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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission File Number: 1-13606
SOLA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3189941
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
2420 SAND HILL ROAD, SUITE 200, MENLO PARK, CA 94025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 324-6868
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
Common Stock, Par Value $0.01 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in a definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of May 28, 1999, the aggregate market value of Common Stock held by
non-affiliates was approximately $408,402,347. For purposes of this computation,
shares held by directors and executive officers of the registrant have been
excluded. Such exclusion of shares held by directors and executive officers is
not intended, nor shall it be deemed, to be an admission that such persons are
affiliates of the registrant.
As of May 28, 1999, 24,866,482 shares of the registrant's common stock, par
value $0.01 per share, which is the only class of common stock of the
registrant, were outstanding. The Company's stock is traded on the New York
Stock Exchange under the symbol SOL.
The responses to Items 11, 12 and 13 are incorporated by reference to the
material included in the Company's proxy statement for the fiscal year ended
March 31, 1999.
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<PAGE>
SOLA INTERNATIONAL INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
Page
PART I
Item 1. Business.......................................................... 3
Item 2. Properties........................................................ 8
Item 3. Legal Proceedings................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders............... 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.......................................... 10
Item 6. Selected Financial Data........................................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 19
Item 8. Financial Statements and Supplementary Data....................... 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 23
PART III
Item 10. Directors and Executive Officers of the Registrant................ 24
Item 11. Executive Compensation............................................ 26
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 26
Item 13. Certain Relationships and Related Transactions.................... 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................. 27
2
<PAGE>
PART I
Item 1. Business
General
Sola International Inc., a Delaware corporation, designs, manufactures
and distributes a broad range of plastic and glass eyeglass lenses. Sola has
manufacturing and distribution sites in three major regions -- North America,
Europe, and Rest of World (comprising primarily Australia, Asia and South
America). Sola's business commenced operations in 1960. Sola International Inc.
acquired the Sola business unit (the "Predecessor Business") of Pilkington plc
("Pilkington") on December 1, 1993 (the "Acquisition"). In March 1995, Sola
completed its initial public offering (the "IPO"). On June 19, 1996 Sola
acquired substantially all of the worldwide ophthalmic business (the "AO" and
"AO Acquisition") of American Optical Corporation ("AOC"). On July 2, 1996 the
Company acquired Neolens, Inc. ("Neolens"), a manufacturer of polycarbonate
eyeglass lenses. Unless the context otherwise requires, all references to the
"Company" or "Sola" herein refer to Sola International Inc. and its consolidated
subsidiaries. The Company's fiscal year ends on March 31 of each year. The
fiscal years ended March 31, 1999, March 31, 1998 and March 31, 1997 are
referred to herein as "fiscal 1999", "fiscal 1998" and "fiscal 1997",
respectively.
Products
The Company produces plastic and glass eyeglass lenses. The Company's
lens products are differentiated by type of vision correction, lens design, lens
material and coatings applied to the lens. The Company's lenses include single
vision lenses (lenses which have a constant corrective power at all points);
multifocal lenses (lenses which have more than one corrective power, including
bifocal lenses, which have two distinct areas of different corrective power, and
progressive lenses, which have a continuous gradient of different corrective
power); and plano lenses (lenses which have no corrective power and are
primarily used for sunglasses).
Although the Company's lenses are manufactured in both glass and
plastic, plastic lenses currently account for approximately 90% of the Company's
net lens sales. Approximately 47% of ophthalmic lens sales generated by plastic
lenses are accounted for by conventional hard resin plastics, with the remainder
derived from advanced lens materials such as thinner and lighter plastics and
plastic photochromics. These more advanced materials have accounted for a
growing percentage of the Company's sales both by volume and revenue. Sola
manufactures and markets several advanced thinner and lighter plastic lens
materials, including Spectralite(R), Finalite 1.6(TM) and polycarbonate.
Spectralite and Finalite 1.6 are proprietary materials developed by Sola's
research and development operation. Raw materials used in the manufacture of
these products are available from a number of chemical suppliers. Polycarbonate
is a thin and light material with greater impact resistance. To make its lenses
even thinner and lighter, the Company has increasingly employed aspheric and
atoric designs (i.e., lenses that achieve comparable optical performance with a
thinner cross section). The Company also sells plastic photochromic lenses,
which require processing by a third party. The technology for such processing is
currently proprietary to such third party.
The Company also manufactures and sells glass lenses, primarily in
North America and Europe. These lenses are manufactured in plants located in the
United States, Mexico and France. The Company's strategy for the glass lens
market is to focus on high value-added product categories, such as glass
progressive and higher index glass lenses. Since the Company is primarily
focused on plastic lenses, glass lenses represent a small and decreasing portion
of the Company's sales. The Company sells virtually no glass lenses in South
America and non-Japan Asia, markets where glass is still the predominant
material for eyeglass lenses.
The Company produces a variety of lens coatings, which primarily
provide scratch resistance and anti-reflection properties. The penetration of
coated lenses varies significantly from market to market.
3
<PAGE>
The Company has recently introduced a number of new products and has a
number of products in development that are intended to maintain and increase the
Company's operating margins. For example, the Company has developed and
successfully marketed proprietary progressive lenses (including Percepta(R),
Visuality(R) and AO Compact(R)), which incorporate more complex design features
than standard products and therefore attract an above average gross profit per
pair. During fiscal 1998 and 1999 Sola's proprietary Matrix(R) delivery system
was installed at an increasing number of sites in the U.S. and foreign
locations. This system, which creates finished prescriptions by bonding together
thin lens wafers in a desktop laminating console, allows the rapid delivery of
lenses with anti-reflective coating and potentially other high margin add-ons.
The Company from time to time may also market products or technologies of third
parties to broaden its product range pursuant to contractual relationships with
such third parties.
Marketing and Sales
The Company develops and manages its marketing strategy on a
decentralized basis and has sales offices in 25 countries across its three
regions. The Company differentiates its products from those of its competitors
through lens design, lens materials and coatings formulations. In response to
customer demand, the Company's strategy is focused on providing a wide range of
quality products on short notice. In developing markets, particularly in
non-Japan Asia and Latin America, the Company seeks to expand its market share
by increasing local production, attempting to develop brand recognition for its
products and marketing to customers the advantage of higher value-added
products, all of which are intended to help the Company compete on the basis of
quality and service rather than price.
During fiscal 1999 Sola reached co-branding agreements with Nike, Inc.
and Fisher-Price, Inc. The agreement with Nike represents the initiation of a
marketing strategy using "Optics by SOLA" as the cornerstone. The Fisher-Price,
Inc. relationship enables the Company to reach the children's lens market
segment combined with a powerful brand name.
Distribution
In order to meet customer demand for delivery of a broad range of
products within a short time, the Company has established a widespread
distribution network, which is managed on a regional basis. The Company operates
59 major distribution centers located in 23 countries, covering all of its three
regions.
The Company utilizes three primary distribution channels for its
products. Lenses with corrective power are distributed (i) through a wholesale
channel to wholesale distributors or to independent processing laboratories that
process the Company's lenses and then resell them to retail outlets and
practitioners for resale to consumers, (ii) through a retail channel to chains,
superoptical retail stores (retail outlets with on-site lens processing
capability) and other retailers (including "buying groups" consisting of a
number of retailers acting together to purchase lenses) who sell the lenses to
consumers and (iii) in certain markets in Asia and Europe, direct to eyecare
practitioners through the Company's processing laboratories. Plano lenses are
sold primarily to manufacturers of sunglasses.
Customers
During fiscal 1999, the Company's ten largest customers accounted for
approximately 22.8% of net sales and the Company's largest customer accounted
for less than 5% of net sales. During fiscal 1999, 8 of the Company's 10 largest
customers were located in North America and accounted for approximately 18.4% of
net sales in the aggregate.
One of the company's largest competitors, Essilor International, is
extensively vertically integrated into wholesale laboratories, both in the
United States and other parts of the world. Sola has sold and continues to sell
its products to these Essilor laboratories. A number of these laboratories have
decreased the purchase of Sola products since being acquired by Essilor.
4
<PAGE>
International Operations
The Company operates manufacturing and distribution sites in all major
regions of the world--North America (including Mexico), Europe, and Rest of
World--and derived approximately half of its net sales in fiscal 1999 from the
sale of products outside the United States. See Note 16 of Notes to Consolidated
Financial Statements included elsewhere herein. As a result, a significant
portion of the Company's sales and operations are subject to certain risks,
including adverse developments in the foreign political and economic
environment, exchange rates, tariffs and other trade barriers, staffing and
managing foreign operations and potentially adverse tax consequences. Although
the Company and its predecessors have been successfully conducting business
outside of the United States since its inception in 1960, there can be no
assurance that any of these factors will not have a material adverse effect on
the Company's financial condition or results of operations in the future.
Manufacturing Operations
The Company has 19 manufacturing facilities located in its three major
regions, including 17 lens manufacturing facilities. The Company has sought to
make each operating region self-sufficient in the production of core products,
while manufacturing both high-volume plano lenses and newer, low-volume and more
complex products in fewer locations. More centralized manufacturing is pursued
where appropriate in order to maximize production efficiencies or maintain
strict quality controls and research and development support. For the location
and principal operations of these facilities, see "Properties".
The principal materials used by the Company in the production of
eyeglass lenses are hard resins (a commodity plastic used in most plastic
lenses), glass, specialized chemicals used in many higher index plastic lenses
and monomers mixed by the Company in the production of Spectralite and Finalite.
The Company believes that these materials are currently available from a variety
of sources and that the materials necessary to produce the Company's coatings
are readily available from a number of potential sources. In order to reduce
materials costs, the Company coordinates centrally the purchasing of raw
materials (including monomers).
Research and Development
The Company has invested and continues to invest heavily in research
and development in order to continually develop new and innovative products and
to improve the efficiency of its manufacturing process. At March 31, 1999, there
were approximately 184 employees involved in the Company's research and
development efforts. The Company's research and development expenditures for
fiscal 1999, 1998 and 1997 were $18.8 million, $18.3 million and $17.5 million,
respectively, (excluding the non-recurring $9.5 million in-process research and
development non-cash charge associated with the AO Acquisition in fiscal 1997)
representing 3.5%, 3.3% and 3.6% of net sales for each of those years. The
Company has its own research and development centers in Petaluma, California,
Southbridge, Massachusetts, and Adelaide, Australia. A small process automation
group is attached to the manufacturing operation in Wexford, Ireland.
The Company's research and development focuses on the design and
development of innovative, value-added products, on new materials with superior
characteristics, on technology that will deliver products to the market more
efficiently, and on technologies to improve productivity in the manufacture of
existing products. Recent research and development programs include the
successful development of the Finalite thin and light lens material, the
development of Spectralite with photochromic capabilities, Percepta, Visuality
and AO Compact progressive designs and ViZio(TM) polycarbonate lenses. Sola's
proprietary Matrix delivery system which creates finished prescriptions by
bonding together thin lens wafers in a desktop laminating console, allows the
rapid delivery of lenses with anti-reflection coating and potentially other high
margin add-ons. This system is being installed at an increasing number of sites
in the U.S. and foreign locations.
5
<PAGE>
Competition
The eyeglass lens and coating industry is highly competitive. The
Company competes principally on the basis of customer service, the quality and
breadth of product offerings, and price. The Company believes that among its
largest global competitors are Essilor International and Hoya Corporation. The
eyeglass lens and coating industry is characterized by price competition, which
can be severe in certain markets, particularly for high volume, standard
products. Sola attempts, to the extent possible, to counter competition on the
basis of price by focusing on providing a rapid response to orders, maintaining
high fill rates, developing differentiated new products, and educating
processing laboratories and eyecare practitioners on the benefits of Sola lenses
and coatings. There can be no assurance, however, that the Company's competitors
will not develop products or services that are more effective or less expensive
than the Company's products or which could render certain of the Company's
products less competitive. Since recently-developed products comprise a
substantial portion of the Company's sales, the Company's performance is
dependent upon its continuing ability to develop and market new products. Some
of the Company's competitors have significantly greater financial resources than
the Company to fund expansion and research and development. Within a particular
market, certain of the Company's competitors may enjoy a "home-country"
advantage over foreign competition. In addition, in certain markets (primarily
Europe), the Company also faces competition from a number of its principal
competitors which are vertically integrated with processing centers to a greater
extent than the Company, enabling them to customize prescription lenses. This
limits the number of independent lens processing customers to which the Company
can market its products.
In addition to direct competition with other manufacturers of eyeglass
lenses, the Company competes indirectly with manufacturers of contact lenses and
providers of medical procedures for the correction of visual impairment. Contact
lenses and eyeglasses are not, however, perfect substitutes because of the
difficulty of developing progressive or bifocal contact lenses for presbyopia
and the tendency of contact lens wearers to also own eyeglasses. A number of
companies have developed, or are developing, surgical equipment or implants used
to correct refractive error, including myopia, hyperopia and astigmatism. These
procedures are ineffective at correcting presbyopia, which affects the vast
majority of people above the age of 45, and is a major cause of demand for
Sola's progressive and other multifocal lenses. However, there can be no
assurance that current medical procedures, or ones developed in the future, will
not materially impact demand for the Company's lenses.
Patents, Trademarks & Licenses
The Company seeks to protect its intellectual property throughout the
world. As of March 31, 1999, the Company had filed (or applied for) patents for
69 discrete inventions or technologies. Many of the Company's patents have been
filed in multiple countries, and they include 55 patents (or patent
applications) filed in the United States. The Company has been granted, or is
licensed to use, 1,021 trademarks in various countries, representing rights to
245 discrete names. These include 65 trademarks granted in the United States. A
further 56 trade names are under application. The Company does not believe that
it is dependent on any particular patent, trade secret or similar intellectual
property and, in light of its manufacturing, marketing and distribution
strengths, believes that the loss of any individual trademark, trade secret or
patent would not have a material adverse effect on its results of operations or
financial condition.
Employees
As of March 31, 1999, the Company had approximately 7,450 employees
throughout the world. The majority of the Company's employees are not
represented by labor unions. Labor relations are considered to be good and there
have been no significant labor disputes in the past ten years.
Environmental Matters
The Company (together with the industry in which it operates) is
subject to United States and foreign environmental laws and regulations
concerning emissions to the air, waste water discharges and the
6
<PAGE>
generation, handling, storage, transportation and disposal of hazardous wastes,
and to other federal, state and foreign laws and regulations. The Company
believes that it possesses all material permits and licenses necessary for the
continuing operation of its business and believes that its operations are in
substantial compliance with the terms of all applicable environmental laws. It
is impossible to predict accurately what effect these laws and regulations will
have on the Company in the future.
Environmental laws and regulations vary among countries in which the
Company operates. During fiscal 1992, the Company adopted an environmental
policy which includes an environmental auditing process designed to evaluate and
assist operating regions in their environmental compliance efforts.
The Company's manufacturing processes generally utilize non-hazardous
chemicals where feasible. Certain processes, including those for cleaning lenses
and mold assemblies, and abrasion resistant and anti-reflection coating of
lenses, use a variety of volatile and other hazardous substances. Company
developments in manufacturing methods, alternative non-solvent cleaning
processes and waste reduction have been successful in reducing the use of these
chemicals and/or emissions and environmental damage from these processes.
Programs to eliminate use of chlorinated hydrocarbons and chlorofluorocarbons
("CFC's") in manufacturing processes have also been developed and the current
use of these substances in the Company's North American operations is minimal.
Since 1988 the Company has operated a ground water remediation system
at its Petaluma, California manufacturing facility in accordance with a consent
order issued by the U.S. Environmental Protection Agency ("EPA") under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980.
The system is designed to remediate a pre-1982 release of hazardous substances.
Analytical results indicate that contamination levels have decreased
significantly over the past few years. Since March 1997 the Company has
curtailed clean-up activities, while continuing 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.
Late in fiscal 1996, the Company was requested by the Missouri
Department of Natural Resources ("MDNR") to conduct a removal action at a
disposal site near Eldon, Missouri known as the Coburn Optical Industries Dump
site, which was allegedly used by a predecessor to the Company for disposal of
waste water sludge containing lead from 1974 to 1986. The Company completed its
clean-up program during fiscal 1998 and the MDNR issued a no further action
letter.
It is possible that the Company may be involved in other similar
investigations and actions under state, federal or foreign law in the future.
Based on currently available information, the Company does not believe that its
share of costs, either at the existing sites or at any future sites, is likely
to result in a liability that will have a material adverse effect on its results
of operations or financial condition.
It is the Company's policy to meet or exceed all applicable
environmental, health and safety laws and regulations. The complexity and
continuing evolution of environmental regulation (including certain programs for
which implementing regulations have not yet been finalized) preclude precise
estimation of future environmental expenditures.
