 for the year ended
November 30, 1994. This decrease resulted principally from increased interest
expense and nonrecurring recapitalization expenses and nonrecurring provision
for loss on affiliate, partially offset by the increased income from operations.
Hobie. Net sales of Hobie sunglasses increased to $4.0 million for the year
ended December 31, 1995 from $3.7 million for the year ended December 31, 1994.
Hobie's income from operations increased to $162,000 for the year ended December
31, 1995 from $84,000 for the year ended December 31, 1994. This increase was
primarily the result of Hobie's net sales growth and gross margin improvement
partially offset by an increase in operating expenses.
24
<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES
On October 2, 1996, the Company concluded its initial public offering in
which 1,954,465 new shares of common stock were issued at a price of $16 per
share. The initial public offering raised $27 million in net proceeds for the
Company. A portion of these net proceeds was used to repay $19 million of debt
in early October.
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 $4.7 million, $2.8 million and $400,000 for the years ended December 31,
1996 and 1995 and November 30, 1994, respectively. Cash used in the Company's
investing activities, primarily to fund capital expenditures, and in 1996 to
fund the Hobie Acquisition, totaled $5.4 million, $1.3 million and $700,000 for
the years ended December 31, 1996 and 1995 and November 30, 1994, respectively.
Cash provided by the Company's financing activities, primarily proceeds from
stock issuance and bank debt totaled $14.5 million, $4.1 million and $1.0
million for the years ended December 31, 1996 and 1995 and November 30, 1994,
respectively. As of December 31, 1996, the Company had working capital of $15.6
million.
The Company has a Credit Facility (the "Credit Facility") consisting of (i)
a revolving $10 million unsecured operating facility for general short-term
corporate purposes and (ii) a $5 million term fixed asset facility secured by
the Company's equipment. The Credit Facility expires on October 1, 1998. There
were no outstanding borrowings under the Credit Facility at December 31, 1996.
In anticipation of the Sungold acquisition, the Company is currently
negotiating an amendment to its Credit Facility which would increase its
operating facility and would include a new acquisition facility. It is
anticipated that amounts borrowed by the Company under the amended Credit
Facility would be secured by the assets of the Company, including the assets of
any acquired entity.
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 such financing would be available if
required. See "Business -- Forward-Looking Statements."
Capital expenditures totaled $1.4 million for the year ended December 31,
1996. Capital expenditures during 1996 were primarily for optical molds and
production and office equipment.
The Company presently believes, however, that cash flow from operations,
the net proceeds of its initial public offering and available borrowings will be
sufficient to meet its operating needs and capital expenditures for the
foreseeable future. See "Business -- Forward-Looking Statements."
SEASONALITY
The following table sets forth certain unaudited quarterly data for the
periods shown:
<TABLE>
<CAPTION>
1996 QUARTER ENDED (IN MILLIONS) 1995 QUARTER ENDED (IN MILLIONS)
----------------------------------------------- -----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ ----------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales...... $7.0 $10.6 $8.9 $ 6.6 $3.3 $ 5.8 $5.2 $ 3.6
Gross profit... 4.1 6.1 5.2 4.0 2.0 3.6 3.3 2.0
</TABLE>
The Company's net sales generally have been higher in the period from March
to September, the period during which sunglass purchases are highest. As a
result, operating income is typically lower in the first and fourth quarters as
fixed operating costs are spread over lower sales volume. In anticipation of
seasonal increases in demand, the Company typically builds inventories in the
fourth quarter, when net sales have historically been lower. The Company also
experiences higher accounts receivable during March through September as a
result of higher sales during this period. This increase in accounts receivable
does not have a significant effect on the Company's liquidity due to the
Company's ability to borrow against these receivables under the Credit Facility.
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
25
<PAGE> 28
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
"Important Factors Regarding Forward Looking Statements -- Fluctuation of
Quarterly Results; Seasonality of Business."
BACKLOG AND BACKORDERS
During the second and third quarters of 1996, 1995 and 1994, the Company
experienced a significant increase in backlog (which represents all unshipped
orders, regardless of the scheduled shipping date) and occasional increases in
backorders (which represent orders for merchandise remaining unshipped beyond
its scheduled shipping date). The occasional increases in backorders have been
due to increases in the market demand for Gargoyles and Hobie products, which
have temporarily exceeded either the capacity of the Company's lens and frame
suppliers or the Company's internal production capacity. Prior to the
Recapitalization, the Company did not have sufficient capital to maintain an
adequate supply of certain key components, which resulted in an increase in
backorders in the months preceding and immediately following the
Recapitalization. The Recapitalization increased the Company's access to
capital, thereby allowing it to reduce backorders and further develop adequate
inventory levels. The Company has been taking actions since the Recapitalization
to reduce the potential of future backorders. In particular, Gargoyles has
worked with its suppliers to increase the level of production of Gargoyles
products, has added new suppliers and has increased its own production capacity
through the addition of personnel and equipment. In addition, in late 1995 the
Company refocused its product offerings on the most popular frame and lens color
combinations, allowing the Company to narrow the stockkeeping units offered,
thereby reducing the potential for future backorders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors............................... 27
Gargoyles, Inc. Consolidated Financial Statements
Consolidated Balance Sheets................................................... 28
Consolidated Statements of Operations......................................... 29
Consolidated Statements of Shareholders' Equity............................... 30
Consolidated Statements of Cash Flows......................................... 31
Notes to Consolidated Financial Statements.................................... 32
Schedule
Consolidated Valuation and Qualifying Accounts................................ 43
</TABLE>
26
<PAGE> 29
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Gargoyles, Inc.
We have audited the accompanying consolidated balance sheets of Gargoyles,
Inc. as of December 31, 1996 and 1995, and the related consolidated statements
of operations, shareholders' equity, and cash flows for the years ended November
30, 1994, December 31, 1995 and 1996. Our audit also included the Financial
Statement Schedule listed in the Company's Annual Report on Form 10-K in Part IV
at Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gargoyles, Inc.
at December 31, 1995 and 1996, and the related consolidated results of its
operations and its cash flows for the years ended November 30, 1994, December
31, 1995 and 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Seattle, Washington
January 24, 1997
27
<PAGE> 30
GARGOYLES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 4,382,048 $ 900
Trade receivables, less allowances for doubtful accounts of
$172,600 and $10,355......................................... 8,897,879 2,514,489
Inventories..................................................... 5,881,884 5,473,692
Trade credits................................................... 624,295 497,587
Other current assets and prepaid expenses....................... 1,542,802 732,984
----------- -----------
Total current assets.............................................. 21,328,908 9,219,652
Property and equipment, net....................................... 2,811,935 1,900,603
Intangibles, net.................................................. 2,961,110 --
Other assets...................................................... 160,262 145,979
----------- -----------
Total assets...................................................... $27,262,215 $11,266,234
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 3,380,895 $ 3,572,739
Accrued expenses and other current liabilities.................. 2,347,738 1,577,048
Note payable to bank............................................ -- 5,412,916
Current maturities of long-term debt............................ -- 1,349,333
----------- -----------
Total current liabilities......................................... 5,728,633 11,912,036
----------- -----------
Deferred license income........................................... 360,000 540,000
----------- -----------
Long-term debt.................................................... -- 6,017,812
----------- -----------
Minority interest................................................. 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 -- 7,419,008 and 5,450,003............ 25,643,576 (5,107,430)
Retained earnings (deficit)..................................... (4,740,192) (1,946,184)
Deferred compensation........................................... -- (150,000)
----------- -----------
Total shareholders' equity........................................ 20,903,384 (7,203,614)
----------- -----------
Total liabilities and shareholders' equity........................ $27,262,215 $11,266,234
=========== ===========
</TABLE>
See accompanying notes.
28
<PAGE> 31
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED
--------------------------- NOVEMBER 30,
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Net sales........................................... $33,094,398 $17,895,968 $ 11,082,986
Cost of sales....................................... 13,743,496 7,016,815 4,265,002
----------- ----------- -----------
Gross profit........................................ 19,350,902 10,879,153 6,817,984
License income...................................... 479,609 480,000 --
----------- ----------- -----------
19,830,511 11,359,153 6,817,984
----------- ----------- -----------
Operating expenses:
Sales and marketing............................... 9,480,986 5,934,213 3,041,008
General and administrative........................ 4,399,286 3,029,638 2,558,002
Shipping and warehousing.......................... 1,976,303 1,030,070 607,058
Research and development.......................... 946,992 305,592 127,226
Stock compensation and IPO bonus.................. 3,833,140 250,000 --
----------- ----------- -----------
Total operating expenses............................ 20,636,707 10,549,513 6,333,294
----------- ----------- -----------
Income (loss) from operations....................... (806,196) 809,640 484,690
----------- ----------- -----------
Other income (expense):
Interest, net..................................... (1,987,812) (1,042,523) (175,486)
Recapitalization expenses......................... -- (573,710) --
Provision for loss on affiliate................... -- (1,597,051) --
Other............................................. -- 6,829 158
----------- ----------- -----------
Total other income (expense)........................ (1,987,812) (3,206,455) (175,328)
----------- ----------- -----------
Income (loss) before income taxes................... (2,794,008) (2,396,815) 309,362
Income tax provision (benefit)...................... -- (100,000) 10,500
----------- ----------- -----------
Net income (loss)................................... $(2,794,008) $(2,296,815) $ 298,862
=========== =========== ===========
Per share data (unaudited for pro forma):
Historical income (loss) before income tax
provision (benefit)............................ $(2,396,815) $ 309,362
Pro forma income tax provision (benefit).......... (54,300) 130,800
----------- -----------
Pro forma net income (loss)....................... $(2,342,515) $ 178,562
=========== ===========
Net loss per share................................ $ (0.45)
===========
Pro forma net income (loss) per share............. $ (0.41) $ 0.03
=========== ===========
Weighted average common shares used in calculation
of net loss per share and pro forma net income
(loss) per share, respectively................. 6,217,738 5,707,078 5,707,078
=========== =========== ===========
</TABLE>
See accompanying notes.
29
<PAGE> 32
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------------------- EARNINGS DEFERRED
SHARES AMOUNT (DEFICIT) COMPENSATION TOTAL
---------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at November 30, 1993............ 5,450,000 $ 572 $ 1,100,683 $ -- $ 1,101,255
Net income for the year ended November
30, 1994............................ -- -- 298,862 -- 298,862
Distributions to former majority
shareholder......................... -- -- (624,500) -- (624,500)
---------- ------------ ----------- ----------- ------------
Balance at November 30, 1994............ 5,450,000 572 775,045 -- 775,617
Net loss for the month ended December
31, 1994............................ -- -- (111,481) -- (111,481)
Distributions to former majority
shareholder......................... -- -- (51,786) -- (51,786)
---------- ------------ ----------- ----------- ------------
Balance at December 31, 1994............ 5,450,000 572 611,778 -- 612,350
Stock redemption from former majority
shareholder......................... (3,270,000) (10,895,500) -- -- (10,895,500)
Stock issued for cash................. 3,270,003 5,387,498 -- -- 5,387,498
Deferred compensation related to
amendment of stock options.......... -- 400,000 -- (400,000) --
Stock compensation.................... -- -- -- 250,000 250,000
Distributions to former majority
shareholder......................... -- -- (261,147) -- (261,147)
Net loss for the year ended December
31, 1995............................ -- -- (2,296,815) -- (2,296,815)
---------- ------------ ----------- ----------- ------------
Balance at December 31, 1995............ 5,450,003 (5,107,430) (1,946,184) (150,000) (7,203,614)
Sale of warrant....................... -- 56,000 -- -- 56,000
Stock issued in connection with acquisition... 14,540 80,040 -- -- 80,040
Deferred compensation related to
amendment of stock options.......... -- 3,378,140 -- (3,378,140) --
Stock compensation.................... -- -- -- 3,528,140 3,528,140
Stock issued in Company's initial
public offering..................... 1,954,465 27,236,826 -- -- 27,236,826
Net loss for the year ended December
31, 1996............................ -- -- (2,794,008) -- (2,794,008)
---------- ------------ ----------- ----------- ------------
Balance at December 31, 1996............ 7,419,008 $ 25,643,576 $(4,740,192) $ -- $ 20,903,384
========== ============ =========== =========== ============
Authorized shares....................... 40,000,000
==========
</TABLE>
See accompanying notes.
30
<PAGE> 33
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
YEAR ENDED NOVEMBER
DECEMBER 31, 30,
--------------------------- -----------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................... $(2,794,008) $(2,296,815) $ 298,862
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Stock compensation................................. 3,528,140 -- --
Depreciation....................................... 571,422 234,054 127,827
Amortization....................................... 204,360 250,000 --
Deferred license income............................ (180,000) 540,000 --
Minority interest.................................. (89,802) -- --
Recapitalization expenses included in note payable
to shareholder.................................. -- 283,100 --
Changes in assets and liabilities net of effects
from purchase of Hobie:
Accounts receivable............................. (6,088,770) (446,436) (795,403)
Inventories..................................... 690,152 (2,850,389) (1,288,041)
Other current assets and other assets........... (798,293) (780,751) (458,655)
Accounts payable, accrued expenses and other
current liabilities........................... 207,957 2,278,893 1,728,069
----------- ----------- -----------
Net cash used in operating activities................ (4,748,842) (2,788,344) (387,341)
----------- ----------- -----------
INVESTING ACTIVITIES
Acquisition of property and equipment................ (1,407,875) (1,269,601) (659,020)
Purchase of Hobie.................................... (3,974,900) -- --
----------- ----------- -----------
Net cash used in investing activities................ (5,382,775) (1,269,601) (659,020)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from stock issuance......................... 27,236,826 897,918 --
Proceeds from issuance of long-term debt............. 5,360,000 7,000,000 371,339
Principal payments on long-term debt................. (12,727,145) (390,374) (133,036)
Net proceeds (repayment) under revolving line of
credit............................................. (5,412,916) 2,746,444 1,256,801
Proceeds from warrant issuance....................... 56,000 -- --
Payments for stock repurchase........................ -- (6,405,920)--
Distributions to shareholder......................... -- (261,147) (624,500)
Net proceeds on affiliate accounts................... -- 463,894 170,069
----------- ----------- -----------
Net cash provided by financing activities............ 14,512,765 4,050,815 1,040,673
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ 4,381,148 (7,130) (5,688)
Cash and cash equivalents, beginning of period....... 900 8,030 7,970
----------- ----------- -----------
Cash and cash equivalents, end of period............. $ 4,382,048 $ 900 $ 2,282
=========== =========== ===========
</TABLE>
See accompanying notes.
31
<PAGE> 34
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Principal Industry
Gargoyles, Inc. ("Gargoyles" or the "Company") designs, manufactures and
markets a broad line of performance and outdoor lifestyle-oriented sunglasses.
The Company's products are mainly sold through sunglass specialty, sporting
goods, department and optical stores. The Company subcontracts certain of its
manufacturing processes. Management believes there are adequate alternative
sources for these services should an existing subcontractor be unable to
perform. Its headquarters and main warehouse are located in Kent, Washington.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany balances have
been eliminated in consolidation. Minority interest represents the 30% ownership
held by outside investors in the kindling company ("Kindling").
Fiscal Year
In 1995, the Company changed its reporting period from a fiscal year ending
November 30 to a calendar year. Accordingly, condensed results of operations and
cash flows for the one month ended December 31, 1994 are separately presented
herein.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
Revenue Recognition
Revenue is recognized when merchandise is shipped to a customer. The
Company records sales net of volume and cash discounts.
Warranties
The Company's sunglasses are covered by a warranty against defects in
material and workmanship. The Company has established a reserve for these
anticipated future warranty costs which is periodically adjusted to reflect
actual experience.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Significant additions and improvements are capitalized.
Maintenance and repairs are expensed as incurred. The Company provides for
depreciation and amortization using the straight-line method which recognizes
the cost over the estimated useful lives of the respective assets or, as to
leasehold improvements, the term of the related lease, if less than the
estimated useful life.
32
<PAGE> 35
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
$380,671, $258,419 and $407,422 in advertising costs during the years ended
December 31, 1996 and 1995 and November 30, 1994, respectively.
Income Taxes
The Company accounts for income taxes under the liability method, whereby
deferred taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities. These
deferred tax assets and liabilities are measured under the provisions of
currently enacted tax laws.
Prior to the recapitalization in March 1995, Antone Manufacturing, Inc.
("Antone") had elected to be taxed as an S corporation under the provisions of
the Internal Revenue Code. Accordingly, Antone's taxable income included in the
financial statements, through the date of the recapitalization, is treated as if
it were distributed to the shareholder who was responsible for payment of taxes
thereon.
Pro Forma and Earnings Per Share Data
Pro forma income tax provision (benefit) and net income (loss) data for
1995 and 1994 is included to present the results of operations as if Antone's
earnings had been taxed as a C corporation rather than an S corporation. The
difference between the pro forma income tax rate and the federal statutory rate
of 34% relates primarily to deferred tax assets which have been reserved due to
the uncertainty of the Company's ability to recover such amounts.
Net loss per share and pro forma net income (loss) per share are computed
based on the weighted average number of common and common equivalent shares
outstanding using the treasury stock method. In accordance with the Securities
and Exchange Commission requirements, common and common equivalent shares issued
during the 12-month period prior to the filing of the Company's proposed initial
public offering have been included in the calculation as if they were
outstanding for all periods presented using the treasury stock method and the
initial public offering price of $16 per share.
License Agreement
During the first quarter of 1995, the Company entered into an agreement to
license the name "Gargoyles" for use on certain nonsunglass products, whereby
the Company, as licenser, receives quarterly cash payments based on a portion of
the licensee's income from the sale of certain products.
The Company received a payment of $1,000,000 at the inception of the
agreement. After deducting expenses associated with the license agreement, the
$720,000 balance was recorded as deferred license income and is being amortized
over the four-year estimated term of the license agreement.
Concentration of Credit Risk and Financial Instruments
The Company sells its products to local and national companies throughout
the United States. Net sales to the Company's largest customer represented 30%,
32% and 34% of net sales for the years ended December 31, 1996 and 1995 and
November 30, 1994, respectively. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral. The Company
maintains an allowance for doubtful accounts at a level which management
believes is sufficient to cover potential credit losses.
The carrying value of financial instruments, which include cash,
receivables, payables and debt, approximates market value at December 31, 1996.
33
<PAGE> 36
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at time of grant.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement No. 123"). Statement No. 123 is effective for fiscal
years beginning after December 15, 1995 and allows companies to measure
stock-based compensation expense using either the intrinsic value method, as
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25"), or the
fair value method described in Statement No. 123. The Company has elected to
follow APB No. 25. In management's opinion, the alternative fair value method
provided for under Statement No. 123 does not necessarily provide a reliable
single measure of the fair value of its employee stock options. Statement No.
123 requires companies choosing the intrinsic value method to disclose the pro
forma effect on net income (loss) of valuing the stock option grants using the
fair value method. Pro forma net income (loss) information has been disclosed in
Note 10.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Raw materials....................................... $4,503,054 $4,804,323
Finished goods...................................... 1,378,830 669,369
---------- ----------
$5,881,884 $5,473,692
========== ==========
</TABLE>
3. OTHER CURRENT ASSETS AND PREPAID EXPENSES
Other current assets and prepaid expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- --------
<S> <C> <C>
Prepaid expenses..................................... $ 536,479 $117,332
Other receivables.................................... 344,008 188,640
Income tax refund receivable......................... 195,750 191,742
Deposits............................................. 160,187 56,466
Other................................................ 306,378 178,804
---------- --------
$1,542,802 $732,984
========== ========
</TABLE>
34
<PAGE> 37
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
Molds and production equipment..................... $ 1,553,076 $1,037,936
Office furniture and equipment..................... 1,180,104 1,024,908
Exhibit and marketing equipment.................... 1,040,394 308,418
Transportation equipment........................... 24,718 24,718
Leasehold improvements............................. 258,968 179,570
----------- ----------
4,057,260 2,575,550
Less accumulated depreciation and amortization..... (1,245,325) (674,947)
----------- ----------
Furniture and equipment, net....................... $ 2,811,935 $1,900,603
=========== ==========
</TABLE>
5. INTANGIBLES
Intangible assets are carried on the basis of cost and are amortized on the
straight-line method over their estimated useful lives, ranging from 2 to 27
years.
At December 31, 1996, intangibles consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
------------
<S> <C> <C>
Licensing and management agreements................. $2,885,430 8-27 years
Noncompete agreements............................... 280,040 2 years
----------
3,165,470
Less accumulated amortization....................... (204,360)
----------
$2,961,110
==========
</TABLE>
6. DEBT
The Company has a Credit Facility (the "Credit Facility") consisting of (i)
a revolving $10 million unsecured operating facility for general short-term
corporate purposes and (ii) a $5 million term fixed asset facility secured by
the Company's equipment. The Credit Facility expires on October 1, 1998. There
were no outstanding borrowings under the Credit Facility at December 31, 1996.
In October 1996, a portion of the net proceeds from the Company's initial
public offering were used to repay all outstanding debt.
At December 31, 1995, long-term debt consisted of the following:
<TABLE>
<S> <C>
Note payable to bank, bearing interest at prime rate plus
1.5%.......................................................... $ 5,769,231
Notes payable to bank, bearing interest at prime rate plus
1.25%, secured by equipment................................... 996,750
Note payable to shareholder, bearing interest at 10%............ 257,836
Other notes payable at various interest rates, secured by
equipment and other assets.................................... 343,328
-----------
Total long-term debt............................................ 7,367,145
Less current maturities......................................... (1,349,333)
-----------
Long-term debt, less current maturities......................... $ 6,017,812
===========
</TABLE>
In January 1996, the Company borrowed $290,000 at 12% per annum from
officers and shareholders. The loans were repaid in full with interest as of
April 1996.
