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SOLA
INTERNATIONAL
Sola International Inc.
2420 Sand Hill Road, Suite 200
Menlo Park, CA 94025
(650) 324-6868
Fax: (650) 324-6870
www.sola.com
(C)1999 Sola International Inc. 1377-AR-99
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1999 ANNUAL REPORT
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================================[LOGO] OPTICS BY================================
SOLA
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SOLA
INTERNATIONAL
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"SOLA has consistently
been an industry leader in
enhancing the quality of
people's lives. Each week,
people around the world
purchase more than one million
pairs of SOLA lenses."
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[LOGO]
SOLA
INTERNATIONAL
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corporate information
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SOLA International 1999 Annual Report
Corporate Offices
Sola International Inc.
2420 Sand Hill Road, Suite 200
Menlo Park, CA 94025
(650) 324-6868
Transfer Agent and Registrar
BankBoston, NA
c/o Boston EquiServe LP
PO Box 8040
Boston, MA 02266-8040
(781) 575-3400
Stockholder Inquiries
Communications regarding transfer requirements, lost certificates and
change of address should be directed to the transfer agent.
General Information regarding the Company may be obtained by contacting
SOLA's Investor Relations Department at (650) 324-6822.
Stock Price and Shareholder Data
The Company's Common Stock has been listed on the New York Stock Exchange
since February 23, 1995 under the symbol SOL.
The following table sets forth on a per share basis the closing high and
low sales prices for consolidated trading in the Common Stock as reported on the
New York Stock Exchange Composite Tape for the fiscal quarters indicated.
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Common Stock Price Range High Low
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Fiscal Year Ended
March 31, 1998
First Quarter Ended
June 30, 1997 $33 1/2 $21 7/8
Second Quarter Ended
September 30, 1997 $34 1/2 $30 1/8
Third Quarter Ended
December 31, 1997 $36 1/4 $29 1/2
Fourth Quarter Ended
March 31, 1998 $41 7/16 $30 3/16
Fiscal Year Ended
March 31, 1999
First Quarter Ended
June 30, 1998 $43 3/4 $32 1/2
Second Quarter Ended
September 30, 1998 $34 3/4 $14 3/8
Third Quarter Ended
December 31, 1998 $20 $13
Fourth Quarter Ended
March 31, 1999 $18 3/4 $ 9 7/8
On May 28, 1999, the closing price per share of the Company's Common Stock
on the New York Stock Exchange was $16.69. As of May 28, 1999 there were 433
holders of record of the Company's Common Stock, which excludes beneficial
owners of Common Stock held in street name.
The Company has not declared or paid any cash dividends on its Common Stock
since December 1993. The Company's debt agreements generally restrict, subject
to certain exceptions, the payment of dividends, distributions and other
payments. The Company does not anticipate paying any cash dividends in the
foreseeable future and intends to retain future earnings for the development and
expansion of its business. Subject to such restrictions, any future
determination to pay dividends will be at the discretion of the Company's Board
of Directors and subject to certain limitations under the General Corporation
Law of the State of Delaware and will depend upon the Company's results of
operations, financial con dition, other contractual restrictions and other
factors deemed relevant by the Board of Directors.
SEC Form 10-K
A copy of the Company's annual report to the Securities and Exchange
Commission on Form 10-K is available upon written request to:
Investor Relations Department
2420 Sand Hill Road, Suite 200
Menlo Park, CA 94025
Annual Meeting
The annual meeting of stockholders will be held at 10:00 a.m. on Friday,
August 13, 1999 at the Quadrus Conference Center, 2400 Sand Hill Road, Menlo
Park, CA.
Independent Auditors
Ernst & Young LLP
Palo Alto, CA
Designed by Curran & Connors, Inc. / www.curran-connors.com
Fisher-Price is a registered trademark of Fisher-Price, Inc. Fisher-Price
trademarks are used under license from Fisher-Price, Inc., a subsidiary of
Mattel, Inc. ViZio is a trademark and Access, Matrix, Percepta, AO Compact,
Visuality, UTMC and Spectralite are registered trademarks of Sola International,
Inc.
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financial highlights
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SOLA International 1999 Annual Report
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<CAPTION>
Fiscal Year Ended March 31,
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(dollars in thousands, except per share data) 1999 1998 1997(3) 1996 1995
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<S> <C> <C> <C> <C> <C>
Net sales $529,789 $547,735 $488,689 $387,709 $345,631
Sales growth (decline) (3.3)% 12.1% 26.0% 12.2% 12.9%
Pro forma gross profit(1) $238,400 $258,058 $231,370 $185,718 $160,005
Pro forma operating income(1) 65,057 92,706 74,063 60,753 43,661
Pro forma net income(1) 33,022 45,153 41,762 33,676 23,645
Pro forma earnings per share (diluted) 1.30 1.77 1.68 1.47 1.05
Operating income 37,751 92,706 57,347 60,753 39,744
Net income 12,521 45,153 30,897 33,676 9,725
Earnings per share (diluted) 0.49 1.77 1.24 1.47 0.56
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Total assets $699,299 $684,058 $605,508 $416,849 $383,457
Short-term debt 22,000 12,600 19,413 17,403 11,078
Long-term debt 208,414 196,386 162,797 97,890 107,407
Shareholders' equity 332,362 327,022 284,298 192,241 159,443
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Sales at constant exchange rates $543,647 $556,539 $477,436 $380,204 $341,730
Sales growth (decline) at constant exchange rates (2.3)% 16.6% 25.6% 11.3% 11.1%
Value-added product sales(2) $344,604 $348,738 $286,183 $216,162 $180,431
Value-added products as a percentage of
net lens sales 67.1% 65.8% 60.7% 57.1% 53.3%
Ophthalmic unit sales volume growth 1.4% 8.7% 14.7% 5.2% 5.6%
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(1) Fiscal 1997 and fiscal 1995 include pro forma adjustments, where necessary,
to reflect the effects of the IPO in 1995 and the AO Acquisition, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Fiscal 1999 includes pro forma adjustments, where necessary,
to reflect the effects of removing special charges, and tax effects
thereon, from fiscal 1999 operating performance.
(2) Value-added product sales comprise sales of thin and light, plastic
photochromic and progressive lenses.
(3) Fiscal 1997 includes AO operations since acquisition in June 1996.
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Net Sales Total Assets
(in millions) (in millions)
'95 $346 '95 $383
'96 $388 '96 $417
'97 $489 '97 $606
'98 $548 '98 $684
'99 $530 '99 $699
1
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to our shareholders:
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SOLA International faced a challenging year in fiscal 1999, with revenues and
earnings declining. This was the first down year for SOLA in over 18 years, and
was especially disappointing coming off the strong results we delivered in
fiscal 1998.
I nevertheless feel very optimistic about SOLA's future, primarily because I
believe we have taken the correct measures to recommence growing the business.
Specifically:
o We understand what happened in fiscal 1999;
o We have acted swiftly to correct the problems and have seen posi tive
results from these actions in the fourth quarter of fiscal 1999;
o Most importantly, we are working aggressively to build on SOLA's inherent
strengths in order to return the Company to its historic patterns of
growth.
Actions Taken
SOLA has long been guided by five core strategies for building shareholder
value. The strategies are to:
o Open new markets that maintain SOLA's global leadership through penetration
of high-growth regions and new customer segments;
o Develop innovative new products that meet the vision and lifestyle needs of
consumers;
o Build customer equity through meaningful and productive relationships with
trade and consumer segments;
o Bring costs down each year by sharing best practices and by encouraging a
cost-conscious culture; and
o Invest in people in order to enhance the depth and breadth of SOLA's
organization.
The challenges of fiscal 1999 have provided an invaluable experience for SOLA
that has ultimately left us a stronger company. They have also required us to
sharpen our focus on, and execution of, several core strategies in order to
strengthen the foundation on which our success has traditionally been built.
Internally, we have called this initiative "getting back to the basics."
Following are the key actions we have taken.
Strengthened management focus. In Fall 1998 we instituted a worldwide corporate
reorganization that separates the responsibilities for day-to-day operations
from long-term development issues. Jim Cox moved from his role as president of
SOLA Optical USA to executive vice president of SOLA International, responsible
for the global operating performance of the Company. Jim works closely with
Steve Neil, executive vice president and chief financial officer of SOLA
International, to strengthen our ability to deliver consistent short-term
results.
This realignment allows me to focus on guiding the development of the strategic
initiatives that are critical to the long-term success of the Company. It also
enables me to fully address the organizational development of the Company to
ensure it is well positioned for competition and growth. During the past fiscal
year we added senior executive roles in strategic marketing and corporate
branding; expanded the SOLA Optical USA management teams in marketing, sales and
operations; and consolidated the global research and development teams under one
management structure. These actions have positioned SOLA for greater
responsiveness in our fast-changing industry and business environment.
Progressives strategy. With progressive lenses a critical source of revenue for
the Company, it became clear in fiscal 1999 that a revitalized positioning of
our progressives product line was necessary.
2
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The challenges of fiscal 1999 have provided an invaluable experience for SOLA
that has made us a stronger company...We are confident that our renewed focus on
core company strategies will provide the foundation for improved performance in
fiscal 2000.
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During the fourth quarter we introduced a new marketing strategy for SOLA
progressives that communicates the versatile range of progressive lenses
available from SOLA. We offer the most complete line of progressives in the
industry, and we expect our new emphasis on this competitive advantage to have a
significant impact on sales in fiscal 2000. In fact, the fourth quarter of
fiscal 1999 showed evidence that the new strategy will be a success, with
progressive lens sales growing more than 4 percent over the same quarter in the
previous year.
Polycarbonate product line. During the fourth quarter we energized our
polycarbonate efforts with two exciting new product introductions--ViZioE atoric
single vision lenses and Fisher-Price(R) children's lenses. We also implemented
programs to improve the quality of our polycar bonate products so that they are
on par with, or better than, the competition. We will leverage our design and
coating technology to differentiate our polycarbonate products in the
marketplace. These initiatives form the foundation for a full SOLA polycarbonate
product line that we believe will make us a major player in this segment. With
these programs we enter fiscal 2000 confident that we are well positioned to
take advantage of the growing demand for polycarbonate lenses.
Production volume and overhead staffing adjustments. Last year, when we found
sales growth softening and inventories growing, we responded by reducing
overhead and cutting production volumes significantly. Gross margins were
adversely impacted by the lower production volumes, but the reduction in
finished goods inventories by $23.8 million in the fourth quarter generated
$10.8 million of free cash flow in the quarter. Going forward, the benefits from
consolidating the SOLA and American Optical manufacturing facilities in Mexico,
reducing the workforce overhead, and instilling comprehensive production control
disciplines will enable SOLA to fully realize its "cost down" objective.
Building and strengthening customer relationships. With the increasing
competition for visibility in the marketplace, it has become apparent that SOLA
must deepen its relationships with its valuable customers. That effort must
include the dispenser as a critical target customer and address our customers'
needs for tailor-made programs and services. Today we have implemented
comprehensive customer relationship programs in the U.S. and Australia that have
been highly successful in generating support for the Company and its products.
The U.S. program has been adopted by a majority of dispensers, while the
Australia program has been accepted by over 80 percent of lens dispensers. We
have begun implementing similar pro grams in other regions.
It is important to point out that fiscal 1999 generated some significant
successes for SOLA.
o SOLA reached co-branding agreements with Nike, Inc. and Fisher-Price, Inc.
The agreement with Nike represents the initiation of an aggressive strategy
using "Optics by SOLA" as the cornerstone. Our Fisher-Price, Inc.
relationship enables us to reach a new segment combined with a powerful
brand name.
o High-impact new products such as Visuality(R), AO Compact(R) and ViZio were
successfully introduced.
o American Optical, acquired in 1996, made substantial progress, generating
strong growth and introducing AO Compact, its first new progressive lens
since our acquisition.
o SOLA's proprietary anti-reflection ("AR") coating, UTMC(R), was launched in
the U.S., supported by the acquisition of an AR coating laboratory in
Oregon.
3
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Our vision for SOLA's future builds on the history and culture of SOLA, while
continuing to leverage our competitive advantages in new technology.
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Financial Summary
In fiscal 1999:
o Net sales of $529.8 million declined 3.3 percent (a decline of 2.3 percent
at constant exchange rates).
o Net income, before special charges, of $33.0 million, or $1.30 per diluted
share, declined 35 percent.
o A special pre-tax charge of $27.3 million was recorded, relating to
strategic actions designed to improve operating performance and to the
impact on asset realization from the dramatic devaluation of the Brazilian
Real.
The reasons for SOLA's poor financial performance in fiscal 1999 were complex.
Some causes were internal and have been addressed, as noted above. Our business
was also impacted by external causes, most notably a North American market that
was sluggish yet increasingly competitive, and economic difficulties in Asia and
Brazil. However, once we addressed the issues within our control, we began to
see encouraging signs of progress.
o Although progressive lens sales declined 1.5 percent for the fiscal year,
they grew 4.3 percent in the fourth quarter over the previous year,
including 6.1 percent growth in North America, buoyed by strong sales of
the recently introduced AO Compact lens.
o Finished goods inventories declined over $23 million in the fourth quarter.
o Free cash flow in excess of $10 million, before special charges, was
generated in the fourth quarter.
o Value-added products as a percentage of net lens sales again grew in fiscal
1999 to 67.1 percent of net lens sales.
We believe these signs of progress, together with our strengthened focus on core
strategies, bode well for SOLA's success in the new millennium.
