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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission File Number: 1-13606
SOLA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3189941
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
2420 SAND HILL ROAD, SUITE 200, MENLO PARK, CA 94025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 324-6868
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
Common Stock, Par Value $0.01 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in a definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of May 23, 2000, the aggregate market value of Common Stock held by non-
affiliates was approximately $147,677,405. For purposes of this computation,
shares held by directors and executive officers of the registrant have been
excluded. Such exclusion of shares held by directors and executive officers is
not intended, nor shall it be deemed, to be an admission that such persons are
affiliates of the registrant.
As of May 23, 2000, 24,861,516 shares of the registrant's common stock, par
value $0.01 per share, which is the only class of common stock of the
registrant, were outstanding. The Company's stock is traded on the New York
Stock Exchange under the symbol SOL.
The responses to Items 11, 12 and 13 are incorporated by reference to the
material included in the Company's proxy statement for the fiscal year ended
March 31, 2000.
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SOLA INTERNATIONAL INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
Page
PART I
Item 1. Business.................................................. 3
Item 2. Properties................................................ 8
Item 3. Legal Proceedings......................................... 9
Item 4. Submission of Matters to a Vote of Security Holders....... 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters..................................... 10
Item 6. Selected Financial Data................................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19
Item 8. Financial Statements and Supplementary Data............... 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 22
PART III
Item 10. Directors and Executive Officers of the Registrant........ 23
Item 11. Executive Compensation.................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 25
Item 13. Certain Relationships and Related Transactions............ 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................. 26
2
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PART I
Item 1. BUSINESS
General
Sola International Inc., a Delaware corporation, designs, manufactures and
distributes a broad range of plastic and glass eyeglass lenses. Sola has
manufacturing and distribution sites in three major regions North America,
Europe, and Rest of World (comprising primarily Australia, Asia and South
America). Sola's business commenced operations in 1960. Sola International
Inc. acquired the Sola business unit (the "Predecessor Business") of Pilkington
plc ("Pilkington") on December 1, 1993 (the "Acquisition"). In March 1995, Sola
completed its initial public offering (the "IPO"). On June 19, 1996 Sola
acquired substantially all of the worldwide ophthalmic business (the "AO" and
"AO Acquisition") of American Optical Corporation ("AOC"). Unless the context
otherwise requires, all references to the "Company" or "Sola" herein refer to
Sola International Inc. and its consolidated subsidiaries. The Company's fiscal
year ends on March 31 of each year. The fiscal years ended March 31, 2000,
March 31, 1999 and March 31, 1998 are referred to herein as "fiscal 2000",
"fiscal 1999" and "fiscal 1998", respectively.
Products
The Company's lens products are differentiated by type of vision correction,
lens design, lens material and coatings applied to the lens. The Company's
lenses include single vision lenses (lenses which have a constant corrective
power at all points); multifocal lenses (lenses which have more than one
corrective power, including bifocal lenses, which have two distinct areas of
different corrective power, and progressive lenses, which have a continuous
gradient of different corrective power); and plano lenses (lenses which have no
corrective power and are primarily used for sunglasses).
Although the Company's lenses are manufactured in both glass and plastic,
plastic lenses currently account for approximately 92% of the Company's net lens
sales. Approximately 50% of ophthalmic lens sales generated by plastic lenses
use conventional hard resin plastics, with the remainder derived from advanced
lens materials such as thinner and lighter plastics and plastic photochromics.
These more advanced materials generally account for a growing percentage of the
Company's sales both by volume and revenue. Sola manufactures and markets
several advanced thinner and lighter plastic lens materials, including
Spectralite(R), Finalite 1.6(TM) and polycarbonate. Spectralite and Finalite
1.6 are proprietary materials developed by Sola's research and development
operation. Raw materials used in the manufacture of these products are available
from a number of chemical suppliers. Polycarbonate is a thin and light material
with greater impact resistance. To make its lenses even thinner and lighter, the
Company has increasingly employed aspheric and atoric designs (i.e., lenses that
achieve comparable optical performance with a thinner cross section). The
Company also sells plastic photochromic lenses, which require processing by a
third party. The technology for such processing is currently proprietary to the
third party.
The Company also manufactures and sells glass lenses, primarily in North
America and Europe. These lenses are manufactured in plants located in the
United States, Mexico and France. The Company's strategy for the glass lens
market is to focus on high value-added product categories, such as glass
progressive and higher index glass lenses. Since the Company is primarily
focused on plastic lenses, glass lenses represent a small and decreasing portion
of the Company's sales. In South America and non-Japan Asia glass is still the
predominant material for eyeglass lenses. The Company sells virtually no glass
lenses in these markets.
The Company produces a variety of lens coatings, which primarily provide
scratch resistance and anti-reflection properties. The penetration of coated
lenses varies significantly from market to market and represents a significant
growth opportunity for the Company.
3
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The Company has recently introduced a number of new products and has a number
of products in development that are intended to maintain and increase the
Company's operating margins. For example, the Company has developed and
successfully marketed proprietary progressive lenses (including Percepta(R),
Visuality(R), AO Compact(R), and SOLAMAX(R), which incorporate more complex
design features than standard products and therefore attract an above average
gross profit per pair. During fiscal 1999 and to a lesser extent during fiscal
2000 Sola's proprietary Matrix delivery system was installed at an increasing
number of sites in the U.S. and foreign locations. This system, which creates
finished prescriptions by bonding together thin lens wafers in a desktop
laminating console, allows the rapid delivery of lenses with anti-reflective
coating and potentially other high margin add-ons. The Company from time to time
may also market products or technologies of third parties to broaden its product
range pursuant to contractual relationships with such third parties.
Marketing and Sales
The Company develops and manages its marketing strategy on a centralized basis
with local sales and marketing implementation and tactics. Sales offices are
located in 30 countries across the three major regions. The Company
differentiates its products from those of its competitors through lens design
targeted to meet consumer needs, lens materials and coatings formulations. In
response to customer demand, the Company's strategy is focused on providing a
wide range of quality products on short notice. In developing markets,
particularly in non-Japan Asia and Latin America, the Company seeks to expand
its market share by increasing local production, attempting to develop brand
recognition for its products and marketing to customers the advantage of higher
value-added products, all of which are intended to help the Company compete on
the basis of quality and service rather than price.
During fiscal 1999 Sola reached co-branding agreements with Nike, Inc. and
Fisher-Price, Inc. The agreement with Nike, Inc. represents the initiation of a
marketing strategy using "Optics by SOLA" as the cornerstone. The Fisher-Price,
Inc. relationship enables the Company to reach the children's lens market
segment combined with a powerful brand name associated with polycarbonate lenses
and the ophthalmic business. During fiscal 2000, the Company reached co-branding
agreements with a number of branding partners, including Native Eyewear, Apollo,
Timberland, and IZOD.
Distribution
In order to meet customer demand for delivery of a broad range of products
within a short time, the Company centrally manages inventory and logistics
through a widespread distribution network, which is operated on a regional
basis. The Company operates 62 major distribution centers located in 24
countries, covering all of its three major regions.
The Company utilizes three primary distribution channels for its products.
Lenses with corrective power are distributed (i) through a wholesale channel to
wholesale distributors or to independent processing laboratories that process
the Company's lenses and then resell them to retail outlets and practitioners
for resale to consumers, (ii) through a retail channel to chains, superoptical
retail stores (retail outlets with on-site lens processing capability) and other
retailers (including "buying groups" consisting of a number of retailers acting
together to purchase lenses) who sell the lenses to consumers and (iii) in
certain markets in Asia and Europe, direct to eyecare practitioners through the
Company's processing laboratories. Plano lenses are sold primarily to
manufacturers of sunglasses.
Customers
During fiscal 2000, the Company's ten largest customers accounted for
approximately 23.2% of net sales and the Company's largest customer accounted
for less than 5% of net sales. During fiscal 2000, 8 of the Company's 10
largest customers were located in North America and accounted for approximately
16.5% of net sales in the aggregate.
4
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One of the company's largest competitors, Essilor International, is
extensively vertically integrated into wholesale laboratories, both in the
United States and other parts of the world. Sola has sold and continues to sell
its products to these Essilor laboratories. A number of these laboratories have
decreased the purchase of Sola products since being acquired by Essilor. During
fiscal 2000, Hoya Corporation, another of the Company's largest competitors,
has also vertically integrated into wholesale laboratories in the United States
and other parts of the world. Sales to Essilor and Hoya owned laboratories were
approximately 4% of total sales for fiscal 2000.
International Operations
The Company operates manufacturing and distribution sites in all major regions
of the world--North America (including Mexico), Europe, and Rest of World --and
derived approximately half of its net sales in fiscal 2000 from the sale of
products outside the United States. See Note 16 of Notes to Consolidated
Financial Statements included elsewhere herein. As a result, a significant
portion of the Company's sales and operations are subject to certain risks,
including adverse developments in the foreign political and economic
environment, exchange rates, tariffs and other trade barriers, staffing and
managing foreign operations and potentially adverse tax consequences. Although
the Company and its predecessors have been successfully conducting business
outside of the United States since its inception in 1960, there can be no
assurance that any of these factors will not have a material adverse effect on
the Company's financial condition or results of operations in the future.
Manufacturing Operations
The Company has 16 manufacturing facilities located in its three major
regions, including 14 lens manufacturing facilities. The Company is in the
process of transferring commodity and other high volume product manufacturing
from the United States, Australia and Ireland to low cost manufacturing sites in
Mexico, China, Venezuela and Brazil. The transfer of production requires
development of global product standard specifications and will enable the
Company to globally source product from these manufacturing sites. The Company
will retain certain regional manufacturing operations for the purpose of
supplying regional demand. The transfer of production and standardization of
product specifications resulted in a special charge in fiscal 2000. See Note 10
(Special Charges) of the Notes to Consolidated Financial Statements included
elsewhere herein. For the location and principal operations of these
facilities, see "Properties".
The principal materials used by the Company in the production of eyeglass
lenses are hard resins (a commodity plastic used in most plastic lenses), glass,
specialized chemicals used in many higher index plastic lenses and monomers
mixed by the Company in the production of Spectralite and Finalite. The Company
believes that these materials are currently available from a variety of sources
and that the materials necessary to produce the Company's coatings are readily
available from a number of potential sources. In order to reduce materials
costs, the Company coordinates centrally the purchasing of raw materials
(including monomers).
Research and Development
The Company has invested and continues to invest heavily in research and
development in order to develop new and innovative products and to improve the
efficiency of its manufacturing process. At March 31, 2000, there were
approximately 184 employees involved in the Company's research and development
efforts. The Company's research and development expenditures for fiscal 2000,
1999 and 1998 were $20.0 million, $18.8 million and $18.3 million, respectively,
representing 3.7%, 3.5% and 3.3% of net sales for each of those years. The
Company has its own research and development centers in Petaluma, California,
Southbridge, Massachusetts, and Adelaide, Australia. A small process automation
group is attached to the manufacturing operation in Wexford, Ireland.
The Company's research and development focuses on the design and development
of innovative, value-added products, on new materials with superior
characteristics, on technology that will deliver
5
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products to the market more efficiently, and on technologies to improve
productivity in the manufacture of existing products. Recent research and
development programs include the successful development of the Finalite thin and
light lens material, the development of Spectralite with photochromic
capabilities, Percepta, Visuality and AO Compact progressive designs and
ViZio(TM) polycarbonate lenses. Sola's proprietary Matrix delivery system which
creates finished prescriptions by bonding together thin lens wafers in a desktop
laminating console, allows the rapid delivery of lenses with anti-reflection
coating and potentially other high margin add-ons.
Competition
The eyeglass lens and coating industry is highly competitive. The Company
competes principally on the basis of customer service, the quality and breadth
of product offerings, and price. The Company believes that among its largest
global competitors are Essilor International and Hoya Corporation. The eyeglass
lens and coating industry is characterized by price competition, which can be
severe in certain markets, particularly for high volume, standard products.
Sola attempts, to the extent possible, to counter competition on the basis of
price by focusing on providing a rapid response to orders, maintaining high fill
rates, developing differentiated new products, and educating processing
laboratories and eyecare practitioners on the benefits of Sola lenses and
coatings. There can be no assurance, however, that the Company's competitors
will not develop products or services that are more effective or less expensive
than the Company's products or which could render certain of the Company's
products less competitive. Since recently developed products comprise a
substantial portion of the Company's sales, the Company's performance is
dependent upon its continuing ability to develop and market new products. Some
of the Company's competitors have significantly greater financial resources than
the Company to fund expansion and research and development. Within a particular
market, certain of the Company's competitors may enjoy a "home-country"
advantage over foreign competition. In addition, in certain markets (primarily
Europe and the United States), the Company also faces competition from a number
of its principal competitors which are vertically integrated with processing
centers to a greater extent than the Company, enabling them to customize
prescription lenses. This limits the number of independent lens processing
customers to which the Company can market its products.
In addition to direct competition with other manufacturers of eyeglass lenses,
the Company competes indirectly with manufacturers of contact lenses and
providers of medical procedures for the correction of visual impairment.
Contact lenses and eyeglasses are not, however, perfect substitutes because of
the difficulty of developing progressive or bifocal contact lenses for
presbyopia and the tendency of contact lens wearers to also own eyeglasses. A
number of companies have developed, or are developing, surgical equipment or
implants used to correct refractive error, including myopia, hyperopia and
astigmatism. These procedures are ineffective at correcting presbyopia, which
affects the vast majority of people above the age of 45, and is a major cause of
demand for Sola's progressive and other multifocal lenses. However, there can
be no assurance that current medical procedures, or ones developed in the
future, will not materially impact demand for the Company's lenses.
Patents, Trademarks & Licenses
The Company seeks to protect its intellectual property throughout the world.
As of March 31, 2000, the Company had filed (or applied for) patents for 89
discrete inventions or technologies. Many of the Company's patents have been
filed in multiple countries, and they include 65 patents (or patent
applications) filed in the United States. The Company has been granted, or is
licensed to use, 1,021 trademarks in various countries, representing rights to
240 discrete names. These include 65 trademarks granted in the United States. A
further 56 trade names are under application. The Company does not believe that
it is dependent on any particular patent, trade secret or similar intellectual
property and, in light of its manufacturing, marketing and distribution
strengths, believes that the loss of any individual trademark, trade secret or
patent would not have a material adverse effect on its results of operations or
financial condition.
6
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Employees
As of March 31, 2000, the Company had approximately 7,300 employees throughout
the world. The majority of the Company's employees are not represented by labor
unions. Labor relations are considered to be good and there have been no
significant labor disputes in the past ten years.
Environmental Matters
The Company (together with the industry in which it operates) is subject to
United States and foreign environmental laws and regulations concerning
emissions to the air, waste water discharges and the generation, handling,
storage, transportation and disposal of hazardous wastes, and to other federal,
state and foreign laws and regulations. The Company believes that it possesses
all material permits and licenses necessary for the continuing operation of its
business and believes that its operations are in substantial compliance with the
terms of all applicable environmental laws. It is impossible to predict
accurately what effect these laws and regulations will have on the Company in
the future.
The Company's manufacturing processes generally utilize non-hazardous
chemicals where feasible. Certain processes, including those for cleaning
lenses and mold assemblies, and abrasion resistant and anti-reflection coating
of lenses, use a variety of volatile and other hazardous substances. Company
developments in manufacturing methods, alternative non-solvent cleaning
processes and waste reduction have been successful in reducing the use of these
chemicals and/or emissions and environmental damage from these processes.
Programs to eliminate use of chlorinated hydrocarbons and chlorofluorocarbons
("CFC's") in manufacturing processes have also been developed and the current
use of these substances in the Company's North American operations is minimal.
