1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) MAY 14, 1997
GARGOYLES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 0-21355 91-1247269
(STATE OF INCORPORATION) (COMMISSION (IRS EMPLOYER
FILE NUMBER) IDENTIFICATION NO.)
5866 SOUTH 194TH STREET
KENT, WASHINGTON 98032
(206) 872-6100
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS (AS PREVIOUSLY STATED IN FORM 8-K
FILED ON MAY 28, 1997).
(a) On May 14, 1997, Gargoyles Acquisition Corporation II, a newly formed
Washington corporation ("Purchaser") and wholly-owned subsidiary of
Gargoyles, Inc. ("Registrant") acquired substantially all the assets,
and assumed certain liabilities, of The Private Eyes Sunglass
Corporation, a Massachusetts corporation ("Private Eyes"), pursuant to
the terms of an Asset Purchase and Sale Agreement dated May 5, 1997, by
and between Private Eyes and Purchaser (the "Agreement").
The purchased assets include tangible assets, contracts, warranties,
books and records, drawings and designs, leasehold interests, license
agreements and other intellectual properties including rights to the
Private Eyes name. Private Eyes' management, including its president,
were hired by Purchaser and will continue to operate the Private Eyes
sunglass business from Private Eyes' facilities in Norwell,
Massachusetts.
As consideration for the purchased assets, Purchaser paid $6,500,000
cash at the closing and agreed to pay, subject to certain conditions,
additional amounts up to $2,500,000.
The purchase price was paid with funds borrowed from U. S. Bank of
Washington, National Association under Registrant's credit facility. The
purchase price will be allocated among the purchased assets based on the
fair value of the assets acquired and the obligations assumed.
(b) Private Eyes was a sunglass design and distribution company with its
principal executive office in Norwell, Massachusetts. Private Eyes'
plant and equipment were used for designing and manufacturing
sunglasses. Registrant intends to continue using these assets in a
similar manner.
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1 ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
INDEX
Page Number
-----------
(A) FINANCIAL STATEMENTS OF THE PRIVATE EYES SUNGLASS CORPORATION
Report of Leydon & Gallagher, Independent Auditors.............................. 3
Balance Sheets.................................................................. 4
Statements of Operations and Retained Earnings.................................. 5
Statements of Cash Flows........................................................ 6
Notes to Financial Statements................................................... 7
(B) PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Pro Forma Financial Information Basis of Presentation........................... 14
Pro Forma Consolidated Balance Sheets........................................... 15
Pro Forma Consolidated Statements of Operations................................. 16
(C) EXHIBITS
23.1 Consent of Leydon & Gallagher, Independent Auditors.................... 20
2
4
REPORT OF LEYDON & GALLAGHER, INDEPENDENT AUDITORS
To the Board of Directors
The Private Eyes Sunglass Corporation
We have audited the accompanying balance sheet of The Private Eyes
Sunglass Corporation as of September 30, 1996, and the related statements of
operations and retained earnings and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Private Eyes
Sunglass Corporation at September 30, 1996, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
LEYDON & GALLAGHER
Burlington, Massachusetts
December 6, 1996
3
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THE PRIVATE EYES SUNGLASS CORPORATION
BALANCE SHEETS
September 30, March 31,
1996 1997
------------------ -----------------
(Unaudited as
prepared by
ASSETS Company)
Current assets:
Cash and cash equivalents $ 58,434 $ 26,948
Accounts receivable (Note 2) 1,273,880 1,795,423
Inventory 2,020,773 2,197,149
Prepaid expenses and other current assets 162,460 237,050
------------------ -----------------
Total current assets 3,515,547 4,256,570
Property and equipment, net (Note 3) 158,349 136,534
Other assets (Note 4) 54,993 60,474
================== =================
Total assets $ 3,728,889 $ 4,453,578
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Notes payable - line of credit (Note 6) $ 1,045,456 $ 1,543,983
Accounts payable 1,121,680 1,311,456
Accrued expenses (Note 5) 303,981 312,600
Current portion of capital lease obligation (Note 7) 6,621 -
------------------ -----------------
Total current liabilities 2,477,738 3,168,039
------------------ -----------------
Commitments and contingencies
Shareholders' equity:
Common stock, no par value
Series A: 1,000 shares authorized,
issued and outstanding
Series B: 199,000 shares authorized,
1,000 shares issued and outstanding 10,000 10,000
Additional paid-in capital 100,000 100,000
Retained earnings 1,141,151 1,175,539
------------------ -----------------
Total shareholders' equity 1,251,151 1,285,539
------------------ -----------------
Total liabilities and shareholders' equity $ 3,728,889 $ 4,453,578
================== =================
See accompanying notes.
