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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 5, 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.
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<PAGE>
<TABLE>
SOLA INTERNATIONAL INC.
Table of Contents
Form 10-Q for the Quarterly Period
Ended September 30, 1999
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
<S> <C> <C>
Item 1. Financial Statements
Unaudited Consolidated Condensed Balance Sheet as of September 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 and
six month periods ended September 30, 1999 and September 30, 1998 4
Unaudited Consolidated Condensed Statements of Cash Flows for the six month
periods ended September 30, 1999 and September 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 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
2
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<TABLE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SOLA INTERNATIONAL INC.
Consolidated Condensed Balance Sheets
(in thousands, except per share data)
<CAPTION>
March 31, 1999
(derived from
September audited
30, 1999 financial
(unaudited) statements)
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 22,756 $ 21,578
Trade accounts receivable, less allowance for doubtful
accounts of $6,663 and $7,003 at September 30, 1999 and
March 31, 1999, respectively .......................... 123,598 118,648
Inventories ............................................. 186,018 168,755
Other current assets .................................... 21,806 20,486
--------- ---------
Total current assets .................................. 354,178 329,467
Property, plant and equipment, at cost, less accumulated
depreciation and amortization ......................... 154,546 153,000
Goodwill and other intangibles, net ........................ 192,359 195,345
Other long-term assets ..................................... 23,137 21,487
--------- ---------
Total assets .......................................... $ 724,220 $ 699,299
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks .................................. $ 17,156 $ 17,490
Current portion of long-term debt ....................... 4,869 4,510
Accounts payable ........................................ 55,524 50,854
Accrued liabilities ..................................... 32,928 31,313
Accrued payroll and related compensation ................ 27,793 26,468
Other current liabilities ............................... 5,070 2,709
--------- ---------
Total current liabilities ............................. 143,340 133,344
Long-term debt, less current portion ....................... 4,188 5,782
Bank debt, less current portion ............................ 101,500 103,000
Senior notes ............................................... 99,655 99,632
Other long-term liabilities ................................ 25,323 25,179
--------- ---------
Total liabilities ..................................... 374,006 366,937
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 ................................. (10) (50)
Retained earnings .......................................... 83,737 70,578
Cumulative other comprehensive income (loss) ............... (14,329) (18,940)
--------- ---------
Total shareholders' equity ............................ 350,214 332,362
--------- ---------
Total liabilities and shareholders' equity ............ $ 724,220 $ 699,299
========= =========
<FN>
The accompanying notes are an integral part of these condensed financial statements
</FN>
</TABLE>
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<TABLE>
SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Income
(in thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ........................... $ 141,071 $ 132,668 $ 274,648 $ 262,194
Cost of sales ....................... 77,613 72,937 151,694 142,032
--------- --------- --------- ---------
Gross profit ..................... 63,458 59,731 122,954 120,162
--------- --------- --------- ---------
Research and development expenses ... 5,146 4,664 10,355 9,394
Selling and marketing expenses ...... 25,696 23,631 51,060 48,102
General and administrative expenses . 14,851 14,216 29,534 24,511
Special charges ..................... 2,863 -- 4,363 --
--------- --------- --------- ---------
Operating expenses ............... 48,556 42,511 95,312 82,007
--------- --------- --------- ---------
Operating income .............. 14,902 17,220 27,642 38,155
Interest expense, net ............... 4,496 4,316 8,949 8,338
--------- --------- --------- ---------
Income before provision for income
taxes and minority interest . 10,406 12,904 18,693 29,817
Provision for income taxes .......... (3,330) (4,384) (5,982) (10,135)
Minority interest ................... 165 283 448 418
--------- --------- --------- ---------
Net income ....................... $ 7,241 $ 8,803 $ 13,159 $ 20,100
========= ========= ========= =========
Earnings per share - basic .......... $ 0.29 $ 0.36 $ 0.53 $ 0.81
========= ========= ========= =========
Weighted average common shares
outstanding ...................... 24,868 24,778 24,868 24,759
========= ========= ========= =========
Earnings per share - diluted ........ $ 0.29 $ 0.35 $ 0.52 $ 0.78
========= ========= ========= =========
Weighted average common and dilutive
securities outstanding ........... 25,158 25,481 25,133 25,696
========= ========= ========= =========
<FN>
The accompanying notes are an integral part of these condensed financial statements
</FN>
</TABLE>
4
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SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)
Six Months Six Months
Ended Ended
September September
30, 1999 30, 1998
-------- ---------
Net cash provided by (used in) operating activities .... $ 13,737 $ (8,865)
-------- --------
