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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, 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)
1290 OAKMEAD PARKWAY, SUITE 230, SUNNYVALE, CA 94085
(Address of principal executive offices)
(zip code)
(408) 735-1982
(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 13, 2000, 23,693,416 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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SOLA INTERNATIONAL INC.
Table of Contents
Form 10-Q for the Quarterly Period
Ended September 30, 2000
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
------ --------------------- ----
<S> <C>
Item 1. Financial Statements
Unaudited Consolidated Condensed Balance Sheet as of September 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 and six
month periods ended September 30, 2000 and September 30, 1999 4
Unaudited Consolidated Condensed Statements of Cash Flows for the six month
periods ended September 30, 2000 and September 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 16
PART II OTHER INFORMATION
------- -----------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
</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
September 30, (derived from
2000 audited financial
ASSETS (unaudited) statements)
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 23,395 $ 18,852
Trade accounts receivable, less allowance for doubtful
accounts of $8,037 and $8,873 at September 30, 2000 and
March 31, 2000, respectively................................. 121,153 120,882
Inventories................................................... 185,224 172,888
Other current assets.......................................... 29,436 35,725
-------- --------
Total current assets...................................... 359,208 348,347
Property, plant and equipment, at cost, less accumulated
depreciation and amortization............................. 149,190 152,979
Goodwill and other intangibles, net.............................. 196,188 195,465
Other long-term assets........................................... 17,205 18,242
-------- --------
Total assets.............................................. $721,791 $715,033
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks........................................ $ 7,212 $ 18,741
Current portion of long-term debt............................. 7,057 4,676
Accounts payable.............................................. 65,979 60,151
Accrued liabilities........................................... 39,023 43,326
Accrued payroll and related compensation...................... 26,644 28,303
Bank debt..................................................... 142,100 --
Other current liabilities..................................... 1,962 2,304
-------- --------
Total current liabilities................................. 289,977 157,501
Long-term debt, less current portion............................. 1,278 4,362
Bank debt, less current portion.................................. -- 105,200
Senior notes..................................................... 94,712 99,672
Other long-term liabilities...................................... 23,691 20,496
-------- --------
Total liabilities......................................... 409,658 387,231
-------- --------
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....................................... 281,491 281,467
Equity participation loans....................................... -- (10)
Retained earnings................................................ 74,906 71,319
Cumulative other comprehensive loss.............................. (36,347) (25,223)
Common stock in treasury, at cost - 1,245 shares at
September 30, 2000....................................... (8,166) --
-------- --------
Total shareholders' equity................................ 312,133 327,802
-------- --------
Total liabilities and shareholders' equity................ $721,791 $715,033
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements
3
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SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales.............................................. $133,704 $141,071 $274,539 $274,648
Cost of sales.......................................... 77,870 77,613 159,873 151,694
-------- -------- -------- --------
Gross profit........................................ 55,834 63,458 114,666 122,954
-------- -------- -------- --------
Research and development expenses...................... 3,871 5,146 7,900 10,355
Selling and marketing expenses......................... 24,078 25,696 49,484 51,060
General and administrative expenses.................... 12,941 14,851 28,674 29,534
Special charges........................................ 7,159 2,863 13,991 4,363
-------- -------- -------- --------
Operating expenses.................................. 48,049 48,556 100,049 95,312
-------- -------- -------- --------
Operating income................................ 7,785 14,902 14,617 27,642
Interest expense, net.................................. 5,916 4,496 11,408 8,949
-------- -------- -------- --------
Income before provision for income
taxes, minority interest and extraordinary
item............................................. 1,869 10,406 3,209 18,693
