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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-K/A Amendment No. 1
 x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended March 31, 2003 or o
    
    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
(State or other jurisdiction of
incorporation or organization) 94-3189941
(I.R.S. employer identification no.) 10590 WEST OCEAN AIR DRIVE, SUITE 300, SAN DIEGO, CA
(Address of principal executive offices) 92130
(Zip Code) Registrants telephone number, including area code: (858) 509-9899 Securities registered pursuant to Section 12(b) of the Act: Title of each class:Common Stock, Par Value $0.01 Name of exchange on which registered:New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None




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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  o 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.  o Indicate by check mark whether the registrant is an accelerated filer as
defined in Exchange Act Rule 12b-2. x o
 As of September 30, 2002, the aggregate market value of Common Stock held
by non-affiliates was approximately $246,890,049. 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 June 12, 2003, 24,728,933 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 registrants stock is traded on the New York
Stock Exchange under the symbol SOL. Documents Incorporated by Reference: Portions of the registrants proxy
statement for its 2003 Annual Meeting of Stockholders are incorporated by
reference into Part III of this report. 2




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Explanatory Note This Amendment No. 1 to the Annual Report of SOLA International Inc.
(SOLA or the Company) on Form 10-K/A for the fiscal year ended March 31,
2003 includes restated consolidated financial statements as of March 31, 2003.
The restatement, as summarized in Note 2 to the consolidated financial
statements, is to correct a computational error in the fiscal 2003 tax
provision. As a result of the restatement, long-term deferred tax assets
increased by $2.4 million and the fiscal 2003 tax provision decreased by $2.4
million, resulting in increased net income of $2.4 million and increased EPS of
$0.10 (Basic and Diluted). This report is being filed to amend and restate only the following items
contained in our Annual Report on Form 10-K for the fiscal year ended March 31,
2003 originally filed with the Securities and Exchange Commission on June 13,
2003:  
    
    Item 6 (Selected Financial Data);  
    
    Item 7 (Managements Discussion and Analysis of Financial Condition and
Results of Operations);  
    
    Item 8 (Financial Statements and Supplementary Data);  
    
    Item 14 (Controls and Procedures); and  
    
    Item 16 (Exhibits, Financial Statement Schedules, and Reports on Form 8-K). This Amendment No. 1 does not reflect events occurring after the June 13,
2003 original filing date of the Companys Annual Report on Form 10-K. All
information contained in this Amendment No. 1 is subject to updating and
supplementing as provided in SOLAs reports filed with the Securities and
Exchange Commission, as amended, for periods subsequent to the date of the
original filing of the Annual Report on Form 10-K. 3




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SOLA INTERNATIONAL INC. ANNUAL REPORT ON FORM 10-K/A FOR THE FISCAL YEAR ENDED MARCH 31, 2003 PagePART IItem 1.
    
    Business
    
    
    5Item 2.
    
    Properties
    
    
    13Item 3.
    
    Legal Proceedings
    
    
    14Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    14PART IIItem 5.
    
    Market for the Registrants Common Equity and Related Stockholder Matters
    
    
    15Item 6.
    
    Selected Financial Data
    
    
    16Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 8.
    
    Financial Statements and Supplementary Data
    
    
    35Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    35PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    36Item 11.
    
    Executive Compensation
    
    
    37Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    37Item 13.
    
    Certain Relationships and Related Transactions
    
    
    38Item 14.
    
    Controls and Procedures
    
    
    38Item 15.
    
    Principal Accountant Fees and Services
    
    
    38PART IVItem 16.
    
    Exhibits, Financial Statement Schedule and Reports on Form 8-K
    
    
    39Signatures
    
    
    40EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 32.1
  Our trademarks, service marks and trade names include AO bActive, AO
Compact, Finalite, Percepta, SOLAMax, Spectralite and ViZio, among others. This
report also contains trademarks, service marks, copyrights and trade name of
other companies. 4




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PART I 
 Item 1.Business Forward-Looking Information Certain of the matters discussed in this report or in the information
incorporated by reference may constitute forward-looking statements.
Forward-looking statements can generally be identified by the use of
forward-looking terminology such as believes, expects, may, will,
should, seeks, approximately, intends, plans, estimates, or
anticipates or the negative of these terms or other comparable terminology,
or by discussions of strategy, plans or intentions. Statements contained in
this report that are not historical facts are forward-looking statements.
Without limiting the generality of the preceding statement, all statements in
this report concerning or relating to estimated and projected earnings,
margins, costs, expenditures, cash flows, growth rates and financial results
are forward-looking statements. In addition, we, through our senior management,
from time to time make forward-looking public statements concerning our
expected future operations and performance and other developments. These
forward-looking statements are necessarily estimates reflecting our best
judgment based upon current information and involve a number of risks and
uncertainties. Other factors may affect the accuracy of these forward-looking
statements and our actual results may differ materially from the results
anticipated in these forward-looking statements. While it is impossible to
identify all relevant factors, factors that could cause actual results to
differ materially from those estimated by us include, but are not limited to,
those factors or conditions described in Managements Discussion and Analysis
of Financial Condition and Results of OperationsRisk Factors, as well as
changes in the regulation of the spectacle lens industry at either or both of
the federal and state levels, competitive pressures in the spectacle lens
industry and our response to these factors, and general conditions in the
economy and capital markets. All subsequent written and oral forward-looking statements attributable to
SOLA and persons acting on our behalf are qualified in their entirety by the
cautionary statements contained in this report. The Company We commenced operations in 1960 and were incorporated in Delaware in 1993.
We are a leading designer, manufacturer and global distributor of a broad range
of plastic and glass eyeglass lenses and hold a strong manufacturing and
technology position in the growing plastic lens segment of the global spectacle
lens market. We have sales offices in 28 countries worldwide and operate in
most major regions of the world. We believe that we hold a top three market
position in terms of volume of plastic eyeglass lenses sold in each major
region where we operate  North America, Europe and Rest of World (consisting
primarily of Australia, Asia and South America). We focus our efforts on
products with advanced design characteristics, lens coatings and treatments,
and thin and light weight materials. We market our spectacle lens products globally under the brands SOLA and
American Optical (AO) and distribute them globally through four primary
channels: (1) direct to national retail chains, (2) direct to retail outlets,
(3) wholesale distributors (e.g.,independent processing laboratories), and (4)
managed care organizations in the United States. Our business is organized into three primary markets: North America,
Europe and Rest of World. For the fiscal year ended March 31, 2003, we
generated approximately 44% of our net sales from North America, 37% from
Europe and 19% from Rest of World.  
    
    North America is currently our largest market. Our net sales in North
America for the fiscal year ended March 31, 2003 were $249.2 million
compared to $236.8 million in the prior year, an increase of 5.2%.
Using constant exchange rates, net sales increased by 5.5%. The sales
increase in North America was due primarily to our sales and marketing
initiatives, improved supply chain management, and increased
prescription laboratory presence.
    
    Europe is currently our second largest market. Our net sales in Europe for
the fiscal year ended March 31, 2003 were $210.3 million compared to
$185.8 million in the prior year, an increase of 13.2%. Using constant
exchange rates, net sales increased by 1.5%. Net sales in the European
region increased due primarily to growth from our prescription laboratory
network in France, Italy and Spain that was partially offset by weaker
results from our wholesale businesses in Germany and the U.K. 5




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
    
    Rest of World is currently our third largest market. Our net sales in Rest
of World for the year ended March 31, 2003 were $103.3 million compared to
$106.9 million in the prior period, a decrease of 3.4%. Using constant
exchange rates, net sales increased by 0.6%. Net sales increased in the
Rest of World primarily in South America. This increase was partially
offset by sales declines in Asia, including Japan, and the Middle East due
largely to current economic and political conditions. For more information concerning our geographic areas, see Note 21 of Notes
to Consolidated Financial Statements and Risk FactorsRisk Factors Relating to
SOLA and the IndustryWe are subject to certain risks associated with our
foreign operations, We concentrate a large part of our manufacturing
operations in Tijuana, Mexico and We conduct all of our foreign operations
through subsidiaries and the payment of dividends by these entities may be
restricted. Competitive Strengths We believe that our strong competitive position is attributable to a
number of factors, including the following: Global Scope We currently sell our products to customers in approximately 50 countries
worldwide and operate in most major regions of the world. Our geographically
diverse customer base limits our dependence upon any particular customer or
geographic region. Our operations consist of four primary and seven specialized
manufacturing facilities, one primary research and development center, 31
full-service prescription laboratories and five primary distribution centers.
In addition, we have sales offices in 28 countries worldwide. Our global scope,
combined with our manufacturing and logistics capabilities, enables us to meet
customer demand for delivery of a broad range of products efficiently, cost
effectively and in a timely manner. Our primary brands, SOLA and AO, are
recognized throughout the world. We believe global brand recognition is a
significant advantage in the highly competitive spectacle lens market. Leading Market Position We believe that we hold a top three market position in terms of volume of
plastic eyeglass lenses sold in most major regions of the world, including
leading market positions in Australia, Brazil, France, Italy, the United
Kingdom, and the U.S. Significant Sales of Valued-Added Products We focus our efforts on products with advanced design characteristics,
lens coatings and treatments, and thin and light weight materials. We believe
our value-added products enable us to strengthen relationships with existing
customers and develop relationships with new customers. Many of our value-added
products are sold under global brand names developed under our two primary
brands, SOLA and AO. Research and Development Expertise We believe that we are a technological leader in the plastic lens segment
of the spectacle lens industry, with particular expertise in the development of
new lens materials and designs. We have devoted significant resources to the
research and development of new products and technology, with expenditures of
$12.2 million in fiscal 2003, $13.1 million in fiscal 2002, and $14.9 million
in fiscal 2001. The $0.9 million, or 6.9%, decrease in our research and
development expenses in fiscal 2003 was due in part to headcount reductions
associated with the transfer of research and development activities from our
Petaluma, California facilities to Lonsdale, Australia. Over the last ten
years, we have successfully developed and marketed a number of innovative
products. Most notable are our progressive lens designs (lenses that have a
continuous gradient of corrective power), including Percepta, SOLAMax, AO
Compact and AO bActive, and our proprietary thin and light weight materials,
Spectralite and Finalite. These products incorporate complex design features
that differentiate them from our competitors products. Sales of new products
generally have experienced a higher growth rate and generated an above average
gross profit per pair compared to other plastic lenses sold by us. Our
technical expertise is demonstrated by our receipt of numerous Optical
Laboratory Association awards for technical design excellence. Leading Position in the Growing Chain Retail and Managed Care Channels We believe that we hold the leading market position in terms of volume of
plastic lenses sold in the North American chain retail and managed care
distribution channels. We have established our strong position in these
channels by providing differentiated new products, timeliness of delivery and a
commitment to product quality, technical support and product education. 6




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We work with most major retail chains in North America, including Wal-Mart
Stores, Inc., LensCrafters and U.S. Vision, Inc. Our commitment to quality and
customer service is evidenced by Wal-Mart selecting us as category manager for
its optical lens business. In addition, our managed care customers include
Kaiser Permanente and Vision Service Plan (VSP). Our managed care customers
select us as their preferred spectacle lens supplier primarily because of our
broad product portfolio and superior marketing support services. Strong Direct to Retail Business in Europe Although the U.S. market is the single largest spectacle market in the
world, we benefit from our global diversity and, most specifically, from our
strong operations in Europe. The significant growth of our direct to retail
business is driven by highly experienced commercial teams across Europe that
are supported by our vertically integrated network of prescription
laboratories. We have five primary prescription laboratories in Europe, which
allow us to directly meet the needs of the eyecare professionals in markets
where an independent wholesale channel generally does not exist. Additionally,
we believe that these laboratories will enable us to penetrate new markets as
we introduce new products that require advanced technical processing
capabilities. Main supplier status with many retail chains and independent
practices alike is built on the cornerstone of a partnership approach and the
successful introduction of highly differentiated products. Experienced Management Team Our senior management team, led by President and Chief Executive Officer
Jeremy C. Bishop, has over 100 years of combined vision care industry
experience. Prior to his appointment as President and Chief Executive Officer
in April 2000, Mr. Bishop served as President of American Optical Lens Company,
a subsidiary of ours since its acquisition in 1996. Mr. Bishop joined American
Optical in 1990 as Vice President of European Operations. Under Mr. Bishops
leadership, we have reduced operating expenses, completed a number of key
strategic initiatives and improved our financial performance. Mr. Bishop and
his senior management team have fostered a new culture geared towards continued
cost reduction, strengthened sales and marketing, new product development and
cash flow generation. Increased Emphasis on Driving Demand Through Wholesale Market Through outright purchases of labs and restrictive distribution contracts,
our competitors have made significant strides in controlling access to
independent eye care professionals (ECPs). We have launched multiple
initiatives to address this trend and strengthen our position in this channel.
In the past year, we have significantly increased hiring of sales
representatives, and created a comprehensive training program for them to
increase their optical and selling skills. The addition of these sales
representatives and investments in prescription laboratories, including
acquired laboratories, has increased our reach in the channel. In addition, we invested $17.3 million during fiscal 2003 for the
acquisition of certain net assets and/or stock of five prescription
laboratories located in the U.S. The acquisition of these businesses will play
an important role in helping us to realize our objectives with independent
retailers. Our operating model continues to emphasize creating profitable
growth for eye care professionals by providing them with innovative products,
dispensing tools and marketing programs supported by superior customer service.
Our continued focus on supplying high-technology products requires that we
posses a robust distribution system for their delivery. Laboratories, both
wholly-owned and independent, are a vital component of that solution. Innovative, Need-Specific Products As the market becomes increasingly saturated with products, especially in
the progressive addition lens category, it becomes necessary to do more to
differentiate a new product. We have accomplished this with lens designs
meeting specific needs of a significant number of lens wearers that are not
ideally met by general-purpose lenses already established in the market.
SOLAMax, the latest progressive lens in the SOLA line, is an excellent example
of this. SOLAMax has the largest near vision area of any progressive lens.
This, combined with its exceptionally high adaptation rate, makes it the ideal
choice for new presbyopes, former bifocal wearers, and any presbyope who has a
near vision emphasis. Presbyopia is a natural aging process that limits the
eyes ability to focus on near objects and is the principal driver behind the
need for multi-focal vision correction. 7




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Business Strategy Our strategy is to enhance our strong market position and to increase net
sales and cash flow by capitalizing on our position as a leading manufacturer
and distributor of plastic eyeglass lenses. Capitalize on Positive Demographic Trends Affecting the Vision Care Industry We believe that we are well positioned to benefit from the positive
demographic changes expected to take place in our markets. According to the
U.S. Census, middle series projections, the number of people in the age group
45-60 is expected to grow approximately 3% per year, through 2005. Further, the
market for progressive lenses is expected to double in size from 2003 to 2015.
This age group is the group primarily affected by presbyopia. Presbyopia
affects the vast majority of people above the age of 45 and is a major source
of demand for our progressive and other multifocal lenses. Our leading position
in the design and manufacture of progressive lenses positions us favorably to
realize the benefit of this demographic trend. We will continue to focus on the
further development and enhancement of our progressive lens designs. Focus on Marketing and Sales We develop and manage our marketing strategy on a centralized basis while
employing local sales and marketing implementation and tactics. We
differentiate our products from those of our competitors through lens designs,
materials and coatings targeted to meet customer needs. We seek to expand our
market share by developing brand recognition for our products, continuing to
develop partnerships with chain retailers, expanding our direct to retail
business through our prescription laboratories and through independent
laboratories, focusing marketing expenditures on target markets and accounts,
and marketing to customers the advantage of higher margin, value-added
products. We continue to market our two primary brands, SOLA and AO, and to
position them throughout the world. Our marketing efforts are intended to help
us compete on the basis of quality and service rather than price. Introduce New Products We invest significant resources in the development of new and innovative
products. Since 1998, we have successfully developed and marketed a number of
proprietary lens designs, including AO Compact, SOLAMax and AO bActive
progressive lenses. In April 2002, we announced a global licensing agreement
with DuPont Fluoroproducts where we market a newly developed high performance
coating for ophthalmic lenses using the Dupont TM Teflon ® brand. Improve Cash Flow Performance A primary focus of ours is executing key business fundamentals and
managing our business for improved financial performance, including cash flow
generation. During fiscal 2000 through 2002 we implemented strategic
initiatives aimed at streamlining and standardizing our operations globally. No
additional restructuring occurred in fiscal 2003. The initiatives had the
following major objectives:  
    
    To shift production of high-volume, standard products from higher-cost
manufacturing facilities in the United States, Australia and Ireland to
low-cost manufacturing sites in Mexico, China and Brazil;
    
    To consolidate manufacturing expertise at fewer production facilities;
    
    To standardize product specifications globally; and
    
    To streamline distribution and logistics operations. We believe that these initiatives have resulted in cost reductions, lower
working capital investment, a more efficient distribution network, and improved
cash flow while maintaining or improving our customer service levels. Other
actions to improve profitability included developing global information
technologies that enable us to manage global inventories and demand and monitor
manufacturing performance. 8




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Products We manufacture lenses using both plastic and glass materials, with plastic
lenses currently accounting for approximately 95% of our net lens sales.
Approximately 53% of our sales of plastic prescription lenses are sales of
conventional hard resin plastic lenses, with the balance derived from advanced
lens materials with thin and light weight features. Our plastic lens materials
are comprised of the following:  
    
    Conventional hard resin plastic;
    
    Spectralite, Finalite and other non-proprietary thin and light weight
plastic; and
    
