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 April 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.
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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 Number)
incorporation or organization)
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 40,952,169
(as of June 12, 2000).
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of April 29, 2000 (Unaudited)
and January 29, 2000................................................ 3
Consolidated Statements of Operations
for the Thirteen Weeks Ended April 29, 2000
and May 1, 1999 (Unaudited)......................................... 4
Consolidated Statements of Cash Flows
for the Thirteen Weeks Ended April 29, 2000
and May 1, 1999 (Unaudited)......................................... 5
Notes to Consolidated Financial Statements (Unaudited).............. 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 11
PART II--OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K........................... 19
Signatures................................................. 20
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
PART I--FINANCIAL INFORMATION
ITEM 1--Financial Statements
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
April 29, January 29,
2000 2000
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,877 $ 9,732
Accounts receivable 5,711 4,696
Inventory 95,018 99,212
Prepaid rent 7,294 7,366
Other current assets 10,094 11,497
--------- ---------
Total current assets 132,994 132,503
PROPERTY AND EQUIPMENT, net 108,204 108,187
COST IN EXCESS OF NET ASSETS OF
ACQUIRED BUSINESSES, net 24,267 24,842
OTHER ASSETS 18,276 17,971
--------- ---------
Total assets $ 283,741 $ 283,503
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 36,461 $ 33,981
Accrued expenses 37,673 37,998
Accrued restructuring expenses 627 1,181
--------- ---------
Total current liabilities 74,761 73,160
LONG-TERM DEBT, net of current portion 159,905 166,196
--------- ---------
Total liabilities 234,666 239,356
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 427 427
Additional paid-in capital 78,179 78,179
Accumulated deficit (25,750) (29,965)
Accumulated other comprehensive income (3,781) (4,494)
--------- ---------
Total stockholders' equity 49,075 44,147
--------- ---------
Total liabilities and stockholders' equity $ 283,741 $ 283,503
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------
April 29, May 1,
2000 1999
--------- --------
<S> <C> <C>
Net sales $150,471 $152,581
Cost of goods sold, occupancy and buying expenses 89,320 89,012
-------- --------
Gross profit 61,151 63,569
-------- --------
Selling, general and administrative expenses:
Operating expenses 44,115 44,615
Depreciation and leasehold amortization 6,821 6,336
Amortization of cost in excess of net assets of acquired businesses 548 511
-------- --------
51,484 51,462
-------- --------
Earnings from operations before interest and income taxes 9,667 12,107
Interest expense 2,812 2,115
-------- --------
Earnings from operations before income taxes 6,855 9,992
Provision for income taxes 2,640 3,946
-------- --------
Net income $ 4,215 $ 6,046
======== ========
Earnings per share (basic and diluted) $ 0.10 $ 0.13
======== ========
Weighted average shares outstanding:
Basic 42,800 46,361
======== ========
Diluted 43,373 47,647
======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
---------------------
April 29, May 1,
2000 1999
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,215 $ 6,046
-------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 7,369 6,847
Accretion of debt discount 99 93
Changes in operating assets and liabilities -
Changes in assets:
Accounts receivable (1,015) (2,652)
Inventory 4,194 (6,178)
Prepaid rent 72 365
Other current assets 1,303 (2,589)
Other assets (205) (709)
Changes in liabilities:
Accounts payable 2,480 14,653
Accrued expenses (325) 4,620
Accrued restructuring expenses (554) (637)
-------- --------
13,418 13,813
-------- --------
Net cash provided by continuing operations 17,633 19,859
Net cash used in discontinued operations -- (312)
-------- --------
Net cash provided by operating activities 17,633 19,547
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,838) (6,070)
-------- --------
Net cash used in investing activities (6,838) (6,070)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under revolving credit facilities 56,142 26,900
Principal payments on revolving credit facilities (62,530) (37,800)
Principal payments on long-term debt -- (125)
Payments for stock repurchases and retirements -- (1,572)
Payment of deferred financing costs -- --
Proceeds from exercise of stock options -- 1,323
-------- --------
Net cash used in financing activities (6,388) (11,274)
-------- --------
Effect of exchange rate changes on cash and cash equivalents 738 (1,061)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,145 1,142
CASH AND CASH EQUIVALENTS, beginning of period 9,732 5,007
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 14,877 $ 6,149
======== ========
</TABLE>
(Continued on next page)
5
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
---------------------
April 29, May 1,
2000 1999
--------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 1,306 $ 393
======== =======
Income taxes $ 1,791 $ 503
======== ========
</TABLE>
See notes to consolidated financial statements.
