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 30, 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 45,322,591
(as of December 1, 1999).
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
PART I--FINANCIAL INFORMATION
<S> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheets as of October 30, 1999 (Unaudited)
and January 30, 1999........................................................................................ 3
Consolidated Statements of Operations for the Thirteen Weeks Ended October 30, 1999
and October 31, 1998 (Unaudited)............................................................................ 4
Consolidated Statements of Operations for the Thirty-Nine Weeks Ended October 30,
1999 and October 31, 1998 (Unaudited)..................................................................... 5
Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 30,
1999 and October 31, 1998 (Unaudited)....................................................................... 6
Notes to 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..................................................................... 26
Signatures........................................................................................... 27
</TABLE>
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
OCTOBER 30, JANUARY 30,
1999 1999
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,339 $ 5,007
Accounts receivable 5,805 3,547
Inventory 103,320 88,834
Prepaid rent 7,665 7,978
Other current assets 29,292 22,045
--------- ---------
Total current assets 152,421 127,411
PROPERTY AND EQUIPMENT, net 100,825 90,987
COST IN EXCESS OF NET ASSETS OF ACQUIRED
BUSINESSES, net 25,708 26,486
OTHER ASSETS 13,294 13,470
--------- ---------
Total assets $ 292,248 $ 258,354
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 33,449 $ 25,113
Accrued expenses 46,016 41,327
Accrued restructuring expenses 2,215 3,604
--------- ---------
Total current liabilities 81,680 70,044
LONG-TERM DEBT 138,200 133,121
--------- ---------
Total liabilities 219,880 203,165
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock 457 464
Additional paid-in capital 108,219 116,420
Accumulated deficit (31,690) (56,715)
Accumulated other comprehensive loss (4,618) (4,980)
--------- ---------
Total stockholders' equity 72,368 55,189
========= =========
Total liabilities and stockholders' equity $ 292,248 $ 258,354
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
----------------------------
OCTOBER 30, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 132,288 $ 122,832
Cost of goods sold, occupancy and buying expenses 80,857 77,792
--------- ---------
Gross profit 51,431 45,040
--------- ---------
Selling, general and administrative expenses:
Operating expenses 45,017 43,656
Depreciation and leasehold amortization 6,546 6,161
Amortization of cost in excess of net assets of acquired businesses 501 439
--------- ---------
52,064 50,256
--------- ---------
Loss from operations before interest and income taxes (633) (5,216)
Interest expense 2,017 1,542
--------- ---------
Loss from operations before income taxes (2,650) (6,758)
Benefit for income taxes (1,086) (2,753)
--------- ---------
Net loss $ (1,564) $ (4,005)
========= =========
Net loss per share (basic and diluted) $ (0.03) $ (0.08)
========= =========
Weighted average shares outstanding (basic and diluted) 45,907 50,028
========= =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
--------------------------
OCTOBER 30, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Net sales $484,487 $462,618
Cost of goods sold, occupancy and buying expenses 279,816 271,963
-------- --------
Gross profit 204,671 190,655
-------- --------
Selling, general and administrative expenses:
Operating expenses 136,995 135,001
Depreciation and leasehold amortization 19,331 17,698
Amortization of cost in excess of net assets of acquired businesses 1,517 1,320
-------- --------
157,843 154,019
-------- --------
Earnings from operations before interest and income taxes 46,828 36,636
Interest expense 5,970 5,331
-------- --------
Earnings from operations before income taxes 40,858 31,305
Provision for income taxes 15,833 12,773
-------- --------
Net income $ 25,025 $ 18,532
======== ========
Earnings per share:
Basic $ 0.54 $ 0.35
======== ========
Diluted $ 0.52 $ 0.34
======== ========
Weighted average shares outstanding:
Basic 46,289 53,117
======== ========
Diluted 47,752 53,868
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
----------------------------
OCTOBER 30, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,025 $ 18,532
--------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 20,848 19,018
Accretion of debt discount 284 253
Changes in operating assets and liabilities-
Changes in assets:
Accounts receivable (2,258) (1,137)
Inventory (14,486) 10,575
Prepaid rent 313 325
Other current assets (7,247) 24,167
Other assets (348) (4,971)
Changes in liabilities:
Accounts payable 8,336 10,124
Accrued expenses 7,037 (619)
Accrued restructuring expenses (2,054) (3,455)
--------- ---------