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THE PRIVATE EYES SUNGLASS CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Period from
Year Ended January 1 to
September 30, March 31,
1996 1997
------------------ ------------------
(Unaudited as
prepared by
Company)
Net sales $ 8,505,226 $ 2,228,437
Cost of sales 4,533,060 1,142,433
------------------ ------------------
Gross profit 3,972,166 1,086,004
------------------ ------------------
Operating expenses:
Selling and advertising expenses 1,816,251 452,931
General and administrative expenses 1,346,208 334,547
Warehouse expenses 320,626 82,483
Product development expenses 184,661 46,788
------------------ ------------------
Total operating expenses 3,667,746 916,749
------------------ ------------------
Income from operations 304,420 169,255
Realized (gain) loss from foreign currency
translation (2,682) -
Interest expense, net 184,191 57,807
------------------ ------------------
Income before income taxes 122,911 111,448
Income taxes 20,001 5,000
------------------ ------------------
Net income 102,910 106,448
Retained earnings - beginning 1,083,241 1,069,091
Distributions to shareholders 45,000 -
------------------ ------------------
Retained earnings - ending $ 1,141,151 $ 1,175,539
================== ==================
See accompanying notes.
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THE PRIVATE EYES SUNGLASS CORPORATION
STATEMENTS OF CASH FLOWS
Period from
Year Ended January 1 to
September 30, March 31,
1996 1997
------------------ ---------------
(Unaudited as
prepared by
Company)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 102,910 $ 106,448
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation 51,803 13,000
Cash surrender value of officers' life
insurance 1,934 -
Changes in operating assets and
liabilities (Note 11) (210,946) (336,374)
------------------ ---------------
Net cash used in operating activities (54,299) (216,926)
------------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (3,332) (2,000)
Payments from shareholder 18,983 -
------------------ ---------------
Net cash provided by (used in) investing 15,651 (2,000)
------------------ ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net advances on line-of-credit 15,998 235,053
Payments on capital lease obligations (35,619) (3,357)
Dividends paid (45,000) -
Additional paid in capital received 100,000 -
------------------ ---------------
Net cash provided by investing activities 35,379 231,696
------------------ ---------------
(Decrease) increase in cash and cash equivalents (3,269) 12,770
Cash and cash equivalents - beginning of year 61,703 14,178
------------------ ---------------
Cash and cash equivalents - end of year $ 58,434 $ 26,948
================== ===============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 182,424 $ 41,005
================== ===============
Income taxes $ 4,566 $ 2,000
================== ===============
See accompanying notes.
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THE PRIVATE EYES SUNGLASS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information as of March 31, 1997 and for the period from
January 1, 1997 to March 31, 1997 is unaudited)
The Private Eyes Sunglass Corporation (the Company) represents major sunglass
manufacturers. The Company's principal business activity is importing and
wholesale distributing of sunglasses and related products.
(1) Summary of Significant Accounting Policies
(a) Business and Credit Concentrations
The Company, in the normal course of business, grants credit to
its customers who are concentrated in the retail industry
throughout the United States and Canada. Ongoing credit
evaluations of customers' financial conditions are performed and,
generally no collateral is required. The Company maintains
reserves for potential credit losses, returns and allowances.
Such losses, in the aggregate, have not exceeded management's
expectations.
(b) Cash and Cash Equivalents
Cash and cash equivalents include principal and accrued interest
on certificates of deposit and time deposits with original
maturities of three months or less.
(c) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(d) Inventories
Inventories consist primarily of eyewear, parts, and related
accessories. Inventories are stated at the lower of cost or
market determined by the first-in, first-out (FIFO) method.
