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 October 28, 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 40,176,414
(as of December 6, 2000).
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
PART I--FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheets as of October 28, 2000 (Unaudited)
and January 29, 2000.............................................................................. 3
Consolidated Statements of Operations for the Thirteen Weeks Ended October 28,
2000 and October 30, 1999 (Unaudited)............................................................. 4
Consolidated Statements of Operations for the Thirty-Nine Weeks Ended October 28,
2000 and October 30, 1999 (Unaudited)............................................................. 5
Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 28, 2000 and
October 30, 1999 (Unaudited)...................................................................... 6
Notes to Consolidated Financial Statements (Unaudited)............................................ 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.....................................................................................15
PART II--OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...............................................................25
Signatures.....................................................................................26
</TABLE>
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
PART I--FINANCIAL INFORMATION
ITEM 1--Financial Statements
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
October 28, January 29,
2000 2000
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,237 $ 9,732
Accounts receivable 3,799 4,696
Inventory 112,307 99,212
Prepaid rent 9,085 7,366
Other current assets 11,291 11,497
------------- -------------
Total current assets 143,719 132,503
PROPERTY AND EQUIPMENT, net 117,018 108,187
COST IN EXCESS OF NET ASSETS OF
ACQUIRED BUSINESSES, net 41,601 24,842
OTHER ASSETS 24,544 17,971
------------- -------------
Total assets $ 326,882 $ 283,503
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 41,438 $ 33,981
Accrued expenses 43,142 39,179
------------- -------------
Total current liabilities 84,580 73,160
LONG-TERM DEBT 202,023 166,196
------------- -------------
Total liabilities 286,603 239,356
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 401 427
Additional paid-in capital 55,411 78,179
Accumulated deficit (9,799) (29,965)
Accumulated other comprehensive loss (5,734) (4,494)
------------- -------------
Total stockholders' equity 40,279 44,147
------------- -------------
Total liabilities and stockholders' equity $ 326,882 $ 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
-------------------------------------
October 28, October 30,
2000 1999
---------------- ----------------
<S> <C> <C>
Net sales $ 146,249 $ 132,288
Cost of goods sold, occupancy and buying expenses 90,188 80,857
---------------- ----------------
Gross profit 56,061 51,431
---------------- ----------------
Selling, general and administrative expenses:
Operating expenses 47,695 45,017
Depreciation and leasehold amortization 8,206 6,546
Amortization of cost in excess of net assets of acquired businesses 712 501
---------------- ----------------
56,613 52,064
---------------- ----------------
Loss from operations before interest and income taxes (552) (633)
Interest expense 3,703 2,017
---------------- ----------------
Loss from operations before income taxes (4,255) (2,650)
Income tax benefit (1,656) (1,086)
---------------- ----------------
Net loss $ (2,599) $ (1,564)
================ ================
Loss per share (basic and diluted) $ (0.06) $ (0.03)
================ ================
Weighted average shares outstanding (basic and diluted) 40,389 45,907
================ ================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
----------------------------
October 28, October 30,
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 502,754 $ 484,487
Cost of goods sold, occupancy and buying expenses 293,675 279,816
------------ ------------
Gross profit 209,079 204,671
------------ ------------
Selling, general and administrative expenses:
Operating expenses 142,234 136,995
Depreciation and leasehold amortization 22,107 19,331
Amortization of cost in excess of net assets of acquired businesses 1,871 1,517
------------ ------------
