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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended March 31, 1997
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. |_|
As of May 30, 1997, the aggregate market value of Common Stock held by
non-affiliates was approximately $682,382,845. 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 30, 1997, 24,266,752 shares of the registrant's common stock, par
value $0.01 per share, which is the only class of common stock of the
registrant, were outstanding. The Company's stock is traded on the New York
Stock Exchange under the symbol SOL.
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<PAGE>
SOLA INTERNATIONAL INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
Page
PART I
Item 1. Business............................................... 3
Item 2. Properties............................................. 8
Item 3. Legal Proceedings...................................... 10
Item 4. Submission of Matters to a Vote of Security Holders.... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................... 11
Item 6. Selected Financial Data................................ 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 13
Item 8. Financial Statements and Supplementary Data............ 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............... 20
PART III
Item 10. Directors and Executive Officers of the Registrant..... 21
Item 11. Executive Compensation................................. 24
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................ 29
Item 13. Certain Relationships and Related Transactions......... 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K....................................... 31
2
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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"). On June 19, 1996 Sola
acquired substantially all of the worldwide ophthalmic business (the "AO" and
"AO Acquisition") of American Optical Corporation ("AOC"). On July 2, 1996 the
Company acquired control of Neolens, Inc. ("Neolens"), a Florida corporation
that manufactures polycarbonate eyeglass lenses and that has been a supplier to
the Company. 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, 1997, March 31, 1996 and March 31,
1995 are referred to herein as "fiscal 1997", "fiscal 1996" and "fiscal 1995",
respectively.
Products
The Company produces plastic and glass eyeglass lenses. The Company's lens
products are differentiated by type of vision correction, lens design, lens
material and coatings applied to the lens. The Company's lenses include single
vision lenses (lenses which have a constant corrective power at all points);
multifocal lenses (lenses which have more than one corrective power, including
bifocal lenses, which have two distinct areas of different corrective power, and
progressive lenses, which have a continuous gradient of different corrective
power); and plano lenses (lenses which have no corrective power and are
primarily used for sunglasses).
Although the Company's lenses are manufactured in both glass and plastic,
plastic lenses currently account for approximately 85% of the Company's net
sales. Approximately 59% 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(R). Polycarbonate lenses have a higher refractive
index than conventional hard resin plastics and a far greater impact resistance.
Spectralite(R), 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(R) 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.
The Company also manufactures and sells glass lenses, primarily in North
America and Europe. These lenses are manufactured in plants located in the
United States, Mexico and France. The Company's strategy for the glass lens
market is to focus on high value-added product categories, such as glass
progressive and higher index glass lenses. Since the Company is primarily
focused on plastic lenses, glass lenses represent a small and decreasing portion
of the Company's sales. The Company
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sells virtually no glass lenses in South America and non-Japan Asia, markets
where glass is still the predominant material for eyeglass lenses.
The Company produces a variety of lens coatings, which primarily provide
scratch resistance and anti-reflection properties. The penetration of coated
lenses varies significantly from market to market.
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(R)
(including Percepta(R) and VIP Gold(R)), which incorporate more complex design
features than standard products and therefore attract an above average gross
profit per pair. 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 18 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 41 major
distribution centers located in 17 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.
Recently the Company made two small acquisitions of prescription
laboratories outside of North America, where development of expertise and
capacity in Rx distribution is a key strategy. HL Optikk based in Norway was
acquired on behalf of AO in January, 1997 and De Muynck Optics N.V., one of the
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largest Rx laboratories in Belgium, joined the Company shortly after the end of
the fiscal year in May 1997.
Customers
During fiscal 1997, 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 1997, six of the Company's ten largest
customers were located in North America and accounted for approximately 13% 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 1997 from the sale of products
outside the United States. See Note 15 of Notes to Consolidated Financial
Statements included elsewhere herein. As a result, a significant portion of the
Company's sales and operations are subject to certain risks, including adverse
developments in the foreign political and economic environment, exchange rates,
tariffs and other trade barriers, staffing and managing foreign operations and
potentially adverse tax consequences. Although the Company and its predecessors
have been successfully conducting business outside of the United States since
its inception in 1960, there can be no assurance that any of these factors will
not have a material adverse effect on the Company's financial condition or
results of operations in the future.
Manufacturing Operations
The Company has 19 manufacturing facilities located in its three major
regions, including 17 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(R). The Company believes
that these materials are currently available from a variety of sources and that
the materials necessary to produce the Company's coatings are readily available
from a number of potential sources. In order to reduce materials costs, the
Company coordinates centrally the purchasing of 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.
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, 1997, there
were approximately 155 employees involved in the Company's research and
development efforts. The Company's research and development expenditures for
fiscal 1997, 1996 and 1995 were $17.5 million (excluding the non-recurring $9.5
million in-process research and development non-cash charge associated with the
AO Acquisition in fiscal 1997), $13.3 million and $14.1 million, respectively,
representing 3.6%, 3.6% and 4.1% of net sales for each of those years. The lower
charge to research and development expenses in fiscal 1996 arose primarily from
the transfer of a
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new product out of research and development and into production. Because
research and development expenditure in AO as a percentage of net sales is lower
than that of Sola on a standalone basis, a reduced ratio of research and
development expenses to net sales can be expected for the combined company in
the future. The Company has its own research and development centers in
Petaluma, California, Southbridge, Massachusetts, and Adelaide, Australia. A
small process automation group is attached to the manufacturing operation in
Wexford, Ireland. The Company's research and development focuses on the design
and development of innovative, value-added products, on new materials with
superior characteristics, on technology that will deliver products to the market
more efficiently, and on technologies to improve productivity in the manufacture
of existing products. Recent research and development programs include the
successful development of the Spectralite(R) thin and light lens material, the
development of Spectralite(R) with photochromic capabilities, Percepta(R)
progressive design, VIP/Graduate Gold progressive design, Access enhanced near
vision lens 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.
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, 1997, the Company had filed (or applied for) patents for
50 discrete inventions or technologies. Many of the Company's patents have been
filed in multiple countries, and they include 31 patents (or patent
6
<PAGE>
applications) filed in the United States. The Company has also registered 433
trademarks in various countries, representing trademarks on 84 discrete names.
These include 49 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.
In addition to the intellectual property described above, in connection
with the AO Acquisition, the acquisition of Neolens, and the ongoing R&D within
those companies, Sola has added 203 patents (55 in the USA) to the Company's
portfolio. These patents are currently under review for the purpose of
consolidating the overall portfolio. A total of 282 additional trademarks (22 in
the USA) was similarly acquired and is also under review.
Employees
As of March 31, 1997, the Company had approximately 7,500 employees
throughout the world. The majority of the Company's employees are not
represented by labor unions. Labor relations are considered to be good and there
have been no significant labor disputes in the past ten years.
Environmental Matters
The Company (together with the industry in which it operates) is subject to
United States and foreign environmental laws and regulations concerning
emissions to the air, waste water discharges and the generation, handling,
storage, transportation and disposal of hazardous wastes, and to other federal,
state and foreign laws and regulations. The Company believes that it possesses
all material permits and licenses necessary for the continuing operation of its
business and believes that its operations are in substantial compliance with the
terms of all applicable environmental laws. It is impossible to predict
accurately what effect these laws and regulations will have on the Company in
the future.
Environmental laws and regulations vary among countries in which the
Company operates. During fiscal 1992, the Company adopted an environmental
policy which includes an environmental auditing process designed to evaluate and
assist operating regions in their environmental compliance efforts.
The Company's manufacturing processes generally utilize non-hazardous
chemicals where feasible. Certain processes, including those for cleaning lenses
and mold assemblies, and abrasion resistant and anti-reflection coating of
lenses, use a variety of volatile and other hazardous substances. Company
developments in manufacturing methods, alternative non-solvent cleaning
processes and waste reduction have been successful in reducing the use of these
chemicals and/or emissions and environmental damage from these processes.
Programs to eliminate use of chlorinated hydrocarbons and chlorofluorocarbons
("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. At the EPA's suggestion, in March 1997
the Company shut down the remediation system for a test period of six months and
will monitor the effect of this shut down on contaminant levels. Based on the
data collected during this period, the EPA will determine whether continued
operation of the system is warranted.
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,
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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 $60,000. 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. The MDNR has
approved a removal action plan submitted by the Company, and the Company
currently anticipates completing the work under this plan by the end of fiscal
1998. The Company currently estimates costs of approximately $350,000 to
$450,000 associated with the removal work. The Company and the MDNR are
currently discussing whether additional investigation of this site is warranted.
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 1997, 1996, and 1995 the Company spent
approximately $216,000, $316,000 and $376,000 on environmental remediation,
respectively. The Company anticipates that its capital expenditures for
environmental improvements during fiscal 1998 will not be material. The Company
cannot accurately predict capital expenditure requirements for environmental
remediation in future periods.
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.
<TABLE>
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.
<CAPTION>
Region and Location Principal Operations Leased/Owned
------------------- -------------------- ------------
<S> <C> <C>
North America
Menlo Park, California......... Headquarters Leased
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Region and Location Principal Operations Leased/Owned
------------------- -------------------- ------------
Petaluma, California........... Manufactures hard resin, Spectralite(R)and polycarbonate Part owned,
lenses; marketing and distribution center; research and part leased
development facility; administrative offices for North
American operations
Eldon, Missouri................ Manufactures multifocal glass lenses, manufactures molds Owned
Southbridge, Massachusetts..... Headquarters for American Optical and distribution center Leased
Tijuana, Mexico................ Three sites manufacturing hard resin and glass lenses, Part owned,
manufactures molds; distribution center part leased
Europe
Goetzenbruck, France........... Manufactures glass lenses; marketing and distribution center Owned
Fougeres, France............... Prescription processing laboratory with anti-reflection
coating capability Leased
Wexford, Ireland............... Manufactures hard resin lenses and Spectralite(R); Owned
prescription processing laboratory; distribution center
Varese, Italy................ Tinting operations; prescription processing laboratory with Leased
anti-reflection coating capability; marketing and
distribution center
Birmingham, United Kingdom..... Prescription processing laboratory with anti-reflection Leased
coating capability; marketing and distribution center
Rest of World
Asia
Xian, China.................... Site owned by a joint venture managed by the Company in Leased
which the Company holds a 50% ownership interest;
manufactures hard resin lenses
Hong Kong...................... Prescription processing laboratory with anti-reflection Leased
coating capability; marketing and distribution center
Osaka, Japan................... Prescription processing laboratory with anti-reflection Leased
coating capability; marketing and distribution center
Chung Li, Taiwan............... Manufactures hard resin lenses; marketing and distribution Leased
center
Singapore...................... Manufactures glass molds; marketing and distribution Leased
center; prescription processing facility with
anti-reflection coating capability
South America
Petropolis, Brazil............. Manufactures hard resin ophthalmic and plano lenses; Owned
regional administration office
Villa de Cura, Venezuela....... Manufactures hard resin lenses; distribution center Owned
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Region and Location Principal Operations Leased/Owned
------------------- -------------------- ------------
Australia
Lonsdale, Australia............ Manufactures hard resin lenses and Spectralite(R); Owned
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
</TABLE>
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 1997 to 2012. The
Company does not anticipate any difficulties in renewing or replacing such
leases as they expire; however, there can be no assurances that the Company will
be able to renew or replace such leases. The Company believes that its
manufacturing capacity is sufficient for its current needs.
Item 3. LEGAL PROCEEDINGS
In addition to the proceedings described under "Business - Environmental
Matters", the Company is involved in routine litigation incidental to its
business, none of which it believes will have a material adverse effect on its
results of operations or financial condition. See Note 14 of Notes to
Consolidated Financial Statements included elsewhere herein.
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 1997.
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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.
Common Stock
Price Range
---------------------
High Low
------- -------
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
Fiscal Year Ended March 31, 1997:
First Quarter ended June 30, 1996 .............. $34 5/8 $27 3/4
Second Quarter ended September 30, 1996 ........ $37 5/8 $28 1/4
Third Quarter ended December 31, 1996 .......... $38 $33
Fourth Quarter ended March 31, 1997 ............ $38 $21 7/8
On May 30, 1997, the closing price per share of the Company's Common Stock
on the New York Stock Exchange was $28 5/8. As of May 30, 1997, there were 489
holders of record of the Company's Common Stock, which excludes beneficial
owners of Common Stock held in "street name".
Since the Acquisition, the Company has not declared or paid any cash
dividends on its Common Stock. The Company's credit agreement, among the
Company, the lenders named therein and The Bank of America National Trust and
Savings Association, for itself and as agent for a syndicate of other financial
institutions, dated June 1996, and the Indenture by and between the Company and
The Bank of New York (successor to 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.