Provision for income taxes............................. (625) (3,330) (1,080) (5,982)
Minority interest...................................... (10) 165 (13) 448
-------- -------- -------- --------
Income before extraordinary item.................. 1,234 7,241 2,116 13,159
Extraordinary item, net of tax......................... -- -- 1,471 --
-------- -------- -------- --------
Net income.......................................... $ 1,234 $ 7,241 $ 3,587 $ 13,159
======== ======== ======== ========
Earnings per share - basic
Earnings per share before extraordinary item..... $ 0.05 $ 0.29 $ 0.09 $ 0.53
Extraordinary item............................... -- -- 0.06 --
-------- -------- -------- --------
Earnings per share - basic....................... $ 0.05 $ 0.29 $ 0.15 $ 0.53
======== ======== ======== ========
Weighted average common shares outstanding............. 23,966 24,868 24,403 24,868
======== ======== ======== ========
Earnings per share - diluted:
Earnings per share before extraordinary item...... $ 0.05 $ 0.29 $ 0.09 $ 0.52
Extraordinary item................................ -- -- 0.06 --
-------- -------- -------- --------
Earnings per share - diluted...................... $ 0.05 $ 0.29 $ 0.15 $ 0.52
======== ======== ======== ========
Weighted average common and dilutive securities
outstanding.......................................... 24,084 25,158 24,452 25,133
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements
4
<PAGE>
SOLA INTERNATIONAL INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
September 30, September 30,
------------- -------------
2000 1999
---- ----
<S> <C> <C>
Net cash provided by operating activities.............. $ 7,896 $ 13,737
-------- --------
Cash flows from investing activities:
Purchase of business.................................. (2,480) --
Investments in trade investments and joint
ventures............................................ (1,313) (2,188)
Capital expenditures.................................. (9,054) (9,434)
Other investing activities............................ 32 335
-------- --------
Net cash used in investing activities.................. (12,815) (11,287)
-------- --------
Cash flows from financing activities:
Payments on equity participation loans/exercise
of stock options..................................... 34 82
Net receipts/(payments) under notes payable to
banks............................................... (11,666) 3,819
Borrowings on long-term debt.......................... 1,078 1,446
Payments on long-term debt............................ (2,945) (5,344)
Proceeds/(payments) under bank debt................... 36,900 (1,500)
Purchase of treasury stock......................... (8,166) --
Repurchase of senior notes............................ (4,984) --
-------- --------
Net cash provided by (used in) financing activities.... 10,251 (1,497)
-------- --------
Effect of exchange rate changes on cash and cash
equivalents........................................... (789) 225
-------- --------
Net increase in cash and cash equivalents.............. 4,543 1,178
Cash and cash equivalents at beginning of period....... 18,852 21,578
-------- --------
Cash and cash equivalents at end of period............. $ 23,395 $ 22,756
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated 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 six months ended September 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 were
effective as of the first quarter of fiscal year 2001. The Company believes
there is no material impact resulting from the application of SAB 101.
2. Inventories
September 30, 2000 March 31, 2000
(in thousands) (in thousands)
-------------- --------------
Raw Materials $ 17,358 $ 15,427
Work In Progress 5,770 7,273
Finished Goods 115,600 105,274
Molds 46,496 44,914
-------- --------
$185,224 $172,888
======== ========
Molds comprise mainly finished goods for use by manufacturing affiliates in
the manufacture of spectacle lenses.
6
<PAGE>
3. Bank Credit Agreement
The Company's Multicurrency Credit Agreement ("Agreement") contains a
number of covenants including compliance with certain financial tests and
maintenance of certain financial ratios. At September 30, 2000 the Company did
not meet the Leverage Ratio covenant of the Agreement. Subsequent to September
30, 2000 a one-time waiver was obtained for this covenant. Management has
prepared projections that indicate that the Company may not be in compliance
with this covenant as of December 31, 2000. As a result, the Company has
classified the $142.1 million outstanding under the Agreement as a current
liability for the period ended September 30, 2000. The terms of the waiver
require the Company to (i) maintain a minimum twelve month earnings before
interest, taxes, depreciation and amortisation of $62 million for the period
ending December 31, 2000 (ii) temporarily limit the facility to $200 million
(iii) pay certain fees. The Company's Senior Notes contain a "cross default"
provision which may be triggered by non-compliance of the above covenant.
Management is currently in the process of negotiating a new credit facility and
believes such refinancing will be completed by January 31, 2001.
