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, 1996
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
incorporation or organization) identification no.)
2420 SAND HILL ROAD, SUITE 200, MENLO PARK, CA 94025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 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. [X]
As of May 31, 1996, the aggregate market value of Common Stock held by
non-affiliates was approximately $641,106,824. 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 31, 1996, 21,797,168 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.
<PAGE>
SOLA INTERNATIONAL INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
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................................ 9
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters.......... 10
Item 6. Selected Financial Data......................... 11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations...................................... 12
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.......................... 24
Item 12. Security Ownership of Certain Beneficial
Owners and Management........................... 31
Item 13. Certain Relationships and Related
Transactions.................................... 32
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K......................... 33
2
<PAGE>
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 an initial public
offering of 5,403,305 shares of common stock (the "IPO"). 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, 1996, March 31, 1995 and March 31, 1994 are referred to
herein as "fiscal 1996", "fiscal 1995" and "fiscal 1994",
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 over 85% of the
Company's net sales. Approximately 63% of net 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. The two principal
materials used by the Company to produce the thinner and lighter
plastics are polycarbonate and Spectralite(registered trademark).
Polycarbonate lenses have a higher refractive index than conventional
hard resin plastics and a far greater impact resistance.
Spectralite(registered trademark), a proprietary plastic material
developed by the Company, is used to produce lenses that have optical
characteristics that are comparable to lenses manufactured from
conventional hard resin plastics but are thinner and lighter. The
Company currently produces Spectralite(registered trademark) in its
own manufacturing facilities from materials available from a number of
chemical suppliers. The Company has manufactured lenses from this
material since late 1991. To further improve the thinness and
lightness of its lenses, the Company has increasingly employed
aspheric 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. Fiscal 1996 was the Company's first full year
marketing photochromic lenses made from Spectralite(registered
trademark) material.
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 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.
3
<PAGE>
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.
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 made from Spectralite(registered trademark)
(including VIP Gold(registered trademark)), which incorporate more
complex design features than standard products and therefore attract
an above average gross profit per pair. 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, SALES AND DISTRIBUTION
Marketing and Sales
The Company develops and manages its marketing strategy on a
decentralized basis. The Company has sales offices in 16 countries
across its three regions. Pricing, promotion and distribution
policies and some product branding policies are primarily determined
by regional and country management.
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 36 major distribution centers located in 16
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 1996, the Company's ten largest customers accounted
for approximately 18% of net sales and the Company's largest customer
accounted for less than 5% of net sales. During fiscal 1996, four of
the Company's ten largest customers were located in North America and
accounted for approximately 11% of net sales in the aggregate.
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
1996 from the sale of products outside the United States. See Note 16
4
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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 14 manufacturing facilities located in its three
major regions, including 12 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
example, during fiscal 1993 the Company completed the transfer of
almost all of its plano lens marketing and distribution to a new
division and now manufactures plano lenses almost exclusively at a
single manufacturing facility located in Petropolis, Brazil. 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(registered trademark). 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 the monomers it uses in the production of plastic lenses
and has negotiated more favorable purchasing arrangements with its
principal suppliers on an annual basis. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
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, 1996, there were approximately 155 employees
involved in the Company's research and development efforts. The
Company's research and development expenditures for fiscal 1994, 1995
and 1996 were $11.1 million (excluding the non-recurring $40.0 million
in-process research and development non-cash charge associated with
the Acquisition), $14.1 million and $13.3 million, respectively,
representing 3.4%, 4.1% and 3.6% of net sales for each of those years.
The 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. The Company has its own research and
development centers in Petaluma, California 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(registered trademark)
thin and light lens material, the development of
Spectralite(registered trademark) with photochromic capabilities,
VIP/Graduate Gold progressive design, and the UltraGard and PermaGard
Plus hard coatings. Sola's proprietary Matrix delivery system is also
being installed at an increasing number of sites in the U.S. and
foreign locations, with further sites planned over the next 12 months.
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-reflection coating and potentially other
high margin add-ons.
5
<PAGE>
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, 1996, the Company had filed (or applied
for) patents for 49 discrete inventions or technologies. Many of the
Company's patents have been filed in multiple countries, and they
include 26 patents (or patent applications) filed in the United
States. The Company has also registered 264 trademarks in various
countries, representing trademarks on 57 discrete names. These
include 27 trademarks registered in the United States. 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.
EMPLOYEES
As of March 31, 1996, the Company had approximately 5,800
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
6
<PAGE>
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 ("CFCs") 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 ("CERCLA"). 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. The EPA is
scheduled to review the remediation program during fiscal 1998.
In 1994, the Company entered into a consent decree with the
Missouri Department of Natural Resources ("MDNR") related to a release
from a disposal site operated by a third party that was used from 1986
until 1990 for the disposal of waste water sludge containing lead from
the Company's Eldon, Missouri facility. To resolve alleged hazardous
waste violations with respect to management of the waste sludge, the
Company agreed to pay $375,000 in penalties, which the Company paid in
1994. The Company also performed certain remedial work at a cost of
approximately $1.4 million and agreed to perform a risk assessment to
determine whether further remedial steps were warranted. In fiscal
1996, based on the risk assessment performed by the Company, the MDNR
determined that the Company had satisfied all of its obligations under
the consent decree and that no further removal or monitoring work
would be required at this site. In addition, the MDNR offered to
settle any potential claim it may have for natural resource damages
for $75,000. The Company currently is negotiating a settlement of
this claim.
Late in fiscal 1996, the Company was requested by the 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 has agreed to undertake the requested removal
action pursuant to the MDNR's Voluntary Cleanup Program.
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
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 fiscal 1994, 1995, and 1996 the Company spent
approximately $211,000, $376,000 and $316,000 on environmental
remediation, respectively. The Company anticipates that its capital
expenditures for environmental improvements during fiscal 1997 will
not be material. The Company cannot accurately predict capital
expenditure requirements for environmental remediation in future
periods.
7
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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 hard resin, Part owned,
Spectralite(registered trademark) part leased
and polycarbonate lenses;
marketing and distribution center;
research and development facility;
administrative offices for North
American operations
Eldon, Missouri Manufactures multifocal glass Owned
lenses
Tijuana, Mexico Manufactures hard resin lenses Leased
EUROPE
Goetzenbruck, France Manufactures glass lenses; Owned
marketing and distribution center
Wexford, Ireland Manufactures hard resin lenses and Owned
Spectralite(registered trademark);
prescription processing
laboratory; distribution center
Varese, Italy Tinting operations; prescription Leased
processing laboratory with anti-
reflection coating capability;
marketing and distribution center
Birmingham, United Prescription processing laboratory Leased
Kingdom with anti-reflection coating
capability; marketing and
distribution center
REST OF WORLD
ASIA
Xian, China Site owned by a joint venture Leased
managed by the Company in which
the Company holds a 50% ownership
interest; manufactures hard resin
lenses
Hong Kong Prescription processing laboratory Leased
with anti-reflection coating
capability; marketing and
distribution center
Osaka, Japan Prescription processing laboratory Leased
with anti-reflection coating
capability; marketing and
distribution center
Chung Li, Taiwan Manufactures hard resin lenses; Leased
marketing and distribution center
Singapore Manufactures glass molds; Leased
marketing and distribution center;
prescription processing facility
with anti-reflection coating
capability
8
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REGION AND LOCATION PRINCIPAL OPERATIONS LEASED/OWNED
------------------- -------------------- ------------
SOUTH AMERICA
Petropolis, Brazil Manufactures hard resin ophthalmic Owned
and plano lenses; regional
administration office
Villa de Cura, Venezuela Manufactures hard resin lenses; Owned
distribution center
AUSTRALIA
Lonsdale, Australia Manufactures hard resin lenses and Owned
Spectralite(registered trademark);
manufactures molds; 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 1996 to 2006. 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.
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 1996.
9
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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.
<TABLE>
<CAPTION>
COMMON STOCK
PRICE RANGE
-----------------------
HIGH LOW
---------- ----------
<S> <C> <C>
Fiscal Year Ended March 31, 1995
Fourth Quarter (beginning February 23, 1995).... $21 1/2 $16 1/2
Fiscal Year Ended March 31, 1996:
First Quarter ended June 30, 1995............... $24 7/8 $21 1/8
Second Quarter ended September 30, 1995......... $26 3/4 $20 5/8
Third Quarter ended December 31, 1995........... $27 3/8 $21 3/8
Fourth Quarter ended March 31, 1996............. $32 1/4 $25 1/2
</TABLE>
On May 31, 1996, the closing price per share of the Company's
Common Stock on the New York Stock Exchange was $30.25. As of May 31,
1996, there were 549 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 Amended and
Restated Bank Credit Agreement, dated as of March 2, 1995, among the
Company, the lenders named therein and The Bank of Nova Scotia, for
itself and as agent for the lenders and the Indenture, dated as of
December 1, 1993, by and between the Company and NationsBank of
Georgia, National Association, as Trustee, generally restrict, 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 other factors
deemed relevant by the Board of Directors.
10
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Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SOLA INTERNATIONAL INC. PREDECESSOR BUSINESS
-------------------------------------- -----------------------------------
FISCAL FISCAL FOUR EIGHT
YEAR YEAR MONTHS MONTHS FISCAL YEAR ENDED
ENDED ENDED ENDED ENDED MARCH 31,
MARCH 31, MARCH 31, MARCH 31, NOV. 30, -----------------------
1996 1995 1994 (1) 1993 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
(in thousands, except
per share data)
Net sales....................... $ 387,709 $ 345,631 $ 106,030 $ 200,025 $ 281,494 $ 258,764
Income (loss) before
extraordinary item............. 34,588 13,640 (61,394) 10,749 16,515 14,919
Extraordinary item, write-off
of debt issuance costs,
net............................ (912) (3,915)(2) - - - -
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............... $ 33,676 $ 9,725 $ (61,394) $ 10,749 $ 16,515 $ 14,919
========== ========== ========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE DATA(3)
Income (loss) before
extraordinary item............ $ 1.51 $ 0.78 $ (3.75)
Extraordinary item............. (0.04) (0.22) -
---------- ---------- ----------
Net income (loss).............. $ 1.47 $ 0.56 $ (3.75)
========== ========== ==========
Weighted average number of
shares outstanding............ 22,944 17,516 16,353
========== ========== ==========
<CAPTION>
SOLA INTERNATIONAL INC. PREDECESSOR BUSINESS
----------------------------------- ------------------------
AS OF MARCH 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets........................... $ 416,849 $ 383,457 $ 360,631 $ 246,944 $ 235,076
Long-term debt......................... 97,890 107,407 186,740 9,744 6,328
Parent company investmen............... - - - 117,129 120,810
Total shareholders' equity............. 192,241 159,443 63,495 - -
<FN>
- -------------------
(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) Earnings per share are computed using the weighted average number
of common shares and common share equivalents outstanding during
the period after giving effect to the IPO, for fiscal 1995 and
1994.
</TABLE>
11
<PAGE>
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 and combined financial statements and notes thereto
included elsewhere in this Form 10-K. The financial statements for
periods prior to December 1, 1993 reflect the combined operations of
the Company's Predecessor Business, while the financial statements for
periods after December 1, 1993 reflect the consolidated operations of
the Company after accounting for the Acquisition (see Note 1 of Notes
to Consolidated Financial Statements) using the purchase method of
accounting. Operating results subsequent to the Acquisition are
comparable to the operating results prior to the Acquisition except
for (i) interest on debt incurred in connection with the Acquisition,
(ii) amortization of goodwill arising from the Acquisition, (iii) the
AEA Investors Inc. ("AEA") management fee, (iv) the effective tax rate
which has been affected by certain net operating loss carryforwards
resulting from the Acquisition and (v) non-recurring, non-cash charges
relating to the write-off of in-process research and development
projects ($40 million) and amortization associated with an inventory
write-up to fair value ($32.9 million), both of which were taken in
connection with the Acquisition. The years ended March 31, 1996 and
March 31, 1995 are referred to herein as fiscal 1996 and fiscal 1995,
respectively. References to results of operations for fiscal 1994 are
references to the results of operations for the eight months ended
November 30, 1993 for the Predecessor Business plus the four months
ended March 31, 1994 for the Company.
The following table reflects the results of operations for the
three fiscal years 1996, 1995 and 1994. The adjustment column in
fiscal 1994 reflects adjustments to present, on a pro forma basis,
results of operations on a more comparable basis adjusting for the
items (i) through (v) noted above and the adjustment columns for
fiscal 1995 and 1994 reflect the effect on the Company's operations
arising from the IPO in March 1995, including a reduction in interest
expense (which partially offset the increase in interest expense in
fiscal 1994 as noted in (i) above), and the effect on income taxes
therefrom, as if these transactions had taken place at the beginning
of the respective periods. The fiscal 1995 adjustment column also
includes an adjustment of $3.9 million to general and administrative
expenses which relates to the elimination of a one-time $3.0 million
charge for the termination of the AEA management agreement and the
elimination of $0.9 million AEA management fee recorded in fiscal 1995
and an adjustment of $3.9 million for the elimination of the
extraordinary charge related to the write-off of debt issuance costs
in connection with the IPO.
12
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FISCAL FISCAL ADJUST- PRO FORMA FISCAL ADJUST- PRO FORMA
(In thousands) 1996 1995 MENTS 1995 1994 MENTS 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $ 387,709 $ 345,631 $ 345,631 $ 306,055 $ 306,055
Cost of sales................ 201,991 185,626 185,626 208,747 $ (32,905) 175,842
--------- --------- --------- --------- --------- ---------
Gross profit................ 185,718 160,005 160,005 97,308 32,905 130,213
--------- --------- --------- --------- --------- ---------
Research and development
expenses.................... 13,329 14,051 14,051 11,123 11,123
Selling and marketing
expenses.................... 66,345 61,143 61,143 52,629 52,629
General and administrative
expenses (including
goodwill amortization)...... 45,291 45,067 $ (3,917) 41,150 34,022 1,626 35,648
In-process research and
development expenses........ - - - 40,000 (40,000) -
--------- --------- --------- --------- --------- --------- ---------
Operating expenses........... 124,965 120,261 (3,917) 116,344 137,774 (38,374) 99,400
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)...... 60,753 39,744 3,917 43,661 (40,466) 71,279 30,813
Interest expense, net........ (12,141) (18,522) 6,372 (12,150) (9,231) (3,443) (12,674)
Foreign currency adjustment.. - - - (645) (645)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before
provision (benefit) for
income taxes, minority
interest and extraordinary
item........................ 48,612 21,222 10,289 31,511 (50,342) 67,836 17,494
Provision (benefit) for
income taxes................ 13,623 6,649 284 6,933 (361) 7,580 7,219
Minority interest............ (401) (933) (933) (664) (664)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before
extraordinary item.......... 34,588 13,640 10,005 23,645 (50,645) 60,256 9,611
--------- --------- --------- --------- --------- --------- ---------
Extraordinary item, write-off
of debt issuance costs, net. (912) (3,915) 3,915 - - -
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)............ $ 33,676 $ 9,725 $ 13,920 $ 23,645 $ (50,645) $ 60,256 $ 9,611
========= ========= ========= ========= ========= ========= =========
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated,
the Company's results and pro forma results of operations as a
percentage of net sales. Management's discussion of results of
operations for the years ended March 31, 1995 and 1994 is based on the
pro forma 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 1995 and 1994 is not
meaningful due to the effects of certain transactions and non-
recurring charges as noted above.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
----------------------------
1996 1995 1994
-------- ------- -------
% % %
<S> <C> <C> <C>
Net sales.......................... 100.0 100.0 100.0
Cost of sales...................... 52.1 53.7 57.5
-------- ------- -------
Gross profit....................... 47.9 46.3 42.5
Research and development expenses.. 3.4 4.1 3.6
Selling and marketing expenses..... 17.1 17.7 17.2
General and administrative expenses 11.7 11.9 11.7
-------- ------- -------
Operating expenses................. 32.2 33.7 32.5
-------- ------- -------
Operating income (loss)............ 15.7 12.6 10.0
Interest expense, net.............. (3.1) (3.5) (4.1)
Foreign currency adjustment........ 0.0 0.0 (0.2)
-------- ------- -------
Income (loss) before provision
(benefit) for income taxes and
minority interest................ 12.6 9.1 5.7
Provision for income taxes......... 3.6 2.0 2.4
Minority interest.................. (0.1) (0.3) (0.2)
Extraordinary item................. (0.2) 0.0 0.0
-------- ------- -------
Net income (loss).................. 8.7 6.8 3.1
======== ======== ========
</TABLE>
13
<PAGE>
Net sales
Net sales were $387.7 million in fiscal 1996, $345.6 million in
fiscal 1995, and $306.1 million in fiscal 1994, reflecting a growth of
12.2% from fiscal 1995 to fiscal 1996 and 12.9% from fiscal 1994 to
fiscal 1995. Using constant exchange rates, the percentage increase
from fiscal 1995 to fiscal 1996 was 11.3%, and from fiscal 1994 to
fiscal 1995 was 11.1%. Higher priced product growth has been the
primary reason for the Company's net sales growth, led by the growth
of Spectralite(registered trademark) and plastic photochromic
products, offset in part by price erosion in net sales of lower priced
products. Higher priced products accounted for 57% of net lens sales
in fiscal 1996 compared to 53% in fiscal 1995 and 47% in fiscal 1994.
