================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13606
SOLA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3189941
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
2420 SAND HILL ROAD, SUITE 200, MENLO PARK, CA 94025
(Address of principal executive offices)
(zip code)
(650) 324-6868
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
As of August 4, 1999, 24,868,233 shares of the registrant's common
stock, par value $0.01 per share, which is the only class of common stock of the
registrant, were outstanding.
================================================================================
<PAGE>
SOLA INTERNATIONAL INC.
Table of Contents
Form 10-Q for the Quarterly Period
Ended June 30, 1999
PART I FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements
Unaudited Consolidated Condensed Balance Sheet as of
June 30, 1999 3
Consolidated Condensed Balance Sheet as of March 31, 1999
(derived from audited financial statements) 3
Unaudited Consolidated Condensed Statements of Income for the
three month periods ended June 30, 1999 and June 30, 1998 4
Unaudited Consolidated Condensed Statements of Cash Flows for the
three month periods ended June 30, 1999 and June 30, 1998 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
SOLA INTERNATIONAL INC.
Consolidated Condensed Balance Sheets
(in thousands, except per share data)
<CAPTION>
March 31, 1999
(derived from
audited
June 30, 1999 financial
ASSETS (unaudited) statements)
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................................................... $ 27,573 $ 21,578
Trade accounts receivable, less allowance for doubtful
accounts of $6,894 and $7,003 at June 30, 1999 and
March 31, 1999, respectively .................................................... 117,799 118,648
Inventories ....................................................................... 175,550 168,755
Other current assets .............................................................. 22,287 20,486
--------- ---------
Total current assets ............................................................ 343,209 329,467
Property, plant and equipment, at cost, less accumulated
depreciation and amortization ................................................... 152,604 153,000
Goodwill and other intangibles, net .................................................. 193,772 195,345
Other long-term assets ............................................................... 22,825 21,487
--------- ---------
Total assets .................................................................... $ 712,410 $ 699,299
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks ............................................................ $ 14,208 $ 17,490
Current portion of long-term debt ................................................. 7,243 4,510
Accounts payable .................................................................. 53,887 50,854
Accrued liabilities ............................................................... 32,315 31,313
Accrued payroll and related compensation .......................................... 26,258 26,468
Other current liabilities ......................................................... 3,478 2,709
--------- ---------
Total current liabilities ....................................................... 137,389 133,344
Long-term debt, less current portion ................................................. 4,387 5,782
Bank debt, less current portion ...................................................... 107,000 103,000
Senior notes ......................................................................... 99,646 99,632
Other long-term liabilities .......................................................... 25,099 25,179
--------- ---------
Total liabilities ............................................................... 373,521 366,937
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;
24,868 shares (24,867 shares as of March 31, 1999)
issued and outstanding .......................................................... 249 249
Additional paid-in capital ........................................................... 280,567 280,525
Equity participation loans ........................................................... (50) (50)
Retained earnings .................................................................... 76,497 70,578
Cumulative other comprehensive income (loss) ......................................... (18,374) (18,940)
--------- ---------
Total shareholders' equity ...................................................... 338,889 332,362
--------- ---------
Total liabilities and shareholders' equity ...................................... $ 712,410 $ 699,299
========= =========
<FN>
The accompanying notes are an integral part of these condensed financial statements
</FN>
</TABLE>
3
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Income
(in thousands, except per share data)
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
------------------ ------------------
<S> <C> <C>
Net sales ........................................................................ $ 133,577 $ 129,526
Cost of sales .................................................................... 74,081 69,095
--------- ---------
Gross profit .................................................................. 59,496 60,431
--------- ---------
Research and development expenses ................................................ 5,209 4,730
Selling and marketing expenses ................................................... 25,364 24,471
General and administrative expenses .............................................. 14,683 10,295
Special charges .................................................................. 1,500 --
--------- ---------
Operating expenses ............................................................ 46,756 39,496
--------- ---------
Operating income ........................................................... 12,740 20,935
Interest expense, net ............................................................ (4,453) (4,022)
--------- ---------
Income before provision for income taxes and
minority interest ......................................................... 8,287 16,913
Provision for income taxes ....................................................... (2,652) (5,751)
Minority interest ................................................................ 283 135
--------- ---------
Net income .................................................................... $ 5,918 $ 11,297
========= =========
Earnings per share - basic ....................................................... $ 0.24 $ 0.46
