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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO __________.
COMMISSION FILE NO. 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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
255 ALHAMBRA CIRCLE, CORAL GABLES, FLORIDA 33134
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 461-6100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK (PAR VALUE $.01 PER SHARE)
(TITLE OF CLASS)
5-1/4% CONVERTIBLE SUBORDINATED DEBENTURES
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of the
Registrant on April 21, 1999 was $491,361,656, based on a $11.22 average of the
high and low sales prices for the Common Stock on such date. For purposes of
this computation, all executive officers and directors have been deemed to be
affiliates. Such determination should not be deemed to be an admission that
such executive officers and directors are, in fact, affiliates of the
Registrant. The number of shares outstanding of the Registrant's Common Stock
on April 21, 1999 was 46,351,689 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
Proxy Statement for the Annual Meeting of Shareholders of the Company,
definitive copies of which will be mailed on or before May 10, 1999.
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<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
Item 1. BUSINESS ..................................................... 4
Item 2. PROPERTIES ................................................... 6
Item 3. LEGAL PROCEEDINGS ............................................ 6
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......... 7
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS ........................................ 9
Item 6. SELECTED FINANCIAL DATA ...................................... 10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................ 12
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK .......................................... 19
Item 8. FINANCIAL STATEMENTS ......................................... 20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ........................ 47
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT ............... 47
Item 11. EXECUTIVE COMPENSATION ....................................... 47
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ............................................. 47
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............... 47
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K ................................................ 47
</TABLE>
<PAGE>
PART I
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 of 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 IMPLEMENT RESTRUCTURING PLANS. During fiscal 1998, the Company
closed 280 store locations and the Company's restructuring plans anticipate the
closure of approximately 150 marginal or unprofitable locations in fiscal 1999.
However, the Company's ability to close stores is subject to a number of
factors, including its ability to negotiate favorable lease termination
provisions, dispose of inventory, and handle employee matters on a timely
basis. The Company's inability to implement planned closures on schedule at the
expected costs could have an adverse effect on its operating results.
Additionally, the Company has closed a significant number of store locations
over the past few years and this could have an adverse effect on the Company's
ability to obtain new store locations in the future. In addition, the Company
continually evaluates store profitability, and there can be no assurance that
the number of future store closings will not change.
RISKS OF NEW SPECIALTY STORE CONCEPTS, LOCATIONS AND DISTRIBUTION
CHANNELS. 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 fiscal 1996 and plans on opening several combination store locations
("combo stores" - featuring both sunglass and watch product offerings) and
converting several existing Sunglass Hut stores into combo store locations
during fiscal 1999. Accordingly, these operations will be subject to the
numerous risks of establishing new business enterprises, including
unanticipated operating problems, ability to secure suitable new store sites on
a timely basis and on satisfactory terms, ability to obtain suitable use clause
changes on a timely basis and on satisfactory terms, lack of experience and
customer acceptance, inventory obsolescence risks, significant competition from
existing and new retailers, and the extent of existing relationships between
such retailers and manufacturers/distributors. There can be no assurance these
concepts will be able to duplicate the growth of the Company's Sunglass Hut
stores or that they will achieve sales and profitability levels that justify
the Company's investment therein.
The Company's planned expansion of its e-commerce activities subjects the
Company to numerous risks of entering new distribution channels, including
unanticipated operating problems, lack of experience and customer acceptance
and significant competition from existing and new retailers. In addition, the
use of the Internet to sell goods and services has developed only recently, and
there can be no assurance that a sufficiently large number of consumers will
begin to use the Internet as a medium of commerce. There can be no assurance
that the Company's e-commerce activities will achieve sales and profitability
levels that justify the Company's investment therein. Expansion of any of the
previously mentioned concepts or any other related concepts, and the entry into
any new distribution channels also involve 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 higher
dependence on holiday season sales, (iv) lower gross margin, and risks
associated with unanticipated problems or legal liabilities.
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There can be no assurance that the Company will be able to successfully
execute other components of its growth strategies. 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 conditions and practices, (iv) foreign currency
losses, (v) the impact of foreign taxes, and (vi) foreign investment
restrictions and limitations. Moreover, the Company's international expansion
may include entry into joint venture and/or franchise arrangements which may
limit the Company's control of operations. During fiscal 1997, the Company
recorded asset impairment charges related to foreign operations of $16.8
million as a result of an analysis of recoverability of underperforming
operations (See Note 2 to Consolidated Financial Statements for further
information).
MERCHANDISING, CONCENTRATION OF SUPPLIERS AND EXCLUSIVE BRANDS. 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 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. In fiscal
1998, Bausch & Lomb (including RayBan, Revo, Killer Loop and other brands) and
Oakley, the Company's largest suppliers, accounted for approximately 25.8% and
26.7%, respectively, of the Company's total merchandise purchases. On April 28,
1999, Bausch & Lomb announced that it had reached an agreement for the sale of
the assets and liabilities of its eyewear business with Luxottica Group SpA.
The sale is subject to various regulatory approvals and is expected to close by
June 30, 1999. There can be no assurance that this transaction or other vendor
consolidation or other changes in the sunglass or watch manufacturing industry
will not materially impact the Company's purchase terms, continued supply,
pricing, access to new products or otherwise negatively impact its future
results of operations. The market for the Company's products is increasingly
subject to the risk of changing fashion trends, and the demand for certain
styles can change. Although the Company has historically benefited from
favorable return and exchange privileges with its vendors, there can be no
assurance that the Company will not be subject to limitations on returns in the
future.
The Company's efforts to develop exclusive brands of products will
increase the Company's exposure to risks of inventory obsolescence and other
exposures normally associated with manufacturers. Accordingly, in the event
that a particular style of product 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. Moreover, the Company's exclusive brand development plans
may include entry into joint venture and/or licensing/distribution arrangements
which may limit the Company's control of these operations.
YEAR 2000 READINESS. The Year 2000 issue ("Y2K") is the result of
computer programs and other business systems being written using two digits
rather than four to represent the year. Many of the time sensitive applications
and business systems of the Company and its business partners may recognize a
date using "00" as the year 1900 rather than the year 2000, which could result
in system failure or disruption of operations. Although the Y2K problem will
impact the Company and its business partners, an assessment of the Y2K exposure
has been made by the Company and, primarily because the Company's major
management information systems were recently acquired, the Company believes it
will be able to substantially achieve Y2K readiness for its internal systems in
the third quarter of fiscal 1999. The Company's operations are also dependent
on the Y2K readiness of third parties. The inability to obtain merchandise from
one or more key vendors on a timely basis due to internal or external Y2K
issues could have a material adverse effect on the Company's operations.
Moreover, the failure of a major vendor's systems to operate properly with
respect to the Y2K
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problem on a timely basis or a Y2K conversion that is incompatible with the
Company's systems, could have a material adverse effect on the Company's
business, financial condition and results of operations. In recognition of this
risk, the Company has developed a plan of communication with significant
business partners to attempt to obtain assurances that the Company's operations
will not be disrupted through these relationships and that external Y2K issues
will be resolved in a timely manner. In addition, a significant portion of
sales at the Company's stores are made with credit cards, and the Company's
operations may be materially adversely affected to the extent that (i) its
customers are unable to use their credit cards or (ii) if the Company is unable
to collect credit card receivables in a timely manner due to Y2K problems. The
Company believes that it will satisfactorily resolve all significant Y2K
problems and that the related costs will not be material. However, estimates of
Y2K readiness and related costs are based on numerous assumptions, including
the continued availability of certain resources, the ability to acquire
accurate information regarding third party suppliers, the ability to correct
all relevant applications and the success of third party modification plans.
There is no guarantee that the readiness will be achieved and actual costs
could differ materially from those anticipated.
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 and
convert selected existing stores into a new combo store format 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 or
concepts will not cannibalize sales at existing locations.
Although the Company has acquired competitors in the past and considers
acquiring additional smaller chains of specialty 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
retail 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.
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 results of
operations. The Company has generally experienced lower net sales and operating
results during the third fiscal quarter of each year, (and to a lesser extent,
during the first and fourth 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 store openings and closings, and the timing of
sales contributed by new stores and new concepts such as Watch Station and
combo 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
3
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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.
ITEM 1. BUSINESS
COMPANY PROFILE
Sunglass Hut International, Inc. ("Sunglass Hut" or the "Company") is the
world's largest specialty retailer of sunglasses with approximately 2,000
locations worldwide. During fiscal 1996, the Company initiated an additional
specialty store concept, Watch Station. Additionally, during fiscal 1998, the
Company began to test a new store concept that combines sunglasses and watches
in a unified format ("combo stores"). The Company intends to continue to expand
and further test this concept in fiscal 1999. Since opening its first kiosk in
Miami, Florida in 1971, the Company has grown rapidly, both through internal
expansion and acquisitions, increasing from 873 stores as of fiscal yearend
1993 to 1,885 specialty sunglass and 120 Watch Station locations as of fiscal
yearend 1998.
During fiscal 1998, the Company opened 60 Sunglass Hut stores, 15 licensed
departments and 44 Watch Station stores. The Company also (1) closed 280
locations and announced the future closing of approximately 150 additional
locations in fiscal 1999 as a part of its restructuring plans, and (2) ceased
operations of its discontinued Eye-X optical segment.
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The following table shows the historical growth of the Company's
locations:
<TABLE>
<CAPTION>
FISCAL
------------------------------------------------
STORE LOCATION 1998 1997 1996 1995 1994
- --------------------------------------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Sunglass Hut stores ................... 1,755 1,876 1,881 1,686 1,202
Licensed sunglass departments ......... 130 213 155 38 1
----- ----- ----- ----- -----
Sunglass specialty subtotal ......... 1,885 2,089 2,036 1,724 1,203
Watch Station stores .................. 120 77 51 -- --
----- ----- ----- ----- -----
Total ............................... 2,005 2,166 2,087 1,724 1,203
===== ===== ===== ===== =====
</TABLE>
At January 30, 1999, the Company operated 1,401 stores and 96 licensed
departments throughout the United States as well as 107 stores and 34 licensed
departments in Canada, 123 stores in Australia, 10 stores in New Zealand, six
stores in Singapore and one store in Hong Kong, 85 locations throughout nine
countries in Europe, 12 stores in Puerto Rico, six stores in the U.S. Virgin
Islands and four stores in other Caribbean locations for a total of 1,885
specialty sunglass locations. At yearend, the Company also operated 120 Watch
Station stores (118 in the United States and two in Europe).
The Company believes that the flexibility of its specialty store formats
and its attractive unit level economics provide it with access to a wide range
of leasing opportunities which will facilitate its continued expansion. The
Company is pursuing opportunities to continue to expand sunglass, watch and
combo store specialty locations both domestically and internationally and plans
to open approximately 85 locations in fiscal 1999.
ADDITIONAL INFORMATION
On January 13, 1999, the Company acquired substantially all of the assets
of shades.com and SwissArmyDepot.com, businesses engaged in selling sunglasses,
watches and accessories primarily through Internet websites. The purchase price
paid for the acquisition was $4.1 million, consisting of $2.9 million in cash
and $1.2 million in convertible subordinated notes. The Company believes that
the acquisition of these businesses enhances its existing Internet development
efforts and provides substantial infrastructure for its expanding e-commerce
activities. The Company plans to continue to expand its e-commerce activities,
which it views as an increasingly important distribution channel.
COMPETITION
The Company is the largest specialty retailer of sunglasses in the world.
However, both the retail sunglass and watch businesses are highly competitive
and the Company competes with many different types of retail stores. Since
retail stores generally serve individual or local markets, competition is
fragmented and varies substantially from one location or geographic area to
another. Competitors in the over $30 sunglass market include chain and
individual sunglass specialty stores, department stores, optical chains and
sporting goods specialty stores. Catalog showrooms, warehouse clubs, discount
stores, drug stores and other mass merchandisers that currently compete
primarily in the under $30 segment of the retail sunglass industry also have a
significant market share in the over $30 segment and could increase competitive
pressure in this segment in the future. Competitors in the retail watch market
include chain and individual watch specialty stores, department stores, catalog
showrooms and jewelry stores. Certain of these competitors may have greater
industry experience or financial and other resources than the Company.
Management believes that the primary elements of competition in specialty
stores are breadth, quality and in-stock availability of merchandise selection,
price, level of customer service and convenience of store location, and that
its specialty store concepts compete successfully on the basis of such factors.
5
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EMPLOYEES
At January 30, 1999, the Company employed 8,352 persons, of whom 3,678
were full-time employees and 4,674 were part-time employees. The number of
part-time associates employed by the Company fluctuates depending on seasonal
needs. None of the Company's domestic employees are covered by collective
bargaining agreements, and management believes that the Company's relations
with its employees are good.
SERVICEMARKS AND TRADEMARKS
The names "Sunglass Hut International", "Watch Station" and "Sungear" are
servicemarks registered in the United States Patent and Trademark Office. As of
fiscal yearend 1998, the "Sunglass Hut International" servicemark and its logo
were registered with approximately 34 legal jurisdictions worldwide. The
Company has also taken active steps to register its "Watch Station", "SunGear",
"Code" and "Torque" servicemarks on a worldwide basis. Management believes that
these servicemarks are an integral element of the Company's marketing strategy.
Although the Company has a number of other registered servicemarks, management
does not believe that these are material to the Company's operations.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
In fiscal year 1998, the Company opened ten and eight new stores in Europe
and Australia, respectively. See Note 14 of the Notes to Consolidated Financial
Statements for additional information with respect to foreign and domestic
operations.
ITEM 2. PROPERTIES
The Company currently leases all of its existing store locations and
expects that its policy of leasing rather than owning will continue. The
Company's leases generally provide for initial lease terms ranging up to seven
years for kiosks and up to 10 years for in-line stores. Management believes
that the use of short-term leases enhances the Company's flexibility to pursue
various expansion opportunities resulting from changing market conditions. Rent
generally includes a percentage of the store's sales volume and a fixed minimum
base rent. The majority of lease rental payments are also subject to annual
increases for taxes, common area maintenance and insurance.
As current leases expire, the Company believes that it will be able either
to obtain lease renewals, if desired, for present store locations, or to obtain
leases for equivalent or better locations in the same general area. To date,
the Company has not experienced difficulty in either renewing leases for
existing locations or securing leases for suitable locations for new stores.
The Company leases its corporate headquarters in Coral Gables, Florida.
The lease has a ten-year term (expiring in 2004) with options to expand to
additional space. The Company has a five-year lease (expiring in 2001) with two
renewable options of five years each at its 92,000 square foot Atlanta
distribution center.
See Note 11 of Notes to Consolidated Financial Statements for additional
information with respect to the Company's operating leases.
ITEM 3. LEGAL PROCEEDINGS
In January 1997, a class action securities lawsuit was filed against the
Company and certain of its current and former executive officers in the U.S.
District Court of the Southern District of Florida. The lawsuit alleges, among
other things, that the Company and certain of its officers made materially
false and misleading statements regarding the Company's business performance
and prospects. The Company believes that the lawsuit has no basis, and intends
to vigorously defend the action. Although
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the ultimate outcome of the lawsuit cannot be predicted, management does not
believe the lawsuit will have a material adverse effect on the financial
position, results of operations or cash flows of the Company. However, there
can be no assurance as to the ultimate resolution of this matter.
In October 1997, two class action lawsuits were filed against the Company
in the State of California in the Superior Court of California. The lawsuits
alleged, among other things, that the Company violated certain California pay
laws. In April 1999, the Company reached a settlement on these actions which
will not have a material adverse effect on the Company's financial position or
results of operations.
There are no other significant legal proceedings pending against the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's 1998 fiscal year.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED AS
NAME(1) PRESENT POSITION(2) AN OFFICER AGE
- --------------------------------- ------------------------------------------------ ------------ ----
<S> <C> <C> <C>
John X. Watson*(3) .............. President, Chief Executive Officer 1998 45
Eric J. Schumann*(4) ............ Executive Vice President, 1997 50
General Merchandising Manager
Enrique M. Arrata*(5) ........... Senior Vice President, International and MIS 1998 52
Stephen P. Lundeen*(6) .......... Senior Vice President, Human Resources 1998 51
Larry G. Petersen*(7) ........... Senior Vice President, Chief Financial Officer 1994 51
Terry G. Pritikin*(8) ........... Senior Vice President Stores, North America 1998 50
James P. Gould(9) ............... Vice President, International Operations 1998 39
and Finance
Carol A. Montgomery(10) ......... Vice President, Exclusive Brands 1998 44
George L. Pita*(11) ............. Vice President, Finance 1994 37
Lisa Karen Smith(12) ............ Vice President, Total Compensation 1998 39
Jill Witter(13) ................. Vice President, General Counsel 1999 44
</TABLE>
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(1) Officers designated as Executive Officers for purposes of Section 16(a)
of the Securities Exchange Act of 1934 are designated by *.
(2) All officers serve at the pleasure of the Board of Directors.
(3) Mr. Watson was appointed President, Chief Executive Officer and a
Director of the Company in January 1998. From July 1995 until his
appointment, Mr. Watson was employed by Reebok International, Ltd. where
he served as Senior Vice President--Apparel and Senior Vice
President--Strategic Marketing/Planning. From 1992 to 1995, Mr. Watson
was employed by Esprit de Corp GmbH where he served as President and
Chief Operating Officer in Dusseldorf, Germany.
(4) Mr. Schumann was appointed Executive Vice President, General
Merchandising Manager, in September 1997. Prior to joining the Company,
Mr. Schumann was employed by Petrie Stores as Senior Vice President and
General Merchandising Manager from December 1994 to December 1996. From
July 1992 to December 1994, he was employed by Liz Claiborne where he
served as President of the Jewelry Division.
7
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(5) Mr. Arrata was Chief Financial Officer, Chief Information Officer, and
Managing Director of Esprit GmbH from March 1992 to October 1995. From
October 1995 to March 1998, Mr. Arrata was Chief Operating Officer and
Managing Director, President of all subsidiaries of Esprit holdings. Mr.
Arrata served as a consultant to the Company from March 1998 until
appointment of his current position in October 1998.
(6) Mr. Lundeen was Senior Vice President, Human Resources, of Eddie Bauer,
from January 1994 until appointment of his current position in August
1998.
(7) Mr. Petersen, appointed Senior Vice President in March 1994, has served
as Chief Financial Officer since joining the Company in February 1994 and
as Vice President-Finance from February 1994 through March 1994. Prior to
joining the Company, Mr. Petersen was employed by Carter Hawley Hale
Stores, Inc. where he most recently served as Executive Vice
President--Chief Financial Officer.
(8) Mr. Pritikin was Vice President, Stores for Charming Shoppes, Inc. from
November 1994 to December 1998 and joined the Company in December 1998.
From March 1994 to November 1994, Mr. Pritikin served as President,
Specialty Stores of Tommy Hilfiger U.S.A. Prior to that time, Mr.
Pritikin was Executive Vice President, Stores, Lerner Division, Limited,
Inc.
(9) Prior to joining the Company, Mr. Gould was Group Treasurer, Sola
International, Inc. from August 1994 to May 1998. From May 1991 to July
1994, Mr. Gould was Director of Strategic Planning of Esprit de Corp
GmbH.
(10) Between October 1996 and October 1998, Ms. Montgomery was engaged in
consulting and advisory work in the eyewear and skin care industry. In
that capacity, Ms. Montgomery was a consultant for the Company from June
1998 until October 1998 when she joined the Company. Prior to that Ms.
Montgomery was Chairman and Chief Executive Officer of Revo Incorporated,
a division of Bausch and Lomb.
(11) Mr. Pita, appointed Vice President, Finance in October 1994, served as
Managing Director of Finance from April 1993 to October 1994 and as
Controller from October 1989 to April 1993. Prior to joining the Company,
Mr. Pita was employed by Arthur Andersen LLP where he most recently
served as Audit Manager.
(12) Ms. Smith was Senior Manager, Compensation and Benefits, for KPMG Peat
Marwick LLP from August 1997 to August 1998. Prior to that time, Ms.
Smith was employed from 1991 to 1997 by Blockbuster Entertainment
Corporation, where she most recently served as Vice President, Human
Resources Planning and Administration.
(13) Prior to joining the Company in February 1999, Ms. Witter served as Vice
President, General Counsel and Secretary of Angelica Corporation from May
1985 to January 1999.
8
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the NASDAQ National Market under
the symbol "RAYS." The following table sets forth, for the periods indicated,
the high and low sale prices of shares of the common stock as reported on the
NASDAQ National Market.
<TABLE>
<CAPTION>
HIGH LOW
----------- -----------
<S> <C> <C>
Fiscal 1998:
First Fiscal Quarter (February 1 to May 2) ............... $10-9/16 $6-15/16
Second Fiscal Quarter (May 3 to August 1) ................ 12-3/4 8
Third Fiscal Quarter (August 2 to October 31) ............ 8-3/4 3-3/4
Fourth Fiscal Quarter (November 1 to January 30) ......... 10-1/8 4-13/32
Fiscal 1997:
First Fiscal Quarter (February 2 to May 3) ............... $ 9 $6
Second Fiscal Quarter (May 4 to August 2) ................ 8-11/16 5
Third Fiscal Quarter (August 3 to November 1) ............ 9-3/4 6-29/32
Fourth Fiscal Quarter (November 2 to January 31) ......... 8-1/4 5-7/8
</TABLE>
On April 21, 1999 the last reported sale price for the Company's common
stock on the NASDAQ National Market was $11.06 per share. As of April 21, 1999
the Company had 313 stockholders of record (including brokerage firms and other
nominees).
The Company intends to retain its earnings to finance the growth and
development of its business and does not anticipate paying cash dividends on
its capital stock in the foreseeable future. Future dividends, if any, will
depend, among other things, on the future earnings, capital requirements and
financial condition of the Company, and on such other factors as the Company's
Board of Directors may consider relevant. In addition, the Company's revolving
credit facility prohibits the payment of cash dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below should be read in conjunction
with the consolidated financial statements and related notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other financial information included elsewhere in this Form 10-K. The data
as of January 30, 1999 and January 31, 1998 and for each of fiscal 1998, 1997
and 1996 are derived from the Company's audited consolidated financial
statements included elsewhere in this Form 10-K. The data as of February 1,
1997, February 3, 1996, and January 28, 1995 and for the fiscal 1995 and 1994
periods are derived from audited financial statements not included in this Form
10-K.
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
FISCAL(1)
-------------------------
1998 1997
----------- -------------
<S> <C> <C>
INCOME STATEMENT DATA:
Net sales ......................................................................... $601,954 $ 573,840
Cost of goods sold, occupancy and buying expenses ................................. 356,523 366,774
-------- ---------
Gross profit ..................................................................... 245,431 207,066
-------- ---------
Selling, general and administrative expenses:
Operating expenses ............................................................... 179,633 186,954
Depreciation and leasehold amortization .......................................... 23,652 28,327
Amortization of cost in excess of net assets of acquired businesses .............. 1,752 2,407
Restructuring expenses (reversals) and asset impairment charges .................. (371) 54,660
Expenses related to acquisitions ................................................. -- --
-------- ---------
204,666 272,348
-------- ---------
Earnings (loss) from continuing operations before interest, income taxes, and
cumulative effect of accounting change ......................................... 40,765 (65,282)
Interest expense .................................................................. 7,319 8,364
-------- ---------
Earnings (loss) from continuing operations before income taxes, and
cumulative effect of accounting change ......................................... 33,446 (73,646)
Provision (benefit) for income taxes .............................................. 13,625 (15,312)
-------- ---------
Earnings (loss) from continuing operations before cumulative effect of
accounting change .............................................................. 19,821 (58,334)
Discontinued operations(2):
Loss from discontinued operations net of tax benefits of
$1.4 million in 1997, $824,000 in 1996 and $11,000 in 1995(2) .................. -- (1,813)
Estimated loss from disposal of discontinued operations, net of income tax
benefit of $5.2 million(2) ..................................................... -- (8,089)
-------- ---------
Earnings (loss) before cumulative effect of accounting change ................... 19,821 (68,236)
Cumulative effect of change in accounting principle, net of income tax
benefit of $851,000(3) ........................................................... -- (1,449)
-------- ---------
Net income (loss) .............................................................. 19,821 (69,685)
Pro forma adjustment for income taxes(4) .......................................... -- --
-------- ---------
Pro forma net income (loss) .................................................... $ 19,821 $ (69,685)
======== =========
Pro forma net income (loss) per share
Basic ............................................................................ $ 0.38 $ (1.27)
======== =========
Diluted .......................................................................... $ 0.38 $ (1.27)
======== =========
Weighted average shares outstanding:
Basic ............................................................................ 51,524 54,670
======== =========
Diluted .......................................................................... 52,226 54,670
======== =========
SELECTED OPERATING DATA:
Number of stores open at end of period ............................................ 2,005 2,166
Comparable store net sales increase ............................................... 3.0% 0.0%
<CAPTION>
FISCAL(1)
-----------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales ......................................................................... $522,297 $418,050 $289,985
Cost of goods sold, occupancy and buying expenses ................................. 312,694 235,163 162,631
-------- -------- --------
Gross profit ..................................................................... 209,603 182,887 127,354
-------- -------- --------
Selling, general and administrative expenses:
Operating expenses ............................................................... 150,148 113,973 82,515
Depreciation and leasehold amortization .......................................... 23,291 16,598 11,832
Amortization of cost in excess of net assets of acquired businesses .............. 2,323 1,746 1,106
Restructuring expenses (reversals) and asset impairment charges .................. 17,528 -- --
Expenses related to acquisitions ................................................. -- 10,100 --
-------- -------- --------
193,290 142,417 95,453
-------- -------- --------
Earnings (loss) from continuing operations before interest, income taxes, and
cumulative effect of accounting change ......................................... 16,313 40,470 31,901
Interest expense .................................................................. 7,969 3,292 2,670
-------- -------- --------
Earnings (loss) from continuing operations before income taxes, and
cumulative effect of accounting change ......................................... 8,344 37,178 29,231
Provision (benefit) for income taxes .............................................. 7,350 15,523 10,913
-------- -------- --------
Earnings (loss) from continuing operations before cumulative effect of
accounting change .............................................................. 994 21,655 18,318
Discontinued operations(2):
Loss from discontinued operations net of tax benefits of
$1.4 million in 1997, $824,000 in 1996 and $11,000 in 1995(2) .................. (1,219) (18) --
Estimated loss from disposal of discontinued operations, net of income tax
benefit of $5.2 million(2) ..................................................... -- -- --
-------- -------- --------
Earnings (loss) before cumulative effect of accounting change ................... (225) 21,637 18,318
Cumulative effect of change in accounting principle, net of income tax
benefit of $851,000(3) ........................................................... -- -- --
-------- -------- --------
Net income (loss) .............................................................. (225) 21,637 18,318
Pro forma adjustment for income taxes(4) .......................................... -- (775) (1,007)
-------- -------- --------
Pro forma net income (loss) .................................................... $ (225) $ 20,862 $ 17,311
======== ======== ========
Pro forma net income (loss) per share
Basic ............................................................................ $ 0.00 $ 0.40 $ 0.36
======== ======== ========
Diluted .......................................................................... $ 0.00 $ 0.38 $ 0.35
======== ======== ========
Weighted average shares outstanding:
Basic ............................................................................ 54,213 52,796 48,321
======== ======== ========
Diluted .......................................................................... 55,088 54,188 49,646
======== ======== ========
SELECTED OPERATING DATA:
Number of stores open at end of period ............................................ 2,087 1,724 1,203
Comparable store net sales increase ............................................... 2.5% 10.3% 13.5%
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .............. $ 57,367 $ 62,276 $140,148 $ 89,153 $ 35,863
Total assets ................. 258,354 299,153 362,513 266,197 153,614
Total debt ................... 133,121 125,378 163,279 69,561 48,528
Stockholders' equity ......... 55,189 86,732 157,792 152,824 72,216
</TABLE>
- ---------------
(1) In June 1995, the Company acquired Sunsations through the exchange of
7,411,764 shares of the Company's common stock for all of the outstanding
common stock of Sunsations. The acquisition was accounted for as a
pooling of interests, and, accordingly, the accompanying selected
financial data has been retroactively adjusted to include the operations
of Sunsations for all periods prior to the acquisition. Prior to the
acquisition, Sunsations used a calendar yearend. Accordingly, the
selected financial data for fiscal 1995 and 1994 combine Sunsations'
historical selected financial data on a calendar yearend basis with the
Company's historical selected financial data on a fiscal yearend basis.