10,425 54,280
--------- ---------
Net cash provided by continuing operations 35,450 72,812
Net cash used in discontinued operations (1,001) (3,466)
--------- ---------
Net cash provided by operating activities 34,449 69,346
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (28,855) (22,122)
Capital expenditures - discontinued operations -- (31)
--------- ---------
Net cash used in investing activities (28,855) (22,153)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under revolving credit facilities 119,100 34,800
Principal payments on revolving credit facilities (114,179) (41,400)
Principal payments on long-term debt (125) (25)
Payments for stock repurchases and retirements (12,633) (42,722)
Payment of deferred financing costs -- (629)
Proceeds from exercise of stock options 3,077 246
--------- ---------
Net cash used in financing activities (4,760) (49,730)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 498 2,212
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,332 (325)
CASH AND CASH EQUIVALENTS, beginning of period 5,007 3,372
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 6,339 $ 3,047
========= =========
</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 30, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 3,911 $ 3,650
======= ========
Income taxes $ 7,277 $(16,576)
======= ========
Non-cash activities:
Write-down of property and equipment against accrued restructuring
expenses $ -- $ 5,618
Write-down or other assets against accrued restructuring expenses -- 1,297
======= ========
$ -- $ 6,915
======= ========
Impact on stockholder's equity from tax benefit related to the exercise of
stock options $ 1,347 $ 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
thirty-nine weeks ended October 30, 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 third quarter, approximately $268,000 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 120 marginal or
unprofitable locations during fiscal 1999 as part of its restructuring plans.
Through the end of the third quarter, 45 of these locations have closed and the
Company anticipates that the remaining store closures will be completed by the
end of the fiscal year.
NOTE 3--DISCONTINUED OPERATIONS:
In January 1998, the Company adopted a plan to discontinue its EyeX optical
segment and substantially completed this disposition during fiscal 1998. The
accompanying Consolidated Balance Sheet as of October 30, 1999 includes an
allowance for estimated loss from disposition of the segment of approximately
$266,000 (included in accrued expenses). As the Company completes its disposal
of the segment, certain matters may arise which could result in additional gains
or losses to be recognized by the Company. Accordingly, such gains or losses
will be included in the Company's Statement of Operations as they are incurred.
8
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--(CONTINUED)
NOTE 4--COMPREHENSIVE INCOME (LOSS):
Total comprehensive income (loss) consists of the following:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
---------------------------------------------
OCTOBER 30, 1999 OCTOBER 31, 1998
--------------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
Net loss $ (1,564) $ (4,005)
Foreign currency translation adjustment 758 591
--------------------- --------------------
Total comprehensive loss $ (806) $ (3,414)
===================== ====================
THIRTY-NINE WEEKS ENDED
---------------------------------------------
OCTOBER 30, 1999 OCTOBER 31, 1998
--------------------- --------------------
(IN THOUSANDS)
Net income $ 25,025 $ 18,532
Foreign currency translation adjustment 362 (289)
===================== ====================
Total comprehensive income $ 25,387 $ 18,243
===================== ====================
</TABLE>
<TABLE>
<CAPTION>
NOTE 5--EARNINGS PER SHARE:
Basic and diluted earnings per share are computed as follows:
THIRTEEN WEEKS ENDED
------------------------------------------
OCTOBER 30, OCTOBER 31,
1999 1998
-------------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Numerator:
Net loss $ (1,564) $ (4,005)
==================== ==================
Denominator:
Denominator for basic earnings per share 45,907 50,028
Effect of dilutive securities:
Options to purchase common stock -- --
-------------------- ------------------
Denominator for diluted earnings per share 45,907 50,028
==================== ==================
Loss per share:
Basic and diluted $ (0.03) $ (0.08)
==================== ==================
Antidilutive securities not included
in the diluted earnings per share computation:
Options to purchase common stock 4,538 4,725
Exercise prices $ 0.25 $ 0.25
to to
$ 30.81 $ 30.81
Convertible subordinated debt $ 116,248 $ 115,000
Conversion price $ 6.00 and $30.25 $ 30.25
</TABLE>
9
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--(CONTINUED)
NOTE 5--EARNINGS PER SHARE--(CONTINUED):
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-------------------------------------
OCTOBER 30, OCTOBER 31,
1999 1998
---------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Numerator:
