UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 2, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21690
SUNGLASS HUT INTERNATIONAL, INC.
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(Exact Name of Registrant as Specified in its Charter)
FLORIDA 65-0667471
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
255 ALHAMBRA CIRCLE
CORAL GABLES, FLORIDA 33134
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 461-6100
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(Former name, former address and fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares outstanding of the registrant's common stock is 54,754,753
(as of June 9, 1998).
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of May 2, 1998 (Unaudited)
and January 31, 1998.........................................................................................3
Consolidated Statements of Income for the Thirteen Weeks Ended May 2, 1998
and May 3, 1997 (Unaudited)..................................................................................4
Consolidated Statements of Cash Flows for the Thirteen Weeks Ended May 2,
1998 and May 3, 1997 (Unaudited).............................................................................5
Notes to Consolidated Financial Statements (Unaudited).......................................................7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..........................................................................................9
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...................................................................16
Signatures.........................................................................................17
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MAY 2, JANUARY 31,
1998 1998
------------------- -------------------
(Unaudited)
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ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 9,039 $ 3,372
Accounts receivable 5,219 3,612
Inventory 101,520 101,965
Prepaid rent 7,709 7,707
Other current assets 43,199 42,777
Net assets of discontinued operations 3,363 2,461
------------------- -------------------
Total current assets 170,049 161,894
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $82,495 and $76,968 99,429 101,069
COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES, net
of accumulated amortization of $28,695 and $28,408 24,565 25,083
OTHER ASSETS 10,697 12,327
------------------- -------------------
Total assets $ 304,740 $ 300,373
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 28,389 $ 18,079
Accrued payroll and related taxes 6,212 7,388
Accrued rent 7,891 7,019
Accrued expenses 34,178 29,988
Accrued restructuring expenses 23,475 25,789
Current portion of long-term debt 150 12,575
------------------- -------------------
Total current liabilities 100,295 100,838
LONG-TERM DEBT, net of current portion and unamortized
discount 112,898 112,803
------------------- -------------------
Total liabilities 213,193 213,641
------------------- -------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock 547 547
Additional paid-in capital 166,151 166,008
Accumulated deficit (72,690) (76,536)
Accumulated other comprehensive income (2,461) (3,287)
------------------- -------------------
Total stockholders' equity 91,547 86,732
------------------- -------------------
Total liabilities and stockholders'
equity $ 304,740 $ 300,373
=================== ===================
</TABLE>
See notes to consolidated financial statements.
3
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS ENDED
--------------------------------------
MAY 2, MAY 3,
1998 1997
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Net sales $ 146,646 $ 136,243
Cost of goods sold, occupancy and buying expenses 87,517 84,917
--------------- -----------------
Gross profit 59,129 51,326
--------------- -----------------
Selling, general and administrative expenses:
Operating expenses 44,236 40,684
Depreciation and leasehold amortization 5,710 6,377
Amortization of cost in excess of net assets of
acquired businesses 442 599
--------------- -----------------
50,388 47,660
--------------- -----------------
Earnings from continuing operations before
interest and income taxes 8,741 3,666
Interest expense 2,223 2,510
--------------- -----------------
Earnings from continuing operations before
income taxes 6,518 1,156
Provision for income taxes 2,672 467
--------------- -----------------
Earnings from continuing operations 3,846 689
Discontinued operations:
Loss from discontinued operations, net of income
tax benefit of $269,000 in 1997 -- (397)
--------------- -----------------
Net income $ 3,846 $ 292
=============== =================
Net income per share (basic and diluted):
From continuing operations $ 0.07 $ 0.01
From discontinued operations -- --
--------------- -----------------
Net income $ 0.07 $ 0.01
=============== =================
Weighted average shares outstanding:
Basic 54,716 54,601
=============== =================
Diluted 55,463 54,949
=============== =================
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See notes to consolidated financial statements.