SOLA's Future
Our vision for SOLA's future builds on the history and culture of SOLA, while
continuing to leverage our competitive advantages in new technology. However, we
will continue to build the SOLA brand and further focus on consumer needs. All
of our key initiatives evolve from the core strategies outlined for the Company,
which continue to form the basis for our future growth.
o Consumer-driven products. SOLA will continue to offer lens products that
are driven by identified market and consumer needs and deliver clear,
differentiated consumer benefits. SOLA is known for its innovative,
high-quality products, and our complete product offering will communicate
to consumers that we have a vision solution for every stage of their
lives--what we call "Lenses to Live In."
o Technology leadership. Our industry-leading R&D capabilities have given us
an array of high-impact new products--Visuality, AO Compact, Percepta(R),
ViZio, and Matrix(R)--and represent a promising new product pipeline.
o Global SOLA branding. SOLA is committed to extending its global presence by
positioning the SOLA brand in the minds of consumers worldwide, through
both ophthalmic and sunlens products. We are aggressively working with a
number of sunlens companies to further strengthen the "Optics by SOLA"
branding in the marketplace.
o Progressives growth. We will continue to support this significant segment
of our product line through compelling line-selling strategies and new
opportunities to target our products to specific consumer needs and
segments.
4
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We are committed to extending our global presence by positioning the SOLA brand
in the minds of consumers worldwide, through both ophthalmic and sunlens
products.
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o Matrix expansion. We will continue to broaden our line of Matrix lenses to
further strengthen our industry-leading flexibility in providing unique,
high-quality products.
o Polycarbonate growth. SOLA has demonstrated its commitment to polycarbonate
with the ViZio, Fisher-Price, and UTMC products. We will build on this
initial success through aggressive marketing programs that clearly position
and communicate the benefits and uniqueness of these lenses.
o AR market penetration. The UTMC brand, available only on SOLA lenses,
provides the broadest line of premium anti-reflective product in the market
today. We will leverage the growing interest in anti-reflective coatings
worldwide with both custom and stock finished lens offerings.
We are confident that the renewed focus on core company strategies will provide
the foundation for improved performance in fiscal 2000. We will continue to
benefit from the actions we have taken to restructure our organization,
reposition our progressives product line, accelerate our new product
introductions and leverage the positive events realized in fiscal 1999.
As we have worked through the issues of this year, I have been constantly
reminded that SOLA's fundamental strength is its people. I continue to be
impressed by their skill and dedication, and I am grateful for their continuing
commitment to our success. I am convinced that our combined efforts will provide
the basis for improved performance in fiscal 2000 and the creation of long-term
shareholder value.
Sincerely,
/s/ John E. Heine
JOHN E. HEINE
President and Chief Executive Officer
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Irving S. Shapiro
Chairman of the Board
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John E. Heine
President and Chief Executive Officer
5
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The quality of our vision impacts the quality of our lives. Many would agree
that better vision means greater freedom and enjoyment of life.
SOLA International helps people across the globe improve the quality of their
vision with lenses that improve the quality of their lives. Today, the
unparalleled breadth of SOLA's product line allows consumers around the world to
find a SOLA lens that meets their exact vision needs, no matter what their age
or lifestyle.
SOLA is working to build on its historic successes in lens and material
technologies through strategic alliances that help the Company extend its
product line. Our direct customers in the ophthalmic industry will be able to
more easily service consumers with a SOLA product, and consumers will enjoy
customized options for meeting all of their vision needs, throughout their
lives.
Children's Polycarbonate Lenses. In March 1999, Fisher-Price, Inc. named SOLA as
its exclusive provider of impact-resistant polycarbonate lenses. Children's
eyeglasses must be tough enough to withstand active play, and SOLA polycarbonate
lenses are virtually unbreakable, exceeding the FDA standards for impact
resistance by 10 times. Fisher-Price lenses by SOLA are the only polycarbonate
lenses with a well-known, trusted consumer name.
Advanced Single Vision Technology. In 1998 SOLA was the first global
manufacturer to introduce an atoric single vision lens with an advanced design
for reducing peripheral blur. Called ViZio, the ultra-thin lens provides
full-field vision clear to the periphery for all single vision prescriptions,
including, for the first time, those with astigmatism. ViZio lenses increase
performance and improve cosmetics for today's active young adults.
Sunlens Partnership with Nike. Nike named the SOLA Sunlens division as the
exclusive provider of sun lenses for the Nike line of sunglass frames in March
1999. Every pair of Nike sunglasses will include "Optics by SOLA" branding. With
this partnership, SOLA gains an important new channel for reaching outdoor- and
sports-oriented adults who want the best in durability and performance. We also
gain exposure of the SOLA product as an important element of the consumer
fashion purchase.
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SOLA makes lenses that fit how people
live--not just how they see.
SOLA is committed to
creating specialized products
that fit into the fabric of
every stage of people's lives.
lenses to live in...lenses to live in...lenses to live in...lenses to live in...
lenses to live in...lenses to live in...lenses to live in...lenses to live in...
lenses to live in...
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6
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SOLA provides Fisher-Price impact-
resistant polycarbonate lenses--perfect
for active children.
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Value added products as
percentage of net sales
'95 53.3%
'96 57.1%
'97 60.7%
'98 65.6%
'99 67.1%
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Customized Progressive Lenses. The Baby Boom generation demands products
customized to their lifestyles--and it's no different with eyewear. SOLA meets
this demand with premium progressive (no-line bifocal) lenses designed for
different needs. Our newest progressive lens, AO Compact, is the first
progressive specifically designed to provide excellent vision in today's smaller
fashion frames. This innovative product has been extremely well received by
consumers, with initial sales exceeding our internal expectations.
SOLA's advanced Percepta progressive lens was the first to provide a fully
customized design for each prescription level. Practitioners have found that
Percepta provides consistently better vision across the full range of
prescriptions, particularly for hyperopes and myopes. Our third premium
progressive, Visuality, utilizes proprietary technology to provide the widest
distance viewing zone possible.
Access(R) Computer Lenses. The extensive use of computers today has led to a
sharp rise in Computer Vision Syndrome in many adults. SOLA's Access computer
lens was the first product designed to address this problem. Access provides
extra-wide, clear vision to easily see the computer monitor, the keyboard and
the surrounding office area. Access lenses are positioned as an ideal second
pair for presbyopes who need vision correction for close-up viewing.
Tapping the AR Market. As consumers are beginning to understand the cosmetic and
performance value of anti-reflection ("AR") coatings, its growth potential in
the U.S. market is significant. Once again, SOLA has taken the lead by
developing a proprietary AR coating, UTMC, which virtually eliminates glare from
the front and back surfaces of the lens. Wearers can see better with UTMC, and
their lenses look practically invisible to viewers. Launched in the U.S. in
1998, UTMC has made significant inroads in the AR market.
New Initiatives in Customization. In 1998, SOLA launched its proprietary lens
delivery system, Matrix, to both wholesale and retail optical outlets. The
Matrix laminating system allows dispensers to provide factory-quality AR-coated
prescription lenses directly at their facility, in less than an hour. Matrix is
the first system that enables immediate dispensing of AR-coated multifocal
lenses, introducing a new level of convenience, quality and customization for
the consumer. As the Matrix system expands its capabilities, it will provide the
ultimate in customization by enabling dispensers to provide lenses on demand
that meet individual lifestyle needs.
lenses to live in...lenses to live in...lenses to live in...lenses to live in...
lenses to live in...lenses to live in...lenses to live in...lenses to live in...
lenses to live in...
7
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R&D Spending
(in millions)
'95 $14.1
'96 $13.3
'97 $17.5
'98 $18.3
'99 $18.7
As we strive to be the
most innovative lens supplier
in the world, we continually
develop new technologies to
meet consumer demand for
better materials, better designs,
and better coatings.
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From the beginning, SOLA has made its mark as an industry leader in lens design
and materials development with a proven record of enhancing existing
technologies and introducing new ones. Today SOLA maintains its leadership
position with constant investments in research and development. SOLA's R&D
facilities, located in California; Massachusetts; and Adelaide, Australia; are
home to more than 180 researchers and scientists including chemists, mechanical
engineers, physicists, mathematicians, computer scientists, psychologists, and
optometrists.
All of these resources are mandatory for the highly complex process of
developing eyeglass lenses, materials and coatings. But product development does
not rest with R&D alone. It relies on the integration of Strategic Marketing,
Manufacturing and R&D, ensuring that SOLA develops products that are viable in
the marketplace and can be made to the highest standards of quality.
SOLA engages in ongoing international market research that monitors consumer
needs, attitudes and behaviors in vision and eyewear. Market research seeks to
identify the critical opportunities for the business, such as a need for lighter
lens materials, better peripheral vision, or a product for an overlooked market
segment such as children. Through market research we understand what consumers
want and need in eyewear.
These identified market opportunities are combined with vision research that
discovers the practical role that vision plays in everyday life. How does the
eye function during specific tasks? Which part
technology and vision...technology and vision...technology and vision...
technology and vision...technology and vision...technology and vision...
technology and vision...
8
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At the SOLA vision research center in
Australia, we study how the eye functions
during specific tasks such as driving.
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SOLA's manufacturing research ensures
that lenses adhere to the highest quality
standards during production.
of a lens does the eye look through during that task? What head movements
follow? At the SOLA vision research center in Australia, this information is
carefully tracked and analyzed for use when designing our products.
Materials and coatings research helps to ensure that our final product is made
of components that enhance optics, cosmetics and performance. SOLA is the only
lens manufacturer that develops many of its own proprietary materials and
coatings, ensuring the highest level of product quality and durability.
Manufacturing research determines whether it's technically feasible to produce
the product, and it ensures that the product adheres to the highest quality
standards through the production process.
Before a new product is commercialized, SOLA sponsors clinical wearer trials in
optical practices and well-known universities to ensure that the wearer's
experience with the lens matches our expectations and identified consumer needs.
This complex and intense process assures that SOLA continues to deliver
ophthalmic products and services that truly meet the demands of both the
marketplace and consumers.
technology and vision...technology and vision...technology and vision...
technology and vision...technology and vision...technology and vision...
technology and vision...
9
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SOLA has accelerated its physical expansion into new markets in the last five
years.
o Existing markets in 1994.
o New markets in the last five years.
o Future markets.
SOLA has globally developed and marketed prescription sunlenses ideal for
today's stylish frames.
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SOLA has developed a strong physical presence worldwide that includes
manufacturing and distribution sites in North America, South America, Europe,
Australia and Asia. Our 7,450 SOLA employees in 30 countries serve customers in
over 50 global markets. Customers throughout these regions are supported by
local SOLA operations that provide manufacturing, sales and technical support.
This local presence has made SOLA the industry expert in understanding the
characteristics and needs of local markets.
Our international presence forms a firm foundation for continuing to grow the
SOLA name into an easily recognizable and memorable brand among eyewear
consumers worldwide. SOLA's global vision involves extending its leadership
position to the consumer market with a brand that stands for quality and
performance, for life and for living. This global branding brings greater value
to our customers--lens distributors and retail outlets--as well as to our
consumers, employees and corporate shareholders.
SOLA is undertaking three key initiatives to support its global vision. We will
strengthen existing customer relationships, further develop and communicate the
meaning of the SOLA brand, and market the SOLA brand to consumers worldwide
through a variety of existing and new channels.
Strengthen existing customer relationships. SOLA has built its success on
strong, mutually beneficial relationships with our many customers. Fortifying
our customer relationships will be critical to the success of new product and
channel initiatives in the future. To that end, our strong relationship
marketing programs in the U.S. and Australia are being extended to other
countries.
In addition, SOLA will use the power of the Internet to provide easier, 24-hour
access to products, technical support and customer service. Relationship
marketing, which allows us to identify and respond personally to our best
customers, will also be used to further enhance customer relationships.
global vision...global vision...global vision...global vision...global vision...
global vision...global vision...global vision...global vision...global vision...
global vision...
10
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Develop and communicate the SOLA brand. The first step in building the SOLA
brand globally is to develop and communicate brand consistency across
international regions, ensuring that the SOLA name stands for the same values in
every market. SOLA will then evolve the brand by continuing to introduce new
products that are market-driven and consistent with the stated values of the
brand. New products will support consumers' varied lifestyle needs, combining
superior performance with excellent cosmetics and unique styling.
Finally, through strategic partnerships and co-branding efforts with
international companies such as Nike and Fisher-Price, Inc., SOLA will continue
to increase credibility and exposure for the brand among both direct customers
and consumers.
Market the SOLA brand. As the SOLA brand becomes established, we will work to
increase awareness and memory of the brand among consumers worldwide using
various traditional marketing methods. A strategic mix of public relations,
event sponsorships, and targeted advertising will strengthen awareness of the
brand and help consumers understand how to select the right SOLA lens for their
needs and lifestyles. Unique point-of-purchase displays will draw the potential
purchaser to the SOLA product by illustrating the specific benefits of our
lenses.
In addition, we will also use less traditional consumer marketing efforts to
give consumers easy access to the variety of SOLA lens products available. In
particular, web marketing, including web advertisements and dedicated product
web sites for consumer-oriented products, will form a cornerstone for educating
consumers on the SOLA brand.
Finally, we will extend SOLA's visibility and reach to new markets through
co-branding and strategic alliances. The Nike and Fisher-Price, Inc.
partnerships make new consumers, such as outdoor enthu siasts and children,
aware of the SOLA brand. SOLA will continue to extend the marketing reach of its
brand by linking its oph thalmic lenses to the fashion sunwear segment through
the SOLA Sunlens division.