Since 1988 the Company has operated a ground water remediation system at its
Petaluma, California manufacturing facility in accordance with a consent order
issued by the U.S. Environmental Protection Agency ("EPA") under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980.
The system is designed to remediate a pre-1982 release of hazardous substances.
Analytical results indicate that contamination levels have decreased
significantly over the past few years. Since March 1997 the Company has
curtailed clean-up activities, while continuing to monitor contamination levels.
During the quarter ended December 31, 1997 a report on contamination levels, and
the impact of curtailed activities, was submitted to the EPA which indicates no
significant impact on the site from the curtailed activities, and the EPA has
consented to continued curtailment of activities. The Company expects continued
reduction of clean-up activities due to relatively low levels of contamination
existing at the site.
It is possible that the Company may be involved in other similar
investigations and actions under state, federal or foreign law in the future.
Based on currently available information, the Company does not believe that its
share of costs, either at the existing sites or at any future sites, is likely
to result in a liability that will have a material adverse effect on its results
of operations or financial condition.
It is the Company's policy to meet or exceed all applicable environmental,
health and safety laws and regulations. The complexity and continuing evolution
of environmental regulation (including certain programs for which implementing
regulations have not yet been finalized) preclude precise estimation of future
environmental expenditures.
In connection with the Acquisition, Pilkington has agreed to indemnify the
Company with respect to environmental losses based upon or resulting from
certain existing facts, events, conditions, matters or issues, for (i) 50% of
such losses to the extent such losses exceed $1 million but are less than or
equal to $5 million, and (ii) 100% of such losses in excess of $5 million.
See Note 15 of Notes to Consolidated Financial Statements included elsewhere
herein.
7
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Item 2. PROPERTIES
The following table sets forth certain information relating to the Company's
principal facilities. The Company operates other smaller domestic and foreign
manufacturing facilities, distribution facilities and sales offices which are
omitted from this table.
<TABLE>
<CAPTION>
Region and Location Principal Operations Leased/Owned
-------------------- -------------------- ------------
<S> <C> <C>
North America
Menlo Park, California............ Headquarters Leased
Petaluma, California.............. Manufactures plastic lenses; marketing and distribution Part owned,
center; research and development facility; administrative part leased
offices for North American operations
Eldon, Missouri................... Manufactures multifocal glass lenses; manufactures molds Owned
San Diego, California............. Headquarters for American Optical Leased
Southbridge, Massachusetts........ Research and development and distribution center; Leased
manufactures glass lenses; administrative offices for AO
operations
Portland, Oregon.................. Anti-reflection coating laboratory Owned
Tijuana, Mexico................... Manufactures plastic and glass lenses; manufactures molds; Part owned,
distribution center part leased
Europe
Goetzenbruck, France.............. Manufactures glass lenses; marketing and distribution center Owned
Fougeres, France.................. Prescription processing laboratory with anti-reflection Leased
coating capability; marketing and distribution center
Wexford, Ireland.................. Manufactures plastic lenses; prescription processing Owned
laboratory; distribution center
Varese, Italy..................... Tinting operations; prescription processing laboratory with Leased
anti-reflection coating capability; marketing and
distribution center
Birmingham, United Prescription processing laboratory with anti-reflection Leased
Kingdom......................... coating capability; marketing and distribution center
Rest of World
Asia
Bangalore, India.................. Site owned by a joint venture co-managed by the Company in Owned
which the Company holds a 45% ownership interest;
manufactures and coats hard resin lenses
Xian, China....................... Site owned by a joint venture managed by the Company in Leased
which the Company holds a 50% ownership interest;
manufactures hard resin lenses
Hong Kong......................... Prescription processing laboratory with anti-reflection Leased
coating capability; marketing and distribution center
Guangzhou, China.................. Two sites; China head office and second China manufacturing Part owned, part
site for hard resin lenses leased
Osaka, Japan...................... Prescription processing laboratory with anti-reflection Leased
coating capability; marketing and distribution center
8
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</TABLE>
<TABLE>
<CAPTION>
Region and Location Principal Operations Leased/Owned
------------------- -------------------- ------------
<S> <C> <C>
Chung Li, Taiwan.................. Manufactures hard resin lenses; marketing and distribution Leased
center
Singapore......................... Manufactures glass molds; marketing and distribution Leased
center; prescription processing facility with
anti-reflection coating capability
South America
Petropolis, Brazil................ Manufactures hard resin ophthalmic and plano lenses Owned
Villa de Cura, Venezuela.......... Manufactures hard resin lenses; distribution center Owned
Australia
Lonsdale, Australia............... Manufactures plastic lenses; manufactures molds; research Part owned, part
and development center; prescription processing laboratory leased
with anti-reflection coating facility; marketing and
distribution center; regional administrative offices for
Australia and Asian regions
</TABLE>
A portion of the Company's research and development activities, its corporate
headquarters and certain manufacturing and distribution operations are located
near major earthquake faults. Operating results could be materially affected in
the event of a major earthquake. The Company is predominantly self-insured for
losses and interruptions caused by earthquakes.
For further information concerning the Company's leased properties, see Note
14 of Notes to Consolidated Financial Statements included elsewhere herein. The
Company's operating leases have expirations ranging from 2000 to 2012. The
Company does not anticipate any difficulties in renewing or replacing such
leases as they expire; however, there can be no assurances that the Company will
be able to renew or replace such leases. The Company believes that its
manufacturing capacity is sufficient for its current needs.
Item 3. LEGAL PROCEEDINGS
In addition to the proceedings described under "Business - Environmental
Matters", the Company is involved in routine litigation incidental to its
business, none of which it believes will have a material adverse effect on its
results of operations or financial condition. See Note 15 of Notes to
Consolidated Financial Statements included elsewhere herein.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the last quarter of fiscal 2000.
9
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been listed on the New York Stock Exchange
since February 23, 1995 under the symbol "SOL". The following table sets forth
on a per share basis the closing high and low sales prices for consolidated
trading in the Common Stock as reported on the New York Stock Exchange Composite
Tape for the fiscal quarters indicated.
<TABLE>
<CAPTION>
Common Stock
Price Range
------------------------
High Low
---- ----
<S> <C> <C>
Fiscal Year Ended March 31, 1999:
First Quarter ended June 30, 1998..................................... $ 43 3/4 $ 32 1/2
Second Quarter ended September 30, 1998............................... $ 34 3/4 $ 14 3/8
Third Quarter ended December 31, 1998................................. $ 20 $ 13
Fourth Quarter ended March 31, 1999................................... $ 18 3/4 $ 9 7/8
Fiscal Year Ended March 31, 2000:
First Quarter ended June 30, 1999..................................... $19 7/16 $ 11 3/8
Second Quarter ended September 30, 1999............................... $19 5/16 $ 14 1/2
Third Quarter ended December 31, 1999................................. $ 15 3/4 $ 11
Fourth Quarter ended March 31, 2000................................... $ 14 $4 13/16
</TABLE>
On May 23, 2000, the closing price per share of the Company's Common Stock on
the New York Stock Exchange was $5.94. As of May 23, 2000, there were 426
holders of record of the Company's Common Stock, which excludes beneficial
owners of Common Stock held in "street name".
The Company has not declared or paid any cash dividends on its Common Stock
since December 1993. The Company's credit agreement, among the Company, the
lenders named therein and The Bank of America National Trust and Savings
Association, for itself and as agent for a syndicate of other financial
institutions, dated June 1996 as amended (the "Amended Agreement"), generally
restricts, subject to certain exceptions, the payment of dividends,
distributions and other payments. The Company does not anticipate paying any
cash dividends in the foreseeable future and intends to retain future earnings
for the development and expansion of its business. Subject to such
restrictions, any future determination to pay dividends will be at the
discretion of the Company's Board of Directors and subject to certain
limitations under the General Corporation Law of the State of Delaware and will
depend upon the Company's results of operations, financial condition, other
contractual restrictions and factors deemed relevant by the Board of Directors.
10
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Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------------------------------------
2000 (1) 1999 (2) 1998 1997 (3) 1996
-------- -------- ---- ------- ----
<S> <C> <C> <C> <C> <C>
Statements of Operations Data
(in thousands, except per share data)
Net sales............................ $538,680 $529,789 $ 547,735 $488,689 $ 387,709
======== ======== =========== ======== =========
Income before
extraordinary item................ $ 741 $ 12,521 $ 51,092 $ 30,897 $ 34,588
Extraordinary item, net of
taxes............................. -- -- (5,939) (4) -- (912)(4)
-------- -------- ----------- -------- ---------
Net income.......................... $ 741 $ 12,521 $ 45,153 $ 30,897 $ 33,676
======== ======== =========== ======== =========
Earnings Per Share Data,
Basic....................................
Income before extraordinary
item.................................. $ 0.03 $ 0.51 $ 2.09 $ 1.31 $ 1.59
Extraordinary item..................... -- -- (0.24) -- (0.04)
-------- -------- ----------- -------- ---------
Net income............................. $ 0.03 $ 0.51 $ 1.85 $ 1.31 $ 1.55
======== ======== =========== ======== =========
Weighted average common
24,887 24,794 24,400 23,561 21,785
shares outstanding.................... ======== ======== =========== ======== =========
Earnings Per Share Data,
Diluted..................................
Income before extraordinary
item.................................. $ 0.03 $ 0.49 $ 2.00 $ 1.24 $ 1.51
Extraordinary item..................... -- -- (0.23) -- (0.04)
-------- -------- ----------- -------- ---------
Net income............................. $ 0.03 $ 0.49 $ 1.77 $ 1.24 $ 1.47
======== ======== =========== ======== =========
Weighted average common and
25,069 25,412 25,547 24,859 22,944
dilutive securities outstanding....... ======== ======== =========== ======== =========
</TABLE>
<TABLE>
<CAPTION>
As of March 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets............................ $715,033 $699,299 $684,058 $605,508 $416,849
Long-term debt.......................... 209,234 208,414 196,386 162,797 97,890
Total shareholders' equity.............. 327,802 332,362 327,022 284,298 192,241
</TABLE>
___________________________
(1) In fiscal 2000, primarily during the fourth quarter, the Company recorded
special charges in the amount of $29.9 million, or $21.1 million, $0.84 per
diluted share, after consideration of the associated tax benefit (see "Note
10 of Notes to Consolidated Financial Statements").
(2) In fiscal 1999, primarily during the fourth quarter, the Company recorded
special charges in the amount of $27.3 million, or $20.5 million, $0.81 per
diluted share, after consideration of the associated tax benefit (see "Note
10 of Notes to Consolidated Financial Statements").
(3) In fiscal 1997, the Company recorded two non-recurring charges in connection
with the AO Acquisition: (i) a $7.2 million charge for the amortization
associated with an inventory write-up to fair value that was reflected in
cost of sales; and (ii) a $9.5 million charge for the write-off of in-
process research and development that was reflected in in-process research
and development expense.
(4) In fiscal 1998 and fiscal 1996, the extraordinary items comprise losses due
to the repurchases of senior subordinated notes, net of tax.
11
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Company's consolidated
financial statements and notes thereto included elsewhere in this Form 10-K. The
years ended March 31, 2000, 1999 and 1998 are referred to herein as fiscal 2000,
fiscal 1999 and fiscal 1998, respectively.
The following table reflects the results of operations for the three fiscal
years 2000, 1999 and 1998.
Fiscal Year Ended March 31,
---------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Net sales.............................. $538,680 $529,789 $547,735
Cost of sales.......................... 303,098 291,389 289,677
-------- -------- --------
Gross profit......................... 235,582 238,400 258,058
-------- -------- --------
Research and development
expenses............................. 20,010 18,757 18,303
Selling and marketing expenses......... 101,337 96,609 93,993
General and administrative
expenses (including goodwill
amortization)........................ 64,000 57,977 53,056
Special charges........................ 29,861 27,306 --
-------- -------- --------
Operating expenses................... 215,208 200,649 165,352
-------- -------- --------
Operating income..................... 20,374 37,751 92,706
Interest expense, net.................. (19,309) (17,559) (16,754)
-------- -------- --------
Income before provision for
income taxes, minority interest
and extraordinary item............. 1,065 20,192 75,952
Provision for income taxes............. (894) (8,394) (25,369)
Minority interest...................... 570 723 509
-------- -------- --------
Income before extraordinary
item................................ 741 12,521 51,092
Extraordinary item, loss on
repurchase of senior subordinated
notes, net of tax.................... -- -- (5,939)
-------- -------- --------
Net income........................... $ 741 $ 12,521 $ 45,153
======== ======== ========
12
<PAGE>
Results of Operations
The following table sets forth, for the fiscal years indicated, the Company's
results of operations as a percentage of net sales.
<TABLE>
<CAPTION>
Fiscal year ended March 31,
---------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
% % %
Net sales................................................. 100.0 100.0 100.0
Cost of sales............................................. 56.3 55.0 52.9
----- ----- -----
Gross profit............................................ 43.7 45.0 47.1
----- ----- -----
Research and development expenses......................... 3.7 3.5 3.3
Selling and marketing expenses............................ 18.8 18.2 17.2
General and administrative expenses....................... 11.9 10.9 9.7
Special charges........................................... 5.5 5.2 --
----- ----- -----
Operating expenses...................................... 39.9 37.8 30.2
----- ----- -----
Operating income........................................ 3.8 7.2 16.9
Interest expense, net..................................... (3.6) (3.3) (3.1)
Income before provision for income taxes,
minority interest and extraordinary item.............. 0.2 3.9 13.8
Provision for income taxes................................ (0.2) (1.6) (4.6)
Minority interest......................................... 0.1 0.1 0.0
Extraordinary item........................................ -- -- (1.0)
----- ----- -----
Net income.............................................. 0.1 2.4 8.2
===== ===== =====
</TABLE>
Fiscal 2000 compared to Fiscal 1999
Net Sales
Net sales were $538.7 million in fiscal 2000 reflecting an increase of 1.7%
from $529.8 million in fiscal 1999. Using constant exchange rates, the
percentage increase was 3.6%. The increase in net sales was primarily
attributable to the European and Rest of World regions offset in part by a
decrease in net sales in the North American region. Net sales in the European
region increased due to strong sales of progressives as well as growth in
France. Net sales in the Rest of World region increased as a result of market
recovery in Asia and South America partially offset by lower sales in Australia
and China. The sales decline in the North American region (primarily the United
States) resulted in part from increased sales in the prior year from product
launches, primarily in the fourth quarter in fiscal 1999, as well as product mix
changes and price decreases at optical retailers in the current year. Net sales
performances by region were as follows: North America declined by 2.8%, Europe
increased by 3.1% and Rest of World increased by 11.7%. Using constant exchange
rates the regional performances were as follows: North America declined by 2.8%,
Europe increased by 10.4% and Rest of World increased by 8.5%.
Higher priced products accounted for approximately 69% of net lens sales in
fiscal 2000 compared to approximately 67% for fiscal 1999. This increase was
led by growth in polycarbonate lens sales with a year on year increase of 16%.
Progressive lens sales for fiscal 2000 increased by 9% compared to fiscal 1999.
Gross Profit and Gross Margin
Gross profit totaled $235.6 million for fiscal 2000 reflecting a decrease of
1.2% from gross profit of $238.4 million for fiscal 1999. Gross profit as a
percentage of net sales ("gross margin") decreased to 43.7% for fiscal 2000 from
45.0% for fiscal 1999. The gross margin decrease was principally due to
continued underabsorption of 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.
13
<PAGE>
Operating Expenses
Operating expenses in fiscal 2000 totaled $215.2 million compared to $200.6
million for fiscal 1999. Included in fiscal 2000 and fiscal 1999 operating
expenses are special charges of $29.9 million and $27.3 million, respectively.
