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 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21690
SUNGLASS HUT INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 65-0667471
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
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 47,307,618
(as of December 7, 1998).
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1998 (Unaudited)
and January 31, 1998....................................................3
Consolidated Statements of Operations for the Thirteen Weeks
Ended October 31, 1998 and November 1, 1997 (Unaudited).................4
Consolidated Statements of Operations for the Thirty-Nine Weeks
Ended October 31, 1998 and November 1, 1997 (Unaudited).................5
Consolidated Statements of Cash Flows for the Thirty-Nine Weeks
Ended October 31, 1998 and November 1, 1997 (Unaudited).................6
Notes to Condensed Consolidated Financial Statements (Unaudited)........8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................13
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.....................................23
Signatures...........................................................24
2
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1998 1998
----------------- ----------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,047 $ 3,372
Accounts receivable 4,749 3,612
Inventory 91,390 101,965
Prepaid rent 7,382 7,707
Other current assets 21,860 42,777
Net assets of discontinued operations 1,907 2,461
----------------- ----------------
Total current assets 130,335 161,894
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $88,550 and $76,968 99,367 101,069
COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES,
net of accumulated amortization of $28,216
and $28,408 22,791 25,083
OTHER ASSETS 16,795 12,327
----------------- ----------------
Total assets $269,288 $ 300,373
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 28,203 $ 18,079
Accrued payroll and related taxes 6,457 7,388
Accrued rent 9,420 7,019
Accrued expenses 27,959 29,988
Accrued restructuring expenses 15,612 25,789
Current portion of long-term debt 150 12,575
----------------- ----------------
Total current liabilities 87,801 100,838
LONG-TERM DEBT, net of current portion and unamortized discount 118,856 112,803
----------------- ----------------
Total liabilities 206,657 213,641
----------------- ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock 478 547
Additional paid-in capital 123,734 166,008
Accumulated deficit (58,005) (76,536)
Accumulated other comprehensive income (3,576) (3,287)
----------------- ----------------
Total stockholders' equity 62,631 86,732
----------------- ----------------
Total liabilities and stockholders' equity $269,288 $ 300,373
================= ================
</TABLE>
See notes to condensed 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 31, NOVEMBER 1,
1998 1997
------------- ---------------
<S> <C> <C>
Net sales $ 122,832 $ 122,355
Cost of goods sold, occupancy and buying expenses 77,792 79,409
------------- ---------------
Gross profit 45,040 42,946
------------- ---------------
Selling, general and administrative expenses:
Operating expenses 43,656 41,485
Depreciation and leasehold amortization 6,161 6,801
Amortization of cost in excess of net assets of
acquired business 439 588
------------- ---------------
50,256 48,874
------------- ---------------
Loss from continuing operations before interest and
Income taxes (5,216) (5,928)
Interest expense 1,542 1,718
------------- ---------------
Loss from continuing operations before income taxes (6,758) (7,646)
Benefit for income taxes (2,753) (3,179)
------------- ---------------
Loss from continuing operations (4,005) (4,467)
Discontinued operations:
Loss from discontinued operations, net of income tax
benefit of $440,000 in 1997 -- (633)
------------- ---------------
Net loss $ (4,005) $ (5,100)
============= ===============
Net loss per share (basic and diluted):
From continuing operations $ (0.08) $ (0.08)
From discontinued operations -- (0.01)
------------- ---------------
Net loss $ (0.08) $ (0.09)
============= ===============
Weighted average shares outstanding:
Basic 50,028 54,689
============= ===============
Diluted 50,028 54,689
============= ===============
</TABLE>
See notes to condensed 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 31, NOVEMBER 1,
1998 1997
------------- ---------------
<S> <C> <C>
Net sales $ 462,618 $ 443,843
Cost of goods sold, occupancy and buying expenses 271,963 268,809
------------- ---------------
Gross profit 190,655 175,034
------------- ---------------
Selling, general and administrative expenses:
Operating expenses 135,001 128,915
Depreciation and leasehold amortization 17,698 19,757
Amortization of cost in excess of net assets of acquired
businesses 1,320 1,782
------------- ---------------
154,019 150,454
------------- ---------------
Earnings from continuing operations before interest
and income taxes 36,636 24,580
Interest expense 5,331 6,342
------------- ---------------
Earnings from continuing operations before income taxes 31,305 18,238
Provision for income taxes 12,773 7,538
------------- ---------------
Earnings from continuing operations 18,532 10,700
Discontinued operations:
Loss from discontinued operations, net of income tax benefit
of $870,000 in 1997 -- (1,262)
------------- ---------------
Net income $ 18,532 $ 9,438
============= ===============
Net income per share:
Basic -
From continuing operations $ 0.35 $ 0.19
From discontinued operations -- (0.02)
------------- ---------------
Net income $ 0.35 $ 0.17
============= ===============
Diluted -
From continuing operations $ 0.34 $ 0.19
From discontinued operations -- (0.02)
------------- ---------------
Net income $ 0.34 $ 0.17
============= ===============
Weighted average shares outstanding:
Basic 53,117 54,658
============= ===============
Diluted 53,868 54,988
============= ===============
</TABLE>
