UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 2, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21690
SUNGLASS HUT INTERNATIONAL, INC.
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(Exact Name of Registrant as Specified in its Charter)
FLORIDA 65-0667471
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
255 ALHAMBRA CIRCLE
CORAL GABLES, FLORIDA 33134
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 461-6100
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(Former name, former address and fiscal year, if changed since last report.)
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 [ ]
The number of shares outstanding of the registrant's common stock is 54,689,646
(as of September 16, 1997).
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of August 2, 1997 (Unaudited)
and February 1, 1997................................................ 3
Consolidated Statements of Income for the Thirteen Weeks Ended
August 2, 1997 and August 3, 1996 (Unaudited)....................... 4
Consolidated Statements of Income for the Twenty-Six Weeks Ended
August 2, 1997 and August 3, 1996 (Unaudited)....................... 5
Consolidated Statements of Cash Flows for the Twenty-Six Weeks
Ended August 2, 1997 and August 3, 1996 (Unaudited)................. 6
Notes to Consolidated Financial Statements (Unaudited).............. 8
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 9
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K................................. 15
Signatures....................................................... 16
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<TABLE>
<CAPTION>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AUGUST 2, FEBRUARY 1,
1997 1997
------------------- -------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,793 $ 5,673
Accounts receivable 5,072 3,032
Inventory 115,085 145,194
Prepaid rent 7,910 7,706
Other current assets 15,763 13,324
------------------- -------------------
Total current assets 154,623 174,929
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $76,198 and $63,941 135,732 135,930
UNAMORTIZED COST IN EXCESS OF NET ASSETS OF ACQUIRED
BUSINESSES, net of accumulated amortization of $28,651 and $27,587 37,441 38,849
OTHER ASSETS 15,843 14,229
------------------- -------------------
Total assets $ 343,639 $ 363,937
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 25,056 $ 13,610
Accrued payroll and related taxes 6,900 6,435
Accrued rent 8,284 6,759
Accrued expenses 12,246 966
Accrued restructuring expenses 7,522 15,096
Current portion of long-term debt - 129
-------------------
-------------------
Total current liabilities 60,008 42,995
LONG-TERM DEBT, net of current portion and unamortized discount 112,633 163,150
------------------- -------------------
Total liabilities 172,641 206,145
------------------- -------------------
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 546 544
Additional paid-in capital 164,716 164,326
Foreign currency translation adjustment (1,950) (227)
Retained earnings (accumulated deficit) 7,686 (6,851)
------------------- -------------------
Total stockholders' equity 170,998 157,792
=================== ===================
Total liabilities and stockholders' equity $ 343,639 $ 363,937
=================== ===================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS ENDED
----------------------------------------
AUGUST 2, AUGUST 3,
1997 1996
---------------- ------------------
<S> <C> <C>
Net sales $ 187,240 $ 166,469
Cost of goods sold, occupancy and buying expenses 105,836 87,828
---------------- ------------------
Gross profit 81,404 78,641
Selling, general and administrative expenses:
Operating expenses 47,557 37,812
Depreciation and leasehold amortization 6,772 5,371
Amortization of cost in excess of net assets of acquired businesses 595 597
---------------- ------------------
54,924 43,780
---------------- ------------------
Earnings before interest and income taxes 26,480 34,861
Interest expense 2,146 1,530
---------------- ------------------
Earnings before income taxes 24,334 33,331
Provision for income taxes 10,089 13,323
---------------- ------------------
Net income $ 14,245 $ 20,008
================ ==================
Net income per share $ 0.26 $ 0.36
================ ==================
Weighted average shares outstanding 55,413 55,747
================ ==================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
----------------------------------------
AUGUST 2, AUGUST 3,
1997 1996
---------------- ------------------
<S> <C> <C>
Net sales $ 325,489 $ 289,291
Cost of goods sold, occupancy and buying expenses 192,308 157,939
---------------- ------------------
Gross profit 133,181 131,352
Selling, general and administrative expenses:
Operating expenses 89,140 71,333
Depreciation and leasehold amortization 13,335 10,548
Amortization of cost in excess of net assets of acquired businesses 1,194 1,118
---------------- ------------------
103,669 82,999
---------------- ------------------
Earnings before interest and income taxes 29,512 48,353
Interest expense 4,688 2,992
---------------- ------------------
Earnings before income taxes 24,824 45,361
Provision for income taxes 10,287 18,195
---------------- ------------------
Net income $ 14,537 $ 27,166
================ ==================
Net income per share $ 0.26 $ 0.49
================ ==================
Weighted average shares outstanding 55,362 55,755
================ ==================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
<TABLE>
<CAPTION>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
-----------------------------------------
AUGUST 2, AUGUST 3,
1997 1996
----------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,537 $ 27,166
----------------- ------------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities-
Depreciation and amortization 14,529 11,666
Compensation expense - stock grants 341 -
Amortization of debt discount 170 35
Changes in assets and liabilities
Changes in assets:
Accounts receivable (2,040) (2,839)
Inventory 30,109 (41,370)
Prepaid rent (204) (887)
Other current assets (2,439) (9,902)
Other assets (3,270) (1,512)
Changes in liabilities:
Accounts payable 11,446 (7,036)
Accrued expenses 7,998 9,583
----------------- ------------------
56,640 (42,262)
----------------- ------------------
Net cash provided by (used in) operating activities 71,177 (15,096)
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (16,092) (36,157)
Acquisitions of businesses - (567)
----------------- ------------------
Net cash used in investing activities (16,092) (36,724)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 112,369
Proceeds from borrowings under revolving credit facilities 51,600 199,994
Principal payments on revolving credit facilities (102,100) (260,700)
Principal payments on long-term debt (316) -
Payment of deferred financing costs (138) (110)
Proceeds from exercise of stock options 21 1,632
----------------- ------------------
Net cash provided by (used in) financing activities (50,933) 53,185
----------------- ------------------
Effect of exchange rate changes on cash and cash equivalents 968 117
----------------- ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,120 1,482
CASH AND CASH EQUIVALENTS, beginning of period 5,673 4,506
----------------- ------------------
CASH AND CASH EQUIVALENTS, end of period $ 10,793 $ 5,988
================= ==================
</TABLE>
Continued on Next Page
6
<PAGE>
<TABLE>
<CAPTION>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
-----------------------------------------
AUGUST 2, AUGUST 3,
1997 1996
----------------- ------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 4,481 $ 2,451
================= ==================
Income taxes $ 2,487 $ 9,659
================= ==================
Non-cash activities:
Write-down of property and equipment against accrued restructuring
expenses $ 2,272 $ -
================= ==================
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL:
The accompanying consolidated financial statements of Sunglass Hut
International, Inc. and subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and, therefore, omit or condense
certain footnotes and other information normally included in financial
statements prepared in accordance with generally accepted accounting principles.