(e) Property and Equipment
Property and equipment are stated at cost. Maintenance and
repairs are charged to expense as incurred. Expenditures which
result in the substantial betterment or extend the useful lives
of assets are capitalized. Upon the disposal of property, the
asset cost and accumulated depreciation are removed from the
accounts and any gain or loss is included in income.
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9
THE PRIVATE EYES SUNGLASS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information as of March 31, 1997 and for the period from
January 1, 1997 to March 31, 1997 is unaudited)
The Company provides depreciation as follows:
Description Years
----------- -----
Office equipment 5 - 10 Years
Furniture and fixtures 5 - 10 Years
Leasehold improvements 5 - 31.5 Years
Depreciation expense charged to operations amounted to $51,803
for the year ended September 30, 1996.
Depreciation is provided using the straight-line method.
(f) S Corporation - Income Tax Status
The Company, with the consent of its shareholders, has elected
under the Internal Revenue Code to be an S Corporation effective
October 1, 1987. In lieu of corporation income taxes, the
shareholders of an S Corporation are taxed on their proportionate
share of the Company's taxable income. Therefore, no provision or
liability for Federal income taxes has been included in the
financial statements for the years ended September 30, 1996. The
Company remains liable for various state income and tangible
property taxes.
The Company may declare a dividend to assist the shareholders in
paying taxes on their proportionate share of the Company's
taxable income.
As a result of the Company's election to be an S Corporation with
a fiscal year end other than December 31, the Company is required
to make a non-interest bearing deposit with the Internal Revenue
Service. At September 30, 1996, the Company had on deposit
$8,936.
(g) Income Taxes
Income tax expense includes state taxes currently payable and
deferred taxes. The Company provides for state deferred taxes on
temporary differences arising from assets and liabilities whose
basis are different for financial reporting and state income tax
purposes. The differences relate primarily to depreciable assets,
the reserves for returns, allowances and uncollectible accounts,
and uniform capitalization on inventory.
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THE PRIVATE EYES SUNGLASS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information as of March 31, 1997 and for the period from
January 1, 1997 to March 31, 1997 is unaudited)
(h) Translation of Foreign Currencies
Accounts payable denominated in foreign currencies, when hedged,
are translated at the fixed hedge rate of exchange. All other
unhedged accounts payable denominated in foreign currencies are
translated at the rate of exchange prevailing at the balance
sheet date. Revenue and expense accounts are translated at the
rates of exchange in effect at the time of sale or purchase.
Translation adjustments originating during the period are
reflected in income.
(2) Accounts Receivable
The following is a summary at year ended September 30, 1996:
Trade accounts receivable.......................... $1,527,360
Less:
Reserve for returns and allowances............ 213,475
Reserve for uncollectible accounts............ 40,005
-----------
$1,273,880
===========
(3) Property and Equipment
The following is a summary at year ended September 30, 1996:
Office equipment.................................. $ 599,827
Furniture and fixtures............................ 234,403
Leasehold Improvements............................ 196,207
-----------
$1,030,437
Less accumulated depreciation and amortization. (872,088)
-----------
Property and equipment, net....................... $ 158,349
===========
(4) Other Assets
The following is a summary at year ended September 30, 1996:
Cash surrender value - officers' life insurance
(net of loans $84,414)............................. $ 13,454
Deposits........................................... 41,539
-----------
$ 54,993
===========
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THE PRIVATE EYES SUNGLASS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information as of March 31, 1997 and for the period from
January 1, 1997 to March 31, 1997 is unaudited)
(5) Accrued Expenses
The following is a summary at year ended September 30, 1996:
Accrued royalties, commissions and advertising.. $154,737
Accrued payroll and payroll taxes............... 66,010
Accrued interest................................ 9,989
Accrued taxes - other........................... 18,899
Accrued other................................... 54,346
------------
$303,981
============
(6) Note Payable - Line of Credit
Note payable - line of credit, consists of a demand note payable in the
amount of $1,045,456 at September 30, 1996. Advances are based on 70% of
qualified accounts receivable and 30% of qualified inventory. These
advances are secured by all Company assets. The maximum line of credit
under this arrangement is $2,000,000. At September 30, 1996, the
available line was $954,544. Interest is calculated at prime + 2.5%
(10.75% at September 30, 1996). The line of credit is renewable annually
at the option of the bank on January 31.