35
<PAGE> 38
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company made interest payments totaling $1,809,505, $1,014,565 and
$164,802 during the years ended December 31, 1996 and 1995 and November 30,
1994, respectively.
7. INCOME TAXES
The difference between the income tax provision (benefit), all of which is
current, based upon the federal statutory income tax rate and the income tax
provision (benefit) recorded in the financial statements is attributable to the
following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, YEAR ENDED
----------------------- NOVEMBER 30,
1996 1995 1994
--------- --------- ------------
<S> <C> <C> <C>
Income tax provision (benefit) at
federal statutory rate (34%)......... $(950,000) $(815,000) $ 105,000
Change in deferred tax valuation
allowance............................ 996,900 737,900 19,500
Antone S corporation earnings.......... -- (45,700) (120,300)
Other.................................. (46,900) 22,800 6,300
--------- --------- ---------
$ -- $(100,000) $ 10,500
========= ========= =========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the bases of assets and liabilities for financial reporting purposes and
the bases used for income tax return purposes. Significant components of the
Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
----------- ---------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation....................... $ (124,300) $ (54,300)
----------- ---------
Deferred tax assets:
Deferred compensation............................ 1,284,600 151,300
Sales return allowance........................... 141,700 71,400
Inventory valuation allowance.................... 129,600 34,000
Deferred license income.......................... 122,400 251,000
Allowance for doubtful accounts.................. 58,700 --
Accrued vacation................................. 46,200 16,000
Warranty reserves................................ 34,000 34,000
Accrued liabilities of affiliate................. 31,900 225,100
Other............................................ 112,800 112,200
----------- ---------
Total deferred tax assets.......................... 1,961,900 895,000
----------- ---------
Net deferred taxes................................. $ 1,837,600 $ 840,700
=========== =========
Valuation allowance................................ $(1,837,600) $(840,700)
=========== =========
</TABLE>
No income tax payments were made during the years ended December 31, 1996
and 1995.
8. COMMITMENTS AND CONTINGENCIES
Since 1994, the Company has been leasing its primary operating and office
premises under a noncancelable operating lease, expiring in March 2000. Terms of
this lease include 4% annual rental payment increases. The owner of these
premises is a current shareholder and the former majority owner of Gargoyles.
Rent expense under this lease totaled $222,798, $214,725 and $210,000 for the
years ended December 31, 1996 and 1995 and November 30, 1994, respectively.
36
<PAGE> 39
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In September 1996, the Company leased additional office and warehouse space
under an operating lease, expiring in December 1998. Terms of this lease include
monthly rental payments of $9,150.
During 1995, the Company leased additional office space under a
noncancelable operating lease, expiring in October 1997. Terms of this lease
include monthly rental payments of $3,066.
Minimum future lease payments under noncancelable operating leases as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-----------------------------------------
<S> <C>
1997..................................... $ 372,162
1998..................................... 350,772
1999..................................... 250,611
2000..................................... 63,261
----------
$1,036,806
==========
</TABLE>
The Company enters into endorsement contracts from time to time with
certain athletes and others to promote the Company's products. Minimum annual
payments under these agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------------------------------------
<S> <C>
1997...................................... $213,500
1998...................................... 230,000
1999...................................... 140,000
----------
$583,500
==========
</TABLE>
The Company is currently involved in litigation incidental to the Company's
business. In the opinion of management, the ultimate resolution of such
litigation will not have a significant effect on results of its operations or
financial condition.
9. EMPLOYEE BENEFIT PLAN
In March 1995, the Company introduced a 401(k) savings plan for all
full-time employees age 21 or older with one year of service. The maximum
employee contribution is 15% of the participant's compensation. The Company
matches 50% of each dollar contributed by a participant, with a maximum matching
contribution of 3% of a participant's earnings. The Company's contributions to
the plan vest over six years and totaled $72,289 and $37,949 for the years ended
December 31, 1996 and 1995, respectively.
10. SHAREHOLDERS' EQUITY
Stock Dividend
On August 29, 1996, the Company's Board of Directors approved a stock
dividend in the amount of 4.45 shares for every one share of common stock
outstanding, thereby giving effect to a 5.45-to-1 stock split payable on August
29, 1996. On August 28, 1996, the Company filed its Restated Articles of
Incorporation to increase the number of authorized shares to 40,000,000 shares
of common stock and 10,000,000 shares of preferred stock. The accompanying
financial statements have been restated to give effect to the stock dividend.
Initial Public Offering
On October 2, 1996, the Company concluded its initial public offering in
which 1,954,465 new shares of common stock were issued at a price of $16 per
share. The initial public offering raised $27 million in net
37
<PAGE> 40
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
proceeds for the Company. A portion of these net proceeds were used to repay $19
million of debt in early October.
Stock Options
In March 1995, the Company established the 1995 Stock Option Plan that
provided for the granting of incentive and nonqualified options to purchase up
to 286,844 shares of common stock. In September 1996, the Company amended the
plan to provide for the granting of options to purchase up to 817,500 shares of
common stock. Generally, options granted vest over a four-year period. Certain
options require acceleration of vesting if specific operational goals are
achieved. Options under this plan have been granted at estimated fair value on
the date of grant and expire after ten years. The plan expires in 2005.
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes multiple option pricing model with the following weighted
average assumptions for 1996 and 1995, respectively: risk-free interest rates of
6.21% and 5.38%, expected volatility range for the Company's common stock of
29.6 to 38.6%, dividend yield of 0.0% and a weighted average expected option
life of 5 years. The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options and are not likely to be representative of the effects on reported
net income for future periods.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Reported net loss................................... $(2,794,008) $(2,296,815)
Pro forma net loss.................................. (3,056,547) (2,325,439)
Reported loss per share............................. (0.45) (0.40)
Pro forma loss per share............................ (0.49) (0.41)
</TABLE>
Stock option activity and option price information are as follows:
<TABLE>
<CAPTION>
NUMBER
OF OPTION PRICE
SHARES PER SHARE
------- ------------------
<S> <C> <C> <C> <C>
Granted........................................... 480,055 $3.48 -- $ 5.50
Canceled.......................................... (28,676) $ 3.48
-------
Balance at December 31, 1995...................... 451,379 $3.48 -- $ 5.50
Granted........................................... 44,785 $7.34 -- $16.00
-------
Balance at December 31, 1996...................... 496,164 $3.48 -- $16.00
=======
</TABLE>
The weighted average fair value of options granted during 1996 using the
Black-Scholes multiple option pricing model is $12.59.
38
<PAGE> 41
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Outstanding and exercisable options by price range as of December 31, 1996
are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------- ----------------------------------------
OPTIONS OUTSTANDING WEIGHTED AVERAGE OPTIONS EXERCISABLE
AS OF REMAINING TERM WEIGHTED AVERAGE AS OF WEIGHTED AVERAGE
DEC. 31, 1996 (YEARS) EXERCISE PRICE DEC. 31, 1996 EXERCISE PRICE
--------------------- -------------------- ---------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 3.48 - $ 5.50.... 451,379 8.71 $ 3.68 122,338 $ 3.66
$ 7.34 - $ 9.00.... 20,805 9.87 8.65 2,232 7.65
$16.00 - $16.00.... 23,980 9.75 16.00 6,176 16.00
------- -------
$ 3.48 - $16.00.... 496,164 8.81 4.48 130,746 4.32
======= =======
</TABLE>
In January 1996, an outside member of the Company's Board of Directors
purchased a warrant for $56,000. The warrant provides for the issuance of 38,150
shares of common stock at a price of $4.58 per share. The warrant can be
exercised any time prior to December 2005.
Recapitalization
In connection with a change in control of the Company, on March 22, 1995,
the Company sold 3,270,003 shares to a group of new investors, including certain
members of the Company's senior management. Proceeds from the sale were
$5,387,498. On the same date, 3,270,000 previously issued and outstanding shares
were repurchased by the Company from the former majority shareholder for
$10,895,500. The redemption was funded with the proceeds from the stock issuance
and bank financing of $6,000,000. Proceeds in excess of redemption requirements
provided additional working capital. In connection with this recapitalization,
the Company recorded a charge of $573,710 relating primarily to severance, legal
and other costs.
In connection with the recapitalization of Gargoyles, Antone was merged
into Gargoyles. Antone was wholly owned by the former majority owner of
Gargoyles. Antone provided assembly operations for Gargoyles. The merger was
accounted for as a pooling of interests due to common ownership, and financial
statements for all periods prior to the recapitalization have been restated to
reflect the pooling.
Prior to the recapitalization of the Company, the President held an option
to purchase up to 10% of the outstanding shares of Gargoyles stock from the
former majority shareholder. In connection with the recapitalization, the new
shareholders of the Company assumed the option and amended certain provisions of
the option agreement. As a result of the amendments, the Company recorded
deferred compensation of $400,000, equal to the difference between the estimated
fair market value of the stock at the date of the recapitalization, and the
option price of $0.91 per share. The amount was being amortized over the option
vesting period.
Also in connection with the recapitalization, the new shareholders granted
the President an additional nonqualified option to purchase 136,250 shares of
common stock owned by the new shareholders at an exercise price of $4.58 per
share. In June 1996, in contemplation of the Company's initial public offering,
the options were further amended to accelerate the vesting and to extend the
expiration date to June 28, 2006. As a result, the remaining balance of $150,000
from the initial $400,000 deferred compensation was expensed and Gargoyles
recognized an additional nonrecurring, noncash stock compensation charge in the
second quarter of 1996 of $3.4 million. Total stock compensation expense related
to these agreements of $3.5 million is reflected as a component of operating
expenses for the year ended December 31, 1996.
11. RECEIVABLE FROM AFFILIATE
Prior to 1996, the Company had advanced funds to Conquest Sports, Inc.
("Conquest," formerly Pro-Tec, Inc.), an affiliate with similar shareholders as
the Company prior to the initial public offering. In addition, the Company had
guaranteed certain liabilities of Conquest. Conquest incurred losses in 1995 and
1994 and Company management concluded that it is likely Conquest will be unable
to meet its obligations. Accordingly, in the fourth quarter of 1995, the Company
recorded a provision related to Conquest in the
39
<PAGE> 42
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amount of $1,597,051. At December 31, 1996, Conquest has approximately $300,000
outstanding on a loan with a bank which is secured by a note receivable and
guaranteed by the Company.
12. DISCONTINUED DISTRIBUTION AGREEMENT
During late 1994, Gargoyles entered into a nonexclusive agreement (the
"Agreement") to distribute a line of sunglasses produced by another
manufacturer. These sunglasses were produced with the name of a major
manufacturer of athletic shoes and apparel under a license agreement. Gargoyles
had no significant sales under the Agreement prior to 1995. During the fourth
quarter of 1995, both parties agreed to terminate the Agreement. The
accompanying consolidated statement of operations for the year ended December
31, 1995 includes net sales of $758,066, cost of sales of $490,011 and sales and
marketing expenses of $579,972 related to the Agreement.
13. ACQUISITION OF HOBIE
On February 13, 1996, Gargoyles purchased all of the issued and outstanding
stock of H.S.I. ("Hobie"). Hobie was the manufacturer of Hobie Polarized
Sunglasses under an exclusive license agreement for use of the name Hobie on
sunglasses.
The acquisition has been accounted for using the purchase method of
accounting from the date of acquisition. Accordingly, the allocation of the
purchase price of $3,974,900, of which $3,380,014 was paid in cash, has been
based on the fair value of the assets acquired and liabilities assumed. Included
in the purchase price are consulting service fees of up to an aggregate of
$300,000 to two of Hobie's former shareholders. As consideration for certain
noncompetition covenants, the Company agreed to pay an aggregate of $200,000 in
12 monthly installments and issue an aggregate of 14,540 shares of its common
stock to two of Hobie's former shareholders. Costs in excess of the fair market
value of assets and liabilities acquired are reflected as intangibles, the most
significant component of which is the Hobie license agreement, that is being
amortized over the remaining 27-year license period of the Hobie brand name.
Pro forma information, assuming the acquisition had occurred at the
beginning of the periods presented, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Sales.............................................. $33,405,000 $21,940,000
Gross profit....................................... 19,495,000 12,931,000
Net loss........................................... (2,951,000) (3,021,000)
Net loss per share................................. (0.48) (0.53)
</TABLE>
14. INVESTMENT IN THE KINDLING COMPANY
In May 1996, the Company formed Kindling, a majority-owned subsidiary, to
design, develop, manufacture and distribute sunglasses and, with The Timberland
Company's consent, ophthalmic frames under the Timberland brand name. The
Company contributed $1,200,000 for its 70% interest in Kindling. The Company may
also be required to contribute an additional $300,000 to Kindling's capital if
Kindling deems such additional amount necessary and makes a demand prior to
January 1, 2000. For the year ended December 31, 1996, the Company incurred
$299,338 in net operating expenses used to fund start up activities of Kindling.
40
<PAGE> 43
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth summary financial data for the Company by
quarter for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
QUARTER
---------------------------------------------------------
YEAR ENDED: FIRST SECOND THIRD FOURTH
- ---------------------------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1996
Net revenue........................... $6,994,293 $10,632,523 $8,910,618 $ 6,556,964
Gross profit.......................... 4,128,898 6,111,733 5,172,914 3,937,357
Net loss.............................. (15,924) (2,605,011) (15,429) (157,644)
Loss per share........................ (0.00) (0.46) (0.00) (0.02)
December 31, 1995
Net revenue........................... $3,294,031 $ 5,829,801 $5,221,008 $ 3,551,128
Gross profit.......................... 2,021,300 3,628,798 3,263,051 1,966,004
Net income (loss)..................... (445,541) 573,899 196,509 (2,621,682)
Earnings (loss) per share............. (0.08) 0.10 0.03 (0.46)
</TABLE>
The sum of quarterly earnings per share will not necessarily equal the
earnings per share reported for the entire year since the weighted average
shares outstanding used in the earnings per share computation changes throughout
the year.
16. CHANGE IN FISCAL YEAR END
Effective January 1, 1995, the Company changed its fiscal year end from
November 30 to December 31. The results of operations for the month of December
1994, therefore, are not reflected in the consolidated statements of operations
or cash flows. The following is a condensed statement of operations and a
condensed statement of cash flows for the month of December 1994:
<TABLE>
<CAPTION>
MONTH OF
DECEMBER 1994
-------------
<S> <C>
Condensed Statement of Operations:
Net sales...................................................... $ 574,831
Cost of sales.................................................. 237,785
---------
Gross profit................................................... 337,046
Operating expenses............................................. (493,746)
Interest expense, net.......................................... (20,975)
Other, net..................................................... 1,194
---------
Loss before income taxes....................................... (176,481)
Income tax benefit............................................. (65,000)
---------
Net loss....................................................... $(111,481)
=========
</TABLE>
41
<PAGE> 44
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
MONTH OF
DECEMBER 1994
---------
<S> <C>
Condensed Statement of Cash Flows:
Operating activities:
Net loss..................................................... $(111,481)
Depreciation and amortization................................ 7,266
Decrease in assets and liabilities........................... (357,662)
---------
Net cash used in operating activities........................ (461,877)
Investing activities:
Acquisition of property and equipment........................ (19,097)
---------
Financing activities:
Net proceeds from bank debt.................................. 538,508
Distributions to shareholder................................. (51,786)
---------
Net cash provided by financing activities.................... 486,722
Net increase in cash and cash equivalents...................... 5,748
Cash and cash equivalents, beginning of period................. 2,282
---------
Cash and cash equivalents, end of period....................... $ 8,030
=========
</TABLE>
17. SUBSEQUENT EVENTS
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.
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. Under the terms of the
sponsorship agreement, over the three-year term of the agreement the Company
will be required to pay $1,050,000 plus a portion of the Company's license
income from the sale of Gargoyles 300 souvenirs. The Company has the right to
terminate the agreement upon the payment of a $100,000 termination fee. In a
related agreement with CBS Television Network, the Company has agreed to pay CBS
$850,000 over the three-year term of that agreement for network broadcast
coverage of the Gargoyles 300 race.
42
<PAGE> 45
GARGOYLES, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED NOVEMBER 30, 1994 AND DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO BALANCE
BEGINNING COSTS AND AT END OF
OF PERIOD EXPENSE DEDUCTIONS PERIOD
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
For the year ended November 30, 1994
Allowance for doubtful accounts.................. $ 10,000 $ 18,169 $ (18,169) $ 10,000
======== ======== ========= ========
For the year ended December 31, 1995
Allowance for doubtful accounts.................. $ 13,333 $ 66,659 $ (69,637) $ 10,355
======== ======== ========= ========
For the year ended December 31, 1996
Allowance for doubtful accounts.................. $ 10,355 $ 269,633 $ (107,388) $ 172,600
======== ======== ========= ========
For the year ended November 30, 1994
Inventory Reserve................................ $ 100,000 $ -- $ -- $ 100,000
======== ======== ========= ========
For the year ended December 31, 1995
Inventory Reserve................................ $ 100,000 $ 533,456 $ (533,456) $ 100,000
======== ======== ========= ========
For the year ended December 31, 1996
Inventory Reserve................................ $ 100,000 $ 736,000 $ (454,850) $ 381,150
======== ======== ========= ========
For the year ended November 30, 1994
Sales Return Reserve............................. $ 70,000 $ 70,000 $ -- $ 140,000
======== ======== ========= ========
For the year ended December 31, 1995
Sales Return Reserve............................. $ 140,000 $ 70,000 $ -- $ 210,000
======== ======== ========= ========
For the year ended December 31, 1996
Sales Return Reserve............................. $ 210,000 $ 568,440 $ (361,717) $ 416,723
======== ======== ========= ========
</TABLE>
43
<PAGE> 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company, and their ages as of
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- --- -------------------------------------------
<S> <C> <C>
Douglas B. Hauff 43 President, Chief Executive Officer and
Director
G. Travis Worth 51 Chief Operating Officer
David W. Jobe 36 Senior Vice President, Sales
Steven R. Kingma 39 Vice President, Chief Financial Officer,
Secretary and Treasurer
Douglas W. Lauer 43 President and Chief Executive Officer,
Kindling
Bruce E. Meckling 43 Vice President, International
Erik J. Anderson(1) 38 Chairman of the Board
Timothy C. Potts(1) 48 Director
William D. Ruckelshaus(2) 64 Director
Paul S. Shipman(2) 44 Director
Walter F. Walker(1) 42 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
All the current directors of the Company, except Messrs. Ruckelshaus,
Shipman and Walker, were elected to the Board of Directors pursuant to a
shareholders agreement entered into in connection with the Recapitalization.
Upon the effective date of the Company's initial public offering, the
shareholders agreement was terminated.
The Company's Board of Directors will be divided into three classes at the
Company's 1997 annual meeting of shareholders following the Offering. After a
transitional period, each director will serve for a three-year term and one
class will be elected each year by the Company's shareholders. Directors hold
office until their terms expire and their successors are elected and qualified.
Executive officers of the Company are appointed by, and serve at the direction
of, the Board of Directors. There are no family relationships between any of the
directors or executive officers of the Company.
Douglas B. Hauff has been President, Chief Executive Officer and a Director
of the Company since June 1996. Between his joining the Company in May 1992 and
June 1996, Mr. Hauff was the Company's President and a Director. Mr. Hauff has
also been President and a director of Conquest since May 1992. From September
1990 to April 1992, Mr. Hauff was Senior Vice President of Frederick & Nelson
Inc. ("Frederick & Nelson"), a department store chain operator. Mr. Hauff was a
Senior Vice President and Division President of McCaw Cellular Communications, a
telecommunications company, between August 1986 and July 1988, President of
Interstate Mobile Phone d/b/a Cellular One, a telecommunications company,
between October 1984 and July 1986 and President of Executone, a Northwest
telecommunications firm, between September 1981 and September 1984.
G. Travis Worth has been Chief Operating Officer of the Company since June
1996. From October 1995 until June 1996, Mr. Worth was the Company's Senior Vice
President. From August 1989 to October 1995, Mr. Worth was the Vice President,
Sales for the Ray-Ban Eyewear Division of Bausch & Lomb. From 1981 to
44
<PAGE> 47
1989, Mr. Worth was Vice President, Sales and Marketing of Technica USA Ski Boot
Company, a manufacturer of ski equipment.
David W. Jobe, Senior Vice President, Sales, joined the Company in February
1994. From May 1988 to January 1994, Mr. Jobe was employed by MEDI-TECH, Inc., a
subsidiary of Boston Scientific Corporation, a medical device company, initially
as Denver territory manager, then as a regional manager from June 1990 to
December 1992 and as Western Division Manager from January 1993 to January 1994.
From January 1985 through April 1988, Mr. Jobe was employed by The Procter &
Gamble Company in a number of sales management capacities.
Steven R. Kingma, Vice President, Chief Financial Officer, Secretary and
Treasurer, joined the Company in September 1994. From September 1993 to
September 1994, Mr. Kingma was employed at Jay Jacobs, Inc., the operator of a
chain of specialty retail apparel stores, in various financial positions, most
recently as its Senior Vice President, Chief Financial Officer and Treasurer
from May 1994 to September 1994. From August 1992 to September 1993, Mr. Kingma
owned and operated Pacific Financial Management, a financial and professional
consulting services business. From January 1990 to July 1992, Mr. Kingma was
employed by Frederick & Nelson as Director of Finance. From September 1979 to
January 1990, Mr. Kingma was employed by Price Waterhouse, a public accounting
firm.
