UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______ to _________
Commission file number 0-21335
GARGOYLES, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1247269
(State of Incorporation) (I.R.S. Employer Identification Number)
5866 SOUTH 194TH STREET
KENT, WASHINGTON 98032
(253) 796-2752
(Address and telephone number of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of September 30, 1998, there were 7,837,191 outstanding shares of the
registrant's common stock, no par value, which is the only class of common or
voting stock of the registrant.
<PAGE>
GARGOYLES, INC.
INDEX TO FORM 10-Q
PAGE(S)
-------
PART 1 - FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
Consolidated Balance Sheets .................................... 1
Consolidated Statements of Operations .......................... 2
Consolidated Statements of Cash Flows .......................... 3
Notes to Consolidated Financial Statements ..................... 4
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 9
Item 3: Quantitative and Qualitative Disclosure about Market Risk ...... *
PART II - OTHER INFORMATION
Item 1: Legal Proceedings ................................................ 14
Item 2: Changes in Securities and Use of Proceeds ........................ *
Item 3: Defaults upon Senior Securities .................................. *
Item 4: Submission of Matters to a Vote of Security Holders .............. *
Item 5: Other Information ................................................ 15
Item 6: Exhibits and Reports on Form 8-K ................................. 15
* Omitted as not applicable
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GARGOYLES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 588,635 $ 892,176
Trade receivables, net ........................ 6,738,925 8,540,120
Inventories, net .............................. 8,827,807 13,057,024
Other current assets and prepaid expenses ..... 2,132,148 1,792,124
------------ ------------
Total current assets ............................ 18,287,515 24,281,444
Property and equipment, net ..................... 1,848,374 2,441,133
Intangibles, net ................................ 12,448,458 21,232,817
Other assets .................................... 699,796 671,411
------------ ------------
Total assets .................................... $ 33,284,143 $ 48,626,805
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................. $ 8,376,251 $ 6,487,131
Accrued expenses and other current liabilities . 2,350,664 6,402,287
Current portion of long-term debt ............. 28,844,095 --
------------ ------------
Total current liabilities ....................... 39,571,010 12,889,418
Long-term debt, net of current portion .......... -- 29,160,554
Commitments and contingencies
Shareholders' equity:
Preferred stock ............................... -- --
Common stock, no par value, authorized shares --
40,000,000, issued and outstanding --
7,837,191 and 7,437,191, respectively ....... 26,574,281 25,711,782
Accumulated deficit ........................... (32,919,467) (19,121,995)
Cumulative translation adjustment ............. 58,319 (12,954)
------------ ------------
Total shareholders' equity ...................... (6,286,866) 6,576,833
------------ ------------
Total liabilities and shareholders' equity ...... $ 33,284,143 $ 48,626,805
============ ============
See accompanying notes to the Consolidated Financial Statements
<PAGE>
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ......................................... $ 9,062,934 $ 11,067,507 $ 33,717,194 $ 35,132,072
Cost of sales ..................................... 3,702,757 4,570,383 14,315,760 14,112,870
------------ ------------ ------------ ------------
Gross profit ...................................... 5,360,177 6,497,124 19,401,434 21,019,202
License income .................................... 98,452 115,000 289,155 446,736
------------ ------------ ------------ ------------
5,458,629 6,612,124 19,690,589 21,465,938
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing ........................... 2,921,467 5,005,848 11,698,157 13,191,886
General and administrative .................... 1,614,982 2,179,994 5,245,497 4,830,085
Shipping and warehousing ...................... 443,200 343,014 1,750,509 1,050,713
Research and development ...................... 160,687 318,149 576,901 1,082,305
Provision for Doubtful Accounts ............... 817,273 55,356 997,545 163,086
------------ ------------ ------------ ------------
Total operating expenses .......................... 5,957,608 7,902,361 20,268,608 20,318,075
------------ ------------ ------------ ------------
Income (loss) from operations ..................... (498,979) (1,290,237) (578,018) 1,147,863
Interest income (expense) ......................... (883,935) (755,021) (2,572,277) (1,261,290)
Other income (expense) ............................ (10,660,271) (10,647,010)
------------ ------------ ------------ ------------
Income (loss) before income taxes ................. (12,043,185) (2,045,258) (13,797,305) (113,427)
Income tax provision (benefit) .................... -- 409,000 -- 15,500
------------ ------------ ------------ ------------
Net income (loss) ................................. $(12,043,185) $ (1,636,258) $(13,797,305) $ (97,927)
============ ============ ============ ============
Basic and diluted net income (loss) per share ..... $ (1.54) $ (0.22) $ (1.77) $ (0.01)
============ ============ ============ ============
</TABLE>
See accompanying notes to the Consolidated Financial Statements
<PAGE>
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ........................................ $(13,797,305) $ (97,927)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation .......................................... 600,259 782,200
Amortization .......................................... 1,061,735 528,566
Deferred license income ............................... -- 186,000
Noncash restructuring expenses ........................ 8,433,228
Loss on disposition of The kindling Co. ............... 1,432,048
Changes in assets and liabilities net of effects from
business acquisitions and dispositions:
Accounts receivable .............................. 1,534,926
Inventories ...................................... 2,896,867 (6,378,963)
Other current assets and other assets ............ (662,206) (2,854,591)
Accounts payable, accrued expenses and other
current liabilities ............................ (1,457,446) (52,293)
------------ ------------
Net cash provided by (used in) operating activities ...... 42,106 (9,489,711)
------------ ------------
INVESTING ACTIVITIES
Acquisition of property and equipment .................... (100,461) (1,437,844)
Purchase of Sungold ...................................... -- (11,892,871)
Purchase of Private Eyes ................................. -- (8,362,158)
------------ ------------
Net cash used in investing activities .................... (100,461) (21,692,873)
FINANCING ACTIVITIES
Proceeds from stock issuance ............................. -- 68,206
Net proceeds (repayment) from revolving line of credit ... (316,459) 12,233,997
Net proceeds from issuance of long-term debt ............. 14,620,000
Principal payments on long-term debt ..................... (121,667)
------------ ------------
Net cash provided by (used in) financing activities ...... (316,459) 26,800,536
------------ ------------
Effect of foreign currency translation on cash ........... 71,273 --
------------ ------------
Net decrease in cash ..................................... (303,541) (4,382,048)
Cash and cash equivalents, beginning of period ........... 892,176 4,382,048
------------ ------------
Cash and cash equivalents, end of period ................. $ 588,635 $ --
============ ============
</TABLE>
See accompanying notes to the Consolidated Financial Statements
<PAGE>
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Gargoyles, Inc. and
its subsidiaries ("Gargoyles" or the "Company") are unaudited and include, in
the opinion of management, all normal recurring adjustments necessary to present
fairly the consolidated financial position at September 30, 1998 and the related
consolidated results of operations and cash flows for the periods presented.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. These condensed consolidated financial
statements should be read in conjunction with the Company's audited consolidated
financial statements and the related notes thereto included in the Company's
1997 Annual Report on Form 10-K/A as filed with the Securities and Exchange
Commission.
The Company's net sales are subject to seasonal variations. Accordingly,
the results of operations for the periods ended September 30 are not necessarily
indicative of the results that may be expected for the entire year.
2. INVENTORIES
Inventories consist of the following:
September 30, December 31,
1998 1997
------------ ------------
Materials ................................ $ 4,582,660 $ 7,119,328
Finished goods .............................. 4,722,715 7,909,147
Reserves for excess, slow-moving and
obsolete inventories .................. (477,568) (1,971,451)
------------ ------------
Inventories, net ................. $ 8,827,807 $ 13,057,024
============ ============
3. COMMITMENTS AND CONTINGENCIES
Lease Agreements
In 1998, the Company negotiated releases from certain of its operating
leases thereby decreasing its minimum future lease payments under noncancelable
operating leases. The Company recognized $260,000 of expense in connection with
the termination of these leases. These expenses were included in other income
(expense) in the consolidated statements of operations. Minimum future lease
payments under noncancelable operating leases are as follows:
September 30, December 31,
1998 1997
----------- ------------
1998 ......................................... $ 164,348 $1,381,397
1999 ......................................... 668,923 1,304,276
2000 ......................................... 445,209 1,101,755
2001 ......................................... 283,277 949,370
2002 ......................................... 94,572 700,000
Thereafter ................................... 7,881 3,500,000
----------- ----------
$ 1,664,210 $8,936,798
=========== ==========
<PAGE>
License Agreements
In 1998 the Company negotiated releases from certain of its licensing
agreements. Effective September 1, 1998, the Company and The Timberland company
agreed to terminate the License Agreement under which the Company sold and
distributed Timberland Eyewear. As a result of the termination, the Company was
released from $3.4 million minimum future payments under the Timberland license
agreement. To terminate the license, the Company paid a termination fee of
$255,000 to The Timberland Company. On September 8, 1998, the Company and Ellen
Tracy, Inc. agreed to terminate the License Agreement under which the Company
sells and distributes Ellen Tracy Eyewear. As a result of the termination, the
Company was released from $8.8 million minimum future payments under the Ellen
Tracy license agreement. Total minimum future payments under remaining license
agreements are as follows:
September 30, December 31,
1998 1997
----------- ------------
1998 ......................................... $ 414,643 $2,896,322
1999 ......................................... 2,088,514 4,551,639
2000 ......................................... 2,198,223 5,729,473
2001 ......................................... 540,344 2,827,844
2002 and thereafter........................... 533,785 2,828,785
---------- ----------
$ 5,775,509 $18,834,063
=========== ==========
4. LITIGATION
The Company settled two lawsuits involving (i) claims by the Company
against a third party related to alleged infringement of the Company's toric
curve technology for which the Company received a one-time paid-up royalty of
$1.2 million and (ii) claims by a former employee against the Company alleging
wrongful termination and discrimination under various laws, which the Company
settled for an amount which did not materially adversely effect the Company
operations or financial position. The Company is also a party to various other
claims, complaints and legal actions that have arisen in the ordinary course of
business from time to time. The Company believes that the outcome of all such
legal proceedings, in the aggregate, will not have a material adverse effect on
its financial position or the results of its operations.
5. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade receivables are shown net of an allowance for doubtful accounts and
sales returns. In addition to the normal provision for doubtful accounts, the
Company recognized a $750,000 additional provision during the quarter ended
September 30, 1998. The additional provision was provided for the probable
write-off of receivable balances that are no longer deemed collectible.
6. INCOME TAXES
The Company recorded no income tax benefit relating to the net loss for the
three-month and nine-month periods ended September 30, 1998, since a future
benefit is not assured. In 1997, the difference from the federal statutory
income tax rate of 34% resulted from a decrease in the reserve against certain
tax assets.
7. DEBT RESTRUCTURING
In January 1998, the Company restructured its credit agreement (the "Credit
Agreement") with its primary lender. The amended Credit Agreement consisted of
(i) a revolving loan commitment of up to $14 million, secured by the assets of
the Company, (ii) a term loan of $16.47 million, also secured by the assets of
the Company and (iii) an equipment loan of $3.9 million, secured by the
equipment of the Company, resulting in approximately $5 million additional
availability to the Company. The Credit Agreement also prohibits the Company
from paying dividends to its shareholders.
