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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission File Number: 1-13606
SOLA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3189941
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
2420 SAND HILL ROAD, SUITE 200, MENLO PARK, CA 94025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 324-6868
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
Common Stock, Par Value $0.01 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
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. |_|
As of May 29, 1998, the aggregate market value of Common Stock held by
non-affiliates was approximately $965,050,713. 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 May 29, 1998, 24,738,165 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 Company's stock is traded on the New York
Stock Exchange under the symbol SOL.
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SOLA INTERNATIONAL INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
Page
PART I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 8
Item 3. Legal Proceedings............................................. 9
Item 4. Submission of Matters to a Vote of Security Holders........... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters...................................... 11
Item 6. Selected Financial Data....................................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 13
Item 8. Financial Statements and Supplementary Data................... 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 20
PART III
Item 10. Directors and Executive Officers of the Registrant............ 21
Item 11. Executive Compensation........................................ 23
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................... 23
Item 13. Certain Relationships and Related Transactions................ 23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.............................................. 24
2
PART I
Item 1. BUSINESS
General
Sola International Inc., a Delaware corporation, designs, manufactures and
distributes a broad range of plastic and glass eyeglass lenses. Sola's business
commenced operations in 1960. Sola International Inc. acquired the Sola business
unit (the "Predecessor Business") of Pilkington plc ("Pilkington") on December
1, 1993 (the "Acquisition"). In March 1995, Sola completed its initial public
offering (the "IPO"). On June 19, 1996 Sola acquired substantially all of the
worldwide ophthalmic business (the "AO" and "AO Acquisition") of American
Optical Corporation ("AOC"). On July 2, 1996 the Company acquired Neolens, Inc.
("Neolens"), a manufacturer of polycarbonate eyeglass lenses. Sola has
manufacturing and distribution sites in three major regions -- North America,
Europe, and Rest of World (comprising primarily Australia, Asia and South
America). Unless the context otherwise requires, all references to the "Company"
or "Sola" herein refer to Sola International Inc. and its consolidated
subsidiaries. The Company's fiscal year ends on March 31 of each year. The
fiscal years ended March 31, 1998, March 31, 1997 and March 31, 1996 are
referred to herein as "fiscal 1998", "fiscal 1997" and "fiscal 1996",
respectively.
Products
The Company produces plastic and glass eyeglass lenses. The Company's lens
products are differentiated by type of vision correction, lens design, lens
material and coatings applied to the lens. The Company's lenses include single
vision lenses (lenses which have a constant corrective power at all points);
multifocal lenses (lenses which have more than one corrective power, including
bifocal lenses, which have two distinct areas of different corrective power, and
progressive lenses, which have a continuous gradient of different corrective
power); and plano lenses (lenses which have no corrective power and are
primarily used for sunglasses).
Although the Company's lenses are manufactured in both glass and plastic,
plastic lenses currently account for approximately 90% of the Company's net lens
sales. Approximately 52% of ophthalmic lens sales generated by plastic lenses
are accounted for by conventional hard resin plastics, with the remainder
derived from advanced lens materials such as thinner and lighter plastics and
plastic photochromics. These more advanced materials have accounted for a
growing percentage of the Company's sales both by volume and revenue. Sola
manufactures and markets several advanced thinner and lighter plastic lens
materials, including Spectralite(R), Finalite 1.6(TM) and polycarbonate.
Spectralite(R) and Finalite 1.6(TM) are proprietary materials developed by
Sola's research and development operation. Raw materials used in the manufacture
of these products are available from a number of chemical suppliers.
Polycarbonate is another thin and light material with greater impact resistance.
To further improve the thinness and lightness of its lenses, the Company has
increasingly employed aspheric and atoric designs (i.e., lenses that achieve
comparable optical performance with a thinner cross section). The Company also
sells plastic photochromic lenses, which require processing by a third party.
The technology for such processing is currently proprietary to such third party.
The Company also manufactures and sells glass lenses, primarily in North
America and Europe. These lenses are manufactured in plants located in the
United States, Mexico and France. The Company's strategy for the glass lens
market is to focus on high value-added product categories, such as glass
progressive and higher index glass lenses. Since the Company is primarily
focused on plastic lenses, glass lenses represent a small and decreasing portion
of the Company's sales. The Company sells virtually no glass lenses in South
America and non-Japan Asia, markets where glass is still the predominant
material for eyeglass lenses.
The Company produces a variety of lens coatings, which primarily provide
scratch resistance and anti-reflection properties. The penetration of coated
lenses varies significantly from market to market.
3
The Company has recently introduced a number of new products and has a
number of products in development that are intended to maintain and increase the
Company's operating margins. For example, the Company has developed and
successfully marketed proprietary progressive lenses (including Percepta(R) and
VIP Gold(R)), which incorporate more complex design features than standard
products and therefore attract an above average gross profit per pair. During
fiscal 1998 Sola's proprietary Matrix(R) delivery system was installed at an
increasing number of sites in the U.S. and foreign locations. This system, which
creates finished prescriptions by bonding together thin lens wafers in a desktop
laminating console, allows the rapid delivery of lenses with anti-reflective
coating and potentially other high margin add-ons. The Company from time to time
may also market products or technologies of third parties to broaden its product
range pursuant to contractual relationships with such third parties.
Marketing and Sales
The Company develops and manages its marketing strategy on a decentralized
basis and has sales offices in 20 countries across its three regions. The
Company differentiates its products from those of its competitors through lens
design, lens materials and coatings formulations. In response to customer
demand, the Company's strategy is focused on providing a wide range of quality
products on short notice. In developing markets, particularly in non-Japan Asia
and Latin America, the Company seeks to expand its market share by increasing
local production, attempting to develop brand recognition for its products and
marketing to customers the advantage of higher value-added products, all of
which are intended to help the Company compete on the basis of quality and
service rather than price.
Distribution
In order to meet customer demand for delivery of a broad range of products
within a short time, the Company has established a widespread distribution
network, which is managed on a regional basis. The Company operates 52 major
distribution centers located in 20 countries, covering all of its three regions.
The Company utilizes three primary distribution channels for its products.
Lenses with corrective power are distributed (i) through a wholesale channel to
wholesale distributors or to independent processing laboratories that process
the Company's lenses and then resell them to retail outlets and practitioners
for resale to consumers, (ii) through a retail channel to chains, superoptical
retail stores (retail outlets with on-site lens processing capability) and other
retailers (including "buying groups" consisting of a number of retailers acting
together to purchase lenses) who sell the lenses to consumers and (iii) in
certain markets in Asia and Europe, direct to eyecare practitioners through the
Company's processing laboratories. Plano lenses are sold primarily to
manufacturers of sunglasses. In English speaking markets (the United States,
Australia and the United Kingdom), a significant percentage of the Company's
sales is to large retail chains and superoptical retail stores. In most other
markets, those retail-oriented channels are less significant, hence, the
Company's sales are primarily oriented toward independent wholesale processing
laboratories, as well as eyecare practitioners served by Company-owned labs.
Customers
During fiscal 1998, the Company's ten largest customers accounted for
approximately 19.6% of net sales and the Company's largest customer accounted
for 5.7% of net sales. During fiscal 1998, 7 of the Company's 10 largest
customers were located in North America and accounted for approximately 15.7% of
net sales in the aggregate.
One of the company's largest competitors, Essilor International, is
extensively vertically integrated into wholesale laboratories, both in the
United States and other parts of the world. Sola has sold and continues to sell
its products to these Essilor laboratories.
4
International Operations
The Company operates manufacturing and distribution sites in all major
regions of the world--North America (including Mexico), Europe, and Rest of
World (comprising primarily Australia, Asia and South America)--and derived
approximately half of its net sales in fiscal 1998 from the sale of products
outside the United States. See Note 15 of Notes to Consolidated Financial
Statements included elsewhere herein. As a result, a significant portion of the
Company's sales and operations are subject to certain risks, including adverse
developments in the foreign political and economic environment, exchange rates,
tariffs and other trade barriers, staffing and managing foreign operations and
potentially adverse tax consequences. Although the Company and its predecessors
have been successfully conducting business outside of the United States since
its inception in 1960, there can be no assurance that any of these factors will
not have a material adverse effect on the Company's financial condition or
results of operations in the future.
Manufacturing Operations
The Company has 20 manufacturing facilities located in its three major
regions, including 18 lens manufacturing facilities. The Company has sought to
make each operating region self-sufficient in the production of core products,
while manufacturing both high-volume plano lenses and newer, low-volume and more
complex products in fewer locations. More centralized manufacturing is pursued
where appropriate in order to maximize production efficiencies or maintain
strict quality controls and research and development support. For the location
and principal operations of these facilities, see "Properties".
The principal materials used by the Company in the production of eyeglass
lenses are hard resins (a commodity plastic used in most plastic lenses), glass,
specialized chemicals used in many higher index plastic lenses and monomers
mixed by the Company in the production of Spectralite(R). The Company believes
that these materials are currently available from a variety of sources and that
the materials necessary to produce the Company's coatings are readily available
from a number of potential sources. In order to reduce materials costs, the
Company coordinates centrally the purchasing of new materals (including
monomers) and has negotiated more favorable purchasing arrangements with its
principal suppliers on an annual basis.
Research and Development
The Company has invested and continues to invest heavily in research and
development in order to continually develop new and innovative products and to
improve the efficiency of its manufacturing process. At March 31, 1998, there
were approximately 184 employees involved in the Company's research and
development efforts. The Company's research and development expenditures for
fiscal 1998, 1997 and 1996 were $18.3 million, $17.5 million (excluding the
non-recurring $9.5 million in-process research and development non-cash charge
associated with the AO Acquisition in fiscal 1997) and $13.3 million,
respectively, representing 3.3%, 3.6% and 3.4% of net sales for each of those
years. The Company has its own research and development centers in Petaluma,
California, Southbridge, Massachusetts, and Adelaide, Australia. A small process
automation group is attached to the manufacturing operation in Wexford, Ireland.
The Company's research and development focuses on the design and development of
innovative, 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 the Spectralite(R) thin and light lens material, the
development of Spectralite(R) with photochromic capabilities, Percepta(R)
progressive design, Access and Continurim enhanced near vision lens designs, and
ultra tough multi coat ("UTMC") and other coatings. Sola's proprietary Matrix(R)
delivery system which creates finished prescriptions by bonding together thin
lens wafers in a desktop laminating console, allows the rapid delivery of lenses
with anti-reflection coating and potentially other high margin add-ons. This
system is being installed at an increasing number of sites in the U.S. and
foreign locations.
5
Competition
The eyeglass lens and coating industry is highly competitive. The Company
competes principally on the basis of customer service, the quality and breadth
of product offerings, and price. The Company believes that among its largest
global competitors are Essilor International and Hoya Corporation. The eyeglass
lens and coating industry is characterized by price competition, which can be
severe in certain markets, particularly for high volume, standard products. Sola
attempts, 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 Sola lenses and
coatings. There can be no assurance, however, that the Company's competitors
will not develop products or services that are more effective or less expensive
than the Company's products or which could render certain of the Company's
products less competitive. Since recently-developed products comprise a
substantial portion of the Company's sales, the Company's performance is
dependent upon its continuing ability to develop and market new products. Some
of the Company's competitors have significantly greater financial resources than
the Company to fund expansion and research and development. Within a particular
market, certain of the Company's competitors may enjoy a "home-country"
advantage over foreign competition. In addition, in certain markets (primarily
Europe), the Company also faces competition from a number of its principal
competitors which are vertically integrated with processing centers to a greater
extent than the Company, enabling them to customize prescription lenses. This
limits the number of independent lens processing customers to which the Company
can market its products.
In addition to direct competition with other manufacturers of eyeglass
lenses, the Company competes indirectly with manufacturers of contact lenses and
providers of medical procedures for the correction of visual impairment. Contact
lenses and eyeglasses are not, however, perfect substitutes because of the
difficulty of developing progressive or bifocal contact lenses for presbyopia
and the tendency of contact lens wearers to also own eyeglasses. Current medical
vision corrective procedures also are ineffective in correcting presbyopia and
many patients who have undergone medical vision correction still require
eyeglasses, although the prescription required may be weaker. The Company
therefore believes that such indirect competition will not have a material
adverse effect on the Company's business in the foreseeable future.
Patents, Trademarks & Licenses
The Company seeks to protect its intellectual property throughout the
world. As of March 31, 1998, the Company had filed (or applied for) patents for
54 discrete inventions or technologies. Many of the Company's patents have been
filed in multiple countries, and they include 46 patents (or patent
applications) filed in the United States. The Company has been granted 250
trademarks in various countries, representing rights to 65 discrete names. These
include 47 trademarks granted in the United States. A further 25 tradenames are
under application. The Company does not believe that it is dependent on any
particular patent, trade secret or similar intellectual property and, in light
of its manufacturing, marketing and distribution strengths, believes that the
loss of any individual trademark, trade secret or patent would not have a
material adverse effect on its results of operations or financial condition.
As a result of the AO Acquisition and the ongoing research and development
within that company, Sola acquired an additional portfolio of patents and patent
applications. Upon consolidation within the overall portfolio and after taking
account of the expiration of older patents, intellectual property protection
will be maintained over an additional 16 discrete inventions and technologies,
within the United States and multiple other countries. An additional trademark
portfolio was similarly acquired. This includes a total of 66 discrete names,
representing a total of 313 trademarks in multiple countries of which 66 are
granted in the United States.
6
Employees
As of March 31, 1998, the Company had approximately 7,800 employees
throughout the world. The majority of the Company's employees are not
represented by labor unions. Labor relations are considered to be good and there
have been no significant labor disputes in the past ten years.
Environmental Matters
The Company (together with the industry in which it operates) is subject to
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 to other federal,
state and foreign laws and regulations. The Company believes that it possesses
all material permits and licenses necessary for the continuing operation of its
business and believes that its 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 the Company in
the future.
Environmental laws and regulations vary among countries in which the
Company operates. During fiscal 1992, the Company adopted an environmental
policy which includes an environmental auditing process designed to evaluate and
assist operating regions in their environmental compliance efforts.
The Company's manufacturing processes generally utilize non-hazardous
chemicals where feasible. Certain processes, including those for cleaning lenses
and mold assemblies, and abrasion resistant and anti-reflection coating of
lenses, use a variety of volatile and other hazardous substances. Company
developments in manufacturing methods, alternative non-solvent cleaning
processes and waste reduction have been successful in reducing the use of these
chemicals and/or emissions and environmental damage from these processes.
Programs to eliminate use of chlorinated hydrocarbons and chlorofluorocarbons
("CFC's") in manufacturing processes have also been developed and the current
use of these substances in the Company's North American operations is minimal.
Since 1988 the Company has operated a ground water remediation system at
its Petaluma, California manufacturing facility in accordance with a consent
order issued by the U.S. Environmental Protection Agency ("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. In March 1997 the EPA consented to the
Company curtailing clean-up activities for a six month period which ended in
September. The Company continued to monitor contamination levels during the
curtailment period. During the quarter ended December 31, 1997 a report on
contamination levels, and the impact of curtailed activities, was submitted to
the EPA, and such report is currently under review. The report indicates no
significant impact on the site from the curtailed activities, and the EPA has
consented to continued curtailment of activities until such time as they have
concluded their review of the report. The Company expects continued reduction of
clean-up activities due to relatively low levels of contamination existing at
the site.