In connection with the Acquisition, Pilkington has agreed to indemnify
the Company with respect to environmental losses based upon or resulting from
certain existing facts, events, conditions, matters or issues, for (i) 50% of
such losses to the extent such losses exceed $1 million but are less than or
equal to $5 million, and (ii) 100% of such losses in excess of $5 million.
See Note 15 of Notes to Consolidated Financial Statements included
elsewhere herein.
7
<PAGE>
Item 2. PROPERTIES
<TABLE>
The following table sets forth certain information relating to the
Company's principal facilities. The Company operates other smaller domestic and
foreign manufacturing facilities, distribution facilities and sales offices
which are omitted from this table.
<CAPTION>
Region and Location Principal Operations Leased/Owned
------------------- -------------------- ------------
<S> <C> <C>
North America
Menlo Park, California......... Headquarters Leased
Petaluma, California........... Manufactures plastic lenses; marketing and distribution Part owned,
center; research and development facility; administrative part leased
offices for North American operations
Eldon, Missouri................ Manufactures multifocal glass lenses; manufactures molds Owned
San Diego, California.......... Headquarters for American Optical Leased
Southbridge, Massachusetts..... Research and development and distribution center Leased
Miami, Florida................. Manufactures finished polycarbonate lenses; houses tinting Leased
and coating operations for plano lenses; Sunlens and Latin
America divisional head offices
Portland, Oregon............... Anti-reflection coating laboratory Owned
Tijuana, Mexico................ Manufactures plastic and glass lenses; manufactures molds; Part owned,
distribution center part leased
Europe
Goetzenbruck, France........... Manufactures glass lenses; marketing and distribution center Owned
Fougeres, France............... Prescription processing laboratory with anti-reflection Leased
coating capability
Wexford, Ireland............... Manufactures plastic lenses; prescription processing Owned
laboratory; distribution center
Varese, Italy................ Tinting operations; prescription processing laboratory with Leased
anti-reflection coating capability; marketing and
distribution center
Birmingham, United Prescription processing laboratory with anti-reflection Leased
Kingdom...................... coating capability; marketing and distribution center
Rest of World
Asia
Xian, China.................... Site owned by a joint venture managed by the Company in Leased
which the Company holds a 50% ownership interest;
manufactures hard resin lenses
Hong Kong...................... Prescription processing laboratory with anti-reflection Leased
coating capability; marketing and distribution center
Guangzhou, China............... Two sites; China head office and second China manufacturing Part owned, part
site for hard resin lenses leased
Osaka, Japan................... Prescription processing laboratory with anti-reflection Leased
coating capability; marketing and distribution center
8
<PAGE>
Region and Location Principal Operations Leased/Owned
------------------- -------------------- ------------
Chung Li, Taiwan............... Manufactures hard resin lenses; marketing and distribution Leased
center
Singapore...................... Manufactures glass molds; marketing and distribution Leased
center; prescription processing facility with
anti-reflection coating capability
South America
Petropolis, Brazil............. Manufactures hard resin ophthalmic and plano lenses Owned
Villa de Cura, Venezuela....... Manufactures hard resin lenses; distribution center Owned
Australia
Lonsdale, Australia............ Manufactures plastic lenses; manufactures molds; research Part owned, part
and development center; prescription processing laboratory leased
with anti-reflection coating facility; marketing and
distribution center; regional administrative offices for
Australia and Asian regions
</TABLE>
A portion of the Company's research and development activities, its
corporate headquarters and certain manufacturing and distribution operations are
located near major earthquake faults. Operating results could be materially
affected in the event of a major earthquake. The Company is predominantly
self-insured for losses and interruptions caused by earthquakes.
For further information concerning the Company's leased properties, see
Note 14 of Notes to Consolidated Financial Statements included elsewhere herein.
The Company's operating leases have expirations ranging from 1999 to 2012. The
Company does not anticipate any difficulties in renewing or replacing such
leases as they expire; however, there can be no assurances that the Company will
be able to renew or replace such leases. The Company believes that its
manufacturing capacity is sufficient for its current needs.
Item 3. LEGAL PROCEEDINGS
In addition to the proceedings described under "Business -
Environmental Matters", the Company is involved in routine litigation incidental
to its business, none of which it believes will have a material adverse effect
on its results of operations or financial condition. See Note 15 of Notes to
Consolidated Financial Statements included elsewhere herein.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the
Company during the last quarter of fiscal 1999.
9
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
<TABLE>
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.
<CAPTION>
Common Stock
Price Range
---------------------
High Low
---- ---
<S> <C> <C>
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
</TABLE>
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 credit agreement, among the Company,
the lenders named therein and The Bank of America National Trust and Savings
Association, for itself and as agent for a syndicate of other financial
institutions, dated June 1996 as amended (the "Amended Agreement"), generally
restricts, subject to certain exceptions, the payment of dividends,
distributions and other payments. The Company does not anticipate paying any
cash dividends in the foreseeable future and intends to retain future earnings
for the development and expansion of its business. Subject to such restrictions,
any future determination to pay dividends will be at the discretion of the
Company's Board of Directors and subject to certain limitations under the
General Corporation Law of the State of Delaware and will depend upon the
Company's results of operations, financial condition, other contractual
restrictions and factors deemed relevant by the Board of Directors.
10
<PAGE>
<TABLE>
Item 6. SELECTED FINANCIAL DATA
<CAPTION>
Fiscal Year Ended March 31,
---------------------------------------------------------------------------
1999(1) 1998 1997(2) 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data
(in thousands, except per share 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 (loss) before
extraordinary ................................ $ 0.51 $ 2.09 $ 1.31 $ 1.59 $ 0.82
item
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 (loss) before
extraordinary ................................ $ 0.49 $ 2.00 $ 1.24 $ 1.51 $ 0.78
item
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
========= ========= ========= ========= =========
As of March 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
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
<FN>
- ---------------------------
(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.
</FN>
</TABLE>
11
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere in this
Form 10-K. The financial statements for the year ended March 31, 1997 reflect
the consolidated operations of the Company after accounting for the acquisition
("AO Acquisition") of substantially all of the worldwide ophthalmic business
("AO") of American Optical Corporation ("AOC") on June 19, 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.
<TABLE>
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.
<CAPTION>
Fiscal Year Ended March 31,
-----------------------------------------------------------------------------
Adjusted
(In thousands) 1999 1998 1997 Adjustments 1997
--------- --------- --------- --------- ---------
<S> <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>
12
<PAGE>
Results of Operations
<TABLE>
The following table sets forth, for the fiscal years indicated, the
Company's results of operations as a percentage of net sales.
<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 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 in the aggregate. Underperformance 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
13
<PAGE>
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 slow-down 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.
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, excluding the special charges, 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%
14
<PAGE>
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 reassumed 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 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.
15
<PAGE>
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%.
16
<PAGE>
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 slow-down 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"). 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 Company'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").
17
<PAGE>
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 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
18
<PAGE>
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 Operations. 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.
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.
19
<PAGE>
<TABLE>
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:
<CAPTION>
Expected Maturity Date (as of March 31, 1999)
-----------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal
2000 2001 2002 2003 2004 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(dollars in thousands)
<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, which are denominated in
currencies other than the U.S. dollar,
20
<PAGE>
o The Company's investments in foreign subsidiaries being
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 downwards in recent
years, such as Brazil, Mexico, China, Venezuela and other Asian
countries.
The Company manages its currency rate risks through a variety of
measures. The Company operates on a decentralized regional basis with
manufacturing operations located in most major markets. As a result, 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 could be made in the currency of
the local entity, whilst still obtaining the benefits of central borrowing
capability. In addition, in certain limited instances, subsidiaries, after
obtaining approval from the Company's head office, will enter into forward
exchange contracts in connection with inter-company purchases and sales 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. Computer
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.
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
21
<PAGE>
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 Form 10-K of the Company includes forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934,
including statements regarding, among other items, (i) the Company's development
of new products, including, among others, Percepta, AO Compact, Visuality,
Spectralite, ViZio, Access(R) 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 Company'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
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Actual results could differ materially from the
forward-
22
<PAGE>
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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are set forth on pages
F-1, and F3 through F-27 and the related financial statement schedule is set
forth on page S-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
23
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the
Company's directors and executive officers. All directors hold office until the
annual meeting of stockholders of the Company following their election or until
their successors are duly elected and qualified. Officers are appointed by, and
serve at the discretion of, the Board of Directors.
Name Age Position
---- --- --------
Irving S. Shapiro............... 82 Chairman of the Board
Douglas D. Danforth............. 76 Director
Hamish Maxwell.................. 72 Director
Maurice J. Cunniffe............. 66 Director
Jackson L. Schultz.............. 73 Director
A. William Hamill............... 51 Director
John E. Heine................... 55 President and Chief Executive Officer,
Director
James H. Cox.................... 50 Executive Vice President, Assistant
Secretary and Assistant Treasurer
Steven M. Neil.................. 46 Executive Vice President, Finance,
Chief Financial Officer, Secretary
and Treasurer
Stephen J. Lee.................. 46 Vice President, Human Resources
Barry J. Packham................ 52 Vice President, Manufacturing
Development
Theodore Gioia.................. 41 Vice President, Strategic Planning
Adrian Walker................... 46 Vice President, Regional Director,
Asia
Alan S. Vaughan................. 55 Vice President, Worldwide Rx
Operations
The principal occupations and positions for at least the past five
years of each of the directors and executive officers of the Company are as
follows (references to the Company include its predecessors):
Irving S. Shapiro has been Chairman of the Board of the Company since
December 1994. Mr. Shapiro is Of Counsel to Skadden, Arps, Slate, Meagher & Flom
LLP. He was Chairman and Chief Executive Officer of E.I. du Pont de Nemours and
Company from 1974 to 1981. He is Chairman of the Board of Marvin & Palmer
Associates, Inc., and is a director of J.P. Morgan Florida Federal Savings Bank,
Pediatric Services of America Inc., and Gliatech, Inc.
Douglas D. Danforth has been a director of the Company since December
1994. He was Chairman and Chief Executive Officer of Westinghouse Electric
Corporation from 1983 to 1987. He is a director of Daltile Inc.
Hamish Maxwell has been a director of the Company since December 1994.
Mr. Maxwell was Chairman of the Executive Committee of the Board of Directors of
Philip Morris Companies Inc. from September 1991 through April 1995 and was
Chairman and Chief Executive Officer of such company from 1984 to 1991. He is a
director of Bankers Trust Company, Bankers Trust New York Corporation and
Chairman of WPP Group plc.
Maurice J. Cunniffe has been a director of the Company since December,
1996. He is Chairman and Chief Executive Officer of American Optical
Corporation, a company of which he has been sole shareholder since 1982.
24
<PAGE>
Jackson L. Schultz has been a director of the Company since November
1995. Mr. Schultz joined Wells Fargo Bank in 1970, retiring in 1990 as Senior
Vice President responsible for Public and Governmental Affairs.
A. William Hamill has been a director of the Company since December,
1996. Mr. Hamill was Executive Vice President and Chief Financial Officer of
Union Camp Corporation from 1996 through April 1999. From 1993 through 1996, he
was a partner in SCI Investors Inc. and a director of Custom Papers Group Inc.
From 1991 to 1993, he was Senior Vice President and Chief Financial Officer of
Specialty Coatings International Inc.. From 1975 through 1990, Mr. Hamill was
with Morgan Stanley & Co. Incorporated, where he was a Managing Director.
John E. Heine has served as Chief Executive Officer and President of
the Company since November 1981 and served as Chairman of the Board of the
Company from September 1993 to December 1994. Mr. Heine joined the Company in
1981 as Managing Director of Sola International Holdings, Ltd. and previously
held general management positions with Southern Farmers Holdings, Ltd. in
Adelaide and H.J. Heinz in Melbourne, Australia.
James H. Cox was appointed Executive Vice President in December 1996,
Assistant Secretary and Assistant Treasurer of the Company in September 1993. He
was President of Sola Optical USA, the Company's North American eyeglass lens
business from 1991 to 1998. He joined the Company as Vice President,
Manufacturing in 1985. Mr. Cox was formerly Executive Vice President of
Operations with Bausch & Lomb's Consumer Products Division.
Steven M. Neil was appointed Executive Vice President, Finance, Chief
Financial Officer, Secretary and Treasurer in October 1997. Prior to joining
Sola, Mr. Neil was Vice President-Finance, Treasurer and Chief Financial Officer
of Perrigo Company from May 1995 to September 1997. He also served as President
of Perrigo International, Inc. from July 1996. Mr. Neil served as Vice
President-Controller of Perrigo Company from January 1993 to May 1995. Prior to
that time he served as Controller and Chief Accounting Officer with Applied
Magnetics Corporation, where he also served in other positions of increasing
responsibility since 1983. He is a member of the Board of Directors of
Intelligent Solutions, Inc.
Stephen J. Lee was appointed Vice President, Human Resources of the
Company in 1988 and was formerly Director of Personnel for Pilkington's
Ophthalmic and Insulation Divisions. Mr. Lee joined the Pilkington Group in
1974.
Barry J. Packham joined the Company as Vice President, Manufacturing
Development in February 1993. Mr. Packham was Managing Director of Ceramic Fuel
Cells Ltd., a research and development joint venture consortium in Melbourne,
Australia, from 1991 to 1993 and formerly held manufacturing and general
management positions with Kodak and Leigh-Mardon Pty. Ltd.
Theodore Gioia has served as Vice President, Strategic Planning since
1992. Mr. Gioia joined the Company as Director of Strategic Planning in 1989,
having sold the start-up recording company he founded in 1987. Mr. Gioia was
previously a consultant with McKinsey & Company and the Boston Consulting Group.
Adrian P. Walker joined the Company as Regional Director, Asia in
November 1996. Mr. Walker held a number of general management positions with
subsidiaries of BTR plc. from March 1980 to November 1996. He was most recently
General Manager of ACI Laminates and Insulations, based in Melbourne, Australia
from July 1995 to October 1996. From August 1992 to July 1995 he was Managing
Director of Dunlop Slazenger (Far East), in Malaysia, and from April 1985 to
July 1992 was General Manager, Serck Services (Gulf) Ltd., in the United Arab
Emirates.
25
<PAGE>
Alan S. Vaughan was appointed Vice President, Worldwide Rx Operations
in June 1994, having previously served as European Manufacturing and Technical
Director. Mr. Vaughan joined the Company in 1978 as Managing Director of Sola
ADC Lenses in Ireland. He was previously Director of Operations with Johnson &
Johnson (Ireland).
Item 11. EXECUTIVE COMPENSATION
Incorporated by reference to the material included under the caption
"Compensation of Executive Officers" in the Company's proxy statement for the
fiscal year ended March 31, 1999.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the material included under the caption
"Security Ownership of Certain Beneficial Owners and Managers" in the Company's
proxy statement for the fiscal year ended March 31, 1999.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the material included under the caption
"Certain Transactions" in the Company's proxy statement for the fiscal year
ended March 31, 1999.
26
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report:
1. Financial Statements. See Index to Consolidated Financial Statements
included on page F-1.
2. Financial Statement Schedules. See "Schedule II - Valuation and
Qualifying Accounts" included on page S-1.
Schedules other than those listed above have been omitted since
they are either not required, not applicable or the information is
otherwise included.
3. List of Exhibits. See Index of Exhibits included on page E-1.
(b) Reports on Form 8-K:
None.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SOLA INTERNATIONAL INC.
(Registrant)
Date: June 16, 1999 By: /s/Steven M. Neil
-------------- -----------------------------
Steven M. Neil
Executive Vice President,
Finance, Chief
Financial Officer, Secretary
and Treasurer
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Irving S. Shapiro
- -------------------------- Chairman of the Board June 16, 1999
Irving S. Shapiro
/s/ John E. Heine
- -------------------------- President and Chief Executive Officer, June 16, 1999
John E. Heine Director (Principal Executive Officer)
/s/ Steven M. Neil
- -------------------------- Executive Vice President, Finance, Chief June 16, 1999
Steven M. Neil Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)
/s/ Douglas D. Danforth
- -------------------------- Director June 16, 1999
Douglas D. Danforth
/s/ Hamish Maxwell
- -------------------------- Director June 16, 1999
Hamish Maxwell
/s/ Maurice J. Cunniffe
- -------------------------- Director June 16, 1999
Maurice J. Cunniffe
/s/ A. William Hamill
- -------------------------- Director June 16, 1999
A. William Hamill
/s/ Jackson L. Schultz
- -------------------------- Director June 16, 1999
Jackson L. Schultz
</TABLE>
28
<PAGE>
SOLA INTERNATIONAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets as of March 31, 1999 and 1998.................. F-3
Consolidated Statements of Income for the years ended March 31, 1999,
1998 and 1997............................................................ F-4
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1999, 1998 and 1997 ........................................... F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1999, 1998 and 1997............................................ F-6
Notes to Consolidated Financial Statements................................. F-7
Quarterly Financial Data (unaudited)....................................... F-28
Financial Statement Schedule............................................... S-1
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Shareholders
Sola International Inc.
