UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13606
SOLA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3189941
(State or other jurisdiction of
(I.R.S. employer identification no.)
incorporation or organization)
2420 SAND HILL ROAD, SUITE 200, MENLO PARK, CA 94025
(Address of principal executive offices)
(zip code)
(415) 324-6868
(Registrant's telephone number, including area code)
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
As of October 30, 1996, 24,129,528 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.
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SOLA INTERNATIONAL INC.
Table of Contents
Form 10-Q for the Quarterly Period
Ended September 30, 1996
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PART I FINANCIAL INFORMATION PAGE
_______ __________________________ _____
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Item 1. Financial Statements
Consolidated Condensed Balance Sheet as of September 30, 1996 3
Consolidated Condensed Balance Sheet as of March 31, 1996
(derived from audited financial statements) 3
Consolidated Condensed Statements of Income for the three and six
month periods ended September 30, 1996 and September 30, 1995 4
Consolidated Condensed Statements of Cash Flows for the six month
periods ended September 30, 1996 and September 30, 1995 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
PART II OTHER INFORMATION
_______ ______________________
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SOLA INTERNATIONAL INC.
Consolidated Condensed Balance Sheets
(in thousands, except per share data)
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March 31, 1996
(derived from
September 30, audited financial
ASSETS 1996 statements)
(unaudited)
_______________ _______________
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Current Assets:
Cash and cash equivalents $ 29,662 $ 22,394
Trade accounts receivable, net 102,866 74,845
Inventories 130,286 100,707
Deferred income taxes 7,491 7,491
Prepaids and other current assets 4,674 1,861
______ ______
Total current assets 274,979 207,298
Property, plant and equipment, net 98,330 79,582
Deferred income taxes 10,125 6,800
Debt issuance costs 2,933 1,907
Goodwill and other intangibles, net 200,705 120,352
Other assets 1,207 910
_______ _______
Total assets $588,279 $416,849
_______ _______
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks and current portion of
long-term and bank debt $ 27,742 $ 17,403
Accounts payable, accrued liabilities and 100,202 82,142
payroll
Accrued reorganization and acquisition 12,612 9,746
expenses
Income taxes payable _ 1,090
Deferred income taxes 260 461
______ ______
Total current liabilities 140,816 110,842
Long-term debt, less current portion 4,513 3,360
Bank debt, less current portion 71,250 6,000
Senior subordinated notes 89,881 88,530
Deferred income taxes 6,105 4,990
Other liabilities 11,052 10,886
______ ______
Total liabilities 323,617 224,608
______ ______
Contingencies
Shareholders' Equity:
Preferred stock, $0.01 par value; 5,000
shares authorized; _ _
no shares issued
Common stock, $0.01 par value; 50,000 shares
authorized;
24,129 shares (21,797 shares as of March 31, 241 218
1996)
issued and outstanding
Additional paid-in capital 269,548 206,412
Equity participation loans (300) (421)
Accumulated deficit (8,862) (17,993)
Cumulative foreign currency adjustment 4,035 4,025
_______ _______
Total shareholders' equity 264,662 192,241
_______ _______
Total liabilities and shareholders' equity $588,279 $416,849
_______ _______
The accompanying notes are an integral part of these condensed
financial statements
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SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Income
(in thousands, except per share data)
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Three Months Ended Six Months Ended
September September September September
30, 1996 30, 1995 30, 1996 30, 1995
____ ____ ____ ____
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Net sales $128,194 $95,866 $237,730 $191,788
Cost of sales 75,085 50,462 133,134 100,644
_____ _____ ______ ______
Gross profit 53,109 45,404 104,596 91,144
_____ _____ ______ ______
Research and development expenses 4,336 2,917 8,543 6,306
Selling and marketing expenses 23,135 16,198 42,410 32,797
General and administrative expenses 11,663 10,724 24,086 22,808
In process research and development 9,500
expense _ _ _
_____ _____ _____ _____
Operating expenses 39,134 29,839 84,539 61,911
_____ _____ _____ _____
Operating income 13,975 15,565 20,057 29,233
Interest expense, net (4,292) (2,993) (7,542) (6,070)
_____ _____ _____ _____
Income before provision for income
taxes, minority interest and
extraordinary item 9,683 12,572 12,515 23,163
Provision for income taxes (2,633) (3,521) (3,211) (6,486)
Minority interest (81) (51) (173) (322)
_____ _____ _____ _____
Income before extraordinary item 6,969 9,000 9,131 16,355
Extraordinary item, loss due to
repurchase of _ _ _ (912)
senior subordinated notes, net of
tax
_____ _____ _____ ______
Net income $6,969 $9,000 $9,131 $15,443
_____ _____ _____ ______
Earnings (loss) per share:
Income before extraordinary item $0.27 $0.39 $0.37 $0.71
Extraordinary item _ _ _ (0.04)
_____ _____ _____ _____
Net income $0.27 $0.39 $0.37 $0.67
_____ _____ _____ _____
Weighted average number of shares 25,460 22,911 24,351 22,887
outstanding _____ _____ _____ _____
The accompanying notes are an integral part of these condensed
financial statements
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SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)
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Six Months Ended
September 30, September 30, 1995
1996
________________ _________________
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Net cash provided by operating activities $4,806 $10,487
_____ ______
Cash flows from investing activities:
