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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13606
SOLA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3189941
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
2420 SAND HILL ROAD, SUITE 200, MENLO PARK, CA 94025
(Address of principal executive offices)
(zip code)
(650) 324-6868
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of October 31, 1997, 24,398,254 shares of the registrant's common stock, par
value $0.01 per share, which is the only class of common stock of the
registrant, were outstanding.
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<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
Table of Contents
Form 10-Q for the Quarterly Period
Ended September 30, 1997
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheet as of September 30, 1997 3
Consolidated Condensed Balance Sheet as of March 31, 1997
(derived from audited financial statements) 3
Consolidated Condensed Statements of Income for the three and six month
periods ended September 30, 1997 and September 30, 1996 4
Consolidated Condensed Statements of Cash Flows for the six month periods
ended September 30, 1997 and September 30, 1996 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
2
<PAGE>
<TABLE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SOLA INTERNATIONAL INC.
Consolidated Condensed Balance Sheets
(in thousands, except per share data)
<CAPTION>
March 31, 1997
(derived from
September 30, 1997 audited financial
(unaudited) statements)
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................................... $ 17,924 $ 24,401
Trade accounts receivable, net .................................................. 116,103 104,960
Inventories ..................................................................... 154,113 138,634
Deferred income taxes ........................................................... 11,367 10,686
Prepaids and other current assets ............................................... 5,338 3,539
--------- ---------
Total current assets ......................................................... 304,845 282,220
Property, plant and equipment, net ................................................. 119,095 110,477
Deferred income taxes .............................................................. 8,402 8,557
Debt issuance costs, net ........................................................... 2,512 2,773
Goodwill and other intangibles, net ................................................ 198,350 200,734
Other assets ....................................................................... 860 747
--------- ---------
Total assets ................................................................. $ 634,064 $ 605,508
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks and current portion of
long-term and bank debt ...................................................... $ 23,402 $ 19,413
Accounts payable, accrued liabilities and payroll ............................... 97,954 112,140
Accrued reorganization and acquisition expenses ................................. 7,660 9,134
Income taxes payable ............................................................ 3,984 467
Deferred income taxes ........................................................... 1,077 1,261
--------- ---------
Total current liabilities .................................................... 134,077 142,415
Long-term debt, less current portion ............................................... 2,297 3,555
Bank debt, less current portion .................................................... 85,625 67,938
Senior subordinated notes .......................................................... 92,796 91,304
Deferred income taxes .............................................................. 4,380 4,384
Other liabilities .................................................................. 12,808 11,614
--------- ---------
Total liabilities ............................................................ 331,983 321,210
--------- ---------
Contingencies
Shareholders' equity:
Preferred stock, $0.01 par value; 5,000 shares
authorized; ........................................................................ -- --
no shares issued
Common stock, $0.01 par value; 50,000 shares
authorized;
24,384 shares (24,263 shares as of March 31, 1997) ................................. 243 243
issued and outstanding
Additional paid-in capital ...................................................... 272,329 271,167
Equity participation loans ...................................................... (240) (270)
Retained earnings ............................................................... 35,771 12,904
Cumulative foreign currency adjustment .......................................... (6,022) 254
--------- ---------
Total shareholders' equity ................................................... 302,081 284,298
--------- ---------
Total liabilities and shareholders' equity ................................... $ 634,064 $ 605,508
========= =========
<FN>
The accompanying notes are an integral part of these condensed financial statements
</FN>
</TABLE>
3
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Income
(in thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales .................................................. $ 135,731 $ 128,194 $ 273,352 $ 237,730
Cost of sales .............................................. 71,892 75,085 144,686 133,134
--------- --------- --------- ---------
Gross profit ............................................ 63,839 53,109 128,666 104,596
--------- --------- --------- ---------
Research and development expenses .......................... 4,599 4,336 9,354 8,543
Selling and marketing expenses ............................. 24,584 23,135 49,530 42,410
General and administrative expenses ........................ 12,773 11,663 26,642 24,086
In process research and development expense ................ -- -- -- 9,500
--------- --------- --------- ---------
