UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13606
SOLA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3189941
(State or other jurisdiction of
(I.R.S. employer identification no.)
incorporation or organization)
2420 SAND HILL ROAD, SUITE 200, MENLO PARK, CA 94025
(Address of principal executive offices)
(zip code)
(415) 324-6868
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter
period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days. Yes X No
As of January 31, 1997, 24,258,924 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.
<PAGE>
SOLA INTERNATIONAL INC.
Table of Contents
Form 10-Q for the Quarterly Period
Ended December 31, 1996
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <S> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheet as of December 31, 1996 3
Consolidated Condensed Balance Sheet as of March 31, 1996
(derived from audited financial statements) 3
Consolidated Condensed Statements of Income for the three and
nine month periods ended December 31, 1996 and December 31, 4
1995
Consolidated Condensed Statements of Cash Flows for the nine
month periods ended December 31, 1996 and December 31, 1995 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SOLA INTERNATIONAL INC.
Consolidated Condensed Balance Sheets
(in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, 1996
(derived from
December 31, 1996 audited financial
ASSETS (unaudited) statements)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 21,496 $ 22,394
Trade accounts receivable, net 97,491 74,845
Inventories 142,760 100,707
Deferred income taxes 7,493 7,491
Prepaids and other current assets 5,331 1,861
_______ _______
Total current assets 274,571 207,298
Property, plant and equipment, net 103,278 79,582
Deferred income taxes 10,125 6,800
Debt issuance costs 2,814 1,907
Goodwill and other intangibles, net 199,317 120,352
Other assets 1,305 910
_______ _______
Total assets $591,410 $416,849
_______ _______
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks and current portion of
long-term and bank debt $ 24,414 $ 17,403
Accounts payable, accrued liabilities and 102,287 82,142
payroll
Accrued reorganization and acquisition 9,667 9,746
expenses
Income taxes payable 2,015 1,090
Deferred income taxes _ 461
______ ______
Total current liabilities 138,383 110,842
Long-term debt, less current portion 3,733 3,360
Bank debt, less current portion 65,938 6,000
Senior subordinated notes 90,578 88,530
Deferred income taxes 6,003 4,990
Other liabilities 12,002 10,886
______ ______
Total liabilities 316,637 224,608
______ ______
Contingencies
Shareholders' Equity:
Preferred stock, $0.01 par value; 5,000
shares authorized; _ _
no shares issued
Common stock, $0.01 par value; 50,000 shares
authorized;
24,195 shares (21,797 shares as of March 31, 242 218
1996)
issued and outstanding
Additional paid-in capital 270,240 206,412
Equity participation loans (300) (421)
Accumulated deficit (1,024) (17,993)
Cumulative foreign currency adjustment 5,615 4,025
_______ _______
Total shareholders' equity 274,773 192,241
_______ _______
Total liabilities and shareholders' equity $591,410 $416,849
_______ _______
The accompanying notes are an integral part of these condensed
financial statements
</TABLE>
<PAGE>
SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December December December December
31, 1996 31, 1995 31, 1996 31, 1995
<S> <C> <C> <C> <C>
Net sales $119,721 $91,329 $357,451 $283,117
Cost of sales 62,597 47,772 195,731 148,416
_____ _____ ______ ______
Gross profit 57,124 43,557 161,720 134,701
_____ _____ ______ ______
Research and development expenses 4,224 3,360 12,767 9,666
Selling and marketing expenses 24,723 17,172 67,133 49,969
General and administrative expenses 12,916 11,564 37,002 34,372
In process research and development
expense - - 9,500 -
_____ _____ _____ _____
Operating expenses 41,863 32,096 126,402 94,007
_____ _____ _____ _____
Operating income 15,261 11,461 35,318 40,694
Interest expense, net (4,150) (2,900) (11,692) 8,970)
______ ______ ______ ______
Income before provision for income
taxes, 11,111 8,561 23,626 31,724
minority interest and
extraordinary item
Provision for income taxes (3,444) (2,397) 6,655) (8,883)
Minority interest 173 (206) _ (528)
_____ ______ _____ ______
Income before extraordinary item 7,840 5,958 16,971 22,313
Extraordinary item, loss due to
repurchase of _ _ _ (912)
senior subordinated notes, net of
tax
______ ______ ______ ______
Net income $7,840 $5,958 $16,971 $21,401
______ ______ ______ ______
Earnings (loss) per share:
Income before extraordinary item $0.31 $0.26 $0.69 $0.97
Extraordinary item _ _ _ (0.04)
______ ______ ______ ______
Net income $0.31 $0.26 $0.69 $0.93
______ ______ ______ ______
Weighted average number of shares 25,552 22,947 24,734 22,901
outstanding
______ ______ ______ ______
The accompanying notes are an integral part of these condensed
financial statements
</TABLE>
<PAGE>
SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
December 31, December 31, 1995
1996
<S> <C> <C>
Net cash provided by operating activities $12,511 $13,285
______ ______
Cash flows from investing activities:
Acquisition of worldwide ophthalmic
business of American Optical Corporation,
less cash and cash equivalents of $3,365 (105,090) _
Acquisition of Neolens Incorporated,
less cash and cash equivalents of $12 (16,848) _
Additional investment in Venezuelan
Subsidiary _ (1,986)
Payments received from Pilkington and
and affiliates _ 1,585
Capital expenditures (18,898) (12,067)
Proceeds from sale of fixed assets 200 95
_______ _______
Net cash used in investing activities (140,636) (12,373)
______ _______
Cash flows from financing activities:
Sale of common stock 63,828 _
Payments on equity participation
loans/exercise of stock options 145 739
Net (payments)/receipts under notes payable
to banks, and (3,100) 4,444
long term debt
Borrowings on long term debt 5,181 _
Payments on long term debt (3,149) (223)
Net receipts under bank debt 64,626 8,500
Repurchase of senior subordinated notes _ (17,766)
______ ______
Net cash provided by (used in) financing 127,531 (4,306)
activities
______ ______
Effect of exchange rate changes on cash and
cash (304) (668)
equivalents
______ ______
Net decrease in cash and cash equivalents (898) (4,062)
Cash and cash equivalents at beginning of 22,394 16,148
period
______ ______
Cash and cash equivalents at end of period $21,496 $12,086
______ ______
The accompanying notes are an integral part of these condensed
financial statements
</TABLE>
<PAGE>
SOLA INTERNATIONAL INC.
Notes to Consolidated Condensed Financial Statements
(unaudited)
1. Basis of Presentation
On June 19, 1996, the Company acquired substantially all of the
worldwide ophthalmic business ("AO") of American Optical Corporation
("AOC") pursuant to the terms of the Purchase Agreement (the "Purchase
Agreement") dated as of May 6, 1996 between the Company and AOC. The
Company acquired AO for cash consideration of $103.6 million (together
with the assumption of certain liabilities) (the "AO Acquisition").
The AO Acquisition was funded primarily through borrowings under the
Company's New Credit Agreement (see Note 4), which borrowings were
subsequently repaid in part with the proceeds of the Stock Offering
during July 1996 (see Note 5).
On July 2, 1996 the Company acquired control of Neolens, Inc.
("Neolens"), a Florida corporation that manufactures polycarbonate
eyeglass lenses and that has been a supplier to the Company. The
Company acquired Neolens for cash consideration of approximately $15.5
million, including the assumption of Neolens debt (the "Neolens
Acquisition"). The Neolens Acquisition was funded through borrowings
under the Company's New Credit Agreement (See Note 4).
The accompanying consolidated condensed financial statements of the
Company have been prepared without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company's financial statements presented herein
include the results of operations and cash flows of the AO business
for the six months and ten days ended December 31, 1996 and the
results of operations and cash flows of the Neolens business for the
six months ended December 31, 1996 subsequent to their respective
acquisitions. The consolidated condensed balance sheet as of March
31, 1996 was derived from audited financial statements. The
accompanying consolidated condensed financial statements should be
read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's annual report on Form 10-K
for the fiscal year ended March 31, 1996.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of the results for
the interim period. The results of operations for the three and nine
months ended December 31, 1996 are not necessarily indicative of the
results to be expected for the full year.
The AO and Neolens Acquisitions have been accounted for under the
purchase method of accounting as of their respective closing dates.