Acquisition of worldwide ophthalmic
business of American Optical Corporation,
less cash and cash equivalents of $3,365 (105,090) -
Acquisition of Neolens Incorporated, less
cash and cash equivalents of $12 (16,848) -
Payments received from Pilkington and
affiliates - 1,138
Capital expenditures (11,358) (7,771)
Proceeds from sale of fixed assets 40 79
_______ _____
Net cash used in investing activities (133,256) (6,554)
_______ _____
Cash flows from financing activities:
Sale of common stock 63,136 -
Payments on equity participation
loans/exercise of stock 121 449
options
Net receipts under notes payable to banks,
and long term debt 1,738 1,079
Borrowings on long term debt 3,968 87
Payments on long term debt (1,798) -
Proceeds from bank debt 69,000 14,500
Repurchase of senior subordinated notes - (17,766)
______ ______
Net cash provided by (used in) financing 136,165 (1,651)
activities
______ ______
Effect of exchange rate changes on cash and
cash equivalents (447) (181)
______ ______
Net increase in cash and cash equivalents 7,268 2,101
Cash and cash equivalents at beginning of 22,394 16,148
period
______ ______
Cash and cash equivalents at end of period $29,662 $18,249
______ ______
The accompanying notes are an integral part of these condensed
financial statements
</TABLE>
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SOLA INTERNATIONAL INC.
Notes to Consolidated Condensed Financial Statements
(unaudited)
1. Basis of Presentation
On June 19, 1996, the Company acquired substantially all of the
worldwide ophthalmic business ("AO") of American Optical Corporation
("AOC") pursuant to the terms of the Purchase Agreement (the "Purchase
Agreement") dated as of May 6, 1996 between the Company and AOC. The
Company acquired AO for cash consideration of $103.6 million (together
with the assumption of certain liabilities) (the "AO Acquisition").
The AO Acquisition was funded primarily through borrowings under the
Company's New Credit Agreement (see Note 4), which borrowings were
subsequently repaid in part with the proceeds of the Stock Offering
during July 1996 (see Note 5).
On July 2, 1996 the Company acquired control of Neolens, Inc.
("Neolens"), a Florida corporation that manufactures polycarbonate
eyeglass lenses and that has been a supplier to the Company. The
Company acquired Neolens for cash consideration of approximately $15.5
million, including the assumption of Neolens debt (the "Neolens
Acquisition"). The Neolens Acquisition was funded through borrowings
under the Company's New Credit Agreement (See Note 4).
The accompanying consolidated condensed financial statements of the
Company have been prepared without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company's financial statements presented herein
include the results of operations and cash flows of the AO business
for the three months and ten days ended September 30, 1996 and the
results of operations and cash flows of the Neolens business for the
three months ended September 30, 1996 subsequent to their respective
acquisitions. The consolidated condensed balance sheet as of March
31, 1996 was derived from audited financial statements. The
accompanying consolidated condensed financial statements should be
read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's annual report on Form 10-K
for the fiscal year ended March 31, 1996.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of the results for
the interim period. The results of operations for the three and six
months ended September 30, 1996 are not necessarily indicative of the
results to be expected for the full year.
The AO and Neolens Acquisitions have been accounted for under the
purchase method of accounting as of their respective closing dates.
Accordingly, the Company's consolidated financial statements reflect
the allocation of the purchase price to the assets and liabilities of
the respective AO and Neolens business units based upon their
respective estimated fair values. The current allocation of the AO
and Neolens purchase prices are preliminary, pending completion of
valuation studies and other determinations of fair values presently in
process, and, therefore, the allocation to inventories, property,
plant and equipment, in-process research and development and
reorganization provisions may change once such valuations are
finalized.
The preliminary allocation of the AO and Neolens purchase price,
subject to finalization of valuation studies and other fair value
determinations have been calculated as follows:
AO
Purchase price $103,659
Estimated acquisition expenses 4,796
_______
Total estimated acquisition cost $108,455
_______
Estimated historical net assets at acquisition
date $29,865
Estimated write-up of inventories 7,215
Estimated write-up of property, plant and
equipment 506
Estimated goodwill and other intangible assets 62,753
Non-compete agreement 1,500
Estimated in-process research and development 9,500
Estimated relocation and exit costs (593)
Net deferred tax effects of certain of the
above purchase accounting adjustments (2,291)
________
$108,455
________
Neolens
Purchase price, including debt repayments $15,484
Estimated acquisition expenses 1,376
_______
Total estimated acquisition cost $16,860
_______
Estimated historical net assets at acquisition
date $(1,422)
Estimated write-up of property, plant and
equipment 696
Estimated goodwill and other intangible assets 17,585
Patent valuation 700
Estimated relocation and exit costs (699)
______
$16,860
______
2. Inventories
September 30, March 31, 1996
1996 (in thousands)
(in thousands)
___________ ___________
Raw Materials $16,448 $ 10,595
Work In Progress 5,623 4,782
Finished Goods 75,366 59,595
Molds 32,849 25,735
_______ _______
$130,286 $100,707
_______ _______
_______ _______
Molds comprise mainly finished goods for use by manufacturing
affiliates in the manufacture of spectacle lenses.
