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 July 29, 2000
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.
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Florida 65-0667471
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
255 Alhambra Circle
Coral Gables, Florida 33134
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 461-6100
---------------------------
--------------------------------------------------------------------------------
(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 40,140,955
(as of September 11, 2000).
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of July 29, 2000 (Unaudited)
and January 29, 2000................................................................................... 3
Consolidated Statements of Income for the Thirteen Weeks Ended July 29, 2000
and July 31, 1999 (Unaudited).......................................................................... 4
Consolidated Statements of Income for the Twenty-Six Weeks Ended July 29, 2000
and July 31, 1999 (Unaudited).......................................................................... 5
Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended July 29, 2000
and July 31, 1999 (Unaudited).......................................................................... 6
Notes to Consolidated Financial Statements (Unaudited)................................................. 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................................... 14
ITEM 4. Submission of Matters to a Vote of Security Holders................................................ 23
PART II--OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K................................................................... 23
Signatures......................................................................................... 24
</TABLE>
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
PART I--FINANCIAL INFORMATION
ITEM 1--Financial Statements
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
July 29, January 29,
2000 2000
---------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,402 $ 9,732
Accounts receivable 5,770 4,696
Inventory 107,574 99,212
Prepaid rent 7,129 7,366
Other current assets 11,619 11,497
---------------- ---------------
Total current assets 143,494 132,503
PROPERTY AND EQUIPMENT, net 117,270 108,187
COST IN EXCESS OF NET ASSETS OF
ACQUIRED BUSINESSES, net 42,335 24,842
OTHER ASSETS 24,783 17,971
---------------- ---------------
Total assets $ 327,882 $ 283,503
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 43,461 $ 33,981
Accrued expenses 55,111 39,179
---------------- ---------------
Total current liabilities 98,572 73,160
LONG-TERM DEBT, net of current portion 179,121 166,196
---------------- ---------------
Total liabilities 277,693 239,356
---------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 409 427
Additional paid-in capital 61,400 78,179
Accumulated deficit (7,200) (29,965)
Accumulated other comprehensive loss (4,420) (4,494)
---------------- ---------------
Total stockholders' equity 50,189 44,147
---------------- ---------------
Total liabilities and stockholders' equity $ 327,882 $ 283,503
================ ===============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------------------------
July 29, July 31,
2000 1999
--------------- -----------------
<S> <C> <C>
Net sales $ 206,034 $ 199,620
Cost of goods sold, occupancy and buying expenses 114,167 109,951
--------------- -----------------
Gross profit 91,867 89,669
--------------- -----------------
Selling, general and administrative expenses:
Operating expenses 50,425 47,364
Depreciation and leasehold amortization 7,080 6,450
Amortization of cost in excess of net assets of acquired businesses 611 503
--------------- -----------------
58,116 54,317
--------------- -----------------
Earnings from operations before interest and income taxes 33,751 35,352
Interest expense 3,393 1,836
--------------- -----------------
Earnings from operations before income taxes 30,358 33,516
Provision for income taxes 11,809 12,973
--------------- -----------------
Net income $ 18,549 $ 20,543
=============== =================
Earnings per share:
Basic $ 0.44 $ 0.44
=============== =================
Diluted $ 0.43 $ 0.42
=============== =================
Weighted average shares outstanding:
Basic 41,731 46,600
=============== =================
Diluted 45,881 48,378
=============== =================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
--------------------------------
July 29, July 31,
2000 1999
-------------- -------------
<S> <C> <C>
Net sales $ 356,505 $ 352,199
Cost of goods sold, occupancy and buying expenses 203,487 198,959
-------------- -------------
Gross profit 153,018 153,240
-------------- -------------
Selling, general and administrative expenses:
Operating expenses 94,539 91,978
Depreciation and leasehold amortization 13,901 12,785
Amortization of cost in excess of net assets of acquired businesses 1,159 1,016
-------------- -------------
109,599 105,779
-------------- -------------
Earnings from operations before interest and income taxes 43,419 47,461
Interest expense 6,205 3,953
-------------- -------------
Earnings from operations before income taxes 37,214 43,508
Provision for income taxes 14,449 16,919
-------------- -------------
