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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13606
SOLA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3189941
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
2420 SAND HILL ROAD, SUITE 200, MENLO PARK, CA 94025
(Address of principal executive offices)
(zip code)
(650) 324-6868
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
As of August 4, 1998, 24,779,280 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 June 30, 1998
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
<S> <C> <C>
Unaudited Consolidated Condensed Balance Sheet as of June 30, 1998 3
Consolidated Condensed Balance Sheet as of March 31, 1998
(derived from audited financial statements) 3
Unaudited Consolidated Condensed Statements of Income for the three
month periods ended June 30, 1998 and June 30, 1997 4
Unaudited Consolidated Condensed Statements of Cash Flows for the three
month periods ended June 30, 1998 and June 30, 1997 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 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
SOLA INTERNATIONAL INC.
Consolidated Condensed Balance Sheets
(in thousands, except per share data)
<CAPTION>
March 31, 1998
(derived from
June 30, 1998 audited financial
(unaudited) statements)
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................................... $ 26,850 $ 34,444
Trade accounts receivable, less allowance for doubtful
accounts of $5,903 and $4,956 at June 30, 1998 and
March 31, 1998, respectively .................................................. 120,051 120,590
Inventories ..................................................................... 183,935 169,756
Other current assets ............................................................ 17,497 16,798
--------- ---------
Total current assets .......................................................... 348,333 341,588
Property, plant and equipment, at cost, less accumulated
depreciation and amortization ................................................. 136,706 132,778
Goodwill and other intangibles, net ................................................ 203,437 198,341
Other long-term assets ............................................................. 15,808 11,351
--------- ---------
Total assets .................................................................. $ 704,284 $ 684,058
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks and current portion of long-term
debt ......................................................................... $ 18,084 $ 12,600
Accounts payable ................................................................ 51,393 60,254
Accrued liabilities ............................................................. 33,728 35,462
Accrued payroll and related compensation ........................................ 24,337 30,758
Other current liabilities ....................................................... 5,677 2,536
--------- ---------
Total current liabilities ..................................................... 133,219 141,610
Long-term debt, less current portion ............................................... 5,520 1,790
Bank debt, less current portion .................................................... 110,000 95,000
Senior notes ....................................................................... 99,605 99,596
Other long-term liabilities ........................................................ 20,397 19,040
--------- ---------
Total liabilities ............................................................. 368,741 357,036
Commitments and Contingencies
Shareholders' equity:
Preferred stock, $0.01 par value; 5,000 shares authorized;
no shares issued ............................................................. -- --
Common stock, $0.01 par value; 50,000 shares authorized;
24,772 shares (24,723 shares as of March 31, 1998)
issued and outstanding ........................................................ 248 247
Additional paid-in capital ......................................................... 279,271 278,688
Equity participation loans ......................................................... (190) (230)
Retained earnings .................................................................. 69,354 58,057
Cumulative foreign currency adjustment ............................................. (13,140) (9,740)
--------- ---------
Total shareholders' equity .................................................... 335,543 327,022
--------- ---------
Total liabilities and shareholders' equity .................................... $ 704,284 $ 684,058
========= =========
<FN>
The accompanying notes are an integral part of these condensed financial statements
</FN>
</TABLE>
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SOLA INTERNATIONAL INC.
<TABLE>
Unaudited Consolidated Condensed Statements of Income
(in thousands, except per share data)
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net sales .................................................................. $ 129,526 $ 137,621
Cost of sales .............................................................. 69,095 72,794
--------- ---------
Gross profit ............................................................ 60,431 64,827
--------- ---------
Research and development expenses .......................................... 4,730 4,755
Selling and marketing expenses ............................................. 24,471 24,946
General and administrative expenses ........................................ 10,295 13,869
--------- ---------
Operating expenses ...................................................... 39,496 43,570
--------- ---------
Operating income ..................................................... 20,935 21,257
Interest expense, net ...................................................... (4,022) (4,455)
--------- ---------
Income before provision for income taxes and
minority interest ................................................... 16,913 16,802
Provision for income taxes ................................................. (5,751) (5,713)
Minority interest .......................................................... 135 --
--------- ---------
Net income .............................................................. $ 11,297 $ 11,089
========= =========
Earnings per share - basic ................................................. $ 0.46 $ 0.46
Weighted average common shares outstanding ................................. 24,740 24,268
Earnings per share - diluted ............................................... $ 0.44 $ 0.44
Weighted average common and dilutive securities
outstanding ............................................................. 25,911 25,419
<FN>
The accompanying notes are an integral part of these condensed financial statements
</FN>
</TABLE>
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<TABLE>
SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net cash used in operating activities ..................................... $(15,594) $(17,693)
-------- --------
Cash flows from investing activities:
Purchases of businesses ................................................ (8,253) (2,651)
Capital expenditures ................................................... (7,794) (6,377)
Proceeds from sale of fixed assets ..................................... 40 258
-------- --------
Net cash used in investing activities ..................................... (16,007) (8,770)
-------- --------
Cash flows from financing activities:
Payments on equity participation
loans/exercise of stock options ...................................... 625 327
Net receipts/payments under notes payable to
banks, and long term debt ........................................... 2,482 (764)
Borrowings on long term debt ........................................... 6,262 1,318
Payments on long term debt ............................................. (310) (1,228)
Proceeds from bank debt ................................................ 15,000 24,606
-------- --------
Net cash provided by financing activities ................................. 24,059 24,259
-------- --------
Effect of exchange rate changes on cash and cash
equivalents ............................................................ (52) (397)
-------- --------
Net increase (decrease) in cash and cash equivalents ...................... (7,594) (2,601)
Cash and cash equivalents at beginning of period .......................... 34,444 24,401
-------- --------
Cash and cash equivalents at end of period ................................ $ 26,850 $ 21,800
======== ========
<FN>
The accompanying notes are an integral part of these condensed financial statements
</FN>
</TABLE>
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SOLA INTERNATIONAL INC.
Notes to Consolidated Condensed Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying consolidated condensed financial statements of the Company
have been prepared without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The consolidated condensed balance sheet as of March 31,
1998 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, 1998.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended June 30, 1998 and 1997 (in
thousands except per share data):
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
------------- -------------
Numerator:
Net income ....................... $11,297 $11,089
Denominator:
Denominator for basic earnings
per share - Weighted average
common share outstanding ......... 24,740 24,269
Effect of dilutive securities:
Employee stock options ......... 1,171 1,150
------- -------
Denominator for diluted earnings
per share - Weighted average
common shares and dilutive
securities outstanding ........... 25,911 25,419
Basic earnings per share ............ $ 0.46 $ 0.46
Diluted earnings per share .......... $ 0.44 $ 0.44
As of April, 1998 the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's net
foreign currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income.
During the three months ended June 30, 1998 and 1997, total comprehensive
income amounted to $7,897 and $7,300, respectively.
