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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Commission File Number: 1-13606

Sola International Inc.

Registrant’s telephone number, including area code: (858) 509-9899

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      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 þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in a definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      As of June 12, 2002, the aggregate market value of Common Stock held by non-affiliates was approximately $282,342,781. For purposes of this computation, shares held by directors and executive officers of the registrant have been excluded. Such exclusion of shares held by directors and executive officers is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant.

      As of June 12, 2002, 24,541,650 shares of the registrant’s common stock, par value $0.01 per share, which is the only class of common stock of the registrant, were outstanding. The registrant’s stock is traded on the New York Stock Exchange under the symbol SOL.

      Documents Incorporated by Reference: Portions of the registrant’s proxy statement for its 2002 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.

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SOLA INTERNATIONAL INC.

ANNUAL REPORT ON FORM 10-K

      Our trademarks, service marks and trade names include AO b’Active, AO Compact, Contour Optics, Finalite 1.6, Percepta, SOLAMax, Spectralite, Visuality and ViZio, among others. This report also contains trademarks, service marks, copyrights and trade name of other companies.

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PART I

Item 1. Business

The Company

      We commenced operations in 1960 and were incorporated in Delaware in 1993. We are a leading global designer, manufacturer and distributor of a broad range of plastic and glass eyeglass lenses and hold a leading manufacturing and technology position in the growing plastic lens segment of the global spectacle lens market. We have sales offices in 28 countries worldwide and operate in most major regions of the world. We believe that we hold a top three market position in terms of volume of plastic eyeglass lenses sold in each major region where we operate — North America, Europe and Rest of World (consisting primarily of Australia, Asia and South America). We focus our efforts on value-added products, including products with advanced design characteristics, lens coatings and treatments and thin and light weight materials (e.g., polycarbonate). Approximately 74% of our annual net sales are represented by value-added products.

      We market our spectacle lens products globally under the brands SOLA and American Optical (AO) and distribute them globally through four primary channels: (1) direct to national retail chain, (2) direct to retail outlets, (3) wholesale distributors (e.g., independent processing laboratories), and (4) managed care organizations in the United States, a growing segment of the spectacle lens market.

      Our business is organized into three primary markets: North America, Europe and Rest of World. For the fiscal year ended March 31, 2002, we generated approximately 45% of our net sales from North America, 35% from Europe and 20% from Rest of World.

	•	North America is currently our largest market. Our net sales in North America for the fiscal year ended March 31, 2002 were $236.8 million compared to $245.4 million in the prior year, a decrease of 3.5%. Using constant exchange rates, net sales decreased by 3.6%. The sales decline in the North American region was due primarily to decreased sales to laboratory customers that are owned by and aligned with two principal competitors.
	•	Europe is currently our second largest market. Our net sales in Europe for the fiscal year ended March 31, 2002 were $185.8 million compared to $182.9 million in the prior year, an increase of 1.6%. Using constant exchange rates, net sales increased by 4.1%. Net sales in the European region increased due primarily to the organic growth of our prescription laboratory network.
	•	Rest of World is currently our third largest market. Our net sales in Rest of World for the year ended March 31, 2002 were $106.9 million compared to $117.1 million in the prior period, a decrease of 8.7%. Using constant exchange rates, net sales increased by 2.0%. Net sales in the Rest of World region were negatively impacted by our efforts to concentrate on higher margin value-added sales.

      For more information concerning our geographic areas, see Note 20 of Notes to Consolidated Financial Statements and “Risk Factors — Risk Factors Relating to Sola and the Industry — We are subject to certain risks associated with our foreign operations”, “— We concentrate a large part of our manufacturing operations in Tijuana, Mexico” and “— We conduct all of our foreign operations through subsidiaries and the payment of dividends by these entities may be restricted.”

Strategic Initiatives

      Our organization has historically been managed on a decentralized basis with each operating unit having its own manufacturing facilities, distribution centers and inventory management systems. This decentralized approach resulted in excess manufacturing capacity, redundant facilities in high cost regions and excessive distribution centers. In the third quarter of fiscal 1999, we initiated a strategic operating review designed to streamline manufacturing and distribution, reduce operating costs worldwide and write-off inventory SKUs that are no longer being manufactured. In April 2000, Jeremy Bishop was appointed President and Chief Executive Officer. Following his appointment, Mr. Bishop expanded the scope of our strategic review program and accelerated the implementation of our strategic initiatives begun in 1999.

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      The charges recorded for these initiatives from fiscal 1999 through the end of fiscal 2002, net of gains on asset sales, totaled approximately $167.7 million, including $39.5 million of associated inventory write-offs classified in cost of sales. The non-cash charges related primarily to the write-off of equipment and other assets, as well as the impairment of goodwill. The cash charges related primarily to severance expenses and facility closures. Operating expenses for fiscal 2002 have declined $30.4 million from fiscal 1999 in addition to significant unit cost decreases, and we expect to generate additional savings in fiscal 2003 as a result of the actions taken in fiscal 2001 and 2002. In fiscal 2002 and 2001, we realized cash proceeds from sales of land and buildings made redundant by these initiatives of approximately $5.5 million and $7.8 million, respectively.

      In addition to special charges, we incurred transition costs associated with executing our strategic initiatives. These transition costs totaled $20.6 million and $17.5 million in fiscal 2002 and 2001, respectively, and were largely related to: (1) expenditures to execute the strategic actions (e.g., certain employee and facility costs) and (2) expenses incurred that will be eliminated upon completion of the strategic actions (e.g., manufacturing variances resulting from the inefficiencies encountered during the product migration and consolidation of manufacturing facilities).

Competitive Strengths

      We believe that our strong competitive position is attributable to a number of factors, including the following:

     Global Scope

      We currently sell our products to customers in over 50 countries worldwide and operate in most major regions of the world. Our geographically diverse customer base limits our dependence upon any particular customer or geographic region. With the completion of our strategic initiatives, our operations consist of four primary and six specialized manufacturing facilities, two primary research and development centers, 12 primary prescription laboratories and five primary distribution centers. In addition, we have sales offices in 28 countries worldwide. Our global scope, combined with our manufacturing and logistics capabilities, enables us to meet customer demand for delivery of a broad range of products efficiently, cost effectively and in a timely manner. Our primary brands, SOLA and AO, are recognized throughout the world. We believe global brand recognition is a significant advantage in the highly competitive spectacle lens market.

     Leading Market Position

      We believe that we hold a top three market position in terms of volume of plastic eyeglass lenses sold in most major regions of the world, including the leading market positions in Australia, Brazil, France, Italy, the United Kingdom, and the U.S.

     Significant Sales of Valued-Added Products

      We focus our efforts on value-added products, which currently represent approximately 74% of our net sales. Value-added products are products with advanced design characteristics, lens coatings and treatments and thin and light weight materials (e.g., polycarbonate). We believe our value-added products enable us to strengthen relationships with existing customers and develop relationships with new customers. Many of our value-added products are sold under global brand names developed under our two primary brands, SOLA and AO.

     Research and Development Expertise

      We believe that we are a technological leader in the plastic lens segment of the spectacle lens industry, with particular expertise in the development of new lens materials and designs. We have devoted significant resources to the research and development of new products and technology, with expenditures of $13.1 million in fiscal 2002, $14.9 million in fiscal 2001, and $20.0 million in fiscal 2000. The $1.8 million, or 12.1%, decrease in our research and development expenses in fiscal 2002 was due in part to headcount reductions associated with the strategic initiatives as well as the impact of the strong U.S. dollar against non-U.S. dollar

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     Leading Position in the Growing Chain Retail and Managed Care Channels

      We believe that we hold the leading market position in terms of volume of plastic lenses sold in the North American chain retail and managed care distribution channels. We have established our strong position in these channels by providing differentiated new products, timeliness of delivery and a commitment to product quality, technical support and product education. We work with most major retail chains in North America, including Wal-Mart Stores, Inc., LensCrafters and U.S. Vision, Inc. Our commitment to quality and customer service is evidenced by Wal-Mart selecting us as category manager for its optical lens business and as the only lens maker to be awarded the title Supplier of the Year for 2000. In addition, our managed care customers include Kaiser Permanente and Vision Service Plan (VSP). Our managed care customers select us as their preferred spectacle lens supplier primarily because of our broad product portfolio and superior marketing support services.

     Strong Direct to Retail Business in Europe

      Although the U.S. market is the single largest spectacle market in the world, we benefit from our global diversity, and most specifically, from our strong operations in Europe. European operations have generated average annual sales growth of more than 9% over the past three fiscal years on a constant dollar basis. The significant growth of our direct to retail business is driven by highly experienced commercial teams across Europe that are supported by our vertically integrated network of prescription laboratories. We have five primary prescription laboratories in Europe, which allow us to directly meet the needs of the eyecare professionals in markets where an independent wholesale channel generally does not exist. Additionally, we believe that these laboratories will enable us to penetrate new markets as we introduce new products that require advanced technical processing capabilities. Main supplier status with many retail chains and independent practices alike is built on the cornerstone of a partnership approach and the successful introduction of highly differentiated products. Our European market share in terms of volume of plastic eyeglass lenses sold has consistently been strong over the past five years, and we believe that we maintain the leading market share positions in France, Ireland, Italy, Portugal and the United Kingdom.

