<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
------------------------ --------------------------------------
(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 June 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
<TABLE>
<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 ......................................... 9
Item 2: Changes in Securities and Use of Proceeds ................. 9
Item 3: Defaults upon Senior Securities ........................... *
Item 4: Submission of Matters to a Vote of Security Holders ....... 10
Item 5: Other Information ......................................... *
Item 6: Exhibits and Reports on Form 8-K .......................... 10
* Omitted as not applicable
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GARGOYLES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 378,183 $ 194,314
Trade receivables, net 5,480,969 2,251,226
Inventories, net 6,790,939 8,558,276
Other current assets and prepaid expenses 1,475,381 2,031,261
------------ ------------
Total current assets 14,125,472 13,035,077
Property and equipment, net 1,232,530 1,510,333
Intangibles, net 12,726,480 13,004,935
Other assets 271,659 457,599
------------ ------------
Total assets $28,356,141 $28,007,943
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,059,017 $ 5,923,196
Accrued expenses and other current
liabilities 5,039,700 7,130,212
Current portion of long-term debt 2,437,902 28,526,379
------------ ------------
Total current liabilities 11,536,619 41,579,787
Long-term debt, net of current portion 19,500,000 --
Deferred license income and other 568,708 600,000
Commitments and contingencies
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 (39,478,467) (40,735,481)
Cumulative translation adjustment -- 34,356
------------ ------------
Total shareholders' equity (3,249,185) (14,171,843)
------------ ------------
Total liabilities and shareholders' equity $28,356,141 $28,007,943
============ ============
See accompanying notes to the Consolidated Financial Statements
</TABLE>
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GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $10,063,484 $13,175,741 $19,411,495 $24,654,260
Cost of sales 4,086,643 5,499,125 8,045,801 10,613,003
------------ ------------ ------------ ------------
Gross profit 5,976,841 7,676,616 11,365,694 14,041,257
License income 149,035 190,703 331,268 190,703
------------ ------------ ------------ ------------
6,125,876 7,867,319 11,696,962 14,231,960
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 2,348,882 4,572,778 4,884,882 9,192,904
General and administrative 1,393,432 1,838,645 2,769,543 3,630,515
Shipping and warehousing 527,865 672,792 1,079,261 1,307,309
Provision for doubtful accounts 125,016 114,275 213,288 180,272
------------ ------------ ------------ ------------
Total operating expenses 4,395,195 7,198,489 8,946,973 14,311,000
------------ ------------ ------------ ------------
Income (loss) from operations 1,730,681 668,830 2,749,989 (79,040)
Interest income (expense) (636,616) (880,940) (1,424,266) (1,675,082)
------------ ------------ ------------ ------------
Income (loss) before income taxes 1,094,065 (212,110) 1,325,723 (1,754,122)
Income tax provision -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ 1,094,065 $ (212,110) $ 1,325,723 $(1,754,122)
============ ============ ============ ============
Basic net income (loss) per share $ .13 $ (.03) $ .16 $ (.22)
============ ============ ============ ============
Diluted net income (loss) per share $ .06 $ (.03) $ .10 $ (.22)
============ ============ ============ ============
See accompanying notes to the Consolidated Financial Statements
</TABLE>
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GARGOYLES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,325,723 $(1,754,122)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 338,858 426,593
Amortization 438,495 722,393
Deferred license income (100,000) --
Changes in assets and liabilities net of effects from
business acquisitions:
Accounts receivable (3,154,743) (2,149,736)
Inventories 1,599,120 1,657,588
Other current assets and other assets 298,690 (771,399)
Accounts payable, accrued expenses and other
current liabilities (3,871,170) (1,033,612)
------------ ------------
Net cash used in operating activities (3,125,027) (2,902,295)
------------ ------------
INVESTING ACTIVITIES
Acquisition of property and equipment (68,271) (70,013)
------------ ------------
Net cash used in investing activities (68,271) (70,013)
------------ ------------
FINANCING ACTIVITIES
Net proceeds from revolving credit facility 3,411,523 2,894,958
------------ ------------
Net cash provided by financing activities 3,411,523 2,894,958
------------ ------------
Effect of foreign currency translation on cash (34,356) (16,861)
------------ ------------
Net decrease in cash 183,869 (94,211)
Cash and cash equivalents, beginning of period 194,314 892,176
------------ ------------