Operating expenses ...................................... 41,956 39,134 85,526 84,539
--------- --------- --------- ---------
Operating income ........................................ 21,883 13,975 43,140 20,057
Interest expense, net ...................................... 4,644 4,292 9,099 7,542
--------- --------- --------- ---------
Income before provision for income taxes
and minority interest ................................ 17,239 9,683 34,041 12,515
Provision for income taxes ................................. (5,661) (2,633) (11,374) (3,211)
Minority interest .......................................... 200 (81) 200 (173)
--------- --------- --------- ---------
Net income .............................................. $ 11,778 $ 6,969 $ 22,867 $ 9,131
========= ========= ========= =========
Earnings per share:
Net income ................................................. $ 0.46 $ 0.27 $ 0.90 $ 0.37
========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding ........................... 25,539 25,460 25,480 24,351
========= ========= ========= =========
<FN>
The accompanying notes are an integral part of these condensed financial statements
</FN>
</TABLE>
4
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)
<CAPTION>
Six Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Net cash provided by (used in) operating activities ................................ $ (9,865) $ 4,806
--------- ---------
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)
Purchases of businesses ....................................................... (2,511) --
Capital expenditures ............................................................ (13,963) (11,358)
Proceeds from sale of fixed assets .............................................. 261 40
--------- ---------
Net cash used in investing activities .............................................. (16,213) (133,256)
--------- ---------
Cash flows from financing activities:
Sale of common stock ............................................................ -- 63,136
Payments on equity participation loans/exercise of
stock options ................................................................. 1,162 121
Net receipts under notes payable to banks, and
long term debt ................................................................ 627 1,738
Borrowings on long term debt .................................................... 234 3,968
Payments on long term debt ...................................................... (326) (1,798)
Proceeds from bank debt ......................................................... 18,624 69,000
--------- ---------
Net cash provided by financing activities .......................................... 20,321 136,165
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents ..................................................................... (720) (447)
--------- ---------
Net increase (decrease) in cash and cash equivalents ............................... (6,477) 7,268
Cash and cash equivalents at beginning of period ................................... 24,401 22,394
--------- ---------
Cash and cash equivalents at end of period ......................................... $ 17,924 $ 29,662
========= =========
<FN>
The accompanying notes are an integral part of these condensed financial statements
</FN>
</TABLE>
5
<PAGE>
SOLA INTERNATIONAL INC.
Notes to Consolidated Condensed Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying consolidated condensed financial statements of the Company
have been prepared without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The Company's financial statements presented herein
include the results of operations and cash flows of the worldwide ophthalmic
business ("AO") of American Optical Corporation ("AOC") for the three months and
ten days ended September 30, 1996 subsequent to the Company's acquisition of AO
on June 19, 1996, and the results of operations and cash flow of Neolens, Inc.
("Neolens") for the three months ended September 30, 1996 subsequent to the
Company's acquisition of Neolens on July 2, 1996. The consolidated condensed
balance sheet as of March 31, 1997 was derived from audited financial
statements. The accompanying consolidated condensed financial statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company's annual report on Form 10-K for the
fiscal year ended March 31, 1997.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
period. The results of operations for the three and six months ended September
30, 1997 are not necessarily indicative of the results to be expected for the
full year.
2. Inventories
September 30, 1997 March 31, 1997
(in thousands) (in thousands)
-------------- --------------
Raw Materials $ 17,924 $ 17,505
Work In Progress 8,185 6,948
Finished Goods 88,729 76,936
Molds 39,275 37,245
-------- --------
$154,113 $138,634
======== ========
Molds comprise mainly finished goods for use by manufacturing affiliates in
the manufacture of spectacle lenses.
3. Contingencies
The Company is subject to environmental laws and regulations concerning
emissions to the air, discharges to surface and subsurface waters and the
generation, handling, storage, transportation, treatment and disposal of waste
materials.
The Company is currently participating in a remediation program of one of
its manufacturing facilities under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and the Superfund Amendments and
Reauthorization Act of 1986. In March 1997 the EPA consented to the Company
curtailing clean-up activities for a six month period which ended in September.
The Company continued to monitor contamination levels during the curtailment
period. An interim report was submitted to the EPA on August 15 and a final
report will be submitted to the EPA in November 1997 to enable the EPA to assess
the impact of the curtailment of clean-up activities. The company expects
continued reduction of clean-up activities due to relatively low level of
contamination existing at the site.
