UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1999
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 45,622,384
(as of September 10, 1999).
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of July 31, 1999 (Unaudited)
and January 30, 1999................................................................................. 3
Consolidated Statements of Income for the Thirteen Weeks Ended July 31, 1999
and August 1, 1998 (Unaudited)....................................................................... 4
Consolidated Statements of Income for the Twenty-Six Weeks Ended July 31, 1999
and August 1, 1998 (Unaudited)....................................................................... 5
Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended July 31, 1999
and August 1, 1998 (Unaudited)....................................................................... 6
Notes to Consolidated Financial Statements (Unaudited)................................................. 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................................... 12
ITEM 4. Submission of Matters to a Vote of Security Holders........................................... 25
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
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JULY 31, JANUARY 30,
1999 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,686 $ 5,007
Accounts receivable 6,752 3,547
Inventory 99,873 88,834
Prepaid rent 7,611 7,978
Other current assets 23,968 22,045
--------- ---------
Total current assets 151,890 127,411
PROPERTY AND EQUIPMENT, net 95,982 90,987
COST IN EXCESS OF NET ASSETS OF ACQUIRED
BUSINESSES, net 25,601 26,486
OTHER ASSETS 13,769 13,470
--------- ---------
Total assets $ 287,242 $ 258,354
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 31,687 $ 25,113
Accrued expenses 55,076 41,327
Accrued restructuring expenses 2,428 3,604
--------- ---------
Total current liabilities 89,191 70,044
LONG-TERM DEBT 114,723 133,121
--------- ---------
Total liabilities 203,914 203,165
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock 466 464
Additional paid-in capital 118,364 116,420
Accumulated deficit (30,126) (56,715)
Accumulated other comprehensive income (5,376) (4,980)
--------- ---------
Total stockholders' equity 83,328 55,189
--------- ---------
Total liabilities and stockholders' equity $ 287,242 $ 258,354
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS ENDED
---------------------
JULY 31, AUGUST 1,
1999 1998
-------- --------
<S> <C> <C>
Net sales $199,620 $193,141
Cost of goods sold, occupancy and buying expenses 109,951 106,654
-------- --------
Gross profit 89,669 86,487
-------- --------
Selling, general and administrative expenses:
Operating expenses 47,364 47,111
Depreciation and leasehold amortization 6,450 5,827
Amortization of cost in excess of net assets of acquired businesses 503 439
-------- --------
54,317 53,377
-------- --------
Earnings from operations before interest and income taxes 35,352 33,110
Interest expense 1,836 1,566
-------- --------
Earnings from operations before income taxes 33,516 31,544
Provision for income taxes 12,973 12,854
-------- --------
Net income $ 20,543 $ 18,690
======== ========
Earnings per share:
Basic $ 0.44 $ 0.34
======== ========
Diluted $ 0.42 $ 0.34
======== ========
Weighted average shares outstanding:
Basic 46,600 54,608
======== ========
Diluted 48,378 55,678
======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
----------------------
JULY 31, AUGUST 1,
1999 1998
-------- --------
<S> <C> <C>
Net sales $352,199 $339,787
Cost of goods sold, occupancy and buying expenses 198,959 194,172
-------- --------
Gross profit 153,240 145,615
-------- --------
Selling, general and administrative expenses:
Operating expenses 91,978 91,347
Depreciation and leasehold amortization 12,785 11,537
Amortization of cost in excess of net assets of acquired businesses 1,016 881
-------- --------
105,779 103,765
-------- --------
Earnings from operations before interest and income taxes 47,461 41,850
Interest expense 3,953 3,788