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<TABLE>
Item 6. SELECTED FINANCIAL DATA
<CAPTION>
Sola International Inc. Predecessor Business
-------------------------------------------------------- ----------------------
Fiscal Year Fiscal Year Fiscal Year Four Months Eight Months Fiscal Year
Ended Ended Ended Ended Ended Ended
March 31, March 31, March 31, March 31, November 30, March 31,
1997 (3) 1996 1995 1994 (1) 1993 1993
--------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations Data
(in thousands, except per share data)
Net sales .............................. $ 488,689 $ 387,709 $ 345,631 $ 106,030 $ 200,025 $ 281,494
========= ========= ========= ========= ========= =========
Income (loss) before
extraordinary item ................... $ 30,897 $ 34,588 $ 13,640 $ (61,394) $ 10,749 $ 16,515
Extraordinary item, write-off of
debt issuance costs, net ............. -- (912) (3,915) -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss) ...................... $ 30,897 $ 33,676 $ 9,725(2) $ (61,394) $ 10,749 $ 16,515
========= ========= ========= ========= ========= =========
Earnings (Loss) Per Share Data (4)
Income (loss) before
extraordinary item ................... $ 1.24 $ 1.51 $ 0.78 $ (3.75)
Extraordinary item ..................... -- (0.04) (0.22) --
--------- --------- --------- ---------
Net income (loss) ...................... $ 1.24 $ 1.47 $ 0.56 $ (3.75)
========= ========= ========= =========
Weighted average number of
shares outstanding ................... 24,859 22,944 17,516 16,353
========= ========= ========= =========
Sola International Inc. Predecessor Business
-------------------------------------------------------- ----------------------
As of March 31,
---------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Balance Sheet Data
Total assets.............. $ 605,508 $ 416,849 $ 383,457 $ 360,631 $ 246,944
Long-term debt............ 162,797 97,890 107,407 186,740 9,744
Parent company investment. -- -- -- -- 117,129
Total shareholders' equity 284,298 192,241 159,433 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) For fiscal 1997, the Company recorded two non-recurring charges in
connection with the AO Acquisition: (i) a $7.2 million charge for the
amortization associated with an inventory write-up to fair value that was
reflected in cost of sales; and (ii) a $9.5 million charge for the
write-off of in-process research and development that was reflected in
in-process research and development expense.
(4) Earnings per share are computed using the weighted average number of common
shares and common share equivalents outstanding during the period, for
fiscal 1997, 1996, 1995, and 1994, after giving effect to the IPO.
</FN>
</TABLE>
12
<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
financial statements and notes thereto included elsewhere in this Form 10-K. The
financial statements for the year ended March 31, 1997 reflect the consolidated
operations of the Company after accounting for the acquisition ("AO
Acquisition") of substantially all of the worldwide ophthalmic business ("AO")
of American Optical Corporation ("AOC") on June 19, 1997 (see Note 1 of Notes to
Consolidated Financial Statements), using the purchase method of accounting.
Operating results subsequent to the AO Acquisition include non-recurring,
non-cash charges relating to the write-off of in-process research and
development projects ($9.5 million) and amortization associated with an
inventory write-up to fair value ($7.2 million), both of which were recorded in
connection with the AO Acquisition. The years ended March 31, 1997, 1996 and
1995 are referred to herein as fiscal 1997, fiscal 1996 and fiscal 1995,
respectively.
<TABLE>
The following table reflects the results of operations for the three fiscal
years 1997, 1996 and 1995. The adjustment column in fiscal 1997 reflects
adjustments to present results of operations on a more comparable basis
adjusting for the non-recurring, non-cash charges, and tax effects thereof in
connection with the AO Acquisition, noted above. The adjustment column for
fiscal 1995 reflects the effect on the Company's operations arising from the IPO
in March 1995, including a reduction in interest expense and the effect on
income taxes therefrom, as if these transactions had taken place at the
beginning of the period. 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.
<CAPTION>
Fiscal Adjusted Fiscal Fiscal Adjusted
(In thousands) 1997 Adjustments 1997 1996 1995 Adjustments 1995
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ............................... $ 488,689 $ 488,689 $ 387,709 $ 345,631 $ 345,631
Cost of sales ........................... 264,535 $ (7,216) 257,319 201,991 185,626 185,626
--------- --------- --------- --------- --------- ---------
Gross profit .......................... 224,154 7,216 231,370 185,718 160,005 160,005
--------- --------- --------- --------- --------- ---------
Research and development expenses ....... 17,539 17,539 13,329 14,051 14,051
Selling and marketing expenses .......... 92,387 92,387 66,345 61,143 61,143
General and administrative
expenses (including goodwill
amortization)........................... 47,381 47,381 45,291 45,067 $ (3,917) 41,150
In-process research and
development expenses................... 9,500 (9,500) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Operating expenses .................... 166,807 (9,500) 157,307 124,965 120,261 (3,917) 116,344
--------- --------- --------- --------- --------- --------- ---------
Operating income ..................... 57,347 16,716 74,063 60,753 39,744 3,917 43,661
Interest expense, net ................... (15,961) (15,961) (12,141) (18,522) 6,372 (12,150)
--------- --------- --------- --------- --------- --------- ---------
Income before provision for income
taxes, minority interest and
extraordinary item.............. 41,386 16,716 58,102 48,612 21,222 10,289 31,511
Provision for income taxes .............. 10,737 5,851 16,588 13,623 6,649 284 6,933
Minority interest ....................... 248 248 (401) (933) (933)
--------- --------- --------- --------- --------- --------- ---------
Net income before extraordinary item..... 30,897 10,865 41,762 34,588 13,640 10,005 23,645
Extraordinary item, write-off of
debt issuance costs, net................. -- -- (912) (3,915) 3,915 --
--------- --------- --------- --------- --------- --------- ---------
Net income ........................... $ 30,897 $ 10,865 $ 41,762 $ 33,676 $ 9,725 $ 13,920 $ 23,645
========= ========= ========= ========= ========= ========= =========
</TABLE>
13
<PAGE>
Results of Operations
The following table sets forth, for the fiscal years indicated, the
Company's results and adjusted results of operations as a percentage of net
sales. Management's discussion of results of operations for the years ended
March 31, 1997 and 1995 is based on the adjusted results of operations and the
related percentages of net sales, because, in the opinion of the Company, a
comparison of the historical results of operations for fiscal 1997 and 1995 is
not meaningful due to the effects of certain transactions and non-recurring
charges as noted above.
Fiscal year ended March 31,
-------------------------
1997 1996 1995
----- ----- -----
% % %
Net sales ........................................ 100.0 100.0 100.0
Cost of sales .................................... 52.7 52.1 53.7
----- ----- -----
Gross profit .................................. 47.3 47.9 46.3
Research and development expenses ................ 3.6 3.4 4.1
Selling and marketing expenses ................... 18.9 17.1 17.7
General and administrative expenses .............. 9.7 11.7 11.9
----- ----- -----
Operating expenses ............................ 32.2 32.2 33.7
----- ----- -----
Operating income ........................... 15.1 15.7 12.6
Interest expense, net ............................ (3.2) (3.1) (3.5)
Income before provision for income taxes
and minority interest ....................... 11.9 12.6 9.1
Provision for income taxes ....................... 3.4 3.6 2.0
Minority interest ................................ 0.0 (0.1) (0.3)
Extraordinary item ............................... 0.0 (0.2) 0.0
----- ----- -----
Net income .................................... 8.5 8.7 6.8
===== ===== =====
Net Sales
Net sales were $488.7 million in fiscal 1997, $387.7 million in fiscal
1996, and $345.6 million in fiscal 1995, reflecting a growth of 26.0% from
fiscal 1996 to fiscal 1997 and 12.2% from fiscal 1995 to fiscal 1996. Using
constant exchange rates, the percentage increase from fiscal 1996 to fiscal 1997
was 25.6%, and from fiscal 1995 to fiscal 1996 was 11.3%. The AO Acquisition,
with nine months of AO net sales, amounting to $64.4 million, included in fiscal
1997 net sales, has had a significant impact on the net sales growth from fiscal
1996 to fiscal 1997. In addition, higher priced product growth has also
contributed to the Company's net sales growth from fiscal 1996 to fiscal 1997
and from fiscal 1995 to fiscal 1996, led by the growth of Spectralite(R) and
plastic photochromic products, offset in part by price and volume erosion in net
sales of lower priced products. Higher priced products accounted for
approximately 61% of net lens sales in fiscal 1997 compared to 57% in fiscal
1996 and 53% in fiscal 1995. 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 priced products. Improvements in world
economies, particularly during fiscal 1995, also contributed to the growth in
net sales during fiscal 1996. Net sales increases were achieved in all major
market areas from fiscal 1996 to 1997 as follows: North America 22.7%, Europe
40.6% and Rest of World 15.9%. Net sales increases in major market areas from
fiscal 1995 to 1996 were as follows: North America 12.7%, Europe 6.7% and Rest
of World 18.3%. At constant exchange rates, net sales increases from fiscal 1996
to fiscal 1997 were: North America 22.9%, Europe 42.2% and Rest of World 12.1%,
and from fiscal 1995 to fiscal 1996 were: North America 12.7%, Europe 3.5% and
Rest of World 18.4%.
Gross Profit and Gross Margin
Gross profit totaled $231.4 million, as adjusted, in fiscal 1997, $185.7
million in fiscal 1996, and $160.0 million in fiscal 1995, reflecting growths of
24.6% from fiscal 1996 to fiscal 1997 and 16.1% from
14
<PAGE>
fiscal 1995 to fiscal 1996. Gross profit as a percentage of net sales in fiscal
1997, as adjusted, fiscal 1996, and fiscal 1995, were 47.3%, 47.9%, and 46.3%,
respectively. The gross profit as a percentage of net sales has decreased in
fiscal 1997, as AO traditionally operates at lower gross margins than Sola on a
standalone basis. In addition, the Company has incurred manufacturing start up
costs in its new finished polycarbonate manufacturing operation acquired when
the Company purchased Neolens Inc. in July 1996, and ramp up costs associated
with new product offerings. Offsetting in part the aforementioned reductions,
has been a continued shift towards higher value added products, and continued
benefits from the Company's cost reduction program. During fiscal 1996 the
Company benefited from reduced manufacturing costs at its Mexican facility
arising from the weakness of the Mexican Peso, and from the Company's cost
reduction program. In addition, improved sales mix and manufacturing
improvements, offset in part by cost inflation in South America, contributed to
the improved gross profit as a percentage of sales from 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 $157.3 million, as adjusted, in fiscal 1997,
$125.0 million in fiscal 1996, and $116.3 million, as adjusted, in fiscal 1995,
reflecting increases of 25.9% from fiscal 1996 to fiscal 1997 and 7.5% from
fiscal 1995 to fiscal 1996. Research and development expenses for fiscal 1997,
1996 and 1995 represent 3.6%, 3.4% and 4.1%, respectively, of annual net sales,
reflecting the Company's continued commitment to research and development of new
products, new materials and processes. Because research and development
expenditure in AO as a percentage of net sales is lower than that of Sola on a
standalone basis, a reduced ratio of research and development expenses to net
sales can be expected for the combined company in the future. The lower charge
to research and development expenses in fiscal 1996 arose primarily from the
transfer of a new product out of research and development and into production.
Selling and marketing expenses were 18.9%, 17.1% and 17.7% of net sales in
fiscal 1997, 1996 and 1995, respectively. During the fourth quarter of fiscal
1997 the Company introduced a new progressive lens design, Percepta(R), with a
worldwide launch. Significant marketing expenditures associated with this launch
were incurred primarily in the last two quarters of the fiscal year. The main
reasons for the percentage decrease in selling and marketing expenses 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. As a percentage of net sales, general and
administrative expenses decreased to 9.7% in fiscal 1997 compared to 11.7% in
fiscal 1996 and 11.9% in fiscal 1995. The lower percentage in fiscal 1997
compared to fiscal 1996 is primarily due to lower performance based management
bonuses in fiscal 1997 and favorable foreign currency gains. In addition, the
provisions for doubtful accounts in South America and Asia were significantly
lower in fiscal 1997 compared to fiscal 1996. 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 1997, fiscal 1996 and fiscal 1995 were 32.2%, 32.2% and 33.7%,
respectively.
Operating Income
Operating income for fiscal 1997 totaled $74.1 million, as adjusted, an
increase of $13.3 million over fiscal 1996 operating income of $60.8 million, or
21.9%. Operating income in fiscal 1996 reflected a growth of $17.1 million, or
39.1% over operating income of $43.7 million for fiscal 1995, as adjusted.