The accounting policies followed for interim financial reporting are the same as
those disclosed in Note 1 of the Notes to Consolidated Financial Statements
included in the Company's audited financial statements for the fiscal year ended
February 1, 1997 which are included in Form 10-K. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of the financial information for the interim periods reported
have been made. Results of operations for the twenty-six weeks ended August 2,
1997 are not necessarily indicative of the results to be expected for the entire
fiscal year ending January 31, 1998.
NOTE 2 - EARNINGS PER SHARE:
If the Company were required to calculate earnings per share under Statement of
Financial Accounting Standards No. 128, which is effective for periods after
December 15, 1997, basic and diluted earnings per share for the second quarter
and first six months of 1997 and 1996, respectively, would not have been
materially different than the earnings per share reported in the accompanying
consolidated statements of income.
NOTE 3 - ACCRUED RESTRUCTURING EXPENSES:
During the second quarter of 1997, $1.9 million of the accrual for restructuring
expenses was utilized for write-downs of property and equipment, lease exit,
inventory restocking and handling, and severance costs related to corporate
restructuring and store closings. Of the 120 store closures included in the
restructuring plan, 70 stores have been closed as of the end of the second
quarter, 1997. The Company intends to substantially complete the restructuring
plan in 1997.
NOTE 4 - CEO SEPARATION ACCRUAL:
On May 29, 1997, the Company's former President and Chief Executive Officer
resigned. The Company recorded a charge of $1.7 million, approximately $0.02 per
share, during the second quarter of 1997 in connection with the former President
and Chief Executive Officer's resignation.
NOTE 5 - CONTINGENCIES:
The Internal Revenue Service ("IRS") is conducting an examination of the
Company's federal income tax returns for fiscal 1992 through 1994. While the
audit has not yet been finalized, the IRS personnel conducting the examination
have advised the Company of concerns related to the Company's income tax
reporting of certain deductions. The Company believes its positions on these
matters are supportable. While this matter is in the early stage of development,
based on information available to the Company at this time, management believes
that this issue will not have a material adverse impact on the Company; however,
there can be no assurance as to the ultimate resolution of this matter.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), Sunglass Hut International,
Inc. (the "Company") is hereby providing cautionary statements identifying
important factors that could cause the Company's actual results to differ
materially from those projected in forward-looking statements (as such term is
defined in the Reform Act) of the Company made by or on behalf of the Company
herein or which are made orally, whether in presentations, in response to
questions or otherwise. Any statements that express, or involve discussions as
to expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"will result," "are expected to," "will continue," "is anticipated," "plans,"
"intends," "estimated," "projection" and "outlook") are not historical facts and
may be forward-looking and, accordingly, such statements involve estimates,
assumptions and uncertainties which could cause actual results to differ
materially from those expressed in the forward-looking statements. Such
uncertainties include, among others, the following factors:
ABILITY TO MANAGE GROWTH. The Company has grown significantly in the past
several years. However, there is no assurance that the Company will sustain the
growth in the number of stores and revenues that it has achieved historically.
Moreover, there can be no assurance that the Company's management and financial
controls, executive personnel and other corporate support systems will be
adequate to manage the increase in the size and scope of the Company's business
in prior and future periods. The continued growth of the Company is dependent,
in large part, upon the Company's ability to open and operate new stores on a
profitable basis, which in turn is subject to, among other things, the Company's
ability to secure suitable store sites on a timely basis and on satisfactory
terms, the Company's ability to hire, train and retain qualified management and
other personnel, the availability of adequate capital resources and the
successful integration of new stores into existing operations. There can be no
assurance that, because of demographic or other reasons, the Company's new
stores will achieve sales and profitability comparable to the Company's existing
stores. In addition, there can be no assurance that the opening of new locations
will not cannibalize sales at existing locations.
RISKS OF NEW SPECIALTY STORE CONCEPTS AND LOCATIONS. The Company's ability to
expand into new concepts has not been fully tested. The Company opened its first
Watch Station store, a watch specialty store, in May 1996. Accordingly, its
operations will be subject to the numerous risks of establishing new business
enterprises, including unanticipated operating problems, lack of experience and
customer acceptance, significant competition from existing and new retailers,
and the extent of existing relationships between such retailers and
manufacturers/distributors. There can be no assurance that Watch Station will be
able to duplicate the growth of the Company's Sunglass Hut stores or that it
will achieve sales and profitability levels that justify the Company's
investment therein. Expansion of Watch Station also involves other risks that
could have a material adverse effect on the Company, including (i) diversion of
management's attention from the Company's core business, (ii) difficulties with
the hiring, retention and training of key personnel, (iii) risks associated with
unanticipated problems or legal liabilities, and (iv) possible reduction of the
Company's gross profit margin. In the fourth quarter of fiscal 1996, the Company
halted expansion of EyeX, a prescription glasses and corrective lens store
concept launched in October 1995.
9
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
There can be no assurance that the Company will be able to successfully execute
other components of its growth strategies. The Company's expansion plans include
both its "Sunscriptions" prescription sunglass program and an increasing
percentage of non-traditional retail locations, including licensed departments,
with respect to which the Company has substantially less experience. Moreover,
the Company's international expansion subjects the Company to certain risks and
limitations not associated with its current U.S. operations, including (i) the
uncertainty of market acceptance of specialty retailers and/or the Company's
product offerings, (ii) the Company's ability to hire and train local personnel,
(iii) the Company's dependence on local business practices, (iv) foreign
currency losses, (v) the impact of foreign taxes, and (vi) foreign investment
restrictions and limitations.
Although the Company has acquired competitors in the past and considers
acquiring additional smaller chains of specialty sunglass retailers on an
ongoing basis, there can be no assurance that the Company will be able to
consummate acquisitions on satisfactory terms or that any acquired operations
will be successfully integrated. Moreover, the consolidation of the domestic
specialty sunglass industry has reduced the number of larger companies available
for sale, which could lead to higher prices being paid for the acquisition of
the remaining independent companies.
MERCHANDISING AND CONCENTRATION OF SUPPLIERS. The Company's success depends to a
large degree on its ability to provide a merchandise selection that appeals to
customers' changing desires and that appropriately reflects geographical or
other demographic differences in brand and style preferences. A failure by the
Company to identify or take advantage of emerging fashion trends in sunglasses
could have a material adverse effect on its results of operations. Moreover, the
Company has no long-term purchase contracts or other contractual assurance of
continued supply, pricing or access to new products. While the Company believes
that it has good relationships with its vendors, the inability to obtain
merchandise from one or more key vendors on a timely basis, or a material change
in the Company's current purchase terms, could have a material adverse effect on
its results of operations.
The market for sunglasses is increasingly subject to the risk of changing
fashion trends, and the demand for certain styles can change. Although the
Company has historically enjoyed favorable return privileges with its vendors,
there can be no assurance that the Company will not be subject to limitations on
returns in the future. In addition, the Company's efforts to develop branded
sunglass products will increase the Company's exposure to risks of inventory
obsolescence. Accordingly, in the event that a particular style of sunglass does
not achieve widespread consumer acceptance, the Company may be required to take
significant markdowns, which could have a material adverse effect on its gross
profit margin and other operating results.