We have audited the accompanying consolidated balance sheets of Sola
International Inc. as of March 31, 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. Our audits also included the financial
statement schedule listed in the index at item 14(a). These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sola International Inc. as of March 31, 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. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/Ernst & Young LLP
Palo Alto, California
May 6, 1999
F-2
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<CAPTION>
March 31,
------------------------------
ASSETS 1999 1998
--------- ---------
<S> <C> <C>
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
========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<CAPTION>
Year Ended March 31,
-----------------------------------------------
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 dilutivesecurities outstanding ......... 25,412 25,547 24,859
========= ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share data)
<CAPTION>
Cumulative
Other
Retained Compre- Total
Additional Equity Earnings/ hensive Share-
Common Stock Paid-in Participation(Accumulated Income holders'
Shares Value Capital Loans Deficit) (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
====== ======== ======== ======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Year Ended March 31,
-------------------------------------------------
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
========= ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-6
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Basis of Presentation
Sola International Inc. ("Company") 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.
F-7
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies - (Continued)
Property, Plant and Equipment:
Property, plant and equipment are stated at cost and are depreciated on
a straight-line basis over the estimated useful lives of the related assets
(buildings--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 $193.9 million and $196.5 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.
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 FASB Statement No. 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.
F-8
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies - (Continued)
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 on-going credit evaluations of its
customers.
Advertising and Promotion Costs:
The Company's policy is to expense advertising and promotion costs as
they are incurred. The Company's advertising and promotion expenses were
approximately $9.3 million, $12.3 million, and $12.5 million for fiscal 1999,
1998, 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.
F-9
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies - (Continued)
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.
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.
F-10
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies - (Continued)
<TABLE>
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:
<CAPTION>
Year Ended March 31,
---------------------------------
1999 1998 1997
------- ------- -------
(in thousands, except per share data)
<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.
F-11
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. Inventories
March 31,
----------------------------
1999 1998
-------- --------
(in thousands)
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,
---------------------
1999 1998
-------- --------
(in thousands)
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.
F-12
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Long-Term Debt
March 31,
1999
-------
(in thousands)
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
=======
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
F-13
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Bank Credit Agreement - (Continued)
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 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. 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%.
F-14
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. Senior Notes - (Continued)
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.
F-15
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Common Stock - (Continued)
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.
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.
F-16
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Common Stock - (Continued)
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,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
(in thousands, except per share data)
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.
F-17
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Common Stock - (Continued)
Option Activity
<TABLE>
A summary of the Company's stock option activity, and related
information for fiscal 1997, 1998 and 1999 follows:
<CAPTION>
Number of Securities Weighted Average
Underlying Options Exercise Price
------------------ --------------
(in thousands, except per share data)
<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
Weighted average fair value of options granted during fiscal year:
1999 ..................................................... $ 7.83
1998 ..................................................... $ 12.46
1997 ..................................................... $ 13.65
</TABLE>
F-18
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Common Stock - (Continued)
<TABLE>
The following table summarizes stock options outstanding at March 31,
1999:
<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:
(in thousands)
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 slow-downs 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
========
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.
F-19
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. Special Charges - (Continued)
The economic slow-down 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 reassumed 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").
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.
<TABLE>
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.
<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>
F-20
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
12. Defined Benefit Retirement Plans - (Continued)
<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
======== ======== ======== ========
Domestic Pension International Pension
Plan Plan
Year ended March 31, (in thousands) 1999 1998 1999 1998
-------- -------- -------- --------
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>
The assumptions used in the measurement of the Company's benefit
obligation are shown in the following table:
Domestic Pension International
Plan Pension Plan
Year ended March 31, 1999 1998 1999 1998
---- ---- ---- ----
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%
F-21
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Defined Benefit Retirement Plans - (Continued)
<TABLE>
Net periodic pension costs include the following components:
<CAPTION>
Domestic Pension Plan International Pension 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:
Year Ended March 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Domestic ................................. $ 9,681 $42,918 $14,351
Foreign ................................. 10,511 33,034 27,035
------- ------- -------
$20,192 $75,952 $41,386
======= ======= =======
The components of the provision for income taxes are as follows:
Year Ended March 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
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
======== ======== ========
F-22
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Income Taxes - (Continued)
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.
A reconciliation between income tax provisions computed at the U.S.
federal statutory rate and the effective rate reflected in the statements of
income is as follows:
Year Ended March 31,
----------------------
1999 1998 1997
---- ---- ----
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%
==== ==== ====
F-23
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Income Taxes - (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
March 31,
-----------------
1999 1998
------- -------
(in thousands)
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
======= =======
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.
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
F-24
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Income Taxes - (Continued)
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 noncancelable 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 Environmental 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 financial position.
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
F-25
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. Contingencies - (Continued)
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.
16. Worldwide Operations
The Company operates in the ophthalmic industry in the design and
manufacture of eyeglass lenses.
<TABLE>
A summary of information about the Company's geographic areas is as
follows:
<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
<FN>
(a) Revenues are attributed to regions based on the location of Sola and its
subsidiaries' country or region of domicile.
</FN>
</TABLE>
Internal sales represent intercompany sales between regions at a
mark-up from cost; the elimination of any profit arising from such sales is
reflected in eliminations in determining operating income.
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.
F-26
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17. Pro Forma Data
The following pro forma data, as restated for the adoption of FAS 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,
1997
-----------
(in thousands,
except per share
data)
Net sales ............................................... $ 507,713
===========
Net income .............................................. $ 41,968
===========
Earnings per share - basic:
Net income ............................................ $ 1.72
===========
Earnings per share - diluted:
Net income ............................................ $ 1.64
===========
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.
<TABLE>
18. Supplementary Cash Flow Data
<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>
F-27
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
QUARTERLY FINANCIAL DATA
(in thousands, except per share data)
(unaudited)
<CAPTION>
Quarter Ended
-------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31,
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
Quarter Ended
-------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31,
1998 1998 1998 1999
--------- --------- --------- ---------
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>
F-28
<PAGE>
<TABLE>
SCHEDULE II
SOLA INTERNATIONAL INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<CAPTION>
Balance, Charged Balance,
Beginning to End of
of Period Expenses Deductions Other(1) Period
--------- -------- ---------- -------- ------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1999
Allowance for doubtful accounts ........... $ 4,956 $ 2,716 $ (677) $ 8 $ 7,003
======= ======= ======= ========= =======
Allowance for excess and obsolete
inventory .............................. $ 4,360 $ 5,620 $ (666) $ (78) $ 9,236
======= ======= ======= ========= =======
Year ended March 31, 1998
Allowance for doubtful accounts ........... $ 4,030 $ 1,337 $ (254) $ (157) $ 4,956
======= ======= ======= ========= =======
Allowance for excess and obsolete
inventory .............................. $ 4,471 $ 1,833 $(1,578) $ (366) $ 4,360
======= ======= ======= ========= =======
Year ended March 31, 1997
Allowance for doubtful accounts ........... $ 5,424 $ 1,258 $(2,652) $ -- $ 4,030
======= ======= ======= ========= =======
Allowance for excess and obsolete
inventory .............................. $ 3,434 $ 1,593 $ (556) $ -- $ 4,471
======= ======= ======= ========= =======
<FN>
- --------------------
(1) Other relates primarily to foreign currency translation adjustments.
</FN>
</TABLE>
S-1
<PAGE>
<TABLE>
INDEX OF EXHIBITS
<CAPTION>
Page Number or
Exhibit No. Description Incorporation by Reference to
----------- ----------- -----------------------------
<S> <C> <C>
2.1 Purchase agreement between Sola Filed as Exhibit 2 to the Form 8-K of the
International Inc. and American Optical Company, dated May 6, 1996, and
Corporation, dated as of May 6, 1996 incorporated herein by reference
3.1 Amended and Restated Certificate of Filed as Exhibit 3.1 to the Annual Report
Incorporation of the Company on Form 10-K of the Company for the
fiscal year ending March 31, 1995, dated
June 7, 1995, and incorporated herein by
reference
3.2 Amended and Restated By-Laws of the Company Filed as Exhibit 3 to the Company's
Quarterly Report on Form 10-Q for the
period ending September 30, 1998, and
incorporated herein by reference
4.1 Rights Agreement dated as of August 27, Filed as Exhibit 1 to the Form 8-A of the
1998 between Sola International Inc. and Company, dated August 27, 1998, and
Bank Boston N.A. incorporated herein by reference
10.1 Purchase Agreement, dated as of September Filed as Exhibit 10.1 to the Registration
1, 1993 by and between Sola Holdings Inc., Statement, as amended, on Form S-1 of the
Pilkington plc and certain of Pilkington Company (File No. 33-68824) and
plc's subsidiaries incorporated herein by reference
10.2* Confidential Severance Agreement between Filed as Exhibit 10 to the Company's
Sola International Inc. and John E. Heine, Quarterly Report on Form 10-Q for the
dated as of November 20, 1996 period ending December 31, 1996, and
incorporated herein by reference
10.3* Confidential Severance Agreement between
Sola International Inc. and James H. Cox,
dated as of January 1, 1997
10.4* Employment Agreement between Sola Filed as Exhibit 10.2 to the Registration
International Inc. and Steven M. Neil, Statement, as amended, on Form S-3 of the
dated as of September 2, 1997 Company (File No. 333-45929) and
incorporated herein by reference
10.5* Confidential Severance Agreement between
Sola International Inc. and Steven M.
Neil, dated as of October 13, 1997
10.6* Confidential Severance Agreement between
Sola International Inc. and Stephen J.
Lee, dated as of January 1, 1997
10.7* Confidential Severance Agreement between
Sola International Inc. and Theodore Gioia
dated as of January 1, 1997
E-1
<PAGE>
INDEX OF EXHIBITS
(continued)
Page Number or
Exhibit No. Description Incorporation by Reference to
----------- ----------- -----------------------------
10.8 Multicurrency Credit Agreement, dated as Filed as Exhibit 4 to the Report on Form
of June 14, 1996, among Sola International 8-K/A of the Company, dated May 6, 1996,
Inc., and the other Borrowers as the and incorporated herein by reference
Borrowers, the Subsidiary Guarantors, Bank
of America National Trust and Savings
Association, as Agent and Letter of Credit
Issuing Bank, The First National Bank of
Boston and The Bank of Nova Scotia, as
Co-Agents, and the Other Financial
Institutions Party Thereto
10.9 Amendment No. 1 to the Multicurrency Filed as Exhibit 10.1 to the Company's
Credit Agreement, dated as of June 14, Quarterly Report on Form 10-Q for the
1996, among Sola International Inc., and period ending December 31, 1997, and
the other Borrowers as the Borrowers, the incorporated herein by reference
Subsidiary Guarantors, The Bank of America
National Trust and Savings Association, as
Agent and Letter of Credit Issuing Bank,
The First National Bank of Boston and The
Bank of Nova Scotia, as Co-Agents, and the
Other Financial Institutions Party Thereto
10.10 Amendment No. 2 to the Multicurrency As above except Exhibit 10.2
Credit Agreement, dated as of June 14,
1996, among Sola International Inc., and
the other Borrowers as the Borrowers, the
Subsidiary Guarantors, The Bank of America
National Trust and Savings Association, as
Agent and Letter of Credit Issuing Bank,
The First National Bank of Boston and The
Bank of Nova Scotia, as Co-Agents, and the
Other Financial Institutions Party Thereto
10.11 Amendment No. 3 to the Multicurrency Filed as Exhibit 10.1 to the Company's
Credit Agreement, dated as of June 14, Registration Statement, as amended, on
1996, among Sola International Inc., and Form S-3 of the Company (File No
the other Borrowers as the Borrowers, the 333-45929) and incorporated herein by
Subsidiary Guarantors, The Bank of America reference
National Trust and Savings Association, as
Agent and Letter of Credit Issuing Bank,
The First National Bank of Boston and The
Bank of Nova Scotia, as Co-Agents, and the
Other Financial Institutions Party Thereto
10.12 Lease Agreement, dated May 10, 1993, Filed as Exhibit 10.9 to the Registration
between Sola Optical Taiwan Ltd. and Chang Statement, as amended, on Form S-1 of the
Jin Co., Ltd. (including English summary Company (File No. 33-68824) and
of principal terms) incorporated herein by reference
10.13 Lease Agreement between Optical Sola de Filed as Exhibit 10.10 to the
Mexico and Messrs. Salvadore Registration Statement, as amended, on
Luttenroth-Camou and Carlos Form S-1 of the Company (File No.
Lutteroth-Lomeli (including English 33-68824) and incorporated herein by
summary of principal terms) reference
E-2
<PAGE>
INDEX OF EXHIBITS
(continued)
Page Number or
Exhibit No. Description Incorporation by Reference to
----------- ----------- -----------------------------
10.14* Sola Investors Inc. Stock Option Plan Filed as Exhibit 10.11 to the Annual
Report on Form 10-K of the Company, dated
March 31, 1994, and incorporated herein
by reference
10.15 Amendment Number One to Sola Investors Filed as Exhibit 10.21 to the
Inc. Stock Option Plan Registration Statement, as amended, on
Form S-1 of the Company (File No.
33-87892) and incorporated herein by
reference
10.16 Sola International Inc. Stock Option Plan Filed as Exhibit 10.22 to the
Registration Statement, as amended, on
Form S-1 of the Company (File No.
33-87892) and incorporated herein by
reference
10.17 Sola International Inc. Stock Option Plan, Filed as Exhibit A and Exhibit B to the
Amendment Number One and Amendment Number fiscal 1996 Proxy Statement of Sola
Two International Inc., dated July 12, 1996,
and incorporated herein by reference
10.18 Amended and Restated 1998 Sola Filed as Appendix A to the Fiscal 1998
International Inc. Stock Option Plan Proxy Statement of Sola International
Inc. dated June 30, 1998 and incorporated
herein by reference
10.19 Indenture by and between the Company and Filed as Exhibit 10.21 to the Annual
State Street Bank and Trust Company of Report on Form 10-K of the Company, dated
California, N.A., as Trustee, with respect March 31, 1998, and incorporated herein
to the 6 7/8% Notes due 2008 by reference
10.20 Officers' Certificate Related to Senior Filed as Exhibit 99.1 to the Company's
Notes Quarterly Report on Form 10-Q for the
period ending June 30, 1998, and
incorporated herein by reference
10.21 Form of Indemnification Agreement between Filed as Exhibit 10.24 to the
the executive officers and directors of Registration Statement, as amended, on
the Company and the Company Form S-1 of the Company (File No.
33-87892) and incorporated herein by
reference
10.22 Sola International Inc. Management Filed as Exhibit 10.25 to the
Incentive Plan Registration Statement, as amended, on
Form S-1 of the Company (File No.
33-87892) and incorporated herein by
reference
10.23 Sola Optical 401(k) Savings Plan Filed as Exhibit 4.4 to the Registration
Statement on Form S-8 of the Company
(File No. 333-4489), filed with the
Commission on May 23, 1996, and
incorporated herein by reference
10.24 Trust Agreement entered into as of May 15, Filed as Exhibit 4.5 to the Registration
1996 between Sola Optical USA, Inc. and Statement on Form S-8 (File No. 333-4489)
Chase Manhattan Bank, N.A. of the Company, filed with the Commission
on May 23, 1996, and incorporated herein
by reference
12.1 Statement regarding ratio of earnings to
fixed charges
E-3
<PAGE>
INDEX OF EXHIBITS
(continued)
Page Number or
Exhibit No. Description Incorporation by Reference to
----------- ----------- -----------------------------
21.1 List of subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, Independent
Auditors
27.1 Financial Data schedule
99.1 Factors Affecting Future Operating Results
<FN>
- -------------------------
*Compensatory plan or management agreement
</FN>
</TABLE>
E-4
CONFIDENTIAL SEVERANCE AGREEMENT
This agreement between SOLA INTERNATIONAL, INC., a Delaware corporation
(the "Company") and James H. Cox (the "Executive") is dated and entered into as
of January 1, 1997. The Company and the Executive hereby agree as follows:
WHEREAS, the Executive is a valued employee of the Company; and
WHEREAS, the Company desires to provide the Executive with certain
benefits should his employment be terminated:
THEREFORE, in consideration of the foregoing, the Company and the
Executive have agreed to the following terms while he is employed and in the
event of such a Severance:
1. Employment Term. The Executive acknowledges that he is employed
at-will by the Company subject only to the terms of this Agreement. The
Executive agrees to devote substantially all of his productive time, ability and
attention to the business of the company while he is employed by the Company,
and shall not, directly or indirectly, render services of a business, commercial
or professional nature to any other person or organization, whether for
compensation or otherwise, without the prior consent of the President of the
Company or his designee.
