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 NOVEMBER 1, 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 54,704,746
(as of December 9, 1997).
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
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ITEM 1. Financial Statements
Consolidated Balance Sheets as of November 1, 1997 (Unaudited) and
February 1, 1997......................................................................................... 3
Consolidated Statements of Operations for the Thirteen Weeks Ended November 1, 1997
and November 2, 1996 (Unaudited)......................................................................... 4
Consolidated Statements of Operations for the Thirty-Nine Weeks Ended November 1,
1997 and November 2, 1996 Unaudited)..................................................................... 5
Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended November 1, 1997 and November 2,
1996 (Unaudited)......................................................................................... 6
Notes to Consolidated Financial Statements (Unaudited)................................................... 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................................... 10
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................................................... 16
Signatures..................................................................................... 17
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
November 1, February 1,
1997 1997
------------------- -------------------
(Unaudited)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,936 $ 5,673
Accounts receivable 3,626 3,032
Inventory 124,653 145,194
Prepaid rent 8,161 7,706
Other current assets 15,256 13,324
------------------- -------------------
Total current assets 154,632 174,929
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $80,219 and $63,941 136,444 135,930
UNAMORTIZED COST IN EXCESS OF NET ASSETS OF ACQUIRED
BUSINESSES, net of accumulated amortization of $29,175 and $27,587 35,510 38,849
OTHER ASSETS 15,851 14,229
------------------- -------------------
Total assets $ 342,437 $ 363,937
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 32,613 $ 13,610
Accrued payroll and related taxes 5,532 6,435
Accrued rent 9,266 6,759
Accrued expenses 6,440 966
Accrued restructuring expenses 4,047 15,096
Current portion of long-term debt 6,200 129
------------------- -------------------
Total current liabilities 64,098 42,995
LONG-TERM DEBT, net of current portion and unamortized discount 112,720 163,150
------------------- -------------------
Total liabilities 176,818 206,145
------------------- -------------------
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 546 544
Additional paid-in capital 164,840 164,326
Foreign currency translation adjustment (2,353) (227)
Retained earnings (accumulated deficit) 2,586 (6,851)
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Total stockholders' equity 165,619 157,792
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Total liabilities and stockholders' equity $ 342,437 $ 363,937
=================== ===================
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See Notes to Consolidated Financial Statements.
3
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Thirteen Weeks Ended
----------------------------------------
November 1, November 2,
1997 1996
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Net sales $ 124,089 $ 112,866
Cost of goods sold, occupancy and buying expenses 81,082 72,087
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Gross profit 43,007 40,779
Selling, general and administrative expenses:
Operating expenses 42,392 36,766
Depreciation and leasehold amortization 7,000 6,000
Amortization of cost in excess of net assets of acquired businesses 588 601
---------------- ------------------
49,980 43,367
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Loss before interest and income taxes (6,973) (2,588)
Interest expense 1,746 2,356
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Loss before income taxes (8,719) (4,944)
Benefit from income taxes (3,619) (2,002)
---------------- ------------------
Net loss $ (5,100) $ (2,942)
================ ==================
Net loss per share $ (0.09) $ (0.05)
================ ==================
Weighted average shares outstanding 54,689 54,243
================ ==================
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See Notes to Consolidated Financial Statements.
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Thirty-Nine Weeks Ended
----------------------------------------
November 1, November 2,
1997 1996
---------------- ------------------
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Net sales $ 449,578 $ 402,157
Cost of goods sold, occupancy and buying expenses 273,390 230,026
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Gross profit 176,188 172,131
Selling, general and administrative expenses:
Operating expenses 131,532 108,099
Depreciation and leasehold amortization 20,335 16,548
Amortization of cost in excess of net assets of acquired businesses 1,782 1,719
---------------- ------------------
153,649 126,366
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Earnings before interest and income taxes 22,539 45,765
Interest expense 6,434 5,348
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Earnings before income taxes 16,105 40,417
Provision for income taxes 6,668 16,193
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Net income $ 9,437 $ 24,224
================ ==================
Net income per share $ 0.17 $ 0.44
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Weighted average shares outstanding 55,158 55,251
================ ==================
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See Notes to Consolidated Financial Statements.