3. 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,
<PAGE>
additional clean-up costs of approximately $150,000 for the current
fiscal year and $100,000 per annum thereafter for up to 16 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
the fiscal year ending March 31, 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 plc
("Pilkington"), for the purchase of the Sola business in December 1993
("Acquisition"), Pilkington has indemnified the Company with regard to
expenditures subsequent to the Acquisition for certain environmental
matters relating to circumstances existing at or prior to 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 September 30, 1996 and March 31, 1996, the Company has
provided for environmental remediation costs in the amount of $2.4
million, and $2.5 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.
4. Bank Credit Agreement
Simultaneous with the closing of the AO Acquisition (see Note 1),
the Company entered into a new bank credit agreement with The Bank of
America National Trust and Savings Association, for itself and as
agent for a syndicate of other financial institutions, covering an
aggregate amount of $180 million (the "New Credit Agreement"),
replacing the Company's existing credit agreement. The New Credit
Agreement is divided into three tranches which comprise: a five-year
term loan of $30 million, a renewable three-year foreign currency
revolving facility of $30 million, and a five-year US dollar revolver
of $120 million. The term and revolving loan facilities were made in
order to finance a portion of the AO Acquisition and to refinance
existing facilities generally used for working capital. The foreign
currency revolver matures on May 31, 1999 and the term loan and US
dollar revolver both mature on May 31, 2001.
Borrowings under the term loan facilities and the US dollar
revolver (other than swing line loans, which may only be Base Rate
Loans) may be made as Base Rate Loans or LIBO Rate Loans. Base Rate
Loans bear interest at rates per annum equal to the higher of (a)
0.50% per annum above the latest Federal Funds Rate, or (b) the Bank
of America Reference Rate. Base Rate Loans include a margin varying
from 0% to .125% based on the Company's Funded Debt to EBITDA Ratio.
LIBO Rate Loans bear interest at a rate per annum equal to the sum of
the LIBO Rate and a margin varying from .500% to 1.125% based on the
Company's Funded Debt to EBITDA Ratio. Fixed rate borrowings under
the foreign currency revolver bear interest at rates per annum equal
to the referenced currency's local IBOR plus a margin varying from
.500% to 1.125% based on the Company's Funded Debt to EBITDA Ratio.
Borrowings under the foreign currency revolver are also available at
local Currency Base Rates at spreads similar to those for U.S. Base
Rate Loans. The term loan and U.S. dollar revolver currently bear
interest at a rate of LIBOR plus 0.75% (approximately 6.5% as of
September 30, 1996) and the foreign currency revolver bears an
interest rate of the relevant local economy IBOR plus 0.75%.
<PAGE>
The US term loan amortizes in semiannual installments with total
annual principal repayments as follows:
Year Ended March 31
(in thousands)
1997 $1,875.0
1998 4,687.5
1999 5,625.0
2000 6,562.5
2001 7,500.0
2002 3,750.0
Outstanding unpaid principal amounts on both the US dollar and
foreign currency revolver are due on their respective maturity dates.
Interest on all the above loans is payable at the end of the
interest period, or 90 days, whichever is shorter. Repayments of
principal on the above loans must be accompanied by a payment equal to
the accrued interest associated with the principal being repaid.
The New 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), the creation of liens, the making of certain investments
and loans, engaging in unrelated businesses, transactions with
affiliates, the consummation of certain transactions such as sales of
substantial assets, mergers or consolidations, margin stock purchases
and other transactions. Additionally, the New Credit Agreement
restricts significant accounting changes, negative pledges and
designated senior indebtedness. The New Credit Agreement also
restricts the ability of the Company and its subsidiaries to make
restricted payments in the nature of, among other things, (i)
declaring, making or paying dividends or other distributions in excess
of prescribed levels, (ii) purchasing, redeeming or retiring shares of
the Company's capital stock, and (iii) making certain payments,
purchases, redemptions, modifications or other acquisitions of any
Subordinated Notes. The Company and its subsidiaries are also
required to comply with certain financial tests and maintain certain
financial ratios. The New Credit Agreement includes standard events
of default.
5. Common Stock
During July 1996 the Company sold 2,320,000 additional shares of
common stock at $28.625 per share through a public offering (the
"Offering"). The net proceeds from the Offering, after deducting
expenses of the Offering, including discounts and commissions paid to
the underwriters, were approximately $63.1 million. The Company used
such net proceeds to repay indebtedness which it incurred under the
New Credit Agreement ( See Note 4).