As a result of the acquisition, effective January 29, 1995 (the first day
of the Company's fiscal 1995 year), Sunsations' yearend was changed to
conform to the Company's fiscal yearend.
(2) The Company adopted a plan to discontinue its EyeX segment in January
1998 (see Note 4 of the Notes to Consolidated Financial Statements for
additional details).
(3) The Company adopted Emerging Issues Task Force Issue No. 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract
that Combines Business Process Reengineering and Information Technology
Transformation" in the fourth quarter of fiscal 1997 (see Note 3 of the
Notes to Consolidated Financial Statements for additional details).
(4) The pro forma adjustment for income taxes reflects the additional tax
provision that would have been recorded at the corporation level had
Sunsations not been an S corporation during the respective periods.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
selected income statement data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL
-----------------------------------
1998 1997 1996
-------- ------------ ---------
<S> <C> <C> <C>
Net sales ................................................................ 100.0% 100.0% 100.0%
Cost of goods sold, occupancy and buying expenses ........................ 59.2 63.9 59.9
----- ----- -----
Gross profit ............................................................ 40.8 36.1 40.1
----- ----- -----
Selling, general and administrative expenses:
Operating expenses ...................................................... 29.9 32.6 28.7
Depreciation and leasehold amortization ................................. 3.9 4.9 4.5
Amortization of cost in excess of net assets of acquired businesses ..... 0.3 0.4 0.4
Restructuring expenses (reversals) and asset impairment charges ......... (.1) 9.5 3.4
----- ----- -----
34.0 47.4 37.0
----- ----- -----
Earnings (loss) from continuing operations before interest, income
taxes and cumulative effect of accounting change ..................... 6.8 (11.3) 3.1
Interest expense ......................................................... 1.2 1.5 1.5
----- ----- -----
Earnings (loss) from continuing operations before income taxes
and cumulative effect of accounting change ........................... 5.6 (12.8) 1.6
Provision (benefit) for income taxes ..................................... 2.3 (2.7) 1.4
----- ----- -----
Earnings (loss) from continuing operations before cumulative
effect of accounting change .......................................... 3.3 (10.1) 0.2
Discontinued operations:
Loss from discontinued operations, net of income tax benefits ........... -- (0.3) (0.2)
Estimated loss from disposal of discontinued operations, net of
income tax benefit .................................................... -- (1.4) --
----- ----- -----
Earnings (loss) before cumulative effect of accounting change .......... 3.3 (11.8) --
----- ----- -----
Cumulative effect of change in accounting principle, net of income tax
benefit ................................................................ -- (0.3) --
----- ----- -----
Net income (loss) ...................................................... 3.3% (12.1%) --%
===== ===== ======
</TABLE>
Amounts for fiscal 1997 and 1996 have been reclassified from amounts
originally reported to conform to the current year's presentation and to
segregate the effects of EyeX, the Company's optical segment, which was
recorded as a discontinued operation in fiscal 1997, from continuing
operations.
RESTRUCTURING EXPENSE/ASSET IMPAIRMENT CHARGE OVERVIEW ("OVERVIEW")
During fiscal years 1996, 1997 and 1998, the Company adopted formal
restructuring plans for the closure of store locations.
During fiscal 1996, the Company recorded restructuring expenses of $17.5
million for the closure of approximately 120 store locations. The $17.5 million
pre-tax charge consisted of $8.8 million of fixed asset and other asset
write-offs as well as lease exit and other incremental exit costs of $8.7
million. As of fiscal yearend 1998, this plan had been completed.
During fiscal 1997, the Company's North America operations continued to be
negatively affected by a slowdown in comparable store sales, and certain
international and licensed department
12
<PAGE>
operations continued to perform below expectations. In response to these
performance issues, management performed an assessment of the Company's asset
base, and determined (1) that approximately 250 marginal or unprofitable
locations should be closed, (2) asset impairments should be recognized with
respect to certain international and licensed department locations, certain
store locations and other fixed assets, (3) merchandise assortments should be
focused and the Company's vendor base should be reduced, and (4) the Company's
EyeX segment should be discontinued.
The evaluation of the Company's asset base, the related decision to reduce
vendor and total unit presentation, the adoption of two new accounting
principles and other responses to the current sunglass specialty environment
resulted in $102.6 million of costs ($75.8 million net of tax), or $1.39 per
share, during the fourth quarter of fiscal 1997 as follows: (1) $31.1 million
of long-lived and intangible asset impairments recognized in the Company's
international operations, licensed department operations, selected store
locations (which will continue to be operated), as well as certain other fixed
assets, (2) $23.5 million of costs (write-off of fixed assets, lease exit and
other incremental exit costs) related to the elimination of approximately 250
marginal or unprofitable sites through closure (which was mostly completed
during fiscal 1998 and which the Company anticipates will be fully completed in
fiscal 1999) (3) $13.3 million of costs associated with the discontinuation and
disposal of the Company's EyeX optical segment, (4) $13.0 million of inventory
disposition costs in connection with the Company's decision to improve
merchandise clarity and focus through the reduction of its vendor and total
unit presentation (which reduction was completed in fiscal 1998 through bulk
sales of this product), (5) $4.6 million of costs related to the impact of the
adoption of new accounting principles during fiscal 1997 related to internal
use software, including the cumulative effect of a change in accounting
principle related to costs incurred in connection with the Company's
information technology transformation projects, and (6) $17.1 million of other
unusual costs and expenses attributable to, among other things, efforts to
restructure the Company's organizational infrastructure (including litigation
reserves, management retention and severance costs associated with the
reorganization of international operations and other items), which costs were
mostly incurred during fiscal 1998. As of fiscal yearend 1998, $4.2 million of
the other costs and expenses remained in accrued expenses, including costs
related to the April 1999 settlement of outstanding litigation (see Item 3,
Legal Proceedings).
13
<PAGE>
The fiscal 1997 charges discussed previously are reflected in the
accompanying consolidated statement of operations as follows:
<TABLE>
<CAPTION>
FISCAL 1997
---------------
(IN THOUSANDS)
<S> <C>
Inventory disposition costs (reflected in cost of goods sold, occupancy
and buying expenses) ..................................................... $ 13,015
--------
Unusual costs attributable to restructuring of organizational
infrastructure:
Reflected in cost of goods sold, occupancy and buying expenses ........... 2,620
Reflected in operating expenses .......................................... 13,236
Reflected in depreciation and leasehold amortization ..................... 1,220
--------
17,076
--------
Restructuring expenses and asset impairment charges:
Impairment of long-lived and intangible assets ........................... 31,125
Restructuring costs ...................................................... 23,535
--------
54,660
--------
Discontinuation of EyeX segment ($8,089 net of tax) ....................... 13,260
--------
Costs related to the impact of adoption of new accounting principles:
Costs attributable to adoption of new accounting principle for
internal use software (reflected in operating expenses) ................ 2,314
Cumulative effect of change in accounting principle for costs
incurred in information technology transformation projects
($1,449 net of tax) .................................................... 2,300
--------
4,614
--------
Total charges .......................................................... $102,625
========
</TABLE>
During fiscal 1998, the Company recorded a net reversal of restructuring
expenses of $371,000. This amount reflects (a) reversal of $5.1 million of
restructuring store closing costs recorded in fiscal 1997, primarily as a
result of favorable experience in store closing costs, and (b) $4.7 million of
costs related to the adoption of a plan in fiscal 1998 for the closure of
approximately 175 additional locations ("175 store plan"). During fiscal 1998,
the Company's operations continued to be negatively affected by the performance
of certain licensed department operations and selected other domestic and
international locations. In response to these performance issues, management
adopted a formal plan for the closure of approximately 175 additional
locations. Costs associated with this plan consist of $3.2 million of fixed
asset write-offs and $1.5 million of lease exit and other incremental exit
costs. The net cash impact of this plan in fiscal 1999 is expected to be
minimal, as cash restructuring costs will likely be offset by inventory
reduction and operating loss reduction associated with the store closings. The
Company anticipates that all remaining closures will be substantially completed
in fiscal 1999.
See Note 2 of Notes to Consolidated Financial Statements for further
information regarding the Company's restructuring plans and Note 4 for further
information regarding discontinued operations.
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales increased $28.2 million, or 4.9%, to $602.0 million in fiscal
1998 from $573.8 million in fiscal 1997. The increase reflects sales from new
stores opened during fiscal 1998 (and fiscal 1997 to the extent not reflected
in comparable store sales) of $31.6 million, an increase in comparable store
sales of 3.0% (accounting for $14.5 million of the increase), offset by a
decrease of $17.9 million for sales lost due to store closures during fiscal
1997 and 1998.
Gross profit increased $38.3 million, or 18.5%, to $245.4 million in
fiscal 1998 from $207.1 million in fiscal 1997 as a result of increased net
sales and an increased gross profit percentage. As a
14
<PAGE>
percentage of net sales, gross profit increased 4.7% to 40.8% in fiscal 1998
from 36.1% in fiscal 1997. The 4.7% increase in gross profit was due to (1)
non-recurrence of $15.6 million of charges recorded in fiscal 1997, primarily
for vendor and unit discontinuation costs, (2) improved gross merchandise
margins as a result of reduced inventory reduction activity and improved vendor
terms, and (3) occupancy expense leverage due to a comparable store sales
increase of 3.0% and the closure of marginal store locations.
Operating expenses decreased $7.4 million, or 4.0%, to $179.6 million in
fiscal 1998 from $187.0 million in fiscal 1997. The decrease was due to the
non-recurrence of $15.6 million in unusual charges related to the restructuring
of the Company's organizational infrastructure and the adoption of a new
accounting principle included in fiscal 1997 operating expenses. This decrease
was partially offset by increased costs associated with the operations and
management of new stores opened in fiscal 1998 and 1997. As a percentage of net
sales, operating expenses decreased 2.7% to 29.9% in fiscal 1998 from 32.6% in
fiscal 1997.
Depreciation and leasehold amortization expense decreased $4.7 million, or
16.5%, in fiscal 1998 reflecting the positive impact of the Company's lower
asset base due to asset impairment charges recognized in fiscal 1997 and store
closures under the restructuring plans during fiscal 1998 and 1997.
Amortization of cost in excess of net assets of acquired businesses
decreased $655,000, or 27.2%, in fiscal 1998 reflecting the impact of the
Company's lower asset base due to asset impairment charges recognized in fiscal
1997.
Interest expense decreased $1.1 million, or 12.5%, in fiscal 1998 due to a
decrease in average outstanding borrowings during the period, which was
attributable to increased cash provided by operating activities.
The Company's effective tax rate for fiscal 1998 and 1997 was 40.7% and
20.8%, respectively. The variation in the effective rate for the tax provision
in fiscal 1998 and the tax benefit in fiscal 1997 is primarily due to the
recording of a valuation allowance for certain international deferred tax
assets during fiscal 1997.
As a result of the foregoing, the Company had net income of $19.8 million
in fiscal 1998 compared to a net loss from continuing operations of $58.3
million in fiscal 1997 ($69.7 million net loss including discontinued
operations).
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased $51.5 million, or 9.9%, to $573.8 million in fiscal
1997 from $522.3 million in fiscal 1996. Comparable store sales for fiscal 1997
were flat. Management attributes this weakness to a variety of factors
including a lack of successful industry marketing initiatives.
Gross profit decreased $2.5 million, or 1.2%, to $207.1 million in fiscal
1997 from $209.6 million in fiscal 1996. As a percentage of net sales, gross
profit decreased by 4.0% to 36.1% in fiscal 1997 from 40.1% in fiscal 1996. The
4.0% decrease in gross profit margin was primarily due to (1) the fourth
quarter charges for (a) the vendor and unit discontinuation charge of $13.0
million to reflect discontinued merchandise at its realizable value upon
disposal and other related disposal costs, and (b) an additional $2.6 million
of other costs, (2) markdowns and promotions as part of the Company's 1997
initiative to reduce and rebalance inventory levels, (3) reduced manufacturers'
rebates and other vendor support, and (4) negative occupancy expense leverage
due to flat comparable store sales, as well as higher occupancy costs in
international markets.
Operating expenses increased $36.8 million, or 24.5%, in fiscal 1997,
primarily due to unusual fourth quarter charges of $15.6 million and costs
associated with the operations and management of new stores opened in fiscal
1997 and fiscal 1996. As a percentage of net sales, operating expenses
15
<PAGE>
increased 3.9% to 32.6% in fiscal 1997 from 28.7% in fiscal 1996, primarily due
to unusual fourth quarter charges of $15.6 million, a charge of $1.7 million in
connection with the resignation of the Company's former President and Chief
Executive Officer, and higher marketing costs, coupled with the negative
expense leverage impact of flat comparable store sales.
Depreciation and leasehold amortization expense increased $5.0 million, or
21.6%, in fiscal 1997, primarily due to new store growth during fiscal 1997 and
1996 and fourth quarter charges of $1.2 million.
Amortization of cost in excess of net assets of acquired businesses
increased by $84,000, or 3.6%, in fiscal 1997.
Total restructuring expenses and asset impairment charges of $54.6 million
consist of $31.1 million non-cash asset impairment charges and $23.5 million of
restructuring expenses related to the closing of 250 marginal or unprofitable
locations. Restructuring expenses consist of $12.9 million of non-cash fixed
and other asset write-downs and $10.6 million for lease exit and other
incremental cash exit costs (see "Overview" for further information).
Interest expense increased $395,000, or 5.0%, in fiscal 1997 due to an
increase in average outstanding borrowings, primarily to support new store
operating and capital cash needs.
The Company's effective tax rate for fiscal 1997 and fiscal 1996 was 20.8%
and 88.1%, respectively. The variation in the effective rate for the tax
benefit in fiscal 1997 and the tax provision in 1996 is primarily due to the
recording of a valuation allowance to account for certain international
deferred tax assets.
As a result of the foregoing, the Company had a net loss from continuing
operations before cumulative effect of accounting change of $58.3 million in
fiscal 1997 compared to net income from continuing operations of $994,000 in
fiscal 1996.
The net loss from discontinued operations reflects the operating losses of
EyeX, the Company's optical segment, net of taxes.
The estimated loss from disposal of discontinued operations of $8.1
million, net of taxes, reflects the estimated loss to dispose of EyeX,
including costs to dispose of inventory and store locations, and the estimated
remaining operating losses through closure.
The Company reported a net loss of $69.7 million in 1997 compared to a net
loss of $225,000 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's short-term cash needs are primarily for (i) working capital
to support its inventory requirements and new store additions (ii) the
implementation of its restructuring plans and (iii) common stock repurchases,
as authorized by the Company's Board of Directors. The Company's long-term
liquidity requirements relate principally to the maturity of its revolving
credit facility in November 2001, the maturity of its $115 million convertible
subordinated Notes in June 2003, operating lease commitments and continued
store expansion. In April 1998, the Company entered into a revolving credit
with borrowing availability of up to $80 million, depending on inventory
levels, with BankBoston Retail Finance Inc. ("BankBoston"), which replaced its
former revolving credit agreement. BankBoston's commitment to fund revolving
credit borrowings based on inventory levels was reduced to $65 million
effective February 1, 1999. In November 1998, the Company amended this facility
to incorporate a supplemental borrowing facility. As of April 12, 1999, the
Company's borrowing base was approximately $61.8 million and the Company was
entitled to borrow up to an additional $15 million under the supplemental
component of its facility. The credit facility includes up
16
<PAGE>
to $12.5 million in letters of credit. Borrowings under the credit facility
generally bear interest at a floating rate equal to, at the Company's option,
(a) the prime rate or (b) LIBOR plus 2.00%. The facility is secured with a
first priority lien and security interest in substantially all assets.
Borrowings under the BankBoston facility can be used for working capital and
other general corporate purposes, including stock repurchases (which purchases
are subject to a minimum remaining borrowing availability of $12.5 million).
Due to the seasonal nature of the Company's business, outstanding
borrowings 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." At January 30, 1999, the
Company had outstanding borrowings under its credit facility of $18.6 million
and $1.0 million in letters of credit outstanding, which were maintained as
security for performance under the Company's executive office lease and for
purchases of certain merchandise.
Net cash provided by operating activities was $79.0 million during fiscal
1998 compared to $66.6 million in fiscal 1997. The difference between the
Company's net income and operating cash flow in fiscal 1998 was primarily
attributable to the reduction in inventory of $13.1 million, depreciation and
amortization of $25.4 million, and the decrease in other current assets due to
tax refunds of $18.2 million.
Net cash used in investing activities was $31.3 million during fiscal 1998
compared to $31.1 million during fiscal 1997. Investing cash flows reflect
capital expenditures related to new store expansion and acquisitions, the
renovation of existing stores and required systems enhancements.
Net cash used in financing activities was $44.9 million for fiscal 1998
compared to $38.7 million for fiscal 1997. Financing cash flows for 1998
reflect stock repurchases of $50.2 million.
At January 30, 1999, the Company's commitments for capital expenditures
totaled $1.9 million and are related primarily to capital costs for new store
construction and existing store renovations. Management believes that net cash
provided by operations, together with borrowing availability under the
Company's credit facility, will be sufficient to fund estimated capital
expenditures associated with the Company's planned opening of approximately 85
store locations in fiscal 1999, amounts associated with the Company's common
stock repurchase program and other working capital requirements, including cash
expenditures associated with the Company's restructuring activities, through at
least fiscal 1999.
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).
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 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 affect results of operations on a
quarter-to-quarter basis. See Note 15 of the Notes to Consolidated Financial
Statements for additional information regarding quarterly financial data.
YEAR 2000 COMPLIANCE
The Company recognizes that the arrival of the year 2000 poses a unique
challenge to the ability of many technical systems to process the date change
from December 31, 1999, to January 1, 2000. The Y2K issue is the result of
computer programs being written using two digits rather than four to define an
applicable year. These programs, if not corrected, could fail or create
erroneous results after the century date change. The Y2K issue is believed to
affect virtually all companies and organizations.
17
<PAGE>
The Company utilizes software, hardware, and related technologies
throughout its business that will be affected by the Y2K date change. The
Company has established a Y2K Project Team, which is currently addressing the
impact of Y2K on its systems and business processes. The Project Team focuses
on four areas: (1) information systems and technology, (2) merchandise vendors,
(3) third party suppliers, and (4) corporate facilities. The Project Plan in
each area includes the following phases: (1) Assessment/Inventory, (2) Risk
Analysis, (3) Remediation, (4) Testing, and (5) Implementation. A risk-based
approach is being employed to prioritize and direct the internal and external
resources dedicated to the Y2K initiative.
INFORMATION SYSTEMS & TECHNOLOGY
Based on an enterprise-wide risk analysis completed at the end of fiscal
1998, the following critical application systems areas are the focus of the
Company's Y2K compliance efforts: Merchandising, Inventory Management,
Point-of-Sale systems, Human Resources (including Payroll), and Financial
information. During the past few years, the Company has undergone significant
strategic improvements in its application systems in order to improve business
processes. The Merchandising, Human Resources, and Financial information
systems were selected for improved business functionality and are
vendor-certified as Y2K compliant. The Human Resources and Financial
information systems were implemented during 1998 and the Merchandising system
will be implemented by mid-1999. All critical functions will be tested to
ensure the asserted compliance. Additionally, the hardware and communications
infrastructure has been inventoried, assessed and, where necessary, is
currently being upgraded and tested. The remaining systems and processes are in
various stages of remediation through implementation. The remediation, testing,
and implementation phases can run concurrently within system projects as well
as overall for all system areas; however, implementation for all mission
critical systems is expected to be substantially complete by the third quarter
of the 1999 fiscal year.
MERCHANDISE VENDORS, THIRD PARTY VENDORS, AND CORPORATE FACILITIES
The Company's operations are dependent on the Y2K readiness of third
parties. In particular, the sales systems interact with commercial electronic
transaction processing systems to handle customer credit card purchases and
other point-of-sale transactions. Additionally, the Company relies on third
party suppliers for infrastructure elements such as telephone services,
electric power, water, and banking facilities, as well as merchandise suppliers
for the delivery of goods to sell.
The Vendor Relations area of the project refers to the Y2K status
evaluation of key merchandise and service vendors. As part of the Y2K
initiative, merchandise and service vendors are being surveyed to determine
their readiness and the Company is in the process of obtaining or negotiating
to obtain assurances from these vendors. In addition, because the Company
depends heavily on a select group of merchandise vendors, the Company will
conduct more in depth assessments of certain of these mission critical vendors
to further assess such vendors' progress. Where necessary, contingency plans
will be developed to be used in the event of supplier delivery delay or
failure. Although the Company has not been put on notice that any known third
party's problem will not be resolved, the Company has limited information and
no assurance of additional information concerning the Y2K readiness of third
parties. The resulting risks to the Company's business are very difficult to
assess; however, the inability to obtain merchandise from one or more key
vendors on a timely basis could have a material adverse effect on the Company's
results of operations.
The Company is developing contingency plans and identifying what actions
would be required if a critical system, service provider, or merchandise vendor
were not Y2K compliant. The Company expects these plans to be finalized by the
third quarter of 1999 and will re-evaluate these plans throughout the balance
of fiscal 1999.
COSTS
To date, the Company estimates that it has spent approximately $600,000 on
Y2K efforts across all areas and expects to spend an additional $300,000 -
$400,000 to complete the project, which
18
<PAGE>
amounts will be funded through operating cash flows. Operating costs related to
Y2K compliance projects will be incurred over several quarters and will be
expensed as incurred. Costs associated with business system solutions for
improved business processes are not included in these amounts. The Company does
not anticipate that these amounts will have a material adverse effect on the
Company's financial condition or operating results. The costs of the project
and the dates on which the Company plans to complete the work are based on
management's best estimates, which were derived from numerous assumptions about
future events, including the availability of certain resources, third party
compliance information, and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause material
differences include, but are not limited to, the availability and cost of
trained personnel, the ability to identify and correct all relevant
technologies, and the ability to acquire accurate information regarding third
party suppliers. Additionally, Y2K expenditures in relation to total estimated
costs should not be considered or relied on as a basis for estimating progress
to completion for any element of the Y2K project.
The Company presently believes that upon remediation of its business
software applications, hardware, and other equipment with embedded technology,
the Y2K issue will not present a materially adverse risk to the Company's
future consolidated results of operations, liquidity, and capital resources.
However, if such remediation is not completed in a timely manner or the level
of timely compliance by key suppliers or vendors is not sufficient, the Y2K
issue could have a material impact on the Company's operations including, but
not limited to, failures to or delays in delivery of merchandise resulting in
loss of business.
EUROPEAN MONETARY UNION
On January 1, 1999 eleven of the existing members of the European Union
(the "EU") joined the European Monetary Union (the "EMU"). This will lead to,
among many other things, fundamental changes in the way participating EU states
implement their monetary policies and manage local currency exchange rates.