4
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
-----------------------------------------
MAY 2, MAY 3,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,846 $ 292
----------------- ------------------
Adjustments to reconcile net income to net cash provided by
continuing operations:
Depreciation and amortization 6,152 6,976
Loss from discontinued operations, net of tax benefits -- 397
Compensation expense - stock grants -- 216
Accretion of debt discount 95 85
Changes in operating assets and liabilities -
Changes in assets:
Accounts receivable (1,607) (1,168)
Inventory 445 9,469
Prepaid rent (2) (144)
Other current assets (422) 1,189
Other assets 2,084 (14)
Changes in liabilities:
Accounts payable 10,310 7,956
Accrued expenses 3,903 4,587
Accrued restructuring expenses (558) (3,505)
----------------- ------------------
20,400 26,072
----------------- ------------------
Net cash provided by continuing operations 24,246 26,364
Net cash used in discontinued operations (902) (1,612)
----------------- ------------------
Net cash provided by operating activities 23,344 24,752
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,440) (9,086)
Capital expenditures - discontinued operations -- (206)
----------------- ------------------
Net cash used in investing activities (5,440) (9,292)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under revolving credit facilities 29,000 65,600
Principal payments on revolving credit facilities (41,400) (81,500)
Principal payments on long-term debt (25) (29)
Payment of deferred financing costs (629) (22)
Proceeds from exercise of stock options 126 11
----------------- ------------------
Net cash used in financing activities (12,928) (15,940)
----------------- ------------------
Effect of exchange rate changes on cash and cash equivalents 691 305
----------------- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,667 (175)
CASH AND CASH EQUIVALENTS, beginning of period 3,372 5,589
----------------- ------------------
CASH AND CASH EQUIVALENTS, end of period $ 9,039 $ 5,414
================= ==================
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(Continued on next page)
5
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
-----------------------------------------
MAY 2, MAY 3,
1998 1997
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 549 $ 860
================= ==================
Income taxes $ 140 $ 393
================= ==================
Non-cash activities:
Write-down of property and equipment against
accrued restructuring expenses $ 1,756 $ 2,233
================= ==================
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See notes to consolidated financial statements.
6
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL:
The accompanying consolidated financial statements of Sunglass Hut
International, Inc. and subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and, therefore, omit or condense
certain footnotes and other information normally included in financial
statements prepared in accordance with generally accepted accounting principles.
The accounting policies followed for interim financial reporting are the same as
those disclosed in Note 1 of the Notes to Consolidated Financial Statements
included in the Company's audited financial statements for the fiscal year ended
January 31, 1998 which are included in Form 10-K. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of the financial information for the interim periods reported
have been made. Results of operations for the thirteen weeks ended May 2, 1998
are not necessarily indicative of the results to be expected for the entire
fiscal year ending January 30, 1999.
NOTE 2 - RECLASSIFICATIONS:
The accompanying consolidated financial statements of income and cash flows for
the thirteen weeks ended May 3, 1997 and notes thereto have been reclassified to
reflect EyeX, the Company's optical segment, as a discontinued operation.
NOTE 3 - ACCRUED RESTRUCTURING EXPENSES:
During the first quarter of 1998, $2.3 million of the accrual for restructuring
expenses was utilized for write-downs of property and equipment, lease exit,
inventory stocking and handling, and severance costs related to corporate
restructuring and store closings. Of the 250 store closures included in the
restructuring plan, 44 stores have been closed as of the end of first quarter,
1998. The Company plans to substantially complete the restructuring plan in
1998.
NOTE 4 - COMPREHENSIVE INCOME:
Total comprehensive income consists of the following:
THIRTEEN WEEKS ENDED
----------------------
MAY 2, MAY 3,
1998 1997
------ ------
(IN THOUSANDS)
Net income $3,846 $292
Foreign currency translation adjustment 826 78
------ ----
Total comprehensive income $4,672 $370
====== ====
7
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 5 - EARNINGS PER SHARE:
Basic and diluted earnings per share for income from continuing operations is
computed as follows:
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MAY 2, MAY 3,
1998 1997
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
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Numerator:
Earnings from continuing operations $ 3,846 $ 689
=============== ===============
Denominator:
Denominator for basic earnings per share 54,716 54,601
Effect of dilutive securities:
Options to purchase common stock 747 348
--------------- ---------------
Denominator for diluted earnings per share 55,463 54,949
=============== ===============
Earnings per share from continuing operations:
Basic and diluted $ 0.07 $ 0.01
=============== ===============
Antidilutive securities not included in the
diluted earnings per share computation:
Options to purchase common stock 3,502 1,958
Exercise prices $ 13.44 $ 7.38
to to
$ 30.81 $ 30.81
Convertible subordinated debt $ 115,000 $ 115,000
Conversion price $ 30.25 $ 30.25
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NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENT - 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 prior to or 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. The Company is in the process of reviewing its capitalization
policies and determining the impact of adoption of SOP 98-5 on its financial
position and results of operations.