    Polycarbonate, a thin and lightweight material with greater impact
resistance. We market and produce a variety of lens coatings and treatments that
significantly enhance the performance of our lens products. These coatings and
treatments include the following:  
    
    Anti-scratch coatings that prolong the life of our lenses;
    
    Anti-reflective coatings that allow more light to pass through the lens
for improved vision; and
    
    Photochromic treatments that darken the lens when exposed to direct
sunlight. The penetration of coated and treated lenses varies significantly from
market to market and represents a significant growth opportunity for us.
Photochromic lenses are processed by a third party using technology that is
proprietary to it. Most of the materials necessary to produce our products and coatings are
readily available from a number of potential sources at competitive prices.
While there are currently multiple suppliers of polycarbonate and monomer raw
materials, we purchase over 50% of those materials from three suppliers. The
loss of any of these suppliers, or a significant decrease in the supply of
polycarbonate or monomer, would require us to obtain these raw materials
elsewhere. In order to reduce materials costs, we coordinate centrally the
purchasing of raw materials, including monomers. For more information regarding
the availability of polycarbonate and monomer raw materials, see Risk
FactorsRisks Relating to SOLA and the IndustryWe are dependent on a small
number of suppliers for raw materials. Marketing and Sales Our sales offices are located in 28 countries worldwide. As of March 31,
2003, there were approximately 684 employees involved in our sales and
marketing efforts. Our sales and marketing expenditures for fiscal 2003 were
$106.9 million, representing 19% of net sales. We differentiate our products
from those of our competitors through lens designs, materials and coatings
targeted to meet customer needs. We seek to expand our market share by
developing brand recognition for our products, continuing to develop
partnerships with chain retailers, expanding our direct to retail business
through our prescription laboratories and through independent laboratories,
focusing our marketing expenditures on target markets and accounts and
marketing to customers the advantage of higher margin, value-added products.
Our marketing efforts are intended to help us compete on the basis of product
breadth, quality and service rather than price. We continue to develop our two primary brands, SOLA and AO, and to
position them throughout the world. Under each of these brands, we will
continue to market a portfolio of products designed to meet the lifestyle needs
of consumers worldwide. Key brands of ours recognized throughout the world
include Percepta, AO Compact, SOLAMax and AO bActive. Distribution Most multifocal lenses and some single vision lenses require secondary
processing at a laboratory before they can be dispensed to a consumer. In some
cases, lens manufacturers operate their own laboratories, while in other
instances they sell semi-finished lenses to independent labs that handle the
final processing and distribute the products to eyecare practitioners. Many
retail chains operate their own laboratories, either inside the retail location
or at a separate site. The final stage in distribution takes place in either a retail store or an
independent eyecare practitioners office. Although dispensing regulations
differ from market to market, prescription lenses still require the involvement
of an optician, optometrist or ophthalmologist in most instances before they
can be sold to a consumer. Chain retailers have an increased presence in all
regions 9




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of the world and are gradually replacing the medical/healthcare
orientation of the industry with more consumer-oriented approaches. The four primary channels that are used for distribution of our
prescription lenses are the following:  
    
    National chain retail, super optical retail stores and retail buying
groups, many of which have on-site lens processing capability. This is a
growing distribution channel for us in each of our major regions;
    
    Direct distribution to small- and medium-sized retail outlets, including
distribution direct to eyecare professionals through our processing
laboratories;
    
    Wholesale distributors or independent processing laboratories that process
our lenses and then resell them to retail outlets and eyecare
practitioners; and
    
    Managed care organizations in the United States, many of which have
on-site lens processing capability. Our plano lenses (lenses with no corrective power) are primarily sold
direct to sunglass manufacturers. Our distribution and logistics operations consist of five primary
distribution centers. The five primary distribution centers are located in
North America (2), Europe, Asia and South America. For more information
regarding our North American chain retail channel, see Risk FactorsRisks
Relating to SOLA and the IndustryWe are dependent upon the North American
chain retail channel. Customers During fiscal 2003, our ten largest customers accounted for 27.9% of net
sales, and our largest customer accounted for less than 6% of net sales. During
fiscal 2003, five of our ten largest customers were located in North America
and accounted for 14.9% of net sales. For the year ended March 31, 2003, sales
to our top 20 customers, excluding competitors, increased by 17.4% as compared
to the prior year. Manufacturing Operations We currently operate eleven facilities, four primary and seven specialized
manufacturing sites worldwide. Recent strategic initiatives included shifting
production of high-volume, standard products from the U.S., Australia and
Ireland to low-cost manufacturing sites in Mexico, China and Brazil while
maintaining complex production at the Australian and Irish sites. This transfer
of production was facilitated by a global product standard specifications
project. Research and Development We continue to invest heavily in research and development in order to
introduce new and innovative products and to improve the efficiency of our
manufacturing process. As of March 31, 2003, there were 122 employees involved
in our research and development efforts. Our research and development
expenditures for fiscal 2003 were $12.2 million, representing 2.1% of net
sales, for fiscal 2002 were $13.1 million, representing 2.5% of net sales, and
for fiscal 2001 were $14.9 million, representing 2.7% of net sales. Our primary
research and development center is located in Lonsdale, Australia. Our research and development focuses on the design and development of
higher margin, value-added products, on new materials with superior
characteristics, on technology that will deliver products to the market more
efficiently and on technologies to improve productivity in the manufacture of
existing products. In April 2002, we announced a global licensing agreement with DuPont
Fluoroproducts where we market a newly developed anti-reflective coating for
ophthalmic lenses using the Dupont  Teflon ® brand. Competition The spectacle lens industry is highly competitive. We compete principally
on the basis of customer service, quality, breadth of product offerings,
innovation and price. Our largest global competitors are Essilor International
SA and Hoya Corporation. The 10




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spectacle lens industry is characterized by price competition, which can
be severe in certain markets, particularly for high-volume, standard products. We attempt, 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 our lenses and
coatings. Since recently developed products comprise a substantial portion of
our sales, our performance is dependent on our continuing ability to develop
and market new products. In addition to direct competition from other manufacturers of eyeglass
lenses, we compete indirectly with manufacturers of contact lenses and
providers of medical procedures for the correction of visual impairment. Patents, Trademarks & Licenses We seek to protect our intellectual property throughout the world. As of
March 31, 2003, we had filed, or applied for, patents for 98 discrete
inventions or technologies. Many of our patents have been filed in multiple
countries, and they include 71 patents, or patent applications, filed in the
United States. We have been granted, or are licensed to use, 1,055 trademarks
in various countries, representing rights to 251 discrete names. These include
92 trademarks granted in the United States. Further, there are 82 trade names
under application by us. We do not believe that we are dependent on any
particular patent, trade secret or similar intellectual property. Because of
our manufacturing, marketing and distribution strengths, we believe that the
loss of any individual trademark, trade secret or patent would not have a
material adverse effect on our results of operations or financial condition. Employees As of March 31, 2003, we had 6,791 employees throughout the world. The
majority of our employees are not represented by labor unions. We consider our
labor relations to be good and there have been no significant labor disputes in
the past ten years. Strategic Initiatives Our organization has historically been managed on a decentralized basis
with each operating unit having its own manufacturing facilities, distribution
centers and inventory management systems. This decentralized approach resulted
in excess manufacturing capacity, redundant facilities in high cost regions and
excessive distribution centers. In the third quarter of fiscal 1999, we
initiated a strategic operating review designed to streamline manufacturing and
distribution, reduce operating costs worldwide and write-off inventory SKUs
that are no longer being manufactured. In April 2000, Jeremy Bishop was
appointed President and Chief Executive Officer. Following his appointment, Mr.
Bishop expanded the scope of our strategic review program and accelerated the
implementation of our strategic initiatives begun in 1999. The charges recorded for these initiatives from fiscal 1999 through the
end of fiscal 2001, net of gains on asset sales, totaled approximately $167.7
million, including $39.5 million of associated inventory write-offs classified
in cost of sales. The non-cash charges related primarily to the write-off of
equipment and other assets, as well as the impairment of goodwill. The cash
charges related primarily to severance expenses and facility closures Environmental Matters We must comply with United States and foreign environmental laws and
regulations concerning emissions to the air, wastewater discharges and the
generation, handling, storage, transportation and disposal of hazardous wastes,
and with other federal, state and foreign laws and regulations. We believe that
we possess all material permits and licenses necessary for the continuing
operation of our business and believe that our 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 us in the future. Our manufacturing processes generally use non-hazardous chemicals where
feasible. Certain processes use a variety of volatile and other hazardous
substances. Where practical, we have been reducing the use of these chemicals.
Where the use of hazardous materials is essential, manufacturing processes are
developed which minimize the use of these chemicals and which comply with
relevant safety and environmental standards. We have also developed programs
to eliminate use of chlorinated hydrocarbons and chlorofluorocarbons, or CFCs,
in our manufacturing processes. Our current use of these substances is minimal
in our operations. 11




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Since 1988, we have operated a ground water remediation system at our
Petaluma, California manufacturing facility in accordance with a consent order
issued by the U.S. 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, we have curtailed clean-up activities, while continuing to
monitor contamination levels. In 1997, we submitted to the EPA a report on
contamination levels and the impact of curtailed activities that indicates no
significant impact on the site from the curtailed activities. The EPA has
consented to continued curtailment of clean-up activities. We expect continued
reduction of clean-up activities due to relatively low levels of contamination
existing at the site. In connection with the acquisition from Pilkington,
Pilkington has agreed to indemnify us with respect to environmental losses
relating to certain then existing facts, events, conditions, matters or issues,
for (1) 50% of the losses to the extent they exceed $1 million but are less
than or equal to $5 million, and (2) 100% of the losses in excess of $5
million. In March 2001, we completed the sale of the affected property and
indemnified the buyer with respect to certain then-existing facts, events,
conditions, matters or issues. It is possible that we may be involved in other similar investigations and
actions under state, federal or foreign laws in the future. Based on currently
available information, we do not believe that our share of costs at the
existing sites is likely to result in a liability that will have a material
adverse effect on our results of operations, financial condition or cash flows. Our policy is 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. Regulation To satisfy Food and Drug Administration safety requirements for sale of
lenses in the U.S., all of our lenses, like those of our competitors, must
comply with the drop-ball impact test. This test involves dropping a steel
ball of diameter 5/8 inches onto the surface of the lens from a height of 50
inches. The lens is held in place and the steel ball must impact the lens near
its center. The central region of the lens deflects as the ball strikes, and
cracks may form, which could lead to the fracture of the lens. The lens passes
the test if it does not break. There is a similar European ISO/CEN test for spectacle lenses, which
involves a static load, rather than an impact. In this case, force is applied
to the convex side of the lens through a steel ball. The load is applied for 10
seconds and then removed. The lens passes if it does not break. There are several factors that could contribute to whether our lenses pass
these tests, including the nature of the lens material, coatings applied to the
lenses and lens power and curvature. While our manufacturing processes are
designed for our lenses to pass these tests, we cannot guarantee that they will
continue to pass these tests. Available Information Our website address is www.sola.com. We make available free of charge
through our internet site our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and Forms 3, 4 and 5 filed on behalf of
directors and executive officers, and any amendments to these reports, filed or
furnished pursuant to the Securities Exchange Act of 1934 as soon as reasonably
practicable after they are electronically filed with or furnished to the
Securities and Exchange Commission. 12




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##### Table of Contents



Item 2.Properties Our principal properties are set forth in the following table: Owned orRegion and Location
    
    Leased
    
    Principal OperationsNorth AmericaSan Diego, CA
    
    Leased
    
    Corporate Offices; Distribution CenterPetaluma, CA
    
    Leased
    
    Sales and Marketing; Administrative OfficesClearwater, FL
    
    Leased
    
    ManufacturingHebron, KY
    
    Leased
    
    Distribution Center and LaboratorySouthbridge, MA
    
    Leased
    
    Research and Development; Sales OfficeBaltimore, MD
    
    Leased
    
    LaboratoryPortland, OR
    
    Owned
    
    LaboratoryWarwick, RI
    
    Leased
    
    Manufacturing; Sales and Administrative OfficesRoanoke, VA
    
    Leased
    
    LaboratoryTijuana, Mexico
    
    Leased
    
    ManufacturingMexico City, Mexico
    
    Leased
    
    Laboratory and Sales OfficeOntario, Canada
    
    Leased
    
    Sales OfficeEuropeGhent, Belgium
    
    Leased
    
    LaboratoryCopenhagen, Denmark
    
    Leased
    
    Sales OfficeGoetzenbruck, France
    
    Owned
    
    ManufacturingFougeres, France
    
    Both
    
    Laboratory; Sales and MarketingWexford, Ireland
    
    Owned
    
    Manufacturing; LaboratoryVarese, Italy
    
    Leased
    
    Laboratory; Manufacturing; Sales and MarketingSetubal, Portugal
    
    Leased
    
    Laboratory and SalesBirmingham, UK
    
    Leased
    
    Laboratory; Sales and Marketing; Administrative OfficesLondon, UK
    
    Leased
    
    Sales and Marketing; Distribution Center;Basel, Switzerland
    
    Owned
    
    Sales OfficeBarcelona, Spain
    
    Leased
    
    Sales OfficeSouth AmericaBuenos Aires, Argentina
    
    Owned
    
    Sales OfficePetropolis, Brazil
    
    Owned
    
    Manufacturing; Sales and Marketing; Distribution CenterVilla de Cura, Venezuela
    
    Owned
    
    ManufacturingAsiaKowloon Bay, Hong Kong
    
    Leased
    
    Sales OfficeGuangzhou, China
    
    Both
    
    China Corporate Offices and ManufacturingOsaka, Japan
    
    Leased
    
    Laboratory; Sales and MarketingSingapore
    
    Leased
    
    Manufacturing; Sales and Marketing; LaboratorySelangor, Malaysia
    
    Leased
    
    Sales and Marketing; LaboratoryAustraliaLonsdale, Australia
    
    Both
    
    Manufacturing; Research and Development; Laboratory; Marketing
and Distribution Center; Administrative officesAuckland, New Zealand
    
    Leased
    
    Laboratory and SalesAfricaHarare, Zimbabwe
    
    Owned
    
    Laboratory
 Our corporate headquarters and certain of our manufacturing and
distribution operations are located near major earthquake faults. Operating
results could be materially affected in the event of a major earthquake. We are
predominantly self-insured for losses and interruptions caused by earthquakes. 13




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##### Table of Contents



For further information concerning our leased properties, see Note 18 of
Notes to Consolidated Financial Statements. Our operating leases have
expirations ranging from 2004 to 2014. While we do not anticipate any
difficulties in renewing or replacing such leases as they expire, we cannot be
certain that we can do so. We believe that our manufacturing capacity is
sufficient for our current needs. 
 Item 3.Legal Proceedings In addition to the proceedings described under BusinessEnvironmental
Matters, we are involved in routine litigation incidental to our business. We
believe that this routine litigation will not have a material adverse effect on
our results of operations, financial condition, or cash flows. See Note 20 of
Notes to Consolidated Financial Statements. 
 Item 4.Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of our security holders during the
last quarter of fiscal 2003. 14




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##### Table of Contents



PART II 
 Item 5.Market for the Registrants Common Equity and Related Stockholder Matters Public Market for Common Stock Our 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 our common stock as reported on the New York Stock Exchange Composite Tape
for the fiscal quarters indicated. High
    
    LowFiscal Year Ended March 31, 2003:First Quarter ended June 30, 2002
    
    $
    15.07
    
    
    $
    9.60Second Quarter ended September 30, 2002
    
    
    10.64
    
    
    
    7.67Third Quarter ended December 31, 2002
    
    
    13.68
    
    
    
    8.89Fourth Quarter ended March 31, 2003
    
    
    12.80
    
    
    
    10.40Fiscal Year Ended March 31, 2002:First Quarter ended June 30, 2001
    
    $
    14.52
    
    
    $
    9.01Second Quarter ended September 30, 2001
    
    
    16.65
    
    
    
    11.75Third Quarter ended December 31, 2001
    
    
    19.89
    
    
    
    14.20Fourth Quarter ended March 31, 2002
    
    
    20.10
    
    
    
    10.80
 On June 12, 2003, the closing price per share of our common stock on the
New York Stock Exchange was $17.29. As of June 12, 2003, we had 304 holders of
record of our common stock, which excludes beneficial owners of common stock
held in street name. We have not declared or paid any cash dividends on our common stock since
December 1993. The Indentures governing our 6 7/8% Senior Notes and our 11%
Senior Notes restrict and limit the payment of dividends on our common stock.
We do not anticipate paying any cash dividends in the foreseeable future and
intend to retain future earnings for the development and expansion of our
business. Recent Unregistered Issuances of Common Stock On March 21, 2003, we acquired Siouxland Ophthalmic Labs, Inc., an Iowa
corporation, and its partially owned subsidiary, Kansas City Ophthalmics,
L.L.C., a Missouri limited liability company, in a cash transaction. In
connection with the acquisition, we issued 4,422 shares of our common stock to
a substantial customer of Kansas City Ophthalmics in consideration for a
three-year Exclusive Supply Agreement between Kansas City Ophthalmics and the
customer. The customer, who had been a member of Kansas City Ophthalmics, was
determined to be an accredited investor under Rule 501(a) of Regulation D, as
it was a corporation with assets totaling over $5,000,000. An exemption from
registration is claimed pursuant to Section 4(2) of the Securities Act of 1933,
as amended, and Rule 506 Regulation D promulgated thereunder. 15