<PAGE>
In consideration for the amendments to the Credit Agreement, the Company
issued 400,000 shares of the Company's common stock to an affiliate of its
lender and agreed to file a registration statement related to those shares with
the Securities and Exchange Commission by January 4, 1999. The shares were
valued at the time of issuance based on the market price of the Company's stock
on the date of issuance less an appropriate discount based on the nature of the
underlying stock and its marketability. The common stock was valued at $862,500
and was recorded as payment of $200,000 in bank fees that were due December 31,
1997 and $662,500 in debt issuance costs.
The Credit Agreement was further amended on March 31, 1998 to reschedule
principal payments and to revise financial covenants. The Credit Agreement was
further amended on August 13, 1998 to waive covenant defaults through July 31,
1998 and to revise financial covenants for periods after August 1, 1998. The
Credit Agreement was further amended on September 17, 1998 to bifurcate the term
loan into a term loan of $13 million and a term loan of $3.47 million. The
Credit Agreement was further amended on November 2, 1998 (i) to increase the
amount the Company could borrow under its revolving loan by increasing the
advance rate from 50% to 65% on the value of its eligible inventory and (ii) to
delete the financial covenants.
The revised Credit Agreement requires $8.8 million of principal payments
due January 4, 1999, with all remaining outstanding debt due in April 1999. The
Company believes that it is unlikely it will be able to make such principal
payments when due, absent the Company obtaining additional financing through the
sale of equity or debt securities.
8. COMPREHENSIVE INCOME (LOSS)
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes display requirements of comprehensive income in financial
statements. The Company's total comprehensive income (loss) for the three and
nine month periods of 1998 and 1997 was ($11,988,773) and ($1,636,258), and
($13,726,032) and ($97,927), respectively.
9. EARNINGS PER SHARE
The weighted-average number of common shares used in the calculation of earnings
per share for the three and nine month periods ended September 30, 1998 and 1997
is 7,837,191 and 7,431,523, and 7,816,450 and 7,601,229, respectively. For
purposes of calculating diluted earnings per share for the three and nine months
ended September 30, 1998 and 1987, common stock equivalents have not been
included as the effect would be antidilutive or would be immaterial.
10. RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.
11. 1997 BUSINESS ACQUISITIONS
Sungold Acquisition
On April 11, 1997, the Company purchased substantially all the assets and
assumed certain liabilities of Sungold Enterprises, LTD., a New York corporation
("Sungold") Sungold manufactured two principal lines of premium sunglasses,
Stussy EyeGear, a young men's fashion brand licensed to Sungold by Stussy, Inc.,
a leading designer of streetwear apparel and accessories, and Anarchy Eyewear, a
cutting-edge brand popular with alternative sports enthusiasts age 15 to 25.
The acquisition was accounted for using the purchase method of accounting at the
date of acquisition. Accordingly, the allocation of the purchase price of $11.7
million was based on the fair value of the assets acquired and liabilities
assumed. Costs in excess of the fair value of the assets acquired and
liabilities assumed are reflected as intangibles, a component of which is the
Stussy license agreement, which is being amortized over the remaining term of
the license.
<PAGE>
Proforma information for the nine months ended September 30, 1997, assuming the
Sungold acquisition had occurred at January 1, 1997, is as follows:
Sales ..................... $39,393,259
Gross profit .............. 24,852,943
Net income (loss) ......... 46,435
Net income (loss) per share $ 0.01
Private Eyes Acquisition
On May 14, 1997, the Company purchased substantially all the assets and assumed
certain liabilities of the Private Eyes Sunglass Corporation, a Massachusetts
corporation ("Private Eyes"). Private Eyes was the licensee for Ellen Tracy
eyewear which features a collection of high-quality, high-fashion women's
sunglasses, readers, optical frames and accessories in a variety of designs
ranging from traditional to fashion forward. Private Eyes is the North American
distributor for Emmanuelle Khanh Paris Eyewear and also distributes it own line
of prescription frames and eyewear accessories.
The acquisition was accounted for using the purchase method of accounting at the
date of acquisition. Accordingly, the allocation of the purchase price of $8
million was based on the fair value of the assets acquired and liabilities
assumed. Costs in excess of the fair value of the assets acquired and
liabilities assumed were reflected as intangibles.
Proforma information for the nine months ended September 30, 1997, assuming the
Private Eyes acquisition had occurred at January 1, 1997, is as follows:
Sales ..................... $43,531,324
Gross profit .............. 27,139,488
Net income (loss) ......... 22,703
Net income (loss) per share $ 0.00
The Company's Ellen Tracy Eyewear business was unable to support the minimum
royalty and advertising obligations under the Ellen Tracy license agreement. On
September 8, 1998, the Company and Ellen Tracy, Inc. mutually agreed to
terminate the license. As a result of the license termination, the Company
recorded a charge to earnings of $8.6 million consisting of:
<TABLE>
<S> <C>
Write-down of identifiable intangibles - Ellen Tracy License .......... $1,040,000
Impairment of long-lived assets (goodwill) based on the
expected undiscounted cash flows of the Private Eyes division
without the Ellen Tracy sales. Ellen Tracy product sales accounted
for 84% of the total Private Eyes sales in 1997 .................. 7,164,000
Write-off of deferred marketing costs and estimated sales
returns and doubtful accounts associated with the termination
of the Ellen Tracy license ....................................... 405,000
----------
$8,609,000
</TABLE>
Timberland Eyewear
In May 1996, the Company, Douglas W. Lauer, and The Timberland Company
formed the kindling company, a California corporation ("Kindling"), a
majority-owned subsidiary of the Company, to develop and distribute sunglasses
and ophthalmic frames under the Timberland brand name. Concurrently with
Kindling's formation, the Company and Kindling, jointly and severally, acquired
an exclusive, world-wide license from The Timberland Company to use the
Timberland trademark on eyewear. The Company contributed $1.2 million for its 70
percent interest in Kindling. Kindling launched its Timberland sunglass line in
March 1997 and its Timberland ophthalmic line in Europe in early 1998. Sales of
Timberland branded products totaled approximately 7.2 percent and 2.1 percent of
the Company's sales in 1997 and the first nine months of 1998, respectively.
Approximately 4.3 percent of the Company's losses in 1997 and an amount
approximately equal to the Company's total operating loss for the first nine
months of 1998, respectively, were attributable to Kindling's operations.
<PAGE>
Effective September 1, 1998, Kindling sold substantially all of its assets
to Adventure Optics, LLC, a limited liability company majority owned by REM
Optical Company, Inc. and by The Timberland Company and Douglas W. Lauer. The
total purchase price for the assets was $1,008,000 payable in cash and the
assumption of certain liabilities. The Company received $358,000 of the proceeds
from the sale in partial payment of an intercompany loan from Gargoyles to
Kindling. As part of the sale transaction, the license agreement with The
Timberland Company was terminated. $255,000 of the proceeds from the asset sale
were paid to Timberland as a license termination fee. The Company recorded a
charge to earnings of $1,432,000 as a result of the sale of Kindling's assets
and the termination of the Timberland license agreement.
London Office
In late 1996 the Company opened a sales and marketing office in London to
manage its European sales efforts. The Company's London office was responsible
for approximately 2.9 percent and 2.4 percent of the Company's sales in 1997 and
the first nine months of 1998, respectively. A significant portion of the
Company's European sales were comprised of Timberland branded products. Costs
associated with the Company's European operations totaled $2.4 million and $1.1
million in 1997 and the first nine months of 1998, respectively. The Company
closed its London office July 31, 1998. As a result of the London office
closing, the Company recorded a charge to earnings of $373,000 consisting of the
non-cash write-off of start-up costs of $238,000 and severance and other closing
costs.
12. LIQUIDITY
The Company incurred significant operating losses in 1997 and for the nine
months ended September 30, 1998. The Company was unable to make a scheduled
payment on its bank debt in December 1997, and at the Company's request, its
banking arrangements were restructured in the first quarter of 1998. The Company
also has had difficulty paying suppliers on a timely basis, and has made
arrangements with certain suppliers to provide for payment schedules for past
due amounts and to provide letters of credit for a portion of the purchase price
of future orders.
On October 22, 1998, the Company entered into an agreement in principal for
a recapitalization of the Company with a New York investment bank which
specializes in transactions with middle market companies with growth prospects.
The proposed transaction contemplates the sale by the Company of equity and
subordinated debt securities and the restructure and refinancing of the
Company's current senior credit facility. While the terms of the securities to
be issued remain subject to negotiation, it is anticipated that holders of the
Company's presently outstanding common stock will hold less than 20% of the
Company's equity, on a fully diluted basis, after the transaction is completed.
See "Forward-Looking Statements." The transaction will be completed with the
continued cooperation of the Company's current lender and is expected to close
in early 1999. Closing of the transaction is conditioned, however, on a number
of factors including completion of review of the Company's business and
operations, finalizing placement of the securities, and the parties agreement on
the terms of definitive documentation, and there can be no assurance that the
financing and recapitalization transaction will close when scheduled or at all.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements within this report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. 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 differ materially from
the anticipated results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, without limitation, the
ability of the Company to complete its planned recapitalization transaction, the
continued cooperation of the Company's bank and suppliers, competitive
conditions in the sunglass industry, the possibility of unanticipated expenses
and third-party claims, and the factors discussed in the Company's Annual
Report, as amended, on Form 10-K/A under factors discussed in connection with
the forward-looking statements. Forward-looking statements reflect management's
views, estimates and opinions at the date on which the statements are made. The
Company undertakes no obligation to update forward-looking statements to reflect
changes in circumstances or changes in the views, estimates or opinions of
management that occur after the statements are made. Because of the inherent
uncertainty of forward-looking statements and because circumstances or
management's views, estimates and opinions may change, investors are cautioned
not to place undue reliance on forward-looking statements. Certain
forward-looking statements are identified with a cross reference to this
paragraph.
GENERAL
Gargoyles designs, assembles, markets and distributes a broad range of
sunglasses and eyewear products. The Company competes primarily in the premium
sunglass markets by offering a diverse line of products marketed under a number
of brands owned by the Company or licensed from third parties. The Company's
principal brands include Gargoyles Performance Eyewear, Gargoyles Protective
Eyewear, Hobie Polarized Sunglasses, Stussy EyeGear, Anarchy Eyewear, Angel
Eyewear, Emmanuelle Khanh Paris Eyewear, Private Eyes and Tomichi Studio, a
women's fashion brand that was introduced in November 1998. Under the Emmanuelle
Khanh Paris Eyewear and Private Eyes brands, the Company also offers lines of
ophthalmic frames.
During the quarter ended September 30, 1998, the Company terminated the
license under which it has sold its Ellen Tracy Eyewear line, sold the assets of
its partially owned subsidiary, the kindling company ("Kindling") and terminated
the license under which Kindling sold the Timberline eyewear brand, and closed
its London office. See Note 11 of Notes to Financial Statements, "Results of
Operations" and "Liquidity and Capital Resources."
The Company operates both directly and through three wholly-owned
subsidiaries and, until September 1, 1998, through one majority-controlled
subsidiary. The Company's operating subsidiaries include: H.S.C., Inc., a
Washington corporation, Sungold Eyewear, Inc., a Washington corporation, and
Private Eyes Sunglass Corporation, a Washington corporation.