Douglas W. Lauer, President and Chief Executive Officer of Kindling, joined
the Company in June 1996 in connection with the license agreement with
Timberland. Previously, Mr. Lauer was President of Revo, a subsidiary of Bausch
& Lomb, from July 1989 to May 1996. Mr. Lauer formerly served in a number of
management capacities for Polo Ralph Lauren Corporation.
Bruce E. Meckling, Vice President, International, joined the Company in
July 1996. From 1980 to July 1996, Mr. Meckling was employed by Bausch & Lomb's
Europe, Middle East and Africa division. Mr. Meckling was employed as General
Manager of Distributor Operations and Bausch & Lomb Germany GmbH from August
1993 to July 1996, as Commercial Director of Distributor Operations from April
1992 to August 1993 and as Marketing Director of Distributor Operations from
October 1990 to April 1992. Prior to October 1990, Mr. Meckling was employed in
a number of marketing and financial capacities.
Erik J. Anderson has been a Director of the Company since March 1995 and
was named Chairman of the Board in July 1995. Mr. Anderson has been Chief
Executive Officer of Trillium, a corporation with investments primarily in
timber and real estate, since January 1996, was its Co-President from January
1995 to January 1996 and its Executive Vice President from February 1994 to
January 1995. From March 1992 to January 1994, Mr. Anderson was a partner of
Frazier & Company, a merchant bank. From October 1990 to March 1992, Mr.
Anderson was a Vice President of Service Group of America, a food distribution
and insurance company. Mr. Anderson is also a director of Smart Modular
Technologies, Inc.
Timothy C. Potts has been a Director of the Company since March 1995. Mr.
Potts has been Senior Vice President -- Finance of Trillium since July 1994.
From April 1987 to July 1994, Mr. Potts was the Chief Financial Officer of
Trillium.
William D. Ruckelshaus has been a Director of the Company since July 1996.
Since March 1996, Mr. Ruckelshaus has been a principal of the Madrona Investment
Group, L.L.C., a private investment firm. Mr. Ruckelshaus is also Chairman of
the Board of Browning-Ferris Industries, Inc., a waste services company, and
from October 1988 to October 1995 was its Chief Executive Officer. From 1983 to
1985, Mr. Ruckelshaus was Administrator of the Environmental Protection Agency
and from 1979 to 1983, a Senior Vice President of Weyerhaeuser Co. Mr.
Ruckelshaus is also a director of Cummins Engine Co., Monsanto Company,
Nordstrom, Inc. and Weyerhaeuser Co.
Paul S. Shipman has been a Director of the Company since June 1996. Mr.
Shipman has been President since September 1981, Chairman of the Board since
November 1992 and Chief Executive Officer since June 1993 of Redhook Ale
Brewery, Incorporated ("Redhook"), a brewer of craft beers.
Walter F. Walker has been a Director of the Company since December 1995.
Since September 1994, Mr. Walker has been the President of the Seattle
Supersonics National Basketball Association basketball
45
<PAGE> 48
team, owned by a subsidiary of Ackerley Communications, Inc. From March to
September 1994, he was President of Walker Capital, Inc., a money management
firm. From July 1987 to March 1994, Mr. Walker was a Vice President of Goldman,
Sachs & Co., a registered broker-dealer. From 1976 to 1985, Mr. Walker was a
professional basketball player in the National Basketball Association. Mr.
Walker is also a director of Redhook, Advanced Digital Information Corp.,
Washington State Special Olympics and a member of the Board of Visitors of the
University of Virginia.
Frederick & Nelson, a company for which Mr. Hauff served as Senior Vice
President and Mr. Kingma served as Director of Finance, filed a voluntary
petition for Chapter 11 bankruptcy in September 1991 and was liquidated by order
of the bankruptcy court in 1992. Jay Jacobs, Inc., a company for which Mr.
Kingma was employed in various financial positions, filed a voluntary petition
for Chapter 11 bankruptcy protection in May 1994 and emerged therefrom in
November 1995.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is hereby incorporated by
reference from the Company's 1997 Proxy Statement for its 1997 Annual Meeting of
Shareholders (the "1997 Proxy Statement") under the caption "Executive
Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is hereby incorporated by reference from the 1997 Proxy Statement
under the caption "Beneficial Ownership of Shares".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated by reference from the 1997 Proxy Statement under the caption
"Certain Transactions".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
See Index to Financial Statements at Item 8 on page 26 of this report.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended December 31, 1996.
(C) EXHIBITS
The following exhibits are filed as a part of, or incorporated by reference
into, this report:
<TABLE>
<S> <C>
3.1* Form of Amended and Restated Articles of Incorporation currently in
effect.
3.2* Bylaws of the registrant currently in effect.
10.1* Stock Purchase Agreement, dated as of March 14, 1995, among Gargoyles
and certain other parties.
10.2* Indemnity Agreement, dated as of March 22, 1995, by Gargoyles, Inc. in
favor of Trillium Corporation.
10.3* Amended and Restated Promissory Note, dated as of March 17, 1995, made
by Gargoyles, Inc. to Dennis Burns (the "Founder").
10.4* Guaranty, dated March 17, 1995, by Conquest Sports, Inc. (formerly
Pro-Tec, Inc.) for the benefit of the Founder.
</TABLE>
46
<PAGE> 49
<TABLE>
<S> <C>
10.5* Guaranty by Gargoyles, Inc. for the benefit of the Founder.
10.6* Nondisclosure, Noncompetition and Indemnity Agreement, dated as of
March 22, 1995, among Gargoyles, Inc., Conquest Sports, Inc., Antone
Manufacturing, Inc. and the Founder.
10.7* Stock Purchase Agreement, dated as of January 25, 1996, among
Gargoyles, Inc., H.S.C., Inc., Douglas B. Hauff, H.S.I., a California
corporation, dba Hobie Sunglasses and the Sellers listed therein.
10.8* Industrial Real Estate Lease (Multi-Tenant Facility) dated October 12,
1995, between Gargoyles, Inc. and Cascade Investors.
10.9* Industrial Real Estate Lease (Single Tenant Facility) dated December
16, 1993, between Gargoyles, Inc. and DB&D Partnership.
10.10* Lease Amendment dated as of March 17, 1995, between Gargoyles, Inc. and
DB&D Partnership.
10.11* Gargoyles, Inc. Common Stock Purchase Warrant, dated January 1996,
between Gargoyles, Inc. and Wally Walker.
10.12* Amended and Restated Option Agreement, dated as of March 17, 1995,
among Gargoyles, Inc., the Founder and Douglas B. Hauff.
10.13* Assignment and Assumption of Amended and Restated Option Agreement,
dated as of March 22, 1995, between the Founder and the Investors
listed therein.
10.14* Option Agreement dated as of March 22, 1995, between Douglas Hauff and
the Investors listed therein.
10.15+* License Agreement between Gargoyles, Inc. and Dale Earnhardt.
10.16+* License Agreement dated as of October 1995, as amended as of October
18, 1995, between Gargoyles, Inc. and Ken Griffey, Jr.
10.17* Employment Agreement, dated as of March 22, 1995, between Gargoyles,
Inc. and Douglas B. Hauff.
10.18* Employment Agreement, dated as of March 22, 1995, between Gargoyles,
Inc. and Steven R. Kingma.
10.19* Employment Agreement, dated as of March 22, 1995, between Gargoyles,
Inc. and David W. Jobe.
10.20* Employment Agreement, dated as of November 1, 1995, between Gargoyles,
Inc. and G. Travis Worth.
10.21* Form of Indemnity Agreement between Gargoyles, Inc. and each of its
directors.
10.22* 1995 Stock Incentive Compensation Plan.
10.23* Guaranty, dated as of March 7, 1995, by Gargoyles, Inc. to and for the
benefit of Trillium Corporation.
10.24* Retail License Agreement, dated August 7, 1995, between Warner Bros.
Division of Time Warner Entertainment Company L.P. and Gargoyles, Inc.,
as amended.
10.25* Amended and Restated Agreement Regarding Claim Rights, dated July 3,
1996, by and between the Founder, Gargoyles, Inc. and Conquest Sports,
Inc.
10.26+* Ratification of Settlement Agreement and General Release, dated August
27, 1996.
10.27+* Trademark License Agreement dated as of April 12, 1995.
10.28* Agreement for Purchase of Common Stock, dated as of May 17, 1996, among
Gargoyles, Inc., The Timberland Company, Douglas W. Lauer and the
kindling company (formerly The D.W. Lauer Company).
10.29* Promissory Note, dated May 17, 1996, made by Gargoyles, Inc. to the
kindling company.
</TABLE>
47
<PAGE> 50
<TABLE>
<S> <C>
10.30* Contingent Demand Note, dated May 17, 1996, made by Gargoyles, Inc. to
the kindling company.
10.31* Employment Agreement effective as of May 17, 1996, between Douglas W.
Lauer and the kindling company.
10.32* Investor Rights Agreement, dated as of May 17, 1996, among The D.W.
Lauer Company, Douglas W. Lauer, Gargoyles, Inc. and The Timberland
Company.
10.33+* License Agreement, dated as of May 17, 1996, among The Timberland
Company, Gargoyles, Inc. and the kindling company.
10.34* Incentive Pool Agreement, effective as of May 17, 1996, between
Gargoyles, Inc. and Douglas W. Lauer.
10.35* License Agreement, effective January 1, 1989 between Hobie Designs,
Inc. and H.S.I.
10.36+* License Agreement dated as of June 1996, between Scottie Pippen and
Gargoyles, Inc.
10.37+* License Agreement dated as of May 31, 1996 among Ixela, Inc., Alexi
Lalas and Gargoyles, Inc.
10.38** Credit Agreement dated October 2, 1996, between U.S. Bank of
Washington, National Association and Gargoyles, Inc.
10.39** First Amendment to Option Agreement dated June 28, 1996 between Douglas
B. Hauff, Gargoyles and certain shareholders of Gargoyles.
10.40** Second Amendment to Option Agreement dated June 28, 1996 between
Gargoyles, Dennis Burns and Douglas B. Hauff.
10.41** Indemnity Agreement dated September 26, 1996 by Trillium Corporation
and Douglas B. Hauff in favor of Gargoyles.
10.42*** Agreement, dated January 9, 1997, between Gargoyles and International
Speedway Corporation.
10.43+*** Product Development and Licensing Agreement dated January 1, 1997,
between Gargoyles and Golden Bear Golf, Inc.
10.44*** Registration Rights Agreement dated February 20, 1997, between
Gargoyles and Douglas B. Hauff.
10.45*** Registration Rights Agreement dated February 20, 1997, between
Gargoyles and Trillium Investors II.
11.1*** Computation of Earnings (Loss) Per Share
21.1* Subsidiaries of the registrant
23.1*** Consent of Ernst & Young LLP, Independent Accountants
27.1*** Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential Treatment Requested
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-07573).
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the Quarterly Period Ended September 30, 1996.
*** Filed herewith
48
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Seattle,
State of Washington, on the 28th day of March, 1997.
GARGOYLES, INC.
By: /s/ DOUGLAS B. HAUFF
------------------------------------
Douglas B. Hauff
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated below on the 28th day of March, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ---------------------------------------------
<S> <C>
/s/ DOUGLAS B. HAUFF President, Chief Executive Officer and
- --------------------------------------------- Director (Principal Executive Officer)
Douglas B. Hauff
/s/ ERIK J. ANDERSON Chairman of the Board
- ---------------------------------------------
Erik J. Anderson
/s/ STEVEN R. KINGMA Vice President, Chief Financial Officer,
- --------------------------------------------- Secretary and Treasurer (Principal Financial
Steven R. Kingma and Accounting Officer)
/s/ KIMBERLY L. EIRING Director of Finance
- ---------------------------------------------
Kimberly L. Eiring
/s/ TIMOTHY C. POTTS Director
- ---------------------------------------------
Timothy C. Potts
/s/ WILLIAM D. RUCKELSHAUS Director
- ---------------------------------------------
William D. Ruckelshaus
/s/ PAUL S. SHIPMAN Director
- ---------------------------------------------
Paul S. Shipman
/s/ WALTER F. WALKER Director
- ---------------------------------------------
Walter F. Walker
</TABLE>
49
<PAGE> 52
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ----------------------------------------------------
<C> <S> <C>
3.1* Form of Amended and Restated Articles of
Incorporation currently in effect...................
3.2* Bylaws of the registrant currently in effect........
10.1* Stock Purchase Agreement, dated as of March 14,
1995, among Gargoyles and certain other parties.....
10.2* Indemnity Agreement, dated as of March 22, 1995, by
Gargoyles, Inc. in favor of Trillium Corporation....
10.3* Amended and Restated Promissory Note, dated as of
March 17, 1995, made by Gargoyles, Inc. to Dennis
Burns (the "Founder")...............................
10.4* Guaranty, dated March 17, 1995, by Conquest Sports,
Inc. (formerly Pro-Tec, Inc.) for the benefit of the
Founder.............................................
10.5* Guaranty by Gargoyles, Inc. for the benefit of the
Founder.............................................
10.6* Nondisclosure, Noncompetition and Indemnity
Agreement, dated as of March 22, 1995, among
Gargoyles, Inc., Conquest Sports, Inc., Antone
Manufacturing, Inc. and the Founder.................
10.7* Stock Purchase Agreement, dated as of January 25,
1996, among Gargoyles, Inc., H.S.C., Inc., Douglas
B. Hauff, H.S.I., a California corporation, dba
Hobie Sunglasses and the Sellers listed therein.....
10.8* Industrial Real Estate Lease (Multi-Tenant Facility)
dated October 12, 1995, between Gargoyles, Inc. and
Cascade Investors...................................
10.9* Industrial Real Estate Lease (Single Tenant
Facility) dated December 16, 1993, between
Gargoyles, Inc. and DB&D Partnership................
10.10* Lease Amendment dated as of March 17, 1995, between
Gargoyles, Inc. and DB&D Partnership................
10.11* Gargoyles, Inc. Common Stock Purchase Warrant, dated
January 1996, between Gargoyles, Inc. and Wally
Walker..............................................
10.12* Amended and Restated Option Agreement, dated as of
March 17, 1995, among Gargoyles, Inc., the Founder
and Douglas B. Hauff................................
10.13* Assignment and Assumption of Amended and Restated
Option Agreement, dated as of March 22, 1995,
between the Founder and the Investors listed
therein.............................................
10.14* Option Agreement dated as of March 22, 1995, between
Douglas Hauff and the Investors listed therein......
10.15+* License Agreement between Gargoyles, Inc. and Dale
Earnhardt...........................................
10.16+* License Agreement dated as of October 1995, as
amended as of October 18, 1995, between Gargoyles,
Inc. and Ken Griffey, Jr. ..........................
10.17* Employment Agreement, dated as of March 22, 1995,
between Gargoyles, Inc. and Douglas B. Hauff........
</TABLE>
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ----------------------------------------------------
<C> <S> <C>
10.18* Employment Agreement, dated as of March 22, 1995,
between Gargoyles, Inc. and Steven R. Kingma........
10.19* Employment Agreement, dated as of March 22, 1995,
between Gargoyles, Inc. and David W. Jobe...........
10.20* Employment Agreement, dated as of November 1, 1995,
between Gargoyles, Inc. and G. Travis Worth.........
10.21* Form of Indemnity Agreement between Gargoyles, Inc.
and each of its directors...........................
10.22* 1995 Stock Incentive Compensation Plan..............
10.23* Guaranty, dated as of March 7, 1995, by Gargoyles,
Inc. to and for the benefit of Trillium
Corporation.........................................
10.24* Retail License Agreement, dated August 7, 1995,
between Warner Bros. Division of Time Warner
Entertainment Company L.P. and Gargoyles, Inc., as
amended.............................................
10.25* Amended and Restated Agreement Regarding Claim
Rights, dated July 3, 1996, by and between the
Founder, Gargoyles, Inc. and Conquest Sports,
Inc. ...............................................
10.26+* Ratification of Settlement Agreement and General
Release, dated August 27, 1996......................
10.27+* Trademark License Agreement dated as of April 12,
1995................................................
10.28* Agreement for Purchase of Common Stock, dated as of
May 17, 1996, among Gargoyles, Inc., The Timberland
Company, Douglas W. Lauer and the kindling company
(formerly The D.W. Lauer Company)...................
10.29* Promissory Note, dated May 17, 1996, made by
Gargoyles, Inc. to the kindling company.............
10.30* Contingent Demand Note, dated May 17, 1996, made by
Gargoyles, Inc. to the kindling company.............
10.31* Employment Agreement effective as of May 17, 1996,
between Douglas W. Lauer and the kindling company...
10.32* Investor Rights Agreement, dated as of May 17, 1996,
among The D.W. Lauer Company, Douglas W. Lauer,
Gargoyles, Inc. and The Timberland Company..........
10.33+* License Agreement, dated as of May 17, 1996, among
The Timberland Company, Gargoyles, Inc. and the
kindling company....................................
10.34* Incentive Pool Agreement, effective as of May 17,
1996, between Gargoyles, Inc. and Douglas W.
Lauer...............................................
10.35* License Agreement, effective January 1, 1989 between
Hobie Designs, Inc. and H.S.I. .....................
10.36+* License Agreement dated as of June 1996, between
Scottie Pippen and Gargoyles, Inc. .................
10.37+* License Agreement dated as of May 31, 1996 among
Ixela, Inc., Alexi Lalas and Gargoyles, Inc. .......
10.38** Credit Agreement dated October 2, 1996, between U.S.
Bank of Washington, National Association and
Gargoyles, Inc. ....................................
</TABLE>
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ----------------------------------------------------
<C> <S> <C>
10.39** First Amendment to Option Agreement dated June 28,
1996 between Douglas B. Hauff, Gargoyles and certain
shareholders of Gargoyles...........................
10.40** Second Amendment to Option Agreement dated June 28,
1996 between Gargoyles, Dennis Burns and Douglas B.
Hauff...............................................
10.41** Indemnity Agreement dated September 26, 1996 by
Trillium Corporation and Douglas B. Hauff in favor
of Gargoyles........................................
10.42*** Agreement, dated January 9, 1997, between Gargoyles
and International Speedway Corporation..............
10.43+*** Product Development and Licensing Agreement dated
January 1, 1997, between Gargoyles and Golden Bear
Golf, Inc. .........................................
10.44*** Registration Rights Agreement dated February 20,
1997, between Gargoyles and Douglas B. Hauff........
10.45*** Registration Rights Agreement dated February 20,
1997, between Gargoyles and Trillium Investors II...
11.1*** Computation of Earnings (Loss) Per Share............
21.1* Subsidiaries of the registrant......................
23.1*** Consent of Ernst & Young LLP, Independent
Accountants.........................................
27.1*** Financial Data Schedule.............................
</TABLE>
- ---------------
+ Confidential Treatment Requested
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-07573).
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the Quarterly Period Ended September 30, 1996.
*** Filed herewith
<PAGE> 1
EXHIBIT 10.42
AGREEMENT
THIS AGREEMENT is made as of the date of the last signature herein by
and between GARGOYLES, INC. (Gargoyles), a Washington corporation with its
principal place of business at 5866 South 194th Street, Kent, Washington 98032,
and INTERNATIONAL SPEEDWAY CORPORATION ("ISC"), a Florida corporation with its
principal place of business at 1801 West International Speedway Boulevard,
Daytona Beach, Florida 32114.
WHEREAS, ISC conducts several stock car races at the Daytona
International Speedway during the month of February of each year (the "Event");
WHEREAS, ISC desires Gargoyles to be title sponsor of the Busch Grand
National race in Daytona, the Gargoyles 300 (the "Race"), conducted in 1997,
1998 and 1999;
WHEREAS, Gargoyles wishes to be the title sponsor of the Race;
NOW, THEREFORE, in consideration of the mutual covenants herein set
forth, the parties agree as follows:
1. THE RACE
(a) ISC shall conduct the 1997, 1998, 1999 Race at the
Daytona International Speedway (the "Speedway") during the month of February.
Gargoyles shall be the title sponsor of the Race.
(b) After execution of this Agreement, all public
identification of and reference to the Race by ISC, its employees, agents and
representatives, shall give the title of the Race as follows: the "Gargoyles
300". ISC shall exercise its best efforts to cause any public media over which
it has no direct control to refer to the Race as the Gargoyles 300.
2. ADVERTISING AND PROMOTION
(a) Gargoyles shall have the right to use their name to
promote an association with the Race by advertising, point of sales materials,
direct mail and any other appropriate methods agreed to by ISC with respect to
the sponsorship of the Race.