5
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Thirty-Nine Weeks Ended
-----------------------------------------
November 1, November 2,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,437 $ 24,224
----------------- ------------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities-
Depreciation and amortization 22,117 18,267
Compensation expense - stock grants 465 -
Amortization of debt discount 257 117
Changes in assets and liabilities
Changes in assets:
Accounts receivable (594) (1,154)
Inventory 20,541 (71,290)
Prepaid rent (455) (1,235)
Other current assets (1,932) (5,862)
Other assets (3,147) (3,730)
Changes in liabilities:
Accounts payable 19,003 (4,185)
Accrued expenses 640 3,133
----------------- ------------------
56,895 (65,939)
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Net cash provided by (used in) operating activities 66,332 (41,715)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (24,292) (49,815)
Acquisitions of businesses - (1,618)
----------------- ------------------
Net cash used in investing activities (24,292) (51,433)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 112,625
Proceeds from borrowings under revolving credit facilities 68,900 259,994
Principal payments on revolving credit facilities (113,200) (280,000)
Principal payments on long-term debt (316) (594)
Payment of deferred financing costs (240) (362)
Proceeds from exercise of stock options 21 1,663
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Net cash provided by (used in) financing activities (44,835) 93,326
------------------
-----------------
Effect of exchange rate changes on cash and cash equivalents 58 1,229
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,737) 1,407
CASH AND CASH EQUIVALENTS, beginning of period 5,673 4,506
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CASH AND CASH EQUIVALENTS, end of period $ 2,936 $ 5,913
================= ==================
Continued on Next Page
6
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
Thirty-Nine Weeks Ended
-----------------------------------------
November 1, November 2,
1997 1996
----------------- ------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 4,563 $ 3,011
================= ==================
Income taxes $ 6,451 $ 13,146
================= ==================
Non-cash activities-
Write-down of property and equipment against accrued restructuring
expenses $ 3,824 $ -
Write-down of other assets against accrued restructuring expenses 757 -
----------------- ------------------
$ 4,581 $ -
================= ==================
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See Notes to Consolidated Financial Statements.
7
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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 thirty-nine weeks ended November
1, 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 third quarter
and first nine months of 1997 and 1996, respectively, would not have been
materially different than the earnings per share reported in the accompanying
consolidated statements of operations.
NOTE 3 - ACCRUED RESTRUCTURING EXPENSES:
During the third quarter of 1997, $3.5 million of the accrual for restructuring
expenses was utilized for write-downs of property and equipment and other
assets, 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, 106 stores have been closed as of the end of
the third quarter, 1997. The Company intends to substantially complete the 1996
restructuring plan by the end of the first quarter of 1998.
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 - LONG TERM DEBT:
Effective October 30, 1997, the Company amended its existing credit facility
decreasing the maximum credit amount from $60 to $40 million and amending
certain financial covenants. The amended facility expires in June 1998.
NOTE 6 - 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 position on these
matters is 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
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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 due to inherently lower gross profit margins in
the watch industry (as compared to the sunglass industry), coupled with exposure
to risk of inventory obsolescence and retail markdown. 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
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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 attract, hire and train local
personnel, (iii) the Company's lack of experience with local business practices
and retail environment, (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 or watch 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 greater
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 included the
closure of approximately 120 marginal or unprofitable locations. Of the 120
store closures included in the restructuring plan, 106 stores have been closed
as of the end of the third quarter, 1997. The Company intends to substantially
complete the 1996 restructuring plan by the end of the first quarter of 1998.
The Company's inability to implement planned closures on schedule could have an
adverse effect on its gross profit margin and other operating results. In
addition, the Company continually evaluates store profitability, and there can
be no assurance that additional future store closings may not be required.
10
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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 Company
is currently recruiting several open senior management positions and has filled
several senior management positions during fiscal 1997. 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 the first fiscal
quarter of each year and lower net sales and net losses in the third quarter of
each year. 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 management's
determination of the timing of new store openings and closings.