Late in fiscal 1996, the Company was requested by the Missouri Department
of Natural Resources ("MDNR") to conduct a removal action at a disposal site
near Eldon, Missouri known as the Coburn Optical Industries Dump site, which was
allegedly used by a predecessor to the Company for disposal of waste water
sludge containing lead from 1974 to 1986. The MDNR has indicated that it
considers the removal action at this site to be a low priority. Nonetheless, the
Company agreed to undertake the requested removal action pursuant to the MDNR's
Voluntary Cleanup Program. The Company completed its clean-up program during
fiscal 1998 and the MDNR issued a no further action letter in March 1998.
It is possible that the Company may be involved in other similar
investigations and actions under state, federal or foreign law in the future.
Based on currently available information, the Company does
7
not believe that its share of costs, either at the existing sites or at any
future sites, is likely to result in a liability that will have a material
adverse effect on its results of operations or financial condition.
It is the Company's policy 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.
In connection with the Acquisition, Pilkington has agreed to indemnify the
Company with respect to environmental losses based upon or resulting from
certain existing facts, events, conditions, matters or issues, for (i) 50% of
such losses to the extent such losses exceed $1 million but are less than or
equal to $5 million, and (ii) 100% of such losses in excess of $5 million.
See Note 14 of Notes to Consolidated Financial Statements included
elsewhere herein.
Item 2. PROPERTIES
The following table sets forth certain information relating to the
Company's principal facilities. The Company operates other smaller domestic and
foreign manufacturing facilities, distribution facilities and sales offices
which are omitted from this table.
Region and Location Principal Operations Leased/Owned
------------------- -------------------- ------------
North America
Menlo Park, California......... Headquarters Leased
Petaluma, California........... Manufactures plastic lenses; marketing and distribution Part owned,
center; research and development facility; administrative part leased
offices for North American operations
Eldon, Missouri................ Manufactures multifocal glass lenses, manufactures molds Owned
San Diego, California.......... Headquarters for American Optical Leased
Southbridge, Massachusetts..... Distribution center Leased
Miami, Florida................. One site manufacturing finished polycarbonate lenses; the Leased
other site houses tinting and coating operations for plano
lenses, and the Sunlens divisional head office
Tijuana, Mexico................ Four sites manufacturing plastic and glass lenses, Part owned,
manufactures molds; distribution center part leased
Europe
Goetzenbruck, France........... Manufactures glass lenses; marketing and distribution center Owned
Fougeres, France............... Prescription processing laboratory with anti-reflection Leased
coating capability
Wexford, Ireland............... Manufactures plastic lenses; prescription processing Owned
laboratory; distribution center
Varese, Italy................ Tinting operations; prescription processing laboratory with Leased
anti-reflection coating capability; marketing and
distribution center
Birmingham, United
Kingdom...................... Prescription processing laboratory with anti-reflection Leased
coating capability; marketing and distribution center
8
Region and Location Principal Operations Leased/Owned
------------------- -------------------- ------------
Rest of World
Asia
Xian, China.................... Site owned by a joint venture managed by the Company in Leased
which the Company holds a 50% ownership interest;
manufactures hard resin lenses
Hong Kong...................... Prescription processing laboratory with anti-reflection Leased
coating capability; marketing and distribution center
Guangzhou, China............... Two sites; China head office and second China manufacturing Part owned,
site for hard resin lenses part leased
Osaka, Japan................... Prescription processing laboratory with anti-reflection Leased
coating capability; marketing and distribution center
Chung Li, Taiwan............... Manufactures hard resin lenses; marketing and distribution Leased
center
Singapore...................... Manufactures glass molds; marketing and distribution Leased
center; prescription processing facility with
anti-reflection coating capability
South America
Petropolis, Brazil............. Manufactures hard resin ophthalmic and plano lenses; Owned
regional administration office
Villa de Cura, Venezuela....... Manufactures hard resin lenses; distribution center Owned
Australia
Lonsdale, Australia............ Manufactures plastic lenses; manufactures molds; Owned
research and development center; prescription
processing laboratory with anti-reflection coating
facility; marketing and distribution center; regional
administrative offices for Australia and Asian regions
A portion of the Company's research and development activities, its
corporate headquarters and certain manufacturing and distribution operations are
located near major earthquake faults. The ultimate impact on the Company is
unknown, but operating results could be materially affected in the event of a
major earthquake. The Company is predominantly self-insured for losses and
interruptions caused by earthquakes.
For further information concerning the Company's leased properties, see
Note 13 of Notes to Consolidated Financial Statements included elsewhere herein.
The Company's operating leases have expirations ranging from 1998 to 2012. The
Company does not anticipate any difficulties in renewing or replacing such
leases as they expire; however, there can be no assurances that the Company will
be able to renew or replace such leases. The Company believes that its
manufacturing capacity is sufficient for its current needs.
Item 3. LEGAL PROCEEDINGS
In addition to the proceedings described under "Business - Environmental
Matters", the Company is involved in routine litigation incidental to its
business, none of which it believes will have a material adverse effect on its
results of operations or financial condition. See Note 14 of Notes to
Consolidated Financial Statements included elsewhere herein.
9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the last quarter of fiscal 1998.
10
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's 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 the Common Stock as reported on the New York Stock Exchange Composite
Tape for the fiscal quarters indicated.
Common Stock
Price Rang
---------------------
High Low
---- ---
Fiscal Year Ended March 31, 1997:
First Quarter ended June 30, 1996...................................... $34 5/8 $27 3/4
Second Quarter ended September 30, 1996................................ $37 5/8 $28 1/4
Third Quarter ended December 31, 1996.................................. $38 $33
Fourth Quarter ended March 31, 1997.................................... $38 $21 7/8
Fiscal Year Ended March 31, 1998:
First Quarter ended June 30, 1997...................................... $33 1/2 $21 7/8
Second Quarter ended September 30, 1997................................ $34 1/2 $30 1/8
Third Quarter ended December 31, 1997.................................. $36 1/4 $29 1/2
Fourth Quarter ended March 31, 1998.................................... $41 7/16 $30 3/16
On May 29, 1998, the closing price per share of the Company's Common Stock
on the New York Stock Exchange was $39 9/16. As of May 29, 1998, there were 408
holders of record of the Company's Common Stock, which excludes beneficial
owners of Common Stock held in "street name".
Since the Acquisition, the Company has not declared or paid any cash
dividends on its Common Stock. The Company's credit agreement, among the
Company, the lenders named therein and The Bank of America National Trust and
Savings Association, for itself and as agent for a syndicate of other financial
institutions, dated June 1996 as amended (the "Amended Agreement"), generally
restricts, subject to certain exceptions, the payment of dividends,
distributions and other payments. The Company does not anticipate paying any
cash dividends in the foreseeable future and intends to retain future earnings
for the development and expansion of its business. Subject to such restrictions,
any future determination to pay dividends will be at the discretion of the
Company's Board of Directors and subject to certain limitations under the
General Corporation Law of the State of Delaware and will depend upon the
Company's results of operations, financial condition, other contractual
restrictions and factors deemed relevant by the Board of Directors.
11
Item 6. SELECTED FINANCIAL DATA
Presecessor
Sola Internation Inc. Business
------------------------------------------------------------------------ ---------
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Four Months Eight Months
Ended Ended Ended Ended Ended Ended
March 31, March 31, March 31, March 31, March 31, November 30,
1998 1997 (3) 1996 1995 1994 (1) 1993
--------- --------- --------- --------- --------- ---------
Statements of Operations Data
(in thousands, except per share data)
Net sales ............................ $ 547,735 $ 488,689 $ 387,709 $ 345,631 $ 106,030 $ 200,025
========= ========= ========= ========= ========= =========
Income (loss) before
extraordinary item ................. $ 51,092 $ 30,897 $ 34,588 $ 13,640 $ (61,394) $ 10,749
Extraordinary item, net of
taxes ............................. (5,939)(4) -- (912)(4) (3,915)(2) -- --
--------- --------- --------- --------- --------- ---------
Net income (loss) .................... $ 45,153 $ 30,897 $ 33,676 $ 9,725(2) $ (61,394) $ 10,749
========= ========= ========= ========= ========= =========
Earnings (Loss) Per Share
Data basic (5)........................
Income (loss) before extraordinary
item............................. $ 2.09 $ 1.31 $ 1.59 $ 0.82 $ (3.75)
Extraordinary item................. (0.24) -- (0.04) (0.23) --
--------- --------- --------- --------- ---------
Net income (loss).................. $ 1.85 $ 1.31 $ 1.55 $ 0.59 $ (3.75)
========= ========= ========= ========= =========
Weighted average common
shares outstanding............... 24,400 23,561 21,785 16,710 16,353
========= ========= ========= ========= =========
Earnings (Loss) Per Share Data
diluted (6)...........................
Income (loss) before extraordinary
item............................. $ 2.00 $ 1.24 $ 1.51 $ 0.78 $ (3.75)
Extraordinary item................. (0.23) -- (0.04) (0.22) --
--------- --------- --------- --------- ---------
Net income (loss).................. $ 1.77 $ 1.24 $ 1.47 $ 0.56 $ (3.75)
========= ========= ========= ========= =========
Weighted average common and
dilutive securities outstanding.. 25,547 24,859 22,944 17,516 16,353
========= ========= ========= ========= =========
Sola International Inc
----------------------------------------------------------------------------
As of March 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Balance Sheet Data
Total assets .................................. $684,058 $605,508 $416,849 $383,457 $360,631
Long-term debt ................................ 196,386 162,797 97,890 107,407 186,740
Total shareholders' equity .................... 327,022 284,298 192,241 159,443 63,495
- ---------------------------
(1) For the four months ended March 31, 1994, the Company recorded two
non-recurring, non-cash charges associated with the Acquisition: (i) a
$32.9 million charge for the amortization associated with an inventory
write-up to fair value that was reflected in cost of sales; and (ii) a
$40.0 million charge for the write-off of in-process research and
development that was reflected in in-process research and development
expense.
(2) For fiscal 1995, the Company recorded two non-recurring charges in
connection with the IPO: (i) a $3.0 million charge for the termination of
the AEA Investors Inc. management agreement with the Company that was
reflected in general and administrative expenses; and (ii) a $3.9 million
write-off of debt issuance costs, that was reflected in the historical
financial statements as an extraordinary item.
(3) For fiscal 1997, the Company recorded two non-recurring charges in
connection with the AO Acquisition: (i) a $7.2 million charge for the
amortization associated with an inventory write-up to fair value that was
reflected in cost of sales; and (ii) a $9.5 million charge for the
write-off of in-process research and development that was reflected in
in-process research and development expense.
(4) For fiscal 1998 and fiscal 1996, the extraordinary items comprise losses
due to the repurchases of senior subordinated notes, net of tax.
(5) Earnings per share, as restated for the adoption of FAS 128, are computed
using the weighted average number of common shares outstanding during the
period, for fiscal 1998, 1997, 1996, 1995, and 1994, after giving effect to
the IPO.
(6) Earnings per share, as restated for the adoption of FAS 128, are computed
using the weighted average number of common shares and dilutive securities
outstanding during the period, for fiscal 1998, 1997, 1996, 1995, and 1994,
after giving effect to the IPO.
12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Company's consolidated
financial statements and notes thereto included elsewhere in this Form 10-K. The
financial statements for the year ended March 31, 1997 reflect the consolidated
operations of the Company after accounting for the acquisition ("AO
Acquisition") of substantially all of the worldwide ophthalmic business ("AO")
of American Optical Corporation ("AOC") on June 19, 1996 (see Note 1 of Notes to
Consolidated Financial Statements), using the purchase method of accounting.
Operating results for fiscal 1997 subsequent to the AO Acquisition include
non-recurring, non-cash charges relating to the write-off of in-process research
and development projects ($9.5 million) and amortization associated with an
inventory write-up to fair value ($7.2 million), both of which were recorded in
connection with the AO Acquisition. The years ended March 31, 1998, 1997 and
1996 are referred to herein as fiscal 1998, fiscal 1997 and fiscal 1996,
respectively.
The following table reflects the results of operations for the three fiscal
years 1998, 1997 and 1996. The adjustment column in fiscal 1997 reflects
adjustments to present results of operations on a more comparable basis
adjusting for the non-recurring, non-cash charges, and tax effects thereof in
connection with the AO Acquisition, noted above.
Fiscal Year Ended March 31,
-----------------------------------------------------------------------------
Adjusted
(In thousands) 1998 1997 Adjustments 1997 1996
--------- --------- ----------- --------- ---------
Net sales ..................................... $ 547,735 $ 488,689 $ 488,689 $ 387,709
Cost of sales ................................. 289,677 264,535 $ (7,216) 257,319 201,991
--------- --------- --------- --------- ---------
Gross profit ................................ 258,058 224,154 7,216 231,370 185,718
--------- --------- --------- --------- ---------
Research and development
expenses .................................... 18,303 17,539 17,539 13,329
Selling and marketing expenses ................ 93,993 92,387 92,387 66,345
General and administrative
expenses (including goodwill
amortization) ............................... 53,056 47,381 47,381 45,291
In-process research and
development expenses ........................ -- 9,500 (9,500) -- --
--------- --------- --------- --------- ---------
Operating expenses .......................... 165,352 166,807 (9,500) 157,307 124,965
--------- --------- --------- --------- ---------
Operating income ............................ 92,706 57,347 16,716 74,063 60,753
Interest expense, net ......................... (16,754) (15,961) (15,961) (12,141)
--------- --------- --------- --------- ---------
Income before provision for
income taxes, minority interest
and extraordinary item .................... 75,952 41,386 16,716 58,102 48,612
Provision for income taxes .................... (25,369) (10,737) (5,851) (16,588) (13,623)
Minority interest ............................. 509 248 248 (401)
--------- --------- --------- --------- ---------
Income before extraordinary
item ........................................ 51,092 30,897 10,865 41,762 34,588
Extraordinary item, loss on
repurchase of senior subordinated
notes, net of tax ........................... (5,939) -- -- (912)
--------- --------- --------- --------- ---------
Net income .................................. $ 45,153 $ 30,897 $ 10,865 $ 41,762 $ 33,676
========= ========= ========= ========= =========
13
Results of Operations
The following table sets forth, for the fiscal years indicated, the
Company's results and adjusted results of operations as a percentage of net
sales. Management's discussion of results of operations for the year ended March
31, 1997 is based on the adjusted results of operations and the related
percentages of net sales, because, in the opinion of the Company, a comparison
of the historical results of operations for fiscal 1997 is not meaningful due to
the effects of certain transactions and non-recurring charges as noted above.