-------- --------
Earnings from operations before income taxes 43,508 38,062
Provision for income taxes 16,919 15,526
-------- --------
Net income $ 26,589 $ 22,536
======== ========
Earnings per share:
Basic $ 0.57 $ 0.41
======== ========
Diluted $ 0.55 $ 0.41
======== ========
Weighted average shares outstanding:
Basic 46,480 54,662
======== ========
Diluted 48,012 55,571
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
----------------------
JULY 31, AUGUST 1,
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,589 $ 22,536
-------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 13,801 12,418
Accretion of debt discount 187 179
Changes in operating assets and liabilities-
Changes in assets:
Accounts receivable (3,205) (189)
Inventory (11,039) 10,289
Prepaid rent 367 94
Other current assets (1,923) 12,573
Other assets (647) 1,494
Changes in liabilities:
Accounts payable 6,574 6,406
Accrued expenses 15,758 4,664
Accrued restructuring expenses (1,780) (1,599)
-------- --------
18,093 46,329
-------- --------
Net cash provided by continuing operations 44,682 68,865
Net cash used in discontinued operations (924) (2,420)
-------- --------
Net cash provided by operating activities 43,758 66,445
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (16,382) (14,067)
-------- --------
Net cash used in investing activities (16,382) (14,067)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under revolving credit facilities 55,791 29,000
Principal payments on revolving credit facilities (74,251) (41,400)
Principal payments on long-term debt (125) (25)
Payments for stock repurchases and retirements (1,722) (4,491)
Payment of deferred financing costs -- (629)
Proceeds from exercise of stock options 2,584 246
-------- --------
Net cash used in financing activities (17,723) (17,299)
-------- --------
Effect of exchange rate changes on cash and cash equivalents (974) 1,634
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,679 36,713
CASH AND CASH EQUIVALENTS, beginning of period 5,007 3,372
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 13,686 $ 40,085
======== ========
</TABLE>
(Continued on next page)
6
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
----------------------
JULY 31, AUGUST 1,
1999 1998
------- -------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 3,692 $ 3,568
======= =======
Income taxes $ 4,280 $(5,518)
======= =======
Non-cash activities:
Write-down of property and equipment against accrued restructuring
expenses $ -- $ 3,835
======= =======
Impact on stockholder's equity from tax benefit related to the exercise of
stock options $ 1,084 $ 137
======= =======
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--GENERAL:
The accompanying consolidated financial statements of Sunglass Hut
International, Inc. and subsidiaries (collectively 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 30, 1999 which are included in Form 10-K. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the financial information for the interim
periods reported have been made. Results of operations for the thirteen and
twenty-six weeks ended July 31, 1999 are not necessarily indicative of the
results to be expected for the entire fiscal year ending January 29, 2000.
NOTE 2--ACCRUED RESTRUCTURING EXPENSES:
During the second quarter of fiscal 1999, as the Company continued to execute
its restructuring plans, it was determined that a net reversal of previously
accrued expenses of $275,000 was required. This amount is included in operating
expenses in the accompanying statements of income.
Additionally, during the second quarter, approximately $260,000 of the
restructuring accrual was utilized for the payment of lease exit and other
incremental costs related to store closures. The Company plans to close
approximately 130 marginal or unprofitable locations during fiscal 1999 as part
of its restructuring plans. Through the end of the second quarter, 31 of these
locations have closed and the Company anticipates that the remaining store
closures will be substantially completed by the end of the fiscal year.