RESULTS OF OPERATIONS
The following table sets forth results of operations, as a percentage of
net sales, for the periods indicated:
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
------ ------ ------ ------
Net sales ............................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................... 40.9 41.3 42.5 40.2
Gross profit ............................ 59.1 58.7 57.5 59.8
License income .......................... 1.1 1.0 .9 1.3
Operating expenses:
Sales and marketing ................... 32.2 45.2 34.7 37.5
General and administrative ............ 17.8 19.7 15.6 13.7
Shipping and warehousing .............. 4.9 3.1 5.2 3.0
Research and development .............. 1.8 2.9 1.7 3.1
Provision for Doubtful Accounts 9.0 .5 3.0 .5
Total operating expenses ................ 65.7 71.4 60.1 57.8
Income (loss) from operations ........... (5.5) (11.7) (1.7) 3.3
<PAGE>
Three Months Ended September 30, 1998
Compared To Three Months Ended September 30, 1997
Net sales. Net sales decreased from $11.1 million for the quarter ended
September 30, 1997 to $9.1 million for the quarter ended September 30, 1998.
This decrease of $2 million (18%) was primarily the result of decreases in sales
of the Company's Ellen Tracy and Timberland products and the Company's inability
to pay for certain purchases of inventory to fill orders.
Gross profit. Gross profit decreased from $6.5 million for the quarter
ended September 30, 1997 to $5.4 million for the quarter ended September 30,
1998. Gross margin percentage was 59.1% in the 1998 quarter compared to 58.7% in
the 1997 quarter.
License income. License income decreased to $98,000 for the quarter ended
September 30, 1998 compared to $115,000 for the quarter ended September 30,
1997. License income represents royalties collected on product sold by others
that have been authorized to utilize the Gargoyles name or technology.
Operating expenses. Operating expenses decreased to $6 million for the
quarter ended September 30, 1998 from $7.9 million for the quarter ended
September 30, 1997. As a percentage of net sales, operating expenses decreased
to 65.7% in the 1998 quarter from 71.4% in the 1997 quarter. Sales and marketing
expenses decreased $2.1 million in the 1998 quarter, as a result of cost cutting
efforts and reduced sales levels. As a percentage of net sales, sales and
marketing expenses decreased to 32.2% in the 1998 quarter from 45.2% in the 1997
quarter. General and administrative expenses decreased $565,000 in the 1998
quarter. As a percentage of net sales, general and administrative expenses
decreased to 17.8% in the 1998 quarter from 19.7% in the 1997 quarter. Shipping
and warehousing expenses increased $100,000 in the 1998 quarter. As a percentage
of net sales, shipping and warehousing expenses increased to 4.9% in the 1998
quarter from 3.1% in the 1997 quarter. Research and development expenses
decreased $157,000 in the 1998 quarter, primarily as a result of management's
efforts to contain certain costs. As a percentage of net sales, research and
development expenses decreased to 1.8% in the 1998 quarter from 2.9% in the 1997
quarter. Provision for doubtful accounts increased to $817,273 for the three
month period ended September 30, 1998 from $55,356 for the three month period
ended September 30, 1997. This increase was the result of a $750,000 provision
for the probable write-off of receivable balances that are no longer deemed
collectible. The decrease in total operating expenses of $1.9 million is
primarily due to the reduction in operating expenses resulting from the
Company's cost-cutting measures, reduced sales levels and the closure of the
London office and disposition of the Timberland Eyewear operations.
<PAGE>
Income (loss) from operations. The Company realized a loss from operations
of $499,000 for the quarter ended September 30, 1998 compared to a loss from
operations of $1,290,000 for the quarter ended September 30, 1997.
Interest income (expense). Interest expense was $884,000 for the quarter
ended September 30, 1998 compared with interest expense of $755,000 for the
quarter ended September 30, 1997 as a result of increased interest-bearing
borrowings. The Company's outstanding borrowings were $28.8 million at September
30, 1998 compared to $26.7 million at September 30, 1997.
Other income (expense). The Company recognized other expense of $10.6
million during the three months ended September 30, 1998, including (i) a charge
of $8.6 million related to write down of goodwill, certain intangible assets,
deferred marketing costs and other assets related to the termination of the
Ellen Tracy license agreement and related Ellen Tracy Eyewear business, (ii) a
charge to earnings of $1.4 million resulting from the sale of the assets of
Kindling and the termination of the Timberland license agreement and related
Timberland Eyewear business, (iii) a charge of $373,000 in connection with the
closing of the Company's London office, which includes charges for the write-off
of certain start-up expenses of $238,000 and estimated severance and other costs
incurred in connection with closing the office. See "Forward-Looking
Statements."
Income tax provision (benefit). The Company's income tax benefit was zero
for the quarter ended September 30, 1998 compared to an income tax benefit of
$409,000 for the quarter ended September 30, 1997. Differences from the federal
statutory income tax rate of 34% resulted from changes in the reserve against
certain tax assets.
Net income (loss). As a result of the items discussed above, the Company's
net loss was $12 million or ($1.54) per share for the quarter ended September
30, 1998 compared to a net loss of $1.6 million or ($.22) per share for the
quarter ended September 30, 1997.
Nine Months Ended September 30, 1998
Compared To Nine Months Ended September 30, 1997
Net sales. Net sales decreased to $33.7 million for the nine months ended
September 30, 1998 from $35.1 million for the nine months ended September 30,
1997. This decrease was primarily the result of decreased sales of the Company's
Gargoyles, Hobie and Timberland products that were partially offset by increased
sales of the Sungold and Private Eyes lines which were acquired in the second
quarter of 1997.
Gross profit. Gross profit decreased to $19.4 million for the nine months
ended September 30, 1998 from $21 million for the nine months ended September
30, 1997. Gross margin decreased to 57.5% in 1998 from 59.8% in 1997. The
decrease in gross margin in 1998 was primarily attributable to reduced sales
levels and the liquidation of certain inventories in 1998 at discounted prices.
License income. License income decreased to $289,000 for the nine months
ended September 30, 1998 compared to $447,000 for the nine months ended
September 30, 1997. The decrease in license income in 1998 was the result of a
decrease in sales of product by licensees.
<PAGE>
Operating expenses. Operating expenses, as a percentage of net sales,
increased to 60.1% in 1998 from 57.8% in 1997. Sales and marketing expenses
decreased $1.5 million in 1998 as compared to the same period in 1997. As a
percentage of net sales, sales and marketing expenses decreased to 34.7% in the
1998 period from 37.5% in the comparable 1997 period. General and administrative
expenses increased $415,000 million for the nine months ended September 30,
1998, primarily as a result of the second quarter 1997 Sungold and Private Eyes
acquisitions. As a percentage of net sales, general and administrative expenses
increased to 15.6% in 1998 from 13.7% in 1997. Shipping and warehousing expenses
increased $700,000 in 1998 as compared to the nine months ended September 30,
1997. As a percentage of net sales, shipping and warehousing expenses increased
to 5.2% in 1998 from 3.0% in 1997. Research and development expenses decreased
$505,000 in the nine months ended September 30, 1998, primarily as a result of
management's efforts to contain certain costs. As a percentage of net sales,
research and development expenses decreased to 1.7% in 1998 from 3.1% in 1997.
Provision for doubtful accounts increased to $997,545 for the nine month period
ended September 30, 1998 from $163,086 for the nine month period ended September
30, 1997. This increase was the result of a $750,000 provision in the third
quarter of 1998 for the probable write-off of receivable balances that are no
longer deemed collectible.
Income (loss) from operations. The Company incurred a loss from operations
of $578,000 for the nine months ended September 30, 1998 compared to income from
operations of $1,148,000 for the nine months ended September 30, 1997.
Interest income (expense). Interest expense was $2,572,000 for the nine
months ended September 30, 1998 compared with interest expense of $1,261,000 for
the nine months ended September 30, 1997 as a result of increased
interest-bearing borrowings.
Income tax provision (benefit). The Company's income tax benefit was zero
for the nine months ended September 30, 1998 compared to an income tax provision
of $15,500 for the nine months ended September 30, 1997. Differences from the
federal statutory income tax rate of 34% resulted from changes in the reserve
against certain tax assets.
Net income (loss). As a result of the items discussed above, the Company's
net loss was $13.8 million or ($1.77) per share for the nine months ended
September 30, 1998 compared to a net loss of $98,000 or ($.01) per share for the
nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has relied primarily on cash from operations,
borrowings and its initial public offering of common stock to finance its
operations. Cash provided by the Company's operating activities totaled $42,000
for the nine months ended September 30, 1998. Cash used in the Company's
operating activities totaled $9.5 million for the nine months ended September
30, 1997. The Company reduced the cash used in operating activities in the first
nine months of 1998 by $9.4 million compared to the first nine months of 1997 by
(i) reducing the buildup of accounts receivable by $3.1 million, (ii) reducing
net inventories by $2.9 million in the first nine months of 1998 compared to a
$6.3 million increase in inventories in the first nine months of 1997, (iii)
reducing the effect of changes in other assets and liabilities, primarily
<PAGE>
through a decrease in expenditures on prepaid advertising costs and (iv)
repaying $1.5 million in accounts payable and accrued expenses in 1998 as
compared to repaying $52,000 in accounts payable and accrued expenses in the
similar period in 1997. Cash used in the Company's investing activities, to fund
acquisitions of property and equipment, totaled $100,000 and $1,438,000 for the
nine months ended September 30, 1998 and 1997, respectively. The purchase
acquisitions of Sungold and Private Eyes required $20.2 million of cash during
the nine months ended September 30, 1997. Cash used in the Company's financing
activities to repay bank debt totaled $316,000 for the nine month period ended
September 30, 1998. Cash provided by the Company's financing activities,
primarily proceeds from bank debt, total $26.8 million for the same period in
1997. As of September 30, 1998, the Company had unused sources of liquidity of
$870,000, consisting of cash and cash equivalents of $588,000 and borrowings
available under its revolving loan of $282,000.
In January 1998, the Company restructured its credit agreement (the "Credit
Agreement") with its primary lender. The amended Credit Agreement consisted of
(i) a revolving loan commitment of up to $14 million, secured by the assets of
the Company, (ii) a term loan of $16.47 million, also secured by the assets of
the Company and (iii) an equipment loan of $3.9 million, secured by the
equipment of the Company, resulting in approximately $5 million additional
availability to the Company. The Credit Agreement also prohibits the Company
from paying dividends to its shareholders.
In consideration for the amendments to the Credit Agreement, the Company
issued 400,000 shares of the Company's common stock to an affiliate of its
lender and agreed to file a registration statement related to those shares with
the Securities and Exchange Commission by January 4, 1999. The shares were
valued at the time of issuance based on the market price of the Company's stock
on the date of issuance less an appropriate discount based on the nature of the
underlying stock and its marketability. The common stock was valued at $862,500
and was recorded as payment of $200,000 in bank fees that were due December 31,
1997 and $662,500 in debt issuance costs.