Net income $ 22,765 $ 26,589
============== =============
Earnings per share:
Basic $ 0.54 $ 0.57
============== =============
Diluted $ 0.53 $ 0.55
============== =============
Weighted average shares outstanding:
Basic 42,266 46,480
============== =============
Diluted 42,726 48,012
============== =============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
--------------------------------------
July 29, July 31,
2000 1999
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,765 $ 26,589
----------------- ----------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 15,060 13,801
Accretion of debt discount 197 187
Changes in operating assets and liabilities, net of effect of acquisitions -
Changes in assets:
Accounts receivable (651) (3,205)
Inventory (945) (11,039)
Prepaid rent 1,028 367
Other current assets (122) (1,923)
Other assets (149) (647)
Changes in liabilities:
Accounts payable 2,956 6,574
Accrued expenses 11,320 13,978
----------------- ----------------
28,694 18,093
----------------- ----------------
Net cash provided by continuing operations 51,459 44,682
Net cash used in discontinued operations (38) (924)
----------------- ----------------
Net cash provided by operating activities 51,421 43,758
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (14,675) (16,382)
Acquisition of business (21,835) -
----------------- ----------------
Net cash used in investing activities (36,510) (16,382)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under revolving credit facilities 294,092 55,791
Principal payments on revolving credit facilities (281,364) (74,251)
Principal payments on long-term debt - (125)
Payments for stock repurchases and retirements (25,141) (1,722)
Payment of deferred financing costs (1,657) --
Proceeds from exercise of stock options 307 2,584
----------------- ----------------
Net cash used in financing activities (13,763) (17,723)
----------------- ----------------
Effect of exchange rate changes on cash and cash equivalents 522 (974)
----------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,670 8,679
CASH AND CASH EQUIVALENTS, beginning of period 9,732 5,007
----------------- ----------------
CASH AND CASH EQUIVALENTS, end of period $ 11,402 $ 13,686
================= ================
</TABLE>
(Continued on next page)
6
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
--------------------------------------
July 29, July 31,
2000 1999
----------------- ----------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 5,904 $ 3,692
================= ================
Income taxes $ 4,420 $ 4,280
================= ================
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1--General:
The accompanying consolidated financial statements of Sunglass Hut
International, Inc. and subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and, therefore, omit or condense
certain footnotes and other information normally included in financial
statements prepared in accordance with generally accepted accounting principles.
The accounting policies followed for interim financial reporting are the same as
those disclosed in Note 1 of the Notes to Consolidated Financial Statements
included in the Company's audited financial statements for the fiscal year ended
January 29, 2000 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 and twenty-six weeks
ended July 29, 2000 are not necessarily indicative of the results to be expected
for the entire fiscal year ending February 3, 2001.
Note 2--Acquisition of Watch World International, Inc.
On June 1, 2000, the Company acquired all of the outstanding shares of Watch
World International, Inc. ("Watch World"), a national chain of 118 specialty
watch stores and operator of WatchWorld.com, based in New York, New York. The
purchase price was approximately $30.1 million, consisting of $10.5 million in
cash, 1.3 million shares of the Company's common stock valued at $7.4 million,
142,000 warrants to purchase the Company's common stock valued at $248,000,
assumed debt of $11.7 million which was subsequently retired, and acquisition
costs of approximately $250,000. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the results of operations of
Watch World are included in the Company's consolidated results of operations
from the date of acquisition. The excess of purchase price over the fair value
of net assets acquired of approximately $18.9 million has been recorded as cost
in excess of net assets of acquired businesses and will be amortized over 25
years. 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.
The pre-acquisition results of operations of Watch World were not material to
the Company's results of operations.
In connection with the acquisition of Watch World, the Company adopted a plan
for the closure of approximately 25 Watch World locations. The charges to be
incurred in connection with these store closures consist of approximately
$875,000 for lease exit and other incremental exit costs. These costs were
included in the allocation of the purchase price and are included in accrued
expenses in the accompanying consolidated balance sheets. The amounts accrued
are based on preliminary assessments, and any adjustments to the accrual will
result in an adjustment to the cost of the acquisition. The Company expects the
store closures to be completed by fiscal 2001.