Interest expense on the line of credit was $148,091 for the year ended
September 30, 1996.
The Company must comply with certain conditions set forth in its
line-of-credit agreement. The lender has waived covenants relating to
capital funds, operating cash flows, and earnings before interest and
taxes.
(7) Obligations Under Capital Leases
The Company is the lessee of certain office equipment under capital
leases expiring through 1997. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum
lease payments or the fair value of the asset. The assets are amortized
over their estimated productive lives. Amortization of assets under
capital leases is included in depreciation expense for the year ended
September 30, 1996.
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THE PRIVATE EYES SUNGLASS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information as of March 31, 1997 and for the period from
January 1, 1997 to March 31, 1997 is unaudited)
The following is a summary of property held under capital leases at
September 30, 1996:
Office equipment.................................... $210,637
Less: accumulated amortization...................... 130,900
---------
$ 79,737
=========
Future minimum lease payments under the capital leases as of September
30, 1996 for the next year in the aggregate is as follows:
1997................................................... $ 6,842
Total minimum lease payments
Less: amount representing interest..................... 221
-------
Present value of net minimum lease payment............. 6,621
Less: Current maturities............................... 6,621
-------
Long-term maturities................................... $ -
=======
The interest rate on the capitalized leases is approximately 12% and is
imputed based on the lower of the Company's incremental borrowing rate
at the inception of each lease or the lessor's implicit rate of return.
(8) Income Taxes
State tax expense consist of state income taxes payable of $20,001 for
the year ended September 30, 1996:
The Company has approximately $24,000 available in state net operating
loss carryforwards expiring through 2008.
(9) Commitments
Lease Commitments
The Company leases its warehouse, executive office, sales office space,
and equipment under operating leases expiring at various dates through
2003. Total rental expense was approximately $284,637 for the year ended
September 30, 1996.
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THE PRIVATE EYES SUNGLASS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information as of March 31, 1997 and for the period from
January 1, 1997 to March 31, 1997 is unaudited)
Minimum future rental payments under noncancelable operating leases as
of September 30, 1996 for each of the next five years and in the
aggregate are as follows:
1997............................................. $107,622
1998............................................. 107,764
1999............................................. 104,330
2000............................................. 94,566
2001............................................. 94,566
Thereafter....................................... 126,088
--------
Total minimum future rental payments............. $634,936
========
(10) Foreign Exchange Contracts
The Company enters into foreign exchange contracts to hedge foreign
currency transactions on a continuing basis for periods consistent with
its purchase commitment exposures. The effect of this practice is to
minimize variability in the Company's operating results arising from
foreign exchange rate movements. The Company's foreign exchange
contracts do not subject the Company to risk due to exchange rate
movements because gains and losses on these contracts offset losses and
gains on the liabilities being hedged. At September 30, 1996, the
Company had $717,118 of foreign exchange contracts outstanding,
primarily denominated in lira. The foreign exchange contracts generally
have maturities which do not exceed twelve months.
(11) Changes in Operating Assets and Liabilities
Operating assets and liabilities (used) provided cash as follows during
the year ended September 30, 1996:
Accounts receivable.................................$ 220,883
Inventory........................................... (353,014)
Accounts payable.................................... (114,398)
Accrued expenses.................................... 81,738
Prepaid expenses and other current assets........... (94,193)
Deposits............................................ 48,038
=========
Net cash used by operating assets and
liabilities.....................................$(210,946)
=========
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THE PRIVATE EYES SUNGLASS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information as of March 31, 1997 and for the period from
January 1, 1997 to March 31, 1997 is unaudited)
(12) Disclosures About Fair Values of Financial Instruments
Statement of Financial Accounting Standard No. 107, "Disclosures About
Fair Value of Financial Instruments," requires the Company to disclose
estimated fair values for all financial instruments for which it is
practicable to estimate fair value.