Net Interest Expense
Net interest expense totaled $15.9 million for fiscal 1997, $12.1 million
for fiscal 1996, and $12.1 million, as adjusted, for fiscal 1995. Interest
expense was higher in fiscal 1997 than the fiscal 1996 level by approximately
$3.8 million primarily as a result of indebtedness incurred to finance the AO
and Neolens acquisitions offset by the lower interest rate under the New Credit
Agreement and the reduction
15
<PAGE>
of debt from the proceeds of the equity public offering. 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 of common
stock in a public offering for which it received net proceeds of approximately
$62.8 million.
Provision for Income Taxes
The Company's combined state, federal and foreign tax rate was
approximately 28.5% for fiscal 1997, as adjusted, compared to 28.6% for fiscal
1996 and 22.0% for fiscal 1995, as adjusted. The Company provided valuation
allowances against fiscal 1994 net operating loss carryforwards in the United
States, primarily as a result of the Acquisition, and against fiscal 1997, 1996,
1995 and 1994 net operating losses in Australia. The utilization of the United
States valuation allowance has resulted in a reduced effective tax rate for
fiscal 1997, 1996 and 1995. The net operating losses in Australia, which do not
expire, are expected to exceed taxable profits in Australia in fiscal 1998. The
valuation allowances provided against United States deferred tax assets have
been fully reversed as of March 31, 1997, and therefore the Company expects its
effective tax rate to increase in fiscal 1998 and beyond. The Company has
deferred tax assets on its balance sheet as of March 31, 1997 amounting to
approximately $19.2 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 Company's prior credit agreement and partly from excess
cash arising from the IPO.
Net Income
Net income for fiscal 1997 totaled $41.8 million, as adjusted, compared to
$33.6 million for fiscal 1996 and $23.6 million, as adjusted, for fiscal 1995,
increases of $8.2 million and $10.0 million, respectively. The growth in net
income from fiscal 1996 to fiscal 1997, as adjusted, was 24.0% and from 1995, as
adjusted, to fiscal 1996 was 42.4%.
Liquidity and Capital Resources
The following analysis of the Company's cash flow statement reflects the
historical results of the Company which have not been adjusted for the AO
Acquisition, Acquisition or IPO.
Operating activities generated $32.2 million in cash in fiscal 1997,
compared with $30.8 million in fiscal 1996 and $18.5 million in fiscal 1995.
Improved net income in fiscal 1997, after adding back one time non-recurring
non-cash charges associated with the AO Acquisition, was offset in part by
increases in inventories and accounts receivable. Accounts payable in fiscal
1997 increased in line with inventory growth. Significantly improved net income
in fiscal 1996 was offset in part by increases in inventories and accounts
receivable. Accounts payable, which increased in line with inventory growth, was
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.
During fiscal 1997 inventories as a percentage of net sales grew to 28.4%
(27.2% if a full year's net sales for AO are used) from 26.0% in the prior year.
The growth in inventory levels has resulted from the introduction and regional
spread of new products, resulting in both finished goods inventory growth and
increased mold inventory requirements. The primary increase was caused by
increases in inventories
16
<PAGE>
and molds to support the worldwide launch of a new progressive lens design,
Percepta(R), in the fourth quarter of fiscal 1997. Accounts receivable as a
percentage of net sales increased to 21.5% (20.5% if a full year's net sales for
AO are used) in fiscal 1997 compared to 19.3% a year ago. During fiscal 1996
inventories as a percentage of net sales grew to 26.0% from 24.8% in the prior
year resulting from the introduction of new products and regional spread of new
products, causing 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% in fiscal 1995. The accounts
receivable growth from increased net sales in fiscal 1996 was offset by
provisions for doubtful accounts reflecting the lengthening days sales
outstanding in parts of South America and Asia.
During fiscal 1997 net cash expended on investing activities amounted to
$154.8 million. On June 19, 1996, the Company acquired substantially all of the
worldwide ophthalmic business of AOC 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"). 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 Neolens,
Inc. ("Neolens"), a Florida corporation that manufactures polycarbonate eyeglass
lenses 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 ("Neolens Acquisition"). The Neolens Acquisition was funded through
borrowings under the Company's New Credit Agreement. In addition, the Company
spent approximately $30.0 million on capital expenditures primarily in the
United States, Mexico, China and Brazil. The capital expenditure in fiscal 1997
were primarily to add production capacity. During fiscal 1996 net cash expended
on investing activities was primarily for capital expenditures and increasing
the Company's investment in its Venezuela joint venture. The capital
expenditures in fiscal 1996 relate mainly to expansion of production capacity to
accommodate higher volumes and the introduction of new products. 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, Sola
may be required to pay a contingent payment based on the growth in the net
income of Sola Venezuela in fiscal 1998 over the net income of Sola Venezuela in
fiscal 1995, although the contingent payment could be based on an earlier 12
month period. During fiscal 1995 capital expenditures amounted to $11.6 million.
Management anticipates capital expenditures of $30 million to $40 million
annually over the next several years, of which approximately $4 million annually
is viewed as discretionary.
Financing activities generated $125.6 million in fiscal 1997. During July
1996 the Company sold 2,320,000 additional shares of common stock at $28.625 per
share through a public offering ("Offering"). The net proceeds from the
Offering, after deducting expenses of the Offering, including discounts and
commissions paid to the Underwriters, were approximately $62.8 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 (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 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. As of March 31, 1997, $28.1 million was
outstanding under the term loan, and $44.5 million outstanding under the
revolvers. $105.5 million was available for future borrowings under the
revolvers.
17
<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 spreads
similar to those described above for US Base Rate Loans. The term loan and U.S.
dollar revolver currently bear interest at an initial rate of LIBOR plus 0.60%
(approximately 6.30% as of March 31, 1997) and the foreign currency revolver
bears an initial interest rate of the relevant local economy IBOR plus 0.60%.
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.
Financing activities were an outflow of $4.7 million in fiscal 1996. During
the three months ended June 1995 the Company repurchased approximately $19.9
million principal amount at maturity of its 9 5/8% Senior Subordinated Notes due
2003. The repurchase was partly funded by borrowings under the prior credit
agreement and partly from excess cash arising from the IPO. The Company 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 Investors Inc. $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, 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 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. 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.
18
<PAGE>
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, 1997, the Company's total credit available under such
facilities was approximately $30.0 million, of which $9.4 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.
Currency Exchange Rates
As a result of the Company's worldwide operations, currency exchange rate
fluctuations tend to affect the Company's results of operations and financial
position. The two principal effects of currency exchange rates on the Company's
results of operations and financial position are (i) translation adjustments for
subsidiaries where the local currency is the functional currency and (ii)
translation adjustments for subsidiaries in hyper-inflationary countries.
Translation adjustments for functional local currencies have been made to
shareholders' equity. For the fiscal years ended March 31, 1997, 1996 and 1995
such translation adjustments were approximately $(3.8) million, $(1.6) million,
$4.4 million, respectively.
During fiscal 1996 the Company benefited from reduced manufacturing costs
at its Mexican facility arising from the weakness of the Mexican Peso. For
translation adjustments of the Company's subsidiaries operating in
hyper-inflationary countries, until recently primarily Brazil, the functional
currency is determined to be the U.S. dollar, and therefore all translation
adjustments are reflected in the Company's Statements of Operations. Commencing
with the fourth quarter of fiscal 1997 the Company's operations in Mexico have
been accounted for as hyper-inflationary economies. In hyper-inflationary
environments, the Company generally protects margins by methods which include
increasing prices monthly at a rate appropriate to cover anticipated inflation,
compounding interest charges on sales invoices daily and holding cash balances
in U.S. dollar denominated accounts where possible.
Because a majority of the Company's debt is U.S. dollar denominated, the
Company may hedge against certain currency fluctuations by entering into
currency swaps (however certain currencies, such as the Brazilian Real, cannot
be hedged), although no such swaps had been entered into as of March 31, 1997.
As of March 31, 1997 certain of the Company's foreign subsidiaries had entered
into forward contracts for intercompany purchase commitments in amounts other
than their home currency. The carrying amount of the forward contracts
approximates fair value, which has been estimated based on current exchange
rates. For further financial data of the Company's performance by region, see
Note 15 of Notes to Consolidated Financial Statements.
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
19
<PAGE>
lines. The Company seeks to mitigate the adverse effects of inflation through
cost containment and productivity and manufacturing process improvements.
Approximately 7.4% of the Company's net sales during fiscal 1997 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,
1997, inflation has reduced to approximately 2% per month. 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, Percepta, Spectralite, Access and Matrix,
(ii) the availability of raw materials for the Company's products, the costs of
product introductions, and trends in sales growth (including growth related to
new products), (iii) anticipated trends in the Company's business environment,
including competitive and pricing pressures, (iv) the Company's ability to
continue to control costs and maintain adequate standards of customer service
and product quality and (v) future income tax rates and capital expenditures and
working capital requirements. These forward looking statements reflect the
Company's current views with respect to future events and financial performance.
The words "believe", "expect", "anticipate" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Actual results could differ materially from the
forward-looking statements as a result of various factors including the "Factors
Affecting Future Operating Results" included in Exhibit 99.1 of the Company's
Form 10-K for the fiscal year ended March 31, 1997 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,
and F3 through F-27 and the related financial statement schedule is set forth on
page S-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
20
<PAGE>
PART III
<TABLE>
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the
Company's directors and executive officers. All directors hold office until the
annual meeting of stockholders of the Company following their election or until
their successors are duly elected and qualified. Officers are appointed by, and
serve at the discretion of, the Board of Directors.
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Irving S. Shapiro.............................. 80 Chairman of the Board
Douglas D. Danforth............................ 74 Director
Hamish Maxwell................................. 70 Director
Ruben F. Mettler............................... 73 Director
Maurice J. Cunniffe............................ 64 Director
Jackson L. Schultz............................. 71 Director
A. William Hamill.............................. 49 Director
John E. Heine.................................. 53 President and Chief Executive Officer,
Director
James H. Cox................................... 48 Executive Vice President, Assistant
Secretary and Assistant Treasurer;
President, Sola Optical USA
Ian S. Gillies................................. 55 Vice President, Administration, Chief
Financial Officer, Secretary and
Treasurer
Stephen J. Lee................................. 44 Vice President, Human Resources
Barry J. Packham............................... 50 Vice President, Manufacturing
Development
Colin M. Perrott............................... 50 Vice President, Technology and
Development
John J. Bastian................................ 45 Vice President, Regional Director, Australia
Theodore Gioia................................. 39 Vice President, Strategic Planning
Adrian Walker.................................. 44 Vice President, Regional Director, Asia
Mark T. Mackenzie.............................. 47 Vice President, Regional Director, Europe
Alan S. Vaughan................................ 53 Vice President, Worldwide Rx Operations
</TABLE>
The principal occupations and positions for at least the past five years of
each of the directors and executive officers of the Company are as follows
(references to the Company include its predecessors):
Irving S. Shapiro has been Chairman of the Board of the Company since
December 1994. Mr. Shapiro is Of Counsel to Skadden, Arps, Slate, Meagher & Flom
LLP. He was Chairman and Chief Executive Officer of E.I. du Pont de Nemours and
Company from 1974 to 1981. He is Chairman of the Board of the Howard Hughes
Medical Institute and of Marvin & Palmer Associates, Inc., and is a director of
J.P. Morgan Florida Federal Savings Bank, Pediatric Services of America Inc.,
and Gliatech, Inc.
Douglas D. Danforth has been a director of the Company since December 1994.
He was Chairman and Chief Executive Officer of Westinghouse Electric Corporation
from 1983 to 1987. He is a director of Travelers, Inc., and Daltile Inc.
21
<PAGE>
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, and Chairman of WPP Group plc.
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.
Maurice J. Cunniffe has been a director of the Company since December,
1996. He is Chairman and Chief Executive Officer of American Optical
Corporation, a company of which he has been sole shareholder since 1982.
Jackson L. Schultz has been a director of the Company since November 1995.
Mr. Schultz joined Wells Fargo Bank in 1970, retiring in 1990 as Senior Vice
President responsible for Public and Governmental Affairs. Mr. Schultz remains a
consultant to the bank. Mr. Schultz is also a director of The San Francisco
Company.
A. William Hamill has been a director of the Company since December, 1996.
Mr. Hamill is Executive Vice President and Chief Financial Officer of Union Camp
Corporation, which he joined in 1996. From 1993 through 1996, he was a partner
in SCI Investors Inc. and a director of Custom Papers Group Inc. From 1991 to
1993, he was Senior Vice President and Chief Financial Officer of Specialty
Coatings International Inc.. From 1975 through 1990, Mr. Hamill was with Morgan
Stanley & Co. Incorporated, where he was a Managing Director.