Net income $ 25,025 $ 18,532
Effect of dilutive securities:
Interest expense on convertible debt issued in
January 1999, net of tax benefit 30 --
--------------- ----------------
Numerator for diluted earnings per share $ 25,055 $ 18,532
=============== ================
Denominator:
Denominator for basic earnings per share 46,289 53,117
Effect of dilutive securities:
Convertible debt issued in January 1999 208 --
Options to purchase common stock 1,255 751
--------------- ----------------
Denominator for diluted earnings per share 47,752 53,868
=============== ================
Earnings per share:
Basic $ 0.54 $ 0.35
=============== ================
Diluted $ 0.52 $ 0.34
=============== ================
Antidilutive securities not included
in the diluted earnings per share computation:
Options to purchase common stock 552 950
Exercise prices $ 10.56 $ 3.75
to to
$ 30.81 $ 30.81
Convertible subordinated debt $ 115,000 $ 115,000
Conversion price $ 30.25 $ 30.25
</TABLE>
NOTE 6--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 7--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
OCTOBER 30, 1999
North America $ 112,401 $ (1,566)
Other areas 19,887 946
--------- ---------
132,288 (620)
Restructuring expense -- (13)
--------- ---------
Total $ 132,288 $ (633)
========= =========
THIRTEEN WEEKS ENDED
OCTOBER 31, 1998
North America $ 106,143 $ (4,175)
Other areas 16,689 (848)
--------- ---------
122,832 (5,023)
Restructuring expense -- (193)
--------- ---------
Total $ 122,832 $ (5,216)
========= =========
</TABLE>
<TABLE>
<CAPTION>
EARNINGS (LOSS)
FROM OPERATIONS
BEFORE INTEREST
NET SALES AND INCOME TAXES
-------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
THIRTY-NINE WEEKS ENDED
OCTOBER 30, 1999
North America $425,526 $ 45,448
Other areas 58,961 1,118
-------- --------
484,487 46,566
Restructuring expense reversal -- 262
-------- --------
Total $484,487 $ 46,828
======== ========
THIRTY-NINE WEEKS ENDED
OCTOBER 31, 1998
North America $408,261 $ 38,963
Other areas 54,357 (2,134)
-------- --------
462,618 36,829
Restructuring expense -- (193)
-------- --------
Total $462,618 $ 36,636
======== ========
</TABLE>
11
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--(CONTINUED)
NOTE 8--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
nine months of fiscal 1999, the Company repurchased 1.2 million shares at a cost
of $12.6 million under this authorization. In addition, subsequent to October
30, 1999, the Company repurchased an additional 493,500 shares at a cost of $5.9
million.
NOTE 9--LITIGATION CONTINGENCY:
In September 1999, a class action lawsuit was filed against the Company in the
United States District Court in the Eastern District of Missouri. The lawsuit
alleges, among other things, that the Company violated state and Federal wage
and overtime laws. The Company is in the process of investigating and responding
to the charges. The outcome or effect of this litigation on the Company's
operating results cannot be predicted at this time.
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:
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 the Company believes it will be able to substantially achieve
Y2K readiness for its internal systems either due to recent implementations of
new application systems or through remediation of its existing internal systems.
However, there can be no assurance that the Company will achieve Y2K readiness
for its internal systems or that other issues related to systems integration and
implementation will not arise and have a material adverse effect on the
Company's business, financial condition and results of operations.
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 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 card
receivables in a timely manner due to Y2K problems.
13
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
The Company believes that it will satisfactorily resolve all significant Y2K
problems and that the related disruptions and costs will not have a material
adverse effect on the Company. However, estimates of Y2K readiness and related
disruptions and 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 internal
systems applications and the success of third party modification plans. There is
no guarantee that the readiness will be achieved without an adverse effect on
the Company.
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 nine months
of fiscal 1999, Luxottica (including RayBan, Revo, Killer Loop, Arnette, Giorgio
Armani and other brands) and Oakley, the Company's largest suppliers, accounted
for approximately 27.1% and 23.2%, respectively, of the Company's total
merchandise purchases. On June 28, 1999, Luxottica Group SpA completed the
purchase of the assets and liabilities of Bausch & Lomb's eyewear business
(which included Ray Ban, Revo, Killer Loop, Arnette and other brands). There can
be no assurance that this transaction or other vendor 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.
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.