The Company has used a variety of methods and assumptions, which were
based on estimates of market conditions and risks existing at the time,
to estimate the fair value of the Company's financial instruments as of
September 30, 1996. For certain instruments, including cash and cash
equivalents, accounts receivable, accounts payable, and short-term debt,
it was assumed that the carrying amount approximated fair value for the
majority of these instruments because of their short maturity.
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GARGOYLES, INC.
PRO FORMA FINANCIAL INFORMATION BASIS OF PRESENTATION
The following Pro Forma Consolidated Balance Sheets as of March 31, 1997
are unaudited and were prepared as if the Sungold Acquisition, which was
consummated in April 1997, was effective as of March 31, 1997. The following Pro
Forma Consolidated Statements of Operations for the year ended December 31, 1996
and the three months ended March 31,1997 are unaudited and were prepared as if
the Sungold Acquisition was effective as of January 1, 1996 and January 1, 1997,
respectively. The Pro Forma Consolidated Statements of Operations do not purport
to represent what the Company's results of operations would actually have been
if the Sungold Acquisition had in fact occurred on such dates or to project the
Company's results of operations for any future period. The Pro Forma
Consolidated Statements of Operations are based on the historical financial
statements of the Company and Sungold and give effect to the Sungold Acquisition
under the purchase method of accounting.
The additional Pro Forma Consolidated Balance Sheets as of March 31,
1997 are unaudited and were prepared as if the Private Eyes Acquisition, which
was consummated in May 1997, was effective as of March 31, 1997. The following
Pro Forma Consolidated Statements of Operations for the year ended September 30,
1996 and the three months ended March 31,1997 are unaudited and were prepared as
if the Private Eyes Acquisition was effective as of October 1, 1995 and January
1, 1997, respectively. The Pro Forma Consolidated Statements of Operations do
not purport to represent what the Company's results of operations would actually
have been if the Private Eyes Acquisition had in fact occurred on such dates or
to project the Company's results of operations for any future period. The Pro
Forma Consolidated Statements of Operations are based on the historical
financial statements of the Company and Private Eyes and give effect to the
Private Eyes Acquisition under the purchase method of accounting.
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GARGOYLES, INC.
Pro Forma Consolidated Balance Sheets
March 31, 1997
(Unaudited)
Pro Forma Pro Forma
Gargoyles Sungold Adjustments Subtotal Private Eyes Adjustments Pro Forma
--------- ------- ----------- -------- ------------ ----------- ---------
Assets
Current assets:
Cash and cash equivalents $1,100 $103,430 $- $104,530 $26,948 $- $131,478
Trade receivables, net 12,516,578 2,574,321 - 15,090,899 1,795,423 - 16,886,322
Inventories 9,238,919 1,441,898 - 10,680,817 2,197,149 - 12,877,966
Trade credits 217,253 - - 217,253 - - 217,253
Other current assets and
prepaid expenses 5,216,148 68,936 - 5,285,084 237,050 - 5,522,134
----------- ---------- ---------- ----------- ---------- ----------- -----------
Total current assets 27,189,998 4,188,585 - 31,378,583 4,256,570 - 35,635,153
Property and equipment, net 3,382,454 119,632 - 3,502,086 136,534 - 3,638,620
Intangibles, net 2,902,721 - 9,697,016 (1) 12,599,737 - 6,379,461 (1) 18,979,198
Other assets 276,979 16,694 - 293,673 60,474 - 354,147
----------- ---------- ---------- ----------- ---------- ----------- -----------
Total assets $33,752,152 $4,324,911 $9,697,016 $47,774,079 $4,453,578 $6,379,461 $58,607,118
=========== ========== ========== =========== ========== =========== ===========
Liabilities and shareholders' equity
Current liabilities:
Notes payable to bank $- $401,497 ($401,497)(2) $- $1,543,983 ($1,543,983)(2) $-
Accounts payable 4,351,668 978,029 - 5,329,697 1,311,456 - 6,641,153
Accrued expenses and other