John E. Heine has served as Chief Executive Officer and President of the
Company since November 1981 and served as Chairman of the Board of the Company
from September 1993 to December 1994. Mr. Heine joined the Company in 1981 as
Managing Director of Sola International Holdings, Ltd. and previously held
general management positions with Southern Farmers Holdings, Ltd. in Adelaide
and H.J. Heinz in Melbourne, Australia.
James H. Cox was appointed Executive Vice President in December 1996,
Assistant Secretary and Assistant Treasurer of the Company in September 1993 and
President of Sola Optical USA, the Company's North American eyeglass lens
business in 1991. He joined the Company as Vice President, Manufacturing in
1985. Mr. Cox was formerly Executive Vice President of Operations with Bausch &
Lomb's Consumer Products Division.
Ian S. Gillies was appointed Vice President, Administration in December
1996, and continues as Chief Financial Officer, Secretary and Treasurer. Mr.
Gillies held the position of Vice President, Finance, Chief Financial Officer
and Treasurer of the Company from 1991 to 1996. Prior to 1991 Mr. Gillies was
the Regional Director of the Company's European operations and Managing Director
of Pilkington Ophthalmic Products. Mr. Gillies joined Pilkington in 1966. Mr.
Gillies was appointed Secretary of the Company 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.
22
<PAGE>
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.
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.
Adrian P. Walker joined the Company as Regional Director, Asia in November
1996. Mr. Walker held a number of general management positions with subsidiaries
of BTR plc. from March 1980 to November 1996. He was most recently General
Manager of ACI Laminates and Insulations, based in Melbourne, Australia from
July 1995 to October 1996. From August 1992 to July 1995 he was Managing
Director of Dunlop Slazenger (Far East), in Malaysia, and from April 1985 to
July 1992 was General Manager, Serck Services (Gulf) Ltd., in the United Arab
Emirates.
Mark T. Mackenzie was appointed Regional Director, Europe in April 1994.
Mr. Mackenzie served as Group Marketing Director of Tarkett Pegulan AG, and as
General Manager of the Residential Flooring Division, based in Germany. He
formerly held marketing and sales positions with Gillette, L'Oreal and Cadbury
Schweppes.
Alan S. Vaughan was appointed Vice President, Worldwide Rx Operations in
June 1994, having previously served as European Manufacturing and Technical
Director. Mr. Vaughan joined the Company in 1978 as Managing Director of Sola
ADC Lenses in Ireland. He was previously Director of Operations with Johnson &
Johnson (Ireland).
23
<PAGE>
Item 11. EXECUTIVE COMPENSATION
<TABLE>
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
1997, 1996 and 1995, 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 $100,000 (collectively, with the Chief Executive
Officer, the "Named Executive Officers").
<CAPTION>
Summary Compensation Table
Long Term
Compensation
Awards
--------------
Annual Compensation Securities
----------------------------------------------- Underlying
Name and Other Annual Options/ All Other
Principal Position Year Salary ($) Bonus ($) Compensation (1)($) SARs (#) Compensation ($)
------------------ ---- ---------- --------- ------------------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
John E. Heine 1997 $460,661 $206,057 $102,102 -- -- (2)
President 1996 430,048 432,427 103,592 -- --
and Chief 1995 425,240 704,521 148,463 -- --
Executive Officer
James H. Cox 1997 $302,329 $ 81,540 $ 4,810 5,000 4,500(3)
Executive Vice 1996 261,725 207,368 4,192 -- 4,072
President, 1995 257,824 293,017 5,749 -- 9,283
Assistant
Secretary and
Assistant
Treasurer;
President, Sola
Optical USA
Colin M. Perrott 1997 $248,948 $ 85,422 $ 83,262 -- -- (2)
Vice President, 1996 235,870 168,961 93,756 -- --
Technology 1995 232,601 275,260 165,916 -- --
and Development
Ian S. Gillies 1997 $225,701 $ 77,340 $ 76,481 -- $4,500(3)
Vice President, 1996 213,624 152,075 96,290 -- 4,620
Finance, Chief 1995 209,355 247,751 98,470 -- 4,711
Financial Officer,
Secretary and
Treasurer
Stephen J. Lee 1997 $225,261 $ 76,346 $ 91,789 -- $4,500(3)
Vice President, 1996 209,923 150,151 89,473 -- 4,500
Human Resources 1995 206,705 244,759 112,049 -- 3,101
<FN>
- ----------
(1) The amounts indicated for Messrs. Heine, Perrott, Gillies and Lee include
an expatriate accommodation allowance and benefits package of $117,509,
$112,584, $73,534 and $77,791, respectively, for fiscal 1995, $78,445,
$67,277, $68,281, and $64,341, respectively, for fiscal 1996, and $83,330,
$58,853, $58,497, and $62,455, respectively, for fiscal 1997.
(2) 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".
24
<PAGE>
(3) Messrs. Cox, Gillies, and Lee 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 1997 in the amounts of
$4,500, $4,500, and $4,500, respectively.
</FN>
</TABLE>
Option Exercise Table
<TABLE>
The following table sets forth the number of shares covered by both
exercisable and unexercisable options granted to the Named Executive Officers
under the Company's option plans as of March 31, 1997. No options were exercised
by the Named Executive Officers during fiscal 1997.
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
Number of Securities Underlying Unexercised Value of Unexercised In-the-Money
Options/SARs at Fiscal Year-End Options/SARs at Fiscal Year-End (1)
------------------------------- -----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John E. Heine 317,809 79,452 4,263,402 1,065,850
James H. Cox 90,816 26,454 1,204,882 301,220
Colin M. Perrott 69,093 17,273 926,875 231,719
Ian S. Gillies 89,816 22,454 1,204,882 301,220
Stephen J. Lee 69,093 17,273 926,880 231,720
<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 $23.125 per share of Common Stock of the Company at March
31, 1997, as reported on the New York Stock Exchange. Mr. Cox's options
under the International Stock Option Plan were not "in-the-money" as of
March 31, 1997.
</FN>
</TABLE>
Option Grant Table
<TABLE>
The following table sets forth the number of options granted the Named
Executive Officers under the Company's option plans during fiscal 1997. No
options were exercised by the Named Executive Officers during fiscal 1997.
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Individual Grants
-----------------------------------------------------
Potential Realizable
Number of Percent Of Total Value At Assumed
Securities Options/ SARs Annual Rates Of Stock Price
Underlying Granted To Exercise Or Appreciation For Options Term
Options/SARs Employees In Base Price Expiration -------------------------
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
---- ----------- ----------- ------ ---- ----- -------
<S> <C> <C> <C> <C> <C> <C>
John E. Heine -- -- -- -- -- --
James H. Cox 5,000 1.3% $35.88 12/6/06 292,224 465,317
Colin M. Perrott -- -- -- -- -- --
Ian S. Gillies -- -- -- -- -- --
Stephen J. Lee -- -- -- -- -- --
</TABLE>
25
<PAGE>
Employment Agreements
The Company and Mr. Heine entered into a severance agreement dated November
20, 1996. If the Company elects to terminate Mr. Heine's employment other than
for Cause (cause is defined as, willful misconduct; neglect of duties, or any
act or omission any or all of which materially adversely affect the Company's
business; or conviction of a felony) or if Mr. Heine terminates his employment
under certain circumstances, the Company is required to continue his
compensation, including annual salary and an average of the past three years
Management Incentive Plan payments made to him, for a 24 month period. In
addition, for a 24 month period Mr. Heine may continue to participate in any and
all benefit plans the Company regularly provides its other executives including,
but not limited to, health, dental, vision, pension and other retirement plans,
and receive outplacement assistance and consultation up to a maximum of $25,000.
If, within two years of a change in control (as defined in the agreement), the
Company elects to terminate Mr. Heine's employment other than for cause or if
Mr. Heine terminates his employment with the Company under certain
circumstances, the Company shall pay Mr. Heine in cash an amount equal to 2.99
times the sum of the amount of Mr. Heine's annual salary in effect immediately
prior to the date of such termination plus the average of the Management
Incentive Plan compensation paid to him over the immediately prior three years.
The agreement also contains covenants not to compete, covenants not to solicit,
and invention assignment, and confidentiality clauses.
The Company and each of the Messrs. Cox, Perrott, Gillies and Lee 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 12 months' notice. 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 12-month period
commencing with the date of termination.
Pension Plan
Prior to the Acquisition, Mr. Cox was a participant 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 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
26
<PAGE>
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 $2,288,000 and Australian $1,385,000,
respectively (U.S. $1,790,000 and U.S. $1,034,000, based on a conversion rate of
1.278 Australian $ to the U.S. $). Mr. Gillies and Mr. Lee did not participate
in the Pilkington Visioncare Pension Plan; however, they do participate in the
Sola Optical Pension Plan.
<TABLE>
The following table shows estimated annual benefits payable upon retirement
to Messrs. Cox, Gillies and Lee 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
which will be offset from the Sola Optical Pension Plan will be $16,929.48.
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.
<CAPTION>
Pension Plan Table
Years of Service
Remuneration 15 20 25 30 35
------------ ----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$125,000 $26,740 $35,653 $44,566 $53,479 $62,392
150,000 32,462 43,283 54,103 64,924 75,745
175,000 32,462 43,283 54,103 64,924 75,745
200,000 32,462 43,283 54,103 64,924 75,745
225,000 32,462 43,283 54,103 64,924 75,745
250,000 32,462 43,283 54,103 64,924 75,745
300,000 32,462 43,283 54,103 64,924 75,745
350,000 32,462 43,283 54,103 64,924 75,745
400,000 32,462 43,283 54,103 64,924 75,745
450,000 32,462 43,283 54,103 64,924 75,745
500,000 32,462 43,283 54,103 64,924 75,745
</TABLE>
The years of credited service as of March 31, 1996 for Messrs. Cox,
Gillies, and Lee are 11.25, 3.33, and 3.33 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, 1997 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, 1997, 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 1997. 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, 1997.
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
27
<PAGE>
compensation plans. The current compensation covered by the Sola Optical Pension
Plan for Messrs. Cox, Gillies and Lee 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 1996) are based upon the compensation cap in each year, as
required by law. The IRC Section 415 defined limit was $125,000 for 1997, 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 1997, directors received an annual fee of $20,000, except for the
Chairman who received an annual fee of $40,000, and $500 for each Board meeting
attended. During fiscal 1998, 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
each Board meeting attended. In April 1996 the Board of Directors amended the
International Stock Option Plan, which amendment was ratified by the
Shareholders on August 16, 1996, to permit non-employee directors to receive all
or a portion of their retainer fee in options to acquire shares of Common Stock,
which amendments were ratified by the shareholders of the Company at the annual
general meeting in August 1996. 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 1997 (and will receive $500 in fiscal 1998) 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, 1997 were Hamish Maxwell, Ruben F. Mettler, and Irving S. Shapiro (an
officio). Lawrence Za Yu Moh served as a member of the Compensation Committee
during part of fiscal 1997 and resigned as a director for the Company during
fiscal 1997. Dr. Mettler will not be standing for re-election to the Board of
Directors.
28
<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 as of May 30, 1997
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.
Number of Shares
Beneficially Percentage
Name Owned of Class(1)
- ---- ----- -----------
5% Stockholders:
J. & W. Seligman & Co. Inc. ........................
100 Park Avenue
New York, NY 10007 ............................ 1,378,435 5.7
John W. Bristol & Co. ..............................
41st Floor, 233 Broadway
New York, N.Y. 10279 .......................... 1,252,790 5.2
Directors:
Irving S. Shapiro(2) ............................... 20,036 *
Douglas D. Danforth(3) ............................. 17,232 *
John E. Heine(4) ................................... 391,184 1.6
Hamish Maxwell(5) .................................. 70,083 *
Ruben F. Mettler(6) ................................ 14,935 *
Maurice J. Cunniffe ................................ 40,000
Jackson L. Schultz(7) .............................. 3,454 *
A. William Hamill .................................. 3,000
Named Executive Officers:
James H. Cox(8) .................................... 124,003 *
Ian S. Gillies(9) .................................. 116,466 *
Colin M. Perrott(10) ............................... 97,873 *
Stephen J. Lee(11) ................................. 97,263
All directors and executive officers
as a group (19 persons)(12) ................... 1,382,964 5.5
- ----------
* The percentage of shares of Common Stock beneficially owned does not
exceed one percent of the outstanding shares of Common Stock.
(1) Based on 24,266,752 shares of Common Stock outstanding on May 30, 1997.
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 30, 1997.
29
<PAGE>
(2) Mr. Shapiro's shares are held by a trust of which Mr. Shapiro is both
trustee and sole beneficiary. Includes 825 shares of Common Stock
issuable upon exercise of options that are exercisable within 60 days
from May 30, 1997.