If these charges were excluded from operating expenses, operating expenses would
have been $185.3 million in fiscal 2000 and $173.3 million in fiscal 1999, an
increase of 6.9%. Operating expenses, excluding the special charges, for fiscal
2000 and 1999 as a percentage of net sales were 34.4% and 32.7%, respectively.
Research and development expenses for fiscal 2000 and 1999 represent 3.7% and
3.5% of net sales, respectively. Selling and marketing expenses were 18.8% and
18.2%, of net sales in fiscal 2000 and 1999, respectively. As a percentage of
net sales, general and administrative expenses increased to 11.9% for fiscal
2000 compared to 10.9% for fiscal 1999. The change in general and
administrative expenses primarily relates to favorable changes in estimates
related to certain reserves and accruals in the first quarter of fiscal 1999.
Of the $29.9 million in fiscal 2000 special charges, $26.8 million relates to
strategic actions designed to improve the Company's operating performance. The
charges include costs associated with the transfer of high volume production to
low cost manufacturing locations including consolidation of certain
manufacturing facilities ($12.9 million), work force reductions ($6.7 million),
and inventory write-downs associated with product standardization ($7.2
million). The Company anticipates that it is likely to incur additional charges
associated with further reductions in force and product migration efforts
primarily in the first half of fiscal 2001. The Company estimates the total
annual savings from these actions will be $15.0 million to $20.0 million in
fiscal 2001 and $30.0 million to $40.0 million in fiscal 2002. Additionally,
the Company recorded a charge for accounts receivable write-downs associated
with the economic slow-down in Asia and the currency devaluation in Brazil ($3.1
million). (See Note 10 of Notes to Consolidated Financial Statements).
In fiscal year 1999 the Company recorded special charges of $27.3 million
primarily related to the consolidation of the Mexican manufacturing facilities,
the impact from the devaluation of the Brazilian Real and Asian economic
slowdowns, and certain workforce reductions.
Operating Income
Operating income for fiscal 2000 totaled $20.4 million, a decrease of $17.4
million from fiscal 1999 operating income of $37.8 million. Operating income
excluding the special charges in fiscal 2000 and fiscal 1999 would have been
$50.2 million and $65.1 million, respectively, a decrease of $14.9 million, or
22.8%.
Net Interest Expense
Net interest expense totaled $19.3 million for fiscal 2000 compared to $17.6
million for fiscal 1999, an increase of $1.7 million. The increase was due
primarily to increased borrowing rates and borrowing levels in fiscal 2000
compared to fiscal 1999.
Provision for Income Taxes
The Company's combined state, federal and foreign tax rate was approximately
83.9% for fiscal 2000 compared to 41.6% for fiscal 1999. If the special charges
are excluded from income before provision for income taxes, and the tax benefit
associated with the special charges are excluded from the provision for income
taxes, the resulting effective combined state, federal and foreign tax rate in
fiscal 2000 and fiscal 1999 would have been 31.2% and 32.0%, respectively. The
Company has deferred tax assets on its balance sheet as of March 31, 2000
amounting to approximately $15.6 million. The ultimate utilization of these
deferred tax assets is dependent on the Company's ability to generate taxable
income in the future.
14
<PAGE>
Net Income
Net income for fiscal 2000 totaled $0.7 million compared to $12.5 million for
fiscal 1999. If the special charges and associated taxes were excluded in both
years, net income would have been $21.8 million ($0.87 per share) in fiscal
2000, compared to $33.0 million ($1.30 per share) in fiscal 1999, a decline in
fiscal 2000 of $11.2 million, or 33.9%.
Fiscal 1999 compared to Fiscal 1998
Net Sales
Net sales were $529.8 million in fiscal 1999 reflecting a decrease of 3.3%
from $547.7 million in fiscal 1998. Using constant exchange rates, the
percentage decrease was 2.3%, and excluding Brazilian frame and equipment
business sales (see below), constant exchange rate net sales would have
decreased by 1.4%. The decline in net sales was primarily attributable to the
North American and Rest of World regions. The sales decline in the North
American region (primarily the United States) resulted from reduced net sales to
laboratory customers that were acquired in fiscal 1998 by Essilor Laboratories
of America, as well as changes in product mix in fiscal 1999. Also contributing
to the net sales shortfall was softness of the Asian, Australian and South
American economies, although these regions only accounted for approximately 18%
of net sales in the aggregate. South American sales declined by approximately
25% in the fourth quarter compared to the fourth quarter of fiscal 1998.
Significantly contributing to this decline was the devaluation of the Brazilian
Real in January 1999 and the sale of the Company's Brazilian frame and equipment
business during April 1998, which had contributed approximately $5.2 million of
net sales in fiscal 1998.
Higher priced products accounted for approximately 67% of net lens sales in
fiscal 1999 compared to approximately 66% for fiscal 1998. Net sales
performances by region were as follows: North America declined by 6.2%, Europe
increased by 6.9% and Rest of World declined by 10.9%. Using constant exchange
rates the regional performances were as follows: North America declined by 6.0%,
Europe increased by 5.7% and Rest of World declined by 5.1%.
Gross Profit and Gross Margin
Gross profit totaled $238.4 million for fiscal 1999 reflecting a decrease of
7.6% from gross profit of $258.1 million for fiscal 1998. Gross profit as a
percentage of net sales ("gross margin") decreased to 45.0% for fiscal 1999 from
47.1% for fiscal 1998. The gross margin decrease was principally due to lower
progressive lens product sales, product mix changes, and underabsorption of
overhead due to a slow-down in production levels during the second through
fourth quarters to align production with sales demand and expectations.
Operating Expenses
Operating expenses in fiscal 1999 totaled $200.6 million compared to operating
expenses of $165.4 million in fiscal 1998. Included in fiscal 1999 operating
expenses is $27.3 million representing special charges incurred predominantly in
the fourth quarter. If these charges were excluded from operating expenses,
operating expenses would have been $173.3 million, an increase over fiscal 1998
of 4.8%. Operating expenses, excluding the special charges, for fiscal 1999 and
1998 as a percentage of net sales were 32.7% and 30.2%, respectively.
Reflecting the reduced net sales in fiscal 1999, overall operating expenses,
excluding the special charges, in fiscal 1999, have remained relatively flat
with those of fiscal 1998. Research and development expenses for fiscal 1999
and 1998 represent 3.5% and 3.3% of net sales, respectively. Selling and
marketing expenses were 18.2% and 17.2%, of net sales in fiscal 1999 and 1998,
respectively. As a percentage of net sales, general and administrative expenses
increased to 10.9% for fiscal 1999 compared to 9.7% for fiscal 1998. The change
in general and administrative expenses relates to increased information
technology related expenses and impact of
15
<PAGE>
currency rates offset by lower expenses for performance based management bonuses
and favorable changes in estimates related to certain reserves and accruals in
the first quarter of fiscal 1999.
Fiscal 1999 operating expenses included $27.3 million of special charges
primarily related to the consolidation of the Mexican manufacturing facilities,
the impact from the devaluation of the Brazilian Real and Asian economic
slowdowns and certain workforce reductions.
Operating Income
Operating income for fiscal 1999 totaled $37.8 million, a decrease of $54.9
million from fiscal 1998 operating income of $92.7 million, or 59.3%. If the
special charges included in operating expenses were excluded from the operating
income, fiscal 1999 operating income would have been $65.1 million and the
decrease of fiscal 1999 operating income from fiscal 1998 operating income would
have been 29.8%.
Net Interest Expense
Net interest expense totaled $17.6 million for fiscal 1999 compared to $16.8
million for fiscal 1998, an increase of $0.8 million. During the third quarter
of fiscal 1998 the Company repurchased its 9 5/8% Senior Subordinated Notes, and
during the fourth quarter of fiscal 1998 the Company issued 6 7/8% Senior Notes.
The net effect of the above two changes was to reduce fiscal 1999 interest
rates. This reduction in interest rates and therefore interest expense was more
than offset by an increase in interest expense due to increased borrowing levels
in fiscal 1999.
Provision for Income Taxes
The Company's combined state, federal and foreign tax rate was approximately
41.6% for fiscal 1999 compared to 33.4% for fiscal 1998. If the special charges
are excluded from income before provision for income taxes, and the tax benefit
associated with the special charges are excluded from the provision for income
taxes, the resulting effective combined state, federal and foreign tax rate
would have been 32.0%.
Net Income
Net income for fiscal 1999 totaled $12.5 million compared to $45.2 million for
fiscal 1998. If the extraordinary item was excluded from fiscal 1998 results
and the special charges and associated taxes were excluded from fiscal 1999
results, the decline from fiscal 1998, as adjusted, to fiscal 1999, as adjusted,
would have been $18.1 million, or 35.4%.
Liquidity and Capital Resources
Operating activities generated $19.4 million in cash in fiscal 2000 compared
with $3.2 million in fiscal 1999 and $20.9 million in fiscal 1998. The increase
in cash flows from operations in fiscal 2000 compared to fiscal 1999 was mainly
due to decreased investments in working capital, offset in part by reduced net
income. The change in cash flows from operations in fiscal 1999 compared to
fiscal 1998 was primarily due to the reduced net income and an increased
investment in working capital.
During fiscal 2000, inventories as a percentage of net sales grew to 32.1%
from 31.8 % in the prior year. As noted in "Operating Expenses" above, 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, and implementing
worldwide product standardization. During fiscal 1999 inventories as a
percentage of net sales grew to 31.8% from 31.0% in the prior year. The
increase in inventories as a percentage of net sales was primarily a result of
reduced net sales. Net accounts receivable as a percentage of net sales in
fiscal 2000 remained flat with the prior year at 22.4%. Net accounts receivable
as a percentage of net sales increased to 22.4% in fiscal 1999
16
<PAGE>
compared to 22.0% in the prior year. The slow-down in world economies,
particularly in Asia and South America contributed to the increase in accounts
receivable as a percentage of net sales.
During fiscal 2000 net cash expended on investing activities amounted to $28.7
million. Of this amount, $20.1 million represented capital expenditures, $5.6
million related to investment in a joint venture in India and other trade
investments, and $4.1 million was for the acquisition of a wholesale laboratory
in Portugal in December 1999. The most significant capital expenditures in
fiscal 2000 were made in the United States and Europe, primarily related to
capacity increases. Subsequent to March 31, 2000 the Company acquired the
remaining 65% ownership interest in a wholesale laboratory group located in
Australia and New Zealand for $2.6 million. During fiscal 1999, net cash
expended on investing activities amounted to $38.5 million. Of this amount
$30.5 million represented capital expenditures and $8.6 million represented
investment in acquisitions. The most significant capital expenditures,
primarily on additional production capacity and computer system upgrades, were
made in the United States, Mexico, Brazil, Italy and Australia. Management
anticipates capital expenditures of $25 million to $30 million annually over the
next several years, of which approximately $5 million annually is viewed as
discretionary.
Financing activities generated $7.1 million in cash in fiscal 2000, $22.5
million in fiscal 1999 and $32.3 million in fiscal 1998, primarily from
borrowings on revolving credit facilities. In the third quarter of fiscal 1998
the Company repurchased all of its remaining 9 5/8% Senior Subordinated Notes
due 2003. The notes repurchase was funded by borrowings under the Company's
credit facility. In conjunction with the repurchase of its Senior Subordinated
Notes the Company amended its bank credit agreement with The Bank of America
National Trust and Savings Association, for itself and as agent for a syndicate
of other financial institutions ("Amended Agreement").
The Amended Agreement increased the Company's multicurrency revolving facility
from $180 million to $300 million. Borrowings are divided into two tranches.
Tranche A permits borrowings up to $30 million in either U.S. dollars or foreign
currencies, to be used for working capital and consummating certain permitted
acquisitions. Tranche B permits borrowings of up to $270 million and can be
used for working capital purposes, outstanding letters of credit and
consummating certain permitted acquisitions. The Tranche A Facility matures on
October 31, 2000 and the Tranche B Facility matures on May 31, 2001. Among
other things the Amended Agreement changed certain financial covenants, removed
the requirement for foreign subsidiary guarantees under the Tranche A Facility,
increased the basket for incurring other unsecured indebtedness to $150 million,
and deleted the term facility portion.
Borrowings under the Tranche A and Tranche B revolvers (other than swing line
loans, which may only be Base Rate loans) may be made as Base Rate Loans or LIBO
Rate Loans. Base Rate Loans bear interest at rates per annum equal to the
higher of (a) 0.50% per annum above the latest Federal Funds Rate, or (b) the
Bank of America Reference Rate. LIBO Rate Loans bear interest at a rate per
annum equal to the sum of the LIBO Rate and a margin varying from 0.450% to
0.750% based on the Company's leverage ratio. Fixed rate borrowings in foreign
currencies bear interest at rates per annum equal to the referenced currency's
local IBOR plus a margin varying from 0.450% to 0.750% based on the Company's
leverage ratio. Local currency Base Rate Loans are also available at a spread
similar to US Base Rate Loans described above.
During the fourth quarter of fiscal 1998 the Company issued 6 7/8% Senior
Notes ("Notes") due 2008, for which the Company received approximately $98.5
million net proceeds, after discounts and issuance expenses. Net proceeds were
used to pay down borrowings under the Amended Agreement. The Notes are
unsecured senior obligations of the Company, limited to $100 million aggregate
principal amount at maturity, and will mature on March 15, 2008. The Notes will
be redeemable, as a whole or from time to time in part, at the option of the
Company on any date at a redemption price equal to the aggregate principal
amount plus a make whole premium.
Subsequent to March 31, 2000 the Company purchased $5.0 million of its 6 7/8%
Senior Notes due 2008. As a result, during the first quarter of fiscal 2001
the Company recorded an extraordinary gain of $1.4 million, net of tax of $0.9
million
17
<PAGE>
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.
The Company's foreign subsidiaries maintain local credit facilities to provide
credit for overdraft, working capital and some fixed asset investment purposes.
As of March 31, 2000, the Company's total credit available under such facilities
was approximately $34.2 million, of which $18.7 million had been utilized.
The Company continues to have significant liquidity requirements. In addition
to working capital needs and capital expenditures, the Company has substantial
cash requirements for debt service. The Company expects that the Amended
Agreement and other overseas credit facilities, together with cash on hand and
internally generated funds, if available as anticipated, will provide sufficient
capital resources to finance the Company's operations, fund anticipated capital
expenditures, and meet interest requirements on its debt, including the Notes,
for the foreseeable future. As the Company's debt matures, the Company may need
to refinance such debt. The Company has the intention, and believes it has the
ability, to refinance such debt. However, there can be no assurance that such
debt can be refinanced on terms acceptable to the Company.
From time to time, the Company may acquire up to 1.25 million shares of its
common stock in open market transactions. Such purchases will be facilitated
using a combination of existing cash reserves and cash flow from operations.
Any such purchases, and the actual number of shares purchased, will depend upon
the availability of shares at acceptable market prices. Any shares of common
stock acquired will be held as treasury shares to be issued from time to time
under the Company's employee stock option program.
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 fiscal years ended March 31, 2000, 1999 and 1998
such translation adjustments were approximately $(6.3) million, $(9.2) million,
and $(10.0)million, respectively, primarily as a result of the strength of the
U.S. dollar.