2. Severance. In the event that any of the following occurs, the
Executive shall be entitled to the benefits set forth in paragraph 3 below. For
purposes of this Agreement a Severance shall have taken place only if:
A. The Executive's employment with the Company is terminated
for any reason other than cause. For purposes of this Agreement, "cause" is
defined as the Executive's engaging in: (i) willful misconduct, neglect of
duties, or any act or omission any or all of which materially adversely affect
the Company's business, or (ii) conviction of a felony.
(i) For purposes of subparagraph 2.A(i), no such
event or omission shall constitute cause unless the Executive fails to cure the
underlying matter within forty-five (45) days after receipt from the Company of
a detailed statement of the cause for termination.
B. The Executive is regularly assigned duties and
responsibilities that materially diminish his position as an Executive of the
Company. For the purpose of this subparagraph, the assignment of duties, other
than those Executive performs as of the date of this Agreement, whether or not
in lieu of those previously assigned duties, does not by itself constitute a
material diminishment of the Executive's position with the Company.
1
<PAGE>
C. The Executive's compensation (including but not limited to
salary and benefits) is reduced and that reduction is not part of, or is
disproportionate to a company general reduction of executive compensation.
The Executive shall not be entitled to any Severance Benefits as set
forth in paragraph 3 of this Agreement if he freely and voluntarily resigns his
employment with the Company.
3. Severance Benefits. If a Severance takes place, then immediately
after the occurrence of that event or events, the Executive shall be entitled to
the following:
A. To continue to receive his compensation for either the
period of twelve (12) months or one (1) month per completed year of service with
the Company, up to a maximum of (18) months, whichever is longer, commencing
the first of the month following the month in which the Severance takes place.
For purposes of this paragraph, the Executive's "compensation" shall be that
annual salary in effect immediately prior to the Severance, plus the average of
Management Incentive Plan compensation (or successor thereto) paid to him over
the three years immediately prior to the Severance.
B. To continue for either a period of twelve (12) months or
one (1) month per completed year of service with the Company up to a maximum of
eighteen (18) months whichever is longer to be covered by and participate in, at
the Company's expense, any and all benefit plans the Company regularly provides
its other executives or employees including, but not limited to, health, dental,
vision, pension or other retirement plans.
C. To receive outplacement assistance in the form of
professional consultation and administrative assistance, subject to the approval
of the Company, which shall not be unreasonably withheld. The Company shall pay
up to a maximum of twenty-five thousand dollars ($25,000.00) for the
aforementioned outplacement services during the period the Executive receives
Severance Benefits as described in A and B above.
4. Non-Mitigation. The Executive shall not be required to mitigate the
amount of any payments or other benefits provided under this Agreement at any
time by seeking other employment or consultancy; however the Executive shall
notify the Company of any employment or consulting engaged in during the period
covered by Severance Benefits provided in Section 3 and the amounts payable and
benefits provided shall be reduced or offset by the amount of any salary, bonus
of any sort, fees, stock, stock options, stock dividends, other securities or
any non-cash consideration so paid or payable and benefits to be received with
respect to such period and that offset or reduction shall be determined by the
Company in the complete and absolute exercise of its sole discretion.
2
<PAGE>
5. Non-Disparagement. In the event of a Severance both the Executive
and the Company agree that neither of them will disparage the other in any
manner.
6. Covenants-Not to Compete and Not to Solicit.
A. Covenant Not to Compete.
The Executive recognizes that the services to be performed
while employed by the Company are special, unique, and extraordinary and that by
reason of the Executive's prior and continued employment with the Company the
Executive has acquired and will acquire confidential information and trade
secrets concerning the Company's operations ("Company Confidential Information")
and the operations of its parent and affiliates ("Affiliate Confidential
Information"). Accordingly, it is agreed that during the period of Employment by
the Company, and for any period following a Severance covered by payments
provided for in Section 3 hereof, the Executive will not, directly or
indirectly, as an officer, director, stockholder, partner, associate, owner,
employee, consultant or otherwise, become or be interested in or associated with
any other corporation, firm or business engaged in the same or a similar or
competitive business with the Company or any of its affiliates in any
geographical area in which the Company or any of its affiliates are then engaged
in business, provided that the Executive's ownership, directly or indirectly, of
not more than one percent of the issued and outstanding stock of a corporation
the shares of which are regularly traded on a national securities exchange or in
the over-the-counter market shall not, in any event, be deemed to be a violation
of this subsection.
B. Covenant Not to Solicit.
The Executive agrees not to solicit any person employed by the
Company or its affiliates who perform a scientific, technical, sales or
marketing function. As used herein, "solicit" or "soliciting" means any direct
or indirect approach or appeals to such an employee to leave the Company.
Indirect solicitation includes but is not limited to, acting through a third
party or parties or characterizing job advertisements or opportunities in such a
fashion so as to entice any employee. The executive agrees that, if approached
by a Company employee, the Executive will:
(i) Inform the employee of the Executive's
obligations set forth in this subparagraph;
(ii) Refer the employee to the relevant Company
Human Resources personnel; and
(iii) Request that the employee confirm in writing
to the Company that he has approached the
Executive and confirm that request in a
memorandum to such Human Resources
organization.
3
<PAGE>
7. Confidentiality. The Executive recognizes that the services to be
performed while employed by the Company are special, unique, and extraordinary
and that by reason of the Executive's prior and continued employment with the
Company the Executive has acquired and will acquire confidential information and
trade secrets concerning the Company's operations ("Company Confidential
Information") and the operations of its parent and affiliates ("Affiliate
Confidential Information"). Accordingly, it is agreed that:
A. The Executive shall not divulge to any entity or person,
other than the Company or its affiliates, or, in the event of an assignment of
this Agreement pursuant to Section 10 hereof, the assignee and its affiliates,
if any, whether while employed or after a Severance, any Company Confidential
Information concerning the Company's customer lists, research or development
programs or plans, processes, methods or any other of its trade secrets, except
information that is then available to the public in published literature and
became publicly available through no fault of the Executive.
B. The Executive shall not divulge to any person or entity,
including an assignee of this Agreement and its affiliates, but excepting the
Company and its affiliates, whether while employed or after a Severance, any
Affiliate Confidential Information acquired by the Executive concerning the
customer lists, research or development programs or plans, processes, methods or
any other trade secrets of the parent or any affiliate, except information which
is then available to the public in published literature and became publicly
available through no fault of the Executive.
C. The Executive acknowledges that all information the
disclosure of which is prohibited hereby is of a confidential and proprietary
character and of great value to the Company and its affiliates. Upon a
Severance, the Executive shall forthwith deliver up to the Company all records,
memoranda, data and documents of any description which refer or relate in any
way to Company Confidential Information or Affiliate Confidential Information
and return to the Company any of its equipment and property which may then be in
the Executive's possession or under the executive's personal control. Upon the
assignment of this Agreement, pursuant to Section 10, the Executive shall
forthwith deliver up to the Company all records, memoranda, data and documents
of any description which refer or relate in any way to Affiliate Confidential
Information and return to the Company any of its equipment and property which
may then be in the Executive's possession or under the Executive's personal
control.
D. The Executive agrees that while employed and for a two year
period after the occurrence of a Severance not to disclose the terms of this
Agreement to any person other than the Executive's immediate family, the
executive's attorneys, accountants and other professional advisors or a
prospective employer permitted hereby, except as otherwise required by law.
4
<PAGE>
8. Invention Assignment. The Executive agrees that any invention made
by the Executive while employed shall belong to the Company if (i) it was made
in the normal course of the duties of the Executive or in the course of duties
falling outside the Executive's normal duties but specifically assigned to the
Executive, and the circumstances in either case were such that an invention
might reasonably be expected to result from the carrying out of such duties, or
(ii) the invention was made in the course of the duties of the Executive and, at
the time of making the invention, because of the nature of the Executive's
duties and the particular responsibilities arising from the nature of the
Executive's duties, the Executive had a special obligation to further the
interests of the Company. In addition, if (x) the Executive while employed shall
make any improvement or develop any know-how, copyrightable work or design, (y)
such improvement, know-how, copyrightable work or design is relevant to the
business of the Company or any of its subsidiaries, and (z) such improvement,
know-how, copyrightable work or design arouse directly out of any work carried
out while employed, or out of Confidential Company Information or Confidential
Affiliate Information to which the Executive had access while in the employ of
the Company, then such improvement, know-how, copyrightable work or design shall
belong to the Company whether or not it was disclosed to the Company while
employed by the Company.
A. In the event that the Executive makes any invention or
develops any improvement, know-how, copyrightable design or work which belongs
to the Company, the Executive shall fully, freely and immediately communicate
the same to the Company and the Executive shall, if and as desired by the
Company execute all documents and do all acts and things at the Company's cost
which may be necessary or desirable to obtain letters patent or other adequate
protection in any part of the world for such invention, improvement, know-how,
copyrightable work or design and to vest the same in the Company for the
Company's benefit. The Executive hereby irrevocably appoints the Company as the
Executive's attorney in the Executive's name and on the Executive's behalf to
execute all such deeds and documents and to do all such acts and things as may
be necessary to give effect to this Subsection in the event that the Executive
fails to comply within seven days with the written directions given by the
Company pursuant to this Subsection.
B. The Executive has been notified and understands that the
provisions of Subsections 6(g) and 6(h) hereof do not apply to any invention
that qualifies fully under the provisions of Section 2870 of the California
Labor Code, which states as follows:
(i) Any provision in an employment agreement which
provides that an employee shall assign, or offer to assign, any of his or her
rights in an invention to his or her employer shall not apply to an invention
that the employee developed entirely on his or her own time without using the
employer's equipment, supplies, facilities, or trade secret information except
for those inventions that either:
5
<PAGE>
(1) Relate at the time of conception or
reduction to practice of the invention to the employer's business, or actual or
demonstrably anticipated research or development of the employer; or
(2) Result from any work performed by the
employee for the employer.
(ii) To the extent a provision in an employment
agreement purports to require an employee to assign an invention otherwise
excluded from being required to be assigned under subdivision (a), the provision
is against the public policy of this state and is unenforceable.
9. Remedies. The Company shall be entitled, in addition to any other
right or remedy that it may have at law or in equity with respect to a breach of
this Agreement by the Executive (including the right to terminate payments
pursuant to Section 3 hereof), to an injunction, without the posting of a bond
or other security, enjoining or restraining the Executive from any violation or
threatened violation of this section, and the Executive hereby consents to the
issuance of such an injunction.
10. Moral Rights Waiver. "Moral Rights" means any right to claim
authorship of a work, any right to object to any distortion, or other
modification of a work, and any similar right, existing under the law of any
country in the world, or under any treaty. Executive hereby irrevocably
transfers and assigns to the Company any and all Moral Rights that Executive may
have in any services or materials. Executive also hereby forever waives and
agrees never to assert against client, its successors or assigns and any and all
Moral Rights Executive may have in any services or materials, even after
termination of this Agreement.
11. Release. In consideration of the payments and covenants made in
this Agreement, the Executive hereby releases the Company, its Employees,
officers, directors, subsidiaries, affiliates, successors and assigns and the
Company, its subsidiaries, affiliates, successors and assigns hereby release the
Executive from any and all claims for relief or causes of action relating to any
matters of any kind arising out of his employment (or its termination) with the
Company excepting those claims for relief for causes of action relating to the
Severance Benefit obligations of the Company under Section 3 of this Agreement.
The Executive expressly waives all rights and remedies under Section
1542 of the Civil Code of the State of California which provides as follows:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
6
<PAGE>
The Executive understands that if the facts with respect to which this
Agreement is executed are found hereafter to be different from the facts which
you now believe to be true, the Executive expressly accepts and assumes the risk
of such possible differences in facts and agrees that this Agreement shall be
and remain effective notwithstanding such differences in facts.
12. Notices. All notices, consents, waivers or demands of any kind
which either party to this Agreement may be required or may desire to serve on
the other party in connection with this Agreement shall be in writing and may be
delivered by personal service or sent by telegraph or cable or sent by
registered or certified mail, return receipt requested with postage thereon
fully prepaid. All such communications shall be addressed as follows:
THE COMPANY: Sola International, Inc.
Suite 200
2420 Sand Hill Road
Menlo Park, California 94025
THE EXECUTIVE:
James H Cox
1956 Perth Avenue
Santa Rosa, CA 95404
If sent by telegraph or cable, a confirmed copy of such telegraphic or
cable notice shall be promptly sent by mail (in the manner provided above) to
the addressees. Service of any such communication made only by mail shall be
deemed complete on the date of actual delivery as shown by the addressee's
registry or certification receipt or at the expiration of the third (3rd)
business day after the date of mailing which ever is later in time. Either party
hereto may from time to time, by notice in writing served upon the other as
aforesaid, designate a different mailing address or a different person to which
such notices or demands are thereafter to be addressed or delivered. Nothing
contained in this Agreement shall excuse either party from giving oral notice to
the other when prompt notification is appropriate, but any oral notice given
shall not satisfy the requirement of written notice as provided in this
paragraph.
13. Choice of Law. This Agreement shall be governed and construed and
enforced in accordance with the laws of the State of California (regardless of
that jurisdiction or any other jurisdictions choice of law principles).
14. Assignment. This Agreement may be assigned by the Company to any
affiliate of the Company or to any non-affiliate of the Company that shall
succeed to the business and assets of the Company. In the event of such
assignment, the Company shall cause such affiliate or non-affiliate as the case
may be, to assume the obligations of the Company hereunder by written agreement
addressed to the
7
<PAGE>
Executive concurrently with any assignment with the same effect as if such
assignee were the Company hereunder. This Agreement is personal to the Executive
and the Executive may not assign any rights or delegate any responsibilities
hereunder without the prior approval of the Company.
15. Entire Agreement. This Agreement is the entire Agreement between
the Company and the Executive with respect to the subject matter hereof and
cancels and supersedes any and all other agreements regarding the subject matter
hereof between the parties. This Agreement may not be altered, modified,
changed, or discharged except in writing signed by both of the parties.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instruments.
17. Construction. If any one or more of the provisions (or any part
thereof) of this Agreement shall be held to be invalid, illegal or unenforceable
in any respect of validity, legality and enforceability of the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.
18. Arbitration. With respect to any controversy arising out of or
relating to this Agreement, or the subject matter thereof, such controversy
shall be settled by final and binding arbitration in Palo Alto, California in
accordance with the then existing rules ("the Rules") of the American
Arbitration Association ("AAA") and judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof; provided
however, that the law applicable to any controversy shall be the law of
California, regardless of its or any jurisdictions choice of law principles.
Arbitration shall be the sole and exclusive remedy for the resolution of the
disputes described above. In any such arbitration, the award or decision shall
be rendered by a majority of the members of a board of arbitration, consisting
of three (3) members, one of whom shall be appointed by each party and the third
of whom shall be the chairman of the panel and be appointed by mutual agreement
of said two party appointed arbitrators. In the event of the failure of said two
arbitrators to agree, within five (5) working days after the commencement of the
arbitration, upon appointment of the third arbitrator, the third arbitrator
shall be appointed by the AAA in accordance with the Rules. In the event that
either party shall fail to appoint an arbitrator within five (5) days after the
commencement of the arbitration proceeding, such arbitrator and the third
arbitrator shall be appointed by the AAA in accordance with the Rules. The
arbitrator is empowered but, not limited, in making an award in favor of the
Executive to require any act or acts which they believe necessary to effectuate
the intent of this Agreement. The Company agrees that any costs of any
arbitration brought whether by the Executive or the Company including the
Executive's reasonable attorney's fees and expenses and the costs, fees and
expenses of the Executive's party appointed arbitrator, shall be borne in their
entirety by the Company.
8
<PAGE>
19. THE EXECUTIVE ACKNOWLEDGES THAT HE HAS HAD THE OPPORTUNITY TO
CONSULT WITH THE ADVISOR OF HIS CHOICE AND THAT HE HAS FREELY AND VOLUNTARILY
ENTERED INTO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year written below.
Sola International, Inc.
By ______________________________
______________________________
James H. Cox
9
CONFIDENTIAL SEVERANCE AGREEMENT
This agreement between SOLA INTERNATIONAL, INC., a Delaware corporation (the
"Company") and Steven M. Neil (the "Executive") is dated and entered into as of
October 13, 1997. The Company and the Executive hereby agree as follows:
WHEREAS, the Executive is a valued employee of the Company; and
WHEREAS, the Company desires to provide the Executive with certain
benefits should his employment be terminated:
THEREFORE, in consideration of the foregoing, the Company and the
Executive have agreed to the following terms while he is employed and in the
event of such a Severance:
1. Employment Term. The Executive acknowledges that he is employed
at-will by the Company subject only to the terms of this Agreement. The
Executive agrees to devote substantially all of his productive time, ability and
attention to the business of the company while he is employed by the Company,
and shall not, directly or indirectly, render services of a business, commercial
or professional nature to any other person or organization, whether for
compensation or otherwise, without the prior consent of the President of the
Company or his designee.