Cash flows from investing activities:
Purchase of business ................................ -- (8,598)
Investment in joint venture ......................... (2,188) --
Capital expenditures ................................ (9,434) (17,110)
Proceeds from sale of fixed assets .................. 335 61
-------- --------
Net cash used in investing activities .................. (11,287) (25,647)
-------- --------
Cash flows from financing activities:
Payments on equity participation
loans/exercise of stock options .................. 82 729
Net receipts/payments under notes payable to
banks ............................................ 3,819 11,099
Borrowings on long term debt ........................ 1,446 2,287
Payments on long term debt .......................... (5,344) (1,330)
Proceeds from bank debt ............................. (1,500) 21,427
-------- --------
Net cash provided by (used in) financing activities .... (1,497) 34,212
-------- --------
Effect of exchange rate changes on cash and cash
equivalents ......................................... 225 581
-------- --------
Net increase in cash and cash equivalents ............. 1,178 281
Cash and cash equivalents at beginning of period ....... 21,578 34,444
-------- --------
Cash and cash equivalents at end of period ............. $ 22,756 $ 34,725
======== ========
The accompanying notes are an integral part of these
condensed financial statements
5
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SOLA INTERNATIONAL INC.
Notes to Consolidated Condensed Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying consolidated condensed financial statements of the Company
have been prepared without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The consolidated condensed balance sheet as of March 31,
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 six months ended September 30, 1999
are not necessarily indicative of the results to be expected for the full year.
2. Inventories
September 30, 1999 March 31, 1999
(in thousands) (in thousands)
-------------- --------------
Raw Materials $ 17,347 $ 15,714
Work In Progress 10,619 6,551
Finished Goods 112,094 102,862
Molds 45,958 43,628
-------- --------
$186,018 $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. The Company expects continued reduction of clean-up activities due
to relatively low levels of contamination existing at the
6
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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.
<TABLE>
4. Comprehensive Income
The components of comprehensive income, net of related tax, are as follows
(in thousands):
<CAPTION>
Three Months Six Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 7,241 $ 8,803 $ 13,159 $ 20,100
Foreign currency translation adjustments 4,045 (450) 4,611 (3,850)
-------- -------- -------- ---------
Comprehensive income $ 11,286 $ 8,353 $ 17,770 $ 16,250
======== ======== ======== =========
</TABLE>
<TABLE>
5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three and six months ended September 30, 1999 and
1998 (in thousands except per share data):
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Numerator:
<S> <C> <C> <C> <C>
Net income........................................... $ 7,241 $ 8,803 $13,159 $20,100
Denominator:
Denominator for basic earnings per share -
Weighted average common shares outstanding........... 24,868 24,778 24,868 24,759
Effect of dilutive securities:
Employee stock options............................. 290 703 265 937
------- ------- ------- -------
Denominator for diluted earnings per share -
Weighted average common shares and dilutive
securities outstanding........................... 25,158 25,481 25,133 25,696
Basic earnings per share................................ $0.29 $0.36 $0.53 $0.81
Diluted earnings per share.............................. $0.29 $0.35 $0.52 $0.78
</TABLE>
7
<PAGE>
6. Special Charges
The special charges during the six months ended September 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 ($2.6 million) and work force reductions in North America, Europe
and Rest of World ($0.9 million). In addition, the erosion of the Brazilian Real
against the US dollar (Sola Brazil's functional currency) in the three months
ended September 30, 1999 by approximately 8%, has resulted in a foreign exchange
translation charge to the income statement in the three months ended September
30, 1999 of $0.9 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 September 30, 1999 compared to three months ended September
30, 1998
Net Sales
Net sales totaled $141.1 million in the three months ended September 30,
1999, reflecting an increase of 6.3% from net sales of $132.7 million for the
same period in the prior year. Using constant exchange rates, the percentage
increase was 6.9%. All three operating regions contributed to the increase in
net sales, due primarily to strong progressive lens sales. Growth in Rest of
World sales reflects a modest market recovery in Asia and a reasonably strong
market in South America despite the economic impact from the Brazilian Real
devaluation in January 1999 and the erosion of the currency in the second
quarter of fiscal 2000. Progressive lens net sales for the three months ended
September 30, 1999 increased 18.7% from the same period in the prior year, led
by the Company's new progressive lens designs, AO Compact, Percepta and
Visuality. Higher priced products accounted for approximately 70% of net lens
sales in the three months ended September 30, 1999 compared to approximately 68%
for the three months ended September 30, 1998. Net sales increases by region,
were as follows: North America 7.3%, Europe 3.4% and Rest of World 8.8%. Using
constant exchange rates the regional increases were as follows: North America
7.5%, Europe 8.1% and Rest of World 3.6%.