6
<PAGE>
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 September 30, 1997 and March 31, 1997, the Company has provided for
environmental remediation costs in the amount of $1.7 million and $2.3 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. Subsequent Events
Tender Offer for Senior Subordinated Notes
During October 1997 the Company commenced a tender offer to repurchase all
of its 9 5/8% Senior Subordinated Notes due 2003 together with a related consent
solicitation ("Offer"). The Offer is priced on a fixed spread of 40 basis points
over the yield on the 5 5/8% U.S. Treasury Note due November 30, 1998 as of
12:00 noon, New York City time, on the second business day immediately preceding
the expiration date of the Offer, less a consent payment of $12.50 per $1,000
principal amount for which a valid consent is received. As of October 31, 1997
all of the bondholders had accepted the Offer. The Company anticipates recording
an extraordinary charge of approximately $6.0 million in the three months ending
December 31, 1997 representing the write-off of unamortized debt issuance costs
and premium over accreted value, net of tax.
Amendment of Bank Credit Facility
In conjunction with the Offer the Company is amending its 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 ("Amended
Agreement"). The Amended Agreement increases the Company's multicurrency
revolving facility from $180 million to $300 million. Borrowings are divided
into two tranches. Tranche A permits borrowings up to $30 million in either U.S.
dollars or foreign currencies, to be used for working capital and consummating
certain permitted acquisitions. Tranche B permits borrowings of up to $270
million and can be used for working capital purposes, refinancing the term loans
under the existing bank credit agreement, repurchasing the Company's Senior
Subordinated Notes, and consummating certain permitted acquisitions. The Tranche
A Facility matures on October 31, 2000 and the Tranche B Facility matures on May
31, 2001. Among other things the Amended Agreement amended certain financial
covenants, removed the requirement for foreign subsidiary guarantees under the
Tranche A facility, increased the basket for incurring other unsecured
indebtedness to $150 million, and deleted the term facility portion under the
existing agreement.
7
<PAGE>
Borrowings under the Tranche A and Tranche B revolvers (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. LIBO Rate Loans bear interest at a rate per
annum equal to the sum of the LIBO Rate and a margin varying from 0.450% to
0.750% based on the Company's leverage ratio. Fixed rate borrowings in foreign
currencies bear interest at rates per annum equal to the referenced currency's
local IBOR plus a margin varying from 0.450% to 0.750% based on the Company's
leverage ratio. Local currency Base Rate Loans are also available at a spread
similar to US Base Rate Loans described above.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Company's consolidated
condensed financial statements and notes thereto included elsewhere herein.
On June 19, 1996 the Company acquired substantially all of the worldwide
ophthalmic business of American Optical Corporation pursuant to the terms of the
Purchase Agreement dated as of May 6, 1996 between the Company and AOC. The
Company consolidated the results of operations of AO from the date of
acquisition to September 30, 1996. The acquisition was accounted for using the
purchase method of accounting. As a result of the acquisition the Company
incurred two non-recurring charges in the six months ended September 30, 1996:
(i) a $7.2 million ($6.5 million in the three months ended September 30, 1996)
charge to cost of sales for the amortization associated with an inventory
write-up to fair value; and (ii) a $9.5 million charge for the write-off of
in-process research and development (all of which was recorded in the three
months ended June 30, 1996).
Results of Operations
Three months ended September 30, 1997 compared to three months ended September
30, 1996
The results of operations of the Company for the three months ended
September 30, 1997 reflect net income of $11.8 million as compared to net income
of $7.0 million for the same period in the prior year. If the non-recurring
charge referred to above and the provision for taxes related thereto were
excluded from the results of operations, the net income for the three months
ended September 30, 1996 would have been $11.1 million, and the increase in net
income for the three months ended September 30, 1997 over the three months ended
September 30, 1996, as adjusted, would have been $0.7 million, or 6.3%.