See notes to condensed 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 31, NOVEMBER 1,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,532 $ 9,438
----------- -----------
Adjustments to reconcile net income to net cash provided by
continuing operations:
Depreciation and amortization 19,018 21,539
Loss from discontinued operations, net of tax benefits -- 1,262
Compensation expense - stock grants -- 465
Accretion of debt discount 253 257
Changes in operating assets and liabilities -
Changes in assets:
Accounts receivable (1,137) (565)
Inventory 10,575 20,124
Prepaid rent 325 (504)
Other current assets 24,167 (1,931)
Other assets (4,971) (3,959)
Changes in liabilities:
Accounts payable 10,124 20,114
Accrued expenses (619) 8,643
Accrued restructuring expenses (3,455) (6,469)
----------- -----------
54,280 58,976
----------- -----------
Net cash provided by continuing operations 72,812 68,414
Net cash used in discontinued operations (3,466) (2,026)
----------- -----------
Net cash provided by operating activities 69,346 66,388
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (22,122) (24,688)
Capital expenditures - discontinued operations (31) (397)
----------- -----------
Net cash used in investing activities (22,153) (25,085)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under revolving credit facilities 34,800 68,900
Principal payments on revolving credit facilities (41,400) (113,200)
Principal payments on long-term debt (25) (316)
Payment of deferred financing costs (629) (240)
Payments for stock repurchases (42,722) --
Proceeds from exercise of stock options 246 21
----------- -----------
Net cash used in financing activities (49,730) (44,835)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents 2,212 850
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (325) (2,682)
CASH AND CASH EQUIVALENTS, beginning of period 3,372 5,589
----------- -----------
CASH AND CASH EQUIVALENTS, end of period 3,047 2,907
=========== ===========
</TABLE>
(Continued on next page)
6
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
--------------------------------
OCTOBER 31, NOVEMBER 1,
1998 1997
----------- ----------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 3,650 $ 4,563
=========== ================
Income taxes, net of refunds received $ (16,576) $ 6,451
=========== ================
Non-cash activities-
Write-down of property and equipment against accrued
restructuring expenses $ 5,618 $ 3,824
Write-down of other assets against accrued restructuring
expenses 1,297 757
----------- ----------------
$ 6,915 $ 4,581
=========== ================
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL:
The accompanying consolidated financial statements of Sunglass Hut
International, Inc. and subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and, therefore, omit or condense
certain footnotes and other information normally included in financial
statements prepared in accordance with generally accepted accounting principles.
The accounting policies followed for interim financial reporting are the same as
those disclosed in Note 1 of the Notes to Consolidated Financial Statements
included in the Company's audited financial statements for the fiscal year ended
January 31, 1998 which are included in Form 10-K. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of the financial information for the interim periods reported
have been made. Results of operations for the thirteen and thirty-nine weeks
ended October 31, 1998 are not necessarily indicative of the results to be
expected for the entire fiscal year ending January 30, 1999.
NOTE 2 - RECLASSIFICATIONS:
The accompanying consolidated statements of income and cash flows for the
thirteen and thirty-nine weeks ended November 1, 1997 and notes thereto have
been reclassified to reflect EyeX, the Company's optical segment, as a
discontinued operation.
NOTE 3- RESTRUCTURING EXPENSES:
In the fourth quarter of 1997, management performed an assessment of the
recoverability of the Company's asset base and, as a result, recorded $54.7
million ($34.8 net of tax benefits) for restructuring expenses and asset
impairment charges (the "250 Store Restructuring"). Pre-tax restructuring
charges of $23.5 million related to the closing of approximately 250 marginal or
unprofitable locations and consisted of non-cash charges of $12.9 million for
fixed and other asset write-downs and cash charges of $10.6 million for lease
exit and other incremental exit costs. The Company anticipates that the planned
closures of the 250 store restructuring will be substantially completed during
fiscal 1998 with approximately 30 closings continuing into fiscal 1999.
During the third quarter of 1998, the Company assessed the amounts recorded with
its 250 Store Restructuring plan, and determined that as a result of favorable
experience in store closing costs, a reversal of previously accrued expenses of
approximately $3.9 million was required. Additionally, during the third quarter,
the Company adopted a plan for the closure of approximately 150 additional store
and licensed department locations (the "150 Store Restructuring"). Restructuring
expenses associated with this plan are approximately $4.1 million. These items
are reflected in operating expenses in the accompanying statements of
operations.
As of October 31, 1998, the Company had closed approximately 150 of the 250
stores included in the 250 Store Restructuring plan. The Company has realized
favorable results in relation to store closures in that actual cash payments for
lease exit costs and other incremental costs have been less than originally
estimated and provided for. Management has evaluated the remaining accrued
restructuring expenses and believes that the Company will continue to experience
favorable results in lease exit and other incremental costs related to the
remaining store closings. As a result, during the third quarter of 1998, the
Company reduced the 250 Store Restructuring accrual by approximately $3.9
million.