Fiscal year ended March 31,
---------------------------------
1998 1997 1996
----- ----- -----
% % %
Net sales......................................... 100.0 100.0 100.0
Cost of sales..................................... 52.9 52.7 52.1
----- ----- -----
Gross profit.................................... 47.1 47.3 47.9
----- ----- -----
Research and development expenses................. 3.3 3.6 3.4
Selling and marketing expenses.................... 17.2 18.9 17.1
General and administrative expenses............... 9.7 9.7 11.7
----- ----- -----
Operating expenses.............................. 30.2 32.2 32.2
----- ----- -----
Operating income ............................. 16.9 15.1 15.7
Interest expense, net............................. (3.1) (3.2) (3.1)
Income before provision for income taxes,
minority interest and extraordinary item...... 13.8 11.9 12.6
Provision for income taxes........................ (4.6) (3.4) (3.6)
Minority interest................................. 0.0 0.0 (0.1)
Extraordinary item................................ (1.0) 0.0 (0.2)
----- ----- -----
Net income ..................................... 8.2 8.5 8.7
===== ===== =====
Net Sales
Net sales were $547.7 million in fiscal 1998, $488.7 million in fiscal
1997, and $387.7 million in fiscal 1996, reflecting a growth of 12.1% from
fiscal 1997 to fiscal 1998 and 26.0% from fiscal 1996 to fiscal 1997. Using
constant exchange rates, the percentage increase from fiscal 1997 to fiscal 1998
was 16.6%, and from fiscal 1996 to fiscal 1997 was 25.6%. The AO Acquisition,
with nine months of AO net sales, amounting to $64.4 million, included in fiscal
1997 net sales, had a significant impact on the net sales growth from fiscal
1996 to fiscal 1997. Higher priced product growth has contributed to the
Company's net sales growth in fiscal 1997 and fiscal 1998, led by the growth of
Spectralite(R), plastic photochromic and polycarbonate products, offset in part
by price and volume erosion in net sales of lower priced products. Higher priced
products accounted for approximately 66% of net lens sales in fiscal 1998
compared to 61% in fiscal 1997 and 57% in fiscal 1996. Increased marketing and
customer service efforts have also contributed to the growth in other higher
priced products. Net sales increases by region from fiscal 1997 to 1998 were as
follows: North America 20.1%, Europe 7.1% and Rest of World 1.3%. Net sales
increases in major market areas from fiscal 1996 to 1997 were as follows: North
America 22.7%, Europe 40.6% and Rest of World 15.9%. At constant exchange rates,
net sales increases from fiscal 1997 to fiscal 1998 were: North America 20.1%,
Europe 16.0% and Rest of World 6.8%, and from fiscal 1996 to fiscal 1997 were:
North America 22.9%, Europe 42.2% and Rest of World 12.1%.
Gross Profit and Gross Margin
Gross profit totaled $258.1 million in fiscal 1998, $231.4 million, as
adjusted, in fiscal 1997 and $185.7 million in fiscal 1996, reflecting growths
of 11.5% from fiscal 1997 to fiscal 1998 and 24.6% from fiscal 1996 to fiscal
1997. Gross profit as a percentage of net sales ("gross margin") in fiscal 1998,
fiscal 1997, as adjusted and fiscal 1996, were 47.1%, 47.3%, and 47.9%,
respectively. The gross margin has decreased in fiscal 1998 and fiscal 1997, as
AO traditionally operates at lower gross margins than Sola on a stand alone
basis. In addition, the Company continues to incur manufacturing start up costs
in its
14
new finished polycarbonate manufacturing operation acquired when the Company
purchased Neolens, Inc. in July 1996, and ramp up costs associated with new
product offerings, such as Matrix, the Company's new anti-reflective coating
delivery system. Offsetting in part the aforementioned reductions, has been a
continued shift towards higher value added products, and continued benefits from
the Company's cost reduction program. During fiscal 1996 the Company benefited
from reduced manufacturing costs at its Mexican facility arising from the
weakness of the Mexican Peso, and from the Company's cost reduction program. The
Company continues to experience price competition, which can be severe in
certain markets, particularly for standard products.
Operating Expenses
Operating expenses totaled $165.4 million in fiscal 1998, $157.3 million,
as adjusted, in fiscal 1997 and $125.0 million in fiscal 1996 reflecting
increases of 5.1% from fiscal 1997 to fiscal 1998 and 25.9% from fiscal 1996 to
fiscal 1997. Research and development expenses for fiscal 1998, 1997 and 1996
represent 3.3%, 3.6% and 3.4%, respectively, of annual net sales, reflecting the
Company's continued commitment to research and development of new products,
materials and processes. Because research and development expenditure in AO as a
percentage of net sales is lower than that of Sola on a stand alone basis, the
current lower ratio of research and development expenses to net sales can be
expected for the combined company in the future. The lower charge to research
and development expenses in fiscal 1996 arose primarily from the transfer of a
new product out of research and development and into production. Selling and
marketing expenses were 17.2%, 18.9% and 17.1% of net sales in fiscal 1998, 1997
and 1996, respectively. During the fourth quarter of fiscal 1997 the Company
introduced a new progressive lens design, Percepta(R), with a worldwide launch.
Significant marketing expenditures associated with this launch were incurred
primarily in the last two quarters of the 1997 fiscal year resulting in higher
sales and marketing expenses as a percentage of net sales in fiscal 1997. As a
percentage of net sales, general and administrative expenses in fiscal 1998,
fiscal 1997 and fiscal 1996 were 9.7%, 9.7% and 11.7%, respectively. The higher
percentage in fiscal 1996 compared to fiscal 1998 and fiscal 1997 was primarily
due to higher performance based management bonuses in fiscal 1996 and higher
provisions for doubtful accounts in South America and Asia.
Operating Income
Operating income for fiscal 1998 totaled $92.7 million, an increase of
$18.6 million over fiscal 1997 operating income, as adjusted, of $74.1 million,
or 25.2%. Operating income for fiscal 1997 totaled $74.1 million, as adjusted,
an increase of $13.3 million over fiscal 1996 operating income of $60.8 million,
or 21.9%.
Net Interest Expense
Net interest expense totaled $16.8 million for fiscal 1998, $15.9 million
for fiscal 1997 and $12.1 million for fiscal 1996. Interest expense was higher
in fiscal 1998 than fiscal 1997, primarily due to a full year of higher
indebtedness to fund the acquisitions of AO and Neolens in June and July of
1996, offset in part by lower interest rates on the Company's revolving line of
credit, and the repurchase of its 9 5/8% senior subordinated notes in December
1997. Interest expense was higher in fiscal 1997 than fiscal 1996 also due to
the AO and Neolens acquisitions, offset by the lower interest rate under the
Company's new bank credit facility and the reduction of debt from the proceeds
of the equity public offering. Simultaneously with the AO Acquisition, the
Company entered into a new bank credit facility with The Bank of America
National Trust and Savings Association, for itself and as agent for a syndicate
of other financial institutions (see "--Liquidity and Capital Resources"). In
July 1996, the Company issued 2.32 million shares of common stock in a public
offering for which it received net proceeds of approximately $62.8 million.
Provision for Income Taxes
The Company's combined state, federal and foreign tax rate was
approximately 33.4% for fiscal 1998 compared to 28.5% for fiscal 1997, as
adjusted, and 28.0% for fiscal 1996. The utilization of
15
United States valuation allowances, arising in fiscal 1994, were the primary
reasons for the lower income tax rates in fiscal 1997 and fiscal 1996. The
Company has deferred tax assets on its balance sheet as of March 31, 1998
amounting to approximately $16.0 million. The ultimate utilization of these
deferred tax assets is dependent on the Company's ability to generate taxable
income in the future.
Extraordinary Item
During fiscal 1998 the Company repurchased all of its remaining 9 5/8%
Senior Subordinated Notes due 2003, and during fiscal 1996 the Company
repurchased approximately $19.9 million principal amount at maturity of the
Senior Subordinated notes. As a result of the repurchases the Company recorded
extraordinary charges of $5.9 million for fiscal 1998, and $0.9 million for
fiscal 1996, in each case resulting from the write-off of unamortized debt
issuance costs and premium over accreted value, net of tax. The 1998 repurchase
was funded by borrowings under the Company's credit agreement and the 1996
repurchase was partly funded by borrowings under the Company's prior credit
agreement and partly from cash arising from the IPO.
Net Income
Net income for fiscal 1998 totaled $45.2 million compared to $41.8 million,
as adjusted, for fiscal 1997 and $33.6 million for fiscal 1996, increases of
$3.4 million and $8.2 million, respectively. The growth in net income from
fiscal 1997, as adjusted, to fiscal 1998 was 8.1% and from fiscal 1996 to fiscal
1997, as adjusted, was 24.0%. If the extraordinary items in fiscal 1998 and
fiscal 1996 are excluded, the growth from fiscal 1997, as adjusted, to fiscal
1998, and from fiscal 1996 to fiscal 1997, as adjusted, would have been 22.3%
and 20.7%, respectively.
Liquidity and Capital Resources
The following analysis of the Company's cash flow statement reflects the
historical results of the Company which have not been adjusted for the AO
Acquisition.
Operating activities generated $20.9 million in cash in fiscal 1998
compared with $32.4 million in fiscal 1997 and $30.8 million in fiscal 1996.
Significantly improved net income in fiscal 1998 was more than offset by
increases in inventories and accounts receivable. During fiscal 1998 the Company
decided to take advantage of prompt pay discounts offered by suppliers in the
United States resulting in accounts payable not increasing in line with the
increases in the business. Improved net income in fiscal 1997, after adding back
one time non-recurring non-cash charges associated with the AO Acquisition, was
offset in part by increases in inventories and accounts receivable. Accounts
payable in fiscal 1997 increased in line with inventory growth.
During fiscal 1998 inventories as a percentage of net sales grew to 31.0%
from 28.4% in the prior year. The increase in inventories is primarily a result
of building inventories to support new product launches, growth in higher priced
products as a percentage of net sales and therefore of inventories, and the
projected overall increase in the business. During fiscal 1997 inventories as a
percentage of net sales grew to 28.4% (27.2% if a full year's net sales for AO
are used) from 26.0% in the prior year. The growth in inventory levels resulted
from the introduction and regional spread of new products, resulting in both
finished goods inventory growth and increased mold inventory requirements. The
primary increase was caused by increases in inventories and molds to support the
worldwide launch of a new progressive lens design, Percepta(R), in the fourth
quarter of fiscal 1997. Accounts receivable as a percentage of net sales
increased to 22.0% in fiscal 1998 compared to 21.5% a year ago. Accounts
receivable as a percentage of net sales increased to 21.5% (20.5% if a full
year's net sales for AO are used) in fiscal 1997 compared to 19.3% for fiscal
1996.
During fiscal 1998 net cash expended on investing activities amounted to
$41.2 million, primarily being capital expenditures. The most significant
capital expenditures, primarily on additional production capacity, were made in
the United States, Mexico, Brazil, China, Venezuela and Australia. During fiscal
1997 net cash expended on investing activities amounted to $154.8 million. On
June 19, 1996, the
16
Company acquired substantially all of the worldwide ophthalmic business of AOC
for cash consideration of $103.6 million (together with the assumption of
certain liabilities) (the "AO Acquisition"). The AO Acquisition was funded
primarily through borrowings under the Company's then existing credit agreement,
which borrowings were subsequently repaid in part with the proceeds from the
equity public offering during July 1996. On July 2, 1996 the Company acquired
Neolens, Inc. ("Neolens"), a Florida corporation for cash consideration of
approximately $15.5 million, including the assumption of Neolens debt ("Neolens
Acquisition"). The Neolens Acquisition was funded through borrowings under the
Company's then existing credit agreement. During fiscal 1997, the Company spent
approximately $30.0 million on capital expenditures primarily in the United
States, Mexico, China and Brazil. The capital expenditures in fiscal 1997 were
primarily to add production capacity. During fiscal 1996 net cash expended on
investing activities was primarily for capital expenditures and increasing the
Company's investment in its Venezuela joint venture. The capital expenditures in
fiscal 1996 related mainly to expansion of production capacity to accommodate
higher volumes and the introduction of new products. During fiscal 1996 the
Company increased its investment in its Venezuela joint venture, Sola de
Venezuela Industria Optica, C.A. ("Sola Venezuela"), from 45% to 100%. The
purchase price amounted to approximately $3.6 million and was paid in cash.
Management anticipates capital expenditures of $40 million to $45 million
annually over the next several years, of which approximately $5 million annually
is viewed as discretionary.
Financing activities generated $32.3 million in fiscal 1998, primarily from
additional borrowings under the Amended Agreement and exercise of stock options
by employees. In the third quarter of fiscal 1998 the Company repurchased all of
its remaining 9 5/8% Senior Subordinated Notes due 2003. The notes repurchase
was funded by borrowings under the Amended Agreement. In conjunction with the
repurchase of its Senior Subordinated Notes the Company amended its bank credit
agreement with The Bank of America National Trust and Savings Association, for
itself and as agent for a syndicate of other financial institutions ("Amended
Agreement"). The Amended Agreement increased the Company's multicurrency
revolving facility from $180 million to $300 million. Borrowings are divided
into two tranches. Tranche A permits borrowings up to $30 million in either U.S.
dollars or foreign currencies, to be used for working capital and consummating
certain permitted acquisitions. Tranche B permits borrowings of up to $270
million and can be used for working capital purposes, refinancing the term loans
under the existing bank credit agreement, repurchasing the Company's Senior
Subordinated Notes, and consummating certain permitted acquisitions. The Tranche
A Facility matures on October 31, 2000 and the Tranche B Facility matures on May
31, 2001. Among other things the Amended Agreement changed certain financial
covenants, removed the requirement for foreign subsidiary guarantees under the
Tranche A facility, increased the basket for incurring other unsecured
indebtedness to $150 million, and deleted the term facility portion.
Borrowings under the Tranche A and Tranche B revolvers (other than swing
line loans, which may only be Base Rate loans) may be made as Base Rate Loans or
LIBO Rate Loans. Base Rate Loans bear interest at rates per annum equal to the
higher of (a) 0.50% per annum above the latest Federal Funds Rate, or (b) the
Bank of America Reference Rate. LIBO Rate Loans bear interest at a rate per
annum equal to the sum of the LIBO Rate and a margin varying from 0.450% to
0.750% based on the Company's leverage ratio. Fixed rate borrowings in foreign
currencies bear interest at rates per annum equal to the referenced currency's
local IBOR plus a margin varying from 0.450% to 0.750% based on the Company's
leverage ratio. Local currency Base Rate Loans are also available at a spread
similar to US Base Rate Loans described above.
During the fourth quarter of fiscal 1998 the Company issued 6 7/8% Senior
Notes ("Notes") due 2008, for which the Company received approximately $98.5
million net proceeds, after discounts and issuance expenses. Net proceeds were
used to pay down borrowings under the Amended Agreement. The Notes are unsecured
senior obligations of the Company, limited to $100 million aggregate principal
amount at maturity, and will mature on March 15, 2008. The Notes will be
redeemable, as a whole or from time to time in part, at the option of the
Company on any date at a redemption price equal to the aggregate principal
amount plus a make whole premium.
17
Financing activities generated $125.3 million in fiscal 1997. During July
1996 the Company sold 2,320,000 additional shares of common stock at $28.625 per
share through a public offering. The net proceeds from this offer, were
approximately $62.8 million. The Company used such net proceeds to repay
indebtedness which it incurred under its then existing bank credit agreement.