(b) ISC agrees to:
(i) promote an association between Gargoyles and
the Race;
(ii) provide two hundred (200) event tickets for
Race at no cost;
(iii) provide forty (40) Daytona 500 tickets at no
cost;
<PAGE> 2
(iv) provide use of Winston Tower Suite # 18 on
Race day, catering to be contracted solely through ISC's authorized catering
company and will be billed separately to Gargoyles;
(v) provide space for one (1) full-page,
four-color advertisement in the Event program, for which Gargoyles will supply
advertising copy and materials by a mutually agreed upon deadline and one (1)
extra page for use in the program based upon purchase of a third page, in 1997,
1998 and 1999;
(vi) provide space for one (1) full-page,
four-color advertisement in the Pepsi 400 program at Daytona International
Speedway, and one in each of the two (2) race day programs produced at
Talladega Superspeedway and Darlington Raceway, and one in The Bud at the Glen
program produced at Watkins Glen, for which Gargoyles will supply advertising
copy and materials by a mutually agreed upon deadline, in 1997, 1998 and 1999;
(vii) provide one race-related story in the Event
program that highlights Gargoyles;
(viii) cause the public address announcer to promote
Gargoyles at regular intervals during each Race, copy to be provided by
Gargoyles;
(ix) display Gargoyles logo flags during the Race
at twenty-six (26) locations along Pit Road to be determined by ISC. Gargoyles
will provide twenty-six (26) flags standard size at least twenty (20) days
prior to the Race in 1997, 1998 and 1999;
(x) display during the Race six (6) Gargoyles
dirigibles, 10' by 4.5' in size, provided by Gargoyles and pending Gargoyle's
procurement of zoning approval, in 1997, 1998, and 1999;
(xi) provide Gargoyles 300 identification, on a
rotating basis, on the main Daytona International Speedway marquee sign located
at the entrance of Daytona International Speedway on International Speedway
Boulevard in 1997, 1998 and 1999;
(xii) provide one (1) location during the Race
positioned on the drivers' left, turn 1 entrance for Gargoyles' inflatable race
signage, in 1997, 1998 and 1999;
(xiii) provide four (4) Gargoyles Race signage
positions during the Race on the photo tower along Pit Road: one (1) facing
north, one (1) facing south, one (1) facing east, and one (1) facing west in
1997, 1998 and 1999;
(xiv) provide major race signage presence during
the Race in Victory Lane in 1997, 1998 and 1999;
(xv) provide two (2) Gargoyles 300 race signs
during the Race on the official Daytona race starter's flag stand in 1997, 1998
and 1999;
(xvi) provide product sales exclusivity of premium
performance eyewear at four (4) locations at Daytona International Speedway
during the Event. The Royalty Schedule will
-2-
<PAGE> 3
be as follows: 25% on hats and shirts, 15% on premium eyewear (as more
specifically set forth in the on-premise agreement). Vendors other than
Gargoyles will be allowed to sell other brands of eyewear if priced below
$30.00;
(xvii) provide non-exclusive product sales of
performance eyewear at one (1) location each at Darlington Raceway, Talladega
Superspeedway and Watkins Glen International. The Royalty Schedule will be as
follows: 25% on hats and shirts, 15% on premium eyewear (as more specifically
set forth in the on-premise agreement);
(xviii) provide signage location throughout the year
during the term of this Agreement at Darlington Raceway and Watkins Glen
International, location to be determined by each respective speedway.
Fabrication costs to be the responsibility of Gargoyles; and
(xix) use its best efforts to support Gargoyles and
to assist Gargoyles with Gargoyles' negotiations with other speedway owners and
for other ISC properties to permit Gargoyles to sell its products at other
events similar to the Event.
3. TERM
The term of this Agreement shall be three (3) years, commencing as of
the date hereof and, unless sooner terminated in accordance with the provisions
hereof, shall end on September 30, 1999.
4. SPONSORSHIP FEE
For the acquisition of such rights, Gargoyles will pay to ISC the sum
of One Million Fifty Thousand Dollars ($1,050,000) in accordance with the
following schedule:
Two Hundred Fifty Thousand Dollars ($250,000) on or before January 1,
1997 for the 1997 Race;
Three Hundred Seventy Five Thousand Dollars ($375,000) on or before
January 1, 1998 for the 1998 Race; and
Four Hundred Twenty Five Thousand Dollars ($425,000) on or before
January 1, 1999 for the 1999 Race.
5. RIGHT OF FIRST NEGOTIATION
If ISC conducts a similar Race in 2000, Gargoyles shall have the first
option to purchase the several rights granted under this Agreement for such
Race, and ISC shall propose to Gargoyles in writing on or before January 1,
1999 to sponsor the Race at a cost to Gargoyles of Four Hundred Seventy Five
Thousand Dollars ($475,000). Unless otherwise mutually agreed, all terms and
conditions other than the amount of the sponsorship fees shall be the same as
provided for herein, with appropriate changes in dates. Gargoyles shall have
until the later of January, 1999 or thirty (30) days after receiving ISC's
proposal within which to accept the same. If Gargoyles does not accept such
proposal within such time, ISC shall be free to contract with any third party
with respect to any or all of such rights.
-3-
<PAGE> 4
6. TERMINATION
(a) Either party shall have the right at any time to
terminate this Agreement, effective upon the other party's receipt of
termination notice, without prejudice to any other legal rights to which such
terminating party may be entitled, upon the occurrence of any one or more of
the following:
(i) material default by the other party in
performance of any of the provisions of this Agreement, which default is not
cured within fifteen (15) days following written notice of such default to the
defaulting party; or
(ii) if any of the material representations or
warranties made by the other party in this Agreement shall prove to be untrue
or inaccurate in any material respect.
(b) Termination of this Agreement for any reason provided
herein shall not relieve either party from its obligation to perform up to the
effective date of such termination or to perform such obligations as may
survive termination. However, ISC agrees to release Gargoyles from this
Agreement at any time after the Race day and before close of business EST
ninety (90) days after the Race in any year during the term of this Agreement
at which time Gargoyles will provide written notification of termination to ISC
and pay ISC a termination fee of $100,000 due the January following the
termination. Upon such termination, no further sponsorship fees shall be due
and payable by Gargoyles for any Race otherwise scheduled during the term of
this Agreement occurring after the termination date. In the event that
Gargoyles chooses early termination of this Agreement, Paragraph 5. of this
Agreement becomes void.
7. WARRANTY
(a) ISC represents, warrants and covenants to Gargoyles
as follows:
(i) It has the full right and legal authority to
enter into and fully perform this Agreement in accordance with its terms.
(ii) This Agreement when executed and delivered by
ISC, will be its legal, valid and binding obligation enforceable against ISC in
accordance with its terms, except to the extent that enforcement thereof may be
limited by bankruptcy, insolvency or other similar laws affecting creditors'
rights generally.
(iii) The execution and delivery of this Agreement
has been duly authorized by ISC, and such execution and delivery and the
performance by ISC of its obligations hereunder, do not and will not violate or
cause a breach of any other agreements or obligations to which it is a party or
by which it is bound, and no approval or other action by any governmental
authority or agency is required in connection herewith.
(iv) In addition to being true as of the date
first written above, each of the foregoing representations, warranties, and
covenants shall be true at all times during the term hereof. Each of such
representations, warranties and covenants shall be deemed to be material and to
have been relied upon by Gargoyles notwithstanding any investigation made by
Gargoyles.
-4-
<PAGE> 5
(b) Gargoyles represents, warrants and covenants to ISC
as follows:
(i) It has the full right and legal authority to
enter into and fully perform this Agreement in accordance with its terms.
(ii) This Agreement when executed and delivered by
Gargoyles, will be its legal, valid and binding obligation enforceable against
Gargoyles in accordance with its terms, except to the extent that enforcement
thereof may be limited by bankruptcy, insolvency or other similar laws
affecting creditors' rights generally.
(iii) The execution and delivery of this Agreement
has been duly authorized by Gargoyles, and such execution and delivery and the
performance by Gargoyles of its obligations hereunder, do not and will not
violate or cause a breach of any other agreements or obligations to which it is
a party or by which it is bound, and no approval or other action by any
governmental authority or agency is required in connection herewith.
(iv) In addition to being true as of the date
first written above, each of the foregoing representations, warranties, and
covenants shall be true at all times during the term hereof. Each of such
representations, warranties and covenants shall be deemed to be material and to
have been relied upon by ISC notwithstanding any investigation made by ISC.
8. TRADEMARKS
(a) The trademarks, label designs, product identification
and artwork of each of the parties as referred to herein (collectively
"Trademarks") shall remain the property of the respective party. Any and all
rights in a party's Trademarks under trademark or copyright law or other
property rights shall inure to the benefit of and be the exclusive property of
such party. Gargoyles grants to ISC and ISC grants to Gargoyles the right to
use the above in connection with the Race; provided, however, that said right
is nonexclusive, nonassignable and nontransferable. All proposed uses by one
party of any Trademarks of the other shall be subject to review and prior
written approval of such other party.
(b) ISC shall own and control, exclusive of the Gargoyles
name and logo, any race name and/or logo developed as part of Gargoyles'
sponsorship of any facility, event, and/or other property. ISC and its
subsidiaries (specifically Americrown Service Corporation) shall have the right
to utilize the mutually agreed upon race name and logo (incorporating the
Gargoyles name and logo with "300") on merchandise and services to be sold on
ISC property at all times during the term of this agreement. ISC shall grant
to Gargoyles, by separate agreement, a license to use the race name and logo on
products and/or services to be distributed and sold off the premises of ISC's
racing facilities (the "License Agreement"). Gargoyles and/or its
manufacturers or service providers shall pay to ISC the appropriate advances,
minimum guarantees, and royalties included in the license to use the race name
and logo.
9. FORCE MAJEURE
Neither party shall be liable for any failure, inability, or delay to
perform its obligations hereunder if such failure, inability or deal arises
beyond control or without fault or the offending party. By way of example, and
not limitation, such causes may include acts of war, riots, sabotage,
-5-
<PAGE> 6
explosion, fire, strike, accident or casualty, rendering performance
commercially impractical. In the event of such failure, ISC or Gargoyles, as
the case may be, shall use its best efforts to cure such cause and to resume
performance. Notwithstanding the foregoing, either party shall have the right
to immediately terminate this Agreement, without cause, if the Race is not held
in any given year, for any reason whatsoever.
10. INDEMNITY
(a) Each party will indemnify, protect, defend and hold
harmless the other party, its parent, subsidiary and affiliated corporations,
its wholesale distributorship, and their respective directors, officers,
employees and agents, from and against any and all claims, liabilities, losses,
damages, injuries, demands, actions, causes of action, suits, proceedings,
judgments and expenses, including, without limitation, attorneys' fees, court
costs and other legal expenses, arising from or connected with (i) any alleged
or actual breach by such indemnitor of any provision hereof or the inaccuracy
of any warranty or representation made by such indemnitor herein, and (ii) such
indemnitors advertising, promotion, preparation for, and conduct of the Race,
or actions otherwise related to the Race; provided that neither party hereunder
shall be obligated to indemnify the other party for liability arising from such
other party's own breach of any agreement, negligence, knowing or willful
misconduct, or violation of federal, state or local law or regulation.
(b) Each party shall give the other party prompt notice
of any claim or suit coming within the purview of these indemnities. Upon the
written request of an indemnitee, the indemnitor will assume the defense of any
claim, demand or action against such indemnitee and will upon the request of
the indemnitee, allow the indemnitee to participate in the defense thereof,
such participation to be at the expense of the indemnitee. Settlement by the
indemnitee without the indemnitor's prior written consent shall release the
indemnitor from the indemnity as to the claim, demand or action so settled.
Termination of this Agreement shall not affect the continuing obligations of
each of the parties as indemnitors hereunder.
11. INDEPENDENT CONTRACTOR
The parties shall be and act as independent contractors, and under no
circumstances shall this Agreement be construed as one of agency, partnership,
joint venture or employment between the parties. Each party acknowledges and
agrees that it neither has nor will give the appearance or impression of having
any legal authority to bind or commit the other party in any way.
12. FAILURE TO OBJECT NOT A WAIVER
The failure of either party to object to or to take affirmative action
with respect to any conduct of the other party which is in violation of the
terms hereof shall not be construed as a waiver thereof, nor of any future
breach or subsequent wrongful conduct.
13. NOTICES
All notices required or permitted hereunder shall be in writing and
shall be deemed duly given upon receipt if either personally delivered or sent
by certified mail, return receipt requested, addressed to the parties as
follows or to such other address as either party may provide to the other in
accordance herewith:
-6-
<PAGE> 7
If to Gargoyles: If to ISC:
Gargoyles, Inc. International Speedway Corporation
5866 South 194th Street 1801 International Speedway Blvd.
Kent, WA 98032 Daytona Beach, FL 32114
Attn: Janice Gaub VP, Attn: W. Garrett Crotty,
Marketing and Cynthia L. Page, General Counsel
General Counsel
Notices in connection with proof of insurance coverage and consents hereunder
shall be provided to Gargoyles at the above address.
14. SUCCESSORS AND ASSIGNS
Neither party shall assign its rights and/or obligations under this
Agreement without the prior written approval of the other party. This
Agreement and all of the terms and provisions hereof will be binding upon, and
will inure to the benefit of, the parties hereto, and their respective
successors and approved assigns.
15. MISCELLANEOUS
(a) Each of the individuals executing this Agreement
certifies that he or she is duly authorized to do so.
(b) This Agreement constitutes the entire understanding
between the parties with respect to the subject matter hereof and supersedes
all prior or contemporaneous agreements in regard thereto.
(c) This Agreement cannot be altered or modified except
by an agreement in writing signed by authorized representatives of both parties
and specifically referring to this Agreement.
(d) The rights and remedies set forth herein are intended
to be cumulative, and the exercise of any one right or remedy by either party
shall not preclude or waive its exercise of any other rights or remedies
hereunder or pursuant to law or equity.
(e) The paragraph headings set forth herein are for
convenience only and do not constitute a substantive part of the Agreement.
(f) On or before January 15, or within fifteen (15) days
of this Agreement, ISC shall provide Gargoyles with a certificate of insurance
showing that ISC has obtained insurance for the Race naming Gargoyles as an
additional named insured for the Race in the amount of $1,000,000. It shall be
deemed a material breach of this Agreement if ISC fails to provide such
insurance certificate.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
GARGOYLES, INC.
By /S/ DOUGLAS B. HAUFF
-------------------------------------
Print Name DOUGLAS B HAUFF
-----------------------------
Title PRESIDENT
----------------------------------
Date 1/9/97
-----------------------------------
INTERNATIONAL SPEEDWAY CORPORATION
By /S/ JOHN E. GRAHAM, JR.
-------------------------------------
Print Name JOHN E. GRAHAM, JR.
----------------------------------
Title VICE PRESIDENT
----------------------------------
Date 1/8/97
-----------------------------------
-8-
<PAGE> 1
EXHIBIT 10.43
PRODUCT DEVELOPMENT AND LICENSING AGREEMENT
THIS AGREEMENT, is made and entered into as of this 1st day of
January, 1997, by and between GOLDEN BEAR GOLF, INC., a Florida corporation,
whose address is 11780 U.S. Highway One, Suite 300, North Palm Beach, Florida
33408 ("GB Golf") and GARGOYLES, INC., a Washington corporation, whose mailing
address is 5866 South 194th Street, Kent, Washington 98032 ("Gargoyles").
W I T N E S S E T H:
WHEREAS, Gargoyles currently designs, manufactures, markets and
distributes various lines of high performance eyewear, including specialty
eyewear for sports enthusiasts;
WHEREAS, GB Golf, through its business activities and the professional
activities of its principal, Jack Nicklaus ("Nicklaus"), has developed unique
expertise with respect to the requirements of professional and serious amateur
golfers for equipment and accessories;
WHEREAS, Gargoyles and GB Golf are desirous of developing a new line
of specialty eyewear for golfers as identified in Schedule "1" annexed hereto
(the "Licensed Products"), which Licensed Products will be designed to
Nicklaus' standards by Gargoyles in consultation with GB Golf and will be
manufactured and distributed by Gargoyles using certain brands developed by GB
Golf and the endorsement of Nicklaus.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants and conditions set forth herein, the parties hereto agree as
follows:
1. DESIGN CONSULTATION
Promptly after the execution and delivery of this Agreement, GB Golf
and Gargoyles will begin a joint and cooperative effort to create and develop
the Products. Such collaboration will include, but not be limited to,
consultation between Nicklaus and other designated representatives of GB Golf
and Gargoyles's staff and outside design consultants regarding technical design
ideas, performance characteristics, materials, styles and colors, in order to
develop a complete line of Licensed Products. It is anticipated by the parties
that the efforts of Gargoyles and its independent design consultants will be
undertaken at Gargoyles' design and manufacturing facilities
<PAGE> 2
where necessary to make use of Gargoyles' testing and manufacturing equipment,
and that any consulting services to be rendered personally by Nicklaus,
including review of designs and prototypes, may be rendered whenever
appropriate from such locations as may be convenient to him. All costs
incurred in connection with the design of the Licensed Products, including
prototype development, product testing and regulatory approvals, shall be
solely borne by Gargoyles. Gargoyles acknowledges that GB Golf's consultation
in the design process for the Products shall not relieve Gargoyles from its
legal obligations to provide those engineering and design services required to
develop merchantable products, fit for their intended purposes, in conformity
to all applicable laws and regulations governing the design and manufacture of
eyewear. The parties agree that neither GB Golf nor Nicklaus, by virtue of
consulting services rendered by them under this Agreement or otherwise, will
assume any professional responsibility or products liability with respect to
the Licensed Products or any other products manufactured or distributed by
Gargoyles.
2. GRANT OF TRADEMARK AND ENDORSEMENT RIGHTS
GB Golf represents and warrants to Gargoyles that it is the exclusive
licensee of Golden Bear International, Inc. ("GBI"), and that GBI is the owner
of trademark and service mark rights in those trademarks identified in Schedule
"2" annexed hereto and made a part hereof (the "Trademarks"), and has developed
substantial goodwill in connection with its use of such Trademarks for a
variety of goods and services worldwide. GB Golf has full right and authority
to sub-license the Trademarks to Gargoyles for use by Gargoyles in accordance
with the terms of this Agreement. Subject to the terms and conditions of this
Agreement, GB Golf hereby grants to Gargoyles the right during the term of this
Agreement: (i) to affix the Trademarks to Licensed Products to be marketed in
and sold in the "Territory" (as defined in Section 6, below), and (ii) to
utilize the Trademarks and the name, likeness and signature of Nicklaus and
other information, artwork and materials approved in writing by GB Golf
(collectively, the "Nicklaus Endorsement") to indicate Nicklaus' endorsement of
the Licensed Products marketed within the Territory.
3. PRODUCT DESIGN AND APPROVALS
GB Golf shall have the right to approve all Licensed Products prior to
sale by Gargoyles under this Agreement, which approval shall be in writing in
accordance with the procedures set forth herein. As set forth in Section 1,
above, GB Golf shall assist Gargoyles in the conceptual development of the
Licensed Products and Gargoyles shall consult with GB Golf on an ongoing basis
during all phases of the design and development of the Licensed Products.
Without limiting the generality of
-2-
<PAGE> 3
the foregoing, GB Golf and Gargoyles shall agree upon conceptual design and
performance criteria for each new or materially changed model of the Licensed
Products in advance of the commencement of the design process. Gargoyles shall
be responsible for integrating reasonable comments and suggestions made by GB
Golf into the design of each model of this Licensed Products, including
providing the design and engineering services reasonably required to implement
such matters with existing know-how and research of Gargoyles. Unless
otherwise agreed by GB Golf, Gargoyles shall furnish to GB Golf, free of
charge, working prototypes of each new or materially changed model of the
Licensed Products for review, testing and approval prior to Gargoyles'
commitment to manufacture such model on other than a prototype basis.
Gargoyles shall also furnish to GB Golf for its approval a final production
sample of each model of the Licensed Products before production in commercial
quantities. GB Golf shall have ten (10) working days from receipt of any
working prototype to approve or disapprove of such prototype, and shall have
ten (10) working days from receipt of any production sample to approve or
disapprove such sample. If no written disapproval of a prototype is received
by Gargoyles within the required time period, Gargoyles shall be authorized to
prepare the corresponding model for final production. Gargoyles shall not
prepare production samples of Licensed Products until corresponding prototypes
have been approved by GB Golf, and Gargoyles shall not manufacture, distribute
or sell any Licensed Products in commercial quantities until corresponding
production samples have been approved by GB Golf. Approvals under this section
shall in no event be unreasonably withheld or delayed, and if withheld, the
reasons therefor shall be clearly explained to Gargoyles. Gargoyles agrees
that all Licensed Products to be distributed, sold, promoted, or manufactured
under this Agreement shall substantially conform to the latest production
samples approved, or deemed to be approved, by GB Golf, and to those additional
quality standards and controls applied by Licensee in general to similar
products manufactured and marketed by Licensee.
4. ADVERTISING/PROMOTIONAL DEVELOPMENT AND APPROVALS
Gargoyles acknowledges that it is essential for the protection of the
interests of GB Golf in the Nicklaus Endorsement that GB Golf have a continuing
control over the design and content of all labelling, packaging, advertising,
and promotional materials (collectively, "Promotional Material") used in
connection with marketing of the Licensed Products, including, without
limitation, any brand name, trademark or trade name used by Gargoyles in
connection therewith to promote itself as a source of the Licensed Products.