Ultimately, there will be a single currency within certain countries of the EU,
known as the Euro and one organization, the European Central Bank, responsible
for setting European monetary policy. While some believe that the change will
bring a higher level of competition within Europe and a greater sense of
economic stability within that region, there is no certainty that the Company's
activity in this region will necessarily realize any benefits as a result of
such changes. The Company has reviewed the impact the Euro will have on its
business and whether this will give rise to a need for significant changes in
its commercial operations or treasury management functions. While it is
uncertain whether there will be any immediate direct benefits from the planned
conversion, the Company believes it is properly prepared to accommodate any
changes deemed necessary without any significant changes to its current
commercial operations, treasury management and management information systems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On a limited basis, the Company selectively uses foreign currency swap
agreements to hedge the effect of changes in currency exchange rates on certain
short-term intercompany transactions. No derivative contracts are entered into
for trading or speculative purposes. The use of derivatives did not have a
material impact on the Company's financial position, results of operations or
cash flows in fiscal 1998, 1997 or 1996. See Note 1 of Notes to Consolidated
Financial Statements for further information.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Certified Public Accountants ...................... 21
Consolidated Balance Sheets ............................................. 22
Consolidated Statements of Operations ................................... 23
Consolidated Statements of Stockholders' Equity and Comprehensive Income 24
Consolidated Statements of Cash Flows ................................... 25
Notes to Consolidated Financial Statements .............................. 27
</TABLE>
20
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
of Sunglass Hut International, Inc.:
We have audited the accompanying consolidated balance sheets of Sunglass
Hut International, Inc. (a Florida corporation) and subsidiaries as of January
30, 1999 and January 31, 1998, and the related consolidated statements of
operations, stockholders' equity and comprehensive income and cash flows for
each of the three fiscal years in the period ended January 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sunglass Hut International,
Inc. and subsidiaries as of January 30, 1999 and January 31, 1998, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended January 30, 1999 in conformity with generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the
Company adopted the provisions of Emerging Issues Task Force Issue No. 97-13
and American Institute of Certified Public Accountants Statement of Position
No. 98-1 in the fourth quarter of fiscal 1997.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 17, 1999 (except with respect to the matters described
in the fourth sentence of Note 1, under "Concentration of
Suppliers", and the penultimate paragraph of Note 11, as
to which the date is April 28, 1999).
21
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 5,007 $ 3,372
Accounts receivable .................................. 3,547 3,612
Inventory ............................................ 88,834 101,965
Prepaid rent ......................................... 7,978 7,707
Other current assets ................................. 22,045 42,777
Net assets of discontinued operations ................ -- 2,461
--------- ---------
Total current assets ............................... 127,411 161,894
--------- ---------
PROPERTY AND EQUIPMENT, net ........................... 90,987 99,849
COST IN EXCESS OF NET ASSETS OF
ACQUIRED BUSINESSES, net ............................ 26,486 25,083
OTHER ASSETS .......................................... 13,470 12,327
--------- ---------
Total assets ....................................... $ 258,354 $ 299,153
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................... $ 25,113 $ 18,079
Accrued expenses ..................................... 41,327 43,175
Accrued restructuring expenses ....................... 3,604 25,789
Current portion of long-term debt .................... -- 12,575
--------- ---------
Total current liabilities .......................... 70,044 99,618
LONG-TERM DEBT, net of current portion ................ 133,121 112,803
--------- ---------
Total liabilities .................................. 203,165 212,421
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY:
Preferred stock ...................................... -- --
Common stock ......................................... 464 547
Additional paid-in capital ........................... 116,420 166,008
Accumulated deficit .................................. (56,715) (76,536)
Accumulated other comprehensive income ............... (4,980) (3,287)
--------- ---------
Total stockholders' equity ......................... 55,189 86,732
--------- ---------
Total liabilities and stockholders' equity ......... $ 258,354 $ 299,153
========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
22
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL
-----------------------------------------
1998 1997 1996
----------- ------------- -----------
<S> <C> <C> <C>
Net sales ........................................................................ $601,954 $ 573,840 $522,297
Cost of goods sold, occupancy and buying expenses ................................ 356,523 366,774 312,694
-------- --------- --------
Gross profit .................................................................. 245,431 207,066 209,603
-------- --------- --------
Selling, general and administrative expenses:
Operating expenses .............................................................. 179,633 186,954 150,148
Depreciation and leasehold amortization ......................................... 23,652 28,327 23,291
Amortization of cost in excess of net assets of acquired businesses ............. 1,752 2,407 2,323
Restructuring expenses (reversals) and asset impairment charges ................. (371) 54,660 17,528
-------- --------- --------
204,666 272,348 193,290
-------- --------- --------
Earnings (loss) from continuing operations before interest, income taxes
and cumulative effect of accounting change .................................. 40,765 (65,282) 16,313
Interest expense ................................................................. 7,319 8,364 7,969
-------- --------- --------
Earnings (loss) from continuing operations before income taxes
and cumulative effect of accounting change .................................. 33,446 (73,646) 8,344
Provision (benefit) for income taxes ............................................. 13,625 (15,312) 7,350
-------- --------- --------
Earnings (loss) from continuing operations before cumulative effect
of accounting change ........................................................ 19,821 (58,334) 994
-------- --------- --------
Discontinued operations:
Loss from discontinued operations, net of income tax benefits of $1.4 million
in 1997 and $824,000 in 1996 ................................................... -- (1,813) (1,219)
Estimated loss from disposal of discontinued operations, net of
income tax benefit of $5.2 million in 1997 ..................................... -- (8,089) --
-------- --------- --------
-- (9,902) (1,219)
-------- --------- --------
Earnings (loss) before cumulative effect of accounting change ................. 19,821 (68,236) (225)
Cumulative effect of change in accounting principle, net of
income tax benefit of $851,000 in 1997 .......................................... -- (1,449) --
-------- --------- --------
Net income (loss) ............................................................. $ 19,821 $ (69,685) $ (225)
======== ========= ========
Net income (loss) per share:
Basic and diluted--
From continuing operations ..................................................... $ 0.38 $ (1.07) $ 0.02
From discontinued operations ................................................... -- (0.18) (0.02)
Cumulative effect of change in accounting principle ............................ -- (0.02) --
-------- --------- --------
Net income (loss) ............................................................. $ 0.38 $ (1.27) $ --
======== ========= ========
Weighted average shares outstanding:
Basic ........................................................................... 51,524 54,670 54,213
======== ========= ========
Diluted ......................................................................... 52,226 54,670 55,088
======== ========= ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
23
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------
ADDITIONAL
NUMBER OF PAID-IN
SHARES AMOUNT CAPITAL
--------------- -------- -----------
<S> <C> <C> <C>
BALANCE, FISCAL 1995 ................... 53,826,866 $ 538 $ 159,088
Exercise of stock options, including
tax benefit ........................... 556,494 5 5,238
Pooling of interests with acquired
entities .............................. 65,186 1 --
Net loss for fiscal 1996 ............... -- -- --
Foreign currency translation
adjustment ............................ -- -- --
Total comprehensive loss ............. -- -- --
---------- ----- ---------
BALANCE, FISCAL 1996 ................... 54,448,546 544 164,326
Stock and restricted stock awards ...... 225,000 2 1,573
Exercise of stock options, including
tax benefit ........................... 31,100 1 109
Net loss for fiscal 1997 ............... -- -- --
Foreign currency translation
adjustment ............................ -- -- --
Total comprehensive loss ............. -- -- --
---------- ----- ---------
BALANCE, FISCAL 1997 ................... 54,704,646 547 166,008
Exercise of stock options, including
tax benefit ........................... 77,604 1 544
Stock repurchases and retirements ...... (8,351,800) (84) (50,132)
Net income for fiscal 1998 ............. -- -- --
Foreign currency translation
adjustment ............................ -- -- --
Total comprehensive income ........... -- -- --
---------- ----- ---------
BALANCE, FISCAL 1998 ................... 46,430,450 $ 464 $ 116,420
========== ===== =========
<CAPTION>
COMPREHENSIVE
INCOME
-----------------------------
COMPREHENSIVE
OTHER INCOME
ACCUMULATED COMPREHENSIVE FOR THE
DEFICIT INCOME TOTAL PERIOD
------------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
BALANCE, FISCAL 1995 ................... $ (6,302) $ (500) $ 152,824 $ --
Exercise of stock options, including
tax benefit ........................... -- -- 5,243 --
Pooling of interests with acquired
entities .............................. (324) -- (323) (324)
Net loss for fiscal 1996 ............... (225) -- (225) (225)
Foreign currency translation
adjustment ............................ -- 273 273 273
---------
Total comprehensive loss ............. -- -- -- $ (276)
--------- -------- --------- =========
BALANCE, FISCAL 1996 ................... (6,851) (227) 157,792 $ --
Stock and restricted stock awards ...... -- -- 1,575 --
Exercise of stock options, including
tax benefit ........................... -- -- 110 --
Net loss for fiscal 1997 ............... (69,685) -- (69,685) (69,685)
Foreign currency translation
adjustment ............................ -- (3,060) (3,060) (3,060)
---------
Total comprehensive loss ............. -- -- -- $ (72,745)
--------- -------- --------- =========
BALANCE, FISCAL 1997 ................... (76,536) (3,287) 86,732 $ --
Exercise of stock options, including
tax benefit ........................... -- -- 545 --
Stock repurchases and retirements ...... -- -- (50,216) --
Net income for fiscal 1998 ............. 19,821 -- 19,821 19,821
Foreign currency translation
adjustment ............................ -- (1,693) (1,693) (1,693)
---------
Total comprehensive income ........... -- -- -- $ 18,128
--------- -------- --------- =========
BALANCE, FISCAL 1998 ................... $ (56,715) $ (4,980) $ 55,189
========= ======== =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
24
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL
-------------------------------------------
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................................... $ 19,821 $ (69,685) $ (225)
--------- --------- ---------
Adjustments to reconcile net income (loss) to net cash provided by
(used in) continuing operations:
Depreciation and amortization .......................................... 25,404 30,734 25,614
Provision for discontinued merchandise ................................. -- 13,015 --
Restructuring expenses (reversals) and asset impairment charges ........ (371) 54,660 17,528
Loss from discontinued operations, net of tax benefits ................. -- 1,813 1,219
Estimated loss from disposal of discontinued operations, net of
tax benefit .......................................................... -- 8,089 --
Cumulative effect of change in accounting principle, net of tax
benefit .............................................................. -- 1,449 --
Write-off of deferred software development costs, net of tax
benefit .............................................................. -- 1,459 --
Stock-based compensation ............................................... -- 1,575 --
Accretion of debt discount ............................................. 359 340 194
Changes in operating assets and liabilities, net of effect of
acquisitions-- .......................................................
Changes in assets:
Accounts receivable .................................................. 65 (651) (596)
Inventory ............................................................ 13,131 28,781 (32,635)
Prepaid rent ......................................................... (271) (295) (1,513)
Other current assets ................................................. 12,950 (14,940) (134)
Other assets ......................................................... 853 (1,465) (2,368)
Deferred income taxes ................................................ 10,660 (13,514) (4,529)
Changes in liabilities:
Accounts payable ..................................................... 7,034 5,953 (16,046)
Accrued expenses ..................................................... (3,572) 28,116 1,554
Accrued restructuring expenses ....................................... (4,777) (7,509) (1,782)
--------- --------- ---------
61,465 137,610 (13,494)
--------- --------- ---------
Net cash provided by (used in) continuing operations ................... 81,286 67,925 (13,719)
Net cash used in discontinued operations ............................... (2,254) (1,374) (3,810)
--------- --------- ---------
Net cash provided by (used in) operating activities .................... 79,032 66,551 (17,529)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................................... (28,507) (29,059) (67,595)
Capital expenditures-discontinued operations ............................ (31) (648) (6,763)
Acquisitions of businesses .............................................. (2,769) (1,396) (1,807)
--------- --------- ---------
Net cash used in investing activities .................................. (31,307) (31,103) (76,165)
--------- --------- ---------
</TABLE>
(CONTINUED ON NEXT PAGE)
25
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FISCAL
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ............................ -- -- 112,625
Principal payments on long-term debt ................................ (50) (316) (526)
Proceeds from borrowings under revolving credit facilities .......... 104,236 104,900 188,518
Principal payments on revolving credit facilities ................... (98,051) (143,000) (207,579)
Payments for stock repurchases and retirements ...................... (50,216) -- --
Payment of deferred financing costs ................................. (1,178) (288) (583)
Proceeds from exercise of stock options ............................. 392 49 2,036
------- -------- --------
Net cash provided by (used in) financing activities ............... (44,867) (38,655) 94,491
------- -------- --------
Effect of exchange rate changes on cash and cash equivalents ......... (1,223) 990 294
------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ........................................................ 1,635 (2,217) 1,091
CASH AND CASH EQUIVALENTS, beginning of year ......................... 3,372 5,589 4,498
------- -------- --------
CASH AND CASH EQUIVALENTS, end of year ............................... $ 5,007 $ 3,372 $ 5,589
========= ========== ==========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest ........................................................... $ 7,021 $ 7,925 $ 7,229
========= ========== ==========
Income taxes ....................................................... $ (15,597) $ 3,293 $ 13,627
========= ========== ==========
Non-cash activities:
Write-off of property and equipment against accrued
restructuring expenses ........................................... $ 15,387 $ 25,421 $ --
Write-off of other assets against accrued restructuring
expenses ......................................................... 1,650 11,037 650
Impact on stockholders' equity from tax benefit related to the
exercise of stock options ........................................ 153 61 3,207
Issuance of convertible subordinated notes payable in
connection with the acquisition of shades.com and
SwissArmy Depot.com .............................................. 1,248 -- --
--------- ---------- ----------
$ 18,438 $ 36,519 $ 3,857
========= ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
26
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Sunglass Hut International, Inc., a Florida corporation, and subsidiaries
(collectively, the "Company"), are engaged in retail sunglass and watch sales.
The Company operates stores located throughout the United States, Canada, the
Caribbean, Europe, Australia, New Zealand, and Southeast Asia.
PRINCIPLES OF CONSOLIDATION/FISCAL YEAR
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. EyeX, the Company's optical
segment, has been recorded as a discontinued operation. The Company's yearend
is the Saturday nearest January 31. Consequently, the Company's fiscal 1998,
1997 and 1996 years encompass the periods of February 1, 1998 through January
30, 1999, February 2, 1997 through January 31, 1998 and February 4, 1996
through February 1, 1997, respectively.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates made by management include but are not
limited to the realizability of the Company's deferred tax assets, the possible
outcome of outstanding litigation, inventory shrinkage and obsolescence
accruals, self-insurance accruals for employee medical benefits, recognition of
supplier incentives and support, and future obligations and costs associated
with the Company's restructuring plans and strategic initiatives. Actual
results in subsequent periods could differ from those estimates.
EARNINGS PER SHARE
During fiscal 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share". Basic earnings per common
share calculations are determined by dividing earnings available to common
stockholders by the weighted average number of shares of common stock. Diluted
earnings per share are determined by dividing earnings available to common
shareholders by the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding (related to outstanding stock
options discussed in Note 13 and the convertible debt discussed in Notes 5 and
10). The adoption of SFAS No. 128 did not have a material impact on the
Company's previously reported earnings (loss) per share for 1996.
27
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
Basic and diluted earnings per share for income (loss) from continuing
operations before cumulative effect of accounting change is computed as
follows:
<TABLE>
<CAPTION>
FISCAL
----------------------------------------
1998 1997 1996
---------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Earnings (loss) from continuing operations before
cumulative effect of accounting change .................. $ 19,821 $ (58,334) $ 994
======== ========= ========
Denominator:
Denominator for basic earnings (loss) per share ........... 51,524 54,670 54,213
Effect of dilutive securities:
Options to purchase common stock ......................... 685 -- 875
Convertible debt issued in January 1999 .................. 17 -- --
-------- --------- --------
Denominator for diluted earnings (loss) per share .......... 52,226 54,670 55,088
======== ========= ========
Earnings (loss) per share from continuing operations
before cumulative effect of accounting change:
Basic .................................................... $ 0.38 $ (1.07) $ 0.02
======== ========= ========
Diluted .................................................. $ 0.38 $ (1.07) $ 0.02
======== ========= ========
Antidilutive securities not included in the diluted earnings
(loss) per share computation:
Options to purchase common stock ......................... 438 3,139 1,057
Exercise price ........................................... $ 7.00 $ 0.25 $ 7.38
to to to
$ 30.81 $ 30.81 $ 30.81
Convertible subordinated debt ............................ $115,000 $ 115,000 $115,000
Conversion price ......................................... $ 30.25 $ 30.25 $ 30.25
</TABLE>
CONCENTRATION OF SUPPLIERS
In fiscal 1998, Bausch & Lomb (including Ray-Ban, Revo, Killer Loop and
other brands) and Oakley, the Company's largest suppliers, accounted for
approximately 25.8% and 26.7%, respectively, of the Company's total merchandise
purchases. The Company has not experienced any significant difficulty in
obtaining satisfactory sources of supply in the past. However, the Company has
no long-term purchase contracts or other contractual assurance of continued
supply, pricing or access to new products. On April 28, 1999, Bausch & Lomb
announced that it reached an agreement for the sale of assets and liabilities
of its eyewear business with Luxottica Group SpA. The sale is subject to
various regulatory approvals and is expected to close by June 30, 1999. 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.
28
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
INVENTORY
Inventory, which consists of retail merchandise, is stated at the lower of
cost (computed using the average cost method which approximates the first-in,
first-out method) or market. Provision, when necessary, has been made to reduce
inventory to its net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation
and leasehold amortization. Depreciation and leasehold amortization are
calculated using the straight-line method over the expected useful lives of the
related assets. Useful lives generally range from 5 to 10 years. Upon the sale
or disposition of property and equipment, the asset cost and related
accumulated depreciation and leasehold amortization are removed from the
accounts and any resulting gain or loss is included in income. Maintenance and
repairs are expensed as incurred.
COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES
The unamortized cost in excess of net assets of acquired businesses is
being amortized on a straight-line basis over periods ranging primarily from 15
to 25 years. Accumulated amortization at January 30, 1999 and January 31, 1998
was $28.9 million and $28.4 million, respectively. The Company continually
evaluates whether events and circumstances have occurred subsequent to
acquisitions that indicate the remaining estimated useful life of cost in
excess of net assets of acquired businesses may warrant revision or that the
remaining balance of cost in excess of net assets of acquired businesses may
not be recoverable. When factors indicate that cost in excess of net assets of
acquired businesses should be evaluated for possible impairment, the Company
uses an estimate of the related business' undiscounted projected net operating
cash flows over the remaining life of the cost in excess of net assets of
acquired businesses in measuring whether the remaining unamortized cost and the
net book value of the related fixed and other assets are recoverable. If the
cost in excess of net assets of acquired businesses is determined to be
impaired, such assets are reduced to management's best estimate of fair value
using the discounted projected net operating cash flows over the remaining
life.
STORE OPENING COSTS
Salaries, training and travel costs relating to opening new retail
locations are expensed as incurred.
CATALOGUE AND ADVERTISING COSTS
Catalogue costs, primarily consisting of catalogue production and mailing
costs, are amortized over the expected future revenue stream, which is
principally from three to six months from the date catalogues are mailed. A
significant amount of these costs is funded by vendors and, as such, the
expense incurred by the Company is not material. All other advertising costs
are not material and are expensed as incurred.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that are
29
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
expected to be in effect when the differences are expected to reverse. Deferred
income tax provisions and benefits are based on the changes to the asset or
liability from period to period. A valuation allowance is recognized to reduce
net deferred tax assets to amounts that management believes are more likely
than not to be realized. The Company files a consolidated tax return with its
domestic subsidiaries in the United States.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries are translated at the rate
of exchange in effect at the balance sheet date; income and expenses are
translated at the average rates of exchange prevailing during the year. The
related translation adjustments are reflected in the accumulated other
comprehensive income section of the consolidated statements of stockholders'
equity and comprehensive income. Foreign currency gains and losses resulting
from transactions denominated in foreign currencies, including intercompany
transactions, except for intercompany loans of a long-term investment nature,
are included in results of operations.
FORWARD CURRENCY SWAP AGREEMENTS
The Company enters into forward currency swap agreements from time to time
to hedge the effect of changes in currency exchange rates on certain short-term
intercompany transactions. Forward currency swap agreements obligate the
Company to exchange, at future dates, various currencies at agreed upon
exchange rates. Gains and losses on these agreements resulting from changes in
currency exchange rates, if any, are offset against corresponding gains and
losses on the short-term intercompany transactions, if any. Premiums paid or
discounts received on these agreements are amortized over the term of the
agreement. For reporting purposes, the assets and liabilities resulting from
these agreements are offset because there is a legal right of offset.
At January 30, 1999, foreign currency swap agreements cover approximately
$3.4 million of intercompany amounts and mature in fiscal 1999. The fair value
of these instruments approximates their carrying value at January 30, 1999.
Fair value generally represents the amount the Company would pay or receive to
terminate the agreements.
The counterparties to these agreements are major international financial
institutions, and the Company monitors the credit-worthiness of the
counterparties and presently does not anticipate losses resulting from the
credit risk of these institutions.
CASH AND CASH EQUIVALENTS/FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company classifies as cash and cash equivalents all interest-bearing
deposits with original maturities of three months or less. The fair value of a
financial instrument represents the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation. Fair value estimates are made at a specific point
in time, based on relevant market information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment, and therefore cannot be determined with precision. The
assumptions used have a significant effect on the estimated amounts reported.
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and borrowings under the revolving credit facility approximate
fair value as of January 30, 1999 and
30
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
January 31, 1998. The fair value of convertible subordinated debentures
approximates $74.4 million based on the quoted market price as of January 30,
1999.
NEW ACCOUNTING STANDARDS
Segment Reporting
Effective February 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 superseded SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS No. 131 establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS No. 131 did not
affect results of operations or financial position, but did affect the
disclosure of segment information (see Note 14). Prior year disclosures have
been restated to conform to the requirements of SFAS No. 131.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" for fiscal
years beginning after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that entities recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Company will adopt SFAS No. 133 in fiscal 2000
and is in the process of reviewing the impact of such adoption on its financial
position and results of operations.
Start-Up Costs
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities". SOP 98-5 requires that costs incurred during the
organization, pre-opening and start up phases of a project be expensed as
incurred, unless they are appropriately capitalizable under other existing
accounting pronouncements. The Company is required to adopt the SOP in the
first quarter of fiscal 1999, and, upon adoption, expense all remaining
capitalized start-up costs as a cumulative effect of change in accounting
principle, net of income tax benefit. The Company will adopt SOP 98-5 in fiscal
1999 and the adoption will not have a material effect on its financial position
and results of operations.
NOTE 2--RESTRUCTURING EXPENSES AND ASSET IMPAIRMENT CHARGES
During fiscal 1996, the Company developed and commenced implementation of
a restructuring plan to eliminate approximately 120 marginal or unprofitable
locations through closure or conversion. In connection with the restructuring
plan, the Company recorded restructuring expenses of $17.5 million ($14.7
million net of tax). The pre-tax charge consisted of expenses related to the
write-down of fixed and other assets of $8.8 million and cash charges of $8.7
million for lease exit and other
31
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--RESTRUCTURING EXPENSES AND ASSET IMPAIRMENT CHARGES--(CONTINUED)
incremental costs. The after-tax charge also reflects the probability that
certain net operating loss carry-forwards will not provide future tax benefits
to the Company. As of January 30, 1999, this plan was fully completed.
During fiscal 1997, management performed an assessment of the
recoverability of the Company's asset base and, as a result, recorded $54.6
million ($34.8 million net of tax benefits) for restructuring expenses and
asset impairment charges (the "250 Store Restructuring"). Pre-tax restructuring
charges of $23.5 million related to the closing of approximately 250 marginal
or unprofitable locations in the Company's North American, European and
Australian segments and consisted of non-cash charges of $12.9 million for
fixed and other asset write-downs and cash charges of $10.6 million for lease
exit and other incremental exit costs. Additionally, asset impairment charges
of $31.1 million ($20.1 million net of tax) were determined based on an
analysis of projected estimated cash flows for underperforming operations which
will continue to be operated and consisted of write-downs of fixed and other
assets of European operations of $6.5 million, Australian operations of $10.3
million (including $7.9 million of cost in excess of net assets of acquired
businesses), licensed departments of $4.0 million, certain underperforming
domestic acquisitions of $2.5 million, and other underperforming assets of $7.8
million. The after-tax charge also reflects the probability that certain net
operating loss carry-forwards will not provide future tax benefits to the
Company.
Additionally, during fiscal 1997, the Company recorded charges of (a)
$13.0 million (reflected in cost of goods sold, occupancy and buying expenses)
for inventory disposition costs in connection with the Company's decision to
improve merchandise clarity and focus through the reduction of its vendor and
total unit presentation and (b) $17.1 million ($13.3 million in operating
expenses, $2.6 million in cost of goods sold, occupancy and buying expenses and
$1.2 million in depreciation and leasehold amortization) of other unusual costs
and expenses attributable to, among other things, efforts to restructure the
Company's organizational infrastructure (including litigation reserves,
management retention and severance costs associated with the reorganization of
international operations and other items). During fiscal 1998, the Company
substantially completed these programs and as of fiscal yearend 1998, $4.2
million included in accrued expenses in the accompanying consolidated balance
sheet remained, including costs related to the April 1999 settlement of
outstanding litigation (see Note 11).
During fiscal 1998, the Company assessed the amounts recorded with its 250
Store Restructuring plan and determined that as a result of favorable
experience in store closing costs, a reversal of previously accrued expenses of
$5.1 million was required. Additionally, during fiscal 1998, as management
continued the evaluation of its asset base, a formal plan was adopted for the
closure of approximately 175 additional store locations and restructuring
expenses of $4.7 million were recorded. The Company anticipates that these
stores closures will be substantially completed during fiscal 1999. The Company
estimates that the charges to be incurred in connection with the 175 store plan
will consist of $3.2 million of non-cash charges for fixed and other asset
write-downs and cash charges of $1.5 million for lease exit and other
incremental costs.
As the Company completes its restructuring plans, store locations held for
disposal under the plans remain in operation up until the date of closure. For
fiscal years 1998, 1997 and 1996, the net sales for these stores were $48.2
million, $63.5 million, and $64.9 million, respectively. Additionally, results
of operations of these stores generated negative EBITDA (earnings before
interest, taxes,
32
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--RESTRUCTURING EXPENSES AND ASSET IMPAIRMENT CHARGES--(CONTINUED)
depreciation and amortization) of $4.1 million, $5.1 million, and $3.0 million
in fiscal years 1998, 1997 and 1996, respectively. Store assets are written
down to fair value at the time the plans are approved and depreciation expense
for these locations is suspended. The effect of suspending depreciation on
assets held for disposal through the dates of disposition (assuming no
writedown in value) was $1,594,000, $751,000 and $134,000 in fiscal years 1998,
1997 and 1996, respectively.