Weighted average common shares outstanding ....................................... 24,868 24,740
Earnings per share - diluted ..................................................... $ 0.24 $ 0.44
Weighted average common and dilutive securities
outstanding ................................................................... 25,107 25,911
<FN>
The accompanying notes are an integral part of these condensed financial statements
</FN>
</TABLE>
4
<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
------------------ ------------------
<S> <C> <C>
Net cash provided by (used in) operating activities ................................ $ 7,646 $(15,594)
-------- --------
Cash flows from investing activities:
Purchase of business ............................................................ -- (8,253)
Capital expenditures ............................................................ (5,195) (7,794)
Proceeds from sale of fixed assets .............................................. 289 40
-------- --------
Net cash used in investing activities .............................................. (4,906) (16,007)
-------- --------
Cash flows from financing activities:
Payments on equity participation
loans/exercise of stock options ............................................... 42 625
Net receipts/payments under notes payable to
banks ........................................................................ 798 2,482
Borrowings on long term debt .................................................... 343 6,262
Payments on long term debt ...................................................... (1,629) (310)
Proceeds from bank debt ......................................................... 4,000 15,000
-------- --------
Net cash provided by financing activities .......................................... 3,554 24,059
-------- --------
Effect of exchange rate changes on cash and cash
equivalents ..................................................................... (299) (52)
-------- --------
Net increase (decrease) in cash and cash equivalents ............................... 5,995 (7,594)
Cash and cash equivalents at beginning of period ................................... 21,578 34,444
-------- --------
Cash and cash equivalents at end of period ......................................... $ 27,573 $ 26,850
======== ========
<FN>
The accompanying notes are an integral part of these condensed financial statements
</FN>
</TABLE>
5
<PAGE>
SOLA INTERNATIONAL INC.
Notes to Consolidated Condensed Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying consolidated condensed financial statements of the
Company have been prepared without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The consolidated condensed balance sheet
as of March 31, 1999 was derived from audited financial statements. The
accompanying consolidated condensed financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the fiscal year ended
March 31, 1999.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement establishes
accounting and reporting standards for derivative instruments and requires
recognition of all derivatives as assets or liabilities in the statement of
financial position and measurement of those instruments at fair value.
Subsequently, the FASB issued SFAS No. 137, which defers the effective date of
SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company is in
the process of determining the impact that adoption and implementation will have
on its consolidated financial statements.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
period. The results of operations for the three months ended June 30, 1999 are
not necessarily indicative of the results to be expected for the full year.
2. Inventories
June 30, 1999 March 31, 1999
(in thousands) (in thousands)
-------------- --------------
Raw Materials $ 16,103 $ 15,714
Work In Progress 8,316 6,551
Finished Goods 106,343 102,862
Molds 44,788 43,628
-------- --------
$175,550 $168,755
======== ========
Molds comprise mainly finished goods for use by manufacturing
affiliates in the manufacture of spectacle lenses.
3. Contingencies
The Company is subject to environmental laws and regulations concerning
emissions to the air, discharges to surface and subsurface waters and the
generation, handling, storage, transportation, treatment and disposal of waste
materials.
The Company is currently participating in a remediation program of one
of its manufacturing facilities under the Comprehensive Environmental Response,
Compensation and Liability Act 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.
6
<PAGE>
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 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.
4. Comprehensive Income
The components of comprehensive income, net of related tax, are as
follows (in thousands):
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
------------------ ------------------
Net income $ 5,918 $ 11,297
Foreign currency translation
adjustments 566 (3,400)
-------- --------
Comprehensive income $ 6,484 $ 7,897
======== ========
5. Earnings Per Share
<TABLE>
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended June 30, 1999 and 1998 (in
thousands except per share data):
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
------------------ ------------------
<S> <C> <C>
Numerator:
Net income ...................................................................... $ 5,918 $11,297
Denominator:
Denominator for basic earnings per share -
Weighted average common shares outstanding ...................................... 24,868 24,740
Effect of dilutive securities:
Employee stock options ........................................................ 239 1,171
------- -------
Denominator for diluted earnings per share -
Weighted average common shares and dilutive
securities outstanding ...................................................... 25,107 25,911
Basic earnings per share ........................................................... $ 0.24 $ 0.46
Diluted earnings per share ......................................................... $ 0.24 $ 0.44
</TABLE>
7
<PAGE>
6. Special Charges
The special charges during the three months ended June 30, 1999
comprise costs associated with the consolidation of the Sola and American
Optical manufacturing facilities in Mexico, which was started in the fourth
quarter of fiscal 1999. The Company anticipates additional special charges
during fiscal 2000, primarily over the next two quarters and principally
severance related, of $1.0 million to $1.5 million.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Company's
consolidated condensed financial statements and notes thereto included elsewhere
herein.