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
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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 2,116 specialty sunglass and 74
Watch Station locations as of the quarter ended November 1, 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, new store additions, and the repayment or
refinancing of the existing revolving credit facility due in June 1998. The
Company's long-term liquidity requirements relate principally to the maturity of
the $115 million Convertible Subordinated Notes in June 2003, operating lease
commitments and continued store expansion. Effective October 30, 1997, the
Company amended its existing revolving credit facility to decrease the maximum
credit amount from $60 million to $40 million and amend certain financial
covenants. The amended credit facility requires that borrowing levels be reduced
to a maximum of $20 million for any selected 45-day period prior to the
expiration of the facility in June 1998. 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 November
1, 1997, borrowings under the credit facility totaled $6.2 million.
Approximately $3.0 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 $66.3 million for the first nine
months of fiscal 1997 compared to net cash used of $41.7 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 $20.5 million, the increase in accounts payable and accrued
expenses of $19.6 million, and non-cash charges for depreciation and
amortization of $22.4 million.
Net cash used in investing activities was $24.3 million for the first nine
months of fiscal 1997 compared to $51.4 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 $44.8 million for the first nine
months of fiscal 1997 compared to net cash provided by financing activities of
$93.3 million for the same period last year. 1997 financing cash flows primarily
reflect net repayment of the Company's revolving credit facility of $44.3
million during the first nine months of the fiscal year.
12
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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 30 additional locations in fiscal 1997 and other
working capital requirements through at least fiscal 1997. The Company intends
to replace the revolving credit facility upon expiration in June 1998; however,
no commitments have been obtained for refinancing this facility, and there can
be no assurance that terms of a replacement facility will be comparable to the
existing facility.
RESULTS OF OPERATIONS
QUARTER ENDED NOVEMBER 1, 1997 COMPARED TO QUARTER ENDED NOVEMBER 2, 1996
Net sales increased $11.2 million, or 9.9%, to $124.1 million during the quarter
ended November 1, 1997 compared to $112.9 million for the same period of fiscal
1996. Approximately 89% of this increase was attributable to sales from new
stores opened during the third 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 1.1% accounted for approximately 11% of this increase.
Gross profit increased $2.2 million, or 5.5%, to $43.0 million during the
quarter ended November 1, 1997 compared to $40.8 million for the same period of
fiscal 1996. As a percentage of net sales, gross profit decreased to 34.7% for
the quarter ended November 1, 1997 from 36.1% for the quarter ended November 2,
1996. The decrease in gross profit was primarily due to (1) higher occupancy
costs related to the Company's new store expansion, (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 margins as a percentage of net sales than the Company's traditional
domestic sunglass business.
Operating expenses increased $5.6 million, or 15.3%, during the quarter ended
November 1, 1997 compared to the same period of fiscal 1996. This increase was
primarily due to operating expenses associated with the operations and
management of new stores opened in fiscal 1997 as well as increased marketing
costs. Operating expenses as a percentage of net sales increased to 34.2% for
the quarter ended November 1, 1997 from 32.6% for the quarter ended November 2,
1996 mainly due to the impact of higher marketing costs, coupled with the
negative impact of lower than expected comparable and new store sales.
Depreciation and leasehold amortization expense increased $1.0 million, or
16.7%, to $7.0 million during the quarter ended November 1, 1997 compared to
$6.0 million for the same period of fiscal 1996, primarily due to new store
growth.
Interest expense decreased $610,000 to $1.7 million for the quarter ended
November 1, 1997, compared to $2.4 million for the same period last year due to
a decrease in the level of average borrowings.