     Experienced Management Team

      Our senior management team, led by President and Chief Executive Officer Jeremy C. Bishop, has over 100 years of combined vision care industry experience. Prior to his appointment as President and Chief Executive Officer in April 2000, Mr. Bishop served as President of American Optical Lens Company, a subsidiary of ours since its acquisition in 1996. Mr. Bishop joined American Optical in 1990 as Vice President of European Operations. Under Mr. Bishop’s leadership, we have reduced operating expenses by more than $30.4 million since fiscal 1999, completed a number of key strategic initiatives and improved our financial performance. Mr. Bishop and his senior management team have fostered a new culture geared towards continued cost reduction, cash flow generation, marketing and new product development.

     Increased Emphasis on Driving Demand Through Wholesale Market

      Through outright purchases of labs and restrictive distribution contracts, our competitors have made significant strides in controlling access to independent eye care professionals (ECPs). We have launched multiple initiatives to combat this trend and strengthen our position in this channel. In the past year, we have significantly increased hiring of sales representatives, and created a comprehensive training program for them

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     Innovative, Need-Specific Products

      As the market becomes increasingly saturated with products, especially in the progressive addition lens category, it becomes necessary to do more to differentiate a new product. We have accomplished this with lens designs meeting specific needs of a significant number of lens wearers that are not ideally met by “general-purpose” lenses already established in the market. SOLAMax, the latest progressive lens in the SOLA line, is an excellent example of this. SOLAMax has the largest near vision area of any progressive lens. This, combined with its exceptionally high adaptation rate, makes it the ideal choice for new presbyopes, former bifocal wearers, and any presbyope who has a near vision emphasis. Presbyopia is a natural aging process that limits the eyes’ ability to focus on near objects and is the principal driver behind the need for multi-focal vision correction. SOLAMax has enjoyed strong sales and won the Optical Laboratory Association’s 2001 “Best in Lens Design” award.

Business Strategy

      Our strategy is to enhance our strong market position and to increase net sales and cash flow by capitalizing on our position as a leading manufacturer and distributor of plastic eyeglass lenses.

     Capitalize on Positive Demographic Trends Affecting the Vision Care Industry

      We believe that we are well positioned to benefit from the positive demographic changes expected to take place in our markets. According to the U.S. Census, middle series projections, the number of people in the age group 45-60 is growing at 3% per year, peaking in 2015. This age group is the group primarily affected by presbyopia. Our leading position in the design and manufacture of progressive lenses positions us favorably to realize the benefit of this demographic trend. We plan to focus on the further development and enhancement of our progressive lens designs.

     Focus on Marketing and Sales

      We develop and manage our marketing strategy on a centralized basis while employing local sales and marketing implementation and tactics. We differentiate our products from those of our competitors through lens designs, materials and coatings targeted to meet customer needs. We seek to expand our market share by developing brand recognition for our products, continuing to develop partnerships with chain retailers, expanding our direct to retail business through our prescription laboratories and through independent laboratories, focusing marketing expenditures on target markets and accounts, and marketing to customers the advantage of higher margin, value-added products. We continue to market our two primary brands, SOLA and AO, and to position them throughout the world. Our marketing efforts are intended to help us compete on the basis of quality and service rather than price.

     Introduce New Products

      We invest significant resources in the development of new and innovative products. Since 1998, we have successfully developed and marketed proprietary lens designs, including Visuality and AO Compact. In fiscal year 2001, we successfully introduced additional new products including SOLAMax and AO b’Active progressive lenses. In April 2001, we opened SOLA Technologies, our first prescription laboratory in the U.S., with the introduction of our initial product, Enigma, in our Contour Optics category. In April 2002, we announced a global licensing agreement with DuPont Fluoroproducts where we will market a newly developed coating for ophthalmic lenses using the Dupont™ Teflon® brand.

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     Improve Cash Flow Performance

      A primary focus of ours is executing key business fundamentals and managing our business for improved financial performance, including cash flow generation. We have implemented strategic initiatives aimed at streamlining and standardizing our operations globally. The initiatives had the following major objectives:

	•	to shift production of high-volume, standard products from higher-cost manufacturing facilities in the United States, Australia and Ireland to low-cost manufacturing sites in Mexico, China and Brazil;
	•	to consolidate manufacturing expertise at fewer production facilities;
	•	to standardize product specifications globally; and
	•	to streamline distribution and logistics operations.

      We believe that these initiatives have resulted in cost reductions, lower working capital investment, a more efficient distribution network and improved cash flow while maintaining or improving our customer service levels. Other actions to improve profitability included developing global information technologies that enable us to manage global inventories and demand and monitor manufacturing performance.

Products

      We manufacture lenses using both plastic and glass materials, with plastic lenses currently accounting for approximately 94% of our net lens sales. Approximately 43% of our sales of plastic prescription lenses are sales of conventional hard resin plastic lenses, with the balance derived from advanced lens materials with thin and light weight features. Our plastic lens materials are comprised of the following:

	•	Conventional hard resin plastic;
	•	Spectralite, Finalite and other non-proprietary thin and light weight plastic; and
	•	Polycarbonate, a thin and lightweight material with greater impact resistance.

      We market and produce a variety of lens coatings and treatments that significantly enhance the performance of our lens products. These coatings and treatments include the following:

	•	Anti-scratch coatings that prolong the life of our lenses;
	•	Anti-reflective coatings that allow more light to pass through the lens for improved vision; and
	•	Photochromic treatments that darken the lens when exposed to direct sunlight.

      The penetration of coated and treated lenses varies significantly from market to market and represents a significant growth opportunity for us. Photochromic lenses are processed by a third party using technology that is proprietary to the third party.

      Most of the materials necessary to produce our products and coatings are readily available from a number of potential sources at competitive prices. In order to reduce materials costs, we coordinate centrally the purchasing of raw materials, including monomers. For more information regarding the availability of polycarbonate and monomer raw materials, see “Risk Factors — Risks Relating to Sola and the Industry — We are dependent on a small number of suppliers for raw materials.”

Marketing and Sales

      Our sales offices are located in 28 countries worldwide. As of March 31, 2002, there were approximately 680 employees involved in our sales and marketing efforts. Our sales and marketing expenditures for fiscal 2002 were $101.7 million, representing 19.2% of net sales. We differentiate our products from those of our competitors through lens designs, materials and coatings targeted to meet customer needs. We seek to expand our market share by developing brand recognition for our products, continuing to develop partnerships with chain retailers, expanding our direct to retail business through our prescription laboratories and through independent laboratories, focusing our marketing expenditures on target markets and accounts and marketing

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      We continue to develop our two primary brands, SOLA and AO, and to position them throughout the world. Under each of these brands, we will continue to market a portfolio of products designed to meet the lifestyle needs of consumers worldwide. Key brands of ours recognized throughout the world include VIP, Percepta, Visuality, AO Compact, SOLAMax and AO b’Active.

Distribution

      Most multifocal lenses and some single vision lenses require secondary processing at a laboratory before they can be dispensed to a consumer. In some cases, lens manufacturers operate their own laboratories, while in other instances they sell semi-finished lenses to independent labs that handle the final processing and distribute the products to eyecare practitioners. Many retail chains operate their own laboratories, either inside the retail location or at a separate site.

      The final stage in distribution takes place in either a retail store or an independent eyecare practitioner’s office. Although dispensing regulations differ from market to market, prescription lenses still require the involvement of an optician, optometrist or ophthalmologist, in most instances before they can be sold to a consumer. Chain retailers have an increased presence in all regions of the world and are gradually replacing the medical/ healthcare orientation of the industry with more consumer-oriented approaches.

      The four primary channels that are used for distribution of our prescription lenses are the following:

	•	National chain retail, super optical retail stores and retail buying groups, many of which have on-site lens processing capability. This is a growing distribution channel for us in each of our major regions;
	•	Direct distribution to small- and medium-sized retail outlets, including distribution direct to eyecare professionals through our processing laboratories;
	•	Wholesale distributors or independent processing laboratories that process our lenses and then resell them to retail outlets and eyecare practitioners; and
	•	Managed care organizations in the United States, many of which have on-site lens processing capability.

      Our plano lenses (lenses with no corrective power) are sold primarily direct to sunglass manufacturers.

      Prior to the strategic initiatives, we operated numerous distribution centers worldwide. As a result of our strategic initiatives, our distribution and logistics operations will consist of five primary distribution centers. The five primary distribution centers are located in North America (2), Europe, Asia and South America. For more information regarding our North American chain retail channel, see “Risk Factors — Risks Relating to Sola and the Industry — We are dependent upon the North American chain retail channel.”

Customers

      During fiscal 2002, our ten largest customers accounted for 23.8% of net sales, and our largest customer accounted for less than 6% of net sales. During fiscal 2002, six of our ten largest customers were located in North America and accounted for 14.1% of net sales. For the year ended March 31, 2002, sales to our top 20 customers, excluding competitors, increased by 7.9% as compared to the prior year.

