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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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.
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(Exact name of registrant as specified in its charter)
Washington 91-1247269
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(State of Incorporation) (I.R.S. Employer Identification Number)
5866 SOUTH 194TH STREET
KENT, WASHINGTON 98032
(253) 796-2752
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(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, 1999, there were 7,822,191 outstanding shares of the
registrant's common stock, no par value, which is the only class of common stock
of the registrant, and 10,000,000 outstanding shares of the registrant's Series
A preferred stock, which is the only series of preferred stock of the
registrant. Each share of preferred stock is convertible into 3.1600342 shares
of common stock, and each share of preferred stock is entitled to 3.1600342
votes.
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GARGOYLES, INC.
INDEX TO FORM 10-Q
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<CAPTION>
PAGE(S)
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PART 1 - FINANCIAL INFORMATION
<S> <C> <C>
Item 1: Financial Statements (Unaudited)
Consolidated Balance Sheets ................................ 1
Consolidated Statements of Operations ...................... 2
Consolidated Statements of Cash Flows ...................... 3
Notes to Consolidated Financial Statements ................. 4
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 7
Item 3: Quantitative and Qualitative Disclosure about
Market Risk ................................................ *
PART II - OTHER INFORMATION
Item 1: Legal Proceedings .......................................... 10
Item 2: Changes in Securities and Use of Proceeds .................. 11
Item 3: Defaults upon Senior Securities ............................ *
Item 4: Submission of Matters to a Vote of Security Holders ........ *
Item 5: Other Information .......................................... 11
Item 6: Exhibits and Reports on Form 8-K ........................... 11
* Omitted as not applicable
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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<TABLE>
GARGOYLES, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 162,829 $ 194,314
Trade receivables, net 3,578,458 2,251,226
Inventories, net 6,824,418 8,558,276
Other current assets and prepaid expenses 1,524,060 2,031,261
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Total current assets 12,089,765 13,035,077
Property and equipment, net 1,131,963 1,510,333
Intangibles, net 13,196,300 13,004,935
Other assets 275,120 457,599
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Total assets $ 26,693,148 $ 28,007,944
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,259,042 $ 5,923,196
Accrued expenses and other current liabilities 3,642,236 7,130,212
Current portion of long-term debt 4,972,083 28,526,379
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Total current liabilities 10,873,361 41,579,787
Long-term debt, net of current portion 18,725,000 --
Deferred license income and other 733,321 600,000
Shareholders' equity:
Preferred stock, no par value, authorized shares--
10,000,000, issued and outstanding -
10,000,000 and none, respectively
Liquidation value $1.00 per share -- 9,700,000 --
Common stock, no par value, authorized shares --
40,000,000, issued and outstanding --
7,822,191 and 7,822,191, respectively 26,529,282 26,529,282
Accumulated deficit (39,867,816) (40,735,481)
Cumulative translation adjustment -- 34,356
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Total shareholders' equity (3,638,534) (14,171,843)
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Total liabilities and shareholders' equity $ 26,693,148 $ 28,007,944
============ ============
See accompanying notes to the Consolidated Financial Statements
</TABLE>
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<TABLE>
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------- ------------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Net sales $ 6,631,018 $ 9,062,934 $ 26,042,513 $ 33,717,195
Cost of sales 2,526,257 3,702,757 10,572,058 14,315,760
------------- -------------- ------------- --------------
Gross profit 4,104,761 5,360,177 15,470,455 19,401,435
License income 52,360 98,452 383,628 289,155
------------- -------------- ------------- --------------
4,157,121 5,458,629 15,854,083 19,690,590
------------- -------------- ------------- --------------
Operating expenses:
Sales and marketing 2,492,663 3,082,154 7,377,545 12,275,057
General and administrative 1,363,220 1,614,982 4,132,763 5,245,497
Shipping and warehousing 448,015 443,199 1,527,276 1,750,509
Provision for Doubtful Accounts (37,001) 817,273 176,287 997,545
------------- -------------- ------------- --------------
Total operating expenses 4,266,897 5,957,608 13,213,871 20,268,608
------------- -------------- ------------- --------------
Income (loss) from operations (109,776) (498,979) 2,640,212 (578,018)
Interest income (expense) (553,055) (883,935) (2,068,218) (2,572,277)
Other income (expense) 488,094 (10,660,271) 578,991 (10,647,010)
------------- -------------- ------------- --------------
Income (loss) before income taxes (174,737) (12,043,185) 1,150,985 (13,797,305)
Income tax provision (benefit) -- -- -- --
------------- -------------- ------------- --------------
Net income (loss) $ (174,737) $ (12,043,185) $ 1,150,985 $ (13,797,305)
============= ============== ============ ==============
Basic net income (loss) per share $ (0.05) $ (1.54) $ .11 $ (1.77)
============= ============== ============ ==============
Diluted net income (loss) per share $ (0.05) $ (1.54) $ .05 $ (1.77)
============= ============== ============ ==============
See accompanying notes to the Consolidated Financial Statements
</TABLE>
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<TABLE>
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,150,985 $ (13,797,305)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 491,187 600,259
Amortization 586,630 1,061,735
Deferred license income (150,000) --
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 (1,274,432) 1,534,926
Inventories 1,565,641 2,896,867
Other current assets and other assets 237,204 (662,206)
Accounts payable, accrued expenses and other
current liabilities (6,742,730) (1,457,446)
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Net cash provided by (used in) operating activities (4,135,515) 42,106
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INVESTING ACTIVITIES
Acquisition of property and equipment (119,994) (100,461)
Increase in intangibles (616,146) --
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Net cash used in investing activities (736,140) (100,461)
FINANCING ACTIVITIES
PrincipaL payments of long term debt (50,000) --
Net proceeds(repayment)from revolving line of credit 5,220,704 (316,459)
Preferred stock issuance costs (296,178) --
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Net cash provided by (used in) financing activities 4,874,526 (316,459)
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Effect of foreign currency translation on cash (34,356) 71,273
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Net decrease in cash (31,485) (303,541)
Cash and cash equivalents, beginning of period 194,314 892,176
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Cash and cash equivalents, end of period $ 162,829 $ 588,635
============ ============
Supplemental disclosure of non-cash investing and
financing activities:
Preferred stock issued in exchange for a decrease in debt $10,000,000 --
Common stock issued for other than cash -- $ 862,500
See accompanying notes to the Consolidated Financial Statements
</TABLE>
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GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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, 1999 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 30,1999 are not
necessarily indicative of the results that may be expected for the entire year.
2. INVENTORIES
Inventories consist of the following:
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<CAPTION>
September 30, December 31,
1999 1998
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Materials ................................... $ 3,326,303 $ 4,204,151
Finished goods .............................. 4,175,875 4,934,896
Reserves for excess, slow-moving and
obsolete inventories .................. (677,760) (580,771)
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Inventories, net ................. $ 6,824,418 $ 8,558,276
============ ============
</TABLE>
3. 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 and the three month
period ended September 30, 1999, since a future benefit is not assured. The
Company utilized its net operating losses to eliminate any provision for income
taxes for the nine months ended September 30, 1999.
4. REFINANCING
On June 1, 1999 Gargoyles completed a transaction with its lender, U.S.
Bank National Association, for the restructure of its credit facility with the
bank and a recapitalization of the company. As a result of the refinancing, the
Company's indebtedness to U.S. Bank was decreased by $10 million, and the
balance of the loans were restructured into $19.5 million of term loans with
maturity dates of June 1, 2005, and a commitment for a $9 million revolving
loan. No principal payments are due under $3 million of the term loans until
their maturity date; principal payments under $7.5 million of the term loans are
based on a percentage of excess cash as defined in the credit agreement; and
annual principal payments under the remaining $9.5 million term loan are
scheduled as follows:
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<S> <C> <C>
1999 $ 100,000
2000 900,000
2001 1,500,000
2002 2,000,000
2003 2,000,000
2004 2,000,000
2005 2,000,000
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$ 9,500,000
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</TABLE>
Substantially all the assets of the Company are pledged as collateral for
the repayment of borrowings under the credit agreement. The credit agreement
also prohibits the Company from paying dividends to its common shareholders.
In exchange for $10 million of debt, the Company issued 10 million shares
of Gargoyles, Inc. Series A Preferred Stock to U.S. Bank. The bank's series A
Preferred Stock is immediately convertible into 31,600,342 shares of Gargoyles,
Inc. Common Stock, or 79% of the authorized capital of the Company on a fully-
diluted basis. U.S. Bank's affiliate, U.S. Bankcorp, currently owns 400,000
shares of Gargoyles, Inc. common stock, or 1% of the authorized capital of the
Company, giving U.S. Bank and its affiliate beneficial ownership, in the
aggregate, of 80% of the authorized capital of Gargoyles on a fully-diluted
basis. The Series A Preferred Stock annually accrues a cumulative dividend
equal to the U.S. Bank reference rate plus 75 basis points.
After the refinancing and as of September 30, 1999 the Company had unused
sources of liquidity of $3.4 million, consisting of cash and cash equivalents of
$163,000 and borrowings available under its revolving loan of $3.2 million.
5. EARNINGS PER SHARE
The calculation of earnings per share is based on net income less dividend
requirements divided by weighted average common shares. The weighted-average
number of common shares used in the calculation of basic earnings per share for
the three and nine month periods ended September 30, 1999 and 1998 is 7,822,191
and 7,837,191, and 7,822,191 and 7,816,450, respectively. The calculation of
diluted income per common share assumes the dilutive issuance of convertible
Series A Preferred Stock resulting in an increase in weighted average common
shares and an adjustment in income available for common shareholders due to
reduced dividend requirements. For purposes of calculating diluted earnings per
share, stock options have not been included as their effect would be
antidilutive. The weighted-average number of common shares used in the
calculation of diluted earnings per share for the three and nine month periods
ended September 30, 1999 and 1998 is 7,822,191 and 7,837,191, and 21,866,787 and
7,837,191 respectively.
6. RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.
7. OTHER INCOME (EXPENSE)
Other income (expense) for the three and nine months ended September 30,
1999 primarily included income associated with the settlement of various
previously estimated trade liabilities and contingencies in the amount of
$688,000, net of employee severance payments and benefits of $177,000.
8. LITIGATION
On November 18, December 4 and December 9, 1998, following a periodic state
tax audit, the Washington State Department of Revenue assessed the Company, in
the aggregate, $475,830 plus interest in business and occupation taxes and use
taxes allegedly due and payable related to the Company's operations during
various periods between January 1, 1993 and June 30, 1997. At issue in this
matter is the Company's status as a "manufacturer" or "wholesaler" as such terms
are defined by the state of Washington's business and occupation and use tax
statutes and the percentage of business the Company does in the state of
Washington. The Company has retained counsel in this matter and intends to
appeal and to vigorously defend the Department's assessment.
On May 11, 1998, Morris Rosenbloom & Co., Inc. filed an action against the
Company in the Supreme Court of the State of New York for Wayne County, under
Index No. 44010. In the lawsuit, plaintiff alleges breach of contract due to
the Company's failure to accept a return of sunglasses under the terms of a
Repurchase Agreement between Morris Rosenbloom and the Company. Plaintiff
claims damages from the Company in excess of $500,000. The Company has retained
counsel to represent it in this matter and intends to defend vigorously the
plaintiff's claims.
The Company believes that the ultimate resolution of these matters will not
have a material adverse effect on its results of operations or financial
position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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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
factors discussed in the Company's Annual Report, as amended, on Form 10-K/A,
Amendment No. 2, 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, Tomichi Studio, and Private Eyes.
The Company operates both directly and through three wholly-owned
subsidiaries: H.S.C., Inc., a Washington corporation, Sungold Eyewear, Inc., a
Washington corporation, and Private Eyes Sunglass Corporation, also a Washington
corporation.
RESULTS OF OPERATIONS
The following table sets forth results of operations, as a percentage of
net sales, for the periods indicated:
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<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C> <C>
Net sales ........................ 100.0% 100.0% 100.0% 100.0%
Cost of sales .................... 38.1 40.9 40.6 42.5
Gross profit ..................... 61.9 59.1 59.4 57.5
License income ................... 0.8 1.1 1.5 0.9
Operating expenses:
Sales and marketing ............ 37.6 34.0 28.3 36.4
General and administrative...... 20.6 17.8 15.9 15.6
Shipping and warehousing ....... 6.8 4.9 5.9 5.2
Provision for Doubtful Accounts. (0.6) 9.0 0.7 3.0
Total operating expenses ......... 64.3 65.7 50.7 60.1
Income (loss) from operations..... (1.7) (5.5) 10.1 (1.7)
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
NET SALES. Net sales decreased from $9.1 million for the quarter ended
September 30, 1998 to $6.6 million for the quarter ended September 30, 1999.
This decrease of $2.4 million was primarily due to the disposition of various
unprofitable businesses during 1998, which included the sale of the Company's
Timberland Eyewear division, the termination of the Ellen Tracy Licenses
Agreement and the closing of the Company's London office.
GROSS PROFIT. Gross profit decreased from $5.4 million for the quarter
ended September 30, 1998 to $4.1 million for the quarter ended September 30,
1999. The decrease in gross profit in 1999 as compared to 1998 was due primarily
to reduced sales. As a percentage of net sales, gross profit increased to 61.9%
in the 1999 quarter from 59.1% in the 1998 quarter primarily due to reduced
sales of excess inventory in the 1999 quarter.
LICENSE INCOME. License income decreased to $52,000 for the quarter ended
September 30, 1999 compared to $98,000 for the quarter ended September 30, 1998.
License income in 1999 was the result of sales of product by a licensee, and
amortization of license income over a 3-year period.
OPERATING EXPENSES. Operating expenses decreased to $4.3 million for the
quarter ended September 30, 1999 from $6 million for the quarter ended September
30, 1998. As a percentage of net sales, operating expenses decreased to 64.3% in
the 1999 quarter from 65.7% in the 1998 quarter. Sales and marketing expenses
decreased $589,000 in the 1999 quarter, as a result of cost cutting efforts and
reduced sales levels. As a percentage of net sales, sales and marketing expenses
increased to 37.6% in the 1999 quarter from 34% in the 1998 quarter. General and
administrative expenses decreased $252,000 in the 1999 quarter. As a percentage
of net sales, general and administrative expenses increased to 20.6% in the 1999
quarter from 17.8% in the 1998 quarter. Shipping and warehousing expenses
remained virtually unchanged in the 1999 quarter. As a percentage of net sales,
shipping and warehousing expenses increased to 6.8% in the 1999 quarter from
4.9% in the 1998 quarter. Provision for doubtful accounts decreased to $(37,000)
for the three month period ended September 30, 1999 from $817,000 for the three
month period ended September 30, 1998. This decrease was the result of a
$750,000 provision in the 1998 quarter for the probable write-off of receivable
balances that were no longer deemed collectible as a result of the Company's
review and reconciliation of various over-aged accounts; compared to an
adjustment to reduce the provision by $37,001 in the 1999 quarter. The decrease
in total operating expenses of $1.7 million is primarily the result of the
disposition of various unprofitable businesses and the Company's cost cutting
measures.
INCOME (LOSS) FROM OPERATIONS. The Company realized a loss from operations
of $110,000 for the quarter ended September 30, 1999 compared to a loss from
operations of $499,000 for the quarter ended September 30, 1998
INTEREST INCOME (EXPENSE). Interest expense was $553,000 for the quarter
ended September 30, 1999 compared with interest expense of $884,000 for the
quarter ended September 30, 1998. The Company's outstanding borrowings were
$23.7 million at September 30, 1999 compared to $28.8 million at September 30,
1998.
OTHER INCOME (EXPENSE). The Company recognized (net) other income of
$488,000 for the quarter ended September 30, 1999 primarily due to settlements
of various previously estimated trade liabilities and contingencies, net of
employee severance payments and benefits. In the same period of 1998, the
Company recognized net expenses of $10.6 million, primarily the result of the
disposition of various unprofitable businesses during 1998, which included the
sale of the Company's Timberland Eyewear division, the termination of the Ellen
Tracy Licenses Agreement and the closing of the Company's London office.
INCOME TAX PROVISION (BENEFIT). The Company's income tax benefit was zero
for the quarters ended September 30, 1999 and September 30, 1998. In 1999 and
in 1998 an income benefit was not recorded since a future benefit was not
assured.
NET INCOME (LOSS). As a result of the items discussed above, the Company's
net loss was $175,000 or ($.05) per common share for the quarter ended September
30, 1999 compared to a net loss of $12 million or ($1.54) per common share for
the quarter ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
NET SALES. Net sales decreased to $26 million for the nine months ended
September 30, 1999 from $33.7 million for the nine months ended September 30,
1998. This decrease was primarily due to the disposition of various unprofitable
businesses during 1998, which included the sale of the Company's Timberland
Eyewear division, the termination of the Ellen Tracy Licenses Agreement and the
closing of the Company's London office, and to the Company's continuing focus on
profitable sales practices.
GROSS PROFIT. Gross profit decreased to $15.5 million for the nine months
ended September 30, 1999 from $19.4 million for the nine months ended September
30, 1998. The decrease in gross profit in 1999 as compared to 1998 was due
primarily to reduced sales. As a percentage of net sales, gross profit
increased to 59.4% in the 1999 period from 57.5% in the 1998 period primarily
due to reduced sales of excess inventory in the 1999 period.
LICENSE INCOME. License income increased to $384,000 for the nine months
ended September 30, 1999 compared to $289,000 for the nine months ended
September 30, 1998. License income in 1999 was the result of sales of product
by a licensee, and amortization of license income over a 3-year period.
OPERATING EXPENSES. Operating expenses decreased to $13.2 million for the
nine months ended September 30, 1999 from $20.2 million for the nine months
ended September 30, 1998. As a percentage of net sales, operating expenses
decreased to 50.7% in 1999 from 60.1% in 1998. Sales and marketing expenses
decreased $4.9 million in 1999 as compared to the same period in 1998. As a
percentage of net sales, sales and marketing expenses decreased to 28.3% in the
1999 period from 36.4% in the comparable 1998 period. General and administrative
expenses decreased $1.1 million for the nine months ended September 30, 1999. As
a percentage of net sales, general and administrative expenses increased to
15.9% in 1999 from 15.6% in 1998. Shipping and warehousing expenses decreased
$223,000 in 1999 as compared to the nine months ended September 30, 1998. As a
percentage of net sales, shipping and warehousing expenses increased to 5.9% in
1999 from 5.2% in 1998. Provision for doubtful accounts decreased to $176,000
for the nine month period ended September 30, 1999 from $998,000 for the nine
month period ended September 30, 1998. As a percentage of net sales, provision
for doubtful accounts decreased to 0.7% in the 1999 period from 3% in the
comparable 1998 period.
INCOME (LOSS) FROM OPERATIONS. The Company generated income from operations
of $2.6 million for the nine months ended September 30, 1999 compared to a loss
from operations of $578,000 for the nine months ended September 30, 1998. As a
percentage of net sales, income from operations increased to 10.1% for the nine
months ended September 30, 1999 compared to (1.7%) for the nine months ended
September 30, 1998.
INTEREST INCOME (EXPENSE). Interest expense was $2 million for the nine
months ended September 30, 1999 compared with interest expense of $2.6 million
for the nine months ended September 30, 1998.
INCOME TAX PROVISION (BENEFIT). The Company's income tax benefit was zero
for the nine months ended September 30, 1999 and September 30, 1998. In 1999
the Company utilized its net operating losses to eliminate any provision for
income taxes and in 1998 an income tax benefit was not recorded since a future
benefit was not assured.