Results of Operations
Three months ended June 30, 1999 compared to three months ended June 30, 1998
Net Sales
Net sales totaled $133.6 million in the three months ended June 30,
1999, reflecting an increase of 3.1% over net sales of $129.5 million for the
same period in the prior year. Using constant exchange rates, the percentage
increase was 3.8%. The increase in net sales is primarily attributable to the
North American region, due to strong progressive lens sales. Also contributing
to the net sales increase is a return to growth in the Rest of World region, led
by the Company's Asian and Australian operations. The European region net sales
were comparable with the prior year period. Progressive lens net sales for the
three months ended June 30, 1999 increased 18.2% from the same period in the
prior year, led by the Company's new progressive lens designs, AO Compact and
Visuality. Higher priced products accounted for approximately 68% of net sales
in the three months ended June 30, 1999 compared to approximately 67% for the
three months ended June 30, 1998. Net sales performances by region were as
follows: North America increased by 4.3%, Europe was comparable to the prior
year, and Rest of World increased by 5.8%. Using constant exchange rates, the
regional performances were as follows: North America increased by 4.4%, Europe
increased by 3.0% and Rest of World increased by 3.8%.
Gross Profit and Gross Margin
Gross profit totaled $59.5 million for the three months ended June 30,
1999, reflecting a decrease of 1.5% from gross profit of $60.4 million for the
same period in the prior year. Gross profit as a percentage of net sales ("gross
margin") decreased from 46.7% for the three months ended June 30, 1998 to 44.5%
for the three months ended June 30, 1999. The margin decrease was principally
due to underabsorption of overhead due to a slowdown of production levels to
align production with sales demand and expectations.
Operating Expenses
Operating expenses in the three months ended June 30, 1999 totaled
$46.8 million compared to operating expenses of $39.5 million for the same
period in the prior year. Included in operating expenses for the three months
ended June 30, 1999 is $1.5 million representing special charges. If these
charges were excluded from operating expenses, operating expenses would have
been $45.3 million, an increase over the three months ended June 30, 1998 of
14.6%. Operating expenses, excluding the special charges, for the three months
ended June 30, 1999 and 1998 as a percentage of net sales were 33.9% and 30.5%,
respectively. Research and development expenses for the three months ended June
30, 1999 amounted to $5.2 million, compared to $4.7 million for the three months
ended June 30, 1998, which represent 3.9% and 3.7% of net sales, respectively.
Selling and marketing expenses for the three months ended June 30, 1999
increased by $0.9 million to $25.4 million, compared to $24.5 million for the
three months ended June 30, 1998, which represent 19.0% and 18.9% of net sales
for the three months ended June 30, 1999 and June 30, 1998, respectively. As a
percentage of net sales, general and administrative expenses increased to 11.0%
for the three months ended June 30, 1999 compared to 7.9% for the three months
ended June 30, 1998. The lower than historical general and administrative
expenses in the three months ended June 30, 1998 reflected lower
9
<PAGE>
accruals for performance based management bonuses and favorable changes in
estimates related to certain reserves and accruals.
Operating expenses for the three months ended June 30, 1999 included
$1.5 million of special charges. The charges comprise costs associated with the
consolidation of the Sola and American Optical manufacturing facilities in
Mexico, which was started in the fourth quarter of fiscal 1999. The Company
anticipates additional special charges during fiscal 2000, primarily over the
next two quarters and principally severance related, of $1.0 million to $1.5
million.
Operating Income
Operating income, for the three months ended June 30, 1999 totaled
$12.7 million, a decrease of $8.2 million, or 39.1%, from operating income of
$20.9 million for the three months ended June 30, 1998.
Net Interest Expense
Net interest expense totaled $4.4 million for the three months ended
June 30, 1999 compared to $4.0 million for the three months ended June 30, 1999,
an increase of $0.4 million. The increase in interest expense is due primarily
to increased borrowing levels.
Provision for Income Taxes
The Company's combined state, federal and foreign tax rate represents
an effective tax rate projected for the full fiscal 2000 year of 32%. For the
three months ended June 30, 1998, the Company recorded an effective income tax
rate of 34%, and for the full fiscal 1999 year the Company reported an effective
tax rate of 41.6%. The primary cause of the fiscal 1999 effective income tax
rate of 41.6% was the Company booking a valuation allowance, and therefore no
income tax benefit, against the loss related to the Company's inability to
collect the accounts receivable from the original sale of the Brazilian frame
and equipment business, which the Company re-assumed in April 1999. If the
special charges reported in fiscal 1999 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 for fiscal 1999 would
have been 32% or the same as the projected rate for the full fiscal 2000 year.