4. 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.
5. Comprehensive Income
The components of comprehensive income, net of related tax, are as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 1,234 $ 7,241 $ 3,587 $13,159
Foreign currency translation adjustments (13,234) 4,045 (11,124) 4,611
-------- ------- -------- -------
Comprehensive income (loss) $(12,000) $11,286 $ (7,537) $17,770
======== ======= ======== =======
</TABLE>
7
<PAGE>
6. 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, 2000 and
1999 (in thousands except per share data):
<TABLE>
<CAPTION>
Three
Months Three Months Six Months Six Months
Ended Ended Ended Ended
September September 30, September 30, September 30,
30, 2000 1999 2000 1999
-------- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Income before extraordinary item................... $ 1,234 $ 7,241 $ 2,116 $13,159
Extraordinary item, net of tax..................... -- -- 1,471 --
------- ------- ------- -------
Net income........................................ $ 1,234 $ 7,241 $ 3,587 $13,159
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share -
Weighted average common shares
outstanding.................................... 23,966 24,868 24,403 24,868
Effect of dilutive securities:
Employee stock options.......................... 118 290 49 265
------- ------- ------- -------
Denominator for diluted earnings per share -
Weighted average common shares and
dilutive securities outstanding............. 24,084 25,158 24,452 25,133
======= ======= ======= =======
Basic earnings per share:
Income before extraordinary item................... $ 0.05 $ 0.29 $ 0.09 $ 0.53
Extraordinary item, net of tax..................... -- -- 0.06 --
------- ------- ------- -------
Net income........................................ $ 0.05 $ 0.29 $ 0.15 $ 0.53
======= ======= ======= =======
Diluted earnings per share:
Income before extraordinary item................... $ 0.05 $ 0.29 $ 0.09 $ 0.52
Extraordinary item, net of tax..................... -- -- 0.06 --
------- ------- ------- -------
Net income........................................ $ 0.05 $ 0.29 $ 0.15 $ 0.52
======= ======= ======= =======
</TABLE>
Options to purchase 2.5 million shares of common stock at a range of $7.87
to $41.44 per share and 1.4 million shares of common stock at a range of $16.87
to $25.25 per share were outstanding as of September 30, 2000 and September 30,
1999, respectively, but were not included in the computation of the diluted
earnings per share for the three and six months ended September 2000 and 1999
respectively, because the options' exercise price was greater than the average
market price of the common shares.
7. Special Charges
During the three and six months ended September 30, 2000 the Company
recorded pretax special charges of $7.2 million and $13.9 million, respectively.
The pre-tax special charges are comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(in thousands) September 30,2000 September 30,2000
----------------- -----------------
<S> <C> <C>
Charges associated with work-force reductions $1,161 $ 7,248
Inventory write-down associated with product standardization 2,181 2,181
Charges associated with facility closures and product transfers 3,817 4,562
------ -------
Total $7,159 $13,991
====== =======
</TABLE>
During the three months ended September 30, 2000 the Company recorded
pretax special charges of $7.2 million. The Company incurred $1.1 million
associated with workforce reductions in North
8
<PAGE>
America, Europe and Australia (91 employees). During the three months ended
September 30, 2000 the Company paid $3.8 million related to workforce reductions
implemented in the fourth quarter of fiscal 2000 and first six months of fiscal
2001 (as of September 30, 2000 the Company had $7.2 million remaining in accrued
current liabilities). The special charge includes $2.2 million related to the
write-down of inventories identified as excess as a result of the Company's
efforts to globally standardize product specifications. The Company commenced
this identification of inventories in the fourth quarter of fiscal 2000.
Additionally, the Company continued the transfer of high-volume production to
low-cost manufacturing locations and the consolidation of manufacturing
expertise into fewer production facilities that commenced in the fourth quarter
of fiscal 2000. As a result, charges of $1.0 million were incurred related to
production cost inefficiencies and $2.8 million related to redundant equipment
write-down and facility closure costs (as of September 30, 2000 the company had
$1.0 million related to facility closure costs remaining in accrued current
liabilities).