166,212 157,843
------------ ------------
Earnings from operations before interest and income taxes 42,867 46,828
Interest expense 9,908 5,970
------------ ------------
Earnings from operations before income taxes 32,959 40,858
Provision for income taxes 12,793 15,833
------------ ------------
Net income $ 20,166 $ 25,025
============ ============
Earnings per share:
Basic $ 0.48 $ 0.54
============ ============
Diluted $ 0.48 $ 0.52
============ ============
Weighted average shares outstanding:
Basic 41,688 46,289
============ ============
Diluted 42,148 47,752
============ ============
</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>
Thirty-Nine Weeks Ended
-------------------------------
October 28, October 30,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,166 $ 25,025
------------- -------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 23,978 20,848
Accretion of debt discount 299 284
Income tax benefit from the exercise of nonqualified stock options 429 1,347
Changes in operating assets and liabilities, net of effect of acquisitions -
Changes in assets:
Accounts receivable 1,320 (2,258)
Inventory (5,798) (14,486)
Prepaid rent (928) 313
Other current assets 206 (7,247)
Other assets (3) (348)
Changes in liabilities:
Accounts payable 933 8,336
Accrued expenses (1,158) 3,636
------------- -------------
19,278 10,425
------------- -------------
Net cash provided by continuing operations 39,444 35,450
Net cash used in discontinued operations (9) (1,001)
------------- -------------
Net cash provided by operating activities 39,435 34,449
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (23,197) (28,855)
Acquisition of business (21,835) --
------------- -------------
Net cash used in investing activities (45,032) (28,855)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under revolving credit facilities 206,725 119,100
Principal payments on revolving credit facilities (171,197) (114,179)
Principal payments on long-term debt -- (125)
Payments for stock repurchases and retirements (31,348) (12,633)
Payment of deferred financing costs (1,696) --
Proceeds from exercise of stock options 492 3,077
------------- -------------
Net cash provided by (used in) financing activities 2,976 (4,760)
------------- -------------
Effect of exchange rate changes on cash and cash equivalents 126 498
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,495) 1,332
CASH AND CASH EQUIVALENTS, beginning of period 9,732 5,007
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 7,237 $ 6,339
============= =============
</TABLE>
(Continued on next page)
6
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands)
(Unaudited)
Thirty-Nine Weeks Ended
---------------------------
October 28, October 30,
2000 1999
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 7,680 $ 3,911
============ ============
Income taxes $ 5,104 $ 7,277
============ ============
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 thirty-nine weeks
ended October 28, 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, as adjusted on November 10, 2000 as a result of a closing
balance sheet audit required by the purchase agreement, was approximately $29.3
million, consisting of $10.0 million in cash, 1.3 million shares of the
Company's common stock valued at $7.1 million, 142,000 warrants to purchase the
Company's common stock valued at $237,000, 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 $18.1 million has been recorded as cost in excess of net assets of
acquired businesses and is being 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. As of October 28,
2000, no accrued amounts have been utilized. 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 anticipates that
substantially all the store closures will be completed by the end 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 October 28, 2000, remaining accrued restructuring expenses
pursuant to these plans, which is included in accrued expenses in the
accompanying consolidated balance sheets, totaled $254,000 and were comprised of
liabilities for remaining lease exit costs related to stores closed during the
completion of the restructuring plans. During the third quarter of fiscal 2000,
$150,000 of the accrual for restructuring expenses was utilized for the payment
of lease exit costs related to store closings completed under the restructuring
plans.