The following summarizes the activity in accrued restructuring expenses
during fiscal years 1998, 1997 and 1996:
<TABLE>
<CAPTION>
PROVISION FOR FIXED AND
RESTRUCTURING CASH PAYMENTS FOR OTHER ASSET REVERSAL OF
BEGINNING EXPENSES/ASSET LEASE EXIT AND OTHER WRITEDOWNS/ RESTRUCTURING ENDING
ACCRUAL IMPAIRMENT INCREMENTAL COSTS IMPAIRMENTS EXPENSES ACCRUAL
----------- ---------------- ---------------------- ------------- --------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year 1998 ......... $25,789 $ 4,727 $4,777 $17,037 $5,098 $ 3,604
Fiscal Year 1997 ......... 15,096 54,660 7,509 36,458 -- 25,789
Fiscal Year 1996 ......... -- 17,528 1,782 650 -- 15,096
</TABLE>
NOTE 3--ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS REGARDING ACCOUNTING FOR
INTERNAL USE SOFTWARE
During fiscal 1997, as required, the Company adopted Emerging Issues Task
Force ("EITF") Issue No. 97-13, "Accounting for Costs Incurred in Connection
with a Consulting Contract that Combines Business Process Reengineering and
Information Technology Transformation", which requires that reengineering costs
incurred as part of an acquisition, installation or development of software be
separated from other software project costs and expensed as incurred. In
accordance with EITF Issue No. 97-13, the cumulative effect of the change in
accounting principle of $2.3 million ($1.4 million net of tax) was recognized
in the fourth quarter of fiscal 1997 in the accompanying consolidated
statements of operations to reflect reengineering costs previously capitalized
as part of the consulting costs incurred for the Company's human resources and
financial software implementation projects.
As of fiscal yearend 1997, the Company adopted AICPA SOP 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use". SOP
98-1 requires, in general, that all costs in the preliminary project stage of a
software installation or development project (prior to software selection) and
all costs in the post-implementation stage (once the software is operational),
as well as costs incurred to convert data (other than coding), should be
expensed as incurred. In accordance with this pronouncement, the provisions of
SOP 98-1 were retroactively adopted as of the beginning of fiscal year 1997,
and, as a result, the Company recorded charges of $2.3 million in operating
expenses in the accompanying consolidated statements of operations for the
period. Data for the first three quarters of fiscal 1997 has not been restated
due to immateriality.
33
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--DISCONTINUED OPERATIONS
In January 1998, as part of the Company's evaluation of its asset base,
the Company adopted a plan to discontinue its EyeX segment. The Company
substantially completed the disposition of Eye-X during fiscal 1998. Summarized
results of EyeX for fiscal 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
FISCAL
---------------------------
1997 1996
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net sales ..................................... $ 7,819 $ 4,784
======== ========
Loss before tax benefit ....................... $ (3,163) $ (2,043)
Income tax benefit ............................ 1,350 824
-------- --------
Net loss from operations ...................... (1,813) (1,219)
Estimated loss from disposition ............... (8,089) --
-------- --------
Net loss from discontinued operations ......... $ (9,902) $ (1,219)
======== ========
Basic and diluted net loss per share .......... $ (0.18) $ (0.02)
======== ========
</TABLE>
EyeX fiscal 1998 net sales were approximately $2.1 million.
The net assets of discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
FISCAL
--------------------------
1998 1997
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Current assets ........................................ $ 675 $ 7,763
Property and equipment, net ........................... -- 7,385
Other assets .......................................... -- 1,556
Current liabilities ................................... -- (983)
Allowance for estimated loss from disposition ......... (1,396) (13,260)
-------- ---------
Net assets (liabilities) .............................. $ (721) $ 2,461
======== =========
</TABLE>
The allowance for estimated loss from disposition represents provision for
lease exit and other incremental costs. The net liabilities at January 30, 1999
are included in accrued expenses in the accompanying consolidated balance
sheet.
NOTE 5--ACQUISITIONS
In January 1999, the Company acquired substantially all of the assets of
shades.com and SwissArmyDepot.com, businesses engaged in selling sunglasses,
watches and accessories primarily through Internet websites. The purchase price
paid for the acquisition was $4.1 million, consisting of $2.9 million in cash
and $1.2 million in convertible subordinated notes. The acquisition was
accounted for as a purchase, with the excess of purchase price over the fair
value of net assets acquired of approximately $4.1 million being recorded as
cost in excess of net assets of acquired businesses. The allocation of purchase
price related to the acquisition is based on preliminary assessments of the
assets acquired and liabilities assumed and could be subject to adjustment
based on the ultimate resolution of such assessments. Proforma results of
operations, assuming the acquisition occurred on February 1, 1998 are not
materially different from current reported results.
34
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--OTHER CURRENT ASSETS
Other current assets consist of the following at fiscal yearend:
<TABLE>
<CAPTION>
FISCAL
-----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Current deferred tax assets ......... $12,755 $19,822
Tax refund receivable ............... 4,271 17,660
Other ............................... 5,019 5,295
------- -------
$22,045 $42,777
======= =======
</TABLE>
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment consists of the following at fiscal yearend:
<TABLE>
<CAPTION>
FISCAL
---------------------------
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements ................. $ 84,583 $ 80,743
Furniture and fixtures ................. 96,299 83,862
Construction in progress ............... 3,291 12,212
--------- ---------
184,173 176,817
Less--Accumulated depreciation ......... (93,186) (76,968)
--------- ---------
$ 90,987 $ 99,849
========= =========
</TABLE>
NOTE 8--ACCRUED EXPENSES
Accrued expenses consist of the following at fiscal yearend:
<TABLE>
<CAPTION>
FISCAL
---------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accrued payroll and related taxes ......... $ 9,015 $ 7,388
Accrued rent .............................. 8,450 7,019
Other accrued expenses .................... 23,862 28,768
------- -------
$41,327 $43,175
======= =======
</TABLE>
35
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--INCOME TAXES
Income tax expense (benefit) attributable to income (loss) from continuing
operations before cumulative effect of accounting change consists of:
<TABLE>
<CAPTION>
FISCAL
------------------------------------------
1998 1997 1996
------------ ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal ......... $ (4,271) $ (10,208) $ 9,229
State ........... 456 1,701 2,167
Foreign ......... 733 571 1,300
-------- --------- --------
(3,082) (7,936) 12,696
-------- --------- --------
Deferred:
Federal ......... 13,380 (6,106) (2,339)
State ........... 2,325 (4,316) (572)
Foreign ......... 1,002 3,046 (2,435)
-------- --------- --------
16,707 (7,376) (5,346)
-------- --------- --------
$ 13,625 $ (15,312) $ 7,350
======== ========= ========
</TABLE>
Income tax expense (benefit) attributable to income (loss) from continuing
operations before cumulative effect of accounting change differed from the
amounts computed by applying the U.S. federal income tax rate of 35% to pretax
income (loss) from continuing operations before cumulative effect of accounting
change as a result of the following:
<TABLE>
<CAPTION>
FISCAL
--------------------------------------
1998 1997 1996
---------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax provision (benefit) at the statutory rate ................ $11,706 $ (25,776) $2,920
State and local income taxes, net of federal income tax benefit ..... 1,950 (1,711) 1,054
Non-deductible amortization of cost in excess of net assets of
acquired businesses ................................................ 234 237 453
Non-deductible expenses related to acquisition ...................... -- -- (352)
Valuation allowance and contingencies ............................... 201 12,180 3,128
Other, net .......................................................... (466) (242) 147
------- --------- ------
$13,625 $ (15,312) $7,350
======= ========= ======
</TABLE>
36
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--INCOME TAXES--(CONTINUED)
The components of the current and non-current deferred tax assets are
summarized as follows at fiscal yearend:
<TABLE>
<CAPTION>
FISCAL
-------------------------
1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current deferred tax assets:
Inventory, principally due to additional costs capitalized for tax
purposes ............................................................ $ 848 $ 1,060
Reserves, principally due to accruals for financial reporting
purposes ............................................................ 11,835 18,165
Other .................................................................. 72 597
-------- --------
Current deferred tax assets (included in other
current assets) .................................................. 12,755 19,822
-------- --------
Non-current deferred tax assets:
Property and equipment, principally due to differences
in depreciation ..................................................... 3,231 2,595
Accrued rents, principally due to the equalization of expenses
for financial reporting purposes .................................... 1,468 1,457
Net operating loss carryforwards ...................................... 6,129 10,026
Alternative minimum tax credit ........................................ 845 --
Other .................................................................. 104 (422)
-------- --------
Non-current deferred tax assets ..................................... 11,777 13,656
Valuation allowance .................................................... (4,427) (8,180)
-------- --------
Non-current deferred tax assets (included in other assets) .......... 7,350 5,476
-------- --------
Net deferred tax assets ................................................ $ 20,105 $ 25,298
======== ========
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset may not be realized. The net change in
the total valuation allowance for the year ended January 30, 1999 was a
decrease of $3.8 million.
The Company has not recognized a deferred tax liability for the
undistributed earnings of its wholly-owned foreign subsidiaries because the
Company currently does not expect those unremitted earnings to reverse and
become taxable to the Company in the foreseeable future. A current or deferred
tax provision net of foreign tax credits, as applicable, will be recognized
when the Company expects that it will recover those undistributed earnings in a
taxable manner. As of January 30, 1999, the undistributed earnings of these
subsidiaries (not including subsidiaries with foreign net operating losses) was
approximately $8.0 million.
37
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT
Long-term debt consists of the following at fiscal yearend:
<TABLE>
<CAPTION>
FISCAL
-------------------------
1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
5-1/4% convertible subordinated notes, net of unamortized discount of
$1,838,000 and $2,197,000, respectively, interest payable semi-
annually, principal due June 2003. ...................................... $113,162 $ 112,803
Borrowings under the Company's prior revolving credit facility with
NationsBank at the Company's option of (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 of .625% to 1.75%
depending on the levels of certain financial ratios, (9.00% and
6.1875%, respectively, as of January 31, 1998). ......................... -- 12,400
Borrowings under the Company's revolving credit facility with
BankBoston at the Company's option of (a) the prime rate (8.0% as
of January 30, 1999) or (b) LIBOR (4.9% as of January 30, 1999)
plus 2%, due November 2001. ............................................. 18,584 --
5-1/4% convertible subordinated notes, interest payable semi-annually,
principal due January 2001 .............................................. 1,248 --
Other .................................................................... 127 175
-------- ---------
133,121 125,378
Less--Current portion of long-term debt .................................. -- (12,575)
-------- ---------
$133,121 $ 112,803
======== =========
</TABLE>
In April 1998, the Company refinanced the NationsBank of Florida, National
Association ("NationsBank") revolving credit facility, by entering into an $80
million revolving credit facility with BankBoston Retail Finance Inc.
("BankBoston") which was subsequently reduced to $65 million effective
February, 1999. The $65 million facility provides for a commitment through
November 2001 and includes up to $12.5 million in letters of credit. In
November 1998, the Company amended this facility to incorporate a supplemental
borrowing facility, amounts of which vary depending on the period that the
borrowings are outstanding, as stated in the credit agreement. At January 30,
1999 the Company was entitled to borrow up to an additional $15 million under
the supplemental component of its facility. Additionally, at January 30, 1999
the Company had $1.0 million in unsecured letters of credit outstanding which
are being maintained as security for performance under the Company's executive
office lease and for certain purchases of merchandise. Borrowings under the
credit facility generally bear interest at a floating rate equal to, at the
Company's option, (a) the prime rate or (b) LIBOR plus 2.0%. The facility is
secured with a first priority lien and security interest in substantially all
assets. Borrowings under the BankBoston facility can be used for working
capital and other general corporate purposes, including stock repurchases
(which purchases are subject to minimum remaining availability of $12.5
million). The Company's revolving credit facility prohibits the payment of cash
dividends. The $15 million supplemental component of the BankBoston facility
has certain financial covenant requirements that are effective when borrowings
occur against this facility. As of fiscal yearend 1998, no borrowings were
outstanding on this supplemental facility.
38
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT--(CONTINUED)
In June 1996, the Company issued $115 million principal amount of
convertible subordinated notes (the "Notes Due 2003") to certain qualified
institutional investors. (The resale of the Notes Due 2003 was later registered
with the Securities and Exchange Commission in October 1996.) The private
placement was made for the purpose of refinancing senior indebtedness and to
finance the Company's expansion plans. The notes bear interest at 5-1/4%,
payable semi-annually, and mature June 2003. The Notes are subordinated to all
existing and future indebtedness of the Company, and are convertible into
Company common stock at $30.25 per share.
In January 1999, the Company issued $1.2 million of convertible
subordinated notes (the "Notes Due 2001") in connection with an acquisition
(see Note 5). The notes bear interest at 5-1/4%, payable semi-annually, and
mature in January 2001. The Notes Due 2001 are unsecured and subordinate and
junior to the Notes Due 2003, and are convertible into Company common stock at
$6.00 per share.
Maturities of long-term debt are as follows at fiscal yearend:
FISCAL YEAR AMOUNT
- ---------------------------- ---------------
(IN THOUSANDS)
1998 ..................... $ --
1999-2002 ................ 19,959
2003 ..................... 115,000
--------
$134,959
========
NOTE-11--COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases all of its retail stores and its office and warehouse
facilities under operating leases. Store rent expense generally includes a
percentage of the retail store's sales volume and/or a fixed minimum base rent.
In addition, the majority of leases are subject to an annual adjustment for
increases in real estate taxes, maintenance and insurance costs.
The Company was obligated for the following minimum annual base rentals
under operating leases at fiscal yearend:
FISCAL YEAR AMOUNT
- ----------------------------- ---------------
(IN THOUSANDS)
1999 ...................... $ 74,879
2000 ...................... 61,696
2001 ...................... 53,338
2002 ...................... 45,851
2003 ...................... 37,006
Thereafter ................ 97,555
--------
$370,325
========
Base rent expense totaled $81,430,000, $83,878,000 and $73,402,000 for
fiscal years 1998, 1997 and 1996, respectively. Percentage of sales over a
fixed minimum base rent totaled $5,865,000, $6,195,000 and $5,677,000 for
fiscal years 1998, 1997 and 1996, respectively.
39
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE-11--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
SELF-INSURED GROUP HEALTH
The Company is self-insured for employee medical benefits under the
Company's group health plan. The Company maintains stop loss coverage for
individual medical claims in excess of $150,000 and for annual Company medical
claims which exceed approximately $3.8 million in the aggregate. While the
ultimate amount of claims incurred are dependent on future developments, in
management's opinion, recorded reserves are adequate to cover the future
payment of claims. However, it is reasonably possible that recorded reserves
may not be adequate to cover the future payment of claims. Adjustments, if any,
to estimates recorded resulting from ultimate claim payments will be reflected
in operations in the periods in which such adjustments are known.
CONSTRUCTION COMMITMENTS
In the normal course of business, the Company enters into commitments for
the construction of both new stores and existing store renovations. At January
30, 1999, the amounts outstanding under these construction commitments totaled
approximately $1.9 million.
LITIGATION, CLAIMS AND ASSESSMENTS
In January 1997, a class action securities lawsuit was filed against the
Company and certain of its executive officers in the U.S. District Court of the
Southern District of Florida. The lawsuit alleges, among other things, that the
Company and certain of its officers made materially false and misleading
statements regarding the Company's business performance and prospects. The
Company believes that the lawsuit has no basis, and intends to vigorously
defend the action. Although the ultimate outcome of the lawsuit cannot be
predicted, management does not believe the outcome of the lawsuit will have a
material adverse effect on the financial position, results of operations or
cash flows of the Company. However, there can be no assurance as to the
ultimate resolution of this matter.
In October 1997, two class action lawsuits were filed against the Company
in the State of California in the Superior Court of California. The lawsuits
alleged, among other things, that the Company violated certain California pay
laws. In April 1999, the Company reached a settlement on these actions which
will not have a material adverse effect on the accompanying consolidated
financial statements.
There are no other significant legal proceedings pending against the
Company.
NOTE 12--STOCKHOLDERS' EQUITY
PREFERRED AND COMMON STOCK
The Company is authorized to issue 1,000,000 shares of preferred stock,
$.01 par value per share. The Company's Board of Directors has the authority to
fix the voting powers, dividend rates, liquidation preferences, conversion and
other rights. No preferred stock is outstanding.
As of January 30, 1999 and January 31, 1998 the Company was authorized to
issue 100,000,000 shares of common stock, $.01 par value per share.
During fiscal 1998, the Board of Directors authorized the repurchase of up
to 15.5 million shares of Sunglass Hut's outstanding common stock. The
repurchase program authorizes management, at its
40
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--STOCKHOLDERS' EQUITY--(CONTINUED)
discretion, to make purchases from time to time on the open market or in
privately negotiated transactions, as well as to sell put options. Stock
repurchases and sales of put options would be based on management's assessment
of the Company's capital structure and liquidity, the market price of the
Company's common stock compared to management's assessment of its underlying
value, as well as regulatory, accounting and other factors. As of January 30,
1999, the Company has repurchased and retired 8.4 million shares under these
authorizations at a cost of $50.2 million.
NOTE 13--EMPLOYEE BENEFIT PLANS
STOCK-BASED COMPENSATION PLAN
Effective March 31, 1996, the Company adopted the Sunglass Hut
International, Inc. 1996 Executive Incentive Compensation Plan (the "1996
Plan") for key employees, officers, non-employee directors and independent
contractors, which superseded the Company's previous stock-based compensation
plan. The 1996 Plan provides for grants of stock options, stock appreciation
rights, restricted common stock and other related awards that may be settled in
cash, stock or other property. The total number of common shares subject to
grant under the 1996 Plan is limited to 6,000,000, as adjusted, based on the
1996 Plan's formula, for issuances, redemptions, forfeitures and certain
outstanding awards plan. As of fiscal yearend 1998, 1,667,730 common shares
remained available for grant under the 1996 Plan. Options granted have a
ten-year term, an exercise price equal to the fair market value of the
Company's stock on the date of grant and vest equally over three or four years.
In December, 1998, the Company's Board of Directors approved the exchange
of certain stock options outstanding which were granted during 1995 and 1996.
Options granted during 1995 and 1996, which had exercise prices of $13.94 and
$30.50, respectively, were exchanged for fewer options at an exercise price of
$6.00. The exchange ratio between the original options and the new options,
based on an option valuation formula, resulted in the cancellation of
approximately 279,000 options and the issuance of 106,000 options. The exchange
was made available to all employees who held outstanding options that were
granted during 1995 or 1996 on a voluntary basis. The exchanged options were
issued with the same vesting and expiration schedule as the original options.
41
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--EMPLOYEE BENEFIT PLANS--(CONTINUED)
A summary of the status of the Company's stock-based compensation plans as
of the end of fiscal years 1998, 1997 and 1996, and changes during the fiscal
years then ended is presented below:
<TABLE>
<CAPTION>
FISCAL
------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- ----------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ---------------------------------- ---------------- ----------- ---------------- ----------- ---------------- ----------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year ......................... 3,139 $ 7.83 2,073 $ 9.55 2,340 $ 9.00
Granted .......................... 2,213 7.17 1,562 7.06 373 28.33
Exercised ........................ (78) 5.05 (31) 1.58 (556) 3.66
Forfeited ........................ (893) 13.25 (465) 13.35 (84) 6.13
----- ----- -----
Outstanding, end of year ......... 4,381 $ 6.47 3,139 $ 7.83 2,073 $ 9.55
===== ===== =====
Options exercisable .............. 1,899 1,376 1,282
===== ===== =====
</TABLE>
The following table summarizes information about stock options outstanding
at fiscal 1998 yearend:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
OPTIONS REMAINING AVERAGE OPTIONS AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 1/30/99 LIFE PRICE AT 1/30/99 PRICE
- ----------------------------- ---------------- ------------- ----------- --------------- ----------
(IN THOUSANDS) (YEARS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ 0.25 to $ 3.75 ......... 875 2.92 $ 1.15 826 $ 0.96
5.44 to 9.75 ......... 3,302 8.65 7.14 894 7.31
12.50 to 15.25 ......... 143 6.74 13.34 118 13.51
30.81 ................... 61 7.14 30.81 61 30.81
----- ---
$ 0.25 to $30.81 ......... 4,381 7.42 $ 6.47 1,899 $ 5.69
===== =====
</TABLE>
42
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--EMPLOYEE BENEFIT PLANS--(CONTINUED)
As permitted under SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company accounts for stock-based employee compensation
arrangements in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", whereby no compensation cost is
deducted in determining net income (loss). Had the Company recorded stock-based
compensation cost for options granted in fiscal 1998, 1997 and 1996 pursuant to
SFAS No. 123 (using the Black-Scholes options pricing model) net income (loss)
and diluted net income (loss) per share, including the assumptions used in
these calculations, would have been as follows:
<TABLE>
<CAPTION>
FISCAL
------------------------------------------------------------
1998 1997 1996
------------------- ----------------- ------------------
<S> <C> <C> <C>
Pro forma net income (loss) ......... $ 16,346,000 $ (71,501,000) $ (2,942,000)
Pro forma diluted net income (loss)
per share .......................... $ 0.32 $ (1.31) $ (0.05)
Pro forma weighted average fair value
of options granted ................. $ 4.12 $ 3.90 $ 14.47
Risk free interest rates ............ 4.46% to 5.75% 5.49% to 6.95% 5.92% to 7.05%
Expected lives ...................... 6.0 years 6.0 years 6.2 years
Expected volatility ................. 54% 48% 41%
Expected dividends .................. $ -- $ -- $ --
</TABLE>
SAVINGS PLAN
The Company has an employee savings plan (the "Savings Plan") pursuant to
Section 401(k) of the Internal Revenue Code. All employees who are age 21 or
older and who have been credited with at least 1,000 hours of service within 12
consecutive months are eligible to participate in the Savings Plan. Employees
may elect to contribute to the Savings Plan through payroll deductions in an
amount not to exceed the amount permitted under the Internal Revenue Code. The
Company makes matching contributions equal to 50% of the participant's eligible
tax deferred contribution to a maximum of 5% of their compensation on behalf of
the participants. Employees are fully vested in their contributions. Company
contributions vest at a rate of 20% on February 1 of each year, provided that
the participant has completed one full year of employment with the Company as
of such date.
During fiscal years 1998, 1997 and 1996, the Company's contributions to
the Savings Plan aggregated $324,000, $250,000 and $295,000, respectively.
STOCK PURCHASE PLAN
In February 1996, the Company implemented an employee stock purchase plan
(the "Stock Purchase Plan"). The Stock Purchase Plan enables qualified
employees of the Company to subscribe to shares of the Company's common stock
on periodic offering dates at a purchase price equal to the fair market value
of the shares on such dates.
NOTE 14--SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in the retail sunglass and watch industries and in
markets throughout the world. The basis for determining the Company's operating
segments is the manner in which financial information is used by the Company in
its operations. Management operates and organizes itself
43
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--SEGMENT AND GEOGRAPHIC INFORMATION--(CONTINUED)
according to business units which comprise the Company's products across
geographic locations. Accordingly, the North America segment (comprised of the
United States, Canada and the Caribbean) includes sunglass and watch retail
operations in this geographic market. Over ninety percent of the North America
segment's net sales are derived from sales of sunglasses. The Other segment
reported herein includes the sunglass and watch retail operations in other
geographic locations, primarily Europe and Australia. The Company evaluates
performance and allocates resources based on profit or loss from operations.
The accounting policies of the reportable segment are the same as those
described in the summary of significant accounting policies. All intercompany
revenues and expenses are eliminated in computing revenues and earnings (loss)
before interest and taxes.
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
EARNINGS (LOSS) DEPRECIATION
BEFORE INTEREST AND
NET SALES AND TAXES(1) AMORTIZATION ASSETS
----------- ----------------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998
North America ........................... $528,023 $ 41,575 $23,617 $233,310
Other ................................... 73,931 (1,181) 1,787 25,044
-------- --------- ------- --------
601,954 40,394 25,404 258,354
Restructuring expense reversal .......... -- 371 -- --
-------- --------- ------- --------
Total ................................. $601,954 $ 40,765 $25,404 $258,354
======== ========= ======= ========
1997
North America ........................... $497,997 $ 28,590 $24,940 $261,827
Other ................................... 75,843 (6,807) 4,574 34,865
-------- --------- ------- --------
573,840 21,783 29,514 296,692
Restructuring expenses/asset impairment
charges and other expenses(2) ......... -- (87,065) 1,220 --
-------- --------- ------- --------
573,840 (65,282) 30,734 296,692
Discontinued operations(3) .............. -- -- -- 2,461
-------- --------- ------- --------
Total ................................. $573,840 $ (65,282) $30,734 $299,153
======== ========= ======= ========
1996
North America ........................... $457,897 $ 39,321 $21,807 $281,648
Other ................................... 64,400 (5,480) 3,807 70,524
-------- --------- ------- --------
522,297 33,841 25,614 352,172
Restructuring expenses/asset impairment
charges ............................... -- (17,528) -- --
-------- --------- ------- --------
522,297 16,313 25,614 352,172
Discontinued operations(3) .............. -- -- -- 10,341
-------- --------- ------- --------
Total ................................. $522,297 $ 16,313 $25,614 $362,513
======== ========= ======= ========
</TABLE>
- ----------------
(1) Represents earnings (loss) from continuing operations before interest,
income taxes and cumulative effect of accounting change.
(2) Represents (a) $54.6 million of restructuring expenses and asset impairment
charges, (b) $13.0 million of inventory disposition costs, (c) $2.3
million of costs related to the adoption of a new accounting principle for
internal use software and (d) $17.1 million of other costs expenses (see
Notes 2, 3 and "Overview--Management Discussion and Analysis of Financial
Condition and Results of Operations" for further information).
(3) Represents net assets of discontinued operations (see Note 4 for further
information).