For translation adjustments of the Company's subsidiaries operating in hyper-
inflationary countries, until recently primarily Brazil, the functional currency
is determined to be the U.S. dollar, and therefore all translation adjustments
are reflected in the Company's Statements of Operations. During January 1999
the Brazilian Real devalued against the U.S. dollar. By March 31, 1999 the Real
had deteriorated to 1.74 against the U.S. dollar, compared to 1.21 against the
U.S. dollar as of December 31, 1998, although it had reached higher than 2.00
against the U.S. dollar in February 1999. At March 31, 2000 the Real was 1.74
compared to the U.S. dollar. As a result of this devaluation, the Company
incurred an exchange loss of approximately $5.9 million fiscal 1999 and $0.3
million in fiscal 2000 which were included in the special charges in the
statement of operations. (see Note 10 of Notes to Consolidated Financial
Statements). In hyper-inflationary environments, the Company generally protects
margins by methods which include increasing prices monthly at a rate appropriate
to cover anticipated inflation, compounding interest charges on sales invoices
daily and holding cash balances in U.S. dollar denominated accounts where
possible.
Because a majority of the Company's debt is U.S. dollar denominated, the
Company may hedge against certain currency fluctuations by entering into
currency swaps (however certain currencies, such as the Brazilian Real, cannot
be hedged economically), although no such swaps had been entered into as of
March 31, 2000. As of March 31, 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
18
<PAGE>
estimated based on current exchange rates. For further financial data of the
Company's performance by region, see Note 16 of Notes to Consolidated Financial
Statements.
Seasonality
The Company's business is somewhat seasonal, with third quarter results
generally weaker than the other three quarters as a result of lower sales during
the holiday season, and fourth quarter results generally the strongest.
Inflation
Inflation continues to affect the cost of the goods and services used by the
Company. The competitive environment in many markets limits the Company's
ability to recover higher costs through increased selling prices, and the
Company is subject to price erosion in many of its standard product lines. The
Company seeks to mitigate the adverse effects of inflation through cost
containment and productivity and manufacturing process improvements. For a
description of the effects of inflation on the Company's reported revenues and
profits and the measures taken by the Company in response to inflationary
conditions (see--"Currency Exchange Rates" ).
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
currently evaluating the impact of the application of the new rules on the
Company's 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 first 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, (FIN44), 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 has not yet determined the impact, if any, of adopting this
Interpretation.
Quantitative and Qualitative Disclosures about Market Risk
Quantitative Disclosures.
The Company is exposed to market risks inherent in its operations, primarily
related to interest rate risk and currency risk. These risks arise from
transactions and operations entered into in the normal course of business.
19
<PAGE>
Interest Rate Risk. The Company is subject to interest rate risk on its
existing long-term debt and any future financing requirements. Fixed rate debt
consists primarily of outstanding balances on Senior Notes, and variable rate
debt relates primarily to borrowings under the Company's Bank Credit Agreement.
The following table presents the future principal cash flows and weighted
average interest rates expected on the Company's existing long-term debt
instruments. Fair values have been determined based on quoted market prices as
of March 31, 2000:
<TABLE>
<CAPTION>
Expected Maturity Date (as of March 31, 2000)
--------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal -----------
2001 2002 2003 2004 2005 Thereafter Total Fair Value
---- ---- ---- ---- ---- ----------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed rate debt....... $4,676 $ 3,412 $ 191 $ 153 $ 210 $100,068 $108,710 $ 61,038
Weighted average
Interest rate......... 5.81% 6.39% 3.37% 2.69% 3.98% 6.76% 6.69%
Long-term debt:
Variable rate debt.... -- $105,200 -- -- -- -- $105,200 $105,200
Weighted average
Interest rate......... -- 6.77% -- -- -- -- 6.77%
</TABLE>
Currency Rate Risk. The Company's subsidiaries primarily operate in foreign
markets, and predominantly have their local currencies as their functional
currencies. These subsidiaries do not have third party borrowings in currencies
other than their local currencies, and therefore there are no appropriate
quantitative disclosures.
Qualitative Disclosures.
Interest Rate Risk. The Company's primary interest rate risk exposures relate
to:
. Interest rate risk on variable long-term borrowings,
. The ability of the Company to pay or refinance long-term borrowings at
maturity at market rates,
. The impact of interest rate movements on the Company's ability to meet
interest expense requirements and financial covenants and
. The impact of interest rate movements on the Company's ability to obtain
adequate financing to fund future operations or business acquisitions.
The Company manages interest rate risk on its outstanding long-term borrowings
through the use of fixed and variable rate debt. While the Company cannot
predict its ability to refinance existing debt, or the impact interest rate
movements might have on existing debt, management evaluates the Company's
financial position on an ongoing basis.
Currency Rate Risk. The Company's primary currency rate risk exposures relate
to:
. The Company's decentralized operations, whereby approximately 50% of the
Company's revenues are derived from operations outside the United
States, denominated in currencies other than the U.S. dollar,
20
<PAGE>
. The ability of the Company's U.S. operations to satisfy cash flow
requirements of predominantly U.S. dollar denominated long-term debt
without the need to repatriate into the United States foreign earnings
and profits, which are denominated in currencies other than the U.S.
dollar,
. The Company's investments in foreign subsidiaries being primarily
directly from the U.S. parent, resulting in U.S. dollar investments in
foreign currency functional companies and
. The location of the Company's operating subsidiaries in a number of
countries that have seen significant exchange rate changes against the
U.S. dollar, primarily downwards in recent years, such as Brazil,
Mexico, China, Venezuela and other Asian countries.
The Company manages its currency rate risks through a variety of measures.
The Company operates on a decentralized regional basis with manufacturing
operations located in most major markets. As a result, individual markets are
not necessarily impacted by changes in currency exchange rates. In addition,
the Company negotiated as part of its Bank Credit Agreement a multicurrency
facility so that local borrowings could be made in the currency of the local
entity, while still obtaining the benefits of central borrowing capability. In
addition, in certain limited instances, subsidiaries, after obtaining approval
from the Company's head office, will enter into forward exchange contracts in
connection with inter-company purchases and sales of products. These contracts
do not extend longer than one year, and are immaterial to the overall operations
of the group. Subsidiaries operating in high or hyper-inflationary environments
protect margins by methods which include increasing prices monthly at a rate
appropriate to cover anticipated inflation, compounding interest charges on
sales invoices daily and holding cash balances in U.S. dollar denominated
accounts where possible. The Company discloses constant exchange rate net sales
performances in the aggregate, as well as by region, in the management's
discussion and analysis of financial condition and results of operations (see "-
-Currency Exchange Rates").
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, 2000 and January 1, 2002. By January 1, 2002 all companies operating
in the eleven member states will be required to be fully operational using the
new currency. The Euro conversion team has primarily addressed the accounting
and information systems changes that are necessary to facilitate trading in the
Euro, the possible marketplace implications of a common currency and the
currency exchange rate risks, with the initial emphasis placed on the system
modifications. The Company has not completed the evaluation of the possible
effect of the changes to the Euro on foreign currency loans, or the impact if
any, on the marketplace implications of a common currency. Preliminary
assessments indicate that the financial impact of conversion to a Euro based
currency will not be material to the Company's consolidated financial position,
results of operations or cash flows.
Information Relating to Forward-Looking Statements
This Form 10-K of the Company includes forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, including
statements regarding, among other items, (i) the Company's development of new
products, including, among others, Percepta, AO Compact, Visuality, Spectralite,
ViZio, Access(R) and Matrix, (ii) the availability of raw materials for the
Company's products, the costs of product introductions, and trends in sales
growth (including growth related to new products), (iii) anticipated trends in
the Company's business environment, including competitive and pricing pressures,
(iv) the Company's ability to continue to control costs and maintain adequate
standards of customer service and product quality, (v) future income tax rates
and capital expenditures and working capital requirements and (vi) statements
regarding the adequacy of the Company's planning for the Euro
21
<PAGE>
issues. These forward looking statements reflect the Company's current views
with respect to future events and financial performance. The words "believe",
"expect", "anticipate" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of their dates. The Company undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. Actual
results could differ materially from the forward-looking statements as a result
of various factors including those described in "Business--Environmental
Matters" and "Factors Affecting Future Operating Results", included in Exhibit
99.1, of the Company's Form 10-K for the fiscal year ended March 31, 2000.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are set forth on pages F-1, and
F4 through F-25 and the related financial statement schedule is set forth on
page S-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Incorporated by reference to the material included in the Form 8-K of the
Company, dated November 10, 1999, filed to report a change in the Company's
certifying public accountants from Ernst & Young LLP to PricewaterhouseCoopers
LLP.
22
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the
Company's directors and executive officers. All directors hold office until the
annual meeting of stockholders of the Company following their election or until
their successors are duly elected and qualified. Officers are appointed by, and
serve at the discretion of, the Board of Directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Irving S. Shapiro............................. 83 Chairman of the Board
Jeremy C. Bishop.............................. 50 President and Chief Executive Officer, Director
Maurice J. Cunniffe........................... 67 Director
Douglas D. Danforth........................... 77 Director
A. William Hamill............................. 52 Director
Hamish Maxwell................................ 73 Director
Jackson L. Schultz............................ 74 Director
James H. Cox.................................. 51 Executive Vice President, Business and Product
Development
Stephen J. Lee................................ 47 Vice President, Human Resources
Steven M. Neil................................ 47 Executive Vice President, Finance, Chief
Financial Officer, Secretary and Treasurer
Barry J. Packham.............................. 53 Executive Vice President Manufacturing and
Logistics
Alan S. Vaughan............................... 56 Vice President, European Operations
Adrian Walker................................. 47 Vice President, Regional Director, Asia
</TABLE>
The principal occupations and positions for at least the past five years of
each of the directors and executive officers of the Company are as follows
(references to the Company include its predecessors):
Irving S. Shapiro has been Chairman of the Board of the Company since
December 1994. Mr. Shapiro is Of Counsel to Skadden, Arps, Slate, Meagher & Flom
LLP. He was Chairman and Chief Executive Officer of E.I. du Pont de Nemours and
Company from 1974 to 1981. He is Chairman of the Advisory Board of Marvin &
Palmer Associates, Inc., and is a director of J.P. Morgan Florida Federal
Savings Bank and Gliatech, Inc.
Jeremy C. Bishop has served as Chief Executive Officer and President and
been a director of the Company since April 2000. Prior to his appointment, he
served as President of the American Optical Ophthalmic Business ("AO"), a
position held since Sola's purchase of AO in June 1996. He joined AO in November
1990 as Vice President of European Operations.
Maurice J. Cunniffe has been a director of the Company since December 1996.
He is Chairman and Chief Executive Officer of American Optical Corporation, a
company of which he has been sole shareholder since 1982.
Douglas D. Danforth has been a director of the Company since December 1994.
He was Chairman and Chief Executive Officer of Westinghouse Electric Corporation
from 1983 to 1987. He is a director of Daltile Inc. and Atlantic Express.
A. William Hamill has been a director of the Company since December 1996.
He is Executive Vice President and Chief Financial Officer of United Dominion
Realty Trust, Inc., a position he has held since October 1999. Mr. Hamill was
Executive Vice President and Chief Financial Officer of Union Camp Corporation
from 1996 through April 2000. From 1993 through 1996, he was a partner in SCI
Investors Inc. and a director of Custom Papers Group Inc. From 1991 to 1993, he
was Senior Vice President and
23
<PAGE>
Chief Financial Officer of Specialty Coatings International Inc.. From 1975
through 1990, Mr. Hamill was with Morgan Stanley & Co. Incorporated, where he
was a Managing Director.
Hamish Maxwell has been a director of the Company since December 1994. Mr.
Maxwell was Chairman of the Executive Committee of the Board of Directors of
Philip Morris Companies Inc. from September 1991 through April 1995 and was
Chairman and Chief Executive Officer of such company from 1984 to 1991. He is
Chairman of WPP Group plc.
Jackson L. Schultz has been a director of the Company since November 1995.
Mr. Schultz joined Wells Fargo Bank in 1970, retiring in 1990 as Senior Vice
President responsible for Public and Governmental Affairs.
James H. Cox was appointed Executive VP, Business and Product Development
in May 2000. He previously served as Executive Vice President, Assistant
Secretary and Assistant Treasurer of the Company since September 1993. He was
President of Sola Optical USA, the Company's North American eyeglass lens
business from 1991 to 1998. He joined the Company as Vice President,
Manufacturing in 1985. Mr. Cox was formerly Executive Vice President of
Operations with Bausch & Lomb's Consumer Products Division.
Stephen J. Lee was appointed Vice President, Human Resources of the Company
in 1988 and was formerly Director of Personnel for Pilkington's Ophthalmic and
Insulation Divisions. Mr. Lee joined the Pilkington Group in 1974.
Steven M. Neil was appointed Executive Vice President, Finance, Chief
Financial Officer, Secretary and Treasurer in October 1997. Prior to joining
Sola, Mr. Neil was Vice President-Finance, Treasurer and Chief Financial Officer
of Perrigo Company from May 1995 to September 1997. He also served as President
of Perrigo International, Inc. from July 1996. Mr. Neil served as Vice
President-Controller of Perrigo Company from January 1993 to May 1995. Prior to
that time he served as Controller and Chief Accounting Officer with Applied
Magnetics Corporation, where he also served in other positions of increasing
responsibility since 1983.
Barry J. Packham was appointed Executive VP, Manufacturing and Logistics in
May 2000. He joined the Company as Vice President, Manufacturing Development in
February 1993. Mr. Packham was Managing Director of Ceramic Fuel Cells Ltd., a
research and development joint venture consortium in Melbourne, Australia, from
1991 to 1993 and formerly held manufacturing and general management positions
with Kodak and Leigh-Mardon Pty. Ltd.
Alan S. Vaughan was appointed Vice President European operations in January
2000. From June 1994 to January 2000 he served as Vice President, Worldwide Rx
Operations. Prior to that, he served as European Manufacturing and Technical
Director. Mr. Vaughan joined the Company in 1978 as Managing Director of Sola
ADC Lenses in Ireland. He was previously Director of Operations with Johnson &
Johnson (Ireland).
Adrian P. Walker joined the Company as Regional Director, Asia in November
1996. Mr. Walker held a number of general management positions with subsidiaries
of BTR plc. from March 1980 to November 1996. He was most recently General
Manager of ACI Laminates and Insulations, based in Melbourne, Australia from
July 1995 to October 1996. From August 1992 to July 1995 he was Managing
Director of Dunlop Slazenger (Far East), in Malaysia, and from April 1985 to
July 1992 was General Manager, Serck Services (Gulf) Ltd., in the United Arab
Emirates.
24
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The directors, executive officers and ten percent stockholders of the
Company are required to file reports of their ownership of the Company's Common
Stock with the Securities and Exchange Commission and the New York Stock
Exchange pursuant to Section 16(a) of the Securities Exchange Act of 1934. To
the Company's knowledge, based solely on a review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, all of such reporting requirements were satisfied during fiscal 2000.
Item 11. EXECUTIVE COMPENSATION
Incorporated by reference to the material included under the caption
"Compensation of Executive Officers" in the Company's proxy statement for the
fiscal year ended March 31, 2000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the material included under the caption
"Security Ownership of Certain Beneficial Owners and Managers" in the Company's
proxy statement for the fiscal year ended March 31, 2000.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the material included under the caption
"Certain Transactions" in the Company's proxy statement for the fiscal year
ended March 31, 2000.
25
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report:
1. Financial Statements. See Index to Consolidated Financial Statements
included on page F-1.
2. Financial Statement Schedules. See "Schedule II - Valuation and
Qualifying Accounts" included on page S-1.
Schedules other than those listed above have been omitted since they
are either not required, not applicable or the information is
otherwise included.
3. List of Exhibits. See Index of Exhibits included on page E-1.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K dated November 10, 1999 to report a
change in the Company's certifying public accountants from Ernst & Young
LLP to PricewaterhouseCoopers LLP.