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
October 28, 2000, the Company had outstanding borrowings under the credit
facility of $88.2 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
-------------------------------
October 28, October 30,
2000 1999
-------------- -------------
(In thousands)
Net loss $ (2,599) $ (1,564)
Foreign currency translation adjustment (1,314) 758
-------------- -------------
Total comprehensive loss $ (3,913) $ (806)
============== =============
Thirty-Nine Weeks Ended
-------------------------------
October 28, October 30,
2000 1999
-------------- -------------
(In thousands)
Net income $ 20,166 $ 25,025
Foreign currency translation adjustment (1,240) 362
-------------- -------------
Total comprehensive income $ 18,926 $ 25,387
============== =============
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
-----------------------------
October 28, October 30,
2000 1999
----------- ----------
(In thousands, except per share data)
<S> <C> <C>
Numerator:
Net loss $ (2,599) $ (1,564)
Denominator:
Denominator for basic earnings per share 40,389 45,907
Effect of dilutive securities:
Options to purchase common stock -- --
--------- ---------
Denominator for diluted earnings per share 40,389 45,907
========= =========
Loss per share:
Basic and diluted $ (0.06) $ (0.03)
========= =========
Antidilutive securities not included in the diluted earnings per share
computation:
Options and warrants to purchase
common stock 5,064 4,538
Exercise prices $ 0.25 $ 0.25
to to
$ 17.08 $ 30.81
Convertible subordinated debt $ 115,000 $ 116,248
Conversion price $ 30.25 $ 6.00 and 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>
Thirty-Nine Weeks Ended
--------------------------------
October 28, October 30,
2000 1999
----------- -----------
(In thousands, except per share data)
<S> <C> <C>
Numerator:
Net income $ 20,166 $ 25,025
Effect of dilutive securities:
Interest expense, net of tax benefit on
convertible debt issued in January 1999 -- 30
----------- -----------
Numerator for diluted earnings per share $ 20,166 $ 25,055
=========== ===========
Denominator:
Denominator for basic earnings per share 41,688 46,289
Effect of dilutive securities:
Convertible debt issued in January 1999 -- 208
Options to purchase common stock 460 1,255
----------- -----------
Denominator for diluted earnings per share 42,148 47,752
=========== ===========
Earnings per share:
Basic $ 0.48 $ 0.54
=========== ===========
Diluted $ 0.48 $ 0.52
=========== ===========
Antidilutive securities not included in the diluted earnings per share
computation:
Options and warrants to purchase common stock 2,579 552
Exercise prices $ 7.00 $ 10.56
to to
$ 17.08 $ 30.81
Convertible subordinated debt $ 115,000 $ 115,000
Conversion price $ 30.25 $ 30.25
</TABLE>
Note 7--Recent Accounting Pronouncements:
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 7--Recent Accounting Pronouncements--(Continued):
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements. SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company is required to adopt SAB No. 101 no later than the
fourth quarter of fiscal 2000 and, in the opinion of the Company's management,
the adoption will not have a material impact on its financial position and
results of operations.
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 (loss)
from operations
before interest
Net sales and income taxes
---------------- ------------------
(In thousands)
Thirteen Weeks Ended
October 28, 2000
North America $ 126,482 $ (2,211)
Other segments 19,767 1,659
---------------- ------------------
Total $ 146,249 $ (552)
================ ==================
Thirteen Weeks Ended
October 30, 1999
North America $ 112,401 $ (1,566)
Other segments 19,887 946
---------------- ------------------
132,288 (620)
Restructuring expense -- (13)
---------------- ------------------
Total $ 132,288 $ (633)
================ ==================
12
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)--(Continued)
Note 8--Segment Information--(Continued):
<TABLE>
<CAPTION>
Earnings from
operations before
interest and income
Net sales taxes
----------------- ------------------
(In thousands)
<S> <C> <C>
Thirty-Nine Weeks Ended
October 28, 2000
North America $ 443,166 $ 39,754
Other segments 59,588 2,957
----------------- ------------------
502,754 42,711
Restructuring expense reversal -- 156
----------------- ------------------
Total $ 502,754 $ 42,867
================= ==================
Thirty-Nine Weeks Ended
October 30, 1999
North America $ 425,526 $ 45,448
Other segments 58,961 1,118
----------------- ------------------
484,487 46,566
Restructuring expense reversal -- 262
----------------- ------------------
Total $ 484,487 $ 46,828
================= ==================
</TABLE>
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.
During the first nine months of fiscal 2000, the Company repurchased 4.2 million
shares at a cost of $31.3 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. In August 2000, the Company reached a settlement on this
action, which did not have a material adverse effect on the Company's operating
results.
13
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)--(Continued)
Note 10--Litigation, Claims and Assessment Contingencies --(Continued):
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.