[GRAPHIC OMITTED] [PHOTO OMITTED]
- --------------------------------------------------------------------------------
Myopia (near-sighted vision) is very com-
mon in Asia. SOLA's new myopia-control
lens results in less eye strain, which aids
in delaying or preventing myopia.
We want people around the
world to view SOLA as an
innovative company using the
latest lens technology to bring
better vision to people in all
aspects of their lives.
global vision...global vision...global vision...global vision...global vision...
global vision...global vision...global vision...global vision...global vision...
global vision...
- --------------------------------------------------------------------------------
11
<PAGE>
financial table of contents
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
Selected Financial Data 13
Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-21
Consolidated Balance Sheets 22
Consolidated Statements of Income 23
Consolidated Statements of Shareholders' Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 26-39
Report of Ernst & Young LLP, Independent Auditors 40
Quarterly Financial Data 41
Corporate Directory 42
Corporate Information Inside Back Cover
12
<PAGE>
selected financial data
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1999(1) 1998 1997(2) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data
Net sales $ 529,789 $ 547,735 $ 488,689 $ 387,709 $ 345,631
- ----------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item $ 12,521 $ 51,092 $ 30,897 $ 34,588 $ 13,640)(4)
Extraordinary item, net of taxes -- (5,939)(3) -- (912)(3) (3,915)(4)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 12,521 $ 45,153 $ 30,897 $ 33,676 $ 9,725
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Share Data--basic
Income before extraordinary item $ 0.51 $ 2.09 $ 1.31 $ 1.59 $ 0.82
Extraordinary item -- (0.24) -- (0.04) (0.23)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.51 $ 1.85 $ 1.31 $ 1.55 $ 0.59
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 24,794 24,400 23,561 21,785 16,710
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Share Data--diluted
Income before extraordinary item $ 0.49 $ 2.00 $ 1.24 $ 1.51 $ 0.78
Extraordinary item -- (0.23) -- (0.04) (0.22)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.49 $ 1.77 $ 1.24 $ 1.47 $ 0.56
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average common and dilutive
securities outstanding 25,412 25,547 24,859 22,944 17,516
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
As of March 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets $ 699,299 $ 684,058 $ 605,508 $ 416,849 $ 383,457
Long-term debt 208,414 196,386 162,797 97,890 107,407
Total shareholders' equity 332,362 327,022 284,298 192,241 159,443
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In fiscal 1999, primarily during the fourth quarter, the Company recorded
special charges in the amount of $27.3 million, or $20.5 million, $0.81 per
diluted share, after consideration of the associated tax benefit (see Note
10 of Notes to Consolidated Financial Statements).
(2) For fiscal 1997, the Company recorded two non-recurring charges in
connection with the AO Acquisition: (i) a $7.2 million charge for the
amortization associated with an inventory write-up to fair value that was
reflected in cost of sales; and (ii) a $9.5 million charge for the
write-off of in-process research and development that was reflected in
in-process research and development expense.
(3) For fiscal 1998 and fiscal 1996, the extraordinary items comprise losses
due to the repurchases of senior subordinated notes, net of tax.
(4) For fiscal 1995, the Company recorded two non-recurring charges in
connection with the IPO: (i) a $3.0 million charge for the termination of
the AEA Investors Inc. management agreement with the Company that was
reflected in general and administrative expenses; and (ii) a $3.9 million
write-off of debt issuance costs, that was reflected in the historical
financial statements as an extraordinary item.
13
<PAGE>
management's discussion and analysis of
- --------------------------------------------------------------------------------
financial condition and results of operations
SOLA International 1999 Annual Report
Overview
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Company's consolidated
financial statements and notes thereto included elsewhere in this Annual Report.
The financial statements for the year ended March 31, 1997 reflect the
consolidated operations of the Company after accounting for the acquisition ("AO
Acquisition") of substantially all of the worldwide ophthalmic business ("AO")
of American Optical Corporation ("AOC") on June 19, 1996 (see Note 1 of Notes to
Consolidated Financial Statements), using the purchase method of accounting.
Operating results for fiscal 1997 subsequent to the AO Acquisition include
non-recurring, non-cash charges relating to the write-off of in-process research
and development projects ($9.5 million) and amortization associated with an
inventory write-up to fair value ($7.2 million), both of which were recorded in
connection with the AO Acquisition. The years ended March 31, 1999, 1998 and
1997 are referred to herein as fiscal 1999, fiscal 1998 and fiscal 1997,
respectively.
The following table reflects the results of operations for the three fiscal
years 1999, 1998 and 1997. The adjustment column in fiscal 1997 reflects
adjustments to present results of operations on a more comparable basis
adjusting for the non-recurring, non-cash charges, and tax effects thereof in
connection with the AO Acquisition, noted above.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
- -------------------------------------------------------------------------------------------------------------------------------
Adjusted
(in thousands) 1999 1998 1997 Adjustments 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 529,789 $ 547,735 $ 488,689 $ 488,689
Cost of sales 291,389 289,677 264,535 $ (7,216) 257,319
- -------------------------------------------------------------------------------------------------------------------------------
Gross profit 238,400 258,058 224,154 7,216 231,370
- -------------------------------------------------------------------------------------------------------------------------------
Research and development expenses 18,757 18,303 17,539 17,539
Selling and marketing expenses 96,609 93,993 92,387 92,387
General and administrative expenses
(including goodwill amortization) 57,977 53,056 47,381 47,381
Special charges 27,306 -- -- --
In-process research and development expenses -- -- 9,500 (9,500) --
- -------------------------------------------------------------------------------------------------------------------------------
Operating expenses 200,649 165,352 166,807 (9,500) 157,307
- -------------------------------------------------------------------------------------------------------------------------------
Operating income 37,751 92,706 57,347 16,716 74,063
Interest expense, net (17,559) (16,754) (15,961) (15,961)
- -------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes, minority interest
and extraordinary item 20,192 75,952 41,386 16,716 58,102
Provision for income taxes (8,394) (25,369) (10,737) (5,851) (16,588)
Minority interest 723 509 248 248
- -------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 12,521 51,092 30,897 10,865 41,762
Extraordinary item, loss on repurchase of senior
subordinated notes, net of tax -- (5,939) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 12,521 $ 45,153 $ 30,897 $ 10,865 $ 41,762
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
Results of Operations
The following table sets forth, for the fiscal years indicated, the
Company's results of operations as a percentage of net sales.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
- --------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
% % %
Net sales 100.0 100.0 100.0
Cost of sales 55.0 52.9 54.1
- --------------------------------------------------------------------------------------------------------------------
Gross profit 45.0 47.1 45.9
- --------------------------------------------------------------------------------------------------------------------
Research and development expenses 3.5 3.3 3.6
Selling and marketing expenses 18.2 17.2 18.9
General and administrative expenses 10.9 9.7 9.7
Special charges 5.2 -- --
In-process research and development expenses -- -- 1.9
- --------------------------------------------------------------------------------------------------------------------
Operating expenses 37.8 30.2 34.1
- --------------------------------------------------------------------------------------------------------------------
Operating income 7.2 16.9 11.8
Interest expense, net (3.3) (3.1) (3.2)
Income before provision for income taxes, minority interest and extraordinary item 3.9 13.8 8.6
Provision for income taxes (1.6) (4.6) (2.2)
Minority interest 0.1 0.0 0.0
Extraordinary item 0.0 (1.0) 0.0
- --------------------------------------------------------------------------------------------------------------------
Net income 2.4 8.2 6.4
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Fiscal 1999 compared to Fiscal 1998
Net Sales
Net sales were $529.8 million in fiscal 1999 reflecting a decrease of 3.3%
from $547.7 million in fiscal 1998. Using constant exchange rates, the
percentage decrease was 2.3%, and excluding Brazilian frame and equipment
business sales (see below), constant exchange rate net sales would have
decreased by 1.4%. The decline in net sales was primarily attributable to the
North American and Rest of World regions. The sales decline in the North
American region (primarily the United States) resulted from reduced net sales to
laboratory customers that were acquired in fiscal 1998 by Essilor Laboratories
of America, as well as lower sales of Spectralite(R) photochromic products
caused by the release of a new generation Transitions product in CR39 plastic
material. Also contributing to the net sales shortfall was softness of the
Asian, Australian and South American economies, although these regions only
accounted for approximately 18% of net sales. Under performance in the Company's
Australian operations was partially caused by weakness of the Australian dollar
against the U.S. dollar. South American sales declined by approximately 25% in
the fourth quarter compared to the fourth quarter of fiscal 1998. Significantly
contributing to this decline was the devaluation of the Brazilian Real in
January 1999 and the sale of the Company's Brazilian frame and equipment
business during April 1998, which had contributed approximately $5.2 million of
net sales in fiscal 1998.
The foregoing decreases were offset, in part, by growth in CR39
photochromic lens sales, especially due to the new generation Transitions
product in CR39 plastic material, mentioned above, sales of high index lenses
and new progressive lens designs. Higher priced products accounted for
approximately 67% of net lens sales in fiscal 1999 compared to approximately 66%
for fiscal 1998. Progressive lens net sales for fiscal 1999 were down by 1.5%
compared to fiscal 1998, although, in the fourth quarter progressive lens net
sales were 4.3% higher than for the same period in the prior year. Net sales
performances by region were as follows: North America declined by 6.2%, Europe
increased by 6.9% and Rest of World declined by 10.9%. Using constant exchange
rates the regional performances were as follows: North America declined by 6.0%,
Europe increased by 5.7% and Rest of World declined by 5.1%.
Gross Profit and Gross Margin
Gross profit totaled $238.4 million for fiscal 1999 reflecting a decrease
of 7.6% from gross profit of $258.1 million for fiscal 1998. Gross profit as a
percentage of net sales ("gross margin") decreased to 45.0% for fiscal 1999 from
47.1% for fiscal 1998. The gross margin decrease was principally due to lower
progressive lens product sales, product mix changes, and underabsorption of
overhead due to a slowdown in production levels during the second through fourth
quarters to align production with sales demand and expectations. The Company
experiences price competition, which can be severe in certain markets,
particularly for standard products.
15
<PAGE>
management's discussion and analysis of
- --------------------------------------------------------------------------------
financial condition and results of operations (continued)
SOLA International 1999 Annual Report
Operating Expenses
Operating expenses in fiscal 1999 totaled $200.6 million compared to
operating expenses of $165.4 million for fiscal 1998. Included in fiscal 1999
operating expenses is $27.3 million representing special charges incurred
predominantly in the fourth quarter. If these charges were excluded from
operating expenses, operating expenses would have been $173.3 million, an
increase over the prior year of 4.8%. Operating expenses, excluding the special
charges, for fiscal 1999 and 1998 as a percentage of net sales were 32.7% and
30.2%, respectively. Reflecting the reduced net sales in fiscal 1999, overall
operating expenses in fiscal 1999 have remained relatively flat with those of
the prior year. Research and development expenses for fiscal 1999 and 1998
represent 3.5% and 3.3% of net sales, respectively. Selling and marketing
expenses were 18.2% and 17.2%, of net sales in fiscal 1999 and 1998,
respectively. As a percentage of net sales, general and administrative expenses
increased to 10.9% for fiscal 1999 compared to 9.7% for fiscal 1998. The change
in general and administrative expenses relates to increased information
technology related expenses and impact of currency rates offset by lower
expenses for performance based management bonuses and favorable changes in
estimates related to certain reserves and accruals in the first quarter of
fiscal 1999.
Fiscal 1999 operating expenses included $27.3 million of special charges.
Of this $27.3 million charge, $15.2 million related to strategic actions
designed to improve the Company's operating performance. The charges include
costs associated with the consolidation of the Sola and American Optical
manufacturing facilities in Mexico ($8.0 million), other work force reductions
($3.0 million), as well as inventory ($3.1 million) and accounts receivable
($1.1 million) write-downs which resulted from the Asian and Brazilian economic
softness. The Company currently estimates that it is likely to incur an
additional $2 million to $3 million in charges associated with further
reductions in force in the first half of fiscal 2000. Additionally, the dramatic
devaluation of the Brazilian Real in January 1999, and the related impact on
asset realization, including losses related to the Company's inability to
collect the accounts receivable from the original sale of the Brazilian frame
and equipment business (which the Company re-assumed in April 1999) resulted in
pre-tax charges of $12.1 million in the fourth quarter, which comprised the
remainder of the $27.3 million special charge (see Note 10 of Notes to
Consolidated Financial Statements).
Operating Income
Operating income for fiscal 1999 totaled $37.8 million, a decrease of $54.9
million from fiscal 1998 operating income of $92.7 million, or 59.3%. If the
special charges included in operating expenses were excluded from the operating
income, fiscal 1999 operating income would have been $65.1 million, and the
decrease of fiscal 1999 operating income from fiscal 1998 operating income would
have been 29.8%.
Net Interest Expense
Net interest expense totaled $17.6 million for fiscal 1999 compared to
$16.8 million for fiscal 1998, an increase of $0.8 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
period interest rates. This reduction in interest rates and therefore interest
expense has been more than offset by an increase in interest expense due to
increased borrowing levels in the current year.