14
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
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 and during fiscal 1998 initiated a test and subsequent roll-out of
combination sunglass and watch stores ("Combo stores"). During the first nine
months of fiscal 1999, the Company has converted and/or opened 133 Combo store
locations and is planning on converting and/or opening approximately 40
additional 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 and start-up costs, lack of experience and
customer acceptance and significant competition from existing and new retailers.
In addition, the use of the Internet to sell goods and services has developed
only recently, and there can be no assurance that a sufficiently large number of
consumers will begin to use the Internet as a medium of commerce. There can be
no assurance that the Company's e-commerce activities will achieve sales and
profitability levels that justify the Company's investment therein.
Expansion of any of the previously mentioned concepts or any other related
concepts, and the entry into any new distribution channels also involve other
risks that could have a material adverse effect on the Company, including (i)
diversion of management's attention from the Company's core business, (ii)
difficulties with the hiring, retention and training of key personnel, (iii)
risks associated with higher dependence on holiday season sales, (iv) lower
gross margin, and risks associated with unanticipated problems or legal
liabilities.
There can be no assurance that the Company will be able to successfully execute
other components of its growth strategies. The Company's current international
operations and any future international expansion subject the Company to certain
risks and limitations not associated with its current U.S. operations, including
(i) the uncertainty of market acceptance of specialty retailers and/or the
Company's product offerings, (ii) the Company's ability to
15
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
hire and train local personnel, (iii) the Company's dependence on local business
conditions and practices, (iv) foreign currency losses, (v) the impact of
foreign taxes, and (vi) foreign investment restrictions and limitations.
Moreover, the Company's international expansion may include entry into joint
venture and/or franchise arrangements, which may limit the Company's control of
operations.
ABILITY TO IMPLEMENT RESTRUCTURING PLANS. The Company's restructuring plans
anticipate the closure of approximately 120 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.
IMPACT OF DISPOSAL OF DISCONTINUED OPERATIONS. In January 1998, the Company
adopted a plan to discontinue its EyeX optical segment and substantially
completed the disposition in fiscal 1998. The Company's consolidated financial
statements include an allowance for estimated loss from disposition of this
segment. As the Company completes its disposal of EyeX, certain matters may
arise which could result in additional gains or losses to be recognized by the
Company.
UNCERTAINTIES OF LITIGATION. In September 1999, a class action lawsuit was filed
against the Company in the United States District Court in the Eastern District
of Missouri. The lawsuit alleges, among other things, that the Company violated
state and Federal wage and overtime laws. The Company is in the process of
investigating and responding to the charges. The outcome or effect of this
litigation on the Company's operating results cannot be predicted at this time.
However, there can be no assurance that an unfavorable outcome will not have an
adverse effect on the Company's operating results.
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
16
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
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.
SEASONALITY. The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its net sales and results of operations. The
Company has generally experienced lower net sales and operating results during
the third quarter of each fiscal year, (and to a lesser extent, during the first
and fourth quarters of each year) and the Company expects this trend may
continue for the foreseeable future. The Company's quarterly results of
operations may also fluctuate significantly as a result of a variety of factors,
including the timing of store openings and closings, and the timing of sales
contributed by new stores and new concepts such as Combo stores and new
distribution channels, such as the Internet.
POSSIBLE VOLATILITY OF STOCK AND NOTE PRICES. The market prices of the Company's
common stock and convertible subordinated notes are subject to significant
volatility caused by factors such as quarterly fluctuations in the financial
results of the Company, monthly comparable store sales results, changes in
financial estimates by securities analysts, shortfalls in earnings or sales
below analysts' expectations, the overall economy and the financial markets. In
addition, the common stock is quoted on the NASDAQ National Market and the notes
are traded on the NASDAQ SmallCap Market, which stock markets have experienced,
and are likely to experience in the future, significant price and volume
fluctuations which could
17
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
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. New factors emerge from time to time and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
GENERAL
Sunglass Hut International, Inc. ("Sunglass Hut" or the "Company") is the
world's largest specialty retailer of sunglasses with approximately 1,900
locations worldwide. During fiscal 1996, the Company initiated an additional
specialty store concept, Watch Station. Additionally, during fiscal 1998, the
Company began to test a new store concept that combines sunglasses and watches
in a unified format ("Combo stores") and the Company has announced plans to
further expand this concept. 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 1,682
specialty sunglass locations, 109 Watch Station locations and 155 Combo stores
as of October 30, 1999.