(3) Includes 413 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days from May 30, 1997.
(4) Includes 317,809 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days from May 30, 1997 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.
(5) Includes 83 shares of Common Stock issuable upon exercise of options that
are exercisable within 60 days from May 30, 1997.
(6) Includes 413 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days from May 30, 1997. Dr. Mettler will
not be standing for re-election to the Board of Directors.
(7) Includes 454 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days from May 30, 1997.
(8) Includes 90,816 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days from May 30, 1997.
(9) Includes 89,816 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days from May 30, 1997.
(10) Includes 69,093 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days from May 30, 1997.
(11) Includes 69,093 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days from May 30, 1997.
(12) Includes shares held by Mr. Peter Kendall, who was an executive officer
on May 30, 1997 and subsequently terminated his employment with the
Company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
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. Mr.
Maurice J. Cunniffe, a director of the Company from December 5, 1996, is sole
shareholder of AOC.
30
<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, 1997, there were no reports on Form 8-K
filed by the Company.
31
<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 12, 1997 By: /s/ Ian S. Gillies
------------------------
Ian S. Gillies
Vice President, Administration,
Chief Financial Officer,
Secretary and Treasurer
<TABLE>
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.
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Irving S. Shapiro
- --------------------- Chairman of the Board June 12, 1997
Irving S. Shapiro
/s/ John E. Heine
- ----------------- President and Chief Executive Officer, June 12, 1997
John E. Heine Director (Principal Executive Officer)
/s/ Ian S. Gillies
- ------------------ Vice President, Administration, Chief June 12, 1997
Ian S. Gillies Financial Officer, Secretary and
Treasurer (Principal Financial and
Accounting Officer)
/s/ Douglas D. Danforth
- ----------------------- Director June 12, 1997
Douglas D. Danforth
/s/ Hamish Maxwell
- ------------------ Director June 12, 1997
Hamish Maxwell
/s/ Ruben F. Mettler
- -------------------- Director June 12, 1997
Ruben F. Mettler
32
<PAGE>
/s/ Maurice J. Cunniffe
- ----------------------- Director June 12, 1997
Maurice J. Cunniffe
/s/ A. William Hamill
- ---------------------- Director June 12, 1997
A. William Hamill
/s/ Jackson L. Schultz
- ---------------------- Director June 12, 1997
Jackson L. Schultz
</TABLE>
33
<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, 1997 and 1996................F-3
Consolidated Statements of Income for the years ended
March 31, 1997, 1996 and 1995........................................F-4
Consolidated Statements of Shareholders' Equity for the
years ended March 31, 1997, 1996 and 1995............................F-5
Consolidated Statements of Cash Flows for the years
ended March 31, 1997, 1996 and 1995................................F-6
Notes to Consolidated Financial Statements...............................F-7
Quarterly Financial Data (unaudited).....................................F-29
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, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended March 31, 1997. Our audits also included the financial
statement schedule listed in the index at item 14(a). These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sola International Inc. as of March 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1997, 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, 1997
F-2
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<CAPTION>
March 31,
------------------------
ASSETS 1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 24,401 $ 22,394
Trade accounts receivable, less allowance for doubtful accounts of
$4,030 and $5,424 at March 31, 1997 and 1996, respectively....... 104,960 74,845
Inventories......................................................... 138,634 100,707
Deferred income taxes............................................... 10,686 7,491
Prepaids and other current assets................................... 3,539 1,861
-------- --------
Total current assets............................................. 282,220 207,298
Property, plant and equipment, at cost, less accumulated depreciation
and amortization................................................. 110,477 79,582
Deferred income taxes.................................................. 8,557 6,800
Debt issuance costs, net............................................... 2,773 1,907
Goodwill and other intangibles, net.................................... 200,734 120,352
Other assets........................................................... 747 910
-------- --------
Total assets..................................................... $605,508 $416,849
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Current liabilities:
Notes payable to banks.............................................. $ 9,422 $ 13,722
Current portion of long-term debt................................... 9,991 3,681
Accounts payable.................................................... 56,747 39,415
Accrued liabilities................................................. 29,557 20,167
Accrued reorganization and acquisition expenses..................... 9,134 9,746
Accrued payroll and related compensation............................ 25,836 22,560
Income taxes payable................................................ 467 1,090
Deferred income taxes............................................... 1,261 461
-------- --------
Total current liabilities........................................ 142,415 110,842
Long-term debt, less current portion................................... 3,555 3,360
Bank debt, less current portion........................................ 67,938 6,000
Senior subordinated notes.............................................. 91,304 88,530
Deferred income taxes.................................................. 4,384 4,990
Other liabilities...................................................... 11,614 10,886
-------- --------
Total liabilities................................................ 321,210 224,608
Commitments and contingencies
Shareholders' equity
Preferred stock, $0.01 par value; 5,000 shares authorized; no shares -- --
issued...........................................................
Common stock, $0.01 par value; 50,000 shares authorized; 24,263 shares
(21,797 shares as of March 31, 1996) issued and outstanding...... 243 218
Additional paid-in capital............................................. 271,167 206,412
Equity participation loans............................................. (270) (421)
Retained earnings/(Accumulated deficit)................................ 12,904 (17,993)
Cumulative foreign currency adjustments................................ 254 4,025
-------- --------
Total shareholders' equity....................................... 284,298 192,241
Total liabilities and shareholders' equity....................... $605,508 $416,849
========= ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<CAPTION>
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1997 1996 1995
<S> <C> <C> <C>
Net sales ........................................................... $ 488,689 $ 387,709 $ 345,631
Cost of sales ....................................................... 264,535 201,991 185,626
--------- --------- ---------
Gross profit ..................................................... 224,154 185,718 160,005
--------- --------- ---------
Research and development expenses ................................... 17,539 13,329 14,051
Selling and marketing expenses ...................................... 92,387 66,345 61,143
General and administrative expenses ................................. 47,381 45,291 45,067
In-process research and development
expense .......................................................... 9,500 -- --
--------- --------- ---------
Operating expenses ............................................... 166,807 124,965 120,261
--------- --------- ---------
Operating income .............................................. 57,347 60,753 39,744
Interest income ..................................................... 640 544 470
Interest expense .................................................... (16,601) (12,685) (18,992)
--------- --------- ---------
Income before provision for income taxes,
minority interest and extraordinary item ...................... 41,386 48,612 21,222
Provision for income taxes .......................................... 10,737 13,623 6,649
Minority interest ................................................... 248 (401) (933)
--------- --------- ---------
Income before extraordinary item ................................. 30,897 34,588 13,640
Extraordinary item, repurchase of senior
subordinated notes (1995 - write-off of
debt issuance costs), net of tax ................................. -- (912) (3,915)
--------- --------- ---------
Net income .......................................................... $ 30,897 $ 33,676 $ 9,725
========= ========= =========
Earnings (loss) per share:
Income before extraordinary item .............................. $ 1.24 $ 1.51 $ 0.78
Extraordinary item ............................................ -- (0.04) (0.22)
--------- --------- ---------
Net income .................................................... $ 1.24 $ 1.47 $ 0.56
========= ========= =========
Weighted average number of shares outstanding ....................... 24,859 22,944 17,516
========= ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share data)
<CAPTION>
Cumulative
Retained Foreign
Additional Equity Earnings/ Currency Total
Common Stock Paid-in Participation (Accumulated Translation Shareholders'
Shares Value Capital Loans Deficit) Adjustments Equity
-------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Public Offering of 2,320 shares of
$0.01 par value common stock,
net of offering expenses......... 2,320 23 62,742 62,765
146 shares of $0.01 par value
common stock issued under stock
option plans..................... 146 2 1,747 1,749
Tax benefit from exercise of stock
options.......................... 266 266
Repayment of Equity participation
loans............................ 151 151
Cumulative translation adjustments.. (3,771) (3,771)
Net income.......................... 30,897 30,897
-------- -------- -------- -------- -------- -------- ---------
Balances, March 31, 1997............ 24,263 $243 $271,167 $(270) $12,904 $254 $284,298
======== ======== ======== ======== ======== ======== =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................. $ 30,897 $ 33,676 $ 9,725
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization .......................................... 21,595 17,247 20,981
Inventory write-up ..................................................... 7,216 -- --
In-process research and development .................................... 9,500 -- --
Provision for excess and obsolete inventory ............................ 1,593 1,090 1,981
Provision for doubtful accounts ........................................ 1,258 2,846 2,442
Increase (decrease) in net deferred taxes .............................. (3,644) 1,657 (1,404)
(Gain) loss on disposal/sale of property, plant
and equipment ....................................................... (272) (73) 20
Changes in assets and liabilities:
Trade accounts receivable ........................................... (19,513) (10,883) (8,941)
Inventories ......................................................... (24,464) (16,222) (4,405)
Prepaids and other current assets ................................... 286 127 (318)
Other assets ........................................................ (1,011) 394 (151)
Accounts payable--trade ............................................. 6,258 10,010 (3,183)
Accrued and other current liabilities ............................... 1,803 (9,750) 2,657
Other long-term liabilities ......................................... 650 643 (950)
--------- --------- ---------
Net cash provided by operating activities ......................... 32,152 30,762 18,454
--------- --------- ---------
Cash flows from investing activities:
Acquisition of American Optical, less cash and
cash equivalents of $3,365 .......................................... (108,594) -- --
Acquisition of Neolens, less cash and cash ............................. (16,848) -- --
equivalents of $12
Additional investment in Venezuela subsidiary .......................... -- (3,561) --
Capital expenditures ................................................... (29,951) (17,580) (11,588)
Payments received on notes receivable from
Pilkington and affiliates ........................................... -- 1,585 1,200
Proceeds from sale of fixed assets ..................................... 636 585 550
--------- --------- ---------
Net cash used in investing activities ............................. (154,757) (18,971) (9,838)
--------- --------- ---------
Cash flows from financing activities:
Sale of common stock ................................................... 62,765 -- 81,838
Payments on equity participation loans/exercise
of stock options .................................................... 2,166 733 --
Net receipts (payments) under notes payable to ......................... (4,789) 6,785 396
banks
Borrowings on long-term debt ........................................... 4,081 1,297 7,382
Payments on long-term debt ............................................. (5,278) (1,735) (11,487)
Net receipts (payments) under Bank debt ................................ 66,626 6,000 (82,195)
Repurchase of senior subordinated notes ................................ -- (17,766) --
--------- --------- ---------
Net cash provided by (used in) financing activities................ 125,571 (4,686) (4,066)
Effect of exchange rate changes on cash and cash
equivalents.......................................................... (959) (859) 913
Net increase in cash and cash equivalents .............................. 2,007 6,246 5,463
Cash and cash equivalents at beginning of period ....................... 22,394 16,148 10,685
--------- --------- ---------
Cash and cash equivalents at end of period ............................. $ 24,401 $ 22,394 $ 16,148
========= ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-6
<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 financial
statements. The Company operates in one business segment.
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 7), which
borrowings were subsequently repaid in part with the proceeds of the Stock
Offering during July 1996 (see Note 9). The AO Acquisition has been accounted
for under the purchase method of accounting as of the closing date. The total
purchase price of $110.2 million (including acquisition costs of $6.5 million)
exceeded the historical book value of the net assets acquired and such excess
was allocated to the assets and liabilities based on their estimated fair values
as of the AO Acquisition date, including in-process research and development
with no alternative future use. Independent appraisals were utilized for
determining the amounts assigned to certain purchased assets including property,
plant and equipment and in-process research and development.
The allocation of the AO purchase has been calculated as follows:
Purchase price............................................. $103,659
Acquisition expenses....................................... 6,533
-----------
Total acquisition cost..................................... $110,192
===========
Historical net assets at acquisition date.................. $ 24,649
Write-up of inventories.................................... 7,216
Write-up of property, plant and equipment.................. 506
Goodwill and other intangible assets....................... 69,155
Non-compete agreement...................................... 1,500
In-process research and development........................ 9,500
Relocation and exit costs.................................. (686)
Net deferred tax effects of certain of the above
purchase accounting adjustments......................... ( 1,648)
-----------
$110,192
===========
See Note 16 regarding pro forma data pertaining to the AO Acquisition.
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 7). The
Neolens Acquisition has been accounted for under the purchase method of
accounting as of the closing date. The total purchase price of $16.8 million
(including acquisition costs of $1.3 million) included $17.6 million allocated
to goodwill and other intangible assets. Results of Neolens prior to acquisition
were not material to the Company's consolidated results of operations.