NOTE 3--COMPREHENSIVE INCOME:
Total comprehensive income consists of the following:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
----------------------------------
JULY 31, 1999 AUGUST 1, 1998
1999 1998
-------------- ----------------
(In thousands)
<S> <C> <C>
Net income $ 20,543 $ 18,690
Foreign currency translation adjustment 16 (1,706)
-------------- ----------------
Total comprehensive income $ 20,559 $ 16,984
============== ================
TWENTY-SIX WEEKS ENDED
----------------------------------
JULY 31, 1999 AUGUST 1, 1998
1999 1998
-------------- ----------------
(In thousands)
Net income $ 26,589 $ 22,536
Foreign currency translation adjustment (396) (880)
-------------- ----------------
Total comprehensive income $ 26,193 $ 21,656
============== ================
</TABLE>
8
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--(CONTINUED)
NOTE 4--EARNINGS PER SHARE:
Basic and diluted earnings per share are computed as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-------------------------------------
JULY 31, AUGUST 1,
1999 1998
-------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Numerator:
Net income $ 20,543 $ 18,690
Effect of dilutive securities:
Interest expense, net of tax benefit on
convertible debt issued in January 1999 10 --
-------------- -------------------
Numerator for diluted earnings per share $ 20,553 $ 18,690
============== ===================
Denominator:
Denominator for basic earnings per share 46,600 54,608
Effect of dilutive securities:
Convertible debt issued in January 1999 208 --
Options to purchase common stock 1,570 1,070
-------------- -------------------
Denominator for diluted earnings per share 48,378 55,678
============== ===================
Earnings per share:
Basic $ 0.44 $ 0.34
-------------- -------------------
Diluted $ 0.42 $ 0.34
============== ===================
Antidilutive securities not included
in the diluted earnings per share computation:
Options to purchase common stock 92 571
Exercise prices $ 17.06 $ 11.25
to to
$ 30.81 $ 30.81
Convertible subordinated debt $ 115,000 $ 115,000
Conversion price $ 30.25 $ 30.25
</TABLE>
9
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--(CONTINUED)
NOTE 4--EARNINGS PER SHARE--(CONTINUED):
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
-----------------------------------
JULY 31, AUGUST 1,
1999 1998
--------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
<S> <C> <C>
Net income $ 26,589 $ 22,536
Effect of dilutive securities:
Interest expense, net of tax benefit on
convertible debt issued in January 1999 20 --
--------------- ----------------
Numerator for diluted earnings per share $ 26,609 $ 22,536
=============== ================
Denominator:
Denominator for basic earnings per share 46,480 54,662
Effect of dilutive securities:
Convertible debt issued in January 1999 208 --
Options to purchase common stock 1,324 909
--------------- ----------------
Denominator for diluted earnings per share 48,012 55,571
=============== ================
Earnings per share:
Basic $ 0.57 $ 0.41
=============== ================
Diluted $ 0.55 $ 0.41
=============== ================
Antidilutive securities not included
in the diluted earnings per share
computation:
Options to purchase common stock 736 2,037
Exercise prices $ 10.56 $ 11.25
to to
$ 30.81 $ 30.81
Convertible subordinated debt $ 115,000 $ 115,000
Conversion price $ 30.25 $ 30.25
</TABLE>
NOTE 5--RECENT ACCOUNTING PRONOUNCEMENT - FINANCIAL INSTRUMENTS:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" for all quarters
of fiscal years beginning after June 15, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that entities recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company will adopt SFAS No. 133 when required and is in the
process of reviewing the impact of such adoption on its financial position and
results of operations.
10
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--(CONTINUED)
NOTE 6--GEOGRAPHIC INFORMATION:
The following table presents the Company's revenues and earnings (loss) from
operations before interest and income taxes by geographic area:
<TABLE>
<CAPTION>
EARNINGS (LOSS)
FROM OPERATIONS
BEFORE INTEREST
NET SALES AND INCOME TAXES
------------------ --------------------
(IN THOUSANDS)
<S> <C> <C>
THIRTEEN WEEKS ENDED
JULY 31, 1999
North America $ 177,576 $ 34,349
Other areas 22,044 1,003
------------------ --------------------
Total $ 199,620 $ 35,352
================== ====================
THIRTEEN WEEKS ENDED
AUGUST 1, 1998
North America $ 172,774 $ 33,397
Other areas 20,367 (287)
------------------ --------------------
Total $ 193,141 $ 33,110
================== ====================
EARNINGS (LOSS)
FROM OPERATIONS
BEFORE INTEREST
NET SALES AND INCOME TAXES
------------------ --------------------
(IN THOUSANDS)
TWENTY-SIX WEEKS ENDED
JULY 31, 1999
North America $ 313,125 $ 47,289
Other areas 39,074 172
------------------ --------------------
Total $ 352,199 $ 47,461
================== ====================
TWENTY-SIX WEEKS ENDED
AUGUST 1, 1998
North America $ 302,118 $ 43,138
Other areas 37,669 (1,288)
------------------ --------------------
Total $ 339,787 $ 41,850
================== ====================
</TABLE>
NOTE 7--REPURCHASE OF COMMON STOCK:
During fiscal 1998, the Board of Directors authorized the repurchase of up to
15.5 million shares of Sunglass Hut's outstanding common stock. In the first
half of fiscal 1999, the Company repurchased 178,000 shares at a cost of
approximately $1.7 million under this authorization, and subsequent to July 31,
1999, the Company repurchased an additional 853,000 shares at a cost of
approximately $9.1 million.