44
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--SEGMENT AND GEOGRAPHIC INFORMATION--(CONTINUED)
GEOGRAPHIC INFORMATION
The following represents net sales and long-lived assets by geographic
location:
FISCAL
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
Net sales:
United States ........... $490,026 $461,495 $429,110
Other Countries ......... 111,928 112,345 93,187
-------- -------- --------
Total ................. $601,954 $573,840 $522,297
======== ======== ========
Long-lived assets:
United States ........... $101,116 $107,002 $125,212
Other Countries ......... 16,357 17,930 42,003
-------- -------- --------
Total ................. $117,473 $124,932 $167,215
======== ======== ========
45
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for fiscal 1998 and 1997 is
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
FISCAL 1998
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales ............................... $146,646 $193,141 $122,832 $139,335 $601,954
Gross profit ............................ 59,129 86,487 45,040 54,775 245,431
Net income (loss): ...................... $ 3,846 $ 18,690 $ (4,005) $ 1,290 $ 19,821
======== ======== ======== ======== ========
Basic and diluted income (loss)
per share .............................. $ 0.07 $ 0.34 $ (0.08) $ 0.03 $ 0.38
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997
-----------------------------------------------------------------------
FIRST SECOND(1) THIRD FOURTH(2) TOTAL
----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales ............................... $136,243 $185,245 $122,355 $ 129,997 $ 573,840
Gross profit ............................ 51,326 80,762 42,946 32,032 207,066
Income (loss) from:
Continuing operations .................. 689 14,477 (4,467) (69,033) (58,334)
Discontinued operations ................ (397) (232) (633) (8,640) (9,902)
Change in accounting principle ......... -- -- -- (1,449) (1,449)
-------- -------- -------- --------- ---------
Net income (loss) .................... $ 292 $ 14,245 $ (5,100) $ (79,122) $ (69,685)
======== ======== ======== ========= =========
Basic and diluted net income (loss)
per share from:
Continuing operations .................. $ 0.01 $ 0.26 $ (0.08) $ (1.26) $ (1.07)
Discontinued operations ................ 0.00 0.00 (0.01) (0.16) (0.18)
Change in accounting principle ......... -- -- -- (0.03) (0.02)
-------- -------- -------- --------- ---------
Net income (loss) .................... $ 0.01 $ 0.26 $ (0.09) $ (1.45) $ (1.27)
======== ======== ======== ========= =========
</TABLE>
(1) Results of operations for the second quarter of 1997 were negatively
impacted by $1.7 million, or $0.02 per share, of costs recorded in
connection with the resignation of the Company's former President and CEO.
(2) In the fourth quarter of 1997, the Company's management performed an
assessment of the recoverability of the Company's asset base, and, based on
the results of the assessment, the related decision to reduce vendor and
total unit presentation, the adoption of two new accounting principles and
other responses to the current sunglass specialty environment recorded
$102.6 million ($75.8 million net of tax) of costs. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
for further information.
46
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The Proxy Statement for the Annual Meeting of Stockholders to be held June
8, 1999 which, when filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, will be incorporated by reference in this Annual Report
on Form 10-K pursuant to General Instruction G(3) of Form 10-K, will provide
the information required under Part III (Items 10, 11, 12, and 13). Information
with respect to executive officers of the company appears under the caption
"Executive Officers of the Company" on pages 7 and 8 of Part I of this form
10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS. Reference is made to the Index set forth on
page 20 of this Annual Report on Form 10-K.
2. FINANCIAL STATEMENTS SCHEDULE. Reference is made to Schedule
II-Valuation And Qualifying Accounts on page 51 of this Annual Report
on Form 10-K. All other schedules for which provision is made in the
applicable accounting regulations of the Commission are not required
under the related instructions or are not applicable, and therefore
have been omitted.
The independent auditors report with respect to Schedule II is also
filed as part of this report.
3. EXHIBITS. * Indicates exhibits filed herewith.
** Management contract or compensatory plan incorporated by
reference from the document listed.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------
<S> <C>
3.1 Registrant's Articles of Incorporation. Said Articles were last filed as and are incorporated
herein by reference to Exhibit 3.1 to Registrant's Registration Statement on Form S-1 (File
No. 33-77792).
3.2 Registrant's Amended and Restated Bylaws. Said Bylaws were last filed as and are
incorporated herein by reference to Exhibit 3.2 to Registrant's Registration Statement on
Form S-1 (File No. 33-77792).
4.1 Registration Rights Agreement, dated June 26, 1996, between the Registrant and the initial
purchasers of the 5-1/4% Convertible Subordinated Notes due 2003. Filed as and
incorporated herein by reference to Exhibit 4.7 to Registrant's Registration Statement on
Form S-1 (File No. 33-77792).
4.2 Indenture, dated as of June 26, 1996, among the Registrant and the Bank of New York for
Convertible Subordinated Notes. Filed as and incorporated herein by reference to Exhibit
4.8 to Registrant's Registration Statement on Form S-1 (File No. 33-77792).
10.1** Registrant's Amended and Restated Stock Option Plan, as amended. Filed as and
incorporated herein by reference to Exhibit 10.1 to the Form 10-K for the fiscal year ended
January 31, 1998.
10.2** Sunglass Hut International, Inc. 1996 Executive Incentive Compensation Plan . Filed as and
incorporated herein by reference to Exhibit 10.1 to Registrant's Registration Statement on
Form S-8 (File No. 333-20107).
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------
<S> <C>
10.3** Form of Indemnification Agreement between the Registrant and each of its directors and
certain executive officers. Files as and incorporated herein by reference to Exhibit 10.2 to
Registrant's Registration Statement on Form S-1 (File No. 33-59872.)
10.4 Office Space Lease Agreement, dated as of October 28, 1993, between The Travelers
Insurance Company and the Registrant. Files as and incorporated herein by reference to
Exhibit 10.7 to Registrant's Registration Statement on Form S-1 (File No. 33-7-214.)
10.5** Consulting and Management Services Agreement between Sunglass Hut International, Inc.
and Hauslein & Company, Inc. dated February 24, 1997 (incorporated by reference to
Exhibit 10.11 of the Registrant's Company's Report on Form 10-Q for the fiscal quarter
ended May 3, 1997).
10.6** Stock Option Agreement between the Registrant and James N. Hauslein (incorporated by
reference to Exhibit 10.17 of the Registrant's Company's Report on Form 10-Q for the fiscal
quarter ended November 1, 1997).
10.7 Revolving Credit Notes to BankBoston Retail Finance, Inc. dated April 28, 1998 together with
Loan and Security Agreement. Filed as and incorporated herein by reference to Exhibit
10.11 of the Registrant's Report on Form 10-K for the fiscal year ended January 31, 1998.
10.8* First Amendment dated November 30, 1998 to Loan and Security Agreement dated April 28,
1998 with BankBoston Retail Finance Inc.
10.9* Second Amendment dated January 13, 1999 to Loan and Security Agreement dated April 28,
1998 with BankBoston Retail Finance, Inc., together with First Amendment to Stock Pledge
Agreement, Guaranty of Shadescom, Inc., and Security Agreement between BankBoston
Retail Finance, Inc. and Shadescom, Inc.
21.1* Subsidiaries of the Registrant
23.1* Consent of Arthur Andersen LLP
27* Financial Data Schedule
</TABLE>
The Company will furnish to any record or beneficial shareholder
requesting a copy of this Annual Report on Form 10-K a copy of any exhibit
indicated in the above list as filed with this Annual Report on Form 10-K upon
payment to it of its expenses in furnishing such exhibit.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized.
SUNGLASS HUT INTERNATIONAL, INC.
By: /s/ LARRY G. PETERSEN
-------------------------
Larry G. Petersen, Senior Vice President,
Finance and Chief Financial Officer
Dated: April 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- -------------------------------- -------------------------------- ---------------
<S> <C> <C>
/s/ JOHN X. WATSON President, Chief Executive April 30, 1999
- ------------------------- Officer and Director
John X. Watson (principal executive officer)
/s/ LARRY G. PETERSEN Senior Vice President, Finance April 30, 1999
- ------------------------ and Chief Financial Officer
Larry G. Petersen (principal financial officer)
/s/ GEORGE L. PITA Vice President, Finance April 30, 1999
- ------------------------ (principal accounting officer)
George L. Pita
/s/ JAMES N. HAUSLEIN Chairman of the Board April 30, 1999
- ------------------------
James N. Hauslein
/s/ ROHIT M. DESAI Director April 30, 1999
- ------------------------
Rohit M. Desai
/s/ JOHN H. DUERDEN Director April 30, 1999
- ------------------------
John H. Duerden
/s/ WILLIAM S. FIELD Director April 30, 1999
- ------------------------
William S. Field
/s/ ROBERT C. GRAYSON Director April 30, 1999
- ------------------------
Robert C. Grayson
/s/ WILLIAM E. PHILLIPS Director April 30, 1999
- ------------------------
William E. Phillips
</TABLE>
49
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To the Stockholders
of Sunglass Hut International, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements included in the Sunglass Hut International, Inc.
annual report included in this Form 10-K, and have issued our report thereon
dated March 17, 1999 (except with respect to the matters described in the
fourth sentence of Note 1, under "Concentration of Suppliers", and the
penultimate paragraph of Note 11, as to which the date is April 28, 1999). Our
audit was made for the purpose of forming an opinion on those statements taken
as a whole. The Financial Statement Schedule II listed in Item 14 is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This financial statement
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 17, 1999.
50
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS 1998, 1997 AND 1996
<TABLE>
<CAPTION>
BEGINNING ADDITIONS ENDING
ACCRUAL CHARGED CASH NON-CASH ACCRUAL
DESCRIPTION BALANCE TO INCOME REDUCTIONS REDUCTIONS REVERSAL BALANCE
- --------------------------------- ----------- ----------- ------------ ------------ ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Restructuring accrual
Fiscal Year 1998 ............... $25,789 $ 4,727 $4,777 $17,037 $5,098 $ 3,604
Fiscal Year 1997 ............... 15,096 54,660 7,509 36,458 -- 25,789
Fiscal Year 1996 ............... -- 17,528 1,782 650 -- 15,096
Allowance for estimated loss from
disposition of discontinued
operations (EyeX)
Fiscal Year 1998 ............... $13,260 $ -- $3,106 $ 8,758 $ -- $ 1,396
Fiscal Year 1997 ............... -- 13,260 -- -- -- 13,260
</TABLE>
51
EXHIBIT 10.8
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
This First Amendment to Loan and Security Agreement is made effective
as of this 30 day of November, 1998 by and between
BankBoston Retail Finance Inc. as Agent for the Lenders
party to a certain Loan and Security Agreement dated as of
April 28, 1998, as amended and in effect;
the Lenders party thereto; and
Sunglass Hut Trading Corporation (hereinafter, in such capacity, the
"Lead Borrower"), a Florida corporation with its principal executive
offices at 255 Alhambra Circle, Coral Gables, Florida 33134, as agent
for
Said Sunglass Hut Trading Corporation; and Watch Station,
Inc., a Florida corporation with its principal executive
offices at 255 Alhambra Circle, Coral Gables, Florida 33134
(individually, a "US Borrower" and collectively, the "US
Borrowers");
and
Sunglass Hut of Canada Ltd., an Ontario corporation with its principal
executive offices at 205 Mathenson Blvd., East #11, Mississauga,
Ontario, Canada L4Z 3EZ (the "CAN Borrower"); and
Sunglass Hut International, Inc., a Florida corporation with its
principal executive offices at 255 Alhambra Circle, Coral Gables,
Florida 33134 (the "Parent")
in consideration of the mutual covenants herein contained and benefits to be
derived herefrom.
W I T N E S S E T H:
WHEREAS, on April 28, 1998, the Agent, the Lenders, the Parent and the
Borrowers entered in a certain Loan and Security Agreement,(as amended and in
effect, the "Agreement"); and
WHEREAS, the Agent, the Lenders, the Parent and the Borrowers desire to
modify certain of the provisions of the Agreement as set forth herein.
NOW, THEREFORE, it is hereby agreed among the Agent, the Lenders, the
Parent and the Borrowers as follows:
1. CAPITALIZED TERMS. All capitalized terms used herein
and not otherwise defined shall have the same meaning
herein as in the Agreement.
<PAGE>
2. AMENDMENTS TO ARTICLE 1. The provisions of Article 1 of the
Agreement are hereby amended as follows:
(a) by deleting the definition of "Base Margin" in its
entirety and substituting the following in its
stead:
"BASE MARGIN": 0 basis points.
(b) by deleting the definition of "Commitment" in its
entirety and substituting the following in its
stead:
"COMMITMENT": Subject to /section/2-22, as follows:
LENDER DOLLAR COMMITMENT
COMMITMENT PERCENTAGE
-----------------------------------------------------
BankBoston $35,000,000.00 43.75%
Retail Finance
Inc.
-----------------------------------------------------
LaSalle $20,000,000.00 25.0%
Business
Credit, Inc.
-----------------------------------------------------
Foothill $25,000,000.00 31.25%
Capital
Corporation
-----------------------------------------------------
(c) by deleting the definition of "LIBOR Margin" in
its entirety and substituting the following in its
stead:
"LIBOR MARGIN": 200 basis points.
(d) by deleting the definition of "Loan Ceiling" in
its entirety and substituting the following in its
stead:
"LOAN CEILING": Eighty Million U.S. Dollars
($80,000,000.00), subject to reduction in accordance
with the provisions of Section 2-9 hereof.
(e) by deleting the definition of "Maturity Date" in
its entirety and substituting the following in its
stead:
"MATURITY DATE": November 30, 2001.
(f) by adding the following new definition:
"BORROWING SUPPLEMENT": The following amounts for
the periods indicated:
2
<PAGE>
PERIOD BORROWING SUPPLEMENT
-------------------------------------------------
November 23, 1998 $15,000,000.00
through May 31, 1999
-------------------------------------------------
June 1, 1999 through $13,750,000.00
August 31, 1999
-------------------------------------------------
September 1, 1999 $12,500,000.00
through November 30,
1999
-------------------------------------------------
December 1, 1999 $11,250,000.00
through February 29,
2000
-------------------------------------------------
March 1, 2000 through $10,000,000.00
May 31, 2000
-------------------------------------------------
June 1, 2000 through $8,750,000.00
August 31, 2000
-------------------------------------------------
September 1, 2000 $7,500,000.00
through November 30,
2000
-------------------------------------------------
December 1, 2000 $6,250,000.00
through February 28,
2001
-------------------------------------------------
March 1, 2001 through $5,000,000.00
May 31, 2001
-------------------------------------------------
June 1, 2001 through $3,750,000.00
August 31, 2001
-------------------------------------------------
September 1, 2001 $2,500,000.00
through November 30,
2001
-------------------------------------------------
December 1, 2001 $1,250,000.00
through February 28,
2002
-------------------------------------------------
March 1, 2002 and $0
thereafter
-------------------------------------------------
3. AMENDMENTS TO ARTICLE 2. The provisions of Article 2 of the
Agreement are hereby amended as follows:
(a) by deleting the provisions of Section 2-1(b)(ii)(B)
in their entirety and substituting the following in
their stead:
(B) The Borrowing Supplement
(b) by deleting the number "$5,000,000.00" in Section
2-1(e) and substituting the number "$12,500,000.00"
in its stead.
(c) by adding the following new subparagraph to Section
2-5(a):
3
<PAGE>
(iii) No Revolving Credit Loan shall be made
if, after giving effect to the making of
such Revolving Credit Loan, the aggregate of
all outstanding Revolving Credit Loans would
exceed the amounts calculated under Section
2-1(b)(ii) (exclusive of any amounts
available under Section 2-1(b)(ii)(B)),
unless, after giving effect to the making of
such Revolving Credit Loan, the Borrower is
in then compliance with the financial
performance covenants set forth in Exhibit
5-12.
4. AMENDMENTS TO ARTICLE 4. The provisions of Article 4 of the
Agreement are hereby amended as follows:
(a) by deleting the words "10,000,000 shares" appearing
in Section 4-18(b) and substituting the words
"25,000,000 shares" in their stead.
(b) by deleting the words "the first anniversary of this
Agreement" appearing in the second line of Section
4-26(a) and substituting the words "November 30,
1999" in their stead.
5. AMENDMENTS TO ARTICLE 5. The provisions of Article 5 of the
Agreement are hereby amended by adding the following new
section:
5-12. FINANCIAL PERFORMANCE COVENANTS. The Borrowers
shall observe and comply with those financial
performance covenants set forth on EXHIBIT 5-12,
annexed hereto.
6. AMENDMENTS TO EXHIBITS. The Exhibits to the Agreement are
hereby amended by deleting EXHIBIT 1-2 in its entirety and by
adding EXHIBIT 5-12 thereto in the form annexed hereto.
7. RATIFICATION OF LOAN DOCUMENTS. Except as provided herein, all
terms and conditions of the Agreement and the other Loan
Documents remain in full force and effect. The Borrower hereby
ratifies, confirms, and reaffirms (i) all of the
representations, warranties and covenants therein contained
(except to the extent that such representations and warranties
expressly relate to an earlier date), and (ii) that all
Collateral secures all of the Liabilities, as modified hereby.
8. CONDITIONS TO EFFECTIVENESS. This First Amendment to Loan and
Security Agreement shall not be effective until each of the
following conditions precedent have been fulfilled to the
satisfaction of the Agents:
(a) This First Amendment to Loan and Security
Agreement shall have been duly executed and
delivered by the Borrowers, the Parent, the Agent
and such percentage of the Lenders as is required
to consent hereto under the terms of the Agency
Agreement. The Agent shall have received a fully
executed copy hereof and of each other document
required hereunder.
4
<PAGE>
(b) All action on the part of the Borrowers and the
Parent necessary for the valid execution, delivery
and performance by the Borrowers and the Parent of
this First Amendment to Loan and Security
Agreement shall have been duly and effectively
taken. The Agent shall have received from each of
the Borrowers and the Parent, a true copy of their
respective certificate of the resolutions adopted
by their respective board of directors authorizing
the transactions described herein, certified by
their respective secretaries as of a recent date
to be true and complete.
(c) The Borrowers shall have paid to the Agent, for the
ratable benefit of the Lenders an amendment fee in
the sum of $200,000.00.
(d) The Borrowers shall have executed and delivered to
the Agent an amendment to the Fee Letter on terms
reasonably satisfactory to the Agent and shall have
paid the Agent any amounts then due thereunder.
(e) The Borrower shall have paid to the Agent all fees
and expenses then due and owing pursuant to the Loan
and Security Agreement, as modified hereby,
including, without limitation, reasonable attorneys'
fees incurred by the Agent and each of the Lenders.
(f) The Agent shall have received an opinion of counsel
to the Obligors in form and substance satisfactory to
the Agent.
(g) No Suspension Event shall have occurred and be
continuing.
(h) The Borrower shall have provided such additional
instruments and documents to the Agent as the Agent
and its counsel may have reasonably requested.
9. MISCELLANEOUS.
(a) This First Amendment to Loan and Security Agreement
may be executed in several counterparts and by each
party on a separate counterpart, each of which when
so executed and delivered shall be an original, and
all of which together shall constitute one
instrument.
(b) This First Amendment to Loan and Security Agreement
expresses the entire understanding of the parties
with respect to the transactions contemplated hereby.
No prior negotiations or discussions shall limit,
modify, or otherwise affect the provisions hereof.
(c) Any determination that any provision of this First
Amendment to Loan and Security Agreement or any
application hereof is invalid, illegal or
unenforceable in any respect and in any instance
shall not effect the validity, legality, or
enforceability of such provision
5
<PAGE>
in any other instance, or the validity, legality or
enforceability of any other provisions of this First
Amendment to Loan and Security Agreement.
(d) The Borrowers shall pay on demand all costs and
expenses of the Agent and each of the Lenders,
including, without limitation, reasonable attorneys'
fees in connection with the preparation, negotiation,
execution and delivery of this First Amendment to
Loan and Security Agreement.
(e) The Borrowers and the Parent each warrant and
represent that the Borrowers and the Parent each have
consulted with independent legal counsel of their
selection in connection with this First Amendment to
Loan and Security Agreement and are not relying on
any representations or warranties of the Agent or any
Lender or their respective counsel in entering into
this First Amendment.
IN WITNESS WHEREOF, the parties have hereunto caused this First
Amendment to Loan and Security Agreement to be executed and their seals to be
hereto affixed as of the date first above written.
"AGENT"
BANKBOSTON RETAIL FINANCE INC.
By:__________________________
Name:________________________
Title:_______________________
6
<PAGE>
"LENDERS"
BANKBOSTON RETAIL FINANCE INC.
By:__________________________
Name:________________________
Title:_______________________
LASALLE BUSINESS CREDIT, INC.
By:__________________________
Name:________________________
Title:_______________________
FOOTHILL CAPITAL CORPORATION
By:__________________________
Name:________________________
Title:_______________________
"LEAD BORROWER"
SUNGLASS HUT TRADING
CORPORATION
By:__________________________
Name:________________________
Title:_______________________
"BORROWERS"
7
<PAGE>
SUNGLASS HUT TRADING
CORPORATION
By:__________________________
Name:________________________
Title:_______________________
WATCH STATION, INC.
By:__________________________
Name:________________________
Title:_______________________
SUNGLASS HUT OF CANADA LTD.
By:__________________________
Name:________________________
Title:_______________________
"PARENT"
SUNGLASS HUT INTERNATIONAL,
INC.
By:__________________________
Name:________________________
Title:_______________________
8
EXHIBIT 10.9
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Second Amendment to Loan and Security Agreement is made effective
as of the 13th day of January, 1999 by and between
BankBoston Retail Finance Inc. as Agent for the Lenders
party to a certain Loan and Security Agreement dated as of
April 28, 1998, as amended and in effect;
the Lenders party thereto; and
Sunglass Hut Trading Corporation (hereinafter, in such capacity, the
"Lead Borrower"), a Florida corporation with its principal executive
offices at 255 Alhambra Circle, Coral Gables, Florida 33134, as agent
for
Said Sunglass Hut Trading Corporation; and Watch Station,
Inc., each a Florida corporation with their principal
executive offices at 255 Alhambra Circle, Coral Gables,
Florida 33134 (individually, a "US Borrower" and collectively,
the "US Borrowers");
Sunglass Hut of Canada Ltd., an Ontario corporation with its principal
executive offices at 205 Mathenson Blvd., East #11, Mississauga,
Ontario, Canada L4Z 3EZ (the "CAN Borrower");
Sunglass Hut International, Inc., a Florida corporation with its
principal executive offices at 255 Alhambra Circle, Coral Gables,
Florida 33134 (the "Parent"); and
Shadescom, Inc., a Florida corporation with its principal executive
offices at 255 Alhambra Circle, Coral Gables, Florida 33134 ("Shades")
in consideration of the mutual covenants herein contained and
benefits to be derived herefrom.
W I T N E S S E T H:
WHEREAS, the Agent, the Lenders, the Parent and the Borrowers entered
in a certain Loan and Security Agreement dated as of April 28, 1998 (as amended
and in effect, the "Agreement"); and
WHEREAS, the Parent has acquired the assets of Gallagher & Forsythe,
LLC pursuant to a certain Asset Purchase Agreement dated as of January 13, 1999,
and in connection therewith, among other things, has formed Shades, a new
Subsidiary, to hold such assets; and
<PAGE>
WHEREAS, pursuant to the terms and conditions of the Agreement, among
other things, in connection with the formation of any new Subsidiary, such
Subsidiary is required to guaranty the Liabilities of the US Borrowers and the
CAN Borrower and grant to the Agent, for the ratable benefit of the Lenders, a
security interest in all of such Subsidiary's assets; and
WHEREAS, in connection with the formation of Shades, the Agent, the
Lenders, the Parent and the Borrowers desire to modify certain of the provisions
of the Agreement as set forth herein.
NOW, THEREFORE, it is hereby agreed among the Agent, the Lenders, the
Parent and the Borrowers as follows:
1. CAPITALIZED TERMS. All capitalized terms used herein
and not otherwise defined shall have the same meaning
herein as in the Agreement.
2. ACQUISITION OF ASSETS OF GALLAGHER & FORSYTHE, LLC. The
Agent hereby consents to the acquisition by the Parent
of the assets of Gallagher & Forsythe, LLC, a
Massachusetts limited liability company, pursuant to
that certain Asset Purchase Agreement by and among the
Parent, Gallagher & Forsythe, LLC and the Members of
Gallagher & Forsythe, LLC dated as of January 13, 1999,
(the "Acquisition Agreement") and the Agent
acknowledges that no Event of Default will arise under
the Loan Agreement. The foregoing acknowledgment by
the Agent relates only to the transaction described in
the Acquisition Agreement and shall not be deemed to
constitute a waiver of any rights of the Agent and the
Lenders with respect to any other transaction.
3. AMENDMENTS TO EXHIBITS. The Exhibits to the Agreement are
hereby amended as follows:
(1) EXHIBIT 4-2 is hereby amended by adding
"Shadescom, Inc." as an Active Domestic Entity
(2) EXHIBIT 4-3 is hereby amended by adding the following
tradenames thereto:
shades.com
SwissArmyDepot.com
Swiss Army Depot
Shades & Blades
Shades of the Web
Sunglasses, Shavers & More
Superhighway Sunglass
Shades of Cape Cod
Gallagher & Forsythe
(3) EXHIBIT 4-5 is hereby amended by adding the following
location thereto:
714 Main Street, Yarmouthport, Massachusetts
02675
2
<PAGE>
(4) EXHIBIT 4-7 is hereby amended by adding the following
thereto:
AMOUNT DATE DESCRIPTION
------ ---- -----------
$1,248,341.00 January 13, 1999 Convertible Note
4. FULL FORCE AND EFFECT. Except as provided herein, all terms
and conditions of the Agreement and the other Loan Documents
remain in full force and effect.
5. CONDITIONS TO EFFECTIVENESS. This Second Amendment to Loan and
Security Agreement shall not be effective until each of the
following conditions precedent have been fulfilled to the
satisfaction of the Agent:
(1) This Second Amendment to Loan and Security
Agreement shall have been duly executed and
delivered by the Borrowers, the Parent, Shades,
the Agent and such percentage of the Lenders as is
required to consent hereto under the terms of the
Agency Agreement. The Agent shall have received a
fully executed copy hereof and of each other
document required hereunder. Further, Shades and
the Borrower shall have provided the Agent with
the additional loan documents set forth in
Schedule 1 annexed hereto and incorporated herein
by reference, and the Borrower shall have provided
such additional instruments and documents to the
Agent as the Agent and its counsel may have
reasonably requested.