Net Sales
Net sales totaled $135.7 million in the three months ended September 30,
1997, reflecting an increase of 5.9% over net sales of $128.2 million for the
same period in the prior year. Using constant exchange rates, the percentage
increase was 9.9%. The growth in net sales is principally attributable to the
growth in unit sales of higher priced products, offset in part by price erosion
in net sales of lower priced products. Higher priced products accounted for
approximately 65% of net lens sales in the three months ended September 30, 1997
compared to approximately 61% for the three months ended September 30, 1996. The
higher priced product growth was led by the growth in Spectralite and plastic
photochromic products. Net sales increased by 13.6% in North America and 7.5% in
Rest of World. Net sales in Europe declined by 7.2%. The lower net sales
performance in Europe and Rest of World is primarily a result of the strength of
the U.S. dollar compared to most world currencies. Using constant exchange rates
the regional increases were as follows: North America 13.6%, Europe 2.6% and
Rest of World 11.8%.
Gross Profit and Gross Margin
Gross profit totaled $63.8 million for the three months ended September 30,
1997, reflecting an increase of 20.2% over gross profit of $53.1 million for the
same period in the prior year. Gross profit as a percentage of net sales
increased to 47.0% for the three months ended September 30, 1997 from 41.5% for
the three months ended September 30, 1996. Excluding the amortization of the
non-recurring inventory write-up to fair value associated with the acquisition
of AO in the three months ended September 30, 1996, the gross margin would have
been 46.5%. The margin growth was principally due to sales mix and manufacturing
improvements.
9
<PAGE>
Operating Expenses
Operating expenses in the three months ended September 30, 1997 totaled
$41.9 million, an increase of $2.8 million, over operating expenses of $39.1
million for the same period in the prior year. Operating expenses as a
percentage of net sales were 30.9%, compared to 30.5% for the same period of the
prior year. Research and development expenses for the three months ended
September 30, 1997 increased $0.3 million to $4.6 million, compared to $4.3
million for the three months ended September 30, 1996, which represent 3.4% of
net sales in each period. Selling and marketing expenses for the three months
ended September 30, 1997 increased $1.4 million to $24.5 million, compared to
$23.1 million for the three months ended September 30, 1996 which represent
18.1% and 18.0%, of net sales for the three months ended September 30, 1997 and
the three months ended September 30, 1996, respectively. The increase in sales
and marketing expense is primarily due to on going marketing support for new
products, such as Percepta, which was initially launched in the three months
ended March 31, 1997. As a percentage of net sales, general and administrative
expenses were $12.8 million, or 9.4% of net sales, for the three months ended
September 30, 1997, compared to $11.7 million, or 9.1% of net sales for the
three months ended September 30, 1996.
Operating Income
Exclusive of the non-recurring amortization of the inventory write-up
discussed above, operating income for the three months ended September 30, 1996
totaled $20.5 million. Operating income for the three months ended September 30,
1997 was $21.9 million, an increase of $1.4 million, or 6.9%, over the three
months ended September 30, 1996, as adjusted.
Net Interest Expense
Net interest expense totaled $4.6 million for the three months ended
September 30, 1997 compared to $4.3 million for the three months ended September
30, 1996, an increase of $0.3 million. The higher net interest expense reflects
increased borrowings to fund working capital growth, primarily inventory and
accounts receivable.
Provision for Income Taxes
The Company's combined state, federal and foreign tax rate represents an
effective tax rate projected for the full fiscal 1998 year of 33.4%, a slight
decrease from that anticipated during the three months ended June 30, 1997. For
the three months ended September 30, 1996 the Company recorded an effective
income tax rate of 31%, as adjusted. The utilization of valuation allowances in
the United States resulted in the reduced effective tax rate for fiscal 1997.
The Company has deferred tax assets on its balance sheet as of September 30,
1997 amounting to approximately $19.8 million. The ultimate utilization of these
deferred tax assets is dependent on the Company's ability to generate taxable
income in the future.
Six months ended September 30, 1997 compared to six months ended September 30,
1996
The results of operations of the Company for the six months ended September
30, 1997 reflect net income of $22.9 million as compared to net income of $9.1
million for the same period in the prior year. If the non-recurring charges
associated with the amortization of the inventory write-up to fair value and the
write off of in-process research and development, and the provision for taxes
related thereto, were excluded, net income for the six months ended September
30, 1996 would have been $20.0 million, and the increase in net income for the
six months ended September 30, 1997 over the six months ended September 30,
1996, as adjusted, would have been $2.9 million, or 14.4%.