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The components of comprehensive income, net of related tax are as follows
"in thousand":
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
------------- -------------
Net income $11,297 $11,089
Foreign currency translation
adjustments (3,400) (3,789)
-------- -------
Comprehensive income $ 7,897 $ 7,300
======== =======
Cumulative other comprehensive income, net of related tax at June 30, 1998
and March 31, 1998 consists solely of foreign currency translation adjustments.
In June 1997, the FASB released Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("FAS 131"). FAS 131 will change the way companies report selected segment
information in annual financial statements and also requires those companies to
report selected segment information in interim financial reports to
shareholders. FAS 131 is effective for fiscal years beginning after December 15,
1997. Segment information is not required to be reported in interim financial
statements in the first year of application. The Company is currently evaluating
the impact of the application of the new rules on the Company's consolidated
financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or the
financial position of the Company.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
period. The results of operations for the three months ended June 30, 1998 are
not necessarily indicative of the results to be expected for the full year.
2. Inventories
June 30, 1998 March 31, 1998
(in thousands) (in thousands)
-------------- --------------
Raw Materials $ 17,776 $ 16,714
Work In Progress 7,539 6,872
Finished Goods 115,400 104,966
Molds 43,220 41,204
-------- --------
$183,935 $169,756
======== ========
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 U.S. Environmental Protection
Agency ("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. During the quarter ended
December 31, 1997 a report on contamination levels, and the impact of curtailed
activities, was submitted to the EPA, and such report is currently under review.
The report indicates no significant impact on the site from the curtailed
activities, and the EPA has consented to continued curtailment of
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activities until such time as they have concluded their review of the report.
The Company expects continued reduction of clean-up activities due to relatively
low levels of contamination existing at the site.
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.
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.
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.
Results of Operations
Three months ended June 30, 1998 compared to three months ended June 30, 1997
Net Sales
Net sales totaled $129.5 million in the three months ended June 30, 1998,
reflecting a decrease of 5.9% from net sales of $137.6 million for the same
period in the prior year. Using constant exchange rates, the percentage decrease
was 2.9%. The decline in net sales is primarily attributable to the North
American region. The sales decline in the United States resulted from softness
in the U.S. retail optical market following strong sales in the prior year
resulting from the launch of Percepta and Durathins progresive lens products,
product returns of older plastic photocromic products due to the introduction of
new generation Transitions product, and reduced net sales to laboratory
customers that were acquired by Essilor Laboratories of America. Also
contributing to the net sales shortfall is a continuing softness of the Asian
economies, although Asia only accounts for approximately 5% of net sales, and
underperformance in the Company's Australian operations primarily caused by
softness of the Australian dollar against the U.S. dollar. In addition, the
Company sold its Brazilian frame and equipment business, which had contributed
approximately $1 million of net sales in the three months ended June 30, 1997.
The foregoing decreases were offset, in part, by growth in plastic photocromic
lens sales and growth in net sales of the Company's new Matrix lens product.
Higher priced products accounted for approximately 67% of net sales in the three
months ended June 30, 1998 compared to approximately 66% for the three months
ended June 30, 1997. However, progressive lens net sales for the three months
ended June 30, 1998 declined 9.8% from the same period in the prior year. Net
sales performances by region, were as follows: North America declined by 8.5%,
Europe increased by 6.2% and Rest of World declined by 17.4%. Using constant
exchange rates the regional performances were as follows: North America declined
by 8.4%, Europe increased by 9.7% and Rest of World decreased by 8.1%.
Gross Profit and Gross Margin
Gross profit totaled $60.4 million for the three months ended June 30,
1998, reflecting a decrease of 6.8% from gross profit of $64.8 million for the
same period in the prior year. Gross profit as a percentage of net sales ("gross
margin") decreased from 47.1% for the three months ended June 30, 1997 to 46.7%
for the three months ended June 30, 1998. The margin decrease was principally
due to lower progressive product sales offset in part by improved sales mix due
to higher priced product growth and manufacturing improvements.
Operating Expenses
Operating expenses in the three months ended June 30, 1998 totaled $39.5
million, a decrease of $4.1 million, compared to operating expenses of $43.6
million for the same period in the prior year. Operating expenses for the three
months ended June 30, 1998 as a percentage of net sales was 30.5%, compared to
31.7% for the same period of the prior year. Research and development expenses
for the three months ended June 30, 1998 remained flat at $4.8 million, compared
to the three months ended June 30, 1997, which represent 3.7% and 3.5% of net
sales, respectively. Selling and marketing expenses for the three months ended
June 30, 1998 reduced by $0.5 million to $24.5 million, compared to $25.0
million for the three months ended
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June 30, 1997 which represent 18.9% and 18.1%, of net sales for the three months
ended June 30, 1998 and the three months ended June 30, 1997, respectively. The
increase in sales and marketing expense as a percentage of net sales is
primarily due to on going marketing support for new products. As a percentage of
net sales, general and administrative expenses reduced to 7.9% for the three
months ended June 30, 1998 compared to 10.1% for the three months ended June 30,
1997, reflecting lower accruals for performance based management bonuses and
favorable changes in estimates related to certain reserves and accruals.
Operating Income
Operating income, for the three months ended June 30, 1998 totaled $20.9
million, a decrease of $0.3 million, or 1.5%, from the three months ended June
30, 1997 of $21.2 million.
Net Interest Expense
Net interest expense totaled $4.0 million for the three months ended June
30, 1998 compared to $4.5 million for the three months ended June 30, 1997, a
decrease of $0.5 million. During the third quarter of fiscal 1998 the Company
repurchased its 9 5/8% Senior Subordinated Notes, and during the fourth quarter
of fiscal 1998 the Company issued 6 7/8% Senior notes. The net effect of the
above two changes has been to reduce current interest expense, offset in part by
an increase in interest expense due to increased borrowing levels.
Provision For Income Taxes
The Company's combined state, federal and foreign tax rate represents an
effective tax rate projected for the full fiscal 1999 year of 34%. For the three
months ended June 30, 1997 the company recorded an effective income tax rate of
34%, and for the full fiscal 1998 year an effective tax rate of 33.4%. The
Company has deferred tax assets on its balance sheet as of June 30, 1998
amounting to approximately $14.7 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 June 30, 1998 totaled $11.3 million,
a growth of 2%, as compared to net income of $11.1 million for the same period
in the prior year.
Liquidity and Capital Resources
Net cash used in operating activities for the three months ended June 30,
1998 amounted to $15.6 million, a decreased usage of $2.1 million from the funds
used in operating activities of $17.7 million for the three months ended June
30, 1997. The most significant causes of the decreased usage are the reduced
outflow in accounts receivable, due to lower net sales, and reduced outflow in
accounts payable. The reduction in accounts payable in the three months ended
June 30, 1997 was associated with the decision by the Company to take advantage
of prompt pay discounts offered by suppliers in the United States. The
reductions are offset in part by an increased outflow on growth in inventories.
During the three months ended June 30, 1998, inventories as a percentage of
annualized net sales were 35.5% compared to 26.8% for the three months ended
June 30, 1997. Accounts receivable as a percentage of annualized net sales for
the three months ended June 30, 1998 was 23.2% compared to 20.8% for the same
period a year ago. The lower than anticipated net sales is the primary
contributor to the increase in these ratios.