NET INCOME (LOSS). As a result of the items discussed above, the Company's
net income was $1.2 million or $.05 per diluted common share for the nine months
ended September 30, 1999 compared to a net loss of $13.8 million or ($1.77) per
common share for the nine months ended September 30, 1998.
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 used in the Company's operating activities totaled $4.1
million for the nine months ended September 30, 1999 compared to cash provided
of $42,000 in the quarter ended September 30, 1998. The Company's cash used in
operating activities increased in the first nine months of 1999 by $4.2 million
compared to the same period in 1998 due primarily to (i) an increase in the
seasonal buildup of accounts receivable by $1.3 million, (ii) a decrease in net
inventories by $1.6 million in the first nine months of 1999 compared to a $2.9
million decrease in inventories in the same period of 1998 and (iii) net
payments to vendors on accounts payable and other payments in 1999 of $6.7
million compared to $1.5 million in the comparable 1998 period. Cash used in
the Company's investing activities, to fund acquisitions of property and
equipment, totaled $120,000 and $100,000 for the nine months ended September 30,
1999 and 1998, respectively. Cash used in the Company's investing activities to
increase intangibles in 1999 totaled $616,000, which was due to the early final
payment of royalties pursuant to the Sungold acquisition. Cash provided by the
Company's financing activities, primarily proceeds from bank debt, totaled $4.9
million for the nine months ended September 30, 1999 compared to cash used to
repay bank debt of $316,000 in the same period of 1998. As of September 30,
1999, the Company had unused sources of liquidity of $3.4 million, consisting of
cash and cash equivalents of $163,000 and borrowings available under its
revolving loan of $3.2 million.
On June 1, 1999 Gargoyles completed a transaction with its lender, U.S.
Bank National Association, for the restructure of its credit facility with the
bank and a recapitalization of the company. As a result of the refinancing, the
Company's indebtedness to U.S. Bank was decreased by $10 million, and the
balance of the loans were restructured into $19.5 million of term loans with
maturity dates of June 1, 2005, and a commitment for a $9 million revolving
loan. No principal payments are due under $3 million of the term loans until
their maturity date; principal payments under $7.5 million of the term loans are
based on a percentage of excess cash as defined in the credit agreement; and
annual principal payments under the remaining $9.5 million term loan are
$100,000, $900,000 and $1.5 million in years one, two and three of the loan and
are $2 million per year for the balance of the loan term. Substantially all the
assets of the Company are pledged as collateral for the repayment of borrowings
under the credit agreement. The credit agreement also prohibits the Company
from paying dividends to its common shareholders.
In exchange for $10 million of debt, the Company issued 10 million shares
of Gargoyles, Inc. Series A Preferred Stock to U.S. Bank. The bank's series A
Preferred Stock is immediately convertible into 31,600,342 shares of Gargoyles,
Inc Common Stock, or 79% of the authorized capital of the Company on a fully-
diluted basis. U.S. Bank's affiliate, U.S. Bankcorp, currently owns 400,000
shares of Gargoyles, Inc. common stock, or 1% of the authorized capital of the
Company, giving U.S. Bank and its affiliate beneficial ownership, in the
aggregate, of 80% of the authorized capital of Gargoyles on a fully-diluted
basis. The Series A Preferred Stock annually accrues a cumulative dividend
equal to the U.S. Bank reference rate plus 75 basis points
SEASONALITY
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.
THE YEAR 2000
As the Year 2000 approaches, there are uncertainties concerning whether
computer systems and electronic equipment with date functions will properly
recognize date-sensitive information when the year changes to 2000. Systems
that do not properly recognize such information could generate erroneous data or
fail. Due to the Company's reliance on its management information systems,
failure of these systems for any reasons, including Year 2000 noncompliance,
could affect the Company's operations. Management believes, however, the Year
2000 does not pose a significant operational problem for the Company.
The Company has established a Year 2000 contingency plan, which is being
addressed by a team of internal staff and outside consultants. The team's
activities are designed to ensure that there is no adverse effect on the
Company's core business operations and that transactions with customers,
suppliers, and financial institutions are fully supported. The Company has
completed its assessment of its systems in all facilities.
The Company has initiated and has substantially completed discussions with
its key vendors and customers to assess whether those parties have appropriate
plans to remediate Year 2000 issues where their systems interface with the
Company's systems or otherwise impact its operations. Management believes that
the Company bears little exposure to risk of Year 2000 non-compliance by third
parties.
The Company determined that it needed to modify or replace certain portions
of its computer hardware and software and of its telephone and voice-mail
hardware and software so that its computer, telephone and communications systems
will function properly with respect to dates in the year 2000 and beyond. The
Company has completed the upgrade of its enterprise-wide information system,
time-clocks, electronic mail, voice mail and telephone systems, at a cost of
less that $60,000. Work continues on upgrades of its personal computer software
systems and upgrades to its electronic data entry systems. The Company
estimates the total cost of its system upgrades required for Year 2000
compliance will not exceed $100,000.
In view of the subtlety of the problem and the unfamiliarity with the scope
of the problems by many in the business community, there can be no assurance
that the Company, or its critical vendors or customers, will not encounter some
form of computer or service failures at or after midnight on December 31, 1999
which could result in disruption of the Company's business, perhaps materially
so, to the Company's detriment.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ---------------------------
There have been no material changes in legal proceedings reported in the
Company's 1998 Annual Report, as amended by Form 10-K/A, Amendment No. 2, filed
with the Securities and Exchange Commission on April 20, 1999.
ITEM 2. CHANGES IN SECURITIES
- -------------------------------
On June 1, 1999, Gargoyles completed a transaction with its lender, U.S.
Bank National Association, for the restructure of its credit facility with the
bank and a recapitalization of the Company. In exchange for $10 million of
debt, the Company issued 10 million shares of Gargoyles, Inc. Series A Preferred
Stock to U.S. Bank. The bank's Series A Preferred Stock is immediately
convertible into 31,600,342 shares of Gargoyles, Inc. Common Stock, or 79% of
the authorized capital of the Company on a fully-diluted basis. U.S. Bank's
affiliate, U.S. Bankcorp, currently owns 400,000 shares of Gargoyles, Inc.
common stock, or 1% of the authorized capital of the Company, giving U.S. Bank
and its affiliate beneficial ownership, in the aggregate, of 80% of the
authorized capital of Gargoyles on a fully-diluted basis. The Series A
Preferred Stock annually accrues a cumulative dividend equal to the U.S. Bank
reference rate plus 75 basis points. The Series A Preferred Stock was issued by
Gargoyles to U.S. Bank in a transaction not involving a public offering under
Section 4(2) of the Securities Act of 1933.
ITEM 5. OTHER INFORMATION
- ---------------------------
On November 3, 1999, Gargoyles, Inc. entered into a License Agreement with
Wrangler Apparel Corp. to design, develop, manufacture and distribute eyewear
and eyewear accessories using the "Wrangler" name in the United States, Puerto
Rico, Canada, and Mexico. The license is effective January 1, 2000 and is for a
term of three years with an option to renew for an additional three-year period,
assuming certain conditions are met and certain agreements between the parties
can be reached. The license agreement gives Gargoyles the right to distribute
Wrangler eyewear products into various distribution channels, including western
specialty stores, farm and fleet stores, sunglass specialty stores, military
outlets, optical distributors, and optical retailers, except the optical
departments of mass-market retailers.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) EXHIBITS
Exhibit 10.1* License Agreement by and between Wrangler Apparel Corp. and
Gargoyles, Inc. dated as of November 3, 1999.
Exhibit 11.1 Statement regarding computation of Per Share Earnings
Exhibit 27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
- -------------------------------------
* Confidential Treatment Requested
<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 12, 1999 /s/ Leo Rosenberger
--------------------------------
Leo Rosenberger
Chief Executive Officer, Chief
Financial Officer and Treasurer
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------------ -------------------
Exhibit 10.1* License Agreement by and between Wrangler Apparel Corp. and
Gargoyles, Inc. dated as of November 3, 1999.
Exhibit 11.1 Statement regarding computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
- -------------------------------------
* Confidential Treatment Requested
<PAGE>
LICENSE AGREEMENT
WRANGLER APPAREL CORP.
LICENSOR
AND
GARGOYLES, INC.