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##### Table of Contents



Item 6.Selected Financial Data We derived the following selected statement of operations data for the
five fiscal years in the period ended March 31, 2003 and the balance sheet data
as of March 31, 2003, 2002, 2001, 2000 and 1999 from our audited consolidated
financial statements. You should read the financial data set forth below in
conjunction with the consolidated financial statements and related notes and
Managements Discussion and Analysis of Financial Condition and Results of
Operations. We have reclassified certain prior year items to conform with the
current years presentation. The reclassifications had no impact on total
assets or net income. Fiscal Year Ended March 31,2003Restated(6)
    
    2002
    
    2001(1)
    
    2000(2)
    
    1999(3)(in thousands, except per share data)Statements of Operations DataNet sales
    
    $
    562,746
    
    
    $
    529,505
    
    
    $
    545,432
    
    
    $
    543,445
    
    
    $
    534,103Income/(loss) before extraordinary
item
    
    $
    3,966
    
    
    $
    19,118
    
    
    $
    (67,999
    )
    
    $
    741
    
    
    $
    12,521Extraordinary item, net of taxes
    
    
    
    
    
    
    
    
    
    
    1,471
    (4)
    
    
    
    
    
    
    Net income/(loss)
    
    $
    3,966
    
    
    $
    19,118
    
    
    $
    (66,528
    )
    
    $
    741
    
    
    $
    12,521Earnings/(Loss) Per Share Data, BasicIncome/(loss) before extraordinary
item
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    (2.83
    )
    
    $
    0.03
    
    
    $
    0.51Extraordinary item
    
    
    
    
    
    
    
    
    
    
    0.06
    
    
    
    
    
    
    
    Net income/(loss)
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    (2.77
    )
    
    $
    0.03
    
    
    $
    0.51Weighted average common shares
outstanding
    
    
    24,573
    
    
    
    24,067
    
    
    
    24,049
    
    
    
    24,887
    
    
    
    24,794Earnings/(Loss) Per Share Data, DilutedIncome/(loss) before extraordinary
item
    
    $
    0.16
    
    
    $
    0.78
    
    
    $
    (2.83
    )
    
    $
    0.03
    
    
    $
    0.49Extraordinary item
    
    
    
    
    
    
    
    
    
    
    0.06
    
    
    
    
    
    
    
    Net income/(loss)
    
    $
    0.16
    
    
    $
    0.78
    
    
    $
    (2.77
    )
    
    $
    0.03
    
    
    $
    0.49Weighted average common and dilutive
securities outstanding
    
    
    24,856
    
    
    
    24,583
    
    
    
    24,049
    
    
    
    25,069
    
    
    
    25,412
 As of March 31,2003Restated
    
    2002
    
    2001
    
    2000
    
    1999Balance Sheet DataTotal assets
    
    $
    744,985
    (6)
    
    $
    696,804
    
    
    $
    662,375
    
    
    $
    715,033
    
    
    $
    699,299Long-term debt, less current
portion
    
    
    324,204
    (5)
    
    
    278,245
    
    
    
    254,910
    
    
    
    209,234
    
    
    
    208,414Total stockholders equity
    
    
    264,360
    (6)
    
    
    261,362
    
    
    
    235,375
    
    
    
    327,802
    
    
    
    332,362
   (1)
    
    In fiscal 2001, we recorded special charges of $91.1 million and
inventory write-offs of $25.6 million, or $79.3 million net of tax. See
Note 14 of Notes to Consolidated Financial Statements.(2)
    
    In fiscal 2000, we recorded special charges of $22.3 million and
inventory write-offs of $7.2 million, or $20.4 million net of tax. See
Note 14 of Notes to Consolidated Financial Statements.(3)
    
    In fiscal 1999, we recorded special charges of $14.8 million and
inventory write-offs of $6.6 million, or $14.6 million net of tax. See
Note 14 of Notes to Consolidated Financial Statements.(4)
    
    Consists of a gain resulting from the repurchase of senior notes, net of
tax.(5)
    
    Increase in long-term debt is due entirely to the strengthening of the
Euro versus the U.S. Dollar. Utilizing the exchange rate as of March 31,
2002, long-term debt, less current portion at March 31, 2003, would have
been $279.2 million, an increase of $1.0 million from the prior year.(6)
    
    See Note 2 to the Consolidated Financial Statements. 16




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Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis together with our
consolidated financial statements and related notes included in this report.
This discussion contains forward-looking statements that involve risks,
uncertainties and assumptions. You should read the cautionary statements made
in this report as applying to related forward-looking statements wherever they
appear in this report. Our actual results may be materially different from the
results we discuss in the forward-looking statements due to various factors,
including those discussed in the Risk Factors and other sections of this
report. Overview We are a leading global designer, manufacturer and distributor of a broad
range of plastic and glass eyeglass lenses and hold a leading manufacturing and
technology position in the fast growing plastic lens segment of the global
spectacle lens market. We have sales offices in 28 countries worldwide and
operate in most major regions of the world. We believe that we hold a top three
market position in terms of volume of plastic eyeglass lenses sold in each
major region where we operate- North America, Europe and Rest of World
(consisting primarily of Australia, Asia and South America). We focus our
efforts on products with advanced design characteristics, lens coatings and
treatments and thin and light weight materials. We market our spectacle lens products globally under the brands SOLA and
American Optical (AO) and distribute them globally through four primary
channels: (1) direct to national retail chains, (2) direct to retail outlets,
(3) wholesale distributors (e.g.,independent processing laboratories), and (4)
managed care organizations in the United States. Our business is organized into three primary markets: North America,
Europe and Rest of World. For the fiscal year ended March 31, 2003, we
generated approximately 44% of our net sales from North America, 37% from
Europe and 19% from Rest of World. Our business is somewhat seasonal, with fiscal third quarter results
generally weaker than the other three quarters. Fiscal fourth quarter results
are generally the strongest. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Our
estimates, judgments and assumptions are continually evaluated based on
available information and experience; however, actual amounts could differ from
those estimates. Our significant accounting policies are described in Note 3 of
the Notes to Consolidated Financial Statements. Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts for losses that we estimate
will arise from our customers inability to make required payments. We make
our estimates of the uncollectibility of our accounts receivable by analyzing
historical bad debts, specific customer credit worthiness, transaction history
with the customer and current economic trends. At March 31, 2003, the
allowance for doubtful accounts was $9.0 million and, at March 31, 2002, it was
$8.4 million. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. In fiscal 2003, our bad debt expense was $1.6
million compared to $2.3 million in fiscal 2002 and $3.0 million in fiscal
2001. Valuation of Inventory We write down our inventory for estimated obsolescence or
unmarketablility. The amount of such writedown is equal to the difference
between cost of inventory and the estimated market value based upon assumptions
about future demand, selling prices and market conditions. Our inventories
include components that may be subject to rapid technological obsolescence and
that are sold in a highly competitive industry. If actual product demand or
selling prices are less favorable than we estimate, we may be required to
record additional inventory write-downs in the future. Significant
unanticipated changes in demand or technological development could have a
material and significant impact on the future value of our inventory and
reported operating results. 17




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##### Table of Contents



Income Tax Valuation Allowance On
a quarterly basis, management evaluates the realizability of our
deferred tax assets and assesses the need for a valuation allowance
as of each period end. Realization of our net deferred tax assets as
of March 31, 2003 depends on our ability to generate sufficient
future income. We believe that it is more likely than not that we
will realize our net deferred tax assets based on forecasted income.
The amount of the net deferred tax assets actually realized could
vary if there are differences in the timing or amount of future
reversals of existing deferred tax liabilities or changes in the
actual amounts of future taxable income. Impairment of Goodwill We
account for our goodwill under Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. The SFAS No. 142 goodwill impairment model is a
two-step process. First, it requires a comparison of the book value
of net assets to the fair value of the reporting units that have
goodwill assigned to them. If the fair value is determined to be less
than book value, a second step is performed to compute the amount of
the impairment. In this process, a fair value for goodwill is
estimated, based in part on the fair value of the reporting unit used
in the first step, and is compared to its carrying value. The
shortfall of the value below carrying value represents the amount of
goodwill impairment. We test goodwill for impairment during the
fourth quarter every year, and when an event occurs or circumstances
change such that it is reasonably possible that an impairment may
exist. We
estimate the fair values of the related operations using discounted
cash flows and other indicators of fair value. We base the forecast
of future cash flows on our best estimate of the future revenues and
operating costs, which we derive primarily from existing firm orders,
expected future orders, contracts with suppliers, labor agreements,
and general market conditions. Changes in these forecasts could cause
a particular reporting unit to either pass or fail the first step in
the SFAS No. 142 goodwill impairment model, which could significantly
influence whether a goodwill impairment needs to be recorded. We
adjust the cash flow forecasts by an appropriate discount rate
derived from our market capitalization plus a suitable control
premium at the date of evaluation. Impairment of Long-lived
Assets (property and equipment and other intangible assets) We
adopted SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets on April 1, 2002. In
accordance with SFAS No. 144, we assess potential impairments to
our long-lived assets, including property and equipment and other
intangible assets, when there is evidence that events or changes in
circumstances indicate that the carrying value may not be
recoverable. We recognize an impairment loss when the undiscounted
cash flows expected to be generated by an asset (or group of assets)
is less than its carrying value. Any required impairment loss is
measured as the amount by which the assets carrying value exceeds
its fair value, and is recorded as a reduction in the carrying value
of the related asset and charged to results of operations. 18




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##### Table of Contents



Retirement Benefits Our
employee pension benefit costs and obligations are dependent on the
assumptions used in calculating such amounts. The Companys
assumptions are derived by management from detailed periodic studies
conducted by its pension consultants and in consultation with its
actuaries. These assumptions include discount rates, inflation, salary
growth, long-term return on plan assets, retirement rates, mortality
rates and other factors. They base the discount rate assumptions on
investment yields available at year-end on corporate long-term bond
yields. Their inflation assumption is based on an evaluation of
external market indicators. The salary growth assumptions reflect
their long-term actual experience, the near-term outlook, and assumed
inflation. Retirement and mortality rates are based either on actual
plan experience or actuarial assumptions. Actual results that may
differ from their assumptions are accumulated and amortized over
future periods and, therefore, generally affect our recognized
expense and recorded obligation in those future periods. While we
believe that the assumptions used are appropriate, significant
differences in actual experience or significant changes in
assumptions would affect our pension benefits costs and obligations.
See Note 14 of Notes to our Consolidated Financial Statements
for more information regarding costs and assumptions for employee
retirement benefits. Effective March 31,
2003, we discontinued any further accruals to the participants of our
U.S. pension plan and all benefit levels as of a normal
retirement date were frozen for all U.S. participants. Determining Functional Currencies for the Purpose of Consolidation In preparing our consolidated financial statements, we are required to
translate the financial statements of the foreign subsidiaries from the
currency in which they keep their accounting records, generally the local
currency, into United States Dollars. This process results in exchange gains
and losses, which, under the relevant accounting guidance, are either included
within the statement of operations or as a separate part of our net equity
under the caption accumulated other comprehensive loss. Under the relevant accounting guidance, the treatment of these translation
gains or losses is dependent upon our determination of the functional currency
of each subsidiary. The functional currency is determined based on managements
judgment and involves consideration of all relevant economic facts and
circumstances affecting the subsidiary. Generally, the currency in which the
subsidiary transacts a majority of its transactions, including billings,
financing, payroll and other expenditures would be considered the functional
currency, but any dependency upon the parent and the nature of the subsidiarys
operations must also be considered. If any subsidiarys functional currency is deemed to be the local
currency, then any gain or loss associated with the translation of that
subsidiarys financial statements is included in accumulated other
comprehensive loss. However, if the functional currency is deemed to be the
United States Dollar or a currency other than the local currency, then any gain
or loss associated with the translation of these financial statements would be
included within our statement of operations. If we dispose of any of our
subsidiaries, any cumulative translation gains or losses included in
accumulated other comprehensive loss would be realized into our statement of
operations. If we determine that there has been a change in the functional
currency of a subsidiary from the local currency to the United States Dollar,
any translation gains or losses arising after the date of change would be
included within our statement of operations. Based on our assessment of the factors discussed above, we generally
consider the relevant subsidiarys local currency to be the functional currency
for our international subsidiaries. Accordingly, we had cumulative translation
losses of approximately $48.1 million and $46.3 million that were included in
accumulated other comprehensive loss within our balance sheet at March 31, 2003
and 2002, respectively. During fiscal 2003, 2002 and 2001, translation
adjustments of $1.7 million, $3.3 million and $17.9 million, respectively, were
included in accumulated other comprehensive loss. Had we determined that the
functional currency of our subsidiaries was the United States Dollar or a
currency other than the local currency, these losses would have increased our
net income/(loss) for each of the years presented. The magnitude of these gains or losses is dependent upon movements in the
exchange rates of the foreign currencies in which we transact business against
the United States Dollar. These currencies include the Japanese Yen, Euro,
Pound Sterling and Australian and Canadian Dollars. Any future translation
gains or losses could be significantly higher than those noted in each of these
years. In addition, if we determine that a change in the functional currency of
one of our subsidiaries has occurred, we would be required to include any
translation gains or losses from the date of change in our statement of
operations. 19




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##### Table of Contents



Revenue Recognition We recognize revenue pursuant to applicable accounting standards,
including Securities and Exchange Commission (SEC) Staff Accounting Bulletin
No. 101 (SAB 101), Revenue Recognition in FinancialStatements. SAB 101, as
amended, summarizes certain of the SEC staffs views in applying generally
accepted accounting principles to revenue recognition in financial statements
and provides guidance on revenue recognition issues in the absence of
authoritative literature addressing a specific arrangement or a specific
industry. Our policy is to recognize revenue from sales to customers when the rights
and risks of ownership have passed to the customer, when persuasive evidence of
an arrangement exists, the price is fixed and determinable and collection of
the resulting receivable is reasonably assured. Under specific conditions, we
permit our customers to return or exchange products. The provision for
estimated returns is recorded as a reduction of revenue concurrently with the
recognition of revenue. We analyze historical sales returns and analysis of
credit memo data when evaluating the adequacy of the sales returns allowances
in any accounting period. Financial Risk Management and Derivatives The purpose of our foreign currency hedging activities is to protect us
from the risk that the eventual cash flows resulting from interest payments on
our Euro-denominated debt will be adversely affected by changes in exchange
rates. In addition, we seek to manage the impact of foreign currency
fluctuations related to the repayment of intercompany transactions, including
intercompany borrowings. We do not hold or issue financial instruments for
trading purposes. It is our policy to utilize derivative financial instruments
to reduce foreign exchange risks where internal netting strategies cannot be
effectively employed. Fluctuations in the value of hedging instruments are
offset by fluctuations in the value of the underlying exposures being hedged. In addition, we use forward exchange contracts to hedge certain purchases
and sales commitments and the related payables and receivables, including other
third party or intercompany foreign currency transactions. Hedged transactions
are denominated primarily in European currencies, Australian Dollar and
Japanese Yen. Gains and losses due to rate fluctuations on these transactions
are recognized in the same period as the items being hedged and are recorded as
a foreign currency gain or loss. Cash flows related to these gains and losses
are reported as operating or financing activities in the accompanying
consolidated statements of cash flows depending on the nature of the hedged
item. The counterparties to these contracts are substantial and credit worthy
multinational commercial banks. The risks of counterparty nonperformance
associated with these contracts are not considered to be significant. Contingent Liabilities We establish reserves for estimated loss contingencies when it is
managements assessment that a loss is probable and the amount of the loss can
be reasonably estimated. Revisions to contingent liabilities are reflected in
income in the period in which circumstances change or different facts or
information become known that affect the previous assumptions with respect to
the likelihood or amount of loss. Reserves for contingent liabilities are based
upon managements assumptions and estimates, as well as the advice of legal
counsel or other third parties regarding the probable outcomes of the matter.
Should the outcome differ from the assumptions and estimates, revisions to the
estimated reserves for contingent liabilities would be required. 20




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##### Table of Contents



Results of Operations The following table shows the results of our operations for fiscal years
2003, 2002 and 2001. Fiscal year ended March 31,2003Restated(1)
    
    2002
    
    2001(In thousands)Net sales
    
    $
    562,746
    
    
    $
    529,505
    
    
    $
    545,432Cost of sales
    
    
    329,695
    
    
    
    315,213
    
    
    
    349,556Gross profit
    
    
    233,051
    
    
    
    214,292
    
    
    
    195,876Research and development expenses
    
    
    12,190
    
    
    
    13,053
    
    
    
    14,857Selling and marketing expenses
    
    
    106,876
    
    
    
    101,735
    
    
    
    105,623General and administrative expenses
    
    
    47,079
    
    
    
    47,683
    
    
    
    52,006Amortization
    
    
    44
    
    
    
    44
    
    
    
    6,610Special charges
    
    
    
    
    
    
    28
    
    
    
    91,065Operating expenses
    
    
    166,189
    
    
    
    162,543
    
    
    
    270,161Operating/ income/(loss)
    
    
    66,862
    
    
    
    51,749
    
    
    
    (74,285
    )Interest income
    
    
    1,440
    
    
    
    2,302
    
    
    
    2,123Interest expense
    
    
    (33,540
    )
    
    
    (30,875
    )
    
    
    (25,575
    )Foreign currency
gain/(loss)
    
    
    (31,667
    )
    
    
    1,859
    
    
    
    (2,755
    )Income/(loss) before (provision)/benefit for income taxes, minority interest
and extraordinary item
    