8
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)--(Continued)
Note 3--Accrued Restructuring Expenses:
In prior years, the Company recorded accrued restructuring expenses of $28.2
million related to its restructuring plans which were substantially completed in
fiscal 1999. As of July 29, 2000, remaining accrued restructuring expenses,
which is included in accrued expenses in the accompanying consolidated balance
sheets, totaled $404,000 and were comprised of liabilities for remaining lease
exit costs related to stores closed during the completion of the restructuring
plans. During the second quarter of fiscal 2000, $72,000 of the accrual for
restructuring expenses was utilized for the payment of lease exit costs related
to store closings completed under the restructuring plans. Additionally, as the
Company continued to finalize the lease exit costs for stores closed in the
plans, it was determined that a reversal of previously accrued restructuring
expenses of $152,000 was required. This amount is included in operating expenses
in the accompanying statements of income.
Note 4--Revolving Credit Facility
On May 18, 2000, the Company entered into a $125 million three-year senior
secured revolving credit facility with Fleet National Bank. Proceeds from this
facility were used to refinance the previous credit facility with BankBoston,
and will support normal working capital needs and other general corporate
purposes, including share repurchases, as authorized by the Company's Board of
Directors. Borrowings under the new facility bear interest at a floating rate
ranging from (a) prime plus 0 - 1.0% or (b) LIBOR plus 2.0 - 3.0% depending on a
financial ratio test. The credit facility has certain restrictive covenants,
which include the maintenance of minimum net worth and certain key ratios. As of
July 29, 2000, the Company had outstanding borrowings under the credit facility
of $65.4 million and was in compliance with the covenants of this facility.
Note 5--Comprehensive Income:
Total comprehensive income consists of the following:
Thirteen Weeks Ended:
--------------------------------
July 29, 2000 July 31, 1999
-------------- --------------
(In thousands)
Net income $ 18,549 $ 20,543
Foreign currency translation adjustment (638) 16
-------------- --------------
Total comprehensive income $ 17,911 $ 20,559
============== ==============
Twenty-Six Weeks Ended
--------------------------------
July 29, 2000 July 31, 1999
-------------- --------------
(In thousands)
Net income $ 22,765 $ 26,589
Foreign currency translation adjustment 74 (396)
-------------- --------------
Total comprehensive income $ 22,839 $ 26,193
============== ==============
9
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)--(Continued)
Note 6--Earnings per Share:
Basic and diluted earnings per share is computed as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------------------
July 29, July 31,
2000 1999
-------------- ----------------
(In thousands, except per
share data)
<S> <C> <C>
Numerator:
Net income $ 18,549 $ 20,543
Effect of dilutive securities:
Interest expense, net of tax benefit on
5 1/4% convertible debt 1,004 -
Interest expense, net of tax benefit on
convertible debt issued in January 1999 - 10
-------------- ----------------
Numerator for diluted earnings per share $ 19,553 $ 20,553
============== ================
Denominator:
Denominator for basic earnings per share 41,731 46,600
Effect of dilutive securities:
5 1/4% convertible debt 3,802 -
Convertible debt issued in January 1999 - 208
Options to purchase common stock 348 1,570
-------------- ----------------
Denominator for diluted earnings per share 45,881 48,378
============== ================
Earnings per share:
Basic $ 0.44 $ 0.44
============== ================
Diluted $ 0.43 $ 0.42
============== ================
Antidilutive securities not included in the diluted earnings per share
computation:
Options and warrants to purchase
common stock 2,526 92
Exercise prices $ 8.25 $ 17.06
to to
$ 13.44 $ 30.81
Convertible subordinated debt $ - $ 115,000
Conversion price $ - $ 30.25
</TABLE>
10
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)--(Continued)
Note 6--Earnings per Share--(Continued):
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
-----------------------------------
July 29, July 31,
2000 1999
--------------- ----------------
(In thousands, except per
share data)
<S> <C> <C>
Numerator:
Net income $ 22,765 $ 26,589
Effect of dilutive securities:
Interest expense, net of tax benefit on
convertible debt issued in January 1999 - 20
--------------- ----------------
Numerator for diluted earnings per share $ 22,765 $ 26,609
=============== ================
Denominator:
Denominator for basic earnings per share 42,266 46,480
Effect of dilutive securities:
Convertible debt issued in January 1999 - 208
Options to purchase common stock 460 1,324
--------------- ----------------
Denominator for diluted earnings per share 42,726 48,012
=============== ================
Earnings per share:
Basic $ 0.54 $ 0.57
=============== ================
Diluted $ 0.53 $ 0.55
=============== ================
Antidilutive securities not included in the diluted earnings per share
computation:
Options and warrants to purchase common stock 2,029 736
Exercise prices $ 8.25 $ 10.56
to to
$ 30.81 $ 30.81
Convertible subordinated debt $ 115,000 $ 115,000
Conversion price $ 30.25 $ 30.25
</TABLE>
Note 7--Recent Accounting Pronouncement - Financial Instruments:
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of SFAS No.