<PAGE>
6. Pro forma Data
The following pro forma data was prepared to illustrate the
estimated effect of the AO Acquisition and the financing related
thereto, as if the Acquisition had occurred as of the beginning of
each period presented:
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Six Months Ended September 30
1996 1995
____ ____
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Net Sales $256,754 $236,058
_______ _______
Income before extraordinary item $20,246 $18,947
______ ______
Net income $20,246 $18,035
______ ______
Earnings per share:
Income before extraordinary item $0.79 $0.75
____ ____
Net income $0.79 $0.71
____ ____
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These pro forma results of operations have been prepared for
comparison purposes only, and do not purport to be indicative of what
the results would have been had the AO Acquisition occurred at the
beginning of the period or the results which may occur in the future.
As a result of the AO Acquisition the Company has incurred two non-
recurring charges during the six months ended September 30, 1996: (i)
a $7.2 million charge to cost of sales for the amortization associated
with an inventory write-up to fair value ($6.5 million incurred in the
second quarter September 30, 1996); and (ii) a $9.5 million charge for
the write-off of in-process research and development all of which was
recorded in the quarter ended June 30, 1996. These charges, and the
related provision for tax thereon, have been excluded from the pro
forma results as they are non-recurring. The pro forma data above
does not include pro forma adjustments for the Neolens Acquisition as
this acquisition is immaterial to the results of operations of the
Company.
7. Extraordinary Item
During the three months ended June 30, 1995 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 the
three months ended June 30, 1995 resulting from the write-off of
unamortized debt issuance costs and premium over accreted value. The
repurchase was partly funded by borrowings under the Company's old
credit agreement and partly from excess cash arising from the
Company's initial public offering in March 1995.
<PAGE>
Item 2. 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 condensed financial statements and notes thereto included
elsewhere herein.
On June 19, 1996 the Company acquired substantially all of the
worldwide ophthalmic business of American Optical Corporation pursuant
to the terms of the Purchase Agreement dated as of May 6, 1996 between
the Company and AOC. The Company acquired AO for cash consideration
of $103.6 million (together with the assumption of certain
liabilities). The Company has consolidated the results of operations
of AO from the date of acquisition to September 30, 1996. The
acquisition has been accounted for using the purchase method of
accounting. The purchase consideration paid for the assets and
liabilities of AO has been allocated based on preliminary estimates of
their fair values. The actual allocation of such consideration may
differ from that reflected after valuations and other procedures have
been completed. As a result of the acquisition the Company has
incurred two non-recurring charges in the six months ended September
30, 1996: (i) a $7.2 million ($6.5 million in the three months ended
September 30, 1996) charge to cost of sales, based on average
inventory turns, for the amortization associated with an inventory
write-up to fair value; and (ii) a $9.5 million charge for the write-
off of in-process research and development (all of which was recorded
in the three months ended June 30, 1996).
During the three and six months ended September 30, 1996
approximately 16% and 10.0%, respectively, of the Company's net sales
are attributable to AO. The acquisition of AO has had a significant
impact on the three and six month performance comparisons between
fiscal 1996 and fiscal 1997.
Results of Operations
Three months ended September 30, 1996 compared to three months ended
September 30, 1995
The results of operations of the Company for the three months ended
September 30, 1996 reflect net income of $7.0 million as compared to
net income of $9.0 million for the same period in the prior year. If
the non-recurring charge associated with the amortization of the
inventory write-up to fair value, and the provision for taxes related
thereto, were excluded from the results of operations, the net income
for the three months ended September 30, 1996 would have been $11.1
million, an increase of $2.1 million, or 23.1% over the net income for
the three months ended September 30, 1995.
Net Sales
Net sales totaled $128.2 million in the three months ended
September 30, 1996, reflecting an increase of 33.7% over net sales of
$95.9 million for the same period in the prior year. Using constant
exchange rates, the percentage increase was 33.8%. The growth in net
sales is principally attributable to the AO Acquisition and growth in
unit sales of higher priced products, offset in part by price erosion
in net sales of lower priced products. Higher priced products,
excluding AO, accounted for approximately 60% of net sales in the
three months ended September 30, 1996 compared to approximately 57%
for the three months ended September 30, 1995. The higher priced
product growth was led by the growth in Spectralite and plastic
photochromic products. Net sales increases by region, excluding the
AO business, were achieved as follows: North America 10.1%, Europe
10.9% and Rest of World 16.9% (using constant exchange rates the
growth percentages are not materially different).
<PAGE>
Gross Profit and Gross Margin
Gross profit totaled $53.1 million for the three months ended
September 30, 1996, reflecting an increase of 17.0% over gross profit
of $45.4 million for the same period in the prior year. Gross profit
as a percentage of net sales declined from 47.4% for the three months
ended September 30, 1995 to 41.5% for the three months ended September
30, 1996. Excluding the AO business, and the amortization of the non-
recurring inventory write-up to fair value associated with the
acquisition, the gross margin would have been 47.6%. The margin
growth was principally due to sales mix and manufacturing
improvements.
Operating Expenses
Operating expenses in the three months ended September 30, 1996
totaled $39.1 million, an increase of $9.3 million, over operating
expenses of $29.8 million for the same period in the prior year.