Cash and cash equivalents, end of period $ 378,183 $ 797,965
============ ============
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
Common stock redemption $ -- $ 45,000
See accompanying notes to the Consolidated Financial Statements
</TABLE>
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GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June 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 1998 Annual Report on Form 10-K/A, Amendment No. 2, 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 June 30, 1999 are not
necessarily indicative of the results that may be expected for the entire year.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Materials $ 3,655,747 $ 4,204,151
Finished goods 3,799,391 4,934,896
Reserves for excess, slow-moving
and obsolete inventories (664,199) (580,771)
------------ ------------
Inventories, net $ 6,790,939 $ 8,558,276
============ ============
</TABLE>
3. INCOME TAXES
The Company recorded no income tax benefit relating to the net loss for the
three-month and six-month periods ended June 30, 1998 since a future benefit
was not assured. In 1999 the Company utilized its net operating losses to
eliminate any provision for income taxes for the three and six months ended
June 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:
<TABLE>
<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
------------
$ 9,500,000
============
</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 June 30, 1999, the Company had unused
sources of liquidity of $6.5 million, consisting of cash and cash equivalents
of $378,000 and borrowings available under its revolving loan of $6.1 million.
5. EARNINGS PER SHARE
The calculation of basic 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 six month periods ended June 30, 1999 and 1998 is
7,822,191 and 7,837,191, and 7,822,191 and 7,806,079, 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 six
month periods ended June 30, 1999 and 1998 is 18,355,638 and 7,837,191, and
13,088,915 and 7,806,079, respectively.
6. RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.
7. LITIGATION
On November 18, December 4 and December 9, 1998, following a periodic
state tax audit, the State of Washington 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.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements within this report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results, to differ materially from
the anticipated results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, without limitation, the
factors discussed in the Company's Annual Report 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:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
----------------- ----------------
1999 1998 1999 1998
------- ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 40.6 41.7 41.4 43.0
------ ------ ------ ------
Gross profit 59.4 58.3 58.6 57.0
License income 1.5 1.4 1.7 .8
Operating expenses:
Sales and marketing 23.3 34.7 25.2 37.3
General and administrative 13.8 14.0 14.3 14.7
Shipping and warehousing 5.2 5.1 5.6 5.3
Provision for doubtful accounts 1.2 .9 1.1 .7
------ ------ ------ ------
Total operating expenses 43.7 54.6 46.1 58.0
------ ------ ------ ------
Income (loss) from operations 17.2 5.1 14.2 (0.3)
==== === ==== =====
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
NET SALES. Net sales decreased from $13.2 million for the quarter ended
June 30, 1998 to $10.1 million for the quarter ended June 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 License 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 from $7.7 million for the quarter
ended June 30, 1998 to $6 million for the quarter ended June 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 59.4%
in the 1999 quarter from 58.3% in the 1998 quarter, primarily due to reduced
sales of excess inventory in 1999.
LICENSE INCOME. License income decreased to $149,000 for the quarter
ended June 30, 1999 compared to $191,000 for the quarter ended June 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 $4.4 million for the
quarter ended June 30, 1999 from $7.2 million for the quarter ended June 30,
1998. As a percentage of net sales, operating expenses decreased to 43.7% in
the 1999 quarter from 54.6% in the 1998 quarter. Sales and marketing expenses
decreased $2.2 million in the 1999 quarter, primarily as a result of the
disposition of various unprofitable businesses and cost reduction efforts. As
a percentage of net sales, sales and marketing expenses decreased to 23.3% in
the 1999 quarter from 34.7% in the 1998 quarter. General and administrative
expenses decreased $445,000 in the 1999 quarter. As a percentage of net sales,
general and administrative expenses decreased to 13.8% in the 1999 quarter from
14.0% in the 1998 quarter. Shipping and warehousing expenses decreased $145,000
in the 1999 quarter. As a percentage of net sales, shipping and warehousing
expenses increased to 5.2% in the 1999 quarter from 5.1% in the 1998 quarter.