10
<PAGE>
Net Sales
Net sales totaled $273.4 million in the six months ended September 30,
1997, reflecting an increase of 15.0% over net sales of $237.7 million for the
same period in the prior year. Using constant exchange rates, the percentage
increase was 18.6%. 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 accounted for approximately 65% of net lens sales in the six months
ended September 30, 1997 compared to approximately 59% for the six months ended
September 30, 1996. The higher priced product growth was led by the growth in
Spectralite, plastic photochromic and polycarbonate products. Net sales
increased by 22.7% in North America, 10.3% in Europe and 4.7% in Rest of World.
Using constant exchange rates the regional growths were as follows: North
America 22.8%, Europe 19.6% and Rest of World 7.7%.
Gross Profit and Gross Margin
Gross profit totaled $128.7 million for the six months ended September 30,
1997, reflecting an increase of 23.0% over gross profit of $104.6 million for
the same period in the prior year. Gross profit as a percentage of net sales
increased to 47.1% for the six months ended September 30, 1997 from 44.0% for
the six months ended September 30, 1996. Excluding the amortization of the
non-recurring inventory write-up to fair value associated with the AO
acquisition of $7.2 million, the gross margin for the six months ended September
30, 1996 would have been 47.0%. The margin growth was principally due to sales
mix and manufacturing improvements.
Operating Expenses
Operating expenses in the six months ended September 30, 1997 totaled $85.5
million, an increase of $1.0 million, over operating expenses of $84.5 million
for the same period in the prior year. Included in operating expenses for the
six months ended September 30, 1996 is a non-recurring charge of $9.5 million
for the write-off of in-process research and development arising from the AO
acquisition. If this charge were excluded from operating expenses the growth
over the six months ended September 30, 1996 would be $10.5 million or 14.0%.
Operating expenses for the six months ended September 30, 1997 as a percentage
of net sales was 31.3%, compared to 31.6%, excluding the non-recurring charge,
for the same period of the prior year. Research and development expenses for the
six months ended September 30, 1997 increased $0.8 million to $9.4 million,
compared to $8.6 million for the six months ended September 30, 1996, which
represent 3.4% and 3.6% of net sales, respectively. Selling and marketing
expenses for the six months ended September 30, 1997 increased $7.1 million to
$49.5 million, compared to $42.4 million for the six months ended September 30,
1996 which represent 18.1% and 17.8%, of net sales for the six months ended
September 30, 1997 and the six months ended September 30, 1996, respectively.
The increase in sales and marketing expense is primarily due to the AO
Acquisition and on going marketing support for new products, such as Percepta.
As a percentage of net sales, general and administrative expenses declined to
9.7% for the six months ended September 30, 1997 compared to 10.1% for the six
months ended September 30, 1996.
Operating Income
Exclusive of the non-recurring amortization of the inventory write-up and
the write-off of in-process research and development discussed above, operating
income for the six months ended September 30, 1996 totaled $36.7 million.
Operating income for the six months ended September 30, 1997 was $43.1 million,
an increase of $6.4 million, or 17.3%, over the six months ended September 30,
1996 operating income, as adjusted.
Net Interest Expense
Net interest expense totaled $9.1 million for the six months ended
September 30, 1997 compared to $7.5 million for the six months ended September
30, 1996, an increase of $1.6 million. The increase of
11
<PAGE>
$1.6 million is primarily attributable to increased borrowings to fund the AO
and Neolens acquisitions, and increased borrowings to fund working capital
growth, primarily inventory and accounts receivable.
Liquidity and Capital Resources
Net cash used in operating activities for the six months ended September
30, 1997 amounted to $9.9 million, compared to funds provided by operating
activities of $4.8 million for the six months ended September 30, 1996. The most
significant causes of the increased usage are the growth in accounts receivable
and inventories supporting sales volume growth, and the reduction in accounts
payable associated with the decision by the Company to take advantage of prompt
pay discounts offered by suppliers in the United States, offset in part by an
increase in operating income, after adding back non-recurring non-cash charges
in the six months ended September 30, 1996.
During the six months ended September 30, 1997, using a three month net
sales annualized convention, inventories as a percentage of net sales were 28.4%
compared to 25.4% for the six months ended September 30, 1996. The increase in
inventories is primarily as a result of building inventories to support new
product launches, growth in higher priced products as a percentage of net sales
and therefore of inventories, and the overall increase in business. Accounts
receivable as a percentage of net sales for the six months ended September 30,
1997 was 21.4% compared to 20.0% for the same period a year ago. The increase in
accounts receivable is primarily as a result of geographic sales mix changes,
primarily within Europe, and slow collections in Brazil and China due to
tightening of credit in those economies.