current liabilities 3,041,697 957,401 315,000 (3) 4,314,098 312,600 1,165,000 (3) 5,791,698
----------- ---------- ---------- ----------- ---------- ----------- -----------
Total current liabilities 7,393,365 2,336,927 (86,497) 9,643,795 3,168,039 (378,983) 12,432,851
----------- ---------- ---------- ----------- ---------- ----------- -----------
Notes payable to bank 4,482,118 - 11,771,497 (2) 16,253,615 - 8,043,983 (2) 24,297,598
----------- ---------- ---------- ----------- ---------- ----------- -----------
Deferred license income 270,000 - - 270,000 - - 270,000
----------- ---------- ---------- ----------- ---------- ----------- -----------
Minority interest 271,923 - - 271,923 - - 271,923
----------- ---------- ---------- ----------- ---------- ----------- -----------
Notes payable to shareholder - 275,200 (275,200)(4) - - - -
----------- ---------- ---------- ----------- ---------- ----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock - - - - - - -
Common stock 25,649,405 8,100 (8,100)(4) 25,649,405 10,000 (10,000)(4) 25,649,405
Additional paid-in capital - 227,700 (227,700)(4) - 100,000 (100,000)(4) -
Retained earnings (deficit) (4,314,659) 1,476,984 (1,476,984)(4) (4,314,659) 1,175,539 (1,175,539)(4) (4,314,659)
----------- ---------- ---------- ----------- ---------- ----------- -----------
Total shareholders' equity 21,334,746 1,712,784 (1,712,784) 21,334,746 1,285,539 (1,285,539) 21,334,746
----------- ---------- ---------- ----------- ---------- ----------- -----------
Total liabilities and shareholders'
equity $33,752,152 $4,324,911 $9,697,016 $47,774,079 $4,453,578 $6,379,461 $58,607,118
=========== ========== ========== =========== ========== =========== ===========
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GARGOYLES, INC.
Pro Forma Consolidated Statements of Operations
Gargoyles Sungold Private Eyes
Year Ended Year Ended Year Ended
December 31, December 31, Pro Forma September 30, Pro Forma
1996 1996 Adjustments Subtotal 1996 Adjustments Pro Forma
----------- ----------- ----------- ----------- ---------- ----------- -----------
Net sales $33,094,398 $13,404,588 $- $46,498,986 $8,505,226 $- $55,004,212
Cost of sales 13,743,496 5,417,067 19,160,563 4,533,060 23,693,623
----------- ----------- ----------- ----------- ---------- -------- -----------
Gross profit 19,350,902 7,987,521 27,338,423 3,972,166 31,310,589
License income 479,609 - 479,609 - 479,609
----------- ----------- ----------- ----------- ---------- -------- -----------
19,830,511 7,987,521 27,818,032 3,972,166 31,790,198
----------- ----------- ----------- ----------- ---------- -------- -----------
Operating expenses:
Sales and marketing 9,480,986 4,413,145 13,894,131 1,816,251 15,710,382
General and administrative 4,399,286 2,840,315 353,000 (5) 7,592,601 1,346,208 219,000 (5) 9,157,809
Shipping and warehousing 1,976,303 524,631 2,500,934 320,626 2,821,560
Research and development 946,992 45,785 992,777 184,661 1,177,438
Stock compensation and
IPO bonus 3,833,140 - 3,833,140 - 3,833,140
----------- ----------- ----------- ----------- ---------- -------- -----------
Total operating expenses 20,636,707 7,823,876 353,000 28,813,583 3,667,746 219,000 32,700,329
----------- ----------- ----------- ----------- ---------- -------- -----------
Income (loss) from operations (806,196) 163,645 (353,000) (995,551) 304,420 (219,000) (910,131)
Interest, net (1,987,812) (10,062) (932,000)(6) (2,929,874) (181,509) (595,000)(6) (3,706,383)
----------- ----------- ----------- ----------- ---------- -------- -----------
Income (loss) before income
taxes (2,794,008) 153,583 (1,285,000) (3,925,425) 122,911 (814,000) (4,616,514)
Income tax provision (benefit) - - - - 20,001 (20,001)(7) -
----------- ----------- ----------- ----------- ---------- -------- -----------
Net income (loss) ($2,794,008) $153,583 ($1,285,000) ($3,925,425) $102,910 ($793,999) ($4,616,514)
=========== ======== ============ =========== ======== ========= ============
Net income (loss) per share ($0.45) ($0.63) ($0.74)
=========== ========== ===========
Weighted average common
shares 6,217,738 6,217,738 6,217,738
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GARGOYLES, INC.