Provision for doubtful accounts increased $11,000 in the 1999 quarter. As a
percentage of net sales, provision for doubtful accounts increased to 1.2% in
the 1999 quarter from .9% in the 1998 quarter. The decrease in total operating
expenses of $2.8 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 generated income from
operations of $1.7 million for the quarter ended June 30, 1999 compared to
income from operations of $669,000 for the quarter ended June 30, 1998. As a
percentage of net sales, income from operations increased to 17.2% in the 1999
quarter from 5.1% in the comparable 1998 period.
INTEREST INCOME (EXPENSE). Interest expense was $637,000 for the quarter
ended June 30, 1999 compared with interest expense of $881,000 for the quarter
ended June 30, 1998. The Company's outstanding borrowings were $21.9 million
at June 30, 1999 compared to $32.1 million at June 30, 1998.
INCOME TAX PROVISION (BENEFIT). The Company's income tax benefit was zero
for quarters ended June 30, 1999 and June 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 $1.1 million or $.06 per diluted common share for the quarter
ended June 30, 1999 compared to a net loss of $212,000 or ($.03) per common
share for the quarter ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
NET SALES. Net sales decreased to $19.4 million for the six months ended
June 30, 1999 from $24.6 million for the six months ended June 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 License 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 $11.4 million for the six months
ended June 30, 1999 from $14 million for the six months ended June 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 58.6%
in 1999 from 57.0% in 1998, primarily due to reduced sales of excess inventory
in 1999.
LICENSE INCOME. License income increased to $331,000 for the six months
ended June 30, 1999 compared to $191,000 for the six months ended June 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 $8.9 million for the
six months ended June 30, 1999 from $14.3 million for the six months ended June
30, 1998. As a percentage of net sales, operating expenses decreased to 46.1%
in 1999 from 58% in 1998. Sales and marketing expenses decreased $4.3 million
in 1999 as compared to the same period in 1998. As a percentage of net sales,
sales and marketing expenses decreased to 25.2% in the 1999 period from 37.3%
in the comparable 1998 period. General and administrative expenses decreased
$861,000 for the six months ended June 30, 1999, primarily as a result of the
disposition of various unprofitable businesses and the Company's cost cutting
measures. As a percentage of net sales, general and administrative expenses
decreased to 14.3% in 1999 from 14.7% in 1998. Shipping and warehousing
expenses decreased $228,000 in 1999 as compared to the six months ended June
30, 1998. As a percentage of net sales, shipping and warehousing expenses
increased to 5.6% in 1999 from 5.3% in 1998. The decrease in total operating
expenses of $5.4 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 generated income from
operations of $2.7 million for the six months ended June 30, 1999 compared to a
loss from operations of $79,000 for the six months ended June 30, 1998.
INTEREST INCOME (EXPENSE). Interest expense was $1.4 million for the six
months ended June 30, 1999 compared with interest expense of $1.7 million for
the six months ended June 30, 1998.