8
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
NOTE 3- RESTRUCTURING EXPENSES (CONTINUED):
Additionally, during the third quarter of 1998, as management continued the
evaluation of its asset base, a formal plan was adopted for the closure of
approximately 150 additional store locations including approximately 75 licensed
department locations. The Company anticipates that these closures will be
substantially completed during fiscal 1999. The Company estimates that the
charges to be incurred in connection with this plan will approximate $4.1
million consisting of $3.1 million of non-cash charges for fixed and other asset
write-downs and cash charges of $1.0 million for lease exit and other
incremental costs. As a result, the Company has recorded a provision for
restructuring expenses of $4.1 million during the third quarter of 1998.
The following table summarizes the activity in accrued restructuring expenses
during the period from February 1, 1998 through October 31, 1998:
Balance as of February 1, 1998 $ 25,789
Fixed and other asset write-downs/impairments (6,915)
Cash payments related to lease exit and other incremental costs (3,455)
Reversal of restructuring expenses related to the 250 Store
Restructuring(1) (3,862)
Provision for additional store closures related to the 150 Store
Restructuring(1) 4,055
---------
Balance as of October 31, 1998 $ 15,612
=========
(1) Included in operating expenses in the accompanying statements of operations
9
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
NOTE 4 - COMPREHENSIVE INCOME:
Total comprehensive income consists of the following:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
----------------------------
OCTOBER 31, NOVEMBER 1,
1998 1997
------------ ------------
(In thousands)
<S> <C> <C>
Net loss $ (4,005) $ (5,100)
Foreign currency translation adjustment 591 (403)
------------ ------------
Total comprehensive income $ (3,414) $ (5,503)
============ ============
THIRTY-NINE WEEKS ENDED
----------------------------
OCTOBER 31, NOVEMBER 1,
1998 1997
------------ ------------
(In thousands)
<S> <C> <C>
Net income $ 18,532 $ 9,438
Foreign currency translation adjustment (289) (2,126)
------------ ------------
Total comprehensive income $ 18,243 $ 7,312
============ ============
</TABLE>
10
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
NOTE 5 - EARNINGS ( LOSS) PER SHARE:
Basic and diluted earnings (loss) per share from continuing operations is
computed as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------------
OCTOBER 31, NOVEMBER 1,
1998 1997
------------ -------------
(In thousands, except per
share data)
<S> <C> <C>
Numerator:
Loss from continuing operations $ (4,005) $ (4,467)
============ =============
Denominator:
Denominator for basic earnings per share 50,028 54,689
Effect of dilutive securities -
Options to purchase common stock -- --
------------ ------------
Denominator for diluted earnings per share 50,028 54,689
============ =============
Loss per share from continuing operations:
Basic and diluted $ (0.08) $ (0.08)
============ =============
Antidilutive securities not included
in the diluted earnings per share computation:
Options to purchase common stock 4,725 2,845
Exercise prices $ 0.25 $ 0.25
to to
$ 30.81 $ 30.81
Convertible subordinated debt $ 115,000 $ 115,000
Conversion price $ 30.25 $ 30.25
THIRTY-NINE WEEKS ENDED
-----------------------------
OCTOBER 31, NOVEMBER 1,
1998 1997
------------ -------------
(In thousands, except per
share data)
<S> <C> <C>
Numerator:
Earnings from continuing operations $ 18,532 $ 10,700
============ =============
Denominator:
Denominator for basic earnings per share 53,117 54,658
Effect of dilutive securities -
Options to purchase common stock 751 330
------------ -------------
Denominator for diluted earnings per share 53,868 54,988
============ =============
Earnings per share from continuing operations:
Basic $ 0.35 $ 0.19
============ =============
Diluted $ 0.34 $ 0.19
============ =============
Antidilutive securities not included
in the diluted earnings per share computation:
Options to purchase common stock 950 1,709
Exercise prices $ 3.75 $ 7.19
to to
$ 30.81 $ 30.81
Convertible subordinated debt $ 115,000 $ 115,000
Conversion price $ 30.25 $ 30.25
</TABLE>
11
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENT - START-UP COSTS:
In April 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities". SOP 98-5 requires that costs incurred during the organization,
pre-opening and start-up phases of a project be expensed as incurred, unless
they are appropriately capitalizable under other existing accounting
pronouncements. The Company is required to adopt the SOP prior to or in the
first quarter of fiscal 1999, and, upon adoption, expense all remaining
capitalized start-up costs as a cumulative effect of change in accounting
principle. The Company is in the process of reviewing its capitalization
policies and determining the impact of adoption of SOP 98-5 on its financial
position and results of operations.
NOTE 7 - REPURCHASE OF COMMON STOCK:
In March 1998, the Board of Directors authorized the repurchase of up to 7.5
million shares of the Company's outstanding common stock and in November 1998,
the Board of Directors had authorized the repurchase of up to an additional 8.0
million shares of the Company's outstanding common stock. To date, the Company
has repurchased 7.4 million shares under these authorizations at a cost of
approximately $45.0 million.
12
<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:
ABILITY TO IMPLEMENT RESTRUCTURING PLANS
The Company's restructuring plans include the closure of approximately 400
marginal or unprofitable locations. However, the Company's ability to close
stores is subject to a number of factors, including its ability to negotiate
favorable lease termination provisions, dispose of inventory, and handle
employee matters on a timely basis. The Company's inability to implement planned
closures on schedule at the expected costs could have an adverse effect on its
operating results. In addition, the Company continually evaluates store
profitability, and there can be no assurance that the number of future store
closings will not change (see Note 3 of notes to condensed consolidated
financial statements).