Accordingly, the Company's consolidated financial statements reflect
the allocation of the purchase price to the assets and liabilities of
the respective AO and Neolens business units based upon their
respective estimated fair values. The current allocation of the AO
and Neolens purchase prices are preliminary, pending completion of
valuation studies and other determinations of fair values presently in
process, and, therefore, the allocation to inventories, property,
plant and equipment, in-process research and development and
reorganization provisions may change once such valuations are
finalized.
<PAGE>
The preliminary allocation of the AO and Neolens purchase price,
subject to finalization of valuation studies and other fair value
determinations have been calculated as follows:
AO
Purchase price $103,659
Estimated acquisition expenses 4,796
_______
Total estimated acquisition cost $108,455
_______
Estimated historical net assets at acquisition
date $29,865
Estimated write-up of inventories 7,215
Estimated write-up of property, plant and 506
equipment
Estimated goodwill and other intangible assets 62,753
Non-compete agreement 1,500
Estimated in-process research and development 9,500
Estimated relocation and exit costs (593)
Net deferred tax effects of certain of the
above
purchase accounting adjustments ( 2,291)
_______
$108,455
_______
Neolens
Purchase price, including debt repayments $15,484
Estimated acquisition expenses 1,376
______
Total estimated acquisition cost $16,860
______
Estimated historical net assets at acquisition
date $ (1,422)
Estimated write-up of property, plant and 696
equipment
Estimated goodwill and other intangible assets 17,585
Patent valuation 700
Estimated relocation and exit costs (699)
______
$16,860
______
2. Inventories
December 31, 1996 March 31, 1996
(in thousands) (in thousands)
Raw Materials $17,561 $ 10,595
Work In Progress 5,933 4,782
Finished Goods 82,542 59,595
Molds 36,724 25,735
_____ _______
$142,760 $100,707
_______ _______
Molds comprise mainly finished goods for use by manufacturing
affiliates in the manufacture of spectacle lenses.
3. Contingencies
The Company is subject to environmental laws and regulations
concerning emissions to the air, discharges to surface and subsurface
waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials.
The Company is currently participating in a remediation program of
one of its manufacturing facilities under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") and
the Superfund Amendments and Reauthorization Act of 1986. The Company
estimates that, based on an independent feasibility report prepared in
accordance with an EPA 1991 Consent Order,
<PAGE>
additional clean-up costs of approximately $150,000 for the current
fiscal year, and $100,000 per annum thereafter for up to 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
the fiscal year ending March 31, 1998.
The Company is also involved in other investigations of
environmental contamination at several U.S. sites. Some clean-up
activities have been conducted and investigations are continuing to
determine future remedial requirements, if any.
Under the terms of the sale agreement with Pilkington plc
("Pilkington"), for the purchase of the Sola business in December 1993
("Acquisition"), Pilkington has indemnified the Company with regard to
expenditures subsequent to the Acquisition for certain environmental
matters relating to circumstances existing at or prior to the time of
the Acquisition. Under the terms of the indemnification, the Company
is responsible for the first $1 million spent on such environmental
matters, Pilkington and the Company share equally the cost of any
further expenditures between $1 million and $5 million, and Pilkington
retains full liability for any expenditures in excess of $5 million.
As of December 31, 1996 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.
4. Bank Credit Agreement
Simultaneous with the closing of the AO Acquisition (see Note 1),
the Company entered into a new bank credit agreement with The Bank of
America National Trust and Savings Association, for itself and as
agent for a syndicate of other financial institutions, covering an
aggregate amount of $180 million (the "New Credit Agreement"),
replacing the Company's existing credit agreement. The New Credit
Agreement is divided into three tranches which comprise: a five-year
term loan of $30 million, a renewable three-year foreign currency
revolving facility of $30 million, and a five-year US dollar revolver
of $120 million. The term and revolving loan facilities were made in
order to finance a portion of the AO Acquisition and to refinance
existing facilities generally used for working capital. The foreign
currency revolver matures on May 31, 1999 and the term loan and US
dollar revolver both mature on May 31, 2001.
Borrowings under the term loan facilities and the US dollar
revolver (other than swing line loans, which may only be Base Rate
Loans) may be made as Base Rate Loans or LIBO Rate Loans. Base Rate
Loans bear interest at rates per annum equal to the higher of (a)
0.50% per annum above the latest Federal Funds Rate, or (b) the Bank
of America Reference Rate. Base Rate Loans include a margin varying
from 0% to .125% based on the Company's Funded Debt to EBITDA Ratio.
LIBO Rate Loans bear interest at a rate per annum equal to the sum of
the LIBO Rate and a margin varying from .500% to 1.125% based on the
Company's Funded Debt to EBITDA Ratio. Fixed rate borrowings under
the foreign currency revolver bear interest at rates per annum equal
to the referenced currency's local IBOR plus a margin varying from
.500% to 1.125% based on the Company's Funded Debt to EBITDA Ratio.
Borrowings under the foreign currency revolver are also available at
local Currency Base Rates at spreads similar to those for U.S. Base
Rate Loans. The term loan and U.S. dollar revolver currently bear
interest at a rate of LIBOR plus 0.75% (approximately 6.25% as of
December 31, 1996) and the foreign currency revolver bears an interest
rate of the relevant local economy IBOR plus 0.75%.
<PAGE>
The US term loan amortizes in semiannual installments with total
annual principal repayments as follows:
Year Ended March 31
(in thousands)
1997 $1,875.0
1998 4,687.5
1999 5,625.0
2000 6,562.5
2001 7,500.0
2002 3,750.0
Outstanding unpaid principal amounts on both the US dollar and
foreign currency revolver are due on their respective maturity dates.
Interest on all the above loans is payable at the end of the
interest period, or 90 days, whichever is shorter. Repayments of
principal on the above loans must be accompanied by a payment equal to
the accrued interest associated with the principal being repaid.
The New Credit Agreement contains a number of covenants, including,
among others, covenants restricting the Company and its subsidiaries
with respect to the incurrence of indebtedness (including contingent
obligations), the creation of liens, the making of certain investments
and loans, engaging in unrelated businesses, transactions with
affiliates, the consummation of certain transactions such as sales of
substantial assets, mergers or consolidations, margin stock purchases
and other transactions. Additionally, the New Credit Agreement
restricts significant accounting changes, negative pledges and
designated senior indebtedness. The New Credit Agreement also
restricts the ability of the Company and its subsidiaries to make
restricted payments in the nature of, among other things, (i)
declaring, making or paying dividends or other distributions in excess
of prescribed levels, (ii) purchasing, redeeming or retiring shares of
the Company's capital stock, and (iii) making certain payments,
purchases, redemptions, modifications or other acquisitions of any
Subordinated Notes. The Company and its subsidiaries are also
required to comply with certain financial tests and maintain certain
financial ratios. The New Credit Agreement includes standard events
of default.
5. Common Stock
During July 1996 the Company sold 2,320,000 additional shares of
common stock at $28.625 per share through a public offering (the
"Offering"). The net proceeds from the Offering, after deducting
expenses of the Offering, including discounts and commissions paid to
the underwriters, were approximately $63.1 million. The Company used
such net proceeds to repay indebtedness which it incurred under the
New Credit Agreement ( See Note 4).
<PAGE>
6. Pro forma Data
The following pro forma data was prepared to illustrate the
estimated effect of the AO Acquisition and the financing related
thereto, as if the Acquisition had occurred as of the beginning of
each period presented:
<TABLE>
<CAPTION>
Nine Months Ended December 31
1996 1995
<S> <C> <C>
Net Sales $376,475 $348,281
_______ _______
Income before extraordinary item $28,086 $26,026
______ ______
Net income $28,086 $25,114
______ ______
Earnings per share:
Income before extraordinary item $1.10 $1.03
____ ____
Net income $1.10 $1.00
____ ____
</TABLE>
These pro forma results of operations have been prepared for
comparison purposes only, and do not purport to be indicative of what
the results would have been had the AO Acquisition occurred at the
beginning of the period or the results which may occur in the future.
As a result of the AO Acquisition the Company has incurred two non-
recurring charges during the nine months ended December 31, 1996: (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 this
acquisition is immaterial to the results of operations of the Company.