INCOME TAX PROVISION (BENEFIT). The Company's income tax benefit was zero
for the six months ended June 30, 1999 and for the six months ended June 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 $1.3 million or $.10 per diluted common share for the six months
ended June 30, 1999 compared to a net loss of $1.7 million or ($.22) per
common share for the six months ended June 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 $3.1
million and $2.9 million for the six months ended June 30, 1999 and 1998,
respectively. The Company's cash used in operating activities increased in the
first six months of 1999 by $223,000 compared to the same period in 1998 due
primarily to (i) an increase in the early season buildup of accounts receivable
by $3.1 million, (ii) a decrease in net inventories by $1.6 million in the
first six months of 1999 compared to a $1.7 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 $3.8 million compared to $1 million in the
comparable 1998 period. Cash used in the Company's investing activities, to
fund acquisitions of property and equipment, totaled $68,000 and $70,000 for
the six months ended June 30, 1999 and 1998, respectively. Cash provided by the
Company's financing activities, primarily proceeds from bank debt, totaled $3.4
million and $2.9 million for the six months ended June 30, 1999 and 1998,
respectively. As of June 30, 1999, the Company had unused sources of liquidity
of $6.5 million, consisting of cash and cash equivalents of $378,000 and
borrowings available under its revolving loan of $6.1 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 net sales generally have been higher in the period from
March to September, the period during which sunglass purchases are highest. As
a result, operating income is typically lower in the first and fourth quarters
as fixed operating costs are spread over lower sales volume. See "Forward-
Looking Statements." The Company experiences higher accounts receivable during
March through September as a result of higher sales during this period. The
Company's quarterly results of operations have fluctuated in the past and may
continue to fluctuate as a result of a number of factors, including seasonal
cycles, the timing of new product introductions, the timing of orders by the
Company's customers, the mix of product sales and the effects of weather
conditions on consumer purchases.
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, that 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 is well
under way with these efforts, which are scheduled to be completed by September
1, 1999. The Company has completed its assessment of its systems in its Kent,
Washington facilities and in its Farmingdale, New York facility.
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 has determined that it will need 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 than $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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 18, December 4 and December 9, 1998, following a periodic
state tax audit, the State of Washington 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.
Since June 1999, the Company has settled all suits filed or claims
made by the Company's creditors related to past due amounts which arose in the
ordinary course of the Company's business. Except for the two matters
discussed above, there are currently no collection suits pending against the
Company that have not be paid or settled.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on June 29, 1999.
At the annual meeting, Class 1, 2 and 3 Directors were up for election. The
following summarizes all matters voted on at the meeting:
<TABLE>
<CAPTION>
ELECTION OF DIRECTORS FOR WITHHELD
--------------------- ----------- --------
<S> <C> <C> <C>
Class 1 Director: Elected to serve
until the 2001 annual meeting
William C. Thompson, Jr. 36,030,850 24,887
Class 2 Director: Elected to serve
until the 2002 annual meeting
Daniel C. Regis 36,030,850 24,887
Class 3 Director: Elected to serve
until the 2000 annual meeting
Paul S. Shipman 36,017,490 38,247
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 10.1 Amendment to Employment Agreement dated June 1, 1999, between
Gargoyles, Inc. and Leo Rosenberger.
Exhibit 10.2 Second Amendment to Employment Agreement, Separation and
Release dated July 27, 1999 between Sungold Eyewear, Inc. and
Sheldon Goldman.
Exhibit 10.3 Second Amendment to Royalty Agreement, Termination and
Release dated July 17, 1999 between Sungold Eyewear, Inc. and
Sungold Enterprises, Ltd.
Exhibit 11.1 Statement Regarding Computation of Per Share Earnings
Exhibit 27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
Form 8-K with respect to the Company's refinancing transaction
with the Company's lender, U.S. Bank, was filed with the Securities and
Exchange Commission on June 7, 1999.
<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)
August 13, 1999 /s/ Leo Rosenberger
-------------------------------
Leo Rosenberger
Chief Executive Officer, Chief
Financial Officer and Treasurer
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------------ -------------------------------------------------------------
Exhibit 10.1 Amendment to Employment Agreement dated June 1, 1999, between
Gargoyles, Inc. and Leo Rosenberger.
Exhibit 10.2 Second Amendment to Employment Agreement, Separation and
Release dated July 27, 1999 between Sungold Eyewear, Inc. and
Sheldon Goldman.