(2) All action on the part of the Borrowers and the
Parent necessary for the valid execution, delivery
and performance by the Borrowers and the Parent of
this Second Amendment to Loan and Security
Agreement shall have been duly and effectively
taken. The Agent shall have received from Shades,
a true copy of its resolutions adopted by its
board of directors authorizing the transactions
described herein, certified by its secretary as of
a recent date to be true and complete.
(3) The Borrower shall have paid to the Agent all fees
and expenses then due and owing pursuant to the Loan
and Security Agreement, as modified hereby,
including, without limitation, reasonable attorneys'
fees incurred by the Agent and each of the Lenders.
(4) No Suspension Event shall have occurred and be
continuing.
6. MISCELLANEOUS.
(a) This Second Amendment to Loan and Security
Agreement may be executed in several counterparts and by each
party on a separate counterpart, each of which when so
executed and delivered shall be an original, and all of which
together shall constitute one instrument.
3
<PAGE>
(b) This Second Amendment to Loan and Security
Agreement expresses the entire understanding of the parties
with respect to the transactions contemplated hereby. No prior
negotiations or discussions shall limit, modify, or otherwise
affect the provisions hereof.
(c) Any determination that any provision of this
Second Amendment to Loan and Security Agreement or any
application hereof is invalid, illegal or unenforceable in any
respect and in any instance shall not effect the validity,
legality, or enforceability of such provision in any other
instance, or the validity, legality or enforceability of any
other provisions of this Second Amendment to Loan and Security
Agreement.
(d) The Borrowers shall pay on demand all costs and
expenses of the Agent and each of the Lenders, including,
without limitation, reasonable attorneys' fees in connection
with the preparation, negotiation, execution and delivery of
this Second Amendment to Loan and Security Agreement.
(e) The Borrowers and the Parent each warrant and
represent that the Borrowers and the Parent each have
consulted with independent legal counsel of their selection in
connection with this Second Amendment to Loan and Security
Agreement and are not relying on any representations or
warranties of the Agent or any Lender or their respective
counsel in entering into this Second Amendment.
IN WITNESS WHEREOF, the parties have hereunto caused this Second
Amendment to Loan and Security Agreement to be executed and their seals to be
hereto affixed as of the date first above written.
"AGENT"
BANKBOSTON RETAIL FINANCE INC.
By:__________________________
Name:________________________
Title:_______________________
"LENDERS"
BANKBOSTON RETAIL FINANCE INC.
By:__________________________
Name:________________________
Title:_______________________
LASALLE BUSINESS CREDIT, INC.
By:__________________________
Name:________________________
Title:_______________________
4
<PAGE>
FOOTHILL CAPITAL CORPORATION
By:__________________________
Name:________________________
Title:_______________________
"LEAD BORROWER"
SUNGLASS HUT TRADING
CORPORATION
By:__________________________
Name: LARRY G. PETERSEN
Title: TREASURER
"BORROWERS"
SUNGLASS HUT TRADING
CORPORATION
By:__________________________
Name: LARRY G. PETERSEN
Title: TREASURER
WATCH STATION, INC.
By:__________________________
Name: LARRY G. PETERSEN
Title: TREASURER
5
<PAGE>
SUNGLASS HUT OF CANADA LTD.
By:__________________________
Name: LARRY G. PETERSEN
Title: TREASURER
"PARENT"
SUNGLASS HUT INTERNATIONAL,
INC.
By:__________________________
Name: LARRY G. PETERSEN
Title: TREASURER
"SHADES"
SHADESCOM, INC.
By:__________________________
Name: LARRY G. PETERSEN
Title: TREASURER
6
<PAGE>
Schedule 1
1. Certificate of Legal Existence for Shades from Florida
Secretary of State
2. Certificates of Foreign Qualification for Shades from:
a. Massachusetts Secretary of State
3. Officers' Certificate for Shades with copies of:
a. Certificate of Incorporation
b. By-Laws
c. Resolutions
4. Guaranty by Shades of each of:
a. Sunglass Hut Trading Corporation
b. Watch Station, Inc.
c. Sunglass Hut of Canada Ltd.
5. Financing Statements from Shades
a. Secretary of State of Massachusetts
b. Clerk, Town of Yarmouth
c. Secretary of State of Florida
6. First Amendment to Stock Pledge from Sunglass Hut
Corporation of all of stock of Shades
a. Stock Certificate
b. Stock Power with medallion guaranty
7. Asset Purchase Agreement with all schedules
8. UCC Searches
a. Gallagher & Forsythe, LLC
i. Secretary of State of Massachusetts
ii.
b. Shadescom, Inc.
i. Secretary of State of Florida
9. Release by Adler
7
<PAGE>
FIRST AMENDMENT TO STOCK PLEDGE AGREEMENT
This FIRST AMENDMENT TO STOCK PLEDGE AGREEMENT (the "AGREEMENT") is
made as of the 13th day of January, 1999, by Sunglass Hut Corporation (the
"COMPANY") and BankBoston Retail Finance Inc., N.A. (the "AGENT") as Agent for
the benefit of the Lenders from time to time party to that certain Loan and
Security Agreement dated as of April 28, 1998 (as such may be amended hereafter,
the "CREDIT AGREEMENT"), among the Agent, such Lenders and Sunglass Hut Trading
Corporation, Watch Station, Inc., and Sunglass Hut of Canada Ltd. (collectively,
the "Borrowers"), in consideration of the mutual covenants contained herein and
the benefits to be derived herefrom.
W I T N E S S E T H:
WHEREAS, the Borrowers, the Agent and the Lenders entered into a
certain loan arrangement (the "Loan Arrangement") dated as of April 28, 1998 (as
amended and in effect, the "Loan Arrangement"); and
WHEREAS, in connection with the Loan Arrangement, the Company executed
and delivered to the Agent, among other things, a certain Stock Pledge Agreement
dated April 28, 1998 (the "Pledge Agreement") pursuant to which the Company
granted to the Agent, for the ratable benefit of the Lenders, a security
interest in certain Stock Collateral (as defined in the Pledge Agreement) as
security for the Secured Liabilities (as defined in the Pledge Agreement) and
the Guaranty (as defined in the Pledge Agreement); and
WHEREAS, the Company has created an additional Subsidiary, and pursuant
to the terms and conditions of the Pledge Agreement, the Company is required to
amend the Pledge Agreement to include therein the stock of any additional
Subsidiary of the Company acquired or created after the execution and delivery
of the Pledge Agreement to the Agent; and
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the hereby acknowledges and agrees
as follows:
1. Unless otherwise defined herein, all capitalized terms used
herein shall have the meaning provided for in the Pledge
Agreement.
2. Annex A to the Pledge Agreement is hereby superseded by the
Annex A attached hereto and incorporated herein by reference.
3. The Company acknowledges, confirms and agrees that, except as
modified hereby, the Pledge Agreement remains in full force
and effect. The Company hereby ratifies, confirms and
reaffirms the terms and conditions of, and all warranties and
representations made in the Pledge Agreement.
4. The Company acknowledges, confirms and agrees that any and all
Stock Collateral pledged pursuant to the Pledge Agreement, as
modified hereby, shall continue to secure the prompt, punctual
and faithful payment and performance of all Obligations and
the Guaranty.
<PAGE>
5. This Agreement and all other documents, instruments, and
agreements executed in connection herewith incorporate all
discussions and negotiations between the Company and the
Agent, either express or implied, concerning the matters
included herein and in such other documents, instruments, and
agreements, any statute, custom, or usage to the contrary
notwithstanding.
This Agreement may be executed in multiple counterparts and shall take
effect as a sealed instrument as of the date first written above.
SUNGLASS HUT CORPORATION
By:___________________________
Name__________________________
Title:________________________
Accepted and Agreed as of the 13th day of January, 1999.
BANKBOSTON RETAIL FINANCE INC.
AS AGENT
By:___________________________
Name:
Title:
-2-
<PAGE>
Amended and Restated as of January 13, 1999
ANNEX A
to Stock Pledge Agreement dated as of April 28, 1998
<TABLE>
<CAPTION>
NUMBER OF
CLASS NUMBER OF ISSUED AND PAR OR
RECORD OF AUTHORIZED OUTSTANDING LIQUIDATION
ISSUER OWNER SHARES SHARES SHARES VALUE
------ ------ ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Sunglass Hut Sunglass Hut
Trading Corporation
Corporation Common 500 226 $1.00
Watch Sunglass Hut
Station, Corporation
Inc. Common 1,000 1,000 $0.01
Sunglass Hut Sunglass Hut
Realty Corporation
Corporation Common 500 100 $1.00
Sunglass Hut Sunglass Hut
of Florida, Corporation
Inc. Common 1,000 1,000 $0.01
Sunglass Hut Sunglass Hut
Holding of Corporation
France, Inc. Common 1000 200 $.01
Sunglass Hut Sunglass Hut
of Northern Corporation
France, Inc. Common 1000 200 $.01
Sunglass Hut Sunglass Hut
of Southern Corporation
France, Inc. Common 1000 200 $.01
Shadescom, Sunglass Hut Common 1000 1000 $.01
Inc. Corporation
</TABLE>
-3-
<PAGE>
- --------------------------------------------------------------------------------
GUARANTY BANKBOSTON RETAIL FINANCE INC., AGENT
- --------------------------------------------------------------------------------
January 13, 1999
FOR GOOD AND VALUABLE CONSIDERATION, THE RECEIPT AND SUFFICIENCY OF
WHICH ARE ACKNOWLEDGED, the undersigned unconditionally guaranties to BankBoston
Retail Finance Inc. (in such capacity, herein the "AGENT"), a Delaware
corporation with offices at 40 Broad Street, Boston, Massachusetts 02109, as
Agent for a syndicate of Lenders (the "LENDERS") party to the Loan Agreement
(defined below), and the Lenders, in accordance with the terms hereof and
without any prior written notice, the payment and performance of the Liabilities
(defined below) of each of Sunglass Hut Trading Corporation, Sunglass Hut of
Canada Ltd., and Watch Station, Inc. (singly, a "BORROWER", and collectively,
the "BORROWERS").
DEFINITIONS. As used herein, the following terms have the following
meanings:
"COSTS OF COLLECTION" includes, without limitation, all attorneys'
reasonable fees and reasonable out-of-pocket expenses incurred
by the Agent's and any Lender's attorneys, and all reasonable
costs incurred by the Agent or any Lender in the
administration of the Liabilities, including, without
limitation, reasonable costs and expenses associated with
travel on behalf of the Agent or any Lender (limited, however,
prior to the occurrence of a Suspension Event (as defined in
the Loan Agreement), to those in connection with the
monitoring of the Borrowers and any collateral which secures
any Liabilities) and continuing due diligence in connection
therewith), which costs and expenses are directly or
indirectly related to or in respect of the Agent's and any
Lender's: administration and management of the Liabilities;
negotiation, documentation, and amendment of any instrument
which relates to any Liability; or efforts to preserve,
protect, collect, or enforce any right in any collateral which
secures the Liabilities, the Liabilities, and/or the Agent's
Rights and Remedies and/or any of the Agent's rights and
remedies against or
<PAGE>
in respect of any guarantor or other person liable in respect
of the Liabilities (whether or not suit is instituted in
connection with such efforts). The Costs of Collection are
Liabilities, and at the Agent's option may bear interest at
the highest post-default rate which the Agent may charge the
Borrowers hereunder as if such had been lent, advanced, and
credited by the Agent to, or for the benefit of, the
Borrowers.
"LIABILITIES" (in the singular, "LIABILITY"): Includes, without
limitation, all and each of the following, whether now
existing or hereafter arising from each Borrower singly/or the
Borrowers collectively:
(a) Any and all direct and indirect liabilities,
debts, and obligations of any Borrower to the Agent or any
Lender, each of every kind, nature, and description.
(b) Each obligation to repay any loan, advance,
indebtedness, note, obligation, overdraft, or amount now or
hereafter owing by any Borrower to the Agent or any Lender
(including all future advances whether or not made pursuant to
a commitment by the Agent or any Lender), whether or not any
of such are liquidated, unliquidated, primary, secondary,
secured, unsecured, direct, indirect, absolute, contingent, or
of any other type, nature, or description, or by reason of any
cause of action which the Agent or any Lender may hold against
any of the Borrowers.
(c) All notes and other obligations of any of the
Borrowers now or hereafter assigned to or held by the Agent or
any Lender, each of every kind, nature, and description.
(d) All interest, fees, and charges and other amounts
which may be charged by the Agent or any Lender to any of the
Borrowers and/or which may be due from any of the Borrowers to
the Agent or any Lender from time to time.
(e) All costs and expenses incurred or paid by the
Agent or any Lender in respect of any agreement between any of
the Borrowers and Agent or any the Lender or instrument
furnished by any of the Borrowers to the Agent or any Lender
(including, without limitation, Costs of Collection,
attorneys' reasonable fees, and all court and litigation costs
and expenses).
(f) Any and all covenants of any of the Borrowers to
or with the Agent or any Lender and any and all obligations of
any of the Borrowers to act or to refrain from acting in
accordance with any agreement between any of the Borrowers and
the Agent or any
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Lender or instrument furnished by any of the Borrowers to the
Agent or any Lender.
"LOAN AGREEMENT" means that certain Loan and Security Agreement
dated April 28, 1998 by and among the Borrowers, the Agent and
the Lenders as amended from time to time.
INDEMNIFICATION. FOR SAID GOOD AND VALUABLE CONSIDERATION, the
undersigned shall also indemnify, defend, and hold the Agent and each Lender,
and each agent, employee, officer, or representative of the Agent and each
Lender (each, an "INDEMNIFIED PERSON"), harmless of and from any claim (other
than any claim as to which a final determination is made in a judicial
proceeding (in which the Indemnified Person has had an opportunity to be heard),
which determination includes a specific finding that the Indemnified Person had
acted in a grossly negligent manner or in actual bad faith) brought or
threatened against the Indemnified Person by: any of the Borrowers; the
undersigned; any other guarantor or endorser of the Liabilities or any other
person (as well as from attorneys' reasonable fees and reasonable expenses in
connection therewith) on account of the relationship of any Indemnified Person
with any of the Borrowers, the undersigned, or any other guarantor or endorser
of the Liabilities (each of which may be defended, compromised, settled, or
pursued by the Agent with counsel of the Agent's selection, but at the expense
of the undersigned).
INTEREST. The undersigned will pay on demand interest on all amounts
due to the Agent (for the ratable benefit of the Agent and the Lenders) under
this Guaranty, or arising under any documents, instruments, or agreements
relating to any collateral securing this Guaranty, from the time the Agent first
demands payment of this Guaranty at a rate (determined based upon a 365 day year
and actual days elapsed) equal to the lesser from time to time of (a) the
aggregate of the Base Rate from time to time announced by BankBoston, N.A. (or,
if said bank ceases to announce such a rate, the functional equivalent rate or
index selected in good faith by the Lender) plus Four Percent (4.0 %) per annum
or (b) the highest rate of interest which under the circumstances may be charged
under applicable law.
OBLIGATIONS NOT AFFECTED. The obligations of the undersigned hereunder
shall not be affected by: any fraudulent, illegal, or improper act by any of the
Borrowers, the undersigned, or any person liable or obligated to the Agent or
any Lender for or on the Liabilities; any release, discharge, or invalidation,
by operation of law or otherwise, of the Liabilities; or the
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legal incapacity of any of the Borrowers, the undersigned, or any other person
liable or obligated to the Agent or any Lender for or on the Liabilities.
Interest and Costs of Collection shall continue to accrue and shall continue to
be deemed Liabilities guarantied hereby notwithstanding any stay to the
enforcement thereof against any of the Borrowers or the disallowance of any
claim therefor against any of the Borrowers.
INCORPORATION OF ALL DISCUSSIONS. The within instrument incorporates
all discussions and negotiations between the undersigned and the Agent and
each Lender concerning the guaranty and indemnification provided by the
undersigned hereby. No such discussions or negotiations shall limit, modify,
or otherwise affect the provisions hereof. No provision hereof may be altered,
amended, waived, cancelled or modified, except by a written instrument executed,
sealed, and acknowledged by a duly authorized officer of the Agent.
GENERAL WAIVERS. The undersigned WAIVES: presentment, demand, notice,
and protest with respect to the Liabilities and this Guaranty; any delay on the
part of the Agent or any Lender; any right to require the Agent or any Lender to
pursue or to proceed against any of the Borrowers or any collateral which might
have been granted to secure the Liabilities or to secure the obligations of the
undersigned hereunder; any benefit of, and any right to participate in, any
collateral which may secure the Liabilities; any claim which the undersigned may
have or to which the undersigned may become entitled to the extent that such
claim might otherwise cause any transfer to the Agent by or on behalf of any of
the Borrowers to be avoided as having been, or in the nature of, a preference;
and notice of acceptance of this Guaranty.
WAIVER OF SUBROGATION. The undersigned shall not undertake any of the
following:
(a) Exercise of any right against any of the Borrowers, by way
of subrogation, reimbursement, indemnity, contribution, or the like
unless and until all Liabilities have been irrevocably paid and
satisfied in full.
(b) The filing of any proof of any claim in competition with
the Agent in respect of any payment hereunder in any bankruptcy or
insolvency proceedings of any nature.
(c) The claiming of any set-off or counterclaim against any of
the Borrowers in respect of any liability of the undersigned to any of
the Borrowers.
SUBORDINATION. The payment of any amounts due with respect to any
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indebtedness of any of the Borrowers now or hereafter held by the undersigned
for borrowed money is hereby subordinated to the prior payment in full of the
Liabilities. The undersigned will not demand, sue for, or otherwise attempt to
collect any such indebtedness. Any amounts which are collected, enforced and
received by the undersigned shall be held by the undersigned as trustee for the
Agent and shall be paid over to the Agent on account of the Liabilities without
affecting in any manner the liability of the undersigned under this Guaranty.
AGENT'S LENDER'S BOOKS AND RECORDS. The books and records of the Agent
showing the account between the Agent and the Borrowers shall be admissible in
any action or proceeding and constitute prima facie evidence and proof of the
items contained therein.
GUARANTOR'S OBLIGATIONS PRIMARY. The obligations of the undersigned
hereunder are primary, with no recourse necessary by the Agent against any of
the Borrowers or any collateral given to secure the Liabilities or to secure the
obligations of the undersigned hereunder or against any other person liable for
or on the Liabilities prior to proceeding against the undersigned hereunder.
CHANGES IN LIABILITIES. The undersigned assents to any indulgence or
waiver which the Agent or any Lender might grant or give any of the Borrowers
and/or any other person liable or obligated for or on the Liabilities. The
undersigned authorizes the Agent and each Lender to alter, amend, cancel, waive,
or modify any term or condition of the Liabilities and of the obligations of any
other person liable or obligated for or on the Liabilities, without notice to,
or consent from, the undersigned. The undersigned authorizes the Agent to
complete this Guaranty and any instrument or other document which evidences or
relates to the Liabilities, to the extent that this Guaranty or such instrument
or other document, upon delivery to the Agent, is incomplete in any respect. No
compromise, settlement, or release by the Agent or any Lender of the Liabilities
or of the obligations of any such other person (whether or not jointly liable
with the undersigned) and no release of any collateral securing the Liabilities
or securing the obligations of any such other person shall affect the
obligations of the undersigned hereunder. No action by the Agent or any Lender
which has been assented to herein shall affect the obligations of the
undersigned hereunder.
FINANCIAL INFORMATION. The undersigned, from time to time at the
request of the Agent, will provide the Agent with such information concerning
the
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financial condition of the undersigned as the Agent reasonably may request
(including but not limited to financial statements in such form as reasonably
may be requested by the Agent and copies of the federal and state income tax
returns).
COLLATERAL. Upon demand by the Agent after any change in the condition
or affairs (financial or otherwise) of any of the Borrowers or of the
undersigned deemed by the Agent to be adverse and material, the undersigned
shall secure the payment and performance of the obligations of the undersigned
hereunder by delivering, assigning, or transferring to the Agent or granting the
Agent a security interest in collateral of a value and character reasonably
satisfactory to the Agent. The undersigned shall do all such things and execute
all such documents as the Agent may consider necessary or desirable to give full
effect to this Guaranty and to perfect and preserve the rights and powers of the
Agent hereunder.
COSTS OF ENFORCEMENT. The undersigned will pay on demand, without
limitation, all attorneys' reasonable fees, out-of-pocket expenses incurred by
the Agent's attorneys and all costs incurred by the Agent, including, without
limitation, costs and expenses associated with travel on behalf of the Agent,
which costs and expenses are directly or indirectly related to or in respect of
the Lender's administration, negotiation, documentation, and amendment of this
guaranty and in the Agent's efforts to collect and/or to enforce any of the
obligations of the undersigned hereunder and/or to enforce any of the Agent's
rights, remedies, or powers against or in respect of the undersigned (whether or
not suit is instituted by or against the Agent).
The undersigned shall also pay on demand all costs and expenses
(including attorneys' reasonable fees) incurred, following the occurrence of any
event of default under any instrument or document which evidences or governs the
Liabilities, by each Lender in connection with the enforcement, attempted
enforcement, or preservation of any rights and remedies under this, or any such
instrument or document, as well as any such costs and expenses in connection
with any "workout", forbearance, or restructuring of any credit facility between
any of the Borrowers, on the one hand, and the Agent and the Lenders on the
other.
BINDING EFFECT. This instrument shall inure to the benefit of the Agent
and each Lender and their respective successors and assigns; shall be binding
upon the heirs, successors, representatives, and assigns of the undersigned; and
shall apply to all Liabilities of the Borrowers and any successor to any of the
Borrowers, including any successor by operation of law.
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AGENT'S RIGHTS AND REMEDIES. The rights, remedies, powers, privileges,
and discretions of the Agent hereunder (herein, the "AGENT'S RIGHTS AND
REMEDIES") shall be cumulative and not exclusive of any rights or remedies which
it would otherwise have. No delay or omission by the Agent in exercising or
enforcing any of the Agent's Rights and Remedies shall operate as, or constitute
a waiver thereof. No waiver by the Agent of any of the Agent's Rights and
Remedies or of any default or remedies under any other agreement with the
undersigned, or of any default under any agreement with any of the Borrowers, or
any other person liable or obligated for or on the Liabilities, shall operate as
a waiver of any other of the Agent's Rights and Remedies or of any default or
remedy hereunder or thereunder. No exercise of any of the Agent's Rights and
Remedies and no other agreement or transaction of whatever nature entered into
between the Agent and: the undersigned; and any of the Borrowers; and/or any
such other person at any time shall preclude any other exercise of the Agent's
Rights and Remedies. No waiver by the Agent of any of the Agent's Rights and
Remedies on any one occasion shall be deemed a waiver on any subsequent
occasion, nor shall it be deemed a continuing waiver. All of the Agent's Rights
and Remedies, and all of the Agent's rights, remedies, powers, privileges, and
discretions under any other agreement or transaction with the undersigned, any
of the Borrowers, or any such other person, shall be cumulative and not
alternative or exclusive, and may be exercised by the Agent at such time or
times and in such order of preference as the Agent in its sole discretion may
determine.
COPIES AND FACSIMILES. This instrument and all documents which have
been or may be hereinafter furnished by the undersigned to the Agent or any
Lender may be reproduced by the Agent and any Lender by any photographic,
microfilm, xerographic, digital imaging, or other process. Any such reproduction
shall be admissible in evidence as the original itself in any judicial or
administrative proceeding (whether or not the original is in existence and
whether or not such reproduction was made in the regular course of business).
Any facsimile which bears proof of transmission shall be binding on the party
which or on whose behalf such transmission was initiated and likewise so
admissible in evidence as if the original of such facsimile had been delivered
to the party which or on whose behalf such transmission was received.
CHOICE OF LAWS. This instrument shall be governed, construed, and
interpreted in accordance with the laws of The Commonwealth of Massachusetts.
CONSENT TO JURISDICTION. (a) The undersigned agrees that any legal
action, proceeding, case, or controversy against the undersigned with respect
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<PAGE>
to this Guaranty or otherwise, may be brought in the Superior Court of Suffolk
County Massachusetts or in the United States District Court, District of
Massachusetts, sitting in Boston, Massachusetts, as the Agent may elect in the
Agent's sole discretion. By execution and delivery of this Guaranty, the
undersigned accepts, submits, and consents generally and unconditionally, to the
jurisdiction of the aforesaid courts.
(b) The undersigned WAIVES personal service of any and all
process and irrevocably consents to the service of process out of any of the
aforementioned courts in any such action or proceeding by the mailing of copies
thereof by certified mail, postage prepaid, to the undersigned at the last
address of the undersigned of which the Agent then has written notice, such
service to become effective five (5) business days after such mailing.
(c) The undersigned WAIVES, any objection based on FORUM NON
CONVENIENS and any objection to venue of any action or proceeding instituted
hereunder and consents to the granting of such legal or equitable remedy as is
deemed appropriate by the court in which the Agent initiates the subject action.
(d) Nothing herein shall affect the right of the Agent to
bring legal actions or proceedings in any other competent jurisdiction.
(e) The undersigned agrees that any action commenced by the
undersigned asserting any claim or counterclaim arising under or in connection
with this Guaranty or the Agent's relationship with any of the Borrowers shall
be brought in the Superior Court of Suffolk County Massachusetts or in the
United States District Court, District of Massachusetts, sitting in Boston,
Massachusetts, and that such Courts shall have exclusive jurisdiction with
respect to any such action.
BROAD SCOPE OF GUARANTY. It is the intention of the undersigned that
the provisions of the within Guaranty and indemnification be liberally construed
to the end that the Agent and each Lender may be put in as good a position as if
each of the Borrowers had promptly, punctually, and faithfully performed all
Liabilities and that the undersigned had promptly, punctually, and faithfully
performed hereunder.