Accordingly, Gargoyles agrees that: (i) GB Golf shall have a continuing right
to approve or disapprove of any Promotional Material used in connection with
the Licensed Products, whether used by Gargoyles or provided by
-3-
<PAGE> 4
Gargoyles to any distributor, retailer, or other party selling the Licensed
Products; and (ii) Gargoyles will not use and will not extend to others the
right to use any Promotional Material of any type whatsoever without the prior
approval thereof by GB Golf as provided in this Section. In the event that GB
Golf in good faith requests Gargoyles to terminate further use of Promotional
Material which had been approved prior to the time of such request, the parties
will use their best efforts to negotiate a mutual agreement for phasing out
further use of such Promotional Material in a manner which minimizes the
negative impact of such material on GB Golf and recognizes the financial and
marketing interests of Gargoyles in use of such materials for a reasonable
period. Prior to the creation of any Promotional Material, Gargoyles shall
consult with GB Golf regarding the appropriate uses of the Nicklaus Endorsement
and marketing ideas for the Licensed Products. Gargoyles shall submit
conceptual descriptions for proposed Promotional Material for approval by GB
Golf as soon as reasonably practicable. After approval of such concepts,
Gargoyles shall prepare samples of each item of Promotional Material so
approved, which shall reflect the artwork, photography, and text to be used for
labelling, packaging and print media and scripts and storyboards for
broadcasting media. GB Golf shall have ten (10) working days from receipt of
such samples to approve or disapprove of such samples. Approvals under this
section shall in no event be unreasonably withheld or delayed, and if withheld,
the reasons therefor shall be clearly explained to Gargoyles. Gargoyles shall
not commit to production or media run any Promotional Material without the
prior approval of such Promotional Material GB Golf, and it is understood that
all Promotional Material shall conform to the samples approved by GB Golf or to
revised samples submitted to and approved by GB Golf as provided herein.
Gargoyles shall use reasonable efforts to inform GB Golf of any unauthorized
use of Promotional Material by its customers, and upon request of GB Golf, to
assist GB Golf in its efforts to eliminate any unauthorized use of any part of
the Nicklaus Endorsement in connection with the Licensed Products.
5. STANDARDS OF QUALITY
Gargoyles acknowledges that it shall not be authorized to use any part
of the Nicklaus Endorsement or any of the Product Marks (as defined in Section
11, below) except to identify and promote those Licensed Products meeting the
standards of quality adopted by GB Golf in connection with the product approval
process set forth in this Agreement. GB Golf and/or its representatives shall
have reasonable access to any manufacturing or distribution facility used by
Gargoyles in connection with the Licensed Products for the purpose of verifying
Gargoyles' ongoing adherence to the standards of quality imposed by this
Agreement.
-4-
<PAGE> 5
6. TERRITORY
The Territory shall initially consist of the United States domestic
market and those countries identified in Schedule "3" annexed hereto, which
Gargoyles represents and warrants to be its primary territories for
distribution of its current product lines. GB Golf agrees that Gargoyles shall
have the exclusive right to expand the initial Territory by giving GBI
reasonable prior notice of any proposed sales activities which Licensee intends
to conduct in any jurisdiction outside of those countries expressly identified
in Schedule "3", and provided that GB Golf shall have the right to determine,
in its discretion, whether or not to request GBI to proceed with the
registration of the Trademarks in such jurisdiction based upon the projected
costs of such registration and the amount of compensation which Gargoyles
reasonably expects to generate from its proposed activities. GBI shall not be
responsible for any loss or liability incurred for trademark infringement
incurred by Gargoyles as a result of its distribution of Licensed Products into
any new jurisdiction prior to confirmation by GB Golf that no conflict exists
in such jurisdiction with respect to the proposed use of a Trademark. In the
event that any person not authorized by GBI asserts any interest in a Trademark
or in any similar or conflicting trademark under the trademark laws or
regulations of such a jurisdiction, GB Golf may withdraw such jurisdiction from
the Territory granted to Licensee hereunder unless the parties reach a mutual
determination as to their common business interest in defending GBI's ownership
rights in the Trademark or resolving any conflict with the other trademark
based upon the proposed activities to be conducted in such jurisdiction under
this Agreement or by GBI under any related Agreement. If the parties determine
to proceed with the distribution of Licensed Products into such jurisdiction,
GB Golf shall cause GBI to use its best efforts to secure the trademark rights
required for the proposed activities in such jurisdiction, provided that GB
Golf and Gargoyles will each be required to contribute one-half (1/2) of the
reasonable expenses and attorneys' fees required by GBI to secure such rights.
Notwithstanding the foregoing, it is understood that GBI, as the sole owner of
the Trademarks, and GB Golf, as its master licensee, reserve the right to take
such action at their sole cost and expense as each of them may deem prudent in
order to protect its trademark rights in any jurisdiction, whether included in
the Territory or not.
7. DISTRIBUTION CHANNELS
The Licensed Products will initially be sold for distribution to
sunglass specialty stores and dispensing optical retailers in Gargoyles
existing distribution channels, to on course golf pro shops and off course
specialty golf retailers, and to such other channels as may be mutually agreed
upon in writing by the parties.
-5-
<PAGE> 6
Gargoyles agrees to work with GB Golf and the existing licensees of the
Nicklaus Endorsement for golf equipment and apparel with respect to golf retail
channels in order to avoid conflicts with existing distribution activities in
such channels, provided that the agreement of Gargoyles to enter into any
distribution arrangements for the Licensed Products with other licensees shall
be subject to its reasonable satisfaction with such licensees and the terms of
such arrangements, and provided further, that the delegation of distribution
duties to such licensees or common sales representatives shall not relieve
Gargoyles of its obligations to meet its distribution requirements under this
Agreement. GB Golf agrees that it will not unreasonably refuse to agree to any
new channels proposed by Gargoyles, provided that the proposed distribution
does not conflict with Nicklaus' professional image or reputation for quality
or the brand image of GB Golf. Gargoyles shall use its best efforts to assure
the integrity of the distribution channels selected, and to prevent
transshipment and gray market sales by its customers and distributors through
unauthorized distribution channels. Distribution of the Licensed Products,
including but not limited to the cost thereof, shall be the exclusive
responsibility of Gargoyles.
8. COMPENSATION AND EXPENSES
The parties agree that, in consideration for the performance of this
Agreement by GB Golf, Gargoyles will provide compensation and expense
reimbursements as provided in this Section. As an independent contractor, GB
Golf agrees to be responsible for all other overhead and expenses incurred in
connection with the performance of this Agreement, and GB Golf will be
responsible for payment of all taxes due with respect to the payments received
under this Agreement and for making all employer's withholding deposits in
connection with payments made to its staff, including Nicklaus, for services
rendered in support of this Agreement.
(a) As compensation for the design consulting and marketing
services to be performed by GB Golf under this Agreement, Gargoyles agrees to
pay GB Golf annual consulting fees (the "Consulting Fees") in the amounts set
forth on Schedule "4" annexed hereto for each calendar year during the term.
In addition to the Consulting Fees, Gargoyles hereby agrees to pay GB Golf
guaranteed royalties (the "Minimum Royalties") for each calendar year in the
amounts set forth on Schedule "4" for the intangible rights licensed to
Gargoyles under this Agreement. The Consulting Fee and Minimum Royalty for
each year (collectively, the "Annual Retainer") shall be paid to GB Golf in
equal quarterly installments due and payable in advance, with the first
installment of the Annual Retainer for 1997 due upon execution of this
Agreement, and subsequent installment payments due on or before the first (1st)
day of each calendar quarter thereafter. All Annual Retainer payments made to
GB Golf
-6-
<PAGE> 7
hereunder shall be guaranteed and non-refundable, provided that Annual Retainer
payments will be credited against Percentage Compensation due from Gargoyles as
provided in subsection (b) hereof. In the event that this Agreement is
terminated due to a breach by GB Golf, in which case that portion of the
aggregate Annual Retainer attributable to periods of time subsequent to such
termination shall be repaid to Licensee if in excess of actual Percentage
Compensation earned under subsection (b) hereof.
(b) Within thirty (30) days following the end of each calendar
quarter, commencing with the first quarter in which shipments of Licensed
Products are actually made, Gargoyles shall deliver to GB Golf a statement
setting forth the total amount of shipments of Licensed Products by Gargoyles
during such quarter and for the applicable calendar year on a cumulative basis
and also setting forth the amount of discounts, allowances and returns given
and received with respect to Licensed Products during such quarter and year on
a cumulative basis. All amounts shall be set forth in U.S. Dollars, and any
amounts denominated in foreign currency shall be converted using the exchange
rates actually used by Gargoyles for such conversion. Gargoyles shall at the
same time pay to GB Golf compensation (the "Percentage Compensation") with
respect to such shipments, which Percentage Compensation shall be earned at the
rate of [*] of the actual invoice price thereof, less trade and cash discounts,
sales or similar transaction taxes (if any) which Gargoyles is required to
collect from its customers, freight charges if separately invoiced, and returns
and allowances actually given and received (hereinafter called "Net Sales").
GB Golf acknowledges that the full amount of Annual Retainer payments actually
received by GB Golf for each calendar year shall be credited against the
obligations of Gargoyles to pay Percentage Compensation hereunder with respect
to the Net Sales for such calendar year through the quarter covered by each
statement, and that Gargoyles shall only be required to pay GB Golf the net
balance of Percentage Compensation due under this subsection for the year to
date Net Sales made during such License Year after crediting Annual Retainer
Payments and any additional payments of Percentage Compensation for prior
quarters of such calendar year. Any Annual Retainer payments not applied
against Percentage Compensation earned during the calendar year for which such
Annual Retainer is paid shall not be subject to refund or application against
future Percentage Compensation earned by GB Golf.
(c) Gargoyles shall keep and maintain such books of account as
shall be necessary to record all sales and shipments of Licensed Products and
for the accurate
_______________________
[*] Confidential Treatment Requested
-7-
<PAGE> 8
computation of Net Sales and Percentage Compensation with respect thereto
pursuant to the terms of subsection (b), above, which books of account shall be
open for inspection and copying during reasonable business hours by GB Golf and
its representatives until the conclusion of the twelve (12) month period
following the effective date of the termination of this Agreement.
(d) In addition to the Annual Retainers and Percentage
Compensation due to GB Golf under this Section, Gargoyles shall advance or
promptly reimburse GB Golf and Nicklaus for all out-of-pocket expenses (other
than normal postage and telecommunication expenses) approved in writing by
Gargoyles which are incurred by them in connection with their participation in
the development and marketing of Licensed Products under this Agreement,
including, without limitation, travel expenses incurred in connection with
travel to Gargoyles' principal office and any other location where the parties
may agree that GB Golf shall render particular services to Gargoyles under this
Agreement. GB Golf shall provide Gargoyles with an estimate of expenses to be
incurred under this subsection prior to making any binding commitments to
undertake activities which require GB Golf or Nicklaus to incur such expenses,
and GB Golf shall not be required to undertake a proposed activity if Gargoyles
fails to approve such expenses as required under this subsection. Unless
approved expenses are otherwise paid directly by Gargoyles, GB Golf shall
provide Gargoyles on a periodic basis with invoices including customary
supporting information for all expenses subject to this subsection, and
Gargoyles shall pay all such invoices within fifteen (15) days of receipt
thereof.
9. TERM
The term of this Agreement shall commence upon the execution hereof
and continue until June 30, 2002, unless earlier terminated pursuant to this
Section or renewed as provided in Section 17, below.
(a) Either party may terminate this Agreement on thirty (30) days
written notice to the other in the event of a material breach by such other
party of any of its general obligations or undertakings under this Agreement,
unless the party receiving such notice cures the breach identified therein
within such thirty (30) day period. In the event that (1) Gargoyles shall fail
to make any payment required to be made under this Agreement within fifteen
(15) days of the date the same falls due, or (2) proceedings are instituted by
Gargoyles under any bankruptcy or insolvency law or other law for the benefit
of creditors or the relief of debtors, or involuntary bankruptcy proceedings
are commenced against Gargoyles and such proceedings are not dismissed within
sixty (60) days of the commencement thereof, or Gargoyles shall
-8-
<PAGE> 9
make an assignment for the benefit of its creditors, or Gargoyles shall be
adjudicated bankrupt or insolvent, or (3) Gargoyles shall transfer all or a
substantial part of the employees, or convey all or a substantial part of the
assets or intangible rights necessary to perform this Agreement, to any other
party without the prior written consent of GB Golf, which consent shall not be
unreasonably withheld; then in any such event, GB Golf shall have the right, at
its election, then or at any time thereafter and while such event or events
shall continue, to terminate this Agreement upon written notice to Gargoyles,
without prejudice to any other right or remedy GB Golf may have as a result of
such event or events.
(b) In addition to the foregoing termination rights, either party
shall have a special right to terminate this Agreement in the event that
Gargoyles fails to make sufficient Net Sales during any period of two (2)
consecutive calendar years to generate royalties in excess of the minimum
annual retainer payments required under Schedule "4" annexed hereto despite the
best efforts of Gargoyles to meet its distribution obligations under this
Agreement. Such right may be exercised by written notice from the party
electing to terminate to the other party, and will be deemed waived unless the
required notice is given within ninety (90) days after GB Golf's receipt of the
fourth quarterly payment with respect to Net Sales made by Gargoyles in the
second calendar year of any such period. In addition to the foregoing rights,
either party shall have a special right to terminate this Agreement in the
event that Nicklaus dies or becomes disabled prior to the first public
introduction of Licensed Products by Gargoyles. Such right may be exercised by
written notice from the party electing to terminate to the other party, and
will be deemed waived unless such notice is given within thirty (30) days
following the death or disability of Nicklaus or thirty (30) days prior to the
first scheduled public introduction of Licensed Products, whichever shall first
occur.
(c) Following the effective date of any termination of this
Agreement, and except as otherwise hereinafter expressly provided in subsection
(d) of this Section in the event of a termination by GB Golf, Gargoyles shall
no longer utilize any Product Mark (as defined below) or any other part of the
Nicklaus Endorsement in connection with the manufacture, sourcing,
advertisement, promotion, or sale of any products (whether or not such products
were originally manufactured as Licensed Products), and all rights of Gargoyles
hereunder shall cease absolutely. It is further understood that Gargoyles'
right to sell Licensed Products incorporating technical improvements for which
proprietary rights have been reserved by GB Golf under this Agreement shall
cease in the same manner. Nonetheless, it is understood that distributors and
retailers may continue to promote and sell such Licensed Products as they may
then have in their own inventory. Nothing herein, however, shall be deemed to
limit the
-9-
<PAGE> 10
right of Gargoyles to sell any eyewear products (whether or not such products
were originally manufactured as Licensed Products) subsequent to the
termination of this Agreement, without utilizing any Product Mark or any part
of the Nicklaus Endorsement, or any proprietary rights reserved by GB Golf, so
long as all reference to Nicklaus and GB Golf (or any symbol associated in the
mind of the public with such parties) has been removed therefrom at Gargoyles'
sole cost and expense.
(d) In the event of an early termination of this Agreement by GB
Golf, any Licensed Products which have been manufactured by or for Gargoyles
pursuant to the terms hereof and are in the inventory of GB Golf prior to the
termination of this Agreement may be sold (but only in the same distribution
channels and under the same pricing policies theretofore applicable to the sale
of Licensed Products and subject to all of the obligations and restrictions
imposed by this Agreement) and shipped by Gargoyles during the six (6) month
period next following the date of such termination, provided that within forty
five (45) days next following the date of such termination, Gargoyles shall
have notified GB Golf in writing of the amount, description, and location of
all existing inventory of such Licensed Products, and provided further, that
Gargoyles timely pays and accounts for compensation in the manner and at the
rate specified in Section 8, above, with respect to such sales of Licensed
Products. Upon the expiration of such six (6) month period, all rights of
Gargoyles hereunder to distribute or otherwise deal with Licensed Products
shall cease absolutely.
(e) In the event of a termination of this Agreement, the parties
agree that GB Golf may contract with others with respect to matters which GB
Golf has contracted with Gargoyles hereunder, effective at any time after the
effective date of the termination of this Agreement and prior to the original
expiration date of this Agreement. Such right shall not be deemed to authorize
GB Golf to disclose any confidential information reserved by Gargoyles under
this Agreement, or to authorize GB Golf or any third party to incorporate any
patented improvement owned and incorporated by Gargoyles in any Licensed
Products except as provided in Section 10, below.
10. PROPRIETARY RIGHTS OF THE PARTIES
In recognition of the cooperative nature of the design and development
efforts to be conducted by the parties under this Agreement, they have agreed
to the provisions of this Section in order to protect their respective
interests in the ownership and use of intellectual property other than
trademarks which is involved in the creation of Licensed Products.
-10-
<PAGE> 11
(a) It is understood and acknowledged by GB Golf that Gargoyles
has heretofore developed and may hereafter continue to develop proprietary
rights in patents, trade secrets and manufacturing know-how relating to the
design and manufacture of eyewear, and that Gargoyles intends to maintain such
rights in the event of a termination of this Agreement. It is understood and
acknowledged by Gargoyles that GB Golf has heretofore developed and may
hereafter continue to develop proprietary rights in trade secrets and technical
know-how relating to the requirements of serious recreational and professional
golfers, and that GB Golf intends to maintain such rights in the event of a
termination of this Agreement. The incorporation by Gargoyles in any of the
Licensed Products of proprietary rights reserved by Gargoyles shall not be
deemed to create a waiver of such rights or to give GB Golf permission to use
such rights in the creation of any other eyewear product developed by or in
consultation with GB Golf. The disclosure of proprietary rights by GB Golf in
connection with the design and development of Licensed Products under this
Agreement shall not be deemed to create a waiver of such rights or to give
Gargoyles permission to make any use of such rights in any product other than
Licensed Products developed and distributed under this Agreement. Without the
prior express written consent of the other party, neither party shall disclose
any matters relating to the proprietary rights of the other party which have
been disclosed by such party in confidence in the performance of this
Agreement. It is the understanding of the parties that Gargoyles, as the party
responsible for technical matters relating to the design and manufacture of the
Licensed Products, shall not be required to generally disclose confidential
matters to GB Golf or Nicklaus in the performance of their responsibilities
hereunder, and that Gargoyles shall provide GB Golf with written notice in the
event that Gargoyles finds it necessary to make any disclosures subject to the
terms of this Section. Such notice shall identify the proprietary rights
claimed and the confidential information to be disclosed with reasonable
particularity, in such detail as to reasonably enable GB Golf to abide by its
responsibilities with respect thereto. It is the further understanding of the
parties that GB Golf, as the party responsible for consulting with Gargoyles'
technicians on matters relating to the design of the Licensed Products, will
generally be making disclosures to Gargoyles in the performance of GB Golf's
responsibilities hereunder regarding matters which GB Golf deems confidential,
and that Gargoyles shall be required to hold such disclosures in confidence
unless the parties agree in writing that particular matters to be disclosed by
GB Golf or Nicklaus shall not be subject to the terms of this Section.
(b) To the extent that patented designs and/or processes owned or
licensed by Gargoyles or any part of its proprietary toric curve technology are
used to implement design recommendations of GB Golf with respect to the
Licensed Products, GB Golf shall not acquire any interest in underlying patents
or such toric
-11-
<PAGE> 12
curve technology by virtue of such use, provided however, that this provision
shall not prevent GB Golf from implementing similar design recommendations with
other parties after termination of this Agreement by use of any non-infringing
technology. To the extent that design recommendations of GB Golf with respect
to Licensed Products suggest a newly patentable design feature for eyewear, GB
Golf agrees to assign its rights in such invention to Gargoyles for the
purposes of obtaining patent protection for such feature, provided however,
that such assignment shall be subject to the further terms of this subsection.
In the event that this Agreement is terminated prior to the expiration of its
term, except as a result of a material breach by GB Golf, Gargoyles shall not
utilize any such patent to preclude GB Golf from using or licensing others to
use, or otherwise contest GB Golf's right to use and license others to use, any
invention developed as a result of the collaboration of the parties hereunder
for the limited purpose of manufacturing and selling eyewear products similar
to the Licensed Products after termination of this Agreement. To the extent
required under applicable law in order to carry out the intent of the parties,
this subsection shall be deemed to grant a non-exclusive license to GB Golf to
utilize patents and related technology jointly developed by the parties to the
extent of the contributions of GB Golf and Nicklaus thereto on a royalty free
basis, with the understanding that such license shall not include the right to
utilize any proprietary information contributed to such invention by Gargoyles
unless otherwise agreed by the parties, which agreement may be conditioned upon
the payment of a reasonable royalty for such right.
(c) Neither party shall, by virtue of this Agreement, be entitled
to prevent or restrict the use by the other party, after the effective date of
any termination of this Agreement, of any idea, concept, or technology which is
already known in the prior art of eyewear design or manufacturing, which has
become a part of the public domain other than through a violation of this
Section by a party, or which would otherwise be obvious to a knowledgeable
individual from inspection and/or use of the Licensed Products. It is
understood that the purpose of this Section is to prevent unfair competition
between the parties in the event of a termination of this Agreement, and not to
restrict either party from utilizing technologies in the public domain to meet
the competition of third parties free to utilize such technologies.
11. TRADEMARK AND ENDORSEMENT RIGHTS OF THE PARTIES
The parties intend to introduce the Licensed Products utilizing the
marketing impact associated with both of their respective brands, with the
understanding that this limited association of their brands shall not be deemed
to create any waiver of the respective trademarks or related rights of the
parties. GB Golf acknowledges that
-12-
<PAGE> 13
Gargoyles is the sole and exclusive owner of the entire right, title and
interest in and to the name "Gargoyles" and those trademarks set forth in
Schedule "5" annexed hereto (collectively, the "Gargoyles Marks"), and that all
rights arising out of the use of any Gargoyles Marks by Gargoyles under this
Agreement shall inure to the sole and exclusive benefit of Gargoyles.