11
<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:
RISKS OF NEW SPECIALTY STORE CONCEPTS, LOCATIONS AND DISTRIBUTION CHANNELS. 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. During the first half of fiscal 1999, the Company has converted and/or
opened 73 combination store locations ("combo stores" - featuring both sunglass
and watch product offerings) and is planning on converting and/or opening
approximately an additional 120 combo store locations during the balance of
fiscal 1999. 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, ability to obtain suitable use clause changes on a timely
basis and on satisfactory terms, lack of experience and customer acceptance,
inventory obsolescence risks, significant competition from existing and new
retailers and related retail channels of distribution, and the extent of
existing relationships between such retailers and manufacturers/distributors.
Although the Company has generally experienced favorable sales results in combo
store conversions to date, these results are based on a limited time period and
may vary significantly in the future. 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.
The Company's planned expansion of its e-commerce activities subjects the
Company to numerous risks of entering new distribution channels, including
unanticipated operating problems, 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. There can be no
12
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
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 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 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.
YEAR 2000 READINESS. The Year 2000 issue ("Y2K") 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 Y2K problem will impact the Company
and its business partners, an assessment of the Y2K exposure has been made by
the Company and, primarily because the Company's major management information
systems were recently acquired, the Company believes it will be able to
substantially achieve Y2K readiness for its internal systems by the third
quarter of fiscal 1999. The Company's operations are also dependent on the Y2K
readiness of third parties. The inability to obtain merchandise from one or more
key vendors on a timely basis due to internal or external Y2K issues could have
a material adverse effect on the Company's operations. Moreover, the failure of
a major vendor's systems to operate properly with respect to the Y2K problem on
a timely basis or a Y2K 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 recognition of this risk, the
Company has developed a plan of communication with significant business partners
to attempt to obtain assurances that the Company's operations will not be
disrupted through these relationships and that external Y2K issues will be
resolved in a timely manner. In addition, a significant portion of sales at the
Company's stores are made with credit cards, and the Company's operations may be
materially adversely affected to the extent that (i) its customers are unable to
use their credit cards or (ii) if the Company is unable to collect credit
13
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
card receivables in a timely manner due to Y2K problems. The Company believes
that it will satisfactorily resolve all significant Y2K problems and that the
related costs will not be material. However, estimates of Y2K readiness and
related costs are based on numerous assumptions, including the continued
availability of certain resources, the ability to acquire accurate information
regarding third party suppliers, the ability to correct all relevant
applications and the success of third party modification plans. There is no
guarantee that the readiness will be achieved and actual costs could differ
materially from those anticipated.
ABILITY TO IMPLEMENT RESTRUCTURING PLANS. The Company's restructuring plans
anticipate the closure of approximately 130 marginal or unprofitable locations
in fiscal 1999. 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.
Additionally, the Company has closed a significant number of store locations
over the past few years and this could have an adverse effect on the Company's
ability to obtain new store locations in the future. In addition, the Company
continually evaluates store profitability, and there can be no assurance that
the number of future store closings will not change.
MERCHANDISING, CONCENTRATION OF SUPPLIERS AND EXCLUSIVE BRANDS. 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. In the first half of
fiscal 1999, Bausch & Lomb (including RayBan, Revo, Killer Loop and other
brands) and Oakley, the Company's largest suppliers, accounted for approximately
27.0% and 24.9%, respectively, of the Company's total merchandise purchases. On
June 28, 1999, Luxottica Group SpA completed the purchase of the assets and
liabilities of Bausch & Lomb's eyewear business. There can be no assurance that
this transaction or other vendor consolidation or other changes in the sunglass
or watch manufacturing industry will not materially impact the Company's
purchase terms, continued supply, pricing, access to new products or otherwise
negatively impact its future results of operations. The market for the Company's
products is increasingly subject to the risk of changing fashion trends, and the
demand for certain styles can change. Although the Company has historically
benefited from favorable product return and exchange privileges with its
vendors, there can be no assurance that the Company will not be subject to
limitations on returns in the future.