RISKS OF NEW SPECIALTY STORE CONCEPTS AND LOCATIONS
The Company's ability to expand into new concepts has not been fully tested. The
Company opened its first Watch Station store, a watch specialty store, in fiscal
1996 and has opened several combo store locations (featuring both sunglass and
watch product offerings) during fiscal 1998. Accordingly, these operations will
be subject to the numerous risks of establishing new business enterprises,
including unanticipated operating problems, ability to secure suitable new store
sites on a timely basis and on satisfactory terms, lack of experience and
customer acceptance, inventory obsolescence risks, significant competition from
existing and new retailers, and the extent of existing relationships between
such retailers and manufacturers/distributors. There can be no assurance that
these concepts will be able to duplicate the growth of the Company's Sunglass
Hut stores or that they will achieve sales and profitability levels that justify
the Company's investment therein. Expansion of these concepts or any other
related concepts also involve other risks that could have a material adverse
effect on the Company, including (i) diversion of management's attention either
from or to the Company's core business, (ii) difficulties with the hiring,
retention and training of key personnel, (iii) risks associated with the
concept's higher dependence on holiday season sales and lower gross margin, and
(iv) risks associated with unanticipated problems or legal liabilities.
13
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In the fourth quarter of fiscal 1996, the Company halted expansion of EyeX, a
prescription glasses and corrective lens store concept launched in October 1995,
and, in January 1998, the Company adopted a plan to discontinue its EyeX segment
in fiscal 1998.
There can be no assurance that the Company will be able to successfully execute
other components of its growth strategies. The Company's international expansion
subjects the Company to certain risks and limitations not associated with its
current U.S. operations, including (i) the uncertainty of market acceptance of
specialty retailers and/or the Company's product offerings, (ii) the Company's
ability to hire and train local personnel, (iii) the Company's dependence on
local business conditions and practices, (iv) foreign currency losses, (v) the
impact of foreign taxes, and (vi) foreign investment restrictions and
limitations. Moreover, the Company's international expansion may include entry
into joint venture and/or franchise arrangements which may limit the Company's
control of operations.
Although the Company has acquired competitors in the past and considers
acquiring additional smaller chains of specialty retailers on an ongoing basis,
there can be no assurance that the Company will be able to consummate
acquisitions on satisfactory terms or that any acquired operations will be
successfully integrated. Moreover, the consolidation of the domestic specialty
sunglass retail industry has reduced the number of larger companies available
for sale, which could lead to higher prices being paid for the acquisition of
the remaining independent companies.
MERCHANDISING AND CONCENTRATION OF SUPPLIERS
The Company's success depends to a large degree on its ability to provide a
merchandise selection that appeals to customers' changing desires and that
appropriately reflects geographical or other demographic differences in brand
and style preferences. A failure by the Company to identify or take advantage of
emerging fashion trends could have a material adverse effect on its results of
operations. Moreover, the Company has no long-term purchase contracts or other
contractual assurance of continued supply, pricing or access to new products.
While the Company believes that it has good relationships with its vendors, the
inability to obtain merchandise from one or more key vendors on a timely basis,
or a material change in the Company's current purchase terms, could have a
material adverse effect on its results of operations. Moreover, there can be no
assurance that the Company's plan to reduce vendor and total unit presentation,
or vendor consolidation or other changes in the sunglass or watch manufacturing
industry will not limit the Company's ability to return and/or exchange product,
limit the Company's ability to take advantage of emerging fashion trends or
otherwise negatively impact its future results of operations.
The market for the Company's products is increasingly subject to the risk of
changing fashion trends, and the demand for certain styles can change. Although
the Company has historically enjoyed favorable return and exchange privileges
with its vendors, there can be no assurance that the Company will not be subject
to limitations on returns or exchanges in the future. In addition, the Company's
efforts to develop exclusive brands of products will increase the Company's
exposure to risks of inventory obsolescence and other exposures normally
associated with manufacturers. Accordingly, in the event that a particular style
of product does not achieve widespread consumer acceptance, the Company may be
required to take significant markdowns, which could have a material adverse
effect on its gross profit margin and other operating results.
14
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
During fiscal 1998, Bausch & Lomb (including Ray-Ban, Revo, Killer Loop and
other brands) and Oakley, the Company's largest suppliers, accounted for
approximately 23% and 26%, respectively, of the Company's total merchandise
purchases. On November 18, 1998, Bausch & Lomb announced that it was undertaking
an evaluation of strategic options for its eyewear business. Alternatives to be
considered include joint ventures, sale, spin-off or other business
combinations.
YEAR 2000 READINESS
The Year 2000 issue is the result of computer programs and other business
systems being written using two digits rather than four to represent the year.