1996 RESTRUCTURING PLAN. The Company's 1996 restructuring plan includes the
closure of approximately 120 marginal or unprofitable locations during the
fourth quarter of 1996 and throughout fiscal year 1997. The Company's inability
to implement planned closures on schedule could have an adverse effect on its
gross profit margin and other operating results.
10
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
DEPENDENCE ON KEY PERSONNEL. The Company's success and ability to properly
manage its growth depends to a significant extent both upon the performance of
its current senior management team and its ability to attract, hire, motivate
and retain additional, qualified management personnel in the future. The
inability to recruit and retain such additional personnel, or the loss of
service of any of the Company's current executive officers, could have a
material adverse impact on the Company.
SEASONALITY. The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its net sales and net income. The Company
has generally experienced lower net sales and net income in each of the first
and third fiscal quarters of each year, and the Company expects this trend may
continue for the foreseeable future. The Company's quarterly results of
operations may also fluctuate significantly as a result of a variety of factors,
including the timing of new store openings and sales contributed by new stores.
POSSIBLE VOLATILITY OF STOCK AND NOTE PRICES. The market prices of the Company's
common stock and convertible subordinated notes are subject to significant
volatility caused by factors such as quarterly fluctuations in the financial
results of the Company, monthly comparable store sales results, changes in
financial estimates by securities analysts, shortfalls in earnings or sales
below analysts' expectations, the overall economy and the financial markets. In
addition, the common stock is quoted on the NASDAQ National Market and the notes
are traded on the NASDAQ SmallCap Market, which stock markets have experienced,
and are likely to experience in the future, significant price and volume
fluctuations which could adversely affect the market price of the common stock
and the notes without regard to the operating performance of the Company.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS. Certain provisions of the Company's Articles of
Incorporation and Bylaws may be deemed to have anti-takeover effects and may
delay, defer or prevent a takeover attempt that a stockholder might consider in
its best interest. These provisions (i) classify the Company's Board of
Directors into three classes, each of which will serve for different three-year
periods, (ii) provide that only the Board of Directors or Chief Executive
Officer may call special meetings of the stockholders, and (iii) establish
certain advance notice procedures for nomination of candidates for election as
directors and for stockholder proposals to be considered at stockholders'
meetings. The Company is also subject to certain provisions of the Florida
Business Corporation Act which may deter or frustrate takeovers of Florida
corporations.
The Company cautions that the risk factors described above could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statements of the Company made by or on behalf of the Company.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrences of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
11
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED) GENERAL
Sunglass Hut International, Inc. ("Sunglass Hut" or the "Company") is the
world's largest specialty retailer of sunglasses with over 2,000 locations
worldwide. Since opening its first kiosk in Miami, Florida in 1971, the Company
has grown rapidly, both through internal expansion and acquisitions, increasing
from 716 stores as of fiscal yearend 1992 to 2,106 specialty sunglass and 69
Watch Station locations as of the quarter ended August 2, 1997. The Company's
business strategy is to combine the operating efficiencies, extensive product
assortment and everyday low prices of category dominant retailers with the level
of customer service and ambiance characteristic of specialty retailers. The size
of the Company's products allows the Company to use a wide variety of sales
location formats, including malls, airports, on-street sites and licensed
departments within department stores.
LIQUIDITY AND CAPITAL RESOURCES
The Company's short-term cash needs are primarily for working capital to support
its inventory requirements and new store additions. The Company's long-term
liquidity requirements relate principally to the maturity of the existing
revolving credit facility in December 1998, the maturity of the $115 million
Convertible Subordinated Notes in June 2003, operating lease commitments and
continued store expansion. Effective July 31, the Company amended its existing
revolving credit facility to decrease the maximum revolving credit amount from
$75 million to $60 million and amend certain financial covenants. The credit
facility includes up to $10 million in letters of credit. Borrowings under the
credit facility generally bear interest at a floating rate equal to, at the
Company's option, (i) the greater of (a) the prime rate or (b) the federal funds
effective rate plus 0.50%, plus, in each case, up to a maximum of 0.75%
depending on the levels of certain financial ratios, or (ii) LIBOR plus a range
from .625% to 1.75% depending on the levels of certain financial ratios.
Due to the seasonal nature of the Company's business, outstanding borrowings
under the credit facility typically peak during the first and third fiscal
quarters as the Company finances inventory purchases in advance of the Company's
highest sales periods. See "Seasonality and Quarterly Results." As of August 2,
1997, borrowings under the credit facility were fully eliminated reflecting a
reduction of $50.5 million since the beginning of the year, due to working
capital improvements and seasonally strong second quarter cash flow.
Approximately $1.7 million in letters of credit were outstanding which were
maintained as security for performance under the Company's executive office
lease and to service other debt.
Net cash provided by operating activities was $71.2 million for the first six
months of fiscal 1997 compared to net cash used of $15.1 million for the same
period in fiscal 1996. The difference between the Company's net income and
operating cash flow in fiscal 1997 is primarily attributable to the reduction in
inventory of $30.1 million, the increase in accounts payable and accrued
expenses of $19.4 million, and non-cash charges for depreciation and
amortization.
Net cash used in investing activities was $16.1 million for the first six months
of fiscal 1997 compared to $36.7 million for the same period last year.
Investing cash flows reflect capital expenditures, which are primarily related
to new store expansion and the renovation of existing stores.
Net cash used in financing activities was $50.9 million for the first six months
of fiscal 1997 compared to net cash provided by financing activities of $53.2
million for the same period last year. 1997 financing cash flows primarily
reflect net repayment of the Company's revolving credit facility of $50.5
million during the first six months of the fiscal year.
12
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Management believes that cash provided by operations together with borrowing
availability under the Company's revolving credit facility will be sufficient to
fund estimated capital expenditures associated with the Company's planned
opening of approximately 80 additional locations in fiscal 1997 and other
working capital requirements through at least fiscal 1997.
RESULTS OF OPERATIONS
QUARTER ENDED AUGUST 2, 1997 COMPARED TO QUARTER ENDED AUGUST 3, 1996
Net sales increased $20.8 million, or 12.5%, to $187.2 million during the
quarter ended August 2, 1997 compared to $166.5 million for the same period of
fiscal 1996. Approximately 90% of this increase was attributable to sales from
new stores opened during the second quarter of fiscal 1997 (and fiscal 1996 to
the extent not reflected in comparable store sales increases), while an increase
in comparable store sales of 1.4% accounted for approximately 10% of this
increase.
Gross profit increased $2.8 million, or 3.5%, to $81.4 million during the
quarter ended August 2, 1997 compared to $78.6 million for the same period of
fiscal 1996. As a percentage of net sales, gross profit decreased to 43.5% for
the quarter ended August 2, 1997 from 47.2% for the quarter ended August 3,
1996. The decrease in gross profit is due to (1) higher occupancy costs related
to the Company's new store expansion, including expansion into international
markets, (2) markdowns and promotions to reduce and rebalance inventory levels,
and (3) the Company's expansion into international markets and the retail watch
industry, both of which generate lower gross profits than the Company's
traditional domestic sunglass business.