    
    3,095
    
    
    
    25,035
    
    
    
    (100,492
    )(Provision)/benefit for income taxes
    
    
    1,474
    
    
    
    (7,010
    )
    
    
    32,206Minority interest
    
    
    (603
    )
    
    
    1,093
    
    
    
    287Income/(loss) before extraordinary item
    
    
    3,966
    
    
    
    19,118
    
    
    
    (67,999
    )Extraordinary item, net of tax
    
    
    
    
    
    
    
    
    
    
    1,471Net income/ (loss)
    
    $
    3,966
    
    
    $
    19,118
    
    
    $
    (66,528
    )Net income/(loss) per sharebasic:Income/(loss) per share before extraordinary item
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    (2.83
    )Extraordinary item
    
    
    
    
    
    
    
    
    
    
    0.06Net income/(loss) per sharebasic
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    (2.77
    )Weighted average common shares outstanding
    
    
    24,573
    
    
    
    24,067
    
    
    
    24,049Net income/(loss) per sharediluted:Income/(loss) per share before extraordinary item
    
    $
    0.16
    
    
    $
    0.78
    
    
    $
    (2.83
    )Extraordinary item
    
    
    
    
    
    
    
    
    
    
    0.06Net income/(loss) per sharediluted
    
    $
    0.16
    
    
    $
    0.78
    
    
    $
    (2.77
    )Weighted average common and dilutive securities outstanding
    
    
    24,856
    
    
    
    24,583
    
    
    
    24,049
   (1)
    
    See Note 2 to the Consolidated Financial Statements. 21




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##### Table of Contents



The following table shows certain items expressed as a percentage of our
net sales for the periods indicated: Fiscal year endedMarch 31,2003Restated(1)
    
    2002
    
    2001(%)Net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales
    
    
    58.6
    
    
    
    59.5
    
    
    
    64.1Gross profit
    
    
    41.4
    
    
    
    40.5
    
    
    
    35.9Research and development expenses
    
    
    2.2
    
    
    
    2.5
    
    
    
    2.7Selling and marketing expenses
    
    
    19.0
    
    
    
    19.2
    
    
    
    19.4General and administrative expenses
    
    
    8.4
    
    
    
    9.0
    
    
    
    9.5Amortization
    
    
    
    
    
    
    
    
    
    
    1.2Special charges
    
    
    
    
    
    
    
    
    
    
    16.7Operating expenses
    
    
    29.6
    
    
    
    30.7
    
    
    
    49.5Operating income/(loss)
    
    
    11.8
    
    
    
    9.8
    
    
    
    (13.6
    )Interest expense, net
    
    
    (5.7
    )
    
    
    (5.4
    )
    
    
    (4.3
    )Foreign currency gain/(loss)
    
    
    (5.6
    )
    
    
    0.3
    
    
    
    (0.5
    )Income/(loss) before (provision)/benefit for income taxes, minority interest and
extraordinary item
    
    
    0.5
    
    
    
    4.7
    
    
    
    (18.4
    )(Provision)/benefit for income taxes
    
    
    0.3
    
    
    
    (1.3
    )
    
    
    5.9Minority interest
    
    
    (0.1
    )
    
    
    0.2
    
    
    
    0.1Income/(loss) before extraordinary
item
    
    
    0.7
    
    
    
    3.6
    
    
    
    (12.4
    )Extraordinary item, net of tax
    
    
    
    
    
    
    
    
    
    
    0.3Net income/(loss)
    
    
    0.7
    
    
    
    3.6
    
    
    
    (12.1
    )
   (1)
    
    See Note 2 to the Consolidated Financial Statements. Fiscal 2003 Compared to Fiscal 2002 Net Sales. Our net sales were $562.7 million in fiscal 2003, reflecting an increase
of $33.2 million or 6.3% from $529.5 million in fiscal 2002. Using constant
exchange rates, net sales increased by 3.1%. The increase in net sales was
primarily in our European and North American regions. Net sales in the European
region increased primarily due to growth from our prescription laboratory
network in France, Italy and Spain that was partially offset by weaker results
from our wholesale businesses in Germany and the U.K.. The increase in North
America was primarily due to our sales and marketing initiatives, improved
product portfolio and increased prescription laboratory presence. These
increases were partially offset by a decrease in net sales to the Rest of World
region. A net sales increase in South America was offset by sales declines in
Asia, including Japan, and the Middle East due largely to current economic and
political conditions. Net sales performances by region were as follows:  
    
    North America increased by $12.3 million or 5.2%;
    
    Europe increased by $24.5 million or 13.2%; and
    
    Rest of World decreased by $3.6 million or 3.4%. Using constant exchange rates, the regional performances were as follows:  
    
    North America increased by 5.5%;
    
    Europe increased by 1.5%; and
    
    Rest of World increased by 0.7%. 22




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##### Table of Contents



The following table presents the reconciliation of constant currency
results to as reported results (in millions except percentage data): Net sales, as
    
    
    
    
    
    Adjusted net sales
    
    Net sales, asreported for the
    
    
    
    
    
    for the twelve
    
    reported for thetwelve months ended
    
    Constant Currency
    
    months ended
    
    twelve months endedRegion
    
    March 31, 2003
    
    Adjustment
    
    March 31, 2003
    
    March 31, 2002
    
    Percent increaseNorth America
    
    $
    249.1
    
    
    $
    0.7
    
    
    $
    249.8
    
    
    $
    236.8
    
    
    
    5.5
    %Europe
    
    
    210.3
    
    
    
    (21.7
    )
    
    
    188.6
    
    
    
    185.8
    
    
    
    1.5
    %Rest of World
    
    
    103.3
    
    
    
    4.3
    
    
    
    107.6
    
    
    
    106.9
    
    
    
    0.7
    %Total
    
    $
    562.7
    
    
    $
    (16.7
    )
    
    $
    546.0
    
    
    $
    529.5
    
    
    
    3.1
    %
 Gross Profit and Gross Margin. Our gross profit totaled $233.1 million for fiscal 2003 compared to gross
profit of $214.3 million for fiscal 2002, an increase of $18.8 million or 8.8%.
Gross profit as a percentage of net sales or gross margin increased to 41.4%
for fiscal 2003 from 40.5% for fiscal 2002. The increase in gross margin for
fiscal 2003 resulted primarily from improved overhead absorption due to our
decision to selectively increase global inventory balances to improve customer
service levels and to an increase of higher-margin value-added sales in North
America and Europe. Operating Expenses. Our operating expenses in fiscal 2003 totaled $166.2 million compared to
$162.5 million for fiscal 2002. Research and development expenses were $12.2
million or 2.2% of net sales in fiscal 2003 and were $13.1 million or 2.5% of
net sales for fiscal 2002. The decrease of $0.9 million or 6.9% in our research
and development expenses was due in part to headcount reductions associated
with the transfer of research and development activities from Petaluma,
California to Lonsdale, Australia. Selling and marketing expenses were $106.9
million or 19.0% of net sales in fiscal 2003 and were $101.7 million or 19.2%
of net sales in fiscal 2002. The increase in selling and marketing expenses was
primarily due to increased sales and marketing initiatives during fiscal 2003.
Our general and administrative expenses were $47.1 million in fiscal 2003 and
$47.7 million in fiscal 2002, a decrease of $0.6 million or 1.3%. As a
percentage of net sales, general and administrative expenses decreased to 8.4%
for fiscal 2003 compared to 9.0% for fiscal 2002. The decrease in general and
administrative expenses is the result of lower costs associated with the
consolidation of our corporate functions, as well as consolidating our North
American commercial activities into one primary location. Net Interest Expense and Foreign Currency Gain/(Loss). Our net interest expense totaled $32.1 million for fiscal 2003 compared to
$28.6 million for fiscal 2002, an increase of $3.5 million. The increase was
due primarily to the impact of the Euro-U.S. Dollar exchange rates between
periods. In fiscal 2003, we recorded a net foreign exchange loss of $31.7
million compared to a $1.9 million net foreign exchange gain for fiscal 2002.
Included in the $31.7 million foreign exchange loss recorded in fiscal 2003
were exchange losses on external and intercompany notes of $39.6 million. The
exchange losses on external and intercompany notes were due primarily to the
weakening of the U.S. Dollar to the Euro and the impact this had on our
Euro-denominated notes. Provision for Income Taxes. Our combined state, federal and foreign tax rate, as restated, was a
benefit of 47.6% for fiscal 2003 compared to expense of 28.0% for fiscal 2002.
The change in the effective tax rate resulted primarily from the change in
valuation and tax credits, partially offset by income taxed at differing rates
and other permanent items (See Note 17 of Notes to Consolidated
Financial Statements). 23




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##### Table of Contents



We have net deferred tax assets less deferred tax liabilities
on our balance sheet as of March 31, 2003 of $51.1 million. The utilization of
these net deferred tax assets less deferred tax liabilities depends upon our
ability to generate taxable income in the future. Minority Interest. Our minority interest loss totaled $0.6 million for fiscal 2003 compared
to minority interest income of $1.1 million for fiscal 2002, a decrease of $1.7
million. The decrease was due primarily to increased income during fiscal 2003
from several of our joint venture entities whose results are included in the
consolidated statements of operations. Fiscal 2002 Compared to Fiscal 2001 Net Sales. Our net sales were $529.5 million in fiscal 2002, reflecting a decrease of
$15.9 million or 2.9% from $545.4 million in fiscal 2001. Using constant
exchange rates, net sales increased by 0.2%. The decrease in net sales was
primarily due to reduced sales in the Rest of World and North America regions.
Net sales in the Rest of World region decreased due to our efforts to
concentrate on higher margin value-added sales. The decrease in North America
was due primarily to decreased sales to laboratory customers that are owned and
aligned with two principal competitors. Net sales performances by region were
as follows:  
    
    North America decreased by $8.6 million or 3.5%;
    
    Europe increased by $2.9 million or 1.6%; and
    
    Rest of World decreased by $10.2 million or 8.7%. Using constant exchange rates, the regional performances were as follows:  
    
    North America decreased by 3.6%;
    
    Europe increased by 4.1%; and
    
    Rest of World increased by 2.0%. The following table presents the reconciliation of constant currency
results to as reported results (in millions except percentage data): Net sales, as
    
    
    
    
    
    Adjusted net sales
    
    Net sales, asreported for the
    
    
    
    
    
    for the twelve
    
    reported for thetwelve months ended
    
    Constant Currency
    
    months ended
    
    twelve months endedRegion
    
    March 31, 2002
    
    Adjustment
    
    March 31, 2002
    
    March 31, 2001
    
    Percent increaseNorth America
    
    $
    236.8
    
    
    $
    (0.1
    )
    
    $
    236.7
    
    
    $
    245.4
    
    
    
    (3.6
    )%Europe
    
    
    185.8
    
    
    
    4.6
    
    
    
    190.4
    
    
    
    182.9
    
    
    
    4.1
    %Rest of World
    
    
    106.9
    
    
    
    12.6
    
    
    
    119.5
    
    
    
    117.1
    
    
    
    2.0
    %Total
    
    $
    529.5
    
    
    $
    17.1
    
    
    $
    546.6
    
    
    $
    545.4
    
    
    
    0.2
    %
 24




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##### Table of Contents



Gross Profit and Gross Margin. Our gross profit totaled $214.3 million for fiscal 2002 compared to gross
profit of $195.9 million for fiscal 2001, an increase of $18.4 million or 9.4%.
Gross profit as a percentage of net sales or gross margin increased to 40.5%
for fiscal 2002 from 35.9% for fiscal 2001. Fiscal 2002 gross profit was
adversely impacted by lower sales levels while fiscal 2001 gross profit
included inventory write-offs of $25.6 million. Operating Expenses. Our operating expenses in fiscal 2002 totaled $162.5 million compared to
$270.2 million for fiscal 2001. Operating expenses included special charges of
$91.1 million in fiscal 2001. Research and development expenses were $13.1
million or 2.5% of net sales in fiscal 2002 and were $14.9 million or 2.7% of
net sales for fiscal 2001. The decrease of $1.8 million or 12.1% in our
research and development expenses was due in part to headcount reductions
associated with the strategic initiatives. Selling and marketing expenses were
$101.7 million or 19.2% of net sales in fiscal 2002 and were $105.6 million or
19.4% of net sales in fiscal 2001. The decrease in selling and marketing
expenses was primarily due to lower costs as a result of centralizing product
management and marketing activities. Our general and administrative expenses
were $47.7 million in fiscal 2002 and $52.0 million in fiscal 2001, a decrease
of $4.3 million or 8.3%. As a percentage of net sales, general and
administrative expenses decreased to 9.0% for fiscal 2002 compared to 9.5% for
fiscal 2001. The decrease in general and administrative expenses was the result
of lower costs associated with the consolidation of our corporate functions, as
well as consolidating our North American administrative activities into one
primary location. Included in general and administrative expenses for fiscal
2001 were charges resulting from the devaluation of the Brazilian Real of $3.1
million. Included in operating expenses for fiscal 2001 was goodwill
amortization of $6.6 million. Due to early adoption of SFAS No. 142 in fiscal
2002, we are no longer required to amortize goodwill as a charge to earnings;
however, we are required on an annual basis to review goodwill for potential
impairment. If an impairment is found to exist, a charge will be recorded
against earnings. Primarily as a result of our strategic initiatives, which commenced in the
third quarter of fiscal 1999, during fiscal 2002, we recorded net pretax
special charges comprised of $0.8 million associated with additional facility
closure costs, offset by a gain on the sale of land in North America of $0.8
million, also associated with facility closures. We recorded pretax special charges of $91.1 million in fiscal 2001. We
incurred $19.7 million of expense associated with workforce reductions in North
America, Europe and Australia. Included in the workforce reductions were 780
employees from manufacturing, 91 employees from sales and marketing, 75
employees from administration, and 46 employees from research and development.
At March 31, 2002, $25.1 million cash had been paid related to workforce
reductions incurred since fiscal 1999. The special charges included $24.3
million related to the write-off of molds, which were discontinued as a result
of our efforts to standardize product specifications on a global basis. Also,
we continued to transfer high-volume production to low-cost manufacturing
locations and to consolidate manufacturing expertise into fewer production
facilities. As a result, we incurred special charges of $28.2 million related
to redundant equipment write-offs and facility closure costs in fiscal 2001.
Additionally, as a result of our discontinuation of the development of the
polycarbonate Matrix product line, we incurred $7.6 million in asset
write-offs, including equipment ($7.0 million) and related commitments ($0.6
million). We recognized a gain on the sale of land in North America of $5.8
million associated with facility closures in fiscal 2001. Also included in
special charges is $17.0 million related to the impairment of goodwill
associated with a prior acquisition of a lens manufacturing business. This
impairment was recorded pursuant to SFAS 121, Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, as we decided to
discontinue and cease operations of this lens manufacturing business and
completely close-down the facility. For more information, see Note 14 of Notes
to Consolidated Financial Statements. AssetWrite-offsAssociatedwithDiscontinued
    
    Gain onWorkforce
    
    Mold
    
    Facility
    
    Goodwill
    
    Product
    
    sale ofReductions
    
    Write-offs
    
    Closures
    
    Impairment
    
    Line
    
    Land
    
    TotalStrategic initiative liability as of
March 31, 2000
    
    $
    6,268
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    6,268Fiscal 2001 Charge to operations
    
    
    19,681
    
    
    
    24,256
    
    
    
    28,235
    
    
    
    17,057
    
    
    
    7,690
    
    
    
    (5,854
    )
    
    
    91,065Utilized:Non-cash
    
    
    
    
    
    
    (24,256
    )
    
    
    (25,286
    )
    
    
    (17,057
    )
    
    
    (7,690
    )
    
    
    
    
    
    
    (74,289
    )Cash
    
    
    (12,267
    )
    
    
    
    
    
    
    (510
    )
    
    
    
    
    
    
    
    
    
    
    5,854
    
    
    
    (6,923
    )Strategic initiative liability as of
March 31, 2001
    
    
    13,682
    
    
    
    
    
    
    
    2,439
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,121Fiscal 2002 Charge to operations
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28Utilized:Non-cash
    
    
    
    
    
    
    
    
    
    
    (767
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (767
    )Cash
    
    
    (8,812
    )
    
    
    
    
    
    
    (274
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,086
    )Strategic initiative liability as of
March 31, 2002
    
    
    4,870
    
    
    
    
    
    
    
    1,426
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,296Utilized:Cash
    
    
    (4,219)
    
    
    
    
    
    
    
    (1,207
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,426
    )Strategic initiative liability as of
March 31, 2003
    
    $
    651
    
    
    $
    
    
    