The Credit Agreement was further amended on March 31, 1998 to reschedule
principal payments and to revise financial covenants. The Credit Agreement was
further amended on August 13, 1998 to waive covenant defaults through July 31,
1998 and to revise financial covenants for periods after August 1, 1998. The
Credit Agreement was further amended on September 17, 1998 to bifurcate the term
loan into a term loan of $13 million and a term loan of $3.47 million. The
Credit Agreement was further amended on November 2, 1998 (i) to increase the
amount the Company could borrow under its revolving loan by increasing the
advance rate from 50% to 65% on the value of its eligible inventory and (ii) to
delete the financial covenants.
The revised Credit Agreement requires $8.8 million of principal payments
due January 4, 1999, with all remaining outstanding debt due in April 1999. The
Company believes that it is unlikely it will be able to make such principal
payments when due, absent the Company obtaining additional financing through the
sale of equity or debt securities.
On October 22, 1998, the Company entered into an agreement in principal for
a recapitalization of the Company with a New York investment bank which
specializes in transactions with middle market companies with growth prospects.
The proposed transaction contemplates the sale by the Company of equity and
subordinated debt securities and the restructure and refinancing of the
Company's current senior credit facility. While the terms of the securities to
be issued remain subject to negotiation, it is anticipated that holders of the
Company's presently outstanding common stock will hold less than 20% of the
Company's equity, on a fully diluted basis, after the transaction is completed.
The transaction will be completed with the continued cooperation of the
Company's current lender and is expected to close in early 1999. Closing of the
transaction is conditioned, however, on a number of factors including completion
of review of the Company's business and operations, finalizing placement of the
securities, and the parties agreement on the terms of definitive documentation,
and there can be no assurance that the financing and recapitalization
transaction will close when scheduled or at all.
<PAGE>
The Company has initiated certain cost reduction measures including the
consolidation of its office and warehouse space. During April 1998, the Company
vacated its Norwell, Massachusetts facility and negotiated a termination of the
Norwell lease, negotiated a termination of the lease for its warehouse facility
in Kent, Washington and negotiated a termination of the lease for its Lynnwood,
Washington facility, thereby decreasing minimum future lease payments under
noncancelable operating leases from $8.9 million at December 31, 1997 to $1.7
million at September 30, 1998. The Company also has negotiated releases from
certain of its licensing agreements. In September 1998, the Company and The
Timberland Company agreed to terminate the License Agreement under which the
Company sold and distributed Timberland Eyewear. As a result of the termination,
the Company was released from $3.4 million minimum future payments under the
Timberland license agreement. Also in September 1998, the Company and Ellen
Tracy, Inc. agreed to terminate the License Agreement under which the Company
sells and distributes Ellen Tracy Eyewear. As a result of the termination, the
Company was released from $8.8 million minimum future payments under the license
agreement.
The Company has had difficulty paying suppliers on a timely basis, and has
made arrangements with certain suppliers to provide for payment schedules for
past due amounts and to provide letters of credit for a portion of the purchase
price of future orders. The Company's operations have been constrained
significantly by cash shortages, which have resulted in the reduction of
inventory purchases and impairment of the Company's ability to order a full
inventory of products to fill orders and its ability to make timely payments of
receivables. Failure of operations or expense reduction efforts to meet the
Company's expectations, unanticipated expenses, loss of continued cooperation of
the Company's key suppliers or the bank, third-party claims or adverse
developments in pending litigation could result in additional cash requirements
that could be difficult or impossible to satisfy and could require the Company
to further reduce its operating expenditures, to curtail operations, or to
dispose of operating assets to enable it to continue operations. See
"Forward-Looking Statements."
SEASONALITY
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. See "Forward-Looking
Statements." The Company experiences higher accounts receivable during March
through September as a result of higher sales during this period. 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 22, 1996, the Company filed an action in the United States
District Court for the District of Massachusetts, under Case No. 996-12344RCL,
against Aearo Corporation, a Delaware corporation, alleging infringement of the
Company's toric curve lens utility patent. On May 19, the Court ruled in favor
of the Company and found that product manufactured by Aearo Corporation
infringes the Company's toric curve patent. Following the Court's ruling, the
only significant issues left for trial included the extent of damages to be
awarded to the Company resulting from Aearo's patent infringement and whether
the Company's patent was validly issued. On October 20, 1998 the Company reached
a settlement agreement with Aearo Corporation. Under the terms of the
settlement, all claims by and against the parties were fully released and the
Company granted to Aearo Corporation a license to continue to make and sell
certain infringing product into certain markets in exchange for a one-time, lump
sum royalty of $1.2 million, which was paid by Aearo upon execution of the
license agreement.
<PAGE>
On October 8, 1998, the Company reached a settlement and full release from
Michele J. Maulden and David B. Maulden in a lawsuit filled against the Company
in the Superior Court of Washington, for King County under Case No. 97-2-1877-1
KNT. Payment made by the Company to settle this dispute did not materially,
adversely effect the results of the Company's operations or its financial
position.
There have been no material changes in other legal proceedings reported in
the Company's 1997 Annual Report, as amended, on Form 10-K/A Amendment No. 1
filed with the Securities and Exchange Commission on April 15, 1998.
ITEM 5. OTHER INFORMATION
In July, the Company received notice from Nasdaq that a Nasdaq Listing
Qualifications Panel had determined to delist the Company's common stock from
the Nasdaq National Market for failure to meet Nasdaq's listing requirement with
respect to net tangible assets. Delisting was effective as of the close of
business July 13, 1998. The Company's common stock has continued to trade in the
Nasdaq over-the-counter market.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 10.1 Ninth Amendment to First Amended and Restated Credit
Agreement dated September 17, 1998, by and between U.S. Bank
National Association, successor by merger to U.S. Bank of
Washington, National Association, and Gargoyles, Inc.
Exhibit 10.2 Renewal Term Note I dated September 17, 1998, made by Gargoyles,
Inc. in favor of U.S. Bank National Association.
Exhibit 10.3 Renewal Term Note II dated September 17, 1998, made by Gargoyles,
Inc. in favor of U.S. Bank National Association.
Exhibit 10.4 Tenth Amendment to First Amended and Restated Credit
Agreement dated November 2, 1998, by and between U.S. Bank
National Association, successor by merger to U.S. Bank of
Washington, National Association, and Gargoyles, Inc.
Exhibit 10.5 Letter Agreement dated September 8, 1998, between Ellen Tracy,
Inc. and Gargoyles, Inc., on behalf of itself and its
wholly-owned subsidiary, Gargoyles Acquisition Corporation II,
now known as Private Eyes Sunglass Corporation.
Exhibit 10.6 Guaranty dated September 8, 1998, made by Gargoyles, Inc. in
favor of Ellen Tracy, Inc.
Exhibit 10.7 Termination and Release dated September 15, 1998, by and among
The Timberland Company, Gargoyles, Inc. and the kindling company.
Exhibit 10.8 License Agreement dated October 20, 1998, between Gargoyles, Inc.
and Aearo Company.
Exhibit 27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
Form 8-K with respect to the sale of substantially all the assets of the
Company's subsidiary, the kindling company, and the termination of the Company's
license with The Timberland Company was filed with the Securities and Exchange
Commission on September 30, 1998.
Form 8-K with respect to the Company reaching an agreement in principal for
a recapitalization of the Company was filed with the Securities and Exchange
Commission on November 5, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Gargoyles, Inc.
(Registrant)
November 13, 1998 /s/ Leo Rosenberger
-------------------
Leo Rosenberger
Chief Executive Officer, Chief
Financial Officer and Treasurer
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
Exhibit 10.1 Ninth Amendment to First Amended and Restated Credit
Agreement dated September 17, 1998, by and between U.S. Bank
National Association, successor by merger to U.S. Bank of
Washington, National Association, and Gargoyles, Inc.
Exhibit 10.2 Renewal Term Note I dated September 17, 1998, made by Gargoyles,
Inc. in favor of U.S. Bank National Association.
Exhibit 10.3 Renewal Term Note II dated September 17, 1998, made by Gargoyles,
Inc. in favor of U.S. Bank National Association.
Exhibit 10.4 Tenth Amendment to First Amended and Restated Credit
Agreement dated November 2, 1998, by and between U.S. Bank
National Association, successor by merger to U.S. Bank of
Washington, National Association, and Gargoyles, Inc.
Exhibit 10.5 Letter Agreement dated September 8, 1998, between Ellen Tracy,
Inc. and Gargoyles, Inc., on behalf of itself and its
wholly-owned subsidiary, Gargoyles Acquisition Corporation II,
now known as Private Eyes Sunglass Corporation.
Exhibit 10.6 Guaranty dated September 8, 1998, made by Gargoyles, Inc. in
favor of Ellen Tracy, Inc.
Exhibit 10.7 Termination and Release dated September 15, 1998, by and among
The Timberland Company, Gargoyles, Inc. and the kindling company.
Exhibit 10.8 License Agreement dated October 20, 1998, between Gargoyles, Inc.
and Aearo Company.
Exhibit 27.1 Financial Data Schedule.
Exhibit 10.1
NINTH AMENDMENT TO FIRST AMENDED AND RESTATED
CREDIT AGREEMENT
This ninth amendment to first amended and restated credit agreement
("Amendment") is made and entered into as of September 17, 1998, by and between
U. S. BANK NATIONAL ASSOCIATION, successor by merger to U. S. Bank of
Washington, National Association ("U. S. Bank"), and GARGOYLES, INC., a
Washington corporation ("Borrower").
R E C I T A L S:
A. On or about April 7, 1997, U. S. Bank and Borrower entered into that
certain first amended and restated credit agreement (together with all
amendments, supplements, exhibits, and modifications thereto, the "Credit
Agreement") whereby U. S. Bank agreed to extend certain credit facilities to
Borrower. U. S. Bank and Borrower have entered into eight previous amendments to
the Credit Agreement.
B. The purpose of this Amendment is to set forth the terms and conditions
upon which the Term Loan (as defined in the Credit Agreement) is bifurcated into
two term loans.
NOW, THEREFORE, in consideration of the mutual covenants and conditions set
forth herein, the parties agree as follows:
ARTICLE I. AMENDMENT; DEFINITIONS
1.1 Amendment
The Credit Agreement and each of the other Loan Documents are hereby
amended as set forth herein. Except as specifically provided for herein, all of
the terms and conditions of the Credit Agreement and each of the other Loan
Documents shall remain in full force and effect throughout the terms of the
Loans, as well as any extensions or renewals thereof.
1.2 Modification and Addition of Definitions
As used herein, capitalized terms shall have the meanings given to them in
the Credit Agreement, except as otherwise defined herein, or as the context
otherwise requires. Section 1.1 of the Credit Agreement is hereby amended to
modify or add (as the case may be) the following definitions:
<PAGE>
"Loans" means the Revolving Loan, Term Loan I, Term Loan II, and the
Equipment Loans, as well as all renewals and amendments thereof.
"Notes" means the Revolving Note, Renewal Term Note I, Renewal Term Note
II, and the Equipment Notes, as well as all renewals, replacements, and
amendments thereof.
"Renewal Term Note I" has the meaning set forth in Section 2.2 of this
Amendment and includes all renewals, replacements and amendments of the Renewal
Term Note I.
"Renewal Term Note II" has the meaning set forth in Section 2.2 of this
Amendment and includes all renewals, replacements and amendments of the Renewal
Term Note II.