Exhibit 10.3 Second Amendment to Royalty Agreement, Termination and
Release dated July 17, 1999 between Sungold Eyewear, Inc. and
Sungold Enterprises, Ltd.
Exhibit 11.1 Statement Regarding Computation of Per Share Earnings
Exhibit 27.1 Financial Data Schedule
<PAGE>
EXHIBIT 10.1
AMENDMENT TO EMPLOYMENT AGREEMENT
OF
LEO ROSENBERGER
THE AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment") is made as of
this First day of June, 1999 by and between GARGOYLES, INC., a Washington
corporation (the "Company"), and LEO ROSENBERGER ("Employee").
RECITALS
A. The Company and Employee are parties to that certain Employment
Agreement dated as of February 1, 1998, which was amended by that certain
Amendment to Employment Agreement dated March 31, 1999 (the "Employment
Agreement"); and
B. The Company and Employee desire to further amend the Employment
Agreement in accordance with the terms hereof.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. TERM.
----
The term of the Employment Agreement set forth in Section 3 of the
Employment Agreement shall continue until the earlier of (i) the date upon
which Employee ceases to be the Chief Executive Officer of the Company, or (ii)
January 31, 2000; each of the dates described in (i) and (ii) being referred to
herein as the "Expiration Date."
2. NO OTHER AMENDMENTS.
-------------------
The terms and provisions of this Employment Agreement are hereby
ratified and confirmed and remain in full force and effect except as amended by
this Amendment.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Employment Agreement as of the date first above written.
GARGOYLES, INC.
/s/ Paul S. Shipman
By--------------------------------------
Paul S. Shipman, Member of the Board
of Directors of Gargoyles, Inc.
/s/ Leo Rosenberger
- ----------------------------------------
LEO ROSENBERGER
<PAGE>
EXHIBIT 10.2
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
SEPARATION AND RELEASE
THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT, SEPARATION AND RELEASE (this
"Agreement") is made as of July 27, 1999, by and between SUNGOLD EYEWEAR, INC.,
a Washington corporation (the "Corporation"), and SHELDON GOLDMAN ("Employee").
RECITALS
A. The Corporation and Employee are parties to that certain Employment
Agreement dated as of April 10, 1997 as amended by that certain Amendment to
Employment Agreement dated April 22, 1998 (the "Employment Agreement");
B. Subject to the terms and conditions set forth herein, the Corporation and
Employee desire to further amend and terminate the Employment Agreement.
C. Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Employment Agreement.
AGREEMENT
1. TERMINATION OF EMPLOYMENT RELATIONSHIP.
--------------------------------------
The Employment Agreement shall terminate on July 27, 1999, and effective
as of the close of business on July 27, 1999, the employment relationship
between the Corporation and Employee shall terminate (the "Termination Date").
2. AMENDMENT TO ROYALTY AGREEMENT; TERMINATION AND RELEASE.
-------------------------------------------------------
Together with the execution of this Agreement, the Corporation and
Employee, as an officer and authorized signatory of Sungold Enterprises, Ltd.,
will enter into and execute that certain Amendment to Royalty Agreement,
Termination and Release of even date herewith, a copy of which is attached
hereto as Exhibit A.
3. SEVERANCE BENEFITS.
------------------
3.1 Severance Pay.
-------------
On July 27, 1999, the Corporation shall pay to Employee, by wire
transfer to an account as Employee shall direct, the sum of $92,855.41, which
represents the unpaid portion of Employee's Base Salary under the Employment
Agreement for the remaining Term of Employment (the "Severance Payment") less
normal and authorized payroll withholdings and deductions.
3.2 FTO.
---
The Corporation shall pay to Employee, together with his Severance
Payment, $11,298.39 for Employee's earned but unused Flexible Time Off benefits
through April 10, 2000 less normal and authorized payroll withholdings and
deductions.. Employee understands and acknowledges that he will accrue no
further Flexible Time Off from and after the Termination Date.