133," deferring the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," to the first fiscal quarter of fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. In the opinion
of the Company's management, adoption of this new accounting standard will not
have a material impact, as the Company currently has no such instruments.
11
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)--(Continued)
Note 8--Segment Information:
The following table presents the Company's revenues and earnings from operations
before interest and income taxes by geographic segment:
Earnings from
operations before
interest and
Net sales income taxes
------------------ --------------------
(In thousands)
Thirteen Weeks Ended
July 29, 2000
North America $ 185,110 $ 32,538
Other segments 20,924 1,213
------------------ --------------------
Total $ 206,034 $ 33,751
================== ====================
Thirteen Weeks Ended
July 31, 1999
North America $ 177,576 $ 34,349
Other segments 22,044 1,003
------------------ --------------------
Total $ 199,620 $ 35,352
================== ====================
Earnings from
operations before
interest and
Net sales income taxes
------------------ --------------------
(In thousands)
Twenty-Six Weeks Ended
July 29, 2000
North America $ 316,684 $ 42,121
Other segments 39,821 1,298
------------------ --------------------
Total $ 356,505 $ 43,419
================== ====================
Twenty-Six Weeks Ended
July 31, 1999
North America $ 313,125 $ 47,289
Other segments 39,074 172
------------------ --------------------
Total $ 352,199 $ 47,461
================== ====================
Note 9--Repurchase of Common Stock:
Prior to fiscal 2000, the Company, under authorization from its Board of
Directors, repurchased 12.8 million shares at a cost of $95.1 million. In March
2000, the Board of Directors modified its authorization to allow for additional
share repurchases (from March 2000 forward) of up to $60.0 million. The
repurchase program authorizes management, at its 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 are
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.
12
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)--(Continued)
Note 9--Repurchase of Common Stock--(Continued):
During the first half of fiscal 2000, the Company repurchased 3.3 million shares
at a cost of $25.1 million, and subsequent to July 29, 2000 and through
September 11, 2000 the Company repurchased an additional 855,800 shares at a
cost of $6.2 million. Since the inception of the stock repurchase program, the
Company has repurchased 17.0 million shares at a cost of $126.5 million.
Note 10--Litigation, Claims and Assessment Contingencies:
In October 1999, a class action lawsuit was filed against the Company in the
United States District court in the Eastern District of Missouri. The lawsuit
alleges, among other things, that the Company violated state and Federal wage
and overtime laws. The Company believes that the outcome of the litigation will
not have a material adverse effect on the Company's operating results.
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 litigation cannot be predicted, management
does not believe the outcome of the litigation 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.
There are no other significant legal proceedings pending against the Company.