"Term Loan I" has the meaning set forth in Section 2.1(b) of this Amendment
and includes all renewals of and amendments to Term Loan I.
"Term Loan II" has the meaning set forth in Section 2.1(b) of this
Amendment and includes all renewals of and amendments to Term Loan II.
ARTICLE II. MODIFICATION OF TERM LOAN
2.1 Bifurcation
(a) U. S. Bank and Borrower hereby acknowledge that the outstanding
principal balance of the Term Loan as of the date of this Amendment is
$16,470,000.
(b) Effective as of the date of this Amendment, the Term Loan shall be
bifurcated into the following two loans:
(i) a term loan with an initial principal balance of $13,000,000
("Term Loan I"); and
(ii) a term loan with an initial principal balance of $3,470,000
("Term Loan II").
2.2 Renewal Term Notes
Concurrently with the execution of this Amendment, Borrower shall execute
and deliver to U. S. Bank renewal promissory notes in the forms attached hereto
as Exhibits A ("Renewal Term Note I") and B ("Renewal Term Note II") in order to
evidence Term Loan I and Term Loan II, respectively, which shall be in
<PAGE>
substitution for, but not in payment of the Term Note and any previous renewals
thereof. The Term Note and any previous renewals thereof shall be marked
"renewed" and retained by U. S. Bank until Term Loan I and Term Loan II have
been repaid in full.
2.3 Interest
Section 3.4 of the Credit Agreement is hereby amended to reflect that
commencing as of the date of this Amendment, Term Loan I and Term Loan II shall
bear interest at the Reference Borrowing Rate.
2.4 Repayment of Term Loan I and Term Loan II
Section 3.5 of the Credit Agreement is deleted in its entirety and replaced
with the following:
(a) On the first day of each month until Term Loan I and Term Loan II
are repaid in full, Borrower shall pay U. S. Bank an amount equal to all
accrued interest on Term Loan I and Term Loan II.
(b) On January 4, 1999, Borrower shall make a principal reduction
payment to be applied against the outstanding principal balance of Term
Loan I in the amount of $4,780,000.
(c) On January 4, 1999, Borrower shall pay U. S. Bank all outstanding
principal, accrued interest, and other charges with respect to Term Loan
II.
(d) On April 30, 1999, Borrower shall pay U. S. Bank all outstanding
principal, accrued interest, and other charges with respect to Term Loan I.
ARTICLE III. CONDITIONS PRECEDENT
The modifications set forth in this Amendment shall not be effective unless
and until the following conditions have been fulfilled to U. S. Bank's
satisfaction:
(a) U. S. Bank shall have received this Amendment, Renewal Term Note I, and
Renewal Term Note II, each duly executed and delivered by Borrower.
(b) U. S. Bank shall have received a certified resolution of the board of
directors of Borrower and each of the Subsidiaries in a form acceptable to U. S.
Bank.
<PAGE>
ARTICLE IV. GENERAL PROVISIONS
4.1 Representations and Warranties
Borrower hereby represents and warrants to U. S. Bank that as of the date
of this Amendment and after having given effect to any waivers set forth in this
Amendment, there exists no Default or Event of Default. All representations and
warranties of Borrower contained in the Credit Agreement and the Loan Documents,
or otherwise made in writing in connection therewith, are true and correct as of
the date of this Amendment. Borrower acknowledges and agrees that all of
Borrower's Indebtedness to U. S. Bank is payable without offset, defense, or
counterclaim.
4.2 Security
All Loan Documents evidencing U. S. Bank's security interest in the
Collateral shall remain in full force and effect, and shall continue to secure,
without change in priority, the payment and performance of the Loans, as amended
herein, and any other Indebtedness owing from Borrower to U. S. Bank.
4.3 Guaranties
The parties hereto agree that the Guaranties shall remain in full force and
effect and continue to guarantee the repayment of the Loans to U. S. Bank as set
forth in such Guaranties.
4.4 Payment of Expenses
Borrower shall pay on demand all costs and expenses of U. S. Bank incurred
in connection with the preparation, negotiation, execution, and delivery of this
Amendment and the exhibits hereto, including, without limitation, attorneys'
fees incurred by U. S. Bank.
4.5 Survival of Credit Agreement
The terms and conditions of the Credit Agreement and each of the other Loan
Documents shall survive until all of Borrower's obligations under the Credit
Agreement have been satisfied in full.
4.6 Release of Claims
IN CONSIDERATION FOR U. S. BANK'S AGREEMENT TO RESTRUCTURE THE CREDIT
FACILITIES AS PROVIDED FOR IN THIS AMENDMENT, BORROWER, H.S.C., INC., SUNGOLD
EYEWEAR, INC., AND PRIVATE EYES SUNGLASS CORPORATION EACH HEREBY RELEASES AND
<PAGE>
FOREVER DISCHARGES U. S. BANK, ITS PREDECESSORS AND SUCCESSORS-IN-INTEREST, AND
THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, REPRESENTATIVES AND AGENTS FROM
ANY AND ALL CLAIMS, DEMANDS, DAMAGES, LIABILITIES, CHARGES, ACTIONS, LOSSES,
CAUSES OF ACTION, COSTS, EXPENSES, COMPENSATION, AND SUITS OF ANY KIND, PAST,
PRESENT OR FUTURE, ARISING FROM OR ALLEGED TO ARISE FROM THEIR BUSINESS
RELATIONSHIP, INCLUDING THE RELATIONSHIP PROVIDED FOR IN THE CREDIT AGREEMENT
THROUGH THE DATE OF THIS AMENDMENT, WHETHER KNOWN OR UNKNOWN. THIS RELEASE IS
INTENDED TO BE COMPLETE AND COMPREHENSIVE WITH RESPECT TO ALL SUCH CLAIMS. THIS
RELEASE OF CLAIMS HAS BEEN COMPLETELY READ AND FULLY UNDERSTOOD AND VOLUNTARILY
ACCEPTED FOR THE PURPOSE OF MAKING A FULL AND FINAL COMPROMISE AND SETTLEMENT
WITH RESPECT TO ALL CLAIMS, DISPUTED OR OTHERWISE.
4.7 Counterparts
This Amendment may be executed in one or more counterparts, each of which
shall constitute an original agreement, but all of which together shall
constitute one and the same agreement.
4.8 Statutory Notice
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.
IN WITNESS WHEREOF, U. S. Bank and Borrower have caused this Amendment to
be duly executed by their respective duly authorized signatories as of the date
first above written.
GARGOYLES, INC., a Washington corporation
By /s/ Leo Rosenberger
---------------------------------
Title CEO and CFO
<PAGE>
U. S. BANK NATIONAL ASSOCIATION
By /s/ David Larsen
---------------------------------
David C. Larsen, Vice President
Each of the undersigned Guarantors hereby (i) reaffirms its Guaranty and its
Security Agreement, (ii) agrees that its Guaranty guarantees the repayment of
the Loans, as amended herein, (iii) agrees that its respective Security
Agreement and related collateral documents secures the payment and performance
of the Secured Obligations described in such Security Agreement, (iv)
acknowledges that its obligations pursuant to its Guaranty and Security
Agreement are enforceable without defense, offset, or counterclaim, and (v)
agrees to the release of claims set forth in Section 4.6 of this Amendment.
H.S.C., Inc., a Washington corporation
By /s/ Leo Rosenberger
---------------------------------
Title: President and CFO
SUNGOLD EYEWEAR, INC., a
Washington corporation
By /s/ Leo Rosenberger
---------------------------------
Title: CEO and CFO
<PAGE>
PRIVATE EYES SUNGLASS
CORPORATION, a Washington corporation
By /s/ Leo Rosenberger
---------------------------------
Title: President and CFO
Exhibit 10.2
RENEWAL TERM NOTE I
$13,000,000 September 17, 1998
For value received, the undersigned, GARGOYLES, INC. ("Borrower"), promises
to pay to the order of U. S. BANK NATIONAL ASSOCIATION ("U. S. Bank"), at its
principal place of business, 1420 Fifth Avenue, Seattle, Washington 98101, or
such other place or places as the holder hereof may designate in writing, the
principal sum of Thirteen Million Dollars ($13,000,000) in lawful immediately
available money of the United States of America, in accordance with the terms
and conditions of that certain first amended and restated credit agreement dated
as of April 7, 1997, by and between Borrower and U. S. Bank (together with all
supplements, exhibits, amendments, and modifications thereto, the "Credit
Agreement") and that certain ninth amendment to first amended and restated
credit agreement of even date herewith (the "Ninth Amendment"). Borrower also
promises to pay interest on the unpaid principal balance hereof, in like money
in accordance with the terms and conditions and at the rate or rates provided
for in the Credit Agreement. All principal, interest, and other charges are due
and payable in full on April 30, 1999.
Borrower and all endorsers, sureties, and guarantors hereof jointly and
severally waive presentment for payment, demand, notice of nonpayment, notice of
protest, and protest of this Note, and all other notices in connection with the
delivery, acceptance, performance, default, dishonor, or enforcement of the
payment of this Note except such notices as are specifically required by this
Note or by the Credit Agreement, and they agree that the liability of each of
them shall be unconditional without regard to the liability of any other party
and shall not be in any manner affected by any indulgence, extension of time,
renewal, waiver, or modification granted or consented to by U. S. Bank. Borrower
and all endorsers, sureties, and guarantors hereof (1) consent to any and all
extensions of time, renewals, waivers, or modifications that may be granted by
U. S. Bank with respect to the payment or other provisions of this Note and the
Credit Agreement; (2) consent to the release of any property now or hereafter
securing this Note with or without substitution; and (3) agree that additional
makers, endorsers, guarantors, or sureties may become parties hereto without
notice to them and without affecting their liability hereunder.
This Note is the Renewal Term Note I referred to in the Ninth Amendment and
as such is entitled to all of the benefits and obligations specified in the
Credit Agreement, including but not limited to any Collateral and any conditions
<PAGE>
to making advances hereunder. Terms defined in the Credit Agreement are used
herein with the same meanings. Reference is made to the Credit Agreement for
provisions for the repayment of this Note and the acceleration of the maturity
hereof.
GARGOYLES, INC., a
Washington corporation
By /s/ Leo Rosenberger
-------------------------------
Title: CEO and CFO
Exhibit 10.3
RENEWAL TERM NOTE II
$3,470,000 September 17, 1998
For value received, the undersigned, GARGOYLES, INC. ("Borrower"), promises
to pay to the order of U. S. BANK NATIONAL ASSOCIATION ("U. S. Bank"), at its
principal place of business, 1420 Fifth Avenue, Seattle, Washington 98101, or
such other place or places as the holder hereof may designate in writing, the
principal sum of Three Million Four Hundred Seventy Thousand Dollars
($3,470,000) in lawful immediately available money of the United States of
America, in accordance with the terms and conditions of that certain first
amended and restated credit agreement dated as of April 7, 1997, by and between
Borrower and U. S. Bank (together with all supplements, exhibits, amendments,
and modifications thereto, the "Credit Agreement") and that certain ninth
amendment to first amended and restated credit agreement of even date herewith
(the "Ninth Amendment"). Borrower also promises to pay interest on the unpaid
principal balance hereof, in like money in accordance with the terms and
conditions and at the rate or rates provided for in the Credit Agreement. All
principal, interest, and other charges are due and payable in full on January 4,
1999.
