<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) [MARCH 31, 1998]
GARGOYLES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 0-21355 91-1247269
(STATE OF INCORPORATION) (COMMISSION (IRS EMPLOYER
FILE NUMBER) IDENTIFICATION NO.)
20121 48TH AVENUE WEST
LYNNWOOD, WASHINGTON 98036
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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ITEM 5. OTHER EVENTS.
On April 3, 1998, Gargoyles, Inc. (Nasdaq:GOYL) reported sales and
operating results for the year ended December 31, 1997.
The Company's net sales increased to $41.0 million for the year ended
December 31, 1997 from $33.1 million for the year ended December 31, 1996. The
increase was primarily the result of (i) increased sales of Gargoyles and Hobie
brand products through retail channels other than Sunglass Hut, (ii) sales from
the Company's subsidiaries, Sungold Eyewear, Inc. and Private Eyes Sunglass
Corporation, which were acquired in second quarter 1997, (iii) and sales of
Timberland Eyewear products, introduced in March, 1997. Sales from these new
brands totaled $18.5 million. Sales increases were partially offset by an
unprecedented level of merchandise returns from key customers, including
Sunglass Hut, and from certain distributors. As a result, the Company processed
approximately $10.7 million in sales returns in 1997.
The Company reported a net loss of $14.4 million or $1.94 per share for
the year ended December 31, 1997, compared to a net loss of $2.9 million or
$.47 per share for the year ended December 31, 1996. A number of developments
adversely affected the financial performance of the Company in 1997.
In early 1997, the Company entered into firm commitments for the
purchase of inventory and increased its product inventories to meet projected
1997 needs based on historical growth trends and to avoid the repetition of
order fulfillment problems experienced in prior years. In addition, the Company
increased its sales and marketing expenses by almost $10 million to support the
Gargoyles and Hobie brands and the brands acquired through the Company's
acquisition of Sungold and Private Eyes. General and administrative expenses
increased $4.6 million in 1997 to support the acquired businesses and
anticipated internal growth.
The Company determined that its level of post-acquisition expenditure
and infrastructure commitment exceeded that required to support the Company's
ongoing sales and operational efforts and took steps to consolidate a majority
of its operations to a new facility in Lynnwood, Washington, and evaluated
certain other assets. As a result of these efforts, in the fourth quarter of
1997 the Company recognized expenses related to write-offs of obsolete
production-related assets of $720,000, employee severance payments and benefits
of $350,000, estimated lease obligations and other costs associated with the
relocation of its Kent, Washington and Norwell, Massachusetts facilities of
$704,000, and a write-off of $220,000 in leasehold improvements associated with
the relocated facilities. In addition, the Company recognized an expense of
$729,000 related to the write-off of certain trade credits and recognized a
$611,000 reserve against notes receivable from the Company's former CEO.
During the year, the Company also increased its aggregate inventory and
sales return reserves from $797,873 at December 31, 1996 to $3,957,300 at
December 1997 to reflect the acquisitions of Sungold and Private Eyes and
business conditions experienced during the year.
At December 31, 1997, borrowings under the Company's credit facility with
its primary lender totaled $29.2 million and no additional borrowings were
available. At the Company's request, the facility was restructured in January
1998 to revise financial covenants and to reschedule payments. Under the
revised credit facility, the Company is required to make a principal payment of
$5.5 million on September 30, 1998 and another principal payment of $2.75
million on December 31, 1998.
On March 31, 1998, the Company reached an agreement in principle with its
lender to further amend the credit facility to waive noncompliance with certain
covenants, to reschedule principal payments until January 1999, and to further
revise financial covenants, the specific terms of which covenants are currently
under negotiation. The agreement retains a covenant requiring the Company
to deliver its financial statements together with an opinion of its independent
auditors, free of material qualifications, to the lender by April 30, 1998. The
Company has deferred filing its financial statements with the Securities and
Exchange Commission pending analysis of the effect of the revised credit
facility upon the financial statements, and completion of the audit.