13
<PAGE>
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:
Merchandising, Concentration of Suppliers and Potential Impact of Consolidation
of Sunglass/Watch Manufacturing Industry. 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. 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 the first half of fiscal 2000, Luxottica (including
RayBan, Revo, Killer Loop, Arnette, Giorgio Armani and other brands) and Oakley,
the Company's largest suppliers, accounted for approximately 20.4% and 30.3%,
respectively, of the Company's total merchandise purchases. On June 28, 1999,
Luxottica Group SpA completed the purchase of the assets and liabilities of
Bausch & Lomb's eyewear business (which included Ray Ban, Revo, Killer Loop,
Arnette, Giorgio Armani and other brands). There can be no assurance that this
transaction or other vendor consolidations 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 also increasingly subject to the risk of changing fashion trends, and the
demand for certain styles can change. Accordingly, there can be no assurance
that the Company will not be subject to increasing limitations on product
returns in the future.
Risks of Developing Exclusive Brand Products. The Company's efforts to develop
exclusive brands of products will increase the Company's exposure to risks of
inventory obsolescence and
14
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--Management's Discussion and Analysis of Financial Condition and Results
of Operations--(Continued)
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. Additionally, there can be no assurance that the Company's
efforts to develop exclusive brand products will not negatively impact its
relationship with its existing vendors of branded merchandise. The Company's
efforts to develop exclusive brands may also involve other risks that could have
a material adverse effect on the Company, including diversion of management's
attention from the Company's core business and difficulties with the hiring,
retention and training of key personnel. 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.
Risks of New Specialty Store Concepts, Distribution Channels and International
Operations. The Company's growth plans include expansion of recently developed
specialty store concepts and may include the future development of additional
concepts. The Company opened its first Watch Station store, a watch specialty
store, in fiscal 1996 and during fiscal 1999 initiated a rollout of combination
sunglass and watch stores ("Combo stores"). During the first half of fiscal
2000, the Company converted and/or opened 126 Combo store locations and as of
July 29, 2000 the Company operated a total of 321 Combo stores worldwide.
Additionally, the Company is planning on converting and/or opening approximately
80 - 90 additional Combo store locations during the balance of fiscal 2000.
Accordingly, these operations will be subject to the numerous risks of
establishing new business enterprises, including unanticipated operating
problems, ability to secure suitable 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 related retail channels of distribution, and the extent of
existing relationships between such retailers and manufacturers/distributors.
There can be no assurance that the Company's recently developed specialty store
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. Additionally, the Company's growth plans may
include the development and expansion of additional specialty store concepts,
and there can be no assurance that any newly developed specialty store concepts
will achieve sales and profitability levels that justify the investment therein.
The Company's planned expansion of its e-commerce activity subjects the Company
to numerous risks of entering new distribution channels, including unanticipated
operating problems and start-up costs, 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. Moreover there
can be no assurance that Internet sales will not cannibalize sales from the
Company's store locations and mail order
15
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--Management's Discussion and Analysis of Financial Condition and Results
of Operations--(Continued)
operations. Lastly, 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 (v) risks associated with unanticipated problems or legal
liabilities.
There can be no assurance that the Company will be able to successfully execute
other components of its growth strategies. The Company's current international
operations and any future international expansion subject 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.
Ability to Manage Growth. The Company has opened or converted to Combos a
significant number of new locations 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 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 and/or
obtain suitable use clause changes 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 or converted
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 or
converted 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
16
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--Management's Discussion and Analysis of Financial Condition and Results
of Operations--(Continued)
operations (such as the Company's recently completed Watch World acquisition)
will be successfully integrated.
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 quarter of each fiscal 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 adverse weather conditions particularly during any of its peak selling
seasons, the timing of store openings and closings, and the timing of sales
contributed by new stores and new concepts such as Combo stores and new
distribution channels, such as the Internet.
Possible Volatility of Stock and Note Prices. The market prices of the Company's
common stock and convertible subordinated notes are subject to significant
volatility caused by factors such as quarterly fluctuations in the financial
results of the Company, monthly comparable store sales results, changes in
financial estimates by securities analysts, shortfalls in earnings or sales
below analysts' expectations, the overall economy and the financial markets. In
addition, the common stock is quoted on the NASDAQ National Market and the notes
are traded on the NASDAQ SmallCap Market, which stock markets have experienced,
and are likely to experience in the future, significant price and volume
fluctuations which could adversely affect the market price of the common stock
and the notes without regard to the operating performance of the Company.