Provision for Income Taxes
The Company's combined state, federal and foreign tax rate was
approximately 41.6% for fiscal 1999 compared to 33.4% for fiscal 1998. The
primary cause of the increase in the effective income tax rate for fiscal 1999
to 41.6% was the Company booking a valuation allowance, and therefore no tax
benefit, against the loss related to the Company's inability to collect the
accounts receivable from the original sale of the Brazilian frame and equipment
business, which the Company re-assumed in April 1999. If the special charges are
excluded from income before provision for income taxes, and the tax benefit
associated with the special charges are excluded from the provision for income
taxes, the resulting effective combined state, federal and foreign tax rate
would have been 32.0%. The Company has deferred tax assets on its balance sheet
as of March 31, 1999 amounting to approximately $23.8 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 fiscal 1999 totaled $12.5 million compared to $45.2 million
for fiscal 1998. If the extraordinary item was excluded from fiscal 1998 results
and the special charges and associated taxes were excluded from fiscal 1999
results, the decline from fiscal 1998, as adjusted, to fiscal 1999, as adjusted,
would have been $18.1 million, or 35.4%.
Fiscal 1998 compared to Fiscal 1997
Net Sales
Net sales were $547.7 million in fiscal 1998 reflecting an increase of
12.1% from $488.7 million in fiscal 1997. Using constant exchange rates, the
percentage increase from fiscal 1997 to fiscal 1998 was 16.6%. Higher priced
product growth contributed to the Company's net sales growth in fiscal 1998 and
fiscal 1997, led by the growth of Spectralite, plastic photochromic and
polycarbonate products, offset in part by price
16
<PAGE>
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
and volume erosion in net sales of lower priced products. Higher priced products
accounted for approximately 66% of net lens sales in fiscal 1998 compared to 61%
in fiscal 1997. Increased marketing and customer service efforts also
contributed to the growth in other higher priced products. Net sales increases
by region from fiscal 1997 to 1998 were as follows: North America 20.1%, Europe
7.1% and Rest of World 1.3%. At constant exchange rates, net sales increases
from fiscal 1997 to fiscal 1998 were: North America 20.1%, Europe 16.0% and Rest
of World 6.8%.
Gross Profit and Gross Margin
Gross profit totaled $258.1 million in fiscal 1998 reflecting an increase
of 15.1% from fiscal 1997 gross profit of $224.2 million. If the amortization
associated with an inventory write-up to fair value in fiscal 1997, of $7.2
million, is excluded from the fiscal 1997 gross profit, then the percentage
increase from fiscal 1997 to fiscal 1998 is 11.5%. Gross profit as a percentage
of net sales in fiscal 1998, fiscal 1997 and fiscal 1997, as adjusted, were
47.1%, 45.9% and 47.3%, respectively. The Company incurred manufacturing start
up costs in its new finished polycarbonate manufacturing operation acquired when
the Company purchased Neolens, Inc. in July 1996, and ramp up costs associated
with new product offerings, such as Matrix, the Company's anti-reflective
coating delivery system, which resulted in reduced gross margins. Offsetting in
part the aforementioned reductions, has been a shift towards higher value added
products, and benefits from the Company's cost reduction program.
Operating Expenses
Operating expenses totaled $165.4 million in fiscal 1998, a decrease of
$1.4 million from fiscal 1997 operating expenses of $166.8 million. If the
write-off of in-process research and development projects in fiscal 1997 of $9.5
million is excluded from the fiscal 1997 operating expenses, then the fiscal
1998 operating expenses increased 5.1% compared to fiscal 1997, as adjusted.
Research and development expenses for fiscal 1998 and fiscal 1997 represent 3.3%
and 3.6%, respectively, of annual net sales, reflecting the Company's continued
commitment to research and development of new products, materials and processes.
Selling and marketing expenses were 17.2% and 18.9% of net sales in fiscal 1998
and 1997, respectively. During the fourth quarter of fiscal 1997 the Company
introduced a new progressive lens design, Percepta, with a worldwide launch.
Significant marketing expenditures associated with this launch were incurred
primarily in the last two quarters of the 1997 fiscal year resulting in higher
sales and marketing expenses as a percentage of net sales in fiscal 1997.
General and administrative expenses in both fiscal 1998 and fiscal 1997 were
9.7% as a percentage of net sales.
Operating Income
Operating income for fiscal 1998 totaled $92.7 million, an increase of
$35.4 million over fiscal 1997 operating income of $57.3 million, or 61.7%. If
the amortization associated with the inventory write-up to fair value of $7.2
million, and the write-off of in-process research and development projects of
$9.5 million, are excluded from the operating income of fiscal 1997, then fiscal
1997 operating income increases to $74.1 million, and the growth of fiscal 1998
operating income over fiscal 1997 operating income, as adjusted, is 25.2%.
Net Interest Expense
Net interest expense totaled $16.8 million for fiscal 1998 and $15.9
million for fiscal 1997. Interest expense was higher in fiscal 1998 than fiscal
1997, primarily due to a full year of higher indebtedness to fund the
acquisitions of AO and Neolens in June and July of 1996, offset in part by lower
interest rates on the Company's revolving line of credit, and the repurchase of
its 9 5/8% Senior Subordinated Notes in December 1997. Simultaneously with the
AO Acquisition, the Company entered into a new bank credit facility with The
Bank of America National Trust and Savings Association, for itself and as agent
for a syndicate of other financial institutions (see "Liquidity and Capital
Resources"). In July 1996, the Company issued 2.32 million shares of common
stock in a public offering for which it received net proceeds of approximately
$62.8 million.
Provision for Income Taxes
The Company's combined state, federal and foreign tax rate was
approximately 33.4% for fiscal 1998 compared to 25.9% for fiscal 1997. The
utilization of United States valuation allowances, arising in fiscal 1994, were
the primary reasons for the lower income tax rate in fiscal 1997.
Extraordinary Item
During fiscal 1998 the Company repurchased all of its remaining 9 5/8%
Senior Subordinated Notes due 2003. As a result of the repurchase the Company
recorded an extraordinary charge of $5.9 million resulting from the write-off of
unamortized debt issuance costs and premium over accreted value, net of tax.
The repurchase was funded by borrowings under the Company's credit agreement.
Net Income
Net income for fiscal 1998 totaled $45.2 million compared to $30.9 million
for fiscal 1997. If the extraordinary item is excluded in fiscal 1998 and the
one time charges are excluded in fiscal 1997 the growth from fiscal 1997, as
adjusted, to fiscal 1998, as adjusted, would have been 22.3%.
17
<PAGE>
management's discussion and analysis of
- --------------------------------------------------------------------------------
financial condition and results of operations (continued)
SOLA International 1999 Annual Report
Liquidity and Capital Resources
Operating activities generated $3.2 million in cash in fiscal 1999 compared
with $20.9 million in fiscal 1998 and $32.4 million in fiscal 1997. The
reduction in cash flows from operations in fiscal 1999 compared to fiscal 1998
is primarily due to the reduced net income, reduced trade payables and accrued
liabilities, and increased net deferred taxes, offset in part by reduced growth
of accounts receivable and inventories, and increased depreciation and
amortization. The change in cash flows from operations in fiscal 1998 compared
to fiscal 1997 was primarily due to increases in inventories and accounts
receivable, offset by significantly improved net income in fiscal 1998. In
addition, during fiscal 1998 the Company decided to take advantage of prompt pay
discounts offered by suppliers in the United States resulting in accounts
payable not increasing in line with the increases in the business.
During fiscal 1999 inventories as a percentage of net sales grew to 31.8%
from 31.0% in the prior year. The increase in inventories as a percentage of net
sales is primarily a result of reduced net sales. During the first half of
fiscal 1999 inventory levels increased substantially, and management reduced
production levels, primarily in the second half of the year, to combat this
growth, bringing the inventory levels back in line with the beginning of the
year levels. During fiscal 1998 inventories as a percentage of net sales grew to
31.0% from 28.4% in the prior year. The increase in inventories was primarily 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 projected overall increase in the business. Accounts receivable as a
percentage of net sales increased to 22.4% in fiscal 1999 compared to 22.0% a
year ago. The slowdown in world economies, particularly in Asia and South
America have contributed to the increase in accounts receivable as a percentage
of net sales. Accounts receivable as a percentage of net sales increased to
22.0% in fiscal 1998 compared to 21.5% for fiscal 1997.
During fiscal 1999 net cash expended on investing activities amounted to
$38.5 million. Of this amount $30.5 million represented capital expenditures and
$8.6 million represented investment in acquisitions. The most significant
capital expenditures, primarily on additional production capacity and computer
system upgrades, were made in the United States, Mexico, Brazil, Italy and
Australia. The $8.6 million spent on acquisitions represents the acquisition of
the assets of an anti-reflection coating laboratory in Oregon, USA, acquired by
the Company in June 1998. During fiscal 1998 net cash expended on investing
activities amounted to $41.2 million, primarily being capital expenditures. The
most significant capital expenditures, primarily on additional production
capacity, were made in the United States, Mexico, Brazil, China, Venezuela and
Australia. During fiscal 1997 net cash expended on investing activities amounted
to $154.8 million. On June 19, 1996, the Company acquired substantially all of
the worldwide ophthalmic business of AOC for cash consideration of $103.6
million (together with the assumption of certain liabilities). The AO
Acquisition was funded primarily through borrowings under the Company's then
existing credit agreement, which borrowings were subsequently repaid in part
with the proceeds from the equity public offering during July 1996. On July 2,
1996 the Company acquired Neolens, Inc. ("Neolens"), a Florida corporation for
cash consideration of approximately $15.5 million, including the assumption of
Neolens debt ("Neolens Acquisition"). The Neolens Acquisition was funded through
borrowings under the Com pany's then existing credit agreement. During fiscal
1997, the Company spent approximately $30.0 million on capital expenditures,
primarily to add production capacity, in the United States, Mexico, China and
Brazil. Management anticipates capital expenditures of $25 million to $30
million annually over the next several years, of which approximately $5 million
annually is viewed as discretionary.
Financing activities generated $22.5 million in cash in fiscal 1999 and
$32.3 million in fiscal 1998, primarily from additional borrowings under the
Amended Agreement and exercise of stock options by employees. 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. 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, outstanding letters of credit 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
18
<PAGE>
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SOLA International 1999 Annual Report
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.
Financing activities generated $125.3 million in fiscal 1997. During July
1996 the Company sold 2,320,000 additional shares of common stock at $28.625 per
share through a public offering. The net proceeds from this offering were
approximately $62.8 million. The Company used such net proceeds to repay
indebtedness which it incurred under its then existing bank credit agreement.
Simultaneously with the closing of the AO Acquisition, the Company entered into
a bank credit agreement with The Bank of America National Trust and Savings
Association, for itself and as agent for a syndicate of other financial
institutions, covering an aggregate amount of $180 million.
The Company's foreign subsidiaries maintain local credit facilities to
provide credit for overdraft, working capital and some fixed asset investment
purposes. As of March 31, 1999, the Company's total credit available under such
facilities was approximately $44.1 million, of which $16.9 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 foreseeable future. As the Company's debt matures,
the Company may need to refinance such debt. There can be no assurance that such
debt can be refinanced on terms acceptable to the Company.
Currency Exchange Rates
As a result of the Company's worldwide operations, currency exchange rate
fluctuations tend to affect the Company's results of operations and financial
position. The two principal effects of currency exchange rates on the Company's
results of operations and financial position are (i) translation adjustments for
subsidiaries where the local currency is the functional currency and (ii)
translation adjustments for subsidiaries in hyper-inflationary countries.
Translation adjustments for functional local currencies have been made to
shareholders' equity. For the fiscal years ended March 31, 1999, 1998 and 1997
such translation adjustments were approximately $(9.2) million, $(10.0) million,
and $(3.8) million, respectively, primarily as a result of the strength of the
U.S. dollar.
For translation adjustments of the Company's subsidiaries operating in
hyper-inflationary countries, until recently primarily Brazil, the functional
currency is determined to be the U.S. dollar, and therefore all translation
adjustments are reflected in the Company's Statements of Oper ations. During
January 1999 the Brazilian Real devalued against the U.S. dollar. By March 31,
1999 the Real had deteriorated to 1.74 against the U.S. dollar, compared to 1.21
against the U.S. dollar as of December 31, 1998, although it had reached higher
than 2.00 against the U.S. dollar in February. As a result of this devaluation
the Company incurred an exchange loss of approximately $5.9 million in the
fourth quarter of fiscal 1999 (see Note 10 of Notes to Consolidated Financial
Statements). In hyper-inflationary environments, the Company generally protects
margins by methods which include increasing prices monthly at a rate appropriate
to cover anticipated inflation, compounding interest charges on sales invoices
daily and holding cash balances in U.S. dollar denominated accounts where
possible.
Because a majority of the Company's debt is U.S. dollar denominated, the
Company may hedge against certain currency fluctuations by entering into
currency swaps (however certain currencies, such as the Brazilian Real, cannot
be hedged economically), although no such swaps had been entered into as of
March 31, 1999. As of March 31, 1999 certain of the Company's foreign
subsidiaries had entered into forward contracts for intercompany purchase
commitments in amounts other than their home currency. The carrying amount of
the forward contracts approximates fair value, which has been estimated based on
current exchange rates. For further financial data of the Company's performance
by region, see Note 16 of Notes to Consolidated Financial Statements.
Seasonality
The Company's business is somewhat seasonal, with third quarter results
generally weaker than the other three quarters as a result of lower sales during
the holiday season, and fourth quarter results generally the strongest.