7. Extraordinary Item
During the three months ended June 30, 1995 the Company repurchased
approximately $19.9 million principal amount at maturity of its 9 5/8%
Senior Subordinated Notes due 2003. As a result of the repurchases
the Company recorded an extraordinary charge of $0.9 million for the
three months ended June 30, 1995 resulting from the write-off of
unamortized debt issuance costs and premium over accreted value. The
repurchase was partly funded by borrowings under the Company's old
credit agreement and partly from excess cash arising from the
Company's initial public offering in March 1995.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations
Overview
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Company's
consolidated condensed financial statements and notes thereto included
elsewhere herein.
On June 19, 1996 the Company acquired substantially all of the
worldwide ophthalmic business ("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 Company has consolidated the results of operations of AO from the
date of acquisition to December 31, 1996. The acquisition has been
accounted for using the purchase method of accounting. The purchase
consideration paid for the assets and liabilities of AO has been
allocated based on preliminary estimates of their fair values. The
actual allocation of such consideration may differ from that reflected
after valuations and other procedures have been completed. As a
result of the acquisition the Company has incurred two non-recurring
charges in the nine months ended December 31, 1996: (i) a $7.2 million
charge to cost of sales, based on average inventory turns, for the
amortization associated with an inventory write-up to fair value; and
(ii) a $9.5 million charge for the write-off of in-process research
and development.
During the three and nine months ended December 31, 1996
approximately 16.0% and 12.0%, respectively, of the Company's net
sales are attributable to AO. The acquisition of AO has had a
significant impact on the three and nine month performance comparisons
between fiscal 1996 and fiscal 1997.
In response to a perceived slowing in the sales growth rate of the
Company's progressive lenses, the Company is taking steps such as
increasing expenditures in connection with the introduction of its new
PERCEPTA progressive lens. Operating expenses are anticipated to run
higher than normal in the fourth quarter of fiscal 1997 due to the new
product launch costs and continued investment by the Company in
infrastructure costs in developing markets such as China. As a result
of these higher operating expenses, combined with lower than expected
short-term net sales growth, the Company expects that operating income
and net income performance for the fourth quarter of fiscal 1997 will
fall slightly short of expectations.
Results of Operations
Three months ended December 31, 1996 compared to three months ended
December 31, 1995
The results of operations of the Company for the three months ended
December 31, 1996 reflect net income of $7.8 million as compared to
net income of $6.0 million for the same period in the prior year, an
increase of $1.8 million, or 31.6%.
Net Sales
Net sales totaled $119.7 million in the three months ended December
31, 1996, reflecting an increase of 31.1% over net sales of $91.3
million for the same period in the prior year. Using constant
exchange rates, the percentage increase was 30.4%. The growth in net
sales is principally attributable to the AO Acquisition and growth in
unit sales of higher priced products, offset in part by volume erosion
in net sales of lower priced products. The volume erosion in lower
priced products is primarily in plano lenses used in sunglass
manufacture. Higher priced products, excluding AO, accounted for
approximately 59.2% of net sales in the three months ended December
31, 1996 compared to approximately 54.9% for the three months ended
December 31, 1995. The higher priced product growth was led by the
growth in Spectralite
<PAGE>
and plastic photochromic products. Net sales increases by region,
excluding the AO business, were achieved as follows: North America
14.6%, Europe 3.7% and Rest of World 8.8%. Using constant exchange
rates the growth percentages are as follows: North America 14.6%,
Europe 2.1% and Rest of World 6.1%.
Gross Profit and Gross Margin
Gross profit totaled $57.1 million for the three months ended
December 31, 1996, reflecting an increase of 31.1% over gross profit
of $43.6 million for the same period in the prior year. Gross profit
as a percentage of net sales remained the same at 47.7% for both the
three months ended December 31, 1996 and the three months ended
December 31, 1995. Excluding the AO business the gross margin would
have been 48.1%. The margin growth was principally due to sales mix
and manufacturing improvements.
Operating Expenses
Operating expenses in the three months ended December 31, 1996
totaled $41.9 million, an increase of $9.8 million, over operating
expenses of $32.1 million for the same period in the prior year.
Operating expenses for the three months ended December 31, 1996 as a
percentage of net sales was 35.0%, compared to 35.1% for the same
period of the prior year. Research and development expenses for the
three months ended December 31, 1996 increased $0.8 million to $4.2
million, compared to $3.4 million for the three months ended December
31, 1995, which represent 3.5% and 3.7% of net sales, respectively.
Research and development expenditure in AO as a percentage of net
sales is lower than that of Sola on a stand alone basis; consequently
a reduced ratio of research and development expenses to net sales can
be expected for the combined company in the future. Selling and
marketing expenses for the three months ended December 31, 1996
increased $7.5 million to $24.7 million, compared to $17.2 million for
the three months ended December 31, 1995 which represent 20.7% and
18.8%, of net sales for the three months ended December 31, 1996 and
the three months ended December 31, 1995, respectively. The increase
in selling and marketing expenditures primarily relates to AO
expenditures, and costs associated with the launch of a new
progressive lens in the fourth quarter of fiscal 1997. As a
percentage of net sales, general and administrative expenses declined
to 10.8% for the three months ended December 31, 1996 compared to
12.7% for the three months ended December 31, 1995.
Operating Income
Operating income for the three months ended December 31, 1996 was
$15.3 million, an increase of $3.8 million, or 33.2%, over the three
months ended December 31, 1995 operating income of $11.5 million.
Net Interest Expense
Net interest expense totaled $4.2 million for the three months
ended December 31, 1996 compared to $2.9 million for the three months
ended December 31, 1995, an increase of $1.3 million. The increase of
$1.3 million is primarily attributable to increased borrowings to fund
the AO and Neolens acquisitions. Simultaneous with the AO
Acquisition, the Company entered into a new bank credit facility with
The Bank of America National Trust and Savings Association, for itself
and as agent for a syndicate of other financial institutions (see
"_Liquidity and Capital Resources"). In July 1996, the Company issued
2.32 million shares in a public offering for which it received net
proceeds of approximately $63.1 million. The Company estimates that
interest expense will increase by approximately $4.1 million annually
as a result of the AO and Neolens acquisitions offset by the lower
interest rate under the New Credit Agreement and the reduction of debt
from the proceeds of the equity public offering.
Provision for Income Taxes
The Company's combined state, federal and foreign tax rate
represents an effective tax rate projected for the full fiscal 1997
year of 31%. For the three months ended December 31, 1995 and the
full fiscal
<PAGE>
1996 year, the company recorded an effective income tax
rate of 28%. The Company provided valuation allowances against fiscal
1994 net operating loss carryforwards in the United States and against
fiscal 1995 and 1994 net operating losses in Australia, primarily as a
result of the acquisition of the Sola Group from Pilkington in fiscal
1994. The utilization of certain of these losses resulted in a
reduced effective tax rate for fiscal 1996. The Company expects the
remaining Australian net operating loss carryforwards to offset
taxable income in fiscal 1996, assuming that taxable profits are
realized in Australia. The Company has deferred tax assets on its
balance sheet as of December 31, 1996 amounting to approximately $17.6
million. The ultimate utilization of these deferred tax assets is
dependent on the Company's ability to generate taxable income in the
future.
Net Income
Net income for the three months ended December 31, 1996 was $7.8
million as compared to net income of $6.0 million for the same period
in the prior year, an increase of $1.8 million, or 31.6%.
Nine months ended December 31, 1996 compared to nine months ended
December 31, 1995
The results of operations of the Company for the nine months ended
December 31, 1996 reflect net income of $17.0 million as compared to
net income of $21.4 million for the same period in the prior year. If
the non-recurring charges associated with the amortization of the
inventory write-up to fair value($7.2 million) and the write off of in-
process research and development($9.5 million), and the benefit for
taxes related thereto($5.9 million), were excluded from the results of
operations, the net income for the nine months ended December 31, 1996
would have been $27.8 million, an increase of $6.4 million, or 30.0%
over the net income for the nine months ended December 31, 1995.