LICENSEE
Distribution and Sale in: The United States of America, its territories
and possessions, including Puerto Rico, and Canada and Mexico
Manufacture in: People's Republic of China; Taiwan and Korea
WRANGLER
WRANGLER RUGGED WEAR
<PAGE>
INDEX
-----
ARTICLE 1 - Definitions
ARTICLE 2 - Trademark License
ARTICLE 3 - Trademark Ownership and License Recordation
ARTICLE 4 - Infringement by Third Parties
ARTICLE 5 - Royalty Fee, Minimum Net Sales and Advertising Expenditure
ARTICLE 6 - Accounting and Reporting
ARTICLE 7 - Quality Control
ARTICLE 8 - Product Approvals and Related Issues
ARTICLE 9 - Aid and Assistance; Noncompetition by Licensor
ARTICLE 10 - Termination
ARTICLE 11 - Products on Hand at Termination and Payments
ARTICLE 12 - Records after Termination
ARTICLE 13 - Relinquishment of Licensed Matter
ARTICLE 14 - Fair Practices
ARTICLE 15 - No Joint Venture; Indemnification; Maintenance of Insurance
ARTICLE 16 - Binding Nature; Assignment
ARTICLE 17 - Notices
ARTICLE 18 - Compliance and Operation of Law
ARTICLE 19 - Consent to Jurisdiction; Waiver of Jury Trial
ARTICLE 20 - Arbitration
ARTICLE 21 - Licensor's Representative
ARTICLE 22 - Entire Agreement
ARTICLE 23 - Term
ARTICLE 24 - Governing Law
ARTICLE 25 - Confidentiality
ARTICLE 26 - Equitable Relief
ARTICLE 27 - Prohibition Against Use of Illegal Child Labor and Against
Prison or Forced Labor
Schedule I - Description of Licensed Products
Schedule II - Registered Trademarks
Schedule III - Letter to Third Party Manufacturer
Schedule IV - List of Manufacturers
Schedule V - Quality Standards
Schedule VI - Approved Distribution
Schedule VII - Financial Reporting Forms
<PAGE>
LICENSE AGREEMENT
-----------------
THIS LICENSE AGREEMENT is effective as of the 1st day of January, 2000
and made in the State of Delaware by and between:
WRANGLER APPAREL CORP., a corporation organized under the laws of the
State of Delaware, United States of America, with principal offices at 200
Weldin Building, Concord Plaza, 3411 Silverside Road, Wilmington, Delaware
19810 (hereinafter referred to as "Licensor");
and
GARGOYLES, INC., a corporation, organized under the laws of the State of
Washington, with principal offices at 5866 South 194th, Kent, Washington 98032
(hereinafter referred to as "Licensee");
W I T N E S S E T H :
WHEREAS, Licensor, through one or more related companies, is engaged in
the business of making, selling and distributing jeanswear and casual apparel
and in connection therewith uses or licenses for use in commerce the trademark
WRANGLER and other trademarks, all of which are used in the sale of such
articles in the United States of America and elsewhere throughout the world;
and
WHEREAS, Licensee is engaged in the business of making, having made,
selling and distributing eyewear and eyewear accessories; and
WHEREAS, Licensee desires to acquire from Licensor, and Licensor is
willing to grant to Licensee, a license to use the trademarks WRANGLER and
WRANGLER RUGGED WEAR in the manufacture, distribution, sale and promotion of
eyewear and eyewear accessories, subject to the terms and conditions of this
Agreement;
NOW, THEREFORE, in consideration of the mutual terms, agreements and
conditions herein contained, and for other good and valuable consideration, it
is agreed as follows:
ARTICLE 1 - Definitions
-----------------------
In this Agreement, the following terms are defined as:
1.1 "Advertising": any and all brochures, catalogs, point of purchase
and point-of-sale materials, consumer and trade media, sales promotion and
support materials and marketing support funds .
1.2 "Affiliate": any person or entity directly or indirectly
controlling, controlled by or under common control with another person or
entity.
1.3 "Licensed Products": eyewear and eyewear accessories, more
particularly described on Schedule I hereto, bearing the Licensed Trademarks.
Such items shall be expressly designed for or selected by Licensee, and
approved in writing by Licensor for manufacture by Licensee under this
Agreement, such approval to have been received by Licensee before commencement
of such manufacture, as specified in the provisions of Article 8 (herein
incorporated by reference).
1.4 "Licensed Territory": (a) for the purpose of manufacture, the
territory consisting of and limited to People's Republic of China, Taiwan and
Korea; (b) for the purpose of distribution and sale, the territory consisting
of the United States of America, its territories and possessions, including
Puerto Rico; Canada, and Mexico. Licensee may expand the territory solely for
the purpose of manufacturing Licensed Products only upon Licensor's prior
written consent, which shall not be unreasonably withheld or delayed. Should
Licensor wish to distribute or sell Licensed Products outside the Licensed
Territory for distribution and sale as defined herein, it will first notify
Licensee and permit Licensee an opportunity to present a proposal to expand
such Licensed Territory.
1.5 "Licensed Trademarks": Licensor's trademarks enumerated on
Schedule II attached hereto and all derivatives based thereon that are created
by Licensee.
1.6 "Licensor's Representative": Licensor's Affiliate, VF Jeanswear,
Inc.
1.7 "Termination" of License: extinguishing of this Agreement at any time
before its expiration at the end of its initial term.
ARTICLE 2 - Trademark License
-----------------------------
2.l Licensor is the owner of the trademarks enumerated on Schedule II.
Licensor hereby grants to Licensee, subject to the terms and conditions herein
contained, the exclusive and nonassignable right and license to use the
Licensed Trademarks within the Licensed Territory, upon Licensed Products
manufactured, sold and distributed by Licensee in accordance with this
Agreement.
2.2 Licensee agrees and undertakes that it will not sublicense the rights
herein granted and that it will not, without the prior written consent of
Licensor, authorize other persons, firms, corporations or other entities to use
any of the Licensed Trademarks (except as provided herein), or any trademarks
or trade names confusingly similar thereto.
2.3 All Licensed Products manufactured, sold or distributed by Licensee
shall bear one or more of the Licensed Trademarks in prominence as prescribed
by Licensor. No Licensed Trademark, including specifically the trademarks
WRANGLER and WRANGLER RUGGED WEAR, shall be used by Licensee or its third party
manufacturers except on and in connection with the Licensed Products. No
product bearing a Licensed Trademark shall bear any trademarks or trade names
other than Licensed Trademarks except with the prior written authorization of
Licensor. Licensee covenants on behalf of itself, its Affiliates and related
parties, and such third party manufacturers with which it may contract, that
during the term of this Agreement and thereafter it will refrain from using any
trademark or trade name confusingly similar to any of the Licensed Trademarks,
or confusingly similar to any other trademarks or trade names of Licensor,
except upon such terms and conditions as may be approved in advance, in
writing, by Licensor. Licensee shall promptly terminate its manufacturing
relationship with any third party manufacturer that uses any trademark or
trades names confusingly similar to any of the Licensed Trademarks or
confusingly similar to any other trademarks or trade names of Licensor.
2.4 Licensee shall submit, for prior written approval by Licensor,
specimens of all labels and advertising copy that Licensee intends to use in
identifying, selling or advertising Licensed Products bearing the Licensed
Trademarks. Licensor shall provide Licensee with written notice of approval or
disapproval within ten (10) business days from the date that Licensor receives
such a request for approval; if no notice of approval or disapproval is
provided by Licensor to Licensee, then the request will be deemed to have been
disapproved.
2.5 Nothing herein shall entitle Licensee to use the Licensed Trademarks
in combination with other marks not owned by Licensor, which Licensee expressly
agrees not to do, nor to include any of the Licensed Trademarks in its
corporate or trading name irrespective of whether registered or not. During
the term of this Agreement, Licensee must include on its stationery, business
cards, invoices and packing slips and the phrase "Authorized licensee of
Wrangler Apparel Corp." or such other words to that effect as have been
previously approved, in writing, by Licensor.
ARTICLE 3 - Trademark Ownership and License Recordation
-------------------------------------------------------
3.1 Licensor at its own cost will, insofar as possible and as reasonably
requested by Licensee, register and/or renew relevant trademarks in the
Licensed Territory and will cooperate in registering or recording Licensee as a
registered user or recorded Licensee of the Licensed Trademarks in the Licensed
Territory if appropriate and necessary in Licensor's sole judgment. Licensee
agrees to execute and deliver to Licensor such lawful documents as Licensor may
request for this purpose. Licensee shall not register or attempt to register
any of the Licensed Trademarks or marks similar thereto in its own name or in
any other name in or outside the Licensed Territory unless so authorized by
Licensor in writing.
3.2 Licensee acknowledges that Licensor is the owner of all the Licensed
Trademarks, whether registered or unregistered. All trademarks subsequently
adopted and used by Licensee under the provisions of this Agreement shall be
deemed to be Licensed Trademarks and owned by Licensor (except as otherwise
expressly provided in writing by Licensor). Licensee acknowledges that
Licensor is entitled to all of the rights in and to the Licensed Trademarks,
including the sole and exclusive right to register said trademarks in the
Licensed Territory and elsewhere throughout the world, and Licensee shall
assist Licensor in so doing at Licensor's expense.
3.3 Licensee further agrees never to contest, deny or dispute the
validity of the Licensed Trademarks or Licensor's title therein; agrees never,
either directly or indirectly, or in any other way, to encourage or assist
others in doing so; and agrees never to take any action of any kind
inconsistent with Licensor's holding of all such trademark rights. Nothing in
this Agreement shall confer upon Licensee a proprietary interest of any kind in
and to any of the Licensed Trademarks or any trademarks or trade names
confusingly similar thereto. Any and all use of the Licensed Trademarks by
Licensee shall inure to the benefit of Licensor.
ARTICLE 4 - Infringement by Third Parties
-----------------------------------------
4.1 Licensee shall, insofar as possible, report immediately in writing to
Licensor any and all infringements of the Licensed Trademarks, or of Licensor's
trade names and/or trade dress and any and all attempts by any third party to
use, copy, register, infringe upon or otherwise imitate the Licensed Trademarks
or Licensor's trade names or trade dress, or any design features of the
Licensed Products.
4.2 Except upon the written request and authorization of Licensor,
Licensee shall not take any action to prevent infringements, imitation or
illegal use of the Licensed Trademarks, trade dress associated with the
Licensed Products or trade name of Licensor. However, Licensee shall render to
Licensor all assistance reasonably requested, fully and without reservation, in
connection with any matter pertaining to protection or enforcement of the
Licensed Trademarks before administrative and quasi-judicial agencies and the
courts, and shall make available to Licensor, its representatives, agents and
attorneys, all of Licensee's records, files and other information pertaining to
the Licensed Trademarks, including the purchase, manufacture, sale,
distribution and advertising of the Licensed Products sold and distributed
under said trademarks.
4.3 Licensor, at its cost, shall take such steps and institute such legal
proceedings as shall be reasonably necessary to protect the Licensed Trademarks
and Licensee's license therein as set forth in this Agreement.