SEVERABILITY. Any determination that any provision herein is invalid,
illegal, or unenforceable in any respect in any instance shall not affect the
validity, legality, or enforceability of such provision in any other instance
and shall not affect the validity, legality, or enforceability of any other
provision contained herein.
RIGHT OF SET-OFF. Any and all deposits or other sums at any time
credited by or due to the undersigned from the Agent or any Lender or from any
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participant with any Lender in the Liabilities (a "PARTICIPANT") and any cash,
securities, instruments or other property of the undersigned in the possession
of the Agent or any Lender or any Participant, whether for safekeeping or
otherwise (regardless of the reason the Agent, the Lender or the Participant had
received the same) shall at all times constitute security for all Liabilities
and for any and all obligations of the undersigned to the Agent, each Lender and
any Participant, and may be applied or set off against the Liabilities and
against the obligations of the undersigned to the Agent, each Lender and any
Participant including, without limitation, those arising hereunder, at any time,
whether or not such are then due and whether or not other collateral is then
available to the Agent, any Lender or any Participant.
TERMINATION. The obligations of the undersigned hereunder shall remain
in full force and effect as to all Liabilities, without regard to any reduction
of the Liabilities (other than on account of payments made pursuant to the
within Guaranty) until the earlier of (a) ten (10) days following the actual
receipt by the Agent at its main office (presently BankBoston Retail Finance
Inc., 40 Broad Street, 02109) of written notice signed by the undersigned of the
termination thereof or (b) the delivery of written notice of termination dated
and signed by a duly authorized officer of the Agent, which notice of
termination includes specific reference to this provision. No termination hereof
shall affect any Liability in existence or outstanding ten (10) days following
the date of such actual receipt or delivery (including, without limitation,
those which are contingent or not then due and those which arise out of any
check, draft, item, or paper which was made, executed, or drawn prior to the
expiration of such ten (10) days, even if received by the Agent thereafter) nor
any which arises out of any continuing commitment of the Agent to provide loans,
advances, and financial accommodations to the Borrowers, nor any obligation of
the undersigned hereunder, including, without limitation, any which by its terms
includes any of the Liabilities of a contingent nature (including, without
limitation, the indemnification provided for herein). This Guaranty shall
continue to be effective or, if previously terminated, shall be automatically
reinstated, without any further action, if at any time any payment made or value
received with respect to a Liability is rescinded or must otherwise be returned
by the Agent upon the insolvency, bankruptcy or reorganization of the
undersigned, or otherwise, all as though such payment had not been made or value
received.
MISCELLANEOUS. The undersigned represents and certifies that, prior to
the execution of this Guaranty, the undersigned had carefully read and reviewed
all of the provisions of this Guaranty and had been afforded an
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opportunity to consult with counsel independently selected by the undersigned.
The undersigned further represents and certifies that the undersigned has freely
and willingly executed this Guaranty with full appreciation of the legal effect
of this Guaranty. The undersigned recognizes that the titles to the paragraphs
of the within Guaranty are for ease of reference; are not part of this Guaranty;
and do not alter or affect the substantive provisions hereof. The undersigned
acknowledges that the Liabilities and the obligations of the undersigned
pursuant to this Guaranty constitute "Designated Senior Indebtedness" for
purposes of, and as defined in, the Indenture dated as of June 26, 1996 between
Sunglass Hut International, Inc. (the "Parent") and The Bank of New York, as
Trustee relating to the Parent's 5 1/4% Convertible Subordinated Notes due 2003,
as amended an in effect.
WAIVER OF JURY TRIAL. The undersigned makes the following waiver
knowingly, voluntarily, and intentionally, and understands that the Agent and
each Lender, in the establishment and maintenance of the Agent's and the
Lender's relationship with each of the Borrowers and the undersigned, is relying
thereon. THE UNDERSIGNED HEREBY IRREVOCABLY WAIVES ANY PRESENT OR FUTURE RIGHT
OF THE UNDERSIGNED, EACH OF THE BORROWERS OR ANY ENDORSER OR ANY OTHER GUARANTOR
OF ANY OF THE BORROWERS OR ANY OTHER SIMILAR PERSON, TO A TRIAL BY JURY OF ANY
CASE OR CONTROVERSY IN WHICH THE AGENT AND/OR ANY LENDER IS OR BECOMES A PARTY
(WHETHER SUCH CASE OR CONTROVERSY IS INITIATED BY OR AGAINST THE AGENT OR
AGAINST ANY LENDER OR IN WHICH THE AGENT OR ANY LENDER IS JOINED AS A PARTY
LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF, OR IS IN RESPECT OF, ANY
RELATIONSHIP AMONGST OR BETWEEN THE UNDERSIGNED, ANY OF THE BORROWERS, ANY SUCH
PERSON, AND THE AGENT AND ANY LENDER.
It is intended that this Guaranty take effect as a sealed instrument.
SHADESCOM,INC.
By:___________________________
Name: ________________________
Title: _______________________
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- --------------------------------------------------------------------------------
SECURITY AGREEMENT
- --------------------------------------------------------------------------------
BANKBOSTON RETAIL FINANCE INC.
AGENT FOR
THE LENDERS REFERENCED HEREIN
- --------------------------------------------------------------------------------
SHADESCOM, INC.
GUARANTOR
- --------------------------------------------------------------------------------
As of January 13, 1999
<PAGE>
TABLE OF CONTENTS
ARTICLE 1 - DEFINITIONS:.................................................. 1 ..
ARTICLE 2 - GRANT OF SECURITY INTEREST:................................... 7 ..
2-1. Grant of Security Interest.............................. 7 ..
2-2. Extent and Duration of Security Interest................ 8 ..
ARTICLE 3 - GENERAL REPRESENTATIONS, COVENANTS AND WARRANTIES:............ 8 ..
ARTICLE 4 - USE AND COLLECTION OF COLLATERAL:............................. 8 ..
4-1. Use of Inventory Collateral............................. 8 ..
4-2. Inventory Quality....................................... 9 ..
4-3. Adjustments and Allowances.............................. 9 ..
4-4. Validity of Accounts.................................... 9 ..
4-5. Notification to Account Debtors......................... 9 ..
4-6. Proceeds and Collection of Accounts Held in Trust....... 9 ..
ARTICLE 5 - LENDER AS GUARANTOR'S ATTORNEY-IN-FACT:...................... 10 ..
5-1. Appointment as Attorney-In-Fact........................ 10 ..
5-2. No Obligation to Act................................... 11 ..
ARTICLE 6 - RIGHTS AND REMEDIES UPON DEFAULT:............................ 11 ..
6-1. Rights of Enforcement.................................. 11 ..
6-2. Sale of Collateral..................................... 12 ..
6-3. Occupation of Business Location........................ 13 ..
6-4. Grant of Nonexclusive License.......................... 13 ..
6-5. Assembly of Collateral................................. 13 ..
6-6. Rights and Remedies.................................... 13 ..
ARTICLE 7 - NOTICES:..................................................... 14 ..
7-1. Notice Addresses....................................... 14 ..
7-2. Notice Given........................................... 15 ..
ARTICLE 8 - GENERAL:..................................................... 15 ..
8-1. Protection of Collateral............................... 15 ..
8-2. Successors and Assigns................................. 16 ..
8-3. Severability........................................... 16 ..
8-4. Amendments. Course of Dealing......................... 16 ..
8-5. Application of Proceeds................................ 17 ..
8-6. Costs and Expenses of Agent and Of Lenders............. 17 ..
8-7. Copies and Facsimiles.................................. 17 ..
8-8. Massachusetts Law...................................... 18 ..
.. ii ..
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8-9. Consent to Jurisdiction................................ 18 ..
8-10. Indemnification........................................ 18 ..
8-11. Rules of Construction.................................. 19 ..
8-12. Intent................................................. 20 ..
8-13. Right of Set-Off....................................... 20 ..
8-14. Waivers. .............................................. 20 ..
.. iii ..
<PAGE>
- --------------------------------------------------------------------------------
SECURITY AGREEMENT BANKBOSTON RETAIL FINANCE INC.
- --------------------------------------------------------------------------------
As of January 13, 1999
THIS AGREEMENT is made between
BankBoston Retail Finance Inc. (in such capacity, herein the
"AGENT"), a Delaware corporation with offices at 40 Broad Street,
Boston, Massachusetts 02109, as agent for the ratable benefit of the
"LENDERS", who are party to the Loan Agreement (defined herein)
and
Shadescom, Inc. (hereinafter, the "GUARANTOR"), a Florida
corporation with its principal executive offices at 255 Alhambra
Circle, Coral Gables, Florida 33134
in consideration of the mutual covenants contained herein and benefits to be
derived herefrom,
WITNESSETH:
ARTICLE 1 - DEFINITIONS:
As herein used, the following terms have the following meanings or are
defined in the section of this Agreement so indicated:
"ACCOUNTS" and "ACCOUNTS RECEIVABLE" include, without limitation,
"accounts" as defined in the UCC, and also all: accounts,
accounts receivable, credit card receivables, notes, drafts,
acceptances, and other forms of obligations and receivables
and rights to payment for credit extended and for goods sold
or leased, or services rendered, whether or not yet earned by
performance; all "contract rights" as formerly defined in the
UCC; all Inventory which gave rise thereto, and all rights
associated with such Inventory, including the right of
stoppage in transit; all reclaimed, returned, rejected or
repossessed Inventory (if any) the sale of which gave rise to
any Account.
"ACCOUNT DEBTOR": Has the meaning given that term in the UCC.
"AGENT'S RIGHTS AND REMEDIES": Is defined in Section 6-6.
"BORROWER" OR "BORROWERS": Collectively, the US Borrowers and the CAN
Borrower.
"CAN BORROWER": Sunglass Hut of Canada Ltd.
..1..
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"CAPITAL LEASE": Any lease which may be capitalized in accordance with
GAAP.
"CHATTEL PAPER": Has the meaning given that term in the UCC.
"COLLATERAL": Is defined in Section 2-1.
"COSTS OF COLLECTION": Includes, without limitation, all attorneys'
reasonable fees and reasonable out-of-pocket expenses incurred
by the Agent's and any Lender's attorneys, and all reasonable
costs incurred by the Agent or any Lender in the
administration of the Liabilities and/or the Loan Documents,
including, without limitation, reasonable costs and expenses
associated with travel on behalf of the Agent or any Lender
(limited, however, prior to the occurrence of a Suspension
Event to those in connection with the monitoring of the
Borrowers and or the Guarantor or any other guarantor and the
Collateral and continuing due diligence in connection
therewith), which costs and expenses are directly or
indirectly related to or in respect of the Agent's and any
Lender's: administration and management of the Liabilities;
negotiation, documentation, and amendment of any Loan
Document; or efforts to preserve, protect, collect, or enforce
the Collateral, the Liabilities, and/or the Agent's Rights and
Remedies and/or any of the Agent's rights and remedies against
or in respect of the Guarantor or any other guarantor, or any
other person liable in respect of the Liabilities (whether or
not suit is instituted in connection with such efforts). The
Costs of Collection are Liabilities, and at the Agent's option
may bear interest at the highest post-default rate which the
Agent may charge the Guarantor under the Loan Agreement as if
such had been lent, advanced, and credited by the Agent to, or
for the benefit of, the Borrowers or the Guarantor.
"DEPOSIT ACCOUNT": Has the meaning given that term in the UCC.
"DOCUMENTS": Has the meaning given that term in the UCC.
"DOCUMENTS OF TITLE": Has the meaning given that term in the UCC.
"ENCUMBRANCE": Each of the following:
(a) Any security interest, mortgage, pledge,
hypothecation, lien, attachment, or charge of any kind
(including any agreement to give any of the foregoing); the
interest of a lessor under a capital lease; conditional sale
or other title retention agreement; sale of accounts
receivable or chattel paper; or other arrangement pursuant to
which any Person is entitled to any preference or priority
with respect to the property or assets of another Person or
the income or profits of such other Person or which
constitutes an interest in property to secure an obligation;
each of the foregoing whether consensual or non-consensual and
whether arising by way of agreement, operation of law, legal
process or otherwise.
(b) The filing of any financing statement under the
UCC or comparable law of any jurisdiction.
"EQUIPMENT": "Equipment" as defined in the UCC, and also all motor
vehicles, rolling stock, machinery, office equipment, plant
equipment,
..2..
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tools, dies, molds, store fixtures, furniture, and
other goods, property, and assets which are used and/or were
purchased for use in the operation or furtherance of the
Guarantor's business, and any and all accessions or additions
thereto, and substitutions therefor.
"EVENTS OF DEFAULT": Has the meaning given that term in the Loan
Agreement.
"FIXTURES": Has the meaning given that term in the UCC.
"GENERAL INTANGIBLES": Includes, without limitation, "general
intangibles" as defined in the UCC; and also all: rights to
payment for credit extended; deposits; amounts due to the
Guarantor; credit memoranda in favor of the Guarantor;
warranty claims; tax refunds and abatements; insurance refunds
and premium rebates; all means and vehicles of investment or
hedging, including, without limitation, options, warrants, and
futures contracts; records; customer lists; telephone numbers;
goodwill; causes of action; judgments; payments under any
settlement or other agreement; literary rights; rights to
performance; royalties; license and/or franchise fees; rights
of admission; licenses; franchises; license agreements,
including all rights of the Guarantor to enforce same;
permits, certificates of convenience and necessity, and
similar rights granted by any governmental authority; patents,
patent applications, patents pending, and other intellectual
property; internet addresses and domain names; developmental
ideas and concepts; proprietary processes; blueprints,
drawings, designs, diagrams, plans, reports, and charts;
catalogs; manuals; technical data; computer software programs
(including the source and object codes therefor), computer
records, computer software, rights of access to computer
record service bureaus, service bureau computer contracts, and
computer data; tapes, disks, semi-conductors chips and
printouts; trade secrets rights, copyrights, mask work rights
and interests, and derivative works and interests; user,
technical reference, and other manuals and materials; trade
names, trademarks, service marks, and all goodwill relating
thereto; applications for registration of the foregoing; and
all other general intangible property of the Guarantor in the
nature of intellectual property; proposals; cost estimates,
and reproductions on paper, or otherwise, of any and all
concepts or ideas, and any matter related to, or connected
with, the design, development, manufacture, sale, marketing,
leasing, or use of any or all property produced, sold, or
leased, by the Guarantor or credit extended or services
performed, by the Guarantor, whether intended for an
individual customer or the general business of the Guarantor,
or used or useful in connection with research by the
Guarantor.
"GUARANTOR": Is defined in the Preamble.
"GOODS": Has the meaning given that term in the UCC.
"GUARANTY": The Guarantor's Guaranty of the Liabilities of the
Borrowers to the Agent and the Lenders of even date, as the
same may be amended or restated from time to time hereafter
and any other instrument or undertaking by the Guarantor to
answer for or be obligated on account of any liabilities,
obligations, or indebtedness of the Borrowers to the Agent and
the Lenders.
"INDEBTEDNESS": All indebtedness and obligations of or assumed by any
Person on account of or in respect to any of the following:
(a) In respect of money borrowed (including any
indebtedness which is non-recourse to the credit of such
Person but which is secured by an Encumbrance on any asset of
such Person) whether or not evidenced by a promissory note,
bond, debenture or other
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written obligation to pay money.
(b) In connection with any letter of credit or
acceptance transaction (including, without limitation, the
face amount of all letters of credit and acceptances issued
for the account of such Person or reimbursement on account of
which such Person would be obligated).
(c) In connection with the sale or discount, with
recourse, of accounts receivable or chattel paper of such
Person.
(d) On account of deposits or advances.
(e) As lessee under Capital Leases.
"INDEBTEDNESS" also includes:
(x) Indebtedness of others secured by an
Encumbrance on any asset of such Person, whether or
not such Indebtedness is assumed by such Person.
(y) Any guaranty, endorsement, suretyship or
other undertaking pursuant to which that Person may
be liable on account of any obligation of any third
party.
(z) The Indebtedness of a partnership or
joint venture in which such Person is a general
partner or joint venturer.
"INSTRUMENTS": Has the meaning given that term in the UCC.
"INVENTORY": Includes, without limitation, "inventory" as defined in
the UCC and also all: packaging, advertising, and shipping
materials related to any of the foregoing, and all names or
marks affixed or to be affixed thereto for identifying or
selling the same; Goods held for sale or lease or furnished or
to be furnished under a contract or contracts of sale or
service by the Guarantor, or used or consumed or to be used or
consumed in the Guarantor's business; Goods of said
description in transit: returned, repossessed and rejected
Goods of said description; and all documents (whether or not
negotiable) which represent any of the foregoing.
"INVESTMENT PROPERTY": Has the meaning given that term in the UCC.
"LEASEHOLD INTEREST": Any interest of the Guarantor as lessee under any
lease.
"LENDERS": Defined in the Preamble to the within Agreement.
"LIABILITIES" (in the singular, "LIABILITY"): Has the meaning given
that term in each of the Loan Agreement and the Guaranty.
"LOAN AGREEMENT": The Loan and Security Agreement dated as of April
28, 1998 between the Borrowers, the Agent and the Lenders, as
the same may be amended or restated hereafter. Except as
otherwise defined herein, terms used herein which are defined
in the Loan Agreement are used as so defined.
"PERMITTED ENCUMBRANCES": Has the meaning given that term in the Loan
Agreement.
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"PERSON": Any natural person, and any corporation, limited liability
company, trust, partnership, joint venture, or other
enterprise or entity.
"PROCEEDS": Includes, without limitation, "Proceeds" as defined in the
UCC (defined below), and each type of property described in
Section 2-1 hereof.
"RECEIVABLES COLLATERAL": That portion of the Collateral which consists
of the Guarantor's Accounts, Accounts Receivable, contract
rights, General Intangibles, Chattel Paper, Instruments,
Documents of Title, Documents, Investment Property, letters of
credit for the benefit of the Guarantor, and bankers'
acceptances held by the Guarantor, and any rights to payment.
"REQUIREMENT OF LAW": As to any Person:
(a)(i) All statutes, rules, regulations, orders, or
other requirements having the force of law and (ii) all court
orders and injunctions, arbitrator's decisions, and/or similar
rulings, in each instance ((i) and (ii)) of or by any federal,
state, municipal, and other governmental authority, or court,
tribunal, panel, or other body which has or claims
jurisdiction over such Person, or any property of such Person,
or of any other Person for whose conduct such Person would be
responsible.
(b) That Person's charter, certificate of
incorporation, articles of organization, and/or other
organizational documents, as applicable.
(c) That Person's by-laws and/or other instruments
which deal with corporate or similar governance, as
applicable.
"UCC": The Uniform Commercial Code as presently in effect in
Massachusetts (Mass. Gen. Laws, Ch. 106), as amended from time
to time hereafter.
"US BORROWERS": Sunglass Hut Trading Corporation and Watch
Station, Inc.
ARTICLE 2 - GRANT OF SECURITY INTEREST:
2-1. GRANT OF SECURITY INTEREST. To secure the Guarantor's prompt,
punctual, and faithful performance of all and each of the Liabilities, the
Guarantor hereby grants to the Agent, for the ratable benefit of the Lenders, a
continuing security interest in and to, and assigns to the Agent, as collateral
security, the following, and each item thereof, whether now owned or now due, or
in which the Guarantor has an interest, or hereafter acquired, arising, or to
become due, or in which the Guarantor obtains an interest, and all products,
Proceeds, substitutions, and accessions of or to any of the following (all of
which, together with any other property in which the Lender may in the future be
granted a security interest, is referred to herein as the "COLLATERAL"):
(a) All Accounts and accounts receivable.
(b) All Inventory.
(c) All General Intangibles.
(d) All Equipment.
(e) All Goods.
(f) All Fixtures.
(g) All Chattel Paper.
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(h) All books, records, and information relating to the
Collateral and/or to the operation of the Guarantor's
business, and all rights of access to such books,
records, and information, and all property in which
such books,
(i) records, and information are stored, recorded, and
maintained. All Investment Property, Instruments,
Documents, Deposit Accounts, policies and
certificates of insurance, deposits, impressed
accounts, compensating balances, money, cash, or
other property.
(j) All insurance proceeds, refunds, and premium rebates,
including, without limitation, proceeds of fire and
credit insurance, whether any of such proceeds,
refunds, and premium rebates arise out of any of the
foregoing (2-1(a) through 2-1(i)) or otherwise.
(k) All liens, guaranties, rights, remedies, and
privileges pertaining to any of the foregoing (2-1(a)
through 2-1(i)), including the right of stoppage in
transit.
(l) All Leasehold Interests.
2-2. EXTENT AND DURATION OF SECURITY INTEREST. The security interest
created and granted herein is in addition to, and supplemental of, any security
interest previously granted by the Guarantor to the Lender and shall continue in
full force and effect applicable to all Liabilities until all Liabilities have
been paid and/or satisfied in full (other than contingent Liabilities which have
not then ripened into a claim) and the Guaranty has been duly terminated, at
which time the security interest granted herein shall be terminated in writing
by a duly authorized officer of the Agent.
ARTICLE 3 - GENERAL REPRESENTATIONS, COVENANTS AND WARRANTIES:
To induce each Lender to provide financial accommodations to and for
the account of the Borrowers, the Guarantor acknowledges and agrees that
pursuant to the terms and conditions of the Loan Agreement, the Guarantor is and
shall hereinafter be deemed an Obligor thereunder.
ARTICLE 4 - USE AND COLLECTION OF COLLATERAL:
4-1. USE OF INVENTORY COLLATERAL.
(a) The Guarantor shall not engage in any sale of the
Inventory other than for fair consideration in the conduct of the Guarantor's
business in the ordinary course and shall not (i) engage in sales or other
dispositions to creditors; or (ii) sales or other dispositions in bulk, except
in a manner consistent with past and existing practices of the Guarantor and in
the ordinary course of business (unless either (x) the value of the Guarantor's
remaining Inventory will be materially and adversely affected thereby, or (y) an
Event of Default exists and is continuing, in which events the foregoing will be
prohibited under all circumstances).
(b) No sale of Inventory shall be on consignment, approval, or
under any other circumstances such that, such Inventory may be returned to the
Guarantor without the consent of the Agent.
4-2. INVENTORY QUALITY. All Inventory now owned or hereafter acquired
by the Guarantor is and will be of good and merchantable quality and free from
defects (other than defects within customary trade tolerances).
4-3. ADJUSTMENTS AND ALLOWANCES. The Guarantor may grant such
allowances or other adjustments to the Guarantor's Account Debtors (exclusive of
extending the time for payment of any Account or Account Receivable, which shall
not be done without first obtaining the Agent's prior written consent in
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each instance) as the Guarantor may reasonably deem to accord with sound
business practice, PROVIDED, HOWEVER, the authority granted the Guarantor
pursuant to this Section 4-3 may be limited or terminated by the Agent at any
time after the occurrence and during the continuance of an Event of Default, in
the Agent's discretion.
4-4. VALIDITY OF ACCOUNTS.
(a) The amount of each Account shown on the books, records,
and invoices of the Guarantor represented as owing by each Account Debtor is and
will be the correct amount actually owing by such Account Debtor and shall have
been fully earned by performance by the Guarantor.
(b) The Guarantor has no knowledge of any material impairment
of the validity or collectibility of any of the Accounts and shall notify the
Agent of any such fact immediately after the Guarantor become aware of any such
material impairment.
(c) The Guarantor shall not post any bond to secure the
Guarantor' performance under any agreement to which any Borrower is a party nor
cause any surety, guarantor, or other third party obligee to become liable to
perform any obligation of any Borrower (other than to the Agent ) in the event
of such Borrower's failure so to perform.
4-5. NOTIFICATION TO ACCOUNT DEBTORS. The Agent shall have the right at
any time, after the occurrence and during the continuance of an Event of
Default, to notify any of the Guarantor' Account Debtors to make payment
directly to the Agent and to collect all amounts due on account of the
Collateral.
4-6. PROCEEDS AND COLLECTION OF ACCOUNTS HELD IN TRUST. (a) Except as
provided for in the Loan Agreement, all Receivables Collateral and all proceeds
and collections of the Collateral shall be held in trust by the Guarantor for
the Agent and shall not be commingled with any of the Guarantor's other funds or
deposited in any bank account of the Guarantor.
(b) The Guarantor shall at all times deliver to the Agent in
accordance with the provisions of the Loan Agreement, as and when received by
the Guarantor and in the same form as so received, all checks, drafts, and other
items which represent the Collateral and any proceeds and collections of the
Collateral, each of which checks, drafts, and other items shall be endorsed to
the Agent or as the Agent may otherwise specify from time to time and which
shall be accompanied by remittance reports in form satisfactory to the Agent all
as provided for in the Loan Agreement. In addition, the Guarantor shall cause
any wire or other electronic transfer of funds which constitutes Collateral or
proceeds as provided for in the Loan Agreement. The Agent may apply the proceeds
thereof to the Liabilities as provided for in the Loan Agreement.
(c) The Guarantor shall cause all checks, drafts, and other
items which represent the Receivables Collateral and any proceeds and
collections of the Collateral to be delivered directly to a lock box, blocked
account, or similar recipient over which the Agent has sole access and control
as provided for in the Loan Agreement. The Agent shall apply the proceeds and
collections so delivered to the Liabilities as provided for in the Loan
Agreement.
ARTICLE 5 - LENDER AS GUARANTOR'S ATTORNEY-IN-FACT:
5-1. APPOINTMENT AS ATTORNEY-IN-FACT. The Guarantor hereby irrevocably
constitutes and appoints the Agent as the Guarantor's true and lawful attorney,
with full power of substitution, exercisable after the occurrence and during the
continuance of an Event of Default, to convert the Collateral into cash at the
sole risk, cost, and expense of the Guarantor, but for the sole benefit of the
Agent. The rights and powers granted the Agent by the within appointment include
but are not limited to the right and power to:
(a) Prosecute, defend, compromise, or release any action
relating to the Collateral.
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(b) Sign change of address forms to change the address to
which the Guarantor's mail is to be sent to such address as the Agent shall
designate; receive and open the Guarantor's mail; remove any Receivables
Collateral and Proceeds of Collateral therefrom and turn over the balance of
such mail either to the Guarantor or to any trustee in bankruptcy, receiver,
assignee for the benefit of creditors of the Guarantor, or other legal
representative of the Guarantor whom the Agent determines to be the appropriate
person to whom to so turn over such mail.