Net Sales
Net sales totaled $357.5 million in the nine months ended December
31, 1996, reflecting an increase of 26.3% over net sales of $283.1
million for the same period in the prior year. Using constant
exchange rates, the percentage increase was 25.5%. The growth in net
sales is principally attributable to the AO acquisition and growth in
unit sales of higher priced products, offset in part by price erosion
in net sales of lower priced products. Higher priced products,
excluding AO, accounted for approximately 60% of net sales in the nine
months ended December 31, 1996 compared to approximately 56% for the
nine months ended December 31, 1995. The higher priced product growth
was led by the growth in Spectralite and plastic photochromic
products. Net sales increases by region, excluding the AO business,
were achieved as follows: North America 10.2%, Europe 6.3% and Rest of
World 19.1% (using constant exchange rates the growth percentages are
immaterially different, except for Rest of World which shows a 14.3%
net sales growth using constant exchange rates).
Gross Profit and Gross Margin
Gross profit totaled $161.7 million for the nine months ended
December 31, 1996, reflecting an increase of 20.1% over gross profit
of $134.7 million for the same period in the prior year. Gross profit
as a percentage of net sales declined from 47.6% for the nine months
ended December 31, 1995 to 45.2% for the nine months ended December
31, 1996. Excluding the AO business, and the amortization of the non-
recurring inventory write-up to fair value associated with the
acquisition($7.2 million), the gross margin would have been 47.7%.
The margin growth was principally due to sales mix and manufacturing
improvements.
Operating Expenses
Operating expenses in the nine months ended December 31, 1996
totaled $126.4 million, an increase of $32.4 million, over operating
expenses of $94.0 million for the same period in the prior year.
Included in operating expenses is a non-recurring charge of $9.5
million for the write-off of in-process research and development
arising from the AO acquisition. If this charge were excluded from
operating expenses the
<PAGE>
growth over the nine months ended December 31, 1995 would be $22.9
million or 24.4%. Operating expenses for the nine months ended
December 31, 1996, excluding the non-recurring charge, as
a percentage of net sales was 32.7%, compared to 33.2% for the same
period of the prior year. Research and development expenses for the
nine months ended December 31, 1996 increased $3.1 million to $12.8
million, compared to $9.7 million for the nine months ended December
31, 1995, which represent 3.6% and 3.4% of net sales, respectively.
The growth in research and development expenses is partially
attributable to the transfer of a new product out of research and
development and into production in the nine months ended December 31,
1995, which resulted in a lower than normal research and development
expense in that period. Research and development expenditure in AO as
a percentage of net sales is lower than that of Sola on a stand alone
basis; consequently a reduced ratio of research and development
expenses to net sales can be expected for the combined company in the
future. Selling and marketing expenses for the nine months ended
December 31, 1996 increased $17.2 million to $67.1 million, compared
to $49.9 million for the nine months ended December 31, 1995 which
represent 18.8% and 17.6%, of net sales for the nine months ended
December 31, 1996 and the nine months ended December 31, 1995,
respectively. The increase in selling and marketing expenditures
primarily relates to AO expenditures, and costs associated with the
launch of a new progressive lens in the fourth quarter of fiscal 1997.
As a percentage of net sales, general and administrative expenses
declined to 10.4% for the nine months ended December 31, 1996 compared
to 12.1% for the nine months ended December 31, 1995.
Operating Income
Operating income for the nine months ended December 31, 1996 was
$35.3 million. Exclusive of the non-recurring inventory amortization,
and the write-off of in-process research and development, operating
income for the nine months ended December 31, 1996 totaled $52.0
million, an increase of $11.3 million, or 27.9%, over the nine months
ended December 31, 1995 operating income of $40.7 million.
Net Interest Expense
Net interest expense totaled $11.7 million for the nine months
ended December 31, 1996 compared to $9.0 million for the nine months
ended December 31, 1995, an increase of $2.7 million. The increase is
primarily attributable to increased borrowings to fund the AO and
Neolens acquisitions. Simultaneous with the AO Acquisition, the
Company entered into a new bank credit facility with The Bank of
America National Trust and Savings Association, for itself and as
agent for a syndicate of other financial institutions (see "_Liquidity
and Capital Resources"). In July 1996, the Company issued 2.32
million shares in a public offering for which it received net proceeds
of approximately $63.1 million. The Company estimates that interest
expense will increase by approximately $4.1 million annually as a
result of the AO and Neolens acquisitions offset by the lower interest
rate under the New Credit Agreement and the reduction of debt from the
proceeds of the equity public offering.
Provision for Income Taxes
The Company's combined state, federal and foreign tax rate
represents an effective tax rate projected for the full fiscal 1997
year of 31%. For the nine months ended December 31, 1995 and the full
fiscal 1996 year, the Company recorded an effective income tax rate of
28%. The Company provided valuation allowances against fiscal 1994
net operating loss carryforwards in the United States and against
fiscal 1995 and 1994 net operating losses in Australia, primarily as a
result of the acquisition of the Sola Group from Pilkington in fiscal
1994. The utilization of certain of these losses resulted in a
reduced effective tax rate for fiscal 1996. The Company expects the
remaining Australian net operating loss carryforwards to offset
taxable income in fiscal 1996, assuming that taxable profits are
realized in Australia. The Company has deferred tax assets on its
balance sheet as of December 31, 1996 amounting to approximately $17.6
million. The ultimate utilization of these deferred tax assets is
dependent on the Company's ability to generate taxable income in the
future.
<PAGE>
Extraordinary Item
During the nine months ended December 31, 1995 the Company
repurchased approximately $19.9 million principal amount at maturity
of its 9 5/8% Senior Subordinated Notes due 2003. As a result of the
repurchases the Company recorded an extraordinary charge of $0.9
million for the nine months ended December 31, 1995 resulting from the
write-off of unamortized debt issuance costs and premium over accreted
value. The repurchase was partly funded by borrowings under the
Company's old credit agreement and partly from excess cash reserves
arising from the Company's initial public offering in March 1995.
Net Income
Net income for the nine months ended December 31, 1996 totaled
$17.0 million compared to $21.4 million for the nine months ended
December 31, 1995. If the non-recurring inventory and in-process
research and development charges, and the provision for taxes related
thereto, were excluded from the results of operations, the net income
for the nine months ended December 31, 1996 would have been $27.8
million, an increase of $6.4 million, or 30.0% over the net income for
the nine months ended December 31, 1995.
Liquidity and Capital Resources
Net cash provided by operating activities for the nine months ended
December 31, 1996 amounted to $12.5 million, a reduction of $0.8
million from the funds provided by operating activities of $13.3
million for the nine months ended December 31, 1995. The most
significant cause of the reduction is the growth in accounts
receivable and inventories and a reduction in accounts payable, offset
in part by an increase in operating income, after adding back non-
recurring non-cash charges for in-process research and development and
amortization of inventory write-up, both arising from the AO
Acquisition.
During the nine months ended December 31, 1996, using a three month
net sales annualized convention, inventories as a percentage of net
sales were 29.8% compared to 27.6% for the nine months ended December
31, 1995. The growth in inventories is primarily as a result of mold
inventories, which have increased in preparation for new product
launches. Accounts receivable as a percentage of net sales for the
nine months ended December 31, 1996, using a three month net sales
annualized convention, was 20.4% compared to 20.5% for the same
period a year ago.
Cash flows from investing activities in the nine months ended
December 31, 1996 amounted to an outflow of $140.6 million. On June
19, 1996, the Company acquired substantially all of the worldwide
ophthalmic business ("AO") of American Optical Corporation ("AOC")
pursuant to the terms of the Purchase Agreement (the "Purchase
Agreement") dated May 6, 1996 between the Company and AOC. The
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. Capital expenditures for
the nine months ended December 31, 1996 amounted to $18.9 million,
compared to $12.1 million in the comparable period in the prior year.
Management anticipates capital expenditures of $30.0 million to $35.0
million annually over the next several years, of which approximately
$5.0 million annually is viewed as discretionary.
Net cash provided by financing activities in the nine months ended
December 31, 1996 amounted to $127.5 million. 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
<PAGE>
deducting expenses of the Offering, including discounts and
commissions paid to the Underwriters, were approximately $63.1
million. The Company used such net proceeds to repay
indebtedness which it incurred under the New Credit Agreement.
Simultaneous with the closing of the AO Acquisition, the Company
entered into a bank credit agreement with The Bank of America National
Trust and Savings Association, for itself and as agent for a syndicate
of other financial institutions, covering an aggregate amount of $180
million (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.