8
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), Sunglass Hut International,
Inc. (the "Company") is hereby providing cautionary statements identifying
important factors that could cause the Company's actual results to differ
materially from those projected in forward-looking statements (as such term is
defined in the Reform Act) of the Company made by or on behalf of the Company
herein or which are made orally, whether in presentations, in response to
questions or otherwise. Any statements that express, or involve discussions as
to expectations, beliefs, plans, objectives, assumptions 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 1997 RESTRUCTURING PLAN
The Company's 1997 restructuring plan includes the closure of approximately 250
marginal or unprofitable locations during fiscal 1998. 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. 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 AND LOCATIONS
The Company's ability to expand into new concepts has not been fully tested. The
Company opened its first Watch Station store, a watch specialty store, in May
1996. Accordingly, its operations will be subject to the numerous risks of
establishing new business enterprises, including unanticipated operating
problems, lack of experience and customer acceptance, 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 that Watch Station will be able to duplicate the
growth of the Company's Sunglass Hut stores or that it will achieve sales and
profitability levels that justify the Company's investment therein. Expansion of
Watch Station also involves other risks that could have a material adverse
effect on the Company, including (i) diversion of management's attention from
the Company's core business, (ii) difficulties with the hiring, retention and
training of key personnel, (iii) risks associated with the concept's higher
dependence on holiday season sales and lower gross margin, and (iv) risks
associated with unanticipated problems or legal liabilities.
In the fourth quarter of fiscal 1996, the Company halted expansion of EyeX, a
prescription glasses and corrective lens store concept launched in October 1995,
and, in January 1998, the Company adopted a plan to discontinue its EyeX segment
in fiscal 1998.
9
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
There can be no assurance that the Company will be able to successfully execute
other components of its growth strategies. The Company's 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.
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 sunglass industry has reduced the number of larger companies available
for sale, which could lead to higher prices being paid for the acquisition of
the remaining independent companies.
MERCHANDISING AND CONCENTRATION OF SUPPLIERS
The Company's success depends to a large degree on its ability to provide a
merchandise selection that appeals to customers' changing desires and that
appropriately reflects geographical or other demographic differences in brand
and style preferences. A failure by the Company to identify or take advantage of
emerging fashion trends 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. Moreover, there can be no
assurance that the Company's plan to reduce vendor and total unit presentation
will not limit the Company's ability to return and/or exchange slow-moving
product, limit the Company's ability to take advantage of emerging fashion
trends 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 enjoyed favorable return and exchange privileges
with its vendors, there can be no assurance that the Company will not be subject
to limitations on returns or exchanges in the future. In addition, 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.
In fiscal 1997, Bausch & Lomb (including Ray-Ban, Revo, Killer Loop and other
brands) and Oakley, the Company's largest suppliers, accounted for approximately
21.0% and 16.9%, respectively, of the Company's total merchandise purchases.
10
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
ABILITY TO MANAGE GROWTH
The Company has grown significantly in the past several years. However, there is
no assurance that the Company will sustain the growth in the number of stores
and revenues that it has achieved historically. Moreover, there can be no
assurance that the Company's management and financial controls, executive
personnel and other corporate support systems will be adequate to manage the
increase in the size and scope of the Company's business in prior and future
periods. The continued growth of the Company is dependent, in large part, upon
the Company's ability to open and operate new stores on a profitable basis,
which in turn is subject to, among other things, the Company's ability to secure
suitable store sites on a timely basis and on satisfactory terms, the Company's
ability to hire, train and retain qualified management and other personnel, the
availability of adequate capital resources and the successful integration of new
stores into existing operations. There can be no assurance that, because of
demographic or other reasons, the Company's new stores will achieve sales and
profitability comparable to the Company's existing stores. In addition, there
can be no assurance that the opening of new locations will not cannibalize sales
at existing locations.
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 higher net sales and operating results in the second
fiscal quarter, 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.