Plastic photochromic lenses were first introduced in the United States
in fiscal 1993, and launched in Europe, Australia and South America in
fiscal 1995. Increased marketing and customer service efforts also
contributed to the growth in other higher value-added products.
Improvements in world economies, particularly during fiscal 1995, have
also contributed to the growth in net sales. Net sales increases were
achieved in all major market areas from fiscal 1995 to 1996 as
follows: North America 12.7%, Europe 6.7% and Rest of World 18.3%.
Net sales increases in major market areas from fiscal 1994 to 1995
were as follows: North America 9.2%, Europe 19.5% and Rest of World
13.5%. At constant exchange rates, net sales increases from fiscal
1995 to fiscal 1996 were: North America 12.7%, Europe 3.5% and Rest
of World 18.4%, and from fiscal 1994 to fiscal 1995 were: North
America 9.2%, Europe 14.7% and Rest of World 10.7%.
Gross profit and gross margin
Gross profit totaled $185.7 million in fiscal 1996, $160.0
million in fiscal 1995, and $130.2 million, as adjusted, in fiscal
1994, reflecting growth of 16.1% from fiscal 1995 to fiscal 1996 and
22.9% from fiscal 1994 to fiscal 1995. Gross profit as a percentage
of net sales in fiscal 1996, 1995, and fiscal 1994, as adjusted, were
47.9%, 46.3%, and 42.5%, respectively. During fiscal 1996 the Company
has benefited from reduced manufacturing costs at its Mexican facility
arising from the continued weakness of the Mexican Peso. In addition,
improved sales mix and manufacturing improvements, offset in part by
cost inflation in South America, have contributed to the improved
gross profit as a percentage of sales from fiscal 1995 to fiscal 1996.
The increase from fiscal 1994 to 1995 is principally due to sales mix
and manufacturing improvements. Manufacturing improvements from
fiscal 1994 to fiscal 1995 primarily arose from the closure of the
Colonial Heights manufacturing facility in North America and
restructuring in Australia and Ireland in fiscal 1994. The Company's
cost reduction program has contributed to the increase in gross profit
percentage from fiscal 1994 to fiscal 1995 and fiscal 1995 to fiscal
1996. The Company continues to experience price competition, which
can be severe in certain markets, particularly for standard products.
Operating expenses
Operating expenses totaled $125.0 million in fiscal 1996, $116.3
million, as adjusted, in fiscal 1995, and $99.4 million, as adjusted,
in fiscal 1994, reflecting increases of 7.5% from fiscal 1995 to
fiscal 1996 and 17.0% from fiscal 1994 to fiscal 1995. Research and
development expenses for fiscal 1996, 1995 and 1994 represent 3.4%,
4.1% and 3.6%, respectively, of annual net sales, reflecting the
Company's continued commitment to research and development of new
products, new materials and processes. 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 17.1%, 17.7% and
17.2% of net sales in fiscal 1996, 1995 and 1994, respectively. The
main reasons for the percentage decrease in fiscal 1996 over fiscal
1995 were savings achieved from lower distribution costs, primarily in
North America, which caused selling and marketing expenses to grow at
a slower rate than net sales. Increases from fiscal 1994 to fiscal
1995 were primarily due to increased advertising and promotional
programs with respect to certain key product lines, including
progressive lenses, Spectralite(registered trademark) and plastic
photochromic products, and higher distribution costs. As a percentage
of net sales, general and administrative expenses decreased to 11.7%
in fiscal 1996 compared to 11.9% in fiscal 1995 and 11.7% in fiscal
1994. The decrease in administrative expenses in fiscal 1996 over
fiscal 1995 includes reductions in performance based management
bonuses offset by an increase in provisions for doubtful accounts
reflecting the lengthening days sales outstanding in parts of South
America and Asia. Operating expenses as a percentage of net sales in
each of fiscal 1996, fiscal 1995 and fiscal 1994 were 32.2%, 33.7% and
32.5%, respectively.
14
<PAGE>
Operating income
Operating income for fiscal 1996 totaled $60.8 million, an
increase of $17.1 million over fiscal 1995 operating income of $43.7
million, as adjusted, or 39.1%. Operating income in fiscal 1995
reflected a growth of $12.9 million, or 41.8% over operating income of
$30.8 million for fiscal 1994, as adjusted.
Net interest expense
Net interest expense totaled $12.1 million for fiscal 1996, $12.1
million, as adjusted, for fiscal 1995 and $12.7 million, as adjusted,
for fiscal 1994. The reduction in interest expense from fiscal 1994
to fiscal 1995 primarily relates to interest expense savings from
reduced borrowings by the Company and its foreign subsidiaries. The
Company's IPO in March 1995 resulted in net proceeds of $81.2 million
which were primarily used to pay down debt under the bank credit
agreement. The Company estimated that this repayment and, to a lesser
extent, lower interest rates under the Revised Bank Facility, would
result in annual interest expense savings of approximately $6.4
million at fiscal 1995 interest rates, which savings have been
reflected in the fiscal 1995 pro forma adjustments. The net interest
expense for fiscal 1994 has also been adjusted for this repayment and
for this change in interest rates, as well as for increased
indebtedness arising from the Acquisition.
Foreign currency adjustments
For fiscal 1996 and fiscal 1995 no translation adjustments were
necessary as the Brazilian Real had strengthened slightly against the
U.S. dollar during this period. During fiscal 1994 foreign currency
adjustments reduced income by $645,000. The foreign currency
adjustments reflect the change in the value of monetary assets in the
Company's subsidiary in Brazil, a hyper-inflationary economy until
June 1994.
Provision for income taxes
The Company's combined state, federal and foreign tax rate was
approximately 28.6% for fiscal 1996 compared to 22.0%, as adjusted,
for fiscal 1995 and 41.3%, as adjusted, for fiscal 1994. The Company
provided valuation allowances against fiscal 1994 net operating loss
carryforwards in the United States and against fiscal 1996, 1995 and
fiscal 1994 net operating losses in Australia, primarily as a result
of the Acquisition. The utilization of certain of these losses has
resulted in a reduced effective tax rate for fiscal 1996 and 1995.
The net operating losses in Australia, which do not expire, are
expected to exceed taxable profits in Australia in fiscal 1997. The
Company expects its effective tax rate to be approximately 30.0% to
33.0% for fiscal 1997 and approximately 35.0% to 36.0% thereafter.
The Company has deferred tax assets on its balance sheet as of March
31, 1996 amounting to approximately $14.3 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 1996 the Company repurchased approximately $19.9
million principal amount at maturity of its 9 5/8% Senior Subordinated
Notes due 2003. As a result of the repurchases the Company recorded
an extraordinary charge of $0.9 million for fiscal 1996 resulting from
the write-off of unamortized debt issuance costs and premium over
accreted value. The repurchase was partly funded by borrowings under
the Bank Credit Agreement and partly from excess cash arising from the
IPO.
Net income
Net income for fiscal 1996 totaled $33.6 million compared to
$23.6 million, as adjusted, for fiscal 1995, and $9.6 million, as
adjusted, for fiscal 1994, increases of $10.0 million and $14.0
million, respectively. The growth in net income from fiscal 1995, as
adjusted, to fiscal 1996 was 42.4% and from 1994, as adjusted, to
fiscal 1995, as adjusted, was 145.8 %.
15
<PAGE>
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 Acquisition or IPO.
Operating activities generated $30.8 million in cash in fiscal
1996, compared with $18.5 million in fiscal 1995 and $20.7 million in
fiscal 1994. Significantly improved net income was offset in part by
a growth in inventories and accounts receivable. Accounts payable
which have increased in line with inventory growth is partly offset by
a reduction in accrued and other liabilities, primarily being
expenditures on the Company's reorganization, provided for following
the Acquisition in fiscal 1994. The most significant cause of the
decrease from fiscal 1994 to fiscal 1995 was the decrease in net
income, after adding back non-cash charges, caused by higher interest
expense and one time cash charges associated with the IPO ($1.4
million), and other operating cash movements ($0.9 million).
During fiscal 1996 inventories as a percentage of net sales grew
to 26.0% from 24.8% in the prior year, resulting from a 17.5% increase
in inventory levels. The growth in inventory levels has resulted from
the introduction of new products and regional spread of new products,
resulting in both finished goods inventory growth and increased mold
inventory requirements. Accounts receivable as a percentage of net
sales decreased to 19.3% in fiscal 1996 compared to 20.2% a year ago.
The accounts receivable growth from increased net sales, has been
offset by provisions for doubtful accounts reflecting the lengthening
days sales outstanding in parts of South America and Asia. During
fiscal 1995, inventories as a percentage of net sales reduced to 24.8%
compared to 26.3% in fiscal 1994, caused by net sales growth
outstripping inventory growth. Accounts receivable as a percentage of
net sales in fiscal 1995 were 20.2%, compared to 20.7% in fiscal 1994.
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. Capital expenditures in
fiscal 1996 were $17.6 million compared with $11.6 million and $10.6
million in fiscal 1995 and fiscal 1994, respectively. The increase in
capital expenditure in fiscal 1996 relates mainly to expansion of
production capacity to accommodate higher volumes and the introduction
of new products. Management anticipates capital expenditures of $25
million to $30 million annually over the next several years, of which
approximately $4 million annually is viewed as discretionary. The
anticipation of increased capital expenditures primarily relates to
expansion projects in China, South America and Sunlens initiatives.
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%, which was effective from March
31, 1995. In addition, 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, $2.0 million in October 1995, and $1.6 million in March
1996. In addition to the $1.6 million cash purchase price of the
final 20% of Sola Venezuela, there will be a contingent payment, if
any, based on the growth in the net income of Sola Venezuela in fiscal
1998 over the net income of Sola Venezuela in fiscal 1995. Under
certain circumstances the contingent payment could be based on an
earlier 12 month period.
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 Bank Credit Agreement and partly from excess
cash arising from the IPO. The Company may from time to time purchase
additional Notes in the market or otherwise subject to market
conditions. Net cash used in financing activities in fiscal 1995
amounted to $4.1 million. Of this amount $81.2 million represented
net cash proceeds from the sale of approximately 5.4 million shares of
common stock in the Company's initial public offering in March 1995.
The funds derived from the IPO were used to pay down borrowings of
$72.7 million under the Company's bank credit agreement and to pay AEA
$3.0 million for the termination of its management agreement with the
Company, with the excess of $5.5 million added to working capital.
On December 1, 1993, in connection with the Acquisition, the
Company issued $116.6 million principal amount at maturity of 9 5/8%
Senior Subordinated Notes due 2003, from which it received gross
proceeds of approximately $100 million and net proceeds of
16
<PAGE>
approximately $97 million, after deducting fees and expenses. Cash
interest on the Notes is payable at the rate of 6% per annum of their
principal amount at maturity through and including December 15, 1998,
and after such date is payable at the rate of 9 5/8% per annum of
their principal at maturity. Interest is payable on June 15 and
December 15 of each year. The Notes are redeemable at the option of
the Company, in whole or in part, at any time on or after December 15,
1998, initially at 104.813% of their principal amount at maturity,
plus accrued interest, declining to 100% of their principal amount at
maturity, plus accrued interest, on or after December 15, 2000. In
addition, at the option of the Company at any time prior to December
15, 1996, up to $40.75 million aggregate principal amount at maturity
of the Notes are redeemable from the proceeds of one or more Public
Equity Offerings following which there is a public market, at 109.625%
of their Accreted Value, plus accrued interest. The Indenture
restricts the Company's ability to, among other things, incur
indebtedness, declare or pay dividends or make certain other payments,
create liens, utilize proceeds from an asset sale, conduct
transactions with affiliates and issue capital stock of its
subsidiaries.
The Company entered into a Bank Credit Agreement dated December
1, 1993, with a syndicate of financial institutions, covering an
aggregate amount of $130 million (the "Bank Facility"). The Bank
Facility was comprised of term facilities in the amount of $45 million
and a revolving credit facility. Pursuant to the Company's IPO in
March 1995, proceeds from the offering were used to retire the term
facilities and repay borrowings under the Revolver. Related
unamortized debt issuance costs of $3.9 million were written off and
reflected as an extraordinary item, net of tax. On March 2, 1995, the
Company entered into an Amended and Restated Bank Credit Agreement
with The Bank of Nova Scotia, for itself and as agent for a syndicate
of other financial institutions, covering an aggregate amount of $85
million (the "Revised Bank Facility"). The Revised Bank Facility
consists of a revolving credit facility (the "Revised Revolver") with
the amount thereunder equal to the lesser of (i) $85 million or (ii)
75% of eligible accounts receivable and 45% of eligible inventory of
the Company and its subsidiaries, as defined. Up to $20 million of
capacity under the Revised Revolver is available for the issuance of
letters of credit and up to $15 million of capacity is available for
swing line advances. The Revised Revolver terminates on December 1,
1999. As of March 31, 1996 total availability under the Revised
Revolver was $85 million, of which $6.0 million had been utilized and
a further $1.4 million had been used for letters of credit issued with
varying maturities.
The Revised Bank Facility 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 ability to declare, pay or make dividends
or other distributions in excess of prescribed levels, the creation of
liens, the making of certain investments and loans, engaging in
unrelated business, transactions with affiliates, the consummation of
certain transactions such as sales of substantial assets, mergers or
consolidations and other transactions. The Company and its
subsidiaries are also required to comply with certain financial tests
and maintain certain financial ratios. The Company has pledged the
shares of its domestic subsidiaries and has pledged 65% of the shares
of certain significant foreign subsidiaries, as defined, as collateral
for the Revised Bank Facility.
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, 1996, the Company's
total credit available under such facilities was approximately $37.0
million, of which $13.7 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 Revised Bank Facility 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.
17
<PAGE>
SUBSEQUENT EVENTS
AO Acquisition
The Company and American Optical Corporation ("AOC") are parties
to a Purchase Agreement dated as of May 6, 1996 (the "Purchase
Agreement"). Pursuant to the Purchase Agreement, Sola has agreed to
purchase substantially all of the assets of AOC's United States
ophthalmic business and all of the shares of capital stock of certain
foreign subsidiaries which operate AOC's ophthalmic business in
Mexico, the United Kingdom, France, Switzerland, Singapore, Canada and
Zimbabwe ("AO Acquisition"). The purchase price is $107.0 million,
(together with the assumption of certain liabilities), subject to post
closing adjustments.
In connection with the AO Acquisition, Sola will receive a
perpetual, royalty-free license which generally provides for Sola's
exclusive use of certain trademarks and the AO and American Optical
trade name in the ophthalmic business worldwide, subject to certain
limitations in connection with certain specified geographic areas and
products. Except as licensed to Sola, AOC will retain ownership and
rights to use the licensed trademarks and trade names. In connection
with the AO Acquisition, the principal owner of AOC has agreed not to
compete with the acquired businesses for a period of seven years.
Pursuant to the terms of the Purchase Agreement, and subject to
certain exceptions, AOC has agreed to indemnify the Company for
certain losses (i) arising out of breaches of AOC's representations
and warranties and covenants contained in the Purchase Agreement, (ii)
arising out of retained liabilities or (iii) otherwise relating to
environmental claims.
The AOC business acquired by Sola ("AO") is a leading
manufacturer and worldwide distributor of a broad range of ophthalmic
lenses used in prescription eyewear. Its product line includes single
vision, bifocal, trifocal and progressive lenses, many of which are
sold under AO's brand names such as AOPRO(trademark), TruVision
Omni(registered trademark), and Aspherlite(registered trademark).
AO focuses on the production of plastic lenses, but also offers
value-added glass progressive lenses and glass executive bifocals.
The Company believes that approximately half of AO's fiscal 1996 net
sales represented sales of value-added products such as progressive lenses
and thinner, lighter weight lenses made of high-index plastic,
polycarbonate and other advanced materials. AO also provides
value-added services through five non-U.S. prescription laboratories
which customizes lenses to individual customer prescriptions and
preferences. More than 40.0% of AO's fiscal 1996 net sales were
generated from the services provided by these laboratories.
AO sells its products to a diverse base of international and
domestic customers including retail chains, optical wholesalers and
research laboratories. AO's net sales and operating income, after
allocated corporate expenses, were approximately $85.7 million and
$11.9 million, respectively, during fiscal 1996. More than 70.0%
of its fiscal 1996 net sales originated outside the United States.
AO has manufacturing operations in Massachusetts, Mexico and the
United Kingdom, and sales and distribution operations in the United
States, the United Kingdom, France, Switzerland, Mexico, Canada,
Singapore and Zimbabwe.
AO operates prescription laboratories in France, the United
Kingdom, Mexico, Singapore and Zimbabwe. The Company believes that
AO's primary laboratory in Fougeres, France is among the highest
quality laboratories in Europe. Laboratory services provided by AO
include fabrication, the process of grinding a final prescription onto
a semi-finished lens; coating, which involves the application of
scratch resistant hard coating, anti-reflective coating or color
tinting; and edging, the process of shaping lenses to meet the
specifications of a specific frame.
AO has approximately 1,200 employees, mostly at its Tijuana
manufacturing facilities and French prescription laboratory.
18
<PAGE>
New Credit Agreement
Simultaneous with the closing of the AO Acquisition, the Company
expects to enter into a new bank credit agreement (the "New Credit
Agreement"), replacing its existing credit agreement. The New Credit
Agreement is divided into three tranches which consist of: a five-year
term loan of $30 million, a renewable three-year foreign currency
revolving facility of $30 million, and a five-year U.S. dollar
revolver of $120 million. The New Credit Agreement is unsecured. The
Company believes that the New Credit Agreement will lower the
effective interest rate on its borrowings and provide it with greater
operating flexibility.