As a result of the foregoing, the Company reported a net loss of $0.09 per
share, or $5.1 million, during the quarter ended November 1, 1997 compared to a
net loss of $0.05 per share, or $2.9 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 NINE MONTHS OF 1997 COMPARED TO FIRST NINE MONTHS OF 1996
Net sales increased $47.4 million, or 11.8%, to $449.6 million during the first
nine months of fiscal 1997 compared to $402.2 million for the same period of
fiscal 1996. The increase reflects sales from new stores opened and acquired
during the first nine months of fiscal 1997 (and fiscal 1996 to the extent not
reflected in comparable store sales) of $46.9 million, partially offset by a
decrease in comparable store sales of $541,000.
Gross profit increased $4.1 million, or 2.4%, to $176.2 million during the first
nine months of fiscal 1997 compared to $172.1 million for the same period of
fiscal 1996. As a percentage of net sales, gross profit was 39.2% in 1997 and
42.8% in 1996. The decrease in gross profit margin was 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,
(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 as a percentage of net
sales than the Company's traditional domestic sunglass business.
Operating expenses increased $23.4 million, or 21.7%, during the first nine
months of fiscal 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) costs related to the Company's increased marketing
efforts. The remaining increase in operating expenses as a percentage of net
sales during 1997 was mainly due to the negative impact of lower than expected
comparable and new store sales.
Depreciation and leasehold amortization expense increased approximately $3.8
million, or 22.9%, to $20.3 million during the first nine months of fiscal 1997
compared to $16.6 million for the same period of fiscal 1996. This increase is
primarily due to new store growth.
Interest expense increased $1.1 million to $6.4 million during the first nine
months of fiscal 1997 compared to $5.4 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 $0.17 per share,
or $9.4 million, during the first nine months of fiscal 1997 compared to $0.44
per share or $24.2 million for the same period of fiscal 1996.
SEASONALITY AND QUARTERLY RESULTS
Historically, the Company's operations have been seasonal, with highest net
sales 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
10.16 Amendment No.6 to Amended and Restated Revolving
Agreement, effective as of October 30, 1997, dated as of
December 3, 1997, among the Registrant, Nations Bank,
N.A., and other lenders named therein.
10.17 Stock Option Agreement between the Registrant and James
N. Hauslein
27 Financial Data Schedule
- ---------------
(1) Filed herewith.
(b) The Company did not file any reports on Form 8-K during the quarter
ended November 1, 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.
<TABLE>
<CAPTION>
<S> <C> <C>
Date: December 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: December 16, 1997 By: /s/Larry G. Petersen
----------------------------------------------------------------
Larry G. Petersen
Senior Vice President-Finance
and Chief Financial Officer
(principal financial officer)
Date: December 16, 1997 By: /s/George L. Pita
----------------------------------------------------------------
George L. Pita
Vice President-Finance
(principal accounting officer)
</TABLE>
16
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.16 Amendment No.6 to Amended and Restated Revolving
agreement, effective as of October 30, 1997, dated as of
December 3, 1997, among the Registrant, Nations Bank,
N.A., and other lenders named therein.
10.17 Stock Option Agreement between the Registrant and James
N. Hauslein
27 Financial Data Schedule
EXHIBIT 10.16
AMENDMENT AGREEMENT NO. 6 TO
AMENDED AND RESTATED REVOLVING CREDIT
AND REIMBURSEMENT AGREEMENT
THIS AMENDMENT AGREEMENT is made and entered into as of this 3rd day of
December, 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 $60,000,000 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, in order to induce the Lenders to enter into this Amendment
Agreement the Borrower has agreed to permanently reduce the Total Revolving
Credit Commitment from $60,000,000 to $40,000,000 pursuant to Section 2.08 of
the Agreement;
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:
a. 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.