    $
    219
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    870
 25




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##### Table of Contents



At March 31, 2003, our strategic initiatives have been substantially
completed and we do not anticipate any additional special charges related to
our strategic initiatives. The liability associated with the strategic
initiatives as of March 31, 2003 is included in accrued liabilities. We
anticipate that substantially all of the accrued liability will be paid in
fiscal 2004 and will be funded through cash provided by operations. Operating expenses in fiscal 2002 declined by $30.4 million from fiscal
1999. Additionally, unit costs decreased significantly from fiscal 1999. Net Interest Expense and Foreign Currency Gain/(Loss). Our net interest expense totaled $28.6 million for fiscal 2002 compared to
$23.5 million for fiscal 2001, an increase of $5.1 million. The increase was
due primarily to increased average borrowing rates and increased borrowing
levels in fiscal 2002 compared to fiscal 2001. In fiscal 2002, we recorded a
net foreign exchange gain of $1.9 million compared to a $2.8 million net
foreign exchange loss for fiscal 2001. Exchange gains on external and
intercompany notes of $2.7 million were recorded in fiscal 2002 due primarily
to the strengthening of the U.S. Dollar to the Euro and the weakening of the
U.S. Dollar to the Brazilian Real and the impact this had on our Euro
denominated Senior Notes and U.S. Dollar denominated notes with our Brazilian
subsidiary. Provision for Income Taxes. Our combined state, federal and foreign tax rate was approximately 28.0%
for fiscal 2002 compared to 32.0% for fiscal 2001. We had net deferred tax
assets less deferred tax liabilities on our balance sheet as of March 31, 2002
amounting to approximately $36.1 million. The utilization of these net deferred
tax assets less deferred tax liabilities depends upon our ability to generate
taxable income in the future. Minority Interest. Our minority interest income totaled $1.1 million for fiscal 2002 compared
to $0.3 million for fiscal 2001, an increase of $0.8 million. The increase was
due primarily to increased losses during fiscal 2002 from several of our joint
venture entities whose results are included in the consolidated statements of
operations. Extraordinary Item. In June 2000, we purchased $5.0 million of our 6 7/8% Senior Notes prior
to their scheduled maturity in 2008. As a result, we recorded an extraordinary
gain of $1.5 million, net of tax of $0.9 million, resulting from the difference
between the carrying value of the notes and the purchase price. The purchase
was funded by our credit facility and resulted in a decline in net borrowings. Liquidity and Capital Resources Our operating activities generated $34.0 million in cash in fiscal 2003
compared to $23.6 million in fiscal 2002 and $25.6 million in fiscal 2001. The
increase in cash flows from operations in fiscal 2003 resulted primarily from
improved operating performance in fiscal 2003. Included in net income for
fiscal 2003 was an unrealized $45 million foreign currency loss on net
long-term Euro-denominated debt and cash reserves (net of tax). Cash flow from
operations was not impacted by this currency loss since it was non-cash in
nature and, as a result, has been added back to net income for cash flow
reporting purposes. Our inventories as a percentage of annualized net sales for fiscal 2003,
fiscal 2002, and fiscal 2001 were 14.9%, 15.0%, and 16.2%, respectively.
Inventories at March 31, 2003 increased $8.9 million when compared to the
previous year end. This 26




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##### Table of Contents



increase was due to our decision to selectively increase global inventory
balances to improve customer service levels as well as the impact of exchange
rates. The decrease in fiscal 2002 compared to fiscal 2001 was a result of the
strategic initiatives implemented during fiscal 2001 to reduce inventory
levels. Accounts receivable as a percentage of annualized net sales for fiscal
2003, fiscal 2002, and fiscal 2001 were 20.0%, 20.9%, and 21.8%, respectively.
The decreases in fiscal 2003 and fiscal 2002 were a result of improved
collections. During fiscal 2003, net cash expended on investing activities amounted to
$45.0 million. Included in this amount was $21 million for the acquisition of
certain assets or stock of five optical laboratories located in the U.S. and
the acquisition of the net assets of a fabricator of polycarbonate molds and
inserts and a Scandinavian distributor. We also invested in $21.9 million of
capital expenditures and an additional $3.1 million in molds. During fiscal
2002, net cash expended on investing activities amounted to $15.6 million.
Included in this amount was $17.1 million of capital expenditures and an
additional $5.9 million in molds, offset in part by proceeds from the disposal
of a $1.2 million trade investment and $5.5 million from the sale of a building
in Petaluma, California. During fiscal 2001, net cash expended on investing
activities amounted to $37.6 million. Included in this amount was $20.9 million
of capital expenditures, $15.4 million for the acquisition of Oracle Lens
Manufacturing Corporation, a polycarbonate lens manufacturer in Rhode Island,
and $2.5 million for the acquisition of the remaining 65% interest in a
wholesale laboratory group located in Australia and New Zealand. Partially
offsetting these expenditures was $6.4 million of net proceeds received from
the sale of land in Petaluma, California. We anticipate capital expenditures,
including molds, of approximately $20 to $25 million in fiscal 2004. Our net cash used by financing activities amounted to $2.4 million in
fiscal 2003. This was primarily comprised of net payments on long term debt.
Our net cash provided by financing activities amounted to $34.5 million in
fiscal 2002, primarily as a result of the net impact of our issuance of 11%
Senior Notes, the proceeds of which were primarily used to repay our credit
facility. Net cash provided by financing activities amounted to $20.1 million
in fiscal 2001, primarily from borrowings on our credit facilities. Cash
outflows in fiscal 2001 included $8.2 million related to a stock buy back under
our stock repurchase program. Additionally, in the first quarter of fiscal
2001, we purchased $5.0 million of our 6 7/8% Senior Notes due 2008 for $2.7
million, resulting in an extraordinary gain of $1.5 million, net of tax. On April 17, 2001, we completed the sale of 205 million ($182.0 million
at date of sale) of 11% Senior Notes due March 15, 2008 through a private
placement to qualified institutional buyers pursuant to Rule 144A and to
persons outside of the United States in compliance with Regulation S. The notes
are senior unsecured obligations and rank equally with all of our existing and
future unsecured debt. Interest on the notes is payable semi-annually on each
September 15 and March 15. We may redeem these Senior Notes in whole or in part, at any time, on or
after March 15, 2005, at a redemption price equal to 100% of their principal
amount plus a premium declining ratably to par plus accrued and unpaid interest
and liquidation damages, if any. Prior to March 15, 2004, we may redeem up to
35% of the original aggregate principal amount of these Senior Notes with the
proceeds of qualified equity offerings at a redemption price of 111% of their
principal amount plus accrued and unpaid interest and liquidation damages, if
any. The indenture governing the notes contains certain covenants that, among
other things, limit our ability to incur additional indebtedness or liens, make
investments, sell assets, pay dividends or make other distributions. In addition to our outstanding 6 7/8% Senior Notes and 11% Senior Notes,
our foreign subsidiaries maintain local credit facilities to provide credit for
overdraft, working capital and some fixed asset investment purposes. As of
March 31, 2003, the total borrowing capacity available to our foreign
subsidiaries under such local facilities was approximately $18.6 million, of
which $1.1 million had been utilized. On October 29, 2002, we entered into a three-year $90 million secured
revolving credit facility. This credit agreement replaced the previous $45
million Credit Agreement. The new credit agreement contains a number of
covenants substantially similar to the prior Credit Agreement including, among
others, covenants restricting us and our subsidiaries with respect to the
incurrence of indebtedness, the creation of liens, the making of certain
investments and loans, the payment of dividends, and the ability to enter into
certain transactions with affiliates. In addition, the new credit agreement
requires us to maintain certain interest coverage, net worth and leverage
ratios and places certain restrictions on capital expenditures. Interest on the
new credit agreement is payable at a rate based upon the London Interbank
Offered Rate (LIBOR) plus 2.75% per annum. As of March 31, 2003, we were in
compliance with all covenants and there were no debt outstanding under this
agreement. In order to continue our operations and meet our significant liquidity
requirements, we must achieve profitable operations or obtain additional funds
through equity or debt financing, bank financing, and other sources. We believe
that our existing cash balances, foreign credit facilities, internally
generated funds and other potential financing alternatives will be sufficient
to meet our capital, operating and debt service requirements for at least the
next twelve months. If we are unable to generate adequate cash flow from sales
of our products, we may need to seek additional sources of capital. However, we
cannot be certain that we will be able to obtain additional debt or equity
financing on terms acceptable to us, or at all. If adequate funds 27




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are not available, we could be required to delay development or
commercialization of certain products, or reduce the marketing, customer
support, or other resources devoted to product development. Accordingly, our
failure to obtain sufficient funds on acceptable terms when needed could have a
material adverse effect on our business, results of operations and financial
condition. Contractual Obligations and Commercial Commitments The following table summarizes our contractual obligations at March 31,
2003, and the effect these obligations are expected to have on our liquidity
and cash flow in future periods: Payments Due by PeriodContractual Obligations
    
    Total
    
    Less than 1 year
    
    1-3 years
    
    4-5 years
    
    After 5 years(in thousands)Notes payable
    
    $
    522
    
    
    $
    522
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt, including capital
leases
    
    
    9,472
    
    
    
    3,510
    
    
    
    3,840
    
    
    
    1,679
    
    
    
    443Senior notes
    
    
    318,242
    
    
    
    
    
    
    
    
    
    
    
    318,242
    
    
    
    Operating leases
    
    
    28,367
    
    
    
    7,029
    
    
    
    10,061
    
    
    
    5,253
    
    
    
    6,024Total contractual obligations
    
    $
    356,603
    
    
    $
    11,061
    
    
    $
    13,901
    
    
    $
    325,174
    
    
    $
    6,467
 As of March 31, 2003, we had no debt outstanding under our Bank Credit
Agreement. We have issued a $1.6 million standby letter of credit maturing on
April 25, 2005 to guarantee third party debt. We have recourse provisions that
would enable us to recover fixed assets with an estimated net book value of
approximately $1.1 million in the event that the obligor defaults on its
payment obligation that is subject to our standby letters of credit. Currency Exchange Rates As a result of our worldwide operations, currency exchange rate
fluctuations tend to affect our results of operations and financial position.
The principal effect of currency exchange rates on our results of operations
and financial position is the impact on our Euro-denominated debt and
translation adjustments for subsidiaries where the local currency is the
functional currency. Translation adjustments for functional local currencies
have been recorded to stockholders equity. Certain countries were determined to be hyperinflationary in fiscal 2003
and fiscal 2002 as defined under the provisions of Emerging Issues Task Force
(EITF) Issue No. D-55, Determining a Highly Inflationary Economy under FASB
Statement No. 52and EITF Issue No. D-56, Accounting for a Change in Functional
Currency and Deferred Taxes When an Economy Becomes Highly Inflationary.
Accordingly, the results of our entities located in those countries are being
accounted for in accordance with the provisions of these pronouncements. Because a portion of our debt and associated interest is non-U.S. Dollar
denominated, we may hedge against certain currency fluctuations by entering
into currency swaps or forward contracts. As of March 31, 2003, we have several
foreign exchange contracts outstanding to hedge portions of our accounts
payable and accounts receivable exposure. During fiscal 2003, we had various
contracts in place to hedge the semi-annual interest payments on our
Euro-denominated third party debt. We do not hold derivative financial
instruments for speculative or trading purposes. Seasonality Our business is somewhat seasonal, with fiscal third quarter results
generally weaker than the other three quarters. Fiscal fourth quarter results
are generally the strongest. Inflation Inflation continues to affect our cost of the goods and services that we
use. The competitive environment in many markets limits our ability to recover
higher costs through increased selling prices, and we are subject to price
erosion in many of our standard product lines. We seek 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 our reported revenues and profits and the measures taken by us in
response to inflationary conditions, see Currency Exchange Rates above. 28




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Impact of Recently Issued Accounting Standards In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF Issue No. 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of multiple products,
services and/or rights to use assets. The provisions of EITF Issue No. 00-21
will apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. We believe that the adoption of this standard will have
no material impact on our financial statements. In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity
if the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. We believe that the adoption of this standard
will have no material impact on our financial statements. In March 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, Accounting for Certain Financial Instruments with Characteristics of
Liabilities and Equity (SFAS 149). This Statement establishes standards for
classification of certain financial instruments that have characteristics of
both liabilities and equity in the statement of financial position. This
Statement will be effective upon issuance for all contracts created or modified
after the date the Statement was issued and otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. We
believe that the adoption of this standard will have no material impact on our
financial statements. Management Assessment of Operating Results; Use of Non-GAAP Financial Measures This report discloses certain financial measures that are considered
non-GAAP measures. Generally, a non-GAAP financial measure is a numerical
measure of a companys performance, financial position, or cash flows that
either excludes or includes amounts that are not normally excluded or included
in the most directly comparable measure calculated and presented in accordance
with accounting principles generally accepted in the United States of America
(GAAP). While these financial measures are not determined in accordance with
GAAP and should not be viewed as an alternative to GAAP measures, we believe
that they provide useful information to both management and investors. These
measures may exclude the translation effect of foreign currency and certain
expenses, gains and losses that may not be indicative of our core operating
results. We believe these financial measures are useful to investors in
allowing for greater transparency to supplemental information used by
management in its financial and operational decision-making. In addition, we
have historically reported similar financial measures to our investors and
believe that the inclusion of comparative numbers provides consistency in our
financial reporting. This report includes non-GAAP presentations of sales growth, which are
adjusted for the translation effect of foreign currency. We believe that these
presentations provide management and investors with insight into sales
performance, which facilitates comparisons among SOLA and other companies. Risk Factors Certain of the matters discussed in this report or in the information
incorporated by reference may constitute forward-looking statements.
Forward-looking statements can generally be identified by the use of
forward-looking terminology such as believes, expects, may, will,
should, seeks, approximately, intends, plans, estimates, or
anticipates or the negative of these terms or other comparable terminology,
or by discussions of strategy, plans or intentions. Statements contained in
this report that are not historical facts are forward-looking statements.
Without limiting the generality of the preceding statement, all statements in
this report concerning or relating to estimated and projected earnings,
margins, costs, expenditures, cash flows, growth rates and financial results
are forward-looking statements. In addition, we, through our senior management,
from time to time make forward-looking public statements concerning our
expected future operations and performance and other developments. These
forward-looking statements are necessarily estimates reflecting our best
judgment based upon current information and involve a number of risks and
uncertainties. Other factors may affect the accuracy of these forward-looking
statements and our actual results may differ materially from the results
anticipated in these forward-looking statements. While it is impossible to
identify all relevant factors, factors that could cause actual results to
differ materially from those estimated by us include, but are not limited to,
those factors or conditions described below, as well as changes in the
regulation of the spectacle lens industry at either or both of the federal and
state levels, competitive pressures in the spectacle lens industry and our
response to these factors, and general conditions in the economy and capital
markets. 29




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All subsequent written and oral forward-looking statements attributable to
SOLA and persons acting on our behalf are qualified in their entirety by the
cautionary statements contained in this section and elsewhere in this report. Risks Relating to SOLA and the Industry We operate in the highly competitive spectacle lens industry, and we may not be
able to compete effectively with entities with more established operating
histories and greater financial resources. We operate in the highly competitive spectacle lens industry. We compete
primarily on the basis of customer service, quality and breadth of product
offerings, innovation and price. The spectacle lens industry is characterized
by price competition, which can be severe in some of our markets, particularly
for standard products. We attempt, 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
our lenses and coatings. Our competitors may develop products or services that
are more effective or less expensive than our products or that could render
certain of our products less competitive. Since recently developed products
comprise a substantial portion of our sales, our performance and future growth
are dependent upon our continuing ability to develop and market new products. Some of our competitors have significantly greater financial resources
than we do to fund expansion and research and development. Within a particular
market, certain of our competitors may enjoy a home-country advantage over
foreign competition. We also face competition from a number of our principal
competitors, such as Essilor and Hoya, that are vertically integrated with
processing laboratories to a greater extent than we are. This integration
limits the number of independent processing laboratories to which we can market
products. Since their acquisition by Essilor and Hoya, these laboratories have
decreased the purchase of our products. Our sales to Essilor and Hoya owned
laboratories were approximately 2.9% of net sales in fiscal 2003 and 3.5% in
fiscal 2002. We are subject to certain risks associated with our foreign operations. We have manufacturing and distribution sites in three major regions: North
America (including Mexico), Europe and Rest of World (comprised primarily of
Australia, Asia and South America). Approximately 56% of our net sales in the
fiscal year ended March 31, 2003 were derived from the sale of products outside
the United States. As a result, a significant portion of our sales and
operations are subject to the risks inherent in international operations,
including:  
    
    Developments in the foreign political and economic environment may have an
adverse effect on operations in those countries;
    
    Tax rates in certain foreign countries may exceed those in the United
States and foreign earnings may be subject to withholding requirements or
the imposition of tariffs, exchange controls or other restrictions;
    
    We may find it difficult to manage a large organization spread throughout
various countries, including staffing and managing foreign operations;
    
    We may have difficulty enforcing agreements and collecting receivables
through certain foreign legal systems;
    
    Foreign customers may have longer payment cycles than customers in the
United States; and
    
    We may find it difficult to comply with a variety of foreign laws and
regulations. As we continue to expand our business globally, our success will be
dependent, in part, on our ability to effectively manage these and other risks.
These and other factors could have a material adverse effect on our
international operations or our business as a whole. Our cash flow is comprised
of a variety of currencies. Although we may enter into currency swap agreements
with financial institutions to reduce our exposure to fluctuations in foreign
currency values relative to our debt obligations, these 30