Gargoyles agrees that GB Golf shall have the right to approve any use of the
Gargoyles Marks as a trademark for any of the Licensed Products, and that
Gargoyles shall not use or adopt any other trademark owned or claimed by
Gargoyles to identify the Licensed Products. Gargoyles acknowledges that GBI
is the sole and exclusive owner, and that GB Golf is the exclusive master
licensee, of the entire right, title and interest in and to the Nicklaus
Endorsement, that GBI shall have the exclusive right under its agreements with
GB Golf to adopt and own all new trademarks to be used to identify the Licensed
Products (the "Product Marks"), and that all rights arising out of the use of
any part of the Nicklaus Endorsement and/or any of the Product Marks by
Gargoyles under this Agreement shall inure to the sole and exclusive benefit of
GBI and GB Golf as its master licensee. Upon adoption of any Product Mark, or
later registration thereof by GBI, this Agreement shall be deemed to include a
license of the trademark rights of GB Golf and GB Golf subject to the terms of
this Agreement governing Gargoyles' use of the Nicklaus Endorsement, which
license shall permit the use of such Product Marks in connection with the
Licensed Products without requirement of any compensation to GB Golf in
addition to the compensation otherwise payable under Section 8, above. GB Golf
agrees not to contest, either directly or indirectly, Gargoyles' exclusive
right, title and interest in and to the Gargoyles Marks. Gargoyles agrees not
to contest, either directly or indirectly, GBI's title or GB Golf's exclusive
right and interest in and to the Nicklaus Endorsement and/or the Product Marks.
12. INDEMNIFICATION; INSURANCE
Gargoyles hereby agrees to indemnify GB Golf, GBI and Nicklaus
against, and hold them harmless from, all suits, claims, investigations,
administrative actions, settlements, judgments, obligations and liabilities,
including attorneys' fees and other costs and expenses incurred by them in
connection with the defense or settlement of any such matter, which result
from, or arise out of, or in connection with, the design, manufacture,
distribution and/or sale of the Licensed Products. Gargoyles will obtain
general liability insurance (including products liability coverages) covering
the Licensed Products in the amount of at least $2,000,000 combined single
limit, or such other amounts as may be agreed to from time to time by the
parties, which insurance shall name GB Golf, GBI and Nicklaus as additional
insured parties. Gargoyles shall furnish GB Golf with a certificate of such
insurance from the insurance carrier, which certificate will require the
insurance carrier to give GB Golf prior written notice of
-13-
<PAGE> 14
any cancellation, reduction or material limitation of such insurance. The
indemnification rights provided under this section shall survive the expiration
or earlier termination of this Agreement and inure to the benefit of the
parties and their successors in interest.
13. PREMIUM MARKET
Gargoyles agrees that it will not offer Licensed Products for sale as
a premium in the Premium Market, except in support of promotions developed or
expressly approved by GB Golf or its affiliates. For the purpose of this
Agreement, the "Premium Market" shall be deemed to mean sales of Licensed
Products to consumers or businesses in the Territory where the product is to be
used as a part of a premium promotion or "traffic builder" designed to build
public recognition or goodwill for a purchaser's business through the
association with GB Golf, to serve as a reward or incentive for job
performance, or to induce the ultimate consumer of the product: (i) to come to
or contact a certain place of business under circumstances where the seller is
interested primarily in selling or exposing such consumer to products or
services other than Licensed Products, or (ii) to purchase a service or product
other than Licensed Products.
14. USE OF LICENSED PRODUCTS
GB Golf will make reasonable efforts to directly promote the Licensed
Products by displaying and making gifts of such products as appropriate to its
business purposes and by encouraging Nicklaus and key management personnel to
promote and make use of the Licensed Products where appropriate. In order to
permit GB Golf to carry out its obligations under this Section, Gargoyles
agrees to furnish GB Golf with reasonable quantities of Licensed Products for
such promotional uses, which Licensed Products will be provided without charge.
15. ASSIGNMENT
This Agreement will be binding upon and inure to the benefit of the
parties and their respective successors and assigns; provided that neither this
Agreement nor any rights hereunder may be assigned directly or indirectly by
either party without first receiving the prior written consent of the other
party. Notwithstanding the foregoing, without such consent: (i) Gargoyles may
assign its rights under this Agreement to any party of comparable financial
ability who acquires all or substantially all of its business and assets or
capital stock, provided that such assignment is made as party of such
acquisition and the acquiring party agrees to be bound by the terms and
conditions of this Agreement, and (ii) GB Golf may assign its rights to any
party who
-14-
<PAGE> 15
acquires all or substantially all of its rights to license the Nicklaus
Endorsement with respect to eyewear products, provided that such assignment is
made as a part of such acquisition and the acquiring party agrees to be bound
by the terms and conditions of this Agreement.
16. RELATIONSHIP OF PARTIES
This Agreement does not create nor constitute a partnership, joint
venture or agency relationship between GB Golf and Gargoyles. Neither party
shall have any right to obligate, bind or commit the other party in or to any
matter, cause or thing whatsoever, without such party's express written
consent, and nothing herein shall grant, or is intended to grant, any rights of
any nature to any third party.
17. OPTION TO RENEW AGREEMENT
Subject to the due performance of its obligations hereunder and to the
further terms and conditions of this Section, Gargoyles shall have the first
option to negotiate a renewal of this Agreement for an additional term of five
(5) years, commencing July 1, 2002 (the "Renewal Term"). Gargoyles shall
exercise such option by providing GB Golf with written notice of its intention
to negotiate a renewal of this Agreement, which notice shall be given during
the period commencing January 1 and ending June 30, 2000, unless otherwise
agreed in writing by GB Golf. If such option is timely given by Gargoyles, GB
Golf shall negotiate in good faith with Gargoyles the terms and conditions to
be applicable under this Agreement during the Renewal Term, including without
limitation the Minimum Annual Retainers to be paid by Gargoyles under Schedule
"4", which negotiations shall be exclusive for a period of six (6) months
following the date of GB Golf's receipt of such notice. In the event that
Gargoyles fails to exercise its option as required by this Section, or if the
parties are unable to reach a mutual agreement regarding any material term or
condition to be applicable during the Renewal Term during the exclusive
negotiation period, GB Golf shall be free to negotiate and enter into
agreements with third parties regarding the manufacture, distribution and
marketing of products similar to the Licensed Products, provided that no such
agreement shall permit the introduction of such products into any part of the
Territory prior to the expiration or earlier termination date of this Agreement
without the prior express written consent of Gargoyles, which consent may be
withheld in its discretion to protect its exclusive marketing rights under this
Agreement with respect to the Licensed Products.
-15-
<PAGE> 16
18. MISCELLANEOUS
(A) CHOICE OF LAW; ARBITRATION
This agreement shall be construed and enforced in accordance with the
internal laws of the State of Florida without regard to conflicts of laws rules
which might otherwise be applied. The parties agree, except as otherwise
expressly set forth herein, that all disputes involving the construction or
enforcement of this Agreement shall be resolved by binding arbitration before a
single arbitrator pursuant to the Commercial Arbitration Rules of the American
Arbitration Association ("AAA") and the Federal and Florida Arbitration Acts.
The parties agree that the location of any such arbitration shall be at a site
selected by the arbitrator in Palm Beach County, Florida, unless otherwise
agreed at the time the dispute is submitted to the AAA. In accordance with the
Federal and Florida Arbitration Acts, any party may apply to any court of
competent jurisdiction to compel arbitration in accordance with this subsection
or to enforce any award rendered by the arbitrator in a proceeding conducted
hereunder in accordance with its terms. Unless otherwise agreed in writing by
the parties, legal action to compel any arbitration involving the construction
or enforcement of this Agreement may be brought by either party in that State
or Federal Court having subject matter jurisdiction over the cause which is
located in Palm Beach County, Florida, and each of the parties to this
Agreement hereby agrees to submit to the personal jurisdiction of such Courts
regardless of the domicile of such party at the time such action is filed. In
any arbitration under this subsection, the arbitrator shall have the authority
to award to the prevailing party attorneys' fees and expenses in accordance
with the provisions of subsection (e) of this Section. Nothing in this
subsection 15(a), however, shall deprive a court of competent jurisdiction of
the authority to issue a temporary restraining order or preliminary injunction
prohibiting a violation of this Agreement prior to any arbitration proceeding
required hereunder.
(B) NOTICES
Any notice to be given under this Agreement shall be made in writing
and shall be sent to the address of the intended recipient as set forth at the
beginning of this Agreement or the facsimile number set forth on the signature
page, or to such other address or facsimile number as may be designated in a
written notice meeting the requirements of this subsection. Notices under this
subsection will be effective: (i) if mailed by certified mail, return receipt
requested, three (3) days after the date the notice is deposited, postage paid
with the United States Postal Service, as shown by its receipt for certified
mail; (ii) if sent via courier service or express delivery, upon the
-16-
<PAGE> 17
date of actual delivery as endorsed by the carrier or person accepting such
delivery for the recipient of such notice, or (iii) if sent via facsimile to
the telephone numbers given by the recipients of such notice, on the date of
transmission as shown by the confirmation forms printed by the sending machine
showing the recipients' station identification and verification of error free
communication, provided that confirmation copies of the notice are sent to the
recipient via certified mail or courier as provided above not later than the
day following the date of such confirmed-facsimile transmission.
(C) ENTIRE AGREEMENT; AMENDMENT
This Agreement and the annexed schedules constitute the entire
agreement of the parties with respect to the subject matter hereof. This
Agreement may not be amended or modified, or any right or obligation of a party
hereunder waived or released, except in a written document signed by the party
to be charged with such amendment, modification, waiver or release.
(D) COUNTERPARTS
This agreement may be executed simultaneously in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(E) EXPENSES; ATTORNEYS' FEES
Except as otherwise expressly provided in this Agreement, each party
shall be responsible for payment of its own expenses (including, without
limitation, the fees and expenses of their agents, representatives, counsel and
accountants) incidental to the preparation and carrying out of this Agreement.
In the event any a party is required to retain the services of an attorney to
enforce the rights of such party under this Agreement, or to require a
construction of this Agreement or declaration or determination of the rights of
any party hereunder, the prevailing party or parties in any subsequent
litigation involving such matter shall be entitled to receive an award of all
attorneys' fees incurred by them in connection with such matter, including any
fees incurred for review, negotiation, settlement, preparation of pleadings,
trial or appeal.
(F) SECTION HEADINGS
The section headings are inserted for convenience of reference only,
and shall not affect the interpretation or construction of any of the express
terms of this Agreement.
-17-
<PAGE> 18
(F) DISCLOSURE
The parties agree to mutually agree upon the text of a press release
to be issued as soon as reasonably possible after execution of this Agreement
in order to meet the requirements of the parties to communicate significant
developments to their public investors. Each party hereby consents to the
disclosure of this Agreement in public filings with the Securities and Exchange
Commission to the extent either party is required to make such disclosure or to
include this Agreement as an exhibit in connection with any filing which such
party is obligated to make under applicable securities laws and regulations.
The parties agree to consult with each other and their respective counsel prior
to making any such disclosure, and if requested by either party during such
consultation, to use their reasonable efforts to obtain confidential treatment
by the SEC of any terms of this Agreement deemed confidential by either party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first set forth above.
GARGOYLES, INC. GOLDEN BEAR GOLF, INC.
By: /S/ THOMAS P. HISLOP By: /S/ DOUGLAS B. HAUFF
------------------------- -------------------------
Name: Thomas P. Hislop Name: Douglas B. Hauff
------------------------- -------------------------
Title: Senior Vice President Title: President
------------------------- -------------------------
-18-
<PAGE> 19
SCHEDULE "1"
LIST OF LICENSED PRODUCTS
Premium Sunglasses
Optical Frames
Net Cords
Eyeglass Cases
-19-
<PAGE> 20
SCHEDULE "2"
LIST OF TRADEMARKS
NICKLAUS(TM) WORDMARK
NICKLAUS (TM)
-20-
<PAGE> 21
SCHEDULE "3"
DESCRIPTION OF FOREIGN TERRITORY
--------------------------------
Canada
Other countries Worldwide to be added
subject to limitations of Section 6 and this Schedule
NOTE: As predecessor to GB Golf, GBI authorized JNJ, Inc., a Japanese
corporation affiliated with GB Golf and its Japanese apparel
licensee, Kosugi Sangyo Co., Ltd., to sublicense eyewear to
Sunreeve, Ltd. in the territory of Japan on an exclusive basis
through May 31, 2000. GB Golf has further agreed in principle to
permit Sunreeve to export eyewear manufactured under such
sublicense to the following countries through September 30, 1997:
Hong Kong, Indonesia, Singapore, South Korea, Taiwan and Thailand.
As successor in interest to GBI under the JNJ agreements, GB Golf
will use its best efforts to obtain rights for Gargoyles to
distribute the Licensed Products in Japan upon the expiration or
earlier termination of JNJ's sublicense with Sunreeve, and to add
the above referenced export territories to the list of countries
available for distribution under Section 6 after the agreed
termination date of such export rights.
-21-
<PAGE> 22
SCHEDULE "4"
MINIMUM ANNUAL RETAINERS
<TABLE>
<CAPTION>
CALENDAR YEAR CONSULTING FEE MINIMUM ROYALTY ANNUAL RETAINER
------------- -------------- --------------- ---------------
<S> <C> <C> <C>
1997 [*] [*] [*]
1998 [*] [*] [*]
1999 [*] [*] [*]
2000 [*] [*] [*]
2001 [*] [*] [*]
2002* [*] [*] [*]
</TABLE>
* Represents a short fiscal year consisting of the first two (2) calendar
quarters ending June 30, 2002, and is payable in two (2) equal quarterly
installments due January 1 and April 1, 2002.
__________________________________
[*] Confidential Treatment Requested
-22-
<PAGE> 23
SCHEDULE "5"
List of Gargoyles Trademarks
Gargoyles (R) Wordmark and Design Mark
[LOGO] (TM) Design Mark
Gargoyles Performance Eyewear (TM) Wordmark
Gargoyles Wrapback Toric Curve (TM) Wordmark
-23-
<PAGE> 1
EXHIBIT 10.44
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered into
as of February 20, 1997, by and between GARGOYLES, INC., a Washington
corporation (the "Company"), and DOUGLAS B. HAUFF (the "Hauff").
RECITALS
A. As of the date of this Agreement, Hauff owns 367,875 shares of the Company's
Common Stock and, subject to certain option agreements between Hauff and certain
other shareholders of the Company, has fully-vested options to purchase and
additional 664,209 shares of the Company's common stock (the "Shares").
B. Hauff is President and Chief Executive Officer and is a Director of the
Company.
C. In consideration of the services rendered by Hauff to the Company, the
Company wishes to grant registration rights to Hauff.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the adequacy and receipt of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1. CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the following
respective meanings:
(a) "Commission" shall mean the United States Securities and
Exchange Commission or any other United States federal agency at the time
administering the Securities Act.
(b) "Form S-3" shall mean Form S-3 issued by the Commission or
any substantially similar form then in effect.
(c) "Shareholder(s)" shall mean Hauff holding outstanding
Registrable Securities which have not been sold to the public, and/or an
assignee or transferee of registration rights from Hauff as permitted by Section
8.
(d) "Trillium Agreement" shall mean that certain Registration
Rights Agreement entered into as of February 20, 1997, by and between the
Company
<PAGE> 2
and Trillium Investors II, L.L.C., a Washington limited liability
company and shareholder of the Company.
(e) "Trillium Shareholder(s)" shall mean Trillium Investors
II, L.L.C. and any assignees or transferees pursuant to the Trillium Agreement.
(f) "Initiating Shareholder" shall have the meaning set forth
in subsection 2.1.
(g) "Register," "Registered" and "Registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act (the "Registration Statement"), and the
declaration or ordering of the effectiveness of such Registration Statement.
(h) "Registrable Securities" shall mean the Shares held by the
Shareholder and any Common Stock of the Company issued or issuable in respect of
the Shares or other securities issued or issuable with respect to the Shares
upon any stock split, stock dividend, recapitalization or similar event, or any
Common Stock otherwise issued or issuable with respect to the Shares; provided,
however, that shares of Common Stock or other securities shall only be treated
as Registrable Securities if and so long as they have not been (A) sold to or
through a broker or dealer or underwriter in a public distribution or a public
securities transaction, or (B) sold in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act under
Section 4(l) thereof so that all transfer restrictions and restrictive legends
with respect thereto are removed upon the consummation of such sale.
(i) "Registration Expenses" shall mean all expenses incurred
by the Company in complying with Section 2 or Section 3, including, without
limitation, all federal and state registration, qualification, and filing fees,
printing expenses, fees and disbursements of counsel for the Company, blue sky
fees and expenses, and the expense of any special audits incident to or required
by any such registration.
(j) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
(k) "Selling Expenses" shall mean all underwriting discounts
and selling commissions applicable to the sale of Registrable Securities
pursuant to this Agreement.
-2-
<PAGE> 3
SECTION 2. DEMAND REGISTRATION
2.1 REQUEST FOR REGISTRATION ON FORMS OTHER THAN FORM S-3
Subject to the remainder of this Agreement, if the Company receives
from the Shareholder of Registrable Securities (the "Initiating Shareholder") a
written request that the Company effect a Registration with respect to all or a
part of the Registrable Securities on a form other than Form S-3 for an
underwritten offering of at least 20% of the then outstanding Registrable
Securities having a reasonably anticipated aggregate offering price to the
public equal to or greater than $5,000,000 (U.S.), the Company shall (i)
promptly give written notice of the proposed Registration to all Shareholders
and to all Trillium Shareholders and shall (ii) as soon as practicable, use its
diligent best efforts to effect the prompt Registration of the Registrable
Securities specified in such request, together with any Registrable Securities
(subject to the limitations of Section 2, hereof) of any Shareholder or Trillium
Shareholder joining in such request that are specified in a written request
given within 20 days after delivery of written notice from the Company. The
Company shall not be obligated to take any action to effect any such
registration pursuant to this subsection 2.1 (i) within six months after the
effective date of a Registration initiated by the Company, (ii) within six
months after the effective date of a Registration initiated by the Trillium
Shareholders pursuant to the Trillium Agreement in which Registration the
Shareholder was not excluded from participation pursuant to Section 2.4.4 of
this Agreement or the Trillium Agreement or (iii) after the Company has effected
two such Registrations pursuant to this subsection 2.1 and such Registrations
shall have been declared effective (the "First Demand Registration" and the
"Second Demand Registration", collectively, the "Demand Registrations").
2.2 REQUEST FOR REGISTRATION ON FORM S-3
Subject to this Agreement, if the Company receives from the Shareholder
a written request that the Company effect any Registration on Form S-3, at a
time when the Company is eligible to register securities on Form S-3, for an
offering by the Shareholders of at least 20% of the then outstanding Registrable
Securities having a reasonably anticipated aggregate offering price to the
public equal to or greater than $5,000,000 (U.S.), the Company will promptly
give written notice of the proposed Registration to all the Shareholders and
Trillium Shareholders and will as soon as practicable use its diligent best
efforts to effect Registration of the Registrable Securities specified in such
request together with all or such portion of the Registrable Securities of any
other Shareholder joining in such request as are specified in a written request
delivered to the Company within 20 days after written notice from the Company of
the proposed Registration. The Company shall be obligated to effect registration
under this subsection 2.2 once in any 12-month period, not to exceed four (4)
requests for the term of this Agreement,
-3-
<PAGE> 4
2.3 RIGHT OF DEFERRAL OF REGISTRATION; NO SALES DURING
BLACKOUT PERIODS
The Company shall not be obligated to effect any registration,
qualification or compliance pursuant to section 2 hereof, if:
(i) the Company shall furnish to the Initiating Shareholder a
certificate signed by the President of the Company stating that, in the good
faith judgment of the Board of Directors of the Company, it would be detrimental
to the Company for any Registration requested under subsection 2.1 or 2.3 of
this Agreement to occur at the time the request is received, the Company shall
have the right, exercisable in the aggregate of 180 days in any 12-month period,
to defer the filing of a Registration Statement with respect to such offering
for a period of not more than 180 days from delivery of the request of the
Initiating Shareholder;
(ii) the Company shall furnish to the Shareholder a
certificate signed by the President of the Company stating that the Company
intends within 90 days of the date of such certificate to file a registration
statement for the public offering of securities of the Company to the general
public, in which event the Shareholder shall be entitled to participate to the
fullest extend they desire pursuant to Section 3 hereof; or
(iii) the Company, within the 12-month period preceding the
date of such request, has effected a registration of securities in which the
Shareholders of Registrable Securities requesting registration were entitled to
participate to the fullest extent they desired pursuant to Section 3.
In addition, no sales of Registrable Securities shall be made by any
Shareholder who is subject to the Company's insider trading policies during any
blackout periods proscribed by such policy.
2.4 UNDERWRITING IN DEMAND REGISTRATION
2.4.1 NOTICE OF UNDERWRITING
If the Shareholder intends to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to this Section 2, and the
Company shall include such information in the written notice referred to in
section 2. The right of the Shareholder to Registration pursuant to this Section
2 shall be conditioned upon the Shareholder's agreement to participate in such
underwriting and the inclusion of the Shareholder's Registrable Securities in
the underwriting.
-4-
<PAGE> 5
2.4.2 SELECTION OF UNDERWRITER IN DEMAND REGISTRATION
The Company shall (together with all holders proposing to distribute
their securities through such underwriting) enter into an underwriting agreement
with the representative (the "Underwriter's Representative") of the underwriter
or underwriters selected for such underwriting jointly by a majority of the
Registrable Securities being registered by the Initiating Shareholder and the
Company.
2.4.3 INCLUSION OF OTHER SHAREHOLDERS IN DEMAND
REGISTRATION
If the officers or directors of the Company holding Common Stock other
than Registrable Securities request inclusion in such Registration, or if
holders of securities other than Registrable Securities request and are legally
entitled to inclusion in such Registration, the Initiating Shareholder shall
offer to such officers or directors and such holders of securities other than
Registrable Securities that such securities other than Registrable Securities be
included in the underwriting and may condition such offer on the acceptance by
such persons of the terms of this Section 2, Section 4 and Section 7.