Simultaneously with the closing of the AO Acquisition, the Company entered into
a bank credit agreement with The Bank of America National Trust and Savings
Association, for itself and as agent for a syndicate of other financial
institutions, covering an aggregate amount of $180 million.
Financing activities were an outflow of $4.7 million in fiscal 1996. During
the three months ended June 1995 the Company repurchased approximately $19.9
million principal amount at maturity of its 9 5/8% Senior Subordinated Notes due
2003. The repurchase was partly funded by borrowings under the prior credit
agreement and partly from excess cash arising from the IPO.
The Company's foreign subsidiaries maintain local credit facilities to
provide credit for overdraft, working capital and some fixed asset investment
purposes. As of March 31, 1998, the Company's total credit available under such
facilities was approximately $29.9 million, of which $10.1 million had been
utilized.
The Company continues to have significant liquidity requirements. In
addition to working capital needs and capital expenditures, the Company has
substantial cash requirements for debt service. The Company expects that the
Amended Agreement and other overseas credit facilities, together with cash on
hand and internally generated funds, if available as anticipated, will provide
sufficient capital resources to finance the Company's operations, fund
anticipated capital expenditures, and meet interest requirements on its debt,
including the Notes, for the foreseeable future. As the Company's debt matures,
the Company may need to refinance such debt. There can be no assurance that such
debt can be refinanced on terms acceptable to the Company.
Currency Exchange Rates
As a result of the Company's worldwide operations, currency exchange rate
fluctuations tend to affect the Company's results of operations and financial
position. The two principal effects of currency exchange rates on the Company's
results of operations and financial position are (i) translation adjustments for
subsidiaries where the local currency is the functional currency and (ii)
translation adjustments for subsidiaries in hyper-inflationary countries.
Translation adjustments for functional local currencies have been made to
shareholders' equity. For the fiscal years ended March 31, 1998, 1997 and 1996
such translation adjustments were approximately $(10.0) million, $(3.8) million,
$(1.6) million, respectively.
During fiscal 1996 the Company benefited from reduced manufacturing costs
at its Mexican facility arising from the weakness of the Mexican Peso. For
translation adjustments of the Company's subsidiaries operating in
hyper-inflationary countries, until recently primarily Brazil, the functional
currency is determined to be the U.S. dollar, and therefore all translation
adjustments are reflected in the Company's Statements of Operations. Commencing
with the fourth quarter of fiscal 1997 the Company's operations in Mexico have
been accounted for as hyper-inflationary economies. In hyper-inflationary
environments, the Company generally protects margins by methods which include
increasing prices monthly at a rate appropriate to cover anticipated inflation,
compounding interest charges on sales invoices daily and holding cash balances
in U.S. dollar denominated accounts where possible.
Because a majority of the Company's debt is U.S. dollar denominated, the
Company may hedge against certain currency fluctuations by entering into
currency swaps (however certain currencies, such as the Brazilian Real, cannot
be hedged), although no such swaps had been entered into as of March 31, 1998.
As of March 31, 1998 certain of the Company's foreign subsidiaries had entered
into forward contracts for intercompany purchase commitments in amounts other
than their home currency. The carrying amount of the forward contracts
approximates fair value, which has been estimated based on current exchange
rates. For further financial data of the Company's performance by region, see
Note 15 of Notes to Consolidated Financial Statements.
18
Seasonality
The Company's business is somewhat seasonal, with third quarter results
generally weaker than the other three quarters as a result of lower sales during
the holiday season, and fourth quarter results generally the strongest.
Inflation
Inflation continues to affect the cost of the goods and services used by
the Company. The competitive environment in many markets limits the Company's
ability to recover higher costs through increased selling prices, and the
Company is subject to price erosion in many of its standard product lines. The
Company seeks to mitigate the adverse effects of inflation through cost
containment and productivity and manufacturing process improvements. For a
description of the effects of inflation on the Company's reported revenues and
profits and the measures taken by the Company in response to inflationary
conditions, see--"Currency Exchange Rates" above.
Year 2000
The Company has developed preliminary plans to address the possible
exposures related to the impact on its computer systems of the Year 2000. Key
financial, information and operational systems have been assessed and plans have
been developed to address systems modifications required by December 31, 1999.
Based on work to date, and assuming that project plans, which continue to
evolve, can be implemented as planned, management believes the financial impact
of making the required systems changes will not be material to the Company's
consolidated financial position, results of operations or cash flows.
The Company is also in the preliminary stages of assessing the possible
effects on the Company's operations of the Year 2000 readiness of key suppliers
and customers. The Company's reliance on suppliers and customers and therefore
on the proper functioning of their information systems and software, means that
failure to address Year 2000 issues could have a material impact on the
Company's operations and financial results; however, the potential impact and
related costs are not known at this time.
Information Relating to Forward-Looking Statements
This Form 10-K of the Company includes forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, including
statements regarding, among other items, (i) the Company's development of new
products, including, among others, Percepta, Spectralite, Access and Matrix,
(ii) the availability of raw materials for the Company's products, the costs of
product introductions, and trends in sales growth (including growth related to
new products), (iii) anticipated trends in the Company's business environment,
including competitive and pricing pressures, (iv) the Company's ability to
continue to control costs and maintain adequate standards of customer service
and product quality (v) future income tax rates and capital expenditures and
working capital requirements and (vi) statements regarding the adequacy of the
Company's planning for the Year 2000 computer programming issues. These forward
looking statements reflect the Company's current views with respect to future
events and financial performance. The words "believe", "expect", "anticipate"
and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of their dates. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Actual results could differ materially
from the forward-looking statements as a result of various factors including the
"Factors Affecting Future Operating Results" included in Exhibit 99.1 of the
Company's Form 10-K for the fiscal year ended March 31, 1998 and the factors
described in "Business--Environmental Matters."
19
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are set forth on pages F-1,
and F3 through F-27 and the related financial statement schedule is set forth on
page S-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
20
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the
Company's directors and executive officers. All directors hold office until the
annual meeting of stockholders of the Company following their election or until
their successors are duly elected and qualified. Officers are appointed by, and
serve at the discretion of, the Board of Directors.
Name Age Position
---- --- --------
Irving S. Shapiro.............................. 81 Chairman of the Board
Douglas D. Danforth............................ 75 Director
Hamish Maxwell................................. 71 Director
Maurice J. Cunniffe............................ 65 Director
Jackson L. Schultz............................. 72 Director
A. William Hamill.............................. 50 Director
John E. Heine.................................. 54 President and Chief Executive Officer,
Director
James H. Cox................................... 49 Executive Vice President, Assistant
Secretary and Assistant Treasurer;
President, Sola Optical USA
Steven M. Neil................................. 45 Executive Vice President, Finance, Chief
Financial Officer, Secretary and Treasurer
Stephen J. Lee................................. 45 Vice President, Human Resources
Barry J. Packham............................... 51 Vice President, Manufacturing
Development
John J. Bastian................................ 46 Vice President, Regional Director, Australia
Theodore Gioia................................. 40 Vice President, Strategic Planning
Adrian Walker.................................. 45 Vice President, Regional Director, Asia
Mark T. Mackenzie.............................. 48 Vice President, Regional Director, Europe
Alan S. Vaughan................................ 54 Vice President, Worldwide Rx Operations
The principal occupations and positions for at least the past five years of
each of the directors and executive officers of the Company are as follows
(references to the Company include its predecessors):
Irving S. Shapiro has been Chairman of the Board of the Company since
December 1994. Mr. Shapiro is Of Counsel to Skadden, Arps, Slate, Meagher & Flom
LLP. He was Chairman and Chief Executive Officer of E.I. du Pont de Nemours and
Company from 1974 to 1981. He is Chairman of the Board of Marvin & Palmer
Associates, Inc., and is a director of J.P. Morgan Florida Federal Savings Bank,
Pediatric Services of America Inc., and Gliatech, Inc.
Douglas D. Danforth has been a director of the Company since December 1994.
He was Chairman and Chief Executive Officer of Westinghouse Electric Corporation
from 1983 to 1987. He is a director of Daltile Inc.
Hamish Maxwell has been a director of the Company since December 1994. Mr.
Maxwell was Chairman of the Executive Committee of the Board of Directors of
Philip Morris Companies Inc. from September 1991 through April 1995 and was
Chairman and Chief Executive Officer of such company from 1984 to 1991. He is a
director of Bankers Trust Company, Bankers Trust New York Corporation and
Chairman of WPP Group plc.
21
Maurice J. Cunniffe has been a director of the Company since December,
1996. He is Chairman and Chief Executive Officer of American Optical
Corporation, a company of which he has been sole shareholder since 1982.
Jackson L. Schultz has been a director of the Company since November 1995.
Mr. Schultz joined Wells Fargo Bank in 1970, retiring in 1990 as Senior Vice
President responsible for Public and Governmental Affairs.
A. William Hamill has been a director of the Company since December, 1996.
Mr. Hamill is Executive Vice President and Chief Financial Officer of Union Camp
Corporation, which he joined in 1996. From 1993 through 1996, he was a partner
in SCI Investors Inc. and a director of Custom Papers Group Inc. From 1991 to
1993, he was Senior Vice President and Chief Financial Officer of Specialty
Coatings International Inc.. From 1975 through 1990, Mr. Hamill was with Morgan
Stanley & Co. Incorporated, where he was a Managing Director.
John E. Heine has served as Chief Executive Officer and President of the
Company since November 1981 and served as Chairman of the Board of the Company
from September 1993 to December 1994. Mr. Heine joined the Company in 1981 as
Managing Director of Sola International Holdings, Ltd. and previously held
general management positions with Southern Farmers Holdings, Ltd. in Adelaide
and H.J. Heinz in Melbourne, Australia.
James H. Cox was appointed Executive Vice President in December 1996,
Assistant Secretary and Assistant Treasurer of the Company in September 1993 and
President of Sola Optical USA, the Company's North American eyeglass lens
business in 1991. He joined the Company as Vice President, Manufacturing in
1985. Mr. Cox was formerly Executive Vice President of Operations with Bausch &
Lomb's Consumer Products Division.
Steven M. Neil was appointed Executive Vice President, Finance, Chief
Financial Officer, Secretary and Treasurer in October 1997. Prior to joining
Sola, Mr. Neil was Vice President-Finance, Treasurer and Chief Financial Officer
of Perrigo Company from May 1995 to September 1997. He also served as President
of Perrigo International, Inc. from July 1996. Mr. Neil served as Vice
President-Controller of Perrigo Company from January 1993 to May 1995. Prior to
that time he served as Controller and Chief Accounting Officer with Applied
Magnetics Corporation, where he also served in other positions of increasing
responsibility since 1983. He is a member of the Board of Directors of
Intelligent Solutions, Inc.
Stephen J. Lee was appointed Vice President, Human Resources of the Company
in 1988 and was formerly Director of Personnel for Pilkington's Ophthalmic and
Insulation Divisions. Mr. Lee joined the Pilkington Group in 1974.
Barry J. Packham joined the Company as Vice President, Manufacturing
Development in February 1993. Mr. Packham was Managing Director of Ceramic Fuel
Cells Ltd., a research and development joint venture consortium in Melbourne,
Australia, from 1991 to 1993 and formerly held manufacturing and general
management positions with Kodak and Leigh-Mardon Pty. Ltd.
John J. Bastian has served as Regional Director, Australia since 1987. Mr.
Bastian joined the Company in 1983 as Group General Manager, Marketing in Sola
International Holdings, South Australia following a six-year career with PA
Management Consultants.
Theodore Gioia has served as Vice President, Strategic Planning since 1992.
Mr. Gioia joined the Company as Director of Strategic Planning in 1989, having
sold the start-up recording company he founded in 1987. Mr. Gioia was previously
a consultant with McKinsey & Company and the Boston Consulting Group.
22
Adrian P. Walker joined the Company as Regional Director, Asia in November
1996. Mr. Walker held a number of general management positions with subsidiaries
of BTR plc. from March 1980 to November 1996. He was most recently General
Manager of ACI Laminates and Insulations, based in Melbourne, Australia from
July 1995 to October 1996. From August 1992 to July 1995 he was Managing
Director of Dunlop Slazenger (Far East), in Malaysia, and from April 1985 to
July 1992 was General Manager, Serck Services (Gulf) Ltd., in the United Arab
Emirates.
Mark T. Mackenzie was appointed Regional Director, Europe in April 1994.
Mr. Mackenzie served as Group Marketing Director of Tarkett Pegulan AG, and as
General Manager of the Residential Flooring Division, based in Germany. He
formerly held marketing and sales positions with Gillette, L'Oreal and Cadbury
Schweppes.
Alan S. Vaughan was appointed Vice President, Worldwide Rx Operations in
June 1994, having previously served as European Manufacturing and Technical
Director. Mr. Vaughan joined the Company in 1978 as Managing Director of Sola
ADC Lenses in Ireland. He was previously Director of Operations with Johnson &
Johnson (Ireland).
Item 11. EXECUTIVE COMPENSATION
Incorporated by reference to the material included under the caption
"Compensation of Executive Officers" in the Company's proxy statement for the
fiscal year ended March 31, 1998.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference to the material included under the caption
"Security Ownership of Certain Beneficial Owners and Managers" in the Company's
proxy statement for the fiscal year ended March 31, 1998.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the material included under the caption
"Certain Transactions" in the Company's proxy statement for the fiscal year
ended March 31, 1998.
23
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report:
1. Financial Statements. See Index to Consolidated Financial
Statements and Financial Statement Schedules included on page F-1.
2. Financial Statement Schedules. See "Schedule II - Valuation and
Qualifying Accounts" included on page S-1.
Schedules other than those listed above have been omitted since
they are either not required, not applicable or the information is
otherwise included.
3. List of Exhibits. See Index of Exhibits included on page E-1.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K, dated February 17, 1998 to report
the Company's adoption of FAS 128, Earnings per Share, for its fiscal
quarter ended December 31, 1997, and restating certain earnings per share
information previously presented in the Company's Securities Exchange Act
filings.
24
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SOLA INTERNATIONAL INC.
(Registrant)
Date: June 15th, 1998 By: /s/Steven M. Neil
------------------
Steven M. Neil
Executive Vice President, Finance,
Chief Financial Officer, Secretary
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/Irving S. Shapiro
- --------------------
Irving S. Shapiro Chairman of the Board June 15th, 1998
/s/John E. Heine
- ----------------
John E. Heine President and Chief Executive Officer, June 15th, 1998
Director (Principal Executive Officer)
/s/Steven M. Neil
- -----------------
Steven M. Neil Executive Vice President, Finance, Chief June 15th, 1998
Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)
/s/Douglas D. Danforth
- ----------------------
Douglas D. Danforth Director June 15th, 1998
/s/Hamish Maxwell
- -----------------
Hamish Maxwell Director June 15th, 1998
/s/Maurice J. Cunniffe
- ----------------------
Maurice J. Cunniffe Director June 15th, 1998
/s/A. William Hamill
- --------------------
A. William Hamill Director June 15th, 1998
/s/Jackson L. Schultz
- ---------------------
Jackson L. Schultz Director June 15th, 1998
25
SOLA INTERNATIONAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors....................... F-2
Consolidated Balance Sheets as of March 31, 1998 and 1997............... F-3
Consolidated Statements of Income for the years ended March 31, 1998,
1997 and 1996......................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1998, 1997 and 1996......................................... F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1997 and 1996........................................ F-6
Notes to Consolidated Financial Statements.............................. F-7
Quarterly Financial Data (unaudited).................................... F-28
Financial Statement Schedule............................................ S-1
F-1
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Shareholders
Sola International Inc.