Borrowings under the term loan facilities and the US dollar
revolver (other than swing line loans, which may only be Base Rate
Loans) may be made as Base Rate Loans or LIBO Rate Loans. Base Rate
Loans bear interest at rates per annum equal to the higher of (a)
0.50% per annum above the latest Federal Funds Rate, or (b) the Bank
of America Reference Rate. Base Rate Loans include a margin varying
from 0% to 0.125% based on the Company's Funded Debt to EBITDA Ratio.
LIBO Rate Loans bear interest at a rate per annum equal to the sum of
the LIBO Rate and a margin varying from 0.500% to 1.125% based on the
Company's Funded Debt to EBITDA Ratio. Borrowings under the foreign
currency revolver bear interest at rates per annum equal to the
referenced currency's local IBOR plus a margin varying from 0.500% to
1.125% based on the Company's Funded Debt to EBITDA Ratio. Local
currency Base Rate Loans are also available at similar spread to US
Base Rate Loans described above. The term loan and U.S. dollar
revolver currently bear interest at an initial rate of LIBOR plus
0.75% (approximately 6.25% as of December 31, 1996) and the foreign
currency revolver bears an initial interest rate of the relevant local
economy IBOR plus 0.75%.
During the nine months ended June 30, 1995 the Company repurchased
approximately $19.9 million principal amount at maturity of its 9 5/8%
Senior Subordinated Notes due 2003. The repurchase was partly funded
by borrowings under the Bank Credit Agreement and partly from excess
cash reserves arising from the Company's initial public offering in
March 1995. The Company may from time to time purchase additional
Notes in the market or otherwise subject to market conditions.
On December 1, 1993, in connection with the acquisition of the Sola
business unit from Pilkington, the Company issued $116.6 million
principal amount at maturity of 9 5/8% Senior Subordinated Notes due
in 2003, from which it received gross proceeds of approximately $100.0
million and net proceeds of approximately $97.0 million, after
deducting fees and expenses. Cash interest on the Notes is payable at
the rate of 6% per annum of their principal amount at maturity through
and including December 15, 1998, and after such date is payable at the
rate of 9 5/8% per annum of their principal at maturity. Interest is
payable on June 15 and December 15 of each year. The Notes are
redeemable at the option of the Company, in whole or in part, at any
time on or after December 15, 1998, initially at 104.813% of their
principal amount at maturity, plus accrued interest, declining to 100%
of their principal amount at maturity, plus accrued interest, on or
after December 15, 2000. The Indenture restricts the Company's
ability to, among other things, incur indebtedness, declare or pay
dividends or make certain other payments, create liens, utilize
proceeds from an asset sale, conduct transactions with affiliates and
issue capital stock of its subsidiaries.
The Company's foreign subsidiaries maintain local credit facilities
to provide credit for overdraft, working capital and some fixed asset
investment purposes. As of December 31, 1996 the Company's total
credit available under such facilities was approximately $35.0
million, of which $14.7 million had been utilized.
The Company continues to have significant liquidity requirements.
In addition to working capital needs and capital expenditures, the
Company has substantial cash requirements for debt service. The
Company expects that the New Credit Agreement and other
overseas credit facilities, together with cash
<PAGE>
on hand and internally generated funds, if available as anticipated,
will provide sufficient capital resources to finance the Company's
operations, fund anticipated capital expenditures, and meet
interest requirements on its debt, including the Notes, for the
foreseeable future. As the Company's debt (including debt under the
New Credit Agreement and the Notes) matures, the Company may need to
refinance such debt. There can be no assurance that such debt can be
refinanced on terms acceptable to the Company.
Seasonality
The Company's business is somewhat seasonal, with third quarter
results generally weaker than the other three quarters as a result of
lower sales during the holiday season, and fourth quarter results
generally the strongest.
Inflation
Inflation continues to affect the cost of the goods and services
used by the Company. The competitive environment in many markets
limits the Company's ability to recover higher costs through increased
selling prices, and the Company is subject to price erosion in many of
its commodity product lines. The Company seeks to mitigate the
adverse effects of inflation through cost containment and productivity
and manufacturing process improvements. Approximately 7.3% of the
Company's net sales during the nine months ended December 31, 1996
were derived from its operations in South America, with the majority
of such net sales generated in Brazil, which has experienced periods
of hyper-inflation. In June 1994, the Brazilian Government introduced
a new currency, the Real, and adopted certain financial plans to
reduce inflation in that country. Through December 31, 1996, these
plans have been successful, and inflation has reduced to approximately
1-3% per month, compared to a rate of approximately 45% per month in
June 1994 (3,500% for the full year). Since introduction of this
plan, the Brazilian Real has either strengthened or remained at parity
with the US dollar. During the latter part of fiscal 1996 and during
the first quarter of fiscal 1997, the Venezuelan Bolivar has
significantly deteriorated against the US dollar, however since May
1996 it has been relatively stable at approximately 475 Bolivars to
the US Dollar. The Company is monitoring the volatility of this
currency and provided against earnings during the quarter ended June
30, 1996 for the decline in the Bolivar. If the decline of the later
part of fiscal 1996 and the first quarter of fiscal 1997 continues the
Company expects that it will adopt hyper-inflationary accounting
concepts of SFAS 52 for translation of Bolivar denominated results.
At present approximately 1% of the Company's net sales originate in
Venezuela.
Information Relating to Forward-Looking Statements
This quarterly report includes forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934,
including statements regarding among other items, (i) the Company's
interest expense, (ii) the impact of inflation, and (iii) future
income tax rates and capital expenditures. These forward-looking
statements reflect the Company's current views with respect to future
events and financial performance. The words "believe", "expect",
"anticipate" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise. Actual results could differ materially
from the forward-looking statements as a result of "Factors Affecting
Future Operating Results" included in Exhibit 99.1 of the Company's
Form 10-K for the fiscal year ended March 31, 1996, and the factors
described in "Business-Environmental Matters", also included in the
Company's Form 10-K for the fiscal year ended March 31, 1996.
<PAGE>
PART ll OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2.Changes in Securities
Not applicable
Item 3.Defaults upon Senior Securities
Not applicable
Item 4.Submission of Matters to a Vote of Security Holders
Not applicable
Item 5.Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Page
Number or Incorporation
Exhibit Number Description by Reference to
10 Executive Contracts 21
11 Statement Regarding 32
Computation of Per
Share Earnings
27 Financial Data Schedule 33
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Sola International Inc.
(Registrant)
Dated: February 12 , 1997 By: /s/Ian S.Gillies
Ian S. Gillies
Vice President- Administration, Chief
Financial Officer, Secretary and
Treasurer
<PAGE>
Exhibit Index
Exhibit No. Description Page
10 Agreement between Sola 21
International Inc. and John E. Heine
11 Statement Regarding 32
Computation of Per Share
Earnings
27 Financial Data Schedule 33
<PAGE>
Exhibit 10
CONFIDENTIAL SEVERANCE AGREEMENT
This Agreement between SOLA INTERNATIONAL, INC., a
Delaware corporation (the "Company") and John Heine (the
"Executive") is dated and entered into as of November 20, 1996.
The Company and the Executive hereby agree as follows:
WHEREAS the Executive is a valued employee of the
Company; and
WHEREAS, the Company desires to provide the Executive
with certain benefits should his employment be terminated;
THEREFORE, in consideration of the foregoing, the
Company and the Executive have agreed to the following terms
while he is employed and in the event of a Severance or a
Change of Control Termination (both as defined below):
1. Employment Term. The Executive acknowledges
that he is employed at-will by the Company subject only to the
terms of this Agreement. The Executive agrees to devote
substantially all of his productive time, ability and attention
to the business of the Company while he is employed by the
Company, and shall not, directly or indirectly, render services
of a business, commercial or professional nature to any other
person or organization, whether for compensation or otherwise,
without the prior consent of the Board of Directors of the
Company.