Manufacturing Operations

      At the beginning of fiscal 2000, we operated 16 manufacturing facilities worldwide. We currently operate 10 facilities, including the Oracle operations acquired in fiscal 2001. With the completion of our strategic initiatives, we have four primary and six specialized manufacturing facilities worldwide. These initiatives included shifting production of high-volume, standard products from the U.S., Australia and Ireland to low-cost manufacturing sites in Mexico, China and Brazil while maintaining complex production at the Australian

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Research and Development

      We continue to invest heavily in research and development in order to introduce new and innovative products and to improve the efficiency of our manufacturing process. As of March 31, 2002, there were 154 employees involved in our research and development efforts. Our research and development expenditures for fiscal 2002 were $13.1 million, representing 2.5% of net sales, for fiscal 2001 were $14.9 million, representing 2.7% of net sales, and for fiscal 2000 were $20.0 million, representing 3.7% of net sales. We have our research and development centers in Petaluma, California; Southbridge, Massachusetts; and Lonsdale, Australia.

      Our research and development focuses on the design and development of higher margin, value-added products, on new materials with superior characteristics, on technology that will deliver products to the market more efficiently and on technologies to improve productivity in the manufacture of existing products. Recent research and development programs include the successful development of our Finalite and Spectralite materials; Percepta, Visuality and AO Compact progressive designs; and ViZio polycarbonate lenses.

      In April 2001, we launched a new single vision product, Enigma, featuring an innovative design that matches the contours of the lens to the shape of the eye, thus providing superior optical performance. This proprietary technology has created a new product category for Sola and for the spectacle lens industry. The product is being distributed through our wholly owned prescription laboratory, SOLA Technologies, located in Hebron, Kentucky.

Competition

      The spectacle lens industry is highly competitive. We compete principally on the basis of customer service, quality and breadth of product offerings, innovation and price. Our largest global competitors are Essilor International SA and Hoya Corporation. The spectacle lens industry is characterized by price competition, which can be severe in certain markets, particularly for high-volume, standard products.

      We attempt, to the extent possible, to counter competition on the basis of price by focusing on providing a rapid response to orders, maintaining high fill rates, developing differentiated new products and educating processing laboratories and eyecare practitioners on the benefits of our lenses and coatings. Since recently developed products comprise a substantial portion of our sales, our performance is dependent on our continuing ability to develop and market new products.

      In addition to direct competition from other manufacturers of eyeglass lenses, we compete indirectly with manufacturers of contact lenses and providers of medical procedures for the correction of visual impairment. Contact lenses are not, however, perfect substitutes for eyeglasses because of the difficulty of developing progressive or bifocal contact lenses. In addition, contact lens wearers also tend to own eyeglasses. A number of companies have developed, or are developing, surgical equipment or implants used to correct refractive error, including myopia, hyperopia and astigmatism. These procedures are currently ineffective at correcting presbyopia. Presbyopia affects the vast majority of people above the age of 45 and is a major source of demand for our progressive and other multifocal lenses. However, current medical procedures, or ones developed in the future, could materially impact demand for our lenses.

Patents, Trademarks & Licenses

      We seek to protect our intellectual property throughout the world. As of March 31, 2002, we had filed, or applied for, patents for 109 discrete inventions or technologies. Many of our patents have been filed in multiple countries, and they include 71 patents, or patent applications, filed in the United States. We have been granted, or are licensed to use, 920 trademarks in various countries, representing rights to 233 discrete names. These include 80 trademarks granted in the United States. Further, there are 70 trade names under application by us. We do not believe that we are dependent on any particular patent, trade secret or similar

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Employees

      As of March 31, 2002, we had 6,983 employees throughout the world. The majority of our employees are not represented by labor unions. We consider our labor relations to be good and there have been no significant labor disputes in the past ten years.

Environmental Matters

      We must comply with United States and foreign environmental laws and regulations concerning emissions to the air, waste water discharges and the generation, handling, storage, transportation and disposal of hazardous wastes, and with other federal, state and foreign laws and regulations. We believe that we possess all material permits and licenses necessary for the continuing operation of our business and believe that our operations are in substantial compliance with the terms of all applicable environmental laws. It is impossible to predict accurately what effect these laws and regulations will have on us in the future.

      Our manufacturing processes generally use non-hazardous chemicals where feasible. Certain processes use a variety of volatile and other hazardous substances. Where practical, we have been reducing the use of these chemicals. Where the use of hazardous materials is essential, manufacturing processes are developed which minimize the use of these chemicals and which comply with relevant safety and environmental standards. We have also developed programs to eliminate use of chlorinated hydrocarbons and chlorofluorocarbons, or CFCs, in our manufacturing processes. Our current use of these substances is minimal in our operations.

      Since 1988, we have operated a ground water remediation system at our Petaluma, California manufacturing facility in accordance with a consent order issued by the U.S. EPA under the Comprehensive Environmental Response, Compensation and Liability Act of 1980. The system is designed to remediate a pre-1982 release of hazardous substances. Analytical results indicate that contamination levels have decreased significantly over the past few years. Since March 1997, we have curtailed clean-up activities, while continuing to monitor contamination levels. In 1997, we submitted to the EPA a report on contamination levels and the impact of curtailed activities that indicates no significant impact on the site from the curtailed activities. The EPA has consented to continued curtailment of clean-up activities. We expect continued reduction of clean-up activities due to relatively low levels of contamination existing at the site. In connection with the acquisition from Pilkington, Pilkington has agreed to indemnify us with respect to environmental losses relating to certain then existing facts, events, conditions, matters or issues, for (1) 50% of the losses to the extent they exceed $1 million but are less than or equal to $5 million, and (2) 100% of the losses in excess of $5 million. In March 2001, we completed the sale of the affected property and indemnified the buyer with respect to certain then-existing facts, events, conditions, matters or issues.

      It is possible that we may be involved in other similar investigations and actions under state, federal or foreign laws in the future. Based on currently available information, we do not believe that our share of costs at the existing sites is likely to result in a liability that will have a material adverse effect on our results of operations, financial condition or cash flows.

      Our policy is to meet or exceed all applicable environmental, health and safety laws and regulations. The complexity and continuing evolution of environmental regulation, including certain programs for which implementing regulations have not yet been finalized, preclude precise estimation of future environmental expenditures.

Regulation

      To satisfy Food and Drug Administration safety requirements for sale of lenses in the U.S., all of our lenses, like those of our competitors, must comply with the “drop-ball impact test.” This test involves dropping

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      There is a similar European ISO/CEN test for spectacle lenses, which involves a “static load,” rather than an impact. In this case, force is applied to the convex side of the lens through a steel ball. The load is applied for 10 seconds and then removed. The lens passes if it does not break.

      There are several factors that could contribute to whether our lenses pass these tests, including the nature of the lens material, coatings applied to the lenses and lens power and curvature. While our manufacturing processes are designed for our lenses to pass these tests, we cannot guarantee that they will continue to pass these tests.

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Item 2.     Properties

      Our principal properties are set forth in the following table:

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(1)	We maintain two sites in Guangzhou; the manufacturing site is owned and the corporate offices are leased. The manufacturing site is owned by a joint venture in which we own a 76% ownership interest.

      A portion of our research and development activities, our corporate headquarters and certain of our manufacturing and distribution operations are located near major earthquake faults. Operating results could be materially affected in the event of a major earthquake. We are predominantly self-insured for losses and interruptions caused by earthquakes.

      For further information concerning our leased properties, see Note 17 of Notes to Consolidated Financial Statements included elsewhere herein. Our operating leases have expirations ranging from 2003 to 2014. While we do not anticipate any difficulties in renewing or replacing such leases as they expire, we cannot be certain that we can do so. We believe that our manufacturing capacity is sufficient for our current needs.

Item 3.     Legal Proceedings

      In addition to the proceedings described under “Business — Environmental Matters”, we are involved in routine litigation incidental to our business. We believe that this routine litigation will not have a material adverse effect on our results of operations, financial condition, or cash flows. See Note 19 of Notes to Consolidated Financial Statements included elsewhere herein.

Item 4.     Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of our security holders during the last quarter of fiscal 2002.

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PART II

Item 5.     Market for the Registrant’s Common Equity and Related Stockholder Matters

      Our common stock has been listed on the New York Stock Exchange since February 23, 1995 under the symbol “SOL”. The following table sets forth on a per share basis the closing high and low sales prices for consolidated trading in our common stock as reported on the New York Stock Exchange Composite Tape for the fiscal quarters indicated.

      On June 12, 2002, the closing price per share of our common stock on the New York Stock Exchange was $11.72. As of June 12, 2002, we had 320 holders of record of our common stock, which excludes beneficial owners of common stock held in “street name.”

      We have not declared or paid any cash dividends on our common stock since December 1993. The Indentures governing our 6 7/8% Senior Notes and our 11% Notes restrict and limit the payment of dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future and intend to retain future earnings for the development and expansion of our business.

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Item 6.     Selected Financial Data

      We derived the following selected statement of operations data for the five fiscal years in the period ended March 31, 2002 and the balance sheet data as of March 31, 2002, 2001, 2000, 1999 and 1998 from our audited consolidated financial statements. You should read the financial data set forth below in conjunction with the consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have reclassified certain prior year items to conform with the current year’s presentation. The reclassifications had no impact on total assets or net income.