We have audited the accompanying consolidated balance sheets of Sola
International Inc. as of March 31, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended March 31, 1998. Our audits also included the financial
statement schedule listed in the index at item 14(a). These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sola International Inc. as of March 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/Ernst & Young LLP
Palo Alto, California
May 6, 1998
F-2
SOLA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
March 31,
------------------------------
ASSETS 1998 1997
--------- ---------
Current assets:
Cash and cash equivalents ............................................................. $ 34,444 $ 24,401
Trade accounts receivable, less allowance for doubtful accounts of
$4,956 and $4,030 at March 31, 1998 and 1997, respectively .......................... 120,590 104,960
Inventories ........................................................................... 169,756 138,634
Other current assets .................................................................. 16,798 14,225
--------- ---------
Total current assets ................................................................ 341,588 282,220
Property, plant and equipment, at cost, less accumulated depreciation
and amortization .................................................................... 132,778 110,477
Goodwill and other intangibles, net ...................................................... 198,341 200,734
Other long-term assets ................................................................... 11,351 12,077
--------- ---------
Total assets ........................................................................ $ 684,058 $ 605,508
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Current liabilities:
Notes payable to banks and current portion of ......................................... $ 12,600 $ 19,413
Accounts payable ...................................................................... 60,254 56,747
Accrued liabilities ................................................................... 35,462 29,557
Accrued payroll and related compensation .............................................. 30,758 25,836
Other current liabilities ............................................................. 2,536 10,862
--------- ---------
Total current liabilities ........................................................... 141,610 142,415
Long-term debt, less current portion ..................................................... 1,790 3,555
Bank debt, less current portion .......................................................... 95,000 67,938
Senior notes ............................................................................. 99,596 --
Senior subordinated notes ................................................................ -- 91,304
Other long-term liabilities .............................................................. 19,040 15,998
--------- ---------
Total liabilities ................................................................... 357,036 321,210
Commitments and contingencies
Shareholders' equity
Preferred stock, $0.01 par value; 5,000 shares authorized; no shares
issued ............................................................................. -- --
Common stock, $0.01 par value; 50,000 shares authorized; 24,723 shares
(24,263 shares as of March 31, 1997) issued and outstanding ......................... 247 243
Additional paid-in capital ............................................................... 278,688 271,167
Equity participation loans ............................................................... (230) (270)
Retained earnings ........................................................................ 58,057 12,904
Cumulative foreign currency adjustments .................................................. (9,740) 254
--------- ---------
Total shareholders' equity .......................................................... 327,022 284,298
Total liabilities and shareholders' equity .......................................... $ 684,058 $ 605,508
========= =========
The accompanying notes are integral part of these financial statements.
F-3
SOLA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Year Ended March 31,
-----------------------------------------------
1998 1997 1996
--------- --------- ---------
Net sales ................................................................. $ 547,735 $ 488,689 $ 387,709
Cost of sales ............................................................. 289,677 264,535 201,991
--------- --------- ---------
Gross profit ........................................................... 258,058 224,154 185,718
--------- --------- ---------
Research and development expenses ......................................... 18,303 17,539 13,329
Selling and marketing expenses ............................................ 93,993 92,387 66,345
General and administrative expenses ....................................... 53,056 47,381 45,291
In-process research and development
expense ................................................................ -- 9,500 --
--------- --------- ---------
Operating expenses ..................................................... 165,352 166,807 124,965
--------- --------- ---------
Operating income ..................................................... 92,706 57,347 60,753
Interest income ........................................................... 664 640 544
Interest expense .......................................................... (17,418) (16,601) (12,685)
--------- --------- ---------
Income before provision for income taxes,
minority interest and extraordinary item ............................. 75,952 41,386 48,612
Provision for income taxes ................................................ (25,369) (10,737) (13,623)
Minority interest ......................................................... 509 248 (401)
--------- --------- ---------
Income before extraordinary item ....................................... 51,092 30,897 34,588
Extraordinary item, loss on repurchase of
senior subordinated notes, net of tax .................................. (5,939) -- (912)
--------- --------- ---------
Net income ................................................................ $ 45,153 $ 30,897 $ 33,676
========= ========= =========
Earnings (loss) per share - basic:
Income before extraordinary item ..................................... $ 2.09 $ 1.31 $ 1.59
Extraordinary item ................................................... (0.24) -- (0.04)
--------- --------- ---------
Net income ........................................................... $ 1.85 $ 1.31 $ 1.55
========= ========= =========
Weighted average common shares
outstanding ............................................................. 24,400 23,561 21,785
========= ========= =========
Earnings (loss) per share - diluted:
Income before extraordinary item ..................................... $ 2.00 $ 1.24 $ 1.51
Extraordinary item ................................................... (0.23) -- (0.04)
--------- --------- ---------
Net income ........................................................... $ 1.77 $ 1.24 $ 1.47
========= ========= =========
Weighted average common and dilutivesecurities outstanding ................ 25,547 24,859 22,944
========= ========= =========
The accompanying notes are integral part of these financial statements.
F-4
SOLA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share data)
Retained
Additional Equity Earnings/
Common Stock Paid-in Participation (Accumulated
Shares Value Capital Loans Deficit)
-------- -------- -------- -------- --------
Balances, March 31, 1995 ................................. 21,780 $ 218 $206,353 $ (1,095) $(51,669)
17 shares of $0.01 par value common stock
issued under stock option plans ........................ 17 59
Repayment of Equity participation loans .................. 674
Cumulative translation adjustments
Net income ............................................... 33,676
-------- -------- -------- -------- --------
Balances, March 31, 1996 ................................. 21,797 218 206,412 (421) (17,993)
Public Offering of 2.320 shares of $0.01 par
value common stock, net of offering expenses ........... 2,320 23 62,742
146 shares of $0.01 par value common stock
issued under stock option plans ........................ 146 2 1,747
Tax benefit from exercise of stock options ............... 266
Repayment of Equity participation loans .................. 151
Cumulative translation adjustments
Net income ............................................... 30,897
-------- -------- -------- -------- --------
Balances, March 31, 1997 ................................. 24,263 243 271,167 (270) 12,904
460 shares of $0.01 par value common stock
issued under stock option plans ........................ 460 4 5,330
Tax benefit from exercise of stock options ............... 2,191
Repayment of Equity participation loans .................. 40
Cumulative translation adjustments .......................
Net income ............................................... 45,153
-------- -------- -------- -------- --------
Balances, March 31, 1998 ................................. 24,723 $ 247 $278,688 $ (230) $ 58,057
======== ======== ======== ======== ========
Cumulative
Foreign
Currency Total
Translation Shareholders'
Adjustments Equity
--------- ---------
Balances, March 31, 1995 .......................... $ 5,636 $ 159,443
17 shares of $0.01 par value common stock
issued under stock option plans ................. 59
Repayment of Equity participation loans ........... 674
Cumulative translation adjustments ................ (1,611) (1,611)
Net income ........................................ 33,676
--------- ---------
Balances, March 31, 1996 .......................... 4,025 192,241
Public Offering of 2.320 shares of $0.01 par
value common stock, net of offering expenses .... 62,765
146 shares of $0.01 par value common stock
issued under stock option plans ................. 1,749
Tax benefit from exercise of stock options ........ 266
Repayment of Equity participation loans ........... 151
Cumulative translation adjustments ................ (3,771) (3,771)
Net income ........................................ 30,897
--------- ---------
Balances, March 31, 1997 .......................... 254 284,298
460 shares of $0.01 par value common stock
issued under stock option plans ................. 5,334
Tax benefit from exercise of stock options ........ 2,191
Repayment of Equity participation loans ........... 40
Cumulative translation adjustments ................ (9,994) (9,994)
Net income ........................................ 45,153
--------- ---------
Balances, March 31, 1998 .......................... $ (9,740) $ 327,022
========= =========
The accompanying notes are integral part of these financial statements.
F-5
SOLA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended March 31,
-------------------------------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net income ............................................................. $ 45,153 $ 30,897 $ 33,676
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................................... 22,140 21,595 17,247
Inventory write-up ..................................................... -- 7,216 --
In-process research and development .................................... -- 9,500 --
Provision for excess and obsolete inventory ............................ 1,833 1,593 1,090
Provision for doubtful accounts ........................................ 1,337 1,258 2,846
Increase (decrease) in net deferred taxes .............................. 7,750 (3,644) 1,657
(Gain) on disposal/sale of property, plant and
equipment ........................................................... (82) (272) (73)
Changes in assets and liabilities:
Trade accounts receivable ........................................... (21,242) (19,513) (10,883)
Inventories ......................................................... (38,231) (24,464) (16,222)
Prepaids and other assets ........................................... (6,022) (725) 521
Accounts payable--trade ............................................. 2,710 6,258 10,010
Accrued and other current liabilities ............................... 3,652 1,803 (9,750)
Tax benefit from exercise of stock options .......................... 2,191 266 --
Other long-term liabilities ......................................... (335) 650 643
--------- --------- ---------
Net cash provided by operating activities ......................... 20,854 32,418 30,762
--------- --------- ---------
Cash flows from investing activities:
Acquisition of American Optical, less cash and
cash equivalents of $3,365 .......................................... -- (108,594) --
Acquisition of Neolens, less cash and cash
equivalents of $12 .................................................. -- (16,848) --
Additional investment in Venezuela subsidiary .......................... -- -- (3,561)
Capital expenditures ................................................... (39,497) (29,951) (17,580)
Payments received on notes receivable from
Pilkington and affiliates ........................................... -- -- 1,585
Other investing activities ............................................. (1,730) 636 585
--------- --------- ---------
Net cash used in investing activities ............................. (41,227) (154,757) (18,971)
--------- --------- ---------
Cash flows from financing activities:
Sale of common stock ................................................... -- 62,765 --
Payments on equity participation loans/exercise
of stock options .................................................... 5,374 1,900 733
Net receipts (payments) under notes payable to
banks ............................................................... 2,731 (4,789) 6,785
Borrowings on long-term debt ........................................... -- 4,081 1,297
Payments on long-term debt ............................................. (4,628) (5,278) (1,735)
Net receipts under bank debt ........................................... 22,374 66,626 6,000
Issuance of senior notes ............................................... 99,596 -- --
Repurchase of senior subordinated notes ................................ (93,152) -- (17,766)
--------- --------- ---------
Net cash provided by (used in) financing activities ............... 32,295 125,305 (4,686)
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents ......................................................... (1,879) (959) (859)
--------- --------- ---------
Net increase in cash and cash equivalents .............................. 10,043 2,007 6,246
Cash and cash equivalents at beginning of period ....................... 24,401 22,394 16,148
--------- --------- ---------
Cash and cash equivalents at end of period ............................. $ 34,444 $ 24,401 $ 22,394
========= ========= =========
The accompanying notes are integral part of these financial statements.
F-6
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Basis of Presentation
Sola International Inc. ("Company") designs, manufactures and distributes a
broad range of eyeglass lenses, primarily focusing on the fast growing plastic
lens segment of the global market. The Company operates in one business segment.
In June 1996, the Company acquired substantially all of the worldwide
ophthalmic business ("AO") of American Optical Corporation for cash
consideration of $103.6 million (together with the assumption of certain
liabilities) (the "AO Acquisition"). The AO Acquisition was accounted for under
the purchase method of accounting as of the closing date. The total purchase
price of $110.2 million (including acquisition costs of $6.5 million) exceeded
the historical book value of the net assets acquired and such excess was
allocated to the assets and liabilities based on their estimated fair values as
of the AO Acquisition date, including in-process research and development ($9.5
million) with no alternative future use. Independent appraisals were utilized
for determining the amounts assigned to certain purchased assets including
property, plant and equipment and in-process research and development.
In July 1996 the Company acquired control of Neolens, Inc. ("Neolens"), a
Florida corporation that manufactured polycarbonate eyeglass lenses and was a
supplier to the Company. The Company acquired Neolens for cash consideration of
approximately $15.5 million, including the assumption of Neolens debt (the
"Neolens Acquisition") and was accounted for under the purchase method of
accounting as of the closing date. The total purchase price of $16.8 million
(including acquisition costs of $1.3 million) included $17.6 million allocated
to goodwill and other intangible assets. Results of Neolens prior to acquisition
were not material to the Company's consolidated results of operations.
On October 5, 1995 the Company increased its investment in its Venezuela
joint venture, Sola de Venezuela Industria Optica, C.A. ("Sola Venezuela"), from
45% to 80%, and in March 1996, the Company exercised its option to acquire the
remaining 20% of the shares in Sola Venezuela. The purchase price for all the
shares, including the 20% option, and acquisition expenses, amounted to
approximately $3.6 million and was paid in cash. In addition to the cash
purchase price of the final 20% of Sola Venezuela, Sola will pay a contingent
payment based on the growth in the net income of Sola Venezuela in fiscal 1998
over the net income of Sola Venezuela in fiscal 1995, and such payment is not
anticipated to be significant. The acquisition has been accounted for under the
purchase method of accounting.
The accompanying consolidated financial statements of the Company have been
prepared in accordance with U.S. generally accepted accounting principles. The
Company's fiscal 1997 financial statements presented herein include the results
of operations and cash flows of the AO business for the nine months and ten days
ended March 31, 1997 and the results of operations and cash flows of the Neolens
business for the nine months ended March 31, 1997 subsequent to their respective
acquisitions.
2. Summary of Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned and controlled foreign subsidiaries. All significant
transactions between the entities have been eliminated.
F-7
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies - (Continued)
Cash and Cash Equivalents:
Cash equivalents consist primarily of short-term investments with an
original maturity of three months or less, carried at cost which approximates
market value.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost and are depreciated on a
straight-line basis over the estimated useful lives of the related assets
(buildings--15 to 50 years; plant and office equipment--2 to 10 years).
Leasehold improvements and leased equipment are amortized over the lesser of
their useful lives or the remaining term of the related leases.
Impact of recently issued accounting standards:
In June 1997, the FASB released Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements and is
effective for fiscal years beginning after December 15, 1997. The Company is
currently evaluating the impact of the application of the new rules on the
Company's consolidated financial statements.
In June 1997, the FASB released Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"). FAS 131 will change the way companies report selected segment
information in annual financial statements and also requires those companies to
report selected segment information in interim financial reports to
shareholders. FAS 131 is effective for fiscal years beginning after December 15,
1997. The Company is currently evaluating the impact of the application of the
new rules on the Company's consolidated financial statements.