2. Severance. Except as otherwise provided in
Section 4, in the event that any of the following occurs, the
Executive shall be entitled to the benefits set forth in
Section 3 below. For purposes of this Agreement a Severance
shall have taken place only if:
A. The Executive's employment with the Company
is terminated for any reason other than Cause. For purposes
of this Agreement, "Cause" is defined as the Executive's
engaging in: (x) willful misconduct, neglect of duties, or any
act or omission any or all of which materially adversely affect
the Company's business, or (y) conviction of a felony;
(i) For purposes of subparagraph 2.A(x), no
such event or omission shall constitute Cause unless the
Executive fails to cure the underlying matter within forty-five
(45) days after receipt from the Company of a detailed
statement of the cause for termination;
B. The Executive is regularly assigned duties
and responsibilities that materially diminish his position as
Group President and CEO of SOLA International, Inc. For the
purpose of this subparagraph, the assignment of duties, other
than those the Executive performs as of the date of this
Agreement whether or not in lieu of those previously assigned
duties, does not by itself constitute a material diminishment
of the Executive's position with the Company; or
<PAGE>
C. The Executive's compensation (including but
not limited to salary and benefits) is reduced and that
reduction is not part of, or is disproportionate to a Company
general reduction of executive compensation.
The Executive shall not be entitled to any payments
or benefits as set forth in Sections 3 and 4 of this Agreement
if he freely and voluntarily resigns his employment with the
Company.
3. Severance Benefits. If a Severance takes place,
then immediately after the occurrence of that event or events,
the Executive shall be entitled to the following:
A. To continue to receive his compensation for
a period of twenty-four (24) months, commencing the first of
the month following the month in which the Severance takes
place. For purposes of this paragraph, the Executive's
"compensation" shall be that annual salary in effect
immediately prior to the Severance, plus the average of
Management Incentive Plan compensation (or successor thereto)
paid to him over the three years immediately prior to the
Severance.
B. To continue for a period of twenty-four (24)
months to be covered by and participate in, at the Company's
expense, any and all benefit plans the Company regularly
provides its other executives or employees including, but not
limited to, health, dental, vision, pension or other retirement
plans. In addition, the Executive shall be entitled to the
other benefits specified on the attached Schedule.
C. To receive outplacement assistance in the
form of professional consultation and administrative
assistance, subject to the approval of the Company, which shall
not be unreasonably withheld. The Company shall pay up to a
maximum of twenty-five thousand dollars ($25,000.00) for the
aforementioned outplacement services during the period the
Executive receives Severance Benefits as described in A and B
above.
4. Termination Following a Change in Control.
For purposes of this Agreement, a "Change in Control" shall occur
if or upon the occurrence of:
(i) Any "Person" (as the term person is used for
purposes of Section 13(d) or 14(d) of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"))
acquires "Beneficial Ownership" (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of any
securities of the Company which generally entitles the
holder thereof to vote for the election of directors of the
Company (the "Voting Securities"), which, when added to the
Voting Securities then "Beneficially Owned" by such person,
would result in such Person "Beneficially Owning" thirty
percent (30%) or more of the combined voting power of the
Company's then outstanding Voting Securities; provided,
however, that for purposes of this paragraph (i), a Person
shall not be deemed to have made an acquisition of Voting
Securities if such Person (a) acquires Voting Securities as
a result of a stock split, stock dividend or other
corporate restructuring in which all stockholders of the
class of such Voting Securities are treated on a pro rata
basis; (b) acquires the Voting Securities directly
<PAGE>
from the Company; (c) becomes the Beneficial Owner of more
than the permitted percentage of Voting Securities
solely as a result of the acquisition of Voting
Securities by the Company, which, by reducing the number
of Voting Securities outstanding, increases the
proportional number of shares Beneficially Owned by such
Person; (d) is the Company, or any corporation or other
Person of which a majority of its voting power or its equity
securities or equity interest is owned directly or indirectly
by the Company, (a "Controlled Entity") or (e) acquires
Voting Securities in connection with a "Non-Control
Transaction" (as defined in paragraph (iii) below); or
(ii) The individuals who, as of November 8, 1996,
are members of the Board (the "Incumbent Board"), cease for
any reason to constitute at least two-thirds of the
Incumbent Board, provided, however, that if either the
election of any new director or the nomination for election
of any new director was approved by a vote of more than two-
thirds of the Incumbent Board, such new director shall be
considered as a member of the Incumbent Board; provided
further, however, that no individual shall be considered a
member of the Incumbent Board, if such individual initially
assumed office as a result of either an actual or
threatened "Election Contest" (as described in Rule 14a-11
promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board (a "Proxy
Contest"), including by reason of any agreement intended to
avoid or settle any Election Contest or Proxy Contest; or
(iii) Shareholder approval of:
(a) A merger, consolidation or
reorganization involving the Company (a "Business
Combination"), unless
(1) the stockholders of the Company,
immediately before the Business Combination, own,
directly or indirectly immediately following the
Business Combination, at least fifty-one percent (51%)
of the combined voting power of the outstanding Voting
Securities of the corporation resulting from the
Business Combination (the "Surviving Corporation") in
substantially the same proportion as their ownership
of the Voting Securities immediately before the
Business Combination, and
(2) the individuals who were members
of the Incumbent Board, immediately prior to the
execution of the agreement providing for the Business
Combination constitute at least a majority of the
members of the Board of Directors of the Surviving
Corporation, and
(3) as a result of such Business
Combination no Person (other than the Company, or any
Controlled Entity, a trustee or other fiduciary
holding securities under one or more employee benefit
plans or arrangements (or any trust
<PAGE>
forming a part thereof) maintained by the Company,
the Surviving Corporation or any Controlled Entity,
or any Person who, immediately prior to the Business
Combination, had Beneficial Ownership of thirty percent
(30%) or more of the then outstanding Voting Securities)
has Beneficial Ownership of thirty percent (30%) or more
of the combined voting power of the Surviving
Corporation's then outstanding voting securities (a
transaction described in this subparagraph (a) shall
be referred to as a "Non-Control Transaction");
(b) A complete liquidation or
dissolution of the Company; or
(c) The sale or other
disposition of all or substantially all of the assets
of the Company to any Person (other than a transfer to
a Controlled Entity).
Notwithstanding the foregoing, (x) a Change in Control
shall not be deemed to occur solely because thirty
percent (30%) or more of the then outstanding Voting
Securities is Beneficially Owned by (A) a trustee or
other fiduciary holding securities under one or more
employee benefit plans or arrangements (or any trust
forming a part thereof) maintained by the Company, or
any Controlled Entity or (B) any corporation which,
immediately prior to its acquisition of such interest,
is owned directly or indirectly by the stockholders of
the Company in the same proportion as their ownership
of stock in the Company, immediately prior to such
acquisition; and (y) if the Executive ceases to be an
employee of the Company and the Executive reasonably
demonstrates that such termination (A) was at the
request of a third party who has indicated an
intention or taken steps reasonably calculated to
effect a Change in Control and who effectuates a
Change in Control or (B) otherwise occurred in
connection with, or in anticipation of, a Change in
Control which actually occurs, then for all purposes
hereof, the date of a Change in Control with respect
to the Executive shall mean the date immediately prior
to the date of such termination of employment.
If within two years following a Change in
Control, the Executive's employment with the Company is
terminated by the Company for any reason other than Cause or
the Executive terminates his employment in connection with
either of the circumstances described in Section 2(B) or (C) (a
"Change in Control Termination"), the Company shall pay the
Executive in cash an amount equal to 2.99 times the sum of the
amount of the Executive's annual salary in effect immediately
prior to the date of such termination plus the average of the
Management Incentive Plan compensation (or successor thereto)
paid to him over the three years immediately prior to
<PAGE>
such termination. If a termination of the Executive's employment
occurs under this Section 4, the Executive shall have no right
to receive payments or benefits pursuant to Section 3.
5. Non-Disparagement. In the event of a Severance
or a Change in Control Termination both the Executive and the
Company agree that neither of them will disparage the other in
any manner.
6. Covenants Not to Compete and Not to Solicit.
A. Covenant Not to Compete.
The Executive recognizes that the services to be
performed while employed by the Company are special, unique,
and extraordinary and that by reason of the Executive's prior
and continued employment with the Company the Executive has
acquired and will acquire confidential information and trade
secrets concerning the Company's operations ("Company
Confidential Information") and the operations of its parent and
affiliates ("Affiliate Confidential Information").