18
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
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. The Company has a revolving credit facility with borrowing
availability of up to $80 million, depending on inventory levels, with
BankBoston Retail Finance Inc. ("BankBoston"). As of October 30, 1999, the
Company's borrowing base was approximately $60.5 million and the Company was
entitled to borrow up to an additional $19.5 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).
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 October 30, 1999, the Company had outstanding borrowings under its credit
facility of $23.4 million and, $1.1 million in letters of credit outstanding,
which were maintained as security for performance under the Company's executive
office lease and for purchases of certain merchandise.
Net cash provided by operating activities was $34.4 million for the first nine
months of fiscal 1999 compared to $69.3 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 changes in inventory, accounts payable and accrued expenses.
Net cash used in investing activities was $28.9 million for the first nine
months of fiscal 1999 compared to $22.2 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 $4.8 million for the first nine months
of fiscal 1999 compared to $49.7 million for the same period in fiscal 1998.
Financing cash flows reflect the net increase in the amounts outstanding under
the Company's revolving credit facility as well
19
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
as payments made for stock repurchases, 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 74 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.
RESULTS OF OPERATIONS
QUARTER ENDED OCTOBER 30, 1999 COMPARED TO QUARTER ENDED OCTOBER 31, 1998
Net sales increased $9.5 million, or 7.7%, to $132.3 million during the quarter
ended October 30, 1999 compared to $122.8 million for the same period of fiscal
1998. This increase reflects sales from new stores opened during the third
quarter of fiscal 1999 (and fiscal 1998 to the extent not reflected in
comparable store sales) of $5.1 million, an increase in comparable store sales
of 8.1% (accounting for approximately $9.3 million of this increase), offset by
a decrease of $4.9 million for sales lost due to store closures during fiscal
1998 and 1999.
Gross profit increased $6.4 million, or 14.2%, to $51.4 million during the
quarter ended October 30, 1999 compared to $45.0 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 2.2 percentage points to 38.9% for the quarter
ended October 30, 1999 from 36.7% for the same period of fiscal 1998, primarily
due to lower occupancy expense resulting from the closure of underperforming
locations as well as higher merchandise gross margins.
Operating expenses increased $1.3 million, or 3.2%, to $45.0 million during the
quarter ended October 30, 1999 compared to $43.7 million for the same period of
fiscal 1998. As a percentage of net sales, operating expenses decreased 1.5
percentage points to 34.0% during the quarter ended October 30, 1999 compared to
35.5% for the same period in 1998 due to the leverage impact of strong
comparable store sales and the closure of underperforming locations in fiscal
1998 and 1999.
Depreciation and leasehold amortization expense increased $385,000, or 6.2%, to
$6.5 million during the quarter ended October 30, 1999 compared to $6.2 million
for the same period of fiscal 1998, due to new store growth, the renovation of
existing stores and expenditures for required systems enhancements.
20
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
Interest expense increased $475,000 to $2.0 million for the quarter ended
October 30, 1999, compared to $1.5 million for the same period last year due to
an increase in average outstanding borrowings during the period.
The Company reported a net loss of $0.03 per share, or $1.6 million, during the
quarter ended October 30, 1999 compared to a net loss of $0.08 per share, or
$4.0 million for the same period of fiscal 1998.
FIRST NINE MONTHS OF 1999 COMPARED TO FIRST NINE MONTHS OF 1998
Net sales increased $21.9 million, or 4.7%, to $484.5 million during the first
nine months of fiscal 1999 compared to $462.6 million for the same period of
fiscal 1998. This increase reflects sales from new stores opened during the
first nine months of fiscal 1999 (and fiscal 1998 to the extent not reflected in
comparable store sales) of $18.7 million, an increase in comparable store sales
of 6.6% (accounting for approximately $28.5 million of this increase), offset by
a decrease of $25.3 million for sales lost due to store closures during fiscal
1998 and 1999.
Gross profit increased $14.0 million, or 7.4%, to $204.7 million during the
first nine months of fiscal 1999 compared to $190.7 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 1.0 percentage points to 42.2% for the first
nine months of fiscal 1999 from 41.2% for the same period of fiscal 1998,
primarily due to lower occupancy expense resulting from the closure of
underperforming locations as well as higher merchandise gross margins.