4.4 Licensor shall indemnify and defend Licensee and hold it harmless
from and against any claims, suits and expenses (including reasonable
attorney's fees) arising solely from Licensee's use of the Licensed Trademarks
in accordance with the terms of this Agreement on or in connection with
Licensed Products sold in the Licensed Territory. Licensor's indemnification
and defense obligations are expressly conditioned upon (a) Licensee's giving
Licensor prompt written notice of such claim or suit against Licensee after
assertion thereof and (b) Licensee's full and prompt cooperation and
assistance, to the extent reasonably requested by Licensor, in connection with
the defense of such claim or suit. Licensor shall have the right, at its own
expense, to undertake and conduct the defense and/or negotiation of any
settlement of any such suit or claim.
ARTICLE 5 - Royalty Fee, Minimum Net Sales and Advertising Expenditure
----------------------------------------------------------------------
5.1 In consideration of the licenses herein granted and of the other
benefits that accrue to Licensee hereunder, Licensee agrees to use its best
efforts to promote the sale of the Licensed Products in the Licensed Territory
and Licensee further agrees to pay to Licensor, for use of the Licensed
Trademarks, a royalty fee (the "Royalty Fee") or a minimum royalty (the
"Minimum Royalty"), whichever is greater, on the Net Sales of Licensed Products
sold by Licensee for each period stated below (a "Contract Year") as follows:
<TABLE>
<CAPTION>
First Contract Year Royalty Fee Minimum Royalty
------------------- ----------- ---------------
<S> <C> <C> <C>
01/01/2000 - 12/31/2000 --% $--
Second Contract Year Royalty Fee Minimum Royalty
-------------------- ----------- ---------------
01/01/2001 - 12/31/2001 --% $--
Third Contract Year Royalty Fee Minimum Royalty
------------------- ----------- ---------------
01/01/2002 - 12/31/2002 --% $--
</TABLE>
Said Royalty Fee shall be calculated on actual Net Sales of Licensed
Products. "Net Sales" means (a) the total number of units of Licensed Products
sold or otherwise transferred by Licensee to Affiliates or non-Affiliates,
multiplied by Licensee's published unit list price (excluding shipping/freight
charges separately listed as payable by the customer) charged by Licensee to
its customers who are not its Affiliates, less (b) Licensee's reasonable and
customary trade discounts and allowances given and returns. If Licensee's
actual price to its non-Affiliate customers is higher than as calculated above,
the actual price shall replace the list price in the calculation. Net Sales
shall be computed without deducting uncollectible accounts, anticipations or
financial discounts and shall include all transactions of Licensed Products
distributed by or for Licensee.
5.2 Licensee and Licensor have established the following minimum Net
Sales ("Minimum Net Sales") for the sales of Licensed Products in the Licensed
Territory:
<TABLE>
<CAPTION>
Contract Year Minimum Net Sales
----------------------------------- -----------------
<S> <C> <C>
January 1, 2000 - December 31, 2000 $--
January 1, 2001 - December 31, 2001 $--
January 1, 2001 - December 31, 2002 $--
</TABLE>
Licensor may terminate this Agreement in accordance with Article 10.1 (j) if
Licensee fails to achieve Net Sales of at least the Minimum Net Sales for each
Contract Year specified above.
5.3 With respect to the business done by Licensee under this Agreement,
Licensee shall pay said Royalty Fee to Licensor quarter-annually for the
quarters ending on the last days of March, June, September and December of each
year, payment for each said quarter to be made to Licensor within twenty-five
(25) days after the end of the quarter for which such payment is made. On the
date payment is due for the last quarter of each Contract Year, Licensee shall
also pay to Licensor the deficiency, if any, from the Minimum Royalty payable
for the applicable Contract Year.
5.4 Payment of the Royalty Fee shall be made either by check made payable
to Wrangler Apparel Corp., mailed to the address for Licensor set forth in
Article 17 or to such other address as Licensor may subsequently designate in
writing or by wire transfer to Licensor in United States Dollars at the
following address:
PNC Bank
Wilmington, Delaware 19899
ABA No.: 0311-000-89
Credit to: Wrangler Apparel Corp.
Account No.: 56-8427-5875
5.5 Time is of the essence with regard to the Royalty Fees and Minimum
Royalties due under this Agreement and Licensee shall make each of said
payments on time. Each and every late payment shall, for each day the payment
is late, bear interest at two percent (2%) over the Morgan Guaranty Trust
Company of New York prime rate in effect on the twenty-sixth (26th) day
following the quarter for which such payment is due. Licensor shall have the
right to terminate this Agreement upon notice to Licensee if Licensee fails to
cure a payment default within five (5) business days after receiving written
notice of such default from Licensor.
5.6 Licensee agrees to expend each Contract Year in advertising Licensed
Products a sum not less than three percent (3%) of its Net Sales thereof (the
"Advertising Expenditures"), which sum shall be expended for advertising,
consumer and trade media, production cost, consumer and promotional materials,
point-of-sale materials, sales aids and Licensee's share of marketing support
funds, all as approved by Licensor. In trade advertising and under any
marketing support fund, Licensee shall closely follow the advertising image and
copy concepts indicated by Licensor in advertising its products for sale under
the Licensed Trademarks. Licensee shall keep a true and accurate account of all
Advertising Expenditures, and shall submit to Licensor, quarter-annually for
the quarters ending on the last days of March, June, September and December of
each year, Advertising Expenditures Reports in the form attached in Schedule
VII hereto, each such Report to be received by Licensor within twenty-five (25)
days after the end of the quarter for which the Report is due. Licensee's
failure to expend the full amount of Advertising Expenditures required in each
Contract Year shall invoke Article 10.1 (g) of this Agreement; Licensee's
failure to provide Licensor with the Advertising Expenditures Report shall
invoke Article 10.1(f) of this Agreement. Licensee also agrees to pay to
Licensor's Representative Licensee's proportionate share of expense, as agreed
between Licensor's Representative and Licensee, of showroom display and trade
show space owned by Licensor's Representative and utilized by Licensee with
Licensor's Representative's consent.
5.7 If Licensor or any of its Affiliates (including VF Factory Outlet,
Inc.) wishes to purchase available Licensed Products, Licensee agrees to sell
such Products to Licensor or any of its Affiliates at a price equal to the then
lowest wholesale price at which Licensee sells such Licensed Products.
Licensee shall pay royalties and promotional fees with respect to such sales.
5.8 Termination or expiration of this Agreement for any reason whatsoever
shall not relieve Licensee of its accrued payment obligations or such
obligations incurred by sale of Licensed Products after the effective date of
such termination.
ARTICLE 6 - Accounting and Reporting
------------------------------------
6.1 Licensee shall submit to Licensor's Representative an Annual
Marketing Plan in the format approved by Licensor's Representative within sixty
(60) days of the execution of this Agreement and at least sixty (60) days
before the start of each Contract Year thereafter.
6.2 Licensee shall keep a true and accurate account of all Licensed
Products manufactured, ordered, received, sold and distributed under this
Agreement, and render to Licensor a just and true account in writing, sworn to
and verified by an officer of Licensee, specifying: (a) the number of Licensed
Products2 manufactured by or for Licensee in the preceding three (3) month
period, (b) the number of such Licensed Products distributed or sold in said
three (3) month period and (c) the list prices and sales prices of all such
Licensed Products, within twenty-five (25) days of the last day of March, June,
September and December (the "Quarterly Sales Report").
6.3 The Quarterly Sales Report shall be submitted by Licensee to Licensor
in the format prescribed by Schedule VII . Said Quarterly Sales Report shall
be sent to:
CHIEF ACCOUNTANT
Wrangler Apparel Corp.
200 Weldin Building
Concord Plaza
3411 Silverside Road
Wilmington, Delaware 19810
WITH A COPY TO:
Edyie B. Bryant, Licensing Manager
VF Jeanswear, Inc.
400 North Elm Street
Greensboro, North Carolina 27401
Telephone: 336/332-4636
Fax: 336/332-5295
6.4 Licensee shall also submit such other reports, as and when specified
by Licensor, as will enable Licensor to evaluate the success of Licensee's
marketing , sales and activities relating to this Agreement. Such reports
shall be sent to the addresses set forth in Article 6.3.
6.5 Licensor, its agents, attorneys and accountants shall have the right
to audit and investigate once each calendar year during normal business hours,
at Licensor's expense, the books, accounts, audits, and other things and
matters showing or reflecting all business conducted by Licensee pertaining to
the manufacture, sale or distribution of the Licensed Products under this
Agreement. In the event that an audit of Licensee's books and records reveals
that Licensee's Royalty Fees were underpaid by an amount equal to five percent
(5%) or more in any year, Licensee shall bear Licensor's reasonable direct
costs of said audit. Licensee shall provide Licensor annually with audited
financial statements of Licensee as soon as possible, and in any event within
ninety (90) days, after the close of Licensee's fiscal year.
ARTICLE 7 - Quality Control
---------------------------
Licensee further covenants and agrees as follows:
7.1 Licensee may have Licensed Products manufactured for it by third
party manufacturers for sale only within the Licensed Territory. For purposes
of this Agreement, "third party manufacturers" shall mean such manufacturers as
are listed on Schedule IV. No changes may be made to Schedule IV without the
prior written approval of Licensor. The third party manufacturers shall be
subject to the quality control requirements stipulated in this Article 7. For
purposes only of understanding reference to "manufacture," "manufacturing" and
"manufactured" as these words may be used hereafter in this Agreement, Licensed
Products made for Licensee by third party manufacturers in accordance herewith
shall be deemed manufactured by Licensee. Not less than ten (10) days prior to
engaging any third party manufacturer, Licensee shall advise Licensor of the
specific Licensed Products to be so manufactured. Licensee shall provide
Licensor with the name and address of such manufacturer, and shall cause such
manufacturer to execute ANNUALLY, in duplicate, a letter agreement in the form
set forth in Schedule III, shall forthwith provide a duplicate thereof to
Licensor by registered or certified mail, and shall guarantee such
manufacturer's compliance with the quality standards of Licensor and the terms
of such letter agreement. Licensee shall strictly prohibit any such third
party manufacturer from subcontracting the manufacture of Licensed Products.