Operating expenses for the three months ended September 30, 1996 as a
percentage of net sales was 30.5%, compared to 31.1% for the same
period of the prior year. Research and development expenses for the
three months ended September 30, 1996 increased $1.4 million to $4.3
million, compared to $2.9 million for the three months ended September
30, 1995, which represent 3.4% and 3.0% of net sales, respectively.
The growth in research and development expenses is partially
attributable to the transfer of a new product out of research and
development and into production in the three months ended September
30, 1995, which resulted in a lower than normal research and
development expense in that period. Selling and marketing expenses
for the three months ended September 30, 1996 increased $6.9 million
to $23.1 million, compared to $16.2 million for the three months ended
September 30, 1995 which represent 18.0% and 16.9%, of net sales for
the three months ended September 30, 1996 and the three months ended
September 30, 1995, respectively. As a percentage of net sales,
general and administrative expenses declined to 9.1% for the three
months ended September 30, 1996 compared to 11.2% for the three months
ended September 30, 1995.
Operating Income
Operating income for the three months ended September 30, 1996 was
$14.0 million. Exclusive of the non-recurring amortization of the
inventory write-up discussed above, operating income for the three
months ended September 30, 1996 totaled $20.5 million, an increase of
$4.9 million, or 31.5%, over the three months ended September 30, 1995
operating income of $15.6 million.
Net Interest Expense
Net interest expense totaled $4.3 million for the three months
ended September 30, 1996 compared to $3.0 million for the three months
ended September 30, 1995, an increase of $1.3 million. The increase
of $1.3 million is primarily attributable to increased borrowings to
fund the AO and Neolens acquisitions. Simultaneous with the AO
Acquisition, the Company entered into a new bank credit facility with
The Bank of America National Trust and Savings Association, for itself
and as agent for a syndicate of other financial institutions (see
"_Liquidity and Capital Resources"). In July 1996, the Company issued
2.32 million shares in a public offering for which it received net
proceeds of approximately $63.1 million. The Company estimates that
the annual net interest expense will increase by approximately $4.1
million. This increase is a result of the AO and Neolens acquisitions
offset by the lower interest rate under the New Credit Agreement and
the reduction of debt from the proceeds of the equity public offering.
Provision for Income Taxes
The Company's combined state, federal and foreign tax rate
represents an effective tax rate projected for the full fiscal year
1997 of 31%. For the three months ended September 30, 1995 and the
full fiscal year 1996, the Company recorded an effective income tax
rate of 28%. The Company provided valuation allowances against fiscal
1994 net operating loss carryforwards in the United States and against
fiscal 1995 and 1994 net operating losses in Australia, primarily as a
result of the acquisition of the Sola Group from Pilkington in fiscal
1994. The utilization of certain of these losses resulted in a
reduced effective tax rate for fiscal 1996. The Company expects the
remaining Australian net operating loss carryforwards to
<PAGE>
offset taxable income in fiscal 1997, assuming that taxable profits
are realized in Australia. The Company has deferred tax assets on its
balance sheet as of September 30, 1996 amounting to approximately
$17.6 million. The ultimate utilization of these deferred tax assets
is dependent on the Company's ability to generate taxable income in
the future.
Net Income
Net income for the three months ended September 30, 1996 totaled
$7.0 million compared to $9.0 million for the three months ended
September 30, 1995. If the non-recurring inventory charge, and the
provision for taxes related thereto, were excluded from the results of
operations, the net income for the three months ended September 30,
1996 would have been $11.1 million, an increase of $2.1 million, or
23.1% over the net income for the three months ended September 30,
1995.
Six months ended September 30, 1996 compared to six months ended
September 30, 1995
The results of operations of the Company for the six months ended
September 30, 1996 reflect net income of $9.1 million as compared to
net income of $15.4 million for the same period in the prior year. If
the non-recurring charges associated with the amortization of the
inventory write-up to fair value and the write off of in-process
research and development, and the provision for taxes related thereto,
were excluded from the results of operations, the net income for the
three months ended September 30, 1996 would have been $20.0 million,
an increase of $4.6 million, or 29.5% over the net income for the six
months ended September 30, 1995.
Net Sales
Net sales totaled $237.7 million in the six months ended September
30, 1996, reflecting an increase of 24.0% over net sales of $191.8
million for the same period in the prior year. Using constant
exchange rates, the percentage increase was 24.2%. The growth in net
sales is principally attributable to the AO Acquisition and growth in
unit sales of higher priced products, offset in part by price erosion
in net sales of lower priced products. Higher priced products,
excluding AO, accounted for approximately 60% of net sales in the six
months ended September 30, 1996 compared to approximately 57% for the
six months ended September 30, 1995. The higher priced product growth
was led by the growth in Spectralite and plastic photochromic
products. Net sales increases by region, excluding the AO business,
were achieved as follows: North America 8.2%, Europe 8.3% and Rest of
World 24.1% (using constant exchange rates the growth percentages are
not materially different).
