<PAGE>
================================================================================
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, 2000
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 7, 2000, 24,170,916 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, 2000
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
------ --------------------- ----
<S> <C>
Item 1. Financial Statements
Unaudited Consolidated Condensed Balance Sheet as of June 30, 2000 3
Consolidated Condensed Balance Sheet as of March 31, 2000
(derived from audited financial statements) 3
Unaudited Consolidated Condensed Statements of Income for the three
month periods ended June 30, 2000 and June 30, 1999 4
Unaudited Consolidated Condensed Statements of Cash Flows for the three
month periods ended June 30, 2000 and June 30, 1999 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II OTHER INFORMATION
------- -----------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SOLA INTERNATIONAL INC.
Consolidated Condensed Balance Sheets
(in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, 2000
(derived from
June 30, 2000 audited financial
(unaudited) statements)
ASSETS ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................................... $ 20,765 $ 18,852
Trade accounts receivable, less allowance for doubtful accounts of $8,603 and
$8,873 at June 30, 2000 and March 31, 1999, respectively ......................... 126,568 120,882
Inventories ........................................................................ 181,005 172,888
Other current assets ............................................................... 34,837 35,725
--------- ---------
Total current assets ............................................................. 363,175 348,347
Property, plant and equipment, at cost, less accumulated depreciation
and amortization ................................................................. 153,298 152,979
Goodwill and other intangibles, net ................................................... 195,332 195,465
Other long-term assets ................................................................ 22,150 18,242
--------- ---------
Total assets ..................................................................... $ 733,955 $ 715,033
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks ............................................................. $ 18,198 $ 18,741
Current portion of long-term debt .................................................. 9,266 4,676
Accounts payable ................................................................... 59,439 60,151
Accrued liabilities ................................................................ 44,341 43,326
Accrued payroll and related compensation ........................................... 29,393 28,303
Other current liabilities .......................................................... 2,252 2,304
--------- ---------
Total current liabilities ........................................................ 162,889 157,501
Long-term debt, less current portion .................................................. 1,665 4,362
Bank debt, less current portion ....................................................... 123,300 105,200
Senior notes .......................................................................... 94,703 99,672
Other long-term liabilities ........................................................... 20,564 20,496
--------- ---------
Total liabilities ................................................................ 403,121 387,231
--------- ---------
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; 24,937 shares issued ......... 249 249
Additional paid-in capital ............................................................ 281,467 281,467
Equity participation loans ............................................................ -- (10)
Retained earnings ..................................................................... 73,672 71,319
Cumulative other comprehensive loss ................................................... (23,113) (25,223)
Common stock in treasury, at cost - 274 shares at June 30, 2000 ....................... (1,441) --
--------- ---------
Total shareholders' equity ....................................................... 330,834 327,802
--------- ---------
Total liabilities and shareholders' equity ....................................... $ 733,955 $ 715,033
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
3
<PAGE>
SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Net sales ....................................................... $ 140,835 $ 133,577
Cost of sales ................................................... 82,003 74,081
--------- ---------
Gross profit ................................................. 58,832 59,496
--------- ---------
Research and development expenses ............................... 4,029 5,209
Selling and marketing expenses .................................. 25,406 25,364
General and administrative expenses ............................. 15,733 14,683
Special charges ................................................. 6,832 1,500
--------- ---------
Operating expenses ........................................... 52,000 46,756
--------- ---------
Operating income .......................................... 6,832 12,740
Interest expense, net ........................................... (5,492) (4,453)
--------- ---------
Income before provision for income taxes,
minority interest and extraordinary item ................. 1,340 8,287
Provision for income taxes ...................................... (455) (2,652)
Minority interest ............................................... (3) 283
--------- ---------
Income before extraordinary income ........................... 882 5,918
Extraordinary item, net of tax .................................. 1,471 --
--------- ---------
Net income .................................................. $ 2,353 $ 5,918
========= =========
Earnings per share - basic
Earnings per share before extraordinary item............... $ 0.03 $ 0.24
Extraordinary item ......................................... 0.06 --
--------- ---------
Earnings per share - basic ................................. $ 0.09 $ 0.24
========= =========
Weighted average common shares outstanding ...................... 24,840 24,868
Earnings per share - diluted:
Earnings per share before extraordinary item................ $ 0.03 $ 0.24
Extraordinary item ......................................... 0.06 --
--------- ---------
Earnings per share - diluted ............................... $ 0.09 $ 0.24
========= =========
Weighted average common and dilutive securities
outstanding .................................................. 24,856 25,107
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
4
<PAGE>
SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ (3,000) $ 7,646
-------- --------
Cash flows from investing activities:
Purchase of business ............................................ (2,480) --
Investments in trade investments and joint ventures ............. (751) --
Capital expenditures ............................................ (3,794) (5,195)
Other investing activities ...................................... (48) 289
-------- --------
Net cash used in investing activities .............................. (7,073) (4,906)
-------- --------
Cash flows from financing activities:
Payments on equity participation loans/exercise of stock
options ...................................................... 10 42
Net receipts/payments under notes payable to banks .............. (341) 798
Borrowings on long-term debt .................................... 3,593 343
Payments on long-term debt ...................................... (2,827) (1,629)
Proceeds from bank debt ......................................... 18,100 4,000
Purchase of treasury stock ...................................... (1,441) --
Repurchase of senior notes ...................................... (4,984) --
-------- --------
Net cash provided by financing activities .......................... 12,110 3,554
-------- --------
Effect of exchange rate changes on cash and cash equivalents ....... (124) (299)
-------- --------
Net increase in cash and cash equivalents .......................... 1,913 5,995
Cash and cash equivalents at beginning of period ................... 18,852 21,578
-------- --------
Cash and cash equivalents at end of period ......................... $ 20,765 $ 27,573
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
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,
2000 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, 2000.