Cash flows from investing activities in the three months ended June 30,
1998 amounted to an outflow of $16.0 million. Of this amount $7.8 million
represented capital expenditures on fixed assets, and $8.3 million represented
investment in acquisitions. The $8.3 million spent on acquisitions represents
the acquisition of the assets of an anti-reflection coating laboratory in
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Oregon, USA, acquired by the Company in June 1998. Capital expenditures for the
three months ended June 30, 1997 amounted to $6.4 million and acquisitions
amounted to $2.7 million in the comparable quarter in the prior year. Management
anticipates capital expenditures of approximately $40 million to $45 million
annually over the next several years, of which approximately $5 million annually
is viewed as discretionary.
Net cash provided by financing activities in the three months ended June
30, 1998 amounted to $24.0 million. The most significant use was the increase in
bank borrowings to fund the growth in working capital, and borrowings on long
term debt to fund the lab acquisition. Net cash used in financing activities in
the three months ended June 30, 1997 amounted to $24.3 million. In the third
quarter of fiscal 1998 the Company repurchased all of its remaining 9 5/8%
Senior Subordinated Notes due 2003. The notes repurchase was funded by
borrowings under the Amended Agreement (as defined below). In conjunction with
the repurchase of its Senior Subordinated Notes the Company amended 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 increased 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 changed 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.
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.
During the fourth quarter of fiscal 1998 the Company issued 6 7/8% Senior
Notes ("Notes") due 2008, for which the Company received approximately $98.5
million net proceeds, after discounts and issuance expenses. Net proceeds were
used to pay down borrowings under the Amended Agreement. The Notes are unsecured
senior obligations of the Company, limited to $100 million aggregate principal
amount at maturity, and will mature on March 15, 2008. The Notes will be
redeemable, as a whole or from time to time in part, at the option of the
Company on any date at a redemption price equal to the aggregate principal
amount plus a make whole premium.
The Company's foreign subsidiaries maintain local credit facilities to
provide credit for overdraft, working capital and some fixed asset investment
purposes. As of June 30, 1998 the Company's total credit available under such
facilities was approximately $29.9 million, of which $10.6 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,
including the Notes, for the
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foreseeable future. As the Company's debt matures, the Company may need to
refinance such debt. There can be no assurance that such debt can be refinanced
on terms acceptable to the Company.
CURRENCY EXCHANGE RATES
As a result of the Company's worldwide operations, currency exchange rate
fluctuations tend to affect the Company's results of operations and financial
position. The two principal effects of currency exchange rates on the Company's
results of operations and financial position are (i) translation adjustments for
subsidiaries where the local currency is the functional currency and (ii)
translation adjustments for subsidiaries in hyper-inflationary countries.
Translation adjustments for functional local currencies have been made to
shareholders' equity. For the three months ended June 30, 1998 and 1997 such
translation adjustments were approximately $(3.4) million and $(3.8) million,
respectively.
Seasonality
The Company's business is somewhat seasonal, with third quarter results
generally weaker than the other three quarters as a result of lower sales during
the holiday season, and fourth quarter results generally the strongest.
Inflation
Inflation continues to affect the cost of the goods and services used by
the Company. The competitive environment in many markets limits the Company's
ability to recover higher costs through increased selling prices, and the
Company is subject to price erosion in many of its standard product lines. The
Company seeks to mitigate the adverse effects of inflation through cost
containment and productivity and manufacturing process improvements. For a
description of the effects of inflation on the Company's reported revenues and
profits and the measures taken by the Company in response to inflationary
conditions, see--"Currency Exchange Rates" above.
Year 2000
The Company has developed preliminary plans to address the possible
exposures related to the impact on its computer systems of the Year 2000. Key
financial, information and operational systems have been assessed and plans have
been developed to address systems modifications required by December 31, 1999.
Year 2000 expenditures to-date have not been material. Based on work to date,
and assuming that project plans, which continue to evolve, can be implemented as
planned, management believes the financial impact and other consequences of
making the required systems changes will not be material to the Company's
consolidated financial position, results of operations or cash flows.
The Company is also in the preliminary stages of assessing the possible
effects on the Company's operations of the Year 2000 readiness of key suppliers
and customers. The Company's reliance on suppliers and customers and therefore
on the proper functioning of their information systems and software, means that
failure to address Year 2000 issues could have a material impact on the
Company's operations and financial results; however, the potential impact and
related costs are not known at this time.
European Union Conversion to the "Euro"
The Company has instituted a "Euro" conversion team and begun preliminary
preparation for the conversion by eleven member states of the European Union to
a common currency, the "Euro". Conversion to the Euro by these member states of
the union will take place on a "no compulsion, no prohibition" basis between
January 1, 1999 and January 1, 2002. By January 1, 2002 all companies operating
in the eleven member states will be required to be fully operational using the
new currency. The Sola conversion team has primarily addressed the accounting
and
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information systems changes that are necessary to facilitate trading in the
Euro, the possible market place implications of a common currency and the
currency exchange rate risks, with the initial emphasis placed on the system
modifications. The Company has not completed the evaluation of the possible
effect of the changes to the Euro on foreign currency loans, or the impact if
any, on the market place implications of a common currency. Preliminary
assessments indicate that the financial impact of conversion to a Euro based
currency will not be material to the Company's consolidated financial position,
results of operations or cash flows.
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, (iii) future income tax rates and capital expenditures,
and (iv) the costs and other consequences related to the Year 2000 and
conversion to the Euro. 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, 1998, and the factors described in "Business-Environmental
Matters", also included in the Company's Form 10-K for the fiscal year ended
March 31, 1998.
13
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
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
Any shareholder proposal submitted with respect to Sola's 1999 annual
meeting of shareholders, which proposal is submitted outside the
requirements of Rule 14a-8 under the Securities Exchange Act of 1934,
will be considered timely for purposes of Rules 14a-4 and 14a-5 if
notice thereof is received by Sola not less than sixty days nor more
than ninety days prior to the date of the annual meeting; provided,
however, that in the event that less than seventy days notice or
prior public disclosure of the date of the annual meeting is given or
made to stockholders, notice by the stockholder in order to be timely
must be so received not later than the close of business on the tenth
day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure of the date of the
annual meeting was made, whichever first occurs.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description Page Number
-------------- ----------- -----------
27 Financial Data Schedule 17
99.1 Officers' Certificate Related to Senior 18
Notes
(b) Reports on Form 8-K
Not applicable
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sola International Inc.