14
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
The Company'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.
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.
ABILITY TO MANAGE GROWTH. The Company has opened a significant number of new
locations in the past several years. However, there is no assurance that the
Company will sustain the growth in the number of stores and revenues that it has
achieved historically. Moreover there can be no assurance that the Company's
management and financial controls, executive personnel and other corporate
support systems will be adequate to manage the increase in the size and scope of
the Company's business in future periods. The continued growth of the Company is
dependent, in large part, upon the Company's ability to open and operate new
stores and convert selected existing stores into a new combo store format on a
profitable basis, which in turn is subject to, among other things, the Company's
ability to secure suitable store sites 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
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 will be
successfully integrated. Moreover, the consolidation of the domestic specialty
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.
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.
15
<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 to a lesser extent, during the first
and fourth quarters of each year) and the Company expects this trend may
continue for the foreseeable future. The Company's quarterly results of
operations may also fluctuate significantly as a result of a variety of factors,
including the timing of store openings and closings, and the timing of sales
contributed by new stores and new concepts such as Watch Station and combo
stores.
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.
16
<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 with approximately 2,000
locations worldwide. During fiscal 1996, the Company initiated an additional
specialty store concept, Watch Station. Additionally, during fiscal 1998, the
Company began to test a new store concept that combines sunglasses and watches
in a unified format ("combo stores"). The Company intends to continue to expand
and further test this concept in fiscal 1999. Since opening its first kiosk in
Miami, Florida in 1971, the Company has grown rapidly, both through internal
expansion and acquisitions, increasing from 873 stores as of fiscal yearend 1993
to 1,771 specialty sunglass locations, 108 Watch Station locations and 95
combination sunglass and watch stores as of July 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's short-term cash needs are primarily for (i) working capital to
support its inventory requirements and new store additions (ii) the
implementation of its restructuring plans 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 revolving
credit facility in November 2001, the maturity of its $115 million convertible
subordinated Notes in June 2003, operating lease commitments and continued store
expansion. In April 1998, the Company entered into a revolving credit facility
with borrowing availability of up to $80 million, depending on inventory levels,
with BankBoston Retail Finance Inc. ("BankBoston"), which replaced its former
revolving credit facility. In accordance with the terms of the revolving credit
facility, BankBoston's commitment to fund revolving credit borrowings based on
inventory levels was reduced to $65 million effective February 1, 1999. In
November 1998, the Company amended this facility to incorporate a supplemental
borrowing facility. As of September 4, 1999, the Company's borrowing base was
approximately $65.8 million and the Company was entitled to borrow up to an
additional $13.8 million under the supplemental component of its facility. The
credit facility includes up to $12.5 million in letters of credit. Borrowings
under the credit facility generally bear interest at a floating rate equal to,
at the Company's option, (a) the prime rate or (b) LIBOR plus 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 purchases are subject to a minimum remaining borrowing
availability of $12.5 million).
17
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
Due to the seasonal nature of the Company's business, outstanding borrowings
typically peak during the first and third fiscal quarters as the Company
finances inventory purchases in advance of the Company's highest sales periods.
At July 31, 1999, the Company had no outstanding borrowings under its credit
facility reflecting a reduction of $18.5 million in debt since the beginning of
the year. Approximately, $1.0 million in letters of credit were 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 $43.8 million for the first six
months of fiscal 1999 compared to $66.4 million for the same period in fiscal
1998. The difference between the Company's net income and operating cash flow in
fiscal 1999 was primarily attributable to non-cash charges for depreciation and
amortization, and increases in inventory, accounts payable and accrued expenses.