b. Amendments. Subject to the conditions hereof, the Agreement is
hereby amended, effective as of October 30, 1997, as follows:
(i) New definitions "Borrowing Base" and "Borrowing Base
Certificate" are added to Section 1.01 immediately following the definition
"Borrower's Account" which
<PAGE>
definitions shall read as follows:
"'Borrowing Base' means an amount equal to 50% of Eligible
Inventory;"
"'Borrowing Base Certificate' means a certificate in the form
of Exhibit K hereto with appropriate insertions of date and
amounts, duly executed by an Authorized Representative;"
(ii) A new definition "Eligible Inventory" is added to Section
1.01 immediately following the definition "Dollars" which definition shall read
as follows:
"'Eligible Inventory' means all finished inventory, goods and
products owned by the Borrower or a material Subsidiary and
located within a retail or distribution facility located
within the United States or a territory thereof, which
facility is owned or leased by the Borrower or a Material
Subsidiary;"
(iii) A new definition "Reduction Period" is added to Section
1.01 immediately following the definition "Required Lenders" which definition
shall read as follows:
"'Reduction Period' means a period of 45 consecutive days
during which the Revolving Credit Debit Balance shall not
exceed $20,000,000 which period shall begin upon the giving of
written notice to the Agent by an Authorized Representative
not less than one Business Day prior to the beginning of such
Reduction Period;"
(iv) The definition of "Revolving Credit Termination Date" in
Section 1.01 is hereby amended by deleting the date "December 14, 1998"
appearing in clause (i) and inserting in lieu thereof the date "June 30, 1998."
(v) The definition of "Total Revolving Credit Commitment" in
Section 1.01 is amended in its entirety so that as amended it shall read as
follows:
"'Total Revolving Credit Commitment' means an amount equal to
$40,000,000, as reduced from time to time in accordance with
Section 2.10; provided, however, if the Agent shall not have
received notice of the commencement of the Reduction Period by
May 15, 1998, the Total Revolving Credit Commitment on and
after May 15, 1995 shall mean $20,000,000, as reduced from
time to time in accordance with Section 2.10;"
(vi) The second proviso of the first sentence of Section 2.01
is hereby amended in its entirety to read as follows:
"provided, further, however, that immediately after giving
effect to each Advance, the Dollar Value of outstanding Loans
shall not exceed the lesser of the Borrowing Base or the Total
Revolving Credit Commitment."
<PAGE>
(vii) The last sentence of Section 2.01 is hereby amended in
its entirety so that as amended it shall read as follows:
"The Borrower agrees that if at any time the Revolving Credit
Debit Balance shall exceed either the Borrowing Base or the
Total Revolving Credit Commitment, the Borrower shall
immediately reduce the outstanding principal amount of the
Loans such that, as a result of such reduction, both the
Borrowing Base and the Total Revolving Credit Commitment shall
equal or exceed the Revolving Credit Debit Balance."
(viii) A new sentence is hereby added to the end of Section
2.03(i) which sentence shall read as follows:
"Each request for an Advance shall be accompanied by a
Borrowing Base Certificate containing information as of a date
not earlier than five (5) days preceding the date of such
Advance."
(ix) Section 2.13 is hereby amended by deleting the date
"February 1, 1998" appearing in clause (iii) thereof and inserting in lieu
thereof the date December 1, 1997.
(x) Sections 8.03 and 8.04 are hereby amended in their
entirety so that as amended they shall read as follows:
"8.03 Consolidated Interest Coverage Ratio. Permit at any time
during the periods set forth below the Consolidated Interest
Coverage Ratio to be less than that set forth opposite the
period:
Period Ratio
3rd Quarter 1997 1.90 to 1.00
4th Quarter 1997 2.25 to 1.00
1st Quarter 1998 and Thereafter 2.50 to 1.00"
"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 such
period:
Period Ratio
4th Quarter 1997 1.05 to 1.00
1st Quarter 1998 and Thereafter 1.10 to 1.00"
(xi) Section 8.05 is hereby amended by deleting the date
February 2, 1998 appearing in clause (ii) thereof and inserting in lieu thereof
the date December 2, 1997.
<PAGE>
(xii) 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
4th Quarter 1997 2.50 to 1.00
1st Quarter 1998 and Thereafter 2.10 to 1.00"
(xiii) A new Section 8.19 is hereby added to the Agreement,
which Section shall read as follows:
"8.19. Negative Pledge Clauses. Enter into or cause,
suffer or permit to exist any agreement with any Person other
than the Agent and the Lenders pursuant to this Agreement or
any other Loan Documents which prohibits or limits the ability
of any of the Borrower or any Subsidiary to create, incur,
assume or suffer to exist any Lien upon any of its property,
assets or revenues, whether now owned or hereafter acquired,
provided that the Borrower and any Subsidiary may enter into
such an agreement in connection with property subject to any
Lien permitted by this Agreement and not released after the
date hereof, when such prohibition or limitation is by its
terms effective only against the assets subject to such Lien."