2. Severance. In the event that any of the following occurs, the
Executive shall be entitled to the benefits set forth in paragraph 3 below. For
purposes of this Agreement a Severance shall have taken place only if:
A. The Executive's employment with the Company is terminated
for any reason other than cause. For purposes of this Agreement, "cause" is
defined as the Executive's engaging in: (i) willful misconduct, neglect of
duties, or any act or omission any or all of which materially adversely affect
the Company's business, or (ii) conviction of a felony.
(i) For purposes of subparagraph 2.A(i), no such
event or omission shall constitute cause unless the Executive fails to cure the
underlying matter within forty-five (45) days after receipt from the Company of
a detailed statement of the cause for termination.
B. The Executive is regularly assigned duties and
responsibilities that materially diminish his position as an Executive of the
Company. For the purpose of this subparagraph, the assignment of duties, other
than those Executive performs as of the date of this Agreement, whether or not
in lieu of those previously assigned duties, does not by itself constitute a
material diminishment of the Executive's position with the Company.
1
<PAGE>
C. The Executive's compensation (including but not limited to
salary and benefits) is reduced and that reduction is not part of, or is
disproportionate to a company general reduction of executive compensation.
The Executive shall not be entitled to any Severance Benefits as set
forth in paragraph 3 of this Agreement if he freely and voluntarily resigns his
employment with the Company.
3. Severance Benefits. If a Severance takes place, then immediately
after the occurrence of that event or events, the Executive shall be entitled to
the following:
A. To continue to receive his compensation for either the
period of twelve (12) months or one (1) month per completed year of service with
the Company, up to a maximum of (18) months , whichever is longer, commencing
the first of the month following the month in which the Severance takes place.
For purposes of this paragraph, the Executive's "compensation" shall be that
annual salary in effect immediately prior to the Severance, plus the average of
Management Incentive Plan compensation (or successor thereto) paid to him over
the three years immediately prior to the Severance, or if the Executive has been
employed for less than three years, the annual average of Management Incentive
Plan compensation paid to him during his period of employment with the Company.
B. To continue for either a period of twelve (12) months or
one (1) month per completed year of service with the Company up to a maximum of
eighteen (18) months whichever is longer to be covered by and participate in, at
the Company's expense, any and all benefit plans the Company regularly provides
its other executives or employees including, but not limited to, health, dental,
vision, pension or other retirement plans. In addition, the Executive shall be
entitled to the other benefits specified on the attached Schedule.
C. To receive outplacement assistance in the form of
professional consultation and administrative assistance, subject to the approval
of the Company, which shall not be unreasonably withheld. The Company shall pay
up to a maximum of twenty-five thousand dollars ($25,000.00) for the
aforementioned outplacement services during the period the Executive receives
Severance Benefits as described in A and B above.
4. Non-Mitigation. The Executive shall not be required to mitigate the
amount of any payments or other benefits provided under this Agreement at any
time by seeking other employment or consultancy; however the Executive shall
notify the Company of any employment or consulting engaged in during the period
covered by Severance Benefits provided in Section 3 and the amounts payable and
benefits provided shall be reduced or offset by the amount of any salary, bonus
of any sort, fees, stock, stock options, stock dividends, other securities or
any non-cash consideration so paid or payable and benefits to be received with
respect to such
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period and that offset or reduction shall be determined by the Company in the
complete and absolute exercise of its sole discretion.
5. Non-Disparagement. In the event of a Severance both the Executive
and the Company agree that neither of them will disparage the other in any
manner.
6. Covenants-Not to Compete and Not to Solicit.
A. Covenant Not to Compete.
The Executive recognizes that the services to be performed
while employed by the Company are special, unique, and extraordinary and that by
reason of the Executive's prior and continued employment with the Company the
Executive has acquired and will acquire confidential information and trade
secrets concerning the Company's operations ("Company Confidential Information")
and the operations of its parent and affiliates ("Affiliate Confidential
Information"). Accordingly, it is agreed that during the period of Employment by
the Company, and for any period following a Severance covered by payments
provided for in Section 3 hereof, the Executive will not, directly or
indirectly, as an officer, director, stockholder, partner, associate, owner,
employee, consultant or otherwise, become or be interested in or associated with
any other corporation, firm or business engaged in the same or a similar or
competitive business with the Company or any of its affiliates in any
geographical area in which the Company or any of its affiliates are then engaged
in business, provided that the Executive's ownership, directly or indirectly, of
not more than one percent of the issued and outstanding stock of a corporation
the shares of which are regularly traded on a national securities exchange or in
the over-the-counter market shall not, in any event, be deemed to be a violation
of this subsection.
B. Covenant Not to Solicit.
The Executive agrees not to solicit any person employed by the
Company or its affiliates who perform a scientific, technical, sales or
marketing function. As used herein, "solicit" or "soliciting" means any direct
or indirect approach or appeals to such an employee to leave the Company.
Indirect solicitation inciudes but is not limited to, acting through a third
party or parties or characterizing job advertisements or opportunities in such a
fashion so as to entice any employee. The executive agrees that, if approached
by a Company employee, the Executive will:
(i) Inform the employee of the Executive's
obligations set forth in this subparagraph;
(ii) Refer the employee to the relevant Company
Human Resources personnel; and
(iii) Request that the employee confirm in writing
to the Company that he has approached the
Executive and
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confirm that request in a memorandum to such
Human Resources organization.
7. Confidentiality. The Executive recognizes that the services to be
performed while employed by the Company are special, unique, and extraordinary
and that by reason of the Executive's prior and continued employment with the
Company the Executive has acquired and will acquire confidential information and
trade secrets concerning the Company's operations ("Company Confidential
Information") and the operations of its parent and affiliates ("Affiliate
Confidential Information"). Accordingly, it is agreed that:
A. The Executive shall not divulge to any entity or person,
other than the Company or its affiliates, or, in the event of an assignment of
this Agreement pursuant to Section 10 hereof, the assignee and its affiliates,
if any, whether while employed or after a Severance, any Company Confidential
Information concerning the Company's customer lists, research or development
programs or plans, processes, methods or any other of its trade secrets, except
information that is then available to the public in published literature and
became publicly available through no fault of the Executive.
B. The Executive shall not divulge to any person or entity,
including an assignee of this Agreement and its affiliates, but excepting the
Company and its affiliates, whether while employed or after a Severance, any
Affiliate Confidential Information acquired by the Executive concerning the
customer lists, research or development programs or plans, processes, methods or
any other trade secrets of the parent or any affiliate, except information which
is then available to the public in published literature and became publicly
available through no fault of the Executive.
C. The Executive acknowledges that all information the
disclosure of which is prohibited hereby is of a confidential and proprietary
character and of great value to the Company and its affiliates. Upon a
Severance, the Executive shall forthwith deliver up to the Company all records,
memoranda, data and documents of any description which refer or relate in any
way to Company Confidential Information or Affiliate Confidential Information
and return to the Company any of its equipment and property which may then be in
the Executive's possession or under the executive's personal control. Upon the
assignment of this Agreement, pursuant to Section 10, the Executive shall
forthwith deliver up to the Company all records, memoranda, data and documents
of any description which refer or relate in any way to Affiliate Confidential
Information and return to the Company any of its equipment and property which
may then be in the Executive's possession or under the Executive's personal
control.
D. The Executive agrees that while employed and for a two year
period after the occurrence of a Severance not to disclose the terms of this
Agreement to any person other than the Executive's immediate family, the
executive's
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attorneys, accountants and other professional advisors or a prospective employer
permitted hereby, except as otherwise required by law.
8. Invention Assignment. The Executive agrees that any invention made
by the Executive while employed shall belong to the Company if (i) it was made
in the normal course of the duties of the Executive or in the course of duties
falling outside the Executive's normal duties but specifically assigned to the
Executive, and the circumstances in either case were such that an invention
might reasonably be expected to result from the carrying out of such duties, or
(ii) the invention was made in the course of the duties of the Executive and, at
the time of making the invention, because of the nature of the Executive's
duties and the particular responsibilities arising from the nature of the
Executive's duties, the Executive had a special obligation to further the
interests of the Company. In addition, if (x) the Executive while employed shall
make any improvement or develop any know-how, copyrightable work or design, (y)
such improvement, know-how, copyrightable work or design is relevant to the
business of the Company or any of its subsidiaries, and (z) such improvement,
know-how, copyrightable work or design arouse directly out of any work carried
out while employed, or out of Confidential Company Information or Confidential
Affiliate Information to which the Executive had access while in the employ of
the Company, then such improvement, know-how, copyrightable work or design shall
belong to the Company whether or not it was disclosed to the Company while
employed by the Company.
A. In the event that the Executive makes any invention or
develops any improvement, know-how, copyrightable design or work which belongs
to the Company, the Executive shall fully, freely and immediately communicate
the same to the Company and the Executive shall, if and as desired by the
Company execute all documents and do all acts and things at the Company's cost
which may be necessary or desirable to obtain letters patent or other adequate
protection in any part of the world for such invention, improvement, know-how,
copyrightable work or design and to vest the same in the Company for the
Company's benefit. The Executive hereby irrevocably appoints the Company as the
Executive's attorney in the Executive's name and on the Executive's behalf to
execute all such deeds and documents and to do all such acts and things as may
be necessary to give effect to this Subsection in the event that the Executive
fails to comply within seven days with the written directions given by the
Company pursuant to this Subsection.
B. The Executive has been notified and understands that the
provisions of Subsections 6(g) and 6(h) hereof do not apply to any invention
that qualifies fully under the provisions of Section 2870 of the California
Labor Code, which states as follows:
(i) Any provision in an employment agreement which
provides that an employee shall assign, or offer to assign, any of his or her
rights in an invention to his or her employer shall not apply to an invention
that the employee
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developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or
reduction to practice of the invention to the employer's business, or actual or
demonstrably anticipated research or development of the employer; or
(2) Result from any work performed by the
employee for the employer.
(ii) To the extent a provision in an employment
agreement purports to require an employee to assign an invention otherwise
excluded from being required to be assigned under subdivision (a), the provision
is against the public policy of this state and is unenforceable.
9. Remedies. The Company shall be entitled, in addition to any other
right or remedy that it may have at law or in equity with respect to a breach of
this Agreement by the Executive (including the right to terminate payments
pursuant to Section 3 hereof), to an injunction, without the posting of a bond
or other security, enjoining or restraining the Executive from any violation or
threatened violation of this section, and the Executive hereby consents to the
issuance of such an injunction.
10. Moral Rights Waiver. "Moral Rights" means any right to claim
authorship of a work, any right to object to any distortion, or other
modification of a work, and any similar right, existing under the law of any
country in the world, or under any treaty. Executive hereby irrevocably
transfers and assigns to the Company any and all Moral Rights that Executive may
have in any services or materials. Executive also hereby forever waives and
agrees never to assert against client, its successors or assigns and any and all
Moral Rights Executive may have in any services or materials, even after
termination of this Agreement.
11. Release. In consideration of the payments and covenants made in
this Agreement, the Executive hereby releases the Company, its Employees,
officers, directors, subsidiaries, affiliates, successors and assigns and the
Company, its subsidiaries, affiliates, successors and assigns hereby release the
Executive from any and all claims for relief or causes of action relating to any
matters of any kind arising out of his employment (or its termination) with the
Company excepting those claims for relief for causes of action relating to the
Severance Benefit obligations of the Company under Section 3 of this Agreement.
The Executive expressly waives all rights and remedies under Section
1542 of the Civil Code of the State of California which provides as follows:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release,
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which if known by him must have materially affected his settlement with
the debtor.
The Executive understands that if the facts with respect to which this
Agreement is executed are found hereafter to be different from the facts which
you now believe to be true, the Ekecutive expressly accepts and assumes the risk
of such possible differences in facts and agrees that this Agreement shall be
and remain effective notwithstanding such differences in facts.
12. Notices. All notices, consents, waivers or demands of any kind
which either party to this Agreement may be required or may desire to serve on
the other party in connection with this Agreement shall be in writing and may be
delivered by personal service or sent by telegraph or cable or sent by
registered or certified mail, return receipt requested with postage thereon
fully prepaid. All such communications shall be addressed as follows:
THE COMPANY: Sola International, Inc.
Suite 200
2420 Sand Hill Road
Menlo Park, CA 94025
THE EXECUTIVE: Steven M. Neil
26343 Esperanza Drive
Los Altos Hills, CA 94022
If sent by telegraph or cable, a confirmed copy of such telegraphic or
cable notice shall be promptly sent by mail (in the manner provided above) to
the addressees. Service of any such communication made only by mail shall be
deemed complete on the date of actual delivery as shown by the addressee's
registry or certification receipt or at the expiration of the third (3rd)
business day after the date of mailing which ever is later in time. Either party
hereto may from time to time, by notice in writing served upon the other as
aforesaid, designate a different mailing address or a different person to which
such notices or demands are thereafter to be addressed or delivered. Nothing
contained in this Agreement shall excuse either party from giving oral notice to
the other when prompt notification is appropriate, but any oral notice given
shall not satisfy the requirement of written notice as provided in this
paragraph.
13. Choice of Law. This Agreement shall be governed and construed and
enforced in accordance with the laws of the State of California (regardless of
that jurisdiction or any other jurisdictions choice of law principles).
14. Assignment. This Agreement may be assigned by the Company to any
affiliate of the Company or to any non-affiliate of the Company that shall
succeed to the business and assets of the Company. In the event of such
assignment, the Company shall cause such affiliate or non-affiliate as the case
may be, to assume the
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obligations of the Company hereunder by written agreement addressed to the
Executive concurrently with any assignment with the same effect as if such
assignee were the Company hereunder. This Agreement is personal to the Executive
and the Executive may not assign any rights or delegate any responsibilities
hereunder without the prior approval of the Company.
15. Entire Agreement. This Agreement is the entire Agreement between
the Company and the Executive with respect to the subject matter hereof and
cancels and supersedes any and all other agreements regarding the subject matter
hereof between the parties. This Agreement may not be altered, modified,
changed, or discharged except in writing signed by both of the parties.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instruments.
17. Construction. If any one or more of the provisions (or any part
thereof) of this Agreement shall be held to be invalid, illegal or unenforceable
in any respect of validity, legality and enforceability of the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.
18. Arbitration. With respect to any controversy arising out of or
relating to this Agreement, or the subject matter thereof, such controversy
shall be settled by final and binding arbitration in Palo Alto, California in
accordance with the then existing rules ("the Rules") of the American
Arbitration Association ("AAA") and judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof; provided
however, that the law applicable to any controversy shall be the law of
California, regardless of its or any jurisdictions choice of law principles.
Arbitration shall be the sole and exclusive remedy for the resolution of the
disputes described above. In any such arbitration, the award or decision shall
be rendered by a majority of the members of a board of arbitration, consisting
of three (3) members, one of whom shall be appointed by each party and the third
of whom shall be the chairman of the panel and be appointed by mutual agreement
of said two party appointed arbitrators. In the event of the failure of said two
arbitrators to agree, within five (5) working days after the commencement of the
arbitration, upon appointment of the third arbitrator, the third arbitrator
shall be appointed by the AAA in accordance with the Rules. In the event that
either party shall fail to appoint an arbitrator within five (5) days after the
commencement of the arbitration proceeding, such arbitrator and the third
arbitrator shall be appointed by the AAA in accordance with the Rules. The
arbitrator is empowered but, not limited, in making an award in favor of the
Executive to require any act or acts which they believe necessary to effectuate
the intent of this Agreement. The Company agrees that any costs of any
arbitration brought whether by the Executive or the Company including the
Executive's reasonable attorney's fees and expenses and the costs, fees and
expenses of the Executive's party appointed arbitrator, shall be borne in their
entirety by the Company.
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19. THE EXECUTIVE ACKNOWLEDGES THAT HE HAS HAD THE OPPORTUNITY TO
CONSULT WITH THE ADVISOR OF HIS CHOICE AND THAT HE HAS FREELY AND VOLUNTARILY
ENTERED INTO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year written below.
Sola International, Inc.
Dated: ______________, 1997 By __________________________
Dated: ______________, 1997 __________________________
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Schedule of Continuing Benefits Entitlement Pursuant to Paragraph 3B of the
Attached Agreement between SOLA International Inc. and Steve M. Neil.
1. Reimbursement of the cost of a Company Car under the terms of the SOLA
International Company Automobile Policy for U.S. Executives.