Accordingly, it is agreed that during the period of his
employment by the Company, and for twenty four months following
a Severance or a Change in Control Termination, the Executive
will not, directly or indirectly, as an officer, director,
stockholder, partner, associate, owner, employee, consultant or
otherwise, become or be interested in or associated with any
other corporation, firm or business engaged in the same or a
similar or competitive business with the Company or any of its
affiliates in any geographical area in which the Company or any
of its affiliates are then engaged in business, provided that
the Executive's ownership, directly or indirectly, of not more
than one percent of the issued and outstanding stock of a
corporation the shares of which are regularly traded on a
national securities exchange or in the over-the-counter market
shall not, in any event, be deemed to be a violation of this
subsection.
B. Covenant Not to Solicit.
The Executive agrees not to solicit any person
employed by the Company or its affiliates who perform a
scientific, technical, sales or marketing function. As used
herein, "solicit" or "soliciting" means any direct or indirect
approach or appeals to such an employee to leave the Company.
Indirect solicitation includes but is not limited to, acting
through a third party or parties or characterizing job
advertisements or opportunities in such a fashion so as to
entice any employee. The Executive agrees that, if approached
by a Company employee, the Executive will:
(i) Inform the employee of the
Executive's obligations set
forth in this subparagraph;
(ii) Refer the employee to the
relevant Company Human Resources
personnel; and
<PAGE>
(iii) Request that the employee
confirm in writing to the
Company that he has approached
the Executive and confirm that
request in a memorandum to such
Human Resources organization.
7. Confidentiality. The Executive recognizes that
the services to be performed while employed by the Company are
special, unique, and extraordinary and that by reason of the
Executive's prior and continued employment with the Company the
Executive has acquired and will acquire Company Confidential
Information and Affiliate Confidential Information.
Accordingly, it is agreed that:
A. The Executive shall not divulge to any
entity or person, other than the Company or its affiliates, or,
in the event of an assignment of this Agreement pursuant to
Section 14 hereof, the assignee and its affiliates, if any,
whether while employed, after a Severance or a Change of
Control Termination, any Company Confidential Information
concerning the Company's customer lists, research or
development programs or plans, processes, methods or any other
of its trade secrets, except information that is then available
to the public in published literature and became publicly
available through no fault of the Executive.
B. The Executive shall not divulge to any
person or entity, including an assignee of this Agreement and
its affiliates, but excepting the Company and its affiliates,
whether while employed, after a Severance or a Change of
Control Termination, any Affiliate Confidential Information
acquired by the Executive concerning the customer lists,
research or development programs or plans, processes, methods
or any other trade secrets of the parent or any affiliate,
except information which is then available to the public in
published literature and became publicly available through no
fault of the Executive.
C. The Executive acknowledges that all
information the disclosure of which is prohibited hereby is of
a confidential and proprietary character and of great value to
the Company and its affiliates. Upon a Severance or a Change
of Control Termination, the Executive shall forthwith deliver
up to the Company all records, memoranda, data and documents of
any description which refer or relate in any way to Company
Confidential Information or Affiliate Confidential Information
and return to the Company any of its equipment and property
which may then be in the Executive's possession or under the
Executive's personal control. Upon the assignment of this
Agreement, pursuant to Section 14, the Executive shall
forthwith deliver up to the Company all records, memoranda,
data and documents of any description which refer or relate in
any way to Affiliate Confidential Information and return to the
Company any of its equipment and property which may then be in
the Executive's possession or under the Executive's personal
control.
<PAGE>
8. Invention Assignment.
A. The Executive agrees that any invention made
by the Executive while employed shall belong to the Company if
(i) it was made in the normal course of the duties of the
Executive or in the course of duties falling outside the
Executive's normal duties but specifically assigned to the
Executive, and the circumstances in either case were such that
an invention might reasonably be expected to result from the
carrying out of such duties, or (ii) the invention was made in
the course of the duties of the Executive and, at the time of
making the invention, because of the nature of the Executive's
duties and the particular responsibilities arising from the
nature of the Executive's duties, the Executive had a special
obligation to further the interests of the Company. In
addition, if (x) the Executive while employed shall make any
improvement or develop any know-how, copyrightable work or
design, (y) such improvement, know-how, copyrightable work or
design is relevant to the business of the Company or any of its
subsidiaries, and (z) such improvement, know-how, copyrightable
work or design arose directly out of any work carried out while
employed, or out of Confidential Company Information or
Confidential Affiliate Information to which the Executive had
access while in the employ of the Company, then such
improvement, know-how, copyrightable work or design shall
belong to the Company, whether or not it was disclosed to the
Company while employed by the Company.
B. In the event that the Executive makes any
invention or develops any improvement, know-how, copyrightable
design or work which belongs to the Company, the Executive
shall fully, freely and immediately communicate the same to the
Company and the Executive shall, if and as desired by the
Company execute all documents and do all acts and things at the
Company's cost which may be necessary or desirable to obtain
letters patent or other adequate protection in any part of the
world for such invention, improvement, know-how, copyrightable
work or design and to vast the same in the Company for the
Company's benefit. The Executive hereby irrevocably appoints
the Company as the Executive's attorney in the Executive's name
and on the Executive's behalf to execute all such deeds and
documents and to do all such acts and things as may be
necessary to give effect to this Subsection in the event that
the Executive fails to comply within seven days with the
written directions given by the Company pursuant to this
Subsection.
C. The Executive has been notified and
understands that the provisions of Subsections 8(A) and (B)
hereof do not apply to any invention that qualifies fully under
the provisions of Section 2870 of the California Labor Code,
which states as follows:
(i) Any provision in an employment
agreement which provides that an employee shall assign, or
offer to assign, any of his or her rights in an invention to
his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without
using the employer's equipment, supplies, facilities, or trade
secret information except for those inventions that either:
<PAGE>
(1) Relate at the time of conception
or reduction to practice of the
invention to the employer's
business, or actual or
demonstrably anticipated
research or development of the
employer, or
(2) Result from any work performed
by the employee for the
employer.
(ii) To the extent a provision in an
employment agreement purports to require an employee to assign
an invention otherwise excluded from being required to be
assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
9. Remedies. The Company shall be entitled, in
addition to any other right or remedy that it may have at law
or in equity with respect to a breach of this Agreement by the
Executive (including the right to terminate payments pursuant
to Section 3 and 4 hereof), to an injunction, without the
posting of a bond or other security, enjoining or restraining
the Executive from any violation or threatened violation of
Sections 5, 6, 7 and 8 and the Executive hereby consents to the
issuance of such an injunction.
10. Moral Rights Waiver. "Moral Rights" means any
right to claim authorship of a work, any right to object to any
distortion, or other modification of a work, and any similar
right, existing under the law of any country in the world, or
under any treaty. Executive hereby irrevocably transfers and
assigns to the Company any and all Moral Rights that Executive
may have in any services or materials. Executive also hereby
forever waives and agrees never to assert against the Company,
its successors or assigns any and all Moral Rights Executive
may have in any services or materials, even after termination
of this Agreement.
11. Release. In consideration of the payments and
covenants made in this Agreement, the Executive hereby releases
the Company, its employees, officers, directors, subsidiaries,
affiliates, successors and assigns and the Company, its
subsidiaries, affiliates, successors and assigns hereby release
the Executive from any and all claims for relief or causes of
action relating to any matters of any kind arising out of his
employment (or its termination) with the Company excepting
those claims for relief for causes of action relating to the
obligations of the Company to make payments or provide benefits
under Sections 3 or 4 of this Agreement.
The Executive expressly waives all rights and
remedies under Section 1542 of the Civil Code of the State of
California which provides as follows:
A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the
time of executing the release, which if known by him must have
materially affected his settlement with the debtor.
The Executive understands that if the facts with
respect to which this Agreement is executed are found hereafter
to be different from the facts which he now believes to be
true, the
<PAGE>
Executive expressly accepts and assumes the risk of
such possible differences in facts and agrees that this
Agreement shall be and remain effective notwithstanding such
differences in facts.
12. Notices. All notices, consents, waivers or
demands of any kind which either party to this Agreement may be
required or may desire to serve on the other party in
connection with this Agreement shall be in writing and may be
delivered by personal service or sent by telegraph or cable or
sent by registered or certified mail, return receipt requested
with postage thereon fully prepaid. All such communications
shall be addressed as follows:
THE COMPANY: SOLA INTERNATIONAL, INC.