The Company filed a report on Form 8-K dated March 30, 2000 to report the
appointment of Mr. Jeremy C. Bishop to succeed Mr. John E. Heine as
President and Chief Executive Officer.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SOLA INTERNATIONAL INC.
(Registrant)
Date: June 14, 2000 By: /s/Steven M. Neil
------------- -----------------
Steven M. Neil
Executive Vice President, Finance, Chief
Financial Officer, Secretary and
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/Irving S. Shapiro
--------------------
Irving S. Shapiro Chairman of the Board June 14, 2000
/s/Jeremy C. Bishop
-------------------
Jeremy C. Bishop President and Chief Executive June 14, 2000
Officer, Director (Principal
Executive Officer)
/s/Steven M. Neil
-----------------
Steven M. Neil Executive Vice President, Finance, June 14, 2000
Chief Financial Officer, Secretary
and Treasurer (Principal Financial
and Accounting Officer)
/s/Douglas D. Danforth
----------------------
Douglas D. Danforth Director June 14, 2000
/s/Hamish Maxwell
-----------------
Hamish Maxwell Director June 14, 2000
/s/Maurice J. Cunniffe
----------------------
Maurice J. Cunniffe Director June 14, 2000
/s/A. William Hamill
-------------------- Director June 14, 2000
A. William Hamill
/s/Jackson L. Schultz
---------------------
Jackson L. Schultz Director June 14, 2000
27
<PAGE>
SOLA INTERNATIONAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent Accountants........................................... F-2
Report of Ernst & Young LLP, Independent Auditors........................................................ F-3
Consolidated Balance Sheets as of March 31, 2000 and 1999................................................ F-4
Consolidated Statements of Income for the years ended March 31, 2000, 1999 and 1998...................... F-5
Consolidated Statements of Shareholders' Equity for the years ended March 31, 2000, 1999 and 1998........ F-6
Consolidated Statements of Cash Flows for the years ended March 31, 2000, 1999 and 1998.................. F-7
Notes to Consolidated Financial Statements............................................................... F-8
Quarterly Financial Data (unaudited)..................................................................... F-27
Financial Statement Schedule............................................................................. S-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Sola International, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of shareholders' equity and of cash flows,
present fairly, in all material respects, the financial position of Sola
International, Inc. and its subsidiaries at March 31, 2000 and the results of
their operations and their cash flows for the year ended March 31, 2000 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
San Jose, California
May 5, 2000 except for Note 18
as to which the date is June 5, 2000
F-2
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Shareholders
Sola International Inc.
We have audited the accompanying consolidated balance sheet of Sola
International Inc. as of March 31, 1999 and the related consolidated statements
of income, shareholders' equity, and cash flows for the years ended March
31, 1999 and 1998. Our audits also included the financial statement schedule for
the years ended March 31, 1999 and 1998 listed in the index at item 14(a). These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sola International Inc. as of March 31, 1999, and the consolidated results of
its operations and its cash flows for the years ended March 31, 1999 and 1998,
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule for the years ended March 31,
1999 and 1998, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/Ernst & Young LLP
Palo Alto, California
May 6, 1999
F-3
<PAGE>
SOLA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
March 31,
--------------------
<S> <C> <C>
Assets 2000 1999
-------- --------
Current assets:
Cash and cash equivalents.......................................................................... $ 18,852 $ 21,578
Trade accounts receivable, less allowance for doubtful accounts of $8,873 and $7,003 at March 31,
2000 and 1999, respectively....................................................................... 120,882 118,648
Inventories........................................................................................ 172,888 168,755
Other current assets............................................................................... 35,725 20,486
-------- --------
Total current assets........................................................................... 348,347 329,467
Property, plant and equipment, net.................................................................... 152,979 153,000
Goodwill and other intangibles, net................................................................... 195,465 195,345
Other long-term assets................................................................................ 18,242 21,487
-------- --------
Total assets................................................................................... $715,033 $699,299
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable to banks............................................................................. $ 18,741 $ 17,490
Current portion of long-term debt.................................................................. 4,676 4,510
Accounts payable................................................................................... 60,151 50,854
Accrued liabilities................................................................................ 43,326 31,313
Accrued payroll and related compensation........................................................... 28,303 26,468
Other current liabilities.......................................................................... 2,304 2,709
-------- --------
Total current liabilities...................................................................... 157,501 133,344
Long-term debt, less current portion.................................................................. 4,362 5,782
Bank debt............................................................................................. 105,200 103,000
Senior notes.......................................................................................... 99,672 99,632
Other long-term liabilities........................................................................... 20,496 25,179
-------- --------
Total liabilities.............................................................................. 387,231 366,937
-------- --------
Commitments and contingencies (14 and 15)
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 and 24,867 shares as of March
31, 2000 and March 31,1999 respectively issued and outstanding....................................... 249 249
Additional paid-in capital............................................................................ 281,467 280,525
Equity participation loans............................................................................ (10) (50)
Retained earnings..................................................................................... 71,319 70,578
Cumulative other comprehensive loss................................................................... (25,223) (18,940)
-------- --------
Total shareholders' equity..................................................................... 327,802 332,362
-------- --------
Total liabilities and shareholders' equity..................................................... $715,033 $699,299
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
SOLA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------
<S> <C> <C> <C>
2000 1999 1998
---- ---- ----
Net sales................................................ $538,680 $529,789 $547,735
Cost of sales............................................ 303,098 291,389 289,677
-------- -------- --------
Gross profit............................................ 235,582 238,400 258,058
-------- -------- --------
Research and development expenses........................ 20,010 18,757 18,303
Selling and marketing expenses........................... 101,337 96,609 93,993
General and administrative expenses...................... 64,000 57,977 53,056
Special charges.......................................... 29,861 27,306 --
-------- -------- --------
Operating expenses...................................... 215,208 200,649 165,352
-------- -------- --------
Operating income........................................ 20,374 37,751 92,706
Interest income.......................................... 1,451 913 664
Interest expense......................................... (20,760) (18,472) (17,418)
-------- -------- --------
Income before provision for income taxes, minority
interest and extraordinary item........................ 1,065 20,192 75,952
Provision for income taxes............................... (894) (8,394) (25,369)
Minority interest........................................ 570 723 509
-------- -------- --------
Income before extraordinary item........................ 741 12,521 51,092
Extraordinary item, loss on repurchase of
-- -- (5,939)
senior subordinated notes, net of tax................... -------- -------- --------
Net income............................................... $ 741 $ 12,521 $ 45,153
======== ======== ========
Earnings per share - basic:
Earnings per share before extraordinary item.......... $ 0.03 $ 0.51 $ 2.09
Extraordinary item..................................... -- -- (0.24)
-------- -------- --------
Earnings per share - basic............................. $ 0.03 $ 0.51 $ 1.85
======== ======== ========
Weighted average common shares outstanding............... 24,887 24,794 24,400
======== ======== ========
Earnings per share - diluted:
Earnings per share before extraordinary item........... $ 0.03 $ 0.49 $ 2.00
Extraordinary item..................................... -- -- (0.23)
-------- -------- --------
Earnings per share - diluted........................... $ 0.03 $ 0.49 $ 1.77
======== ======== ========
Weighted average common and dilutive securities
outstanding............................................. 25,069 25,412 25,547
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
SOLA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share data)
<TABLE>
<CAPTION>
Cumulative
Additional Equity Other Total
Common Stock Paid-in Participation Retained Comprehensive Shareholders'
Shares Value Capital Loans Earnings Income (loss) Equity
-------- ------ ---------- ------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1997.................. 24,263 $243 $271,167 $(270) $12,904 $ 254 $284,298
Comprehensive income
Net income.............................. 45,153 45,153
Foreign currency translation
adjustments........................... (9,994) (9,994)
--------
Total comprehensive income................ 35,159
460 shares of $0.01 par value common
stock issued under stock option plans... 460 4 5,330 5,334
Tax benefit from exercise of stock
options................................. 2,191 2,191
Repayment of equity participation loans... 40 40
------ ---- -------- ----- ------- -------- --------
Balances, March 31, 1998.................. 24,723 247 278,688 (230) 58,057 (9,740) 327,022
Comprehensive income
Net income.............................. 12,521 12,521
Foreign currency translation
adjustments........................... (9,200) (9,200)
--------
Total comprehensive income................ 3,321
144 shares of $0.01 par value common
stock issued under stock option plans... 144 2 1,534 1,536
Tax benefit from exercise of stock
options................................. 303 303
Repayment of equity participation loans... 180 180
------ ---- -------- ----- ------- -------- --------
Balances, March 31, 1999.................. 24,867 249 280,525 (50) 70,578 (18,940) 332,362
Comprehensive income
Net income.............................. 741 741
Foreign currency translation
adjustments........................... (6,283) (6,283)
--------
Total comprehensive loss.................. (5,542)
70 shares of $0.01 par value common
stock issued under stock option plans... 70 - 686 686
Stock compensation........................ 200 200
Tax benefit from exercise of stock
options................................. 56 56
Repayment of equity participation loans... 40 40
------ ---- -------- ----- ------- -------- --------
Balances, March 31, 2000.................. 24,937 $249 $281,467 $ (10) $71,319 $(25,223) $327,802
====== ==== ======== ===== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
SOLA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------
2000 1999 1998
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 741 $ 12,521 $ 45,153
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest in earnings....................................... (570) (723) (509)
Depreciation and amortization....................................... 27,700 25,041 22,140
Provision for excess and obsolete inventory......................... 7,293 5,620 1,833
Provision for doubtful accounts..................................... 2,568 2,716 1,337
Increase (decrease) in net deferred taxes........................... 3,170 (7,855) 7,750
Gain on disposal/sale of property, plant and equipment.............. (24) (65) (82)
Changes in assets and liabilities:
Trade accounts receivable......................................... (6,616) (1,313) (21,242)
Inventories....................................................... (13,286) (5,358) (38,231)
Prepaids and other assets......................................... (11,361) (3,847) (6,022)
Accounts payable--trade........................................... 4,306 (16,891) 2,710
Accrued and other current liabilities............................. 4,987 (8,362) 3,652
Tax benefit from exercise of stock options........................ 56 303 2,191
Other long-term liabilities....................................... 484 1,460 174
-------- -------- --------
Net cash provided by operating activities....................... 19,448 3,247 20,854
-------- -------- --------
Cash flows from investing activities:
Purchases of businesses............................................. (4,059) (8,601) --
Investments in trade investments and joint ventures (5,591) -- --
Capital expenditures................................................ (20,060) (30,458) (39,497)
Other investing activities.......................................... 1,033 546 (1,730)
-------- -------- --------
Net cash used in investing activities........................... (28,677) (38,513) (41,227)
-------- -------- --------
Cash flows from financing activities:
Payments on equity participation loans/exercise of stock options.... 926 1,716 5,374
Net receipts under notes payable to banks........................... 7,947 15,611 2,731
Borrowings on long-term debt........................................ 944 5,031 --
Payments on long-term debt.......................................... (4,892) (4,255) (4,628)
Net receipts under bank debt........................................ 2,200 4,427 22,374
Issuance of senior notes............................................ -- -- 99,596
Repurchase of senior subordinated notes............................. -- -- (93,152)
-------- -------- --------
Net cash provided by financing activities....................... 7,125 22,530 32,295
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents........ (622) (130) (1,879)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents................ (2,726) (12,866) 10,043
Cash and cash equivalents at beginning of year...................... 21,578 34,444 24,401
-------- -------- --------
Cash and cash equivalents at end of year............................ $ 18,852 $ 21,578 $ 34,444
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Basis of Presentation
Sola International Inc. ("Company") designs, manufactures and distributes a
broad range of eyeglass lenses, primarily focusing on the fast growing plastic
lens segment of the global market. The Company operates in one business segment.
The accompanying consolidated financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States.
2. Summary of Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly-owned and controlled foreign subsidiaries. All significant
transactions between the entities have been eliminated.
Cash and Cash Equivalents:
Cash equivalents consist primarily of short-term investments with an original
maturity of three months or less.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost and are depreciated on a
straight-line basis over the estimated useful lives of the related assets
(buildings--10 to 50 years; plant and office equipment--2 to 20 years).
Leasehold improvements and leased equipment are amortized over the lesser of
their useful lives or the remaining term of the related leases.
Impact of recently issued accounting standards:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
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
currently evaluating the impact of the application of the new rules on the
Company's 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 first 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, (FIN44), 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
F-8
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 has not yet determined the
impact, if any, of adopting this Interpretation.
Intangible Assets:
Intangible assets, including trademarks, patents and licenses, are stated at
cost and amortized on a straight-line basis over their estimated useful lives of
3 to 15 years. Legal costs incurred by the Company in successfully defending its
patents are capitalized to patent costs and amortized over the remaining life of
the patent. Goodwill, which represents the excess of acquisition cost over the
net assets acquired in business combinations amounting to $194.3 million and
$193.9 million as of March 31, 2000 and 1999, respectively, is being amortized
on a straight-line basis over periods ranging from 10 to 40 years (primarily 40
years). As of March 31, 2000 and 1999 accumulated amortization was $29.7 million
and $23.7 million, respectively.
Debt issuance costs are being amortized to interest expense over the
respective lives of the debt instruments which range from 5 to 10 years. As of
March 31, 2000 and 1999, accumulated amortization was $1.3 million and $0.9
million, respectively. As a result of repurchasing the Company's 9 5/8% Senior
Subordinated Notes in fiscal 1998, the Company wrote off $1.5 million of debt
issuance costs reflected on the statement of income, together with the premium
over accreted value, as an extraordinary item, net of tax.
Long-Lived Assets:
Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. For purposes of evaluating the recoverability
of long-lived assets, the recoverability test is performed using undiscounted
net cash flows for long-lived assets, primarily goodwill and property, plant and
equipment.
Foreign Currency Translation:
The assets and liabilities and revenue and expense accounts of the Company's
foreign subsidiaries operating in non-highly inflationary economies have been
translated using the exchange rate at the balance sheet date and the weighted
average exchange rate for the period, respectively.
The net effect of the translation of the accounts of the Company's
subsidiaries has been included in equity as cumulative other comprehensive
income (loss). Adjustments that arise from exchange rate changes on transactions
denominated in a currency other than the local currency are included in income
as incurred.
The Company has operations in Brazil, a hyper-inflationary country until
recently, for which the functional currency is the U.S. dollar. All translation
and transaction adjustments are included in determining net income. In January
1999 the Brazilian Real was devalued resulting in pretax charges of $0.3 million
and $5.9 million in fiscal 2000 and fiscal 1999, respectively, included in
special charges (see Note 10).
Revenue Recognition:
Sales and related cost of sales are recognized upon shipment of product. The
Company's principal customers are wholesale distributors and processing
laboratories, retail chains, superoptical retail stores, independent eyecare
practitioners and sunglass manufacturers. No individual customer accounts for
F-9
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
more than 10% of net sales. The Company generally does not require collateral
from its customers, but performs on-going credit evaluations of its customers.
Advertising and Promotion Costs:
The Company's policy is to expense advertising and promotion costs as they
are incurred. The Company's advertising and promotion expenses were
approximately $7.5 million, $9.3 million, and $12.3 million for fiscal 2000,
1999, and 1998, respectively.
Income Taxes:
The Company accounts for income taxes under the provisions of FASB Statement
No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities, using enacted tax
rates in effect for the year in which the differences are expected to reverse. A
valuation allowance is established when necessary to reduce deferred tax assets
to amounts expected to be realized.
Comprehensive Income:
Comprehensive income includes currency translation adjustments which are not
adjusted for income taxes as they relate to indefinite investments in non-U.S.
subsidiaries.
