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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 June 30, 1997
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)
(650) 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 August 6, 1997, 24,308,825 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>
Table of Contents
Form 10-Q for the Quarterly Period
Ended June 30, 1997
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
<S> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheet as of June 30, 1997 3
Consolidated Condensed Balance Sheet as of March 31, 1997
(derived from audited financial statements) 3
Consolidated Condensed Statements of Income for the three month periods
ended June 30, 1997 and June 30, 1996 4
Consolidated Condensed Statements of Cash Flows for the three month
periods ended June 30, 1997 and June 30, 1996 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
2
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<TABLE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SOLA INTERNATIONAL INC.
Consolidated Condensed Balance Sheets
(in thousands)
<CAPTION>
March 31, 1997
(derived from
June 30, 1997 audited financial
ASSETS (unaudited) statements)
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................ $ 21,800 $ 24,401
Trade accounts receivable, net....................... 114,311 104,960
Inventories.......................................... 147,401 138,634
Deferred income taxes................................ 10,686 10,686
Prepaids and other current assets.................... 6,706 3,539
--------- ---------
Total current assets.............................. 300,904 282,220
Property, plant and equipment, net...................... 116,078 110,477
Deferred income taxes................................... 8,460 8,557
Debt issuance costs, net................................ 2,641 2,773
Goodwill and other intangibles, net..................... 198,024 200,734
Other assets............................................ 823 747
--------- ---------
Total assets...................................... $ 626,930 $ 605,508
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks and current portion of
long-term and bank debt........................... $ 25,231 $ 19,413
Accounts payable, accrued liabilities and payroll.... 97,960 112,140
Accrued reorganization and acquisition expenses...... 8,126 9,134
Income taxes payable................................. 3,993 467
Deferred income taxes................................ 1,170 1,261
--------- ---------
Total current liabilities......................... 136,480 142,415
Long-term debt, less current portion.................... 3,273 3,555
Bank debt, less current portion......................... 87,625 67,938
Senior subordinated notes............................... 92,034 91,304
Deferred income taxes................................... 4,379 4,384
Other liabilities....................................... 11,271 11,614
--------- ---------
Total liabilities................................. 335,062 321,210
--------- ---------
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; 24,288 shares (24,263 shares as
of March 31, 1997) issued and outstanding......... 243 243
Additional paid-in capital........................... 271,494 271,167
Equity participation loans........................... (328) (270)
Retained earnings.................................... 23,994 12,904
Cumulative foreign currency adjustment............... (3,535) 254
--------- ---------
Total shareholders' equity........................ 291,868 284,298
--------- ---------
Total liabilities and shareholders' equity........ $ 626,930 $ 605,508
========= =========
<FN>
The accompanying notes are an integral part of these condensed financial statements
</FN>
</TABLE>
3
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Income
(in thousands, except per share data)
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Net sales .......................................... $ 137,621 $ 109,536
Cost of sales ...................................... 72,794 58,049
--------- ---------
Gross profit .................................... 64,827 51,487
--------- ---------
Research and development expenses .................. 4,755 4,207
Selling and marketing expenses ..................... 24,946 19,275
General and administrative expenses ................ 13,869 12,423
In-process research and development expense ........ -- 9,500
--------- ---------
Operating expenses .............................. 43,570 45,405
--------- ---------
Operating income ............................. 21,257 6,082
Interest expense, net .............................. (4,455) (3,250)
--------- ---------
Income before provision for income taxes and
minority interest ........................... 16,802 2,832
Provision for income taxes ......................... (5,713) (578)
Minority interest .................................. -- (92)
--------- ---------
Net income ...................................... $ 11,089 $ 2,162
========= =========
Earnings per share ................................. $ 0.44 $ 0.09
Weighted average number of shares outstanding ...... 25,419 23,159
========= =========
<FN>
The accompanying notes are an integral part of these condensed financial statements
</FN>