Intangible Assets:
Intangible assets, including trademarks, patents and licenses, are stated
at cost and amortized on a straight-line basis over their estimated useful lives
of 2 to 17 years. Legal costs incurred by the Company in successfully defending
its patents are capitalized to patent costs and amortized over the remaining
life of the patent. Goodwill is amortized over 40 years. As of March 31, 1998
and 1997 accumulated amortization was $17.9 million and $12.4 million,
respectively.
Debt issuance costs are being amortized to interest expense over the
respective lives of the debt instruments which range from five to ten years. As
of March 31, 1998 and 1997, accumulated amortization was $0.4 million and $1.5
million, respectively. As a result of repurchasing the Company's 9 5/8% Senior
Subordinated Notes in fiscal 1998 and 1996 (see Note 8), the Company wrote off
$1.5 million and $0.4 million, respectively, of debt issuance costs reflected on
the statement of income, together with the premium over accreted value, as an
extraordinary item, net of tax.
F-8
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies - (Continued)
Foreign Currency Translation:
The assets and liabilities and revenue and expense accounts of the
Company's foreign subsidiaries operating in non-highly inflationary economies
have been translated using the exchange rate at the balance sheet date and the
weighted average exchange rate for the period, respectively.
The net effect of the translation of the accounts of the Company's
subsidiaries has been included in equity as cumulative foreign currency
translation adjustments. Adjustments that arise from exchange rate changes on
transactions denominated in a currency other than the local currency are
included in income as incurred and are not material.
The Company has operations in Brazil, a hyper-inflationary country until
recently, for which the functional currency is the U.S. dollar. Commencing with
the fourth quarter of fiscal 1997 the Company's operations in Mexico have been
accounted for as hyper-inflationary economies. All translation and transaction
adjustments are included in determining net income.
Revenue Recognition:
Sales and related cost of sales are recognized upon shipment of product.
The Company's principal customers are wholesale distributors and processing
laboratories, retail chains, superoptical retail stores, independent eyecare
practitioners and sunglass manufacturers. No individual customer accounts for
more than 10% of net sales. The Company generally does not require collateral
from its customers, but performs on-going credit evaluations of its customers.
Advertising and Promotion Costs:
The Company's policy is to expense advertising and promotion costs as they
are incurred. The Company's advertising and promotion expenses were
approximately $12.3 million, $12.5 million, and $9.4 million for fiscal 1998,
1997, 1996, respectively.
Income Taxes:
The accompanying financial statements of the Company reflect the provisions
of FASB 109. Investment tax credits and research and development credits are
accounted for by the flow-through method.
Reclassifications:
Certain prior year items have been reclassified to conform with the current
year's presentation. These reclassifications had no impact on total assets or
net income.
Use of Estimates:
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-9
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies - (Continued)
Concentration of Credit Risks:
Cash and cash equivalents are invested in deposits with major banks in the
United States and in countries where subsidiaries operate. Deposits in these
banks may exceed the amount of insurance provided on such deposits. The Company
has not experienced any losses on its deposits of cash and cash equivalents.
Financial Instruments With Off-Balance-Sheet Risk:
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to reduce its exposure to market and interest
rate risk. Gains and losses due to rate fluctuations on such transactions are
recognized currently. Cash flows related to these gains and losses are reported
as operating or financing activities in the accompanying consolidated statements
of cash flows. As of March 31, 1998, certain of the Company's foreign
subsidiaries had entered into forward contracts for intercompany purchase
commitments, which are not significant, in amounts other than their home
currency. The carrying amount of the foreign exchange contracts approximates
fair value, which has been estimated based on current exchange rates. The
forward exchange contracts generally have varying maturities up to 9 months.
Unless noted otherwise, the Company does not require collateral or other
security to support financial instruments with credit risk.
Earnings (Loss) Per Share:
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all included periods have been presented, and where necessary,
restated to conform to the FAS 128 requirements.
F-10
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies - (Continued)
The following table sets forth the computation of basic and diluted
earnings per share for the fiscal years ended March 31, 1998, 1997 and 1996 (in
thousands, except per share data):
Year Ended March 31,
-------------------------------
1998 1997 1996
-------- -------- --------
Numerator:
Income before extraordinary item ............ $ 51,092 $ 30,897 $ 34,588
Extraordinary item, loss on repurchase of
senior subordinated notes, net of tax ..... (5,939) -- (912)
-------- -------- --------
Net income ............................... $ 45,153 $ 30,897 $ 33,676
======== ======== ========
Denominator:
Denominator for basic earnings per
share-
Weighted average common shares
outstanding............................. 24,400 23,561 21,785
Effect of dilutive securities:
Employee stock options.................. 1,147 1,298 1,159
Denominator for diluted earnings per
share-
-------- -------- --------
Weighted average common shares and
dilutive securities outstanding......... 25,547 24,859 22,944
======== ======== ========
Basic earnings (loss) per share:
Income before extraordinary item............. $ 2.09 $ 1.31 $ 1.59
Extraordinary item........................... (0.24) -- (0.04)
-------- -------- --------
Net income................................ $ 1.85 $ 1.31 $ 1.55
======== ======== ========
Diluted earnings (loss) per share:
Income before extraordinary item............. $ 2.00 $ 1.24 $ 1.51
Extraordinary item........................... (0.23) -- (0.04)
-------- -------- --------
Net income................................ $ 1.77 $ 1.24 $ 1.47
======== ======== ========
F-11
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. Inventories
March 31,
----------------------------
1998 1997
-------- --------
(in thousands)
Raw materials .......................... $ 16,714 $ 17,505
Work in progress ....................... 6,872 6,948
Finished goods ......................... 104,966 76,936
Molds .................................. 41,204 37,245
-------- --------
$169,756 $138,634
======== ========
Molds comprise mainly finished goods for use by manufacturing affiliates in
the manufacture of spectacle lenses.
4. Property, Plant and Equipment
March 31,
---------------------
1998 1997
-------- --------
(in thousands)
Land, buildings and leasehold improvements ........... $ 40,467 $ 29,749
Machinery and office equipment ....................... 136,218 115,943
Equipment under capital leases ....................... 593 259
-------- --------
177,278 145,951
Less accumulated depreciation and amortization ....... 44,500 35,474
-------- --------
$132,778 $110,477
======== ========
Depreciation expense for fiscal 1998, 1997 and 1996 was $14.3 million,
$13.3 million and $11.1 million, respectively.
5. Notes Payable to Banks
Notes payable to banks at March 31, 1998 represent borrowings generally
denominated in foreign currencies under several foreign credit agreements with
lenders at interest rates ranging from 1.63% to 8.63%, and 24.0% for Brazilian
Real based borrowings. The Brazilian Real based borrowings were $351,000 at
March 31, 1998. The weighted average interest rates as of March 31, 1998 and
1997 were 8.06% and 8.68%, respectively. As of March 31, 1998, the Company had
total unused lines of credit amounting to $19.8 million and was in compliance
with minimum net worth requirements of agreements with certain foreign banks.
F-12
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Long-Term Debt
March 31,
---------
1998
----
(in thousands)
Uncollateralized term loans, interest rates varying
from 4.75% to 10.0% at March 31, 1998, principal and
interest payable through December 2008 ......................... $ 3,939
Loans collateralized by equipment and other assets,
interest rates varying from 3.92% to 7.85% at March
31, 1998, principal and interest payable through
March 2001 ..................................................... 246
Other........................................................... 110
-------
4,295
Less current portion (included in other current liabilities).... 2,505
-------
Long-term debt, less current portion............................ $ 1,790
=======
Aggregate annual maturities of long-term debt over the next five years and
thereafter are as follows:
Period Ending March 31, (in thousands)
-----------------------
1999......................................................... $2,505
2000......................................................... 678
2001......................................................... 262
2002......................................................... 191
2003......................................................... 182
Thereafter................................................... 477
The Company believes that as of March 31, 1998, the fair value of its
long-term debt approximates the carrying value of those obligations. The fair
value of the Company's long-term debt is estimated based on quoted market prices
for similar issues with the same interest rates that would be available to the
Company for similar debt obligations.
7. Bank Credit Agreement
In conjunction with the repurchase of its Senior Subordinated Notes (see
Note 8) the Company amended its bank credit agreement with The Bank of America
National Trust and Savings Association, for itself and as agent for a syndicate
of other financial institutions ("Amended Agreement"). The Amended Agreement
increased the Company's multicurrency revolving facility from $180 million to
$300 million. Borrowings are divided into two tranches. Tranche A permits
borrowings up to $30 million in either U.S. dollars or foreign currencies, to be
used for working capital and consummating certain permitted acquisitions.
Tranche B permits borrowings of up to $270 million and can be used for working
capital purposes, refinancing the term loans under the existing bank credit
agreement, repurchasing the Company's Senior Subordinated Notes, outstanding
letters of credit ($2.5 million as of March 31, 1998) and consummating certain
permitted acquisitions. The Tranche A Facility matures on October 31, 2000 and
the Tranche B Facility matures on May 31, 2001. In addition, the Amended
Agreement changed certain financial covenants, removed the requirement for
foreign subsidiary guarantees under the
F-13
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Bank Credit Agreement - (Continued)
Tranche A facility, increased the basket for incurring other unsecured
indebtedness to $150 million, and deleted the term facility portion.
Borrowings under the Tranche A and Tranche B revolvers (other than swing
line loans, which may only be Base Rate loans) may be made as Base Rate Loans or
LIBO Rate Loans. Base Rate Loans bear interest at rates per annum equal to the
higher of (a) 0.50% per annum above the latest Federal Funds Rate, or (b) the
Bank of America Reference Rate. LIBO Rate Loans bear interest at a rate per
annum equal to the sum of the LIBO Rate and a margin varying from 0.450% to
0.750% based on the Company's leverage ratio. Fixed rate borrowings in foreign
currencies bear interest at rates per annum equal to the referenced currency's
local IBOR plus a margin varying from 0.450% to 0.750% based on the Company's
leverage ratio. Local currency Base Rate Loans are also available at a spread
similar to US Base Rate Loans described above.
The Amended Agreement contains a number of covenants, including, among
others, covenants restricting the Company and its subsidiaries with respect to
the incurrence of indebtedness (including contingent obligations), the creation
of liens, the making of certain investments and loans, engaging in unrelated
businesses, transactions with affiliates, the consummation of certain
transactions such as sales of substantial assets, mergers or consolidations,
margin stock purchases and other transactions. The Amended Agreement also
restricts the ability of the Company and its subsidiaries to make restricted
payments in the nature of, among other things, (i) declaring, making or paying
dividends or other distributions in excess of prescribed levels and (ii)
purchasing, redeeming or retiring shares of the Company's capital stock in
excess of prescribed levels. The Company and its subsidiaries are also required
to comply with certain financial tests and maintain certain financial ratios.
8. Senior Subordinated Notes
The Company's 6 7/8% Senior Notes ("Notes") were issued under an indenture
dated March 19, 1998, among the Company and State Street Bank and Trust Company
of California, N.A., as Trustee (the "Indenture"). The Notes are unsecured
senior obligations of the Company, limited to $100 million aggregate principal
amount at maturity, and will mature on March 15, 2008. Interest on the notes is
payable semiannually on March 15 and September 15 of each year, commencing
September 15, 1998.
The Notes will be redeemable, as a whole or from time to time in part, at
the option of the Company on any date (a "Redemption Date") at a redemption
price equal to the greater of (i) 100% of the principal amount of the Notes to
be redeemed or (ii) the sum of the present values of the Remaining Scheduled
Payments (as defined) thereon discounted to such Redemption Date on a semiannual
basis at the Treasury Rate (as defined) plus 20 basis points, plus in either
case accrued interest (as defined).
The Notes rank pari passu to all other Senior Indebtedness, as defined in
the Indenture, of the Company. The Company believes that as of March 31, 1998,
the fair value of its Senior Subordinated Notes approximates the carrying value
of those obligations.
During fiscal 1998 the Company repurchased all of its 9 5/8% Senior
Subordinated Notes due 2003. As a result of the purchase the Company recorded an
extraordinary charge of $5.9 million for fiscal 1998 resulting from the
write-off of unamortized debt issuance costs and premium over accreted value,
net of tax of $3.8 million. The repurchase was funded by borrowings under the
Amended Agreement.
F-14
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Common Stock
Common Stock
The Company has entered into loan agreements with certain members of the
Company's management to enable them to invest in the Company's common stock. As
of March 31, 1998 and 1997, loans amounting to $0.2 million and $0.3 million,
respectively, which bear interest at 7.5% per annum, payable quarterly, and
mature on December 1, 1998, were outstanding under this plan. These loans are
secured by the common stock and have been reflected as a reduction in
shareholders' equity on the consolidated balance sheets.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
On February 23, 1995 all outstanding stock options under the previous
corporate structure were assumed by the Company and converted into options to
acquire shares of the Company's Common Stock, with the number of shares subject
to such option and exercise price thereof adjusted appropriately (the "Existing
Option Plan"). The Existing Option Plan has been amended to provide that no new
options will be granted thereunder.
The Company adopted the Sola International Inc. Stock Option Plan (the
"International Plan"), effective February 15, 1995. On August 16, 1996 the
shareholders of the Company ratified an increase of 500,000 to the number of
options available for issuance under the International Plan. The maximum number
of shares of Common Stock with respect to which options may be granted under the
International Plan is 1,355,868 shares plus, subject to the requirement of rule
16b-3 of the Securities Exchange Act of 1934, if applicable, the number of
shares of Common Stock subject to existing options under the Existing Option
Plan, which expire or terminate without exercise for any reason, which number of
shares underlying Existing Options shall not exceed 1,645,219. Under the
International Plan certain key employees, and non employee directors and/or
creditors of the Company and its subsidiaries and affiliates (each an
"Optionee") are eligible to receive non-qualified stock options (the
"International Options") to acquire shares of common stock of the Company.
International Options granted to an Optionee are evidenced by an agreement
between the Optionee and the Company which contains terms not inconsistent with
the International Plan which the committee appointed to administer the
International Plan, deemed necessary or desirable (the "International Option
Agreement").
Pursuant to the Existing Option Plan and the International Plan ("Plans"),
unless otherwise set forth in an Existing Option Agreement or an International
Option Agreement, 20% of the Options granted to an Optionee vest on the date of
grant, with an additional 20% vesting on each successive one-year anniversary of
the date of grant. Options not previously vested become fully vested in the
event of a sale or other disposition of 80% or more of the outstanding capital
stock or substantially all of the assets of the Company, or upon a Merger or
consolidation of the Company and its subsidiaries and affiliates unless the
merger or consolidation is one in which the Company is the surviving corporation
or one in which control of the Company and its subsidiaries and affiliates does
not change (a "Termination Event").
F-15
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Common Stock - (Continued)
However, Existing Options which are not exercised on or prior to a Termination
Event lapse upon the closing of a Termination Event. All non-vested Options of
an Optionee lapse upon such Optionee's termination of employment for any reason.
An Optionee's vested Options lapse 45 days after termination of such Optionee's
employment with the Company and its subsidiaries and affiliates for any reason
other than death or disability, in which case such options terminate 180 days
after such termination; provided, however, that such options lapse immediately
in the event an Optionee's employment with the Company and its subsidiaries and
affiliates is terminated for cause.