Gross Profit and Gross Margin
Gross profit totaled $104.6 million for the six months ended
September 30, 1996, reflecting an increase of 14.8% over gross profit
of $91.1 million for the same period in the prior year. Gross profit
as a percentage of net sales declined from 47.5% for the six months
ended September 30, 1995 to 44.0% for the six months ended September
30, 1996. Excluding the AO business, and the amortization of the non-
recurring inventory write-up to fair value associated with the
acquisition, the gross margin would have been 47.7%. The margin
growth was principally due to sales mix and manufacturing
improvements.
Operating Expenses
Operating expenses in the six months ended September 30, 1996
totaled $84.5 million, an increase of $22.6 million, over operating
expenses of $61.9 million for the same period in the prior year.
Included in operating expenses is a non-recurring charge of $9.5
million for the write-off of in-process research and development
arising from the AO acquisition. If this charge were excluded from
operating expenses the growth over the six months ended September 30,
1995 would be $13.1 million or 21.2%. Operating expenses for the six
months ended September 30, 1996, excluding the non-recurring charge,
as a percentage of net sales was 31.6%, compared to 32.2% for the same
period of the prior year. Research and development expenses for the
six months ended September 30, 1996 increased $2.2 million to $8.5
million, compared to $6.3 million for the six months ended September
30, 1995, which represent 3.6%
<PAGE>
and 3.3% of net sales, respectively. The growth in research and
development expenses is partially attributable to the transfer of a
new product out of research and development and into production in the
six months ended September 30, 1995, which resulted in a lower than
normal research and development expense in that period. Selling and
marketing expenses for the six months ended September 30, 1996
increased $9.6 million to $42.4 million, compared to $32.8 million
for the six months ended September 30, 1995 which represent 17.8% and
17.1%, of net sales for the six months ended September 30, 1996 and the
six months ended September 30, 1995, respectively. As a percentage
of net sales, general and administrative expenses declined to 10.1%
for the six months ended September 30, 1996 compared to 11.9% for the
six months ended September 30, 1995.
Operating Income
Operating income for the six months ended September 30, 1996 was
$20.1 million. Exclusive of the non-recurring amortization of the
inventory write-up and the write-off of in-process research and
development discussed above, operating income for the six months ended
September 30, 1996 totaled $36.7 million, an increase of $7.5 million,
or 25.8%, over the six months ended September 30, 1995 operating
income of $29.2 million.
Net Interest Expense
Net interest expense totaled $7.5 million for the six months ended
September 30, 1996 compared to $6.1 million for the six months ended
September 30, 1995, an increase of $1.4 million. The increase of $1.4
million is primarily attributable to increased borrowings to fund the
AO and Neolens acquisitions. Simultaneous with the AO Acquisition,
the Company entered into a new bank credit facility with The Bank of
America National Trust and Savings Association, for itself and as
agent for a syndicate of other financial institutions (see "_Liquidity
and Capital Resources"). In July 1996, the Company issued 2.32
million shares in a public offering for which it received net proceeds
of approximately $63.1 million. The Company estimates that the annual
net interest expense will increase by approximately $4.1 million.
This increase is a result of the AO and Neolens acquisitions offset by
the lower interest rate under the New Credit Agreement and the
reduction of debt from the proceeds of the equity public offering.
Provision for Income Taxes
The Company's combined state, federal and foreign tax rate
represents an effective tax rate projected for the full fiscal year
1997 of 31%. For the six months ended September 30, 1995 and the full
fiscal year 1996, the company recorded an effective income tax rate of
28%. The Company provided valuation allowances against fiscal 1994
net operating loss carryforwards in the United States and against
fiscal 1995 and 1994 net operating losses in Australia, primarily as a
result of the acquisition of the Sola Group from Pilkington in fiscal
1994. The utilization of certain of these losses resulted in a
reduced effective tax rate for fiscal 1996. The Company expects the
remaining Australian net operating loss carryforwards to offset
taxable income in fiscal 1997, assuming that taxable profits are
realized in Australia. The Company has deferred tax assets on its
balance sheet as of September 30, 1996 amounting to approximately
$17.6 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 the six months ended September 30, 1995 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 the six months ended September 30, 1995 resulting from the
write-off of unamortized debt issuance costs and premium over accreted
value. The repurchase was partly funded by borrowings under the
Company's old credit agreement and partly from excess cash reserves
arising from the Company's initial public offering in March 1995.
<PAGE>
Net Income
Net income for the six months ended September 30, 1996 totaled $9.1
million compared to $15.4 million for the six months ended September
30, 1995. If the non-recurring inventory and in-process research and
development charges, and the provision for taxes related thereto, were
excluded from the results of operations, the net income for the six
months ended September 30, 1996 would have been $20.0 million, an
increase of $4.6 million, or 29.5% over the net income for the six
months ended September 30, 1995.
Liquidity and Capital Resources
Net cash provided by operating activities for the six months ended
September 30, 1996 amounted to $4.8 million, a reduction of $5.7
million from the funds provided by operating activities of $10.5
million for the six months ended September 30, 1995. The most
significant cause of the reduction is the growth in accounts
receivable offset in part by an increase in operating income, after
adding back non-recurring non-cash charges for in-process research and
development and amortization of inventory write-up, both arising from
the AO Acquisition.