Operating expenses increased $2.0 million, or 1.5% to $137.0 million during the
first nine months of fiscal 1999 compared to $135.0 million for the same period
of fiscal 1998. As a percentage of net sales, operating expenses decreased 0.9
percentage points to 28.3% during the first nine months of fiscal 1999 compared
to 29.2% for the same period in 1998, due to the leverage impact of strong
comparable store sales, the closure of underperforming locations in fiscal 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 $1.6 million, or 9.2%
to $19.3 million during the first nine months of fiscal 1999 compared to $17.7
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
$197,000, or 14.9%, to $1.5 million during the first nine months of fiscal 1999
compared to $1.3 million
21
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
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 $639,000 to $6.0 million for the first nine months of
fiscal 1999, compared to $5.3 million for the same period last year due to an
increase in average outstanding borrowings during the period.
The Company reported net income of $0.52 per diluted share, or $25.0 million,
during the first nine months of fiscal 1999 compared to net income of $0.34 per
diluted share, or $18.5 million for the same period of fiscal 1998.
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 addressed the impact of Y2K on its systems
and business processes. The Project Team focused 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 was used to prioritize
and direct the internal and external resources dedicated to the Y2K initiative.
22
<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 an enterprise-wide risk analysis, 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 was
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. In fiscal 1998 and 1999, the
Merchandising, Human Resources, and International Financial Information systems
were implemented for improved business functionality. The Merchandising, Human
Resources and International Financial Information systems are vendor certified
as Y2K compliant. An upgrade in the North American Financial Information system
is currently being completed to the same Y2K vendor certified version already in
use internationally. Remediation of the mission critical systems at the
Distribution Center was completed and implemented in March 1999. Critical
functions are currently being tested to ensure the asserted compliance. The POS
operating system and application system upgrades are complete and implemented.
Additionally, the hardware and communications infrastructure remediation was
completed in November 1999. Telecommunications software remediation and initial
testing was completed in October 1999. 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, approximately 90%
have been remediated with the balance nearing completion. The remediation,
testing, and implementation phases have been performed concurrently within
system projects as well as overall for all system areas; however, with
implementation and related testing nearing completion, the Company believes it
will be able to substantially achieve Y2K readiness for its internal systems,
although there can be no assurance that such readiness will be achieved.
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 have been surveyed to determine their readiness. In
addition, because the Company depends heavily on a select group of merchandise
vendors, the Company has conducted more
23
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
in depth assessments of certain mission critical vendors including assessments
of their supply chain analysis. The criticality of merchandise vendors and
service providers is being continually monitored and reevaluated to ensure that
review and contingency planning is adequately completed for those vendors most
critical to the Company. Where necessary, contingency plans have been developed
and continue to be reviewed for use 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 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, merchandise vendor or support
equipment were not Y2K compliant.
COSTS
During fiscal 1998 and 1999, the Company has expensed approximately $700,000 on
Y2K efforts across all areas and expects to spend an additional $200,000 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
24
<PAGE>
SUNGLASS HUT INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(CONTINUED)
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.
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.
25
<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 30, 1999.
26
<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 3, 1999 By: /s/John X. Watson
------------------------------------------
John X. Watson
President, Chief Executive Officer and
Director
(principal executive officer)
Date: December 3, 1999 By: /s/Larry G. Petersen
------------------------------------------
Larry G. Petersen
Senior Vice President-Finance
and Chief Financial Officer
(principal financial officer)
Date: December 3, 1999 By: /s/George L. Pita
------------------------------------------
George L. Pita
Vice President-Finance
(principal accounting officer)
27
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> OCT-30-1999
<CASH> 6,339
<SECURITIES> 0
<RECEIVABLES> 5,805
<ALLOWANCES> 0
<INVENTORY> 103,320
<CURRENT-ASSETS> 152,421
<PP&E> 213,265
<DEPRECIATION> 112,440
<TOTAL-ASSETS> 292,248
<CURRENT-LIABILITIES> 81,680
<BONDS> 0
0
0
<COMMON> 457
<OTHER-SE> 71,911
<TOTAL-LIABILITY-AND-EQUITY> 292,248
<SALES> 484,487
<TOTAL-REVENUES> 484,487
<CGS> 279,816
<TOTAL-COSTS> 279,816
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,970
<INCOME-PRETAX> 40,858
<INCOME-TAX> 15,833
<INCOME-CONTINUING> 25,025
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,025
<EPS-BASIC> 0.54
<EPS-DILUTED> 0.52
</TABLE>