14
<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 in future press releases and/or orally, whether in
presentations, in response to questions or otherwise. The Company does not
undertake to publicly update or revise any forward-looking statements even if
experience or future changes make it clear that any projected results expressed
or implied in this Form 10-Q will not be realized. The inclusion of any
statement in this Form 10-Q or such releases or oral statements does not
constitute an admission by the Company or any other person that the events or
circumstances described in such statements are material. 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 and/or
limitations on the timely delivery of products by vendors and from the Company's
distribution center to its retail stores 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 nine months 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 18.1% and 28.1%,
respectively, of the Company's total merchandise purchases, as compared to 27.1%
and 23.2%, respectively, for the same period of fiscal 1999. 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
15
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (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. Historically, the Company has return and/or exchange
privileges on certain levels of slow-moving products with its vendors. There can
be no assurance that the Company will not be subject to increasing limitations
on product returns in the future, which may in turn affect the Company's
inventory management strategy.
Risks of Developing Exclusive Brand Products/Market Share. The Company's efforts
to develop exclusive brands of products in both the sunglass and watch
categories will increase the Company's exposure to risks of inventory
obsolescence and other exposures normally associated with manufacturers.
Accordingly, in the event that a particular style of product does not achieve
widespread consumer acceptance, the Company may be required to take significant
markdowns, which could have a material adverse effect on its gross profit margin
and other operating results. 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"). Additionally, during fiscal 2000,
the Company completed the acquisition of Watch World International, a national
chain of 118 specialty watch stores. During the first nine months of fiscal
2000, the Company converted and/or opened 194 Combo store locations and as of
October 28, 2000 the Company operated a total of 388 Combo stores worldwide.
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,
ability to attract and/or retain qualified personnel, 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 watch 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. There is also no assurance
16
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
that the results achieved in Combo stores in recent periods will continue as the
concept matures and/or expands. 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 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 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.
Changes in the Level of Global Consumer Demand and/or Spending. The success of
the Company's operations depends to a significant extent upon a number of
factors relating to discretionary consumer spending, including economic
conditions affecting disposable consumer income such as employment, business
conditions, interest rates, energy prices, uncertainty surrounding the outcome
of the current U.S. presidential election, and taxation. There can be no
assurance that consumer spending will not be affected by economic conditions,
thereby impacting the Company's growth, net sales and profitability.
17
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Impact of Disposal of Discontinued Operations. In January 1998, the Company
adopted a plan to discontinue its EyeX optical segment and substantially
completed the disposition in fiscal 1998. During fiscal 1999, the Company
recorded $1.2 million ($738,000, net of taxes) of additional exit costs
associated with this segment. The Company's consolidated financial statements
include an allowance for estimated loss from disposition of this segment. As the
Company completes its disposal of EyeX, certain matters may arise which could
result in additional gains or losses to be recognized by the Company.
Ability to Manage Growth. The Company has opened or converted to Combos a
significant number of new locations in the past several years, and in fiscal
2000, completed the acquisition of Watch World International, a national chain
of 118 specialty watch stores. 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 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.
18
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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 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 integration of new
stores into the operations of the Company. Additionally, the timing of sales and
operating results contributed by new concepts (such as the standalone watch
specialty and Combo stores) and new distribution channels (such as the Internet)
are subject to more unpredictable seasonal patterns due to the newer nature of
these concepts.
Possible Volatility of Stock and Note Prices. The market prices of the Company's
common stock and convertible subordinated notes are subject to significant
volatility caused by factors such as quarterly fluctuations in the financial
results of the Company, monthly comparable store sales results, changes in
financial estimates by securities analysts, shortfalls in earnings or sales
below analysts' expectations, the overall economy and the financial markets. In
addition, the common stock is quoted on the NASDAQ National Market and the notes
are traded on the NASDAQ SmallCap Market, which stock markets have experienced,
and are likely to experience in the future, significant price and volume
fluctuations which could adversely affect the market price of the common stock
and the notes without regard to the operating performance of the Company.
Anti-Takeover Effect of Certain Provisions of the Company's Articles of
Incorporation and Bylaws. Certain provisions of the Company's Articles of
Incorporation and Bylaws may be deemed to have anti-takeover effects and may
delay, defer or prevent a takeover attempt that a stockholder might consider in
its best interest. These provisions (i) classify the Company's Board of
Directors into three classes, each of which will serve for different three-year
periods, (ii) provide that only the Board of Directors or Chief Executive
Officer may call special meetings of the stockholders, and (iii) establish
certain advance notice procedures for nomination of candidates for election as
directors and for stockholder proposals to be considered at stockholders'
meetings. The Company is also subject to certain provisions of the Florida
Business Corporation Act, which may deter or frustrate takeovers of Florida
corporations.