</TABLE>
4
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Net cash used in operating activities................... $ (17,693) $ (2,025)
--------- --------
Cash flows from investing activities:
Acquisition of worldwide ophthalmic business of
American Optical Corporation, less cash and cash
equivalents of $3,186............................. -- (107,512)
Acquisition expenses payable......................... -- 3,183
Purchases of businesses.............................. (2,651) --
Capital expenditures................................. (6,377) (2,791)
Proceeds from sale of fixed assets................... 258 21
--------- --------
Net cash used in investing activities................... (8,770) (107,099)
--------- --------
Cash flows from financing activities:
Payments on equity participation loans/exercise of
stock options.................................... 327 169
Net receipts/payments under notes payable to banks,
and long term debt............................... (764) 1,785
Borrowings on long term debt......................... (1,228) 515
Payments on long term debt........................... 1,318 (653)
Proceeds from bank debt.............................. 24,606 112,500
--------- --------
Net cash provided by financing activities............... 24,259 114,316
--------- --------
Effect of exchange rate changes on cash and cash
equivalents.......................................... (397) (489)
--------- --------
Net increase (decrease) in cash and cash equivalents.... (2,601) 4,703
Cash and cash equivalents at beginning of period........ 24,401 22,394
--------- --------
Cash and cash equivalents at end of period.............. $21,800 $27,097
========= ========
<FN>
The accompanying notes are an integral part of these condensed financial statements
</FN>
</TABLE>
5
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SOLA INTERNATIONAL INC.
Notes to Consolidated Condensed Financial Statements
(unaudited)
1. Basis of Presentation
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 worldwide ophthalmic
business ("AO") of American Optical Corporation for the ten days ended June 30,
1996 subsequent to the Company's acquisition of AO on June 19, 1996. The
consolidated condensed balance sheet as of March 31, 1997 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, 1997.
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 months ended June 30, 1997 are
not necessarily indicative of the results to be expected for the full year.
2. Inventories
June 30, 1997 March 31, 1997
(in thousands) (in thousands)
-------------- --------------
Raw Materials $ 17,730 $ 17,505
Work In Progress 7,267 6,948
Finished Goods 84,102 76,936
Molds 38,302 37,245
-------- --------
$147,401 $138,634
======== ========
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,
additional clean-up costs of approximately $70,000 per annum for up to 15 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.
6
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Under the terms of the sale agreement with Pilkington plc ("Pilkington"),
for the purchase of the Sola business in December 1993 ("Acquisition"),
Pilkington has indemnified the Company with regard to expenditures subsequent to
the Acquisition for certain environmental matters relating to circumstances
existing at the time of the Acquisition. Under the terms of the indemnification,
the Company is responsible for the first $1 million spent on such environmental
matters, Pilkington and the Company share equally the cost of any further
expenditures between $1 million and $5 million, and Pilkington retains full
liability for any expenditures in excess of $5 million.
As of June 30, 1997 and March 31, 1997, the Company has provided for
environmental remediation costs in the amount of $2.3 million 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.
7
<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.
Results of Operations
Three months ended June 30, 1997 compared to three months ended June 30, 1996
The results of operations of the Company for the three months ended June
30, 1997 reflect a net income of $11.1 million as compared to a net income of
$2.2 million for the same period in the prior year. 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 May 6, 1996 between the Company and
AOC. The Company consolidated the results of operations of AO from the date of
acquisition to June 30, 1996. The acquisition was accounted for using the
purchase method of accounting. As a result of the acquisition the Company
incurred two non-recurring charges in the quarter ended June 30, 1996: (i) a
$0.7 million charge to cost of sales 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. The total write-up of
inventory to fair value was $7.2 million, and was amortized to cost of sales
based on average inventory turns. The remainder of this write-up was amortized
to cost of sales in the second quarter of fiscal 1997. If these non-recurring
charges and the provision for taxes related thereto were excluded from the
results of operations, the net income for the quarter ended June 30, 1996 would
have been $8.9 million, and the increase in net income for the quarter ended
June 30, 1997 over quarter ended June 30, 1996, as adjusted, would have been
$2.2 million, or 24.3%.