The Company has deferred tax assets on its balance sheet as of June 30, 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 the three months ended June 30, 1999 totaled $5.9
million compared to net income of $11.3 million for the same period in the prior
year. If the special charges and associated taxes were excluded from the three
months ended June 30, 1999 net income, the decline from the three months ended
June 30, 1998 to the three months ended June 30, 1999 would have been $4.4
million, or 38.6%.
Liquidity and Capital Resources
Net cash provided by operating activities for the three months ended
June 30, 1999 amounted to $7.6 million, an increase of $23.2 million over the
funds used in operating activities of $15.6 million for the three months ended
June 30, 1998. The most significant causes of the improvement are the reduced
outflow in accounts receivable and an increase in accounts payable for the three
months ended June 30, 1999, compared to a reduction in accounts payable in the
three months ended June 30, 1998. These improvements in operating cash flow are
offset in part by the reduction in net income.
10
<PAGE>
During the three months ended June 30, 1999, inventories as a
percentage of annualized net sales were 32.9% compared to 35.5% for the three
months ended June 30, 1998, reflecting the Company's actions to reduce
inventories on hand. Accounts receivable as a percentage of annualized net sales
for the three months ended June 30, 1999 was 22.1% compared to 23.2% for the
same period a year ago.
Cash flows from investing activities in the three months ended June 30,
1999 amounted to an outflow of $4.9 million, reflecting capital expenditures of
$5.2 million, offset by proceeds from the sale of fixed assets of $0.3 million.
Cash flows from investing activities in the three months ended June 30, 1998
were an outflow of $16.0 million of which $7.7 million represented capital
expenditures, and $8.3 million represented investment in acquisitions. The $8.3
million spent on acquisitions represents the acquisition of the assets of an
anti-reflection coating laboratory in Oregon, USA, acquired by the Company in
June 1998. Management anticipates capital expenditures of approximately $25
million to $30 million annually over the next several years, of which
approximately $5 million annually is viewed as discretionary.
Net cash provided by financing activities in the three months ended
June 30, 1999 amounted to $3.6 million, primarily borrowings under the Company's
bank credit agreement. Net cash provided by financing activities in the three
months ended June 30, 1998 amounted to $24.1 million. The most significant use
was the increase in bank borrowings to fund the growth in working capital, and
borrowings on long term debt to fund the lab acquisition.
In addition to the Company's borrowings under its multicurrency Bank
Credit Agreement ($107 million borrowed as of June 30, 1999 under a $300 million
facility) and the Company's outstanding 6 7/8% Senior Notes, its foreign
subsidiaries maintain local credit facilities to provide credit for overdraft,
working capital and some fixed asset investment purposes. As of June 30, 1999
the total borrowing capacity available to the Company's foreign subsidiaries
under such local facilities was approximately $46.4 million, of which $17.6
million had been utilized.
The Company continues to have significant liquidity requirements. In
addition to working capital needs and capital expenditures, the Company has
substantial cash requirements for debt service. The Company expects that its
multicurrency credit facility 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 its Senior Notes, for the foreseeable future. As the Company's
debt matures, the Company may need to refinance such debt. There can be no
assurance that such debt can be refinanced on terms acceptable to the Company.
Currency Exchange Rates
As a result of the Company's worldwide operations, currency exchange
rate fluctuations tend to affect the Company's results of operations and
financial position. The two principal effects of currency exchange rates on the
Company's results of operations and financial position are (i) translation
adjustments for subsidiaries where the local currency is the functional currency
and (ii) translation adjustments for subsidiaries in hyper-inflationary
countries. Translation adjustments for functional local currencies have been
made to shareholders' equity. For the three months ended June 30, 1999 and 1998
such translation adjustments were approximately $0.6 million and $(3.4) million,
respectively.
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 significantly against the U.S. dollar.
Between March 31, 1999 and June 30, 1999 the Real has stabilized in the 1.65 to
1.85 range against the US dollar. In hyper-inflationary environments, the
Company generally protects margins by methods which include increasing prices
monthly at a rate appropriate to cover
11
<PAGE>
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 June
30, 1999. As of June 30, 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.
Seasonality
The Company's business is somewhat seasonal, with third quarter results
generally weaker than the other three quarters as a result of lower sales during
the holiday season, and fourth quarter results generally the strongest.
Inflation
Inflation continues to affect the cost of the goods and services used
by the Company. The competitive environment in many markets limits the Company's
ability to recover higher costs through increased selling prices, and the
Company is subject to price erosion in many of its standard product lines. The
Company seeks to mitigate the adverse effects of inflation through cost
containment and productivity and manufacturing process improvements. For a
description of the effects of inflation on the Company's reported revenues and
profits and the measures taken by the Company in response to inflationary
conditions, see--"Currency Exchange Rates" above.