Net cash used in investing activities was $16.4 million for the first six months
of fiscal 1999 compared to $14.1 million for the same period in fiscal 1998.
Investing cash flows reflect capital expenditures related to new store
expansion, the renovation of existing stores and required systems enhancements.
Net cash used in financing activities was $17.7 million for the first six months
of fiscal 1999 compared to $17.3 million for the same period in fiscal 1998.
Financing cash flows reflect the net reduction in the amounts outstanding under
the Company's revolving credit facility as well as payments made for stock
repurchases during the quarter, partially offset by proceeds received from stock
option exercises.
Management believes that net cash provided by operations, together with
borrowing availability under the Company's credit facility, will be sufficient
to fund estimated capital expenditures associated with the Company's planned
opening of approximately 85 store locations in fiscal 1999 as well as the
renovation of existing stores and required systems enhancements, and amounts
associated with the Company's common stock repurchase program and other working
capital requirements, including cash expenditures associated with the Company's
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
QUARTER ENDED JULY 31, 1999 COMPARED TO QUARTER ENDED AUGUST 1, 1998
Net sales increased $6.5 million, or 3.4%, to $199.6 million during the quarter
ended July 31, 1999 compared to $193.1 million for the same period of fiscal
1998. This increase reflects sales from new stores opened during the second
quarter of fiscal 1999 (and fiscal 1998 to the extent not reflected in
comparable store sales) of $6.8 million, an increase in comparable store sales
of 5.9% (accounting for approximately $10.4 million of this increase), offset by
a decrease of $10.7 million for sales lost due to store closures during fiscal
1998 and 1999.
Gross profit increased $3.2 million, or 3.7%, to $89.7 million during the
quarter ended July 31, 1999 compared to $86.5 million for the same period of
fiscal 1998, primarily due to the increase in net sales. As a percentage of net
sales, gross profit increased 0.1% to 44.9% for the quarter ended July 31, 1999
from 44.8% for the same period of fiscal 1998, primarily due to lower occupancy
expense resulting from the closure of underperforming locations.
Operating expenses increased by $253,000, or 0.1%, to $47.4 million during the
quarter ended July 31, 1999 compared to $47.1 million for the same period of
fiscal 1998. As a percentage of net sales, operating expenses decreased 0.7% to
23.7% during the quarter ended July 31, 1999 compared to 24.4% for the same
period in 1998, due to the impact of strong comparable store sales, the closure
of underperforming locations in 1998 and 1999, and the reversal of approximately
$275,000 of previously accrued restructuring expenses.
Depreciation and leasehold amortization expense increased $623,000, or 10.7%, to
$6.5 million during the quarter ended July 31, 1999 compared to $5.8 million for
the same period of fiscal 1998, due to new store growth, the renovation of
existing stores and expenditures for required systems enhancements.
Interest expense increased $270,000 to $1.8 million for the quarter ended July
31, 1999, compared to $1.6 million for the same period last year due to an
increase in average outstanding borrowings during the period.
The Company reported net income of $0.42 per diluted share, or $20.5 million,
during the quarter ended July 31, 1999 compared to net income of $0.34 per
diluted share, or $18.7 million for the same period of fiscal 1998.
FIRST SIX MONTHS OF 1999 COMPARED TO FIRST SIX MONTHS OF 1998
Net sales increased $12.4 million, or 3.7%, to $352.2 million during the first
six months of fiscal 1999 compared to $339.8 million for the same period of
fiscal 1998, primarily due to the increase in net sales. This increase reflects
sales from new stores opened during the first
19
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
six months of fiscal 1999 (and fiscal 1998 to the extent not reflected in
comparable store sales) of $13.1 million, an increase in comparable store sales
of 6.1% (accounting for approximately $18.6 million of this increase), offset by
a decrease of $19.3 million for sales lost due to store closures during fiscal
1998 and 1999.