Pro Forma Disclosures
Pro Forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions: risk-free
interest rates of 5.67%, 6.67% and 6.67%, no dividend yield, volatility factors
of the expected market price of the Company's common stock of .373, .389 and
.389, and a weighted-average expected life of the option of 4 years, for fiscal
1998, 1997 and 1996, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except for earnings per share
information):
Year Ended March 31,
---------------------------------
1998 1997 1996
------- ------- -------
Pro forma net income .................... $44,157 $30,312 $33,603
Pro forma earnings per share:
Basic........................... $ 1.81 $ 1.29 $ 1.54
Diluted......................... $ 1.73 $ 1.22 $ 1.46
The pro forma effect on net income during the phase-in period of FAS 123
may not be representative of the effects on pro forma net income in future
periods.
F-16
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Common Stock - (Continued)
Option Activity
A summary of the Company's stock option activity, and related information
for fiscal 1996, 1997 and 1998 follows:
Number of Securities Weighted-
Underlying Options Average
(in thousands) Exercise Price
-------------- --------------
Options outstanding as of March 31, 1995 ............................................. 2,166 $ 11.34
Options granted during fiscal 1996 ................................................. 113 24.45
Options exercised in fiscal 1996 ................................................... (17) 12.70
Options cancelled in fiscal 1996 ................................................... (35) 13.81
Options outstanding as of March 31, 1996 ............................................. 2,227 11.96
Options granted during fiscal 1997 ................................................. 394 34.01
Options exercised in fiscal 1997 ................................................... (145) 12.02
Options cancelled in fiscal 1997 ................................................... (47) 17.98
Options outstanding as of March 31, 1997 ............................................. 2,429 15.43
Options granted during fiscal 1998 ................................................. 413 33.08
Options exercised in fiscal 1998 ................................................... (460) 11.53
Options cancelled in fiscal 1998 ................................................... (153) 34.44
Options outstanding as of March 31, 1998 ............................................. 2,229 18.20
Options exercisable as of March 31, 1998 ............................................. 1,568 14.14
Weighted - average fair value of options granted during fiscal year:
1998 ............................................................................... $ 12.46
1997 ............................................................................... $ 13.65
Options exercisable as of March 31, 1996 and March 31, 1997 in thousands
were 1,119 and 1,486, respectively. Options available for grant as of March 31,
1996, 1997 and 1998 in thousands were 257, 409 and 149, respectively. Exercise
prices for options granted during fiscal 1998 ranged from $29.81 to $41.44. The
weighted-average remaining contractual life of those options is four years.
10. Defined Contribution Plans
The Company sponsors several defined contribution plans covering
substantially all U.S. and U.K. employees. The plans provide for limited Company
matching of participants' contributions. Contributions to all defined
contribution plans charged to operations were $1.2 million, $1.0 million and
$0.9 million for fiscal 1998, 1997 and 1996, respectively.
11. Defined Benefit Retirement Plans
The Company participates in a defined benefit pension plan ("Domestic
Pension Plan") covering substantially all full-time domestic employees. Benefit
payments under the plan are based principally on
F-17
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Defined Benefit Retirement Plans - (Continued)
employee compensation during the last five or ten year period prior to
retirement and/or length of service. New employees are eligible to participate
in the plan within one year of employment and are vested after five years of
service. The Company's policy is to fund such amounts as are necessary, on an
actuarial basis, to provide for the plan's current service costs and the plan's
prior service costs over their amortization periods.
The Company also participates in a contributory defined benefit pension
plan covering certain Australian employees ("International Pension Plan").
Benefits are generally based on length of service and on employee compensation
during the last three years of service prior to retirement. The Company's policy
is to fund such amounts as are necessary, on an actuarial basis, to provide for
the plan's current service costs and the plan's prior service costs over their
amortization periods.
The following table provides information on the status of the Domestic
Pension Plan and the International Pension Plan.
Net periodic pension cost includes the following:
Year Ended March 31,
-------------------------------------------
1998 1997 1996
------- ------- -------
(in thousands)
Domestic Pension Plan:
Service cost-benefits earned during the period ..................... $ 1,862 $ 1,662 $ 1,370
Interest cost on projected benefit obligation ...................... 810 702 509
Actual return on plan assets ....................................... (2,381) (400) (180)
Net amortization and deferral ...................................... 1,805 83 25
------- ------- -------
Total net periodic pension cost .................................... $ 2,096 $ 2,047 $ 1,724
======= ======= =======
International Pension Plan:
Service cost-benefits earned during the period ..................... $ 1,433 $ 1,843 $ 1,539
Interest cost on projected benefit obligation ...................... 650 731 684
Actual return on plan assets ....................................... (1,860) (1,344) (1,454)
Net amortization and deferral ...................................... 905 308 583
------- ------- -------
Total net periodic pension cost .................................... $ 1,128 $ 1,538 $ 1,352
======= ======= =======
F-18
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Defined Benefit Retirement Plans - (Continued)
The significant actuarial assumptions for the following tables, as of the
period-end measurement dates, are as follows:
Year Ended March 31,
------------------
1998 1997 1996
---- ---- ----
Domestic Pension Plan:
Discount rate .................................. 6.35% 7.35% 7.0%
Expected long-term rate of return on plan assets 8.0% 8.0% 8.0%
Rate of increase in future compensation
levels ....................................... 5.0% 5.0% 5.0%
International Pension Plan:
Discount rate .................................. 6.5% 7.5% 8.0%
Expected long-term rate of return on plan assets 7.5% 8.0% 8.5%
Rate of increase in future compensation
levels ....................................... 4.0% 5.0% 5.5%
The change in the actuarial assumptions for fiscal 1998, 1997 and 1996 have
not had a significant effect on the funded status of the Domestic or
International Pension Plans.
At March 31, 1998, the Domestic Pension Plan and International Pension Plan
assets include cash equivalents, fixed income securities and common stock.
F-19
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Defined Benefit Retirement Plans - (Continued)
The funded status as of the year-end measurement dates was as follows:
Year Ended March 31,
------------------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Domestic Pension Plan:
Actuarial present value of benefit obligations:
Vested benefit obligation ......................................... $ 7,556 $ 4,294 $ 2,776
======== ======== ========
Accumulated benefit obligation .................................... $ 8,012 $ 4,652 $ 3,091
======== ======== ========
Projected benefit obligation ...................................... $ 16,884 $ 11,301 $ 9,603
Plan assets at fair value ......................................... 10,441 6,021 3,733
-------- -------- --------
Projected benefit obligation in excess of plan assets ............. 6,443 5,280 5,870
Unrecognized net loss ............................................. (1,754) (498) (1,179)
Unrecognized prior service cost ................................... -- -- --
Unrecognized transition asset, net ................................ -- -- --
-------- -------- --------
Accrued pension cost .............................................. $ 4,689 $ 4,782 $ 4,691
======== ======== ========
International Pension Plan:
Actuarial present value of benefit obligations:
Vested benefit obligation ......................................... $ 10,591 $ 11,295 $ 10,480
======== ======== ========
Accumulated benefit obligation .................................... $ 10,625 $ 11,297 $ 10,486
======== ======== ========
Projected benefit obligation ...................................... $ 10,810 $ 11,446 $ 10,827
Plan assets at fair value ......................................... 12,612 13,333 12,032
-------- -------- --------
Projected benefit obligation less than plan assets ................ (1,802) (1,887) (1,205)
Unrecognized net gain ............................................. 1,633 1,657 947
Unrecognized transition asset, net ................................ 169 230 258
-------- -------- --------
Accrued pension cost .............................................. $ -- $ -- $ --
======== ======== ========
F-20
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Income Taxes
The domestic and foreign components of income before provision for income
taxes, minority interest and extraordinary item are as follows:
Year Ended March 31,
-----------------------------------------
1998 1997 1996
------- ------- -------
(in thousands)
Domestic .................... $42,918 $14,351 $27,158
Foreign ..................... 33,034 27,035 21,454
------- ------- -------
$75,952 $41,386 $48,612
======= ======= =======
The components of the provision for income taxes are as follows:
Year Ended March 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Current:
Federal and State ........................ $ 9,082 $ 6,142 $ 3,756
Foreign .................................. 8,006 7,178 8,210
Deferred:
Federal and State ........................ 7,808 1,720 9,181
Foreign .................................. 4,891 1,534 1,134
Valuation allowance adjustment ............. (4,418) (9,837) (9,858)
Tax benefit allocated to reduction of
goodwill ................................. -- 4,000 1,200
-------- -------- --------
$ 25,369 $ 10,737 $ 13,623
======== ======== ========
During fiscal 1998 and 1997, the Company recognized certain tax benefits
related to stock option plans in the amount of $2.2 million and $0.3 million,
respectively. Such benefits were recorded as a reduction of income taxes payable
and an increase in additional paid-in capital.
F-21
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Income Taxes - (Continued)
A reconciliation between income tax provisions computed at the U.S. federal
statutory rate and the effective rate reflected in the statements of income is
as follows:
Year Ended March 31,
----------------------
1998 1997 1996
---- ---- ----
Provision at statutory rate ........................ 35.0% 35.0% 35.0%
State tax provision, net of federal effect ......... 3.5 4.0 3.6
Valuation allowance ................................ (5.8) (23.8) (15.2)
Tax benefit allocated to reduction of goodwill ..... -- 9.7 2.5
Income of foreign subsidiaries at differing
statutory rates ................................. (1.3) (2.4) 9.3
Tax benefit from NOL utilization ................... -- -- (5.7)
Other .............................................. 2.0 3.4 (1.5)
---- ---- ----
33.4% 25.9% 28.0%
==== ==== ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
March 31,
-----------------
1998 1997
------- -------
(in thousands)
Deferred tax assets:
Accounts receivable, principally due to allowances for
doubtful accounts ...................................... $ 2,064 $ 2,249
Inventories, principally due to reserves ................. 3,191 3,591
Property, plant and equipment, principally due to
differences in depreciation ............................ 4,874 5,868
Accruals for employee benefits ........................... 8,322 8,904
In-process research and development ...................... 12,281 13,225
Other assets ............................................. 3,610 4,746
Net operating losses ..................................... 9,188 11,221
------- -------
Total gross deferred tax assets .......................... 43,530 49,804
Less valuation allowance ................................. 9,801 14,219
------- -------
Net deferred tax assets .................................. $33,729 $35,585
======= =======
Deferred tax liabilities:
Property, plant and equipment, principally due to
differences in depreciation ............................ $12,102 $ 9,262
Inventories .............................................. 2,752 2,641
Amortization of goodwill ................................. 5,653 3,999
Unremitted income of foreign subsidiaries ................ 3,834 2,700
Other .................................................... 4,071 3,385
------- -------
Net deferred tax liabilities ............................. $28,412 $21,987
======= =======
Net deferred tax assets less net deferred tax
liabilities ............................................ $ 5,317 $13,598
======= =======
F-22
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Income Taxes - (Continued)
In fiscal 1997 a valuation allowance of $8.6 million was established
against deferred tax assets acquired in the AO Acquisition. Movements in the
valuation allowances in fiscal 1998, 1997 and 1996 relate primarily to
realization of NOL's or changes in the Company's evaluation of the realizability
of deferred tax assets.
For tax purposes, the Company's foreign subsidiaries, at March 31, 1998,
had net operating loss carryforwards of $32.9 million. Of this amount, $31.0
million does not expire, and $1.9 million expires between 2002 and 2007. The
deferred tax assets reflected in the Company's accounts as of March 31, 1998
before valuation allowances reflect these NOL's.
The Company has not provided for U.S. federal income and foreign
withholding taxes on $21 million of non-U.S. subsidiaries' undistributed
earnings as of March 31, 1998 because such earnings are intended to be
reinvested indefinitely. Upon distribution of those earnings in the form of
dividends or otherwise, the Company would be subject to U.S. income taxes
(subject to an adjustment for foreign tax credits). Determination of the amount
of unrecognized deferred U.S. income tax liability is not practicable because of
the complexities associated with its hypothetical calculation.
13. Commitments
The Company leases certain warehouse and office facilities, office
equipment and automobiles under non cancelable operating leases which expire in
1998 through 2012. The Company is responsible for taxes, insurance and
maintenance expenses related to the leased facilities. Under the terms of
certain lease agreements, the leases may be extended, at the Company's option,
and certain of the leases provide for adjustments of the minimum monthly rent.
Future minimum annual lease payments under the leases are as follows:
Period Ending March 31,
- ----------------------- (in thousands)
1999.......................................................... $4,774
2000.......................................................... 3,909
2001.......................................................... 2,730
2002.......................................................... 2,540
2003.......................................................... 2,563
Thereafter.................................................... 5,449
Rent expense for fiscal 1998, 1997, and 1996 was $7.8 million, $5.6 million
and $5.4 million, respectively.
14. Contingencies
The Company is subject to environmental laws and regulations concerning
emissions to the air, discharges to surface and subsurface waters and the
generation, handling, storage, transportation, treatment and disposal of waste
materials.
F-23
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. Contingencies - (Continued)
The Company is currently participating in a remediation program of one of
its manufacturing facilities under the Comprehensive Environmental Response,
Compensation and Liability Act and the Superfund Amendments and Reauthorization
Act of 1986. In March 1997 the U.S. Environmental Protection Agency ("EPA")
consented to the Company curtailing clean-up activities for a six month period
which ended in September. The Company continued to monitor contamination levels
during the curtailment period. During the quarter ended December 31, 1997 a
report on contamination levels, and the impact of curtailed activities, was
submitted to the EPA, and such report is currently under review. The report
indicates no significant impact on the site from the curtailed activities, and
the EPA has consented to continued curtailment of activities until such time as
they have concluded their review of the report. The Company expects continued
reduction of clean-up activities due to relatively low levels of contamination
existing at the site.
The Company is also involved in other investigations of environmental
contamination at several U.S. sites. Some clean-up activities have been
conducted and investigations are continuing to determine future remedial
requirements, if any.
Under the terms of the sale agreement with Pilkington plc ("Pilkington"),
for the purchase of the Sola business in December 1993 ("Acquisition"),
Pilkington has indemnified the Company with regard to expenditures subsequent to
the Acquisition for certain environmental matters relating to circumstances
existing at the time of the Acquisition. Under the terms of the indemnification,
the Company is responsible for the first $1 million spent on such environmental
matters, Pilkington and the Company share equally the cost of any further
expenditures between $1 million and $5 million, and Pilkington retains full
liability for any expenditures in excess of $5 million.
In the ordinary course of business, various legal actions and claims
pending have been filed against the Company. While it is reasonably possible
that such contingencies may result in a cost greater than that provided for in
the financial statements, it is the opinion of management that the ultimate
liability, if any, with respect to these matters, will not materially affect the
consolidated operations or financial position of the Company.
F-24
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. Worldwide Operations
The Company operates in the ophthalmic industry in the design and
manufacture of eyeglass lenses.