(1)	In fiscal 2001, we recorded special charges of $91.1 million and inventory write-offs of $25.6 million, or $79.3 million net of tax or $3.30 per diluted share. See Note 13 of Notes to Consolidated Financial Statements.
(2)	In fiscal 2000, we recorded special charges of $22.3 million and inventory write-offs of $7.2 million, or $20.4 million net of tax or $0.82 per diluted share. See Note 13 of Notes to Consolidated Financial Statements.
(3)	In fiscal 1999, we recorded special charges of $14.8 million and inventory write-offs of $6.6 million, or $14.6 million net of tax or $0.60 per diluted share. See Note 13 of Notes to Consolidated Financial Statements.
(4)	Consists of a gain resulting from the repurchase of senior notes, net of tax.
(5)	Consists of a loss resulting from the repurchase of senior subordinated notes, net of tax.

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Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

      You should read the following discussion and analysis together with our consolidated financial statements and related notes included in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. You should read the cautionary statements made in this report as applying to related forward-looking statements wherever they appear in this report. Our actual results may be materially different from the results we discuss in the forward-looking statements due to various factors, including those discussed in the “Risk Factors” and other sections of this report.

Overview

      We are a leading global designer, manufacturer and distributor of a broad range of plastic and glass eyeglass lenses and hold a leading manufacturing and technology position in the fast growing plastic lens segment of the global spectacle lens market. We have sales offices in 28 countries worldwide and operate in most major regions of the world. We believe that we hold a top three market position in terms of volume of plastic eyeglass lenses sold in each major region where we operate- North America, Europe and Rest of World (consisting primarily of Australia, Asia and South America). We focus our efforts on value-added products, including products with advanced design characteristics, lens coatings and treatments and thin and light weight materials (e.g., polycarbonate). Approximately 74% of our annual net sales are represented by value-added products.

      We market our spectacle lens products globally under the brands SOLA and American Optical (AO) and distribute them globally through four primary channels: (1) direct to national retail chain, (2) direct to retail outlets, (3) wholesale distributors (e.g., independent processing laboratories), and (4) managed care organizations in the United States, a growing segment of the spectacle lens market.

      Our business is organized into three primary markets: North America, Europe and Rest of World. For the fiscal year ended March 31, 2002, we generated approximately 45% of our net sales from North America, 35% from Europe and 20% from Rest of World.

      Our organization has historically been managed on a decentralized basis with each operating unit having its own manufacturing facilities, distribution centers and inventory management systems. This decentralized approach resulted in excess manufacturing capacity, redundant facilities in high cost regions and excessive distribution centers. In the third quarter of fiscal 1999, we initiated a strategic operating review designed to streamline manufacturing and distribution, reduce operating costs worldwide and write-off inventory SKUs that are no longer being manufactured. In April 2000, we appointed Jeremy Bishop as our new President and Chief Executive Officer. Following his appointment, Mr. Bishop expanded the scope of our strategic cost cutting program and accelerated the implementation of our strategic initiatives begun in 1999. With the completion of the strategic initiatives, our operations consist of four primary and six specialized manufacturing facilities, two primary research and development centers, 12 primary prescription laboratories and five primary distribution centers.

      The charges recorded for these initiatives from fiscal 1999 through the end of fiscal 2002, net of gains on asset sales, totaled approximately $167.7 million, including $39.5 million of associated inventory write-offs classified in cost of sales. The non-cash charges related primarily to the write-off of equipment and other assets, as well as the impairment of goodwill. The cash charges related primarily to severance expenses and facility closures. Operating expenses for fiscal 2002 have declined $30.4 million from fiscal 1999 in addition to significant unit cost decreases, and we expect to generate additional savings in fiscal 2003 as a result of the actions taken in fiscal 2001 and 2002. In fiscal 2002 and 2001, we realized cash proceeds from sales of land and buildings made redundant by these initiatives of approximately $5.5 million and $7.8 million, respectively.

      In addition to special charges, we incurred transition costs associated with executing our strategic initiatives. These transition costs totaled $20.6 million and $17.5 million in fiscal 2002 and 2001, respectively, and largely related to: (1) expenditures to execute the strategic actions (e.g., certain employee and facility costs) and (2) expenses incurred that will be eliminated upon completion of the strategic actions (e.g.,

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      Our business is somewhat seasonal, with fiscal third quarter results generally weaker than the other three quarters as a result of lower sales during the holiday season. Fiscal fourth quarter results are generally the strongest.

Critical Accounting Policies and Estimates

      The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience; however, actual amounts could differ from those estimates. Our significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements.

Allowance for Doubtful Accounts

      We maintain an allowance for doubtful accounts for losses that we estimate will arise from our customers’ inability to make required payments. We make our estimates of the uncollectibility of our accounts receivable by analyzing historical bad debts, specific customer creditworthiness and current economic trends. At March 31, 2002, the allowance for doubtful accounts was $8.4 million and, at March 31, 2001, it was $9.2 million. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. In fiscal 2002, our bad debt expense was $2.3 million compared to $3.0 million in fiscal 2001.

Valuation of Inventory

      We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between cost of inventory and the estimated market value based upon assumptions about future demand, selling prices and market conditions. Our inventories include components that may be subject to rapid technological obsolescence and that are sold in a highly competitive industry. If actual product demand or selling prices are less favorable than we estimate, we may be required to record additional inventory write-downs in the future. Significant unanticipated changes in demand or technological development could have a material and significant impact on the future value of our inventory and reported operating results.

Accounting for Income Taxes

      As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must reflect this adjustment within the tax provision in the statement of operations.

      Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $16.3 million as of March 31, 2002, due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of certain foreign net operating losses carried forward, before they expire. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance, which could impact our financial position and results of operations.

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      The net deferred tax asset as of March 31, 2002 was $76.5 million, net of a valuation allowance of $16.3 million.

Valuation of Goodwill and Intangible Assets

      At March 31, 2002, goodwill amounted to $190.3 million and identifiable intangible assets amounted to $0.4 million.

      We assess the impairment of identifiable intangibles and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include the following:

	•	Significant underperformance relative to expected historical or projected future operating results;
	•	Significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
	•	Significant negative industry or economic trends;
	•	Significant decline in our stock price for a sustained period; and
	•	Our market capitalization relative to net book value.

      If we were to determine that the carrying value of intangibles or goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we would measure an impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model.

      In fiscal 2002, Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets became effective and, as a result, we ceased to amortize our goodwill. We had recorded $6.6 million of amortization on these amounts during fiscal 2001 and would have recorded approximately $6.8 million of amortization during fiscal 2002. In lieu of amortization, we have performed an initial impairment review of our goodwill in fiscal 2002 and an impairment review is required at least annually.

      We currently do not expect to record an impairment charge, however, there can be no assurance that a material impairment charge will not be recorded in future periods.

Retirement Benefits

      Our employee pension and other postretirement benefit costs and obligations are dependent on our assumptions used by actuaries in calculating such amounts. These assumptions include discount rates, health care cost trends rates, inflation, salary growth, long-term return on plan assets, retirement rates, mortality rates and other factors. We base the discount rate assumptions on investment yields available at year-end on AA-rated corporate long-term bond yields. Our health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment of likely long-term trends. Our inflation assumption is based on an evaluation of external market indicators. The salary growth assumptions reflect our long-term actual experience, the near-term outlook, and assumed inflation. Retirement and mortality rates are based primarily on actual plan experience. Actual results that may differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense and recorded obligation in those future periods. While we believe that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect our pension and other postretirement benefits costs and obligations. See Note 15 of Notes to our Consolidated Financial Statements for more information regarding costs and assumptions for employee retirement benefits.

Determining Functional Currencies for the Purpose of Consolidation

      We have several foreign subsidiaries which together account for approximately 58% of our net revenues and 48% of our assets as of March 31, 2002.

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      In preparing our consolidated financial statements, we are required to translate the financial statements of the foreign subsidiaries from the currency in which they keep their accounting records, generally the local currency, into United States Dollars. This process results in exchange gains and losses, which, under the relevant accounting guidance, are either included within the statement of operations or as a separate part of our net equity under the caption “cumulative comprehensive loss.”

      Under the relevant accounting guidance, the treatment of these translation gains or losses is dependent upon our management’s determination of the functional currency of each subsidiary. The functional currency is determined based on management’s judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures would be considered the functional currency, but any dependency upon the parent and the nature of the subsidiary’s operations must also be considered.

      If any subsidiary’s functional currency is deemed to be the local currency, then any gain or loss associated with the translation of that subsidiary’s financial statements is included in cumulative comprehensive loss. However, if the functional currency is deemed to be the United States Dollar or a currency other than the local currency, then any gain or loss associated with the translation of these financial statements would be included within our statement of operations. If we dispose of any of our subsidiaries, any cumulative translation gains or losses would be realized into our statement of operations. If we determine that there has been a change in the functional currency of a subsidiary to the United States Dollar, any translation gains or losses arising after the date of change would be included within our statement of operations.