2. Relocation housing benefits including provision of an interest free loan as
defined in the Executive's appointment letter and Secured promissory Note.
3. Continuation of the Company's equity stake in the Executive's residence
under the Agreement between the Company and the executive as
Tenants-in-Common.
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CONFIDENTIAL SEVERANCE AGREEMENT
This agreement between SOLA INTERNATIONAL, INC., a Delaware corporation
(the "Company") and Stephen J Lee (the "Executive") is dated and entered into as
of January 1, 1997. The Company and the Executive hereby agree as follows:
WHEREAS, the Executive is a valued employee of the Company; and
WHEREAS, the Company desires to provide the Executive with certain
benefits should his employment be terminated:
THEREFORE, in consideration of the foregoing, the Company and the
Executive have agreed to the following terms while he is employed and in the
event of such a Severance:
1. Employment Term. The Executive acknowledges that he is employed
at-will by the Company subject only to the terms of this Agreement. The
Executive agrees to devote substantially all of his productive time, ability and
attention to the business of the company while he is employed by the Company,
and shall not, directly or indirectly, render services of a business, commercial
or professional nature to any other person or organization, whether for
compensation or otherwise, without the prior consent of the President of the
Company or his designee.
2. Severance. In the event that any of the following occurs, the
Executive shall be entitled to the benefits set forth in paragraph 3 below. For
purposes of this Agreement a Severance shall have taken place only if:
A. The Executive's employment with the Company is terminated
for any reason other than cause. For purposes of this Agreement, "cause" is
defined as the Executive's engaging in: (i) willful misconduct, neglect of
duties, or any act or omission any or all of which materially adversely affect
the Company's business, or (ii) conviction of a felony.
(i) For purposes of subparagraph 2.A(i), no such
event or omission shall constitute cause unless the Executive fails to cure the
underlying matter within forty-five (45) days after receipt from the Company of
a detailed statement of the cause for termination.
B. The Executive is regularly assigned duties and
responsibilities that materially diminish his position as an Executive of the
Company. For the purpose of this subparagraph, the assignment of duties, other
than those Executive performs as of the date of this Agreement, whether or not
in lieu of those previously assigned duties, does not by itself constitute a
material diminishment of the Executive's position with the Company.
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C. The Executive's compensation (including but not limited to
salary and benefits) is reduced and that reduction is not part of, or is
disproportionate to a company general reduction of executive compensation.
The Executive shall not be entitled to any Severance Benefits as set
forth in paragraph 3 of this Agreement if he freely and voluntarily resigns his
employment with the Company.
3. Severance Benefits. If a Severance takes place, then immediately
after the occurrence of that event or events, the Executive shall be entitled to
the following:
A. To continue to receive his compensation for either the
period of twelve (12) months or one (1) month per completed year of service with
the Company, up to a maximum of (18) months, whichever is longer, commencing the
first of the month following the month in which the Severance takes place. For
purposes of this paragraph, the Executive's "compensation" shall be that annual
salary in effect immediately prior to the Severance, plus the average of
Management Incentive Plan compensation (or successor thereto) paid to him over
the three years immediately prior to the Severance.
B. To continue for either a period of twelve (12) months or
one (1) month per completed year of service with the Company up to a maximum of
eighteen (18) months whichever is longer to be covered by and participate in, at
the Company's expense, any and all benefit plans the Company regularly provides
its other executives or employees including, but not limited to, health, dental,
vision, pension or other retirement plans.
C. To receive outplacement assistance in the form of
professional consultation and administrative assistance, subject to the approval
of the Company, which shall not be unreasonably withheld. The Company shall pay
up to a maximum of twenty-five thousand dollars ($25,000.00) for the
aforementioned outplacement services during the period the Executive receives
Severance Benefits as described in A and B above.
4. Non-Mitigation. The Executive shall not be required to mitigate the
amount of any payments or other benefits provided under this Agreement at any
time by seeking other employment or consultancy; however the Executive shall
notify the Company of any employment or consulting engaged in during the period
covered by Severance Benefits provided in Section 3 and the amounts payable and
benefits provided shall be reduced or offset by the amount of any salary, bonus
of any sort, fees, stock, stock options, stock dividends, other securities or
any non-cash consideration so paid or payable and benefits to be received with
respect to such period and that offset or reduction shall be determined by the
Company in the complete and absolute exercise of its sole discretion.
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5. Non-Disparagement. In the event of a Severance both the Executive
and the Company agree that neither of them will disparage the other in any
manner.
6. Covenants-Not to Compete and Not to Solicit.
A. Covenant Not to Compete.
The Executive recognizes that the services to be performed
while employed by the Company are special, unique, and extraordinary and that by
reason of the Executive's prior and continued employment with the Company the
Executive has acquired and will acquire confidential information and trade
secrets concerning the Company's operations ("Company Confidential Information")
and the operations of its parent and affiliates ("Affiliate Confidential
Information"). Accordingly, it is agreed that during the period of Employment by
the Company, and for any period following a Severance covered by payments
provided for in Section 3 hereof, the Executive will not, directly or
indirectly, as an officer, director, stockholder, partner, associate, owner,
employee, consultant or otherwise, become or be interested in or associated with
any other corporation, firm or business engaged in the same or a similar or
competitive business with the Company or any of its affiliates in any
geographical area in which the Company or any of its affiliates are then engaged
in business, provided that the Executive's ownership, directly or indirectly, of
not more than one percent of the issued and outstanding stock of a corporation
the shares of which are regularly traded on a national securities exchange or in
the over-the-counter market shall not, in any event, be deemed to be a violation
of this subsection.
B. Covenant Not to Solicit.
The Executive agrees not to solicit any person employed by the
Company or its affiliates who perform a scientific, technical, sales or
marketing function. As used herein, "solicit" or "soliciting" means any direct
or indirect approach or appeals to such an employee to leave the Company.
Indirect solicitation includes but is not limited to, acting through a third
party or parties or characterizing job advertisements or opportunities in such a
fashion so as to entice any employee. The executive agrees that, if approached
by a Company employee, the Executive will:
(i) Inform the employee of the Executive's
obligations set forth in this subparagraph;
(ii) Refer the employee to the relevant Company
Human Resources personnel; and
(iii) Request that the employee confirm in writing
to the Company that he has approached the
Executive and confirm that request in a
memorandum to such Human Resources
organization.
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7. Confidentiality. The Executive recognizes that the services to be
performed while employed by the Company are special, unique, and extraordinary
and that by reason of the Executive's prior and continued employment with the
Company the Executive has acquired and will acquire confidential information and
trade secrets concerning the Company's operations ("Company Confidential
Information") and the operations of its parent and affiliates ("Affiliate
Confidential Information"). Accordingly, it is agreed that:
A. The Executive shall not divulge to any entity or person,
other than the Company or its affiliates, or, in the event of an assignment of
this Agreement pursuant to Section 10 hereof, the assignee and its affiliates,
if any, whether while employed or after a Severance, any Company Confidential
Information concerning the Company's customer lists, research or development
programs or plans, processes, methods or any other of its trade secrets, except
information that is then available to the public in published literature and
became publicly available through no fault of the Executive.
B. The Executive shall not divulge to any person or entity,
including an assignee of this Agreement and its affiliates, but excepting the
Company and its affiliates, whether while employed or after a Severance, any
Affiliate Confidential Information acquired by the Executive concerning the
customer lists, research or development programs or plans, processes, methods or
any other trade secrets of the parent or any affiliate, except information which
is then available to the public in published literature and became publicly
available through no fault of the Executive.
C. The Executive acknowledges that all information the
disclosure of which is prohibited hereby is of a confidential and proprietary
character and of great value to the Company and its affiliates. Upon a
Severance, the Executive shall forthwith deliver up to the Company all records,
memoranda, data and documents of any description which refer or relate in any
way to Company Confidential Information or Affiliate Confidential Information
and return to the Company any of its equipment and property which may then be in
the Executive's possession or under the executive's personal control. Upon the
assignment of this Agreement, pursuant to Section 10, the Executive shall
forthwith deliver up to the Company all records, memoranda, data and documents
of any description which refer or relate in any way to Affiliate Confidential
Information and return to the Company any of its equipment and property which
may then be in the Executive's possession or under the Executive's personal
control.
D. The Executive agrees that while employed and for a two year
period after the occurrence of a Severance not to disclose the terms of this
Agreement to any person other than the Executive's immediate family, the
executive's attorneys, accountants and other professional advisors or a
prospective employer permitted hereby, except as otherwise required by law.
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8. Invention Assignment. The Executive agrees that any invention made
by the Executive while employed shall belong to the Company if (i) it was made
in the normal course of the duties of the Executive or in the course of duties
falling outside the Executive's normal duties but specifically assigned to the
Executive, and the circumstances in either case were such that an invention
might reasonably be expected to result from the carrying out of such duties, or
(ii) the invention was made in the course of the duties of the Executive and, at
the time of making the invention, because of the nature of the Executive's
duties and the particular responsibilities arising from the nature of the
Executive's duties, the Executive had a special obligation to further the
interests of the Company. In addition, if (x) the Executive while employed shall
make any improvement or develop any know-how, copyrightable work or design, (y)
such improvement, know-how, copyrightable work or design is relevant to the
business of the Company or any of its subsidiaries, and (z) such improvement,
know-how, copyrightable work or design arouse directly out of any work carried
out while employed, or out of Confidential Company Information or Confidential
Affiliate Information to which the Executive had access while in the employ of
the Company, then such improvement, know-how, copyrightable work or design shall
belong to the Company whether or not it was disclosed to the Company while
employed by the Company.
A. In the event that the Executive makes any invention or
develops any improvement, know-how, copyrightable design or work which belongs
to the Company, the Executive shall fully, freely and immediately communicate
the same to the Company and the Executive shall, if and as desired by the
Company execute all documents and do all acts and things at the Company's cost
which may be necessary or desirable to obtain letters patent or other adequate
protection in any part of the world for such invention, improvement, know-how,
copyrightable work or design and to vest the same in the Company for the
Company's benefit. The Executive hereby irrevocably appoints the Company as the
Executive's attorney in the Executive's name and on the Executive's behalf to
execute all such deeds and documents and to do all such acts and things as may
be necessary to give effect to this Subsection in the event that the Executive
fails to comply within seven days with the written directions given by the
Company pursuant to this Subsection.
B. The Executive has been notified and understands that the
provisions of Subsections 6(g) and 6(h) hereof do not apply to any invention
that qualifies fully under the provisions of Section 2870 of the California
Labor Code, which states as follows:
(i) Any provision in an employment agreement which
provides that an employee shall assign, or offer to assign, any of his or her
rights in an invention to his or her employer shall not apply to an invention
that the employee developed entirely on his or her own time without using the
employer's equipment, supplies, facilities, or trade secret information except
for those inventions that either:
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(1) Relate at the time of conception or
reduction to practice of the invention to the employer's business, or actual or
demonstrably anticipated research or development of the employer; or
(2) Result from any work performed by the
employee for the employer.
(ii) To the extent a provision in an employment
agreement purports to require an employee to assign an invention otherwise
excluded from being required to be assigned under subdivision (a), the provision
is against the public policy of this state and is unenforceable.
9. Remedies. The Company shall be entitled, in addition to any other
right or remedy that it may have at law or in equity with respect to a breach of
this Agreement by the Executive (including the right to terminate payments
pursuant to Section 3 hereof), to an injunction, without the posting of a bond
or other security, enjoining or restraining the Executive from any violation or
threatened violation of this section, and the Executive hereby consents to the
issuance of such an injunction.
10. Moral Rights Waiver. "Moral Rights" means any right to claim
authorship of a work, any right to object to any distortion, or other
modification of a work, and any similar right, existing under the law of any
country in the world, or under any treaty. Executive hereby irrevocably
transfers and assigns to the Company any and all Moral Rights that Executive may
have in any services or materials. Executive also hereby forever waives and
agrees never to assert against client, its successors or assigns and any and all
Moral Rights Executive may have in any services or materials, even after
termination of this Agreement.
11. Release. In consideration of the payments and covenants made in
this Agreement, the Executive hereby releases the Company, its Employees,
officers, directors, subsidiaries, affiliates, successors and assigns and the
Company, its subsidiaries, affiliates, successors and assigns hereby release the
Executive from any and all claims for relief or causes of action relating to any
matters of any kind arising out of his employment (or its termination) with the
Company excepting those claims for relief for causes of action relating to the
Severance Benefit obligations of the Company under Section 3 of this Agreement.
The Executive expressly waives all rights and remedies under Section
1542 of the Civil Code of the State of California which provides as follows:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
6
<PAGE>
The Executive understands that if the facts with respect to which this
Agreement is executed are found hereafter to be different from the facts which
you now believe to be true, the Executive expressly accepts and assumes the risk
of such possible differences in facts and agrees that this Agreement shall be
and remain effective notwithstanding such differences in facts.
12. Notices. All notices, consents, waivers or demands of any kind
which either party to this Agreement may be required or may desire to serve on
the other party in connection with this Agreement shall be in writing and may be
delivered by personal service or sent by telegraph or cable or sent by
registered or certified mail, return receipt requested with postage thereon
fully prepaid. All such communications shall be addressed as follows:
THE COMPANY: Sola International, Inc.
Suite 200
2420 Sand Hill Road
Menlo Park, California 94025
THE EXECUTIVE:
Stephen J. Lee
1730 Webster Street
Palo Alto, California 94301
If sent by telegraph or cable, a confirmed copy of such telegraphic or
cable notice shall be promptly sent by mail (in the manner provided above) to
the addressees. Service of any such communication made only by mail shall be
deemed complete on the date of actual delivery as shown by the addressee's
registry or certification receipt or at the expiration of the third (3rd)
business day after the date of mailing which ever is later in time. Either party
hereto may from time to time, by notice in writing served upon the other as
aforesaid, designate a different mailing address or a different person to which
such notices or demands are thereafter to be addressed or delivered. Nothing
contained in this Agreement shall excuse either party from giving oral notice to
the other when prompt notification is appropriate, but any oral notice given
shall not satisfy the requirement of written notice as provided in this
paragraph.
13. Choice of Law. This Agreement shall be governed and construed and
enforced in accordance with the laws of the State of California (regardless of
that jurisdiction or any other jurisdictions choice of law principles).
14. Assignment. This Agreement may be assigned by the Company to any
affiliate of the Company or to any non-affiliate of the Company that shall
succeed to the business and assets of the Company. In the event of such
assignment, the Company shall cause such affiliate or non-affiliate as the case
may be, to assume the obligations of the Company hereunder by written agreement
addressed to the
7
<PAGE>
Executive concurrently with any assignment with the same effect as if such
assignee were the Company hereunder. This Agreement is personal to the Executive
and the Executive may not assign any rights or delegate any responsibilities
hereunder without the prior approval of the Company.
15. Entire Agreement. This Agreement is the entire Agreement between
the Company and the Executive with respect to the subject matter hereof and
cancels and supersedes any and all other agreements regarding the subject matter
hereof between the parties. This Agreement may not be altered, modified,
changed, or discharged except in writing signed by both of the parties.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instruments.
17. Construction. If any one or more of the provisions (or any part
thereof) of this Agreement shall be held to be invalid, illegal or unenforceable
in any respect of validity, legality and enforceability of the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.
18. Arbitration. With respect to any controversy arising out of or
relating to this Agreement, or the subject matter thereof, such controversy
shall be settled by final and binding arbitration in Palo Alto, California in
accordance with the then existing rules ("the Rules") of the American
Arbitration Association ("AAA") and judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof; provided
however, that the law applicable to any controversy shall be the law of
California, regardless of its or any jurisdictions choice of law principles.
Arbitration shall be the sole and exclusive remedy for the resolution of the
disputes described above. In any such arbitration, the award or decision shall
be rendered by a majority of the members of a board of arbitration, consisting
of three (3) members, one of whom shall be appointed by each party and the third
of whom shall be the chairman of the panel and be appointed by mutual agreement
of said two party appointed arbitrators. In the event of the failure of said two
arbitrators to agree, within five (5) working days after the commencement of the
arbitration, upon appointment of the third arbitrator, the third arbitrator
shall be appointed by the AAA in accordance with the Rules. In the event that
either party shall fail to appoint an arbitrator within five (5) days after the
commencement of the arbitration proceeding, such arbitrator and the third
arbitrator shall be appointed by the AAA in accordance with the Rules. The
arbitrator is empowered but, not limited, in making an award in favor of the
Executive to require any act or acts which they believe necessary to effectuate
the intent of this Agreement. The Company agrees that any costs of any
arbitration brought whether by the Executive or the Company including the
Executive's reasonable attorney's fees and expenses and the costs, fees and
expenses of the Executive's party appointed arbitrator, shall be borne in their
entirety by the Company.