Net Sales
Net sales totaled $137.6 million in the three months ended June 30, 1997,
reflecting an increase of 25.7% over net sales of $109.5 million for the same
period in the prior year. Using constant exchange rates, the percentage increase
was 28.5%. The acquisition of AO has had a significant impact on the growth in
net sales, as the June 30, 1996 quarter only recorded 10 days of AO sales,
whereas the June 30, 1997 quarter has a full quarter of net sales included. In
addition, the growth in net sales is attributable to the growth in unit sales of
higher priced products, offset in part by price erosion in net sales of lower
priced products. Higher priced products accounted for approximately 66% of net
sales in the three months ended June 30, 1997 compared to approximately 59% for
the three months ended June 30, 1996. The higher priced product growth was led
by the growth in Spectralite, polycarbonate and plastic photochromic products.
Net sales increases by region, excluding the AO business, were achieved as
follows: North America 22.6%, Europe 0.8% and Rest of World, a decrease of 3.5%.
Using constant exchange rates the regional growths, excluding the AO business,
were as follows: North America 22.6%, Europe 2.9% and Rest of World 0.7%.
Gross Profit and Gross Margin
Gross profit totaled $64.8 million for the three months ended June 30,
1997, reflecting an increase of 24.1% over gross profit of $52.2 million, as
adjusted, for the same period in the prior year. Gross profit as a percentage of
net sales decreased from 47.7% for the three months ended June 30, 1996, as
adjusted, to 47.1% for the three months ended June 30, 1997. Excluding the AO
business, and the amortization of the non-recurring inventory write-up to fair
value associated with the acquisition, the gross margin for the three months
ended June 30, 1996 would have been 47.9%, and excluding the AO business from
the three
8
<PAGE>
months ended June 30, 1997, the gross margin would have been 48.3%. The margin
growth was principally due to sales mix and manufacturing improvements.
Operating Expenses
Operating expenses in the three months ended June 30, 1997 totaled $43.6
million, a decrease of $1.8 million, over operating expenses of $45.4 million
for the same period in the prior year. Included in operating expenses for the
three months ended June 30, 1996 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 quarter ended June 30, 1996 would be $7.7 million, or 21.3%. Operating
expenses for the three months ended June 30, 1997 as a percentage of net sales
was 31.7%, compared to 32.8% for the same period of the prior year, excluding
the non-recurring charge. Research and development expenses for the three months
ended June 30, 1997 increased $0.6 million to $4.8 million, compared to $4.2
million for the three months ended June 30, 1996, which represent 3.5% and 3.8%
of net sales, respectively. Selling and marketing expenses for the three months
ended June 30, 1997 increased $5.7 million to $25.0 million, compared to $19.3
million for the three months ended June 30, 1996 which represent 18.1% and
17.6%, of net sales for the three months ended June 30, 1997 and the three
months ended June 30, 1996, respectively. The increase in sales and marketing
expense is primarily due to the AO Acquisition, and on going marketing support
for new products, such as Percepta, which was launched in the quarter ended
March 31, 1997. As a percentage of net sales, general and administrative
expenses reduced to 10.1% for the three months ended June 30, 1997 compared to
11.3% for the three months ended June 30, 1996.
Operating Income
Operating income, for the three months ended June 30, 1997 totaled $21.2
million, an increase of $4.9 million, or 30.3%, over the three months ended June
30, 1996 operating income of $16.3 million, after adjusting for the
non-recurring inventory amortization, and write-off of in-process research and
development.
Net Interest Expense
Net interest expense totaled $4.5 million for the three months ended June
30, 1997 compared to $3.3 million for the three months ended June 30, 1996, an
increase of $1.2 million. The increase of $1.2 million is primarily attributable
to increased borrowings to fund the acquisition of AO ("AO Acquisition").