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, 2000 are
not necessarily indicative of the results to be expected for the full year.
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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under certain
circumstances. The accounting and disclosures prescribed by SAB 101 will be
effective for the third quarter of fiscal year 2001. The Company believes there
will be no material impact resulting from the application of SAB 101.
In March 2000, the FASB issued Interpretation No. 44, (FIN 44), Accounting
for Certain Transactions Involving Stock Compensation - an Interpretation of APB
25. This Interpretation clarified (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000 but before the effective date of July 1, 2000, the effects of applying
this Interpretation are recognized on a prospective basis from July 1, 2000. The
Company believes that FIN 44 will not have a material effect on the financial
position or results of operation of the Company.
6
<PAGE>
2. Inventories
June 30, 2000 March 31, 2000
(in thousands) (in thousands)
------------- --------------
Raw Materials $ 16,773 $ 15,427
Work In Progress 8,994 7,273
Finished Goods 109,412 105,274
Molds 45,826 44,914
-------- --------
$181,005 $172,888
======== ========
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 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, 2000 June 30, 1999
------------- -------------
Net income $2,353 $5,918
Foreign currency translation adjustments 2,110 566
------ ------
Comprehensive income $4,463 $6,484
====== ======
7
<PAGE>
5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended June 30, 2000 and 1999 (in
thousands except per share data):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Numerator:
Income before extraordinary item ........................ $ 882 $ 5,918
Extraordinary item, net of tax .......................... 1,471 --
------- -------
Net income ........................................... $ 2,353 $ 5,918
======= =======
Denominator:
Denominator for basic earnings per share -
Weighted average common shares outstanding ........... 24,840 24,868
Effect of dilutive securities:
Employee stock options ............................. 16 239
------- -------
Denominator for diluted earnings per share -
Weighted average common shares and dilutive
securities outstanding ........................... 24,856 25,107
Basic earnings per share:
Income before extraordinary item ........................ $ 0.03 $ 0.24
Extraordinary item, net of tax .......................... 0.06 --
------- --------
Net income ........................................... $ 0.09 $ 0.24
======= ========
Diluted earnings per share:
Income before extraordinary item ........................ $ 0.03 $ 0.24
Extraordinary item, net of tax .......................... 0.06 --
------- --------
Net income ........................................... $ 0.09 $ 0.24
======= ========
</TABLE>
Options to purchase 1.9 million shares of common stock at a range of $6.25
to $41.44 per share and 0.8 million shares of common stock at a range of $16.50
to $41.44 per share were outstanding as of June 30, 2000 and June 30, 1999,
respectively, but were not included in the computation of the diluted earnings
per share for the three months ended 2000 and 1999 respectively, because the
options' exercise price was greater than the average market price of the common
shares.
6. Special Charges
During the three months ended June 30, 2000 the Company recorded pretax
special charges of $6.8 million. The Company incurred $6.1 million associated
with work-force reductions in North America, Europe and Australia (219
employees). During the quarter ended June 30, 2000 the Company paid $2.6 million
related to work-force reductions implemented in the fourth quarter of fiscal
2000 and first quarter of fiscal 2001 (as of June 30, 2000 the Company had $9.8
million remaining in accrued current liabilities). Additionally, the Company
incurred $0.7 million related to product cost inefficiencies associated with the
transfer of high volume production to low cost manufacturing locations which
commenced in the fourth quarter fiscal 2000. The Company anticipates additional
special charges during fiscal 2001, primarily over the next two quarters and
principally related to work-force reductions and the transfer of high volume
production to low cost manufacturing locations.
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.