Use of Estimates:
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Business Risk and Concentration of Credit Risks:
The Company operates manufacturing and distribution sites in all major
regions of the world--North America (including Mexico), Europe, and Rest of
World. As a result, a significant portion of the Company's sales and operations
are subject to certain risks, including adverse developments in the foreign
political and economic environment, exchange rates, tariffs and other trade
barriers, staffing and managing foreign operations and potentially adverse tax
consequences. Although the Company and its predecessors have been successfully
conducting business outside of the United States since its inception in 1960,
there can be no assurance that any of these factors will not have a material
adverse effect on the Company's financial condition or results of operations in
the future.
Cash and cash equivalents are invested in deposits with major banks in the
United States and in countries where subsidiaries operate. Deposits in these
banks may exceed the amount of insurance provided on such deposits. The Company
has not experienced any losses on its deposits of cash and cash equivalents.
Financial Instruments with Off-Balance-Sheet Risk:
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to reduce its exposure to currency and interest
rate risk. Gains and losses due to rate fluctuations on such transactions are
recognized in the same period as the items being hedged. Cash flows related to
these gains and losses are reported as operating or financing activities in the
accompanying consolidated statements of cash flows. As of March 31, 2000,
certain of the Company's foreign subsidiaries had entered into forward contracts
for intercompany purchase commitments, which are not significant, in amounts
other than their home currency. The carrying amount of the foreign
F-10
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
exchange contracts approximates fair value, which has been estimated based on
current exchange rates. The forward exchange contracts generally have varying
maturities up to 9 months. Unless noted otherwise, the Company does not require
collateral or other security to support financial instruments with credit risk.
Earnings Per Share:
The following table sets forth the computation of basic and diluted earnings
per share for the fiscal years ended March 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------
2000 1999 1998
------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C>
Numerator:
Income before extraordinary item................. $ 741 $12,521 $51,092
Extraordinary item, loss on repurchase of
senior subordinated notes, net of tax.......... -- -- (5,939)
------- ------- -------
Net income................................... $ 741 $12,521 $45,153
======= ======= =======
Denominator:
Denominator for basic earnings per
share -
Weighted average common shares
outstanding................................ 24,887 24,794 24,400
Effect of dilutive securities:
Employee stock options..................... 182 618 1,147
------- ------- -------
Weighted average common shares and
dilutive securities outstanding............ 25,069 25,412 25,547
======= ======= =======
Basic earnings per share:
Income before extraordinary item................. $ 0.03 $ 0.51 $ 2.09
Extraordinary item............................... -- -- (0.24)
------- ------- -------
Net income................................... $ 0.03 $ 0.51 $ 1.85
======= ======= =======
Diluted earnings per share:
Income before extraordinary item................. $ 0.03 $ 0.49 $ 2.00
Extraordinary item............................... -- -- (0.23)
------- ------- -------
Net income................................... $ 0.03 $ 0.49 $ 1.77
======= ======= =======
</TABLE>
Options to purchase 2.0 million shares of common stock at a range of $9.71
to $41.44 per share and 1.7 million shares of common stock at a range of $16.50
to $41.44 per share were outstanding as of March 31, 2000 and March 31, 1999,
respectively, but were not included in the computation of the diluted earnings
per share for fiscal 2000 and fiscal 1999 respectively, because the options'
exercise price was greater than the average market price of the common shares.
There were no shares excluded from the computation of diluted earnings per share
in fiscal 1998.
3. Inventories
March 31,
-----------------------
2000 1999
---- ----
(in thousands)
Raw materials................................ $ 15,427 $ 15,714
Work in progress............................. 7,273 6,551
Finished goods............................... 105,274 102,862
Molds........................................ 44,914 43,628
-------- --------
$172,888 $168,755
======== ========
F-11
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Molds comprise mainly finished goods for use by manufacturing affiliates in
the manufacture of spectacle lenses.
4. Property, Plant and Equipment
March 31,
----------------
2000 1999
---- ----
(in thousands)
Land, buildings and leasehold improvements.......... $ 47,793 $ 47,465
Machinery and office equipment...................... 176,744 163,864
Equipment under capital leases...................... 2,699 463
-------- --------
227,236 211,792
Less accumulated depreciation and amortization...... 74,257 58,792
-------- --------
$152,979 $153,000
======== ========
Depreciation expense for fiscal 2000, 1999 and 1998 was $ 21.0 million, $18.6
million and $14.3 million, respectively. Accumulated depreciation on equipment
under capital leases was $2.4 million at March 31, 2000.
5. Notes Payable to Banks
Notes payable to banks at March 31, 2000 represent borrowings generally
denominated in foreign currencies under several foreign credit agreements with
lenders at interest rates ranging from 1.63% to 10.00% and 29.0 % to 36.87% for
Brazilian Real based borrowings. The weighted average interest rates as of March
31, 2000 and 1999 were 12.67 % and 7.87%, respectively. As of March 31, 2000,
the Company had total unused lines of credit amounting to $15.5 million and was
in compliance with minimum net worth requirements on agreements with certain
foreign banks.
F-12
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Long-Term Debt
March 31, 2000
----------------
(in thousands)
Uncollateralized promissory note, interest 6.5% at
March 31, 2000, principal and
interest payable through June 2001............................... $4,000
Uncollateralized term loans, interest rates varying
from 4.00% to 15.00% at March 31, 2000, principal and
interest payable through December 2008........................... 4,320
Uncollateralized term loan, interest 1.85% at March 31, 2000,
principal and interest payable through June 2008................. 638
Other............................................................. 80
------
9,038
Less current portion.............................................. 4,676
-----
Long-term debt, less current portion.............................. $4,362
======
Aggregate annual maturities of long-term debt over the next five years and
thereafter are as follows:
Period Ending March 31, (in thousands)
-----------------------
2001................................................. $4,676
2002................................................. 3,412
2003................................................. 191
2004................................................. 153
2005................................................. 210
Thereafter........................................... 396
------
Total................................................ $9,038
======
The Company believes that as of March 31, 2000, the fair value of its long-
term debt approximates the carrying value of those obligations. The fair value
of the Company's long-term debt is estimated based on quoted market prices for
similar issues with the same interest rates that would be available to the
Company for similar debt obligations.
7. Bank Credit Agreement
During fiscal 1998 the Company amended its bank credit agreement with The
Bank of America National Trust and Savings Association, for itself and as agent
for a syndicate of other financial institutions ("Amended Agreement"). The
Amended Agreement increased the Company's multicurrency revolving facility to
$300 million. Borrowings, amounting to $105.2 million and $103.0 million as of
March 31, 2000 and 1999, respectively, are divided into two tranches. Tranche A
permits borrowings up to $30 million in either U.S. dollars or foreign
currencies, to be used for working capital and consummating certain permitted
acquisitions. Tranche B permits borrowings of up to $270 million and can be used
for working capital purposes, outstanding letters of credit ($1.2 million as of
March 31, 2000) and consummating certain permitted acquisitions. The Tranche A
Facility matures on October 31, 2000 and the Tranche B Facility matures on May
31, 2001. The Company has the intent and ability to renew the Amended Agreement
beyond March 31, 2000 and therefore the balance is classified as long term. In
addition, the Amended Agreement changed certain financial covenants, removed the
requirement for foreign subsidiary guarantees under the Tranche A Facility,
increased the basket for incurring other unsecured indebtedness to $150 million,
and deleted the term facility portion. As of March 31, 2000 unused borrowings
under the facility amount to $193.6 million.
Borrowings under the Tranche A and Tranche B revolvers (other than swing line
loans, which may only be Base Rate loans) may be made as Base Rate Loans or LIBO
Rate Loans. Base Rate Loans bear
F-13
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interest at rates per annum equal to the higher of (a) 0.50% per annum above the
latest Federal Funds Rate, or (b) the Bank of America Reference Rate ( 9% at
March 31, 2000, there were no base rate loans as of March 31, 1999). LIBO Rate
Loans bear interest at a rate per annum equal to the sum of the LIBO Rate and a
margin varying from 0.450% to 0.750% based on the Company's leverage ratio
(6.73% as of March 31, 2000 and 5.56% as of March 31, 1999). Fixed rate
borrowings in foreign currencies bear interest at rates per annum equal to the
referenced currency's local IBOR plus a margin varying from 0.450% to 0.750%
based on the Company's leverage ratio. Local currency Base Rate Loans are also
available at a spread similar to US Base Rate Loans described above.
The Amended Agreement contains a number of covenants, including, among
others, covenants restricting the Company and its subsidiaries with respect to
the incurrence of indebtedness (including contingent obligations), the creation
of liens, the making of certain investments and loans, engaging in unrelated
businesses, transactions with affiliates, the consummation of certain
transactions such as sales of substantial assets, mergers or consolidations,
margin stock purchases and other transactions. The Amended Agreement also
restricts the ability of the Company and its subsidiaries to make restricted
payments in the nature of, among other things, (i) declaring, making or paying
dividends or other distributions in excess of prescribed levels and (ii)
purchasing, redeeming or retiring shares of the Company's capital stock in
excess of prescribed levels. The Company and its subsidiaries are also required
to comply with certain financial tests and maintain certain financial ratios.
8. Senior Notes
The Company's 6 7/8% Senior Notes ("Notes") were issued under an indenture
dated March 19, 1998, among the Company and State Street Bank and Trust Company
of California, N.A., as Trustee (the "Indenture"). The Notes are unsecured
senior obligations of the Company, limited to $100 million aggregate principal
amount at maturity, and will mature on March 15, 2008. Interest on the notes is
payable semiannually on March 15 and September 15 of each year.
The Notes will be redeemable, as a whole or from time to time in part, at the
option of the Company on any date (a "Redemption Date") at a redemption price
equal to the greater of (i) 100% of the principal amount of the Notes to be
redeemed or (ii) the sum of the present values of the Remaining Scheduled
Payments (as defined) thereon discounted to such Redemption Date on a semiannual
basis at the Treasury Rate (as defined) plus 20 basis points, plus in either
case accrued interest (as defined).
The Notes rank pari passu to all other Senior Indebtedness, as defined in the
Indenture, of the Company. The Company has determined the estimated fair value
of its Senior Notes using available market information. The estimated fair
value, based on the most recent market trades, of the Senior Notes was $52.0
million and $92.982 million at March 31, 2000 and March 31, 1999, respectively,
and the carrying amounts were $99.672 million and $99.632 million, respectively.
The fair value estimates do not necessarily reflect the values the Company could
realize in the current market.
During fiscal 1998 the Company repurchased all of its 9 5/8% Senior
Subordinated Notes due 2003. As a result of the purchase the Company recorded an
extraordinary charge of $5.9 million for fiscal 1998 resulting from the write-
off of unamortized debt issuance costs and premium over accreted value, net of
tax of $3.8 million. The repurchase was funded by borrowings under the Amended
Agreement.
9. Common Stock
Common Stock
The Company entered into loan agreements with certain members of the
Company's management to enable them to invest in the Company's common stock. As
of March 31, 2000 and 1999, loans amounting to approximately $10,000 and
$50,000, respectively, bearing interest at 7.5% per annum, payable quarterly,
were outstanding under this plan. These loans are collateralized by the common
stock and have been reflected as a reduction in shareholders' equity on the
consolidated balance sheets.
F-14
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shareholder Rights Plan
On August 26, 1998 the Company's Board of Directors adopted a Shareholder
Rights Plan and declared a dividend distribution to be made to shareholders of
record on September 9, 1998 of one Right for each share of the Company's
outstanding common stock. The rights contain provisions which are intended to
protect the Company's shareholders in the event of an unsolicited and unfair
attempt to acquire the Company. The Company is entitled to redeem the Rights at
$.01 per Right at any time before a buyer acquires a 15 percent position in the
Company. The Rights will expire on August 27, 2008, unless redeemed or
exercised.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
On February 23, 1995 all outstanding stock options under the previous
corporate structure were assumed by the Company and converted into options to
acquire shares of the Company's Common Stock, with the number of shares subject
to such option and exercise price thereof adjusted appropriately (the "Existing
Option Plan"). The Existing Option Plan has been amended to provide that no new
options will be granted thereunder.
The Company adopted the Sola International Inc. Stock Option Plan (the
"International Plan"), effective February 15, 1995. On August 14, 1998 and
August 16, 1996 the shareholders of the Company ratified increases of 1,690,000
and 500,000, respectively, to the number of options available for issuance under
the International Plan. The maximum number of shares of Common Stock with
respect to which options may be granted under the International Plan is
3,045,868 shares plus, subject to the requirements of Rule 16b-3 of the
Securities Exchange Act of 1934, if applicable, the number of shares of Common
Stock subject to existing options under the Existing Option Plan, which expire
or terminate without exercise for any reason, which number of shares underlying
Existing Options shall not exceed 1,645,219. Under the International Plan
certain key employees, and non employee directors and/or creditors of the
Company and its subsidiaries and affiliates (each an "Optionee") are eligible to
receive non-qualified stock options (the "International Options") to acquire
shares of common stock of the Company. International Options granted to an
Optionee are evidenced by an agreement between the Optionee and the Company
which contains terms not inconsistent with the International Plan, which the
committee appointed to administer the International Plan deemed necessary or
desirable (the "International Option Agreement").
Pursuant to the Existing Option Plan and the International Plan ("Plans"),
unless otherwise set forth in an Existing Option Agreement or an International
Option Agreement, 20% of the Options granted to an Optionee vest on the date of
grant, with an additional 20% vesting on each successive one-year anniversary of
the date of grant. Options not previously vested become fully vested in the
event of a sale or other disposition of 80% or more of the outstanding capital
stock or substantially all of the assets of the Company, or upon a Merger or
consolidation of the Company and its subsidiaries and affiliates unless the
merger or consolidation is one in which the Company is the surviving corporation
or one in which control of the Company and its subsidiaries and affiliates does
not change (a "Termination Event").
However, Existing Options which are not exercised on or prior to a
Termination Event lapse upon the closing of a Termination Event. All non-vested
Options of an Optionee lapse upon such Optionee's termination of employment for
any reason. An Optionee's vested Options lapse 45 days after termination of such
Optionee's employment with the Company and its subsidiaries and affiliates for
any reason other than death or disability, in which case such options terminate
180 days after such
F-15
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
termination; provided, however, that such options lapse immediately in the event
an Optionee's employment with the Company and its subsidiaries and affiliates is
terminated for cause.
Pro Forma Disclosures
Pro forma information regarding net income and earnings per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions: risk-free interest rates of
4.95% - 5.90%, 5.67% and 5.67%, no dividend yield, volatility factors of the
expected market price of the Company's common stock of .519, .481 and .373, and
a weighted-average expected life of the option of 4 years, for fiscal 2000, 1999
and 1998, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
Year Ended March 31,
------------------------------------
2000 1999 1998
----- ------ ------
(in thousands, except per share data)
Pro forma net (loss) income...... $(1,590) $10,606 $44,157
Pro forma (loss) earnings per
share:
Basic.......................... $ (0.06) $ 0.43 $ 1.81
Diluted........................ $ (0.06) $ 0.42 $ 1.73
The pro forma effect on net income during the phase-in period of SFAS 123 may
not be representative of the effects on pro forma net income in future periods.