Gross profit increased $7.6 million, or 5.2%, to $153.2 million during the first
six months of fiscal 1999 compared to $145.6 million for the same period of
fiscal 1998, due to the increase in net sales. As a percentage of net sales,
gross profit increased 0.6% to 43.5% for the first six months of fiscal 1999
from 42.9% for the same period of fiscal 1998, primarily due to lower occupancy
expense resulting from the closure of underperforming locations and higher
merchandise gross margins related to improved vendor terms and well controlled
inventories.
Operating expenses increased $631,000, or 0.7% to $92.0 million during the first
six months of fiscal 1999 compared to $91.3 million for the same period of
fiscal 1998. As a percentage of net sales, operating expenses decreased 0.8% to
26.1% during the first six months of fiscal 1999 compared to 26.9% for the same
period in 1998, due to the impact of strong comparable store sales, the closure
of underperforming locations in 1998 and 1999 and the reversal during the first
quarter of approximately $500,000 of accrued expenses for certain litigation
that was settled in April 1999.
Depreciation and leasehold amortization expense increased $1.2 million, or 10.8%
to $12.8 million during the first six months of fiscal 1999 compared to $11.5
million for the same period of fiscal 1998, 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
$135,000, or 15.3%, to $1.0 million during the first six months of fiscal 1999
compared to $881,000 for the same period of fiscal 1998 due to the amortization
of goodwill related to the acquisition of shades.com and SwissArmyDepot.com at
the end of fiscal 1998.
Interest expense increased $165,000 to $4.0 million for the first six months of
fiscal 1999, compared to $3.8 million for the same period last year due to an
increase in average outstanding borrowings during the period.
The Company reported net income of $0.55 per diluted share, or $26.6 million,
during the first six months of fiscal 1999 compared to net income of $0.41 per
diluted share, or $22.5 million for the same period of fiscal 1998.
20
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
SEASONALITY AND QUARTERLY RESULTS
Historically, the Company's operations have been seasonal, with highest net
sales and net income occurring in the second fiscal quarter (reflecting
increased demand for sunglasses during the spring and summer months).
The Company's results of operations may also fluctuate from quarter to quarter
as a result of the amount and timing of sales contributed by new stores, the
integration of new stores into the operations of the Company and the timing of
planned store closures, as well as other factors. The addition of a large number
of new stores can affect 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 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.
Information Systems & Technology
Based on an enterprise-wide risk analysis completed at the end of the 1998
fiscal year, the following critical application systems areas are the focus of
the Company's Y2K compliance efforts: Merchandising, Inventory Management,
Point-of-Sale systems, Human Resources (including Payroll), and Financial
Information. This risk analysis will be continually monitored and reevaluated
during the course of the project to ensure that attention and resources are
directed to the most critical areas.
The Company has undergone significant strategic improvements in its application
systems in order to improve business processes. The Merchandising, Human
Resources, and Financial
21
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
Information systems were selected for improved business functionality and are
vendor certified as Y2K compliant. The Human Resources and Financial Information
systems were implemented during 1998. Remediation of the mission critical
systems at the Distribution Center was completed and implemented during 1998.
The Merchandising system was implemented in August 1999 in North America.
International (Europe and Australia) implementations are in process and
scheduled to be completed by November 1999. Critical functions are currently
being tested to ensure the asserted compliance. The POS operating system
upgrades were completed in May 1999 and POS application upgrades are being
implemented and scheduled to be completed by October 1999.
Additionally, approximately 90% of the hardware and communications
infrastructure has been remediated with the remaining remediation scheduled to
be completed by October 1999. Telecommunications software remediation and
initial testing is complete. The store polling process has been converted to an
in-house process to avoid any third party risk as well as improve functionality.
Of the remaining secondary systems, 85% have been remediated with the balance
scheduled to be remediated by October 1999. The remediation, testing, and
implementation phases can run concurrently within system projects as well as
overall for all system areas; however, implementation for all mission critical
systems is expected to be substantially completed by the end of the third
quarter of the 1999 fiscal year.
Merchandise Vendors, Third Party Vendors, and Corporate Facilities
The Company's operations are dependent on the Y2K 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 for the
delivery of goods to sell.