Borrower and all endorsers, sureties, and guarantors hereof jointly and
severally waive presentment for payment, demand, notice of nonpayment, notice of
protest, and protest of this Note, and all other notices in connection with the
delivery, acceptance, performance, default, dishonor, or enforcement of the
payment of this Note except such notices as are specifically required by this
Note or by the Credit Agreement, and they agree that the liability of each of
them shall be unconditional without regard to the liability of any other party
and shall not be in any manner affected by any indulgence, extension of time,
renewal, waiver, or modification granted or consented to by U. S. Bank. Borrower
and all endorsers, sureties, and guarantors hereof (1) consent to any and all
extensions of time, renewals, waivers, or modifications that may be granted by
U. S. Bank with respect to the payment or other provisions of this Note and the
Credit Agreement; (2) consent to the release of any property now or hereafter
securing this Note with or without substitution; and (3) agree that additional
makers, endorsers, guarantors, or sureties may become parties hereto without
notice to them and without affecting their liability hereunder.
This Note is the Renewal Term Note II referred to in the Ninth Amendment
and as such is entitled to all of the benefits and obligations specified in the
Credit Agreement, including but not limited to any Collateral and any conditions
to making advances hereunder. Terms defined in the Credit Agreement are used
herein with the same meanings. Reference is made to the Credit Agreement for
provisions for the repayment of this Note and the acceleration of the maturity
hereof.
GARGOYLES, INC., a
Washington corporation
By /s/ Leo Rosenberger
---------------------------
Title: CEO and CFO
Exhibit 10.4
TENTH AMENDMENT TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT
This tenth amendment to first amended and restated credit agreement
("Amendment") is made and entered into as of November 2, 1998, by and between U.
S. BANK NATIONAL ASSOCIATION, successor by merger to U. S. Bank of Washington,
National Association ("U. S. Bank"), and GARGOYLES, INC., a Washington
corporation ("Borrower").
R E C I T A L S:
A. On or about April 7, 1997, U. S. Bank and Borrower entered into that
certain first amended and restated credit agreement (together with all
amendments, supplements, exhibits, and modifications thereto, the "Credit
Agreement") whereby U. S. Bank agreed to extend certain credit facilities to
Borrower. U. S. Bank and Borrower have entered into nine previous amendments to
the Credit Agreement.
B. The purpose of this Amendment is to set forth the terms and conditions
upon which U. S. Bank will grant Borrower's request to waive and reset certain
financial covenants under the Credit Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and conditions set
forth herein, the parties agree as follows:
ARTICLE I. AMENDMENT; DEFINITIONS
1.1 Amendment
The Credit Agreement and each of the other Loan Documents are hereby
amended as set forth herein. Except as specifically provided for herein, all of
the terms and conditions of the Credit Agreement and each of the other Loan
Documents shall remain in full force and effect throughout the terms of the
Loans, as well as any extensions or renewals thereof.
1.2 Definitions
<PAGE>
As used herein, capitalized terms shall have the meanings given to them in
the Credit Agreement, except as otherwise defined herein, or as the context
otherwise requires.
ARTICLE II. FINANCIAL COVENANTS
2.1 Waiver
U. S. Bank hereby agrees to waive all violations of the following financial
covenants through the date of this Amendment:
(a) Tangible Net Worth covenant set forth in Section 8.15 of the Credit
Agreement;
(b) Working Capital covenant set forth in Section 8.16 of the Credit
Agreement;
(c) Debt Service Coverage Ratio set forth in Section 8.17 of the Credit
Agreement;
(d) Minimum monthly sales covenant set forth in Section 8.19 of the Credit
Agreement; and
(e) Minimum monthly EBITDA covenant set forth in Section 8.20 of the Credit
Agreement.
2.2 Deletion
The following sections of the Credit Agreement are hereby deleted in their
entirety:
(a) Section 8.15 - Tangible Net Worth;
(b) Section 8.16 - Working Capital covenant;
(c) Section 8.17 - Debt Service Coverage Ratio;
(d) Section 8.19 - minimum monthly sales covenant; and
(e) Section 8.20 - minimum monthly EBITDA covenant.
U. S. Bank and Borrower hereby acknowledge that Section 8.18 of the Credit
Agreement - Senior Debt Ratio was deleted in a previous amendment to the Credit
Agreement.
ARTICLE III. MODIFICATION OF BORROWING BASE
Section 2.8(a)(iii) of the Credit Agreement is hereby deleted in its
entirety and replaced with the following:
<PAGE>
(iii) 65 percent of Eligible Inventory; provided that the maximum
advance based upon Eligible Inventory is limited to $8,000,000.
ARTICLE IV. REGISTRATION OF SHARES
The first sentence of Section 7.2(a) of the Third Amendment to First
Amended and Restated Credit Agreement dated January 15, 1998, is hereby deleted
in its entirety and replaced with the following:
Borrower shall take all steps to complete and file a registration
statement for the registration of the Shares on or before January 4,
1999, and shall use its best efforts to cause the registration to
become effective as soon after the filing of the registration
statement as possible.
ARTICLE V. CONDITIONS PRECEDENT
The modifications set forth in this Amendment shall not be effective unless
and until the following conditions have been fulfilled to U. S. Bank's
satisfaction:
(a) U. S. Bank shall have received this Amendment, duly executed and
delivered by Borrower, H.S.C., Inc., Sungold Eyewear, Inc. and Private Eyes
Sunglass Corporation.
(b) After having given effect to any waivers and modifications of
definitions set forth in this Amendment, there shall not exist any Default or
Event of Default.
(c) All representations and warranties of Borrower contained in the Credit
Agreement or otherwise made in writing in connection therewith or herewith shall
be true and correct and in all material respects have the same effect as though
such representations and warranties had been made on and as of the date of this
Amendment.
(d) U. S. Bank shall have received a certified resolution of the board of
directors of Borrower and each of the undersigned guarantors in a form
acceptable to U. S. Bank.
ARTICLE VI. GENERAL PROVISIONS
6.1 Representations and Warranties
Borrower hereby represents and warrants to U. S. Bank that as of the date
of this Amendment and after having given effect to any waivers and modifications
<PAGE>
to definitions set forth in this Amendment, there exists no Default or Event of
Default. All representations and warranties of Borrower contained in the Credit
Agreement and the Loan Documents, or otherwise made in writing in connection
therewith, are true and correct as of the date of this Amendment. Borrower
acknowledges and agrees that all of Borrower's Indebtedness to U. S. Bank is
payable without offset, defense, or counterclaim.
6.2 Security
All Loan Documents evidencing U. S. Bank's security interest in the
Collateral shall remain in full force and effect, and shall continue to secure,
without change in priority, the payment and performance of the Loans, as amended
herein, and any other Indebtedness owing from Borrower to U. S. Bank.
6.3 Guaranties
The parties hereto agree that the Guaranties shall remain in full force and
effect and continue to guarantee the repayment of the Loans to U. S. Bank as set
forth in such Guaranties.
6.4 Payment of Expenses
Borrower shall pay on demand all costs and expenses of U. S. Bank incurred
in connection with the preparation, negotiation, execution, and delivery of this
Amendment and the exhibits hereto, including, without limitation, attorneys'
fees incurred by U. S. Bank.
6.5 Survival of Credit Agreement
The terms and conditions of the Credit Agreement and each of the other Loan
Documents shall survive until all of Borrower's obligations under the Credit
Agreement have been satisfied in full.
6.6 Release of Claims
IN CONSIDERATION FOR U. S. BANK'S AGREEMENT TO ENTER INTO THIS AMENDMENT,
BORROWER, H.S.C., INC., SUNGOLD EYEWEAR, INC., AND PRIVATE EYES SUNGLASS
CORPORATION EACH HEREBY RELEASES AND FOREVER DISCHARGES U. S. BANK, ITS
PREDECESSORS AND SUCCESSORS-IN-INTEREST, AND THEIR RESPECTIVE DIRECTORS,
OFFICERS, EMPLOYEES, REPRESENTATIVES AND AGENTS FROM ANY AND ALL CLAIMS,
DEMANDS, DAMAGES, LIABILITIES, CHARGES, ACTIONS, LOSSES, CAUSES OF ACTION,
COSTS, EXPENSES, COMPENSATION, AND SUITS OF ANY KIND, PAST, PRESENT OR FUTURE,
<PAGE>
ARISING FROM OR ALLEGED TO ARISE FROM THEIR BUSINESS RELATIONSHIP, INCLUDING THE
RELATIONSHIP PROVIDED FOR IN THE CREDIT AGREEMENT THROUGH THE DATE OF THIS
AMENDMENT, WHETHER KNOWN OR UNKNOWN. THIS RELEASE IS INTENDED TO BE COMPLETE AND
COMPREHENSIVE WITH RESPECT TO ALL SUCH CLAIMS. THIS RELEASE OF CLAIMS HAS BEEN
COMPLETELY READ AND FULLY UNDERSTOOD AND VOLUNTARILY ACCEPTED FOR THE PURPOSE OF
MAKING A FULL AND FINAL COMPROMISE AND SETTLEMENT WITH RESPECT TO ALL CLAIMS,
DISPUTED OR OTHERWISE.
6.7 Counterparts
This Amendment may be executed in one or more counterparts, each of which
shall constitute an original agreement, but all of which together shall
constitute one and the same agreement.
6.8 Statutory Notice
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.
IN WITNESS WHEREOF, U. S. Bank and Borrower have caused this Amendment to
be duly executed by their respective duly authorized signatories as of the date
first above written.
GARGOYLES, INC., a Washington corporation
By /s/ Leo Rosenberger
----------------------------
Title: CEO and CFO
U. S. BANK NATIONAL ASSOCIATION
By /s/ David Larsen
----------------------------
David C. Larsen, Vice President
<PAGE>
Each of the undersigned Guarantors hereby (i) reaffirms its Guaranty and its
Security Agreement, (ii) agrees that its Guaranty guarantees the repayment of
the Loans, as amended herein, (iii) agrees that its respective Security
Agreement and related collateral documents secures the payment and performance
of the Secured Obligations described in such Security Agreement, (iv)
acknowledges that its obligations pursuant to its Guaranty and Security
Agreement are enforceable without defense, offset, or counterclaim, and (v)
agrees to the release of claims set forth in Section 6.6 of this Amendment.
H.S.C., Inc., a Washington corporation
By /s/ Leo Rosenberger
----------------------------
Title: President and CFO
SUNGOLD EYEWEAR, INC.,
a Washington corporation
By /s/ Leo Rosenberger
---------------------------------
Title: CEO and CFO
PRIVATE EYES SUNGLASS
CORPORATION, a Washington corporation
By /s/ Leo Rosenberger
---------------------------------
Title: President and CFO
Exhibit 10.5
E L L E N T R A C Y
As of September 8, 1998
Gargoyles, Inc.