Many of the time sensitive applications and business systems of the Company and
its business partners may recognize a date using "00" as the year 1900 rather
than the year 2000, which could result in system failure or disruption of
operations. Although the Year 2000 problem will impact the Company and its
business partners, a preliminary assessment of the Year 2000 exposure has been
made by the Company and, primarily because the Company's major management
information systems were only recently acquired and installed, the Company
believes it will be able to achieve Year 2000 readiness for its internal systems
by mid-fiscal 1999. The Company has also developed a plan of communication with
significant business partners to obtain appropriate assurances that the
Company's operations are not disrupted through these relationships and that the
Year 2000 issues are resolved in a timely manner. The Company believes that it
will satisfactorily resolve all significant Year 2000 problems and that the
related costs will not be material. However, estimates of Year 2000 related
costs are based on numerous assumptions, including the continued availability of
certain resources, the ability to acquire accurate information regarding third
party suppliers, and the ability to correct all relevant applications and third
party modification plans. There is no guarantee that the estimates will be
achieved and actual costs could differ materially from those anticipated.
Moreover, the failure of a major vendor's systems to operate properly with
respect to the Year 2000 problem on a timely basis or a Year 2000 conversion
that is incompatible with the Company's systems could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, a significant portion of the purchases from the Company's stores
are made with credit cards, and the Company's operations may be materially
adversely affected to the extent its customers are unable to use their credit
cards due to Year 2000 problems that are not remedied by their credit card
vendors.
ABILITY TO MANAGE GROWTH
The Company has grown significantly in the past several years. However, there is
no assurance that the Company will sustain the growth in the number of stores
and revenues that it has achieved historically. Moreover, there can be no
assurance that the Company's management and financial controls, executive
personnel and other corporate support systems will be adequate to manage the
increase in the size and scope of the Company's business in prior and future
periods. The continued growth of the Company is dependent, in large part, upon
the Company's ability to open and operate new stores on a profitable basis,
which in turn is subject to, among other things, the Company's ability to secure
suitable store sites on a timely basis and on satisfactory terms, the Company's
ability to hire, train and retain qualified management and other personnel, the
availability of adequate capital resources and the successful integration of new
stores into existing operations. There can be no assurance that, because of
demographic or other reasons, the Company's new stores will achieve sales and
profitability comparable to the Company's existing stores. In addition, there
can be no assurance that the opening of new locations will not cannibalize sales
at existing locations.
15
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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. In addition, a substantial number of the
Company's senior executives were hired in recent periods. The inability to
recruit and retain such additional personnel, or the loss of service of any of
the Company's current executive officers, could have a material adverse impact
on the Company.
SEASONALITY
The Company has historically experienced and expects to continue to experience
seasonal fluctuations in its net sales and results of operations. The Company
has generally experienced higher net sales and operating results in the second
quarter, and the Company expects this trend may continue for the foreseeable
future. The Company's quarterly results of operations may also fluctuate
significantly as a result of a variety of factors, including the timing of store
openings and closings, and the timing of sales contributed by new stores and new
concepts such as Watch Station.
POSSIBLE VOLATILITY OF STOCK AND NOTE PRICES
The market prices of the Company's common stock and convertible subordinated
notes are subject to significant volatility caused by factors such as quarterly
fluctuations in the financial results of the Company, monthly comparable store
sales results, changes in financial estimates by securities analysts, shortfalls
in earnings or sales below analysts' expectations, the overall economy and the
financial markets. In addition, the common stock is quoted on the NASDAQ
National Market and the notes are traded on the NASDAQ SmallCap Market, which
stock markets have experienced, and are likely to experience in the future,
significant price and volume fluctuations which could adversely affect the
market price of the common stock and the notes without regard to the operating
performance of the Company.
16
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS
Certain provisions of the Company's Articles of Incorporation and Bylaws may be
deemed to have anti-takeover effects and may delay, defer or prevent a takeover
attempt that a stockholder might consider in its best interest. These provisions
(i) classify the Company's Board of Directors into three classes, each of which
will serve for different three-year periods, (ii) provide that only the Board of
Directors or Chief Executive Officer may call special meetings of the
stockholders, and (iii) establish certain advance notice procedures for
nomination of candidates for election as directors and for stockholder proposals
to be considered at stockholders' meetings. The Company is also subject to
certain provisions of the Florida Business Corporation Act which may deter or
frustrate takeovers of Florida corporations.
*********
The Company cautions that the risk factors described above could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statements of the Company made by or on behalf of the Company.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrences of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
GENERAL
Sunglass Hut International, Inc. ("Sunglass Hut" or the "Company") is the
world's largest specialty retailer of sunglasses with over 2,000 locations
worldwide. During fiscal 1996, the Company initiated an additional specialty
store concept, Watch Station, and it is currently anticipated that this concept
will continue to expand in fiscal 1998. Since opening its first kiosk in Miami,
Florida in 1971, the Company has grown rapidly, both through internal expansion
and acquisitions, increasing from 873 stores (including 351 Sunsations stores
acquired in 1995 and accounted for as a pooling of interests) as of fiscal
yearend 1993 to 2,005 specialty sunglass and 105 Watch Station locations as of
the quarter ended October 31, 1998. The Company's business strategy is to
combine the operating efficiencies, extensive product assortment and everyday
low prices of category dominant retailers with the level of customer service and
ambiance characteristic of specialty retailers. The size of the Company's
products allows the Company to use a wide variety of sales location formats,
including malls, airports, on-street sites and licensed departments within
department stores.