6
<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 weeks ended April 29,
2000 are not necessarily indicative of the results to be expected for the entire
fiscal year ending February 3, 2001.
Note 2--Accrued Restructuring Expenses:
During fiscal 1999, the Company substantially completed its restructuring plans.
Accrued restructuring expenses of $627,000 as of April 29, 2000 were comprised
of liabilities for remaining lease exit costs related to stores closed during
the completion of the restructuring plans. During the first quarter of fiscal
2000, $554,000 of the accrual for restructuring expenses was utilized for the
payment of lease exit and other incremental costs related to store closings
completed under the restructuring plans.
Note 3--Comprehensive Income:
Total comprehensive income consists of the following:
Thirteen Weeks Ended:
---------------------
April 29, May 1,
2000 1999
--------- -------
(In thousands)
Net income $ 4,215 $ 6,046
Foreign currency translation adjustment 713 (412)
------- -------
Total comprehensive income $ 4,928 $ 5,634
======= =======
7
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4--Earnings per Share:
Basic and diluted earnings per share is computed as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------
April 29, May 1,
2000 1999
--------- --------
(In thousands, except per share data)
<S> <C> <C>
Numerator:
Net income $ 4,215 $ 6,046
Effect of dilutive securities:
Interest expense, net of tax benefit on
convertible debt issued in January 1999 -- 10
-------- --------
Numerator for diluted earnings per share $ 4,215 $ 6,056
======== ========
Denominator:
Denominator for basic earnings per share 42,800 46,361
Effect of dilutive securities:
Convertible debt issued in January 1999 -- 208
Options to purchase common stock 573 1,078
-------- --------
Denominator for diluted earnings per share 43,373 47,647
======== ========
Earnings per share (basic and diluted) $ 0.10 $ 0.13
======== ========
Antidilutive securities not included
in the diluted earnings per share computation:
Options to purchase common stock 1,531 1,379
Exercise prices $ 8.44 $ 10.56
to to
$ 30.81 $ 30.81
Convertible subordinated debt $115,000 $115,000
Conversion price $ 30.25 $ 30.25
</TABLE>
Note 5--Recent Accounting Pronouncement - Financial Instruments:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" for fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company will adopt SFAS No. 133 when required and is in the process of reviewing
the impact of such adoption on its financial position and results of operations.
8
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6--Segment Information:
The following table presents the Company's revenues and earnings (loss) before
interest and taxes by segment:
Earnings (loss)
before interest
Net Sales and income taxes
--------- ----------------
(In thousands)
First Quarter 2000
North America $131,574 $ 9,583
Other segments 18,897 84
-------- --------
Total $150,471 $ 9,667
======== ========
First Quarter 1999
North America $135,549 $ 13,034
Other segments 17,032 (927)
-------- --------
Total $152,581 $ 12,107
======== ========
Note 7--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 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.
During the first quarter of fiscal 2000, the Company did not repurchase any
shares, however, subsequent to April 29, 2000 through June 12, 2000 the Company
repurchased an additional 1.8 million shares at a cost of $13.2 million. Since
the inception of the stock repurchase program, the Company has repurchased 14.7
million shares at a cost of $108 million.
Note 8--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 is in the process of investigating and responding
to the charges. The outcome or effect of this litigation on the Company's
operating results cannot be predicted at this time.
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
9
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and misleading statements regarding the Company's business performance and
prospects. The Company believes that the lawsuit has no basis, and intends to
vigorously defend the action. Although the ultimate outcome of the lawsuit
cannot be predicted, management does not believe the outcome of the lawsuit will
have a material adverse effect on the financial position, results of operations
or cash flows of the Company. However, there can be no assurance as to the
ultimate resolution of this matter.
There are no other significant legal proceedings pending against the Company.
Note 9--Subsequent Events:
On June 1, 2000 the Company completed the acquisition of Watch World
International, Inc., a national chain of 119 specialty watch stores and operator
of WatchWorld.com, based in New York, New York. The purchase price was $30.1
million, consisting of 1.3 million shares of the Company's common stock, $9.1
million in cash and the assumption of debt. The acquisition was accounted for
under the purchase method of accounting.