F-7
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Basis of Presentation - (Continued)
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, Sola
may be required to pay a contingent payment based on the growth in the net
income of Sola Venezuela in fiscal 1998 over the net income of Sola Venezuela in
fiscal 1995. 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 consolidated financial statements of the Company have been
prepared in accordance with U.S. generally accepted accounting principles. The
Company's financial statements presented herein include the results of
operations and cash flows of the AO business for the nine months and ten days
ended March 31, 1997 and the results of operations and cash flows of the Neolens
business for the nine months ended March 31, 1997 subsequent to their respective
acquisitions.
2. Summary of Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned and controlled foreign subsidiaries. All significant
transactions between the entities have been eliminated.
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.
F-8
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies - (Continued)
Property, Plant and Equipment:
Property, plant and equipment are stated at cost and are depreciated on a
straight-line basis over the estimated useful lives of the related assets
(buildings--15 to 50 years; plant and office equipment--2 to 10 years).
Leasehold improvements and leased equipment are amortized over the lesser of
their useful lives or the remaining term of the related leases.
Impact of recently issued accounting standards:
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share", which is required to be adopted in the year ended
March 31, 1998. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact is expected to
result in an increase in primary earnings per share for the year ended March 31,
1997 and March 31, 1996 to $1.27 and $1.54 per share, respectively. The impact
of Statement 128 on the calculation of fully diluted earnings per share for
these periods is not expected to be material.
Also in February 1997, the Financial Accounting Standard Board issued
Statement No. 129, "Disclosure of Information about Capital Structure". As a
publicly traded company, the Company has been required to make the disclosures
required by Statement 129, and therefore, this statement should have no impact.
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, 1997 and 1996
accumulated amortization was $12.4 million and $7.3 million, respectively.
Debt issuance costs are being amortized to interest expense over the
respective lives of the debt instruments which range from five to ten years. As
of March 31, 1997 and 1996, accumulated amortization was $1.5 million and $1.1
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 income, together with the premium over accreted value, as an extraordinary
item, net of tax.
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.
F-9
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies - (Continued)
The Company has operations in Brazil, a hyper-inflationary country until
recently, for which the functional currency is the U.S. dollar. Commencing with
the fourth quarter of fiscal 1997 the Company's operations in Mexico have been
accounted for as hyper-inflationary economies. All translation and transaction
adjustments are included in determining net income (loss).
Revenue Recognition:
Sales and related cost of sales are recognized upon shipment of product.
The Company's principal customers are wholesale distributors and processing
laboratories, retail chains, superoptical retail stores, independent eyecare
practitioners and sunglass manufacturers. No individual customer accounts for
more than 10% of net sales. The Company generally does not require collateral
from its customers, but performs on-going credit evaluations of its customers.
Advertising and Promotion Costs:
The Company's policy is to expense advertising and promotion costs as they
are incurred. The Company's advertising and promotion expenses were
approximately $12.5 million, $9.4 million, and $9.1 million for fiscal 1997,
1996, 1995, respectively.
Income Taxes:
The accompanying financial statements of the Company reflect the provisions
of FASB 109.
Investment tax credits and research and development credits are accounted
for by the flow-through method.
Reclassifications:
Certain prior year items in the Notes to Consolidated Financial Statements
have been reclassified to conform with the current year's presentation.
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.
F-10
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies - (Continued)
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, 1997, 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>
2. Summary of Significant Accounting Policies - (Continued)
<TABLE>
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:
<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>
3. Inventories
March 31,
----------------------------
1997 1996
-------- --------
(in thousands)
Raw materials .......................... $ 17,505 $ 10,595
Work in progress ....................... 6,948 4,782
Finished goods ......................... 76,936 59,595
Molds .................................. 37,245 25,735
-------- --------
$138,634 $100,707
======== ========
Molds comprise mainly finished goods for use by manufacturing affiliates in
the manufacture of spectacle lenses.
F-12
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Property, Plant and Equipment
March 31,
---------------------
1997 1996
-------- --------
(in thousands)
Land, buildings and leasehold improvements ........... $ 29,749 $ 26,599
Machinery and office equipment ....................... 115,943 78,882
Equipment under capital leases ....................... 259 874
-------- --------
145,951 106,355
Less accumulated depreciation and amortization ....... 35,474 26,773
-------- --------
$110,477 $ 79,582
======== ========
At March 31, 1997 and 1996, equipment acquired under capital leases had
related accumulated amortization of approximately $13,000 and $176,000,
respectively. Depreciation expense for fiscal 1997, 1996 and 1995 was $13.3
million, $11.1 million and $10.7 million, respectively.
5. Notes Payable to Banks
Notes payable to banks at March 31, 1997 represent borrowings generally
denominated in foreign currencies under several foreign credit agreements with
lenders at interest rates ranging from 1.63% to 12.00%, and 39.29% for Brazilian
Real based borrowings. The Brazilian Real based borrowings were $545,000 at
March 31, 1997. The weighted average interest rates as of March 31, 1997 and
1996 were 8.68% and 8.47%, respectively. As of March 31, 1997, the Company had
total unused lines of credit amounting to $20.4 million. As of March 31, 1997,
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
March 31,
1997
-----------------
(in thousands)
Uncollateralized term loans, interest rates varying from
4.75% to 7.82% at March 31, 1997, principal and interest
payable through December 2002 .................................... $6,224
Loans collateralized by equipment and other assets, interest
rates varying from 3.84% to 19.36% at March 31, 1997,
principal and interest payable through July 2004 ................. 2,465
------
Other ............................................................... 169
------
8,858
Less current portion ................................................ 5,303
------
Long-term debt, less current portion ................................ $3,555
======
Current portion, per above .......................................... 5,303
Term loan facility (current portion, see note 7) .................... 4,688
------
Current portion of long-term debt ................................... $9,991
======
Aggregate annual maturities of long-term debt over the next five years and
thereafter are as follows:
Period Ending March 31, (in thousands)
-----------------------
1998 ................................................... $5,303
1999 ................................................... 830
2000 ................................................... 777
2001 ................................................... 637
2002 ................................................... 498
Thereafter ............................................. 813
The Company believes that as of March 31, 1997, 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
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 prior 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 U.S. dollar revolver both mature on May 31, 2001.
F-14
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Bank Credit Agreement - (Continued)
Borrowings under the term loan facilities and the U.S. 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 0.60% (approximately 6.30% as of March 31, 1997) and the
foreign currency revolver bears an interest rate of the relevant local economy
IBOR plus 0.60%.
The US term loan amortizes in semiannual installments with total annual
principal repayments as follows:
Year Ended March 31
(in thousands)
1998 $4,688
1999 5,625
2000 6,563
2001 7,500
2002 3,750
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.
F-15
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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, 1997, 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 Company's
Initial Public Offering. The Company may from time to time purchase additional
Notes in the market or otherwise subject to market conditions.
9. Common Stock
Common Stock
The Company's common stock comprises 50 million authorized shares at a par
value of $0.01 each.
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 $62.8
million. The Company used such net proceeds to repay indebtedness which it
incurred under the New Credit Agreement (See Note 7).
F-16
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Common Stock - (Continued)
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, 1997 and 1996, loans amounting to $0.3 million and $0.4 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.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
On February 23, 1995 all outstanding stock options under the previous
corporate structure were assumed by the Company and converted into options to
acquire shares of the Company's Common Stock, with the number of shares subject
to such option and exercise price thereof adjusted appropriately (the "Existing
Option Plan"). The Existing Option Plan has been amended to provide that no new
options will be granted thereunder.
The Company adopted the Sola International Inc. Stock Option Plan
("International Plan"), effective February 15, 1995. On August 16, 1996 the
shareholders of the Company ratified an increase of 500,000 to the number of
options available for issuance under the International Plan. The maximum number
of shares of Common Stock with respect to which options may be granted under the
International Plan is 1,355,868 shares plus, subject to the requirement of rule
16b-3 of the Securities Exchange Act of 1934, if applicable, the number of
shares of Common Stock subject to existing options under the Existing 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 non employee directors and/or
creditors of the Company and its subsidiaries and affiliates (each an
"Optionee") are eligible to receive non-qualified stock options (the
"International Options") to acquire shares of common stock of the Company.
International Options granted to an Optionee are evidenced by an agreement
between the Optionee and the Company which contains terms not inconsistent with
the International Plan which the committee appointed to administer the
International Plan deemed necessary or desirable (the "International Option
Agreement").
F-17
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Common Stock - (Continued)
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.
Pro Forma Disclosures
Pro Forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions:
risk-free interest rate of 6.67%, no dividend yield, volatility factor of the
expected market price of the Company's common stock of .389, and a
weighted-average expected life of the option of 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
1997 1996
---- ----
Pro forma net income.............. $30,251 $33,603
Pro forma earnings per share:
Primary........................ $1.22 $1.46
The pro forma effect on net income during the phase-in period of Statement
123 may not be representative of the effects on pro forma net income in future
periods.
F-18
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Common Stock - (Continued)
Option Activity
A summary of the Company's stock option activity, and related information
for fiscal 1995, 1996 and 1997 follows:
Number of
Securities
Underlying Weighted-
Options Average
(000) Exercise Price
Options outstanding as of March 31, 1994 ............... 1,261 $ 9.71
Options granted during fiscal 1995 .................. 905 13.62
------
Options outstanding as of March 31, 1995 ............... 2,166 11.34
Options granted during fiscal 1996 .................. 113 24.45
Options exercised in fiscal 1996 .................... (17) 12.70
Options cancelled in fiscal 1996 .................... (35) 13.81
------
Options outstanding as of March 31, 1996 ............... 2,227 11.96
Options granted during fiscal 1997 .................. 394 34.01
Options exercised in fiscal 1997 .................... (145) 12.02
Options cancelled in fiscal 1997 .................... (47) 17.98
------
Options outstanding as of March 31, 1997 ............... 2,429 15.43
======
Options exercisable as of March 31, 1997 ............... 1,486 12.47
Weighted - average fair value of options granted during
the year .......................................... $13.65
Options exercisable as of March 31, 1995 and March 31, 1996 in thousands
were 685 and 1,119, respectively. Options available for grant as of March 31,
1995, March 31, 1996 and March 31, 1997 in thousands were 335, 257 and 409,
respectively. Exercise prices for options granted during fiscal 1997 ranged from
$28.00 to $37.38. The weighted-average remaining contractual life of those
options is four years.
10. Defined Contribution Plans
The Company sponsors several defined contribution plans covering
substantially all U.S. and U.K. employees. The plans provide for limited Company
matching of participants' contributions. Contributions to all defined
contribution plans charged to operations were $1.0 million, $0.9 million and
$0.8 million for fiscal 1997, 1996 and 1995, respectively.
F-19
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Defined Benefit Retirement Plans
The Company participates in a defined benefit pension plan ("Domestic
Pension Plan") covering substantially all full-time domestic employees. Benefit
payments under the plan are based principally on 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.
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:
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1997 1996 1995
--------- --------- ---------
(in thousands)
Domestic Pension Plan:
Service cost-benefits earned during the period $ 1,662 $ 1,370 $ 1,252
Interest cost on projected benefit obligation . 702 509 377
Actual return on plan assets .................. (400) (180) 1
Net amortization and deferral ................. 83 25 (1)
--------- --------- ---------
Total net periodic pension costs .............. $ 2,047 $ 1,724 $ 1,629
========= ========= =========
International Pension Plan:
Service cost-benefits earned during the period. $ 1,843 $ 1,539 $ 1,299
Interest cost on projected benefit obligation . 731 684 579
Actual return on plan assets .................. (1,344) (1,454) 134
Net amortization and deferral ................. 308 583 (938)
--------- --------- ---------
Total net periodic pension costs .............. $ 1,538 $ 1,352 $ 1,074
========= ========= =========
F-20
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Defined Benefit Retirement Plans - (Continued)
The significant actuarial assumptions for the following tables, as of the
period-end measurement dates, are as follows:
Year Ended March 31,
--------------------
1997 1996 1995
------- ------ -----
Domestic Pension Plan:
Discount rate ......................................... 7.35% 7.0% 7.5%
Expected long-term rate of return on plan assets ...... 8.0% 8.0% 8.0%
Rate of increase in future compensation levels ........ 5.0% 5.0% 5.0%
International Pension Plan:
Discount rate ......................................... 7.5% 8.0% 7.5%
Expected long-term rate of return on plan assets ...... 8.0% 8.5% 8.0%
Rate of increase in future compensation levels ........ 5.0% 5.5% 5.5%
The change in the actuarial assumptions for fiscal 1997, 1996 and 1995 have
not had a significant effect on the funded status of the Domestic or
International Pension Plans.
At March 31, 1997, the Domestic Pension Plan and International Pension Plan
assets include cash equivalents, fixed income securities and common stock.