Neolens Acquisition
In May 1996 the Company announced that it had entered into a
definitive merger agreement which provides for the acquisition by the
Company of Neolens, Inc. ("Neolens"), a Florida corporation that
manufactures polycarbonate eyeglass lenses and has been a supplier to
the Company. Pursuant to the merger agreement the Company has
commenced a cash tender offer for all outstanding shares of Neolens
Common Stock, Series A Preferred Stock and Series B Preferred Stock.
The aggregate purchase price will be approximately $16.0 million,
including the assumption of Neolens debt. Although there can be no
assurance of consummation, the Company expects to consummate the tender
offer by August 1996. The Company believes that the acquisition of
Neolens will enable the Company to increase its penetration of the
fast growing polycarbonate market and will give the Company access
to certain technologies used in the production of single vision and
polycarbonate lenses.
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 operation 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 historically been credited or debited, as appropriate, to the
parent Company investment account; following consummation of the
Acquisition, such adjustments have been made to shareholders' equity.
For the fiscal years ended March 31, 1996 and 1995, the four months
ended March 31, 1994, and the eight months ended November 30, 1993,
such translation adjustments were approximately $(1.6) million, $4.4
million, $1.3 million, and $(2.5) million, respectively.
During fiscal 1996 the Company has benefited from reduced
manufacturing costs at its Mexican facility arising from the continued
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. For the fiscal
years ended March 31, 1996 and 1995 no translation adjustments were
necessary as the Brazilian Real had strengthened slightly against the
U.S. dollar during these periods. For the four months ended March 31,
1994 and the eight months ended November 30, 1993 such translation
adjustments were $(167,000) and $(478,000), respectively. 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, 1996. As of March
31, 1996 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 16 of Notes to Consolidated
Financial Statements.
19
<PAGE>
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. Approximately 7.6% of the
Company's net sales during fiscal 1996 were derived from its
operations in South America, the majority of which are in Brazil,
which has experienced periods of hyper-inflation. In June 1994, the
Brazilian Government introduced a new currency, the Real, and adopted
certain financial plans to reduce inflation in that country. From
June 1994 through March 31, 1996, inflation has reduced to
approximately 2% per month, compared to a rate of approximately 45%
per month in June 1994 (3,500% for the full year). Since introduction
of this plan, the Brazilian Real has strengthened slightly against the
U.S. dollar. 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.
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,
Spectralite and Matrix, (ii) the availability of raw materials for the
Company's products, (iii) anticipated trends in the Company's business
environment, (iv) the Company's ability to continue to control costs
and maintain adequate standards of customer service and product
quality and (v) future income tax rates and capital expenditures.
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. See "Factors
Affecting Future Operating Results" included in Exhibit 99.1 of the
Company's Form 10-K for the fiscal year ended March 31, 1996 and the
factors described in "Business--Environmental Matters."
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are set forth on
pages F-1 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
<PAGE>
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 as of May 31, 1996.
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........ 79 Chairman of the Board
Douglas D. Danforth...... 73 Director
Hamish Maxwell........... 69 Director
Ruben F. Mettler......... 72 Director
Laurence Za Yu Moh....... 70 Director
Jackson L. Schultz....... 70 Director
John E. Heine............ 52 President and Chief Executive
Officer, Director
James H. Cox............. 47 Vice President, Assistant
Secretary and Assistant
Treasurer; President, Sola
Optical USA
Ian S. Gillies........... 54 Vice President, Finance, Chief
Financial Officer, Secretary
and Treasurer
Stephen J. Lee........... 43 Vice President, Human Resources
Barry J. Packham......... 49 Vice President, Manufacturing
Development
Colin M. Perrott......... 49 Vice President, Technology and
Development
John J. Bastian.......... 44 Vice President, Regional
Director, Australia
Bernard Freiwald......... 57 Vice President, Business
Development
Theodore Gioia........... 38 Vice President, Strategic
Planning
Owen W. Roe.............. 45 Vice President, Regional
Director, Asia
Aurelio F. deB. Seco..... 61 Vice President, Regional
Director, South America
Mark T. Mackenzie........ 46 Vice President, Regional
Director, Europe
Alan S. Vaughan.......... 52 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. He was Chairman and Chief Executive Officer of
E.I. du Pont de Nemours and Company from 1974 to 1981. He has been
Chairman of the Board of the Howard Hughes Medical Institute since
1990 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 Corporation from 1983 to 1987. He is a director of
Travelers, 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 The News Corporation
Limited.
Ruben F. Mettler has been a director of the Company since
December 1994. He was Chairman and Chief Executive Officer of TRW
Inc. from 1977 to 1988.
21
<PAGE>
Laurence Za Yu Moh has been a director of the Company since
December 1994. He is Chairman Emeritus of Universal Furniture
Limited, which he founded in 1959. Mr. Moh is also a director of
Stimsonite Corp.
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. Mr. Schultz remains a consultant to the bank.
Mr. Schultz is also a director of Cooper Development Company and The
San Francisco Company.
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 J.J. Heinz in
Melbourne, Australia.
James H. Cox was appointed Vice President, 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.
Ian S. Gillies was appointed Vice President, Finance, Chief
Financial Officer and Treasurer of the Company in 1991, having
previously held the positions of Regional Director of the Company's
European operations and Managing Director of Pilkington Ophthalmic
Products. Mr. Gillies joined Pilkington in 1966. Mr. Gillies was
elected to the position of Secretary of the Corporation in September
1995.
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.
Colin M. Perrott is the Company's Vice President of Technology
and Development. Dr. Perrott joined the Company in 1984 and was
formerly Officer in Charge of the Commonwealth Scientific and
Industrial Research Organization's Manufacturing Technology Unit in
Adelaide, South Australia.
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.
Bernard Freiwald has served as Vice President, Business
Development since July 1994. He was formerly the Company's Regional
Director, Europe since 1991. Mr. Freiwald joined the Company in 1977
as Vice President of Marketing and Sales in Sola Optical USA and was
subsequently appointed Executive Vice President of Sola Optical USA in
1989.
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.
Owen W. Roe is the Company's Regional Director, Asia. Mr. Roe
joined the Company as Management Accountant in Sola Optical Australia
in 1976, becoming Group Financial Controller in 1983. Following a
two-year assignment as Marketing Manager of the Company's U.K.
operations, Mr. Roe served as Group Human Resources Manager until he
was appointed to his current position in 1988.
22
<PAGE>
Aurelio F. deB. Seco has served as the Company's Regional
Director, South America since 1989. Mr. Seco joined the Company in
1974 as chief engineer in the Company's Brazilian factory, and was
subsequently appointed the Chief Executive Officer of SOLA-Brazil.
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).
23
<PAGE>
Item 11. EXECUTIVE COMPENSATION
The following table sets forth in summary form all compensation
for all services rendered in all capacities to the Company paid or
accrued during fiscal 1996, 1995 and 1994, to the Chief Executive
Officer of the Company and to the four other most highly compensated
executive officers of the Company whose total annual salary and bonus
exceeds $100,000 (collectively, with the Chief Executive Officer, the
"Named Executive Officers").
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term
Compensation
Awards
------------
Securities
Underlying
Name and Other Annual Options/ All Other
Principal Position Year Salary Bonus (1) Compensation (2) SARs (#) Compensation
------------------ ---- ------ --------- ---------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
John E. Heine
President and Chief 1996 $430,048 $432,427 $103,592 __ $__(3)
Executive Officer 1995 425,240 704,521 148,463 __ __
1994 425,240 218,573 149,264 397,261 __
James H. Cox
Vice President, 1996 $261,725 $207,368 $4,192 __ $4,072(4)
Assistant Secretary 1995 257,824 293,017 5,749 __ 9,283
and Assistant 1994 252,832 185,724 7,104 112,270 4,528
Treasurer;
President, Sola
Optical USA
Colin M. Perrott
Vice President, 1996 $235,870 $168,961 $93,756 __ $__(3)
Technology 1995 232,601 275,260 165,916 __ __
and Development 1994 253,496 92,141 180,196 86,366 __
Ian S. Gillies
Vice President, 1996 $213,624 $152,075 $96,290 __ $4,620(4)
Finance, Chief 1995 209,355 247,751 98,470 __ 4,711
Financial Officer, 1994 225,710 82,139 125,524 112,270 118,982
Secretary and
Treasurer
Bernard Freiwald
Vice President, 1996 $230,000 $167,072 $21,599 __ $4,620(4)
Business 1995 224,894 272,182 37,925 __ 26,772
Development 1994 195,425 49,165 50,727 86,366 4,937
<FN>
- -----------
(1) The amounts indicated for fiscal 1994 do not include bonuses paid
by Pilkington to certain Named Executive Officers of the Company
for services rendered to Pilkington in connection with the
Acquisition.
(2) The amounts indicated for Messrs. Heine, Perrott, Gillies and
Freiwald include an expatriate accommodation allowance and
benefits package of $116,008, $109,843, $81,462 and $39,648,
respectively, for fiscal 1994; $117,509, $112,584, $73,534 and
$17,005, respectively, for fiscal 1995, and $78,445, $67,277,
$68,281, and $2,734, respectively, for fiscal 1996.
24
<PAGE>
(3) In lieu of participation in the Sola Optical Australia Superannuation
Plan, Messrs. Heine and Perrott earn equivalent pensions under
separate Expatriate Superannuation Agreements with the Company.
See "--Pension Plan".
(4) Messrs. Cox, Gillies and Freiwald deferred portions of their
annual salary pursuant to the Sola Optical USA 401(k) Savings
Plan. The amounts shown represent cash contributions made by the
Company to the plan for the account of such Named Executive
Officers for fiscal 1996 in the amounts of $4,072, $4,620 and
$4,620, respectively.
</TABLE>
Existing Option Plan
Sola Investors Inc., the Company's former parent, adopted the
Sola Investors Inc. Stock Option Plan (the "Existing Option Plan"),
pursuant to which certain key employees and/or directors of the
Company and its subsidiaries and affiliates (each an "Optionee") were
eligible to receive non-qualified stock options (the "Existing
Options") to acquire shares of the non-voting common stock of Sola
Investors Inc. Existing Options granted to an Optionee are evidenced
by an agreement between the Optionee and Sola Investors Inc. which
contains such terms not inconsistent with the Existing Option Plan as
the committee appointed to administer the Existing Option Plan deemed
necessary or desirable (the "Existing Option Agreements"). Pursuant
to the Existing Option Plan, unless otherwise set forth in an Existing
Option Agreement, 20% of the Existing Options granted to an Optionee
vested on the date of grant, with an additional 20% vesting on each
successive one-year anniversary of the date of grant. Existing
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 Sola Investors Inc. (or
its successor), 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"). However, Existing Options which are
not exercised on or prior to a Termination Event lapse upon the
closing of a Termination Event. The consummation of the merger of
Sola Investors Inc. into the Company in February 1995 (the "Merger")
did not constitute a Termination Event. All non-vested Existing
Options of an Optionee lapse upon such Optionee's termination of
employment for any reason. An Optionee's vested Existing 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.
Upon consummation of the Merger, the Existing Option Plan and the
Existing Option Agreements were assumed by the Company and all
Existing Options which were outstanding at such time were converted
into options to acquire shares of the Company's Common Stock, with the
number of shares subject to such option and the exercise price thereof
adjusted appropriately. Existing Options to acquire approximately
1,645,219 shares of the Company's Common Stock (as adjusted to reflect
consummation of the Merger) were outstanding under the Existing Option
Plan as of the date of the Merger. The Existing Option Plan was
amended to provide that, effective upon the consummation of the
Merger, no new options will be granted thereunder.
International Stock Option Plan
The Company adopted the Sola International Inc. Stock Option Plan
(the "International Stock Option Plan"), effective February 15, 1995.
Pursuant to the International Stock Option Plan, key employees and/or
directors of the Company are eligible to receive awards of stock
options in consideration of their services to the Company. Options
granted under the International Stock Option Plan may be either
nonqualified stock options or "incentive stock options," within the
meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). Subject to antidilution and similar provisions,
the number of shares of Common Stock with respect to which options may
be awarded under the International Stock Option Plan is equal to (i)
855,868, plus (ii) subject to the requirements of Rule 16b-3 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), if
applicable, the number of shares of Common Stock subject to Existing
Options which expire or terminate without exercise for any reason,
which number of shares underlying Existing Options shall not exceed
1,645,219.
25
<PAGE>
The International Stock Option Plan is administered by the
Compensation Committee of the Company's Board of Directors. Subject
to the provisions of the International Stock Option Plan, the
Compensation Committee will determine when and to whom options will be
granted, the number of shares covered by each option and the terms and
provisions with respect to the options. The Compensation Committee
may not grant options to any eligible employee under the International
Stock Option Plan with respect to more than 500,000 shares of Common
Stock in any fiscal year during the term of the plan (subject to
antidilution and similar adjustments).
An option may be granted on such terms and conditions as the
Compensation Committee may approve, provided that all options must be
granted with an exercise price not less than the fair market value of
the underlying Common Stock on the date of grant (110% in the case of
"incentive stock options" granted to a "ten percent stockholder", as
provided in Section 422 of the Code). No option may be exercised
after the expiration of ten years from the date of grant (five years
in the case of an "incentive stock option" granted to a "ten percent
stockholder"). Payment of the option exercise price must be made by
certified or bank check. Options granted under the International
Stock Option Plan will become exercisable at such times and under such
conditions as the Compensation Committee shall determine. However,
unless the Compensation Committee otherwise provides, options shall
become exercisable as to 20% of the shares covered thereby on the date
of grant and as to an additional 20% of such shares on each of the
first four anniversaries of the date of grant. Vested options lapse
45 days after termination of employment with the Company for any
reason other than death or disability, in which case such options
terminate 180 days after termination. The portion of an option that
is not vested will automatically lapse upon the employee's termination
of employment with the Company for any reason. All options
automatically lapse upon the termination of the optionee's employment
for cause. Unless otherwise determined by the Compensation Committee,
in the event of certain change of control transactions with respect to
the Company, all outstanding options shall vest and, upon exercise,
entitle the holder thereof to receive the same amount and kind of
stock, securities, cash, property or other consideration that each
holder of a share of Common Stock was entitled to receive in such
transaction.
The Board of Directors may at any time and from time to time
suspend, amend, modify or terminate the International Stock Option
Plan; provided, however, that, to the extent required by Rule 16b-3
promulgated under the Exchange Act, or any other law, regulation or
stock exchange rule, no such change shall be effective without the
requisite approval of the Company's stockholders. In addition, no
such change may alter or impair any rights or obligations under any
awards previously granted, except with the written consent of the
optionee.
In April 1996 the Board of Directors amended the International
Stock Option Plan to permit non-employee Directors of the Company to
elect to receive all or a portion of their annual retainer fee in the
form of options to acquire shares of Common Stock. In June 1996 the
Board of Directors further amended the International Stock Option Plan
to increase the number of shares reserved for issuance pursuant to
the exercise of stock options by 500,000. Both amendments are subject
to approval by the shareholders of the Company at the fiscal 1996
Annual General Meeting.
26
<PAGE>
Option Exercise Table
The following table sets forth the number of shares covered by
both exercisable and unexercisable Existing Options granted to the
Named Executive Officers under the Existing Option Plan as of
March 31, 1996. No options were granted to the Named Executive
Officers under the International Stock Option Plan as of March 31,
1996.
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-the-
Options/SARs at Fiscal Money Options/SARs at
Year-End Fiscal Year-End(1)
-------- ------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John E. Heine 238,356 158,905 $5,103,202 $3,402,156
James H. Cox 67,362 44,908 1,442,220 961,480
Colin M. Perrott 51,819 34,546 1,109,445 739,630
Ian S. Gillies 67,362 44,908 1,442,220 961,480
Bernard Freiwald 51,819 34,546 1,109,445 739,630
<FN>
- -------------
(1) Values for "in-the-money" Existing Options represent the positive
spread between $9.71, the exercise price of outstanding Existing
Options, and the closing price of $31.12 per share of Common
Stock of the Company at March 29, 1996, as reported on the New
York Stock Exchange.
</TABLE>
Employment Agreements
The Company and each of the Messrs. Heine, Cox, Perrott and
Gillies is party to an employment agreement, each dated as of
February 26, 1993. Each agreement has an initial term of three years
and is automatically extended for an indefinite term unless terminated
upon prior notice by either party. If the Company elects not to
extend the term of an agreement or to terminate an agreement
subsequent to the initial term other than for Cause (i.e., a material
breach by the officer of the terms of his employment agreement,
failure to perform his duties as an officer of the Company or
commission of fraud or willful misconduct), the Company is required to
give 18 months' notice in the case of Mr. Heine, and 12 months' notice
in the case of Messrs. Cox, Perrott and Gillies. Each agreement
provides for an annual base salary at a rate not less than the rate in
effect on the date of the agreement. Such salaries are subject to
discretionary increases in accordance with the Company's normal review
procedures and policies. The agreements also provide for
participation in various other plans and programs provided by the
Company. In the event of a transfer of all or substantially all of
the stock or assets of the Company in a privately negotiated
transaction, the Company will assign its obligations under the
employment agreements to the transferee. For purposes of assignment
and transfer provisions in the agreements, a sale of stock of the
Company as part of a public offering will not be treated as pursuant
to a privately negotiated transaction.