Licensee shall remain primarily and completely responsible to Licensor for the
acts of such third party manufacturers under all of the provisions of this
Agreement and the acts of such third party manufacturers shall be deemed to be
the acts of Licensee. To the extent requested by Licensor, Licensee shall
assist representatives of Licensor in visiting and inspecting such third party
manufacturers from time to time. Licensee further covenants to obtain in
writing from any such manufacturers, undertakings in form satisfactory to
Licensor, regarding the disposition of unused branded materials and defective
finished products to Licensee. Licensor shall also have the right to prohibit
Licensee from using third party manufacturers in countries where such
manufacture would conflict with other licenses granted by Licensor. Licensee
shall, upon request of Licensor, cease using any third party manufacturer whose
activities would be in violation of any of the terms of this Agreement or the
provisions of Schedule III, whether or not such third party manufacturer has
actually executed a letter in the form of Schedule III. Upon the request of
Licensor, Licensee shall take reasonable action in conjunction with Licensor
against any such manufacture that violates the provisions of this Agreement or
of Schedule III.
7.2 All Licensed Products manufactured by or for Licensee and sold or
distributed by Licensee under the Licensed Trademarks shall conform to the
standards set forth in Schedule V and shall as all times be at least equal in
quality to the quality of jeanswear and casual apparel manufactured, sold and
distributed by Licensor's Representative in the United States of America under
the trademarks licensed herein. Licensor, its agents, attorneys and
representatives are hereby authorized, at any reasonable time during normal
working hours, to inspect the physical manufacturing and storage facilities
used by Licensee or under its direction to ascertain whether such products
conform to Licensee's standards of quality. Repeated failure on the part of
Licensee to meet Licensor's quality standards shall be grounds for Licensor to
terminate this Agreement by giving Licensee written notice of termination under
the provision of Article 10.1 (b).
7.3 Licensee shall at all times keep Licensor currently informed as to
the price and discount structure employed by Licensee in the sale of Licensed
Products under this Agreement. Licensee's prices of Licensed Products shall be
made official by the publication of a price list (or lists), and each such
price list shall be submitted to Licensor in advance of publication.
7.4 Licensee agrees to sell its production of Licensed Products under the
Licensed Trademarks directly to approved retailers and approved wholesalers for
resale within the Licensed Territory only. Licensee shall send written notice
to all approved wholesalers, with a copy of such notice to Licensor, advising
them of the Licensed Territory. Retail and wholesale outlets approved as of
the date of this Agreement are listed on Schedule VI. Schedule VI may be
amended from time to time by Licensor upon fifteen (15) business days' written
notice to Licensee.
7.5. Licensee shall not, during the term of this Agreement or thereafter,
manufacture, have manufactured, sell or distribute the Licensed Products
outside the Licensed Territory, nor shall Licensee sell Licensed Products to
any person who it knows, should know, has reason to believe or should have
reason to believe intends to export Licensed Products outside the Licensed
Territory.
7.6 Licensee agrees to mark each Licensed Product manufactured by it with
the country of origin permanently affixed at the time of manufacture to each
Licensed Product. Country of origin shall be affixed to all Licensed Products
regardless of the country in which the Licensed Product will be sold. Licensee
warrants that the genuine and true origin of all merchandise subject to this
Agreement will be the origin as stated on invoice, visa, country of origin
declaration or other document made in conjunction with the importation of the
merchandise into the United States of America, and further warrants that no
shipment has been or will be illegally transshipped from any other country.
7.7 Licensee shall guarantee to its ultimate consumer the quality,
materials and workmanship of the Licensed Products sold under the provisions of
this Agreement. If the ultimate consumer is dissatisfied with any such product
and Licensee fails to make an adjustment satisfactory to such consumer,
Licensor may at its option either replace the product at Licensee's expense and
without cost to the purchaser or refund the purchase price and charge Licensee
for such refund.
7.8 Licensee agrees not to sell more than ten percent (10%) of its annual
sales volume as branded seconds or irregulars bearing the Licensed Trademark.
Licensee has the option to re-label such products and remove all Licensed
Trademarks prior to sale.
ARTICLE 8 - Produce Approvals and Related Issues
------------------------------------------------
Licensee and Licensor agree to the following with respect to Licensor's
rights of approval of the product to be developed, manufactured and marketed
by Licensee:
8.1 On or before October 1st of each year, Licensee will provide to
Licensor its annual product planning calendar for the forthcoming year. This
annual product planning calendar will indicate the dates by which Licensor is
required to approve or disapprove any item which is to be included in the
relevant product line. In no event will such date be less than ten (10)
business days from the date on which Licensor is provided with product samples.
In the event that Licensee submits additional product samples at a time which
is outside the submitted product planning calendar, then Licensor will have ten
(10) business days from the date on which Licensor is provided with product
samples to approve such product. Approval or disapproval shall be at
Licensor's discretion and any product on or in connection with which the
Licensed Trademarks are to be used that is not approved by Licensor in writing
shall be deemed unlicensed and shall not be manufactured or sold. If the
product to be produced by Licensee is a simple extension of previously approved
products, (i.e., the pattern, fabric, threads, buttons, embroidery, colors and
material components have all been previously approved by Licensor for use in
Licensed Products), then no additional approvals shall be required. For
purposes of this Agreement, "product planning" shall include the review of
current in-line products. After approval has been given, Licensee shall
provide to Licensor, at no cost to Licensor, four (4) production samples from
the first production run.
8.2 If any Licensed Product to be included in the product line is to
include "innovative" elements or components, Licensor will have the right to
require the testing of the Licensed Product and/or the innovative element or
component. For purposes of this Agreement, "innovative" elements or components
is defined as those elements or components that have not previously been used
in the manufacture of items comparable to the Licensed Products.
8.3 Licensor shall have the right to approve the items set forth below,
with respect to the Licensed Products to be developed, manufactured and
marketed by Licensee. Licensor shall provide written notice of approval or
disapproval to Licensee within ten (10) business days from the date that
Licensor receives such a request for approval; if no notice of approval or
disapproval is provided by Licensor to Licensee, such request shall be deemed
to have been disapproved:
(a) Retail outlets, in addition to those listed on Schedule VI (as
may be amended from time to time), that will purchase Licensed Products
directly from Licensee or its manufacturing sources;
(b) Wholesale distributors, in addition to those listed on Schedule
VI (as may be amended from time to time), that will purchase licensed products
directly from Licensee or its manufacturing sources;
(c) Point of purchase displays;
(d) Advertising, as more fully described in Article 5;
(e) Any and all methods of distribution to be used by Licensee in
order to dispose of manufacturers' "seconds" and "irregulars" and any product
overruns that are to be disposed of outside previously approved retail or
wholesale distribution outlets. Licensee may dispose of seconds, irregulars
and overruns outside the Licensed Territory provided all trademarked labels,
hang tags and WRANGLER adornments are completely removed. The neck labels of
all "irregulars" must be stamped "irregular"; and
(f) The labels, hang tags and other packaging to be included with or
on the Licensed Products.
8.4 Licensee warrants that each Licensed Product and component thereof
shall comply with all applicable laws, regulations and voluntary industry
standards and shall conform to the samples thereof approved by Licensor.
ARTICLE 9 - Aid and Assistance; Noncompetition by Licensor
----------------------------------------------------------
9.1 So long as this Agreement remains in full force and effect, Licensor
agrees to provide to Licensee available material and information on
merchandising, planning of Licensor's products, including colors,
merchandising, sales promotion and advertising, as appropriate to Licensed
Products.
9.2 So long as Licensee is not in default under this Agreement, Licensor
agrees not to sell or distribute Licensed Products bearing its trademark
WRANGLER or any other trademark licensed under this Agreement within the
Licensed Territory.
ARTICLE 10 - Termination
------------------------
10.1 In addition to the provisions contained in Article 5.5 for the
termination of this Agreement, this Agreement may be terminated as follows:
(a) If, at any time during the term of this Agreement, either party
thereto is unable to pay its debts when due, becomes insolvent, or there is
filed by or against it in any court a petition for bankruptcy , insolvency,
reorganization, or the appointment of a receiver or trustee for all or a
portion of its property; or if either party makes an assignment for the benefit
of creditors, this Agreement may be canceled and terminated at the option of
the non-acting party upon written notice to the acting party; such cancellation
to be effective immediately if the act giving rise to cancellation be
voluntary; otherwise such cancellation to be effective upon adjudication of
bankruptcy or insolvency or upon a court of competent jurisdiction taking and
retaining jurisdiction over the acting party and /or its assets for a period of
sixty (60) days or more;
(b) Except as to a monetary default, which shall be governed by
Article 5.5, by either party by giving thirty (30) days' written notice to the
other party for any breach or default by the other party in its obligations
under this Agreement, such termination to be effective unless the other party
remedies the breach or default specified in the notice before the end of such
thirty (30) days;
(c) By Licensor by giving thirty (30) days' written notice if there
is a change in control of Licensee by way of merger, sale of assets or stock,
consolidation or otherwise unless such change has been approved in writing by
Licensor;
(d) By Licensor upon written notice to Licensee if production
samples submitted by Licensee fail to meet Licensor's quality standards for
three (3) consecutive months;
(e) By Licensor upon written notice to Licensee if Licensee
discontinues manufacture, distribution, product development or sale of the
Licensed Products for any three (3) consecutive months during the term of this
Agreement;
(f) By Licensor upon written notice to Licensee if Licensee fails to
submit reports as and when due under Article 5.6 for two (2) or more
consecutive quarters, or as and when due under Article 6.4 on three (3) or more
consecutive occasions;
(g) By Licensor upon written notice to Licensee if Licensee fails to
expend the full amount of Advertising Expenditures required in each Contract
Year as required under Article 5.6;
(h) By Licensor upon written notice to Licensee if Licensee exhibits
a pattern of failing to make "timely delivery" of sufficient quantities of the
Licensed Products to its retail accounts. For purposes of this provision,
"timely delivery" means 90% of deliveries (by volume) are made within customer
delivery windows, excluding cancellations prior to the expiration of the
delivery window;
(i) By Licensor upon written notice to Licensee should Licensee
become an Affiliate of any competitor of Licensor or Licensor's Representative
without Licensor's prior written approval; or
(j) By Licensor upon written notice to Licensee if Licensee does not
achieve the Minimum Net Sales for any Contract Year. If, however, Licensee
shall develop and submit to Licensor, simultaneously with the submission of the
Annual Marketing Plan for a Contract Year, (a) an explanation of why the
Minimum Net Sales were not attained for the prior Contract Year and (b) a plan
of action as to how the Minimum Net Sales for the current Contract Year will be
achieved, which explanation and plan are accepted by Licensor in its sole
discretion, the default shall be waived.