During the six months ended September 30, 1996, using a three month
net sales annualized convention, inventories as a percentage of net
sales were 25.4% compared to 26.3% for the six months ended September
30, 1995. Accounts receivable as a percentage of net sales for the
six months ended September 30, 1996 was 20.0% compared to 19.5% for
the same period a year ago.
Cash flows from investing activities in the six months ended
September 30, 1996 amounted to an outflow of $133.3 million. On June
19, 1996, the Company acquired substantially all of the worldwide
ophthalmic business of American Optical Corporation pursuant to the
terms of the Purchase Agreement dated May 6, 1996 between the Company
and AOC. The Company acquired AO for cash consideration of $103.6
million (together with the assumption of certain liabilities). The AO
Acquisition was funded primarily through borrowings under the
Company's New Credit Agreement, which borrowings were subsequently
repaid in part with the proceeds of the equity public offering during
July 1996. On July 2, 1996 the Company acquired control of Neolens,
Inc. a Florida corporation that manufactures polycarbonate eyeglass
lenses and that has been a supplier to the Company. The Company
acquired Neolens for cash consideration of approximately $15.5
million, including the assumption of Neolens debt. The Neolens
Acquisition was funded through borrowings under the Company's New
Credit Agreement. Capital expenditures for the six months ended
September 30, 1996 amounted to $11.4 million, compared to $7.8 million
in the comparable period in the prior year. Management anticipates
capital expenditures of $30.0 million to $35.0 million annually over
the next several years, of which approximately $5.0 million annually
is viewed as discretionary.
Net cash provided by financing activities in the six months ended
September 30, 1996 amounted to $136.2 million. During July 1996 the
Company sold 2,320,000 additional shares of common stock at $28.625
per share through a public offering. The net proceeds from the
Offering, after deducting expenses of the Offering, including
discounts and commissions paid to the underwriters, were approximately
$63.1 million. The Company used such net proceeds to repay
indebtedness which it incurred under the New Credit Agreement.
Simultaneous with the closing of the AO Acquisition, the Company
entered into a bank credit agreement with The Bank of America National
Trust and Savings Association, for itself and as agent for a syndicate
of other financial institutions, covering an aggregate amount of $180
million, replacing the Company's existing credit agreement. The New
Credit Agreement is divided into three tranches which comprise: a five-
year term loan of $30 million, a renewable three-year foreign currency
revolving facility of $30 million, and a five-year US dollar revolver
of $120 million. The term and revolving loan were made in order to
finance a portion of the AO Acquisition and refinance existing
facilities generally used for working capital. The foreign currency
revolver matures on May 31, 1999 and the term loan and US dollar
revolver both mature on May 31, 2001.
<PAGE>
Borrowings under the term loan facilities and the US dollar
revolver (other than swing line loans, which may only be Base Rate
Loans) may be made as Base Rate Loans or LIBO Rate Loans. Base Rate
Loans bear interest at rates per annum equal to the higher of (a)
0.50% per annum above the latest Federal Funds Rate, or (b) the Bank
of America Reference Rate. Base Rate Loans include a margin varying
from 0% to 0.125% based on the Company's Funded Debt to EBITDA Ratio.
LIBO Rate Loans bear interest at a rate per annum equal to the sum of
the LIBO Rate and a margin varying from 0.500% to 1.125% based on the
Company's Funded Debt to EBITDA Ratio. Borrowings under the foreign
currency revolver bear interest at rates per annum equal to the
referenced currency's local IBOR plus a margin varying from 0.500% to
1.125% based on the Company's Funded Debt to EBITDA Ratio. Local
currency Base Rate Loans are also available at similar spread to US
Base Rate Loans described above. The term loan and U.S. dollar
revolver currently bear interest at an initial rate of LIBOR plus
0.75% (approximately 6.5% as of September 30, 1996) and the foreign
currency revolver bears an initial interest rate of the relevant local
economy IBOR plus 0.75%.
During the six months ended June 30, 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 reserves arising from the Company's initial public offering in
March 1995. The Company may from time to time purchase additional
Notes in the market or otherwise subject to market conditions.
On December 1, 1993, in connection with the acquisition of the Sola
business unit from Pilkington, the Company issued $116.6 million
principal amount at maturity of 9 5/8% Senior Subordinated Notes due
in 2003, from which it received gross proceeds of approximately $100.0
million and net proceeds of approximately $97.0 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's foreign subsidiaries maintain local credit facilities
to provide credit for overdraft, working capital and some fixed asset
investment purposes. As of September 30, 1996 the Company's total
credit available under such facilities was approximately $35.0
million, of which $21.1 million had been utilized.
The Company continues to have significant liquidity requirements.
In addition to working capital needs and capital expenditures, the
Company has substantial cash requirements for debt service. The
Company expects that the New Credit Agreement and other overseas
credit facilities, together with cash on hand and internally generated
funds, if available as anticipated, will provide sufficient capital
resources to finance the Company's operations, fund anticipated
capital expenditures, and meet interest requirements on its debt,
including the Notes, for the foreseeable future. As the Company's
debt (including debt under the New Credit Agreement and the Notes)
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.