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 are being surveyed to determine their readiness and the
Company is in the process of obtaining or negotiating to obtain assurances from
these vendors. In addition, because the Company depends heavily on a select
group of merchandise vendors, the Company is conducting more in depth
assessments of certain of these mission critical vendors including assessments
of their supply chain analysis. The final phase of these assessments is
scheduled to be completed in October 1999. The criticality of merchandise
vendors and service providers will be continually monitored and reevaluated
during the course of the project to ensure that review and contingency planning
is adequately completed for those vendors most critical to the Company. 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
22
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
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 Y2K 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 has developed contingency plans identifying what actions would be
required if a critical system, service provider, or merchandise vendor were not
Y2K compliant. The Company will continue to re-evaluate these plans during the
remainder of the year.
Costs
During fiscal 1998 and 1999, the Company has expensed approximately $650,000 on
Y2K efforts across all areas and expects to spend an additional $270,000 to
complete the project, which amounts will be funded through operating cash flows.
Operating costs related to Y2K compliance projects have been incurred over
several quarters and are 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 dates 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
business.
23
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
EUROPEAN MONETARY UNION
On January 1, 1999 eleven of the existing members of the European Union (the
"EU") joined the European Monetary Union (the "EMU"). This will lead to, among
many other things, fundamental changes in the way participating EU states
implement their monetary policies and manage local currency exchange rates.
Ultimately, there will be a single currency within certain countries of the EU,
known as the Euro and one organization, the European Central Bank, responsible
for setting European monetary policy. While some believe that the change will
bring a higher level of competition within Europe and a greater sense of
economic stability within that region, there is no certainty that the Company's
activity in this region will necessarily realize any benefits as a result of
such changes. The Company has reviewed the impact the Euro will have on its
business and whether this will give rise to a need for significant changes in
its commercial operations or treasury management functions. While it is
uncertain whether there will be any immediate direct benefits from the planned
conversion, the Company believes it is properly prepared to accommodate any
changes deemed necessary without any significant changes to its current
commercial operations, treasury management and management information systems.
24
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
PART II--OTHER INFORMATION
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 8, 1999, the Company held its 1999 Annual Meeting of Shareholders (the
"Annual Meeting") for the following purposes:
1. To elect two members to the Company's Board of Directors to
hold office until the Company's 2002 Annual Meeting of
Shareholders or until their successors are duly elected and
qualified; and
2. To transact such other business as may properly come before
the Annual Meeting and any adjournments or postponements
thereof.
The votes cast at the Annual Meeting were as follows:
1. Election Directors:
Rohit M. Desai -
For 40,026,705
Withheld 4,214,868
2. William E. Phillips -
For 40,026,705
Withheld 4,214,868
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
July 31, 1999.
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: September 14, 1999 By: /s/John X. Watson
----------------------------------------
John X. Watson
President, Chief Executive Officer and
Director
(principal executive officer)
Date: September 14, 1999 By: /s/Larry G. Petersen
----------------------------------------
Larry G. Petersen
Senior Vice President-Finance
and Chief Financial Officer
(principal financial officer)
Date: September 14, 1999 By: /s/George L. Pita
----------------------------------------
George L. Pita
Vice President-Finance
(principal accounting officer)
26
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> JUL-31-1999
<CASH> 13,686
<SECURITIES> 0
<RECEIVABLES> 6,752
<ALLOWANCES> 0
<INVENTORY> 99,873
<CURRENT-ASSETS> 151,890
<PP&E> 202,052
<DEPRECIATION> 106,070
<TOTAL-ASSETS> 287,242
<CURRENT-LIABILITIES> 89,191
<BONDS> 0
0
0
<COMMON> 466
<OTHER-SE> 82,862
<TOTAL-LIABILITY-AND-EQUITY> 287,242
<SALES> 352,199
<TOTAL-REVENUES> 352,199
<CGS> 198,959
<TOTAL-COSTS> 198,959
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,953
<INCOME-PRETAX> 43,508
<INCOME-TAX> 16,919
<INCOME-CONTINUING> 26,589
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,589
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.55
</TABLE>