8
<PAGE>
7. Extraordinary Item
During the three months ended June 30, 2000 the Company purchased $5.0
million of its 6 7/8% Senior Notes due 2008. As a result, the Company recorded
an extraordinary gain of $1.5 million, net of tax of $0.9 million, resulting
from the difference between the carrying value of the notes and the purchase
price. The purchase was funded by the Company's credit facility and resulted in
a decline in net borrowings.
9
<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, 2000 compared to three months ended June 30, 1999
Net Sales
Net sales totaled $140.8 million in the three months ended June 30, 2000,
reflecting an increase of 5.4% over net sales of $133.6 million for the same
period in the prior year. Using constant exchange rates, the percentage increase
was 9.4%. The increase in net sales is primarily attributable to the European
and Rest of World regions offset in part by a decrease in net sales in the North
American region. Higher priced products accounted for approximately 68% of net
sales in the three months ended June 30, 2000, comparable to the prior year.
Progressive lens net sales for the three months ended June 30, 2000 decreased
4.8% from the same period in the prior year, due primarily to product mix change
in the North American region. Net sales performances by region were as follows:
Europe increased by 10.2%, Rest of World increased by 24.9%, and the North
American region decreased by 4.5%,. Using constant exchange rates, the regional
performances were as follows: Europe increased by 20.3%, Rest of World increased
by 25.8%, and North America decreased by 4.4%.
Gross Profit and Gross Margin
Gross profit totaled $58.8 million for the three months ended June 30,
2000, reflecting a decrease of 1.1% from gross profit of $59.5 million for the
same period in the prior year. Gross profit as a percentage of net sales ("gross
margin") decreased from 44.5% for the three months ended June 30, 1999 to 41.8%
for the three months ended June 30, 2000. The gross margin decrease was
principally due to continued underabsorption of manufacturing overhead due to
reduced production levels and product mix changes. The Company experiences price
competition, which can be severe in certain markets, particularly for standard
products.
Operating Expenses
Operating expenses in the three months ended June 30, 2000 totaled $52.0
million compared to operating expenses of $46.8 million for the same period in
the prior year. Included in operating expenses for the three months ended June
30, 2000 and 1999 are special charges of $6.8 million and $1.5 million
respectively. If these charges were excluded from operating expenses, operating
expenses would have been $45.2 million for the three months ended June 30, 2000
and $45.3 million for the same period in the prior year. Operating expenses,
excluding the special charges, for the three months ended June 30, 2000 and 1999
as a percentage of net sales were 32.1% and 33.9%, respectively. Research and
development expenses for the three months ended June 30, 2000 amounted to $4.0
million, compared to $5.2 million for the three months ended June 30, 1999,
which represent 2.9% and 3.9% of net sales, respectively. Selling and marketing
expenses for the three months ended June 30, 2000 and 1999 were comparable at
$25.4 million for both periods, representing 18.0% and 19.0% of net sales,
respectively. As a percentage of net sales, general and administrative expenses
increased slightly to 11.2% for the three months ended June 30, 2000 compared to
11.0% for the three months ended June 30, 1999.
During the three months ended June 30, 2000 the Company recorded pretax
special charges of $6.8 million. The Company incurred $6.1 million associated
with work-force reductions in
10
<PAGE>
North America, Europe and Australia (219 employees). During the quarter ended
June 30, 2000 the Company paid $2.6 million related to work-force reductions
implemented in the fourth quarter of fiscal 2000 and first quarter of fiscal
2001 (as of June 30, 2000 the Company had $9.8 million remaining in accrued
current liabilities). Additionally, the Company incurred $0.7 million related to
product cost inefficiencies associated with the transfer of high volume
production to low cost manufacturing locations which commenced in the fourth
quarter fiscal 2000. The Company anticipates additional special charges during
fiscal 2001, primarily over the next two quarters and principally related to
work-force reductions and the transfer of high volume production to low cost
manufacturing locations.
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.
Operating Income
Operating income for the three months ended June 30, 2000 totaled $6.8
million, a decrease of $5.9 million, or 46.4%, from operating income of $12.7
million for the three months ended June 30, 1999. Operating income excluding the
special charges in the three months ended June 30. 2000 and 1999 would have been
$13.7 million and $14.2 million, respectively, a decrease of $0.5 million, or
4.0%.
Net Interest Expense
Net interest expense totaled $5.5 million for the three months ended June
30, 2000 compared to $4.5 million for the three months ended June 30, 1999, an
increase of $1.0 million. The increase in interest expense is due primarily to
increased borrowing rates and 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 2001 year of 34%. For the three
months ended June 30, 1999, the Company recorded an effective income tax rate of
32%, and for the full fiscal 2000 year the Company reported an effective tax
rate of 83.9%. If the special charges reported in fiscal 2000 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 2000
would have been 31.2%. The Company has deferred tax assets on its balance sheet
as of June 30, 2000 amounting to approximately $15.2 million. The ultimate
utilization of these deferred tax assets is dependent on the Company's ability
to generate taxable income in the future.