(c) Endorse the name of the Guarantor in favor of the Agent
upon any and all checks, drafts, notes, acceptances, or other items or
instruments; sign and endorse the name of the Guarantor on, and receive as
secured party, any of the Collateral, any invoices, schedules of Collateral,
freight or express receipts, or bills of lading, storage receipts, warehouse
receipts, or other documents of title respectively relating to the Collateral.
(d) Sign the name of the Guarantor on any notice to the
Guarantor's Account Debtors or verification of the Receivables Collateral; sign
the Guarantor's name on any Proof of Claim in Bankruptcy against Account
Debtors, and on notices of lien, claims of mechanic's liens, or assignments or
releases of mechanic's liens securing the Accounts.
(e) Take all such action as may be necessary to obtain the
payment of any letter of credit and/or banker's acceptance of which any
Guarantor is a beneficiary.
(f) Repair, manufacture, assemble, complete, package, deliver,
alter or supply goods, if any, necessary to fulfill in whole or in part the
purchase order of any customer of the Guarantor.
(g) Use, license or transfer any or all General Intangibles of
the Guarantor.
5-2. NO OBLIGATION TO ACT. The Agent shall not be obligated to do any
of the acts or to exercise any of the powers authorized by Section 5-1 herein,
but if the Lender elects to do any such act or to exercise any of such powers,
it shall not be accountable for more than it actually receives as a result of
such exercise of power, and shall not be responsible to the Guarantor for any
act or omission to act except for any act or omission to act as to which there
is a final determination made in a judicial proceeding (in which proceeding the
Agent has had an opportunity to be heard) which determination includes a
specific finding that the subject act or omission to act had been grossly
negligent or in actual bad faith.
ARTICLE 6 - RIGHTS AND REMEDIES UPON DEFAULT:
In addition to all of the rights, remedies, powers, privileges, and
discretions which the Agent is provided prior to the occurrence of an Event of
Default, the Agent shall have the following rights and remedies upon the
occurrence, and during the continuance, of any Event of Default. No stay which
otherwise might be imposed pursuant to Section 362 of the Bankruptcy Code or
otherwise shall stay, limit, prevent, hinder, delay, restrict, or otherwise
prevent the Agent's exercise of any of such rights and remedies.
6-1. RIGHTS OF ENFORCEMENT. The Agent shall have all of the rights and
remedies of a secured party upon default under the UCC, in addition to which the
Agent shall have all and each of the following rights and remedies:
(a) To collect the Receivables Collateral with or without the
taking of possession of any of the Collateral.
(b) To take possession of all or any portion of the
Collateral.
(c) To sell, lease, or otherwise dispose of any or all of the
Collateral, in its then condition or following such preparation or processing as
the Agent deems advisable and with or without the taking of possession of any of
the Collateral.
(d) To conduct one or more going out of business sales which
include the sale or other disposition of the Collateral.
(e) To apply the Receivables Collateral or the Proceeds of the
Collateral towards (but not necessarily in complete satisfaction of)
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the Liabilities.
(f) To exercise all or any of the rights, remedies, powers,
privileges, and discretions under all or any of the Loan Documents.
6-2. SALE OF COLLATERAL.
(a) Any sale or other disposition of the Collateral may be at
public or private sale upon such terms and in such manner as the Agent deems
advisable, having due regard to compliance with any statute or regulation which
might affect, limit, or apply to the Agent's disposition of the Collateral.
(b) The Agent, in the exercise of the Agent's rights and
remedies upon default, may conduct one or more going out of business sales, in
the Agent's own right or by one or more agents and contractors. Such sale(s) may
be conducted upon any premises owned, leased, or occupied by the Guarantor. The
Agent and any such agent or contractor, in conjunction with any such sale, may
augment the Inventory with other goods (all of which other goods shall remain
the sole property of the Agent or such agent or contractor). Any amounts
realized from the sale of such goods which constitute augmentations to the
Inventory (net of an allocable share of the costs and expenses incurred in their
disposition) shall be the sole property of the Agent or such agent or contractor
and neither the Guarantor nor any Person claiming under or in right of the
Guarantor shall have any interest therein.
(c) Unless the Collateral is perishable or threatens to
decline speedily in value, or is of a type customarily sold on a recognized
market (in which event the Agent shall provide the Guarantor with such notice as
may be practicable under the circumstances), the Agent shall give the Guarantor
at least seven (7) days prior written notice of the date, time, and place of any
proposed public sale, and of the date after which any private sale or other
disposition of the Collateral may be made. The Guarantor agrees that such
written notice shall satisfy all requirements for notice to the Guarantor which
are imposed under the UCC or other applicable law with respect to the exercise
of the Agent's rights and remedies upon default.
(d) The Agent and any Lender may purchase the Collateral, or
any portion of it at any sale held under this Article.
(e) The Agent shall apply the proceeds of any exercise of the
Agent's Rights and Remedies under this Article 6 towards the Liabilities in such
manner, and with such frequency, as the Agent determines.
6-3. OCCUPATION OF BUSINESS LOCATION. In connection with the Agent's
exercise of the Agent's rights under this Article 6, the Agent may enter upon,
occupy, and use any premises owned or occupied by the Guarantor, and may exclude
the Guarantor from such premises or portion thereof as may have been so entered
upon, occupied, or used by the Agent. The Agent shall not be required to remove
any of the Collateral from any such premises upon the Agent's taking possession
thereof, and may render any Collateral unusable to the Guarantor. In no event
shall the Agent be liable to the Guarantor for use or occupancy by the Agent of
any premises pursuant to this Article 6, nor for any charge (such as wages for
the Guarantor's employees and utilities) incurred in connection with the Agent's
exercise of the Agent's Rights and Remedies.
6-4. GRANT OF NONEXCLUSIVE LICENSE. The Guarantor hereby grants to the
Agent a royalty free nonexclusive irrevocable license to use, apply, and affix
any trademark, trade name, logo, or the like in which the Guarantor now or
hereafter has rights, such license being solely with respect to the Agent's
exercise of the rights under this Article 6, including, without limitation, in
connection with any completion of the manufacture of Inventory or sale or other
disposition of Inventory.
6-5. ASSEMBLY OF COLLATERAL. The Agent may require the Guarantor to
assemble the Collateral and make it available to the Agent at the Guarantor's
sole risk and expense at a place or places which are reasonably convenient to
both the Agent and Guarantor.
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6-6. RIGHTS AND REMEDIES. The rights, remedies, powers, privileges, and
discretions of the Agent hereunder (herein, the " AGENT'S RIGHTS AND REMEDIES")
shall be cumulative and not exclusive of any rights or remedies which it would
otherwise have. No delay or omission by the Agent in exercising or enforcing any
of the Agent's Rights and Remedies shall operate as, or constitute, a waiver
thereof. No waiver by the Agent of any Event of Default or of any default under
any other agreement shall operate as a waiver of any other default hereunder or
under any other agreement. No single or partial exercise of any of the Agent's
Rights or Remedies, and no express or implied agreement or transaction of
whatever nature entered into between the Agent and any person, at any time,
shall preclude the other or further exercise of the Agent 's Rights and
Remedies. No waiver by the Agent of any of the Agent's Rights and Remedies on
any one occasion shall be deemed a waiver on any subsequent occasion, nor shall
it be deemed a continuing waiver. All of the Agent's Rights and Remedies and all
of the Agent's rights, remedies, powers, privileges, and discretions under any
other agreement or transaction between the Agent and the Guarantor are
cumulative, and not alternative or exclusive, and may be exercised by the Agent
at such time or times and in such order of preference as the Agent in its sole
discretion may determine. The Agent's Rights and Remedies may be exercised
without resort or regard to any other source of satisfaction of the Liabilities.
ARTICLE 7 - NOTICES:
7-1. NOTICE ADDRESSES. All notices, demands, and other communications
made in respect of this Agreement shall be made to the following addresses, each
of which may be changed upon seven (7) days written notice to all others given
by certified mail, return receipt requested:
If to the Agent:
BankBoston Retail Finance Inc.
40 Broad Street
Boston, Massachusetts 02109
Attention : Joseph V. Balsamo
Vice President
Fax : 617 434-4339
WITH A COPY TO:
Riemer & Braunstein
Three Center Plaza
Boston, Massachusetts 02108
Attention : David S. Berman, Esquire
Fax : 617 723-6831
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If to the Guarantor:
Shadescom, Inc.
255 Alhambra Circle
Coral Gables, Florida 33134
Attention : Mr. Larry G. Petersen
Fax : (305) 461-6389
WITH A COPY TO:
Greenberg Traurig, P.A.
1221 Brickell Avenue, 21st Floor
Miami, Florida 33131
Attention : Bruce Macdonough, Esquire
Fax: : (305) 579-0717
7-2. NOTICE GIVEN.
(a) Except as otherwise specifically provided herein, notices
shall be deemed made and correspondence received, as follows (all times being
local to the place of delivery or receipt):
(i) By mail: the sooner of when actually received or
Three (3) days following deposit in the United States mail, postage
prepaid.
(ii) By recognized overnight express delivery: the
Business Day following the day when sent.
(iii) By Hand: If delivered on a Business Day after
9:00 AM and no later than Three (3) hours prior to the close of
customary business hours of the recipient, when delivered. Otherwise,
at the opening of the then next Business Day.
(iv) By Facsimile transmission (which must include a
header on which the party sending such transmission is indicated): If
sent on a Business Day after 9:00 AM and no later than Three (3) hours
prior to the close of customary business hours of the recipient, one
(1) hour after being sent. Otherwise, at the opening of the then next
Business Day.
(b) Rejection or refusal to accept delivery and inability to
deliver because of a changed address or Facsimile Number for which no due notice
was given shall each be deemed receipt of the notice sent.
ARTICLE 8 - GENERAL:
8-1. PROTECTION OF COLLATERAL. The Agent has no duty as to the
collection or protection of the Collateral beyond the safe custody of such of
the Collateral as may come into the possession of the Agent and shall have no
duty as to the preservation of rights against prior parties or any other rights
pertaining thereto.
8-2. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Guarantor and the Guarantor's representatives, successors, and assigns and shall
enure to the benefit of the Agent and each Lender and the respective successors
and assigns of each. In the event that the Agent or any Lender assigns or
transfers its rights under this Agreement, the assignee shall thereupon succeed
to and become vested with all rights, powers, privileges, and duties of such
assignor hereunder and such assignor shall thereupon be discharged and relieved
from its duties and obligations hereunder.
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8-3. SEVERABILITY. Any determination that any provision of this
Agreement or any application thereof is invalid, illegal, or unenforceable in
any respect in any instance shall not affect the validity, legality, or
enforceability of such provision in any other instance, or the validity,
legality, or enforceability of any other provision of this Agreement.
8-4. AMENDMENTS. COURSE OF DEALING.
(a) This Agreement constitutes a "Loan Document" as defined in
the Loan Agreement. This Agreement and the other Loan Documents incorporate all
discussions and negotiations between the Guarantor and the Agent and each
Lender, either express or implied, concerning the matters included herein and in
such other instruments, any custom, usage, or course of dealings to the contrary
notwithstanding. No such discussions, negotiations, custom, usage, or course of
dealings shall limit, modify, or otherwise affect the provisions thereof. No
failure by the Agent or any Lender to give notice to the Guarantor of such
Guarantor's having failed to observe and comply with any warranty or covenant
included in this Agreement shall constitute a waiver of such warranty or
covenant or the amendment of this Agreement.
(b) The Guarantor may undertake any action otherwise
prohibited hereby, and may omit to take any action otherwise required hereby,
upon and with the express prior written consent of the Agent. No consent,
modification, amendment, or waiver of any provision of this Agreement shall be
effective unless executed in writing by or on behalf of the party to be charged
with such modification, amendment, or waiver (and if such party is the Agent,
then by a duly authorized officer thereof). Any modification, amendment, or
waiver provided by the Agent shall be in reliance upon all representations and
warranties theretofore made to the Agent by or on behalf of the Guarantor and
consequently may be rescinded in the event that any of such representations or
warranties was not true and complete in all material respects when given.
8-5. APPLICATION OF PROCEEDS. The proceeds of any collection, sale, or
disposition of the Collateral, or of any other payments received hereunder,
shall be applied towards the Liabilities in such order and manner as the Agent
determines in its sole discretion. The Guarantor shall remain liable for any
deficiency remaining following such application.
8-6. COSTS AND EXPENSES OF AGENT AND OF LENDERS. (a) The Guarantor
shall pay on demand all Costs of Collection and all reasonable expenses of the
Agent in connection with the preparation, execution, and delivery of this
Agreement, whether now existing or hereafter arising, and all other reasonable
expenses which may be incurred by the Agent in preparing or amending this
Agreement and all other agreements, instruments, and documents related thereto,
or otherwise incurred with respect to the Liabilities, and all costs and
expenses of the Agent which relate to the credit facility contemplated hereby.
(b) The Guarantor shall pay on demand all costs and expenses
(including attorneys' reasonable fees) incurred, following the occurrence of any
Event of Default, by each Lender in connection with the enforcement, attempted
enforcement, or preservation of any rights and remedies under this, or any other
Loan Document, as well as any such costs and expenses in connection with any
"workout", forbearance, or restructuring of the credit facility contemplated
hereby.
(c) The undertaking on the part of the Guarantor in this
Section 8-6 shall survive payment of the Liabilities and/or any termination,
release, or discharge executed by the Agent in favor of the Guarantor, other
than a termination, release, or discharge which makes specific reference to this
Section 8-6.
8-7. COPIES AND FACSIMILES. This Agreement and all documents which
relate hereto, which have been or may be hereinafter furnished the Agent or any
Lender may be reproduced by that Person
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or by the Agent by any photographic, microfilm, xerographic, digital imaging, or
other process, and that Person may destroy any document so reproduced. Any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding (whether or not the original is in
existence and whether or not such reproduction was made in the regular course of
business). Any facsimile which bears proof of transmission shall be binding on
the party which or on whose behalf such transmission was initiated and likewise
shall be so admissible in evidence as if the original of such facsimile had been
delivered to the party which or on whose behalf such transmission was received.
8-8. MASSACHUSETTS LAW. This Agreement and all rights and obligations
hereunder, including matters of construction, validity, and performance, shall
be governed by the laws of The Commonwealth of Massachusetts.
8-9. CONSENT TO JURISDICTION.
(a) The Guarantor agrees that any legal action, proceeding,
case, or controversy against the Guarantor with respect to any this Agreement or
any other Loan Documents to which the Guarantor is a party may be brought in the
Superior Court of Suffolk County Massachusetts or in the United States District
Court, District of Massachusetts, sitting in Boston, Massachusetts, as the Agent
may elect in the Agent's sole discretion. By execution and delivery of this
Agreement, the Guarantor, for itself and in respect of its property, accepts,
submits, and consents generally and unconditionally, to the jurisdiction of the
aforesaid courts.
(b) To the extent permitted by applicable law, the Guarantor
WAIVES personal service of any and all process upon it, and irrevocably consents
to the service of process out of any of the aforementioned courts in any such
action or proceeding by the mailing of copies thereof by certified mail, postage
prepaid, to the Guarantor at the address for notices as specified herein, such
service to become effective five (5) Business Days after such mailing.
(c) The Guarantor WAIVES any objection based on FORUM NON
CONVENIENS and any objection to venue of any action or proceeding instituted
under this Agreement or any other Loan Documents and consents to the granting of
such legal or equitable remedy as is deemed appropriate by the Court.
(d) Nothing herein shall affect the right of the Agent to
bring legal actions or proceedings in any other competent jurisdiction.
(e) The Guarantor agrees that any action commenced by the
Guarantor asserting any claim or counterclaim arising under or in connection
with this Agreement or any other Loan Document shall be brought solely in the
Superior Court of Suffolk County Massachusetts or in the United States District
Court, District of Massachusetts, sitting in Boston, Massachusetts, and that
such Courts shall have exclusive jurisdiction with respect to any such action.
8-10. INDEMNIFICATION. The Guarantor shall indemnify, defend, and hold
the Agent and each Lender and any employee, officer, or agent of any of the
foregoing (each, an "INDEMNIFIED PERSON") harmless of and from any claim brought
or threatened against any Indemnified Person by any Obligor, the Guarantor, or
any other Person (as well as from attorneys' reasonable fees and expenses in
connection therewith) on account of the relationship of any such Obligor or the
Guarantor with the Agent or any Lender (each of claims which may be defended,
compromised, settled, or pursued by the Indemnified Person with counsel of the
Lender's selection, but at the expense of the Guarantor) other than any claim as
to which a final determination is made in a judicial proceeding (in which the
Agent and any other Indemnified Person has had an opportunity to be heard),
which determination includes a specific finding that the Indemnified Person
seeking indemnification had acted in a grossly negligent manner or in actual bad
faith. The within indemnification shall survive payment of the Liabilities
and/or any termination, release, or discharge executed by the Agent in favor of
the Guarantor, other than a termination, release, or discharge which makes
specific reference to this Section 8-10.
8-11. RULES OF CONSTRUCTION. The following rules of construction shall
be applied in the interpretation, construction, and enforcement of this
Agreement:
..13..
<PAGE>
(a) Words in the singular include the plural and words in the
plural include the singular.
(b) Headings (indicated by being UNDERLINED) and the Table of
Contents are solely for convenience of reference and do not constitute a part of
the instrument in which included and do not affect such instrument's meaning,
construction, or effect.
(c) The words "includes" and "including" are not limiting.
(d) Text which follows the words "including, without
limitation" (or similar words) is illustrative and not limitational.
(e) Text which is UNDERLINED, shown in ITALICS, shown in BOLD,
shown IN ALL CAPITAL LETTERS, or in any combination of the foregoing, shall be
deemed to be conspicuous.
(f) The words "may not" are prohibitive and not permissive.
(g) The word "or" is not exclusive.
(h) Terms which are defined in one section of an instrument
are used with such definition throughout the instrument in which so defined.
(i) The symbol "$" refers to United States Dollars.
(j) References to "herein", "hereof", and "within" are to this
entire Loan Agreement and not merely to the provision in which such reference is
included.
(k) References to "this Agreement" or to any other Loan
Document is to the subject instrument as amended to the date on which
application of such reference is being made.
(l) Except as otherwise specifically provided, all references
to time are to Boston time.
8-12. INTENT. It is intended that:
(a) This Agreement take effect as a sealed instrument.
(b) The scope of the security interests created by this
Agreement be broadly construed in favor of the Agent.
(c) The security interests created by this Agreement secure
all Liabilities, whether now existing or hereafter arising.
(d) All reasonable costs and expenses incurred by the Agent
and, to the extent provide in Section 8-6 each Lender in connection with such
Person's relationship(s) with the Obligors shall be borne by the Guarantor.
8-13. RIGHT OF SET-OFF. Any and all deposits or other sums at any time
credited by or due to the Guarantor from the Agent or any Lender and any cash,
securities, instruments or other property of the Guarantor in the possession of
the Agent or any Lender, whether for safekeeping or otherwise (regardless of the
reason such Person had received the same) shall at all times constitute security
for all Liabilities and for any and all obligations of the Guarantor to the
Agent and each Lender and may be applied or set off against the Liabilities and
against such obligations at any time, whether or not such are then due and
whether or not other collateral is then available to the Agent.
8-14. WAIVERS.
(a) The Guarantor makes each of the waivers included in
Section 8-14(b), below, knowingly, voluntarily, and intentionally, and
understands that the Agent and each Lender, in providing loans and other
financial accommodations to or for the account of the Borrowers, is relying on
such waivers.
(b) THE GUARANTOR WAIVES THE FOLLOWING:
..14..
<PAGE>
(i) Except as otherwise specifically required hereby,
notice of non-payment, demand, presentment, protest and all forms of
demand and notice, both with respect to the Liabilities and the
Collateral.
(ii) Except as otherwise specifically required
hereby, the right to notice and/or hearing prior to the Agent's
exercising of the Agent's rights upon default.
(iii) THE RIGHT TO A JURY IN ANY TRIAL OF ANY CASE OR
CONTROVERSY IN WHICH THE AGENT OR ANY LENDER IS OR BECOMES A PARTY
(WHETHER SUCH CASE OR CONTROVERSY IS INITIATED BY OR AGAINST THE AGENT
OR ANY LENDER OR IN WHICH THE AGENT OR ANY LENDER IS JOINED AS A PARTY
LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF OR IS IN RESPECT OF,
ANY RELATIONSHIP AMONGST OR BETWEEN THE GUARANTOR OR ANY OTHER PERSON
AND THE AGENT OR ANY LENDER (AND THE AGENT AND EACH LENDER LIKEWISE
WAIVES THE RIGHT TO A JURY IN ANY TRIAL OF ANY SUCH CASE OR
CONTROVERSY).
(iv) The benefits or availability of any stay,
limitation, hindrance, delay, or restriction (including, without
limitation, any automatic stay which otherwise might be imposed
pursuant to Section 362 of the Bankruptcy Code) with respect to any
action which the Agent may or may become entitled to take hereunder.
(v) Any claim to consequential, special, or punitive
damages.
IN WITNESS WHEREOF, the parties have placed their hands and seals.
SHADESCOM, INC.
("GUARANTOR")
By___________________________________
Print Name: LARRY G. PETERSEN
Title: TREASURER
..15..
<PAGE>
BANKBOSTON RETAIL FINANCE INC.
("AGENT")
By___________________________________
Print Name:__________________________
Title:_______________________________
..16..
EXHIBIT 21.1
<TABLE>
<CAPTION>
SUNGLASS HUT INTERNATIONAL, INC.
SUBSIDIARIES OF THE REGISTRANT
NAME OF SUBSIDIARY STATE OR COUNTRY OF INCORPORATION
<S> <C>
SUNGLASS HUT INTERNATIONAL, INC. FLORIDA
SUNGLASS HUT CORPORATION FLORIDA
SUNGLASS HUT TRADING CORPORATION FLORIDA
SUNGLASS HUT OF CANADA, LTD. ONTARIO, CANADA
SUNGLASS HUT OF PUERTO RICO, INC. PUERTO RICO
SUNGLASS HUT OF VIRGIN ISLANDS, INC. US VIRGIN ISLANDS
SUNGLASS HUT REALTY CORPORATION FLORIDA
SUNGLASS HUT OF FLORIDA, INC. FLORIDA
SUNGLASS HUT (U.K.) LIMITED UNITED KINGDOM
SUNGLASS HUT IRELAND, INC. IRELAND
SUNGLASS HUT NETHERLANDS B.V. NETHERLANDS
SUNGLASS HUT BELGIUM N.V. BELGIUM
SUNGLASS HUT ITALY S.R.L. ITALY
SUNGLASS HUT ACQUISITION CORP. FLORIDA
SUNGLASS HUT OF MEXICO, INC. FLORIDA
SUNGLASS HUT HOLDINGS OF MEXICO, INC. FLORIDA
I.H.S. DISTRIBUTION CORPORATION FLORIDA
I.H.S. PROCUREMENT CORP. FLORIDA
SUNGLASS HUT DE MEXICO, SA DE CV MEXICO
DISTRIBUIDORA MEXICANA DE ARTICULOS PARA SOL SA DE CV MEXICO
SUNGLASS HUT HOLDINGS OF FRANCE, INC. FLORIDA
SUNGLASS HUT OF NORTHERN FRANCE, INC. FLORIDA
SUNGLASS HUT OF SOUTHERN FRANCE, INC. FLORIDA
SUNGLASS HUT OF FRANCE, S.A. FRANCE
SHI SALES CORP. FLORIDA
SUNGLASS HUT AUSTRALIA PTY LIMITED AUSTRALIA
SUNGLASS WORLD HOLDING PTY LIMITED AUSTRALIA
SUNGLASS HUT SWEDEN AB SWEDEN
SUNGLASS HUT PORTUGAL, COMERCIO DE OCULOS, LDA. PORTUGAL
SUNGLASS HUT EYEX COMPANY FLORIDA
SUNGLASS HUT GERMANY GMBH GERMANY
SUNGLASS HUT SPAIN SL SPAIN
SUNGLASS HUT AG SWITZERLAND
WATCH STATION, INC. FLORIDA
SHADESCOM, INC. FLORIDA
SUNGLASS HUT VERTRIEBS GMBH GERMANY
SUNGLASS HUT (SINT MAARTEN) N.V. NETHERLAND ANTILLES
SUNGLASS HUT (ST. MARTIN) SARL FRENCH ANTILLES
SUNGLASS HUT (CURACAO) N.V. CURACAO
SUNGLASS HUT (BONAIRE) N.V. BONAIRE
SUNGLASS HUT (ANTIGUA) LIMITED ANTIGUA
SUNGLASS HUT (NEW ZEALAND) PTY. LTD. NEW ZEALAND
SUNGLASS HUT (ST. CROIX) LTD. ST. CROIX
SUNGLASS HUT (BARBADOS), INC. BARBADOS
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the Company's
previously filed registration statements (File No. 33-73644, File No. 33-89954
and File No. 333-20107 on Form S-8 and File No. 333-12003 on Form S-3).
ARTHUR ANDERSEN LLP
Miami, Florida,
April 29, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 5,007
<SECURITIES> 0
<RECEIVABLES> 3,547
<ALLOWANCES> 0
<INVENTORY> 88,834
<CURRENT-ASSETS> 127,411
<PP&E> 184,173
<DEPRECIATION> 93,186
<TOTAL-ASSETS> 258,354
<CURRENT-LIABILITIES> 70,044
<BONDS> 0
0
0
<COMMON> 464
<OTHER-SE> 54,725
<TOTAL-LIABILITY-AND-EQUITY> 258,354
<SALES> 601,954
<TOTAL-REVENUES> 601,954
<CGS> 356,523
<TOTAL-COSTS> 356,523
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,319
<INCOME-PRETAX> 33,446
<INCOME-TAX> 13,625
<INCOME-CONTINUING> 19,821
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,821
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