Each of the agreements provides that the Company has no further
obligations under such agreement (other than for salary through the
officer's termination date) in the event of an officer's termination
by the Company for Cause, by the officer for other than Good Reason
(i.e., diminution of the officer's responsibilities within the
Company) or as a result of the officer's death or disability. If an
officer is terminated by the Company for reason other than Cause or if
the officer terminates his employment for Good Reason, the Company is
required to continue to pay the salary of such officer until the later
of the expiration of (i) the original term of the agreement or
(ii) the 18-month period from the date of termination in the case of
Mr. Heine and the 12-month period from the date of termination in the
case of Messrs. Cox, Perrott and Gillies.
27
<PAGE>
The Company and Mr. Freiwald entered into a letter agreement (the
"Agreement") as of June 7, 1994 with respect to the terms and
conditions of Mr. Freiwald's appointment by the Company to the
position of Vice President, Business Development, which appointment
commenced June 1, 1994. The Agreement provides that Mr. Freiwald will
be employed by the Company on a full-time basis with a provision to
permit employment on a part-time basis at a reduced salary at a to be
agreed upon date. On April 1, 1996 Mr. Freiwald moved to a part-time
basis under the terms of this agreement. Pursuant to the Agreement,
while employed by the Company on a full-time or part-time basis, Mr.
Freiwald is eligible to continue to participate in various employee
benefit plans and programs of the Company and is entitled to
reimbursement of certain costs incurred in connection with his
relocation to California.
Under the Agreement, in the event the Company terminates Mr.
Freiwald's employment for any reason other than cause while he is
employed on a full-time or part-time basis, he will be paid his full-
time salary at the rate in effect on the date of his termination, for
a period of 18 months from his termination date.
Pension Plan
Prior to the Acquisition, Mr. Cox and Mr. Freiwald were
participants in the Pilkington Visioncare Pension Plan. In connection
with the Acquisition, the Company implemented the Sola Optical Pension
Plan, which is currently intended, together with the Pilkington
Visioncare Pension Plan, to provide substantially the same benefit
that would have been payable had Mr. Cox and Mr. Freiwald continued
active participation under the Pilkington Visioncare Pension Plan, as
it existed on December 1, 1993, until retirement. To that end,
retirement benefits under the basic formula of the Sola Optical
Pension Plan currently are substantially identical to the Pilkington
Visioncare Pension Plan for a given level of compensation and service.
Messrs. Heine and Perrott do not participate in the Sola Optical
Pension Plan. In lieu of their participation in the Sola Optical
Australia Superannuation Plan, Messrs. Heine and Perrott earn
equivalent pensions under separate Expatriate Superannuation
Agreements with the Company. Under those agreements, the Company will
be required to make a lump sum payment for the benefit of each of
Messrs. Heine and Perrott upon their termination of service or
retirement from the Company based on the benefits they would have
accrued under the Sola Optical Superannuation Plan had they continued
their participation therein. Payments under the Sola Optical
Australia plan generally are based on years of service and final
average compensation. The estimated lump sum benefits for the benefit
of Messrs. Heine and Perrott upon normal retirement from the Company
at age 65 are Australian $2,328,000 and Australian $1,409,000,
respectively (U.S.$1,822,000 and U.S.$1,103,000, based on a conversion
rate of 1.278 Australian $ to the U.S. $). Mr. Gillies did not
participate in the Pilkington Visioncare Pension Plan; however, he
does participate in the Sola Optical Pension Plan.
The following table shows estimated annual benefits payable upon
retirement to Messrs. Cox, Gillies and Freiwald under the Sola Optical
Pension Plan in combination (to the extent applicable) with the
Pilkington Visioncare Pension Plan. The Sola Optical Pension Plan
will provide the amount of the benefit in excess of a portion of the
amount accrued under the Pilkington Visioncare Pension Plan as of
December 1, 1993; assuming retirement at age 65, the amount of annual
benefit payable by the Pilkington Visioncare Pension Plan to Mr. Cox
and Mr. Freiwald which will be offset from the Sola Optical Pension
Plan will be $16,929.48 and $33,787.08, respectively. Assets of the
Pilkington Visioncare Pension Plan were not transferred to the Company
from Pilkington in connection with the sale of the Company from
Pilkington and the Company has no obligation under the Pilkington
Visioncare Pension Plan.
28
<PAGE>
<TABLE>
PENSION PLAN TABLE
<CAPTION>
YEARS OF SERVICE
---------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------ -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$125,000 $26,850 $35,801 $44,751 $53,701 $62,651
150,000 32,573 43,431 54,288 65,146 76,003
175,000 32,573 43,431 54,288 65,146 76,003
200,000 32,573 43,431 54,288 65,146 76,003
225,000 32,573 43,431 54,288 65,146 76,003
250,000 32,573 43,431 54,288 65,146 76,003
300,000 32,573 43,431 54,288 65,146 76,003
350,000 32,573 43,431 54,288 65,146 76,003
400,000 32,573 43,431 54,288 65,146 76,003
450,000 32,573 43,431 54,288 65,146 76,003
500,000 32,573 43,431 54,288 65,146 76,003
</TABLE>
The years of credited service as of March 31, 1996 for Messrs.
Cox, Gillies and Freiwald are 10.25, 2.33 and 18.25, respectively.
Benefits under the Sola Optical Pension Plan are not offset by
Social Security benefits. The amounts shown are based upon certain
assumptions, including retirement of the employee at exact age 65 on
March 31, 1996 and payment of the benefit under the basic form of the
Sola Optical Pension Plan, a single life annuity for the life of the
participant. The amounts will change if the payment is made under any
other form permitted by the Sola Optical Pension Plan, or if an
employee's retirement occurs after March 31, 1996, since the Social
Security Wage Base of such an employee (one of the factors used in
computing the annual retirement benefits) will reflect higher Social
Security tax bases for years after 1996. The Sola Optical Pension
Plan provides a higher level of benefits for the portion of
compensation above the compensation levels on which Social Security
benefits are based.
The remuneration levels shown represent the five year average of
annual compensation covered by the Sola Optical Pension Plan as of
March 31, 1996. Compensation covered by the Sola Optical Pension Plan
includes regular base salary, hourly wages, shift differentials,
overtime, vacation and sick leave pay, commissions, sales bonus,
amounts deferred under any tax qualified plan of the Company and
amounts paid pursuant to management bonus plans or other formally
adopted incentive compensation plans. The current compensation
covered by the Sola Optical Pension Plan for Messrs. Cox, Gillies and
Freiwald differs substantially (by more than 10%) from that set forth
in the Summary Compensation Table under the aggregate of the "Salary"
and "Bonus" columns because the amount of compensation which may be
covered under a tax qualified pension plan is limited by the Internal
Revenue Code.
The pension amounts shown for remuneration in excess of the
compensation cap ($150,000 for 1995) are based upon the compensation
cap in each year, as required by law. The IRC Section 415 defined
limit was $120,000 for 1995, but it did not provide any further
limitation on the amounts calculated.
Director Compensation
Directors who are full time employees of the Company receive
no compensation for serving on the Board of Directors or its
committees. During fiscal 1996, directors received an annual fee
of $5,000, except for the Chairman who received an annual fee of
$25,000, and $500 for each Board meeting attended. During fiscal
1997, directors will receive an annual fee of $20,000, except for
the Chairman who will receive an annual fee of $40,000, and $500 for
29
<PAGE>
each Board meeting attended. In April 1996 the Board of Directors
amended the International Stock Option Plan, subject to stockholder
approval, to permit non-employee directors to receive all or a portion
of their retainer fee in options to acquire shares of Common Stock.
Directors are reimbursed for traveling costs and other out-of-pocket
expenses incurred in attending such meetings. Directors who serve on
the Audit Committee or the Compensation Committee receive no additional
compensation for committee meetings held on the same date as a Board
meeting and received $500 in fiscal 1996 (and will receive $500 in
fiscal 1997) for each committee meeting held on a date on which there
is or was no Board meeting.
Compensation Committee Interlocks and Insider Participation
Decisions with respect to compensation are made by the
Compensation Committee of the Company. The members of the
Compensation Committee as of March 31, 1996 were Hamish Maxwell, Ruben
F. Mettler, Laurence Za Yu Moh and Irving S. Shapiro. Vincent A. Mai
and Charles F. Baird, Jr. served as members of the Compensation
Committee during part of fiscal 1996 and resigned as directors of the
Company during fiscal 1996.
30
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock by (a) each person
who is known to the Company to be the beneficial owner of more than
five percent of the Company's Common Stock (based on a review by the
Company of filings with the Securities and Exchange Commission), (b)
each director of the Company, (c) each of the executive officers named
in the Summary Compensation Table and (d) all directors and executive
officers of the Company as a group. Except as otherwise indicated,
the persons or entities listed below have sole voting and investment
power with respect to all shares of Common Stock beneficially owned by
them, except to the extent such power may be shared with a spouse.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
NAME BENEFICIALLY OWNED CLASS(1)
- ---- ------------------ --------
<S> <C> <C>
5% STOCKHOLDERS:
Putnam Investment Management, Inc.
Eleventh Floor, One Post Office Square
Boston, MA 02109.......................... 1,405,000 6.4
John W. Bristol & Co.
41st Floor, 233 Broadway
New York, N.Y. 10279...................... 1,301,000 6.0
Fiduciary Trust International
Suite 9400, 2 World Trade Center
New York, N.Y. 10048...................... 1,120,000 5.1
DIRECTORS:
Irving S. Shapiro(2).......................... 19,211 *
Douglas D. Danforth........................... 16,819 *
John E. Heine(3).............................. 311,731 1.4
Hamish Maxwell................................ 126,751 *
Ruben F. Mettler.............................. 14,522 *
Laurence Za Yu Moh(4)......................... 128,853 *
Jackson L. Schultz............................ 3,000 *
NAMED EXECUTIVE OFFICERS:
James H. Cox(5)............................... 100,549 *
Ian S. Gillies(6)............................. 94,012 *
Colin M. Perrott(7)........................... 80,599 *
Bernard Freiwald(8)........................... 67,724 *
All directors and executive officers
as a group (19 persons)(9)................ 1,436,094 6.3
<FN>
- --------------
31
<PAGE>
* The percentage of shares of Common Stock beneficially owned
does not exceed one percent of the outstanding shares of Common Stock.
(1) Based on 21,797,168 shares of Common Stock outstanding on
May 31, 1996. Calculations of percentage of beneficial ownership
assume the exercise by only the respective named stockholder of all
options for the purchase of Common Stock held by such stockholder
which are exercisable within 60 days of May 31, 1996.
(2) Mr. Shapiro's shares are held by a trust of which Mr.
Shapiro is both trustee and sole beneficiary. Excludes shares owned
by the Howard Hughes Medical Institute, for which Mr. Shapiro serves
as Chairman of the Board and for which shares Mr. Shapiro disclaims
beneficial ownership.
(3) Includes 238,356 shares of Common Stock issuable upon
exercise of options that are exercisable within 60 days from May 31,
1996 and 73,375 shares of Common Stock held by a trust for which Mr.
Heine and members of his family are trustees and beneficiaries. Mr.
Heine is also a Named Executive Officer.
(4) All shares are held in the name of Zayucel Ltd., for which
shares Mr. Moh claims beneficial ownership.
(5) Includes 67,362 shares of Common Stock issuable upon
exercise of options that are exercisable within 60 days from May 31,
1996.
(6) Includes 67,362 shares of Common Stock issuable upon
exercise of options that are exercisable within 60 days from May 31,
1996.
(7) Includes 51,819 shares of Common Stock issuable upon
exercise of options that are exercisable within 60 days from May 31,
1996.
(8) Includes 51,819 shares of Common Stock issuable upon
exercise of options that are exercisable within 60 days from May 31,
1996.
(9) Excludes shares held by persons who served as a director of
the Company during part of fiscal 1996, and subsequently resigned as a
director.
</TABLE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has made loans to certain executive officers to
facilitate their purchase of securities of the Company's former
parent. The following executive officers' loans were in an amount in
excess of $60,000 (the amounts listed are the largest aggregate amount
outstanding at any time since the beginning of the Company's last
fiscal year and the amount outstanding on March 31, 1996): Mark T.
Mackenzie, Vice President, European Regional Director, $100,015 (as of
April 1, 1995) and $41,015 (as of March 31, 1996); Ian S. Gillies,
Vice President, Finance, Chief Financial Officer, Secretary and
Treasurer, $98,315 (as of April 1, 1995) and $0 (as of March 31,
1996); and Colin M. Perrott, Vice President, Technology and Development,
$82,500 (as of April 1, 1995) and $0 (as of March 31, 1996). The rate
of interest charged on such indebtedness was 7.5% annually.
The Company has entered into agreements to provide
indemnification for its directors and executive officers in addition
to the indemnification provided for in the Company's Amended and
Restated Certificate of Incorporation and Amended and Restated By-
Laws. The Company has also purchased directors and officers insurance
for its directors and executive officers.
32
<PAGE>
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.
3. List of Exhibits. See Index of Exhibits included on page E-1.
(b) Reports on Form 8-K:
During the quarter ended March 31, 1996, there were no reports on
Form 8-K filed by the Company. On May 6, 1996 the Company filed a
Form 8-K announcing the signing of a purchase agreement for the
acquisition of the worldwide ophthalmic business of American Optical
Corporation.