LIQUIDITY AND CAPITAL RESOURCES
The Company's short-term cash needs are primarily for working capital to support
its inventory requirements, new store additions, the implementation of its
restructuring plans and 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 the revolving credit facility in November 2001,
the maturity of the $115 million Convertible Subordinated Notes in
17
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
June 2003, operating lease commitments and continued store expansion. In April
1998, the Company entered into a revolving credit facility with a borrowing
availability of up to $80 million, depending on inventory levels, with
BankBoston Retail Finance Inc. ("BankBoston"), which replaced its former
revolving credit agreement. BankBoston's commitment to fund revolving credit
borrowings depending on inventory levels will reduce to $65 million effective
February 1, 1999. In November 1998 the Company amended this facility to
incorporate a $15 million supplemental borrowing facility not dependent upon the
Company's borrowing base. As of December 5, 1998, the Company's borrowing base
was approximately $64.7 million and the Company was entitled to borrow up to an
additional $15 million under the supplemental component of its facility.
Borrowings under the credit facility generally bear interest at a floating rate
equal to, at the Company's option, (a) the prime rate or (b) LIBOR plus 2.00%.
The facility is secured with a first priority lien and security interest in
substantially all assets. Borrowings under the BankBoston facility can be used
for working capital and other general corporate purposes, including stock
repurchases (which repurchases are subject to a minimum remaining borrowing
availability of $12.5 million).
Due to the seasonal nature of the Company's business, outstanding borrowings
under the credit facility typically peak during the first and third fiscal
quarters as the Company finances inventory purchases in advance of the Company's
highest sales periods. See "Seasonality and Quarterly Results." As of October
31, 1998, borrowings under the credit facility totaled $5.8 million, reflecting
a reduction of $6.6 million in debt since the beginning of the year.
Approximately $1.2 million in letters of credit were outstanding, which were
maintained as security for performance under the Company's executive office
lease and to service other debt.
Net cash provided by operating activities was $69.3 million for the first nine
months of fiscal 1998 compared to net cash provided by operating activities of
$66.4 million for the same period in fiscal 1997. The difference between the
Company's net income and operating cash flow in fiscal 1998 is primarily
attributable to the reduction of inventory, usage of deferred tax assets
included in other current assets, non-cash charges for depreciation and
amortization, and increases in accounts payable.
Net cash used in investing activities was $22.2 million for the first nine
months of fiscal 1998 compared to $25.1 million for the same period last year.
Investing cash flows reflect capital expenditures, which are primarily related
to new store expansion and the renovation of existing stores. The decrease in
1998 capital expenditures is due to a lower level of new store and remodel
construction activity.
Net cash used in financing activities was $49.7 million for the first nine
months of fiscal 1998 compared to net cash used of $44.8 million for the same
period of last year, primarily due to a net reduction in the amount outstanding
under the revolving credit facility and payments for stock repurchases.
Management believes that cash provided by operations together with borrowing
availability under the Company's revolving credit facility will be sufficient to
fund estimated capital expenditures associated with the Company's planned
opening of approximately 120 locations in fiscal 1998, amounts associated with
the Company's stock repurchase program and other working capital requirements,
including cash expenditures associated with restructuring activities, through at
least the next twelve months.
18
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
(Amounts for 1997 have been reclassified from amounts originally reported to
segregate the effects of EyeX from continuing operations.)
QUARTER ENDED OCTOBER 31, 1998 COMPARED TO QUARTER ENDED NOVEMBER 1, 1997
Net sales increased $477,000, or .4%, to $122.8 million during the quarter ended
October 31, 1998 compared to $122.4 million for the same period of fiscal 1997.
This increase reflects sales from new stores opened during the third quarter of
fiscal 1998 (and fiscal 1997 to the extent not reflected in comparable store
sales) of $1.0 million, which was offset by a decrease in comparable store sales
of .5% or $523,000.
Gross profit increased $2.1 million, or 4.9%, to $45.0 million during the
quarter ended October 31, 1998 compared to $42.9 million for the same period of
fiscal 1997, primarily due to an increase in gross profit percentage. As a
percentage of net sales, gross profit increased 1.6 percentage points to 36.7%
for the third quarter of fiscal 1998 from 35.1% for the same period of fiscal
1997. Gross profit as a percentage of sales increased in the third quarter of
fiscal 1998 primarily due to reduced clearance activity and improved vendor
terms.
Operating expenses increased $2.2 million, or 5.2% to $43.7 million during the
third quarter of fiscal 1998 compared to $41.5 million for the same period of
fiscal 1997. Operating expenses as a percentage of net sales were 35.5% in 1998
and 33.9% in 1997. This increase is primarily due to the negative leverage
caused by the 0.5% decrease in comparable store sales.
During the third quarter of 1998, the Company assessed the amounts recorded with
its 250 Store Restructuring plan, and determined that as a result of favorable
experience in store closing costs, a reversal of previously accrued expenses of
approximately $3.9 million was required. Additionally, during the third quarter,
the Company adopted a plan for the closure of approximately 150 additional store
and licensed department locations (the "150 Store Restructuring"). Restructuring
expenses associated with this plan are approximately $4.1 million. These items
are reflected in operating expenses in the accompanying statements of
operations.