2.4.4 INCLUSION OF THE COMPANY'S SECURITIES IN DEMAND
REGISTRATION
If the underwriter has not limited the number of Registrable Securities
or other securities to be underwritten, the Company may include securities for
its own account in such registration and underwriting if the underwriter so
agrees and if the number of Registrable Securities and other securities which
would otherwise have been included in such Registration and underwriting will
not thereby be limited.
2.4.5 MARKETING LIMITATION IN DEMAND REGISTRATION
If the Underwriter's Representative advises the Initiating Shareholder
in writing that market factors require a limitation of the number of shares to
be underwritten, the Initiating Shareholder shall so advise all Shareholders and
Trillium Shareholders who have elected to participate in such Registration, and
holders of securities which, pursuant to subsection 2.4, would otherwise be
underwritten pursuant to this subsection 2.4, and the number of shares of such
securities that may be included in the Registration and underwriting shall be
allocated first to the Initiating Shareholder, and then among the Company and
all remaining holders thereof in proportion, as nearly as practicable, to the
respective amounts of securities held by such holders at the time of filing the
Registration Statement. Other holders with rights to participation in the
Registration pursuant to this Agreement or the Trillium Agreement shall have the
right to participate in the Registration hereunder only to the extent that such
participation does not preclude
-5-
<PAGE> 6
the Initiating Shareholder from registering in such Registration the total
number of Registrable Securities the Initiating Shareholder requests in such
notification.
2.4.6 RIGHT OF WITHDRAWAL IN DEMAND REGISTRATION
If any Shareholder of Registrable Securities, or a holder of other
securities entitled (upon request) to be included in such Registration,
disapproves of the terms of the underwriting, such person may elect to withdraw
therefrom by written notice to the Company, the underwriter, and the Initiating
Shareholder delivered at least one day before the effective date of the
Registration Statement. The securities so withdrawn shall also be withdrawn from
the Registration Statement.
2.5 BLUE SKY IN DEMAND REGISTRATION
In the event of any Registration pursuant to this Section 2, the
Company will exercise its best efforts to Register and qualify the securities
covered by the Registration Statement under such other securities or "blue sky"
laws of such jurisdictions as shall be requested by the Underwriter's
Representative and reasonably appropriate for the distribution of such
securities; provided, however, that (i) the Company shall not be required to
qualify to do business or to file a general consent to service of process in any
such states or jurisdictions unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities Act, (ii) the
Company shall not be required to Register or qualify the securities covered by
the Registration Statement in any jurisdiction which requires, as a condition of
such Registration or qualification, escrow of securities of the Company held by
founders, officers, directors or employees of the Company, and (iii)
notwithstanding anything in this Agreement to the contrary, in the event any
jurisdiction in which the securities shall be qualified imposes a nonwaivable
requirement that expenses incurred in connection with the qualification of the
securities be borne by selling shareholders, such expenses shall be payable pro
rata by the selling shareholders.
SECTION 3. PIGGYBACK REGISTRATION
3.1 NOTICE OF PIGGYBACK REGISTRATION AND INCLUSION OF
REGISTRABLE SECURITIES
Subject this Agreement, if the Company decides to Register any of its
Common Stock (either for its own account or the account of a security holder or
holders exercising their respective demand registration rights) in connection
with a sale to the public for cash on a form that would be suitable for a
registration involving Registrable Securities, the Company will (i) promptly
give the Shareholders written notice thereof and (ii) include in such
Registration (and any related qualification under state securities or "blue sky"
laws or other compliance),
-6-
<PAGE> 7
and in any underwriting involved therein, all the Registrable Securities
specified in a written request delivered to the Company by any Shareholder
within 20 days after delivery of such written notice from the Company. In
addition, the Company shall have no obligation to register any Registrable
Securities on behalf of the Shareholder pursuant to this subsection 3.1 unless
such securities have a reasonably anticipated aggregate offering price to the
public equal to or greater than $100,000 (U.S.).
3.2 UNDERWRITING IN PIGGYBACK REGISTRATION
3.2.1 NOTICE OF UNDERWRITING IN PIGGYBACK
REGISTRATION
If the Registration of which the Company gives notice is for a
Registered public offering involving an underwriting, the Company shall so
advise the Shareholder as a part of the written notice given pursuant to
subsection 3.1. In such event the right of any Shareholder to Registration shall
be conditioned upon such underwriting and the inclusion of such Shareholder's
Registrable Securities in such underwriting to the extent provided in this
Section 3. The Shareholder proposing to distribute their securities through such
underwriting shall (together with the Company and the other holders distributing
their securities through such underwriting) enter into an underwriting agreement
with the Underwriter's Representative for such offering.
3.2.2 MARKETING LIMITATION IN PIGGYBACK REGISTRATION
If the Underwriter's Representative advises the Company that market
factors require a limitation of the number of shares to be underwritten, the
Underwriter's Representative may (subject to the allocation priority set forth
in subsection 3.2.3) exclude those Registrable Securities from the Registration.
3.2.3 ALLOCATION OF SHARES IN PIGGYBACK REGISTRATION
If the Underwriter's Representative limits the number of shares to be
included in a Registration pursuant to subsection 3.2.2, the number of shares
that may be included in the Registration and underwriting shall be allocated
first to the Company and then among all other holders thereof in proportion, as
nearly as practicable, to the respective amounts of securities (including
Registrable Securities) which such holders, absent any such limitation, would
otherwise be entitled to include in such Registration.
3.2.4 WITHDRAWAL IN PIGGYBACK REGISTRATION
If any Shareholder of Registrable Securities, or a holder of other
securities entitled (upon request) to be included in such Registration
disapproves of the terms of any such underwriting, such person may elect to
withdraw therefrom by written
-7-
<PAGE> 8
notice to the Company and the underwriter delivered at least one day prior to
the effective date of the Registration Statement. The Registrable Securities so
withdrawn shall also be withdrawn from the Registration Statement.
3.3 BLUE SKY IN PIGGYBACK REGISTRATION
In the event of any Registration of Registrable Securities pursuant to
this Section 3, the Company will exercise its best efforts to register and
qualify the securities covered by the Registration Statement under such other
securities or "blue sky" laws of such jurisdictions as shall be requested by the
Underwriter's Representative and reasonably appropriate for the distribution of
such securities; provided, however, that (i) the Company shall not be required
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions and (ii) notwithstanding anything in this
Agreement to the contrary, in the event any jurisdiction in which the securities
shall be qualified imposes a nonwaivable requirement that expenses incurred in
connection with the qualification of the securities be borne by selling
shareholders, such expenses shall be payable pro rata by selling shareholders.
3.4 RIGHT TO TERMINATE COMPANY REGISTRATION
The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section 3 prior to the effectiveness of
such registration, whether or not any Shareholder has elected to include
securities to such registration. Notwithstanding the rights given to the
Shareholder under this Agreement, under no circumstances shall the Shareholder
or other holder participating in any Registration under this Section 3 have the
right to delay or enjoin any Company Registration.
SECTION 4. EXPENSES OF REGISTRATION
All Registration Expenses incurred in connection with all Registrations
pursuant to Section 2 shall be borne by the Shareholder and any other holder of
Registrable Securities Registered pro rata on the basis of the number of Shares
Registered. All Registration Expenses incurred pursuant to Section 3 shall be
borne by the Company and the Shareholder and any other holder of securities
Registered pro rata on the basis of the number of Shares Registered. All Selling
Expenses shall be borne by the Shareholder of the securities Registered and any
other holder of Registrable Securities Registered pro rata on the basis of the
number of shares Registered.
-8-
<PAGE> 9
SECTION 5. REGISTRATION PROCEDURES
The Company will keep the Shareholder whose Registrable Securities are
included in any Registration pursuant to this Agreement advised as to the
initiation and completion of such Registration. Pursuant to the provisions of
Section 2 or 3, as applicable, the Company will: (i) use its best efforts to
keep such Registration effective for a period of 120 days or until the
Shareholder or Shareholders have completed the distribution described in the
Registration Statement relating thereto, whichever first occurs; and (ii)
furnish such number of prospectuses (including preliminary prospectuses) and
other documents as a Shareholder from time to time may reasonably request.
SECTION 6. INFORMATION FURNISHED BY SHAREHOLDER
It shall be a condition precedent to the Company's obligations under
this Agreement that the Shareholder of Registrable Securities included in any
Registration furnish to the Company such information regarding such Shareholder
and the distribution proposed by such Shareholder as the Company may reasonably
request.
SECTION 7. INDEMNIFICATION
7.1 THE COMPANY'S INDEMNIFICATION OF SHAREHOLDERS
To the extent permitted by law, the Company will indemnify the
Shareholder, each of its officers, directors and constituent partners, and each
person controlling such Shareholder, with respect to which qualification or
compliance of Registrable Securities has been effected pursuant to this
Agreement, and each underwriter, if any, and each person who controls any
underwriter against all claims, losses, damages, and liabilities (or actions in
respect thereof) to the extent such claims, losses, damages, or liabilities
arise out of or are based upon any untrue statement (or alleged untrue
statement) of a material fact contained in any such Registration Statement,
prospectus, offering circular or other document or upon any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of any rule or regulation promulgated under the Securities Act
applicable to the Company and relating to action or inaction required of the
Company in connection with any such Registration, qualification, or compliance.
The Company will reimburse the Shareholder, each of its officers, directors and
constituent partners, each such underwriter, and each person who controls any
such Shareholder or underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability, or action; provided, however, that the indemnity contained in
this subsection 7.1 shall not apply to amounts paid in settlement of any such
claim,
-9-
<PAGE> 10
loss, damage, liability, or action if settlement is effected without the consent
of the Company (which consent shall not unreasonably be withheld) and provided,
further, that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability or expense arises out of or is based on
any untrue statement or omission based upon written information furnished to the
Company by such Shareholder, underwriter, or controlling person and stated to be
for use in connection with the offering of securities of the Company; provided,
however, that the obligations of the Company hereunder shall be limited to an
amount equal to the proceeds of the Registrable Securities sold in such
Registration, qualification or compliance.
7.2 SHAREHOLDER'S INDEMNIFICATION OF THE COMPANY
To the extent permitted by law, each Shareholder will, if Registrable
Securities held by such Shareholder are included in the securities as to which
such Registration, qualification or compliance is being effected pursuant to
this Agreement, indemnify the Company, each of its directors and officers, each
underwriter, if any, of the Company's securities covered by such a Registration
Statement, each person who controls the Company or such underwriter within the
meaning of the Securities Act, against all claims, losses, damages, and
liabilities (or actions in respect thereof) to the extent such claims, losses,
damages or liabilities arise out of or are based upon any untrue statement (or
alleged untrue statement) of a material fact contained in any such Registration
Statement, prospectus, offering circular, or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or any violation by
a Shareholder of any rule or regulation promulgated under the Securities Act
applicable to such Shareholder and relating to action or inaction required of
the Shareholder in connection with any such Registration, qualification, or
compliance. The Shareholder will reimburse the Company, and each of its
directors, officers, partners, control persons, or underwriters for any legal or
any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability, or action, in each case to
the extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission (or alleged omission) is made in such Registration
Statement, prospectus, offering circular, or other document in reliance upon and
in conformity with written information furnished to the Company by such
Shareholder and stated to be specifically for use in connection with the
offering of securities of the Company; provided, however, that the obligations
of the Shareholder hereunder shall be limited to an amount equal to the proceeds
to the Shareholder of Registrable Securities sold in such Registration,
qualification or compliance.
-10-
<PAGE> 11
7.3 INDEMNIFICATION PROCEDURE
Promptly after receipt by an indemnified party under this Section 7 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section 7, notify the indemnifying party in writing of the commencement thereof
and generally summarize such action. The indemnifying party shall have the right
to participate in and to assume the defense of such claim; provided, however,
that the indemnifying party shall be entitled to select counsel for the defense
of such claim with the approval of any parties entitled to indemnification,
which approval shall not be unreasonably withheld. In the event that the
indemnifying party elects to assume the defense of any such suit and retain such
counsel and if the indemnified party reasonably determines that a conflict
exists between the indemnifying party and the indemnified party in such defense,
the indemnifying party shall pay the reasonable fees and expenses of one
additional counsel with respect to each such suit retained by the indemnified
party selected by the indemnified party (which selection shall be made by a
majority in interest of the indemnifying Shareholder in the case of the
Shareholder) and reasonably satisfactory to the indemnifying party. The failure
to notify an indemnifying party promptly of the commencement of any such action,
if prejudicial to the ability of the indemnifying party to defend such action,
shall relieve such indemnifying party of any liability to the indemnified party
under this Section 7, but the omission so to notify the indemnifying party will
not relieve such party of any liability that such party may have to any
indemnified party otherwise than under this Section 7.
SECTION 8. TRANSFER AND TERMINATION OF REGISTRATION RIGHTS
The rights to cause the Company to Register securities granted by the
Company under this Agreement may be assigned by a Shareholder to a transferee or
assignee of any Registrable Securities who shall acquire at least 100,000 of the
shares of Registrable Securities. Notwithstanding any other provision of this
Agreement, the rights of the Shareholder pursuant to the First Demand Right, to
cause the Company to Register Registrable Securities under this Agreement shall
terminate in all respects on December 31, 1998. The rights of the Shareholder
pursuant to the Second Demand Right and any other rights to cause the Company to
Register Registrable Securities under this Agreement shall continue indefinitely
until termination of this Agreement. This Agreement shall terminate when the
Shareholder no longer owns sufficient shares of Registrable Securities to make a
demand under Section 2 of this Agreement.
-11-
<PAGE> 12
SECTION 9. SUCCESSORS AND ASSIGNS
Subject to the limitations of Section 8 hereof, this Agreement shall
bind and inure to the benefit of the Company, the Shareholder and its respective
successors and assigns.
SECTION 10. LOCK-UP AGREEMENT
If requested by an underwriter of a Company Registration, the
Shareholder shall agree not to sell or otherwise transfer or dispose (other than
to assignees who agree to be similarly bound) of any Registrable Securities for
up to ten (10) days prior to the estimated effective date of a Registration
Statement of the Company or 180 days following the effective date of a
Registration Statement of the Company filed under the Securities Act; provided,
however, that all officers and directors of the Company and all other persons
holding registration rights under this Agreement, the Trillium Agreement, or
otherwise enter into similar agreements. To enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to the Registrable
Securities (and all other securities subject to registration rights) until the
end of such period.
SECTION 11. ENTIRE AGREEMENT
This Agreement contains the entire agreement of the parties with
respect to the subject matter hereof and supersedes all prior arrangements and
understandings with respect thereto.
SECTION 12. NOTICES
All notices, requests, consents and other communications hereunder to
any party shall be deemed to be sufficient if contained in a written instrument
delivered in person or duly sent by first class registered or certified mail,
postage prepaid, addressed to such party at the address set forth below, or such
other address as may hereafter be designated in writing by the addressee to the
addressor listing all parties. Notice given in accordance with this Section 11
shall be effective upon receipt or when receipt is refused.
(a) If to the Company:
Gargoyles, Inc.
5866 South 194th Street
Kent, WA 98032
Attention: President
(b) If to the Shareholder, at the address set forth on
Schedule A hereto.
-12-
<PAGE> 13
SECTION 13. CHANGES
The terms and provisions of this Agreement may not be modified or
amended, or any of the provisions hereof waived, temporarily or permanently,
except pursuant to the written consent of the Company and the shareholders of
66-2/3% of the Registrable Securities then outstanding.
SECTION 14. COUNTERPARTS
This Agreement may be executed in any number of counterparts, and each
such counterpart hereof shall be deemed to be an original instrument, but all
such counterparts together shall constitute but one agreement.
SECTION 15. HEADINGS
The headings of the various sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed to be a part
of this Agreement.
SECTION 16. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the state of Washington.
-13-
<PAGE> 14
IN WITNESS WHEREOF, the undersigned have executed this Registration
Rights Agreement as of the date set forth above.
Company: GARGOYLES, INC.
By: /s/ Steven R. Kingma
Steven R. Kingma, Vice President
and Chief Financial Officer
Shareholder: DOUGLAS B. HAUFF
/s/ Douglas B. Hauff
Address: The Highlands
Seattle, WA 98177
-14-
<PAGE> 1
EXHIBIT 10.45
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered into
as of February 20, 1997, by and between GARGOYLES, INC., a Washington
corporation (the "Company"), and TRILLIUM INVESTORS II, L.L.C., a Washington
limited liability Company (the "Trillium Investors II").
RECITALS
A. Trillium Investors II owns, as of the date of this Agreement, 2,065,031
shares of the Company's Common Stock (the "Shares"). Trillium Investors II is
majority-owned and managed by Trillium Corporation, a Washington corporation
("Trillium").
B. Erik Andersen, Trillium CEO, is serving as Chairman of the Board of the
Company, and Timothy C. Potts, Trillium Senior VP Finance, is also serving on
the Board of the Company. Neither Mr. Anderson, nor Mr. Potts, nor Trillium are
compensated for their services to the Company.
C. In consideration of the services rendered by Mr. Anderson and Mr. Potts to
the Company, and to induce Trillium Investors II to sell its Shares in a
registered offering rather than in small sales on the market pursuant to Rule
144 of the Securities Act, the Company wishes to grant registration rights to
Trillium Investors II.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the adequacy and receipt of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1. CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the following
respective meanings:
(a) "Commission" shall mean the United States Securities and
Exchange Commission or any other United States federal agency at the time
administering the Securities Act.
(b) "Form S-3" shall mean Form S-3 issued by the Commission or
any substantially similar form then in effect.
<PAGE> 2
(c) "Shareholder(s)" shall mean Trillium Investors II holding
outstanding Registrable Securities which have not been sold to the public,
and/or an assignee or transferee of registration rights from Trillium Investors
II as permitted by Section 8.
(d) "Hauff Agreement" shall mean that certain Registration
Rights Agreement entered into as of February 20, 1997, by and between the
Company and Douglas B. Hauff, President and CEO of the Company.
(e) "Hauff Shareholder(s)" shall mean Douglas B. Hauff and any
assignees or transferees pursuant to the Hauff Agreement.
(f) "Initiating Shareholder" shall have the meaning set forth
in subsection 2.1.
(g) "Register," "Registered" and "Registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act (the "Registration Statement"), and the
declaration or ordering of the effectiveness of such Registration Statement.
(h) "Registrable Securities" shall mean the Shares held by the
Shareholder and any Common Stock of the Company issued or issuable in respect of
the Shares or other securities issued or issuable with respect to the Shares
upon any stock split, stock dividend, recapitalization or similar event, or any
Common Stock otherwise issued or issuable with respect to the Shares; provided,
however, that shares of Common Stock or other securities shall only be treated
as Registrable Securities if and so long as they have not been (A) sold to or
through a broker or dealer or underwriter in a public distribution or a public
securities transaction, or (B) sold in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act under
Section 4(l) thereof so that all transfer restrictions and restrictive legends
with respect thereto are removed upon the consummation of such sale.
(i) "Registration Expenses" shall mean all expenses incurred
by the Company in complying with Section 2 or Section 3, including, without
limitation, all federal and state registration, qualification, and filing fees,
printing expenses, fees and disbursements of counsel for the Company, blue sky
fees and expenses, and the expense of any special audits incident to or required
by any such registration.
(j) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
-2-
<PAGE> 3
(k) "Selling Expenses" shall mean all underwriting discounts
and selling commissions applicable to the sale of Registrable Securities
pursuant to this Agreement.
SECTION 2. DEMAND REGISTRATION
2.1 REQUEST FOR REGISTRATION ON FORMS OTHER THAN FORM S-3
Subject to the remainder of this Agreement, if the Company receives
from the Shareholder of Registrable Securities (the "Initiating Shareholder") a
written request that the Company effect a Registration with respect to all or a
part of the Registrable Securities on a form other than Form S-3 for an
underwritten offering of at least 20% of the then outstanding Registrable
Securities having a reasonably anticipated aggregate offering price to the
public equal to or greater than $5,000,000 (U.S.), the Company shall (i)
promptly give written notice of the proposed Registration to all Shareholders
and to all Hauff Shareholders and shall (ii) as soon as practicable, use its
diligent best efforts to effect the prompt Registration of the Registrable
Securities specified in such request, together with any Registrable Securities
(subject to the limitations of Section 2, hereof) of any Shareholder or Hauff
Shareholder joining in such request that are specified in a written request
given within 20 days after delivery of written notice from the Company. The
Company shall not be obligated to take any action to effect any such
registration pursuant to this subsection 2.1 (i) within six months after the
effective date of a Registration initiated by the Company, (ii) within six
months after the effective date of a Registration initiated by the Hauff
Shareholders pursuant to the Hauff Agreement in which Registration the
Shareholder was not excluded from participation pursuant to Section 2.4.4 of
this Agreement or the Hauff Agreement or (iii) after the Company has effected
two such Registrations pursuant to this subsection 2.1 and such Registrations
shall have been declared effective (the "First Demand Registration" and the
"Second Demand Registration", collectively, the "Demand Registrations").