During the six months ended September 30, 2000 the Company recorded pretax
special charges of $13.9 million. The Company incurred $7.2 million associated
with workforce reductions in North America, Europe and Australia (310
employees). During the six months ended September 30, 2000 the Company paid $6.4
million related to workforce reductions implemented in the fourth quarter of
fiscal 2000 and first six months of fiscal 2001. The special charge includes
$2.2 million related to the write-down of inventories identified as excess as a
result of the Company's efforts to globally standardize product specifications.
The Company commenced this identification of inventories in the fourth quarter
of fiscal 2000. Additionally, the Company continued the transfer of high-volume
production to low-cost manufacturing locations and the consolidation of
manufacturing expertise into fewer production facilities that commenced in the
fourth quarter of fiscal 2000. As a result, charges of $1.7 million were
incurred related to production cost inefficiencies and $2.8 million related to
redundant equipment write-down and facility closure costs. The Company
anticipates additional special charges during fiscal 2001, primarily over the
next quarter and principally related to workforce reductions, the transfer of
high-volume production to low-cost manufacturing locations and global product
standardization efforts.
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, work force reductions and the erosion of the
Brazilian Real.
8. Extraordinary Item
During the six months ended September 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 September 30, 2000 compared to three months ended September
30, 1999
Net Sales
Net sales totaled $133.7 million in the three months ended September 30,
2000, reflecting a decrease of 5.2% over net sales of $141.1 million for the
same period in the prior year. Using constant exchange rates, the percentage
decrease was 0.3%. The decrease in net sales is primarily attributable to the
North American and European regions offset in part by an increase in the Rest of
World region. Higher priced products accounted for approximately 67% of net
sales for the three months ended September 30, 2000 compared to 70% for the same
period in the prior year. Progressive lens net sales for the three months ended
September 30, 2000 decreased 13.6% from the same period in the prior year, due
primarily to product mix changes in the North American region. Using constant
exchange rates the regional performances were as follows: North America
decreased by 13.1%, Europe increased by 9.5% and Rest of World increased by
16.3%.
Gross Profit and Gross Margin
Gross profit totaled $55.8 million for the three months ended September 30,
2000, reflecting a decrease of 12.0% from gross profit of $63.5 million for the
same period in the prior year. Gross profit as a percentage of net sales
("gross margin") decreased from 45.0% for the three months ended September 30,
1999 to 41.8% for the three months ended September 30, 2000. The gross margin
decrease was principally due to continued underabsoption of manufacturing
overhead due to reduced production levels and product mix changes.
Additionally, the Company experiences price competition, which can be severe in
certain markets, especially for standard products.
Operating Expenses
Operating expenses in the three months ended September 30, 2000 totaled
$48.0 million, a decrease of $0.5 million from the same period in the prior
year. Included in operating expenses for the three months ended September 30,
2000 and 1999 were $7.1 million and $2.9 million, respectively, representing
special charges. If these charges were excluded from operating expenses,
operating expenses would have been $40.1 million and $45.7 million,
respectively, representing a decrease over the three months ended September 30,
1999 of 10.5%. Operating expenses, excluding the special charges, for the three
months ended September 30, 2000 and 1999 as a percentage of net sales were 30.6%
and 32.4%, respectively. Research and development expenses for the three months
ended September 30, 2000 decreased $1.3 million to $3.9 million, compared to
$5.2 million for the three months ended September 30, 1999, which represents
2.9% and 3.6% of net sales for the three months
10
<PAGE>
ended September 30, 2000 and 1999, respectively. Selling and marketing expenses
for the three months ended September 30, 2000 decreased by $1.6 million to $
24.1 million, compared to $25.7 million for the three months ended September 30,
1999 which represents 18.0% and 18.2%, of net sales for the three months ended
September 30, 2000, and 1999, respectively. General and administrative expenses
for the three months ended September 30, 2000 were $12.9 million compared to
$14.8 million for the same period in the prior year, a decrease of $1.9 million.