Operating expenses increased $9.8 million, or 25.8%, during the quarter ended
August 2, 1997 compared to the same period of fiscal 1996. The increase in
operating expenses includes (1) a charge of $1.7 million recorded in connection
with the resignation of the Company's former President and Chief Executive
Officer and (2) approximately $2.0 million of costs incurred as part of the
Company's increased marketing efforts during the quarter. The remaining increase
in operating expenses as a percentage of net sales during 1997 is mainly due to
the negative impact of lower than expected comparable and new store sales.
Depreciation and leasehold amortization expense increased $1.4 million, or
26.1%, to $6.7 million during the quarter ended August 2, 1997 compared to $5.4
million for the same period of fiscal 1996, primarily due to new store growth.
Interest expense increased $616,000 to $2.1 million for the quarter ended August
2, 1997, compared to $1.5 million for the same period last year due to an
increased level of average borrowings to support new store operating and capital
cash needs.
As a result of the foregoing, the Company reported net income of $0.26 per
share, or $14.2 million, during the quarter ended August 2, 1997 compared to net
income of $0.36 per share, or $20.0 million, for the same period of fiscal 1996.
13
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
FIRST SIX MONTHS OF 1997 COMPARED TO FIRST SIX MONTHS OF 1996
Net sales increased $36.2 million, or 12.5%, to $325.5 million during the first
six months of fiscal 1997 compared to $289.3 million for the same period of
fiscal 1996. The increase reflects sales from new stores opened and acquired
during the first six months of fiscal 1997 (and fiscal 1996 to the extent not
reflected in comparable store sales) of $38.0 million, partially offset by a
decrease in comparable store sales of $1.8 million.
Gross profit increased $1.8 million, or 1.4%, to $133.2 million during the first
six months of fiscal 1997 compared to $131.4 million for the same period of
fiscal 1996. As a percentage of net sales, gross profit was 40.9% in 1997 and
45.4% in 1996. The decrease in gross profit margin is primarily due to (1)
negative occupancy expense leverage due to a decrease in comparable store sales,
as well as higher occupancy costs related to the Company's new store expansion,
including expansion into international markets, (2) markdowns and promotions to
reduce and rebalance inventory levels, and (3) the Company's expansion into
international markets and the retail watch industry, both of which generate
lower gross profits than the Company's traditional domestic sunglass business.
Operating expenses increased $17.8 million, or 25.0%, during the quarter ended
August 2, 1997 compared to the same period of fiscal 1996. The increase in
operating expenses includes(1) a charge of $1.7 million recorded in connection
with the resignation of the Company's former President and Chief Executive
Officer and (2) approximately $2.0 million of costs incurred as part of the
Company's increased marketing efforts during the second quarter. The remaining
increase in operating expenses as a percentage of net sales during 1997 is
mainly due to the negative impact of lower than expected comparable and new
store sales.
Depreciation and leasehold amortization expense increased approximately $2.8
million, or 26.4%, to $13.3 million during the first six months of fiscal 1997
compared to $10.5 million for the same period of fiscal 1996. This increase is
primarily due to new store growth.
Interest expense increased $1.7 million to $4.7 million during the first six
months of fiscal 1997 compared to $3.0 million for the same period of fiscal
1996, due to an increased level of average borrowings to support new store
operating and capital cash needs.
As a result of the foregoing, the Company reported earnings of $0.26 per share,
or $14.5 million, during the first six months of fiscal 1997 compared to $0.49
per share or $27.2 million for the same period of fiscal 1996.
SEASONALITY AND QUARTERLY RESULTS
Historically, the Company's operations have been seasonal, with highest net
sales and net income occurring in the second fiscal quarter (reflecting
increased demand for sunglasses during the spring and summer months) and, to a
lesser extent, the fourth fiscal quarter (reflecting increased demand during the
calendar year-end holiday selling season).
The Company's results of operations may also fluctuate from quarter to quarter
as a result of the amount and timing of sales contributed by new stores, the
integration of new stores and concepts into the operations of the Company, and
the timing of planned store closures, as well as other factors. The addition of
a large number of new stores can therefore significantly affect results of
operations on a quarter-to-quarter basis.
14
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.14 Separation Agreement and General Release between the Registrant
and Jack B. Chadsey dated May 29, 1997.
10.15 Amendment No. 5 to Amended and Restated Revolving Credit and
Reimbursement Agreement, effective as of July 31, 1997, dated as
of Septemer 12, 1997, among the Registrant, NationsBank, N.A. and
the other lenders named therein.
27 Financial Data Schedule
- ---------------
(1) Filed herewith.
(b) The Company did not file any reports on Form 8-K during the quarter
ended August 2, 1997.
15
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
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 thereunto duly authorized.
SUNGLASS HUT INTERNATIONAL, INC.
Date: September 16, 1997 By: /s/James N. Hauslein
--------------------------------------------
James N. Hauslein
Chairman of the Board and
acting President and Chief Executive Officer
(principal executive officer)
Date: September 16, 1997 By: /s/Larry G. Petersen
--------------------------------------------
Larry G. Petersen
Senior Vice President-Finance
and Chief Financial Officer
(principal financial officer)
Date: September 16, 1997 By: /s/George L. Pita
--------------------------------------------
George L. Pita
Vice President-Finance
(principal accounting officer)
16
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.14 Separation Agreement and General Release between the Registrant
and Jack B. Chadsey dated May 29, 1997.
10.15 Amendment No. 5 to Amended and Restated Revolving Credit and
Reimbursement Agreement, effective as of July 31, 1997, dated
as of Septemer 12, 1997, among the Registrant, NationsBank,
N.A. and the other lenders named therein.
27 Financial Data Schedule
SEPARATION AGREEMENT AND GENERAL RELEASE
THIS SEPARATION AGREEMENT AND GENERAL RELEASE (hereinafter called
"AGREEMENT AND RELEASE") is made and entered by and between SUNGLASS HUT
INTERNATIONAL, INC. its subsidiaries, affiliates, related entities, joint
ventures, officers, directors, employees and/or agents (hereinafter called
"SGHI") and JACK B. CHADSEY and his representatives, executors, heirs and
assigns (hereinafter called "CHADSEY").
W I T N E S S E T H:
WHEREAS, CHADSEY has been and presently is employed by SGHI as
its President and Chief Executive Officer; and
WHEREAS, CHADSEY and SGHI wish to terminate his employment
amicably and in a way that will preserve the good will that exists between them,
and to resolve all other matters between them;
NOW, THEREFORE, for and in consideration of the mutual promises
and covenants contained herein, the receipt and sufficiency of which is hereby
acknowledged, and for good and other consideration, SGHI and CHADSEY agree as
follows:
AGREEMENTS
A. SGHI and CHADSEY agree that effective May 29, 1997 (the
"Effective Date"), CHADSEY will resign from his employment with SGHI, resign
from all corporate offices and committees he may hold with SGHI or any of its
subsidiaries, joint ventures or related entities, and resign from all positions
he may hold on the SGHI Board of Directors or the Board
1.