2.2 REQUEST FOR REGISTRATION ON FORM S-3
Subject to this Agreement, if the Company receives from the Shareholder
a written request that the Company effect any Registration on Form S-3, at a
time when the Company is eligible to register securities on Form S-3, for an
offering by the Shareholders of at least 20% of the then outstanding Registrable
Securities having a reasonably anticipated aggregate offering price to the
public equal to or greater than $5,000,000 (U.S.), the Company will promptly
give written notice of the proposed Registration to all the Shareholders and
Hauff Shareholders and will as soon as practicable use its diligent best efforts
to effect Registration of the Registrable Securities specified in such request
together with all or such portion of the Registrable Securities of any other
Shareholder joining in such request as are
-3-
<PAGE> 4
specified in a written request delivered to the Company within 20 days after
written notice from the Company of the proposed Registration. The Company shall
be obligated to effect registration under this subsection 2.2 once in any
12-month period, not to exceed four (4) requests for the term of this Agreement,
2.3 RIGHT OF DEFERRAL OF REGISTRATION; NO SALES DURING
BLACKOUT PERIODS
The Company shall not be obligated to effect any registration,
qualification or compliance pursuant to section 2 hereof, if:
(i) the Company shall furnish to the Initiating Shareholder a
certificate signed by the President of the Company stating that, in the good
faith judgment of the Board of Directors of the Company, it would be detrimental
to the Company for any Registration requested under subsection 2.1 or 2.3 of
this Agreement to occur at the time the request is received, the Company shall
have the right, exercisable in the aggregate of 180 days in any 12-month period,
to defer the filing of a Registration Statement with respect to such offering
for a period of not more than 180 days from delivery of the request of the
Initiating Shareholder;
(ii) the Company shall furnish to the Shareholder a
certificate signed by the President of the Company stating that the Company
intends within 90 days of the date of such certificate to file a registration
statement for the public offering of securities of the Company to the general
public, in which event the Shareholder shall be entitled to participate to the
fullest extend they desire pursuant to Section 3 hereof; or
(iii) the Company, within the 12-month period preceding the
date of such request, has effected a registration of securities in which the
Shareholders of Registrable Securities requesting registration were entitled to
participate to the fullest extent they desired pursuant to Section 3.
In addition, no sales of Registrable Securities shall be made by any
Shareholder who is subject to the Company's insider trading policies during any
blackout periods proscribed by such policy.
2.4 UNDERWRITING IN DEMAND REGISTRATION
2.4.1 NOTICE OF UNDERWRITING
If the Shareholder intends to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to this Section 2, and the
Company shall include such information in the written notice referred to in
section 2. The right of the Shareholder to Registration pursuant to this Section
2 shall be conditioned upon
-4-
<PAGE> 5
the Shareholder's agreement to participate in such underwriting and the
inclusion of the Shareholder's Registrable Securities in the underwriting.
2.4.2 SELECTION OF UNDERWRITER IN DEMAND REGISTRATION
The Company shall (together with all holders proposing to distribute
their securities through such underwriting) enter into an underwriting agreement
with the representative (the "Underwriter's Representative") of the underwriter
or underwriters selected for such underwriting jointly by a majority of the
Registrable Securities being registered by the Initiating Shareholder and the
Company.
2.4.3 INCLUSION OF OTHER SHAREHOLDERS IN DEMAND
REGISTRATION
If the officers or directors of the Company holding Common Stock other
than Registrable Securities request inclusion in such Registration, or if
holders of securities other than Registrable Securities request and are legally
entitled to inclusion in such Registration, the Initiating Shareholder shall
offer to such officers or directors and such holders of securities other than
Registrable Securities that such securities other than Registrable Securities be
included in the underwriting and may condition such offer on the acceptance by
such persons of the terms of this Section 2, Section 4 and Section 7.
2.4.4 INCLUSION OF THE COMPANY'S SECURITIES IN DEMAND
REGISTRATION
If the underwriter has not limited the number of Registrable Securities
or other securities to be underwritten, the Company may include securities for
its own account in such registration and underwriting if the underwriter so
agrees and if the number of Registrable Securities and other securities which
would otherwise have been included in such Registration and underwriting will
not thereby be limited.
2.4.5 MARKETING LIMITATION IN DEMAND REGISTRATION
If the Underwriter's Representative advises the Initiating Shareholder
in writing that market factors require a limitation of the number of shares to
be underwritten, the Initiating Shareholder shall so advise all Shareholders and
Hauff Shareholders who have elected to participate in such Registration, and
holders of securities which, pursuant to subsection 2.4, would otherwise be
underwritten pursuant to this subsection 2.4, and the number of shares of such
securities that may be included in the Registration and underwriting shall be
allocated first to the Initiating Shareholder, and then among the Company and
all remaining holders thereof in proportion, as nearly as practicable, to the
respective amounts of securities held by such holders at the time of filing the
Registration Statement.
-5-
<PAGE> 6
Other holders with rights to participation in the Registration pursuant to this
Agreement or the Hauff Agreement shall have the right to participate in the
Registration hereunder only to the extent that such participation does not
preclude the Initiating Shareholder from registering in such Registration the
total number of Registrable Securities the Initiating Shareholder requests in
such notification.
2.4.6 RIGHT OF WITHDRAWAL IN DEMAND REGISTRATION
If any Shareholder of Registrable Securities, or a holder of other
securities entitled (upon request) to be included in such Registration,
disapproves of the terms of the underwriting, such person may elect to withdraw
therefrom by written notice to the Company, the underwriter, and the Initiating
Shareholder delivered at least one day before the effective date of the
Registration Statement. The securities so withdrawn shall also be withdrawn from
the Registration Statement.
2.5 BLUE SKY IN DEMAND REGISTRATION
In the event of any Registration pursuant to this Section 2, the
Company will exercise its best efforts to Register and qualify the securities
covered by the Registration Statement under such other securities or "blue sky"
laws of such jurisdictions as shall be requested by the Underwriter's
Representative and reasonably appropriate for the distribution of such
securities; provided, however, that (i) the Company shall not be required to
qualify to do business or to file a general consent to service of process in any
such states or jurisdictions unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities Act, (ii) the
Company shall not be required to Register or qualify the securities covered by
the Registration Statement in any jurisdiction which requires, as a condition of
such Registration or qualification, escrow of securities of the Company held by
founders, officers, directors or employees of the Company, and (iii)
notwithstanding anything in this Agreement to the contrary, in the event any
jurisdiction in which the securities shall be qualified imposes a nonwaivable
requirement that expenses incurred in connection with the qualification of the
securities be borne by selling shareholders, such expenses shall be payable pro
rata by the selling shareholders.
SECTION 3. PIGGYBACK REGISTRATION
3.1 NOTICE OF PIGGYBACK REGISTRATION AND INCLUSION OF
REGISTRABLE SECURITIES
Subject this Agreement, if the Company decides to Register any of its
Common Stock (either for its own account or the account of a security holder or
holders exercising their respective demand registration rights) in connection
with a sale to the public for cash on a form that would be suitable for a
registration
-6-
<PAGE> 7
involving Registrable Securities, the Company will (i) promptly give the
Shareholders written notice thereof and (ii) include in such Registration (and
any related qualification under state securities or "blue sky" laws or other
compliance), and in any underwriting involved therein, all the Registrable
Securities specified in a written request delivered to the Company by any
Shareholder within 20 days after delivery of such written notice from the
Company. In addition, the Company shall have no obligation to register any
Registrable Securities on behalf of the Shareholder pursuant to this subsection
3.1 unless such securities have a reasonably anticipated aggregate offering
price to the public equal to or greater than $100,000 (U.S.).
3.2 UNDERWRITING IN PIGGYBACK REGISTRATION
3.2.1 NOTICE OF UNDERWRITING IN PIGGYBACK
REGISTRATION
If the Registration of which the Company gives notice is for a
Registered public offering involving an underwriting, the Company shall so
advise the Shareholder as a part of the written notice given pursuant to
subsection 3.1. In such event the right of any Shareholder to Registration shall
be conditioned upon such underwriting and the inclusion of such Shareholder's
Registrable Securities in such underwriting to the extent provided in this
Section 3. The Shareholder proposing to distribute their securities through such
underwriting shall (together with the Company and the other holders distributing
their securities through such underwriting) enter into an underwriting agreement
with the Underwriter's Representative for such offering.
3.2.2 MARKETING LIMITATION IN PIGGYBACK REGISTRATION
If the Underwriter's Representative advises the Company that market
factors require a limitation of the number of shares to be underwritten, the
Underwriter's Representative may (subject to the allocation priority set forth
in subsection 3.2.3) exclude those Registrable Securities from the Registration.
3.2.3 ALLOCATION OF SHARES IN PIGGYBACK REGISTRATION
If the Underwriter's Representative limits the number of shares to be
included in a Registration pursuant to subsection 3.2.2, the number of shares
that may be included in the Registration and underwriting shall be allocated
first to the Company and then among all other holders thereof in proportion, as
nearly as practicable, to the respective amounts of securities (including
Registrable Securities) which such holders, absent any such limitation, would
otherwise be entitled to include in such Registration.
-7-
<PAGE> 8
3.2.4 WITHDRAWAL IN PIGGYBACK REGISTRATION
If any Shareholder of Registrable Securities, or a holder of other
securities entitled (upon request) to be included in such Registration
disapproves of the terms of any such underwriting, such person may elect to
withdraw therefrom by written notice to the Company and the underwriter
delivered at least one day prior to the effective date of the Registration
Statement. The Registrable Securities so withdrawn shall also be withdrawn from
the Registration Statement.
3.3 BLUE SKY IN PIGGYBACK REGISTRATION
In the event of any Registration of Registrable Securities pursuant to
this Section 3, the Company will exercise its best efforts to register and
qualify the securities covered by the Registration Statement under such other
securities or "blue sky" laws of such jurisdictions as shall be requested by the
Underwriter's Representative and reasonably appropriate for the distribution of
such securities; provided, however, that (i) the Company shall not be required
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions and (ii) notwithstanding anything in this
Agreement to the contrary, in the event any jurisdiction in which the securities
shall be qualified imposes a nonwaivable requirement that expenses incurred in
connection with the qualification of the securities be borne by selling
shareholders, such expenses shall be payable pro rata by selling shareholders.
3.4 RIGHT TO TERMINATE COMPANY REGISTRATION
The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section 3 prior to the effectiveness of
such registration, whether or not any Shareholder has elected to include
securities to such registration. Notwithstanding the rights given to the
Shareholder under this Agreement, under no circumstances shall the Shareholder
or other holder participating in any Registration under this Section 3 have the
right to delay or enjoin any Company Registration.
SECTION 4. EXPENSES OF REGISTRATION
All Registration Expenses incurred in connection with all Registrations
pursuant to Section 2 shall be borne by the Shareholder and any other holder of
Registrable Securities Registered pro rata on the basis of the number of Shares
Registered. All Registration Expenses incurred pursuant to Section 3 shall be
borne by the Company and the Shareholder and any other holder of securities
Registered pro rata on the basis of the number of Shares Registered. All Selling
Expenses shall be borne by the Shareholder of the securities Registered and any
other holder of
-8-
<PAGE> 9
Registrable Securities Registered pro rata on the basis of the number of shares
Registered.
SECTION 5. REGISTRATION PROCEDURES
The Company will keep the Shareholder whose Registrable Securities are
included in any Registration pursuant to this Agreement advised as to the
initiation and completion of such Registration. Pursuant to the provisions of
Section 2 or 3, as applicable, the Company will: (i) use its best efforts to
keep such Registration effective for a period of 120 days or until the
Shareholder or Shareholders have completed the distribution described in the
Registration Statement relating thereto, whichever first occurs; and (ii)
furnish such number of prospectuses (including preliminary prospectuses) and
other documents as a Shareholder from time to time may reasonably request.
SECTION 6. INFORMATION FURNISHED BY SHAREHOLDER
It shall be a condition precedent to the Company's obligations under
this Agreement that the Shareholder of Registrable Securities included in any
Registration furnish to the Company such information regarding such Shareholder
and the distribution proposed by such Shareholder as the Company may reasonably
request.
SECTION 7. INDEMNIFICATION
7.1 THE COMPANY'S INDEMNIFICATION OF SHAREHOLDERS
To the extent permitted by law, the Company will indemnify the
Shareholder, each of its officers, directors and constituent partners, and each
person controlling such Shareholder, with respect to which qualification or
compliance of Registrable Securities has been effected pursuant to this
Agreement, and each underwriter, if any, and each person who controls any
underwriter against all claims, losses, damages, and liabilities (or actions in
respect thereof) to the extent such claims, losses, damages, or liabilities
arise out of or are based upon any untrue statement (or alleged untrue
statement) of a material fact contained in any such Registration Statement,
prospectus, offering circular or other document or upon any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of any rule or regulation promulgated under the Securities Act
applicable to the Company and relating to action or inaction required of the
Company in connection with any such Registration, qualification, or compliance.
The Company will reimburse the Shareholder, each of its officers, directors and
constituent partners, each such underwriter, and each person who controls any
such Shareholder or underwriter, for any legal and any other expenses reasonably
-9-
<PAGE> 10
incurred in connection with investigating or defending any such claim, loss,
damage, liability, or action; provided, however, that the indemnity contained in
this subsection 7.1 shall not apply to amounts paid in settlement of any such
claim, loss, damage, liability, or action if settlement is effected without the
consent of the Company (which consent shall not unreasonably be withheld) and
provided, further, that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission based upon written information
furnished to the Company by such Shareholder, underwriter, or controlling person
and stated to be for use in connection with the offering of securities of the
Company; provided, however, that the obligations of the Company hereunder shall
be limited to an amount equal to the proceeds of the Registrable Securities sold
in such Registration, qualification or compliance.
7.2 SHAREHOLDER'S INDEMNIFICATION OF THE COMPANY
To the extent permitted by law, each Shareholder will, if Registrable
Securities held by such Shareholder are included in the securities as to which
such Registration, qualification or compliance is being effected pursuant to
this Agreement, indemnify the Company, each of its directors and officers, each
underwriter, if any, of the Company's securities covered by such a Registration
Statement, each person who controls the Company or such underwriter within the
meaning of the Securities Act, against all claims, losses, damages, and
liabilities (or actions in respect thereof) to the extent such claims, losses,
damages or liabilities arise out of or are based upon any untrue statement (or
alleged untrue statement) of a material fact contained in any such Registration
Statement, prospectus, offering circular, or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or any violation by
a Shareholder of any rule or regulation promulgated under the Securities Act
applicable to such Shareholder and relating to action or inaction required of
the Shareholder in connection with any such Registration, qualification, or
compliance. The Shareholder will reimburse the Company, and each of its
directors, officers, partners, control persons, or underwriters for any legal or
any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability, or action, in each case to
the extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission (or alleged omission) is made in such Registration
Statement, prospectus, offering circular, or other document in reliance upon and
in conformity with written information furnished to the Company by such
Shareholder and stated to be specifically for use in connection with the
offering of securities of the Company; provided, however, that the obligations
of the Shareholder hereunder shall be limited to an amount equal to the proceeds
to the
-10-
<PAGE> 11
Shareholder of Registrable Securities sold in such Registration, qualification
or compliance.
7.3 INDEMNIFICATION PROCEDURE
Promptly after receipt by an indemnified party under this Section 7 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section 7, notify the indemnifying party in writing of the commencement thereof
and generally summarize such action. The indemnifying party shall have the right
to participate in and to assume the defense of such claim; provided, however,
that the indemnifying party shall be entitled to select counsel for the defense
of such claim with the approval of any parties entitled to indemnification,
which approval shall not be unreasonably withheld. In the event that the
indemnifying party elects to assume the defense of any such suit and retain such
counsel and if the indemnified party reasonably determines that a conflict
exists between the indemnifying party and the indemnified party in such defense,
the indemnifying party shall pay the reasonable fees and expenses of one
additional counsel with respect to each such suit retained by the indemnified
party selected by the indemnified party (which selection shall be made by a
majority in interest of the indemnifying Shareholder in the case of the
Shareholder) and reasonably satisfactory to the indemnifying party. The failure
to notify an indemnifying party promptly of the commencement of any such action,
if prejudicial to the ability of the indemnifying party to defend such action,
shall relieve such indemnifying party of any liability to the indemnified party
under this Section 7, but the omission so to notify the indemnifying party will
not relieve such party of any liability that such party may have to any
indemnified party otherwise than under this Section 7.
SECTION 8. TRANSFER AND TERMINATION OF REGISTRATION RIGHTS
The rights to cause the Company to Register securities granted by the
Company under this Agreement may be assigned by a Shareholder to a transferee or
assignee of any Registrable Securities who shall acquire at least 500,000 of the
shares of Registrable Securities. Notwithstanding any other provision of this
Agreement, the rights of the Shareholder pursuant to the First Demand Right, to
cause the Company to Register Registrable Securities under this Agreement shall
terminate in all respects on December 31, 1998. The rights of the Shareholder
pursuant to the Second Demand Right and any other rights to cause the Company to
Register Registrable Securities under this Agreement shall continue indefinitely
until termination of this Agreement. This Agreement shall terminate when the
Shareholder no longer owns sufficient shares of Registrable Securities to make a
demand under Section 2 of this Agreement.
-11-
<PAGE> 12
SECTION 9. SUCCESSORS AND ASSIGNS
Subject to the limitations of Section 8 hereof, this Agreement shall
bind and inure to the benefit of the Company, the Shareholder and its respective
successors and assigns.
SECTION 10. LOCK-UP AGREEMENT
If requested by an underwriter of a Company Registration, the
Shareholder shall agree not to sell or otherwise transfer or dispose (other than
to assignees who agree to be similarly bound) of any Registrable Securities for
up to ten (10) days prior to the estimated effective date of a Registration
Statement of the Company or 180 days following the effective date of a
Registration Statement of the Company filed under the Securities Act; provided,
however, that all officers and directors of the Company and all other persons
holding registration rights under this Agreement, the Hauff Agreement, or
otherwise enter into similar agreements. To enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to the Registrable
Securities (and all other securities subject to registration rights) until the
end of such period.
SECTION 11. ENTIRE AGREEMENT
This Agreement contains the entire agreement of the parties with
respect to the subject matter hereof and supersedes all prior arrangements and
understandings with respect thereto.
SECTION 12. NOTICES
All notices, requests, consents and other communications hereunder to
any party shall be deemed to be sufficient if contained in a written instrument
delivered in person or duly sent by first class registered or certified mail,
postage prepaid, addressed to such party at the address set forth below, or such
other address as may hereafter be designated in writing by the addressee to the
addressor listing all parties. Notice given in accordance with this Section 11
shall be effective upon receipt or when receipt is refused.
(a) If to the Company:
Gargoyles, Inc.
5866 South 194th Street
Kent, WA 98032
Attention: President
(b) If to the Shareholder, at the address set forth on
Schedule A hereto.
-12-
<PAGE> 13
SECTION 13. CHANGES
The terms and provisions of this Agreement may not be modified or
amended, or any of the provisions hereof waived, temporarily or permanently,
except pursuant to the written consent of the Company and the shareholders of
66-2/3% of the Registrable Securities then outstanding.
SECTION 14. COUNTERPARTS
This Agreement may be executed in any number of counterparts, and each
such counterpart hereof shall be deemed to be an original instrument, but all
such counterparts together shall constitute but one agreement.
SECTION 15. HEADINGS
The headings of the various sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed to be a part
of this Agreement.
SECTION 16. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the state of Washington.
-13-
<PAGE> 14
IN WITNESS WHEREOF, the undersigned have executed this Registration
Rights Agreement as of the date set forth above.
Company: GARGOYLES, INC.
By: /s/ Douglas Hauff
Douglas Hauff, President & CEO
Shareholder: TRILLIUM INVESTORS II, L.L.C.
By: Trillium Corporation, a Washington
corporation, its Manager
By /s/ Steven Brinn
Its Member, Management Committee
Address: 4350 Cordata Parkway,
Bellingham, WA 98226
-14-
<PAGE> 1
Exhibit 11.1
GARGOYLES, INC.
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended
---------------------------- November 30,
1996 1995 1994
----------- ----------- -------------
<S> <C> <C> <C>
Weighted average number of common
stock outstanding ................... 5,944,213 5,450,003 5,450,003
Common stock and common stock equivalents ... 273,525 257,075 257,075
----------- ----------- -----------
6,217,738 5,707,078 5,707,078
=========== =========== ===========
Net income (loss) ........................... $(2,794,008) $(2,296,815) $ 298,862
=========== =========== ===========
Net income (loss) per share ................. $ (0.45) $ (0.40) $ 0.05
=========== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8, No. 333-16633) pertaining to the Gargoyles, Inc. 1995 Stock Incentive
Compensation Plan of our report dated January 24, 1997, with respect to the
financial statements and schedule of Gargoyles, Inc. included in the Annual
Report (Form 10-K) for the year ended December 31, 1996, filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
Seattle, Washington
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 4382048
<SECURITIES> 0
<RECEIVABLES> 9070479
<ALLOWANCES> (172600)
<INVENTORY> 5881884
<CURRENT-ASSETS> 21328908
<PP&E> 4057260
<DEPRECIATION> (1245325)
<TOTAL-ASSETS> 27262215
<CURRENT-LIABILITIES> 5728633
<BONDS> 0
0
0
<COMMON> 25643576
<OTHER-SE> (4740192)
<TOTAL-LIABILITY-AND-EQUITY> 27262215
<SALES> 33094398
<TOTAL-REVENUES> 33574007
<CGS> 13743496
<TOTAL-COSTS> 13743496
<OTHER-EXPENSES> 20636707
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1987812
<INCOME-PRETAX> (2794008)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2794008)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2794008)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> 0
</TABLE>