As a percentage of net sales general and administrative expenses decreased to
9.7% from 10.5% in the prior year.
During the three months ended September 30, 2000 the Company recorded
pretax special charges of $7.2 million. The Company incurred $1.1 million
associated with workforce reductions in North America, Europe and Australia (91
employees). During the three months ended September 30, 2000 the Company paid
$3.8 million related to workforce reductions implemented in the fourth quarter
of fiscal 2000 and first six months of fiscal 2001 (as of September 30, 2000 the
Company had $7.2 million remaining in accrued current liabilities). The special
charge includes $2.2 million related to the write-down of inventories identified
as excess as a result of the Company's efforts to globally standardize product
specifications. The Company commenced this identification of inventories in the
fourth quarter of fiscal 2000. Additionally, the Company continued the transfer
of high-volume production to low-cost manufacturing locations and the
consolidation of manufacturing expertise into fewer production facilities that
commenced in the fourth quarter of fiscal 2000. As a result, charges of $1.0
million were incurred related to production cost inefficiencies and $2.8 million
related to redundant equipment write-down and facility closure costs (as of
September 30, 2000 the company had $1.0 million related to facility closure
costs remaining in accrued current liabilities). The Company anticipates
additional special charges during fiscal 2001, primarily over the next quarter
and principally related to workforce reductions, the transfer of high-volume
production to low-cost manufacturing locations and global product
standardization efforts.
Operating Income
Operating income, for the three months ended September 30, 2000 totaled
$7.8 million, a decrease of $7.1 million, or 47.8%, from the three months ended
September 30, 1999 of $14.9 million. Operating income excluding the special
charges in the three months ended September 30, 2000 and 1999 would have been
$14.9 million and $17.8 million, respectively, a decrease of $2.8 million, or
15.9%.
Net Interest Expense
Net interest expense totaled $5.9 million for the three months ended
September 30, 2000 compared to $4.5 million for the three months ended September
30, 1999, an increase of $1.4 million. The increase in interest expense is due
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 September 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 is 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 September 30, 2000 amounting to approximately $14.8 million. The ultimate
utilization of these deferred tax assets is dependent on the Company's ability
to generate taxable income in the future.
11
<PAGE>
Net Income
Net income for the three months ended September 30, 2000 totaled $1.2
million compared to net income of $7.2 million for the same period in the prior
year. If the special charges and associated taxes were excluded from the three
months ended September 30, 2000 and 1999, net income would have been $6.0
million and $9.2 million, respectively, a decrease of $3.2 million.
Results of Operations
Six months ended September 30, 2000 compared to six months ended September 30,
1999
Net Sales
Net sales totaled $274.5 million in the six months ended September 30,
2000, comparable to net sales of $274.6 million for the same period in the prior
year. Using constant exchange rates, the net sales percentage increase was 4.4%.
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. Progressive lens net sales for the six months ended September 30, 2000
decreased 8.8% from the same period in the prior year, due primarily to product
mix change in the North American region. Higher priced products accounted for
approximately 67% of net sales for the six months ended September 30, 2000
compared to 69% for the same period in the prior year. Net sales performances by
region were as follows: Europe increased by 3.2%, Rest of World increased by
19.1%, and the North American region decreased by 9.0%. Using constant exchange
rates, the regional performances were as follows: Europe increased by 14.7%,
Rest of World increased by 21.2%, and North America decreased by 8.9%.