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 $62.8 million. In addition, in the quarter ended June 30, 1997 the
Company began to take advantage of prompt pay discounts offered by some of its
major suppliers in the United States. This change has resulted in increased
borrowings under its bank credit facility and thus increased interest expense.
The Company estimates that this change will result in a net improvement to
income before income taxes of approximately $250,000 per annum.
Provision For Income Taxes
The Company's combined state, federal and foreign tax rate represents an
effective tax rate projected for the full fiscal 1998 year of 34%. For the three
months ended June 30, 1996 the company recorded an effective income tax rate of
31%, as adjusted. The utilization of valuation allowances in the United States
resulted in the reduced effective tax rate for fiscal 1997. The Company has
deferred tax assets on its balance sheet as of June 30, 1997 amounting to
approximately $19.1 million. The ultimate utilization of these deferred tax
assets is dependent on the Company's ability to generate taxable income in the
future.
9
<PAGE>
Net Income
Net income for the three months ended June 30, 1997 totaled $11.1 million
compared to $2.2 million for the three months ended June 30, 1996. 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 quarter ended June 30, 1996 would have been
$8.9 million, and the growth for the quarter ended June 30, 1997 over quarter
ended June 30, 1996, as adjusted, would have been $2.2 million, or 24.3%.
Liquidity and Capital Resources
Net cash used in operating activities for the three months ended June 30,
1997 amounted to $17.7 million, an increased usage of $15.7 million from the
funds used in operating activities of $2.0 million for the three months ended
June 30, 1996. The most significant causes of the increased usage are the growth
in accounts receivable and growth in inventories, and the reduction in accounts
payable associated with the decision by the Company to take advantage of prompt
pay discounts offered by suppliers in the United States, offset in part by an
increase in operating income, after adding back non-cash charges for in-process
research and development and amortization of inventory write-up, both arising
from the AO Acquisition in the three months ended June 30, 1996.
During the three months ended June 30, 1997, inventories as a percentage of
net sales were 26.8% compared to 30.4% for the three months ended June 30, 1996.
Included in inventories at June 30, 1996, is an amount of $6.5 million arising
from the write-up of inventories to fair value, associated with the AO
Acquisition. If this amount is excluded from inventories, the percentage of net
sales reduces to 29.0%. The ratios are not comparable as the net sales for the
three months end June 30, 1996 only include 10 days of net sales of AO. Accounts
receivable as a percentage of net sales for the three months ended June 30, 1997
was 20.8% compared to 21.7% for the same period a year ago. This ratio is
similarly impacted by only 10 days of AO business net sales included in the
three months ended June 30, 1996.
Cash flows from investing activities in the three months ended June 30,
1997 amounted to an outflow of $8.8 million. Of this amount $6.4 million
represented capital expenditures on fixed assets, and $2.6 million represented
investment in acquisitions. Capital expenditures for the three months ended June
30, 1997 amounted to $6.4 million, compared to $2.8 million in the comparable
quarter in the prior year. The increased expenditure is considered by management
to be timing related, and management anticipates capital expenditures of $30.0
million to $40.0 million annually over the next several years, of which
approximately $4.0 million annually is viewed as discretionary. Of the $2.6
million spent on acquisitions, $2.3 million represents the acquisition of a Lab
in Belgium, De Muynck Optical, acquired by the Company in April 1997. Cash flows
from investing activities in the three months ended June 30, 1996 amounted to an
outflow of $107.1 million. 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 May 6, 1996 between the Company and AOC. 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 Stock Offering during July 1996.
Net cash used in financing activities in the three months ended June 30,
1997 amounted to $24.3 million. The most significant use was the increase in
bank borrowings to fund the growth in working capital, and the change in prompt
pay discount policy in the United States company. Net cash used in financing
activities in the three months ended June 30, 1996 amounted to $114.3 million.