Pro Forma Consolidated Statements of Operations
For the Three Months Ended March 31, 1997
Pro Forma Pro Forma
Gargoyles Sungold Adjustments Subtotal Private Eyes Adjustments Pro Forma
--------- ------- ----------- -------- ------------ ----------- ---------
Net sales $8,198,266 $4,261,187 $ - $12,459,453 $2,228,437 $ - $14,687,890
Cost of sales 3,081,997 1,894,249 4,976,246 1,142,433 6,118,679
---------- ---------- ---------- ----------- ---------- ---------- -----------
Gross profit 5,116,269 2,366,938 7,483,207 1,086,004 8,569,211
License income 110,000 - 110,000 - 110,000
---------- ---------- ---------- ----------- ---------- ---------- -----------
5,226,269 2,366,938 7,593,207 1,086,004 8,679,211
---------- ---------- ---------- ----------- ---------- ---------- -----------
Operating expenses:
Sales and marketing 2,789,205 1,077,186 3,866,391 452,931 4,319,322
General and administrative 1,157,001 501,921 88,250 (5) 1,747,172 334,547 54,750 (5) 2,136,469
Shipping and warehousing 409,030 168,397 577,427 82,483 659,910
Research and development 365,291 27,368 392,659 46,788 439,447
---------- ---------- ---------- ----------- ---------- ---------- -----------
Total operating expenses 4,720,527 1,774,872 88,250 6,583,649 916,749 54,750 7,555,148
---------- ---------- ---------- ----------- ---------- ---------- -----------
Income (loss) from operations 505,742 592,066 (88,250) 1,009,558 169,255 (54,750) 1,124,063
Interest, net 26,791 (19,907) (233,000)(6) (226,116) (57,807) (148,750)(6) (432,673)
---------- ---------- ---------- ----------- ---------- ---------- -----------
Income (loss) before income taxes 532,533 572,159 (321,250) 783,442 111,448 (203,500) 691,390
Income tax provision (benefit) 107,000 13,546 93,000 (7) 213,546 5,000 (42,000)(7) 176,546
---------- ---------- ---------- ----------- ---------- ---------- -----------
Net income (loss) $425,533 $558,613 ($414,250) $569,896 $106,448 ($161,500) $514,844
========== ========== ========== =========== ========== ========== ===========
Net income (loss) per share $0.06 $0.07 $0.07
========== =========== ===========
Weighted average common shares 7,682,882 7,682,882 7,682,882
========== =========== ===========
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(1) To record intangible assets for the excess of the purchase price over
net assets acquired associated with the Acquisitions. For purposes of
calculating intangibles and related amortization, the allocation of the
purchase price using the purchase method of accounting is based on the
fair value of the assets and liabilities that were acquired. The most
significant component of intangibles is related to license agreements
with Stussy and Ellen Tracy and is being amortized over the remaining
15 - year license terms.
(2) To record debt activity associated with the acquisitions.
(3) To accrue costs associated with the acquisitions.
(4) To eliminate certain liabilities that were not assumed by Gargoyles in
addition to the equity associated with the acquisitions.
(5) To record the amortization of intangibles associated with the
acquisitions.
(6) To record interest expense for the debt incurred in the acquisitions.
(7) Reflects adjustments for income taxes as if Sungold and Private Eyes
had been taxed as C corporations rather than as S corporations and
adjustments for income taxes to a consolidated provision.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GARGOYLES, INC.
Date: July 28, 1997
By: /s/ Steven R. Kingma
--------------------------------
Steven R. Kingma
Vice President, Chief Financial
Officer, Secretary and Treasurer
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21
EXHIBIT INDEX
EX-23.1 Consent of Leydon & Gallagher, Independent Auditors