Extraordinary Item
During the three months ended June 30, 2000 the Company purchased $5.0
million of its 6 7/8% Senior Notes due 2008. As a result, the Company recorded
an extraordinary gain of $1.5 million, net of tax of $0.9 million resulting from
the difference between the carrying value of the notes and the purchase price.
The purchase was funded by the Company's credit facility and resulted in a
decline in net borrowings.
Net Income
Net income for the three months ended June 30, 2000 totaled $2.4 million
compared to net income of $5.9 million for the same period in the prior year. If
the special charges, extraordinary item and associated taxes were excluded from
the three months ended June 30, 2000 and 1999 net income would have been $5.4
million and $7.0 million, respectively, a decrease of $1.6 million.
11
<PAGE>
Liquidity and Capital Resources
Net cash used by operating activities for the three months ended June 30,
2000 amounted to $3.0 million, a decrease of $10.6 million over the funds
provided by operating activities of $7.6 million for the three months ended June
30, 1999. The change from prior year is due primarily to an increase in working
capital and the reduction in net income.
During the three months ended June 30, 2000, inventories as a percentage of
annualized net sales were 32.1% compared to 32.9% for the three months ended
June 30, 1999. The Company is attempting to reduce inventory levels by
transferring high volume production to low cost manufacturing locations,
consolidating certain manufacturing expertise into fewer production facilities,
reducing the number of distribution centers and implementing worldwide product
standardization. Accounts receivable as a percentage of annualized net sales for
the three months ended June 30, 2000 was 22.5% compared to 22.1% for the same
period a year ago.
Cash flows from investing activities in the three months ended June 30,
2000 amounted to an outflow of $7.0 million. Of this amount, $3.8 million
represented capital expenditures, $2.5 million was for investment in
acquisitions and $0.8 million related to investment in a joint venture in India
and other trade investments. The $2.5 million spent on acquisitions represents
the purchase of the remaining 65% ownership interest in a wholesale laboratory
group located in Australia and New Zealand. 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, partially offset by proceeds
from the sale of fixed assets of $0.3 million. 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, 2000 and 1999 amounted to $12.1 million and $3.6 million respectively,
primarily borrowings under the Company's bank credit agreement. During the three
months ended June 30, 2000 the Company purchased $5.0 million of its 6 7/8%
Senior Notes due 2008. The purchase was funded by the Company's credit facility
and resulted in a decline in net borrowings.
In addition to the Company's borrowings under its multicurrency Bank Credit
Agreement ($123.3 million borrowed as of June 30, 2000 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, 2000
the total borrowing capacity available to the Company's foreign subsidiaries
under such local facilities was approximately $34.2 million, of which $18.2
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.
Impact of Recently Issued Accounting Standards
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
12
<PAGE>
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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under certain
circumstances. The accounting and disclosures prescribed by SAB 101 will be
effective for the third quarter of fiscal year 2001. The Company believes there
will be no material impact resulting from the application of SAB 101.
In March 2000, the FASB issued Interpretation No. 44, (FIN 44), Accounting
for Certain Transactions Involving Stock Compensation - an Interpretation of APB
25. This Interpretation clarified (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000 but before the effective date of July 1, 2000, the effects of applying
this Interpretation are recognized on a prospective basis from July 1, 2000. The
Company believes that FIN 44 will not have a material effect on the financial
position or results of operation of 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, 2000 and 1999 such
translation adjustments were approximately $2.1 million and $0.6 million,
respectively.
For translation adjustments of the Company's subsidiaries operating in
hyper-inflationary countries 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. 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 June
30, 2000. As of June 30, 2000 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 fiscal third quarter
results generally weaker than the other three quarters as a result of lower
sales during the holiday season, and fiscal fourth quarter results generally the
strongest.
13
<PAGE>
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.
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 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, 2000, and the factors described in
"Business-Environmental Matters", also included in the Company's Form 10-K for
the fiscal year ended March 31, 2000.
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, 2000.
14
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description Page Number
-------------- ----------- -----------
27 Financial Data Schedule 18
(b) Reports on Form 8-K
Not applicable
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sola International Inc.
(Registrant)
Dated: August 7, 2000 By: /s/ Steven M. Neil
----------------- --------------------------
Steven M. Neil
Executive Vice President, Chief
Financial Officer, Secretary
and Treasurer
16
<PAGE>
Exhibit Index
Exhibit No. Description Page
----------- ----------- ----
27 Financial Data Schedule 18
17