Anti-Takeover Effect of Certain Provisions of the Company's Articles of
Incorporation and Bylaws. Certain provisions of the Company's Articles of
Incorporation and Bylaws may be deemed to have anti-takeover effects and may
delay, defer or prevent a takeover attempt that a stockholder might consider in
its best interest. These provisions (i) classify the Company's Board of
Directors into three classes, each of which will serve for different three-year
periods, (ii) provide that only the Board of Directors or Chief Executive
Officer may call special meetings of the stockholders, and (iii) establish
certain advance notice procedures for nomination of candidates for election as
directors and for stockholder proposals to be considered at stockholders'
meetings. The Company is also subject to certain provisions of the Florida
Business Corporation Act, which may deter or frustrate takeovers of Florida
corporations.
17
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--Management's Discussion and Analysis of Financial Condition and Results
of Operations--(Continued)
*********
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.
General
Sunglass Hut International, Inc. ("Sunglass Hut" or the "Company") is the
world's largest specialty retailer of sunglasses and one of the world's largest
specialty retailers of popular price ($50 - $500) watches with approximately
2,000 locations worldwide. The Company's stores operate under the Sunglass Hut
International and Watch Station International tradenames. On June 1, 2000 the
Company acquired Watch World International Inc., a national chain of 118
specialty watch stores. Additionally, during fiscal 1999, the Company initiated
a rollout of a new store concept that combines sunglasses and watches in a
unified format ("Combo stores"). The Company has continued to expand this
concept in fiscal 2000 with the opening or conversion of 126 stores in the first
half of fiscal 2000. As of July 29, 2000, the Company operated 1,980 locations
including 1,431 specialty sunglass locations, 228 specialty watch locations and
321 Combo locations.
Liquidity and Capital Resources
The Company's short-term cash needs are primarily for (i) working capital to
support its inventory requirements (ii) capital expenditure requirements for new
store additions/conversions, e-commerce and other systems requirements 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 new revolving credit facility with Fleet National Bank in May 2003, the
maturity of its $115 million convertible subordinated Notes in June 2003,
operating lease commitments and continued store expansion/conversion.
On May 18, 2000, the Company entered into a $125 million three-year senior
secured revolving credit facility with Fleet National Bank. Proceeds from this
facility were used to refinance the previous BankBoston facility, and will
support normal working capital needs and other general corporate purposes,
including share repurchases, as authorized by the Company's Board of
18
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--Management's Discussion and Analysis of Financial Condition and Results
of Operations--(Continued)
Directors. Borrowings under the new facility bear interest at a floating rate
ranging from (a) prime plus 0 - 1.0% or (b) LIBOR plus 2.0 - 3.0% depending on a
financial ratio test. The credit facility has certain restrictive covenants,
which include the maintenance of minimum net worth and certain key ratios. As of
July 29, 2000, the Company was in compliance with the covenants of this
facility.
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 July 29, 2000 the Company had
outstanding borrowings under its credit facility of $65.4 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 $51.4 million for the first six
months of fiscal 2000 compared to $43.8 million for the same period in fiscal
1999. The difference between the Company's net income and operating cash flow in
fiscal 2000 was primarily attributable to non-cash charges for depreciation and
amortization and increases in accounts payable and accrued expenses.
Net cash used in investing activities was $36.5 million for the first six months
of fiscal 2000 compared to $16.4 million for the same period in fiscal 1999.
Investing cash flows for fiscal 2000 reflect the acquisition of Watch World,
capital expenditures related to new store expansion, the renovation of existing
stores and required systems enhancements.
Net cash used in financing activities was $13.8 million for the first six months
of fiscal 2000 compared to $17.7 million for the same period in fiscal 1999.
Financing cash flows for fiscal 2000 reflect the payments for stock repurchases
of $25.1 million, partially offset by the net increase in the amounts
outstanding under the Company's revolving credit facility of $12.7 million.
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 store locations as well as the conversion/renovation of existing
stores and required systems enhancements, and amounts associated with the
Company's common stock repurchase program and other working capital
requirements, through at least the next twelve months.