<PAGE>
of Directors of any of its subsidiaries, joint ventures or related entities and
CHADSEY also agrees not to stand for reelection as a director;
B. SGHI and CHADSEY agree and acknowledge that upon his
termination of employment:
1. SGHI shall pay CHADSEY his regular base salary of
$38,500 per month, less all applicable withholdings and deductions, for a period
of eighteen (18) months and such payments shall be made in eighteen (18) equal
monthly installments of $38,500 per month. This period shall be referred to as
the "Salary and Benefits Continuation Period".
2. SGHI shall pay the cost of CHADSEY's premiums for
coverage under SGHI's Group Health Plans and Group Life Insurance Plans, as well
as all other presently available insurance and benefit plans, during the Salary
and Benefits Continuation Period on the same basis and to the same extent that
it paid for such premiums prior to CHADSEY's separation from SGHI.
3. SGHI's obligation to pay CHADSEY his regular base
salary pursuant to Paragraph B.1. and to pay the costs of CHADSEY's premiums for
coverage under SGHI's insurance and benefit plans pursuant to Paragraph B.2.
shall cease in the event, and upon the date, that CHADSEY obtains full-time
employment which is intended to be permanent during the Salary and Benefits
Continuation Period; provided, however, that in no event shall CHADSEY be paid
by SGHI less than twelve (12) months of Salary and Benefits Continuation,
regardless of whether he obtains subsequent employment.
4. SGHI shall, upon termination, accelerate full vesting
of all CHADSEY's unvested stock options and further agrees that all of the SGHI
stock options listed on attached Schedule A shall remain exercisable in full for
the total number of shares subject
2.
<PAGE>
thereto for the thirty-six (36) month period beginning on the Effective Date,
notwithstanding any term or condition in any option plan, agreement or
certificate to the contrary; provided, however, that for a three (3) month
period following the Effective Date, CHADSEY may exercise options and sell
shares acquired upon exercise thereof only in compliance with SGHI's published
trading calendar attached as Schedule B.
5. CHADSEY's vacation time shall cease accruing upon the
date of his termination.
C. SGHI shall, upon termination, pay to CHADSEY all unused
accrued vacation, and shall thereafter reimburse him for business expenses
properly documented and incurred consistent with SGHI policy and actually
incurred through the date his employment terminates.
D. In the event of any litigation or administrative action (an
"Action") against CHADSEY based upon his official duties while employed by SGHI,
SGHI will indemnify CHADSEY to the extent required by law. With respect to the
RUTTENBERG litigation (U.S. District Court, Southern District of Florida, Case
No. 97-0191-CIV-MOORE) and the BIAGAS litigation (U.S. District Court, Southern
District of Florida, Case No. 97-1059-CIV-MOORE), SGHI shall continue to provide
CHADSEY with representation pursuant to the representation agreement attached
hereto as Schedule C. If the interests of SGHI, or its officers, directors or
affiliates are adverse to or conflict with the interests of CHADSEY in any
Action, or if CHADSEY cannot be fairly or adequately represented by legal
counsel to SGHI in any Action, CHADSEY shall have the right to retain
independent legal counsel (reasonably acceptable to SGHI) to represent him in
such Action and SGHI shall pay the reasonable fees and expenses of such legal
counsel. The fees and expenses in the previous sentence shall be paid by SGHI no
less frequently than
3.
<PAGE>
quarterly. Any determination of whether interests are adverse, there is a
conflict or if CHADSEY cannot be fairly or adequately represented shall be made
in good faith.
E. In exchange for the payments and agreements set forth in
paragraph B above, which, but for this AGREEMENT AND RELEASE, CHADSEY would not
otherwise be entitled, CHADSEY shall release, discharge and covenant not to sue
SGHI, its directors, officers, employees, agents, and subsidiaries and other
affiliated entities, from any and all claims, demands, damages, lawsuits,
obligations, promises, administrative actions, charges and causes of action,
both known and unknown, in law or in equity, of any kind whatsoever, which
CHADSEY ever had, now has, or may have against SGHI, by reason of any matter,
cause or thing whatsoever, up to and including the Effective Date, including but
not limited to any and all claims and causes of action arising out of CHADSEY's
employment with SGHI, any and all claims and causes of action under Title VII of
the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment
Act of 1967, as amended ("ADEA"), the Americans With Disabilities Act ("ADA"),
the Employee Retirement Income Security Act ("ERISA"), and any other federal,
state or local anti-discrimination law, statute or ordinance; and any lawsuit
founded in tort, contract or any other common law or equitable basis of action.
Notwithstanding the foregoing, this paragraph does not release SGHI from its
obligations under this AGREEMENT AND RELEASE. This release shall not apply to
(i) any rights of CHADSEY under this AGREEMENT AND RELEASE, (ii) any rights
CHADSEY may have to indemnification from SGHI or under any directors and
officers liability insurance or similar policy purchased by SGHI, or (iii) any
amounts owed to CHADSEY under SGHI's 401(k) plan, 401(k) "wrap around" plan and
deferred compensation plan accrued through the Effective Date.
4.
<PAGE>
SGHI shall release, discharge and covenant not to sue CHADSEY and
his beneficiaries, heirs and assigns from any and all claims, demands, damages,
lawsuits, obligations, promises, administrative actions, charges and causes of
action, both known and unknown, in law or in equity, of any kind whatsoever,
which SGHI ever had, now has, or may have against CHADSEY by reason of any
matter, cause or thing whatsoever, up to and including the Effective Date,
including any claims related to his employment with SGHI or his status as an
officer and director of SGHI.
F. CHADSEY acknowledges that he is currently being represented by
Brobeck, Phleger & Harrison LLP in connection with the RUTTENBERG and BIAGAS
litigations and has been represented by Brobeck, Phleger & Harrison LLP in
connection with a dispute with Lesley Berkovitz and hereby waives any and all
conflicts which may arise by virtue of Brobeck, Phleger & Harrison LLP's
representation of SGHI in connection with the negotiation of this AGREEMENT AND
RELEASE.
G. CHADSEY and SGHI agree not to institute any administrative
proceeding or lawsuit against the other upon any basis outlined in paragraph E
above, and represent and warrant that neither party has authorized any other
person or entity to initiate such administrative proceedings or lawsuit.
H. CHADSEY and SGHI agree that nothing contained in this
AGREEMENT AND RELEASE shall constitute or be treated as an admission of
liability or wrongdoing by either party, and each of the parties hereto hereby
deny any liability or wrongdoing.
I. CHADSEY agrees that he will not seek employment or
re-employment with SGHI at any time in the future, unless the then Board of
Directors of SGHI desires to hire or rehire CHADSEY. Company termination
documents will reflect that CHADSEY has "resigned".