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 (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
10
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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.
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 American 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 a rate of LIBOR plus 0.60% (approximately
6.3% as of June 30, 1997) and the foreign currency revolver bears an interest
rate of the relevant local economy IBOR plus 0.60%.
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. 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. 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 in 2003. The Company may from time to time
purchase additional Notes in the market or otherwise subject to market
conditions.
The Company's foreign subsidiaries maintain local credit facilities to
provide credit for overdraft, working capital and some fixed asset investment
purposes. As of June 30, 1997 the Company's total credit available under such
facilities was approximately $30 million, of which $14 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 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.
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.
11
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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 it commodity product lines. The
Company seeks to mitigate the adverse effects of inflation through cost
containment and productivity and manufacturing process improvements.
Approximately 5.5% of the Company's net sales during the three months ended June
30, 1997 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 June 30, 1997, these plans have been successful, and
inflation has reduced to approximately 2-3% 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 later part of fiscal 1996 and
during the first quarter of fiscal 1997, the Venezuelan Bolivar has
significantly deteriorated against the US dollar. The Company is closely
monitoring the continued deterioration of this currency. At present
approximately 1% of the Company's net sales originate in Venezuela. Commencing
with the fourth quarter of fiscal 1997 the Company's operations in Mexico have
been accounted for as hyper-inflationary economies. In hyper-inflationary
environments, the Company generally protects margins by methods which include
increasing prices monthly at a rate appropriate to cover anticipated inflation,
compounding interest charges on sales invoices daily and holding cash balances
in U.S. dollar denominated accounts where possible.
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, 1997, and the factors described in "Business-Environmental
Matters", also included in the Company's Form 10-K for the fiscal year ended
March 31, 1997.
12
<PAGE>
PART II 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
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description Page Number
-------------- ----------- -----------
11 Statement Regarding Computation of Per
Share Earnings 16
27 Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
13
<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: August 14, 1997 By: /s/Ian S. Gillies
----------------- -------------------
Ian S. Gillies
Vice President of Administration, Chief
Financial Officer, Secretary and
Treasurer
14
<PAGE>
Exhibit Index
Exhibit No. Description Page
----------- ------------ ----
11 Statement Regarding
Computation of Per Share
Earnings. 16
27 Financial Data Schedule
15
Exhibit 11
SOLA INTERNATIONAL INC.
Computation of Earnings Per Share
(in thousands, except per share data)
(unaudited)
Three Months Ended
June 30, June 30,
1997 1996
-------- --------
Net income.............................................. $11,089 $ 2,162
======= =======
Weighted average number of common and common
equivalent shares outstanding....................... 24,269 21,802
Add assumed dilution arising from exercise of
common equivalent shares (stock options)............. 1,150 1,357
Weighted average number of common and common
equivalent shares used in earnings per share
calculation.......................................... 25,419 23,159
======= =======
Earnings per share:
Net income........................................... $0.44 $0.09
======= =======
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BE REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 21,780
<SECURITIES> 20
<RECEIVABLES> 119,471
<ALLOWANCES> (5,160)
<INVENTORY> 147,401
<CURRENT-ASSETS> 300,904
<PP&E> 153,335
<DEPRECIATION> 37,257
<TOTAL-ASSETS> 626,930
<CURRENT-LIABILITIES> 136,480
<BONDS> 194,203
0
0
<COMMON> 243
<OTHER-SE> 291,625
<TOTAL-LIABILITY-AND-EQUITY> 626,930
<SALES> 137,621
<TOTAL-REVENUES> 137,621
<CGS> 72,794
<TOTAL-COSTS> 72,794
<OTHER-EXPENSES> 43,570
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,455
<INCOME-PRETAX> 16,802
<INCOME-TAX> 5,713
<INCOME-CONTINUING> 11,089
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,089
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
</TABLE>