33
<PAGE>
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 17, 1996 By: /s/ Ian S. Gillies
-----------------------
Ian S. Gillies
Vice President, 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
- ------------------------ Chairman of the Board June 17, 1996
Irving S. Shapiro
/s/ John E. Heine
- ------------------------ President and Chief June 17, 1996
John E. Heine Executive Officer,
Director (Principal
Executive Officer)
/s/ Ian S. Gillies
- ------------------------ Vice President, Chief June 17, 1996
Ian S. Gillies Financial Officer,
Secretary and
Treasurer (Principal
Financial and
Accounting Officer)
/s/ Douglas D. Danforth
- ------------------------ Director June 17, 1996
Douglas D. Danforth
/s/ Hamish Maxwell
- ------------------------ Director June 17, 1996
Hamish Maxwell
/s/ Ruben F. Mettler
- ------------------------ Director June 17, 1996
Ruben F. Mettler
/s/ Laurence Za Yu Moh
- ------------------------ Director June 17, 1996
Laurence Za Yu Moh
/s/ Jackson L. Schultz
- ------------------------ Director June 17, 1996
Jackson L. Schultz
34
<PAGE>
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, 1996 and 1995..... F-3
Consolidated Statements of Operations for the years ended
March 31, 1996 and 1995 and for the four months ended March
31, 1994...................................................... F-4
Combined Statement of Operations for the eight months ended
November 30, 1993............................................. F-4
Consolidated Statements of Shareholders' Equity for the years
ended March 31, 1996 and 1995 and for the four months ended
March 31, 1994................................................ F-5
Combined Statement of Parent Company Investment for the eight
months ended November 30, 1993................................ F-6
Consolidated Statements of Cash Flows for the years ended
March 31, 1996 and 1995 and for the four months ended
March 31, 1994................................................ F-7
Combined Statement of Cash Flows for the eight months ended
November 30, 1993............................................. F-7
Notes to Consolidated Financial Statements.................... F-8
Quarterly Financial Data (unaudited).......................... F-28
Financial Statement Schedule.................................. S-1
F-1
<PAGE>
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, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash
flows for the years ended March 31, 1996 and 1995 and for the four
months ended March 31, 1994. We have also audited the combined
statements of operations, cash flows, and parent company investment of
the Predecessor Business for the period from April 1, 1993 to November
30, 1993. Our audits also included the financial statement schedule
listed in the index at item 14(a). These consolidated and combined
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 the 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, 1996 and
1995, and the results of its operations and its cash flows for the
years ended March 31, 1996 and 1995 and for the four months ended
March 31, 1994, in conformity with generally accepted accounting
principles. Also in our opinion, the combined financial statements of
the Predecessor Business referred to above present fairly, in all
material respects, the results of its operations and its cash flows
for the period April 1, 1993 to November 30, 1993 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, 1996
F-2
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
MARCH 31,
----------------------
ASSETS 1996 1995
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 22,394 $ 16,148
Trade accounts receivable, less allowance for
doubtful accounts of $5,424 and $2,854 at March 31,
1996 and 1995, respectively......................... 74,845 69,672
Inventories.......................................... 100,707 85,676
Deferred income taxes................................ 7,491 7,548
Prepaids and other current assets.................... 1,861 2,019
--------- ---------
Total current assets............................... 207,298 181,063
Property, plant and equipment, at cost, less
accumulated depreciation and amortization.......... 79,582 71,432
Deferred income taxes................................. 6,800 4,763
Debt issuance costs, net.............................. 1,907 2,613
Goodwill and other intangibles, net................... 120,352 122,356
Other assets.......................................... 910 1,230
--------- ---------
Total assets....................................... $416,849 $ 383,457
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Current liabilities:
Notes payable to banks............................... $ 13,722 $ 7,291
Current portion of long-term debt.................... 3,681 3,787
Accounts payable..................................... 39,415 28,190
Accrued liabilities.................................. 20,167 22,042
Accrued reorganization and acquisition expenses...... 9,746 13,856
Accrued payroll and related compensation............. 22,560 26,157
Income taxes payable................................. 1,090 855
Deferred income taxes................................ 461 2,290
--------- ---------
Total current liabilities.......................... 110,842 104,468
Long-term debt, less current portion.................. 3,360 3,741
Bank debt, less current portion....................... 6,000 -
Senior subordinated notes............................. 88,530 103,666
Deferred income taxes................................. 4,990 986
Other liabilities..................................... 10,886 11,153
--------- ---------
Total liabilities.................................. 224,608 224,014
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; 21,797 shares (21,780 shares as of March
31, 1995) issued and outstanding..................... 218 218
Additional paid-in capital............................ 206,412 206,353
Equity participation loans............................ (421) (1,095)
Accumulated deficit................................... (17,993) (51,669)
Cumulative foreign currency adjustments............... 4,025 5,636
--------- ---------
Total shareholders' equity......................... 192,241 159,443
--------- ---------
Total liabilities and shareholders' equity......... $ 416,849 $ 383,457
========= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-3
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
PREDECESSOR BUSINESS COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
PREDECESSOR
SOLA INTERNATIONAL INC. BUSINESS
----------------------- ----------
EIGHT
FOUR MONTHS MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, NOVEMBER
1996 1995 1994 30, 1993
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales............................... $ 387,709 $ 345,631 $ 106,030 $ 200,025
Cost of sales........................... 201,991 185,626 93,428 115,319
--------- --------- ----------- -----------
Gross profit........................... 185,718 160,005 12,602 84,706
--------- --------- ----------- -----------
Research and development expenses....... 13,329 14,051 3,877 7,246
Selling and marketing expenses.......... 66,345 61,143 19,146 33,483
General and administrative expenses..... 45,291 45,067 10,584 23,438
In-process research and development
expense................................ - - 40,000 -
--------- --------- ----------- -----------
Operating expenses..................... 124,965 120,261 73,607 64,167
--------- --------- ----------- -----------
Operating income (loss)............... 60,753 39,744 (61,005) 20,539
Interest income......................... 544 470 67 149
Interest expense........................ (12,685) (18,992) (6,227) (3,220)
Foreign currency adjustments............ - - (167) (478)
--------- --------- ----------- -----------
Income (loss) before provision
(benefit) for income taxes, minority
interest and extraordinary item...... 48,612 21,222 (67,332) 16,990
Provision (benefit) for income taxes.... 13,623 6,649 (6,194) 5,833
Minority interest....................... (401) (933) (256) (408)
--------- --------- ----------- -----------
Income (loss) before extraordinary
item................................. 34,588 13,640 (61,394) 10,749
Extraordinary item, repurchase of senior
subordinated notes (1995 - write-off of
debt issuance costs), net of tax....... (912) (3,915) - -
--------- --------- ----------- -----------
Net income (loss)....................... $ 33,676 $ 9,725 $ (61,394) $ 10,749
========= ========= =========== ===========
Earnings (loss) per share:
Income (loss) before extraordinary
item................................. $1.51 $0.78 $(3.75)
Extraordinary item.................... (0.04) (0.22) -
--------- --------- -----------
Net income (loss)..................... $1.47 $0.56 $(3.75)
========= ========= ===========
Weighted average number of shares
outstanding............................ 22,944 17,516 16,353
========= ========= ===========
F-4
<PAGE>
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<TABLE>
SOLA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
CUMULATIVE
COMMON FOREIGN
STOCK ADDITIONAL EQUITY CURRENCY TOTAL
------ PAID-IN PARTICIPATION ACCUMULATED TRANSLATION SHAREHOLDERS'
(SHARES) (VALUE) CAPITAL LOANS DEFICIT ADJUSTMENTS EQUITY
---------- ---------- ---------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
16,319 shares of $0.01 par value
common stock issued on December 1,
1993 for cash and equity
participation loans (restated)........ 16,319 $163 $124,779 $(1,304) $123,638
Cumulative translation adjustments.... $1,251 1,251
Net loss............................... $(61,394) (61,394)
---------- ---------- ---------- ------------ ----------- ----------- -------------
Balances, March 31, 1994 (restated).... 16,319 163 124,779 (1,304) (61,394) 1,251 63,495
58 shares of $0.01 par value common
stock issued for cash and Equity
participation loans................... 58 1 447 (86) 362
Repayment of Equity participation
loans................................. 295 295
Initial Public Offering of 5,403
shares of $0.01 par value common
stock, net of offering expenses....... 5,403 54 81,127 81,181
Cumulative translation adjustments..... 4,385 4,385
Net income............................. 9,725 9,725
---------- ---------- ---------- ------------ ----------- ----------- -------------
Balances, March 31, 1995............... 21,780 218 206,353 (1,095) (51,669) 5,636 159,443
17 shares of $0.01 par value common
stock issued under stock option plans. 17 59 59
Repayment of Equity participation
loans................................. 674 674
Cumulative translation adjustments..... (1,611) (1,611)
Net income............................. 33,676 33,676
---------- ---------- ---------- ------------ ----------- ----------- -------------
Balances, March 31, 1996............... 21,797 $218 $206,412 $(421) $(17,993) $4,025 $192,241
========== ========== ========== ============ =========== =========== =============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-5
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
PREDECESSOR BUSINESS COMBINED STATEMENT OF
PARENT COMPANY INVESTMENT
(IN THOUSANDS)
<CAPTION>
<S> <C>
PARENT COMPANY INVESTMENT
Balances, April 1, 1993............................. $ 117,129
Net income......................................... 10,749
Net change in cumulative translation adjustments... (2,546)
Dividends declared................................. (1,046)
Net change in parent company investment............ 5,868
----------
Balances, November 30, 1993.......................... $ 130,154
==========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-6
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
PREDECESSOR BUSINESS COMBINED STATEMENT OF CASH FLOW
(IN THOUSANDS)
<CAPTION>
PREDECESSOR
SOLA INTERNATIONAL INC. BUSINESS
----------------------------------- -----------
FOUR MONTHS EIGHT
ENDED MONTHS
YEAR ENDED YEAR ENDED MARCH 31, ENDED
MARCH 31, MARCH 31, 1994 NOVEMBER
1996 1995 (RESTATED) 30, 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $ 33,676 $ 9,725 $ (61,394) $10,749
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization.............. 17,247 20,981 5,992 7,017
Inventory write-up......................... - - 32,905 -
In-process research and development........ - - 40,000 -
Provision for excess and obsolete inventory 1,090 1,981 604 1,204
Provision for doubtful accounts............ 2,846 2,442 412 1,223
Increase (decrease) in net deferred taxes.. 1,657 (1,404) (3,522) 6
(Gain) loss on disposal/sale of property,
plant and equipment....................... (73) 20 (22)
Changes in assets and liabilities:
Trade accounts receivable................. (10,883) (8,941) (5,265) (2,994)
Inventories............................... (16,222) (4,405) 6,254 (11,441)
Prepaids and other current assets......... 127 (318) 545 (912)
Other assets.............................. 394 (151) 800 276
Accounts payable-trade.................... 10,010 (3,183) 6,150 (9,207)
Accounts payable-Pilkington and affiliates - - (1,705) 294
Accrued and other current liabilities..... (9,750) 2,657 298 1,417
Other long-term liabilities............... 643 (950) 8 1,005
----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities.............................. 30,762 18,454 22,082 (1,385)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Acquisition of Sola Group, less cash and
cash equivalents of $7,117................ - - (304,316) -
Additional investment in Venezuela
subsidiary................................ (3,561) - - -
Capital expenditures....................... (17,580) (11,588) (4,309) (6,271)
Payments received on notes receivable from
Pilkington and affiliates................. 1,585 1,200 - -
Proceeds from sale of fixed assets......... 585 550 210 161
----------- ----------- ----------- -----------
Net cash used in investing activities.... (18,971) (9,838) (308,415) (6,110)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from acquisition debt............. - - 187,737 -
Sale of common stock....................... - 81,838 123,638 -
Payments on equity participation
loans/exercise of stock options........... 733 - - -
Net receipts (payments) under notes payable 6,785 396 (4,290) 421
to banks..................................
Decrease in notes payable to Pilkington and
affiliates................................ - - - 4,340
Borrowings on long-term debt............... 1,297 7,382 2,495 2,966
Payments on long-term debt................. (1,735) (11,487) (5,973) (3,907)
Net receipts (payments) under Bank debt.... 6,000 (82,195) (6,742) -
Repurchase of senior subordinated notes.... (17,766)
Dividends paid to parent................... - - - (4,562)
Net change in parent company investment - - - 6,286
Net cash provided by (used in) financing
activities.............................. (4,686) (4,066) 296,865 5,544
----------- ----------- ----------- -----------
Effect of exchange rate changes on cash and
cash equivalents.......................... (859) 913 153 (197)
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................... 6,246 5,463 10,685 (2,148)
Cash and cash equivalents at beginning of
period.................................... 16,148 10,685 - 9,265
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period. $ 22,394 $ 16,148 $ 10,685 $ 7,117
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-7
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION
Sola International Inc. ("Company" or "SII") designs, manufactures
and distributes a broad range of eyeglass lenses, primarily focusing
on the fast growing plastic lens segment of the global market. All
significant intercompany transactions have been eliminated in the
accompanying consolidated and combined financial statements. The
Company operates in one business segment.
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%, which was effective from March
31, 1995. In addition, 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, $2.0 million in October 1995, and $1.6 million in March
1996. In addition to the $1.6 million cash purchase price of the
final 20% of Sola Venezuela, there will be a contingent payment, if
any, based on the growth in the net income of Sola Venezuela in fiscal
1998 over the net income of Sola Venezuela in fiscal 1995. Under
certain circumstances the contingent payment could be based on an
earlier 12 month period. The acquisition has been accounted for under
the purchase method of accounting.
On February 23, 1995, Sola Holdings Inc.("SHI"), SII's sole
shareholder, was merged with and into Sola Investors Inc., SHI's
parent, with Sola Investors Inc. being the surviving corporation. On
the same day, Sola Investors Inc. merged with its then wholly owned
subsidiary, Sola International Inc. with Sola International Inc. being
the surviving corporation ("Merger" or "Mergers"). The simplified
corporate structure was adopted to cause the Company's common stock to
be more amenable to sale and trading in public equity markets. The
Mergers have been treated as a reorganization of companies under
common control and are accounted for similar to a pooling of interests
for accounting and financial reporting purposes. The accompanying
statements of shareholders' equity and cash flows for the four months
ended March 31, 1994 have been restated for the effects of the
Mergers. Sola Investors Inc. and Sola Holdings Inc. had no net income
(loss) prior to the Mergers, thus the Mergers did not change
previously reported consolidated net income (loss) of the Company.
On December 1, 1993, the Company acquired the Sola business unit
(the "Predecessor Business" or "Sola Group") of Pilkington plc
("Pilkington") pursuant to the terms of the Purchase Agreement (the
"Purchase Agreement") dated September 1, 1993 between Sola Holdings
Inc., and Pilkington (the "Acquisition"). The Acquisition has been
accounted for under the purchase method of accounting as of the
closing date.
The accompanying consolidated and combined financial statements of
the Company and the Predecessor Business have been prepared in
accordance with U.S. generally accepted accounting principles. The
Predecessor Business's financial statements presented herein include
the results of operations and cash flows for the eight months ended
November 30, 1993 as if the eyeglass operations existed as a
corporation separate from Pilkington during the periods presented on a
historical basis. The Company's financial statements presented herein
include the results of operations and cash flows for fiscal 1996 and
1995 and for the four months ended March 31, 1994, and the balance
sheets as of March 31, 1996 and 1995. The results of operations for
the Company reflect the impact of interest expense on indebtedness
related to the Acquisition and amortization and other expenses
(inclusive of certain non-recurring charges) arising from purchase
accounting adjustments and, therefore, the financial statements of the
Company are not directly comparable to those of the Predecessor
Business.
The combined financial statements of the Predecessor Business
include transactions with Pilkington for treasury functions, tax
services, internal audit services and insurance costs. The
Predecessor Business also had an agreement with Pilkington for use of
technology and the Pilkington logo in which
F-8
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. BUSINESS AND BASIS OF PRESENTATION - (CONTINUED)
amounts totaling $1.0 million for the eight months ended November 30,
1993 have been treated as a dividend to Pilkington in the accompanying
financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Combination:
The consolidated or combined 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.
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.
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--10 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 March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be disposed of", which requires
impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets carrying amounts. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed
of. The Company will adopt Statement 121 in the first quarter of
fiscal 1997 and based on current circumstances does not believe the
effect of adoption will be material.
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 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, 1996 and 1995 accumulated
amortization was $7.3 million and $4.1 million, respectively.
Debt issuance costs are being amortized to interest expense over the
respective lives of the debt instruments which range from six to ten
years. As of March 31, 1996 and 1995, accumulated amortization was
$1.1 million and $1.3 million, respectively. As a result of
repurchasing $19.9 million of the Company's 9 5/8% Senior Subordinated
Notes in fiscal 1996 (see Note 8), the Company wrote off $0.4 million
of debt issuance costs reflected on the statement of operations,
together with the premium
F-9
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
over accreted value, as an extraordinary item, net of tax. In fiscal
1995, associated with the Company's initial public offering ("IPO")
(Note 9) and renegotiation of the Bank Credit Agreement (Note 7) the
Company wrote off $3.9 million of debt issuance costs, net of related
income tax benefit of zero, reflected on the statement of operations
as an extraordinary item.
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.
All translation and transaction adjustments are included in
determining net income (loss). For fiscal 1996 and fiscal 1995 no
translation adjustments were necessary. For the four months ended
March 31, 1994 and the eight months ended November 30, 1993, foreign
currency adjustments attributable to the Brazilian operation totaled
$0.2 million and $0.5 million, respectively.
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 $9.4 million, $9.1 million, $2.1 million
and $2.4 million for fiscal 1996, fiscal 1995, the four months ended
March 31, 1994 and the eight months ended November 31, 1993,
respectively.
Income Taxes:
The accompanying financial statements of the Company and the
Predecessor Business reflect the provisions of FASB 109.
Income taxes have been provided in the Predecessor Business
statements of operations as if the Predecessor Business was a separate
taxable entity. Since the United States ("U.S.") and United Kingdom
("U.K.") operations within the Sola group were not separate taxable
entities but were included in
F-10
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
the consolidated income tax returns of other Pilkington group
companies, the current provision for U.S. federal and state income
taxes and for U.K. income taxes was assumed to be payable to
Pilkington in the period presented. However, in accordance with the
Pilkington tax allocation agreement with its U.S. and U.K.
subsidiaries, the benefit of a reduction in taxes payable due to the
utilization of net operating losses on a consolidated federal tax
return and U.K. tax filing could reduce the payable to Pilkington.
Such benefits were reflected as a capital contribution as of each
fiscal year end. The current provision for all other combined foreign
entities was assumed to be payable to the applicable taxing authority.
Appropriate U.S. and foreign income taxes have been provided on the
portion of the accumulated earnings of the Predecessor Business'
foreign subsidiaries which were intended to be remitted to Pilkington
within the foreseeable future.
Investment tax credits and research and development credits are
accounted for by the flow-through method.
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.
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
activities in the accompanying consolidated statements of cash flows.
As of March 31, 1996, 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 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:
Earnings (loss) per share have been computed based upon the weighted
average number of common and common equivalent shares outstanding,
when dilutive. Common equivalent shares result from dilutive stock
options, using the treasury stock method. Pursuant to Securities and
Exchange Commission (SEC) rules, common and common equivalent shares
issued by the Company at prices below the public offering price during
the twelve months immediately preceding the Company's initial public
offering (IPO) in March 1995 are included in the calculation (using
the treasury stock method and the initial public offering price) as if
they were outstanding for all periods prior to the offering date.
F-11
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Supplemental pro forma earnings per share (unaudited), calculated
as if the Acquisition, Mergers and IPO, had taken place at the
beginning of fiscal 1995, and excluding Acquisition and IPO related
non-recurring charges from net income, was $1.05 for fiscal 1995,
calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1995
--------------------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
(UNAUDITED)
<S> <C>
Net income, as reported............................. $ 9,725
Pro forma adjustments, primarily interest and AEA
fees, assuming that the IPO occurred at the
beginning of the period........................... 13,920
------------
Net Income used for supplemental pro forma
earnings per share calculation.................... $ 23,645
============
Weighted average number of shares outstanding, as
reported.......................................... 17,516
Adjustment necessary assuming shares issued in the
IPO were outstanding for the full period.......... 5,012
------------
Shares used in supplemental pro forma earnings per
share calculation................................. 22,528
============
Supplemental pro forma earnings per share........... $ 1.05
============
</TABLE>
Stock-Based Compensation:
The Company accounts for its stock option plan in accordance with
the provisions of the Accounting Principles Board's Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees". In 1995, the
Financial Accounting Standards Board released the Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation". SFAS 123 provides an alternative method of
accounting for stock-based compensation to APB 25 and is effective for
fiscal years beginning after December 15, 1995. The Company expects
to continue to account for its stock-based compensation in accordance
with the provision of APB 25. Accordingly, SFAS 123 is not expected
to have any material impact on the Company's financial position or
results of operations.
F-12
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. INVENTORIES
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1996 1995
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials......................... $10,595 $10,208
Work in progress...................... 4,782 4,882
Finished goods........................ 59,595 50,767
Molds................................. 25,735 19,819
------------- -------------
$100,707 $85,676
============= =============
</TABLE>
Molds comprise mainly finished goods for use by manufacturing
affiliates in the manufacture of spectacle lenses.