Gross Profit and Gross Margin
Gross profit totaled $63.5 million for the three months ended September 30,
1999, reflecting an increase of 6.2% from gross profit of $59.7 million for the
same period in the prior year. Gross profit as a percentage of net sales ("gross
margin") remained constant at 45.0% for the three months ended September 30,
1999 and 1998. Both periods margin performances are lower than traditional
levels due to product mix changes and due to lower production levels to align
production with sales demand and expectations.
Operating Expenses
Operating expenses in the three months ended September 30, 1999 totaled
$48.6 million, an increase of $6.1 million over operating expenses of $42.5
million for the same period in the prior year. Included in operating expenses
for the three months ended September 30, 1999 is $2.9 million representing
special charges. If these charges were excluded from operating expenses,
operating expenses would have been $45.7 million, an increase over the three
months ended September 30, 1998 of 7.5%. Operating expenses, excluding the
special charges, for the three months ended September 30, 1999 and 1998 as a
percentage of net sales were 32.4% and 32.0%, respectively. Research and
development expenses for the three months ended September 30, 1999 amounted to
$5.1 million, compared to $4.7 million for the three months ended September 30,
1998, which represent 3.7% and 3.5% of net sales, respectively. Selling and
marketing expenses for the three months ended September 30, 1999 increased $2.1
million to $25.7 million, compared to $23.6 million for the three months ended
September 30, 1998 which represent 18.2% and 17.8%, of net sales, respectively.
General and administrative expenses were $14.8 million, or 10.5% of net sales,
for the three months ended September 30, 1999, compared to $14.2 million, or
10.7% of net sales for the three months ended September 30, 1998.
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<PAGE>
Operating expenses for the three months ended September 30, 1999 included
$2.9 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 ($1.1 million)
and work force reductions in North America, Europe and Rest of World ($0.9
million). In addition, the erosion of the Brazilian Real against the US dollar
(Sola Brazil's functional currency) in the three months ended September 30, 1999
by approximately 8%, has resulted in a foreign exchange translation charge to
the income statement in the three months ended September 30, 1999 of $0.9
million.
Operating Income
Operating income, for the three months ended September 30, 1999 totaled
$14.9 million, a decrease of $2.3 million from the operating income for the
three months ended September 30, 1998 of $17.2 million. If the special charges
of $2.9 million are excluded from operating income for the three months ended
September 30, 1999, operating income would have been $17.8 million, an increase
of 3.2% over the same period in the prior year.
Net Interest Expense
Net interest expense totaled $4.5 million for the three months ended
September 30, 1999 compared to $4.3 million for the three months ended September
30, 1998, an increase of $0.2 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 1999 year of 32%. For the three
months ended September 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 September 30,
1999 amounting to approximately $23.3 million. The ultimate utilization of these
deferred tax assets is dependent on the Company's ability to generate taxable
income in the future.
Six months ended September 30, 1999 compared to six months ended September 30,
1998
Net Sales
Net sales totaled $274.6 million in the six months ended September 30,
1999, reflecting an increase of 4.8% from net sales of $262.2 million for the
same period in the prior year. Using constant exchange rates, the percentage
increase was 5.1%. All three operating regions contributed to the increase in
net sales, due primarily to strong progressive lens sales. Growth in Rest of
World sales reflects a modest market recovery in Asia and a reasonably strong
market in South America despite the economic impact from the Brazilian Real
devaluation in January 1999 and the erosion of the currency in the second
quarter of fiscal 2000. Progressive lens net sales for the six months ended
September 30, 1999 increased 18.4% from the same period in the prior year, led
by the Company's new progressive lens designs, AO Compact, Percepta and
Visuality. Higher priced products accounted for approximately 69% of net lens
sales in the six months ended September 30, 1999 compared to approximately 67%
for the three months ended September 30, 1998. Net sales increases by region,
were as follows: North America 5.8%, Europe 1.8% and Rest
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of World 7.1%. Using constant exchange rates the regional increases were as
follows: North America 5.8%, Europe 5.2% and Rest of World 3.4%.