F-16
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Option Activity
A summary of the Company's stock option activity, and related information for
fiscal 1998, 1999 and 2000 follows:
<TABLE>
<CAPTION>
Number of Securities Weighted Average
Underlying Options Exercise Price
-------------------- ---------------
(in thousands, except per share data)
<S> <C> <C>
Options outstanding as of March 31, 1997........................ 2,429 $15.43
Options granted during fiscal 1998............................ 413 33.08
Options exercised in fiscal 1998.............................. (460) 11.53
Options cancelled in fiscal 1998.............................. (153) 34.44
------ ------
Options outstanding as of March 31, 1999........................ 2,229 18.20
Options granted during fiscal 1999 whose market price
equals the grant price on date of grant.................... 191 32.25
Options granted during fiscal 1999 whose market price
is less than the grant price on date of grant.............. 424 27.13
Options exercised in fiscal 1999.............................. (144) 10.89
Options cancelled in fiscal 1999.............................. (57) 30.18
------ ------
Options outstanding as of March 31, 1999........................ 2,643 20.79
Options granted during fiscal 2000 whose market price
equals the grant price on date of grant.................... 600 15.63
Options exercised in fiscal 2000.............................. (70) 9.71
Options cancelled in fiscal 2000.............................. (300) 24.27
------ ------
Options outstanding as of March 31, 2000........................ 2,873 $19.62
======
Options exercisable at:
March 31, 2000................................................ 2,003 $18.08
March 31, 1999................................................ 1,824 $16.51
March 31, 1998................................................ 1,568 $14.14
Weighted average fair value of options granted during
fiscal year:
2000.......................................................... $ 7.13
1999.......................................................... $ 7.83
1998.......................................................... $12.46
</TABLE>
The following table summarizes stock options outstanding at March 31, 2000:
<TABLE>
<CAPTION>
Outstanding at Weighted Average Exercisable at
Range of March 31, 2000 Remaining Weighted Average March 31, 2000 Weighted Average
Exercise Price (in thousands) Contractual Life Exercise Price (in thousands) Exercise Price
--------------- -------------- ----------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 9.71-$ 9.71 895 3.81 $ 9.71 895 $ 9.71
$13.81-$16.50 707 7.34 15.70 415 16.21
$16.86-$27.13 592 8.38 23.81 239 24.24
$28.00-$32.31 314 7.26 30.20 208 30.17
$33.00-$41.44 365 7.06 35.65 246 35.50
------------- ----- ---- ------ ----- ------
$ 9.71-$41.44 2,873 6.41 $19.62 2,003 $18.08
============= ===== ---- ------ ===== ------
</TABLE>
F-17
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Special Charges
In fiscal 2000, primarily during the fourth quarter, the Company recorded
pretax special charges of $29.9 million. The pre-tax special charges are
comprised of the following:
(in thousands)
Charges associated with the consolidation of manufacturing
facilities in Mexico............................................... $ 4,000
Charges associated with work-force reductions........................ 6,650
Accounts receivable and net asset write-downs associated
with economic slow-down in Asia and currency devaluation
in Brazil........................................................... 3,069
Inventory write-down associated with product standardization......... 7,242
Charges associated with facility closures and production transfers... 8,900
-------
Total................................................................ $29,861
=======
The Company commenced consolidation of its Mexican manufacturing operations
in fiscal year 1999 and completed the consolidation in fiscal year 2000.
Included in the Mexican manufacturing facilities consolidation charge of $4.0
million, are write-downs of molds ($ 1.4 million), and costs associated with
combining the two manufacturing operations, including incurred production cost
inefficiencies ($2.6 million).
The special charge amount includes $6.7 million relating to work-force
reductions in North America, Europe and Australia, (approximately 190 employees
from manufacturing, sales, marketing and administration have been identified and
notified). The Company anticipates additional charges associated with further
reductions in force in the first half of fiscal 2001. Of the work-force
reductions, approximately $0.4 million had been paid at March 31, 2000.
The economic slow-down in Asia during fiscal 1999 severely impacted liquidity
of customers. The Company recorded a charge of $2.5 million for provision
against collection of accounts receivable in the affected economies. The
Brazilian Real dramatically devalued in January 1999 and such devaluation
continued in fiscal year 2000 resulting in the Company recording a charge of $
0.3 million.
The special charge includes $7.2 million related to the write-down of
inventories which were identified as excess as a result of the Company's efforts
to globally standardize product specifications. The Company anticipates
additional write-downs during fiscal year 2001 as the impact of additional
product standardization become quantifiable.
During fiscal year 2000, the Company commenced the transfer of high volume
production to low cost manufacturing locations and the consolidation of certain
manufacturing expertise into fewer production facilities. As a result, charges
of $6.2 million were incurred related to production cost inefficiencies and $2.7
million related to redundant equipment write-down and facility closure costs.
The Company anticipates incurring additional charges in fiscal year 2001 as
additional production transfers are completed.
In fiscal year 1999, primarily in the fourth quarter, the Company recorded
special charges of $27.3 million. The charges consisted of $8.0 million related
to the consolidation of manufacturing facilities in Mexico (including $4.3
million of costs and production inefficiencies associated with combining the two
operations, mold and equipment write-downs of $3.0 million and employee
termination costs of $0.7 million), $3.0 million related to global work force
reductions, $4.3 million in write-downs of accounts receivable and inventory
associated with economic slowdowns in Asia and Brazil and $12.1 million related
to the impact on asset realization (including losses of $6.2 million related to
the Company's inability to collect the accounts receivable from the original
sale of the Brazilian frame and equipment business) resulting from the dramatic
devaluation of the Brazilian Real in January 1999. Employee termination costs of
$2.7 million accrued for at March 31, 1999 were fully paid in fiscal 2000.
F-18
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Defined Contribution Plans
The Company sponsors several defined contribution plans covering
substantially all U.S. and U.K. employees. The plans provide for limited Company
matching of participants' contributions. Contributions to all defined
contribution plans charged to operations were $1.3 million, $1.3 million and
$1.2 million for fiscal 2000, 1999 and 1998, respectively.
12. Defined Benefit Retirement Plans
The Company participates in a defined benefit pension plan ("Domestic Pension
Plan") covering substantially all full-time domestic employees. The Company also
participates in a contributory defined benefit pension plan covering certain
Australian employees ("International Pension Plan").
Effective April 1, 1998, the Company adopted FASB Statement No. 132,
"Employers' Disclosures about Pensions and Postretirement Benefits" ("SFAS
132"), which standardizes the disclosure requirements for pensions and other
postretirement benefits. The Statement addresses disclosure only. It does not
change the measurement or recognition of these plans. There was no effect on
financial position or net income as a result of adopting SFAS 132.
F-19
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following provides a reconciliation of the changes in the plans'
benefit obligations and fair value of assets and a statement of the funded
status for both the Domestic and the International Pension Plans.
<TABLE>
<CAPTION>
Domestic Pension International Pension
Plan Plan
Year ended March 31, (in thousands) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Reconciliation of benefit obligation:
Benefit obligation - beginning of year................. $ 20,676 $ 16,884 $ 11,904 $ 11,484
Service cost........................................... 2,608 2,637 1,581 1,217
Interest cost.......................................... 1,302 1,117 737 647
Participant contributions.............................. -- -- 193 248
Actuarial (gain)/loss.................................. (2,873) 179 (44) --
Benefit payments....................................... (222) (141) (1,092) (1,295)
Other.................................................. -- -- 161 66
Effect of exchange rates............................... -- -- (588) (463)
-------- -------- -------- --------
Benefit obligation - end of year....................... $ 21,491 $ 20,676 $ 12,852 $ 11,904
======== ======== ======== ========
<CAPTION>
Domestic Pension International Pension
Plan Plan
Year ended March 31, (in thousands) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Reconciliation of fair value of plan assets:
Fair value of plan assets - beginning of year.......... $ 13,284 $ 10,441 $ 13,475 $ 12,612
Actual return on plan assets........................... 4,924 531 1,830 2,015
Employer contributions................................. 2,332 2,453 697 328
Participant contributions.............................. -- -- 193 248
Benefit payments....................................... (222) (141) (1,092) (1,295)
Other.................................................. -- -- (198) 66
Effect of exchange rates............................... -- -- (654) (499)
-------- -------- -------- --------
Fair value of plan assets - end of year................ $ 20,318 $ 13,284 $ 14,251 $ 13,475
======== ======== ======== ========
<CAPTION>
Domestic Pension International Pension
Plan Plan
Year ended March 31, (in thousands) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Funded status:
Funded status at March 31.............................. ($1,173) ($7,392) $ 1,399 $ 1,571
Unrecognized transition asset.......................... -- -- (111) (139)
Unrecognized (gain) loss............................... (4,362) 2,262 (2,991) (2,718)
-------- -------- -------- --------
Accrued pension cost................................... ($5,535) ($5,130) ($1,703) ($1,286)
======== ======== ======== ========
</TABLE>
The assumptions used in the measurement of the Company's benefit obligation
are shown in the following table:
<TABLE>
<CAPTION>
Domestic Pension International Pension
Plan Plan
Year ended March 31, 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Discount rate.......................................... 7.00% 6.50% 6.25% 6.25%
Expected long-term rate of return on plan
assets................................................ 8.00% 8.00% 8.00% 8.00%
Rate of increase in future compensation
levels................................................ 5.00% 5.00% 4.50% 4.00%
</TABLE>
-20-
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic pension costs include the following components:
<TABLE>
<CAPTION>
Domestic Pension Plan International Pension Plan
Year ended March 31, (in thousands) 2000 1999 1998 2000 1999 1998
------- ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Service cost.......................... $ 2,608 $2,637 $1,862 $ 1,581 $1,217 $1,433
Interest cost......................... 1,302 1,117 810 737 647 650
Expected return on plan
assets............................. (1,173) (942) (576) (1,077) (924) (895)
Amortization of transition asset...... -- -- -- (24) (23) (26)
Amortization of (gain) loss........... -- 83 -- (90) (34) (34)
------- ------ ------ ------- ------ ------
Net periodic benefit cost............. $ 2,737 $2,895 $2,096 $ 1,127 $ 883 $1,128
======= ====== ====== ======= ====== ======
</TABLE>
13. Income Taxes
The domestic and foreign components of income before provision for income
taxes, minority interest and extraordinary item are as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------
2000 1999 1998
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Domestic................................... $(12,120) $ 9,681 $42,918
Foreign.................................... 13,185 10,511 33,034
-------- ------- -------
$ 1,065 $20,192 $75,952
======== ======= =======
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------
2000 1999 1998
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Current:
Federal and State........................... $(9,951) $ 6,128 $ 9,082
Foreign..................................... 7,675 4,025 8,006
Deferred:
Federal and State........................... 2,211 (4,918) 7,808
Foreign..................................... 2,420 2,270 4,891
Valuation allowance adjustment............... (1,461) 889 (4,418)
------- ------- -------
$ 894 $ 8,394 $25,369
======= ======= =======
</TABLE>
During fiscal 2000, 1999 and 1998, the Company recognized certain tax
benefits related to stock option plans in the amount of $0.1 million, $0.3
million and $2.2 million, respectively. Such benefits were recorded as a
reduction of income taxes payable and an increase in additional paid-in capital.
-21-
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation between income tax provisions computed at the U.S. federal
statutory rate and the effective rate reflected in the statements of income is
as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------
2000 1999 1998
------ ---- ----
<S> <C> <C> <C>
Provision at statutory rate................................ 35.0% 35.0% 35.0%
State tax provision, net of federal effect................. 2.0 3.9 3.5
Valuation allowance, excluding special charges............. (137.2) (5.7) (5.8)
Valuation allowance, relating to special charges........... -- 10.1 --
Special charges at differing statutory rates............... 217.8 -- --
Income of foreign subsidiaries at differing statutory
rates.................................................... -- 2.1 (1.3)
Other...................................................... (33.7) (3.8) 2.0
------ ---- ----
83.9% 41.6% 33.4%
====== ==== ====
</TABLE>
The following is an analysis of the income tax provision for fiscal 2000
and fiscal 1999, before and after special charges:
<TABLE>
<CAPTION>
Income before Provision
provision for for income Effective
Fiscal 2000 income taxes taxes rate
----------- -------------- ------------- ---------
(in thousands)
<S> <C> <C> <C>
Before special charges..................... $ 30,926 $ 9,644 31.2%
Special charges............................ (29,861) (8,750) (29.3)%
-------- ------- ======
Total.................................... $ 1,065 $ 894 83.9%
======== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Income before Provision
provision for for income Effective
Fiscal 1999 income taxes taxes rate
----------- -------------- ------------- ---------
(in thousands)
<S> <C> <C> <C>
Before special charges........................ $ 47,498 $15,156 31.9%
Special charges............................... (27,306) (6,762) (24.8)%
-------- ------- ======
Total....................................... $ 20,192 $ 8,394 41.6%
======== ======= ======
</TABLE>
F-22
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
March 31,
-------------------------
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowances for doubtful
accounts........................................................... $ 2,674 $ 2,361
Inventories, principally due to reserves............................ 4,342 3,403
Property, plant and equipment, principally due to differences in
depreciation....................................................... 3,633 4,737
Accruals for employee benefits...................................... 7,300 6,488
In-process research and development................................. 9,786 10,733
Other assets........................................................ 3,856 15,319
Net operating losses (NOL).......................................... 14,186 8,354
------- -------
Total gross deferred tax assets..................................... 45,777 51,395
Less valuation allowance............................................ 9,229 10,690
------- -------
Net deferred tax assets............................................. $36,548 $40,705
======= =======
Deferred tax liabilities:
Property, plant and equipment, principally due to differences in
depreciation....................................................... $14,789 $14,105
Inventories......................................................... 2,442 2,852
Amortization of goodwill............................................ 9,391 7,133
Unremitted income of foreign subsidiaries........................... -- 2,732
Other............................................................... 6,086 6,807
------- -------
Net deferred tax liabilities........................................ $32,708 $33,629
======= =======
Net deferred tax assets less net deferred tax liabilities........... $ 3,840 $ 7,076
======= =======
</TABLE>
In fiscal 1999 a valuation allowance of $2.0 million was established
against unrealized losses related to reassuming ownership of the Brazilian frame
and equipment business. Movements in the valuation allowances in fiscal 2000,
1999 and 1998 relate primarily to realization of NOL's or changes in the
Company's evaluation of the realizability of deferred tax assets.
For tax purposes, the Company's foreign subsidiaries, at March 31, 2000,
had net operating loss carryforwards of $37.1 million. Of this amount, $31.6
million does not expire, and $5.5 million expires between 2002 and 2010. The
deferred tax assets reflected in the Company's accounts as of March 31, 2000
before valuation allowances reflect these NOL's.
The Company has not provided for U.S. federal income and foreign
withholding taxes on $94 million of non-U.S. subsidiaries' undistributed
earnings as of March 31, 2000 because such earnings are intended to be
reinvested indefinitely. Upon distribution of those earnings in the form of
dividends or otherwise, the Company would be subject to U.S. income taxes
(subject to an adjustment for foreign tax credits). Determination of the amount
of unrecognized deferred U.S. income tax liability is not practicable because of
the complexities associated with its hypothetical calculation.
14. Commitments
The Company leases certain warehouse and office facilities, office
equipment and automobiles under noncancelable operating leases which expire in
2000 through 2012. The Company is responsible for taxes, insurance and
maintenance expenses related to the leased facilities. Under the terms of
F-23
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
certain lease agreements, the leases may be extended, at the Company's option,
and certain of the leases provide for adjustments of the minimum monthly rent.
Future minimum annual lease payments under the leases are as follows:
Period Ending March 31, (in thousands)
-----------------------
2001............................................................. $4,485
2002............................................................. 3,665
2003............................................................. 2,686
2004............................................................. 1,971
2005............................................................. 1,638
Thereafter....................................................... 6,627
Rent expense for fiscal 2000, 1999, and 1998 was $7.8 million, $7.2 million
and $7.8 million, respectively.
15. Contingencies
The Company is subject to environmental laws and regulations concerning
emissions to the air, discharges to surface and subsurface waters and the
generation, handling, storage, transportation, treatment and disposal of waste
materials.