F-21
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
11. Defined Benefit Retirement Plans - (Continued)
The funded status as of the year-end measurement dates was as follows:
<CAPTION>
Year Ended March 31,
--------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Domestic Pension Plan:
Actuarial present value of benefit obligations:
Vested benefit obligation ............................................... $ 4,294 $ 2,776 $ 968
======== ======== ========
Accumulated benefit obligation .......................................... $ 4,652 $ 3,091 $ 1,262
======== ======== ========
Projected benefit obligation ............................................ $ 11,301 $ 9,603 $ 6,566
Plan assets at fair value ............................................... 6,021 3,733 58
-------- -------- --------
Projected benefit obligation in excess of plan assets.................... 5,280 5,870 6,508
-------- -------- --------
Unrecognized net loss ................................................... (498) (1,179) (13)
Unrecognized prior service cost ......................................... -- -- --
Unrecognized transition asset, net ...................................... -- -- --
-------- -------- --------
Accrued pension cost .................................................... $ 4,782 $ 4,691 $ 6,495
======== ======== ========
International Pension Plan:
Actuarial present value of benefit obligations:
Vested benefit obligation ............................................... $ 11,295 $ 10,480 $ 3,518
======== ======== ========
Accumulated benefit obligation .......................................... $ 11,297 $ 10,486 $ 8,524
======== ======== ========
Projected benefit obligation ............................................ $ 11,446 $ 10,827 $ 9,069
Plan assets at fair value ............................................... 13,333 12,032 9,546
-------- -------- --------
Projected benefit obligation less than plan assets ...................... (1,887) (1,205) (477)
Unrecognized net gain ................................................... 1,657 947 208
Unrecognized transition asset, net ...................................... 230 258 269
-------- -------- --------
Accrued pension cost .................................................... $ -- $ -- $ --
======== ======== ========
</TABLE>
F-22
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Income Taxes
The domestic and foreign components of income before provision for income
taxes are as follows:
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1997 1996 1995
--------- --------- ---------
(in thousands)
Domestic .................... $14,351 $27,158 $ 9,746
Foreign ..................... 27,035 21,454 11,476
--------- --------- ---------
$41,386 $48,612 $21,222
========= ========= =========
The components of the provision (benefit) for income taxes are as follows:
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1997 1996 1995
--------- --------- ---------
(in thousands)
Current:
Federal and State ................. $ 6,142 $ 3,756 $ 157
Foreign ........................... 7,178 8,210 7,896
Deferred:
Federal and State ................. 1,720 9,181 7,370
Foreign ........................... 1,534 1,134 (4,795)
Valuation allowance adjustment ....... (9,837) (9,858) (6,779)
Tax benefit allocated to reduction of
goodwill .......................... 4,000 1,200 2,800
--------- --------- ---------
$10,737 $13,623 $ 6,649
========= ========= =========
A reconciliation between income tax provisions computed at the U.S. federal
statutory rate and the effective rate reflected in the statements of income is
as follows:
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1997 1996 1995
----- ----- -----
Provision (benefit) at statutory rate ......... 35.0% 35.0% 34.0%
State tax provision, net of federal effect .... 4.0 3.6 2.7
Valuation allowance ........................... (23.8) (15.2) (11.7)
Tax benefit allocated to reduction of goodwill 9.7 2.5 16.2
Income (loss) of foreign subsidiaries tax
provision or benefit at differing
statutory rates ............................ (2.4) 9.3 (4.6)
Tax benefit from NOL utilization .............. -- (5.1) --
Other ......................................... 3.4 (1.5) 1.8
----- ----- -----
25.9% 28.6% 38.4%
===== ===== =====
F-23
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Income Taxes - (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
March 31,
--------------------
1997 1996
-------- --------
(in thousands)
Deferred tax assets:
Accounts receivable, principally due to allowances for
doubtful accounts .................................. $ 2,249 $ 3,008
Inventories, principally due to reserves ............. 3,591 8,626
Property, plant and equipment, principally due to
differences in depreciation ........................ 5,868 2,823
Accruals for employee benefits ....................... 8,904 8,788
In-process research and development .................. 13,225 10,827
Other assets ......................................... 4,746 4,400
Net operating losses ................................. 11,221 3,685
-------- --------
Total gross deferred tax assets ...................... 49,804 42,157
Less valuation allowance ............................. (14,219) (15,294)
-------- --------
Net deferred tax assets .............................. $ 35,585 $ 26,863
======== ========
Deferred tax liabilities:
Property, plant and equipment, principally due to
differences in depreciation ........................ $ 9,262 $ 9,264
Inventories .......................................... 2,641 2,252
Amortization of goodwill ............................. 3,999 2,247
Unremitted income of foreign subsidiaries ............ 2,700 2,400
Other ................................................ 3,385 1,860
-------- --------
Net deferred tax liabilities ......................... $ 21,987 $ 18,023
======== ========
Net deferred tax assets less net deferred tax
liabilities ........................................ $ 13,598 $ 8,840
======== ========
Included in:
Current assets ....................................... $ 10,686 $ 7,491
Non current assets ................................... 8,557 6,800
Current liabilities .................................. (1,261) (461)
Non current liabilities .............................. (4,384) (4,990)
-------- --------
$ 13,598 $ 8,840
======== ========
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 1997, 1996 and
1995 were $(9.8) million, $(9.9) million and $(6.8) million, respectively. In
addition, in fiscal 1997 a valuation allowance of $8.6 million was established
against deferred tax assets acquired in the AO Acquisition. Movements in the
valuation allowances in fiscal 1997, 1996 and 1995 relate primarily to
realization of NOL's or changes in the Company's evaluation of the realizability
of deferred tax assets.
F-24
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Income Taxes - (Continued)
For tax purposes, the Company's foreign subsidiaries, at March 31, 1997,
had net operating loss carryforwards of $35.6 million. Of this amount, $31.7
million does not expire, and $3.9 million expires between 2002 and 2007. The
deferred tax assets reflected in the Company's accounts as of March 31, 1997
before valuation allowances reflect these NOL's.
The Company has not provided for U.S. federal income and foreign
withholding taxes on $11 million of non-U.S. subsidiaries' undistributed
earnings as of March 31, 1997 because such earnings are intended to be
reinvested indefinitely. Upon distribution of those earnings in the form of
dividends or otherwise, the Company would be subject to U.S. income taxes
(subject to an adjustment for foreign tax credits). Determination of the amount
of unrecognized deferred U.S. income tax liability is not practicable because of
the complexities associated with its hypothetical calculation. 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
1997 through 2012. The Company is responsible for taxes, insurance and
maintenance expenses related to the leased facilities. Under the terms of
certain lease agreements, the leases may be extended, at the Company's option,
and certain of the leases provide for adjustments of the minimum monthly rent.
Future minimum annual lease payments under the leases are as follows (in
thousands):
Period Ending March 31,
- -----------------------
1998 ...................................................... $5,392
1999 ...................................................... 4,193
2000 ...................................................... 2,974
2001 ...................................................... 1,564
2002 ...................................................... 1,468
Thereafter ................................................ 4,954
Rent expense for fiscal 1997, 1996, and 1995 was $5.6 million, $5.4 million
and $5.1 million, respectively.
14. Contingencies
The Company is subject to environmental laws and regulations concerning
emissions to the air, discharges to surface and subsurface waters and the
generation, handling, storage, transportation, treatment and disposal of waste
materials.
F-25
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. Contingencies - (Continued)
The Company is currently participating in a remediation program of one of
its manufacturing facilities under the Comprehensive Environmental Response,
Compensation and Liability Act ("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.
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 March 31, 1997 and March 31, 1996, the Company has provided for
environmental remediation costs in the amount of $2.3 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.
F-26
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. Worldwide Operations
The Company operates in the ophthalmic industry in the design and
manufacture of eyeglass lenses.
<TABLE>
A summary of information about the Company's geographic areas is as follows
(in thousands):
<CAPTION>
North Rest of
America Europe World Eliminations Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Year Ended March 31, 1997
Revenue:
External .................................. $ 234,173 $ 150,013 $ 104,503 $ -- $ 488,689
Internal .................................. 30,129 59,455 43,894 (133,478) --
Operating income ............................. 21,416 19,414 16,245 272 57,347
Identifiable assets .......................... 327,590 151,033 131,906 (5,021) 605,508
Year Ended March 31, 1996
Revenue:
External .................................. $ 190,785 $ 106,726 $ 90,198 $ -- $ 387,709
Internal .................................. 12,414 57,300 38,950 (108,664) --
Operating income (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
</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).
For fiscal 1997, 1996 and 1995, the corporate headquarters costs of $6.9
million, $7.7 million and $11.7 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.
F-27
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. 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:
Year Ended Year Ended
March 31, March 31,
1997 1996
--------- --------
Net Sales ....................................... $ 507,713 $475,274
--------- --------
Income before extraordinary item ................ $ 41,968 $ 42,093
--------- --------
Net income ...................................... $ 41,968 $ 41,181
--------- --------
Earnings per share:
Income before extraordinary item ............. $ 1.64 $ 1.67
--------- --------
Net income ................................... $ 1.64 $ 1.63
--------- --------
These pro forma results of operations have been prepared for comparison
purposes only, and do not purport to be indicative of what the results would
have been had the AO Acquisition occurred at the beginning of 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 fiscal 1997: (i) a $7.2
million charge to cost of sales for the amortization associated with an
inventory write-up to fair value during the six months ended September 30, 1996;
and (ii) a $9.5 million charge for the write-off of in-process research and
development all of which was recorded in the quarter ended June 30, 1996. These
charges, and the related provision for tax thereon, have been excluded from the
pro forma results as they are non-recurring. The pro forma data above does not
include pro forma adjustments for the Neolens Acquisition as the results of
Neolens prior to acquisition were not material to the Company's consolidated
results of operations.
17. Supplementary Cash Flow Data (in thousands)
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1997 1996 1995
======= ======= =======
Supplemental disclosures of cash flow
information:
Interest paid ........................... $19,273 $11,220 $19,264
======= ======= =======
Taxes paid .............................. $14,075 $11,486 $ 6,233
======= ======= =======
Supplemental disclosures of non-cash
investing and financing activities:
Capital expenditures accrued but
not paid ................................ $ 3,701 $ 1,646 $ 2,541
======= ======= =======
F-28
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
QUARTERLY FINANCIAL DATA
(in thousands, except per share data)
(unaudited)
<CAPTION>
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
June 30, Sept. 30, Dec. 31, March 31,
1995 1995 1995 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
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
June 30, Sept. 30, Dec. 31, March 31,
1996 1996 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales .......................................... $109,536 $128,194 $119,721 $131,238
Gross profit ....................................... 51,487 53,109 57,124 62,434
Operating income ................................... 6,082 13,975 15,261 22,029
Net income ......................................... 2,162 6,969 7,840 13,926
Earnings per share:
Net income per share ........................... 0.09 0.27 0.31 0.55
</TABLE>
F-29
<PAGE>
<TABLE>
SCHEDULE II
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>
Year ended March 31, 1997
Allowance for doubtful accounts.......... $5,424 $1,258 $(2,652) $ -- $4,030
====== ====== ======== ====== ======
Allowance for excess and obsolete
inventory............................. $3,434 $1,593 $ (556) $ -- $4,471
====== ====== ========= ====== ======
Year ended March 31, 1996
Allowance for doubtful accounts.......... $2,854 $2,846 $ (230) $ (46) $5,424
====== ====== ========= ======== ======
Allowance for excess and obsolete
inventory............................. $2,534 $1,090 $ (201) $ 11 $3,434
====== ====== ========= ======= ======
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
======= ====== ========== ======= ======
<FN>
- -------------------------
(1) Other relates primarily to foreign currency translation adjustments.
(2) Represents write-off and disposition of excess and obsolete inventories.