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;
<PAGE>
(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 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 and hereby is permanently reduced by
$20,000,000 so that after giving effect to such reduction the Total Revolving
Credit Commitment does not exceed $40,000,000.
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,
<PAGE>
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.]
<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
<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
<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
<PAGE>
ABN AMRO BANK N.V.
By:
Name:
Title:
By:
Name:
Title:
<PAGE>
THE BANK OF NOVA SCOTIA
By:
Name:
Title:
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH
By:
Name:
Title:
<PAGE>
U.S. BANK, NATIONAL ASSOCIATION
(successor by merger to UNITED STATES
NATIONAL BANK
OF OREGON)
By:
Name:
Title:
<PAGE>
LTCB TRUST COMPANY
By:
Name:
Title:
<PAGE>
ACKNOWLEDGEMENT OF EXECUTION ON BEHALF OF
SUNGLASS HUT INTERNATIONAL, INC.
STATE OF GEORGIA
COUNTY OF FULTON
Before me, the undersigned, a Notary Public in and for said County and
State on this 4th day of December, 1997 A.D., personally appeared Larry G.
Petersen, known to be the Senior Vice President-Finance, Chief Financial Officer
and Treasurer of Sunglass Hut International, Inc. (the "Borrower"), who, being
by me duly sworn, says he works at 255 Alhambra Circle, Coral Gables, Florida
33134, and that by authority duly given by, and as the act of, the Borrower, the
foregoing and annexed Amendment Agreement dated December 3, 1997, was signed by
him as said Senior Vice President-Finance, Chief Financial Officer and Treasurer
on behalf of the Borrower.
Witness my hand and official seal this 4th day of December, 1997.
----------------------------------
Notary Public
(SEAL)
My commission expires: _______________
<PAGE>
AFFIDAVIT OF _______________________
(Name of Affiant)
The undersigned, being first duly sworn, deposes and says that:
1. He is a _____ Vice President of NationsBank, National Association
and works at 600 Peachtree Street, N.E., Atlanta, Georgia 30308.
2. The Amendment Agreement of Sunglass Hut International, Inc. dated
December 3, 1997 was executed before him and delivered to him on behalf of the
Lenders on December 4, 1997.
This the 4th day of December, 1997.
-----------------------------------
(Signature of Affiant)
Acknowledgement of Execution
STATE OF GEORGIA
COUNTY OF FULTON
Before me, the undersigned, a Notary Public in and for said County and
State on this 4th day of December, 1997 A.D., personally appeared
_______________________ who before me affixed his signature to the above
Affidavit.
Witness my hand and official seal this 4th day of December, 1997.
-----------------------------------
Notary Public
(SEAL)
My Commission Expires: ________________
EXHIBIT 10.17
SUNGLASS HUT INTERNATIONAL, INC.
STOCK OPTION AGREEMENT
FOR
JAMES N. HAUSLEIN
RECITALS
A. Pursuant to that certain Consulting Agreement, dated as of February
24, 1997, between Sunglass Hut International, Inc. (the "Company") and Hauslein
& Co., Inc. (the "Consultant"), the Consultant agreed to make available to the
Company the services of James N. Hauslein (the "Optionee") on a substantially
full time basis.
B. Jack B. Chadsay resigned as the President and Chief Executive
Officer of the Company effective May 29, 1997.
C. The Board of Directors of the Company (the "Board"), together with
the Board's Compensation Committee, has determined that it would be in the best
interests of the Company to grant the Optionee an option to provide incentive
compensation for Optionee's agreement to serve as the Company's acting Chief
Executive Officer on a substantially full time basis.