5866 South 194th Street
Kent, Washington 98032
Attn: Mr. Leo Rosenberger
Mr. Douglas B. Hauff
Ladies and Gentlemen:
Reference is made to that certain License Agreement between Ellen Tracy,
Inc. ("Ellen Tracy") and Gargoyles Acquisition Corporation II, now known as
Private Eyes Sunglass Corporation ("Licensee"), a wholly-owned subsidiary of
Gargoyles, Inc. ("Gargoyles"), dated as of May, 1997 (the "Agreement"). Defined
terms used herein shall have the same meanings as in the Agreement.
This shall confirm that, by mutual agreement of Ellen Tracy and Licensee,
the Agreement shall terminate as of September 8, 1998 (the "Termination Date").
All accrued but unpaid Guaranteed Minimum Royalties in the amount of $214,375.00
shall be paid to Ellen Tracy by delivery concurrently with the execution hereof
of (i) a Promissory Note made by Licensee, and (ii) a Guaranty, made by
Gargoyles, guaranteeing Licensee's obligations under such Promissory Note. On
the Termination Date, all rights granted to Licensee pursuant to the Agreement
shall revert to Ellen Tracy. Pursuant to Section 20(a) of the Agreement,
Licensee agrees that, following the Termination Date, Licensee shall cease all
manufacturing, by itself or by any third party with whom it has contracted, of
any Licensed Articles, other than Licensed Articles which are part of the August
line which are to be delivered in October and November of 1998, and shall
destroy or efface any items used to reproduce Licensed Properties. Furthermore,
upon countersignature of this letter and delivery thereof to Ellen Tracy,
Licensee will deliver to Ellen Tracy (a) any and all artwork used or created by
it in connection with the Agreement, and (b) if Licensee has any unsold Licensed
Articles in inventory on the Termination Date, a complete and accurate statement
of the kinds and numbers of such unsold Licensed Articles. Provided that
Licensee has delivered to Ellen Tracy the Promissory Note referred to above for
an amount equal to the Owed Royalties and Gargoyles has delivered the Guaranty
referred to above, Licensee may continue to sell such unsold inventory for a
limited period of 180 days following the Termination Date (the "Sell-Off
Period") and shall pay Ellen Tracy Actual Royalties with respect to any such
sales. If any such inventory remains unsold at the end of the Sell-Off Period,
such Licensed Articles either shall be destroyed or all Licensed Properties
removed or obliterated therefrom. In no event may Licensee sell or distribute
any Licensed Articles following the expiration of the Sell-Off Period.
<PAGE>
E L L E N T R A C Y
Gargoyles, Inc.
As of September 8, 1998
Page 2
Ellen Tracy and Licensee hereby each waive all defaults (if any) occurring
prior to the Termination Date and hereby release each other and their respective
affiliates, successors, assigns, directors, officers and agents from any and all
liabilities for payments of royalties and all other obligations of the parties
arising under the Agreement prior to the Termination Date, other than (i) those
obligations of the parties set forth in this letter and in the Promissory Note
and Guaranty referred to above, and (ii) Licensee's obligation to pay Ellen
Tracy Actual Royalties with respect to sales of Licensed Articles during the
Sell-Off Period.
This letter agreement contains the entire understanding of the parties
regarding the termination of the Agreement and supersedes all prior agreements
and understandings of the parties relating thereto.
Please acknowledge your agreement with the foregoing by signing, in the
space below, the enclosed two copies of this letter and returning one to the
undersigned.
Very truly yours,
ELLEN TRACY, INC.
By: /s/ Howard Rosenberger
----------------------
Howard Rosenberger
AGREED TO:
GARGOYLES, INC., on behalf of itself and its wholly-owned subsidiary,
GARGOYLES ACQUISITION CORPORATION II, now known as
Private Eyes Sunglass Corporation
By: /s/ Leo Rosenberger
-------------------------------
Leo Rosenberger, CEO & CFO
Exhibit 10.6
GUARANTY
GUARANTY dated September 8, 1998, made by Gargoyles, Inc., a Washington
corporation (the "Guarantor") in favor of Ellen Tracy, Inc., a New Jersey
corporation ("Ellen Tracy").
W I T N E S S E T H :
WHEREAS, Gargoyles Acquisition Corporation II, now known as Private
Sunglasses Corporation ("Obligor"), a wholly-owned subsidiary of Guarantor, has
entered into a Termination Agreement, dated the date hereof, with Ellen Tracy
("the Termination Agreement") pursuant to which Obligor and Ellen Tracy have
agreed to terminate a certain license agreement (the "License Agreement") to
which Ellen Tracy and Obligor are parties; and
WHEREAS, pursuant to the Termination Agreement, Obligor has agreed to pay
Ellen Tracy certain royalties due and owing to Ellen Tracy under the License
Agreement by delivery of a promissory note (the "Note") of even date herewith in
the amount of $214,375.00; and
WHEREAS, as a further inducement to Ellen Tracy to enter into the
Termination Agreement, Guarantor has agreed to deliver this Guaranty,
guaranteeing the obligations of Obligor under the Note; and
WHEREAS, Guarantor has determined that its execution, delivery and
performance of this Guaranty directly benefit, and are within the purposes and
in the best interests of, Guarantor.
NOW, THEREFORE, in consideration of the premises and the agreements herein
and in order to induce Ellen Tracy to execute the Termination Agreement,
Guarantor hereby agrees with Ellen Tracy as follows:
1. Guaranty. Guarantor hereby (i) irrevocably, absolutely and
unconditionally guarantees the prompt payment by Obligor as and when due and
payable (whether by scheduled maturity, demand or otherwise), of all amounts now
or hereafter owing in respect of the Note, for principal or otherwise (the
"Obligations"), and whether accruing before or subsequent to the filing of a
petition initiating a bankruptcy, reorganization, liquidation or similar
proceeding affecting Obligor, notwithstanding the operation of the automatic
stay under Section 362(a) of the U.S. Bankruptcy Code, and (ii) agrees to pay
any and all expenses (including counsel fees and expenses) incurred by Ellen
Tracy in enforcing its rights under this Guaranty.
<PAGE>
2. Guarantor's Obligations Unconditional.
(a) Guarantor hereby guarantees that the Obligations will be paid
strictly in accordance with the terms of the Note, regardless of any law,
regulation or order now or hereafter in effect in any jurisdiction affecting any
of such terms or the rights of Ellen Tracy with respect thereto. The liability
of Guarantor hereunder shall be absolute and unconditional irrespective of: (i)
any lack of validity or enforceability of the Termination Agreement and/or the
Note or any agreement or instrument relating thereto; (ii) any change in the
time, manner or place of payment of, or in any other term in respect of the
Obligations, or any other amendment or waiver of or consent to any departure
from the Termination Agreement and/or the Note or (iii) any other circumstance
which might otherwise constitute a defense available to, or a discharge of,
Obligor or any other guarantor in respect of the Obligations or Guarantor in
respect hereof.
(b) This Guaranty (i) is a continuing guaranty and shall remain in
full force and effect until the satisfaction in full of the Obligations and the
payment of the other expenses to be paid by Guarantor pursuant hereto and (ii)
shall continue to be effective or shall be reinstated, as the case may be, if at
any time any payment of any of the Obligations is rescinded or must otherwise be
returned by Ellen Tracy upon the insolvency, bankruptcy or reorganization of
Obligor or otherwise, all as though such payment had not been made.
3. Waivers. Guarantor hereby waives (i) promptness and diligence, (ii)
notice of acceptance and notice of the incurrence of the Obligations by Obligor,
(iii) notice of any actions taken by Ellen Tracy or Obligor under the
Termination Agreement and/or the Note or any other agreement or instrument
relating thereto, (iv) notice of change, modification or amendment to the Note,
(v) all other notices, demands and protests, and all other formalities of every
kind in connection with the enforcement of the Obligations or of the obligations
of Guarantor hereunder, the omission of or delay in which, but for the
provisions of this Section 3, might constitute grounds for relieving Guarantor
of its obligations hereunder, and (vi) any requirement that Ellen Tracy protect,
secure, perfect or insure any security interest or lien or any property subject
thereto or exhaust any right or take any action against Obligor or any other
entity or any collateral. Guarantor hereby consents to any and all forebearances
and extensions of time of payment or performance of the Note and to any and all
changes in the terms, covenants and conditions thereof now or at any other time
hereafter made or granted with or without notice to Guarantor or prior consent
by Guarantor. Guarantor agrees that this Guaranty shall constitute a guaranty of
payment and not of collection.
4. Representations and Warranties. Guarantor hereby represents and warrants
that (i) it has all requisite power and authority to execute, deliver and
perform this Guaranty, (ii) no authorization or approval or other action by, and
no notice to or filing with, any governmental authority or other regulatory body
is required for the due execution, delivery and performance by Guarantor of this
Guaranty, (iii) this Guaranty is a legal, valid and binding obligation of
Guarantor, enforceable against Guarantor in accordance with its terms, and (iv)
there is no action, suit or proceeding pending or threatened against or
otherwise affecting Guarantor before any court or other governmental authority
<PAGE>
or any arbitrator which may materially adversely affect Guarantor's ability to
perform its obligations hereunder.
5. Consent to Jurisdiction; Waiver of Immunities. Guarantor hereby
irrevocably submits to the jurisdiction of any state or Federal court sitting in
New York in any action or proceeding arising out of or relating to this
Guaranty, and Guarantor hereby irrevocably agrees that all claims in respect of
such action or proceeding may be heard and determined in such state or Federal
court. Guarantor irrevocably consents to the service of any and all process in
any such action or proceeding by the mailing of copies of such process to
Guarantor at its address specified in Section 6 hereof. Guarantor agrees that a
final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Section 5 shall affect the right of Ellen Tracy
to serve legal process in any other manner permitted by law or affect the right
of Ellen Tracy to bring any action or proceeding against Guarantor or its
property in the courts of any other jurisdictions. To the extent that Guarantor
has or hereafter may acquire any immunity from jurisdiction of any court or from
any legal process (whether through service or notice, attachment prior to
judgment, attachment in aid of execution, execution or otherwise) with respect
to itself or its property, Guarantor hereby irrevocably waives such immunity in
respect of its obligations under this Guaranty.
6. Notices, Etc. All notices and other communications provided for
hereunder shall be in writing and shall be mailed, telegraphed or delivered, if
to Guarantor, to its address at 5866 South 194th Street, Kent, Washington 98032;
and if to Ellen Tracy, to its address at 575 Seventh Avenue, New York, NY 10018;
or, as to either such entity, at such other address as shall be designated by
such entity in a written notice to such other entity complying as to delivery
with the terms of this Section 6. All such notices and other communications
shall be effective (i) if mailed, when deposited in the mails, (ii) if
telegraphed, when delivered to the telegraph company, or (iii) if delivered,
upon delivery.
7. Miscellaneous.
(a) Guarantor will make each payment hereunder in lawful money of
United States of America and in same day funds to Ellen Tracy at its address
specified in Section 6 hereof.
(b) No amendment of any provision of this Guaranty shall be effective
unless it is in writing and signed by Guarantor and Ellen Tracy, and no waiver
of any provision of this Guaranty, and no consent to any departure by Guarantor
therefrom, shall be effective unless it is in writing and signed by Ellen Tracy,
and then such waiver of consent shall be effective only in the specific instance
and for the specific purpose for which given.