5.
<PAGE>
In connection with such resignation, SGHI shall issue a press release in the
form attached hereto as Schedule D and will not make or publish any statement to
the press, third-parties or employees of SGHI which conflicts with the terms of
such press release.
J. CHADSEY and SGHI shall not, without compulsion of legal
process, discuss with others, either directly or by implication, the fact or
terms of this settlement, the amounts referred to in this AGREEMENT AND RELEASE,
or the fact of the payment of said amounts, except that each party may disclose
them to his attorneys or accountants to whom the disclosure is necessary to
effect the purposes for which he has consulted such attorneys or accountants and
SGHI may make disclosures required by applicable securities laws (which may
require the filing of this AGREEMENT AND RELEASE with the SEC), and Chadsey may
disclose the confidentiality, nonsolicitation, and noncompete provisions of this
AGREEMENT AND RELEASE to employers or prospective employers. If either party is
served with legal process compelling disclosure of any matters referenced in
this AGREEMENT AND RELEASE, such party shall immediately notify the other party
hereto so that it may have the opportunity to interpose an objection.
K. CHADSEY agrees not to divulge, communicate, use to the
detriment of SGHI or for the benefit of any other person or persons, or misuse
in any way, any Confidential Information (as hereinafter defined) pertaining to
the business of SGHI. Any Confidential Information or data known or hereafter
acquired by CHADSEY with respect to the business of SGHI (which shall include,
but not be limited to, information concerning SGHI personnel issues, financial
condition, prospects, methods of doing business and marketing and promotion of
SGHI's services) shall be deemed a valuable, special and unique asset of SGHI
that is received by CHADSEY in confidence and as a fiduciary, and CHADSEY shall
remain a fiduciary to SGHI
6.
<PAGE>
with respect to all such information. CHADSEY shall, prior to termination,
return to SGHI all originals and copies of any SGHI company document in his
possession.
For purposes of this AGREEMENT AND RELEASE, "Confidential
Information" means information disclosed to CHADSEY or known by CHADSEY as a
consequence of or through his employment by SGHI (including information
conceived, originated, discovered or developed by SGHI) prior to or after the
date hereof, and not generally known, about SGHI's business, which has not been
previously disclosed to the public.
L. Each party to this AGREEMENT AND RELEASE agrees that such
party will do or say nothing in the future to disparage or otherwise impugn the
commercial or personal reputations of the other party hereto, or any of its or
his officers, directors, employees and/or agents. SGHI's current officers and
directors will not expressly disparage CHADSEY or his performance while serving
in their capacity as officers and directors of SGHI.
M. CHADSEY further agrees that he will not voluntarily, and
without compulsion of legal process, assist or encourage others to assert claims
against SGHI or against any affiliates, related entities, officers, directors,
employees and/or agents of SGHI or to commence or maintain litigation against
SGHI or any affiliate, related entity, officer, director, employee and/or agent
of SGHI. SGHI agrees that it will not voluntarily, and without compulsion of
legal process, assist or encourage others to assert claims against CHADSEY or to
commence or maintain litigation against CHADSEY.
N. CHADSEY agrees that, upon reasonable notice and at reasonable
times, he shall make himself available to and cooperate with SGHI in connection
with any threatened or ongoing litigation matters involving SGHI or CHADSEY,
including but not limited to conferences, preparation for deposition, deposition
and trial. CHADSEY shall be available to
7.
<PAGE>
SGHI for consultation on general corporate matters. SGHI shall reimburse
CHADSEY, to the extent not prohibited by law, for all reasonable expenses
incurred by CHADSEY in complying with his obligations under this paragraph.
Nothing in this paragraph N shall require CHADSEY to take any action that would
conflict with his duties and obligations to any subsequent employer (subject to
CHADSEY's use of good faith reasonable efforts to obtain reasonable time off
when there is no significant interference with the business of such subsequent
employer).
O. CHADSEY agrees that for a period coextensive with the Salary
and Benefits Continuation Period, and in no event less than twelve (12) months
("non-compete period"), CHADSEY will not accept employment with, provide
services to, engage in or have any interest in any sole proprietorship,
partnership, corporation or business or any other person or entity (whether as
an employee, officer, director, partner, agent, security holder, creditor,
consultant or otherwise) that, directly or indirectly, whether through retail,
catalog or Internet sales, engages in the sale primarily of watches or related
accessories or primarily the sale, manufacture, or distribution of optical
products of any kind, including sunglasses, or prescription and nonprescription
eyewear.
P. CHADSEY further agrees that, during the non-compete period,
CHADSEY shall not hire or encourage his employer to hire any employee of SGHI,
and shall not induce or attempt to influence any employee of SGHI or any
independent contractor of SGHI to terminate or modify his employment or
relationship with SGHI.
Q. CHADSEY and SGHI understand that the covenants contained in
this AGREEMENT AND RELEASE, including the covenants in paragraphs J, K, L, M,
and O, above, of nondisclosure, confidentiality, nondisparagement,
nonassistance, and non-competition are material inducements to each party for
the making of this settlement and that, for the breach
8.
<PAGE>
thereof, each party will be entitled to pursue its legal and equitable remedies,
including without limitation the right to recover damages and seek injunctive
relief.
R. In the event it becomes necessary to commence litigation in
order to enforce performance of this AGREEMENT AND RELEASE or for breach
thereof, the prevailing party shall recover its costs and reasonable attorneys'
fees.
S. This AGREEMENT AND RELEASE shall be deemed to have been
entered into in the State of Florida and shall be construed and interpreted in
accordance with the laws of that state. The parties agree that any and all
claims and lawsuits pertaining to paragraph O of this AGREEMENT AND RELEASE
shall be brought in the state or federal courts in Dade County, Florida, and the
parties expressly waive the right to proceed in any other jurisdiction or forum.
T. CHADSEY and SGHI acknowledge and agree that no promises or
representations were made which do not appear written herein and that this
AGREEMENT AND RELEASE contains the entire agreement of the parties as to the
subject matter thereof.
U. CHADSEY and SGHI acknowledge and agree that if any provision
of this AGREEMENT AND RELEASE is found to be unenforceable, it shall not affect
the enforceability of the remaining provisions and the court shall enforce all
remaining provisions to the extent permitted by law.
V. CHADSEY hereby acknowledges that he has been given at least
twenty-one (21) days to review this AGREEMENT AND RELEASE, and that he has seven
(7) days after signing this AGREEMENT AND RELEASE within which to rescind this
AGREEMENT AND RELEASE by providing notice to SGHI in writing. CHADSEY
acknowledges that he has been represented by counsel in connection with this
AGREEMENT AND RELEASE and all the
9.
<PAGE>
waivers contained herein. CHADSEY further acknowledges that this AGREEMENT AND
RELEASE satisfies all the requirements for an effective release by CHADSEY of
all age discrimination claims under the ADEA.
Executed this 29th day of May, 1997.