AGREEMENT
1. GRANT OF OPTION. The Company hereby grants, as of June 11, 1997, to
Optionee an option (the "Option") to purchase up to 150,000 shares of the
Company's Common Stock, $.01 par value per share (the "Shares"), at an exercise
price per share equal to $6.5625. The Option shall be subject to the terms and
conditions set forth herein. The Option was issued pursuant to the Company's
1996 Executive Incentive Compensation Plan (the "Plan"), which is incorporated
herein for all purposes. The Option is a nonqualified stock option, and not an
Incentive Stock Option. The Optionee hereby acknowledges receipt of a copy of
the Plan and agrees to be bound by all of the terms and conditions hereof and
thereof.
2. DEFINITIONS. Unless otherwise provided herein, terms used herein
that are defined in the Plan and not defined herein shall have the meanings
attributed thereto in the Plan.
3. EXERCISE SCHEDULE. Except as otherwise provided in Sections 6 or 9
of this Agreement, or in the Plan, the Option shall be exercisable in whole or
in part and cumulatively according to the following schedule:
33-1/3% on or after June 11, 1998
33-1/3% on or after June 11, 1999
33-1/3% on or after June 11, 2000
<PAGE>
provided, however, that the Option shall automatically become fully exercisable
in the event that (x) Optionee's service as acting Chief Executive Officer is
terminated by the Company for any reason other than "Cause" (as hereinafter
defined), or (y) the Optionee dies or suffers a disability while serving as
acting Chief Executive Officer. The Option shall terminate on, and in no event
shall the Option be exercisable after, June 11, 2007. "Cause" shall mean (i) the
willful failure or refusal of the Optionee to perform the duties or render the
services reasonably assigned to him from time to time by the Company's Board of
Directors (except during reasonable vacation periods or sick leave), (ii) the
Optionee's unsatisfactory performance of his duties as acting Chief Executive
Officer of the Company which continues after notice and a reasonable opportunity
to cure, (iii) the charging or indictment of the Optionee in connection with a
felony, (iv) the association, directly or indirectly, of the Optionee, for his
profit of financial benefit, with any person, firm, partnership, association,
entity or corporation that competes in any material way with the Company, (v)
the disclosing or using of any material trade secret or confidential information
of the Company at any time by the Optionee, except as required in connection
with his duties to the Company, or (vi) breach by the Optionee of his fiduciary
duty or duty of trust to the Company.
4. METHOD OF EXERCISE. This Option shall be exercisable in whole or in
part in accordance with the exercise schedule set forth in Section 3 hereof by
written notice which shall state the election to exercise the Option, the number
of Shares in respect of which the Option is being exercised, and such other
representations and agreements as to the holder's investment intent with respect
to such Shares as may be required by the Company pursuant to the provisions of
the Plan. Such written notice shall be signed by the Optionee and shall be
delivered in person or by certified mail to the Secretary of the Company. The
written notice shall be accompanied by payment of the exercise price. This
Option shall be deemed to be exercised after both (a) receipt by the Company of
such written notice accompanied by the exercise price and (b) arrangements that
are satisfactory to the Committee in its sole discretion have been made for
Optionee's payment to the Company of the amount that is necessary to be withheld
in accordance with applicable Federal or state withholding requirements. No
Shares will be issued pursuant to the Option unless and until such issuance and
such exercise shall comply with all relevant provisions of applicable law,
including the requirements of any stock exchange upon which the Shares then may
be traded.
5. METHOD OF PAYMENT. Payment of the exercise price shall be by any of
the following, or a combination thereof, at the election of the Optionee: (a)
cash; (b) check; or (c) such other consideration or in such other manner as may
be determined by the Committee or the Board, which other method, in the
discretion of the Committee or the Board may include, without limitation,
payment of the exercise price in whole or in part (i) with Shares, (ii) by a
promissory note payable to the order of the Company in a form acceptable to the
Committee, or (iii) by the Company retaining from the Shares to be delivered
upon exercise of the Option that number of Shares having a Fair Market Value on
the date of exercise equal to the option price for the number of Shares with
respect to which the Optionee exercises the Option or by any other form of
cashless exercise procedure approved by the Committee or the Board.