A summary of information about the Company's geographic areas is as follows
(in thousands):
North Rest of
America Europe World Eliminations Total
--------- --------- --------- ------------ ---------
Year Ended March 31, 1998
Revenue:
External .................................. $ 281,158 $ 160,697 $ 105,880 $ -- $ 547,735
Internal .................................. 42,784 57,170 47,697 (147,651) --
Operating income ............................. 53,322 25,502 15,007 (1,125) 92,706
Identifiable assets .......................... 370,792 164,891 156,003 (7,628) 684,058
Year Ended March 31, 1997
Revenue:
External .................................. $ 234,173 $ 150,013 $ 104,503 $ -- $ 488,689
Internal .................................. 30,129 59,455 43,894 (133,478) --
Operating income ............................. 21,416 19,414 16,245 272 57,347
Identifiable assets .......................... 327,590 151,033 131,906 (5,021) 605,508
Year Ended March 31, 1996
Revenue:
External .................................. $ 190,785 $ 106,726 $ 90,198 $ -- $ 387,709
Internal .................................. 12,414 57,300 38,950 (108,664) --
Operating income ............................. 35,318 16,645 9,612 (822) 60,753
Identifiable assets .......................... 204,733 115,205 105,096 (8,185) 416,849
Internal sales represent intercompany sales between regions at a mark-up
from cost; the elimination of any profit arising from such sales is reflected in
eliminations in determining operating income.
For fiscal 1998, 1997 and 1996, the corporate headquarters costs of $9.7
million, $6.9 million and $7.7 million, respectively, are included in the North
American geographic area.
F-25
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. Pro Forma Data
The following pro forma data, as restated for the adoption of FAS 128, was
prepared to illustrate the estimated effect of the AO Acquisition and the
financing related thereto, as if the Acquisition had occurred as of the
beginning of each period presented:
Year Ended March 31,
---------------------------
1997 1996
--------- -----------
Net sales .................................... $ 507,713 $ 475,274
========= ===========
Income before extraordinary item ............. $ 41,968 $ 42,093
========= ===========
Net income ................................... $ 41,968 $ 41,181
========= ===========
Earnings per share - basic:
Income before extraordinary item ........... $ 1.72 $ 1.75
========= ===========
Net income ................................. $ 1.72 $ 1.71
========= ===========
Earnings per share - diluted:
Income before extraordinary item ........... $ 1.64 $ 1.67
========= ===========
Net income ................................. $ 1.64 $ 1.63
========= ===========
These pro forma results of operations have been prepared for comparison
purposes only, and do not purport to be indicative of what the results would
have been had the AO Acquisition occurred at the beginning of each period
presented. As a result of the AO Acquisition the Company has incurred two
non-recurring charges during fiscal 1997: (i) a $7.2 million charge to cost of
sales for the amortization associated with an inventory write-up to fair value
during the six months ended September 30, 1996; and (ii) a $9.5 million charge
for the write-off of in-process research and development all of which was
recorded in the quarter ended June 30, 1996. These charges, and the related
provision for tax thereon, have been excluded from the pro forma results as they
are non-recurring. The pro forma data above does not include pro forma
adjustments for the Neolens Acquisition as the results of Neolens prior to
acquisition were not material to the Company's consolidated results of
operations.
F-26
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17. Supplementary Cash Flow Data (in thousands)
Year Ended March 31,
-------------------------------------
1998 1997 1996
------- ------- -------
Supplemental disclosures of cash flow information:
Interest paid ...................................................................... $23,411 $19,273 $11,220
======= ======= =======
Taxes paid ......................................................................... $14,599 $14,075 $11,486
======= ======= =======
Supplemental disclosures of non-cash investing and financing activities:
Capital expenditures accrued but not paid .......................................... $ 3,223 $ 3,701 $ 1,646
======= ======= =======
F-27
SOLA INTERNATIONAL INC.
QUARTERLY FINANCIAL DATA
(in thousands, except per share data)
(unaudited)
Quarter Ended
-----------------------------------------
June 30, Sept. 30, Dec. 31, March 31,
1996 1996 1996 1997
-------- -------- -------- --------
Net sales .......................... $109,536 $128,194 $119,721 $131,238
Gross profit ....................... 51,487 53,109 57,124 62,434
Operating income ................... 6,082 13,975 15,261 22,029
Net income ......................... 2,162 6,969 7,840 13,926
Earnings per share - basic (1):
Net income ....................... 0.10 0.29 0.32 0.57
Earnings per share - diluted (1):
Net income ....................... 0.09 0.27 0.31 0.55
(1) As restated for the adoption of FAS 128.
Quarter Ended
---------------------------------------------
June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1998
-------- -------- ----------- --------
Net sales .............................. $137,621 $135,731 $ 129,272 $145,111
Gross profit ........................... 64,827 63,839 62,367 67,025
Operating income ....................... 21,257 21,883 20,983 28,583
Income before extraordinary item ....... 11,089 11,778 11,235 16,990
Net income ............................. 11,089 11,778 5,312 16,974
Earnings (loss) per share - basic (2):
Income before extraordinary item ..... 0.46 0.48 0.46 0.69
Extraordinary item ................... -- -- (0.24) --
Net income ........................... 0.46 0.48 0.22 0.69
Earnings (loss) per share - diluted (2):
Income before extraordinary item ..... 0.44 0.46 0.44 0.66
Extraordinary item ................... -- -- (0.23) --
Net income ........................... 0.44 0.46 0.21 0.66
(2) The quarter end June 30 and September 30, 1997 have been restated for the
adoption of FAS 128.
F-28
SCHEDULE II
SOLA INTERNATIONAL INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance, Charged Balance,
Beginning to End of
of Period Expenses Deductions Other(1) Period
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1998
Allowance for doubtful accounts ..................... $ 4,030 $ 1,337 $ (254) $ (157) $ 4,956
======= ======= ======= ======== =======
Allowance for excess and obsolete
inventory ........................................ $ 4,471 $ 1,833 $(1,578) $ (366) $ 4,360
======= ======= ======= ======== =======
Year ended March 31, 1997
Allowance for doubtful accounts ..................... $ 5,424 $ 1,258 $(2,652) $ -- $ 4,030
======= ======= ======= ======== =======
Allowance for excess and obsolete
inventory ........................................ $ 3,434 $ 1,593 $ (556) $ -- $ 4,471
======= ======= ======= ======== =======
Year ended March 31, 1996
Allowance for doubtful accounts ..................... $ 2,854 $ 2,846 $ (230) $ (46) $ 5,424
======= ======= ======= ======== =======
Allowance for excess and obsolete
inventory ........................................ $ 2,534 $ 1,090 $ (201) $ 11 $ 3,434
======= ======= ======= ======== =======
- -------------------------
(1) Other relates primarily to foreign currency translation adjustments.
S-1
INDEX OF EXHIBITS
Page Number or
Exhibit No. Description Incorporation by Reference to
----------- ----------- -----------------------------
2.1 Purchase agreement between Sola Filed as Exhibit 2 to the Form 8-K of the
International Inc. and American Optical Company, dated May 6, 1996, and
Corporation, dated as of May 6, 1996 incorporated herein by reference
3.1 Amended and Restated Certificate of Filed as Exhibit 3.1 to the Annual Report
Incorporation of the Company on Form 10-K of the Company for the fiscal
year ending March 31, 1995, dated June 7,
1995, and incorporated herein by reference
3.2 Amended and Restated By-Laws of the Filed as Exhibit 3.1 to the Company's
Company Quarterly Report on Form 10-Q for the
period ending September 30, 1995, and
incorporated herein by reference
10.1 Purchase Agreement, dated as of September Filed as Exhibit 10.1 to the Registration
1, 1993 by and between Sola Holdings Statement, as amended, on Form S-1 of the
Inc., Pilkington plc and certain of Company (File No. 33-68824) and
Pilkington plc's subsidiaries incorporated herein by reference
10.2* Confidential Severance Agreement between Filed as Exhibit 10 to the Company's
Sola International Inc. and John E. Quarterly Report on Form 10-Q for the
Heine, dated as of November 20, 1996 period ending December 31, 1996, and
incorporated herein by reference
10.3* Employment Agreement between Sola Optical Filed as Exhibit 10.4 to the Registration
USA, Inc. and James H. Cox, dated as of Statement, as amended, on Form S-1 of the
February 26, 1993 Company (File No. 33-68824) and
incorporated herein by reference
10.4* Assignment and Amendment of Employment Filed as Exhibit 10.7 to the Registration
Agreement, dated as of December 1, 1993, Statement, as amended, on Form S-1 of the
among Sola Optical USA, Inc., Sola Group Company (File No. 33-87892) and
Ltd. and James H. Cox incorporated herein by reference
10.5* Employment Agreement between Sola Filed as Exhibit 10.2 to the Registration
International Inc. and Steven M. Neil, Statement, as amended, on Form S-3 of the
dated as of September 2, 1997 Company (File No. 333-45929) and
incorporated herein by reference
10.6* Assignment and Amendment of Employment Filed as Exhibit 10.12 to the Registration
Agreement, dated as of December 1, 1993, Statement, as amended, on Form S-1 of the
among Sola Optical USA, Inc., Sola Group Company (File No. 33-87892) and
Ltd. and Stephen J. Lee incorporated herein by reference
10.7* Employment Agreement between Sola Optical
USA, Inc. and Theodore Gioia dated as of
February 26, 1993
10.8* Assignment and Amendment of Employment
Agreement, dated as of December 1, 1993
among Sola Optical USA, Inc., Sola Group
Ltd. and Theodore Gioia
10.9* Employment Agreement between Sola Optical
UK Ltd. and Mark T. Mackenzie dated as of
May 16, 1996
E-1
INDEX OF EXHIBITS
(continued)
Page Number or
Exhibit No. Description Incorporation by Reference to
----------- ----------- -----------------------------
10.10* Employment Agreement between Sola
International Inc. and Mark T. Mackenzie
dated as of May 16, 1996
10.11 Multicurrency Credit Agreement, dated as Filed as Exhibit 4 to the Report on Form
of June 14, 1996, among Sola 8-K/A of the Company, dated May 6, 1996,
International Inc., and the other and incorporated herein by reference
Borrowers as the Borrowers, the
Subsidiary Guarantors, Bank of America
National Trust and Savings Association,
as Agent and Letter of Credit Issuing
Bank, The First National Bank of Boston
and The Bank of Nova Scotia, as
Co-Agents, and the Other Financial
Institutions Party Thereto
10.12 Amendment No. 1 to the Multicurrency Filed as Exhibit 10.1 to the Company's
Credit Agreement, dated as of June 14, Quarterly Report on Form 10-Q for the
1996, among Sola International Inc., and period ending December 31, 1997, and
the other Borrowers as the Borrowers, the incorporated herein by reference
Subsidiary Guarantors, The Bank of
America National Trust and Savings
Association, as Agent and Letter of
Credit Issuing Bank, The First National
Bank of Boston and The Bank of Nova
Scotia, as Co-Agents, and the Other
Financial Institutions Party Thereto
10.13 Amendment No. 2 to the Multicurrency As above except Exhibit 10.2
Credit Agreement, dated as of June 14,
1996, among Sola International Inc., and
the other Borrowers as the Borrowers, the
Subsidiary Guarantors, The Bank of
America National Trust and Savings
Association, as Agent and Letter of
Credit Issuing Bank, The First National
Bank of Boston and The Bank of Nova
Scotia, as Co-Agents, and the Other
Financial Institutions Party Thereto
10.14 Amendment No. 3 to the Multicurrency Filed as Exhibit 10.1 to the Company's
Credit Agreement, dated as of June 14, Registration Statement, as amended, on
1996, among Sola International Inc., and Form S-3 of the Company (File No
the other Borrowers as the Borrowers, the 333-45929) and incorporated herein by
Subsidiary Guarantors, The Bank of reference
America National Trust and Savings
Association, as Agent and Letter of
Credit Issuing Bank, The First National
Bank of Boston and The Bank of Nova
Scotia, as Co-Agents, and the Other
Financial Institutions Party Thereto
10.15 Lease Agreement, dated May 10, 1993, Filed as Exhibit 10.9 to the Registration
between Sola Optical Taiwan Ltd. and Statement, as amended, on Form S-1 of the
Chang Jin Co., Ltd. (including English Company (File No. 33-68824) and
summary of principal terms) incorporated herein by reference
E-2
INDEX OF EXHIBITS
(continued)
Page Number or
Exhibit No. Description Incorporation by Reference to
----------- ----------- -----------------------------
10.16 Lease Agreement between Optical Sola de Filed as Exhibit 10.10 to the Registration
Mexico and Messrs. Salvadore Statement, as amended, on Form S-1 of the
Luttenroth-Camou and Carlos Company (File No. 33-68824) and
Lutteroth-Lomeli (including English incorporated herein by reference
summary of principal terms)
10.17* Sola Investors Inc. Stock Option Plan Filed as Exhibit 10.11 to the Annual
Report on Form 10-K of the Company, dated
March 31, 1994, and incorporated herein by
reference
10.18* Amendment Number One to Sola Investors Filed as Exhibit 10.21 to the Registration
Inc. Stock Option Plan Statement, as amended, on Form S-1 of the
Company (File No. 33-87892) and
incorporated herein by reference
10.19* Sola International Inc. Stock Option Plan Filed as Exhibit 10.22 to the Registration
Statement, as amended, on Form S-1 of the
Company (File No. 33-87892) and
incorporated herein by reference
10.20* Sola International Inc. Stock Option Filed as Exhibit A and Exhibit B to the
Plan, Amendment Number One and Amendment fiscal 1996 Proxy Statement of Sola
Number Two International Inc., dated July 12, 1996,
and incorporated herein by reference
10.21 Indenture by and between the Company and
State Street Bank and Trust Company of
California, N.A., as Trustee, with
respect to the 6 7/8% Notes due 2008
10.22* Form of Indemnification Agreement between Filed as Exhibit 10.24 to the Registration
the executive officers and directors of Statement, as amended, on Form S-1 of the
the Company and the Company Company (File No. 33-87892) and
incorporated herein by reference
10.23* Sola International Inc. Management Filed as Exhibit 10.25 to the Registration
Incentive Plan Statement, as amended, on Form S-1 of the
Company (File No. 33-87892) and
incorporated herein by reference
10.24 Sola Optical 401(k) Savings Plan Filed as Exhibit 4.4 to the Registration
Statement on Form S-8 of the Company (File
No. 333-4489), filed with the Commission
on May 23, 1996, and incorporated herein
by reference
10.25 Trust Agreement entered into as of May Filed as Exhibit 4.5 to the Registration
15, 1996 between Sola Optical USA, Inc. Statement on Form S-8 (File No. 333-4489)
and Chase Manhattan Bank, N.A. of the Company, filed with the Commission
on May 23, 1996, and incorporated herein
by reference
12.1 Statement regarding ratio of earnings to
fixed charges
21.1 List of subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, Independent
Auditors
E-3
INDEX OF EXHIBITS
(continued)
Page Number or
Exhibit No. Description Incorporation by Reference to
----------- ----------- -----------------------------
27.1 Financial Data schedule
99.1 Factors Affecting Future Operating Results
- -------------------------
*Compensatory plan or management agreement
E-4