-------------------------------
JACK B. CHADSEY
SUNGLASS HUT INTERNATIONAL, INC.
By:
----------------------------
James N. Hauslein
Chairman of the Board
10.
EXHIBIT 10.15
AMENDMENT AGREEMENT NO. 5 TO
AMENDED AND RESTATED REVOLVING CREDIT
AND REIMBURSEMENT AGREEMENT
THIS AMENDMENT AGREEMENT is made and entered into as of this 12th day
of September, 1997, by and among SUNGLASS HUT INTERNATIONAL, INC., a Florida
corporation (herein called the "Borrower"), NATIONSBANK NATIONAL ASSOCIATION
(the "Agent"), as Agent for the lenders (the "Lenders") party to the Amended and
Restated Revolving Credit and Reimbursement Agreement dated December 14, 1995,
as amended, among such Lenders, Borrower and the Agent (the "Agreement") and
each of the Lenders party to the Agreement.
W I T N E S S E T H:
WHEREAS, the Borrower, the Agent and the Lenders have entered into the
Agreement pursuant to which the Lenders have agreed to make revolving loans to
the Borrower in the principal amount of up to $75,000,000 as evidenced by the
Notes (as defined in the Agreement); and
WHEREAS, as a condition to the making of the revolving loans pursuant
to the Agreement the Lenders have required that all Material Subsidiaries of the
Borrower guaranty payment of all Obligations of the Borrower arising under the
Agreement; and
WHEREAS, the Borrower has requested that the Lenders further amend the
Agreement and the Agent and the Lenders have agreed subject to the terms of this
Amendment Agreement, to further amend the Agreement in the manner set forth
herein;
NOW, THEREFORE, the Borrower, the Agent and the Lenders do hereby agree
as follows:
1. DEFINITIONS. The term "Agreement" as used herein and in the Loan
Documents (as defined in the Agreement) shall mean the Agreement as hereby
amended and modified. Unless the context otherwise requires, all terms used
herein without definition shall have the definition provided therefor in the
Agreement.
2. AMENDMENTS. Subject to the conditions hereof, the Agreement is
hereby amended, effective as of July 31, 1997, as follows:
(a) The definition of "Consolidated EBIT" in Section 1.01 is
amended by adding the following clause (v) thereto at the end of clause
(iv):
"plus, (v) a $1,700,000 non-cash charge taken in the quarterly
period ended July 31, 1997 representing a corporate
restructuring charge"
<PAGE>
(b) The definition of "Consolidated EBITDA" in Section 1.01 is
amended by adding the following clause (ix) thereto at the end of
clause (viii):
"plus, (ix) a $1,700,000 non-cash charge taken in the
quarterly period ended July 31, 1997 representing a corporate
restructuring charge"
(c) The Definition of "Letter of Credit" in Section 1.01 is
hereby amended by inserting the phrase "and commercial" following the
word "standby" in the first line thereof.
(d) Section 2.13 is hereby amended in its entirety so that as
amended it shall read as follows:
"2.13 USE OF PROCEEDS. The proceeds of the Loans made
pursuant to the Revolving Credit Facility hereunder shall be
used by the Borrower and its Subsidiaries (i) to finance
Permitted Acquisitions, (ii) for other working capital and
general corporate needs of the Borrower and its Subsidiaries
and (iii) to acquire common stock of the Borrower in an
aggregate amount not to exceed $15,000,000, provided that the
Outstanding Credit Obligations do not exceed $30,000,000
(without giving effect to any such stock repurchase) and any
such right to purchase such stock shall terminate on February
1, 1998."
(e) Section 8.01 is hereby amended by (x) deleting in section
(i) the phrase "$94,000,000 at the Closing Date" and inserting in lieu
thereof the phrase "$100,600,000 at July 31, 1997, (y) deleting the
period at the end thereof and (z) inserting the following:
"minus, (iii) the amount paid by Borrower to purchase capital
stock of the Borrower in an aggregate amount not to exceed
$15,000,000, which capital stock is immediately retired and
cancelled on the books of the Borrower."
(f) Section 8.03 is hereby amended in its entirety so that as
amended it shall read as follows:
"8.03 CONSOLIDATED INTEREST COVERAGE RATIO. Permit at
any time during the periods set forth below the Consolidated
Fixed Charge Ratio to be less than that set forth opposite the
period:
PERIOD RATIO
------ -----
2nd Quarter 1997 2.10 to 1.00
3rd Quarter 1997 2.10 to 1.00
4th Quarter 1997 and
2
<PAGE>
thereafter 2.50 to 1.00"
(g) Section 8.04 is hereby amended in its entirety so that as
amended it shall read as follows:
"8.04 CONSOLIDATED FIXED CHARGE RATIO. Permit at any
time during the periods set forth below the Consolidated Fixed
Charge Ratio to be less than that set forth opposite the
period:
PERIOD RATIO
------ -----
2nd Quarter 1997 .85 to 1.00
3rd Quarter 1997 .85 to 1.00
4th Quarter 1997 and
thereafter 1.10 to 1.00"
(h) Section 8.06 is hereby amended in its entirety so that as
amended it shall read as follows:
"8.06 CONSOLIDATED LEVERAGE RATIO. Permit at any time
during the periods set forth below the Consolidated Leverage
Ratio to be less than that set forth opposite the period:
PERIOD RATIO
------ -----
2nd Quarter 1997 2.35 to 1.00
3rd Quarter 1997 2.60 to 1.00
4th Quarter 1997 and
thereafter 2.10 to 1.00"
(i) Section 8.05 is hereby amended in its entirety so that as
amended it shall read as follows:
"8.05 DIVIDENDS AND DISTRIBUTIONS. Declare or pay
dividends (other than stock dividends) or make other
stockholder distributions or redemptions or purchases of its
capital stock, or make any distribution of cash or property
(other than stock dividends and dividends and distributions
paid by S corporations acquired by the Borrower or its
Subsidiary to stockholders which are used to pay income taxes
arising from operations of such S corporation) to its
shareholders except (i) dividends in an aggregate amount in
any Fiscal Year (on a non-cumulative basis, so that any
amounts not distributed in one Fiscal Year may not be
distributed in subsequent Fiscal Years) not to exceed ten
percent (10%) of Consolidated Net Income so long as after
giving effect to the payment of such dividend no Default or
Event of Default exists hereunder and (ii) purchases prior
3
<PAGE>
to February 2, 1998 of common stock of the Borrower in an
aggregate amount of not to exceed $15,000,000, so long as the
Outstanding Credit Obligations do not exceed $30,000,000
(without giving effect to any Advance used to purchase such
stock)."
3. Each Material Subsidiary of the Borrower has joined in the execution
of this Amendment Agreement for the purpose of (i) agreeing to the other
amendments to the Agreement and the other Loan Documents effected hereby and
(ii) confirming its guarantee of payment of all the Obligations.