In addition to Licensor's other rights and remedies hereunder, at
law or in equity, upon termination of this Agreement by Licensor pursuant to
Article 5.5 hereof or clauses (a) through (j) above, Licensee shall pay to
Licensor, within thirty (30) days of such termination of this Agreement, the
total Minimum Royalties that would have been payable over the remaining term
of this Agreement had such termination not occurred.
10.2 At any time within six (6) months before the date of expiration of
this Agreement, Licensor may appoint a new Licensee or distributor for the
Licensed Products in the Licensed Territory. Licensor directly or its newly
appointed Licensee or distributor may sell Licensed Products in the Licensed
Territory at any time within six (6) months of the date of expiration for
shipment subsequent to the date of expiration.
10.3 Failure of either party to exercise any right or option to terminate
this Agreement shall not constitute a waiver of such right or any other right.
ARTICLE 11 - Products on Hand at Termination and Payments
---------------------------------------------------------
11.1 Termination or cancellation or expiration of this Agreement for any
reason shall not relieve Licensee of its obligation to pay to Licensor the
Royalty Fee specified in Article 5.1 with respect to Licensed Products
manufactured and/or sold by Licensee prior to such termination or cancellation.
Licensee further agrees to pay Licensor, at the same royalty rate in effect at
the date of termination, for all Licensed Products sold by Licensee after
termination of this Agreement that Licensee has on hand or are in process of
manufacture at the effective date of termination of this Agreement. For
Licensed Products sold after the termination or cancellation of this Agreement,
Royalty Fees shall be payable not later than the twenty-fifth (25th) day after
the end of the month in which the Licensed Products were sold.
11.2 Within twenty (20) days after termination of this Agreement,
Licensee shall provide Licensor with a complete inventory of all remaining
Licensed Products and all Licensed Products on order from third party
manufacturers, as well as the anticipated delivery date(s) thereof. Licensor
shall have the right to purchase all, but not less than all, of Licensee's
remaining inventory of Licensed Products at a price equal to seventy percent
(70%) of Licensee's list price, in which case no Royalties thereon shall be
payable. Such right shall be exercisable by giving written notice to Licensee
within ten (10) business days after Licensor receives Licensee's inventory
listing. Such purchase shall be completed and the purchase price for the
inventory Licensor elects to purchase shall be paid within ten (10) business
days after Licensor exercises its purchase option.
11.3 To the extent that Licensor does not exercise its right to purchase
Licensee's remaining inventory, Licensee shall have six (6) months from the
date of termination of this Agreement in which to sell unsold Licensed Products
through previously approved retail and wholesale distribution outlets only. As
to any Licensed Products on order on the date of termination, Licensee shall
have six (6) months from the last date on which such Licensed Products are
received in which to sell such goods through previously-approved retail and
wholesale distribution outlets only. However, such six (6) month sell-off
period shall be available to Licensee if, and only if, (a) Licensee has paid
all Royalty Fees and Minimum Royalties and submitted all plans and reports in
accordance with Articles 5 and 6, and (b) an audit during the current Contract
Year in accordance with the terms of Article 6.5 has been completed by or on
behalf of Licensor to its satisfaction.
ARTICLE 12 - Records after Termination
--------------------------------------
Upon termination or expiration of this Agreement, Licensee agrees to
permit Licensor, its agents, attorneys and accountants to inspect, upon
reasonable notice, the records and books of account of Licensee referred to in
Article 6.5, and to investigate generally all business transactions carried on
by Licensee under and pursuant to this Agreement from time to time for a period
of twelve (12) months following the last sale of Licensed Products, and
Licensee agrees not to destroy any of such records prior to the expiration of
said twelve (12) months.
ARTICLE 13 - Relinquishment of Licensed Matter
----------------------------------------------
13.1 At the expiration or termination of this Agreement for any reason,
Licensee shall not have acquired and will not claim any right to use the
trademark WRANGLER or any other trademark licensed hereunder, or any other
trademark of Licensor, or any trade name containing the term WRANGLER or any
part thereof, and Licensee agrees that it will not thereafter use or adopt any
such trademark or trade name or any related trade dress, or any trademark,
trade name, or trade dress confusingly similar thereto. Licensee further
agrees that, after termination or expiration of this Agreement, except as
provided in Article 11, it will refrain from using any trade dress or
distinctive features of the Licensed Products' labeling or design theretofore
employed by Licensee in carrying out the provisions of this Agreement.
13.2 Further, upon expiration or termination of this Agreement for any
reason whatsoever, Licensee shall return to Licensor any and all materials
furnished to Licensee by Licensor (including, but not limited to, promotional
and product development materials), as such material remains the property of
Licensor.
ARTICLE 14 - Fair Practices
---------------------------
Licensor and Licensee each covenants and agrees that during the term of
this Agreement or thereafter it will not encourage, induce or assist any third
party in doing any act or thing which, were it done by Licensor or Licensee, as
applicable, would be contrary to the provisions of this Agreement.
ARTICLE 15 - No Joint Venture; Indemnification; Maintenance of Insurance
------------------------------------------------------------------------
15.1 This Agreement shall not in any way be deemed or construed to
establish any relationship between the parties by way of agency,
distributorship, partnership or joint venture. Neither party will nor will
have the authority, directly or indirectly, to contract or purport to contract
any bills or other obligations of any kind in the name of, or chargeable
against the other party, its agents or employees, or in any way, directly or
indirectly, involve the other party in any expense or liability.
15.2 Except for claims for which Licensor is obligated to indemnify
Licensee under Article 4.4, Licensee shall indemnify, defend, and hold harmless
Licensor, its officers, directors, affiliates, employees and agents from any
and all claims, liabilities and expenses which may be imposed or sought to be
imposed upon it or them by virtue of any representation, act or agency, made by
or on the part of Licensee or any of Licensee's agents or employees including,
without limitation, any of the foregoing arising out of any defect (whether
obvious or hidden and whether or nor present in any sample approved by
Licensor) in a Licensed Product, or any packaging or promotional materials or
arising from personal injury or from any failure on the part of Licensee or its
agents or affiliates to comply with applicable laws, regulations and standards.
Any and all such claims made or suits brought by anyone in connection with the
products manufactured by Licensee under this Agreement shall be the sole
responsibility of Licensee, and Licensor shall be held harmless by Licensee in
all respects from any and all loss, damage, expense, claim or liability of any
kind by reason thereof, including reasonable attorney's fees. In the event
that a judgment, levy, attachment or other seizure is entered against Licensor
arising from any claim as to which indemnification is provided hereunder,
Licensee shall promptly post the necessary bond to prevent execution against
any property of Licensor. The provisions of this Article 15.2 shall survive
termination or expiration of this Agreement. Licensor will endeavor to give
Licensee prompt written notice of any claim or suit which may give rise to a
claim for indemnification hereunder.
15.3 Licensee shall procure and maintain in full force and effect, at its
sole cost and expense, at all times during which Licensed Products are being
sold and for three (3) years thereafter, a product liability insurance policy
(on an occurrence rather than a claims-made basis) with respect to the Licensed
Products with a limit of liability of not less than $5,000,000. Such insurance
policy shall include Licensor as an additional insured thereunder and shall
provide for at least thirty (30) days' prior written notice to Licensor of the
cancellation or substantial modification thereof. Such insurance may be
obtained by Licensee in conjunction with a policy of products liability
insurance which covers products other than the Licensed Products. Licensee
will deliver a certificate of such insurance to Licensor promptly upon issuance
of said insurance policy and shall, from time to time upon reasonable request
by Licensor, promptly furnish to Licensor evidence of the maintenance of said
insurance policy. Nothing contained in this Article 15.3 shall be deemed to
limit in any way the indemnification provisions of Article 15.2.
ARTICLE 16 - Binding Nature; Assignment
---------------------------------------
This Agreement is binding upon and for the benefit of Licensee and
Licensor, their respective legal successors and permitted assigns. The rights
and license given to Licensee by this Agreement are strictly personal. Neither
this Agreement nor any interest in it may be transferred, pledged, mortgaged or
hypothecated by Licensee (including by assignment, sublicense, operation of law
or otherwise) without the prior written consent of Licensor. Any attempted
assignment, sublicense, transfer, encumbrance or other disposal without such
consent shall be void and shall constitute a material default of this
Agreement. Nothing herein shall be deemed to prevent or restrict Licensor's
ability to sell, transfer or assign the Licensed Trademarks or this Agreement
to any party, subject only to Licensee's rights to continue use thereof as
provided herein, subject to the terms and conditions of this Agreement in all
respects.
ARTICLE 17 - Notices
--------------------
All notices given or required to be given hereunder shall be deemed to be
given and received (a) as of the date sent if sent by telecopier, promptly
confirmed by United States registered mail, postage paid, return receipt
requested, or (b) three (3) business days after being sent by United States
certified mail, postage paid, return receipt requested and addressed as
follows:
LICENSOR: Wrangler Apparel Corp.