3.3 COBRA.
-----
Employee acknowledges and understands that since the Corporation's
health and disability insurance policies maintained for the benefit of its
employees, including Employee, are group policies, Employee will be unable to
continue to participate in such policies. Employee may elect to continue his
family medical, dental and vision coverages, however, by paying for COBRA
continuation coverage for up to 18 months after the Termination Date or until
Employee is entitled to Medicare, or until Employee is covered under other
plans with no pre-existing exclusion. The Corporation shall pay to Employee
together with his Severance Payment $5,808.60, which amount is equal to
Employee's COBRA payment from the Termination Date through April 30, 2000 to
continue Employee's family medical, dental and vision coverage through April
30, 2000. The Corporation shall provide Employee with information regarding
COBRA continuation coverage. Employee understands and acknowledges, however,
that it is his responsibility to take any actions and to submit any documents
as may be required to continue COBRA coverage after the Termination Date.
3.4 Expenses.
--------
The Corporation shall reimburse Employee for any reasonable expenses
incurred by Employee on behalf of the Corporation, subject to the receipt by
the Corporation of all supporting documentation. Employee understands that
Employee is not authorized to incur expenses or to make commitments on behalf
of the Corporation after the Termination Date.
4. STOCK OPTIONS.
-------------
As of the Termination Date, Employee is fully vested in options to
purchase 20,000 shares of Gargoyles, Inc. common stock at an exercise price of
$8.00 per share. Employee understands that the vested options will continue to
be governed by the Gargoyles, Inc. 1995 Stock Incentive Compensation Plan, as
Amended and Restated on July 22, 1996, and that in accordance with the terms of
such plan Employee's right to exercise the vested options expires on October
19, 1999.
5. COMPLETE RELEASE OF CLAIMS.
--------------------------
By signing this Agreement, the Corporation and the Employee each agree not
to start any lawsuits, charges, or other legal action against the other
relating to Employee's employment with the Corporation or the benefits that
employee received or should have received from the Corporation. In addition,
the Corporation and Employee, each for itself or himself and for their
respective heirs, representatives, executors, and successors, waive any rights
or claims each may have against the other, or, in the case of Employee, any
employee benefit plans sponsored by the Corporation in which employee
participates, and all of the Corporation's or Employee's respective affiliated
and related entities, owners, shareholders, officers, directors, trustees,
heirs, administrators, executors, agents, employees, employees' spouses,
insurers, either past or present, and all of their successors, agents or
assigns (collectively "Releasees"). The Corporation and Employee each hereby
release the Releasees from any and all claims, actions, causes of action,
obligations, costs, expenses, damages, losses, debts, and demands, including
attorneys' fees and costs actually incurred (collectively "Claims") of whatever
kind, in law or in equity, known or unknown, suspected or unsuspected, which
arose prior to the Termination Date.
This release includes, but is not limited to: (i) any Claims under any
local, state or federal laws regulating employment, including without
limitation, the Civil Rights Acts, the Age Discrimination and Employment Act,
the Americans with Disabilities Act, and the Workers' Adjustment and Retraining
Notification Act; (ii) Claims under the Employee Retirement Income Security
Act; (iii) Claims under any local, state or federal wage and hour laws; or (iv)
Claims alleging any legal restriction on the Corporation's right to terminate
their employees, or personal injury claims, including without limitation
wrongful termination, discrimination, harassment, breach of contract,
defamation, tortuous interference with business expectancy, black listing, or
infliction of emotional distress, whether arising under statute or common law.
6. COOPERATION WITH COMPANY.
------------------------
Until April 10, 2000, Employee will fully cooperate with, and from time to
time make himself available at the Corporation's request to consult with, the
Corporation on matters in which Employee was involved on behalf of the
Corporation. Nothing in this Section 6, however, shall prevent Employee from
taking on other employment.