Inflation
Inflation continues to affect the cost of the goods and services used by
the Company. The competitive environment in many markets limits the Company's
ability to recover higher costs through increased selling prices, and the
Company is subject to price erosion in many of its standard product 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").
Quantitative and Qualitative Disclosures about Market Risk
Quantitative Disclosures. The Company is exposed to market risks inherent in its
operations, primarily related to interest rate risk and currency risk. These
risks arise from transactions and operations entered into in the normal course
of business.
19
<PAGE>
management's discussion and analysis of
- --------------------------------------------------------------------------------
financial condition and results of operations (continued)
SOLA International 1999 Annual Report
Interest Rate Risk. The Company is subject to interest rate risk on its
existing long-term debt and any future financing requirements. Fixed rate debt
consists primarily of outstanding balances on Senior Notes, and variable rate
debt relates primarily to borrowings under the Company's Bank Credit Agreement.
The following table presents the future principal cash flows and weighted
average interest rates expected on the Company's existing long-term debt
instruments. Fair values have been determined based on quoted market prices as
of March 31, 1999.
Expected Maturity Date (as March 31, 1999)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal
(dollars in thousands) 2000 2001 2002 2003 2004 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed rate debt $4,510 $1,441 $3,292 $264 $174 $100,243 $109,924 $103,274
Weighted average interest rate 6.93% 6.09% 6.35% 4.21% 3.13% 6.85% 6.21%
Long-term debt:
Variable rate debt -- -- $103,000 -- -- -- $103,000 $103,000
Weighted average interest rate -- -- 5.56% -- -- -- 5.56%
</TABLE>
Currency Rate Risk. The Company's subsidiaries primarily operate in foreign
markets, and predominantly have their local currencies as their functional
currencies. These subsidiaries do not have third party borrowings in currencies
other than their local currencies, and therefore there are no appropriate
quantitative disclosures.
Qualitative Disclosures.
Interest Rate Risk. The Company's primary interest rate risk exposures
relate to:
o Interest rate risk on variable long-term borrowings,
o The ability of the Company to pay or refinance long-term borrowings at
maturity at market rates,
o The impact of interest rate movements on the Company's ability to meet
interest expense requirements and financial covenants and
o The impact of interest rate movements on the Company's ability to
obtain adequate financing to fund future operations or business
acquisitions.
The Company manages interest rate risk on its outstanding long-term
borrowings through the use of fixed and variable rate debt. While the Company
cannot predict its ability to refinance existing debt, or the impact interest
rate movements might have on existing debt, management evaluates the Company's
financial position on an ongoing basis.
Currency Rate Risk. The Company's primary currency rate risk exposures
relate to:
o The Company's decentralized operations, whereby approximately 50% of
the Company's revenues are derived from operations outside the United
States, denominated in currencies other than the U.S. dollar,
o The ability of the Company's U.S. operations to satisfy cash flow
requirements of predominantly U.S. dollar denominated long-term debt
without the need to repatriate into the United States foreign earnings
and profits, denominated in currencies other than the U.S. dollar,
o The Company's investments in foreign subsidiaries are primarily
directly from the U.S. parent, resulting in U.S. dollar investments in
foreign currency functional companies and
o The location of the Company's operating subsidiaries in a number of
countries that have seen significant exchange rate changes against the
U.S. dollar, primarily downward in recent years, such as Brazil,
Mexico, China, Venezuela and other Asian countries.
The Company operates on a decentralized regional basis with manufacturing
operations located in most major markets, thus individual markets are not
necessarily impacted by changes in currency exchange rates. In addition, the
Company negotiated as part of its Bank Credit Agreement, a multicurrency
facility so that local borrowings can be made in the currency of the local
entity, whilst still obtaining the benefits of central borrowing capacity. In
addition, in certain limited instances, subsidiaries, under authority of head
office, will enter into forward exchange contracts for inter-company supply of
products. These contracts do not extend longer than one year, and are immaterial
to the overall operations of the group. Subsidiaries operating in high or
hyper-inflationary environments protect margins by methods which include
increasing prices monthly at a rate appropriate to cover anticipated inflation,
compounding interest charges on sales invoices daily and holding cash balances
in U.S. dollar denominated accounts where possible. The Company discloses
constant exchange rate net sales performances in the aggregate, as well as by
region, in the management's discussion and analysis of financial condition and
results of operations (see "Currency Exchange Rates").
Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Com puter programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
20
<PAGE>
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
The Company has completed its Year 2000 assessment of critical business
systems. Based on these assessments, the Company determined that it will be
required to modify or replace certain portions of its software so that those
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications or replacements of existing software,
the Year 2000 issue can be mitigated. Year 2000 expenditures to-date have not
been material, and the overall cost to the Company of making its Information
Technology ("IT") systems Year 2000 compliant is also estimated to not be
material to the Company's results of operations (less than $2 million over a
three fiscal year period).
The Company has also performed extensive testing of operating equipment
("embedded chips") to ensure that they are Year 2000 compliant. To date no
material exposures have been detected.
For those IT systems that require upgrades to make them Year 2000
compliant, the Company believes it has commenced upgrade programs in a timely
manner so that the systems will be available for extensive testing prior to
implementation. The majority of remediation work has been completed. However, in
certain instances, the Company will not meet the timetable for implementation of
its main Year 2000 strategy, primarily in Australia and France. In both
instances contingency plans have been developed and implemented which should
deliver adequate computer functionality until the main strategy can be
completed.
The cost of the Company's Year 2000 program and its beliefs regarding its
compliance program are based on the Company's best estimates, which were derived
utilizing a number of assumptions about future events, such as the availability
and cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, the performance of key software and hardware
vendors and other similar uncertainties. However, the Company is not sure that
its estimates will be achieved and actual results could differ materially from
those anticipated.
As part of its overall assessment package, the Company is also in the
process of assessing the possible effects on the Company's operations of the
Year 2000 readiness of key suppliers and customers. The Company has developed a
worksheet for all sites to utilize as an aid in collecting information about
Year 2000 compliance including that of business partners. Initial emphasis has
been on partners with Electronic Data Interfaces ("EDI"), with the second stage
being communication with key suppliers and customers on their readiness. The
Company's largest customer accounts for less than 5% of net sales and the ten
largest customers account for approximately 23% of net sales.
Due to the Company's decentralized operations, and lack of reliance on one
Companywide IT system, the Company believes that the risk of isolated Year 2000
failures should not be material to the Company's consolidated operations.
However, difficulties in making the Company's IT systems Year 2000 compliant in
a number of its significant geographic regions or the failure of a number of the
Company's major vendors, customers or other material service providers to
adequately address their Year 2000 issues would have a material adverse effect
on the Company.
Certain of the Company's North American operations implemented a
significant upgrade of their computer operating systems (unrelated to the Year
2000 issue), which entailed the installation of certain modules of an enterprise
wide IT system. This system underwent extensive testing in the month of November
1998, and since December 1998 the system has been fully operational.
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 Euro conversion team has primarily addressed the accounting
and information systems changes that are necessary to facilitate trading in the
Euro, the possible marketplace 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 marketplace 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 Annual Report of the Company includes forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934,
including statements regarding, among other items, (i) the Company's development
of new products, including, among others, Percepta, AO Compact, Visuality,
Spectralite, ViZio, Access and Matrix, (ii) the availability of raw materials
for the Company's products, the costs of product introductions, and trends in
sales growth (including growth related to new products), (iii) anticipated
trends in the Company's business environment, including competitive and pricing
pressures, (iv) the Company's ability to continue to control costs and maintain
adequate standards of customer service and product quality, (v) future income
tax rates and capital expenditures and working capital requirements and (vi)
statements regarding the adequacy of the Com pany's planning for the Year 2000
and Euro issues. 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 Com
pany undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Actual results could differ materially from the forward-looking statements as a
result of various factors including those described in "Business--Environmental
Matters" and "Factors Affecting Future Operating Results," included in Exhibit
99.1, of the Company's Form 10-K for the fiscal year ended March 31, 1999.
21
<PAGE>
consolidated balance sheets
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
<TABLE>
<CAPTION>
March 31,
- ----------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,578 $ 34,444
Trade accounts receivable, less allowance for doubtful accounts of $7,003 and
$4,956 at March 31, 1999 and 1998, respectively 118,648 120,590
Inventories 168,755 169,756
Other current assets 20,486 16,798
- ----------------------------------------------------------------------------------------------------------------
Total current assets 329,467 341,588
Property, plant and equipment, at cost, less accumulated depreciation and amortization 153,000 132,778
Goodwill and other intangibles, net 195,345 198,341
Other long-term assets 21,487 11,351
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 699,299 $ 684,058
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Current liabilities:
Notes payable to banks $ 17,490 $ 10,095
Current portion of long-term debt 4,510 2,505
Accounts payable 50,854 60,254
Accrued liabilities 31,313 35,462
Accrued payroll and related compensation 26,468 30,758
Other current liabilities 2,709 2,536
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 133,344 141,610
Long-term debt, less current portion 5,782 1,790
Bank debt, less current portion 103,000 95,000
Senior notes 99,632 99,596
Other long-term liabilities 25,179 19,040
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 366,937 357,036
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; 24,867 shares
(24,723 shares as of March 31, 1998) issued and outstanding 249 247
Additional paid-in capital 280,525 278,688
Equity participation loans (50) (230)
Retained earnings 70,578 58,057
Cumulative other comprehensive income (loss) (18,940) (9,740)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 332,362 327,022
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 699,299 $ 684,058
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
22
<PAGE>
consolidated statements of income
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
<TABLE>
<CAPTION>
Year Ended March 31,
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 529,789 $ 547,735 $ 488,689
Cost of sales 291,389 289,677 264,535
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 238,400 258,058 224,154
- ----------------------------------------------------------------------------------------------------------------------
Research and development expenses 18,757 18,303 17,539
Selling and marketing expenses 96,609 93,993 92,387
General and administrative expenses 57,977 53,056 47,381
Special charges 27,306 -- --
In-process research and development expense -- -- 9,500
- ----------------------------------------------------------------------------------------------------------------------
Operating expenses 200,649 165,352 166,807
- ----------------------------------------------------------------------------------------------------------------------
Operating income 37,751 92,706 57,347
Interest income 913 664 640
Interest expense (18,472) (17,418) (16,601)
- ----------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes, minority interest and
extraordinary item 20,192 75,952 41,386
Provision for income taxes (8,394) (25,369) (10,737)
Minority interest 723 509 248
- ----------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 12,521 51,092 30,897
Extraordinary item, loss on repurchase of senior subordinated notes, net of tax -- (5,939) --
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 12,521 $ 45,153 $ 30,897
- ----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share--basic:
Income before extraordinary item $ 0.51 $ 2.09 $ 1.31
Extraordinary item -- (0.24) --
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 0.51 $ 1.85 $ 1.31
- ----------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 24,794 24,400 23,561
- ----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share--diluted:
Income before extraordinary item $ 0.49 $ 2.00 $ 1.24
Extraordinary item -- (0.23) --
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 0.49 $ 1.77 $ 1.24
- ----------------------------------------------------------------------------------------------------------------------
Weighted average common and dilutive securities outstanding 25,412 25,547 24,859
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
23
<PAGE>
consolidated statements of shareholders' equity
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
<TABLE>
<CAPTION>
Cumulative
Retained Other
Additional Equity Earnings/ Compre- Total
Common Stock Paid-in Participation (Accumulated hensive Shareholders'
(in thousands, except per share data) Shares Value Capital Loans Deficit) Income (Loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1996 21,797 $218 $206,412 $(421) $(17,993) $ 4,025 $192,241
Net income 30,897 30,897
Foreign currency translation adjustments (3,771) (3,771)
Total comprehensive income 27,126
Public Offering of 2,320 shares of $0.01
par value common stock, net of
offering expenses 2,320 23 62,742 62,765
146 shares of $0.01 par value common
stock issued under stock option plans 146 2 1,747 1,749
Tax benefit from exercise of stock options 266 266
Repayment of equity participation loans 151 151
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1997 24,263 243 271,167 (270) 12,904 254 284,298
Net income 45,153 45,153
Foreign currency translation adjustments (9,994) (9,994)
Total comprehensive income 35,159
460 shares of $0.01 par value common
stock issued under stock option plans 460 4 5,330 5,334
Tax benefit from exercise of stock options 2,191 2,191
Repayment of equity participation loans 40 40
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1998 24,723 247 278,688 (230) 58,057 (9,740) 327,022
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 12,521 12,521
Foreign currency translation adjustments (9,200) (9,200)
Total comprehensive income 3,321
144 shares of $0.01 par value common
stock issued under stock option plans 144 2 1,534 1,536
Tax benefit from exercise of stock options 303 303
Repayment of equity participation loans 180 180
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1999 24,867 $249 $280,525 $ (50) $ 70,578 $(18,940) $332,362
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
consolidated statements of cash flows
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
<TABLE>
<CAPTION>
Year Ended March 31,
- ------------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 12,521 $ 45,153 $ 30,897
Adjustments to reconcile net income to net cash provided by operating
activities:
Minority interest in earnings (723) (509) (248)
Depreciation and amortization 25,041 22,140 21,595
Inventory write-up -- -- 7,216
In-process research and development -- -- 9,500
Provision for excess and obsolete inventory 5,620 1,833 1,593
Provision for doubtful accounts 2,716 1,337 1,258
Increase (decrease) in net deferred taxes (7,855) 7,750 (3,644)
Gain on disposal/sale of property, plant and equipment (65) (82) (272)
Changes in assets and liabilities:
Trade accounts receivable (1,313) (21,242) (19,513)
Inventories (5,358) (38,231) (24,464)
Prepaids and other assets (3,847) (6,022) (725)
Accounts payable--trade (16,891) 2,710 6,258
Accrued and other current liabilities (8,362) 3,652 1,803
Tax benefit from exercise of stock options 303 2,191 266
Other long-term liabilities 1,460 174 898
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,247 20,854 32,418
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of American Optical, less cash and cash equivalents of $3,365 -- -- (108,594)
Purchases of businesses (8,601) -- (16,848)
Capital expenditures (30,458) (39,497) (29,951)
Other investing activities 546 (1,730) 636
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (38,513) (41,227) (154,757)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Sale of common stock -- -- 62,765
Payments on equity participation loans/exercise of stock options 1,716 5,374 1,900
Net receipts (payments) under notes payable to banks 15,611 2,731 (4,789)
Borrowings on long-term debt 5,031 -- 4,081
Payments on long-term debt (4,255) (4,628) (5,278)
Net receipts under bank debt 4,427 22,374 66,626
Issuance of senior notes -- 99,596 --
Repurchase of senior subordinated notes -- (93,152) --
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 22,530 32,295 125,305
- ------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (130) (1,879) (959)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (12,866) 10,043 2,007
Cash and cash equivalents at beginning of period 34,444 24,401 22,394
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 21,578 $ 34,444 $ 24,401
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
25
<PAGE>
notes to consolidated financial statements
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
1. Business and Basis of Presentation
Sola International Inc. ("Company") designs, manufactures and distributes a
broad range of eyeglass lenses, primarily focusing on the fast growing plastic
lens segment of the global market. The Company operates in one business segment.