(c) No failure on the part of Ellen Tracy to exercise, and no delay in
exercising, any right hereunder or under the Termination Agreement and/or Note
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right preclude any other or further exercise thereof or the exercise of any
<PAGE>
other right. The rights and remedies of Ellen Tracy provided herein and in the
Termination Agreement and/or Note are cumulative and are in addition to, and not
exclusive of, any rights or remedies provided by law. The rights of Ellen Tracy
under the Termination Agreement and/or Note against any party thereto are not
conditional or contingent on any attempt by Ellen Tracy to exercise any of its
rights under the Termination Agreement and/or Note against such party or against
any other entity.
(d) Any provision of this Guaranty which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining portions hereof or thereof or affecting the validity or enforceability
of such provision in any other jurisdiction.
(e) This Guaranty shall (i) be binding on Guarantor and its successors
and assigns, and (ii) inure, together with all rights and remedies of Ellen
Tracy hereunder, to the benefit of Ellen Tracy and its successors, transferees
and assigns. Without limiting the generality of clause (ii) of the immediately
preceding sentence, Ellen Tracy may assign or otherwise transfer the Note, and
its rights under the Agreement, to any other entity, and such other entity shall
thereupon become vested with all of the benefits in respect thereof granted to
Ellen Tracy herein or otherwise. None of the rights or obligations of Guarantor
hereunder may be assigned or otherwise transferred without the prior written
consent of Ellen Tracy.
(f) This Guaranty shall be governed by and construed in accordance
with the law of the State of New York.
(g) Guarantor acknowledges that Ellen Tracy is agreeing to accept the
Note in reliance upon this Guaranty. This Guaranty may not be revoked by the
undersigned except with the express written consent of Ellen Tracy.
IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be executed under
seal as of the date first above written.
GARGOYLES, INC.
By: /s/ Leo Rosenberger
---------------------------------
Leo Rosenberger, CEO & CFO
(SEAL)
Exhibit 10.7
Termination and Release
This Termination and Release dated as of September 15, 1998 is entered into
by and among The Timberland Company ("Timberland"), Gargoyles, Inc.
("Gargoyles") and the kindling company, formerly known as The D.W. Lauer Company
("Kindling") with respect to the following facts:
A. Timberland, Gargoyles and Kindling entered into a License Agreement
dated as of May 17, 1996 (the "License Agreement") whereby Timberland licensed
the Timberland and Tree Logo Design trademarks to Gargoyles and Kindling.
B. Timberland, Gargoyles, Kindling and Douglas W. Lauer entered into an
Investor Rights Agreement date as of May 17, 1996 (the "Shareholder Agreement").
C. The parties wish to effect the sale (the "Sale") of substantially all
the assets of Kindling to Adventure Optics L.L.C. ("Newco") pursuant to the
terms of an Asset Purchase Agreement dated as of September 15, 1998 (the "Asset
Purchase Agreement") by and among Newco, Gargoyles, Kindling and Douglas W.
Lauer.
D. It is a condition precedent to Gargoyles' obligation to close the Sale
that Timberland shall have entered into this Release and Termination.
NOW THEREFORE, for good and valuable consideration, and conditioned upon
the closing of the Sale, the parties hereto agree as follows:
1. Consent to Sale. Timberland hereby consents to the Sale.
2. Termination of License Agreement. Timberland, Gargoyles and Kindling
declare and agree that the License Agreement is hereby terminated, subject to
the following:
2.1 The following specific sections of the License Agreement, Sections
5, 11, 12, 30, 32, 34, 44, 46, 56 and 57, shall survive the termination of
the License Agreement; and provided further that Sections 20 and 22 shall
survive for a period of two years following the date of this Agreement.
Furthermore, Section 31 shall survive the termination of the License
Agreement, but only with respect to Licensed Products (as defined therein
manufactured pursuant to the License Agreement;
2.2 Section 13 shall survive termination the License Agreement except
for the first three sentences of Section 13, which shall not survive
termination of the License Agreement. In addition, all actions which
Gargoyles or Kindling may be required to perform under the surviving
portions of Section 13 shall be at the expense of Timberland;
<PAGE>
2.3 Section 33 shall survive termination of the License Agreement,
provided that Kindling shall not be required to maintain any insurance.
Kindling shall remain as an additional assured on insurance maintained by
Gargoyles.
2.4 Section 35 shall survive termination of the License Agreement in
its entirety insofar as it applies to Kindling. Section 35 shall not
survive termination of the License Agreement insofar as it applies
Gargoyles, provided, however, that Gargoyles agrees that it will not
research, design or sell any eyewear or related accessories which in
Timberland's reasonable opinion are based on, are derived from or replicate
any products which were Licensed Products during the period that the
License was effective.
3. Release. In consideration of, and conditioned upon Timberland's receipt
of, payment of $255,000 from proceeds of the Sale, Timberland hereby releases
Gargoyles and Kindling, and their respective successors, assigns, directors,
officers, employees, agents, attorneys and representatives (other than Newco),
and Gargoyles and Kindling release Timberland and its successors, assigns,
directors, officers, employees, agents, attorneys and representatives, from any
and all liability for payment of royalty payments and all other obligations of
Gargoyles or Kindling whatsoever, known and unknown, arising under the License
Agreement, excluding those obligations which survive the termination of the
License Agreement pursuant to Section 2, above.
4. Counterparts. This Release and Termination may be executed in any number
of counterparts which, when taken together, shall constitute but one agreement.
IN WITNESS WHEREOF, the parties have executed this Release and Termination
as of the 15th day of September, 1998.
THE TIMBERLAND COMPANY GARGOYLES, INC.
By: /s/ Stephanie Lawrence By: /s/ Leo Rosenberger
--------------------------- --------------------------
Its: Vice President - Licensing Its: CEO & CFO
the kindling company
By: /s/ Leo Rosenberger
---------------------------
Its: CFO
Exhibit 10.8
LICENSE AGREEMENT
This License Agreement (the "Agreement") is made this 20th day of October,
1998, between Gargoyles, Inc. ("Gargoyles" or "Licensor"), a Washington
corporation having a principal place of business at 5866 South 194th Street,
Kent, Washington 98032, and Aearo Company ("Aearo" or "Licensee"), a Delaware
corporation having a principal place of business at 5457 West 79th Street,
Indianapolis, Indiana 46268.
WHEREAS, Gargoyles is the owner of United States Patent No. 4,741,611 (the
"'611 Patent") and the United States Design Patent No. 270,165 (the "`165
Patent") (together, the "Patents").
WHEREAS, it is the intent of the parties that Aearo be permitted to
continue to sell licensed products (as herein defined) in the markets in which
it currently sells protective eyewear and not to drastically interfere with
Aearo's sales in such markets nor expand such markets except as expressly
described herein.
NOW THEREFORE, the parties agree as follows:
1. Gargoyles hereby grants to Aearo and its manufacturer representatives,
manufacturers, assemblers, and makers a world-wide, paid-up, perpetual,
non-cancelable, non-exclusive license ("License") to make, have made, use, sell,
and offer for sale any product currently marketed by Aearo that may be covered
by the patents, and all name changes, variations and minor product improvements
("the Licensed Products").
2. Aearo will pay Gargoyles a one-time, lump sum royalty in the amount of
$1.2 million for any past and future sales of the Licensed Products, payable in
full on October 20, 1998.
3. Notwithstanding paragraph 1, Aearo agrees that, during the life of the
`611 Patent, it will not market, sell or distribute the Licensed Products to
sunglass specialty stores (including but not limited to Sunglass Hut and
comparables stores), NASCAR and related track-side sales locations, other
automotive stores (such as NAPA and Snap-On stores), country-western stores, and
<PAGE>
rodeos. As to all other sales under paragraph 1, during the life of the `611
Patent, Aearo will position Licensed Products as safety eyewear at Aearo's
current range of safety eyewear prices by industry or product segments (plus
inflation), although nothing in this License shall be construed to affect
Aearo's right to emphasize the fashionable aspects of the Licensed Products.
4. In the event any sale by Aearo of any Licensed Products to the United
States military would displace a royalty to Gargoyles that Gargoyles is
receiving as a result of Gargoyles, Inc. v. United States, Aearo agrees not to
make such sale unless Aearo and Gargoyles can agree on alternative arrangements.
5. All points of purchase materials, packaging and other marketing
materials used by Aearo with respect to the Licensed Products will reflect the
positioning of the Licensed Products as safety eyewear.
6. Neither parties' marketing materials or product promotions reflecting
Licensed Products or any eyewear covered by the `611 Patent or the `165 Patent
will refer to the other party's products or compare the other party's products
to its own.
7. Any dispute arising under this Agreement shall be resolved by
arbitration in Boston, Massachusetts pursuant to the rules of the American
Arbitration Association, provided, however, that no arbitration shall be
initiated until the following has been complied with: any party who believes the
other is in default of this Agreement shall notify the other party in writing
describing the default and demanding that the party cure the default. If, within
60 days, the party cures the default, then no arbitration shall be brought. If,
however, after 60 days, the party does not cure the default or the parties
cannot otherwise resolve the dispute, then and only then can arbitration be
instituted. The arbitrator may award the prevailing party the costs of bringing
the arbitration, including attorneys' fees, if and only if the other party's
position was not substantially justified. Nothing in this paragraph shall affect
the right or either party to seek instructive relief provided that no such
relief shall be sought until after the expiration of the 60-day cure period and
provided further that, after the party's motion for such relief is decided upon
by the trial court, the parties proceed to arbitration as provided herein.
<PAGE>
8. This Agreement is effective as of October 20th, 1998.
9. This License shall not be transferred by Aearo to any third party,
except that any rights to this License may be transferred to Cabot Safety
Intermediate Corp. ("Cabot") and Cabot may in turn sublicense such rights solely
to Aearo. For purposes of this paragraph, a transfer shall not include any
merger, reorganization, or sale of all, or substantially all, of the assets or
stock of Aearo.
Gargoyles, Inc.: Aearo Company:
/s/ Leo Rosenberger /s/ Michael A. McLain
- ---------------------- ---------------------------------
Leo Rosenberger Michael A. McLain
CEO and CFO President and CEO
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.1
<ARTICLE> 5
<LEGEND>
For purposes of this Exhibit, Primary means Basic.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 588,635
<SECURITIES> 0
<RECEIVABLES> 8,738,175
<ALLOWANCES> (1,999,250)
<INVENTORY> 8,827,807
<CURRENT-ASSETS> 18,287,515
<PP&E> 3,912,622
<DEPRECIATION> (2,064,248)
<TOTAL-ASSETS> 33,284,143
<CURRENT-LIABILITIES> 39,571,010
<BONDS> 0
0
0
<COMMON> 26,574,281
<OTHER-SE> (6,286,866)
<TOTAL-LIABILITY-AND-EQUITY> 33,284,143
<SALES> 9,062,934
<TOTAL-REVENUES> 9,161,386
<CGS> 3,702,757
<TOTAL-COSTS> 3,702,757
<OTHER-EXPENSES> 5,957,608
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 883,935
<INCOME-PRETAX> (12,043,185)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,043,185)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,043,185)
<EPS-PRIMARY> (1.54)
<EPS-DILUTED> (1.54)
</TABLE>