Year 2000
The 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.
12
<PAGE>
The cost of the Company's Year 2000 program and its beliefs regarding
its compliance program are based on the Company's best estimates, which were
derived utilizing a number of assumptions about future events, such as the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, the performance of key software and
hardware vendors and other similar uncertainties. However, the Company is not
sure that its estimates will be achieved and actual results could differ
materially from those anticipated.
As part of its overall assessment package, the Company is also in the
process of assessing the possible effects on the Company's operations of the
Year 2000 readiness of key suppliers and customers. The Company has developed a
worksheet for all sites to utilize as an aid in collecting information about
Year 2000 compliance including that of business partners. Initial emphasis has
been on partners with Electronic Data Interfaces ("EDI"), with the second stage
being communication with key suppliers and customers on their readiness. The
Company's largest customer accounts for less than 5% of net sales and the ten
largest customers account for approximately 23% of net sales.
Due to the Company's decentralized operations, and lack of reliance on
one Companywide IT system, the Company believes that the risk of isolated Year
2000 failures should not be material to the Company's consolidated operations.
However, difficulties in making the Company's IT systems Year 2000 compliant in
a number of its significant geographic regions or the failure of a number of the
Company's major vendors, customers or other material service providers to
adequately address their Year 2000 issues would have a material adverse effect
on the Company.
European Union Conversion to the "Euro"
The Company has instituted a "Euro" conversion team and begun
preliminary preparation for the conversion by eleven member states of the
European Union to a common currency, the "Euro". Conversion to the Euro by these
member states of the union will take place on a "no compulsion, no prohibition"
basis between January 1, 1999 and January 1, 2002. By January 1, 2002 all
companies operating in the eleven member states will be required to be fully
operational using the new currency. The Sola conversion team has primarily
addressed the accounting and 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 intercompany foreign
currency loans, or the impact if any, on the market place implications of a
common currency. Preliminary assessments indicate that the financial impact of
conversion to a Euro based currency will not be material to the Company's
consolidated financial position, results of operations or cash flows.
Information Relating to Forward-Looking Statements
This quarterly report includes forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, including
statements regarding among other items, (i) the impact of inflation, (ii) future
income tax rates and capital expenditures, (iii) future special charges, and
(iv) the costs and other consequences related to the Year 2000 and conversion to
the Euro. These forward-looking statements reflect the Company's current views
with respect to future events and financial performance. The words "believe",
"expect", "anticipate" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Actual results could differ materially from the forward-looking statements as a
result of "Factors Affecting Future Operating Results" included in Exhibit 99.1
of the Company's Form 10-K for the fiscal year ended March 31, 1999, and the
factors described in "Business-Environmental Matters", also included in the
Company's Form 10-K for the fiscal year ended March 31, 1999.
13
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the Company's assessment of its
sensitivity to market risk since its presentation set forth in Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk", in its Annual
Report on Form 10-K for the fiscal year ended March 31, 1999.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description Page Number
-------------- ----------- -----------
27 Financial Data Schedule 17
(b) Reports on Form 8-K
Not applicable
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sola International Inc.
(Registrant)
Dated: August 4, 1999 By: /s/ Steven M. Neil
------------------ ---------------------------
Steven M. Neil
Executive Vice President,
Chief Financial Officer,
Secretary and Treasurer
15
<PAGE>
Exhibit Index
Exhibit Number Description Page Number
-------------- ----------- -----------
27 Financial Data Schedule 17
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FIRST QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 27,554
<SECURITIES> 19
<RECEIVABLES> 124,693
<ALLOWANCES> 6,894
<INVENTORY> 175,550
<CURRENT-ASSETS> 343,209
<PP&E> 216,741
<DEPRECIATION> 64,137
<TOTAL-ASSETS> 712,410
<CURRENT-LIABILITIES> 137,389
<BONDS> 222,119
0
0
<COMMON> 249
<OTHER-SE> 338,640
<TOTAL-LIABILITY-AND-EQUITY> 712,410
<SALES> 133,577
<TOTAL-REVENUES> 133,577
<CGS> 74,081
<TOTAL-COSTS> 74,081
<OTHER-EXPENSES> 46,756
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,453
<INCOME-PRETAX> 8,287
<INCOME-TAX> 2,652
<INCOME-CONTINUING> 5,918
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,918
<EPS-BASIC> 0.24
<EPS-DILUTED> 0.24
</TABLE>