8
<PAGE>
19. THE EXECUTIVE ACKNOWLEDGES THAT HE HAS HAD THE OPPORTUNITY TO
CONSULT WITH THE ADVISOR OF HIS CHOICE AND THAT HE HAS FREELY AND VOLUNTARILY
ENTERED INTO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year written below.
Sola International, Inc.
By:
9
CONFIDENTIAL SEVERANCE AGREEMENT
This agreement between SOLA INTERNATIONAL, INC., a Delaware corporation
(the "Company") and Theodore Gioia (the "Executive") is dated and entered into
as of January 1,1997. The Company and the Executive hereby agree as follows:
WHEREAS, the Executive is a valued employee of the Company; and
WHEREAS, the Company desires to provide the Executive with certain
benefits should his employment be terminated:
THEREFORE, in consideration of the foregoing, the Company and the
Executive have agreed to the following terms while he is employed and in the
event of such a Severance:
1. Employment Term. The Executive acknowledges that he is employed
at-will by the Company subject only to the terms of this Agreement. The
Executive agrees to devote substantially all of his productive time, ability and
attention to the business of the company while he is employed by the Company,
and shall not, directly or indirectly, render services of a business, commercial
or professional nature to any other person or organization, whether for
compensation or otherwise, without the prior consent of the President of the
Company or his designee.
2. Severance. In the event that any of the following occurs, the
Executive shall be entitled to the benefits set forth in paragraph 3 below. For
purposes of this Agreement a Severance shall have taken place only if:
A. The Executive's employment with the Company is terminated
for any reason other than cause. For purposes of this Agreement, "cause" is
defined as the Executive's engaging in: (i) willful misconduct, neglect of
duties, or any act or omission any or all of which materially adversely affect
the Company's business, or (ii) conviction of a felony.
(i) For purposes of subparagraph 2.A(i), no such
event or omission shall constitute cause unless the Executive fails to cure the
underlying matter within forty-five (45) days after receipt from the Company of
a detailed statement of the cause for termination.
B. The Executive is regularly assigned duties and
responsibilities that materially diminish his position as an Executive of the
Company. For the purpose of this subparagraph, the assignment of duties, other
than those Executive performs as of the date of this Agreement, whether or not
in lieu of those previously assigned duties, does not by itself constitute a
material diminishment of the Executive's position with the Company.
1
<PAGE>
C. The Executive's compensation (including but not limited to
salary and benefits) is reduced and that reduction is not part of, or is
disproportionate to a company general reduction of executive compensation.
The Executive shall not be entitled to any Severance Benefits as set
forth in paragraph 3 of this Agreement if he freely and voluntarily resigns his
employment with the Company.
3. Severance Benefits. If a Severance takes place, then immediately
after the occurrence of that event or events, the Executive shall be entitled to
the following:
A. To continue to receive his compensation for either the
period of twelve (12) months or one (1) month per completed year of service with
the Company, up to a maximum of (18) months, whichever is longer, commencing
the first of the month following the month in which the Severance takes place.
For purposes of this paragraph, the Executive's "compensation" shall be that
annual salary in effect immediately prior to the Severance, plus the average of
Management Incentive Plan compensation (or successor thereto) paid to him over
the three years immediately prior to the Severance.
B. To continue for either a period of twelve (12) months or
one (1) month per completed year of service with the Company up to a maximum of
eighteen (18) months whichever is longer to be covered by and participate in, at
the Company's expense, any and all benefit plans the Company regularly provides
its other executives or employees including, but not limited to, health, dental,
vision, pension or other retirement plans.
C. To receive outplacement assistance in the form of
professional consultation and administrative assistance, subject to the approval
of the Company, which shall not be unreasonably withheld. The Company shall pay
up to a maximum of twenty-five thousand dollars ($25,000.00) for the
aforementioned outplacement services during the period the Executive receives
Severance Benefits as described in A and B above.
4. Non-Mitigation. The Executive shall not be required to mitigate the
amount of any payments or other benefits provided under this Agreement at any
time by seeking other employment or consultancy; however the Executive shall
notify the Company of any employment or consulting engaged in during the period
covered by Severance Benefits provided in Section 3 and the amounts payable and
benefits provided shall be reduced or offset by the amount of any salary, bonus
of any sort, fees, stock, stock options, stock dividends, other securities or
any non-cash consideration so paid or payable and benefits to be received with
respect to such period and that offset or reduction shall be determined by the
Company in the complete and absolute exercise of its sole discretion.
2
<PAGE>
5. Non-Disparagement. In the event of a Severance both the Executive
and the Company agree that neither of them will disparage the other in any
manner.
6. Covenants-Not to Compete and Not to Solicit.
A. Covenant Not to Compete.
The Executive recognizes that the services to be performed
while employed by the Company are special, unique, and extraordinary and that by
reason of the Executive's prior and continued employment with the Company the
Executive has acquired and will acquire confidential information and trade
secrets concerning the Company's operations ("Company Confidential Information")
and the operations of its parent and affiliates ("Affiliate Confidential
Information"). Accordingly, it is agreed that during the period of Employment by
the Company, and for any period following a Severance covered by payments
provided for in Section 3 hereof, the Executive will not, directly or
indirectly, as an officer, director, stockholder, partner, associate, owner,
employee, consultant or otherwise, become or be interested in or associated with
any other corporation, firm or business engaged in the same or a similar or
competitive business with the Company or any of its affiliates in any
geographical area in which the Company or any of its affiliates are then engaged
in business, provided that the Executive's ownership, directly or indirectly, of
not more than one percent of the issued and outstanding stock of a corporation
the shares of which are regularly traded on a national securities exchange or in
the over-the-counter market shall not, in any event, be deemed to be a violation
of this subsection.
B. Covenant Not to Solicit.
The Executive agrees not to solicit any person employed by the
Company or its affiliates who perform a scientific, technical, sales or
marketing function. As used herein, "solicit" or "soliciting" means any direct
or indirect approach or appeals to such an employee to leave the Company.
Indirect solicitation includes but is not limited to, acting through a third
party or parties or characterizing job advertisements or opportunities in such a
fashion so as to entice any employee. The executive agrees that, if approached
by a Company employee, the Executive will:
(i) Inform the employee of the Executive's
obligations set forth in this subparagraph;
(ii) Refer the employee to the relevant Company
Human Resources personnel; and
(iii) Request that the employee confirm in writing
to the Company that he has approached the
Executive and confirm that request in a
memorandum to such Human Resources
organization.
3
<PAGE>
7. Confidentiality. The Executive recognizes that the services to be
performed while employed by the Company are special, unique, and extraordinary
and that by reason of the Executive's prior and continued employment with the
Company the Executive has acquired and will acquire confidential information and
trade secrets concerning the Company's operations ("Company Confidential
Information") and the operations of its parent and affiliates ("Affiliate
Confidential Information"). Accordingly, it is agreed that:
A. The Executive shall not divulge to any entity or person,
other than the Company or its affiliates, or, in the event of an assignment of
this Agreement pursuant to Section 10 hereof, the assignee and its affiliates,
if any, whether while employed or after a Severance, any Company Confidential
Information concerning the Company's customer lists, research or development
programs or plans, processes, methods or any other of its trade secrets, except
information that is then available to the public in published literature and
became publicly available through no fault of the Executive.
B. The Executive shall not divulge to any person or entity,
including an assignee of this Agreement and its affiliates, but excepting the
Company and its affiliates, whether while employed or after a Severance, any
Affiliate Confidential Information acquired by the Executive concerning the
customer lists, research or development programs or plans, processes, methods or
any other trade secrets of the parent or any affiliate, except information which
is then available to the public in published literature and became publicly
available through no fault of the Executive.
C. The Executive acknowledges that all information the
disclosure of which is prohibited hereby is of a confidential and proprietary
character and of great value to the Company and its affiliates. Upon a
Severance, the Executive shall forthwith deliver up to the Company all records,
memoranda, data and documents of any description which refer or relate in any
way to Company Confidential Information or Affiliate Confidential Information
and return to the Company any of its equipment and property which may then be in
the Executive's possession or under the executive's personal control. Upon the
assignment of this Agreement, pursuant to Section 10, the Executive shall
forthwith deliver up to the Company all records, memoranda, data and documents
of any description which refer or relate in any way to Affiliate Confidential
Information and return to the Company any of its equipment and property which
may then be in the Executive's possession or under the Executive's personal
control.
D. The Executive agrees that while employed and for a two year
period after the occurrence of a Severance not to disclose the terms of this
Agreement to any person other than the Executive's immediate family, the
executive's attorneys, accountants and other professional advisors or a
prospective employer permitted hereby, except as otherwise required by law.
4
<PAGE>
8. Invention Assignment. The Executive agrees that any invention made
by the Executive while employed shall belong to the Company if (i) it was made
in the normal course of the duties of the Executive or in the course of duties
falling outside the Executive's normal duties but specifically assigned to the
Executive, and the circumstances in either case were such that an invention
might reasonably be expected to result from the carrying out of such duties, or
(ii) the invention was made in the course of the duties of the Executive and, at
the time of making the invention, because of the nature of the Executive's
duties and the particular responsibilities arising from the nature of the
Executive's duties, the Executive had a special obligation to further the
interests of the Company. In addition, if (x) the Executive while employed shall
make any improvement or develop any know-how, copyrightable work or design, (y)
such improvement, know-how, copyrightable work or design is relevant to the
business of the Company or any of its subsidiaries, and (z) such improvement,
know-how, copyrightable work or design arouse directly out of any work carried
out while employed, or out of Confidential Company Information or Confidential
Affiliate Information to which the Executive had access while in the employ of
the Company, then such improvement, know-how, copyrightable work or design shall
belong to the Company whether or not it was disclosed to the Company while
employed by the Company.
A. ln the event that the Executive makes any invention or
develops any improvement, know-how, copyrightable design or work which belongs
to the Company, the Executive shall fully, freely and immediately communicate
the same to the Company and the Executive shall, if and as desired by the
Company execute all documents and do all acts and things at the Company's cost
which may be necessary or desirable to obtain letters patent or other adequate
protection in any part of the world for such invention, improvement, know-how,
copyrightable work or design and to vest the same in the Company for the
Company's benefit. The Executive hereby irrevocably appoints the Company as the
Executive's attorney in the Executive's name and on the Executive's behalf to
execute all such deeds and documents and to do all such acts and things as may
be necessary to give effect to this Subsection in the event that the Executive
fails to comply within seven days with the written directions given by the
Company pursuant to this Subsection.
B. The Executive has been notified and understands that the
provisions of Subsections 6(g) and 6(h) hereof do not apply to any invention
that qualifies fully under the provisions of Section 2870 of the California
Labor Code, which states as follows:
(i) Any provision in an employment agreement which
provides that an employee shall assign, or offer to assign, any of his or her
rights in an invention to his or her employer shall not apply to an invention
that the employee developed entirely on his or her own time without using the
employer's equipment, supplies, facilities, or trade secret information except
for those inventions that either:
5
<PAGE>
(1) Relate at the time of conception or
reduction to practice of the invention to the employer's business, or actual or
demonstrably anticipated research or development of the employer; or
(2) Result from any work performed by the
employee for the employer.
(ii) To the extent a provision in an employment
agreement purports to require an employee to assign an invention otherwise
excluded from being required to be assigned under subdivision (a), the provision
is against the public policy of this state and is unenforceable.
9. Remedies. The Company shall be entitled, in addition to any other
right or remedy that it may have at law or in equity with respect to a breach of
this Agreement by the Executive (including the right to terminate payments
pursuant to Section 3 hereof), to an injunction, without the posting of a bond
or other security, enjoining or restraining the Executive from any violation or
threatened violation of this section, and the Executive hereby consents to the
issuance of such an injunction.
10. Moral Rights Waiver. "Moral Rights" means any right to claim
authorship of a work, any right to object to any distortion, or other
modification of a work, and any similar right, existing under the law of any
country in the world, or under any treaty. Executive hereby irrevocably
transfers and assigns to the Company any and all Moral Rights that Executive may
have in any services or materials. Executive also hereby forever waives and
agrees never to assert against client, its successors or assigns and any and all
Moral Rights Executive may have in any services or materials, even after
termination of this Agreement.
11. Release. In consideration of the payments and covenants made in
this Agreement, the Executive hereby releases the Company, its Employees,
officers, directors, subsidiaries, affiliates, successors and assigns and the
Company, its subsidiaries, affiliates, successors and assigns hereby release the
Executive from any and all claims for relief or causes of action relating to any
matters of any kind arising out of his employment (or its termination) with the
Company excepting those claims for relief for causes of action relating to the
Severance Benefit obligations of the Company under Section 3 of this Agreement.
The Executive expressly waives all rights and remedies under Section
1542 of the Civil Code of the State of California which provides as follows:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
6
<PAGE>
The Executive understands that if the facts with respect to which this
Agreement is executed are found hereafter to be different from the facts which
you now believe to be true, the Executive expressly accepts and assumes the risk
of such possible differences in facts and agrees that this Agreement shall be
and remain effective notwithstanding such differences in facts.
12. Notices. All notices, consents, waivers or demands of any kind
which either party to this Agreement may be required or may desire to serve on
the other party in connection with this Agreement shall be in writing and may be
delivered by personal service or sent by telegraph or cable or sent by
registered or certified mail, return receipt requested with postage thereon
fully prepaid. All such communications shall be addressed as follows:
THE COMPANY: Sola International, Inc.
Suite 200
2420 Sand Hill Road
Menlo Park, California 94025
THE EXECUTIVE:
Theodore Gioia
627 Webster Street
Palo Alto, California 94301
If sent by telegraph or cable, a confirmed copy of such telegraphic or
cable notice shall be promptly sent by mail (in the manner provided above) to
the addressees. Service of any such communication made only by mail shall be
deemed complete on the date of actual delivery as shown by the addressee's
registry or certification receipt or at the expiration of the third (3rd)
business day after the date of mailing which ever is later in time. Either party
hereto may from time to time, by notice in writing served upon the other as
aforesaid, designate a different mailing address or a different person to which
such notices or demands are thereafter to be addressed or delivered. Nothing
contained in this Agreement shall excuse either party from giving oral notice to
the other when prompt notification is appropriate, but any oral notice given
shall not satisfy the requirement of written notice as provided in this
paragraph.
13. Choice of Law. This Agreement shall be governed and construed and
enforced in accordance with the laws of the State of California (regardless of
that jurisdiction or any other jurisdictions choice of law principles).
14. Assignment. This Agreement may be assigned by the Company to any
affiliate of the Company or to any non-affiliate of the Company that shall
succeed to the business and assets of the Company. In the event of such
assignment, the Company shall cause such affiliate or non-affiliate as the case
may be, to assume the obligations of the Company hereunder by written agreement
addressed to the
7
<PAGE>
Executive concurrently with any assignment with the same effect as if
such assignee were the Company hereunder. This Agreement is personal to the
Executive and the Executive may not assign any rights or delegate any
responsibilities hereunder without the prior approval of the Company.
15. Entire Agreement. This Agreement is the entire Agreement between
the Company and the Executive with respect to the subject matter hereof and
cancels and supersedes any and all other agreements regarding the subject matter
hereof between the parties. This Agreement may not be altered, modified,
changed, or discharged except in writing signed by both of the parties.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instruments.
17. Construction. If any one or more of the provisions (or any part
thereof) of this Agreement shall be held to be invalid, illegal or unenforceable
in any respect of validity, legality and enforceability of the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.
18. Arbitration. With respect to any controversy arising out of or
relating to this Agreement, or the subject matter thereof, such controversy
shall be settled by final and binding arbitration in Palo Alto, California in
accordance with the then existing rules ("the Rules") of the American
Arbitration Association ("AAA") and judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof; provided
however, that the law applicable to any controversy shall be the law of
California, regardless of its or any jurisdictions choice of law principles.
Arbitration shall be the sole and exclusive remedy for the resolution of the
disputes described above. In any such arbitration, the award or decision shall
be rendered by a majority of the members of a board of arbitration, consisting
of three (3) members, one of whom shall be appointed by each party and the third
of whom shall be the chairman of the panel and be appointed by mutual agreement
of said two party appointed arbitrators. In the event of the failure of said two
arbitrators to agree, within five (5) working days after the commencement of the
arbitration, upon appointment of the third arbitrator, the third arbitrator
shall be appointed by the AAA in accordance with the Rules. In the event that
either party shall fail to appoint an arbitrator within five (5) days after the
commencement of the arbitration proceeding, such arbitrator and the third
arbitrator shall be appointed by the AAA in accordance with the Rules. The
arbitrator is empowered but, not limited, in making an award in favor of the
Executive to require any act or acts which they believe necessary to effectuate
the intent of this Agreement. The Company agrees that any costs of any
arbitration brought whether by the Executive or the Company including the
Executive's reasonable attorney's fees and expenses and the costs, fees and
expenses of the Executive's party appointed arbitrator, shall be borne in their
entirety by the Company.