Depreciation and leasehold amortization expense decreased $640,000, or 9.4%, to
$6.2 million during the third quarter of fiscal 1998 compared to $6.8 million
for the same period of fiscal 1997, primarily reflecting the positive impact of
a lower asset base due to asset impairment charges recognized in fiscal 1997 and
store closures under the Company's restructuring plans.
Interest expense decreased $176,000 to $1.5 million during the third quarter of
fiscal 1998, compared to $1.7 million for the same period last year due to a
decrease in average outstanding borrowings during the period.
The net loss from discontinued operations in fiscal 1997 reflects the operating
losses of EyeX, the Company's optical segment, net of income tax benefits.
The Company reported a net loss of $0.08 per share, or $4.0 million, during the
third quarter of 1998 compared to a net loss of $0.09 per share, or $5.1 million
for the same period of fiscal 1997.
FIRST NINE MONTHS OF 1998 COMPARED TO FIRST NINE MONTHS OF 1997
Net sales increased $18.8 million, or 4.2%, to $462.6 million during the first
nine months of fiscal 1998 compared to $443.8 million for the same period of
fiscal 1997. This increase reflects sales from new stores opened during the
first nine months of fiscal 1998 (and fiscal 1997 to the extent not reflected in
comparable store sales) of $9.4 million, while an increase in comparable store
sales of 2.2% accounted for $9.4 million of this increase.
19
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Gross profit increased $15.6 million, or 8.9%, to $190.7 million during the
first nine months of fiscal 1998 compared to $175.0 million for the same period
of fiscal 1997, due to the increase in net sales and an increased gross profit
percentage. As a percentage of net sales, gross profit increased 1.8 percentage
points to 41.2% for the first nine months of fiscal 1998 from 39.4% for the same
period of fiscal 1997. Gross profit as a percentage of sales increased in the
first nine months of fiscal 1998 primarily due to reduced clearance activity and
improved vendor terms.
Operating expenses increased $6.1 million, or 4.7%, to $135.0 million during the
first nine months of fiscal 1998 compared to $128.9 million for the same period
of fiscal 1997. Operating expenses as a percentage of net sales were 29.2% in
1998 and 29.0% in 1997.
Depreciation and leasehold amortization expenses decreased $2.1 million, or
10.4%, to $17.7 million during the first nine months of fiscal 1998 compared to
$19.8 million for the same period of fiscal 1997, primarily reflecting the
positive impact of a lower asset base due to asset impairment charges recognized
in fiscal 1997 and store closures under the restructuring plan during 1997 and
1998.
Interest expense decreased $1.0 million to $5.3 million for the first nine
months of fiscal 1998, compared to $6.3 million for the same period last year
due to a decrease in average outstanding borrowings during the period.
The net loss from discontinued operations in fiscal 1997, reflects the operating
losses of EyeX, the Company's optical segment, net of income tax benefits.
The Company reported net income of $0.34 per share, or $18.5 million, during the
first nine months of fiscal 1998 compared to net income of $0.17 per share, or
$9.4 million, for the same period of fiscal 1997.
SEASONALITY AND QUARTERLY RESULTS
Historically, the Company's operations have been seasonal, with highest net
sales and net income occurring in the second fiscal quarter (reflecting
increased demand for sunglasses during the spring and summer months) and, to a
lesser extent, the fourth quarter (reflecting increased demand during the
calendar yearend holiday selling season).
The Company's results of operations may also fluctuate from quarter to quarter
as a result of the amount and timing of sales contributed by new stores, the
integration of new stores into the operations of the Company and the timing of
planned store closures, as well as other factors. The addition of a large number
of new stores can therefore significantly effect results of operations on a
quarter-to-quarter basis.
YEAR 2000 COMPLIANCE
The Company recognizes that the arrival of the year 2000 poses a unique
challenge to the ability of many technical systems to process the date change
from December 31, 1999, to January 1, 2000. The year 2000 ("Y2K") issue is the
result of computer programs being written using two digits rather than four to
define an applicable year. These programs, if not corrected, could fail or
create erroneous results after the century date change. The Y2K issue is
believed to affect virtually all companies and organizations.
The Company utilizes software, hardware, and related technologies throughout its
business that will be affected by the Y2K date change. The Company has
established a Y2K Project Team, which is currently addressing the impact of Y2K
on its systems and business processes. The Project Team focuses on four areas:
(1) information systems and technology, (2) merchandise vendors, (3) third party
suppliers, and (4) corporate facilities. The Project Plan in each area includes
the following phases: (1) Assessment/Inventory, (2) Risk Analysis, (3)
Remediation, (4) Testing, and (5) Implementation. A risk-based approach is being
employed to prioritize and direct the internal and external resources dedicated
to the Y2K initiative.