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hedging transactions, if entered into, will not eliminate that risk
entirely. As a result of our worldwide operations, currency exchange rate
fluctuations tend to affect our results of operations and financial position.
See Managements Discussion and Analysis of Financial Condition and Results of
OperationsCurrency Exchange Rates andInflation. We may not be able to continually reduce manufacturing costs. To maintain and/or strengthen our competitive position within the
spectacle lens industry, we must continually reduce our product manufacturing
costs and operating expenses. In addition to normal cost reduction activities,
we have initiated product migration and standardization activities and reduced
the number of people employed worldwide. These reductions were necessary to
help offset price decreases, inflationary pressures and changes in product and
regional mix. To the extent our cost reduction activities are unsuccessful, in
part or in full, our ability to compete may be significantly impacted. We concentrate a large part of our manufacturing operations in Tijuana, Mexico. Currently, approximately 40% of our manufacturing operations are based in
three facilities in Tijuana, Mexico. A fire, flood, earthquake, war, work
stoppage, supply shortage or disruption, adverse government action or other
disaster or condition could result in a loss of production capabilities and,
accordingly, impede our ability to meet our customers requirements. The risks
of these events are partially mitigated by various efforts, in particular our
global specifications standardization program, which increasingly allows access
to inventory around the world; and our program to ensure dual or
multi-manufacturing site production of key products with planned stand-by
capacity. We must continue to develop new and enhanced products. We are continually developing new and enhanced products in an effort to
develop incremental sales and improved gross margins. Our ability to develop
new and enhanced products successfully will be a significant factor in our
ability to grow and remain competitive. Some of our products may become
obsolete, and we may not achieve the technological advances necessary for us to
remain competitive. We are also subject to the risks generally associated with
new product introductions, such as lack of market acceptance and delays in
product development. Our results may be affected by our ability to generate
sales from new products as anticipated and the costs of such introductions. We compete against alternative technologies and treatments that provide a
substitute for spectacle lenses. Spectacle lenses compete with other methods of vision correction,
including laser surgery and contact lenses. As these technologies evolve, they
may provide more competition to the spectacle lens business and lead to
declines in our net sales. We conduct all of our foreign operations through subsidiaries and the payment
of dividends by these entities may be restricted. We conduct all of our foreign operations through subsidiaries. These
operations contribute significantly to our sales and profitability. The payment
of dividends and the making of loans and advances to us by our subsidiaries are
in many instances subject to statutory restrictions, are contingent upon the
results of operations of those subsidiaries and are subject to various business
considerations. Dividends and other payments to us from subsidiaries in certain
jurisdictions are subject to legal restrictions and may have adverse tax
consequences to us. Management reviews the need for cash distributions to us
from our foreign subsidiaries on a case by case basis. Although it is
managements intention that all undistributed earnings of non-U.S. subsidiaries
be reinvested indefinitely, if the need for cash distributions from the
subsidiaries should arise in the future, there can be no assurance that the
subsidiaries will be permitted to make such cash distributions without legal
restrictions or adverse tax consequences to us. We are dependent on a small number of suppliers for raw materials. Most of the raw materials used in our products are readily available from
a number of suppliers at competitive prices, and we have not experienced any
significant shortages in obtaining raw materials. While there are currently
multiple suppliers of polycarbonate and monomer raw materials, we purchase over
50% of those materials from three suppliers. The loss of any of these
suppliers, or a significant decrease in the supply of polycarbonate or monomer,
would require us to obtain these raw 31




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materials elsewhere. If we were unable to obtain polycarbonate or monomer
from other suppliers at acceptable prices, we might realize lower margins and
experience difficulty in meeting our customers requirements. In addition, our
photochromic lenses are processed by a third party using technology that is
proprietary to it. We are dependent upon the North American chain retail channel. Distribution to national chain retail, super optical retail stores and
retail buying groups is a growing distribution channel for spectacle lenses. We
believe this distribution channel will continue to be important to sustain
growth and profitability. While we are currently well positioned in this
distribution channel through relationships with key retailers, these
relationships could terminate or these retailers could choose one or more of
our competitors to provide them with lenses in the future. Additionally, these
retailers could choose to process and distribute lenses themselves rather than
purchasing the lenses from us or any other third party. We may be adversely affected by environmental and safety regulations to which
we are subject. We must comply with U.S. 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 with
other federal, state and foreign laws and regulations. We believe that we
possess all material permits and licenses necessary for the continuing
operation of our business and believe that our operations are in substantial
compliance with the terms of all applicable environmental laws. We cannot
assure you that we will operate at all times in complete compliance with all
such requirements. We could be subject to potentially significant fines and
penalties for any noncompliance that may occur. It is impossible to predict
accurately what effect these laws and regulations will have on us in the
future. Our success depends on our key personnel and we may not be able to retain
sufficient qualified personnel. Our success depends in part on our ability to attract personnel with
spectacle industry experience. We may face competition in recruiting this
personnel and accordingly experience difficulty in growing and succeeding. The
loss of the services of this personnel or the ability to retain such personnel
in the future could hinder the implementation of our business strategy. We do
not carry key man insurance on our senior management team. Our substantial level of indebtedness could adversely affect our financial
condition. We have substantial indebtedness that may limit our ability to respond to
market conditions (including our ability to satisfy capital expenditure
requirements) or to meet our contractual or financial obligations. In addition,
the debt instruments governing our indebtedness are subject to covenants that
could limit our ability to conduct our business. Furthermore, our ability to
satisfy our obligations depends on our future performance. Our future
performance is subject to prevailing economic conditions and to financial,
business and other factors, including factors beyond our control. Interest on
our $95 million aggregate principal amount of 6 7/8% Senior Notes and  205
million aggregate principal amount of 11% Senior Notes is payable in cash
semi-annually through and including March 15, 2008. The Senior Notes are both
payable in full on March 15, 2008. Although we believe that cash flow from
operations will be sufficient to meet all of our debt service requirements and
to fund our capital expenditure requirements, we cannot guarantee that this
will be the case. Our Charter and By-laws contain antitakeover provisions that could make the
acquisition of SOLA more difficult. Certain provisions of Delaware law and our certificate of incorporation
and by-laws could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire,
control of SOLA. For example, our by-laws include advance notice procedures for
stockholders to nominate candidates for election as directors as well as to
submit proposals for consideration at stockholders meetings. We have also
adopted a shareholder rights plan that could have the effect of delaying or
hindering a possible takeover of SOLA. In addition, we are subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation
Law, which could have the effect of delaying or preventing a change in control
of SOLA. 32




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Risks Relating to our Common Stock The public market for our common stock has been and may continue to be
volatile. The market price of our common stock is highly volatile and could
fluctuate significantly in response to various factors, including:  
    
    Actual or anticipated variations in our quarterly operating results;
    
    Announcements of new products by us or our competitors;
    
    Changes in financial estimates by securities analysts;
    
    Trends in our business environment, including competitive and pricing
pressures; and
    
    General market conditions and other factors. In addition, the stock markets have experienced extreme price and volume
fluctuations that have affected the market prices of equity securities. These
fluctuations have often been unrelated or disproportionate to operating
performance. These broad market factors may materially affect the trading price
of our common stock. General economic, political and market conditions like
recessions and interest rate fluctuations may also have an adverse effect on
the market price of our common stock. Our quarterly operating results may vary. Our quarterly operating results have varied in the past, and we expect
that our quarterly operating results will continue to vary in future periods
depending on a number of factors, including seasonal variances in demand for
our products, the cost of product introductions, changes in product mix, our
ability to control costs, capital expenditures, working capital requirements
and other factors described in this Risk Factors section of this report. For
example, all other factors aside, our results are generally weakest in the
third quarter as a result of lower sales during the holiday season and
strongest in the fourth quarter. For these and other reasons, we may not meet
the earnings estimates of securities analysts or investors, and our stock price
could suffer. 
 Item 7A.Quantitative and Qualitative Disclosures about Market Risk Quantitative Disclosures We are exposed to market risks inherent in our 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. Interest Rate Risk.We are subject to interest rate risk on our existing
long-term debt and any future financing requirements. During fiscal 2003, fixed
rate debt consisted primarily of outstanding balances on Senior Notes. The following table presents the future principal cash flows and weighted
average interest rates expected on our existing long-term debt instruments.
Fair values have been determined based on quoted market prices as of March 31,
2003: Expected Maturity Date (as of March 31, 2003)Fiscal
    
    Fiscal
    
    Fiscal
    
    Fiscal
    
    Fiscal
    
    
    
    
    
    
    
    
    
    Fair2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    Value(Dollars in thousands)Long-term debt:Fixed rate debt
    
    $
    3,267
    
    
    $
    1,746
    
    
    $
    1,773
    
    
    $
    1,248
    
    
    $
    318,586
    
    
    $
    444
    
    
    $
    327,064
    
    
    $
    341,896Weighted average interest rate
    
    
    4.96
    %
    
    
    5.32
    %
    
    
    5.35
    %
    
    
    5.22
    %
    
    
    9.74
    %
    
    
    4.09
    %
    
    
    9.63
    %Long-term debt:Variable rate debt
    
    $
    243
    
    
    $
    178
    
    
    $
    143
    
    
    $
    86
    
    
    $
    
    
    
    $
    
    
    
    $
    650
    
    
    $
    650Weighted average interest rate
    
    
    1.90
    %
    
    
    1.56
    %
    
    
    1.61
    %
    
    
    1.59
    %
    
    
    
    
    
    
    
    
    
    
    1.70
    %
 Currency Rate Risk.We are exposed to currency exchange rate fluctuations
on our 205 million 11% Senior Notes, due 2008 as well as accounts receivable
and accounts payable of our subsidiaries denominated in currencies other than
their local 33




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currencies. Our 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. Accordingly, there are no quantitative disclosures
related to borrowings by our subsidiaries. The following table presents the future principal cash flows and weighted
average interest rates expected on the 205 million 11% Senior Notes, due 2008
as well as the contract amount and weighted average settlement price of the
outstanding forward exchange contracts. Fair values have been determined based
on quoted market prices as of March 31, 2003: Expected Maturity Date (as of March 31, 2003)Fiscal2004
    
    Fiscal 2005-2008
    
    Total
    
    Fair Value(Dollars in thousands)Long-term debt:Fixed rate debt
    
    
    
    
    
    $
    223,433
    
    
    $
    223,433
    
    
    $
    239,074Weighted average
interest rate
    
    
    
    
    
    
    11
    %
    
    
    11
    %Forward exchange
contracts:Contract amounts
due April 2003
    
    $
    65,077
    
    
    
    
    
    
    $
    65,077
    
    
    $
    65,123Contract amounts
due May 2003
    
    $
    19,136
    
    
    
    
    
    
    $
    19,136
    
    
    $
    19,148Contract amounts
due June 2003
    
    $
    23,561
    
    
    
    
    
    
    $
    23,561
    
    
    $
    23,593Contract amounts
due July 2003
    
    $
    21,290
    
    
    
    
    
    
    $
    21,290
    
    
    $
    21,332Contract amounts
due August 2003
    
    $
    25,865
    
    
    
    
    
    
    $
    25,865
    
    
    $
    25,922Contract amounts
due September 2003
    
    $
    15,098
    
    
    
    
    
    
    $
    15,098
    
    
    $
    15,122Contract amounts
due October 2003
    
    $
    19,491
    
    
    
    
    
    
    $
    19,491
    
    
    $
    19,531Contract amounts
due November 2003
    
    $
    24,560
    
    
    
    
    
    
    $
    24,560
    
    
    $
    24,619Contract amounts
due December 2003
    
    $
    10,437
    
    
    
    
    
    
    $
    10,437
    
    
    $
    10,447Contract amounts
due January 2004
    
    $
    15,835
    
    
    
    
    
    
    $
    15,835
    
    
    $
    15,864Contract amount
due February 2004.
    
    $
    19,600
    
    
    
    
    
    
    $
    19,600
    
    
    $
    19,632Contract amount
due March 2004
    
    $
    14,550
    
    
    
    
    
    
    $
    14,550
    
    
    $
    14,564Weighted average
settlement price
    
    
    .3728
    
    
    
    
    
    
    
    .3728
 Qualitative Disclosures Interest Rate Risk.Our primary interest rate risk exposures relate to:  
    
    Our ability to pay or refinance long-term borrowings at maturity at market
rates;
    
    The impact of interest rate movements on our ability to meet interest
expense requirements and financial covenants; and
    
    The impact of interest rate movements on our ability to obtain adequate
financing to fund future operations or business acquisitions. We manage interest rate risk on our outstanding long-term borrowings
through the use of fixed rate debt. While we cannot predict our ability to
refinance existing debt, or the impact interest rate movements might have on
existing debt, we evaluate our financial position on an ongoing basis.
Because the majority of our debt is fixed rate in nature, an increase of 10% in
interest rates would not have a material increase in our net income for the
next 12 months. Currency Rate Risk.Our primary currency rate risk exposures relate to:  
    
    Our global operations, whereby approximately 56% of our revenues are
derived from operations outside the United States, denominated in
currencies other than the U.S. Dollar; 34




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##### Table of Contents




    
    The ability of our operations to satisfy cash flow requirements of
predominantly Euro and U.S. Dollar denominated long-term debt without the
need to repatriate earnings and profits, which are denominated in
currencies other than the Euro and U.S. Dollar;
    
    Our 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 our operating subsidiaries in a number of countries that
have seen significant exchange rate changes against the U.S. Dollar,
primarily downward in recent years, such as Brazil, Mexico, Venezuela and
certain Asian countries. We manage our currency rate risks through a variety of measures. In
certain limited instances, subsidiaries, after obtaining direction and approval
from our 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. Subsidiaries operating in high inflation
environments protect margins by methods that 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. We disclose constant exchange rate net
sales performances in the aggregate, as well as by region, in Managements
Discussion and Analysis of Financial Condition and Results of Operations. For
more information, see Currency Exchange Rates. 
 Item 8.Financial Statements and Supplementary Data The restated consolidated financial statements at March 31, 2003 and the
Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
Firm, are included in this annual report on pages F-1 through F-27. Summarized Quarterly Data (Unaudited) The following financial information reflects all normal recurring
adjustments which are, in the opinion of management, necessary for the fair
statement of the results for the interim periods. As discussed in Note 2 to the
consolidated financial statements, we have restated the income tax provision
for the year ended March 31, 2003. Summarized quarterly data for fiscal year
2003 is as follows and includes the restatement: Quarter EndedMarch 31,June 30,
    
    Sept. 30,
    
    Dec. 31,
    
    20032002
    
    2002
    
    2002
    
    Restated(1)Net sales
    
    $
    135,177
    
    
    $
    138,486
    
    
    $
    135,241
    
    
    $
    153,842Gross profit
    
    
    55,416
    
    
    
    56,165
    
    
    
    56,041
    
    
    
    65,429Operating income
    
    
    15,028
    
    
    
    14,993
    
    
    
    14,018
    
    
    
    22,823Net income/(loss)
    
    
    (5,352
    )
    
    
    6,530
    
    
    
    (5,238
    )
    
    
    8,026Net income/(loss) per sharebasic
    
    
    (0.22
    )
    
    
    0.27
    
    
    
    (0.21
    )
    
    
    0.33Net income/(loss) per sharediluted
    
    
    (0.22
    )
    
    
    0.26
    
    
    
    (0.21
    )
    
    
    0.32
   (1)
    
    See Note 2 to the Consolidated Financial Statements. 
 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 35




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PART III 
 Item 10.Directors and Executive Officers of the Registrant The following table sets forth information with respect to the executive
officers and directors of SOLA as of June 13, 2003. Name
    
    Age
    
    PositionMaurice J. Cunniffe
    
    
    70
    
    
    Chairman of the BoardJeremy C. Bishop
    
    
    53
    
    
    President and Chief Executive Officer, DirectorDouglas D. Danforth
    
    
    80
    
    
    DirectorA. William Hamill
    
    
    55
    
    
    DirectorNeil E. Leach
    
    
    65
    
    
    DirectorRobert A. Muh
    
    
    65
    
    
    DirectorJackson L. Schultz
    
    
    77
    
    
    DirectorSteven M. Neil
    
    
    51
    
    
    Executive Vice President, Finance, Chief Financial Officer,
Secretary and TreasurerBarry J. Packham
    
    
    55
    
    
    Executive Vice President, Manufacturing and LogisticsMark Ashcroft
    
    
    41
    
    
    President, Europe and AmericasSimon Edwards
    
    
    36
    
    
    Vice President, Research & DevelopmentWayne Rockall
    
    
    47
    
    
    Vice President, Regional Director, AustralasiaGaetano Sciuto
    
    
    35
    
    
    Vice President, Sunlens Division
 Maurice J. Cunniffe was appointed Chairman of the Board of Directors in
November 2000. He has been a director since December 1996. He is Chairman and
Chief Executive Officer of A.O. Capital Corporation. Jeremy C. Bishop was appointed Chief Executive Officer and President and a
director in April 2000. Prior to his appointment, he served as President of the
American Optical business, a position held since our purchase of American
Optical Corporations ophthalmic business in June 1996. He joined American
Optical Corporation in November 1990 as Vice President of European Operations. Douglas D. Danforth has been a director since December 1994. He was
Chairman and Chief Executive Officer of Westinghouse Electric Corporation from
1983 to 1987. He is a director of Atlantic Express Transportation Corp and
Enivosource. He was a former director of Travelers, PNC Bank, PPG Industries,
Rubbermaid, and The Whirlpool Corporation and also served as Chairman and CEO
of the Pittsburgh Pirates Baseball Club from 1987 to 1994. A. William Hamill has been a director since December 1996. Mr. Hamill is
President of H3 Companies LLC, an investments and advisory firm. From 1999
until May 2001, he served as Executive Vice President and Chief Financial
Officer of United Dominion Realty Trust, Inc. Prior to joining Union Dominion,
he served as Executive Vice President and Chief Financial Officer of Union
Camp Corporation, from June 1996 to April 1999, and previously served as
managing director of Morgan Stanley & Co. Incorporated. He is a director of
NTELOS Inc. Neil E. Leach has been a director since November 2000. He is Chairman of
the Board and Chief Executive Officer of Barnies Coffee and Tea Company
(formerly a division of Sara Lee). He has been Managing Director of Coastal
Development Associates LLC since 1987 and has founded and led a number of
companies both in and outside the optical industry, including Multifocal Rx
Lens Laboratory Inc. and affiliated laboratories during the past 43 years. He
is also past Chairman of Microtool and Instruments, Inc. and a director of
Intercontinental Bank, which was acquired by Bank of America. Robert A. Muh serves as Chief Executive Officer of Sutter Securities,
Inc., a full-service brokerage firm he co-founded in 1992. Prior to that time,
he served as President of Financial Services International, Inc., a financial
advisory firm, from 1987 to 1992. From 1978 to 1987, he served as a partner and
a managing director for Bear, Stearns & Co., Inc. He also currently serves as a
director for Worldwide Restaurants, Inc. and DayRunner, Inc. and is a trustee
of the Massachusetts Institute of Technology. 36