*********
The Company cautions that the risk factors described above could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statements of the Company made by or on behalf of the Company.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrences of unanticipated
events.
19
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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. On June 1, 2000 the Company acquired Watch World
International Inc., a national chain of 118 specialty watch stores. The
Company's stores operate under the Sunglass Hut International, Watch Station
International and Watch World tradenames. Additionally, during fiscal 1999, the
Company initiated a rollout of a new store concept (previously tested on a
limited basis in 1998) 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 194 stores in the first nine months of
fiscal 2000. As of October 28, 2000, the Company operated 1,974 locations
including 1,359 specialty sunglass locations, 227 specialty watch locations and
388 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 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 October 28,
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
20
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
advance of the Company's highest sales periods. However, during fiscal 2000, the
Company anticipates that outstanding borrowings will peak during the fourth
quarter due to the impact of the Watch World acquisition and share repurchases
during the year. See "Seasonality and Quarterly Results." At October 28, 2000
the Company had outstanding borrowings under its credit facility of $88.2
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 $39.4 million for the first nine
months of fiscal 2000 compared to $34.4 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 increase in inventory.
Net cash used in investing activities was $45.0 million for the first nine
months of fiscal 2000 compared to $28.9 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 provided by financing activities was $3.0 million for the first nine
months of fiscal 2000 compared to a net cash used in financing activities of
$4.8 million for the same period in fiscal 1999. Financing cash flows for fiscal
2000 primarily reflect the net increase in the amounts outstanding under the
Company's revolving credit facility of $35.5 million, offset by payments for
stock repurchases of $31.3 million.
Management believes that net cash provided by operations, together with
borrowing availability under the Company's credit facility, should 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 other working capital
requirements, through at least the next twelve months.
Results of Operations
Quarter Ended October 28, 2000 Compared to Quarter Ended October 30, 1999
The Company reported net loss of $0.06 per share, or $2.6 million, during the
quarter ended October 28, 2000 compared to net loss of $0.03 per share, or $1.6
million for the same period of fiscal 1999. The Company's loss for the quarter
ended October 28, 2000 include two unique items, (1) a $0.02 loss per share
reflecting operating results from the recently acquired Watch World operations;
and (2) a $0.02 per share dilutive impact from the Company's share repurchases,
which will be accretive to full year results.
21
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Net sales increased $14.0 million, or 10.6%, to $146.2 million during the
quarter ended October 28, 2000 compared to $132.3 million for the same period of
fiscal 1999. This increase reflects sales from new stores opened during the
third quarter of fiscal 2000 (and fiscal 1999 to the extent not reflected in
comparable store sales) of $5.7 million, an increase in comparable store sales
of 7.5% (accounting for an increase of approximately $9.1 million) and sales
from the Company's newly acquired Watch World stores of $8.9 million, offset by
a decrease of $9.7 million for sales lost due to store closures during fiscal
1999 and 2000.
There can be no assurance that sales results during the peak December holiday
sales period will achieve similar comparable store or sales growth rates as
experienced during the third quarter. The Company remains cautious regarding its
fourth quarter earnings, which are heavily dependent on the success or failure
of December holiday season sales. The Company has previously announced that
November 2000 sales results increased 3.6% to $35.8 million, with comparable
stores reporting flat performance.
Gross profit increased $4.6 million, or 9.0%, to $56.1 million during the
quarter ended October 28, 2000 compared to $51.4 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 0.6 percentage points to 38.3% for the quarter
ended October 28, 2000 from 38.9% 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 $2.7 million, or 5.9%, to $47.7 million during the
quarter ended October 28, 2000 compared to $45.0 million during the same period
of fiscal 1999. As a percentage of net sales, operating expenses decreased 1.4
percentage points to 32.6% during the quarter ended October 28, 2000 compared to
34.0% for the same period in 1999 primarily due to the leverage impact of strong
comparable store sales.