200 Weldin Building
Concord Plaza
3411 Silverside Road
Wilmington, Delaware 19810
Telephone: 302/477-3930
Fax: 302/477-3932
with a copy to:
Edyie B. Bryant, Licensing Manager
VF Jeanswear, Inc.
400 North Elm Street
Greensboro, North Carolina 27401
Telephone: 336/332-4636
Fax: 336/332-5295
LICENSEE: Gargoyles, Inc.
5866 South 194th Street
Kent, Washington 98032
Attn.: Nancy Parker
Telephone: 303-440-4088
Fax: 303-440-4051
unless another address for either party is substituted by prior written notice.
ARTICLE 18 - Compliance With and Operation of Law
-------------------------------------------------
18.1 Licensee shall comply in all material respects with all applicable
laws, rules and regulations. Licensee shall use its best efforts to determine
that each manufacturer of Licensed Products complies in all material respects
with all applicable laws, rules and regulations, including applicable wage,
hour, child labor and other employment laws and shall deal only with
manufacturers who so comply and shall, from time to time as requested by
Licensor, certify that to the best of Licensee's knowledge, after reasonable
inquiry, such is the case.
18.2 Nothing in this Agreement shall require, encourage or oblige a party
to perform any act or make any payment which is illegal or in contravention of
any applicable statute, law or regulation.
18.3 If any provision of this Agreement is in violation of the present or
future law of any relevant jurisdiction in such a way that it is void or
voidable, the validity of the remaining provisions shall not be affected
thereby unless such invalidity is of an essential and material part of this
Agreement, in which event either party shall have the right to terminate this
Agreement.
ARTICLE 19 - Consent to Jurisdiction: Waiver of Jury Trial
-----------------------------------------------------------
19.1 Licensee hereby irrevocably submits to the jurisdiction of any
Delaware state court sitting in Wilmington, Delaware or the United States
District Court for the District of Delaware over any action or proceeding
arising out of or relating to this Agreement. Service of process in any such
action or proceeding arising out of or relating to this Agreement may be made
to Licensee by mailing or delivering a copy of such process to Licensee at
Licensee's address as specified in Article 17 hereof. Nothing in this Article
19 shall affect the right of Licensor to serve legal process in any other
manner permitted by law or affect the right of Licensor to bring any action or
proceeding against Licensee or its property in the courts of any other
jurisdictions.
19.2 Licensee hereby irrevocably agrees that any action or proceeding
arising out of or relating to this Agreement may be brought against Licensor
solely in Delaware state court sitting in Wilmington, Delaware or the United
States District Court for the District of Delaware.
19.3 LICENSEE AND LICENSOR HEREBY WAIVE ALL RIGHTS TO TRIAL BY JURY IN
ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR ANY OTHER AGREEMENT, INSTRUMENT OR OTHER DOCUMENT EXECUTED IN
CONNECTION HEREWITH.
ARTICLE 20 - Arbitration
-------------------------
At the election of Licensor, any controversy or claim arising out of or
relating to this Agreement, or the breach thereof, except any claim or
controversy relating to the performance of a third party manufacturer, may be
finally settled by arbitration before three (3) arbitrators in accordance with
the Commercial Arbitration Rules of the American Arbitration Association
("AAA"). Each party to this Agreement shall appoint one (1) arbitrator, and a
third shall be appointed by agreement of the named arbitrators. If any party
fails to appoint an arbitrator within thirty (30) days after demand for
arbitration is filed with the AAA, or if the named arbitrators are unable to
agree on the appointment of a third arbitrator within sixty (60) days after the
first two arbitrators have been appointed, the AAA shall select such unnamed or
unappointed arbitrators in accordance with its standard procedures.
Arbitration shall be conducted in the English language at Wilmington, Delaware.
The award of the arbitrators shall be final and enforceable, and judgment upon
any award rendered thereby may be entered in any Court having jurisdiction, or
application may be made to such Court for a judicial acceptance of the award
and an order of enforcement, as the case may be. Anything herein to the
contrary notwithstanding, the arbitration provided for herein shall in no way
limit, affect, hinder or become a precondition to or a qualification upon the
rights of either party hereto to obtain immediate equitable relief to which it
may be entitled.
ARTICLE 21 - Licensor's Representative
--------------------------------------
Licensor has appointed Licensor's Representative to perform Licensor's
rights and obligations under Articles 2.4, 7, 8, 9, and 21 of this Agreement,
and Licensee shall cooperate with Licensor's Representative under this
Agreement with respect to such Articles and otherwise as Licensor may direct
from time to time.
ARTICLE 22 -Entire Agreement
----------------------------
This Agreement constitutes the entire Agreement between the parties
hereto, relating to the subject matter hereof, and supersedes any prior
agreement or understanding. There are no terms, obligations, covenants,
representations, statements or conditions other than those contained herein.
No variation or modification of this Agreement nor waiver of any of the terms
and provisions hereof shall be deemed valid unless in a writing signed by both
parties hereto.
ARTICLE 23 - Term
-----------------
23.1 This Agreement shall become effective as of January 1, 2000, and
shall expire on December 31, 2003, unless sooner terminated as herein provided.
23.2 If Licensee has complied in all material respects with the terms of
this Agreement, and if its Net Sales of Licensed Products are in excess of $**
for the third Contract Year of the Agreement, Licensee may request that
Licensor renew this Agreement for a single additional period of three (3) years
commencing January 1, 2004 and terminating December 31, 2006 (the "Renewal
Term"), upon the terms and conditions set by Licensor. Such request must be
made in writing on or before October 1, 2002 and will not be unreasonably
denied.
ARTICLE 24 -Governing Law
-------------------------
This Agreement shall be governed and construed in accordance with the
internal laws of the State of Delaware, United States of America, without
regard to its provisions governing conflicts of law.
ARTICLE 25 -Confidentiality
---------------------------
Each party hereto agrees that the terms of this Agreement will be kept
confidential by it and its representatives (which term shall include its
directors, members, officers, employees, agents, banks, advisors, and in the
case of Licensee, factors). Each party shall be responsible for any breach of
this agreement of confidentiality by it or its representatives, and the other
party shall be entitled to directly enforce such agreement. The foregoing to
the contrary notwithstanding, disclosure of this Agreement may be made in a
public announcement or filing with the Securities and Exchange Commission or a
national securities exchange if and to the extent, in the written opinion of
either party's counsel, such disclosure is required.
ARTICLE 26 -Equitable Relief
----------------------------
Licensee acknowledges that Licensor will have no adequate remedy at law if
Licensee continues to manufacture, sell, advertise, promote or distribute the
Licensed Products upon the expiration or termination of this Agreement.
Licensee acknowledges and agree that, in addition to any and all other remedies
available to Licensor, Licensor shall have the right to have any such activity
by Licensee restrained by equitable relief, including, but not limited to, a
temporary restraining order, a preliminary injunction, a permanent injunction,
or such other alternative relief as may be appropriate, without the necessity
of posting any bond.
ARTICLE 27 -Prohibition Against Use of Illegal Child Labor and
Against Use of Prision or Forced Labor
--------------------------------------------------------------
Licensee warrants that it and, to the best of its knowledge after
reasonable investigation, each manufacturer, vendor or supplier utilized by
Licensee in connection with the manufacture of Licensed Products, is in
compliance with and will remain in compliance with all applicable laws
governing the use of child labor and the importation of merchandise produced
with child labor into the Licensed Territory. Licensee also warrants that to
the best of its knowledge after reasonable investigation, no prison or forced
labor is utilized in the production of any of the Licensed Products. Licensee
shall certify to Licensor from time to time upon request its continued
compliance with the terms of Article 18.1 and this Article 27.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers in two or more counterparts, each of which
shall for all purposes be deemed an original, as of the day and year first
above written.
LICENSOR
WRANGLER APPAREL CORP.
By: /s/ Jacquelyn A. Pellegrino
----------------------------
Title: Assistant Secretary
Date: 11/3/99
LICENSEE
GARGOYLES, INC.
By: /s/ Leo Rosenberger
-----------------------------
Title: Leo Rosenberger, CEO & CFO
Date: Nov. 2, 1999
<PAGE>
<TABLE>
EXHIBIT 11.1
STATEMENT REGARDING PER SHARE EARNINGS
<S> <C> <C>
Primary Earnings Per Share
- --------------------------
Net Income $ (174,737) $ 1,150,985
Cumulative preferred dividends (214,613) (283,321)
------------ -------------
Income for common shareholders $ (389,350) $ 867,664
------------ -------------
Weighted average common shares 7,822,191 7,822,191
============ ============
Primary earning per share $ (0.05) $ 0.11
============ ============
Diluted Earning Per Share
- -------------------------
Net Income * $ 1,150,985
Cumulative preferred dividends -- --
------------ -------------
* $ 1,150,985
============ ============
Weighted average common shares * 7,822,191
Effect of stock options -- --
Assumed conversion of cumulative
Preferred stock * 14,044,596
------------ -------------
* 21,866,787
============ ============
Diluted earnings per share $ (0.05) $ 0.05
============ ============
- ---------------------------
* Antidilutive
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 162,829
<SECURITIES> 0
<RECEIVABLES> 4,129,890
<ALLOWANCES> (551,432)
<INVENTORY> 6,824,418
<CURRENT-ASSETS> 12,089,765
<PP&E> 3,826,487
<DEPRECIATION> (2,694,523)
<TOTAL-ASSETS> 26,693,148
<CURRENT-LIABILITIES> 10,873,361
<BONDS> 0
0
9,700,000
<COMMON> 26,529,282
<OTHER-SE> (39,867,816)
<TOTAL-LIABILITY-AND-EQUITY> 26,693,148
<SALES> 26,042,513
<TOTAL-REVENUES> 26,426,141
<CGS> 10,572,058
<TOTAL-COSTS> 13,213,870
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 1,489,227
<INCOME-PRETAX> 1,150,985
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,150,985
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,150,985
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