      Based on our assessment of the factors discussed above, we generally consider the relevant subsidiary’s local currency to be the functional currency for our international subsidiaries. Accordingly, we had cumulative translation losses of approximately $46.3 million and $43.1 million that were included as part of accumulated other comprehensive loss within our balance sheet at March 31, 2002 and 2001, respectively. During 2002, 2001 and 2000, translation adjustments of $3.3 million, $17.9 million and $6.3 million, respectively, were included under accumulated other comprehensive loss. Had we determined that the functional currency of our subsidiaries was the United States Dollar or a currency other than the local currency, these losses would have increased our loss for each of the years presented.

      The magnitude of these gains or losses is dependent upon movements in the exchange rates of the foreign currencies in which we transact business against the United States Dollar. These currencies include the Japanese Yen, the Euro, the United Kingdom Pound Sterling and Australian and Canadian Dollars. Any future translation gains or losses could be significantly higher than those noted in each of these years. In addition, if we determine that a change in the functional currency of one of our subsidiaries has occurred at any point in time, we would be required to include any translation gains or losses from the date of change in our statement of operations.

Revenue Recognition

      Our policy is to recognize revenue from sales to customers when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the price is fixed and determinable and the collection of the resulting receivable is reasonably assured. Under specific conditions, we permit our customers to return or exchange products. The provision for estimated returns is recorded concurrently with the recognition of revenue based on historical sales returns and analysis of credit memo data.

Warranty Costs

      We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in product quality programs and processes, including actively monitoring and evaluating the quality of our suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

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Financial Risk Management and Derivatives

      The purpose of our foreign currency hedging activities is to protect us from the risk that the eventual cash flows resulting from interest payments on our Euro-denominated debt will be adversely affected by changes in exchange rates. In addition, we seek to manage the impact of foreign currency fluctuations related to the repayment of intercompany transactions, including intercompany borrowings. We do not hold or issue financial instruments for trading purposes. It is our policy to utilize derivative financial instruments to reduce foreign exchange risks where internal netting strategies cannot be effectively employed. Fluctuations in the value of hedging instruments are offset by fluctuations in the value of the underlying exposures being hedged.

      We use forward exchange contracts to hedge certain purchases and sales commitments and the related payables and receivables, including other third party or intercompany foreign currency transactions. Hedged transactions are denominated primarily in European currencies and Japanese yen. Gains and losses due to rate fluctuations on these transactions are recognized in the same period as the items being hedged and are recorded as a foreign currency gain or loss. Realized and unrealized foreign currency gains resulting from these hedges were approximately $0.1 million during fiscal 2002. Cash flows related to these gains and losses are reported as operating or financing activities in the accompanying consolidated statements of cash flows depending on the nature of the hedged item. The counterparties to these contracts are substantial and credit worthy multinational commercial banks. The risks of counterparty nonperformance associated with these contracts are not considered to be significant.

Contingent Liabilities

      We establish reserves for estimated loss contingencies when it is management’s assessment that a loss is probable and the amount of the loss can be reasonably estimated. Revisions to contingent liabilities are reflected in income in the period in which circumstances change or different facts or information become known that affect the previous assumptions with respect to the likelihood or amount of loss. Reserves for contingent liabilities are based upon management’s assumptions and estimates, as well as the advice of legal counsel or other third parties regarding the probable outcomes of the matter. Should the outcome differ from the assumptions and estimates, revisions to the estimated reserves for contingent liabilities would be required.

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Results of Operations

      The following table shows the results of our operations for fiscal years 2002, 2001 and 2000.

(1)	Using constant currency exchange rates, fiscal 2002 sales increased 0.2% compared with fiscal 2001 and increased 4.9% (2.4% compound annual growth) compared with fiscal 2000.

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      The following table shows certain items expressed as a percentage of our net sales for the periods indicated:

Fiscal 2002 Compared to Fiscal 2001

     Net Sales.

      Our net sales were $529.5 million in fiscal 2002, reflecting a decrease of $15.9 million or 2.9% from $545.4 million in fiscal 2001. Using constant exchange rates, net sales increased by 0.2%. The decrease in net sales was primarily due to reduced sales in the Rest of World and North America regions. Net sales in the Rest of World region decreased due to our efforts to concentrate on higher margin value-added sales. The decrease in North America was due primarily to decreased sales to laboratory customers that are owned and aligned with two principal competitors. Net sales performances by region were as follows:

	•	North America decreased by $8.6 million or 3.5%;
	•	Europe increased by $2.9 million or 1.6%; and
	•	Rest of World decreased by $10.2 million or 8.7%.

      Using constant exchange rates, the regional performances were as follows:

	•	North America decreased by 3.6%;
	•	Europe increased by 4.1%; and
	•	Rest of World increased by 2.0%.

      Our value-added products accounted for $363.5 million or 74% of net lens sales in fiscal 2002 compared to $359.4 million or 68% of net lens sales in fiscal 2001. This increase was led by growth in polycarbonate lens sales with a year over year increase of $8.3 million or 27% and increased sales of Finalite lenses of $1.5 million or 14%.

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     Gross Profit and Gross Margin.

      Our gross profit totaled $214.3 million for fiscal 2002 compared to gross profit of $195.9 million for fiscal 2001, an increase of $18.4 million or 9.4%. Gross profit as a percentage of net sales or gross margin increased to 40.5% for fiscal 2002 from 35.9% for fiscal 2001. Fiscal 2002 gross profit was adversely impacted by lower sales levels while fiscal 2001 gross profit included inventory write-offs of $25.6 million. We recorded transition costs related to our strategic initiatives of $12.2 million and $11.2 million in fiscal 2002 and 2001, respectively.

     Operating Expenses.

      Our operating expenses in fiscal 2002 totaled $162.5 million compared to $270.2 million for fiscal 2001. Operating expenses included special charges of $91.1 million in fiscal 2001 and transition costs related to our strategic initiatives of $8.4 million and $6.3 million in fiscal 2002 and 2001, respectively. Research and development expenses were $13.1 million or 2.5% of net sales in fiscal 2002 and were $14.9 million or 2.7% of net sales for fiscal 2001. The decrease of $1.8 million or 12.1% in our research and development expenses was due in part to headcount reductions associated with the strategic initiatives. Selling and marketing expenses were $101.7 million or 19.2% of net sales in fiscal 2002 and were $105.6 million or 19.4% of net sales in fiscal 2001. The decrease in selling and marketing expenses was primarily due to lower costs as a result of centralizing product management and marketing activities. Our general and administrative expenses were $47.7 million in fiscal 2002 and $52.0 million in fiscal 2001, a decrease of $4.3 million or 8.3%. As a percentage of net sales, general and administrative expenses decreased to 9.0% for fiscal 2002 compared to 9.5% for fiscal 2001. The decrease in general and administrative expenses is the result of lower costs associated with the consolidation of our corporate functions, as well as consolidating our North American commercial administrative activities into one primary location. Included in general and administrative expenses for fiscal 2001 are charges associated with the devaluation of the Brazilian Real of $3.1 million. Included in operating expenses for fiscal 2001 was goodwill amortization of $6.6 million. Due to the adoption of SFAS No. 142, we are no longer required to amortize goodwill as a charge to earnings; however, we are required on an annual basis to review goodwill for potential impairment. If an impairment is found to exist, a charge will be recorded against earnings.

      Primarily as a result of our strategic initiatives, which commenced in the third quarter of fiscal 1999, during fiscal 2002, we recorded net pretax special charges comprised of $0.8 million associated with additional facility closure costs, offset by a gain on the sale of land in North America of $0.8 million, also associated with facility closures.

      We recorded pretax special charges of $91.1 million in fiscal 2001. We incurred $19.7 million of expense associated with workforce reductions in North America, Europe and Australia. Included in the workforce reductions were 780 employees from manufacturing, 91 employees from sales and marketing, 75 employees from administration, and 46 employees from research and development. At March 31, 2002, $25.1 million cash had been paid related to workforce reductions incurred since fiscal 1999. The special charges included $24.3 million related to the write-off of molds, which were discontinued as a result of our efforts to standardize product specifications on a global basis. Also, we continued to transfer high-volume production to low-cost manufacturing locations and to consolidate manufacturing expertise into fewer production facilities. As a result, we incurred special charges of $28.2 million related to redundant equipment write-offs and facility closure costs in fiscal 2001. Additionally, as a result of our discontinuation of the development of the polycarbonate Matrix product line, we incurred $7.6 million in asset write-offs, including equipment ($7.0 million) and related commitments ($0.6 million). We recognized a gain on the sale of land in North America of $5.8 million associated with facility closures in fiscal 2001. Also included in special charges is $17.0 million related to the impairment of goodwill associated with a prior acquisition of a lens manufacturing business. This impairment was recorded pursuant to SFAS 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, as we decided to discontinue and cease operations of this lens manufacturing business and completely close-down the facility. For more information, see Note 13 of Notes to Consolidated Financial Statements.

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      Details of the special charges are as follows:

      At March 31, 2002, our strategic initiatives have been substantially completed and we do not anticipate any additional special charges related to our current strategic initiatives. The liability associated with the strategic initiatives as of March 31, 2002 is included in accrued liabilities. We anticipate that substantially all of the accrued liability will be paid in fiscal 2003 and will be funded primarily through cash provided by operations.