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1996 1995
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Land, buildings and leasehold improvements.. $26,599 $21,720
Machinery and office equipment.............. 78,882 63,782
Equipment under capital leases.............. 874 910
------------- -------------
106,355 86,412
Less accumulated depreciation and
amortization............................... 26,773 14,980
------------- -------------
$79,582 $71,432
============= =============
</TABLE>
At March 31, 1996 and 1995, equipment acquired under capital leases
had related accumulated amortization of approximately $176,000 and
$169,000, respectively.
5. NOTES PAYABLE TO BANKS
Notes payable to banks at March 31, 1996 represent borrowings
generally denominated in foreign currencies under several foreign
credit agreements with lenders at interest rates ranging from 1.63% to
11.50%, and 54.00% for Brazilian Real based borrowings. The Brazilian
Real based borrowings were $124,000 at March 31, 1996. The weighted
average interest rates as of March 31, 1996 and 1995 were 8.47% and
8.07%, respectively. As of March 31, 1996, the Company had total
unused lines of credit amounting to $23.3 million. As of March 31,
1996, the Company was in compliance with minimum net worth
requirements of agreements with certain foreign banks.
F-13
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31,
1996
------------------
(in thousands)
<S> <C>
Uncollateralized term loans, interest rates varying
from 5.70% to 6.35% at March 31, 1996, principal and
interest payable through December 2002.................. $3,547
Uncollateralized term loans, interest rates varying
from PIBOR plus .50% to plus .75%, (PIBOR was 4.23% at
March 31,1996) principal and interest payable through
January 1998............................................ 2,185
Loans collateralized by equipment and other assets,
interest rates varying from 8.0% to 16.6% at March 31,
1996, principal and interest payable through March
1998.................................................... 590
Loans collateralized by equipment and other assets in
Brazil, interest rates varying from 29.0% to 52.94% at
March 31, 1996, principal and interest payable through
April 1998.............................................. 188
Loan collateralized by guarantees over Company assets,
interest 13.27% at March 31, 1996, principal and
interest payable through June 1996...................... 359
Other.................................................... 172
----------
7,041
Less current portion..................................... 3,681
----------
$3,360
==========
</TABLE>
Aggregate annual maturities of long-term debt over the next five
years and thereafter are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING MARCH 31, (in thousands)
- -----------------------
<S> <C>
1997................................................. $3,681
1998................................................. 1,437
1999................................................. 791
2000................................................. 401
2001................................................. 341
Thereafter 390
</TABLE>
The Company believes that as of March 31, 1996, 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
On March 2, 1995 the Company entered into an Amended and Restated Bank
Credit Agreement with The Bank of Nova Scotia, for itself and as agent
for a syndicate of other financial institutions, covering an aggregate
amount of $85 million (the "Revised Bank Facility"). The Revised Bank
Facility consists of a revolving credit facility (the "Revised
Revolver") with the amount thereunder equal to the lesser of (i) $85
million or (ii) 75% of eligible accounts receivable and 45% of
eligible inventory of the Company and its subsidiaries, as defined. Up
to $20 million of capacity under the Revised Revolver is available for
the issuance of letters of credit and up to $15 million of capacity is
available for swing line advances. The
F-14
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. BANK CREDIT AGREEMENT - (CONTINUED)
Revised Revolver terminates on December 1, 1999. As of March 31, 1996
total availability under the Revised Revolver was $85 million, of
which $6.0 million had been utilized and a further $1.4 million had
been used for letters of credit issued with varying maturities.
Borrowings under the Amended and Restated Bank Credit Agreement's
Revised Revolver (other than swing line loans, which may only be Base
Rate loans) can be made in both Base Rate and LIBO Rate Loans. Base
Rate Loans bear interest at rates per annum equal to the sum of the
Scotiabank Alternate Base Rate and a margin varying from nil to 1/4%,
based on the Company's consolidated debt to EBITDA Ratio, as defined.
LIBO Rate Loans bear interest at a rate per annum equal to the sum of
the LIBO Rate and a margin varying from 3/4% to 1 1/2%, based on the
Company's consolidated debt to EBITDA Ratio. In addition a commitment
fee on the unused portion of the Revolver is payable quarterly in
arrears at a rate varying from 0.25% to 0.5% per annum based on the
Company's consolidated debt to EBITDA Ratio.
The Amended and Restated Bank Credit 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), declare, make or pay dividends or
other distributions in excess of prescribed levels, the creation of
liens, the making of certain investments and loans, engaging in
unrelated business, transactions with affiliates, the consummation of
certain transactions such as sales of substantial assets, mergers or
consolidations and other transactions. The Company and its
subsidiaries are also required to comply with certain financial tests
and maintain certain financial ratios. The Company has pledged the
shares in its domestic subsidiaries and has pledged 65% of the shares
of certain significant foreign subsidiaries, as defined in the Amended
and Restated Bank Credit Agreement as collateral for the Revised
Facility.
8. SENIOR SUBORDINATED NOTES
The Company's 9 5/8% Senior Subordinated Notes ("Notes") were
issued under an indenture dated December 1, 1993, among the Company
and Bank of New York, as Trustee (the "Indenture"). The Notes are
unsecured senior subordinated obligations of the Company, limited to
$116.6 million aggregate principal amount at maturity, and will mature
on December 15, 2003. Prior to December 15, 1998, interest will
accrue on the Notes and is payable in cash semiannually at the rate of
6% per annum of the principal amount at maturity of the Notes on June
15 and December 15 of each year. In addition, prior to December 15,
1998, original issue discount will accrete on the Notes such that the
yield to maturity will be 9 5/8% per annum, compounded on the basis of
semiannual compounding. From and after December 15, 1998, interest on
the Notes will accrue and be payable in cash semiannually at the rate
of 9 5/8% per annum of the principal amount at maturity of the Notes
on June 15 and December 15 of each year, commencing June 15, 1999.
The Notes may be redeemed at the option of the Company, in whole or
in part, at any time on or after December 15, 1998, initially at
104.813% of their principal amount at maturity and declining to 100%
of such principal amount at maturity on or after December 15, 2000, in
each case plus accrued interest. In addition, at the option of the
Company at any time prior to December 15, 1996, the Company may redeem
up to $40.75 million aggregate principal amount at maturity of the
Notes from the proceeds of one or more Public Equity Offerings
following which there is a Public Market, at a redemption price of
109.625% of the Accreted Value of the Notes, plus accrued interest.
F-15
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. SENIOR SUBORDINATED NOTES (CONTINUED)
The Indenture contains certain covenants that, among other things,
limit the ability of the Company and its subsidiaries to incur
indebtedness, pay dividends, redeem capital stock and make other
restricted payments, issue capital stock of subsidiaries, create
liens, permit dividend restrictions affecting subsidiaries, engage in
transactions with stockholders and affiliates, sell assets and engage
in mergers and consolidations.
The Notes are subordinated to all Senior Indebtedness, as defined
in the Indenture, of the Company and effectively subordinated to all
liabilities of the Company's subsidiaries. The Company believes that
as of March 31, 1996, the fair value of its Senior Subordinated Notes
approximates the carrying value of those obligations.
During fiscal 1996 the Company repurchased approximately $19.9
million principal amount at maturity of the Notes. As a result of the
repurchases the Company recorded an extraordinary charge of $0.9
million for fiscal 1996 resulting from the write-off of unamortized
debt issuance costs and premium over accreted value, net of tax. The
repurchase was partly funded by borrowings under the Bank Credit
Agreement and partly from excess cash arising from the IPO. The
Company may from time to time purchase additional Notes in the market
or otherwise subject to market conditions.
9. COMMON STOCK
The Company's common stock comprises 50 million authorized shares
at a par value of $0.01 each.
During February and March 1995, the Company sold 5,403,305 shares
of common stock at $16.50 per share through its initial public
offering (IPO). The net proceeds (after underwriter's discounts and
commissions and other costs associated with the IPO) totaled $81.2
million.
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, 1996 and 1995, loans amounting to $0.4
million and $1.1 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 sheet.
Sola Investors Inc. adopted the Sola Investors Inc. Stock Option
Plan (the "Existing Option Plan"), pursuant to which certain key
employees and/or directors of the Company and its subsidiaries and
affiliates (each an "Optionee") were eligible to receive non-qualified
stock options (the "Existing Options") to acquire shares of the non-
voting common stock of Sola Investors Inc. Existing Options granted
to an Optionee are evidenced by an agreement between the Optionee and
Sola Investors Inc. which contains terms not inconsistent with the
Existing Option Plan which the committee appointed to administer the
Existing Option Plan deemed necessary or desirable (the "Existing
Option Agreement").
Upon consummation of the Mergers, the Existing Option Plan and the
Existing Option Agreements were assumed by the Company and all
Existing Options which were outstanding at such time were converted
into options to acquire shares of the Company's Common Stock, with the
number of shares subject to such option and the exercise price thereof
adjusted appropriately. The Existing Option Plan has been amended to
provide that effective upon the consummation of the Mergers, no new
options will be granted thereunder.
F-16
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. COMMON STOCK - (CONTINUED)
The Company adopted the Sola International Inc. Stock Option Plan
("International Plan"), effective February 15, 1995. The maximum
number of shares of Common Stock with respect to which options may be
granted under the International Plan is 855,868 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 Stock 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/or creditors of the
Company and its subsidiaries and affiliates (each an "Optionee") were
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").
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.
The following table contains information concerning the options
under the Plans after giving effect to the Merger:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING EXERCISE PRICE
OPTIONS ($/SHARE)
-------------- --------------------
(in thousands, except per share data)
<S> <C> <C>
Options granted during fiscal 1995..................... 905 $ 9.71 - $16.50
Options outstanding as of March 31, 1995............... 2,166 $ 9.71 - $16.50
Options exercisable as of March 31, 1995............... 685 $ 9.71 - $16.50
Options available for grant as of March 31, 1995....... 335 -
Options granted during fiscal 1996..................... 113 $ 21.13 - $25.25
Options outstanding as of March 31, 1996............... 2,227 $ 9.71 - $25.25
Options exercised in fiscal 1996....................... 17 $ 9.71 - $16.50
Options cancelled in fiscal 1996....................... 35 $ 9.71 - $16.50
Options exercisable as of March 31, 1996............... 1,119 $ 9.71 - $25.25
Options available for grant as of March 31, 1996....... 257 -
</TABLE>
F-17
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 $0.9 million and $0.8 million for fiscal 1996, $0.3 million and
$0.5 million fiscal 1995, the four months ended March 31, 1994 and the
eight months ended November 30, 1993, respectively.
11. DEFINED BENEFIT RETIREMENT PLANS
Prior to the sale by Pilkington, the Predecessor Business
participated in a non-contributory Pilkington defined benefit pension
plan covering substantially all full-time domestic employees. As of
the Acquisition, Pilkington retained responsibility for all assets and
liabilities of this plan. The domestic employees participation in the
plan was curtailed as of the closing date and all employees were fully
vested as of that date.
Costs incurred and charged to the Predecessor Business's operations
for its portion of the Domestic Pension Plan were $1.1 million for the
eight months ended November 30, 1993.
The Company implemented a new Sola Optical defined benefit pension
plan ("Domestic Pension Plan") with substantially the same pension
benefits as the Pilkington plan. The new plan offers pension benefits
from December 1, 1993. The plan provides prior service benefits to
employees for years of service completed under Pilkington ownership,
and a liability reflecting the difference between Projected Benefit
Obligation and Accumulated Benefit Obligation as of December 1, 1993
has been provided in the financial statements as of the Acquisition
date.
Benefit payments under the new plan are based principally on
earnings 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 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.
F-18
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. DEFINED BENEFIT RETIREMENT PLANS - (CONTINUED)
The following table provides information on the status of the
Domestic Pension Plan and the International Pension Plan.
Net periodic pension cost included the following:
<TABLE>
<CAPTION>
FOUR EIGHT
YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, NOVEMBER
1996 1995 1994 30, 1993
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Domestic Pension Plan:
Service cost-benefits earned during
the period......................... $1,370 $1,252 $469
Interest cost on projected benefit
obligation......................... 509 377 127
Actual return on plan assets........ (180) 1 -
Net amortization and deferral....... 25 (1) -
--------- --------- ---------
Total net periodic pension costs.... $1,724 $1,629 $596
========= ========= =========
International Pension Plan:
Service cost-benefits earned during
the period......................... $1,539 $1,299 $428 $856
Interest cost on projected benefit
obligation......................... 684 579 187 375
Actual return on plan assets........ (1,454) 134 (533) (1,067)
Net amortization and deferral....... 583 (938) 231 461
--------- --------- --------- ---------
Total net periodic pension costs.... $1,352 $1,074 $313 $625
========= ========= ========= =========
</TABLE>
The significant actuarial assumptions for the following tables, as
of the period-end measurement dates, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Domestic Pension Plan:
Discount rate............................ 7.0% 7.5%
Expected long-term rate of return on
plan assets............................ 8.0% 8.0%
Rate of increase in future compensation
levels... ............................ 5.0% 5.0%
International Pension Plan:
Discount rate............................ 8.0% 7.5% 7.5%
Expected long-term rate of return on
plan assets............................ 8.5% 8.0% 8.0%
Rate of increase in future compensation
levels................................. 5.5% 5.5% 5.5%
</TABLE>
The change in the actuarial assumptions for fiscal 1996 and 1995
have not had a significant effect on the funded status of the Domestic
or International Pension Plans.
F-19
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. DEFINED BENEFIT RETIREMENT PLANS - (CONTINUED)
At March 31, 1996, the Domestic Pension Plan and International
Pension Plan assets include cash equivalents, fixed income securities
and common stock.
The funded status as of the year-end measurement dates was as
follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Domestic Pension Plan:
Actuarial present value of benefit obligations:
Vested benefit obligation...................... $2,776 $968 $313
======== ======== ========
Accumulated benefit obligation................. $3,091 $1,262 $408
======== ======== ========
Projected benefit obligation................... $9,603 $6,566 $5,023
Plan assets at fair value...................... 3,733 58 -
-------- -------- --------
Projected benefit obligation in excess of plan
assets........................................ 5,870 6,508 5,023
Unrecognized net loss.......................... (1,179) (13) (18)
Unrecognized prior service cost................ - - -
Unrecognized transition asset, net............. - - -
-------- -------- --------
Accrued pension cost........................... $4,691 $6,495 $5,005
======== ======== ========
International Pension Plan:
Actuarial present value of benefit
obligations:
Vested benefit obligation...................... $10,480 $3,518 $7,439
======== ======== ========
Accumulated benefit obligation................. $10,486 $8,524 $7,442
======== ======== ========
Projected benefit obligation................... $10,827 $9,069 $7,857
Plan assets at fair value...................... 12,032 9,546 8,966
-------- -------- --------
Projected benefit obligation less than plan
assets........................................ (1,205) (477) (1,109)
Unrecognized net gain.......................... 947 208 828
Unrecognized transition asset, net............. 258 269 281
-------- -------- --------
Accrued pension cost........................... $ - $ - $ -
======== ======== ========
</TABLE>
Employees in the U.K. participated in the Pilkington Superannuation
Scheme which is a defined benefit pension plan with employee and
employer contributions. The employees remained covered under this
plan through March 31, 1994 and the Company contributed $0.1 million
to the plan for the four months ended March 31, 1994. Subsequent to
March 31, 1994, employees in the UK ceased to participate in the
Pilkington Superannuation Scheme and are eligible to participate in a
new, defined contribution pension plan (see Note 10).
F-20
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. INCOME TAXES
The domestic and foreign components of income (loss) before taxes
are as follows:
<TABLE>
<CAPTION>
EIGHT
FOUR MONTHS
MONTHS ENDED
YEAR ENDED YEAR ENDED ENDED NOVEMBER
MARCH 31, MARCH 31, MARCH 31, 30,
1996 1995 1994 1993
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Domestic............... $27,158 $9,746 $(44,930) $5,683
Foreign................ 21,454 11,476 (22,402) 11,307
---------- ---------- ---------- ----------
$48,612 $21,222 $(67,332) $16,990
========== ========== ========== ==========
</TABLE>
The components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
FOUR EIGHT
YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED
MARCH MARCH MARCH NOVEMBER
31, 31, 31, 30,
1996 1995 1994 1993
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Current:
Federal........................ $2,912 $28 $ - $2,907
State.......................... 844 129 - 322
Foreign........................ 8,210 7,896 (1,377) 3,555
Deferred:
Federal........................ 7,020 5,695 (573) (957)
State.......................... 2,161 1,675 - -
Foreign........................ 1,134 (4,795) (4,244) 6
Valuation allowance adjustment..... (8,658) (3,979) - -
-------- -------- -------- --------
$13,623 $6,649 $(6,194) $5,833
======== ======== ======== ========
</TABLE>
F-21
<PAGE>
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 operations is as follows:
<TABLE>
<CAPTION>
FOUR EIGHT
YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED
MARCH MARCH MARCH NOVEMBER
31, 31, 31, 30,
1996 1995 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Provision (benefit) at statutory rate.... 35.0% 34.0% (34.0)% 34.0%
State tax provision...................... 3.6 2.7 - .6
Valuation allowance...................... (12.7) 4.5 28.6 -
Income (loss) of foreign subsidiaries
tax provision or benefit at differing
statutory rates......................... 9.3 (4.6) (3.8) (.3)
Tax benefit from NOL utilization......... (5.1) - - -
Other.................................... (1.5) 1.8 - -
-------- -------- -------- --------
28.6% 38.4% (9.2)% 34.3%
======== ======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to
allowances for doubtful accounts................. $3,008 $3,264
Inventories, principally due to reserves.......... 8,626 3,819
Property, plant and equipment, principally due to
differences in depreciation...................... 2,687 765
Accruals for employee benefits.................... 8,788 11,398
In-process research and development............... 10,809 11,477
Other assets...................................... 4,554 8,755
Net operating losses.............................. 3,685 4,507
----------- -----------
Total gross deferred tax assets................... 42,157 43,985
Less valuation allowance.......................... (15,294) (25,155)
----------- -----------
Net deferred tax assets........................... $26,863 $18,830
=========== ===========
Deferred tax liabilities:
Property, plant and equipment, principally due to
differences in depreciation...................... $9,264 $6,735
Inventories....................................... 2,252 1,818
Unremitted income of foreign subsidiaries......... 2,400 -
Other............................................. 4,107 1,242
----------- -----------
$18,023 $9,795
=========== ===========
</TABLE>
F-22
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. INCOME TAXES - (CONTINUED)
For balance sheet presentation, deferred tax assets and liabilities
have been netted for each separate tax jurisdiction.