Management believes that the Gargoyles brand, together with the new brands
acquired through acquisitions and licensing arrangements, offer significant
opportunities for sales growth if properly managed. The Company has been
working to solidify its relationships with its suppliers, and arrangements have
been made to schedule payments of obligations to certain suppliers. The
Company's restructured management intends to take a number of steps to address
the causes and results of the Company's 1997 financial performance. In addition
to working with the Company's lender and key suppliers, management is seeking to
reduce expenses to levels that can be sustained by operations.
The Company is exploring various options designed to maximize shareholder
value, including the possible sale of equity or convertible debt securities to
fund working capital and, in part, to finance the January loan payments.
Failure of operations or the Company's expense reduction efforts to meet the
Company's expectations, unanticipated expenses, third-party claims or adverse
developments in pending litigation could result in additional cash
requirements that could be difficult or impossible to satisfy.
Gargoyles, Inc., a manufacturer of sunglass and eyewear products
headquartered in Lynnwood, Washington, is the third largest sunglass
manufacturer in the United States. The Company also has operations in New York
State and offices in San Francisco and London.
This press release contains forward-looking statements concerning the
Company's expectations with respect to future operations and its cash
requirements and its ability to fulfill them. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, but are not
limited to, factors described in this press release and those involving
business cycles and developments involving consumer products in general and the
sunglass industry in particular, the need for continued cooperation of the
Company's vendors and its bank, the Company's ability to obtain financing in a
timely manner and on acceptable terms, the Company's abilities to reduce
expenses as anticipated, and other factors, including those described in the
Company's filings with the Securities and Exchange Commission. 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.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
Not applicable.
(b) Pro Forma Financial Information.
Not applicable.
(c) Exhibits.
99.1 Press Release or Registrant dated April 3, 1998
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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.
Date: April 3, 1998
By: /s/ LEO ROSENBERGER
------------------------------
Leo Rosenberger
Chief Executive Officer, Chief
Financial Officer
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Exhibit Index
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<TABLE>
<CAPTION>
Exhibit
Number
- -------
<S> <C>
99.1 Press Release of Registrant dated April 3, 1998
</TABLE>
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GARGOYLES REPORTS 1997 YEAR END FINANCIAL RESULTS
LYNNWOOD, WASHINGTON: APRIL 3, 1998 -- Gargoyles, Inc. (Nasdaq:GOYL) today
reported sales and operating results for the year ended December 31, 1997.
The Company's net sales increased to $41.0 million for the year ended
December 31, 1997 from $33.1 million for the year ended December 31, 1996. The
increase was primarily the result of (i) increased sales of Gargoyles and Hobie
brand products through retail channels other than Sunglass Hut, (ii) sales from
the Company's subsidiaries, Sungold Eyewear, Inc. and Private Eyes Sunglass
Corporation, which were acquired in second quarter 1997, (iii) and sales of
Timberland Eyewear products, introduced in March, 1997. Sales from these new
brands totaled $18.5 million. Sales increases were partially offset by an
unprecedented level of merchandise returns from key customers, including
Sunglass Hut, and from certain distributors. As a result, the Company processed
approximately $10.7 million in sales returns in 1997.
The Company reported a net loss of $14.4 million or $1.94 per share for
the year ended December 31, 1997, compared to a net loss of $2.9 million or
$.47 per share for the year ended December 31, 1996. A number of developments
adversely affected the financial performance of the Company in 1997.
In early 1997, the Company entered into firm commitments for the
purchase of inventory and increased its product inventories to meet projected
1997 needs based on historical growth trends and to avoid the repetition of
order fulfillment problems experienced in prior years. In addition, the Company
increased its sales and marketing expenses by almost $10 million to support the
Gargoyles and Hobie brands and the brands acquired through the Company's
acquisition of Sungold and Private Eyes. General and administrative expenses
increased $4.6 million in 1997 to support the acquired businesses and
anticipated internal growth.