7. SURVIVAL OF PROVISIONS OF EMPLOYMENT AGREEMENT.
----------------------------------------------
Employee understands that as of the Termination Date, the Employment
Agreement is terminated and is amended by this Agreement, and that Employee
shall have no further rights or obligations under the Employment Agreement
except for the terms set forth in Sections 7 through 9 of the Employment
Agreement (as amended by the Amendment to Employment Agreement dated April 22,
1998) relating to "Intellectual Property; Nondisclosure of Confidential
Information; Dispute Resolution, and Enforcement", which shall remain in effect
following the Termination Date in accordance with their terms.
8. SUCCESSORS
----------
This Agreement shall be binding upon the parties hereto and their
respective heirs, representatives, executors, administrators, successors and
assigns, and shall inure to the benefit of each and all of the Releasees, and
to their heirs, representatives, executors, administrators, successors and
assigns.
9. GENERAL PROVISIONS
------------------
9.1 Governing Law.
-------------
This Agreement shall in all respects be interpreted, enforced and
governed under the laws of the state of Washington. The language of all parts
of this Agreement shall in all cases by construed as a whole, according to its
fair meaning, and not strictly for or against either party.
9.2 Invalidity.
----------
If any of the provisions of this Agreement are held to be illegal or
invalid, the remaining provisions shall not be affected thereby, and the
illegal or invalid provision shall be deemed not to be a part of this
Agreement.
9.3 Entire Agreement.
----------------
Except for the provisions of the Employment Agreement which survive
the Termination Date, this Agreement represents and contains the entire
understanding between the Corporation and Employee in connection with
Employee's separation from the Corporation.
10. NON-ADMISSION OF LIABILITY.
--------------------------
This Agreement shall not be construed in any way as an admission by either
the Corporation or Employee of any liability or wrongdoing whatsoever on the
part of either party.
11. PRESS RELEASES.
--------------
The Corporation shall not issue a press release or make any public
announcement that relates to or references Employee without Employee first
having the opportunity to review and provide comments to the release. Employee
acknowledges that memoranda circulated by the Corporation to its employees and
the employees of its subsidiaries are not the type of press release or public
announcement that are the subject of this section 11.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
SUNGOLD EYEWEAR, INC.
a Washington corporation
/s/ Leo Rosenberger
By -------------------------------
Leo Rosenberger, CEO and CFO
/s/ Sheldon Goldman
- ----------------------------------
SHELDON GOLDMAN
<PAGE>
EXHIBIT 10.3
SECOND AMENDMENT TO ROYALTY AGREEMENT
TERMINATION AND RELEASE
THIS SECOND AMENDMENT TO ROYALTY AGREEMENT, TERMINATION AND RELEASE (this
"Amendment") is made as of this 27th day of July 1999, by and between SUNGOLD
EYEWEAR, INC., a Washington corporation f/k/a Gargoyles Acquisition Corporation
("Purchaser"), and SUNGOLD ENTERPRISES, LTD., a New York corporation and/or its
assigns ("Seller").
RECITALS
A. Seller and Purchaser are parties to that certain Royalty Agreement dated
as of April 10, 1997, as amended by that certain Amendment to Royalty Agreement
dated April 22, 1998 (the "Royalty Agreement").
B. Seller and Purchase desire to further amend the Royalty Agreement in
accordance with the terms of this Amendment.
C. Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Royalty Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual agreements of
the parties set forth herein, the parties hereto hereby agree as follows:
1. STIPULATION AS TO AMOUNT OF 1999 ROYALTY PAYMENT.
------------------------------------------------
Section 2(c) of the Royalty Agreement is amended to provide that the
Royalty Payment payable to Seller for calendar year 1999 is a sum certain of
$614,131.
2. PAYMENT OF 1999 ROYALTY PAYMENT.
-------------------------------
Section 3 of the Royalty Agreement is amended to provide that the 1999
Royalty Payment of $614,131 is payable to Seller on July 27, 1999 by wire
transfer to an account specified by Seller; PROVIDED, HOWEVER, the such payment
is subject to receipt by Purchaser of that certain Second Amendment to
Employment Agreement, Separation and Release of even date herewith executed by
Sheldon Goldman.