Gross Profit and Gross Margin
Gross profit totaled $123.0 million for the six months ended September 30,
1999, reflecting an increase of 2.3% from gross profit of $120.2 million for the
same period in the prior year. Gross profit as a percentage of net sales ("gross
margin") decreased to 44.8% for the six months ended September 30, 1999 from
45.8% for the six months ended September 30, 1998. The margin decrease was
principally due to product mix changes and due to underabsorption of overhead
due to a slowdown of production levels, primarily in the first quarter of fiscal
2000, in order to align production with sales demand and expectations.
Operating Expenses
Operating expenses in the six months ended September 30, 1999 totaled $95.3
million, an increase of $13.3 million, compared to operating expenses of $82.0
million for the same period in the prior year. Included in operating expenses
for the six months ended September 30, 1999 is $4.4 million representing special
charges. If these charges were excluded from operating expenses, operating
expenses would have been $90.9 million, an increase over the six months ended
September 30, 1998 of 10.9%. Operating expenses, excluding the special charges,
for the six months ended September 30, 1999 and 1998 as a percentage of net
sales were 33.1% and 31.3%, respectively. Research and development expenses for
the six months ended September 30, 1999 totaled $10.4 million, compared to $9.4
million for the six months ended September 30, 1998, which represent 3.8% and
3.6% of net sales, respectively. Selling and marketing expenses for the six
months ended September 30, 1999 increased $3.0 million to $51.1 million,
compared to $48.1 million for the six months ended September 30, 1998 which
represent 18.6% and 18.4%, of net sales, respectively. As a percentage of net
sales, general and administrative expenses increased to 10.8% for the six months
ended September 30, 1999 compared to 9.4% for the six months ended September 30,
1998. The lower than historical general and administrative expenses in the six
months ended September 30, 1998, primarily in the first three months of fiscal
1999, reflected lower accruals for performance based bonuses and favorable
changes in estimates related to certain reserves and accruals.
Operating expenses for the six months ended September 30, 1999 included
$4.4 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 ($2.6 million)
and work force reductions in North America, Europe and Rest of World ($0.9
million). In addition, the erosion of the Brazilian Real against the US dollar
(Sola Brazil's functional currency) in the six months ended September 30, 1999,
primarily during the last three months, by approximately 10%, has resulted in a
foreign exchange translation charge to the income statement in the six months
ended September 30, 1999 of $0.9 million.
Operating Income
Operating income for the six months ended September 30, 1999 was $27.6
million, a decrease of $10.5 million, from the six months ended September 30,
1998 operating income of $38.1 million. If the special charges of $4.4 million
are excluded from operating income for the six months ended September 30, 1999,
operating income would have been $32.0 million, a decrease of 16.1% over the
same period in the prior year.
Net Interest Expense
Net interest expense totaled $8.9 million for the six months ended
September 30, 1999 compared to $8.3 million for the six months ended September
30, 1998, an increase of $0.6 million. The increase in interest expense is due
primarily to increased borrowing levels.
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<PAGE>
Liquidity and Capital Resources
Net cash provided by operating activities for the six months ended
September 30, 1999 amounted to $13.7 million, an increase of $22.6 million over
the funds used in operating activities of $8.9 million for the six months ended
September 30, 1998. The most significant causes of the improvement are the
reduced outflow in accounts receivable and inventories and an increase in
accounts payable and accrued liabilities for the six months ended September 30,
1999, compared to a reduction in accounts payable and accrued liabilities in the
six months ended September 30, 1998. These improvements in operating cash flow
are offset in part by the reduction in net income.
During the six months ended September 30, 1999, using a three month net
sales annualized convention, inventories as a percentage of annualized net sales
were 33.0% compared to 35.7% for the six months ended September 30, 1998,
reflecting the Company's actions to reduce inventories on hand. Accounts
receivable as a percentage of annualized net sales for the six months ended
September 30, 1999 was 21.9% compared to 23.3% for the same period a year ago.