Cash flows from investing activities in the six months ended September 30,
1997 amounted to an outflow of $16.2 million, compared to an outflow of $133.3
million for the six months ended September 30, 1996. During the six months ended
September 30, 1996 the Company acquired AO and Neolens, Inc., a Florida
Corporation. Cash outflows from these investing activities were $121.9 million.
Capital expenditures for the six months ended September 30, 1997 amounted to
$13.9 million, compared to $11.4 million in the comparable period in the prior
year. Management anticipates capital expenditures of $40.0 million to $45.0
million annually over the next several years, of which approximately $5.0
million annually is viewed as discretionary.
Net cash provided by financing activities, primarily from borrowings under
bank debt, in the six months ended September 30, 1997 amounted to $20.3 million,
compared to $136.2 million in the same period in the prior year. The primary
source of funds in the six months ended September 30, 1996 was from the sale of
2,320,000 shares of the Company's common stock, and borrowings under the
Company's bank credit agreement
During October 1997 the Company commenced a tender offer to repurchase all
of its 9 5/8% Senior Subordinated Notes due 2003 together with a related consent
solicitation ("Offer"). The Offer is priced on a fixed spread of 40 basis points
over the yield on the 5 5/8% U.S. Treasury Note due November 30, 1998 as of
12:00 noon, New York City time, on the second business day immediately preceding
the expiration date of the Offer, less a consent payment of $12.50 per $1,000
principal amount for which a valid consent is received. The consent solicitation
is to effect certain amendments to the indenture under which the Senior
Subordinated Notes were issued, including the elimination of substantially all
of the restrictive covenants and certain of the events of default. The Offer
expires at 12:00 midnight, New York City time, on November 7, 1997, and to
receive a consent payment, holders had to deliver their consents to the proposed
amendments by 5:00 p.m., New York City time, on October 31, 1997. As of October
31, 1997 all of the bondholders had accepted the Offer. The Company anticipates
recording an extraordinary charge of approximately $6.0 million in the three
months ending December 31, 1997 representing the write-off of unamortized debt
issuance costs and premium over accreted value, net of tax.
In conjunction with the Offer the Company is amending its 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 ("Amended
Agreement"). The Amended Agreement increases the Company's multicurrency
revolving facility from $180 million to $300 million. Borrowings are divided
into two tranches. Tranche
12
<PAGE>
A permits borrowings up to $30 million in either U.S. dollars or foreign
currencies, to be used for working capital and consummating certain permitted
acquisitions. Tranche B permits borrowings of up to $270 million and can be used
for working capital purposes, refinancing the term loans under the existing bank
credit agreement, repurchasing the Company's Senior Subordinated Notes, and
consummating certain permitted acquisitions. The Tranche A Facility matures on
October 31, 2000 and the Tranche B Facility matures on May 31, 2001. Among other
things the Amended Agreement amended certain financial covenants, removed the
requirement for foreign subsidiary guarantees under the Tranche A facility,
increased the basket for incurring other unsecured indebtedness to $150 million,
and deleted the term facility portion under the existing agreement.
Borrowings under the Tranche A and Tranche B revolvers (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. LIBO Rate Loans bear interest at a rate per
annum equal to the sum of the LIBO Rate and a margin varying from 0.450% to
0.750% based on the Company's leverage ratio. Fixed rate borrowings in foreign
currencies bear interest at rates per annum equal to the referenced currency's
local IBOR plus a margin varying from 0.450% to 0.750% based on the Company's
leverage ratio. Local currency Base Rate Loans are also available at a spread
similar to US Base Rate Loans described above.
The Company's foreign subsidiaries maintain local credit facilities to
provide credit for overdraft, working capital and some fixed asset investment
purposes. As of September 30, 1997 the Company's total credit available under
such facilities was approximately $30.0 million, of which $16.0 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
Amended 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 for
the foreseeable future. As the Company's debt (including debt under the Amended
Agreement) 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 fiscal third quarter
results generally weaker than the other three quarters as a result of lower
sales during the holiday season, and fiscal 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 6% of the Company's net sales during the six months ended
September 30, 1997 were derived from its operations in South American countries,
which have experienced, or may experience, periods of hyper-inflation. In
hyper-inflationary environments, the Company generally protects margins by
methods which include increasing prices periodically 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.