Gross Profit and Gross Margin
Gross profit totaled $114.7 million for the six months ended September 30,
2000, reflecting a decrease of 6.7% from gross profit of $123.0 million for the
same period in the prior year. Gross profit as a percentage of net sales
("gross margin") decreased from 44.8% for the six months ended September 30,
1999 to 41.8% for the six months ended September 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 six months ended September 30, 2000 totaled
$100.0 million compared to operating expenses of $95.3 million for the same
period in the prior year. Included in operating expenses for the six months
ended September 30, 2000 and 1999 were special charges of $13.9 million and $4.4
million respectively. If these charges were excluded from operating expenses,
operating expenses would have been $86.1 million for the six months ended
September 30, 2000 and $90.9 million for the same period in the prior year, a
decrease of $4.8 million. Operating expenses, excluding the special charges, for
the six months ended September 30, 2000 and 1999 as a percentage of net sales
were 31.3% and 33.1%, respectively. Research and development expenses for the
six months ended September 30, 2000 decreased $2.5 million to $7.9 million, from
$10.4 million for the six months ended September 30, 1999, which represent 2.9%
and 3.8% of net sales for the six months ended September 30, 2000 and 1999,
respectively. Selling and marketing expenses for the six months ended September
30, 2000 decreased $1.6 million to $49.5 million compared to $51.1 million for
the same period in the prior year. Selling and marketing expenses represent
18.0% and 18.6% of net sales for the six months ended September 30, 2000 and
1999, respectively. General and administrative expenses were $28.7 million for
the six months ended September 30, 2000 and $29.5 million for the same period
12
<PAGE>
in the prior year, a decrease of $0.8 million. As a percentage of net sales,
general and administrative expenses decreased from 10.8% for the months ended
September 30, 1999 to 10.4% for the six months ended September 30, 2000.
During the six months ended September 30, 2000 the Company recorded pretax
special charges of $13.9 million. The Company incurred $7.2 million associated
with workforce reductions in North America, Europe and Australia (310
employees). During the six months ended September 30, 2000 the Company paid $6.4
million related to workforce reductions implemented in the fourth quarter of
fiscal 2000 and first six months of fiscal 2001 (as of September 30, 2000 the
Company had $7.2 million remaining in accrued current liabilities). The special
charge includes $2.2 million related to the write-down of inventories identified
as excess as a result of the Company's efforts to globally standardize product
specifications. The Company commenced this identification of inventories in the
fourth quarter of fiscal 2000. Additionally, the Company continued the transfer
of high-volume production to low-cost manufacturing locations and the
consolidation of manufacturing expertise into fewer production facilities that
commenced in the fourth quarter of fiscal 2000. As a result, charges of $1.7
million were incurred related to production cost inefficiencies and $2.8 million
related to redundant equipment write-down and facility closure costs (as of
September 30, 2000 the company had $1.0 million related to facility closure
costs remaining in accrued current liabilities). The Company anticipates
additional special charges during fiscal 2001, primarily over the next quarter
and principally related to workforce reductions, the transfer of high-volume
production to low-cost manufacturing locations and global product
standardization efforts. 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, work force reductions
and the erosion of the Brazilian Real.
Operating Income
Operating income for the six months ended September 30, 2000 totaled $14.6
million, a decrease of $13.0 million, or 47.1%, from operating income of $27.6
million for the six months ended September 30, 1999. Operating income excluding
the special charges in the six months ended September 30, 2000 and 1999 would
have been $28.6 million and $32.0 million, respectively, a decrease of $3.4
million, or 10.6%.
Net Interest Expense
Net interest expense totaled $11.4 million for the six months ended
September 30, 2000 compared to $8.9 million for the six months ended September
30, 1999, an increase of $2.5 million. The increase in interest expense is due
primarily to increased borrowing rates and increased borrowing levels.
Extraordinary Item
During the six months ended September 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 six months ended September 30, 2000 totaled $3.6 million
compared to net income of $13.2 million for the same period in the prior year.
If the special charges, extraordinary item and associated taxes were excluded
from the six months ended September 30, 2000 and 1999, net income would have
been $11.3 million and $16.2 million, respectively, a decrease of $4.9 million.
13
<PAGE>
Liquidity and Capital Resources
Net cash provided by operating activities for the six months ended
September 30, 2000 amounted to $7.9 million, a decrease of $5.8 million over the
funds provided by operating activities of $13.7 million for the six months ended
September 30, 1999. The change from prior year is due primarily to the reduction
in net income offset in part by a decrease in working capital and other long-
term liabilities.
During the six months ended September 30, 2000 inventories as a percentage
of annualized net sales were 34.6% compared to 33.0% for the six months ended
September 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 six months ended September 30, 2000 was 22.7% compared to 21.9% for the same
period a year ago.