19
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--Management's Discussion and Analysis of Financial Condition and Results
of Operations--(Continued)
Results of Operations
Quarter Ended July 29, 2000 Compared to Quarter Ended July 31, 1999
The Company reported net income of $0.43 per diluted share, or $18.5 million,
during the quarter ended July 29, 2000 compared to net income of $0.42 per
share, or $20.5 million for the same period of fiscal 1999. The Company's
earnings for the quarter ended July 29, 2000 include two unique items, (1) a
$0.03 loss per share from Watch World, reflecting operating results subsequent
to the June 1, 2000 acquisition; and (2) a $0.01 loss per share impact due to an
accounting requirement, which assumes conversion of the Company's existing
5 1/4% convertible debt.
Net sales increased $6.4 million, or 3.2%, to $206.0 million during the quarter
ended July 29, 2000 compared to $199.6 million for the same period of fiscal
1999. This increase reflects sales from new stores opened during the second
quarter of fiscal 2000 (and fiscal 1999 to the extent not reflected in
comparable store sales) of $6.6 million, an increase in comparable store sales
of 2.7% (accounting for an increase of approximately $5.1 million) and sales
from the Company's newly acquired Watch World stores of $6.8 million, offset by
a decrease of $12.1 million for sales lost due to store closures during fiscal
1999 and 2000.
Gross profit increased $2.2 million, or 2.5%, to $91.9 million during the
quarter ended July 29, 2000 compared to $89.7 million for the same period of
fiscal 1999, primarily due to the increase in net sales. As a percentage of net
sales, gross profit decreased 0.3 percentage points to 44.6% for the quarter
ended July 29, 2000 from 44.9% for the same period of fiscal 1999. Gross profit
as a percentage of sales decreased in the quarter ended July 29, 2000 primarily
due to a higher percentage of watch sales (watch sales typically have lower
margins than sunglasses).
Operating expenses increased $3.1 million, or 6.5%, to $50.4 million during the
quarter ended July 29, 2000 compared to $47.4 million during the same period of
fiscal 1999. As a percentage of net sales, operating expenses increased 0.8
percentage points to 24.5% during the quarter ended July 29, 2000 compared to
23.7% for the same period in 1999 primarily due to the seasonal nature of the
newly acquired Watch World business, as well as duplicative and transitional
expenses incurred in connection with the acquisition. Excluding the operating
expenses related to Watch World, the Company's operating expenses as a
percentage of net sales during the quarter remained generally consistent with
the same period in fiscal 1999.
Depreciation and leasehold amortization expense increased $630,000, or 9.8%, to
$7.1 million during the quarter ended July 29, 2000 compared to $6.5 million for
the same period of fiscal 1999, due to new store growth, the renovation of
existing stores and expenditures for required systems enhancements.
20
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--Management's Discussion and Analysis of Financial Condition and Results
of Operations--(Continued)
Amortization of cost in excess of net assets of acquired business increased
$108,000, or 21.5%, to $611,000 during the quarter ended July 29, 2000 compared
to $503,000 for the same period of fiscal 1999 due to the acquisition of Watch
World.
Interest expense increased $1.6 million to $3.4 million for the quarter ended
July 29, 2000, compared to $1.8 million for the same period of fiscal 1999 due
to an increase in average outstanding borrowings which was substantially related
to the acquisition of Watch World, as well as the Company's repurchase of shares
during fiscal years 1999 and 2000.
First Six Months of Fiscal 2000 Compared to First Six Months of Fiscal 1999
The Company reported net income of $0.53 per diluted share, or $22.8 million,
during the first six months of fiscal 2000 compared to net income of $0.53 per
diluted share, or $26.6 million for the same period of fiscal 1999. The
Company's earnings for the first six months of fiscal 2000 include a $0.03 loss
per share from Watch World, reflecting operating results subsequent to the June
1, 2000 acquisition.
Net sales increased $4.3 million, or 1.2%, to $356.5 million during the first
six months of fiscal 2000 compared to $352.2 million for the same period of
fiscal 1999. This increase reflects sales from new stores opened during the
first six months of fiscal 2000 (and fiscal 1999 to the extent not reflected in
comparable store sales) of $11.8 million, an increase in comparable store sales
of 1.7% (accounting for approximately $5.5 million of this increase), sales from
the Company's newly acquired Watch World stores of $6.8 million, offset by a
decrease of $19.8 million for sales lost due to store closures during fiscal
1999 and 2000.