The Company is currently participating in a remediation program of one of
its manufacturing facilities under the Comprehensive Environmental Response,
Compensation and Liability Act and the Superfund Amendments and Reauthorization
Act of 1986. Since March 1997 the Company has curtailed clean-up activities, and
continues to monitor contamination levels. During the quarter ended December 31,
1997 a report on contamination levels, and the impact of curtailed activities,
was submitted to the EPA, which indicates no significant impact on the site from
the curtailed activities, and the EPA has consented to continued curtailment of
activities. The Company expects continued reduction of clean-up activities due
to relatively low levels of contamination existing at the site. Reserves for
these clean-up and monitoring activities are considered to be adequate by the
Company and are immaterial to the Company's financial position.
Under the terms of the sale agreement with Pilkington plc ("Pilkington"),
for the purchase of the Sola business in December 1993 ("Acquisition"),
Pilkington has indemnified the Company with regard to expenditures subsequent to
the Acquisition for certain environmental matters relating to circumstances
existing at the time of the Acquisition. Under the terms of the indemnification,
the Company is responsible for the first $1 million spent on such environmental
matters, Pilkington and the Company 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.
F-24
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Worldwide Operations
The Company operates in the ophthalmic industry in the design and
manufacture of eyeglass lenses.
A summary of information about the Company's geographic areas is as
follows:
<TABLE>
<CAPTION>
North Rest of
(in thousands) America Europe World Eliminations Total
------- ------ ----- ------------ -----
<S> <C> <C> <C> <C> <C>
Year Ended March 31, 2000
Revenue (a):
External........................... $256,254 $177,104 $105,322 $ -- $538,680
Internal........................... 56,674 63,225 64,384 (184,283) --
Identifiable assets................. 371,650 164,857 178,420 106 715,033
Year Ended March 31, 1999
Revenue (a):
External........................... $263,687 $171,766 $ 94,336 $ -- $529,789
Internal........................... 43,823 58,715 52,269 (154,807) --
Identifiable assets................. 384,771 158,265 161,494 (5,231) 699,299
Year Ended March 31, 1998
Revenue (a):
External........................... $281,158 $160,697 $105,880 $ -- $547,735
Internal........................... 42,784 57,170 47,697 (147,651) --
Identifiable assets................. 370,792 164,891 156,003 (7,628) 684,058
</TABLE>
(a) Revenues are attributed to regions based on the location of Sola and its
subsidiaries' country or region of domicile.
Internal sales represent intercompany sales between regions at a mark-up
from cost; the elimination of any profit arising from such sales is reflected in
eliminations in determining operating income.
Included in North American operations are the Company's businesses in
Canada and Mexico, as well as the United States. In each of the three fiscal
years ended March 31, 2000, Canadian and Mexican operations accounted for less
than 6% of external revenues and less than 3.5% of identifiable assets of the
North American region. The information for Canada and Mexico individually and
combined, is not considered material to information for the United States alone.
17. Supplementary Cash Flow Data
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------
(in thousands) 2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid...................................... $27,134 $24,011 $23,411
======= ======= =======
Taxes paid......................................... $ 7,133 $16,274 $14,599
======= ======= =======
Supplemental disclosures of non-cash investing and
financing activities:
Capital expenditures accrued but not paid.......... $ 4,258 $ 7,115 $ 3,223
======= ======= =======
</TABLE>
18. Subsequent Events (Unaudited)
In April 2000 the Company acquired the remaining 65% ownership interest in
a wholesale laboratory group located in Australia and New Zealand for $2.6
million.
F-25
<PAGE>
SOLA INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2000 the Company purchased $5.0 million of its 6 7/8% Senior Notes
due 2008. As a result, during the first quarter of fiscal 2001 the Company
recorded an extraordinary gain of $1.4 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.
F-26
<PAGE>
SOLA INTERNATIONAL INC.
QUARTERLY FINANCIAL DATA
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31,
1998 1998 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales..................................... $129,526 $132,668 $126,345 $141,250
Gross profit.................................. 60,431 59,731 57,277 60,961
Special charges............................... -- -- 1,570 25,736
Operating income (loss)....................... 20,935 17,220 11,058 (11,462)
Net income (loss)............................. 11,297 8,803 5,176 (12,755)
Earnings per share - basic:
Net income (loss)........................... 0.46 0.36 0.21 (0.51)
Earnings per share - diluted:
Net income (loss)........................... 0.44 0.35 0.21 (0.51)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31,
1999 1999 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales..................................... $133,577 $141,071 $127,238 $136,794
Gross profit.................................. 59,496 63,458 55,255 57,373
Special charges............................... 1,500 2,863 (657) 26,155
Operating income (loss)....................... 12,740 14,902 8,770 (16,038)
Net income (loss)............................. 5,918 7,241 2,675 (15,093)
Earnings per share - basic:
Net income (loss)........................... 0.24 0.29 0.11 (0.61)
Earnings per share - diluted:
Net income (loss)........................... 0.24 0.29 0.11 (0.61)
</TABLE>
F-27
<PAGE>
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors and
Shareholders of Sola International, Inc.:
Our audit of the consolidated financial statements referred to in our report
dated May 5, 2000 except for Note 18 as to which the date is June 5, 2000
appearing on page F-2 of this Form 10-K also included an audit of the financial
statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion,
this financial statement schedule present fairly, in all material respects, the
information set forth therein as of March 31, 2000 when read in conjunction with
the related consolidated financial statements.
/s/PricewaterhouseCoopers LLP
San Jose California
May 5, 2000
S-1
<PAGE>
SCHEDULE II
SOLA INTERNATIONAL INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance, Charged Balance,
Beginning to End of
of Period Expenses Deductions Other(1) Period
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 2000
Allowance for doubtful accounts.......... $7,003 $2,568 $ (396) $(302) $ 8,873
====== ====== ======= ===== =======
Allowance for excess and obsolete
inventory............................. $9,236 $7,293 $(1,455) $(411) $14,663
====== ====== ======= ===== =======
Year ended March 31, 1999
Allowance for doubtful accounts.......... $4,956 $2,716 $ (677) $ 8 $ 7,003
====== ====== ======= ===== =======
Allowance for excess and obsolete
inventory............................. $4,360 $5,620 $ (666) $ (78) $ 9,236
====== ====== ======= ===== =======
Year ended March 31, 1998
Allowance for doubtful accounts.......... $4,030 $1,337 $ (254) $ (157) $ 4,956
====== ====== ======= ====== =======
Allowance for excess and obsolete
inventory............................. $4,471 $1,833 $(1,578) $(366) $ 4,360
====== ====== ======= ===== =======
</TABLE>
_________________________
(1) Other relates primarily to foreign currency translation adjustments.
S-2
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page Number or Incorporation by Reference No.
----------- ----------- ---------------------------------------------
<C> <S> <C>
2.1 Purchase agreement between Sola International Filed as Exhibit 2 to the Form 8-K of the
Inc. and American Optical Corporation, dated as Company, dated May 6, 1996, and incorporated
of May 6, 1996 herein by reference
3.1 Amended and Restated Certificate of Incorporation Filed as Exhibit 3.1 to the Annual Report on Form
of the Company 10-K of the Company for the fiscal year ending
March 31, 1995, dated June 7, 1995, and
incorporated herein by reference
3.2 Amended and Restated By-Laws of the Company Filed as Exhibit 3 to the Company's Quarterly
Report on Form 10-Q for the period ending
September 30, 1998, and incorporated herein by
reference
4.1 Rights Agreement dated as of August 27, 1998 Filed as Exhibit 1 to the Form 8-A of the
between Sola International Inc. and Bank Boston Company, dated August 27, 1998, and incorporated
N.A. herein by reference
10.1 Purchase Agreement, dated as of September 1, 1993 Filed as Exhibit 10.1 to the Registration
by and between Sola Holdings Inc., Pilkington plc Statement, as amended, on Form S-1 of the Company
and certain of Pilkington plc's subsidiaries (File No. 33-68824) and incorporated herein by
reference
10.2* Confidential Severance Agreement between Sola Filed as Exhibit 10 to the Company's Quarterly
International Inc. and John E. Heine, dated as of Report on Form 10-Q for the period ending
November 20, 1996 December 31, 1996, and incorporated herein by
reference
10.3* Confidential Severance Agreement between Sola Filed as Exhibit 10.3 to the Annual Report on
International Inc. and James H. Cox, dated as of Form 10-K of the Company, dated March 31, 1999,
January 1, 1997 and incorporated herein by reference
10.4* Employment Agreement between Sola International Filed as Exhibit 10.2 to the Registration
Inc. and Steven M. Neil, dated as of September 2, Statement, as amended, on Form S-3 of the Company
1997 (File No. 333-45929) and incorporated herein by
reference
10.5* Confidential Severance Agreement between Sola Filed as Exhibit 10.5 to the Annual Report on
International Inc. and Steven M. Neil, dated as Form 10-K of the Company, dated March 31, 1999,
of October 13, 1997 and incorporated herein by reference
10.6* Confidential Severance Agreement between Sola Filed as Exhibit 10.6 to the Annual Report on
International Inc. and Stephen J. Lee, dated as Form 10-K of the Company, dated March 31, 1999,
of January 1, 1997 and incorporated herein by reference
10.7* Confidential Severance Agreement between Sola Filed as Exhibit 10.7 to the Annual Report on
International Inc. and Theodore Gioia dated as of Form 10-K of the Company, dated March 31, 1999,
January 1, 1997 and incorporated herein by reference
10.8* Separation Agreement and Release between Sola
International Inc. and John Heine dated as of
March 31, 2000
</TABLE>
E-1
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page Number or Incorporation by Reference No.
----------- ----------- ---------------------------------------------
<S> <C> <C>
10.9 Multicurrency Credit Agreement, dated as of June Filed as Exhibit 4 to the Report on Form 8-K/A of
14, 1996, among Sola International Inc., and the the Company, dated May 6, 1996, and incorporated
other Borrowers as the Borrowers, the Subsidiary herein by reference
Guarantors, Bank of America National Trust and
Savings Association, as Agent and Letter of
Credit Issuing Bank, The First National Bank of
Boston and The Bank of Nova Scotia, as Co-Agents,
and the Other Financial Institutions Party Thereto
10.10 Amendment No. 1 to the Multicurrency Credit Filed as Exhibit 10.1 to the Company's Quarterly
Agreement, dated as of June 14, 1996, among Sola Report on Form 10-Q for the period ending
International Inc., and the other Borrowers as December 31, 1997, and incorporated herein by
the Borrowers, the Subsidiary Guarantors, The reference
Bank of America National Trust and Savings
Association, as Agent and Letter of Credit
Issuing Bank, The First National Bank of Boston
and The Bank of Nova Scotia, as Co-Agents, and
the Other Financial Institutions Party Thereto
10.11 Amendment No. 2 to the Multicurrency Credit As above except Exhibit 10.2
Agreement, dated as of June 14, 1996, among Sola
International Inc., and the other Borrowers as
the Borrowers, the Subsidiary Guarantors, The
Bank of America National Trust and Savings
Association, as Agent and Letter of Credit
Issuing Bank, The First National Bank of Boston
and The Bank of Nova Scotia, as Co-Agents, and
the Other Financial Institutions Party Thereto
10.12 Amendment No. 3 to the Multicurrency Credit Filed as Exhibit 10.1 to the Company's
Agreement, dated as of June 14, 1996, among Sola Registration Statement, as amended, on Form S-3
International Inc., and the other Borrowers as of the Company (File No 333-45929) and
the Borrowers, the Subsidiary Guarantors, The incorporated herein by reference
Bank of America National Trust and Savings
Association, as Agent and Letter of Credit
Issuing Bank, The First National Bank of Boston
and The Bank of Nova Scotia, as Co-Agents, and
the Other Financial Institutions Party Thereto
10.13 Lease Agreement, dated May 10, 1993, between Sola Filed as Exhibit 10.9 to the Registration
Optical Taiwan Ltd. and Chang Jin Co., Ltd. Statement, as amended, on Form S-1 of the Company
(including English summary of principal terms) (File No. 33-68824) and incorporated herein by
reference
10.14 Lease Agreement between Optical Sola de Mexico Filed as Exhibit 10.10 to the Registration
and Messrs. Salvadore Luttenroth-Camou and Carlos Statement, as amended, on Form S-1 of the Company
Lutteroth-Lomeli (including English summary of (File No. 33-68824) and incorporated herein by
principal terms) reference
</TABLE>
E-2
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page Number or Incorporation by Reference No.
----------- ----------- ---------------------------------------------
<S> <C> <C>
10.15* Sola Investors Inc. Stock Option Plan Filed as Exhibit 10.11 to the Annual Report on
Form 10-K of the Company, dated March 31, 1994,
and incorporated herein by reference
10.16 Amendment Number One to Sola Investors Inc. Stock Filed as Exhibit 10.21 to the Registration
Option Plan Statement, as amended, on Form S-1 of the Company
(File No. 33-87892) and incorporated herein by
reference
10.17 Sola International Inc. Stock Option Plan Filed as Exhibit 10.22 to the Registration
Statement, as amended, on Form S-1 of the Company
(File No. 33-87892) and incorporated herein by
reference
10.18 Sola International Inc. Stock Option Plan, Filed as Exhibit A and Exhibit B to the fiscal
Amendment Number One and Amendment Number Two 1996 Proxy Statement of Sola International Inc.,
dated July 12, 1996, and incorporated herein by
reference
10.19 Amended and Restated 1998 Sola International Inc. Filed as Appendix A to the Fiscal 1998 Proxy
Stock Option Plan Statement of Sola International Inc. dated June
30, 1998 and incorporated herein by reference
10.20 Indenture by and between the Company and State Filed as Exhibit 10.21 to the Annual Report on
Street Bank and Trust Company of California, Form 10-K of the Company, dated March 31, 1998,
N.A., as Trustee, with respect to the 6 /7//8% and incorporated herein by reference
Notes due 2008
10.21 Officers' Certificate Related to Senior Notes Filed as Exhibit 99.1 to the Company's Quarterly
Report on Form 10-Q for the period ending June
30, 1998, and incorporated herein by reference
10.22 Form of Indemnification Agreement between the Filed as Exhibit 10.24 to the Registration
executive officers and directors of the Company Statement, as amended, on Form S-1 of the Company
and the Company (File No. 33-87892) and incorporated herein by
reference
10.23 Sola International Inc. Management Incentive Plan Filed as Exhibit 10.25 to the Registration
Statement, as amended, on Form S-1 of the Company
(File No. 33-87892) and incorporated herein by
reference
10.24 Sola Optical 401(k) Savings Plan Filed as Exhibit 4.4 to the Registration
Statement on Form S-8 of the Company (File No.
333-4489), filed with the Commission on May 23,
1996, and incorporated herein by reference
10.25 Trust Agreement entered into as of May 15, 1996 Filed as Exhibit 4.5 to the Registration
between Sola Optical USA, Inc. and Chase Statement on Form S-8 (File No. 333-4489) of the
Manhattan Bank, N.A. Company, filed with the Commission on May 23,
1996, and incorporated herein by reference
12.1 Statement regarding ratio of earnings to fixed
charges
</TABLE>
E-3
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page Number or Incorporation by Reference No.
----------- ----------- ---------------------------------------------
<S> <C> <C>
16.1 Letter regarding change in certifying accountant Filed as Exhibit 16 to the Form 8-K of the
Company, dated November 10, 1999, and
incorporated herein by reference
21.1 List of subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP,
Independent Accountants
23.2 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data schedule
99.1 Factors Affecting Future Operating Results
</TABLE>
________________________________
*Compensatory plan or management agreement
E-4