      Operating expenses have declined by $30.4 million from fiscal 1999. Additionally, unit costs have decreased significantly from fiscal 1999. We expect to generate additional savings in fiscal 2003 as a result of the actions taken in fiscal 2001 and 2002.

      During fiscal 2002, we incurred transition costs of $20.6 million associated with executing our strategic initiatives. These costs were primarily related to interim workforce expenses, manufacturing variances and out-of-pocket expenditures that we expect to be eliminated due to the completion of our strategic initiatives. Of these costs, $12.2 million are reflected in cost of sales, $0.7 million in research and development expenses, $3.3 million in selling and marketing expenses and $4.4 million in general and administrative expenses. During the second half of fiscal 2001, we incurred transition costs of $17.5 million associated with executing our strategic initiatives. These costs were primarily related to interim workforce expenses, manufacturing variances and out-of-pocket expenditures. Of these costs, $11.2 million are reflected in cost of sales, $0.8 million in research and development expenses, $2.4 million in selling and marketing expenses and $3.1 million in general and administrative expenses.

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     Net Interest Expense and Foreign Currency Gain/(Loss).

      Our net interest expense totaled $28.6 million for fiscal 2002 compared to $23.5 million for fiscal 2001, an increase of $5.1 million. The increase was due primarily to increased average borrowing rates and increased borrowing levels in fiscal 2002 compared to fiscal 2001. In fiscal 2002, we recorded a net foreign exchange gain of $1.9 million compared to a $2.8 million net foreign exchange loss for fiscal 2001. Exchange gains on external and intercompany notes of $2.7 million were recorded in fiscal 2002 due primarily to the strengthening of the U.S. Dollar to the Euro and the weakening of the U.S. Dollar to the Brazilian Real and the impact this had on our Euro denominated Senior Notes and U.S. Dollar denominated notes with our Brazilian subsidiary.

     Provision for Income Taxes.

      Our combined state, federal and foreign tax rate was approximately 28.0% for fiscal 2002 compared to 32.0% for fiscal 2001. We have net deferred tax assets on our balance sheet as of March 31, 2002 amounting to approximately $83.3 million. The utilization of these deferred tax assets depends upon our ability to generate taxable income in the future.

     Minority Interest.

      Our minority interest income totaled $1.1 million for fiscal 2002 compared to $0.3 million for fiscal 2001, an increase of $0.8 million. The increase was due primarily to increased losses during fiscal 2002 from several of our joint venture entities whose results are included in the consolidated statements of operations.

     Extraordinary Item.

      In June 2000, we purchased $5.0 million of our 6 7/8% Senior Notes due 2008. As a result, we recorded an extraordinary gain of $1.5 million, net of tax of $0.9 million, resulting from the difference between the carrying value of the notes and the purchase price. The purchase was funded by our credit facility and resulted in a decline in net borrowings.

     Management Assessment of Operating Results

      Management believes that fiscal 2002 and 2001 operating results are best understood when costs associated with implementing our strategic initiatives and the impact of currency devaluation in Brazil are excluded from recorded operating results. In the following paragraphs, we present gross profit and gross margin, operating expenses, operating income/ (loss), and net income/ (loss) as adjusted to exclude the charges associated with our strategic initiatives, including the transition costs associated with executing our strategic initiatives, and the currency devaluation in Brazil. We consider these measures to be useful as they provide an additional basis upon which to evaluate our ability to fund our operations, growth and other capital expenditures. However, these measures are not indicators of performance under generally accepted accounting principles and may not be comparable to information reported by other companies. Further, these measures do not replace gross profit, total operating expenses, operating income (loss) and net income (loss) as indicators of our operating performance or cash flow as a measure of liquidity.

      Gross Profit and Gross Margin. In calculating gross profit, we wrote-off $25.6 million of inventory in fiscal 2001 and recorded transition costs of $12.2 million in fiscal 2002 and $11.2 million in fiscal 2001 associated with our strategic initiatives. If these inventory write-offs and transition costs were excluded, gross profit would have been $226.5 million in fiscal 2002 and $232.7 million in fiscal 2001, a decrease of 2.7%. Gross profit as a percentage of net sales, or gross margin, after adjusting for the inventory write-offs and transition costs, increased marginally to 42.8% for fiscal 2002 from 42.7% for fiscal 2001.

      Operating Expenses. In fiscal 2002, transition costs of $8.4 million were included in operating expenses. In fiscal 2001, special charges of $91.1 million, transition costs of $6.3 million and charges associated with the devaluation of the Brazilian Real of $3.1 million were included in operating expenses. If these special charges, transition costs and currency devaluation were excluded from operating expenses, operating expenses would

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      Operating Income/(Loss). Operating income, excluding transition costs of $20.6 million in fiscal 2002 and excluding special charges of $91.1 million, transition costs of $17.5 million, Brazilian Real currency devaluation of $3.1 million and inventory write-offs of $25.6 million in fiscal 2001, would have been $72.3 million in fiscal 2002 and $63.0 million in fiscal 2001, an increase of $12.4 million, or 20.7%.

      Net Income/(Loss). In fiscal 2002, if the transition costs of $20.6 million and net foreign exchange gains on external and intercompany notes of $2.7 million, net of the related tax effect, were excluded, our net income would have been $32.0 million. In fiscal 2001, if the special charges of $91.1 million, transition costs of $17.5 million, inventory write-offs of $25.6 million, amortization of goodwill of $6.6 million, foreign currency devaluation charge of $3.1 million, and extraordinary gain of $1.5 million and associated tax benefit of $45.6 million were excluded, our net income would have been $30.3 million. As a result, our adjusted net income increased $1.7 million, or 5.6%, from fiscal 2001 to fiscal 2002.

Fiscal 2001 Compared to Fiscal 2000

     Net Sales.

      Our net sales were $545.4 million in fiscal 2001, reflecting an increase of $2.0 million or 0.4% from $543.4 million in fiscal 2000. Using constant exchange rates, the percentage increase was 5.5%. The increase in net sales was primarily due to an increase in net sales in the European and Rest of World regions offset in part by a decrease in net sales in the North American region. Net sales in the European region increased despite slowdowns in the United Kingdom and Germany. This sales growth represents significant market share gains across the continent. These gains are attributable to strong sales of progressive lenses, particularly AO Compact, strengthened sales and marketing strategies and the robust relationships developed by our prescription laboratories with customers in Italy, France and Belgium. Net sales in the Rest of World region increased as a result of the continued market recovery in Asia and South America, partially offset by lower sales in China and Southeast Asia. The sales decline in the North American region occurred mostly in the second quarter due to temporarily limited distribution opportunities as a result of competitors’ acquisitions of independent processing laboratories. Net sales performances by region were as follows:

	•	North America decreased by $12.7 million or 4.9%;
	•	Europe increased by $3.9 million or 2.2%; and
	•	Rest of World increased by $10.8 million or 10.2%.

      Using constant exchange rates, the regional performances were as follows:

	•	North America decreased by 4.8%;
	•	Europe increased by 13.6%; and
	•	Rest of World increased by 15.1%.

      Our value-added products accounted for $359.4 million or 68% of net lens sales in fiscal 2001 compared to $344.5 million or 68% of net lens sales in fiscal 2000. This increase was led by growth in polycarbonate lens sales with a year over year increase of $6.6 million or 27% and increased sales in Finalite of $5.3 million.

     Gross Profit and Gross Margin.

      Our gross profit totaled $195.9 million for fiscal 2001 compared to gross profit of $233.1 million for fiscal 2000, a decrease of $37.2 million or 16.0%. Gross profit as a percentage of net sales, or gross margin, decreased to 35.9% for fiscal 2001 from 42.9% for fiscal 2000. Fiscal 2001 gross profit was adversely impacted by the underabsorption of overhead of $7.4 million caused by reduced production levels and product mix changes. In

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     Operating Expenses.

      Our operating expenses in fiscal 2001 totaled $270.2 million compared to $211.3 million for fiscal 2000. Operating expenses included special charges of $91.1 million in fiscal 2001 and $22.3 million in fiscal 2000. We also recorded $6.3 million of transition costs related to our strategic initiatives in fiscal 2001. Research and development expenses were $14.9 million or 2.7% of net sales in fiscal 2001 and were $20.0 million or 3.7% of net sales for fiscal 2000. The $5.1 million or 25.5% decrease in our research and development expenses was due in part to headcount reductions associated with the strategic initiatives as well as the impact of the strong U.S. Dollar against non-U.S. Dollar expenses. Selling and marketing expenses decreased to $105.6 million or 19.4% of net sales in fiscal 2001 from $106.1 million or 19.5% of net sales in fiscal 2000, despite increased costs associated with the initial launch of Contour Optics and SOLA Technologies in fiscal 2001. Our general and administrative expenses were $52.0 million in fiscal 2001 and $57.0 million in fiscal 2000, a decrease of $5.0 million or 8.8%. As a percentage of net sales, general and administrative expenses decreased to 9.5% for fiscal 2001 compared to 11.6% for fiscal 2000. Included in general and administrative expenses are charges associated with the devaluation of the Brazilian Real of $3.1 million in fiscal 2001 and $0.3 million in fiscal 2000. Also included in fiscal 2000 general and administrative expenses is a $1.3 million charge related to the write-off of accounts receivable due to the bankruptcy of a customer in North America. The decrease in our general and administrative expenses primarily relates to headcount reductions associated with the strategic initiatives as well as additional reductions in overall spending levels.