(Registrant)
Dated: August 7, 1998 By: /s/ Steven M. Neil
--------------------------------
Steven M. Neil
Executive Vice President, Chief
Financial Officer, Secretary and
Treasurer
15
<PAGE>
Exhibit Index
Exhibit No. Description Page
----------- ----------- ----
27 Financial Data Schedule 17
99.1 Officers' Certificate Related to Senior Notes 18
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FIRST QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> MAR-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 26,830
<SECURITIES> 20
<RECEIVABLES> 118,591
<ALLOWANCES> 5,903
<INVENTORY> 183,935
<CURRENT-ASSETS> 348,333
<PP&E> 181,759
<DEPRECIATION> 45,053
<TOTAL-ASSETS> 704,284
<CURRENT-LIABILITIES> 133,219
<BONDS> 227,336
0
0
<COMMON> 248
<OTHER-SE> 335,294
<TOTAL-LIABILITY-AND-EQUITY> 704,284
<SALES> 129,526
<TOTAL-REVENUES> 129,526
<CGS> 69,095
<TOTAL-COSTS> 69,095
<OTHER-EXPENSES> 39,496
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,022
<INCOME-PRETAX> 16,913
<INCOME-TAX> 5,751
<INCOME-CONTINUING> 11,297
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,297
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.44
</TABLE>
Exhibit 99.1
Officers' Certificate Pursuant to Sections 201 and 301 of the Indenture
Dated: March 19, 1998
The undersigned, John E. Heine, President and Chief Executive Officer and
Steven M. Neil, Executive Vice President, Chief Financial Officer, Treasurer and
Secretary of Sola International Inc. (the "Company"), hereby certify as follows:
The undersigned, having read the appropriate provisions of the Indenture
dated as of March 19, 1998 (the "Indenture") between the Company and State
Street Bank and Trust Company of California, N.A., as trustee (the "Trustee"),
including Sections 201, 301 and 303 thereof and the definitions in such
Indenture relating thereto, and certain other corporate documents and records,
and having made such examination and investigation as, in the opinion of the
undersigned, each considers necessary to enable the undersigned to express an
informed opinion as to whether or not the conditions set forth in the Indenture
relating to the establishment of the terms of the Company's 6 7/8% Notes due
2008 (the "Notes") and the form of certificate for the Notes have been complied
with, and whether the conditions in the Indenture relating to the authentication
and delivery by the Trustee of the Notes have been complied with, certify that
(1) the terms of the Notes were established by the undersigned pursuant to
authority delegated to them by resolutions (the "Resolutions") duly adopted by
the Board of Directors of the Company by unanimous written consent as of March
5, 1998 and such terms are as set forth in Annex I hereto, (2) the form of
certificate for the Notes was established by the undersigned pursuant to
authority delegated to them by the Resolutions and shall be in substantially the
form attached as Annex II hereto, (3) a true, complete and correct copy of the
Resolutions, which were duly adopted by the Board of Directors of the Company
and are in full force and effect on the date hereof, are attached as an exhibit
to the Secretary's Certificate of the Company of even date herewith, and (4) the
form and terms of the Notes have been established pursuant to Sections 201 and
301 of the Indenture and comply with the Indenture and, in the opinion of the
undersigned, all conditions provided for in the Indenture (including, without
limitation, those set forth in Sections 201, 301 and 303 of the Indenture)
relating to the establishment of the terms of the Notes and the form of
certificate for the Notes, and relating to the execution, authentication and
delivery of the Notes, have been complied with.
This certificate may be executed by the parties hereto in counterparts,
each of which when so executed shall be deemed to be an original, with the same
effect as if the signatures thereto and hereto were on the same instrument, but
all such counterparts shall together constitute but one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, we have hereunto set our hands as of the date first
written above.
/s/ John E. Heine
-----------------------------------------
John E. Heine
President and Chief Executive Officer
/s/ Steven M. Neil
-----------------------------------------
Steven M. Neil
Executive Vice President, Chief Financial
Officer, Treasurer and Secretary
<PAGE>
ANNEX I
Capitalized terms used in this Annex I and not otherwise defined herein
have the same definitions as in the indenture dated as of March 19, 1998 (the
"Indenture") between Sola International Inc. (the "Company") and State Street
Bank and Trust Company of California, N.A., as trustee (the "Trustee").
(1) The Securities of the series established hereby shall be known and
designated as the 6 7/8% Notes due 2008. The Securities of such series are
sometimes hereinafter called the "Notes."
(2) The aggregate principal amount of the Securities of such series which
may be authenticated and delivered under the Indenture is limited to
$100,000,000, except for Securities of such series authenticated and delivered
upon registration of transfer of, or in exchange for, or in lieu of, other
Securities of the same series pursuant to Sections 304, 305, 306, 906 or 1107 of
the Indenture. However, such series may be reopened by the Company for the
issuance of additional Securities of such series, so long as any such additional
Securities have the same form and terms (other than date of issuance and the
date from which interest thereon shall begin to accrue), and carry the same
right to receive accrued and unpaid interest, as the Securities of such series
theretofore issued; provided, however, that, notwithstanding the foregoing, such
series may not be reopened if the Company has effected defeasance (as defined in
the Indenture) or covenant defeasance (as defined in the Indenture) with respect
to the Securities of such series.
(3) The Securities of such series are to be issuable only as Registered
Securities without coupons.
(4) The Securities of such series shall be sold by the Company to Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley
& Co. Incorporated and BancAmerica Robertson Stephens, as Representatives of the
several underwriters (the "Underwriters") named in Schedule A to the Purchase
Agreement dated March 13, 1998 (the "Purchase Agreement") with the Company, at a
price equal to 98.945% of the principal amount thereof and the initial price to
public of the Securities of such series shall be 99.595% of the principal amount
thereof plus accrued interest from March 19, 1998, and underwriting discounts
and commissions shall be .65% of the principal amount of such Securities.
(5) The Stated Maturity of the Securities of such series on which the
principal thereof is due and payable shall be March 15, 2008.
(6) The principal of the Securities of such series shall bear interest at
the rate of 6 7/8% per annum from March 19, 1998 or from the most recent date to
which interest has been paid or duly provided for, payable semiannually in
arrears on March 15 and September 15 (each, an "Interest Payment Date") of each
year, commencing September 15, 1998, to the Persons in whose names such
Securities (or one or more Predecessor Securities) are registered at the close
of business on the March 1 or September 1 immediately prior to such Interest
Payment Dates (each, a "Regular Record Date") regardless of whether such Regular
Record Date is a Business Day. Interest on the Securities of such series will be
computed on the basis of a 360-day year of twelve 30-day months. No Additional
Amounts shall be payable on the Securities of such series.
(7) Anything in the Indenture to the contrary notwithstanding, the only
terms, provisions, covenants or conditions of the Company applicable to the
Securities of such series which may be waived by the Holders of the Securities
of such series pursuant to
<PAGE>
Section 1006 of the Indenture are the covenants set forth in paragraphs 17 and
18 below and the covenants set forth in Sections 1004 and 1005 of the Indenture.