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##### Table of Contents



Jackson L. Schultz has been a director since November 1995. Following a
career in the United States Navy, where he retired as a Captain, Mr. Schultz
joined Wells Fargo Bank in 1970, retiring in 1990 as Senior Vice President
responsible for Public and Governmental Affairs. He is a past director of the
Bank of San Francisco and the Cooper Development Company. He was a member of
the Advisory Board to the United States Navy Exchange Command, and also serves
as Vice Chairman and a Governor of Claremont McKenna College Rose Institute of
State and Local Government. 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 Vice President, Manufacturing and
Logistics in May 2000. He joined SOLA 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. Mark Ashcroft was appointed President, American Commercial Operations in
January 2002. He also is Vice President, Europe, a position he has held since
October 1999. He joined us in August 1998 as Managing Director of SOLA UK,
based in Birmingham, England. From 1994 to 1998, he served as a Director of
Applied Chemicals International Pty Ltd., with responsibility for Strategy and
Market development, based in Melbourne, Australia. Simon Edwards was appointed Vice President, Research & Technology in
August 2001. He served as Technical Director of Research Laboratories of
Australia from 1999 to 2001. Previous to that he had joined SOLA in 1989 and
served with SOLA in the role of Director of Optical Lens Design from 1996 until
1998. Wayne Rockall was appointed Vice President, Australasia upon his joining
SOLA in October 1999. From 1992 to 1999, he served as Commercial Director of
United Distillers and Vintners division of Diageo Plc., with responsibility for
key accounts, in addition to field sales training and development, customer
service and export. Gaetano Sciuto was appointed Vice President, Sunlens Division in July
2001. Prior to that time, he served as General Manager of the Sunlens Division.
From 1998 to 2000, he served as Director for Sunlens European operations. From
1996 to 1998, he was Vice President of Sales and Marketing for Lotto Sport
U.S.A. Section 16(a) Beneficial Ownership Reporting Compliance Information regarding Section 16(a) reporting compliance is included under
the caption Section 16(a) Beneficial Ownership Reporting Compliance in our
proxy statement for the 2003 Annual Meeting of Stockholders and is incorporated
by reference herein. 
 Item 11.Executive Compensation Information regarding executive and director compensation is included
under the captions Executive Compensation and Director Compensation in our
proxy statement for the 2003 Annual Meeting of Stockholders and is incorporated
by reference herein. 
 Item 12.Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters Information regarding security ownership is included under the caption
Ownership of SOLA Common Stock in our proxy statement for the 2003 Annual
Meeting of Stockholders and is incorporated by reference herein. Information regarding equity compensation plans is included under the
caption Equity Compensation Plan Information in our proxy statement for the
2003 Annual Meeting of Stockholders and is incorporated by reference herein. 37




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##### Table of Contents



Item 13.Certain Relationships and Related Transactions Information regarding certain relationships and related party transactions
is included under the caption Certain Transactions in our proxy statement for
the 2003 Annual Meeting of Stockholders and is incorporated by reference
herein. 
 Item 14.Controls and Procedures Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted
an evaluation of our disclosure controls and procedures, as such term is
defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of
1934, as amended (the Exchange Act), within 90 days of the filing date of our
original report on Form 10-K for the year ended March 31, 2003. Based on their
evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures were effective. Subsequent to filing our original report, and in connection with the
preparation and review of our financial statements for the fiscal year ended
March 31, 2004, management identified the
error that led to the restatement of our financial statements for the year
ended March 31, 2003. This restatement, as referenced in
Note 2 to the Consolidated Financial Statements, decreased the
fiscal 2003 tax provision, resulting in increased net income of
$2.4 million and increased EPS of $0.10 (basis and diluted). During the audit of the year
end March 31, 2004, our independent registered public accounting
firm, PricewaterhouseCoopers LLP,
advised management and the Audit Committee that it noted certain matters
regarding staffing, monitoring, and review limitations during the period under
review that it collectively considered to be a material weakness. The
following
deficiencies were identified in internal controls:  
    
    inadequate staffing and resources allocated to the corporate tax
function, leading to the untimely identification and resolution of
complex tax related matters, and failure to perform timely review,
substantiation and evaluation of certain tax account balances;
    
    inadequate staffing and supervision over the corporate consolidation,
review, and financial close function, leading to the untimely
identification and resolution of accounting matters as a result of
failure to perform timely review, substantiation and evaluation of
certain account balances and financial information from subsidiary
locations; and
    
    limitations in our ability to perform adequate formal review and
documentation of our accounting policies and procedures in accordance
with accounting principles generally accepted in the United States of
America. In connection with restating our financial statements as provided in this
report, our Chief Executive Officer and Chief Financial Officer, with the
participation of other management, re-evaluated the effectiveness of our
disclosure controls and procedures for the year ended March 31, 2003. Based
on the re-evaluation by our Chief Executive Officer and Chief Financial
Officer, they concluded that, as of the end of the year ended March 31, 2003,
there were deficiencies in our disclosure controls and procedures. We have assigned a high priority to the short-term and long-term improvement of
our internal controls over financial reporting. The process began last October
2003 with plans presented by our CFO, who joined SOLA last September, to the
Board of Directors to improve internal controls and financial reporting. We
believe that we have developed a plan that addresses the material weakness in
our internal controls that should provide
for adequate financial reporting in future periods. To date, we have implemented internal control improvements by first
strengthening our monitoring controls over the company. For example, we
implemented detailed line item reviews with country controllers and corporate
staff in the second quarter of fiscal 2004. Other actions we have put in place
include implementing more rigorous documentation of accounting issues and
creating an audit checklist for country controllers. We have also relocated
and integrated our North American accounting group with our corporate
accounting group to achieve better connectivity between regional accounting and
corporate consolidation and analysis. We have also taken other actions focused
on improving timeliness and accuracy of reporting financial information from
entities globally. In addition to the foregoing action, we have begun the process of:  
    
    Engaging outside consultants to supplement our internal tax staff;
    
    Requiring reporting of monthly/quarterly tax liabilities by our country controllers;
    
    Establishing a tax audit checklist for our country controllers;
    
    Identifying and analyzing process and staffing improvements
related to interaction of our corporate accounting and finance group
with our regional accounting and finance groups;
    
    Adding three CPA positions at corporate accounting, including
a Director of Internal Audit and related staff, with offers having
been extended for all positions; and
    
    Restructuring management reporting to require detailed
variance reporting tied to our plan and our prior year, as well as
the identification of quarterly risks and opportunities. Also, we consider the implementation of Sarbanes-Oxley Section 404 as part
of our plan to improve controls and are well into the implementation, including
expenditures of approximately of $2.5  $3.5 million anticipated in fiscal
2005. We are using outside resources combined with internal resources to
achieve implementation. Management believes that the measures noted above will address the conditions
identified as a material weakness. We will continue to evaluate the
effectiveness of our disclosure controls and procedures and internal control
over financial reporting on an on-going basis and will take further action and
implement improvements as necessary. There have been no other significant changes (including corrective actions with
regards to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in the preceding paragraph. The Company believes the measures it is currently implementing to improve its
internal controls are reasonably likely to have a material impact on its
internal controls over financial reporting in future periods. 
 Item 15.Principal Accountant Fees and Services Information regarding principal accountant fees and services is included
under the caption Relationship with Independent Registered Public Accounting
Firm in our proxy statement for the 2003 Annual Meeting of Stockholders and is
incorporated by reference herein. 38




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##### Table of Contents



PART IV 
 Item 16.Exhibits, Financial Statement Schedule and Reports on Form 8-K (a) Documents Filed as Part of this Report: 1.
    
    
    Financial Statements.Report of PricewaterhouseCoopers LLP, Independent Registered Public
Accounting Firm .
    
    
    F-2Consolidated Balance Sheets as of March 31, 2003 and 2002 .
    
    
    F-3Consolidated Statements of Operations for the years ended March 31,
2003, 2002 and 2001 .
    
    
    F-4Consolidated Statements of Stockholders Equity for the years ended
March 31, 2003, 2002 and 2001 .
    
    
    F-5Consolidated Statements of Cash Flows for the years ended March 31,
2003, 2002 and 2001 .
    
    
    F-6Notes to Consolidated Financial Statements .
    
    
    F-72.
    
    
    Supplemental Information.Quarterly Financial Data  Unaudited .
    
    
    S-13.
    
    
    Financial Statement Schedule.Valuation and Qualifying Accounts .
    
    
    S-24.
    
    
    List of Exhibits
    
    
    E-1
 (b) Reports on Form 8-K: On February 12, 2003, we filed a Form 8-K containing as Exhibit 99.1
our press release dated February 12, 2003. This press release contained our
earnings information for the third quarter of fiscal 2003. 39




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##### Table of Contents



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 amendment to be signed on its behalf by the undersigned, thereunto duly
authorized. SOLA 
INTERNATIONAL INC.
(Registrant)Date: June 23, 2004By:
    /s/   RONALD F. DUTTRonald F. DuttExecutive Vice President and Chief Financial Officer 40




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##### Table of Contents



SOLA INTERNATIONAL INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm .
    
    
    F-2Consolidated Balance Sheets as of March 31, 2003 and 2002 .
    
    
    F-3Consolidated Statements of Operations for the years ended March 31, 2003, 2002 and 2001 .
    
    
    F-4Consolidated Statements of Stockholders Equity for the years ended March 31, 2003, 2002 and 2001
..
    
    
    F-5Consolidated Statements of Cash Flows for the years ended March 31, 2003, 2002 and 2001 .
    
    
    F-6Notes to Consolidated Financial Statements .
    
    
    F-7Supplemental Information .
    
    
    S-1
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and
Shareholders of SOLA International Inc.: In our opinion, the consolidated financial statements listed in the index
appearing under Item 16(a)(1) on page 39 present fairly, in all material
respects, the financial position of SOLA International Inc. and its
subsidiaries at March 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2003 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 16(a)(3) presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and the financial statement schedule are the responsibility of the
Companys management; our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with the Public
Company Accounting Oversight Board (United States). 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. As discussed in Note 3 to the consolidated financial statements, the
Company changed its method of accounting for goodwill in fiscal year 2002, so
as to comply with the Statement of Financial Accounting Standard 142 Goodwill
and Other Intangible Assets. As discussed in Note 2, the Company has restated its previously issued
financial statements to correct a computational error in the fiscal 2003 tax
provision. PricewaterhouseCoopers LLP
San Jose, California June 13, 2003, except
for Note 2 as to which the date is June 21, 2004 F-2




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SOLA INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data) March 31,2003(Restated, Note 2)
    
    2002ASSETSCurrent assets:Cash and cash equivalents
    
    $
    58,679
    
    
    $
    68,419Trade accounts receivable, less allowance for doubtful accounts of $8,972 and
$8,395 at March 31, 2003 and 2002, respectively
    
    
    123,088
    
    
    
    114,993Inventories
    
    
    91,442
    
    
    
    82,586Deferred taxes, current
    
    
    12,475
    
    
    
    14,222Prepaid and other current assets
    
    
    13,095
    
    
    
    15,509Total current assets
    
    
    298,779
    
    
    
    295,729Property, plant and equipment, net
    
    
    172,448
    
    
    
    164,465Goodwill and other intangibles, net
    
    
    208,809
    
    
    
    190,719Deferred taxes, long-term
    
    
    38,651
    
    
    
    21,861Other long-term assets
    
    
    26,298
    
    
    
    24,030Total assets
    
    $
    744,985
    
    
    $
    696,804LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Notes payable to banks
    
    $
    522
    
    
    $
    170Current portion of long-term debt
    
    
    3,510
    
    
    
    4,140Accounts payable
    
    
    65,637
    
    
    
    68,546Accrued liabilities
    
    
    41,692
    
    
    
    43,470Accrued payroll and related compensation
    
    
    26,811
    
    
    
    25,390Total current liabilities
    
    
    138,172
    
    
    
    141,716Long-term debt, less current portion
    
    
    5,962
    
    
    
    5,042Senior notes.
    
    
    318,242
    
    
    
    273,203Other long-term liabilities
    
    
    18,249
    
    
    
    15,481Total liabilities
    
    
    480,625
    
    
    
    435,442Commitments and contingencies (Notes 17 and 19)
Stockholders equity:Preferred stock, $0.01 par value; 5,000 shares authorized; no shares issued
    
    
    
    
    
    
    Common stock, $0.01 par value; 50,000 shares authorized; 24,996 and 24,938 shares
issued as of March 31, 2003 and March 31, 2002, and 24,628 and 24,532
shares outstanding as of March 31, 2003 and March 31, 2002, respectively
    
    
    250
    
    
    
    249Additional paid-in capital
    
    
    286,677
    
    
    
    286,169Retained earnings
    
    
    27,875
    
    
    
    23,909Accumulated other comprehensive loss
    
    
    (48,055
    )
    
    
    (46,329
    )Common stock in treasury, at cost
368 and 406 shares at March 31, 2003 and March 31, 2002, respectively
    
    
    (2,387
    )
    
    
    (2,636
    )Total stockholders equity
    
    
    264,360
    
    
    
    261,362Total liabilities and stockholders equity
    
    $
    744,985
    
    
    $
    696,804
 The accompanying notes are an integral part of these consolidated financial
statements F-3




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##### Table of Contents



SOLA INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) Year Ended March 31,2003
    
    2002
    
    2001(Restated, Note 2)Net sales
    
    $
    562,746
    
    
    $
    529,505
    
    
    $
    545,432Cost of sales
    
    
    329,695
    
    
    
    315,213
    
    
    
    349,556Gross profit
    
    
    233,051
    
    
    
    214,292
    
    
    
    195,876Research and development expenses
    
    
    12,190
    
    
    
    13,053
    
    
    
    14,857Selling and marketing expenses
    
    
    106,876
    
    
    
    101,735
    
    
    
    105,623General and administrative expenses
    
    
    47,079
    
    
    
    47,683
    
    
    
    52,006Amortization of goodwill and other intangibles
    
    
    44
    
    
    
    44
    
    
    
    6,610Special charges
    
    
    
    
    
    
    28
    
    
    
    91,065Operating expenses
    
    
    166,189
    
    
    
    162,543
    
    
    
    270,161Operating income/(loss)
    
    
    66,862
    
    
    
    51,749
    
    
    
    (74,285
    )Interest income
    
    
    1,440
    
    
    
    2,302
    
    
    
    2,123Interest expense
    
    
    (33,540
    )
    
    
    (30,875
    )
    
    
    (25,575
    )Foreign currency gain/(loss)
    
    
    (31,667
    )
    
    
    1,859
    
    
    
    (2,755
    )Income/(loss) before (provision)/benefit for income
taxes, minority interest and extraordinary item
    
    
    3,095
    
    
    
    25,035
    
    
    
    (100,492
    )(Provision)/benefit for income taxes
    
    
    1,474
    
    
    
    (7,010
    )
    
    
    32,206Minority interest
    
    
    (603
    )
    
    
    1,093
    
    
    
    287Income/(loss) before extraordinary item
    
    
    3,966
    
    
    
    19,118
    
    
    
    (67,999
    )Extraordinary item, net of tax
    
    
    
    
    
    
    
    
    
    
    1,471Net income/(loss)
    
    $
    3,966
    
    
    $
    19,118
    
    
    $
    (66,528
    )Net income/(loss) per sharebasic:Income/(loss) per share before extraordinary item
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    (2.83
    )Extraordinary item
    
    
    
    
    
    
    
    
    
    
    0.06Net income/(loss) per sharebasic
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    (2.77
    )Weighted average common shares outstanding
    
    
    24,573
    
    
    
    24,067
    
    
    
    24,049Net income/(loss) per sharediluted:Income/(loss) per share before extraordinary item
    
    $
    0.16
    
    
    $
    0.78
    
    
    $
    (2.83
    )Extraordinary item
    
    
    
    
    
    
    
    
    
    
    0.06Net income/(loss) per sharediluted
    
    $
    0.16
    
    
    $
    0.78
    
    
    $
    (2.77
    )Weighted average common and dilutive securities outstanding
    
    
    24,856
    
    
    
    24,583
    
    
    
    24,049
 The accompanying notes are an integral part of these consolidated financial statements F-4




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##### Table of Contents



SOLA INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands, except per share data) AccumulatedCommon Stock
    
    Additional
    
    
    
    
    
    
    
    
    
    Other
    
    Treasury Stock
    
    TotalPaid-in
    
    Equity
    
    Retained
    
    Comprehensive
    
    
    