The net changes in the total valuation allowance for fiscal 1996,
1995 and 1994 were $(9.9) million, $(6.8) million and $30.9 million,
respectively, and relate primarily to movements in certain foreign and
U.S. net operating losses.
For tax purposes, the Company, at March 31, 1996, utilized net
operating loss ("NOL") carryforwards for U.S. Federal income tax
purposes of approximately $7.0 million. The Company's Australian
subsidiary had available, as of March 31, 1996, NOL carryforwards for
Australian tax purposes of approximately $9.8 million which do not
expire. The deferred tax assets reflected in the Company's accounts
as of March 31, 1996 before valuation allowances reflect these NOLs.
A valuation allowance of approximately $15.3 million, comprising
$9.2 million against U.S. and $6.1 million against Australian deferred
tax assets has been established for those tax assets which may not be
realized. Of the $7.0 million of valuation allowances provided in
fiscal 1994 against deferred tax assets arising from the Acquisition,
$1.2 million was applied to reduce goodwill, in fiscal 1996 and $2.8
million in fiscal 1995. The remaining valuation allowances of $3.0
million will be applied first to reduce remaining goodwill, and if no
goodwill remains, then will reduce income tax expense.
The Company has not provided for U.S. federal income and foreign
withholding taxes on $5 million of non-U.S. subsidiaries'
undistributed earnings as of March 31, 1996 because such earnings are
intended to be reinvested indefinitely. If these earnings were
distributed, foreign tax credits should become available under current
law to reduce or eliminate the resulting U.S. income tax liability.
Where excess cash has accumulated in the company's non-U.S.
subsidiaries and it is advantageous for tax or foreign exchange
reasons, subsidiary earnings are remitted.
13. COMMITMENTS
The Company leases certain warehouse and office facilities, office
equipment and automobiles under non cancelable operating leases which
expire in 1996 through 2006. 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 (in thousands):
<TABLE>
<CAPTION>
PERIOD ENDING MARCH 31,
-----------------------
<S> <C>
1997................................................ $4,185
1998................................................ 3,391
1999................................................ 2,461
2000................................................ 1,359
2001................................................ 439
Thereafter.......................................... 3,264
</TABLE>
Rent expense for fiscal 1996, fiscal 1995, the four months ended
March 31, 1994, and the eight months ended November 30, 1993 was $5.4
million, $5.1 million, $1.0 million and $3.6 million, respectively.
F-23
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
The Company is currently participating in a remediation program of
one of its manufacturing facilities under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") and
the Superfund Amendments and Reauthorization Act of 1986. The Company
estimates that, based on an independent feasibility report prepared in
accordance with an EPA 1991 Consent Order, additional clean-up costs
of approximately $100,000 per annum for up to 17 years may be
incurred. Under the current remediation program, the EPA has
established that re-evaluation of the program be performed every five
years, with the next scheduled review by the EPA being in fiscal 1998.
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, 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.
As of March 31, 1996 and March 31, 1995, the Company has provided
for environmental remediation costs in the amount of $2.5 million and
$2.7 million, respectively, which is included in the balance sheet
under other long-term liabilities.
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.
15. SIGNIFICANT RELATED PARTY TRANSACTIONS
Notes Payable to Pilkington and Affiliates:
Interest expense on notes payable to Pilkington for the eight
months ended November 30, 1993, was $1.5 million.
Payables to Affiliated Companies and other Activities:
Pilkington charged the Predecessor Business for services and shared
costs relating to treasury functions, tax return preparations,
internal audit service and risk management services. For the eight
months ended November 30, 1993 the Predecessor Business expensed $0.4
million relating to Pilkington services and shared costs. In
addition, Pilkington facilitated the Predecessor Business purchases of
certain outside services, such as legal, worker's compensation and
other insurance premiums.
F-24
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. SIGNIFICANT RELATED PARTY TRANSACTIONS - (CONTINUED)
Arrangements with AEA Investors Inc.:
In connection with the Acquisition and in consideration of services
performed by AEA Investors Inc. ("AEA"), in arranging, structuring,
and negotiating the terms of the Acquisition and the related financing
transactions, the Company paid AEA a transaction fee of $5 million.
Prior to the IPO, AEA and the Company were parties to an agreement
pursuant to which AEA provided management, consulting and financial
services to the Company. In consideration for such services, the
Company paid AEA a management fee for the first nine months of fiscal
1995 and the four months ended March 31, 1994 of $750,000 and
$250,000, respectively. Subsequent to the IPO the agreement was
terminated and the Company paid AEA a fee of $3.0 million in
connection therewith.
16. 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):
<TABLE>
<CAPTION>
NORTH REST OF ELIMINA-
AMERICA EUROPE WORLD TIONS TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SOLA INTERNATIONAL INC.
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 (loss)........ 35,318 16,645 9,612 (822) 60,753
Identifiable assets............ 204,733 115,205 105,096 (8,185) 416,849
YEAR ENDED MARCH 31, 1995
Revenue:
External..................... $169,316 $100,045 $76,270 $ - $345,631
Internal..................... 13,357 52,524 37,180 (103,061) -
Operating income (loss)........ 18,391 12,443 9,010 (100) 39,744
Identifiable assets............ 192,425 106,916 90,281 (6,165) 383,457
FOUR MONTHS ENDED
MARCH 31, 1994
Revenue:
External..................... $ 54,880 $27,643 $23,507 $ - $106,030
Internal..................... 2,759 14,889 9,226 (26,874) -
Operating income (loss)........ (41,033) (5,774) (11,778) (2,420) (61,005)
Identifiable assets............ 187,083 96,624 80,897 (4,155) 360,449
PREDECESSOR BUSINESS
EIGHT MONTHS ENDED
NOVEMBER 30,1993
Revenue:
External..................... $100,230 $56,095 $43,700 $ - $200,025
Internal..................... 5,265 28,874 24,044 (58,183) -
Operating income............... 10,222 3,554 6,070 693 20,539
</TABLE>
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
(loss).
F-25
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. WORLDWIDE OPERATIONS - (CONTINUED)
Included in the operating loss for the four months ended March 31,
1994 for North America, Europe, and Rest of World were charges of
$15.1 million, $8.6 million and $6.3 million, respectively,
representing the reversal of write-up of inventories to fair value at
the Acquisition date, and amortization of goodwill. In addition,
write-off of in-process research and development expenses in North
America and Australia (included in Rest of World) amounted to $32
million and $8 million, respectively.
For fiscal 1996 and 1995, the four months ended March 31, 1994 and
the eight months ended November 30, 1993 the corporate headquarters
costs of $7.7 million, $11.7 million, $0.8 million and $4.2 million,
respectively, are included in the North American geographic area.
Included in fiscal 1995 corporate headquarters costs are the AEA
management fees and management agreement termination fee totaling $3.9
million.
17. SUPPLEMENTARY CASH FLOW DATA (IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
SOLA INTERNATIONAL INC. BUSINESS
----------------------------------- -----------
EIGHT
FOUR MONTHS MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, NOVEMBER
1996 1995 1994 30, 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Interest paid.................................. $11,220 $19,264 $2,389 $3,211
=========== =========== =========== ===========
Taxes paid..................................... $11,486 $ 6,233 $ 439 $4,223
=========== =========== =========== ===========
Supplemental disclosures of noncash investing
and financing activities:
Capital expenditures accrued but not paid...... $1,646 $2,541 $2,236 $ 930
=========== =========== =========== ===========
Dividends previously declared subsequently
cancelled..................................... $ - $ - $ - $3,304
=========== =========== =========== ===========
</TABLE>
18. SUBSEQUENT EVENTS (unaudited)
In May 1996 the Company signed a purchase agreement ("AO Purchase")
with American Optical Corporation ("AOC"), whereby the Company would
purchase AOC's worldwide ophthalmic business. The purchase price will
be approximately $107.0 million, excluding acquisition costs, and
assumption of certain debt and liabilities, subject to adjustment for
certain financial conditions as of closing. Closing of the AO
Purchase is subject to a number of conditions including regulatory
approval in the United States and certain foreign jurisdictions. The
AO Purchase if and when consummated will be accounted for under the
purchase method of accounting. AO's worldwide ophthalmic business
recorded net sales and operating income, after allocated corporate
expenses, of approximately $85.7 million and $11.9 million, respectively,
for its fiscal year ended March 31, 1996.
Simultaneous with the closing of the AO Acquisition, the Company
expects to enter into a new bank credit agreement (the "New
Credit Agreement"), replacing its existing credit agreement. The New
Credit Agreement is divided into three tranches which consist of: a five-
year term loan of $30 million, a renewable three-year foreign currency
revolving facility of $30 million, and a further five-year U.S. dollar
revolver of $120 million. The New Credit Agreement is unsecured. The
Company believes that the New
F-26
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
18. SUBSEQUENT EVENTS (unaudited) - (CONTINUED)
Credit Agreement will lower the effective interest rate on its
borrowings and provide it with greater operating flexibility.
In May 1996 the Company announced that it had entered into a
definitive merger agreement which provides for the acquisition by the
Company of Neolens, Inc. ("Neolens"), a Florida corporation that
manufactures polycarbonate eyeglass lenses and has been a supplier to
the Company. Pursuant to the merger agreement the Company will
commence a cash tender offer for all outstanding shares of Neolens
Common Stock, Series A Preferred Stock and Series B Preferred Stock.
The aggregate purchase price will be approximately $16.0 million,
including the assumption of Neolens debt. Although there can be no
assurance of consummation, the Company expects to consummate the
tender offer by August 1996.
F-27
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
QUARTERLY FINANCIAL DATA
(in thousands, except per share data)
(unaudited)
<CAPTION>
QUARTER QUARTER QUARTER
ENDED ENDED ENDED QUARTER
JUNE 30, SEPT. 30, DEC. 31, ENDED MARCH
1995 1995 1995 31, 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.................... $95,922 $95,866 $91,329 $104,592
Gross profit................. 45,740 45,404 43,557 51,017
Operating income............. 13,668 15,565 11,461 20,059
Income before extraordinary
item........................ 7,355 9,000 5,958 12,275
Net income................... 6,443 9,000 5,958 12,275
Earnings per share:
Income before extraordinary
item....................... 0.32 0.39 0.26 0.53
Extraordinary item.......... (0.04) - - -
Net income per share......... 0.28 0.39 0.26 0.53
<CAPTION>
QUARTER QUARTER QUARTER
ENDED ENDED ENDED QUARTER
JUNE 30, SEPT. 30, DEC. 31, ENDED MARCH
1994 1994 1994 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.................... $83,741 $84,420 $82,854 $94,616
Gross profit................. 35,900 38,931 39,374 45,800
Operating income............. 8,149 10,511 7,631 13,453
Income before extraordinary
item........................ 2,373 4,347 1,332 5,588
Net income(1)................ 2,373 4,347 1,332 1,673
Earnings per share:
Income before extraordinary
item....................... 0.14 0.25 0.08 0.32
Extraordinary item.......... - - - (0.22)
Net income per share......... 0.14 0.25 0.08 0.10
<FN>
(1) The quarter ended March 31, 1995 net income reflects an effective
tax rate of 36% compared to the previous three quarters
reflecting an effective tax rate of 28%. The increase in
effective tax rate for the quarter ended March 31, 1995 is caused
by non-recurring charges associated with the IPO.
F-28
<PAGE>
</TABLE>
SCHEDULE II
<TABLE>
SOLA INTERNATIONAL INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<CAPTION>
BALANCE, CHARGED BALANCE,
BEGINNING TO END OF
OF PERIOD EXPENSES DEDUCTIONS OTHER(1) PERIOD
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SOLA INTERNATIONAL INC.
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
=========== =========== =========== =========== ==========
YEAR ENDED MARCH 31, 1995
Allowance for doubtful accounts.... $ 412 $2,442 $ (129) $ 129 $2,854
=========== =========== =========== =========== ==========
Allowance for excess and obsolete
inventory......................... $ 604 $1,981 $ (65) $ 14 $2,534
=========== =========== =========== =========== ==========
FOUR MONTHS ENDED MARCH 31, 1994
Allowance for doubtful accounts.... $ - $ 412 $ - $ - $ 412
=========== =========== =========== =========== ==========
Allowance for excess and obsolete
inventory......................... $ - $ 604 $ - $ - $ 604
=========== =========== =========== =========== ==========
PREDECESSOR BUSINESS
EIGHT MONTHS ENDED NOVEMBER 30, 1993
Allowance for doubtful accounts.... $2,359 $1,223 $(1,287) $ (89) $2,206
=========== =========== =========== =========== ==========
Allowance for excess and obsolete
inventory......................... $2,335 $1,204 $ 342 $ (116) $3,765
=========== =========== =========== =========== ==========
<FN>
- -----------------
(1) Other relates primarily to foreign currency translation
adjustments.
(2) Represents write-off and disposition of excess and obsolete
inventories.