4. REPRESENTATIONS AND WARRANTIES. The Borrower hereby certifies that:
(a) The representations and warranties made by Borrower in
Article VI of the Agreement are true and correct in all material
respects on and as of the date hereof except to the extent that such
representations and warranties expressly relate to an earlier date and
except that the financial statements referred to in Section 6.01(f)
shall be those most recently furnished to each Lender pursuant to
Section 7.01(a) and (b);
(b) There has been no material change in the condition,
financial or otherwise, of the Borrower and its Subsidiaries since the
date of the most recent financial reports of the Borrower received by
each Lender under Section 7.01 thereof, other than changes in the
ordinary course of business or as described in paragraph 2(b) of this
Amendment Agreement, none of which has been a material adverse change;
(c) The business and properties of the Borrower and its
Subsidiaries are not, and since the date of the most recent financial
report of the Borrower and its Subsidiaries received by each Lender
under Section 7.01 thereof have not been, adversely affected in any
substantial way as the result of any fire, explosion, earthquake,
accident, strike, lockout, combination of workers, flood, embargo,
riot, activities of armed forces, war or acts of God or the public
enemy, or cancellation or loss of any major contracts; and
(d) No event has occurred and no condition exists which, upon
the consummation of the transaction contemplated hereby, constitutes a
Default or an Event of Default on the part of the Borrower under the
Agreement, the Notes or any other Loan Document either immediately or
with the lapse of time or the giving of notice, or both.
5. CONDITIONS. As a condition to the effectiveness of this Amendment
Agreement,
(a) the Borrower shall deliver, or cause to be delivered to the Agent,
the following:
(i) eight (8) counterparts of this Amendment Agreement duly
executed by the Borrower and the Material Subsidiaries;
(ii) an amendment fee of 5 basis points times the Revolving
Credit
4
<PAGE>
Commitment of each Lender executing this Amendment Agreement;
and
(iii) such other instruments and documents as the Agent may
reasonably request.
(b) pursuant to Section 2.08 of the Agreement, the Total Revolving
Credit Commitment of the Borrower shall be permanently reduced by $15,000,000 so
that after giving effect to such reduction the Total Revolving Credit Commitment
does not exceed $60,000,000.
6. OTHER DOCUMENTS. All instruments and documents incident to the
consummation of the transactions contemplated hereby shall be satisfactory in
form and substance to the Agent and its counsel; the Agent shall have received
copies of all additional agreements, instruments and documents which it may
reasonably request in connection therewith, including evidence of the authority
of Borrower and the Material Subsidiaries to enter into the transactions
contemplated by this Amendment Agreement, such documents, when appropriate, to
be certified by appropriate corporate or governmental authorities; and all
proceedings of the Borrower and the Material Subsidiaries relating to the
matters provided for herein shall be satisfactory to the Agent and its counsel.
7. ENTIRE AGREEMENT. This Amendment Agreement sets forth the entire
understanding and agreement of the parties hereto in relation to the subject
matter hereof and supersedes any prior negotiations and agreements among the
parties relative to such subject matter. No promise, conditions, representation
or warranty, express or implied, not herein set forth shall bind any party
hereto, and no one of them has relied on any such promise, condition,
representation or warranty. Each of the parties hereto acknowledges that, except
as in this Amendment Agreement otherwise expressly stated, no representations,
warranties or commitments, express or implied, have been made by any other party
to the other. None of the terms or conditions of this Amendment Agreement may be
changed, modified, waived or canceled orally or otherwise, except by writing,
signed by all the parties hereto, specifying such change, modification, waiver
or cancellation of such terms or conditions, or of any proceeding or succeeding
breach thereof.
8. FULL FORCE AND EFFECT OF AGREEMENT. Except as hereby specifically
amended, modified or supplemented, the Agreement and all of the other Loan
Documents are hereby confirmed and ratified in all respects and shall remain in
full force and effect according to their respective terms.
[The remainder of this page intentionally left blank.]
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
Agreement to be duly executed by their duly authorized officers, all as of the
day and year first above written.
BORROWER:
SUNGLASS HUT INTERNATIONAL, INC.
WITNESS:
___________________________ By:
-----------------------------------
Name: Larry G. Petersen
___________________________ Title: Senior Vice President-Finance
Chief Financial Officer and
Treasurer
6
<PAGE>
GUARANTORS:
SUNGLASS HUT CORPORATION
SUNGLASS HUT TRADING CORPORATION
SUNSATIONS SUNGLASS COMPANY
SUNGLASS HUT REALTY CORPORATION
SUNGLASS HUT OF FLORIDA, INC.
SUNGLASS HUT ACQUISITION CORP.
IHS DISTRIBUTION CORP.
IHS PROCUREMENT CORP.
SUNGLASS HUT EYE X COMPANY
SHI SALES CORP.
SUNGLASS HUT HOLDINGS OF FRANCE, INC.
SUNGLASS HUT OF NORTHERN FRANCE, INC.
SUNGLASS HUT OF SOUTHERN FRANCE, INC.
BY:
----------------------------------
Name: Larry G. Petersen
Title: Vice President
SUNGLASS HUT (U.K.) LIMITED
SUNGLASS WORLD HOLDING PTY LIMITED
SUNGLASS HUT OF FRANCE, S.A.
BY:
----------------------------------
Name: Larry G. Petersen
Title: Director
SUNGLASS HUT AUSTRALIA PTY LIMITED
BY:
----------------------------------
Name: Larry G. Petersen
Title: Authorized Signatory
7
<PAGE>
NATIONSBANK, NATIONAL ASSOCIATION,
AS AGENT FOR THE LENDERS
BY:
----------------------------------
Name: Andrew M. Airheart
Title: Senior Vice President
NATIONSBANK, NATIONAL ASSOCIATION,
as Lender
BY:
----------------------------------
Name: Andrew M. Airheart
Title: Senior Vice President
8
<PAGE>
ABN AMRO BANK N.V.
BY:
----------------------------------
Name:
Title:
BY:
----------------------------------
Name:
Title:
9
<PAGE>
THE BANK OF NOVA SCOTIA
BY:
----------------------------------
Name:
Title:
10
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH
BY:
----------------------------------
Name:
Title:
11
<PAGE>
FIRST BANK (formerly known as
UNITED STATES NATIONAL BANK OF OREGON)
BY:
----------------------------------
Name:
Title:
12
<PAGE>
LTCB TRUST COMPANY
BY:
----------------------------------
Name:
Title:
13
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<ARTICLE> 5
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> AUG-02-1997
<CASH> 10,793
<SECURITIES> 0
<RECEIVABLES> 5,072
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<INVENTORY> 115,085
<CURRENT-ASSETS> 154,623
<PP&E> 211,930
<DEPRECIATION> 76,198
<TOTAL-ASSETS> 343,639
<CURRENT-LIABILITIES> 60,008
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0
0
<COMMON> 546
<OTHER-SE> 170,452
<TOTAL-LIABILITY-AND-EQUITY> 343,639
<SALES> 325,489
<TOTAL-REVENUES> 325,489
<CGS> 192,308
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