20
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Information Systems & Technology
Based on the risk analysis, the following critical application systems areas are
the focus of the Company's Y2K compliance efforts: Merchandising, Inventory
Management, Point-of-Sales systems, Human Resources (including Payroll), and
Financials. The Company has undergone significant strategic improvements in its
application systems in order to improve business processes. The Merchandising,
Human Resources, and Financials systems were selected for improved business
functionality and are vendor certified as Y2K compliant. The Human Resources and
Financials systems were implemented during 1998 and the Merchandising system
will be implemented by mid 1999. All critical functions will be tested to ensure
the asserted compliance. Additionally, the hardware and communications
infrastructure has been inventoried, assessed, and, where necessary, is
currently being upgraded and tested. The remaining systems and processes are in
various stages of assessment through testing and an enterprise-wide risk
analysis is expected to be completed by the end of December, 1998. The
remediation phase is expected to be complete by mid 1999. Testing is being
performed concurrently with remediation activities and final testing is expected
to be substantially complete in the same timeframe.
Merchandise Vendors, Third Party Vendors, and Corporate Facilities
The Company's operations are dependent on the year 2000 readiness of third
parties. In particular, the sales systems interact with commercial electronic
transaction processing systems to handle customer credit card purchases and
other point-of-sale transactions. Additionally, the Company relies on
third-party suppliers for infrastructure elements such as telephone services,
electric power, water, and banking facilities, as well as merchandise suppliers.
The Vendor Relations area of the project refers to the Y2K status evaluation of
key merchandise and service vendors. As part of the Y2K initiative, merchandise
and service vendors have been surveyed to determine their readiness and the
Company is in the process of obtaining or negotiating to obtain appropriate
assurances from these vendors. In addition, because the Company depends heavily
on a select group of merchandise vendors, the Company will conduct more in depth
assessments of certain of these mission critical vendors to further assess such
vendors' progress. Where necessary, contingency plans will be developed to be
used in the event of supplier delivery delay or failure. Although the Company
has not been put on notice that any known third party's problem will not be
resolved, the Company has limited information and no assurance of additional
information concerning the year 2000 readiness of third parties. The resulting
risks to the Company's business are very difficult to assess; however, the
inability to obtain merchandise from one or more key vendors on a timely basis
could have a material adverse effect on the Company's results of operations.
The Company is developing contingency plans and identifying what actions would
be required if a critical system, service provider, or merchandise vendor were
not year 2000 compliant. The Company expects these plans to be finalized by mid
1999.
21
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF INANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Costs
To date, the Company estimates that it has spent approximately $350,000 on Y2K
efforts across all areas and expects to spend an additional $500,000 - $750,000
to complete the project, which amounts will be funded through operating cash
flows. Operating costs related to Y2K compliance projects will be incurred over
several quarters and will be expensed as incurred. Costs associated with
business system solutions for improved business processes are not included in
these amounts. The Company does not anticipate that these amounts will have a
material adverse effect on the Company's financial condition or operating
results. The costs of the project and the date on which the Company plans to
complete the work are based on management's best estimates, which were derived
from numerous assumptions about future events, including the availability of
certain resources, third party compliance information, and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
might cause material differences include, but are not limited to, the
availability and cost of trained personnel, the ability to identify and correct
all relevant technologies, and the ability to acquire accurate information
regarding third party suppliers. Additionally, Y2K expenditures vary
significantly in project phases and vary depending on the remediation method
used, and past expenditures in relation to total estimated costs should not be
considered or relied on as a basis for estimating progress to completion for any
element of the Y2K project.
The Company presently believes, that upon remediation of its business software
applications, hardware, and other equipment with embedded technology, the Y2K
issue will not present a materially adverse risk to the Company's future
consolidated results of operations, liquidity, and capital resources. However,
if such remediation is not completed in a timely manner or the level of timely
compliance by key suppliers or vendors is not sufficient, the Y2K issue could
have a material impact on the Company's operations including, but not limited
to, failures to or delays in delivery of merchandise resulting in loss of the
Company's business.
EUROPEAN MONETARY UNION
On January 1, 1999 eleven of the existing members of the European Union (the
"EU") will join 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 after January 1, 1999 without any significant changes
to its current commercial operations, treasury management and management
information systems.
22
<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 31, 1998.
23
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNGLASS HUT INTERNATIONAL, INC.
Date: December 15, 1998 By: /s/ JOHN X. WATSON
--------------------------------
John X. Watson
President, Chief Executive Officer
and Director
(principal executive officer)
Date: December 15, 1998 By: /s/ LARRY G. PETERSEN
--------------------------------
Larry G. Petersen
Senior Vice President-Finance
and Chief Financial Officer
(principal financial officer)
Date: December 15, 1998 By: /s/ GEORGE L. PITA
--------------------------------
George L. Pita
Vice President-Finance
(principal accounting officer)
24
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- ------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 3,047
<SECURITIES> 0
<RECEIVABLES> 4,749
<ALLOWANCES> 0
<INVENTORY> 91,390
<CURRENT-ASSETS> 130,335
<PP&E> 187,917
<DEPRECIATION> 88,550
<TOTAL-ASSETS> 269,288
<CURRENT-LIABILITIES> 87,801
<BONDS> 0
0
0
<COMMON> 478
<OTHER-SE> 62,153
<TOTAL-LIABILITY-AND-EQUITY> 269,288
<SALES> 462,618
<TOTAL-REVENUES> 462,618
<CGS> 271,963
<TOTAL-COSTS> 271,963
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,331
<INCOME-PRETAX> 31,305
<INCOME-TAX> 12,773
<INCOME-CONTINUING> 18,532
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,532
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.34
</TABLE>