POSSIBLE VOLATILITY OF STOCK AND NOTE PRICES
The market prices of the Company's common stock and convertible subordinated
notes are subject to significant volatility caused by factors such as quarterly
fluctuations in the financial results of the Company, monthly comparable store
sales results, changes in financial estimates by securities analysts, shortfalls
in earnings or sales below analysts' expectations, the overall economy and the
financial markets. In addition, the common stock is quoted on the NASDAQ
National Market and the notes are traded on the NASDAQ SmallCap Market, which
stock markets have experienced, and are likely to experience in the future,
significant price and volume fluctuations which could adversely affect the
market price of the common stock and the notes without regard to the operating
performance of the Company.
11
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
12
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
GENERAL
Sunglass Hut International, Inc. ("Sunglass Hut" or the "Company") is the
world's largest specialty retailer of sunglasses with over 2,000 locations
worldwide. During fiscal 1996, the Company initiated an additional specialty
store concept, Watch Station, and it is currently anticipated that this concept
will continue to expand in fiscal 1998. 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 (including 351 Sunsations stores
acquired in 1995 and accounted for as a pooling of interests) as of fiscal
yearend 1993 to 2,070 specialty sunglass and 87 Watch Station locations as of
the quarter ended May 2, 1998. The Company's business strategy is to combine the
operating efficiencies, extensive product assortment and everyday low prices of
category dominant retailers with the level of customer service and ambiance
characteristic of specialty retailers. The size of the Company's products allows
the Company to use a wide variety of sales location formats, including malls,
airports, on-street sites and licensed departments within department stores.
LIQUIDITY AND CAPITAL RESOURCES
The Company's short-term cash needs are primarily for working capital to support
its inventory requirements, new store additions, and the implementation of the
1997 restructuring plan. The Company's long-term liquidity requirements relate
principally to the maturity of the revolving credit facility in April 2001, the
maturity of the $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 facility with a borrowing base 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 will reduce to $65
million effective February 1, 1999. The credit facility includes up to $10
million in letters of credit. Borrowings under the credit facility generally
bear interest at a floating rate equal to, at the Company's option, (a) the
prime rate or (b) LIBOR plus 1.50%. 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 (subject to minimum remaining
borrowing availability of $10 million).
Due to the seasonal nature of the Company's business, outstanding borrowings
under the credit facility typically peak during the first and third fiscal
quarters as the Company finances inventory purchases in advance of the Company's
highest sales periods. See "Seasonality and Quarterly Results." Outstanding
borrowings as of the end of first quarter, 1998, have been reduced from yearend
1997, however, primarily due to the Company's continued efforts to improve
inventory turnover and the resulting accounts payable leverage during the
quarter. As of May 2, 1998, borrowings under the credit facility were fully
eliminated reflecting a reduction of $12.4 million in debt since the beginning
of the year. Approximately $1.8 million in letters of credit were outstanding,
which were maintained as security for performance under the Company's executive
office lease and to service other debt.
13
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Net cash provided by operating activities was $23.3 million for the first three
months of fiscal 1998 compared to net cash provided by operating activities of
$24.8 million for the same period in fiscal 1997. The difference between the
Company's net income and operating cash flow in fiscal 1998 is primarily
attributable to the increase in accounts payable and accrued expenses of $14.2
million and non-cash charges for depreciation and amortization.
Net cash used in investing activities was $5.4 million for the first three
months of fiscal 1998 compared to $9.3 million for the same period last year.
Investing cash flows reflect capital expenditures, which are primarily related
to new store expansion and the renovation of existing stores. The decrease in
1998 capital expenditures is due to a lower level of new store and remodel
construction activity.
Net cash used in financing activities was $12.9 million for the first three
months of fiscal 1998 compared to net cash used of $15.9 million for the same
period last year, primarily due to a net reduction in the amount outstanding
under the revolving credit facility.
Management believes that cash provided by operations together with borrowing
availability under the Company's revolving credit facility will be sufficient to
fund estimated capital expenditures associated with the Company's planned
opening of approximately 150 locations in fiscal 1998 and other working capital
requirements, including cash expenditures associated with restructuring
activities, through at least fiscal 1998, as well as to make repurchases of
stock, as authorized by the Company's Board of Directors in March 1998, if
management determines market conditions, as well as other considerations, are
favorable.
RESULTS OF OPERATIONS
QUARTER ENDED MAY 2, 1998 COMPARED TO QUARTER ENDED MAY 3, 1997
Amounts for 1997 have been reclassified from amounts originally reported to
segregate the effects of EyeX from continuing operations.
Net sales increased $10.4 million, or 7.6%, to $146.6 million during the quarter
ended May 2, 1998 compared to $136.2 million for the same period of fiscal 1997.