The Company determined that its level of post-acquisition expenditure
and infrastructure commitment exceeded that required to support the Company's
ongoing sales and operational efforts and took steps to consolidate a majority
of its operations to a new facility in Lynnwood, Washington, and evaluated
certain other assets. As a result of these efforts, in the fourth quarter of
1997 the Company recognized expenses related to write-offs of obsolete
production-related assets of $720,000, employee severance payments and benefits
of $350,000, estimated lease obligations and other costs associated with the
relocation of its Kent, Washington and Norwell, Massachusetts facilities of
$704,000, and a write-off of $220,000 in leasehold improvements associated with
the relocated facilities. In
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addition, the Company recognized an expense of $729,000 related to the
write-off of certain trade credits and recognized a $611,000 reserve against
notes receivable from the Company's former CEO.
During the year, the Company also increased its aggregate inventory and
sales return reserves from $797,873 at December 31, 1996 to $3,957,300 at
December 1997 to reflect the acquisitions of Sungold and Private Eyes and
business conditions experienced during the year.
At December 31, 1997, borrowings under the Company's credit facility with
its primary lender totaled $29.2 million and no additional borrowings were
available. At the Company's request, the facility was restructured in January
1998 to revise financial covenants and to reschedule payments. Under the
revised credit facility, the Company is required to make a principal payment of
$5.5 million on September 30, 1998 and another principal payment of $2.75
million on December 31, 1998.
On March 31, 1998, the Company reached an agreement in principle with its
lender to further amend the credit facility to waive noncompliance with certain
covenants, to reschedule principal payments until January 1999, and to further
revise financial covenants, the specific terms of which covenants are currently
under negotiation. The agreement retains a covenant requiring the Company
to deliver its financial statements together with an opinion of its independent
auditors, free of material qualifications, to the lender by April 30, 1998. The
Company has deferred filing its financial statements with the Securities and
Exchange Commission pending analysis of the effect of the revised credit
facility upon the financial statements, and completion of the audit.
Management believes that the Gargoyles brand, together with the new brands
acquired through acquisitions and licensing arrangements, offer significant
opportunities for sales growth if properly managed. The Company has been
working to solidify its relationships with its suppliers, and arrangements have
been made to schedule payments of obligations to certain suppliers. The
Company's restructured management intends to take a number of steps to address
the causes and results of the Company's 1997 financial performance. In addition
to working with the Company's lender and key suppliers, management is seeking to
reduce expenses to levels that can be sustained by operations.
The Company is exploring various options designed to maximize shareholder
value, including the possible sale of equity or convertible debt securities to
fund working capital and, in part, to finance the January loan payments.
Failure of operations or the Company's expense reduction efforts to meet the
Company's
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<PAGE> 3
expectations, unanticipated expenses, third-party claims or adverse developments
in pending litigation could result in additional cash requirements that could
be difficult or impossible to satisfy.
Gargoyles, Inc., a manufacturer of sunglass and eyewear products
headquartered in Lynnwood, Washington, is the third largest sunglass
manufacturer in the United States. The Company also has operations in New York
State and offices in San Francisco and London.
This press release contains forward-looking statements concerning the
Company's expectations with respect to future operations and its cash
requirements and its ability to fulfill them. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, but are not
limited to, factors described in this press release and those involving
business cycles and developments involving consumer products in general and the
sunglass industry in particular, the need for continued cooperation of the
Company's vendors and its bank, the Company's ability to obtain financing in a
timely manner and on acceptable terms, the Company's abilities to reduce
expenses as anticipated, and other factors, including those described in the
Company's filings with the Securities and Exchange Commission. 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.
CONTACT GARGOYLES, INC.: LEO ROSENBERGER, CEO AND CFO, 425-921-3600 EXT. 3405
OR CYNTHIA POPE, VP AND GENERAL COUNSEL, 425-921-3600 EST. 3404.
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