In June 1996, the Company acquired substantially all of the worldwide
ophthalmic business ("AO") of American Optical Corporation for cash
consideration of $103.6 million (together with the assumption of certain
liabilities) (the "AO Acquisition"). The AO Acquisition was accounted for under
the purchase method of accounting as of the closing date. The total purchase
price of $110.2 million (including acquisition costs of $6.5 million) exceeded
the historical book value of the net assets acquired and such excess was
allocated to the assets and liabilities based on their estimated fair values as
of the AO Acquisition date, including in-process research and development ($9.5
million) with no alternative future use. Independent appraisals were utilized
for determining the amounts assigned to certain purchased assets including
property, plant and equipment and in-process research and development.
In July 1996 the Company acquired control of Neolens, Inc. ("Neolens"), a
Florida corporation that manufactured polycarbonate eyeglass lenses and was a
supplier to the Company. The Company acquired Neolens for cash consideration of
approximately $15.5 million, including the assumption of Neolens debt (the
"Neolens Acquisition") and was accounted for under the purchase method of
accounting as of the closing date. The total purchase price of $16.8 million
(including acquisition costs of $1.3 million) included $17.6 million allocated
to goodwill and other intangible assets. Results of Neolens prior to acquisition
were not material to the Company's consolidated results of operations.
The accompanying consolidated financial statements of the Company have been
prepared in accordance with U.S. generally accepted accounting principles. The
Company's fiscal 1997 financial statements presented herein include the results
of operations and cash flows of the AO business for the nine months and ten days
ended March 31, 1997 and the results of operations and cash flows of the Neolens
business for the nine months ended March 31, 1997 subsequent to their respective
acquisitions.
2. Summary of Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned and controlled foreign subsidiaries. All significant
transactions between the entities have been eliminated.
Cash and Cash Equivalents:
Cash equivalents consist primarily of short-term investments with an
original maturity of three months or less, carried at cost which approximates
market value.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost and are depreciated on a
straight-line basis over the estimated useful lives of the related assets
(buildings--10 to 50 years; plant and office equipment--2 to 20 years).
Leasehold improvements and leased equipment are amortized over the lesser of
their useful lives or the remaining term of the related leases.
Impact of Recently Issued Accounting Standards:
In June 1998, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which is required to be adopted in years beginning after June 15,
1999. The Company is currently evaluating the impact of the application of the
new rules on the Company's consolidated financial statements.
Intangible Assets:
Intangible assets, including trademarks, patents and licenses, are stated
at cost and amortized on a straight-line basis over their estimated useful lives
of 3 to 15 years. Legal costs incurred by the Company in successfully defending
its patents are capitalized to patent costs and amortized over the remaining
life of the patent. Goodwill, which represents the excess of acquisition cost
over the net assets acquired in business combinations amounting to $217.6
million and $214.4 million as of March 31, 1999 and 1998, respectively, is being
amortized on a straight-line basis over periods ranging from 10 to 40 years
(primarily 40 years). As of March 31, 1999 and 1998 accumulated amortization was
$23.7 million and $17.9 million, respectively.
Debt issuance costs are being amortized to interest expense over the
respective lives of the debt instruments which range from 5 to 10 years. As of
March 31, 1999 and 1998, accumulated amortization was $0.9 million and $0.4
million, respectively. As a result of repurchasing the Company's 9 5/8% Senior
Subordinated Notes in fiscal 1998, the Company wrote off $1.5 million of debt
issuance costs reflected on the statement of income, together with the premium
over accreted value, as an extraordinary item, net of tax.
26
<PAGE>
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
Long-Lived Assets:
In fiscal year 1997, the Company adopted FASB Statement No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" ("SFAS 121"). The adoption of SFAS 121 had no impact on the Company's
financial position or on its results of operations.
In accordance with SFAS 121 long-lived assets held and used by the Company
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows for long-lived assets, primarily
goodwill and property, plant and equipment.
Foreign Currency Translation:
The assets and liabilities and revenue and expense accounts of the
Company's foreign subsidiaries operating in non-highly inflationary economies
have been translated using the exchange rate at the balance sheet date and the
weighted average exchange rate for the period, respectively.
The net effect of the translation of the accounts of the Company's
subsidiaries has been included in equity as cumulative other comprehensive
income (loss). Adjustments that arise from exchange rate changes on transactions
denominated in a currency other than the local currency are included in income
as incurred.
The Company has operations in Brazil, a hyper-inflationary country until
recently, for which the functional currency is the U.S. dollar. All translation
and transaction adjustments are included in determining net income. In January
1999 the Brazilian Real was devalued resulting in pretax charges of $5.9 million
in the fourth quarter, included in special charges (See Note 10).
Revenue Recognition:
Sales and related cost of sales are recognized upon shipment of product.
The Company's principal customers are wholesale distributors and processing
laboratories, retail chains, superoptical retail stores, independent eyecare
practitioners and sunglass manufacturers. No individual customer accounts for
more than 10% of net sales. The Company generally does not require collateral
from its customers, but performs ongoing credit evaluations of its customers.
Advertising and Promotion Costs:
The Company's policy is to expense advertising and promotion costs as they
are incurred. The Company's advertising and promotion expenses were
approximately $9.3 million, $12.3 million, and $12.5 million for fiscal 1999,
1998 and 1997, respectively.
Income Taxes:
The Company accounts for income taxes under the provisions of FASB
Statement No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
Comprehensive Income:
As of April 1, 1998, the Company adopted FASB Statement No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 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. SFAS 130 requires the foreign currency translation
adjustments, which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. The currency translation
adjustments are not adjusted for income taxes as they relate to indefinite
investments in non-U.S. subsidiaries. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
Reclassifications:
Certain prior year items have been reclassified to conform with the current
year's presentation. These reclassifications had no impact on total assets or
net income.
Use of Estimates:
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentration of Credit Risks:
Cash and cash equivalents are invested in deposits with major banks in the
United States and in countries where subsidiaries operate. Deposits in these
banks may exceed the amount of insurance provided on such deposits. The Company
has not experienced any losses on its deposits of cash and cash equivalents.
27
<PAGE>
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
Financial Instruments with Off-Balance-Sheet Risk:
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to reduce its exposure to currency and interest
rate risk. Gains and losses due to rate fluctuations on such transactions are
recognized in the same period as the items being hedged. Cash flows related to
these gains and losses are reported as operating or financing activities in the
accompanying consolidated statements of cash flows. As of March 31, 1999,
certain of the Company's foreign subsidiaries had entered into forward contracts
for intercompany purchase commitments, which are not significant, in amounts
other than their home currency. The carrying amount of the foreign exchange
contracts approximates fair value, which has been estimated based on current
exchange rates. The forward exchange contracts generally have varying maturities
up to 9 months. Unless noted otherwise, the Company does not require collateral
or other security to support financial instruments with credit risk.
Earnings (Loss) Per Share:
In 1997, FASB issued FASB Statement No. 128, "Earnings per Share" ("SFAS
128"). SFAS 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 included periods have been presented, and
where necessary, restated to conform to the SFAS 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share for the fiscal years ended March 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Year Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Income before extraordinary item $12,521 $ 51,092 $30,897
Extraordinary item, loss on repurchase of senior subordinated notes, net of tax -- (5,939) --
- ---------------------------------------------------------------------------------------------------------------------
Net income $12,521 $ 45,153 $30,897
- ---------------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share--
Weighted average common shares outstanding 24,794 24,400 23,561
Effect of dilutive securities:
Employee stock options 618 1,147 1,298
Denominator for diluted earnings per share--
- ---------------------------------------------------------------------------------------------------------------------
Weighted average common shares and dilutive securities outstanding 25,412 25,547 24,859
- ---------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Income before extraordinary item $ 0.51 $ 2.09 $ 1.31
Extraordinary item -- (0.24) --
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 0.51 $ 1.85 $ 1.31
- ---------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Income before extraordinary item $ 0.49 $ 2.00 $ 1.24
Extraordinary item -- (0.23) --
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 0.49 $ 1.77 $ 1.24
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Options to purchase 1.7 million shares of common stock at a range of $16.50
to $41.44 were outstanding as of March 31, 1999 but were not included in the
computation of the diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares.
28
<PAGE>
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
3. Inventories
March 31,
- --------------------------------------------------------------------------------
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Raw materials $ 15,714 $ 16,714
Work in progress 6,551 6,872
Finished goods 102,862 104,966
Molds 43,628 41,204
- --------------------------------------------------------------------------------
$168,755 $169,756
- --------------------------------------------------------------------------------
Molds comprise mainly finished goods for use by manufacturing affiliates in
the manufacture of spectacle lenses.
4. Property, Plant and Equipment
March 31,
- --------------------------------------------------------------------------------
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Land, buildings and leasehold improvements $ 47,465 $ 40,467
Machinery and office equipment 163,864 136,218
Equipment under capital leases 463 593
- --------------------------------------------------------------------------------
211,792 177,278
Less accumulated depreciation and amortization 58,792 44,500
- --------------------------------------------------------------------------------
$153,000 $132,778
- --------------------------------------------------------------------------------
Depreciation expense for fiscal 1999, 1998 and 1997 was $18.6 million,
$14.3 million and $13.3 million, respectively.
5. Notes Payable to Banks
Notes payable to banks at March 31, 1999 represent borrowings generally
denominated in foreign currencies under several foreign credit agreements with
lenders at interest rates ranging from 1.63% to 15.00%. The weighted average
interest rates as of March 31, 1999 and 1998 were 7.87% and 8.06%, respectively.
As of March 31, 1999, the Company had total unused lines of credit amounting to
$27.2 million and was in compliance with minimum net worth requirements of
agreements with certain foreign banks.
6. Long-Term Debt
<TABLE>
<CAPTION>
March 31,
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands) 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Uncollateralized promissory note, interest 6.5% at March 31, 1999, principal and interest payable through June 2001 $ 5,000
Uncollateralized term loans, interest rates varying from 4.00% to 17.2% at March 31, 1999, principal and interest
payable through December 2008 4,087
Uncollateralized term loan, interest 1.85% at March 31, 1999, principal and interest payable through June 2008 916
Loans collateralized by equipment and other assets, interest rates varying from 4.78% to 10.00% at March 31, 1999,
principal and interest payable through March 2001 173
Other 116
- --------------------------------------------------------------------------------------------------------------------------------
10,292
Less current portion 4,510
- --------------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current portion $ 5,782
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
Aggregate annual maturities of long-term debt over the next five years and
thereafter are as follows:
Period Ending March 31, (in thousands)
- -----------------------------------------------------------------------
2000 $ 4,510
2001 1,441
2002 3,292
2003 264
2004 174
Thereafter 611
The Company believes that as of March 31, 1999, the fair value of its
long-term debt approximates the carrying value of those obligations. The fair
value of the Company's long-term debt is estimated based on quoted market prices
for similar issues with the same interest rates that would be available to the
Company for similar debt obligations.
7. Bank Credit Agreement
During fiscal 1998 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 to
$300 million. Borrowings, amounting to $103,000 and $95,000 as of March 31, 1999
and 1998, respectively, 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, outstanding letters of credit ($2.4 million as of March 31,
1999) and consummating certain permitted acquisitions. The Tranche A Facility
matures on October 31, 2000 and the Tranche B Facility matures on May 31, 2001.
In addition, the Amended Agree ment 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. As of March 31, 1999 unused borrowings
under the facility amount to $194.6 million.