</FN>
</TABLE>
S-1
<PAGE>
<TABLE>
INDEX OF EXHIBITS
<CAPTION>
Page Number or
Exhibit No. Description Incorporation by Reference to
----------- ----------- -----------------------------
<S> <C> <C>
2.1 Purchase agreement between Sola Filed as Exhibit 2 to the Form 8-K of the
International Inc. and American Optical Company, dated May 6, 1996, and
Corporation, dated as of May 6, 1996 incorporated herein by reference
3.1 Amended and Restated Certificate of Filed as Exhibit 3.1 to the Annual Report
Incorporation of the Company on Form 10-K of the Company for the fiscal
year ending March 31, 1995, dated June 7,
1995, and incorporated herein by reference
3.2 Amended and Restated By-Laws of the Filed as Exhibit 3.1 to the Company's
Company Quarterly Report on Form 10-Q for the
period ending September 30, 1995, and
incorporated herein by reference
10.1 Purchase Agreement, dated as of September Filed as Exhibit 10.1 to the Registration
1, 1993 by and between Sola Holdings Statement, as amended, on Form S-1 of the
Inc., Pilkington plc and certain of Company (File No. 33-68824) and
Pilkington plc's subsidiaries incorporated herein by reference
10.2* Confidential Severance Agreement between Filed as Exhibit 10 to the Company's
Sola International, Inc. and John E. Quarterly Report on Form 10-Q for the
Heine, dated as of November 20, 1996 period ending December 31, 1996, and
incorporated herein by reference
10.3* Assignment and Amendment of Employment Filed as Exhibit 10.3 to the Registration
Agreement, dated as of December 1, 1993, Statement, as amended, on Form S-1 of the
among Sola Optical USA, Inc., Sola Group Company (File No. 33-87892) and
Ltd. and John E. Heine incorporated herein by reference
10.4* Employment Agreement between Sola Optical Filed as Exhibit 10.4 to the Registration
USA, Inc. and James H. Cox, dated as of Statement, as amended, on Form S-1 of the
February 26, 1993 Company (File No. 33-68824) and
incorporated herein by reference
10.5* Assignment and Amendment of Employment Filed as Exhibit 10.7 to the Registration
Agreement, dated as of December 1, 1993, Statement, as amended, on Form S-1 of the
among Sola Optical USA, Inc., Sola Group Company (File No. 33-87892) and
Ltd. and James H. Cox incorporated herein by reference
10.6* Employment Agreement between Sola Optical Filed as Exhibit 10.5 to the Registration
USA, Inc. and Colin M. Perrott, dated as Statement, as amended, on Form S-1 of the
of February 26, 1993 Company (File No. 33-68824) and
incorporated herein by reference
10.7* Assignment and Amendment of Employment Filed as Exhibit 10.9 to the Registration
Agreement, dated as of December 1, 1993, Statement, as amended, on Form S-1 of the
among Sola Optical USA, Inc., Sola Group Company (File No. 33-87892) and
Ltd. and Colin M. Perrott incorporated herein by reference
10.8* Employment Agreement between Sola Optical Filed as Exhibit 10.6 to the Registration
USA, Inc., and Ian S. Gillies, dated as Statement, as amended, on Form S-1 of the
of February 26, 1993 Company (File No. 33-68824) and
incorporated herein by reference
E-1
<PAGE>
INDEX OF EXHIBITS
(continued)
Page Number or
Exhibit No. Description Incorporation by Reference to
----------- ----------- -----------------------------
10.9* Assignment and Amendment of Employment Filed as Exhibit 10.11 to the Registration
Agreement, dated as of December 1, 1993, Statement, as amended, on Form S-1 of the
among Sola Optical USA, Inc., Sola Group Company (File No. 33-87892) and
Ltd. and Ian S. Gillies incorporated herein by reference
10.10* Assignment and Amendment of Employment Filed as Exhibit 10.12 to the Registration
Agreement, dated as of December 1, 1993, Statement, as amended, on Form S-1 of the
among Sola Optical USA, Inc., Sola Group Company (File No. 33-87892) and
Ltd. and Stephen J. Lee incorporated herein by reference
10.11 Multicurrency Credit Agreement, dated as Filed as Exhibit 4 to the Report on Form
of June 14, 1996, among Sola 8-K/A of the Company, dated May 6, 1996,
International Inc., and the other and incorporated herein by reference
Borrowers as the Borrowers, the
Subsidiary Guarantors, Bank of America
National Trust and Savings Association,
as Agent and Letter of Credit Issuing
Bank, The First National Bank of Boston
and The Bank of Nova Scotia, as
Co-Agents, and the Other Financial
Institutions Party Thereto
10.12 Lease Agreement, dated May 10, 1993, Filed as Exhibit 10.9 to the Registration
between Sola Optical Taiwan Ltd. and Statement, as amended, on Form S-1 of the
Chang Jin Co., Ltd. (including English Company (File No. 33-68824) and
summary of principal terms) incorporated herein by reference
10.13 Lease Agreement between Optical Sola de Filed as Exhibit 10.10 to the Registration
Mexico and Messrs. Salvadore Statement, as amended, on Form S-1 of the
Luttenroth-Camou and Carlos Company (File No. 33-68824) and
Lutteroth-Lomeli (including English incorporated herein by reference
summary of principal terms)
10.14* Sola Investors Inc. Stock Option Plan Filed as Exhibit 10.11 to the Annual
Report on Form 10-K of the Company, dated
March 31, 1994, and incorporated herein by
reference
10.15* Amendment Number One to Sola Investors Filed as Exhibit 10.21 to the Registration
Inc. Stock Option Plan Statement, as amended, on Form S-1 of the
Company (File No. 33-87892) and
incorporated herein by reference
10.16* Sola International Inc. Stock Option Plan Filed as Exhibit 10.22 to the Registration
Statement, as amended, on Form S-1 of the
Company (File No. 33-87892) and
incorporated herein by reference
10.17* Sola International Inc. Stock Option Filed as Exhibit A and Exhibit B to the
Plan, Amendment Number One and Amendment fiscal 1996 Proxy Statement of Sola
Number Two International Inc., dated July 12, 1996,
and incorporated herein by reference
10.18 Indenture by and between the Company and Filed as Exhibit 10.23 to the Registration
NationsBank of Georgia, National Statement, as amended, on Form S-1 of the
Association, as Trustee, with respect to Company (File No. 33-87892) and
the 9 5/8% Senior Subordinated Notes due incorporated herein by reference
2003 (including the form of Note)
E-2
<PAGE>
INDEX OF EXHIBITS
(continued)
Page Number or
Exhibit No. Description Incorporation by Reference to
----------- ----------- -----------------------------
10.19* Form of Indemnification Agreement between Filed as Exhibit 10.24 to the Registration
the executive officers and directors of Statement, as amended, on Form S-1 of the
the Company and the Company Company (File No. 33-87892) and
incorporated herein by reference
10.20* Sola International Inc. Management Filed as Exhibit 10.25 to the Registration
Incentive Plan Statement, as amended, on Form S-1 of the
Company (File No. 33-87892) and
incorporated herein by reference
10.21 Sola Optical 401(k) Savings Plan Filed as Exhibit 4.4 to the Registration
Statement on Form S-8 of the Company (File
No. 333-4489), filed with the Commission
on May 23, 1996, and incorporated herein
by reference
10.22 Trust Agreement entered into as of May Filed as Exhibit 4.5 to the Registration
15, 1996 between Sola Optical USA, Inc. Statement on Form S-8 (File No. 333-4489)
and Chase Manhattan Bank, N.A. of the Company, filed with the Commission
on May 23, 1996, and incorporated herein
by reference
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
<FN>
- -------------------------
*Compensatory plan or management agreement
</FN>
</TABLE>
E-3
<TABLE>
EXHIBIT 11.1
SOLA INTERNATIONAL INC.
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
(unaudited)
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
March 31, March 31, March 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income before extraordinary item ................................................. $ 30,897 $ 34,588 $ 13,640
Extraordinary item, repurchase of senior subordinated notes
(1995-write-off of debt issuance costs), net of tax .......................... -- (912) (3,915)
-------- -------- --------
Net income ....................................................................... $ 30,897 $ 33,676 $ 9,725
======== ======== ========
Weighted average number of common and common equivalent shares
outstanding .................................................................. 23,561 21,785 16,710
Add: Assumed dilution arising from exercise of common equivalent
shares (stock options) ....................................................... 1,298 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
-------- -------- --------
Weighted average number of common and common equivalent shares used
in earnings (loss) per share calculation ..................................... 24,859 22,944 17,516
======== ======== ========
Earnings (loss) per share:
Income before extraordinary item ............................................. $ 1.24 $ 1.51 $ 0.78
Extraordinary item ........................................................... -- (0.04) (0.22)
-------- -------- --------
Net income ................................................................... $ 1.24 $ 1.47 $ 0.56
======== ======== ========
</TABLE>
EXHIBIT 12.1
SOLA INTERNATIONAL INC.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
(Unaudited)
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1997 1996 1995
------- ------- -------
Income from continuing operations before income
taxes ......................................... $41,386 $48,612 $21,222
------- ------- -------
Fixed charges:
Interest ............................ 16,187 12,412 18,068
Amortization of financing costs ..... 414 273 924
Interest portion of rental expense .. 1,862 1,790 1,690
------- ------- -------
Total ............................... 18,463 14,475 20,682
------- ------- -------
TOTAL ............................... $59,849 $63,087 $41,904
======= ======= =======
Fixed charges ....................... $18,463 $14,475 $20,682
======= ======= =======
Ratio of earnings to fixed charges .. 3.24 4.36 2.03
======= ======= =======
<TABLE>
EXHIBIT 21.1
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
------------------------------
Name Jurisdiction
---- ------------
<S> <C>
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%)
De Muynck Optics N.V. Belgium
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 Limited Canada
1132782 Ontario, Inc. Canada
Sola Optical (U.K.) Limited England
UKO International Limited England
UK Optical Limited England
Raphael Taylor Group Limited England
United Kingdom Optical Company Limited England
The Hadley Company Limited England
Levers Optical (Manufacturing) Limited England
J&H Taylor Group Limited England
Raphael's Limited England
UKO International (Overseas Holdings) Ltd. England
M. Wiseman and Company (South Africa) Limited England
M. Wiseman and Company (Zimbabwe) Limited England
AO European Services Limited England
Alpha Lens Company Limited England
British American Optical Company Limited England
Chadwick Taylor Limited England
U.K. Wiseman Limited England
M. Wiseman and Company Limited England
Sola Optical Holdings S.A.R.L. France
Industrie Optique Sola S.A. France
Sola Optical S.A. France
AO Quest Optique S.A. France
Sola Group Holdings GmbH Germany
Sola Optical GmbH Germany
Sola Brillenglas Vertriebs GmbH Germany
Sola Hong Kong Ltd. Hong Kong
Sola Holdings Ireland Limited Ireland
Sola IFSC Ireland
Sola ADC Lenses Limited Ireland
Sola RDC Limited Ireland
Sola Ophthalmic Products Ltd. Ireland
Sola Optical Italia S.p.A. Italy
O.V.Bari S.r.l. Italy (51%)
<PAGE>
Name Jurisdiction
---- ------------
Sola Optical Japan Limited Japan (Osaka)
Solnox Optical Ltd. Japan (50%)
Lentes Sola S.A. de C.V. Mexico
American Optical de Mexico S.A. de C.V. Mexico
Optica Sola de Mexico S.A. de C.V. Mexico
American Optical Lensmex S.A. de C.V. Mexico
Imgo Industries B.V. Netherlands
HL Optikk Norway
Sola Optica Singapore Pte Ltd. Singapore
American Optical Co. Pte. Ltd. Singapore
American Optical Company International A.G. Switzerland
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 Neolens, Inc. U.S.A. (Florida)
Sola de Venezuela Industria Optica C.A. Venezuela
Sola Optical China Limited British Virgin Islands (70%)
Sola Optical Guangzhou Ltd. People's Republic of China
Sola Shanghai Omyl Ltd. People's Republic of China (50%)
Sola Guangzhou Jiu Fo People's Republic of China
</TABLE>
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. 33-93788) 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, 1997, 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, 1997.
Ernst & Young LLP
Palo Alto, California
June 7, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-K.
</LEGEND>
<CIK> 0000912088
<NAME> SOLA INTERNATIONAL INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 24380
<SECURITIES> 21
<RECEIVABLES> 108,990
<ALLOWANCES> 4,030
<INVENTORY> 138,634
<CURRENT-ASSETS> 282,220
<PP&E> 145,951
<DEPRECIATION> 35,474
<TOTAL-ASSETS> 605,508
<CURRENT-LIABILITIES> 142,515
<BONDS> 174,411
0
0
<COMMON> 243
<OTHER-SE> 284,055
<TOTAL-LIABILITY-AND-EQUITY> 605,508
<SALES> 488,689
<TOTAL-REVENUES> 488,689
<CGS> 264,535
<TOTAL-COSTS> 264,535
<OTHER-EXPENSES> 166,807
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,961
<INCOME-PRETAX> 41,368
<INCOME-TAX> 10,737
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,897
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.24
</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 and Affect of New Products on Results
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. The Company's quarterly results can be affected
by the ability to generate sales from new products as anticipated and the costs
of such introductions.
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 1997 from the sale of products
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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 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 certain 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. 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. As of March 31,
1997, $72.6 million was outstanding under this agreement, and $105.5 million was
available for future borrowings. Through and including December 15, 1998,
interest on the Company's
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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.
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 June 1996 the Company acquired from American Optical Corporation ("AOC")
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 Bank Credit Agreement with The Bank of America
National Trust and Savings Association, 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.