Cash flows from investing activities in the six months ended September 30,
2000 amounted to an outflow of $12.8 million. Of this amount, $9.1 million
represented capital expenditures, $2.5 million was for investment in
acquisitions and $1.3 million related to 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 six months ended September 30, 1999
amounted to an outflow of $11.3 million, reflecting capital expenditures of $9.4
million, investment in joint venture of $2.2 million, partially offset by
proceeds from the sale of fixed assets of $0.3 million. Management anticipates
capital expenditures of approximately $25 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 six months ended September
30, 2000 amounted to $10.3 million, primarily borrowings under the Company's
bank credit agreement. Cash outflows included $8.2 million related to stock buy
back under the Company's stock repurchase program. Additionally, during the six
months ended September 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. Net cash used by 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.
The Company's Multicurrency Credit Agreement ("Agreement") contains a
number of covenants including compliance with certain financial tests and
maintenance of certain financial ratios. At September 30, 2000 the Company did
not meet the Leverage Ratio covenant of the Agreement. Subsequent to September
30, 2000 a one-time waiver was obtained for this covenant. Management has
prepared projections that indicate that the Company may not be in compliance
with this covenant as of December 31, 2000. As a result, the Company has
classified the $142.1 million outstanding under the Agreement as a current
liability for the period ended September 30, 2000. The terms of the waiver
require the Company to (i) maintain a minimum twelve month earnings before
interest, taxes, depreciation and amortisation of $62 million for the period
ending December 31, 2000 (ii) temporarily limit the facility to $200 million
(iii) pay certain fees. The Company's Senior Notes contain a "cross default"
provision which may be triggered by non-compliance of the above covenant.
Management is currently in the process of negotiating a new credit facility and
believes such refinancing will be completed by January 31, 2001.
In addition to the Company's borrowings under its multicurrency Bank Credit
Agreement ($142.1 million borrowed as of September 30, 2000 under a $200 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,
2000 the total borrowing capacity available to the Company's foreign
subsidiaries under such local facilities was approximately $34.2 million, of
which $7.2 million had been utilized.
14
<PAGE>
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 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 were
effective as of the first quarter of fiscal year 2001. The Company believes
there is no material impact resulting from the application of SAB 101.
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 six months ended September 30, 2000 and 1999 such
translation adjustments were approximately ($11.1) million and $4.6 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
September 30, 2000. As of September 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.
15
<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 is taking 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.
16
<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 matter was submitted to a vote of the security holders at
the Company's Annual Meeting of Stockholders on August 18, 2000:
Election of Directors. Votes as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Total Vote for Each Total Vote Withheld from
Director Each Director
-------- -------------
----------------------------------------------------------------------------------------
<S> <C> <C>
Jeremy C. Bishop 20,767,596 431,294
----------------------------------------------------------------------------------------
Maurice J. Cunniffe 20,747,364 451,526
----------------------------------------------------------------------------------------
Douglas D. Danforth 18,361,288 2,837,602
----------------------------------------------------------------------------------------
A. William Hamill 19,399,967 1,798,923
----------------------------------------------------------------------------------------
Hamish Maxwell 19,707,680 1,491,210
----------------------------------------------------------------------------------------
Irving S. Shapiro 19,706,188 1,492,702
----------------------------------------------------------------------------------------
Jackson L. Schultz 20,706,843 492,047
----------------------------------------------------------------------------------------
</TABLE>
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description Page Number
-------------- ----------- -----------
<S> <C> <C>
27 Financial Data Schedule 20
</TABLE>
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the fiscal quarter ended
September 30, 2000.
17
<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 14, 2000 By: /s/ Steven M. Neil
----- ------------------------
Steven M. Neil
Executive Vice President, Chief
Financial Officer, Secretary and
Treasurer (Duly Authorized Officer
and Principal Financial Officer)
18
<PAGE>
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<S> <C> <C>
27 Financial Data Schedule 20
</TABLE>
19