Depreciation and leasehold amortization expense increased $1.7 million, or
25.4%, to $8.2 million during the quarter ended October 28, 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.
Amortization of cost in excess of net assets of acquired business increased
$211,000, or 42.1%, to $712,000 during the quarter ended October 28, 2000
compared to $501,000 for the same period of fiscal 1999 due to the acquisition
of Watch World.
Interest expense increased $1.7 million to $3.7 million for the quarter ended
October 28, 2000, compared to $2.0 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.
22
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
First Nine Months of Fiscal 2000 Compared to First Nine Months of Fiscal 1999
The Company reported net income of $0.48 per diluted share, or $20.2 million,
during the first nine months of fiscal 2000 compared to net income of $0.52 per
diluted share, or $25.0 million for the same period of fiscal 1999. The
Company's earnings for the first nine months of fiscal 2000 include a $0.05 loss
per share from Watch World, reflecting operating results subsequent to the June
1, 2000 acquisition, as well as a $0.01 per share benefit due to the Company's
share repurchase activity.
Net sales increased $18.3 million, or 3.8%, to $502.8 million during the first
nine months of fiscal 2000 compared to $484.5 million for the same period of
fiscal 1999. This increase reflects sales from new stores opened during the
first nine months of fiscal 2000 (and fiscal 1999 to the extent not reflected in
comparable store sales) of $17.6 million, an increase in comparable store sales
of 3.2% (accounting for approximately $14.6 million of this increase), sales
from the Company's newly acquired Watch World stores of $15.7 million, offset by
a decrease of $29.6 million for sales lost due to store closures during fiscal
1999 and 2000.
Gross profit increased $4.4 million, or 2.2%, to $209.1 million during the first
nine months of fiscal 2000 compared to $204.7 million for the same period of
fiscal 1999. As a percentage of net sales, gross profit decreased 0.6% to 41.6%
for the first nine months of fiscal 2000 from 42.2% 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 $5.2 million, or 3.8% to $142.2 million during the
first nine months of fiscal 2000 compared to $137.0 million for the same period
of fiscal 1999. As a percentage of net sales, operating expenses remained
consistent with the same period in fiscal 1999.
Depreciation and leasehold amortization expense increased $2.8 million, or 14.4%
to $22.1 million during the first nine months of fiscal 2000 compared to $19.3
million for the same period of fiscal 1999, due to new store growth, the
renovation of existing stores and expenditures for required systems
enhancements.
Amortization of cost in excess of net assets of acquired business increased
$354,000, or 23.3%, to $1.9 million during the first nine months of fiscal 2000
compared to $1.5 million for the same period of fiscal 1999 due to the
acquisition of Watch World.
Interest expense increased $4.0 million to $9.9 million for the first nine
months of fiscal 2000, compared to $6.0 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
23
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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, and, to a
lesser extent, during the fourth quarter, reflecting increased demand for
sunglasses and watches during the holiday season.
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 timing of store
openings and closings and the integration of new stores into the operations of
the Company. Additionally, the timing of sales and operating results contributed
by new concepts (such as the standalone watch specialty and Combo stores) and
new distribution channels (such as the Internet) are subject to more
unpredictable seasonal patterns due to the newer nature of these concepts.
24
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
PART II--OTHER INFORMATION
ITEM 6--Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule/(1)/
---------------
(1)Filed herewith.
(b) The Company did not file any reports on Form 8-K during the quarter ended
October 28, 2000.
25
<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: December 12, 2000 By: /s/John X. Watson
----------------------------------------
John X. Watson
President, Chief Executive Officer and
Director
(principal executive officer)
Date: December 12, 2000 By: /s/Stephen L. Pattison
----------------------------------------
Stephen L. Pattison
Senior Vice-President-Finance
(principal financial officer)
Date: December 12, 2000 By: /s/George L. Pita
----------------------------------------
George L. Pita
Vice President-Finance
(chief accounting officer)
26
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
27 Financial Data Schedule