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 existing 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 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.
10
<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 fiscal 1999, Luxottica (including RayBan, Revo, Killer
Loop, Arnette, Giorgio Armani and other brands) and Oakley, the Company's
largest suppliers, accounted for approximately 24.6% and 23.9%, 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 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
11
<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 roll-out of combination
sunglass and watch stores ("Combo stores"). During the first three months of
fiscal 2000, the Company has converted and/or opened 51 Combo store locations
and as of April 29, 2000 the Company operated 246 Combo stores. Additionally,
the Company is planning on converting and/or opening approximately 200
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
12
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--Management's Discussion and Analysis of Financial Condition and
Results of Operations--(Continued)
Internet sales will not cannibalize sales from the Company's store locations and
mail order 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 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/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/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
13
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--Management's Discussion and Analysis of Financial Condition and
Results of Operations--(Continued)
Company will be able to consummate acquisitions on satisfactory terms or that
any acquired 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 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.
14
<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 with approximately 1,900
locations worldwide. During fiscal 1996, the Company initiated an additional
specialty store concept, Watch Station and on June 1, 2000 acquired Watch World
International Inc., a national chain of 119 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 51 stores in the first quarter of fiscal 2000.
Since opening its first kiosk in Miami, Florida in 1971, the Company has grown
rapidly, both through internal expansion and acquisitions, increasing from 873
stores as of fiscal yearend 1993 to 1,870 locations including 1,514 specialty
sunglass locations, 110 specialty watch locations and 246 combination sunglass
and watch stores as of April 29, 2000.
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. As
of June, 2000, the Company's long-term liquidity requirements related
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.
15
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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)
As of the end of the quarter, the Company had a revolving credit facility with
BankBoston Retail Finance, Inc. ("BankBoston") which included a borrowing
availability of up to $65 million depending on inventory levels, and a
supplemental borrowing component, amounts of which vary depending on the period
the borrowings are outstanding. As of April 29, 2000, the Company's borrowing
base was approximately $56.0 million and the Company was entitled to borrow up
to an additional $10.0 million under the supplemental component of its facility.
The credit facility included up to $10.0 million in letters of credit.
Borrowings under the BankBoston credit facility bore interest at a floating rate
equal to, at the Company's option, (a) the prime rate or (b) LIBOR plus 2.0%.
The facility was secured with a first priority lien and security interest in
substantially all assets.
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 existing 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 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.
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 April 29, 2000 the Company had
outstanding borrowings under its credit facility of $46.2 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 $17.6 million for the first three
months of fiscal 2000 compared to $19.5 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 the reduction in inventory, non-cash
charges for depreciation and amortization, and changes in other current assets
and accounts payable.
Net cash used in investing activities was $6.8 million for the first three
months of fiscal 2000 compared to $6.1 million for the same period in fiscal
1999. Investing cash flows reflect capital expenditures related to new store
expansion, the renovation of existing stores and required systems enhancements.
Net cash used in financing activities was $6.4 million for the first three
months of fiscal 2000 compared to $11.3 million for the same period in fiscal
1999. Financing cash flows reflect the net reduction in the amounts outstanding
under the Company's revolving credit facility.
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--Management's Discussion and Analysis of Financial Condition and
Results of Operations--(Continued)
Management believes that net cash provided by operations, together with
borrowing availability under the Company's credit facility, will be sufficient
to fund estimated capital expenditures associated with the Company's planned
opening of approximately 80 store locations in fiscal 2000 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.
Results of Operations
Quarter Ended April 29, 2000 Compared to Quarter Ended May 1, 1999
Net sales decreased $2.1 million, or 1.4%, to $150.5 million during the quarter
ended April 29, 2000 compared to $152.6 million for the same period of fiscal
1999. This overall decrease reflects a decrease of $7.7 million for sales lost
due to store closures during fiscal 1999 and 2000 offset by sales increases from
new stores opened during the first quarter of fiscal 2000 (and fiscal 1999 to
the extent not reflected in comparable store sales) of $5.2 million, and an
increase in comparable store sales of 0.3% (accounting for an increase of
approximately $.4 million).