S-1
<PAGE>
</TABLE>
INDEX OF EXHIBITS
Page Number or
Exhibit No. Description Incorporation by Reference to
- ----------- ----------- -----------------------------
2.1 Purchase agreement between Filed as Exhibit 2 to the
Sola International Inc. and Form 8-K of the Company,
American Optical Corporation, dated May 6, 1996, and
dated as of May 6, 1996 incorporated herein by
reference
3.1 Amended and Restated Filed as Exhibit 3.1 to the
Certificate of Incorporation Annual Report on Form 10-K of
of the Company 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 Filed as Exhibit 3.1 to the
of the Company Company's Quarterly Report on
Form 10-Q for the period
ending September 30, 1995,
and incorporated herein by
reference
10.1 Purchase Agreement, dated as Filed as Exhibit 10.1 to the
of September 1, 1993 by and Registration Statement, as
between Sola Holdings Inc., amended, on Form S-1 of the
Pilkington plc and certain of Company (File No. 33-68824)
Pilkington plc's subsidiaries and incorporated herein by
reference
10.2* Employment Agreement between Filed as Exhibit 10.2 to the
Sola Optical USA, Inc. and Registration Statement, as
John E. Heine, dated as of amended, on Form S-1 of the
February 26, 1993 Company (File No. 33-68824)
and incorporated herein by
reference
10.3* Assignment and Amendment of Filed as Exhibit 10.3 to the
Employment Agreement, dated as Registration Statement, as
of December 1, 1993, among amended, on Form S-1 of the
Sola Optical USA, Inc., Sola Company (File No. 33-87892)
Group Ltd. and John E. Heine and incorporated herein by
reference
10.4* Employment Agreement between Filed as Exhibit 10.4 to the
Sola Optical USA, Inc. and Registration Statement, as
James H. Cox, dated as of amended, on Form S-1 of the
February 26, 1993 Company (File No. 33-68824)
and incorporated herein by
reference
10.5* Assignment and Amendment of Filed as Exhibit 10.7 to the
Employment Agreement, dated as Registration Statement, as
of December 1, 1993, among amended, on Form S-1 of the
Sola Optical USA, Inc., Sola Company (File No. 33-87892)
Group Ltd. and James H. Cox and incorporated herein by
reference
10.6* Employment Agreement between Filed as Exhibit 10.5 to the
Sola Optical USA, Inc. and Registration Statement, as
Colin M. Perrott, dated as of amended, on Form S-1 of the
February 26, 1993 Company (File No. 33-68824)
and incorporated herein by
reference
10.7* Assignment and Amendment of Filed as Exhibit 10.9 to the
Employment Agreement, dated as Registration Statement, as
of December 1, 1993, among amended, on Form S-1 of the
Sola Optical USA, Inc., Sola Company (File No. 33-87892)
Group Ltd. and Colin M. and incorporated herein by
Perrott reference
10.8* Employment Agreement between Filed as Exhibit 10.6 to the
Sola Optical USA, Inc., and Registration Statement, as
Ian S. Gillies, dated as of amended, on Form S-1 of the
February 26, 1993 Company (File No. 33-68824)
and incorporated herein by
reference
10.9* Assignment and Amendment of Filed as Exhibit 10.11 to the
Employment Agreement, dated as Registration Statement, as
of December 1, 1993, among amended, on Form S-1 of the
Sola Optical USA, Inc., Sola Company (File No. 33-87892)
Group Ltd. and Ian S. Gillies and incorporated herein by
reference
E-1
<PAGE>
INDEX OF EXHIBITS
(continued)
Page Number or
Exhibit No. Description Incorporation by Reference to
- ----------- ----------- -----------------------------
10.10* Employment Agreement between Filed as Exhibit 10.10 to the
Bernard Freiwald and Sola Annual Report on Form 10-K of
Group Ltd., dated as of May the Company for the fiscal
31, 1994 year ending March 31, 1995,
dated June 7, 1995, and
incorporated herein by
reference
10.11 Amended and Restated Credit Filed as Exhibit 10.11 to the
Agreement, dated as of March Annual Report on Form 10-K of
2, 1995, among the Company, the Company for the fiscal
the lenders (the "Lenders") year ending March 31, 1995,
named therein and The Bank of dated June 7, 1995, and
Nova Scotia, as agent for the incorporated herein by
Lenders (the "Agent") reference
10.12 Lease Agreement, dated May 10, Filed as Exhibit 10.9 to the
1993, between Sola Optical Registration Statement, as
Taiwan Ltd. and Chang Jin Co., amended, on Form S-1 of the
Ltd. (including English Company (File No. 33-68824)
summary of principal terms) and incorporated herein by
reference
10.13 Lease Agreement between Filed as Exhibit 10.10 to the
Optical Sola de Mexico and Registration Statement, as
Messrs. Salvadore Luttenroth- amended, on Form S-1 of the
Camou and Carlos Lutteroth- Company (File No. 33-68824)
Lomeli (including English and incorporated herein by
summary of principal terms) reference
10.14* Sola Investors Inc. Stock Filed as Exhibit 10.11 to the
Option Plan Annual Report on Form 10-K of
the Company, dated March 31,
1994, and incorporated herein
by reference
10.15* Amendment Number One to Sola Filed as Exhibit 10.21 to the
Investors Inc. Stock Option Registration Statement, as
Plan amended, on Form S-1 of the
Company (File No. 33-87892)
and incorporated herein by
reference
10.16* Sola International Inc. Stock Filed as Exhibit 10.22 to the
Option Plan Registration Statement, as
amended, on Form S-1 of the
Company (File No. 33-87892)
and incorporated herein by
reference
10.17 Indenture by and between the Filed as Exhibit 10.23 to the
Company and NationsBank of Registration Statement, as
Georgia, National Association, amended, on Form S-1 of the
as Trustee, with respect to Company (File No. 33-87892)
the 9 5/8% Senior Subordinated and incorporated herein by
Notes due 2003 (including the reference
form of Note)
10.18* Form of Indemnification Filed as Exhibit 10.24 to the
Agreement between the Registration Statement, as
executive officers and amended, on Form S-1 of the
directors of the Company and Company (File No. 33-87892)
the Company and incorporated herein by
reference
10.19* Sola International Inc. Filed as Exhibit 10.25 to the
Management Incentive Plan Registration Statement, as
amended, on Form S-1 of the
Company (File No. 33-87892)
and incorporated herein by
reference
10.20 Sola Optical 401(k) Savings Filed as Exhibit 4.4 to the
Plan 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
E-2
<PAGE>
INDEX OF EXHIBITS
(continued)
Page Number or
Exhibit No. Description Incorporation by Reference to
- ----------- ----------- -----------------------------
10.21 Trust Agreement entered into Filed as Exhibit 4.5 to the
as of May 15, 1996 between Registration Statement on
Sola Optical USA, Inc. and Form S-8 of the Company (File
Chase Manhattan Bank, N.A. No. 333-4489) filed with the
Commission on May 23, 1996, and
incorporated herein by
reference
11.1 Statement regarding
computation of per share
earnings
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
27.1 Financial Data schedule
99.1 Factors Affecting Future
Operating Results
- -------------------------
*Compensatory plan or management agreement
<PAGE> E-3
EXHIBIT 11.1
<TABLE>
SOLA INTERNATIONAL INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
Fiscal Year Fiscal Year Four Months
Ended Ended Ended
March 31, March 31, March 31,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Income (loss) before extraordinary item....... $34,588 $13,640 $(61,394)
Extraordinary item, repurchase of senior
subordinated notes (1995-write-off of debt
issuance costs), net of tax.................. (912) (3,915) -
------------- ------------- -------------
Net income (loss)............................. $33,676 $ 9,725 $(61,394)
============= ============= =============
Weighted average number of common and common
equivalent shares outstanding................ 21,785 16,710 16,319
Add: Assumed dilution arising from exercise
of common equivalent shares (stock options).. 1,159 772 -
Add: Adjustment for common shares issued
below the public offering price during the
twelve months preceding the Company's
initial public offering...................... - 34 34
Weighted average number of common and common
equivalent shares used in earnings (loss)
per share calculation........................ 22,944 17,516 16,353
============= ============= =============
Earnings (loss) per share:
Income (loss) before extraordinary item...... $ 1.51 $ 0.78 $ (3.75)
Extraordinary item........................... (0.04) (0.22) -
------------- ------------- -------------
Net income (loss)............................ $ 1.47 $ 0.56 $ (3.75)
============= ============= =============
</TABLE>
EXHIBIT 12.1
<TABLE>
SOLA INTERNATIONAL INC.
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<CAPTION>
PREDECESSOR
SOLA INTERNATIONAL INC. BUSINESS
------------------------------------ -----------
EIGHT
FOUR MONTHS MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, NOVEMBER 30,
1996 1995 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income (loss) from continuing
operations before income taxes...... $48,612 $21,222 $(67,332) $16,990
----------- ----------- ----------- -----------
Fixed charges:
Interest........................... 12,412 18,068 6,227 3,220
Amortization of financing costs.... 273 924 338 -
Interest portion of rental expense. 1,790 1,690 331 1,184
----------- ----------- ----------- -----------
Total.............................. 14,475 20,682 6,896 4,404
----------- ----------- ----------- -----------
TOTAL.............................. $63,087 $41,904 ($60,436) $21,394
=========== =========== =========== ===========
Fixed charges...................... $14,475 $20,682 $ 6,896 $ 4,404
=========== =========== =========== ===========
Ratio of earnings to fixed charges. 4.36 2.03 - 4.86
=========== =========== =========== ===========
</TABLE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
NAME JURISDICTION
Sola Argentina S.A. Argentina
Sola Optical Partners, A Limited Partnership Australia (Victoria)
Sola Optical Holdings Pty. Ltd. Australia (Victoria)
Sola Corporation Limited Australia (South
Australia)
Sola Optical Licensing Pty. Ltd. Australia (South
Australia)
Sola International Holdings Ltd. Australia (South
Australia)
Sola Licensing Pty. Ltd. Australia (South
Australia)
Sola Optical Australia Pty. Ltd. Australia (South
Australia)
Norinco Sola Optical Ltd. People's Republic of
China (50%)
Sola Brasil Industria Optica Ltda Brazil
Solbras-Distribuidora de Produtos Sola Ltda Brazil
Sola Industria e Comercio Ltda Brazil
Sociedade Amazonense de Oculos Ltda Brazil
American Optical Lens Company, Ltd. Canada
Sola Optical Holdings (U.K.) Ltd. England
Sola Optical (U.K.) Limited England
Sola Optical Holdings S.A.R.L. France
Industrie Optique Sola S.A. France
Sola Optical S.A. France
Sola Group Holdings GmbH Germany
Sola Optical GmbH Germany
Sola Brillenglas Vertriebs GmbH Germany
Sola Hong Kong Ltd. Hong Kong
Sola ADC Lenses Limited Ireland
Sola RDC Limited Ireland
Sola Ophthalmic Products Ltd. Ireland
Sola Optical Italia S.p.A. Italy
Optiservice S.r.l. Italy
O.V.Bari S.r.l. Italy (51%)
Sola Optical Japan Limited Japan (Osaka)
Solnox Optical Ltd. Japan (50%)
Lentes Sola S.A. de C.V. Mexico
Optica Sola de Mexico S.A. de C.V. Mexico
Imgo Industries B.V. Netherlands
Sola Optica Singapore Pte Ltd. Singapore
Sola Optical Taiwan Ltd. Republic of China
Sola Optical Holdings I Ltd. U.S.A. (Delaware)
Sola Optical Holdings II Ltd. U.S.A. (Delaware)
Sola Optical Holdings III Ltd. U.S.A. (Delaware)
Sola Optical Holdings IV Ltd. U.S.A. (Delaware)
Sola Optical Holdings V Ltd. U.S.A. (Delaware)
Sola Optical Holdings VI Ltd. U.S.A. (Delaware)
Sola Optical Holdings Aus. Ltd. U.S.A. (Delaware)
Sola Optical Holdings Fr. Ltd. U.S.A. (Delaware)
American Optical Lens Company U.S.A. (Delaware)
Sola Acquisition Corp. U.S.A. (Florida)
NAME JURISDICTION
Sola de Venezuela Industria Optica C.A. Venezuela
Sola Optical China Limited (70%) British Virgin Islands
Sola Optical Guangzhou Ltd. People's Republic of
China
Shanghai Omyl Ltd. (50%) People's Republic of
China
Sola GJ Lens Manufacturing Ltd. People's Republic of
China
Shenzen Ming Li Optical (25%) People's Republic of
China
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-4489) pertaining to the Sola Optical
401(k) Savings Plan and in the Registration Statement (Form S-8
No. 93788) pertaining to the Sola International Inc. Stock Option
Plan and the Sola Investors' Stock Option Plan of Sola
International Inc. of our report dated May 6, 1996, with respect
to the consolidated financial statements and schedule of Sola
International Inc. included in this Annual Report (Form 10-K) for
the year ended March 31, 1996.
ERNST & YOUNG LLP
Palo Alto, California
June 14, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 22,394
<SECURITIES> 0
<RECEIVABLES> 80,269
<ALLOWANCES> 5,424
<INVENTORY> 100,707
<CURRENT-ASSETS> 207,298
<PP&E> 106,355
<DEPRECIATION> 26,773
<TOTAL-ASSETS> 416,849
<CURRENT-LIABILITIES> 110,842
<BONDS> 108,776
0
0
<COMMON> 218
<OTHER-SE> 192,023
<TOTAL-LIABILITY-AND-EQUITY> 416,849
<SALES> 387,709
<TOTAL-REVENUES> 387,709
<CGS> 201,991
<TOTAL-COSTS> 201,991
<OTHER-EXPENSES> 124,965
<LOSS-PROVISION> 2,846
<INTEREST-EXPENSE> 12,685
<INCOME-PRETAX> 48,612
<INCOME-TAX> 13,623
<INCOME-CONTINUING> 34,588
<DISCONTINUED> 0
<EXTRAORDINARY> (912)
<CHANGES> 0
<NET-INCOME> 33,676
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 0
</TABLE>
Exhibit 99.1
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-K, the Company's Annual Report to Shareholders,
any Form 10-Q or any Form 8-K of the Company or any other written
or oral statements made by or on behalf of the Company include
forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934 which reflect the Company's
current views with respect to future events and financial
performance. These forward-looking statements are subject to
certain risks and uncertainties, including those discussed below,
that could cause actual results to differ materially from
historical results or those anticipated. 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.
Although the Company believes that it has the product
offerings and resources needed for continuing success, future net
sales and margin trends cannot be reliably predicted and may
cause the Company to adjust its operations. Factors external to
the Company can result in volatility of the Company's common
stock price. Because of the foregoing factors, recent trends
should not be considered reliable indicator of future stock
prices or financial results.
The following factors could cause actual operating results
to differ materially from historical results or those
anticipated:
HIGHLY COMPETITIVE INDUSTRY
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 eyeglass lens and coating industry is
characterized by price competition, which can be severe in
certain markets, particularly for 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 and future growth are
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. See "--Substantial Indebtedness"
and "--Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources".
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.
INTERNATIONAL OPERATIONS
The Company operates manufacturing and distribution sites in
three 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 1996 from the sale of products outside
the United States. 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
<PAGE>
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.
The Company's interest expense is denominated predominantly
in U.S. dollars; its cash flow, however, is comprised of a
variety of currencies. Although the Company may enter into
currency swap agreements with financial institutions to reduce
its exposure to fluctuations in foreign currency values relative
to its debt obligations, such hedging transactions, if entered
into, will not eliminate that risk entirely. 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 Company has significant operations
in Brazil, which has, until recently, experienced a
hyper-inflationary environment and whose currency risk may not be
effectively hedged. The functional currency of the Company's
operations in Brazil is the U.S. dollar. Under U.S. generally
accepted accounting principles for hyper-inflationary countries,
all translation and transaction adjustments of foreign operations
are reflected in the Company's statements of operations. The
Company's historical statements of operations reflect significant
charges to income primarily attributable to significant
devaluations of the Brazilian currency. There can be no
assurance that hyper-inflationary conditions will not return to
Brazil or be present in other countries in which the Company has
significant operations. See "--Management's Discussion and
Analysis of Financial Condition and Results of
Operations--Currency Exchange Rates" and "--Inflation".
RESTRICTIONS ON PAYMENT OF DIVIDENDS FROM SUBSIDIARIES
The Company's foreign operations are conducted through its
subsidiaries. These operations contribute significantly to the
Company's sales and profitability. The payment of dividends and
the making of loans and advances to the Company by its
subsidiaries may be subject to statutory restrictions, are
contingent upon the earnings of those subsidiaries and are
subject to various business considerations. Dividends and other
payments to the Company from subsidiaries in certain
jurisdictions are subject to legal restrictions and may have
adverse tax consequences to the Company. The Company intends to
remit dividends from its foreign operations subject to local cash
requirements and legal restrictions. Management reviews the need
for cash distributions to the Company from its foreign
subsidiaries on a case by case basis. If the need for cash
distributions from the subsidiaries should arise in the future,
there can be no assurance that the subsidiaries will be permitted
to make such cash distributions without legal restrictions or
adverse tax consequences to the Company. Commencing in fiscal
1996, the Company has provided for U.S. federal and state income
taxes on unremitted earnings of foreign subsidiaries.
SUBSTANTIAL INDEBTEDNESS
Although the Company's outstanding indebtedness was reduced
by application of the proceeds of the Company's initial public
offering in March 1995, the Company continues to have substantial
indebtedness. The Company's substantial indebtedness may limit
its capacity to respond to market conditions (including its
ability to satisfy capital expenditure requirements) or to meet
its contractual or financial obligations. In addition, pursuant
to the debt instruments governing the Company's indebtedness, the
Company is subject to restrictive covenants that could limit its
ability to conduct its business. Furthermore, the ability of the
Company to satisfy its obligations will be dependent upon its
future performance, which will be subject to prevailing economic
conditions and to financial, business and other factors,
including factors beyond the control of the Company. Through and
including December 15, 1998, interest on the Company's 9 5/8%
Senior Subordinated Notes due 2003 (the "Notes") will be payable
in cash semiannually at the rate of 6% per annum of the principal
amount at maturity of the Notes. After December 15, 1998,
interest on the Notes will accrue and be payable in cash
semiannually at the rate of 9 5/8% per annum of the principal
amount at maturity of the Notes. Although the Company believes
that cash flow from operations will be sufficient to meet all of
its debt service requirements and to fund its capital expenditure
requirements, there can be no assurance that this will be the
case.
<PAGE>
RELIANCE ON KEY MANAGEMENT
The operation of the Company requires managerial and
operational expertise. Although all of the key management
employees have employment contracts with the Company, there can
be no assurance that such individuals will remain with the
Company. If, for any reason, such key personnel do not continue
to be active in the Company's management, operations could be
adversely affected.
RISKS IN THE OPERATION OF RECENTLY ACQUIRED FACILITIES
In May 1996 the Company entered into a Purchase Agreement
with American Optical Corporation ("AOC") providing for the
acquisition (the "AO Acquisition") of substantially all of AOC's
worldwide ophthalmic business ("AO"). The future success of the
AO Acquisition and the effect of the AO Acquisition on the
financial and operating results of the Company will depend in
part on the ability of the Company to operate AO successfully as
a stand-alone business and, where possible, to engage in
cooperative and joint activities with AO. The ability of the
Company to accomplish its objectives in connection with the AO
Acquisition is, like any acquisition, subject to certain risks
including, among others, the possible inability to retain certain
AO personnel, potential negative effects of diverting management
resources and the possible failure to retain AO customers.
DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company has not declared or paid any cash dividends on
any class of its capital stock, and does not intend to pay
dividends on its Common Stock in the foreseeable future. The
Company's Amended and Restated Bank Credit Agreement with the
Bank of Nova Scotia, and the Indenture governing the Notes (the
"Indenture"), restrict and limit the payment of dividends on the
Common Stock. See "--Price Range of Common Stock and Dividend
Policy".
ANTITAKEOVER PROVISIONS
The Company's Amended and Restated Certificate of
Incorporation and Amended and Restated By-Laws contain certain
provisions that could make more difficult the acquisition of the
Company by means of a tender offer, a proxy contest or otherwise.
These provisions include advance notice procedures for
stockholders to nominate candidates for election as directors of
the Company and for stockholders to submit proposals for
consideration at stockholders' meetings. In addition, the
Company is subject to Section 203 of the Delaware General
Corporation Law, which limits transactions between a publicly
held company and "interested stockholders" (generally, those
stockholders who, together with their affiliates and associates,
own 15% or more of a company's outstanding capital stock). This
provision of Delaware law also may have the effect of deterring
certain potential acquisitions of the Company.