      Primarily as a result of our strategic initiatives, which commenced in the third quarter of fiscal 1999, we recorded pretax special charges of $91.1 million in fiscal 2001. We incurred $19.7 million of expense associated with workforce reductions in North America, Europe and Australia. Included in the workforce reductions were 780 employees from manufacturing, 91 employees from sales and marketing, 75 employees from administration, and 46 employees from research and development. At March 31, 2001, $14.5 million cash had been paid related to workforce reductions incurred since fiscal 1999. The special charges include $24.3 million related to the write-off of molds, which were discontinued as a result of our efforts to standardize product specifications on a global basis. Also, we continued to transfer high-volume production to low-cost manufacturing locations and to consolidate manufacturing expertise into fewer production facilities. As a result, we incurred special charges of $28.2 million related to redundant equipment write-offs and facility closure costs in fiscal 2001. Additionally, as a result of our discontinuation of the development of the polycarbonate Matrix product line, we incurred $7.6 million in asset write-offs, including equipment ($7.0 million) and related commitments ($0.6 million). We recognized a gain on the sale of land in North America of $5.8 million associated with facility closures in fiscal 2001. Also included in special charges is $17.0 million related to the impairment of goodwill associated with a prior acquisition of a lens manufacturing business. This impairment was recorded pursuant to SFAS 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, as we decided to discontinue and cease operations of this lens manufacturing business and completely close-down the facility. For more information, see Note 13 of Notes to Consolidated Financial Statements.

      In fiscal 2000, primarily during the fourth quarter, we recorded pretax special charges of $22.3 million. We commenced consolidation of our Mexican manufacturing operations in fiscal 1999 and completed the consolidation in fiscal year 2000. Included in the Mexican manufacturing facilities consolidation charge of $4.0 million are write-offs of molds ($1.4 million) and costs associated with combining the two manufacturing operations ($2.6 million). The special charge amount includes $6.7 million relating to workforce reductions in North America, Europe and Australia. Included in the workforce reductions were 143 employees from manufacturing, 19 employees from sales and marketing, 19 employees from administration and 9 employees from research and development. We recorded a charge of $2.5 million for provision against collection of accounts receivable in Asia as a result of the economic slow-down in the region during fiscal 1999. During fiscal 2000, we commenced the transfer of high-volume production to low-cost manufacturing locations and

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     Net Interest Expense and Foreign Currency Gain/(Loss).

      Our net interest expense totaled $23.5 million for fiscal 2001 compared to $19.3 million for fiscal 2000, an increase of $4.2 million. The increase was due primarily to increased borrowing rates, waiver fees and borrowing levels in fiscal 2001 compared to fiscal 2000.

     Provision for Income Taxes.

      Our combined state, federal and foreign tax rate was approximately 32.0% for fiscal 2001 compared to 83.9% for fiscal 2000.. We had net deferred tax assets on our balance sheet as of March 31, 2001 amounting to approximately $46.7 million.

     Minority Interest.

      Our minority interest income totaled $0.3 million for fiscal 2001 compared to $0.6 million for fiscal 2000, a decrease of $0.3 million. The decrease was due primarily to lower operating losses incurred during fiscal 2001 by several of our joint venture entities whose results are included in the consolidated statements of operations.

     Extraordinary Item.

      In June 2000, we purchased $5.0 million of our 6 7/8% Senior Notes due 2008. As a result, we recorded an extraordinary gain of $1.5 million, net of tax of $0.9 million, resulting from the difference between the carrying value of the notes and the purchase price. The purchase was funded by our credit facility and resulted in a decline in net borrowings.

     Management Assessment of Operating Results

      Management believes that fiscal 2001 and 2000 operating results are best understood when costs associated with implementing our strategic initiatives and the impact of currency devaluation in Brazil are excluded from recorded operating results. In the following paragraphs, we present gross profit and gross margin, operating expenses, operating income/ (loss), and net income/ (loss) as adjusted to exclude the charges associated with our strategic initiatives, including the transition costs associated with executing our strategic initiatives, the currency devaluation in Brazil and accounts receivable write-offs due to a customer bankruptcy. We consider these measures to be useful as they provide an additional basis upon which to evaluate our ability to fund our operations, growth and other capital expenditures. However, these measures are not indicators of performance under generally accepted accounting principles and may not be comparable to information reported by other companies. Further, these measures do not replace gross profit, total operating expenses, operating income (loss) and net income (loss) as indicators of our operating performance or cash flow as a measure of liquidity.

      Gross Profit and Gross Margin. In calculating gross profit, we wrote-off $25.6 million of inventory in fiscal 2001 and $7.2 million of inventory in fiscal 2000 and recorded $11.3 million of transition costs in fiscal 2001 associated with our strategic initiatives. If these inventory write-offs and transition costs were excluded, gross profit would have been $232.8 million in fiscal 2001 and $240.3 million in fiscal 2000, a decrease of 3.1%. Gross profit as a percentage of net sales, or gross margin, after adjusting for the inventory write-offs and transition costs, decreased to 42.7% for fiscal 2001 from 44.2% for fiscal 2000. The gross margin decrease was principally due to continued underabsorption of overhead of $7.4 million caused by reduced production levels and product mix changes. We experience price competition, which can be severe in certain markets, particularly for our standard products.

      Operating Expenses. In fiscal 2001, special charges of $91.1 million, transition costs of $6.3 million and charges associated with the devaluation of the Brazilian Real of $3.1 million were included in operating expenses. In fiscal 2000, special charges of $22.3 million, Brazilian Real devaluation charges of $0.3 million

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      Operating Income/(Loss). Operating income, excluding the special charges of $91.1 million, transition costs of $17.5 million, inventory write-offs of $25.6 million, and currency devaluation charges of $3.1 million in fiscal 2001 and excluding special charges of $22.3 million, inventory write-offs of $7.2 million, currency devaluation of $0.3 million and accounts receivable write-offs of $1.3 million in fiscal 2000, would have been $63.0 million in fiscal 2001 and $52.9 million in fiscal 2000, an increase of $10.1 million, or 19.1%.

      Net Income/(Loss). In fiscal 2001, if the special charges of $91.1 million, transition costs of $17.5 million, inventory write-offs of $25.6 million, foreign currency devaluation charge of $3.1 million, extraordinary gain of $1.5 million and associated taxes of $43.6 million were excluded, our net income would have been $25.7 million. In fiscal 2000, if the special charges of $22.3 million, inventory write-offs of $7.2 million, foreign currency devaluation charge of $0.3 million, receivable write-offs of $1.3 million and associated taxes of $9.1 million were excluded, our net income would have been $22.7 million. As a result, our adjusted net income increased $3.0 million, or 13.3%, from fiscal 2000 to fiscal 2001.

Liquidity and Capital Resources

      Our operating activities generated $21.9 million in cash in fiscal 2002 compared to $31.8 million in fiscal 2001 and $23.5 million in fiscal 2000. The decrease in cash flows from operations in fiscal 2002 resulted from the reduction in liabilities associated with strategic initiatives and financing costs associated with debt refinancings. The increase in cash flows from operations in fiscal 2001 compared to fiscal 2000 was primarily the result of decreased investments in working capital.

      Our inventories as a percentage of annualized net sales for fiscal 2002, fiscal 2001, and fiscal 2000 were 15.0%, 16.2%, and 23.2%, respectively. The decrease in fiscal 2002 was a result of the strategic initiatives implemented during fiscal 2001 to reduce inventory levels. The decrease in fiscal 2001 was a result of the strategic initiatives and $25.6 million inventory write-off. Accounts receivable as a percentage of annualized net sales for fiscal 2002, fiscal 2001, and fiscal 2000 were 20.9%, 21.8%, and 21.9%, respectively. The decrease in fiscal 2002 was a result of improved collections. Fiscal 2001 was consistent with fiscal 2000.

      During fiscal 2002, net cash expended on investing activities amounted to $15.6 million. Included in this amount was $17.1 million of capital expenditures and $5.9 million related to investments in molds, offset in part, by proceeds from the disposal of a $1.2 million trade investment and $5.5 million from the sale of a building in Petaluma, California. During fiscal 2001, net cash expended on investing activities amounted to $37.6 million. Included in this amount was $20.9 million of capital expenditures, $15.4 million for the acquisition of Oracle Lens Manufacturing Corporation, a polycarbonate lens manufacturer in Rhode Island, and $2.5 million for the acquisition of the remaining 65% interest in a wholesale laboratory group located in Australia and New Zealand. Partially offsetting these expenditures was $6.4 million of net proceeds received from the sale of land in Petaluma, California. During fiscal 2000, net cash expended on investing activities amounted to $32.8 million. Of this amount, $20.1 million represented capital expenditures, $5.6 million related to investment in a joint venture in India and other trade investments, and $4.1 million was for the acquisition of a wholesale laboratory in Portugal in December 1999.