13
<PAGE>
Information Relating to Forward-Looking Statements
This quarterly report includes forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, including
statements regarding among other items, (i) the Company's interest expense, (ii)
the impact of inflation, and (iii) future income tax rates and capital
expenditures. These forward-looking statements reflect the Company's current
views with respect to future events and financial performance. The words
"believe", "expect", "anticipate" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Actual results could differ materially from the
forward-looking statements as a result of "Factors Affecting Future Operating
Results" included in Exhibit 99.1 of the Company's Form 10-K for the fiscal year
ended March 31, 1997, and the factors described in "Business-Environmental
Matters", also included in the Company's Form 10-K for the fiscal year ended
March 31, 1997.
14
<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
The following matters were submitted to a vote of the security holders
at the Company's Annual Meeting of Stockholders held on August 15, 1997:
Proposal I The Shareholders elected 7 members of the Board of Directors
to serve until the next Annual Meeting of Stockholders or until their successors
are elected and qualified. Votes cast were as follows:
Total Vote For Total Vote Withheld
Each Director From Each Director
Maurice J. Cunniffe 19,827,163 46,747
Douglas D. Danforth 19,805,930 67,980
A. William Hamill 19,827,525 46,385
John E. Heine 19,826,035 47,875
Hamish Maxwell 19,805,307 68,603
Irving S. Shapiro 19,818,605 55,305
Jackson L. Schultz 19,805,770 68,140
Proposal II The Shareholders ratified the appointment of Ernst & Young
LLP as the Company's independent auditors for the fiscal year ending March 31,
1998. Votes cast were as follows:
For Against Abstain
19,795,468 21,561 56,881
Item 5. Other Information
Not applicable
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description Page Number
11 Statement Regarding Computation
of Per Share Earnings 19
27 Financial Data Schedule 20
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sola International Inc.
(Registrant)
Dated: November 7, 1997 By:/s/Steven M. Neil
--------------------
Steven M. Neil
Executive Vice
President, Chief
Financial Officer,
Secretary and
Treasurer
17
<PAGE>
Exhibit Index
Exhibit No. Description Page
----------- ------------ ----
11 Statement Regarding Computation
of Per Share Earnings 19
27 Financial Data Schedule 20
18
<TABLE>
Exhibit 11
SOLA INTERNATIONAL INC.
Computation of Earnings Per Share
(in thousands, except per share data)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income ................................................... $11,778 $ 6,969 $22,867 $ 9,131
======= ======= ======= =======
Weighted average number of common and common
equivalent shares outstanding ............................. 24,319 24,033 24,294 22,957
Add assumed dilution arising from exercise of
common equivalent shares (stock options) .................. 1,220 1,427 1,186 1,394
------- ------- ------- -------
Weighted average number of common and common
equivalent shares used in earnings per share
calculation ............................................... 25,539 25,460 25,480 24,351
======= ======= ======= =======
Earnings per share:
Net income ................................................ $ 0.46 $ 0.27 $ 0.90 $ 0.37
======= ======= ======= =======
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SECOND QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 17,904
<SECURITIES> 20
<RECEIVABLES> 121,146
<ALLOWANCES> 5,043
<INVENTORY> 154,113
<CURRENT-ASSETS> 304,845
<PP&E> 158,106
<DEPRECIATION> 39,011
<TOTAL-ASSETS> 634,064
<CURRENT-LIABILITIES> 134,077
<BONDS> 193,726
0
0
<COMMON> 243
<OTHER-SE> 301,438
<TOTAL-LIABILITY-AND-EQUITY> 634,064
<SALES> 273,352
<TOTAL-REVENUES> 273,352
<CGS> 144,686
<TOTAL-COSTS> 144,686
<OTHER-EXPENSES> 85,526
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,099
<INCOME-PRETAX> 34,041
<INCOME-TAX> 11,374
<INCOME-CONTINUING> 22,867
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,867
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.90
</TABLE>