(8) The Securities of such series are redeemable, as a whole or from time
to time in part, at the option of the Company on any date (a "Redemption Date")
at a Redemption Price equal to the greater of (i) 100% of the principal amount
of the Securities of such series to be redeemed and (ii) the sum of the present
values of the Remaining Scheduled Payments thereon discounted to such Redemption
Date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day
months) at the Treasury Rate plus 20 basis points, plus in either case accrued
interest on the principal amount being redeemed to such Redemption Date;
provided, however, that installments of interest whose Stated Maturity is on or
prior to a Redemption Date shall be payable to the Holders of the Securities of
such series, or one or more Predecessor Securities, registered as such at the
close of business on the relevant Regular Record Dates according to their terms
and the provisions of the Indenture. Notice of redemption of Securities of such
series shall be given not less than 30 nor more than 60 days prior to the
relevant Redemption Date to each Holder of Securities of such series to be
redeemed as provided in the Indenture, and any redemption of the Securities of
such series shall be made in accordance with the other terms and provisions of
the Indenture.
As used in this paragraph 8, the following terms have the meanings set
forth below:
"Treasury Rate" means, with respect to any Redemption Date for the Notes,
the rate per annum equal to the semiannual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such Redemption Date.
"Comparable Treasury Issue" means, with respect to any Redemption Date for
the Notes, the United States Treasury security selected by an Independent
Investment Banker as having a maturity comparable to the remaining term of the
Notes to be redeemed that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of corporate
debt securities of comparable maturity to the remaining term of such Notes.
"Independent Investment Banker" means one of the Reference Treasury Dealers
appointed by the Trustee after consultation with the Company.
"Comparable Treasury Price" means, with respect to any Redemption Date for
the Notes, (i) the average of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
on the third Business Day preceding such Redemption Date, as set forth in the
daily statistical release (or any successor release) published by the Federal
Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities" or (ii) if such release (or any successor release) is not
published or does not contain such prices on such Business Day, the average of
the Reference Treasury Dealer Quotations actually obtained by the Trustee for
such Redemption Date. "Reference Treasury Dealer Quotations" means, with respect
to each Reference Treasury Dealer and any Redemption Date, the average, as
determined by the Trustee, of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m.
(New York City time) on the third Business Day preceding such Redemption Date.
As used in the foregoing two sentences, the term "Business Day" shall have the
meaning set forth in the
<PAGE>
Indenture, assuming that the Place of Payment referred to in such definition is
the Borough of Manhattan, The City of New York.
"Reference Treasury Dealer" means each of Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Morgan Stanley & Co. Incorporated and BancAmerica Robertson
Stephens and their respective successors; provided, however, that if any of the
foregoing shall cease to be a primary U.S. Government securities dealer in New
York City (a "Primary Treasury Dealer"), the Company shall substitute therefor
another Primary Treasury Dealer.
"Remaining Scheduled Payments" means, with respect to any Note to be
redeemed, the remaining scheduled payments of the principal thereof and interest
thereon that would be due after the related Redemption Date but for such
redemption; provided, however, that, if such Redemption Date is not an Interest
Payment Date with respect to such Note, the amount of the next succeeding
scheduled interest payment thereon will be reduced by the amount of interest
accrued thereon to such Redemption Date.
(9) The Securities of such series shall not be repayable or redeemable at
the option of the Holders prior to the Stated Maturity of the principal thereof
(except as provided in Article Five of the Indenture) and shall not be subject
to a sinking fund or analogous provision.
(10) The Borough of Manhattan, The City of New York is hereby designated as
a Place of Payment for the Securities of such series. The principal of, premium,
if any, and interest on the Securities of such series shall be payable and the
Securities of such series may be surrendered or presented for payment, the
Securities of such series may be surrendered for registration of transfer or
exchange, and notices and demands to or upon the Company in respect of the
Securities of such series and the Indenture may be served, at the office or
agency of the Company maintained for such purposes in the Borough of Manhattan,
The City of New York, and the Company hereby appoints the Trustee, acting
through the office of its affiliate, State Street Bank and Trust Company, in the
Borough of Manhattan, The City of New York designated from time to time for such
purpose, as its agent for the foregoing purposes; provided, however, that each
installment of interest on any Security of such series may at the Company's
option be paid by (i) mailing a check for such interest, payable to or upon the
written order of the Person entitled thereto pursuant to the Indenture, to the
address of such Person as it appears in the Security Register, or (ii) wire
transfer to an account located inside the United States maintained by the payee,
except that payment of interest on Book-Entry Securities of such series shall be
made in accordance with the procedures of the Depositary as in effect from time
to time and except as provided below; and provided, further, that (subject to
Section 1002 of the Indenture) the Company may at any time remove the Trustee as
its office or agency in the Borough of Manhattan, The City of New York
designated for the foregoing purposes and may from time to time designate one or
more other offices or agencies for the foregoing purposes and may from time to
time rescind such designations, so long as the Company shall at all times
maintain an office or agency for the foregoing purposes in the Borough of
Manhattan, The City of New York. Payment of principal and premium, if any, due
upon the Maturity of any Security of such series, and payment of accrued and
unpaid interest due upon the Maturity of any such Security (except for
installments of interests whose Stated Maturity is on or prior to the date of
such Maturity), shall be payable to the Person entitled thereto by wire transfer
of immediately available funds to an account located in the United States
maintained by the payee or, at the option of the Person entitled thereto, by
mailing a check, payable to or upon the written order of the Person entitled
thereto pursuant to the Indenture, to the address of such Person as it appears
in the Security Register, except that payment of principal, premium, if any, and
<PAGE>
interest due upon the Maturity of any Book-Entry Security of such series shall
be made in accordance with the procedures of the Depositary as in effect from
time to time.
(11) The Securities of such series shall be issued in denominations of
$1,000 and integral multiples of $1,000.
(12) The Principal of, premium, if any, and interest on the Securities of
such series shall be payable in Dollars.
(13) Sections 1402 and 1403 of the Indenture shall apply to the Securities
of such series, provided that (i) the Company may effect defeasance and covenant
defeasance pursuant to Section 1402 and 1403, respectively, only with respect to
all (and not less than all) of the Outstanding Securities of such series and
(ii) the only covenants which, for purposes of the Securities of such series,
shall be subject to covenant defeasance are the covenants set forth in Sections
1004 (other than the covenant of the Company to preserve and keep in full force
and effect its existence subject to Article 8 of the Indenture) and 1005 of the
Indenture and the covenants set forth in paragraphs 17 and 18 below.
(14) The Securities of such series shall be issued in the form of one or
more global Book-Entry Securities, the initial depositary for such Book-Entry
Securities shall be The Depository Trust Company, and the depositary
arrangements shall be those employed by whoever shall be the depositary with
respect to the Securities of such series from time to time.
(15) The Securities of such series shall not be convertible into other
securities.
(16) in addition to the covenants set forth in the Indenture, the covenants
set forth in paragraphs (17) and (18) below, together with the definitions set
forth in paragraph (19) below, are hereby added to the Indenture for the benefit
of the Securities of such series and the Holders thereof.