8
<PAGE>
19. THE EXECUTIVE ACKNOWLEDGES THAT HE HAS HAD THE OPPORTUNITY TO
CONSULT WITH THE ADVISOR OF HIS CHOICE AND THAT HE HAS FREELY AND VOLUNTARILY
ENTERED INTO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year written below.
Sola International, Inc.
By ______________________________
_________________________________
Theodore Gioia
9
<TABLE>
EXHIBIT 12.1
SOLA INTERNATIONAL INC.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
(Unaudited)
<CAPTION>
Year Ended March 31,
------------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Fixed charges:
Interest expense ............................................ $ 18,015 $ 16,988 $ 16,187
Interest capitalized during period .......................... 167 666 --
Amortization of financing costs ............................. 457 429 414
Interest portion of rental expense .......................... 2,391 2,607 1,862
-------- -------- --------
Total fixed charges ............................................ $ 21,030 $ 20,690 $ 18,463
-------- -------- --------
Earnings:
Income from continuing operations before
income taxes .............................................. $ 20,192 $ 75,952 $ 41,386
Fixed charges per above ........................................ 21,030 20,690 18,463
Less interest capitalized during the period .................... (167) (666) --
Current period amortization of interest capitalized
in prior periods ............................................ 27 -- --
-------- -------- --------
Earnings as adjusted ........................................... $ 41,082 $ 95,976 $ 59,849
======== ======== ========
Ratio of earnings to fixed charges ............................. 1.95 4.64 3.24
======== ======== ========
</TABLE>
<TABLE>
EXHIBIT 21.1
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
Name Jurisdiction
---- ------------
<S> <C>
Sola Argentina S.A. Argentina
Sola Optical Partners, A Limited Partnership Australia (Victoria)
Sola Optical Holdings (Pty.) Ltd. Australia (Victoria)
Optical Eyewear Pty. Ltd. Australia (35%)
Sola Corporation Limited Australia (South Australia)
Sola Optical Licensing Pty. Ltd. Australia (South Australia)
Sola International Holdings Ltd. Australia (South Australia)
Sola Licensing Pty. Ltd. Australia (South Australia)
Sola Optical Australia Pty. Ltd. Australia (South Australia)
Norinco Sola Optical Ltd. People's Republic of China (50%)
Sola Belgium N.V. Belgium
De Muynck Optics N.V. Belgium
Sola Brasil Industria Optica Ltda Brazil
A.O. Brazil Brazil
Sola Industria e Comercio Ltda Brazil
Sociedade Amazonense de Oculos Ltda Brazil
American Optical Lens Company Limited Canada
1132782 Ontario, Inc. Canada
Sola Optical S.R.O. Czech Republic
Sola Optical (U.K.) Limited England
UKO International Limited England
UK Optical Limited England
Raphael Taylor Group Limited England
United Kingdom Optical Company Limited England
The Hadley Company Limited England
Levers Optical (Manufacturing) Limited England
J&H Taylor Group Limited England
Raphael's Limited England
UKO International (Overseas Holdings) Ltd. England
M. Wiseman and Company (South Africa) Limited England
M. Wiseman and Company (Zimbabwe) Limited England
AO European Services Limited England
Alpha Lens Company Limited England
British American Optical Company Limited England
Chadwick Taylor Limited England
U.K. Wiseman Limited England
M. Wiseman and Company Limited England
Sola Optical Holdings S.A.R.L. France
Industrie Optique Sola S.A. France
Sola Optical S.A. France
AO Ouest Optique S.A. France
Sola Group Holdings GmbH Germany
Sola Optical GmbH Germany
Sola Brillenglas Vertriebs GmbH Germany
Sola Hong Kong Ltd. Hong Kong
Sola Optical Lens Marketing Pvt. Ltd. India
Indian Ophthalmic Lenses Manufacturing Company Private Ltd. India (45%)
Sola Holdings Ireland Limited Ireland
Sola IFSC Ireland
<PAGE>
Name Jurisdiction
---- ------------
Sola ADC Lenses Limited Ireland
Sola RDC Limited Ireland
Sola Ophthalmic Products Ltd. Ireland
Sola Optical Italia S.p.A. Italy
O.V.Bari S.r.l. Italy (51%)
Sola Optical Japan Limited Japan (Osaka)
Solnox Optical Ltd. Japan (50%)
Sun Ophthalmic Lenses Distribution SDN BHD Malaysia
Lentes Sola S.A. de C.V. Mexico
American Optical de Mexico S.A. de C.V. Mexico
Optica Sola de Mexico S.R.L. de C.V. Mexico
American Optical Lensmex S.R.L. de C.V. Mexico
Imgo Industries B.V. Netherlands
American Optical Norway AS Norway
Sola Optical (Poland) Sp.zo.o Poland
Sola Optical Singapore Pte Ltd. Singapore
American Optical Co. Pte. Ltd. Singapore
American Optical Company International A.G. Switzerland
Sola Optical Taiwan Ltd. Republic of China
Sola Optical Holdings I Ltd. U.S.A. (Delaware)
Sola Optical Holdings II Ltd. U.S.A. (Delaware)
Sola Optical Holdings III Ltd. U.S.A. (Delaware)
Sola Optical Holdings IV Ltd. U.S.A. (Delaware)
Sola Optical Holdings V Ltd. U.S.A. (Delaware)
Sola Optical Holdings VI Ltd. U.S.A. (Delaware)
Sola Optical Holdings Aus. Ltd. U.S.A. (Delaware)
Sola Optical Holdings Fr. Ltd. U.S.A. (Delaware)
Sola Optical Holdings Mex LLC U.S.A. (Delaware)
American Optical Lens Company U.S.A. (Delaware)
Sola Custom Coatings Inc. U.S.A. (Delaware)
U.S. Coatings of Oregon, LLC U.S.A. (Oregon LLC)
Uniscoat, Inc. U.S.A. (California) (46%)
Westcom Partners, LP, a Limited Partnership U.S.A. (California) (42%)
Sola Neolens, Inc. U.S.A. (Florida)
Sola de Venezuela Industria Optica C.A. Venezuela
Sola Optical China Limited British Virgin Islands (70%)
Sola Optical Guangzhou Ltd. People's Republic of China
Sola Shanghai Omyl Ltd. People's Republic of China (50%)
Sola Guangzhou Jiu Fo People's Republic of China
</TABLE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-4489) pertaining to the Sola Optical 401 (K) Savings Plan, the
Registration Statement and amendments (Form S-8 No. 33-93788, 333-14749 and
333-61797) pertaining to the Sola International Inc. Stock Option Plan and the
Sola Investors' Stock Option Plan of Sola International Inc. and the
Registration Statement (Form S-3 No. 333-45929) pertaining to the registration
of $250,000,000 of common stock and/or debt securities of our report dated May
6, 1999, with respect to the consolidated financial statements and schedule of
Sola International Inc. included in this Annual Report (Form 10-K) for the year
ended March 31, 1999.
/s/Ernst & Young LLP
Palo Alto, California
June 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FOURTH QUARTER 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 21,558
<SECURITIES> 20
<RECEIVABLES> 125,651
<ALLOWANCES> 7,003
<INVENTORY> 168,755
<CURRENT-ASSETS> 329,467
<PP&E> 211,792
<DEPRECIATION> 58,792
<TOTAL-ASSETS> 699,299
<CURRENT-LIABILITIES> 133,344
<BONDS> 219,482
0
0
<COMMON> 249
<OTHER-SE> 332,113
<TOTAL-LIABILITY-AND-EQUITY> 699,299
<SALES> 529,789
<TOTAL-REVENUES> 529,789
<CGS> 291,389
<TOTAL-COSTS> 291,389
<OTHER-EXPENSES> 200,649
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,559
<INCOME-PRETAX> 20,192
<INCOME-TAX> 8,394
<INCOME-CONTINUING> 12,521
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,521
<EPS-BASIC> 0.51
<EPS-DILUTED> 0.49
</TABLE>
Exhibit 99.1
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-K, the Company's Annual Report to Shareholders, any Form
10-Q or any Form 8-K of the Company or any other written or oral statements made
by or on behalf of the Company include forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934 which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed below, that could cause actual results to differ
materially from historical results or those anticipated. The words "believe",
"expect", "anticipate" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Although the Company believes that it has the product offerings and
resources needed for continuing success, future net sales and margin trends
cannot be reliably predicted and may cause the Company to adjust its operations.
Factors external to the Company can result in volatility of the Company's common
stock price. Because of the foregoing factors, recent trends should not be
considered reliable indicators of future stock prices or financial results.
The following factors could cause actual operating results to differ
materially from historical results or those anticipated:
Highly Competitive Industry and Affect of New Products on Results
The eyeglass lens and coating industry is highly competitive. The
Company competes principally on the basis of customer service, the quality and
breadth of product offerings, and price. The eyeglass lens and coating industry
is characterized by price competition, which can be severe in certain markets,
particularly for standard products. Sola attempts, to the extent possible, to
counter competition on the basis of price by focusing on providing a rapid
response to orders, maintaining high fill rates, developing differentiated new
products, and educating processing laboratories and eyecare practitioners on the
benefits of Sola lenses and coatings. There can be no assurance, however, that
the Company's competitors will not develop products or services that are more
effective or less expensive than the Company's products or which could render
certain of the Company's products less competitive. Since recently-developed
products comprise a substantial portion of the Company's sales, the Company's
performance and future growth are dependent upon its continuing ability to
develop and market new products. The Company's quarterly results can be affected
by the ability to generate sales from new products as anticipated and the costs
of such introductions.
Some of the Company's competitors have significantly greater financial
resources than the Company to fund expansion and research and development. See
"--Substantial Indebtedness" and "--Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources".
Within a particular market, certain of the Company's competitors may enjoy a
"home-country" advantage over foreign competition. In addition, in certain
markets (primarily Europe), the Company also faces competition from a number of
its principal competitors which are vertically integrated with processing
centers to a greater extent than the Company, enabling them to customize
prescription lenses. This limits the number of independent lens processing
customers to which the Company can market its products.
International Operations
The Company operates manufacturing and distribution sites in three
major regions of the world--North America (including Mexico), Europe and Rest of
World (comprising primarily Australia, Asia and South America)--and derived
approximately half of its net sales in fiscal 1999 from the sale of products
<PAGE>
outside the United States. As a result, a significant portion of the Company's
sales and operations are subject to certain risks, including adverse
developments in the foreign political and economic environment, exchange rates,
tariffs and other trade barriers, staffing and managing foreign operations and
potentially adverse tax consequences. Although the Company and its predecessors
have been successfully conducting business outside of the United States since
its inception in 1960, there can be no assurance that any of these factors will
not have a material adverse effect on the Company's financial condition or
results of operations in the future.
The Company's interest expense is denominated predominantly in U.S.
dollars; its cash flow, however, is comprised of a variety of currencies.
Although the Company may enter into currency swap agreements with financial
institutions to reduce its exposure to fluctuations in foreign currency values
relative to its debt obligations, such hedging transactions, if entered into,
will not eliminate that risk entirely. As a result of the Company's worldwide
operations, currency exchange rate fluctuations tend to affect the Company's
results of operations and financial position. The Company has significant
operations in Brazil, which has, until recently, experienced a
hyper-inflationary environment and whose currency risk may not be effectively
hedged. The functional currency of the Company's operations in Brazil is the
U.S. dollar. Under U.S. generally accepted accounting principles for
hyper-inflationary countries, all translation and transaction adjustments of
foreign operations are reflected in the Company's statements of operations. The
Company's statements of operations reflect significant charges to income
primarily attributable to significant devaluations of the Brazilian currency.
There can be no assurance that hyper-inflationary conditions will not return to
Brazil or be present in other countries in which the Company has significant
operations. See "--Management's Discussion and Analysis of Financial Condition
and Results of Operations--Currency Exchange Rates" and "--Inflation".
Restrictions on Payment of Dividends from Subsidiaries
The Company's foreign operations are conducted through its
subsidiaries. These operations contribute significantly to the Company's sales
and profitability. The payment of dividends and the making of loans and advances
to the Company by its subsidiaries may be subject to statutory restrictions, are
contingent upon the earnings of those subsidiaries and are subject to various
business considerations. Dividends and other payments to the Company from
subsidiaries in certain jurisdictions are subject to legal restrictions and may
have adverse tax consequences to the Company. Management reviews the need for
cash distributions to the Company from its foreign subsidiaries on a case by
case basis. If the need for cash distributions from the subsidiaries should
arise in the future, there can be no assurance that the subsidiaries will be
permitted to make such cash distributions without legal restrictions or adverse
tax consequences to the Company. Commencing in fiscal 1996, the Company has
provided for U.S. federal and state income taxes on unremitted earnings of
certain foreign subsidiaries.
Substantial Indebtedness
The Company's substantial indebtedness may limit its capacity to
respond to market conditions (including its ability to satisfy capital
expenditure requirements) or to meet its contractual or financial obligations.
In addition, pursuant to the debt instruments governing the Company's
indebtedness, the Company is subject to restrictive covenants that could limit
its ability to conduct its business. Furthermore, the ability of the Company to
satisfy its obligations will be dependent upon its future performance, which
will be subject to prevailing economic conditions and to financial, business and
other factors, including factors beyond the control of the Company. The Company
entered into an Amended 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 $300 million. As of
March 31, 1999, $103 million was outstanding under this agreement, and $194.6
million was available for future borrowings. Through and including March 15,
2008, interest on the Company's $100 million aggregate principal amount of 6
7/8% Senior Notes due 2008 (the "Notes") will be payable in cash semiannually.
Although the Company believes that cash flow from operations will be sufficient
to meet all of its debt service requirements and to fund its capital expenditure
requirements, there can be no assurance that this will be the case.
<PAGE>
Reliance on Key Management
The operation of the Company requires managerial and operational
expertise. There can be no assurance that the Company's key management employees
will remain with the Company. If, for any reason, such key personnel do not
continue to be active in the Company's management, operations could be adversely
affected. The Company does not maintain key-man life insurance policies.
Medical Procedures
A number of companies have developed, or are developing, surgical
equipment or implants used to correct refractive error, including myopia,
hyperopia and astigmatism. These procedures are ineffective at correcting
presbyopia, which affects the vast majority of people above the age of 45, and
is a major cause of demand for Sola's progressive and other multifocal lenses.
However, there can be no assurance that current medical procedures, or ones
developed in the future, will not materially impact demand for the Company's
lenses.
Forward Integration
In some instances, Sola's competitors have made or may make
acquisitions of wholesale distributors or independent processing laboratories
that are customers of Sola. In these instances, Sola aims to continue to supply
lens products to these wholesale operations. However, there is no assurance that
sales will continue at previous levels to these wholesalers.
Dividend Policy; Restrictions on Payment of Dividends
The Company has not declared or paid any cash dividends on any class of
its capital stock, and does not intend to pay dividends on its Common Stock in
the foreseeable future. The Company's Bank Credit Agreement with The Bank of
America National Trust and Savings Association, and the Indenture governing the
Notes (the "Indenture"), restrict and limit the payment of dividends on the
Common Stock. See "--Price Range of Common Stock and Dividend Policy".
Antitakeover Provisions
The Company's Amended and Restated Certificate of Incorporation and
Amended and Restated By-Laws contain certain provisions that could make more
difficult the acquisition of the Company by means of a tender offer, a proxy
contest or otherwise. These provisions include advance notice procedures for
stockholders to nominate candidates for election as directors of the Company and
for stockholders to submit proposals for consideration at stockholders'
meetings. In addition, the Company is subject to Section 203 of the Delaware
General Corporation Law, which limits transactions between a publicly held
company and "interested stockholders" (generally, those stockholders who,
together with their affiliates and associates, own 15% or more of a company's
outstanding capital stock). This provision of Delaware law also may have the
effect of deterring certain potential acquisitions of the Company. In addition,
the Company's shareholder rights plan could have the effect of delaying or
hindering a possible takeover of the Company. The Company believes that these
measures enhance the ability of the Board of Directors of the Company to respond
to proposals to acquire control of the Company in a manner that is in the best
interests of the Company, its stockholders, employees and other affected
constituents.
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. Computer
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
<PAGE>
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
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
their 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, we are not sure that
our 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
<PAGE>
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 market place implications of a common currency
and the currency exchange rate risks, with the initial emphasis placed on the
system modifications. The Company has not completed the evaluation of the
possible effect of the changes to the Euro on foreign currency loans, or the
impact if any, on the market place implications of a common currency.
Preliminary assessments indicate that the financial impact of conversion to a
Euro based currency will not be material to the Company's consolidated financial
position, results of operations or cash flows.