Gross profit decreased $2.4 million, or 3.8%, to $61.2 million during the
quarter April 29, 2000 compared to $63.6 million for the same period of fiscal
1999, primarily due to the decrease in net sales. As a percentage of net sales,
gross profit decreased 1.1 percentage points to 40.6% for the quarter ended
April 29, 2000 from 41.7% for the same period of fiscal 1999. Gross profit as a
percentage of sales decreased in the quarter ended April 29, 2000 primarily due
to higher occupancy and buying expenses as a percentage of sales due to the
overall decline in sales as well as slightly lower gross merchandise margins due
to watch sales becoming a higher percentage of net sales (watch sales typically
have lower margins than sunglasses).
Operating expenses decreased $500,000, or 1.1%, during the quarter ended April
29, 2000 compared to the same period of fiscal 1999. As a percentage of net
sales, operating expenses increased 0.1 percentage points to 29.3% during the
quarter ended April 29, 2000 compared to 29.2% for the same period in 1999.
Operating expenses as a percentage of net sales increased mainly due to the
overall decline in sales.
Depreciation and leasehold amortization expense increased $485,000, or 7.7%, to
$6.8 million during the quarter ended April 29, 2000 compared to $6.3 million
for the same period of fiscal 1999, due to new store growth, the renovation of
existing stores and expenditures for required systems enhancements.
Interest expense increased $697,000 to $2.8 million for the quarter ended April
29, 2000, compared to $2.1 million for the same period last year due to an
increase in average
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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)
outstanding borrowings which was substantially related to the Company's
repurchase of shares during fiscal 1999.
The Company reported net income of $0.10 per share, or $4.2 million, during the
quarter ended April 29, 2000 compared to net income of $0.13 per share, or $6.0
million for the same period of fiscal 1999.
Seasonality and Quarterly Results
Historically, the Company's operations have been seasonal, with highest net
sales and net income occurring in the second fiscal quarter (reflecting
increased demand for sunglasses during the spring and summer months).
The Company's results of operations may also fluctuate from quarter to quarter
as a result of the amount and timing of sales contributed by new stores, the
integration of new stores into the operations of the Company, the timing of
store closures or acquisitions, as well as other factors.
European Monetary Union
On January 1, 1999 eleven of the existing members of the European Union (the
"EU") joined the European Monetary Union (the "EMU"). This will lead to, among
many other things, fundamental changes in the way participating EU states
implement their monetary policies and manage local currency exchange rates.
Ultimately, there will be a single currency within certain countries of the EU,
known as the Euro and one organization, the European Central Bank, responsible
for setting European monetary policy. While some believe that the change will
bring a higher level of competition within Europe and a greater sense of
economic stability within that region, there is no certainty that the Company's
activity in this region will necessarily realize any benefits as a result of
such changes. The Company has reviewed the impact the Euro will have on its
business and whether this will give rise to a need for significant changes in
its commercial operations or treasury management functions. While it is
uncertain whether there will be any immediate direct benefits from the planned
conversion, the Company believes it is properly prepared to accommodate any
changes deemed necessary without any significant changes to its current
commercial operations, treasury management and management information systems.
18
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SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
PART II--OTHER INFORMATION
ITEM 6--Exhibits and Reports on Form 8-K
(a) Exhibits
10.11 Revolving Credit Agreement with Fleet National Bank and
other lenders named therein, dated as of May 18, 2000(1)
27 Financial Data Schedule(1)
---------------
(1) Filed herewith.
(b) The Company did not file any reports on Form 8-K during the quarter
ended April 29, 2000.
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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 12, 2000 By: /s/ John X. Watson
--------------------------------------
John X. Watson
President, Chief Executive Officer and
Director
(principal executive officer)
Date: June 12, 2000 By: /s/ Larry G. Petersen
--------------------------------------
Larry G. Petersen
Senior Vice President-Finance
and Chief Financial Officer
(principal financial officer)
Date: June 12, 2000 By: /s/ George L. Pita
--------------------------------------
George L. Pita
Vice President-Finance
(principal accounting officer)
20
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.11 Revolving Credit Agreement with Fleet National Bank and
other lenders named therein, dated as of May 18, 2000(1)
27 Financial Data Schedule