(17) The Company will not, and will not permit any Subsidiary to, create,
incur, assume or guarantee any Debt secured by a Lien on any Principal Property
or by a Lien on any Debt or shares of capital stock of, or other ownership
interests in, any Restricted Subsidiary ("Secured Debt") (whether such Principal
Property, Debt, shares of capital stock or ownership interests are owned or
outstanding on the Original Issuance Date or thereafter acquired or issued, as
the case may be) if, immediately after giving effect thereto, the sum, without
duplication, of (a) the aggregate principal amount of all Secured Debt (other
than Excluded Debt (as defined below)) and (b) the aggregate amount of all
Attributable Debt in respect of Sale and Leaseback Transactions (other than
Excluded Transactions (as defined below)) would exceed 15% of the Company's
Consolidated Net Tangible Assets as of the date of determination, unless the
Company provides, concurrently with or prior to the creation, incurrence,
assumption or guarantee of such Secured Debt, that the Notes shall be secured
equally and ratably with (or, at the option of the Company, prior to) such
Secured Debt (for so long only as such Secured Debt is so secured).
The provisions set forth in the immediately preceding paragraph shall not
apply to Debt secured by the following Liens ("Excluded Debt"):
(i) Liens existing on the Original Issuance Date;
<PAGE>
(ii) Liens on any Principal Property, Debt, shares of capital stock or
other ownership interests existing at the time of acquisition thereof (whether
by merger, acquisition of stock or assets or otherwise) by the Company or any of
its Subsidiaries (whether or not the obligations secured by such Liens are
assumed by the Company or a Restricted Subsidiary), provided that such Liens
were not created in contemplation of or in connection with such acquisition;
(iii) Liens upon or with respect to any Principal Property acquired,
constructed, improved, developed or expanded by the Company or any of its
Subsidiaries after the Original Issuance Date which (A) are created, incurred or
assumed contemporaneously with, or not later than 270 days after, the latest to
occur of the acquisition (whether by merger, acquisition of stock or assets or
otherwise), or the completion of construction, improvement, development or
expansion, as the case may be, of such Principal Property, and (B) secure Debt
incurred or assumed to finance all or any part of the purchase price of such
Principal Property or the cost of such construction, improvement, development or
expansion, as the case may be;
(iv) Liens on shares of capital stock of or other ownership interests in or
property of a Restricted Subsidiary to secure Debt incurred or assumed to
finance all or any part of the acquisition cost of such Restricted Subsidiary,
provided that such Debt is incurred or assumed and the related Liens are created
not later than 270 days after such Restricted Subsidiary first becomes a
Subsidiary;
(v) Liens on the property of any Subsidiary securing Debt owing by such
Subsidiary to the Company or to any other Subsidiary;
(vi) Liens in favor of domestic or foreign governments or governmental
bodies to secure partial, advance, progress or other payments pursuant to any
contract or statute and Liens in favor of any domestic or foreign government or
governmental body incurred in connection with industrial revenue, pollution
control, private activity bond or similar financing;
(vii) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation and deposits
securing liability to insurance carriers under insurance or self-insurance
arrangements;
(viii) Liens for taxes, assessments or governmental charges or levies not
yet due or which are being contested by the Company in good faith and for which
appropriate reserves have been established in accordance with GAAP;
(ix) Permitted Liens; and
(x) Liens for the sole purpose of extending, renewing or replacing in whole
or in part the Debt secured thereby referred to in the foregoing clauses (i)
through (ix), inclusive, or in this clause (x); provided, however, that the Debt
excluded pursuant to this clause (x) shall be excluded only in an amount not to
exceed the principal amount of Debt so secured at the time of such extension,
renewal or replacement (together with any premium, fee or expense payable in
connection with any such replacement, extension or renewal), and that such
extension, renewal or replacement shall be limited to all or part of the
Principal Property, Debt, shares of capital stock or other ownership interests,
as the case may be, subject to the Lien so extended, renewed or replaced.
(18) The Company will not, and will not permit any of its Restricted
Subsidiaries to, enter into, assume, guarantee or otherwise become liable with
respect to
<PAGE>
any Sale and Leaseback Transaction involving any Principal Property or a
significant portion thereof (whether such Principal Property is owned on the
Original Issuance Date or thereafter acquired), if, immediately after giving
effect thereto, the sum, without duplication, of (a) the aggregate principal
amount of all Secured Debt (other than Excluded Debt) and (b) the aggregate
amount of all Attributable Debt in respect of Sale and Leaseback Transactions
(other than Excluded Transactions) would exceed 15% of the Company's
Consolidated Net Tangible Assets as of the date of determination.
The provisions set forth in the immediately preceding paragraph shall not
apply to any Sale and Leaseback Transaction (an "Excluded Transaction") if:
(i) not later than 270 days from the date of such Sale and Leaseback
Transaction, the Company or such Subsidiary applies an amount not less than the
greater of (A) the net proceeds of the sale of the principal Property (or
portion thereof) sold pursuant to such Sale and Leaseback Transaction and (B)
the fair value (as determined by the Board of Directors by Board Resolution) of
such Principal Property (or portion thereof) to retire Funded Debt of the
Company or any Subsidiary, or to purchase other property having a fair value (as
determined by the Board of Directors by Board Resolution) at least equal to the
fair value (as determined by the Board of Directors by Board Resolution) of the
Principal Property (or portion thereof) sold in such Sale and Leaseback
Transaction and which other property constitutes a Principal Property (or
portion thereof);
(ii) such Sale and Leaseback Transaction occurs not later than 270 days
after the latest to occur of the date of acquisition by the Company or such
Subsidiary or the completion of construction of the Principal Property (or
portion thereof) sold pursuant to such transaction;
(iii) such Sale and Leaseback Transaction is between the Company and any
Subsidiary or between any Subsidiaries;
(iv) at the time such Sale and Leaseback Transaction is entered into, the
term of the related lease to the Company or such Subsidiary of the Principal
Property (or portion thereof) sold pursuant to such transaction is three years
or less;
(v) such Sale and Leaseback Transaction is a transaction in which the
relevant Principal property (or significant portion thereof) is sold to and
leased back from any domestic or foreign government or governmental body in
connection with pollution control, industrial revenue, private activity bond or
similar financing;
(vi) such Sale and Leaseback Transaction involves the extension, renewal or
replacement (or successive extensions, renewals or replacements) in whole or in
part of a lease pursuant to a Sale and Leaseback Transaction referred to in the
above clauses (i) through (v); provided, however, that such lease extension,
renewal or replacement shall be limited to all or any part of the same property
leased under the lease so extended, renewed or replaced (plus improvements to
such property).