Cash flows from investing activities in the six months ended September 30,
1999 amounted to an outflow of $11.3 million, reflecting capital expenditures of
$9.4 million and investment in a joint venture in India of $2.2 million, offset
by proceeds from the sale of fixed assets of $0.3 million. Cash flows from
investing activities in the six months ended September 30, 1998 were an outflow
of $25.6 million of which $17.1 million represented capital expenditures, and
$8.6 million represented investment in acquisitions. 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.
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 used in financing activities in the six months ended September 30,
1999 amounted to $1.5 million, primarily repayments under the Company's bank
credit agreement and repayments of long term debt, offset by borrowings under
notes payable to banks. Net cash provided by financing activities in the six
months ended September 30, 1998 amounted to $34.2 million. The most significant
use was the increase in bank borrowings and bank debt to fund the growth in
working capital, capital expenditures and the lab acquisition.
In addition to the Company's borrowings under its multicurrency Bank Credit
Agreement ($101.5 million borrowed as of September 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 September 30,
1999 the total borrowing capacity available to the Company's foreign
subsidiaries under such local facilities was approximately $46.4 million, of
which $18.4 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)
12
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translation adjustments for subsidiaries in hyper-inflationary countries.
Translation adjustments for functional local currencies have been made to
shareholders' equity. For the six months ended September 30, 1999 and 1998 such
translation adjustments were approximately $4.6 million and $(3.9) 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, however, during the three months ended
September 30, 1999 the Real deteriorated against the US dollar by approximately
8%. 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
September 30, 1999. As of September 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 would 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 these modifications and replacements of existing
software, to mitigate the Year 2000 issue, have been completed. 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 has not
been material to the Company's results of operations (less than $2 million over
a three fiscal year period).
13
<PAGE>
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, and none are expected.
For those IT systems that required upgrades to make them Year 2000
compliant, the Company commenced upgrade programs in a timely manner and the
majority of remediation work has been completed. In certain instances, the
Company developed contingency plans which have been implemented which should
deliver adequate computer functionality until the main IT 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 endeavors, which were
implemented utilizing a number of assumptions about future events, such as the
ability to locate and correct all relevant computer codes, the performance of
key software and hardware vendors and other similar uncertainties. However,
although the Company has completed its preparedness program the Company is not
sure that actual results will not differ materially from those anticipated.
As part of its overall assessment package, the Company also assessed the
possible effects on the Company's operations of the Year 2000 readiness of key
suppliers and customers. The Company has not been advised by any key suppliers
or customers that they will not be ready for the Year 2000. The Company's
largest customer accounts for approximately 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
14
<PAGE>
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.
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.
15
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of the security holders
at the Company's Annual Meeting of Stockholders held on August 13,
1999:
Proposal I Election of Directors. Votes as follows:
Total Vote Total Vote
for Each Withheld From Each
Director Director
-------- --------
Maurice J. Cunniffe 19,686,710 552,055
Douglas D. Danforth 19,682,724 556,041
A. William Hamill 20,136,659 102,106
John E. Heine 20,145,779 92,986
Hamish Maxwell 19,683,624 555,141
Irving S. Shapiro 19,681,324 557,441
Jackson L. Schultz 19,675,824 562,941
Proposal II Approval to ratify the Company's Management Incentive Plan.
Votes as follows:
For Against Abstain No Vote
--- ------- ------- -------
18,751,141 1,437,636 49,989 0
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 19
(b) Reports on Form 8-K
Not applicable
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sola International Inc.
(Registrant)
Dated: November 5, 1999 By: /s/ Steven M. Neil
-------------------- --------------------------
Steven M. Neil
Executive Vice President, Chief
Financial Officer, Secretary and
Treasurer
17
<PAGE>
Exhibit Index
Exhibit No. Description Page Number
----------- ----------- -----------
27 Financial Data Schedule 19
18
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SECOND
QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 22,737
<SECURITIES> 19
<RECEIVABLES> 130,261
<ALLOWANCES> 6,663
<INVENTORY> 186,018
<CURRENT-ASSETS> 354,178
<PP&E> 224,710
<DEPRECIATION> 70,164
<TOTAL-ASSETS> 724,220
<CURRENT-LIABILITIES> 143,340
<BONDS> 216,637
0
0
<COMMON> 249
<OTHER-SE> 349,965
<TOTAL-LIABILITY-AND-EQUITY> 724,220
<SALES> 274,648
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<CGS> 151,694
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<OTHER-EXPENSES> 95,312
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<INTEREST-EXPENSE> 8,949
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