Suite 200
2420 Sand Hill Road
Menlo Park, California 94025
Attn: Stephen J. Lee
THE EXECUTIVE: John Heine
210 Josselyn Lane
Woodside, California 94062
If sent by telegraph or cable, a confirmed copy of
such telegraphic or cable notice shall be promptly sent by mail
(in the manner provided above) to the addressees. Service of
any such communication made only by mail shall be deemed
complete on the date of actual delivery as shown by the
addressee's registry or certification receipt or at the
expiration of the third (3rd) business day after the date of
mailing which ever is later in time. Either party hereto may
from time to time, by notice in writing served upon the other
as aforesaid, designate a different mailing address or a
different person to which such notices or demands are
thereafter to be addressed or delivered. Nothing contained in
this Agreement shall excuse either party from giving oral
notice to the other when prompt notification is appropriate,
but any oral notice given shall not satisfy the requirement of
written notice as provided in this paragraph.
13. Choice of Law. This Agreement shall be governed
and construed and enforced in accordance with the laws of the
State of California (regardless of that jurisdiction or any
other jurisdictions' choice of law principles).
14. Assignment. This Agreement may be assigned by
the Company to any affiliate of the Company or to any non-
affiliate of the Company that shall succeed to the business and
assets of the Company. In the event of such assignment, the
Company shall cause such affiliate or non-affiliate as the case
may be, to assume the obligations of the Company hereunder by
written agreement addressed to the Executive concurrently with
any assignment with the same effect as if such assignee were
the Company hereunder. This Agreement is personal to the
Executive and the Executive may not assign any rights or
delegate any responsibilities hereunder without the prior
approval of the Company.
<PAGE>
15. Entire Agreement. This Agreement is the entire
Agreement between the Company and the Executive with respect to
the subject matter hereof and cancels and supersedes any and
all other agreements regarding the subject matter hereof
between the parties. This Agreement may not be altered,
modified, changed, or discharged except in writing signed by
both of the parties.
16. Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the
same instrument.
17. Construction. If any one or more of the
provisions (or any part thereof) of this Agreement shall be
held to be invalid, illegal or unenforceable in any respect the
remaining provisions (or any part thereof) shall not in any way
be affected or impaired thereby.
18. Arbitration. Except as otherwise provided in
Section 9, with respect to any controversy arising out of or
relating to this Agreement, or the subject matter thereof, such
controversy shall be settled by final and binding arbitration
in Palo Alto, California in accordance with the then existing
rules ("the Rules") of the American Arbitration Association
("AAA") and judgment upon the award rendered by the arbitrators
may be entered in any court having jurisdiction thereof;
provided, however, that the law applicable to any controversy
shall be the law of California, regardless of its or any
jurisdiction's choice of law principle. Arbitration shall be
the sole and exclusive remedy for the resolution of the
disputes described above. In any such arbitration, the award
or decision shall be rendered by a majority of the members of a
board of arbitration consisting of three (3) members, one of
whom shall be appointed by each party and the third of whom
shall be the chairman of the panel and be appointed by mutual
agreement of said two party appointed arbitrators. In the
event of the failure of said two arbitrators to agree, within
five (5) working days after the commencement of the
arbitration, upon appointment of the third arbitrator, the
third arbitrator shall be appointed by the AAA in accordance
with the Rules. In the event that either party shall fail to
appoint an arbitrator within five (5) days after the
commencement of the arbitration proceeding, such arbitrator and
the third arbitrator shall be appointed by the AAA in
accordance with the Rules. The arbitrators are empowered but,
not limited, in making an award in favor of the Executive to
require any act or acts which they believe necessary to
effectuate the intent of this Agreement. The Company agrees
that any costs of any arbitration brought whether by the
Executive or the Company including the Executive's reasonable
attorneys' fees and expenses and the costs, fees and expenses
of the Executive's appointed arbitrator, shall be borne in
their entirety by the Company.
19. Excise Tax Limitation
(a) Notwithstanding anything contained in this Agreement
to the contrary, to the extent that the payments and benefits
provided under this Agreement and benefits provided to, or for the
benefit of, the Executive under any other Company plan or agreement
(such payments or benefits are
<PAGE>
collectively referred to as the "Payments") would be subject to
the excise tax (the "Excise Tax") imposed under Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"),the Payments
shall be reduced (but not below zero) if and to the extent
necessary so that no Payment to be made or benefit to be provided
to the Executive shall be subject to the Excise Tax (such reduced
amount is hereinafter referred to as the "Limited Payment Amount").
Unless the Executive shall have given prior written notice
specifying a different order to the Company to effectuate the
foregoing, the Company shall reduce or eliminate the
Payments, by first reducing or eliminating the portion of the
Payments which are not payable in cash and then by reducing or
eliminating cash payments, in each case in reverse order beginning
with payments or benefits which are to be paid the farthest in time
from the Determination (as hereinafter defined). Any notice given
by the Executive pursuant to the preceding sentence shall take
precedence over the provisions of any other plan, arrangement or
agreement governing the Executive's rights and entitlements to any
benefits or compensation.
(b) The determination of whether the Payments shall be
reduced to the Limited Payment Amount pursuant to this Agreement
and the amount of such Limited Payment Amount shall be made, at the
Company's expense, by an accounting firm selected by the Executive
which is one of the six largest accounting firms in the United
States (the "Accounting Firm"). The Accounting Firm shall provide
its determination (the "Determination"), together with detailed
supporting calculations and documentation to the Company and the
Executive within ten (10) days of the date of termination, if
applicable, or such other time as requested by the Company or by
the Executive (provided the Executive reasonably believes that any
of the Payments may be subject to the Excise Tax) and if the
Accounting Firm determines that no Excise Tax is payable by the
Executive with respect to the Payments, it shall furnish the
Executive and the Company with an opinion reasonably acceptable to
the Executive that no Excise Tax will be imposed with respect to
any such Payments. The Determination shall be binding, final and
conclusive upon the Company and the Executive.
20. THE EXECUTIVE ACKNOWLEDGES THAT HE HAS HAD THE
OPPORTUNITY TO CONSULT WITH THE ADVISOR OF HIS CHOICE AND THAT
HE HAS FREELY AND VOLUNTARILY ENTERED INTO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the day and year first written above.
SOLA INTERNATIONAL, INC.
By /s/Stephen J. Lee
JOHN HEINE
By /s/John Heine
<PAGE>
Exhibit 11
SOLA INTERNATIONAL INC.
Computation of Earnings Per Share
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December December December December
31, 1996 31, 1995 31, 31,
1996 1995
<S> <C> <C> <C> <C>
Income before extraordinary item $7,840 $5,958 $16,971 $22,313
Extraordinary item, loss due to repurchase of
senior _ _ _ (912)
subordinated notes, net of tax
_____ _____ ______ ______
Net income $7,840 $5,958 $16,971 $21,401
_____ _____ ______ ______
Weighted average number of common and common
equivalent shares outstanding 24,157 21,783 23,347 21,783
Add assumed dilution arising from exercise of
common equivalent shares (stock options) 1,395 1,164 1,387 1,118
_____ _____ ______ ______
Weighted average number of common and common
equivalent shares used in earnings (loss)
per share 25,552 22,947 24,734 22,901
calculation
_____ _____ ______ ______
Earnings (loss) per share:
Income before extraordinary item $0.31 $0.26 $0.69 $0.97
Extraordinary item _ _ _ (0.04)
____ ____ ____ ____
Net income $0.31 $0.26 $0.69 $0.93
____ ____ ____ ____
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THIRD
QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<CIK> 0000912088
<NAME> SOLA INTERNATIONAL INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 21,473
<SECURITIES> 23
<RECEIVABLES> 103,016
<ALLOWANCES> 5,525
<INVENTORY> 142,760
<CURRENT-ASSETS> 274,571
<PP&E> 139,680
<DEPRECIATION> 36,402
<TOTAL-ASSETS> 591,410
<CURRENT-LIABILITIES> 138,383
<BONDS> 172,251
0
0
<COMMON> 242
<OTHER-SE> 274,531
<TOTAL-LIABILITY-AND-EQUITY> 591,410
<SALES> 357,451
<TOTAL-REVENUES> 357,451
<CGS> 195,731
<TOTAL-COSTS> 195,731
<OTHER-EXPENSES> 126,402
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,692
<INCOME-PRETAX> 23,626
<INCOME-TAX> 6,655
<INCOME-CONTINUING> 16,971
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,971
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0
</TABLE>