Gross profit decreased $222,000, or 0.1%, to $153.0 million during the first six
months of fiscal 2000 compared to $153.2 million for the same period of fiscal
1999. As a percentage of net sales, gross profit decreased 0.6% to 42.9% for the
first six months of fiscal 2000 from 43.5% for the same period of fiscal 1999,
primarily due to a higher percentage of watch sales (watch sales typically have
lower margins than sunglasses).
Operating expenses increased $2.6 million, or 2.8% to $94.5 million during the
first six months of fiscal 2000 compared to $92.0 million for the same period of
fiscal 1999. As a percentage of net sales, operating expenses increased 0.4% to
26.5% during the first six months of fiscal 2000 compared to 26.1% for the same
period in 1999 primarily due to the seasonal nature of the newly acquired Watch
World business, as well as duplicative and transitional expenses incurred in
connection with the acquisition. Excluding the operating expenses related to
Watch World, operating expenses as a percentage of net sales during the first
six months of 2000 remained generally consistent with the same period in fiscal
1999.
21
<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 increased $1.1 million, or 8.7%
to $13.9 million during the first six months of fiscal 2000 compared to $12.8
million for the same period of fiscal 1999, due to new store growth, the
renovation of existing stores and expenditures for required systems
enhancements.
Amortization of cost in excess of net assets of acquired business increased
$143,000, or 14.1%, to $1.2 million during the first six months of fiscal 2000
compared to $1.0 million for the same period of fiscal 1999 due to the
acquisition of Watch World.
Interest expense increased $2.3 million to $6.2 million for the first six months
of fiscal 2000, compared to $4.0 million for the same period of fiscal 1999 due
to an increase in average outstanding borrowings during the period which was
substantially related to the Company's acquisition of Watch World, as well as
the repurchase of shares during fiscal years 1999 and 2000.
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 a variety of factors, including adverse weather conditions
particularly during any of its peak selling seasons, the amount and timing of
sales contributed by new stores, the integration of new stores into the
operations of the Company, the timing of store closures or acquisitions, as well
as other factors.
22
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
PART II--OTHER INFORMATION
ITEM 4--Submission of Matters to a Vote of Security Holders
On June 7, 2000, the Company held its 2000 Annual Meeting of Shareholders (the
"Annual Meeting") for the following purposes:
1. To elect two members to the Company's Board of Directors to
hold office until the Company's 2003 Annual Meeting of
Shareholders or until their successors are duly elected and
qualified; and
2. To transact such other business as may properly come before
the Annual Meeting and any adjournments or postponements
thereof.
The votes cast at the Annual Meeting were as follows:
1. Election Directors:
John H. Duerden -
For 36,260,971
Withheld 283,175
2. John X. Watson -
For 36,244,418
Withheld 299,728
ITEM 6--Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule(1)
---------------
(1) Filed herewith.
(b) The Registrant filed a Form 8-K with the Securities and Exchange Commission
on June 16, 2000. In this filing the Registrant disclosed that on June 1,
2000 it acquired all of the outstanding capital stock of Watch World
Licensing Corp. ("Watch World"), a Delaware Corporation, pursuant to a
Stock Purchase Agreement (the "Purchase Agreement") dated as of May 5, 2000
by and among the Registrant, Watch World and the stockholders of Watch
World named therein. In consideration for the Watch World capital stock,
the Registrant issued stock, warrants and paid cash to the stockholders of
Watch World all as more fully described in the Purchase Agreement that is
included as an exhibit to the Form 8-K.
23
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNGLASS HUT INTERNATIONAL, INC.
Date: September 12, 2000 By: /s/John X. Watson
-----------------------------------------
John X. Watson
President, Chief Executive Officer and
Director
(principal executive officer)
Date: September 12, 2000 By: /s/George L. Pita
-----------------------------------------
George L. Pita
Vice President-Finance
(chief accounting officer)
24
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
27 Financial Data Schedule