3. TERMINATION OF ROYALTY AGREEMENT.
--------------------------------
Upon payment in full of the 1999 Royalty Payment, the Royalty Agreement
shall terminate and shall be of no further force or effect.
4. MUTUAL RELEASE OF CLAIMS.
------------------------
By signing this Agreement, and subject to payment by Purchaser and receipt
by Seller of the 1999 Royalty Payment, Seller and Purchaser each agree not to
start any lawsuits, charges, or other legal actions against the other relating
to the Royalty Agreement. In addition, Seller and Purchaser, each for itself
and for their respective agents, representatives, successors and assigns,
waives any rights or claims each may have against the other and their
respective affiliated and related entities, owners, shareholders, officers,
directors, trustees, heirs, administrators, executors, agents, employees,
employees' spouses, insurers, either past or present, and all of their
successors, agents or assigns (collectively "Releasees") related to the Royalty
Agreement. Seller and Purchaser each hereby release the Releasees from any and
all claims, actions, causes of action, obligations, costs, expenses, damages,
losses, debts, and demands, including attorneys' fees and costs actually
incurred (collectively "Claims") of whatever kind, in law or in equity, known
or unknown, suspected or unsuspected, related to the Royalty Agreement.
5. COUNTERPARTS.
------------
This Amendment may be signed in one or more counterparts each of which
shall be deemed an original and together shall be deemed on and the same
instrument.
IN WITNESS WHEREOF, the parties hereby have executed this Second Amendment to
Royalty Agreement as of the date first above written.
SUNGOLD EYEWEAR, INC.,
a Washington corporation
/s/ Leo Rosenberger
By ________________________________
Leo Rosenberger, CEO and CFO
SUNGOLD ENTERPRISES, LTD.,
a New York corporation
/s/ Sheldon Goldman
By ________________________________
Sheldon Goldman, President
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING PER SHARE EARNINGS
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
June 30, 1999 June 30, 1999
-------------- --------------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE
- --------------------------
Net income $ 1,094,065 $ 1,325,723
Cumulative preferred dividends (68,708) (68,708)
------------- ------------
Income for common shareholders $ 1,025,357 $ 1,257,015
============= ============
Weighted average common shares 7,822,191 7,822,191
============= ============
Primary earnings per share $ .13 $ .16
============= ============
DILUTED EARNINGS PER SHARE
- --------------------------
Net income $ 1,094,065 $ 1,325,723
Cumulative preferred dividends -0- -0-
------------- ------------
$ 1,094,065 $ 1,325,723
============= ============
Weighted average common shares 7,822,191 7,822,191
Effect of stock options -- --
Assumed conversion of cumulative
preferred stock 10,533,447 5,266,724
------------- ------------
18,355,638 13,088,915
============= ============
Diluted earnings per share $ .06 $ .10
============= ============
</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 1 AND 2 OF THE COMPANY'S FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1999,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 378,183
<SECURITIES> 0
<RECEIVABLES> 6,037,150
<ALLOWANCES> (556,181)
<INVENTORY> 6,790,939
<CURRENT-ASSETS> 1,475,381
<PP&E> 3,774,725
<DEPRECIATION> (2,542,195)
<TOTAL-ASSETS> 28,356,141
<CURRENT-LIABILITIES> 11,536,619
<BONDS> 0
0
9,700,000
<COMMON> 26,529,282
<OTHER-SE> (39,478,467)
<TOTAL-LIABILITY-AND-EQUITY> 28,356,141
<SALES> 19,411,495
<TOTAL-REVENUES> 19,742,763
<CGS> 8,045,801
<TOTAL-COSTS> 8,946,973
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,424,266
<INCOME-PRETAX> 1,325,723
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,325,723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,325,723
<EPS-BASIC> .16<F1>
<EPS-DILUTED> .10
<FN>
<F1>For purposes of thsi Exhibit, Primary means Basic.
</FN>
</TABLE>