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 (there were no base rate loans as of March 31,
1999 or 1998). 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 (5.56% as of March 31, 1999 and 6.19% as of March 31,
1998). 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 Amended Agreement contains a number of covenants, including, among
others, covenants restricting the Company and its subsidiaries with respect to
the incurrence of indebtedness (including contingent obligations), the creation
of liens, the making of certain investments and loans, engaging in unrelated
businesses, transactions with affiliates, the consummation of certain
transactions such as sales of substantial assets, mergers or consolidations,
margin stock purchases and other transactions. The Amended Agreement also
restricts the ability of the Company and its subsidiaries to make restricted
payments in the nature of, among other things, (i) declaring, making or paying
dividends or other distributions in excess of prescribed levels and (ii)
purchasing, redeeming or retiring shares of the Company's capital stock in
excess of prescribed levels. The Company and its subsidiaries are also required
to comply with certain financial tests and maintain certain financial ratios.
8. Senior Notes
The Company's 6 7/8% Senior Notes ("Notes") were issued under an indenture
dated March 19, 1998, among the Company and State Street Bank and Trust Company
of California, N.A., as Trustee (the "Indenture"). 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. Interest on the notes is
payable semiannually on March 15 and September 15 of each year.
The Notes will be 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 or (ii) the sum of the present values of the Remaining Scheduled
Payments (as defined) thereon discounted to such Redemption Date on a semiannual
basis at the Treasury Rate (as defined) plus 20 basis points, plus in either
case accrued interest (as defined).
The Notes rank pari passu to all other Senior Indebtedness, as defined in
the Indenture, of the Company. The Company believes the fair value of its Senior
Notes approximates the carrying value of those obligations, and as of March 31,
1999 the Senior Notes were trading at a price of 92.982%.
30
<PAGE>
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
During fiscal 1998 the Company repurchased all of its 9 5/8% Senior
Subordinated Notes due 2003. As a result of the purchase the Company recorded an
extraordinary charge of $5.9 million for fiscal 1998 resulting from the
write-off of unamortized debt issuance costs and premium over accreted value,
net of tax of $3.8 million. The repurchase was funded by borrowings under the
Amended Agreement.
9. Common Stock
Common Stock
The Company entered into loan agreements with certain members of the
Company's management to enable them to invest in the Company's common stock. As
of March 31, 1999 and 1998, loans amounting to approximately $0.1 million and
$0.2 million, respectively, bearing interest at 7.5% per annum, payable
quarterly, were outstanding under this plan. Certain employees were granted an
extension on repaying their notes, which were due for repayment by December 1,
1998. These loans are secured by the common stock and have been reflected as a
reduction in shareholders' equity on the consolidated balance sheets.
Shareholder Rights Plan
On August 26, 1998 the Company's Board of Directors adopted a Shareholder
Rights Plan and declared a dividend distribution to be made to shareholders of
record on September 9, 1998 of one Right for each share of the Company's
outstanding common stock. The rights contain provisions which are intended to
protect the Company's shareholders in the event of an unsolicited and unfair
attempt to acquire the Company. The Company is entitled to redeem the Rights at
$.01 per Right at any time before a buyer acquires a 15 percent position in the
Company. The Rights will expire on August 27, 2008, unless redeemed or
exercised.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
On February 23, 1995 all outstanding stock options under the previous
corporate structure were assumed by the Company and converted into options to
acquire shares of the Company's Common Stock, with the number of shares subject
to such option and exercise price thereof adjusted appropriately (the "Existing
Option Plan"). The Existing Option Plan has been amended to provide that no new
options will be granted thereunder.
The Company adopted the Sola International Inc. Stock Option Plan (the
"International Plan"), effective February 15, 1995. On August 14, 1998 and
August 16, 1996 the shareholders of the Company ratified increases of 1,690,000
and 500,000, respectively, to the number of options available for issuance under
the International Plan. The maximum number of shares of Common Stock with
respect to which options may be granted under the International Plan is
3,045,868 shares plus, subject to the requirements of Rule 16b-3 of the
Securities Exchange Act of 1934, if applicable, the number of shares of Common
Stock subject to existing options under the Existing Option Plan, which expire
or terminate without exercise for any reason, which number of shares underlying
Existing Options shall not exceed 1,645,219. Under the International Plan
certain key employees, and non-employee directors and/or creditors of the
Company and its subsidiaries and affiliates (each an "Optionee") are eligible to
receive non-qualified stock options (the "International Options") to acquire
shares of common stock of the Company. International Options granted to an
Optionee are evidenced by an agreement between the Optionee and the Company
which contains terms not inconsistent with the International Plan, which the
committee appointed to administer the International Plan deemed necessary or
desirable (the "International Option Agreement").
Pursuant to the Existing Option Plan and the International Plan ("Plans"),
unless otherwise set forth in an Existing Option Agreement or an International
Option Agreement, 20% of the Options granted to an Optionee vest on the date of
grant, with an additional 20% vesting on each successive one-year anniversary of
the date of grant. Options not previously vested become fully vested in the
event of a sale or other disposition of 80% or more of the outstanding capital
stock or substantially all of the assets of the Company, or upon a Merger or
consolidation of the Company and its subsidiaries and affiliates unless the
merger or consolidation is one in which the Company is the surviving corporation
or one in which control of the Company and its subsidiaries and affiliates does
not change (a "Termination Event").
However, Existing Options which are not exercised on or prior to a
Termination Event lapse upon the closing of a Termination Event. All non-vested
Options of an Optionee lapse upon such Optionee's termination of employment for
any reason. An Optionee's vested Options lapse 45 days after termination of such
Optionee's employment with the Company and its subsidiaries and affiliates for
any reason other than death or disability, in which case such options terminate
180 days after such termination; provided, however, that such options lapse
immediately in the event an Optionee's employment with the Company and its
subsidiaries and affiliates is terminated for cause.
31
<PAGE>
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
Pro Forma Disclosures
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions: risk-free
interest rates of 5.67%, 5.67% and 6.67%, no dividend yield, volatility factors
of the expected market price of the Company's common stock of .481, .373 and
.389, and a weighted average expected life of the option of 4 years, for fiscal
1999, 1998 and 1997, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
Year Ended March 31,
- --------------------------------------------------------------------------------
(in thousands, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------
Pro forma net income $10,606 $44,157 $30,312
Pro forma earnings per share:
Basic $ 0.43 $ 1.81 $ 1.29
Diluted $ 0.42 $ 1.73 $ 1.22
The pro forma effect on net income during the phase-in period of SFAS 123
may not be representative of the effects on pro forma net income in future
periods.
Option Activity
A summary of the Company's stock option activity, and related information
for fiscal 1997, 1998 and 1999 follows:
<TABLE>
<CAPTION>
Number of Weighted
Securities Average
Underlying Exercise
(in thousands, except per share data) Options Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding as of March 31, 1996 2,227 $11.96
Options granted during fiscal 1997 394 34.01
Options exercised in fiscal 1997 (145) 12.02
Options cancelled in fiscal 1997 (47) 17.98
Options outstanding as of March 31, 1997 2,429 15.43
Options granted during fiscal 1998 413 33.08
Options exercised in fiscal 1998 (460) 11.53
Options cancelled in fiscal 1998 (153) 34.44
-------------------------
Options outstanding as of March 31, 1998 2,229 18.20
Options granted during fiscal 1999 whose market price equals the grant price on date of grant 191 32.25
Options granted during fiscal 1999 whose market price is less than the grant price on date of grant 424 27.13
Options exercised in fiscal 1999 (144) 10.89
Options cancelled in fiscal 1999 (57) 30.18
Options outstanding as of March 31, 1999 2,643 $20.79
-------------------------
Options exercisable at:
-------------------------
March 31, 1999 1,824 $16.51
-------------------------
March 31, 1998 1,568 $14.14
March 31, 1997 1,486 $12.47
<CAPTION>
Weighted average fair value of options granted during fiscal year:
<S> <C>
-------
1999 $ 7.83
-------
1998 $12.46
1997 $13.65
</TABLE>
32
<PAGE>
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
The following table summarizes stock options outstanding at March 31, 1999:
<TABLE>
<CAPTION>
Weighted Average
Outstanding at Remaining Weighted Exercisable at Weighted
Range of March 31, 1999 Contractual Average March 31, 1999 Average
Exercise Price (in thousands) Life Exercise Price (in thousands) Exercise Price
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 9.71-$ 9.71 988 4.82 $ 9.71 988 $ 9.71
$16.50-$25.25 451 5.99 17.49 421 17.19
$27.13-$36.44 1,107 8.57 30.35 385 31.32
$37.25-$41.44 97 9.11 39.87 30 40.27
- --------------------------------------------------------------------------------------------------------------------------------
$ 9.71-$41.44 2,643 6.75 $20.79 1,824 $16.51
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10. Special Charges
In fiscal 1999, primarily during the fourth quarter, the Company recorded
special charges in the amount of $27.3 million, or $20.5 million, $0.81 per
diluted share, after consideration of the associated tax benefit. The pre-tax
special charges are comprised of the following:
<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Charges associated with the consolidation of manufacturing facilities in Mexico, including asset write-downs
and work force reductions $ 7,994
Charges associated with work force reductions designed to improve the Company's operating performance 2,957
Accounts receivable and inventory write-downs associated with economic slowdowns
in Asia and South America, primarily Brazil 4,301
Charges associated with the devaluation of the Brazilian Real in January 1999 5,880
Net asset write-down from reassuming ownership of the Brazilian frame and equipment business 6,174
- --------------------------------------------------------------------------------------------------------------------------------
Total $27,306
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in the Mexican manufacturing facilities consolidation total of
$8.0 million, are write-downs of redundant equipment ($0.7 million), write-downs
of molds ($2.3 million), employee termination costs ($0.7 million)
(approximately 330 manufacturing employees) and costs associated with combining
the two manufacturing operations, including production cost inefficiencies ($4.3
million). Approximately $0.1 million of the employee termination costs had been
paid by March 31, 1999 with approximately $0.6 million estimated to be paid by
September 1999.
The special charge amount includes $3.0 million relating to work force
reductions in North America, Europe and Australia (approximately 102 employees
from manufacturing, procurement, marketing and administration), including the
closure of the European regional office in Farnham, UK. The Company anticipates
an additional $2 million to $3 million in charges associated with further
reductions in force in the first half of fiscal 2000. Of the work force
reductions, approximately $0.9 million had been paid by March 31, 1999 with the
remainder to be paid through March 31, 2000.
The economic slowdown in Asia and South America during fiscal 1999
significantly affected developing markets used by the Company to distribute
aging or redundant product lines, and severely impacted liquidity of customers.
The Company has recorded a charge of $4.3 million for provisions against
inventories scheduled for sale in the affected economies and collection of
accounts receivable, primarily in Asia.
The dramatic devaluation of the Brazilian Real in January 1999, and the
related impact on asset realization, including losses related to the Company's
inability to collect the accounts receivable from the original sale of the
Brazilian frame and equipment business, which the Company re-assumed in April
1999, resulted in the Company recording a charge of $12.1 million.
11. Defined Contribution Plans
The Company sponsors several defined contribution plans covering
substantially all U.S. and U.K. employees. The plans provide for limited Company
matching of participants' contributions. Contributions to all defined
contribution plans charged to operations were $1.3 million, $1.2 million and
$1.0 million for fiscal 1999, 1998 and 1997, respectively.
12. Defined Benefit Retirement Plans
The Company participates in a defined benefit pension plan ("Domestic
Pension Plan") covering substantially all full-time domestic employees. The
company also participates in a contributory defined benefit pension plan
covering certain Australian employees ("International Pension Plan").
33
<PAGE>
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
Effective April 1, 1998, the Company adopted FASB Statement No. 132,
"Employers' Disclosures about Pensions and Postretirement Benefits" ("SFAS
132"), which standardizes the disclosure requirements for pensions and other
postretirement benefits. The Statement addresses disclosure only. It does not
change the measurement or recognition of these plans. There was no effect on
financial position or net income as a result of adopting SFAS 132.
The following provides a reconciliation of the changes in the plans'
benefit obligations and fair value of assets and a statement of the funded
status for both the Domestic and the International Pension Plans.