This increase reflects sales from new stores opened during the first quarter of
fiscal 1998 (and fiscal 1997 to the extent not reflected in comparable store
sales) of $5.4 million, while an increase in comparable store sales of 3.8%
accounted for approximately $5.0 million of this increase.
Gross profit increased $7.8 million, or 15.2%, to $59.1 million during the
quarter ended May 2, 1998 compared to $51.3 million for the same period of
fiscal 1997, primarily due to the increase in net sales. As a percentage of net
sales, gross profit increased 2.6 percentile points to 40.3% for the quarter
ended May 2, 1998 from 37.7% for the quarter ended May 3, 1997. Gross profit as
a percentage of sales increased in the first quarter of 1998 primarily due to
lower clearance activity and improved vendor terms.
Operating expenses increased $3.6 million, or 8.7%, during the quarter ended May
2, 1998 compared to the same period of fiscal 1997. This increase is primarily
due to operating expenses associated with the operations and management of new
stores opened and acquired in fiscal 1998 and 1997. Operating expenses as a
percentage of net sales were 30.2% in 1998 and 29.9% in 1997, as well as
increased marketing expenditures.
14
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Depreciation and leasehold amortization expense decreased $667,000, or 10.5%, to
$5.7 million during the quarter ended May 2, 1998 compared to $6.4 million for
the same period of fiscal 1997, primarily reflecting the positive impact of a
lower asset base due to asset impairment charges recognized in fiscal 1997 and
store closures under the restructuring plan during 1997 and 1998.
Interest expense decreased $287,000 to $2.2 million for the quarter ended May 2,
1998, compared to $2.5 million for the same period last year due to a decrease
in average outstanding borrowings during the period.
The net loss from discontinued operations reflects the operating losses of EyeX,
the Company's optical segment, net of taxes.
The Company reported net income of $0.07 per share, or $3.8 million, during the
quarter ended May 2, 1998 compared to net income of $0.01 per share, or
$292,000, for the same period of fiscal 1997.
SEASONALITY AND QUARTERLY RESULTS
Historically, the Company's operations have been seasonal, with highest net
sales and net income occurring in the second fiscal quarter (reflecting
increased demand for sunglasses during the spring and summer months) and, to a
lesser extent, the fourth fiscal quarter (reflecting increased demand during the
calendar yearend holiday selling season).
The Company's results of operations may also fluctuate from quarter to quarter
as a result of the amount and timing of sales contributed by new stores, the
integration of new stores into the operations of the Company and the timing of
planned store closures, as well as other factors. The addition of a large number
of new stores can therefore significantly effect results of operations on a
quarter-to-quarter basis.
15
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule(1)
- ---------------
(1) Filed herewith.
(b) The Company did not file any reports on Form 8-K during the quarter ended
May 2, 1998.
16
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNGLASS HUT INTERNATIONAL, INC.
Date: June 16, 1998 By: /s/ JOHN X. WATSON
--------------------------------------
John X. Watson
President, Chief Executive Officer and
Director
(principal executive officer)
Date: June 16, 1998 By: /s/LARRY G. PETERSEN
--------------------------------------
Larry G. Petersen
Senior Vice President-Finance
and Chief Financial Officer
(principal financial officer)
Date: June 16, 1998 By: /s/GEORGE L. PITA
--------------------------------------
George L. Pita
Vice President-Finance
(principal accounting officer)
17
<PAGE>
EXHIBIT AND INDEX
EXHIBIT DESCRIPTION
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> MAY-02-1998
<CASH> 9,039
<SECURITIES> 0
<RECEIVABLES> 5,219
<ALLOWANCES> 0
<INVENTORY> 101,520
<CURRENT-ASSETS> 170,049
<PP&E> 181,924
<DEPRECIATION> 82,495
<TOTAL-ASSETS> 304,740
<CURRENT-LIABILITIES> 100,295
<BONDS> 0
0
0
<COMMON> 547
<OTHER-SE> 91,000
<TOTAL-LIABILITY-AND-EQUITY> 304,740
<SALES> 146,646
<TOTAL-REVENUES> 146,646
<CGS> 87,517
<TOTAL-COSTS> 87,517
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,223
<INCOME-PRETAX> 6,518
<INCOME-TAX> 2,672
<INCOME-CONTINUING> 3,846
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,846
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