<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 commodity product lines. The Company seeks to mitigate the
adverse effects of inflation through cost containment and productivity
and manufacturing process improvements. Approximately 8.0% of the
Company's net sales during the six months ended September 30, 1996
were derived from its operations in South America, with the majority
of such net sales generated 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. Through September 30, 1996, these
plans have been successful, and inflation has reduced to approximately
1-3% 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 either strengthened or remained at parity
with the US dollar. During the latter part of fiscal 1996 and during
the first quarter of fiscal 1997, the Venezuelan Bolivar has
significantly deteriorated against the US Dollar. However since May
1996 it has been relatively stable at approximately 475 Bolivars to
the US Dollar. The Company is monitoring the volatility of this
currency and provided against earnings during the quarter ended June
30, 1996 for the decline in the Bolivar. If the decline of the later
part of fiscal 1996 and the first quarter of fiscal 1997 continues the
Company expects that it will adopt hyper-inflationary accounting
concepts of SFAS 52 for translation of Bolivar denominated results.
At present approximately 1% of the Company's net sales originate in
Venezuela.
Information Relating to Forward-Looking Statements
This quarterly report 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
interest expense, (ii) the impact of inflation, and (iii) 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 as a result of "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", also included in the
Company's Form 10-K for the fiscal year ended March 31, 1996.
<PAGE>
PART ll OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2.Changes in Securities
Not applicable
Item 3.Defaults upon Senior Securities
Not applicable
Item 4.Submission of Matters to a Vote of Security Holders
(a) The following matters were submitted to a vote of the
security holders at the Company's Annual Meeting of Stockholders
held on August 16, 1996:
(c)(i) The Shareholders elected 7 members of the Board of
Directors to serve until the next Annual Meeting of Stockholders or
until their successors are elected and qualified. Votes cast
were as follows:
Total Vote For Total Vote
Each Director Withheld From Each
Director
Douglas D. Danforth 17,452,704 48,336
John E. Heine 17,411,883 89,157
Hamish Maxwell 17,453,653 47,387
Ruben F. Mettler 17,453,623 47,417
Laurence Za Yu Moh 14,770,629 2,730,411
Irving S. Shapiro 17,452,854 48,186
Jackson L. Schultz 17,453,404 47,636
<PAGE>
(c)(ii) The Shareholders amended the Sola International Inc.
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. Votes cast
were as follows:
<TABLE>
<CAPTION>
<S> <S> <S> <S>
For Against Abstain Broker Non-Vote
17,369,491 68,429 51,165 11,955
(c)(iii) The Shareholders amended the Sola International Inc.
Stock Option Plan by increasing the number of shares reserved for
issuance pursuant to the exercise of stock options issued thereunder
by 500,000. The results of the vote were as follows:
For Against Abstain Broker Non-Vote
15,278,879 2,138,634 71,572 11,955
(c)(iv) The Shareholders ratified the appointment of Ernst &
Young LLP as the Company's independent auditors for the
fiscal year ending March 31, 1997. Votes cast were as follows:
For Against Abstain
17,460,019 24,515 16,506
Item 5.Other Information
Not applicable
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description Page Number or Incorporation
Reference to
_____________ _________ ____________
11 Statement Regarding Computation
of Per Share Earnings 22
27 Financial Data Schedule
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Sola International Inc.
(Registrant)
Dated: November 11 , 1996 By: /s/Ian S. Gillies
________________
Ian S. Gillies
Vice President - Finance, Chief
Financial Officer, Secretary and
Treasurer
<PAGE>
Exhibit Index
___________
Exhibit No. Description Page
_________ ___________ ----
11 Statement Regarding
Computation of Per Share
Earnings 22
27 Financial Data Schedule
<PAGE>
Exhibit 11
SOLA INTERNATIONAL INC.
Computation of Earnings Per Share
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September September September September
30, 30, 30, 30,
1996 1995 1996 1995
____ ____ ____ ____
<S> <C> <C> <C> <C>
Income before extraordinary item $6,969 $9,000 $9,131 $16,355
Extraordinary item, loss due to repurchase of
senior _ _ _ (912)
subordinated notes, net of tax
_____ _____ _____ ______
Net income $6,969 $9,000 $9,131 $15,443
_____ _____ _____ ______
Weighted average number of common and common
equivalent shares outstanding 24,033 21,780 22,957 21,780
Add assumed dilution arising from exercise of
common equivalent shares (stock options) 1,427 1,131 1,394 1,107
Weighted average number of common and common
equivalent shares used in earnings (loss)
per share 25,460 22,911 24,351 22,887
calculation
_____ _____ _____ _____
Earnings (loss) per share:
Income before extraordinary item $0.27 $0.39 $0.37 $0.71
Extraordinary item _ _ _ (0.04)
____ ____ ____ _____
Net income (loss) $0.27 $0.39 $0.37 $0.67
____ ____ ____ ____
</TABLE>