<TABLE>
<CAPTION>
Domestic Pension International Pension
Plan Plan
- ------------------------------------------------------------------------------------------------------
Year Ended March 31, (in thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reconciliation of benefit obligation
Benefit obligation--beginning of year $ 16,884 $ 11,301 $ 11,484 $ 11,491
Service cost 2,637 1,862 1,217 1,433
Interest cost 1,117 810 647 650
Participant contributions -- -- 248 200
Actuarial loss 179 3,062 -- 726
Benefit payments (141) (151) (1,295) (1,238)
Other -- -- 66 180
Effect of exchange rates -- -- (463) (1,958)
- ------------------------------------------------------------------------------------------------------
Benefit obligation--end of year $ 20,676 $ 16,884 $ 11,904 $ 11,484
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Domestic Pension International Pension
Plan Plan
- ------------------------------------------------------------------------------------------------------
Year Ended March 31, (in thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reconciliation of fair value of plan assets
Fair value of plan assets--beginning of year $ 10,441 $ 6,021 $ 12,612 $ 13,333
Actual return on plan assets 531 2,381 2,015 1,860
Employer contributions 2,453 2,190 328 493
Participant contributions -- -- 248 200
Benefit payments (141) (151) (1,295) (1,238)
Other -- -- 66 180
Effect of exchange rates -- -- (499) (2,216)
- ------------------------------------------------------------------------------------------------------
Fair value of plan assets--end of year $ 13,284 $ 10,441 $ 13,475 $ 12,612
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Domestic Pension International Pension
Plan Plan
- ------------------------------------------------------------------------------------------------------
Year Ended March 31, (in thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Funded status
Funded status at March 31 $ (7,392) $ (6,443) $ 1,571 $ 1,128
Unrecognized transition asset -- -- (139) (169)
Unrecognized prior-service cost -- -- -- --
Unrecognized (gain) loss 2,262 1,754 (2,718) (1,710)
- ------------------------------------------------------------------------------------------------------
Accrued pension cost $ (5,130) $ (4,689) $ (1,286) $ (751)
- ------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
The assumptions used in the measurement of the Company's benefit obligation
are shown in the following table:
<TABLE>
<CAPTION>
Domestic Pension International Pension
Plan Plan
- -------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 6.50% 6.35% 6.25% 6.50%
Expected long-term rate of return on plan assets 8.00% 8.00% 8.00% 7.50%
Rate of increase in future compensation levels 5.00% 5.00% 4.00% 4.00%
</TABLE>
Net periodic pension costs include the following components:
<TABLE>
<CAPTION>
Domestic Pension International Pension
Plan Plan
- -----------------------------------------------------------------------------------------------------
Year Ended March 31, (in thousands) 1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 2,637 $ 1,862 $ 1,662 $ 1,217 $ 1,433 $ 1,843
Interest cost 1,117 810 702 647 650 731
Expected return on plan assets (942) (576) (317) (924) (895) (1,036)
Amortization of transition asset -- -- -- (23) (26) --
Amortization of prior service cost -- -- -- -- -- --
Amortization of (gain) loss 83 -- -- (34) (34) --
- -----------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 2,895 $ 2,096 $ 2,047 $ 883 $ 1,128 $ 1,538
- -----------------------------------------------------------------------------------------------------
</TABLE>
13. Income Taxes
The domestic and foreign components of income before provision for income
taxes, minority interest and extraordinary item are as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
- -----------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ 9,681 $42,918 $14,351
Foreign 10,511 33,034 27,035
- -----------------------------------------------------------------------------------
$ 20,192 $75,952 $41,386
- -----------------------------------------------------------------------------------
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
- -----------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal and State $ 6,128 $ 9,082 $ 6,142
Foreign 4,025 8,006 7,178
Deferred:
Federal and State (4,918) 7,808 1,720
Foreign 2,270 4,891 1,534
Valuation allowance adjustment 889 (4,418) (9,837)
Tax benefit allocated to reduction of goodwill -- -- 4,000
- -----------------------------------------------------------------------------------
$ 8,394 $ 25,369 $ 10,737
- -----------------------------------------------------------------------------------
</TABLE>
During fiscal 1999 and 1998, the Company recognized certain tax benefits
related to stock option plans in the amount of $0.3 million and $2.2 million,
respectively. Such benefits were recorded as a reduction of income taxes payable
and an increase in additional paid-in capital.
35
<PAGE>
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
A reconciliation between income tax provisions computed at the U.S. federal
statutory rate and the effective rate reflected in the statements of income is
as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
- -----------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision at statutory rate 35.0% 35.0% 35.0%
State tax provision, net of federal effect 3.9 3.5 4.0
Valuation allowance, excluding special charges (5.7) (5.8) (23.8)
Valuation allowance, relating to special charges 10.1 -- --
Tax benefit allocated to reduction of goodwill -- -- 9.7
Income of foreign subsidiaries at differing statutory rates 2.1 (1.3) (2.4)
Other (3.8) 2.0 3.4
- -----------------------------------------------------------------------------------------------------------
41.6% 33.4% 25.9%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
March 31,
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowances for doubtful accounts $ 2,361 $ 2,064
Inventories, principally due to reserves 3,403 3,191
Property, plant and equipment, principally due to differences in depreciation 4,737 4,874
Accruals for employee benefits 6,488 8,322
In-process research and development 10,733 12,281
Other assets 15,319 3,610
Net operating losses (NOL) 8,354 9,188
- --------------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 51,395 43,530
Less valuation allowance 10,690 9,801
- --------------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $40,705 $33,729
- --------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment, principally due to differences in depreciation $14,105 $12,102
Inventories 2,852 2,752
Amortization of goodwill 7,133 5,653
Unremitted income of foreign subsidiaries 2,732 3,834
Other 6,807 4,071
- --------------------------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities $33,629 $28,412
- --------------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets less net deferred tax liabilities $ 7,076 $ 5,317
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In fiscal 1999 a valuation allowance of $2.0 million was established
against unrealized losses related to reassuming ownership of the Brazilian frame
and equipment business. In fiscal 1997 a valuation allowance of $8.6 million was
established against deferred tax assets acquired in the AO Acquisition.
Movements in the valuation allowances in fiscal 1999, 1998 and 1997 relate
primarily to realization of NOL's or changes in the Company's evaluation of the
realizability of deferred tax assets.
For tax purposes, the Company's foreign subsidiaries, at March 31, 1999,
had net operating loss carryforwards of $37.1 million. Of this amount, $32.3
million does not expire, and $4.8 million expires between 2002 and 2009. The
deferred tax assets reflected in the Company's accounts as of March 31, 1999
before valuation allowances reflect these NOL's.
36
<PAGE>
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
The Company has not provided for U.S. federal income and foreign
withholding taxes on $32 million of non-U.S. subsidiaries' undistributed
earnings as of March 31, 1999 because such earnings are intended to be
reinvested indefinitely. Upon distribution of those earnings in the form of
dividends or otherwise, the Company would be subject to U.S. income taxes
(subject to an adjustment for foreign tax credits). Determination of the amount
of unrecognized deferred U.S. income tax liability is not practicable because of
the complexities associated with its hypothetical calculation.
14. Commitments
The Company leases certain warehouse and office facilities, office
equipment and automobiles under non-cancelable operating leases which expire in
1999 through 2012. The Company is responsible for taxes, insurance and
maintenance expenses related to the leased facilities. Under the terms of
certain lease agreements, the leases may be extended, at the Company's option,
and certain of the leases provide for adjustments of the minimum monthly rent.
Future minimum annual lease payments under the leases are as follows:
Period Ending March 31, (in thousands)
- ------------------------------------------------------------------------
2000 $3,985
2001 3,250
2002 2,571
2003 2,252
2004 2,068
Thereafter 8,787
Rent expense for fiscal 1999, 1998, and 1997 was $7.2 million, $7.8 million
and $5.6 million, respectively.
15. 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 Environ mental Response,
Compensation and Liability Act and the Superfund Amendments and Reauthorization
Act of 1986. Since March 1997 the Company has curtailed clean-up activities, and
continues to monitor contamination levels. During the quarter ended December 31,
1997 a report on contamination levels, and the impact of curtailed activities,
was submitted to the EPA, which indicates no significant impact on the site from
the curtailed activities, and the EPA has consented to continued curtailment of
activities. The Company expects continued reduction of clean-up activities due
to relatively low levels of contamination existing at the site. Reserves for
these clean up and monitoring activities are considered to be adequate by the
Company and are immaterial to the Company's operations.
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.
37
<PAGE>
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
16. Worldwide Operations
The Company operates in the ophthalmic industry in the design and
manufacture of eyeglass lenses.
A summary of information about the Company's geographic areas is as
follows:
<TABLE>
<CAPTION>
North Rest of
(in thousands) America Europe World Eliminations Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended March 31, 1999
Revenue(a):
----------------------------------------------------------
External $ 263,687 $ 171,766 $ 94,336 $ -- $ 529,789
Internal 43,823 58,715 52,269 (154,807) --
Identifiable assets 384,771 158,265 161,494 (5,231) 699,299
----------------------------------------------------------
Year Ended March 31, 1998
Revenue(a):
External $ 281,158 $ 160,697 $ 105,880 $ -- $ 547,735
Internal 42,784 57,170 47,697 (147,651) --
Identifiable assets 370,792 164,891 156,003 (7,628) 684,058
Year Ended March 31, 1997
Revenue(a):
External $ 234,173 $ 150,013 $ 104,503 $ -- $ 488,689
Internal 30,129 59,455 43,894 (133,478) --
Identifiable assets 327,590 151,033 131,906 (5,021) 605,508
</TABLE>
(a) Revenues are attributable to regions based on the location of Sola and its
subsidiaries' country or region of domicile.
Internal sales represent intercompany sales between regions at a mark-up
from cost; the elimination of any profit arising from such sales is reflected in
eliminations in determining operating income.
Included in North American operations are the Company's businesses in
Canada and Mexico, as well as the United States. In each of the three fiscal
years ended March 31, 1999, Canadian and Mexican operations accounted for less
than 5% of external revenues and less than 2.5% of identifiable assets of the
North American region. The information for Canada and Mexico individually and
combined, is not considered material to information for the United States alone.
17. Pro Forma Data
The following pro forma data, as restated for the adoption of SFAS 128, was
prepared to illustrate the estimated effect of the AO Acquisition and the
financing related thereto, as if the acquisition had occurred as of the
beginning of the year ended March 31, 1997:
Year Ended
March 31,
- ---------------------------------------------------------------------------
(in thousands, except per share data) 1997
- ---------------------------------------------------------------------------
Net sales $507,713
- ---------------------------------------------------------------------------
Net income $ 41,968
- ---------------------------------------------------------------------------
Earnings per share--basic:
Net income $ 1.72
- ---------------------------------------------------------------------------
Earnings per share--diluted:
Net income $ 1.64
- ---------------------------------------------------------------------------
38
<PAGE>
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
These pro forma results of operations have been prepared for comparison
purposes only, and do not purport to be indicative of what the results would
have been had the AO Acquisition occurred at April 1, 1996. As a result of the
AO Acquisition the Company incurred two non-recurring charges during fiscal
1997: (i) a $7.2 million charge to cost of sales for the amortization associated
with an inventory write-up to fair value during the six months ended September
30, 1996; and (ii) a $9.5 million charge for the write-off of in-process
research and development all of which was recorded in the quarter ended June 30,
1996. These charges, and the related provision for tax thereon, have been
excluded from the pro forma results as they are non-recurring. The pro forma
data above does not include pro forma adjustments for the Neolens Acquisition as
the results of Neolens prior to acquisition were not material to the Company's
consolidated results of operations.
18. Supplementary Cash Flow Data
<TABLE>
<CAPTION>
Year Ended March 31,
- -------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid $24,011 $23,411 $19,273
- -------------------------------------------------------------------------------------------------------
Taxes paid $16,274 $14,599 $14,075
- -------------------------------------------------------------------------------------------------------
Supplemental disclosures of non-cash investing and financing activities:
Capital expenditures accrued but not paid $ 7,115 $ 3,223 $ 3,701
- -------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
report of ernst & young llp, independent auditors
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
Board of Directors and Shareholders
Sola International Inc.
We have audited the accompanying consolidated balance sheets of Sola
International Inc. as of March 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended March 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sola International Inc. as of March 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1999, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Palo Alto, California
May 6, 1999
40
<PAGE>
quarterly financial data
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
<TABLE>
<CAPTION>
Quarter Ended
- ----------------------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31,
(in thousands, except per share data) (unaudited) 1997 1997 1997 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 137,621 $ 135,731 $ 129,272 $ 145,111
Gross profit 64,827 63,839 62,367 67,025
Operating income 21,257 21,883 20,983 28,583
Income before extraordinary item 11,089 11,778 11,235 16,990
Net income 11,089 11,778 5,312 16,974
Earnings (loss) per share--basic:
Income before extraordinary item 0.46 0.48 0.46 0.69
Extraordinary item -- -- (0.24) --
Net income 0.46 0.48 0.22 0.69
Earnings (loss) per share--diluted:
Income before extraordinary item 0.44 0.46 0.44 0.66
Extraordinary item -- -- (0.23) --
Net income 0.44 0.46 0.21 0.66
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
- ----------------------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31,
(in thousands, except per share data) (unaudited) 1998 1998 1998 1999
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 129,526 $ 132,668 $ 126,345 $ 141,250
Gross profit 60,431 59,731 57,277 60,961
Operating income (loss) 20,935 17,220 11,058 (11,462)
Net income (loss) 11,297 8,803 5,176 (12,755)
Earnings per share--basic:
Net income (loss) 0.46 0.36 0.21 (0.51)
Earnings per share--diluted:
Net income (loss) 0.44 0.35 0.21 (0.51)
</TABLE>
41
<PAGE>
corporate directory
- --------------------------------------------------------------------------------
SOLA International 1999 Annual Report
Board of Directors
Irving S. Shapiro
Chairman of the Board,
Sola International Inc.,
former Chairman and CEO,
E.I. du Pont de Nemours & Co.(a)(b)
John E. Heine
President and CEO,
Sola International Inc.
Maurice J. Cunniffe
Chairman and CEO,
American Optical Corporation
Douglas D. Danforth
retired Chairman and CEO,
Westinghouse Electric Corp.(a)
A. William Hamill
former Executive Vice President and CFO,
Union Camp Corporation(b)
Hamish Maxwell
retired Chairman and CEO,
Philip Morris Companies Inc.(b)
Jackson L. Schultz
retired Senior Vice President,
Wells Fargo Bank(a)
(a) member of the audit committee
(b) member of the compensation committee
Executive Officers
John E. Heine
President and CEO
Steven M. Neil
Executive Vice President, Finance and CFO
James H. Cox
Executive Vice President
Theodore Gioia
Vice President, Strategic Planning
Stephen J. Lee
Vice President, Human Resources
Barry J. Packham
Vice President, Manufacturing Development
Alan S. Vaughan
Vice President, Worldwide Rx Operations
Adrian P. Walker
Vice President and Regional Director, Asia