2
<PAGE>
6. TERMINATION OF OPTION. Any unexercised portion of the Option shall
automatically and without notice terminate and become null and void at the time
of the earliest to occur of:
(a) three months after the date on which the
Optionee ceases to be a Director of the Company for any reason other than
Optionee's willful misconduct or negligence, disability, death or retirement;
(b) immediately in the event of the Optionee's
willful misconduct or negligence;
(c) twelve months after the Optionee ceases to be a
Director by reason of his disability; and
(d) twelve months after the date of the Optionee's
death in the event that such death occurs prior to the time the Option otherwise
would become null and void pursuant to this Section 6.
Also, the Committee or the Board, in its sole discretion may
by giving written notice (the "cancellation notice") cancel, effective upon the
date of the consummation of any Corporate Transaction described in Section
9(b)(ii) of the Plan or the consummation of any reorganization, merger,
consolidation or other transaction in which the Company does not survive, any
Option that remains unexercised on such date. Such cancellation notice shall be
given a reasonable period of time prior to the proposed date of such
cancellation and may be given either before or after approval of such corporate
transaction.
7. TRANSFERABILITY. The Option is not transferable otherwise than by
will or the laws of descent and distribution, and during the lifetime of the
Optionee the Option shall be exercisable only by the Optionee. The terms of this
Option shall be binding upon the executors, administrators, heirs, successors
and assigns of the Optionee.
8. NO RIGHTS OF STOCKHOLDERS. Neither the Optionee nor any personal
representative (or beneficiary) shall be, or shall have any of the rights and
privileges of, a stockholder of the Company with respect to any shares of Stock
purchasable or issuable upon the exercise of the Option, in whole or in part,
prior to the date of exercise of the Option.
9. ACCELERATION OF EXERCISABILITY OF OPTION. This Option shall become
immediately fully exercisable in the event of a "Change in Control", as defined
in Section 9(b) of the Plan, or in the event that the Committee or the Board
exercises its discretion to provide a cancellation notice with respect to the
Option pursuant to Section 6 hereof.
10. NO RIGHT TO CONTINUED SERVICE AS A DIRECTOR OR ACTING CHIEF
EXECUTIVE OFFICER. Neither the Option nor this Agreement shall confer upon the
Optionee any right to continued service as a Director or acting Chief Executive
Officer of the Company.
3
<PAGE>
11. LAW GOVERNING. This Agreement shall be governed in accordance with
and governed by the internal laws of the State of Florida.
12. INTERPRETATION. The Optionee accepts the Option subject to all the
terms and provisions of the Plan and this Agreement. The undersigned Optionee
hereby accepts as binding, conclusive and final all decisions or interpretations
of the Committee or the Board upon any questions arising under the Plan and this
Agreement.
13. NOTICES. Any notice under this Agreement shall be in writing and
shall be deemed to have been duly given when delivered personally or when
deposited in the United States mail, registered, postage prepaid, and addressed,
in the case of the Company, to the Company's Secretary at 255 Alhambra Circle,
Coral Gables, FL 33134, or if the Company should move its principal office, to
such principal office, and, in the case of the Optionee, to the Optionee's last
permanent address as shown on the Company's records, subject to the right of
either party to designate some other address at any time hereafter in a notice
satisfying the requirements of this Section.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the 11th day of June, 1997.
COMPANY:
SUNGLASS HUT INTERNATIONAL, INC.
By:____________________________________
Larry G. Petersen,
Chief Financial Officer
4
<PAGE>
Optionee acknowledges receipt of a copy of the Plan and represents that
he or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option, and fully
understands all provisions of the Option.
OPTIONEE:
______________________________________
James N. Hauslein
5
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<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> NOV-01-1997
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<SECURITIES> 0
<RECEIVABLES> 3,626
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<CURRENT-ASSETS> 154,632
<PP&E> 216,663
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<SALES> 449,578
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