(19) As used herein, the following terms have the meanings set forth below:
"Attributable Debt" in respect of a Sale and Leaseback Transaction means,
as of the time of determination, the present value (discounted at a rate per
annum equal to the rate per annum at which, at the inception of the lease
involved in such Sale and Leaseback Transaction, the lessee would have been able
to borrow monies in an amount equal to the proceeds of the Principal Property
(or portion thereof) sold pursuant to such
<PAGE>
Sale and Leaseback Transaction and for a term substantially similar to the term
of such lease (including any period for which such lease has been extended or
may, at the option of the lessor, be extended)) of the obligation of the lessee
thereunder for rental payments (excluding, however, any amounts required to be
paid by such lessee, whether or not designated as rent or additional rent, on
account of maintenance and repairs, insurance, taxes, assessments, water rates
or similar charges or any amounts required to be paid by such lessee thereunder
contingent upon the amount of sales or similar contingent amounts) during the
remaining term of such lease (including any period for which such lease has been
extended or may, at the option of the lessor, be extended). In the case of any
lease which is terminable by the lessee upon the payment of a penalty, such
rental payments shall also include the lesser of (i) the total amount of rental
payments required to be paid under such lease from the later of the first date
upon which such lease may be so terminated and the date of the determination of
such Attributable Debt, through the remaining term of such lease (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended) and (ii) the amount of such penalty.
"Consolidated Net Tangible Assets" means, with respect to the Company and
as of any date of determination, the total assets of the Company and its
consolidated Subsidiaries determined in accordance with GAAP as they appear on
the then most recently prepared consolidated balance sheet of the Company as of
the end of a fiscal quarter, less (i) all liabilities shown on such consolidated
balance sheet that are classified and accounted for as current liabilities or,
in the event that such consolidated balance sheet does not separately classify
current liabilities, that otherwise would be considered current liabilities
under GAAP (excluding current maturities of long-term debt and current
maturities of capitalized lease obligations) and (ii) all assets shown on such
consolidated balance sheet that are classified and accounted for as intangible
assets and all other assets reflected in such consolidated balance sheet which,
although not identified as intangible assets, would be considered intangible
assets under GAAP, including, without limitation, franchises, patents and patent
applications, trademarks, brand names and goodwill.
"Debt" means indebtedness for borrowed money or indebtedness evidenced by
bonds, notes, debentures or other similar instruments given to finance the
acquisition of any businesses, properties or assets of any kind (including,
without limitation, capital stock or other equity interests in any Person).
"Funded Debt" means, as of any date of determination, any Debt of the
Company or any of its Subsidiaries which, under GAAP, would appear as
indebtedness on a consolidated balance sheet of the Company as of such date and
which matures (or by its terms is extendable or renewable at the option of the
Company or such Subsidiary for a period ending) more than 12 months from such
date.
"Lien" means any mortgage, pledge, lien, charge, security interest,
conditional sale or other title retention agreement or other encumbrance of any
nature whatsoever.
"Original Issuance Date" means March 19, 1998.
"Permitted Lien" means (i) statutory liens or landlords', carriers',
warehousemens', mechanics', suppliers', materialmens', repairmens' or other like
Liens arising in the ordinary course of business and with respect to amounts not
yet delinquent or being contested in good faith by appropriate proceedings, if a
reserve or other appropriate provisions, if any, required by GAAP shall have
been made therefor, (ii) pledges or deposits to secure surety, stay, appeal,
indemnity, customs or performance bonds which
<PAGE>
do not involve indebtedness for borrowed money and (iii) Liens incurred in
connection with repurchase, swap or other similar agreements entered into for
hedging purposes and not for speculation.
"Principal Property" means any manufacturing, processing, distribution,
research, research and development, warehousing or principal administration
facility (including, without limitation, land, fixtures and equipment) owned or
leased by the Company or any Subsidiary (including any of the foregoing acquired
or leased after the Original Issuance Date) and located within the United States
of America, the gross book value of which exceeds 1% of the Company's
Consolidated Net Tangible Assets at the date of determination, in each case
other than any of the foregoing which the Board of Directors by Board Resolution
determines, together with all other manufacturing, processing, distribution,
research, research and development, warehousing and principal administration
facilities (including, without limitation, land, fixtures and equipment)
previously so determined, are not of material importance to the business
conducted by the Company and its Subsidiaries taken as an entirety.
"Restricted Subsidiary" means any Subsidiary of the Company which (i) owns
or leases a Principal Property (or portion thereof) and (ii) (A) substantially
all of the property of which is located, or substantially all of the business of
which is carried on, within the United States of America or (B) which is
incorporated or organized under the laws of the United States of America, any
state thereof or the District of Columbia.
"Sale and Leaseback Transaction" means any direct or indirect arrangement,
in one transaction or a series of related transactions, with any Person
providing for the leasing to the Company or a Subsidiary of any Principal
Property (or significant portion thereof), whether owned on the Original
Issuance Date or thereafter acquired, which has been or is to be sold or
transferred by the Company or such Subsidiary to such Person with the intention
of taking back a lease of such Principal Property (or significant Portion
thereof).
<PAGE>
ANNEX 11
Form of Certificate Evidencing the Notes
<PAGE>
[Legend for inclusion in Global Notes--THIS NOTE IS A GLOBAL NOTE WITHIN THE
MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME
OF A DEPOSITARY OR A NOMINEE THEREOF. THIS NOTE IS NOT EXCHANGEABLE FOR NOTES
REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE
EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND, UNLESS AND
UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE CERTIFICATED
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.]
[Legend for inclusion in Global Notes-UNLESS THIS NOTE IS PRESENTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK
CORPORATION ("DTC"), TO THE COMPANY (AS DEFINED BELOW) OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED
IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER
ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER,
PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.]
No.: o
CUSIP No.: 834092 AA 6 Principal Amount: $__________
Sola International Inc.
6 7/8% Notes due 2008
Sola International Inc., a Delaware corporation (hereinafter called the
"Company", which term includes any successor corporation under the Indenture
referred to below), for value received, hereby promises to pay to _________, or
registered assigns, the principal sum of _________ DOLLARS ($_______) on March
15, 2008 (the "Maturity Date"), and to pay interest thereon from March 19, 1998
or from the most recent date to which interest has been paid or duly provided
for, semiannually on March 15 and September 15 of each year (each, an "Interest
Payment Date"), commencing September 15, 1998, and at Maturity, at the rate of 6
7/8% per annum, until the principal hereof is paid or duly made available for
payment. Interest on this Note shall be calculated on the basis of a 360-day
year consisting of twelve 30-day months. The interest so payable and punctually
paid or duly provided for on any Interest Payment Date will, as provided in such
Indenture, be paid to the Person in whose name this Note (or one or more
Predecessor Securities) is registered at the close of business on the Regular
Record Date for such interest, which shall be the March 1 or September 1
(whether or not a Business Day), as the case may be, next preceding such
Interest Payment Date. Any such interest which is payable, but is not
<PAGE>
punctually paid or duly provided for, on any Interest Payment Date shall
forthwith cease to be payable to the registered Holder hereof on the relevant
Regular Record Date by virtue of having been such Holder, and may be paid to the
Person in whose name this Note (or one or more Predecessor Securities) is
registered at the close of business on a Special Record Date for the payment of
such Defaulted Interest to be fixed by the Trustee, notice whereof shall be
given to the Holder of this Note not less than 10 days prior to such Special
Record Date, or may be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange on which the Notes
may be listed, and upon such notice as may be required by such exchange, all as
more fully provided in such Indenture.