      We anticipate capital expenditures, including molds, of approximately $31 to $36 million in fiscal 2003.

      Our net cash provided by financing activities amounted to $36.2 million in fiscal 2002, primarily as a result of the net impact of our issuance of 11% Senior Notes, the proceeds of which were primarily used to repay our credit facility. Net cash provided by financing activities amounted to $13.9 million in fiscal 2001, primarily from borrowings on our credit facilities. Cash outflows in fiscal 2001 included $8.2 million related to a stock buy back under our stock repurchase program. Additionally, in the first quarter of fiscal 2001, we

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      On April 17, 2001, we completed the sale of €205 million ($182.0 million at date of sale) of 11% Senior Notes due March 15, 2008 through a private placement to qualified institutional buyers pursuant to Rule 144A and to persons outside of the United States in compliance with Regulation S. The notes are senior unsecured obligations and rank equally with all of our existing and future unsecured debt. Interest on the notes is payable semi-annually on each September 15 and March 15.

      We may redeem these Senior Notes in whole or in part, at any time, on or after March 15, 2005, at a redemption price equal to 100% of their principal amount plus a premium declining ratably to par plus accrued and unpaid interest and liquidation damages, if any. Prior to March 15, 2004, we may redeem up to 35% of the original aggregate principal amount of these Senior Notes with the proceeds of qualified equity offerings at a redemption price of 111% of their principal amount plus accrued and unpaid interest and liquidation damages, if any. The indenture governing the notes contains certain covenants that, among other things, limit our ability to incur additional indebtedness or liens, make investments, sell assets, pay dividends or make other distributions.

      In addition to our outstanding 6 7/8% Senior Notes and 11% Senior Notes, our foreign subsidiaries maintain local credit facilities to provide credit for overdraft, working capital and some fixed asset investment purposes. As of March 31, 2002, the total borrowing capacity available to our foreign subsidiaries under such local facilities was approximately $13.6 million, of which $0.2 million had been utilized.

      On July 26, 2001, we entered into a three-year $45 million secured revolving credit facility (“Credit Agreement”) maturing on July 27, 2004. Borrowings under the Credit Agreement may be made as either U.S. Dollar Alternate Base Rate (“ABR”) loans or Eurodollar loans. ABR loans bear interest at a rate per annum equal to the greater of (a) the Prime Rate in effect on such day, or (b) the Federal Funds Effective Rate in effect on such day plus 0.5%, plus in either case, an applicable percentage based on our adjusted leverage ratio. The Eurodollar loans bear interest at a rate per annum equal to the LIBOR Rate plus an applicable percentage based on our adjusted leverage ratio. At March 31, 2002, there was no debt outstanding under this agreement and the borrowing base amounted to $43.6 million.

      The Credit Agreement contains a number of covenants, including, among others, covenants restricting us and our subsidiaries with respect to the incurrence of indebtedness, the creation of liens, the making of certain investments and loans, the payment of dividends, and our ability to enter into certain transactions with affiliates. In addition, the Credit Agreement requires us to maintain certain interest coverage, net worth and leverage ratios and places certain restrictions on capital expenditures. As of March 31, 2002, we were in compliance with all covenants.

      In connection with the Credit Agreement, we entered into a Security Agreement that grants a security interest in and pledges the rights to certain of our assets, including domestic accounts receivable, domestic inventory, and 65% of the pledged stock of certain significant foreign subsidiaries, for the payment and performance of our obligations under the Credit Agreement.

      In order to continue our operations and meet our significant liquidity requirements, we must achieve profitable operations or obtain additional funds through equity or debt financing, bank financing, and other sources. We believe that our existing cash balances, foreign credit facilities, internally generated funds and other potential financing alternatives will be sufficient to meet our capital, operating and debt service requirements for at least the next twelve months. If we are unable to generate adequate cash flow from sales of our products, we may need to seek additional sources of capital. However, we cannot be certain that we will be able to obtain additional debt or equity financing on terms acceptable to us, or at all. If adequate funds are not available, we could be required to delay development or commercialization of certain products, or reduce the marketing, customer support, or other resources devoted to product development. Accordingly, our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business, results of operations and financial condition.

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Contractual Obligations and Commercial Commitments

      The following table summarizes our contractual obligations at March 31, 2002, and the effect these obligations are expected to have on our liquidity and cash flow in future periods:

      As of March 31, 2002, we had no debt outstanding under our Bank Credit Agreement. We have two standby letters of credit amounting to $2.7 million, of which $2.1 million expires April 23, 2003 and $0.6 million expires May 31, 2003.

Currency Exchange Rates

      As a result of our worldwide operations, currency exchange rate fluctuations tend to affect our results of operations and financial position. The principal effect of currency exchange rates on our results of operations and financial position is the impact on our Euro-denominated debt and translation adjustments for subsidiaries where the local currency is the functional currency. Translation adjustments for functional local currencies have been recorded to shareholders’ equity.

      Certain countries have been determined to be hyperinflationary in fiscal 2002 as defined under the provisions of Emerging Issues Task Force (EITF) Issue No. D-55, Determining a Highly Inflationary Economy under FASB Statement No. 52 and EITF Issue No. D-56, Accounting for a Change in Functional Currency and Deferred Taxes When an Economy Becomes Highly Inflationary. Accordingly, the results of our entities located in those countries are being accounted for in accordance with the provisions of these pronouncements.

      Because a portion of our debt and associated interest is non-U.S. Dollar denominated, we may hedge against certain currency fluctuations by entering into currency swaps or forward contracts. Since July 27, 2001, we have transacted four foreign exchange contracts to hedge our interest expense exposure associated with the semi-annual coupon payments due September 15, 2001, March 15, 2002, September 15, 2002 and March 15, 2003 on our €205 million 11% Notes. In addition, we have entered into other foreign exchange contracts to hedge portions of our accounts payable exposure. As of March 31, 2002, we had the September 15, 2002 and March 15, 2003 foreign exchange contracts, in addition to the other foreign exchange contracts, outstanding as described above. We do not hold derivative financial instruments for speculative or trading purposes.

Seasonality

      Our business is somewhat seasonal, with fiscal third quarter results generally weaker than the other three quarters as a result of lower sales during the holiday season. Fiscal fourth quarter results are generally the strongest.

Inflation

      Inflation continues to affect our cost of the goods and services that we use. The competitive environment in many markets limits our ability to recover higher costs through increased selling prices, and we are subject to price erosion in many of our standard product lines. We seek to mitigate the adverse effects of inflation through cost containment and productivity and manufacturing process improvements. For a description of the

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European Union Conversion to the “Euro‘

      We had instituted a “Euro” conversion team in preparation for the conversion of twelve member states of the European Monetary Union by January 1, 2002 to a common currency, the “Euro.” The financial impact of the conversion to a Euro based currency was not material to our consolidated financial position, results of operations or cash flows.

Impact of Recently Issued Accounting Standards

      We adopted SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and 138, as of April 1, 2001. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow and foreign currency hedges and establishes respective accounting standards for reporting changes in the fair value of the instruments. Since July 27, 2001, we have transacted four foreign exchange contracts to hedge our interest expense exposure associated with the semi-annual coupon payments due September 15, 2001, March 15, 2002, September 15, 2002 and March 15, 2003 on our €205 million 11% Notes. In addition, we have entered into other foreign exchange contracts to hedge portions of our accounts payable exposure. As of March 31, 2002, we had the September 15, 2002 and March 15, 2003 foreign exchange contracts, in addition to the other foreign exchange contracts, outstanding as described above. We recognize the gain or loss on our foreign exchange contracts in the period incurred. The transition adjustments upon adoption of SFAS No. 133 were not material. We do not hold derivative financial instruments for speculative or trading purposes.

      In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 Business Combinations, which establishes financial accounting and reporting for business combinations and supersedes Accounting Principles Board (“APB”) Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. It requires that all business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. The provisions of this Statement apply to all business combinations initiated after June 30, 2001, and also apply to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. We have adopted SFAS No. 141 with the first quarter of fiscal 2002, and the adoption of SFAS No. 141 had no material impact on our financial reporting and related disclosures.

      In July 2001, the FASB issued SFAS No. 142 Goodwill and Other Intangible Assets, which establishes financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition, and after they have been initially recognized in the financial statements. We have elected to early adopt SFAS No. 142 beginning with the first quarter of fiscal 2002 and have disclosed the impact of adopting SFAS No. 142 on our consolidated financial statements in Note 4 of Notes to the Consolidated Financial Statements.

      In August 2001, the FASB issued SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, which establishes financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. In addition, SFAS No. 144 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements. SFAS No. 144 addresses the accounting for a segment of a business accounted for as a discontinued operation not previously addressed by SFAS No. 121. In addition, SFAS No. 144 also resolves significant implementation issues related to SFAS No. 121. The provisions of this Statement are effective starting with fiscal years beginning after December 15, 2001. We believe that the adoption of SFAS No. 144 will have no material impact on our financial reporting and related disclosures.