Payment of the principal of, premium, if any, and interest on this Note
will be made at the office or agency of the Company maintained for that purpose
in the Borough of Manhattan, The City of New York, in such coin or currency of
the United States of America as at the time of payment is legal tender for
payment of public and private debts; provided, however, that, at the option of
the Company, interest may be paid by check mailed to the address of the Person
entitled thereto as such address shall appear in the Security Register or by
transfer to an account located in the United States maintained by the payee.
This Note is one of a duly authorized issue of Securities of the Company
(herein called the "Notes") issued and to be issued in one or more series under
an Indenture dated as of March 19, 1998 (herein called, together with all
indentures supplemental thereto, the "Indenture", which term, as used herein,
includes the Officers' Certificate dated as of March 19, 1998 establishing the
form and terms of the Notes pursuant to Sections 201 and 301 of the Indenture)
between the Company and State Street Bank and Trust Company of California, N.A.,
as trustee (herein called the "Trustee", which term includes any successor
trustee under the Indenture), to which Indenture and all indentures supplemental
thereto reference is hereby made for a statement of the respective rights,
limitations of rights, duties and immunities thereunder of the Company, the
Trustee and the Holders of the Notes, and the terms upon which the Notes are,
and are to be, authenticated and delivered. This Note is one of the series
designated on the face hereof, initially limited (subject to exceptions provided
in the Indenture) in aggregate principal amount to S100,000,000.
The Notes are redeemable, as a whole or from time to time in part, at the
option of the Company on any date (a "Redemption Date") at a Redemption Price
equal to the greater of (i) 100% of the principal amount of the Notes to be
redeemed and (ii) the sum of the present values of the Remaining Scheduled
Payments (as defined in the Officers' Certificate referred to above) thereon
discounted to such Redemption Date on a semiannual basis (assuming a 360-day
year consisting of twelve 30-day months) at the Treasury Rate (as defined in the
Officers' Certificate referred to above) plus 20 basis points, plus in either
case accrued interest on the principal amount being redeemed to such Redemption
Date; provided that installments of interest whose Stated Maturity is on or
prior to a Redemption Date shall be payable to the Holders of the Notes, or one
or more Predecessor Securities, registered as such at the close of business on
the relevant Regular Record Dates according to their terms and the provisions of
the Indenture. Notice of redemption of Notes shall be given not less than 30 nor
more than 60 days prior to the relevant Redemption Date to each Holder of Notes
to be redeemed as provided in the Indenture, and any redemption of the Notes
shall be made in accordance with the other terms and provisions of the
Indenture.
<PAGE>
The Notes shall be entitled to the benefit of the covenants set forth in
the Indenture, including, without limitation, the covenants set forth in the
Officers' Certificate referred to above.
If an Event of Default with respect to the Notes shall occur and be
continuing, the principal of the Notes may be declared due and payable in the
manner and with the effect provided in the Indenture.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series issued
under the Indenture at any time by the Company and the Trustee with the consent
of the Holders of not less than a majority in aggregate principal amount of the
Securities at the time Outstanding of each series affected thereby. The
Indenture also contains provisions permitting the Holders of specified
percentages in aggregate principal amount of the Securities of any series at the
time Outstanding, on behalf of the Holders of all Securities of such series, to
waive compliance by the Company with certain provisions of the Indenture and
certain past defaults under the Indenture and their consequences. Any such
consent or waiver by the Holder of this Note shall be conclusive and binding
upon such Holder and upon all future Holders of this Note and of any Notes
issued upon the registration of transfer hereof or in exchange herefor or in
lieu hereof, whether or not notation of such consent or waiver is made upon this
Note,
No reference herein to the Indenture and no provision of this Note or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, premium, if any, and
interest on this Note, at the time, place and rate, and in the coin or currency,
herein and in the Indenture prescribed.
As provided in the Indenture and subject to certain limitations set forth
therein, the transfer of this Note may be registered on the Security Register
upon surrender of this Note for registration of transfer at the office or agency
of the Company maintained for the purpose in any place where the principal of,
premium, if any, and interest on this Note are payable, duly endorsed, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by the Holder hereof or by his
attorney duly authorized in writing, and thereupon one or more new Notes, of
authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees.
The Notes are issuable only in registered form without coupons in the
denominations of $1,000 and integral multiples of $1,000. As provided in the
Indenture and subject to certain limitations set forth therein, the Notes are
exchangeable for a like aggregate principal amount of Notes of authorized
denominations as requested by the Holders surrendering the same.
No service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith, other than in
certain cases provided in the Indenture.
Prior to due presentment of this Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
<PAGE>
The Indenture contains provisions whereby (i) the Company may be discharged
from its obligations with respect to the Notes (subject to certain exceptions)
or (ii) the Company may be released from its obligations under specified
covenants and agreements in the Indenture, in each case if the Company
irrevocably deposits with the Trustee money or Government Obligations sufficient
to pay and discharge the entire indebtedness on all Notes, and satisfies certain
other conditions, all as more fully provided in the Indenture.
This Note shall be governed by and construed in accordance with the laws of
the State of New York.
All terms used in this Note which are defined in the Indenture shall have
the meanings assigned to them in the Indenture.
Unless the certificate of authentication hereon has been executed by or on
behalf of the Trustee under the Indenture by the manual signature of one of its
authorized signatories, this Note shall not be entitled to any benefits under
the Indenture or be valid or obligatory for any purpose.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated:
[Seal] SOLA INTERNATIONAL INC.
Attest: ____________________________ By: __________________________________
Theodore Gioia Steven M. Neil
Vice President Executive Vice President
Chief Financial Officer, Treasurer
and Secretary
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to in
the within-mentioned Indenture.
STATE STREET BANK AND TRUST COMPANY OF
CALIFORNIA, N.A., as Trustee
By: _________________________________________
Authorized Signatory
<PAGE>
ABBREVIATIONS
<TABLE>
The following abbreviations, when used in the inscription on the face of
this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:
<CAPTION>
<S> <C>
TEN COM--as tenants in common UNIF GIFT MIN ACT--_____Custodian -____
TEN ENT--as tenants by the entireties; (Cust) (Minor)
JT TEN--as joint tenants with right of survivorship Under Uniform Gifts to Minors
and not as tenants in common Act____________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
________________________________________
FOR VALUE RECEIVED, the undersigned registered holder hereby sell(s), assign(s)
and transfer(s) unto
PLEASE INSERT SOCIAL SECURTY OR OTHER IDENTIFYWG NUMBER OF ASSIGNEE
______________________________________________________________________
______________________________________________________________________
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
________________________________________________________________________________
the within Note and all rights thereunder, hereby irrevocably constituting and
appointing
________________________________________________________________________________
Attorney to transfer said Note on the books of the Company with full power of
substitution in the premises.
Dated: _________________________________________________________________________
Notice: The signature(s) to this assignment must correspond with the
name(s) as it/they appear(s) upon the face of the within Note in every
particular, without alteration or enlargement or any change whatever.