    Stockholders'Shares
    
    Value
    
    Capital
    
    Loans
    
    Earnings
    
    Loss
    
    Shares
    
    Value
    
    EquityBalances, March 31, 2000
    
    
    24,937
    
    
    $
    249
    
    
    $
    281,467
    
    
    $
    (10
    )
    
    $
    71,319
    
    
    $
    (25,223
    )
    
    
    
    
    
    $
    
    
    
    $
    327,802Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (66,528
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (66,528
    )Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,846
    )
    
    
    
    
    
    
    
    
    
    
    (17,846
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (84,374
    )Purchase of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,250
    )
    
    
    (8,166
    )
    
    
    (8,166
    )Common stock issued under stock option
plans
    
    
    1
    
    
    
    
    
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    136
    
    
    
    76Tax benefit from exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27Repayment of equity participation loans
..
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Balances, March 31, 2001
    
    
    24,938
    
    
    
    249
    
    
    
    281,434
    
    
    
    
    
    
    
    4,791
    
    
    
    (43,069
    )
    
    
    (1,229
    )
    
    
    (8,030
    )
    
    
    235,375Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,118
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,118Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,260
    )
    
    
    
    
    
    
    
    
    
    
    (3,260
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,858Common stock issued under stock option
plans
    
    
    
    
    
    
    
    
    
    
    2,281
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    823
    
    
    
    5,394
    
    
    
    7,675Tax benefit from exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    2,454
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,454Balances, March 31, 2002
    
    
    24,938
    
    
    
    249
    
    
    
    286,169
    
    
    
    
    
    
    
    23,909
    
    
    
    (46,329
    )
    
    
    (406
    )
    
    
    (2,636
    )
    
    
    261,362Comprehensive loss:Net income, as restated (Note 2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,966
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,966Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,726
    )
    
    
    
    
    
    
    
    
    
    
    (1,726
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,240Common stock issued under stock option
plans
    
    
    54
    
    
    
    1
    
    
    
    328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    249
    
    
    
    578Common stock issued related to purchase
of
businesses
    
    
    4
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Tax benefit from exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150Balances, March 31, 2003 , as restated
    
    
    24,996
    
    
    $
    250
    
    
    $
    286,677
    
    
    $
    
    
    
    $
    27,875
    
    
    $
    (48,055
    )
    
    
    (368
    )
    
    $
    (2,387
    )
    
    $
    264,360
 The accompanying notes are an integral part of these consolidated financial statements F-5




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SOLA INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Year Ended March 31,2003(Restated, Note 2)
    
    2002
    
    2001Cash flows from operating activities:Net income/(loss)
    
    $
    3,966
    
    
    $
    19,118
    
    
    $
    (66,528
    )Adjustments to reconcile net income/(loss) to net cash provided by operating
activities:Minority interest in earnings
    
    
    603
    
    
    
    (1,093
    )
    
    
    (287
    )Depreciation
    
    
    19,678
    
    
    
    18,542
    
    
    
    19,998Amortization  goodwill and other intangibles
    
    
    44
    
    
    
    44
    
    
    
    6,610Amortization  debt issuance costs
    
    
    3,086
    
    
    
    2,543
    
    
    
    986Provision for doubtful accounts
    
    
    1,611
    
    
    
    2,317
    
    
    
    2,992Tax benefit from exercise of stock options
    
    
    150
    
    
    
    2,454
    
    
    
    27Non-cash portion of special charges
    
    
    
    
    
    
    767
    
    
    
    74,289Deferred taxes
    
    
    (14,877
    )
    
    
    1,155
    
    
    
    (30,923
    )Foreign currency (gain)/loss
    
    
    30,631
    
    
    
    (1,868
    )
    
    
    (6,211
    )Gain on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (2,306
    )(Gain)/loss on disposal/sale of property, plant and equipment
    
    
    185
    
    
    
    167
    
    
    
    (5,812
    )Changes in assets and liabilities, net of acquisitions:Trade accounts receivable
    
    
    1,371
    
    
    
    3,931
    
    
    
    (8,916
    )Inventories
    
    
    201
    
    
    
    7,316
    
    
    
    28,711Prepaid and other assets
    
    
    758
    
    
    
    (14,294
    )
    
    
    (1,992
    )Accounts payable
    
    
    (6,734
    )
    
    
    (5,702
    )
    
    
    3,354Accrued and other current liabilities
    
    
    (6,980
    )
    
    
    (12,558
    )
    
    
    7,425Other long-term liabilities
    
    
    280
    
    
    
    721
    
    
    
    4,207Net cash provided by operating activities
    
    
    33,973
    
    
    
    23,560
    
    
    
    25,624Cash flows from investing activities:Purchases of businesses
    
    
    (21,024
    )
    
    
    
    
    
    
    (17,917
    )Disposal of/(investments in) joint ventures
    
    
    210
    
    
    
    1,183
    
    
    
    (1,335
    )Capital expenditures
    
    
    (21,897
    )
    
    
    (17,144
    )
    
    
    (20,923
    )Mold expenditures
    
    
    (3,073
    )
    
    
    (5,865
    )
    
    
    (5,352
    )Divestitures and other asset dispositions
    
    
    
    
    
    
    5,500
    
    
    
    7,816Other investing activities
    
    
    810
    
    
    
    678
    
    
    
    90Net cash used in investing activities
    
    
    (44,974
    )
    
    
    (15,648
    )
    
    
    (37,621
    )Cash flows from financing activities:Proceeds from the exercise of stock options
    
    
    578
    
    
    
    7,675
    
    
    
    86Receipts/(payments) under notes payable to banks
    
    
    302
    
    
    
    717
    
    
    
    (15,890
    )Borrowings on long-term debt
    
    
    1,252
    
    
    
    3,572
    
    
    
    4,531Payments on long-term debt
    
    
    (4,511
    )
    
    
    (9,461
    )
    
    
    (2,599
    )Proceeds from bank debt
    
    
    10,000
    
    
    
    17,500
    
    
    
    44,800Repayment of bank debt
    
    
    (10,000
    )
    
    
    (167,500
    )
    
    
    Issuance of senior notes
    
    
    
    
    
    
    182,009
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (8,166
    )Repurchase of senior subordinated notes
    
    
    
    
    
    
    
    
    
    
    (2,678
    )Net cash provided by/(used in) financing activities
    
    
    (2,379
    )
    
    
    34,512
    
    
    
    20,084Effect of exchange rate changes on cash and cash equivalents
    
    
    3,640
    
    
    
    (154
    )
    
    
    (790
    )Net increase/ (decrease) in cash and cash equivalents
    
    
    (9,740
    )
    
    
    42,270
    
    
    
    7,297Cash and cash equivalents at beginning of year
    
    
    68,419
    
    
    
    26,149
    
    
    
    18,852Cash and cash equivalents at end of year
    
    $
    58,679
    
    
    $
    68,419
    
    
    $
    26,149
 The accompanying notes are an integral part of these consolidated financial statements F-6




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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. In order to continue its operations and meet its significant liquidity
requirements, the Company must maintain profitable operations or obtain
additional funds through equity or debt financing, bank financing, and other
sources. Management believes that its existing cash balances, foreign credit
facilities, internally generated funds and other potential financing
alternatives will be sufficient to meet the Companys capital, operating and
debt service requirements for at least the next twelve months. If the Company
is unable to generate adequate cash flow from sales of its products, the
Company may need to seek additional sources of capital. There can be no
assurance that the Company will be able to obtain additional debt or equity
financing on terms acceptable to the Company, or at all. If adequate funds are
not available, the Company could be required to delay development or
commercialization of certain products, or reduce the marketing, customer
support, or other resources devoted to product development. Accordingly, the
failure of the Company to obtain sufficient funds on acceptable terms when
needed could have a material adverse effect on the Companys business, results
of operations and financial condition. 2. Restatement of Previously Issued Financial Statements The Company has restated its 2003 financial statements to correct a
computational error in the fiscal 2003 tax provision, which resulted from
double booking a tax valuation adjustment for a foreign subsidiary. As a result
of the restatement, long-term deferred tax assets as of
March 31, 2003 increased by $2.4 million and
the fiscal 2003 tax provision decreased by $2.4 million, resulting in increased
net income of $2.4 million and increased EPS of $0.10 (Basic and Diluted). F-7




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 3. Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All significant transactions between the entities
have been eliminated in the consolidation. The Company records minority
interest gain or loss which reflects the portion of the earnings of
majority-owned operations that are applicable to minority stockholders. Cash and Cash Equivalents: Cash equivalents consist primarily of highly liquid 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. The Company writes down its inventory for estimated obsolescence or
unmarketablility. The amount of such writedown is equal to the difference
between cost of inventory and the estimated market value based upon assumptions
about future demand, selling prices and market conditions. 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, molds and office equipment2 to 10 years).
Leasehold improvements and leased equipment are amortized over the lesser of
their useful lives or the remaining term of the related leases. Gains and
losses on sale of assets are recorded in general and administrative expenses.
Repairs and maintenance costs are expensed when incurred. Goodwill and Intangible Assets: Goodwill represents the excess of purchase price and related costs over
the value assigned to the net tangible and identifiable intangible assets of
businesses acquired. In July 2001, the Financial Accounting Standards Board
issued SFAS No. 142, Goodwill and Other Intangible Assets,which establishes
financial accounting and reporting for acquired goodwill and other intangible
assets and supersedes APB Opinion No. 17, Intangible Assets.The Company
adopted SFAS No. 142 beginning with the first quarter of fiscal 2002. SFAS 142
requires that goodwill and intangible assets that have indefinite useful lives
not be amortized but instead be tested when there are triggering factors that
indicate an impairment may have occurred or at least annually for impairment.
Intangible assets that have finite useful lives continue to be amortized over
their useful lives. F-8




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) The following table reconciles the Companys net income/(loss) for the
fiscal 2003, 2002, and 2001 adjusted to exclude goodwill amortization pursuant
to SFAS No. 142 to amounts previously reported: (in thousands, except per share
data) March 31,2003
    
    2002
    
    2001(Restated, Note 2)Reported income/(loss) before extraordinary item
    
    $
    3,966
    
    
    $
    19,118
    
    
    $
    (67,999
    )Add back: Goodwill amortization, net of tax effect
    
    
    
    
    
    
    
    
    
    
    4,495Adjusted income/(loss) before extraordinary item
    
    $
    3,966
    
    
    $
    19,118
    
    
    $
    (63,504
    )Reported net income/(loss)
    
    $
    3,966
    
    
    $
    19,118
    
    
    $
    (66,528
    )Add back: Goodwill amortization, net of tax effect
    
    
    
    
    
    
    
    
    
    
    4,495Adjusted net income/(loss)
    
    $
    3,966
    
    
    $
    19,118
    
    
    $
    (62,033
    )Earnings/(loss) per share  basicReported income/(loss) before extraordinary item
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    (2.83
    )Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    0.19Adjusted income/(loss) before extraordinary item
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    (2.64
    )Earnings/(loss) per share  basicReported net income/(loss)
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    (2.77
    )Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    0.19Adjusted net income/(loss)
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    (2.58
    )Earnings/(loss) per share  dilutedReported income/(loss) before extraordinary item
    
    $
    0.16
    
    
    $
    0.78
    
    
    $
    (2.83
    )Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    0.19Adjusted income/(loss) before extraordinary item
    
    $
    0.16
    
    
    $
    0.78
    
    
    $
    (2.64
    )Earnings/(loss) per share- dilutedReported net income/(loss)
    
    $
    0.16
    
    
    $
    0.78
    
    
    $
    (2.77
    )Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    0.19Adjusted net income/(loss)
    
    $
    0.16
    
    
    $
    0.78
    
    
    $
    (2.58
    )
 The SFAS No. 142 goodwill impairment model is a
two-step process. First, it requires a comparison of the book value
of net assets to the fair value of the reporting units that have
goodwill assigned to them. If the fair value is determined to be
less than book value, a second step is performed to compute the
amount of the impairment. In this process, a fair value for goodwill
is estimated, based in part on the fair value of the reporting unit
used in the first step, and is compared to its carrying value. The
shortfall of the value below carrying value represents the amount of
goodwill impairment. We test goodwill for impairment during the
fourth quarter every year, and when an event occurs or circumstances
change such that it is reasonably possible that an impairment may
exist. We
estimate the fair values of the related operations using discontinued
cash flows and other indicators of fair value. We base the forecast
of future cash flows on our best estimate of the future revenues and
operating costs, which we derive primarily from existing firm orders,
expected future orders, contracts with suppliers, labor agreements,
and general market conditions. Changes in these forecasts could cause
a particular reporting unit to either pass or fail the first step in
the SFAS No. 142 goodwill impairment model, which could
significantly influence whether a goodwill impairment needs to be
recorded. We adjust the cash flow forecasts by an appropriate
discount rate derived from our market capitalization plus a suitable
control premium at the date of evaluation. F-9




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SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Intangible assets with finite lives, 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. Other Assets: Debt issuance costs are amortized to interest expense over the respective
lives of the debt instruments, which range from 5 to 10 years. As of March 31,
2003 and 2002, accumulated amortization was $6.0 million and $3.0 million,
respectively. The Companys debt issuance amortization costs were approximately
$3.1 million, $2.5 million and $1.0 million for fiscal 2003, 2002, and 2001,
respectively. Long-Lived Assets: We
adopted SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets on April 1, 2002. In
accordance with SFAS No. 144, we assess potential impairments to
our long-lived assets, including property and equipment and other
intangible assets, when there is evidence that events or changes in
circumstances indicate that the carrying value may not be
recoverable. We recognize an impairment loss when the undiscounted
cash flows expected to be generated by an asset (or group of assets)
is less than its carrying value. Any required impairment loss is
measured as the amount by which the assets carrying value
exceeds its fair value, and is recorded as a reduction in the
carrying value of the related asset and charged to results of
operations. Foreign Currency Translation: The assets and liabilities and revenue and expense accounts of the
Companys foreign subsidiaries have been translated using the exchange rate at
the balance sheet date and the 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 a component of accumulated 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. Under the relevant accounting guidance, the treatment of these translation
gains or losses is dependent upon the Companys determination of the functional
currency of each subsidiary. The functional currency is determined based on
managements judgment and involves consideration of all relevant economic facts
and circumstances affecting the subsidiary. Generally, the currency in which
the subsidiary transacts a majority of its transactions, including billings,
financing, payroll and other expenditures would be considered the functional
currency, but any dependency upon the parent and the nature of the subsidiarys
operations must also be considered. Revenue Recognition: The Company recognizes revenue pursuant to applicable accounting
standards, including Securities and Exchange Commission (SEC) Staff Accounting
Bulletin No. 101 (SAB 101), Revenue Recognition in FinancialStatements. SAB
101, as amended, summarizes certain of the SEC staffs views in applying
generally accepted accounting principles to revenue recognition in financial
statements and provides guidance on revenue recognition issues in the absence
of authoritative literature addressing a specific arrangement or a specific
industry. The Companys policy is to recognize revenue from sales to customers when
the rights and risks of ownership have passed to the customer, when persuasive
evidence of an arrangement exists, the price is fixed and determinable and
collection of the resulting receivable is reasonably assured. Under specific
conditions, the Company permits its customers to return or exchange products.
The provision for estimated returns is recorded as a reduction of revenue
concurrently with the recognition of revenue. Management analyzes historical
sales returns and analysis of credit memo data when evaluating the adequacy of
the sales returns allowances in any accounting period. No individual customer
accounts for more than 6% of net sales. The Company generally does not require
collateral from its customers, but performs on-going credit evaluations of its
customers. Shipping and handling fees charged to customers are included in net sales
and the related costs of $30.1 million, $32.6 million and $29.1 million for
fiscal 2003, 2002 and 2001, respectively, are included in selling and marketing
expenses. F-10




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SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 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 $7.1 million, $6.1 million and $6.2 million for fiscal 2003, 2002
and 2001, 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 basis of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are expected
to reverse. On
a quarterly basis, management evaluates the realizability of our
deferred tax assets and assesses the need for a valuation allowance
as of each period end. Realization of our net deferred tax assets as
of March 31, 2004 depends on our ability to generate sufficient
future income. We believe that it is more likely than not that we
will realize our net deferred tax assets based on forecasted income.
The amount of the net deferred tax assets actually realized could
vary if there are differences in the timing or amount of future
reversals of existing deferred tax liabilities or changes in the
actual amounts of future taxable income. Comprehensive Income/(Loss): Other comprehensive income/(loss) includes foreign currency translation
adjustments that are not adjusted for income taxes as they relate to indefinite
investments in non-U.S. subsidiaries. Reclassifications: Certain prior year items have been reclassified to conform to the current
years presentation. These reclassifications had no impact on total assets,
operating income/(loss) or net income/(loss). 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, cash flows, 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. During fiscal 2003, the Companys ten largest customers accounted for
27.9% of net sales, and the largest customer accounted for less than 6% of net
sales. During fiscal 2003, five of the ten largest customers were located in
North America and accounted for 14.9% of net sales. No single customers
accounts receivable balance was greater than 2.5% of total accounts receivable. F-11




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SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) While there are currently multiple suppliers of polycarbonate and monomer
raw materials, the Company purchases over 50% of those materials from three
suppliers. The loss of any of these suppliers, or a significant decrease in the
supply of polycarbonate or monomer, would require the Company to obtain these
raw materials elsewhere. If the Company was unable to obtain polycarbonate or
monomer from other suppliers at acceptable prices, it might realize lower
margins and experience difficulty in meeting its customers requirements. In
addition, the Companys photocromic lenses are processed by a third party using
technology that is proprietary to it. Derivative Instruments: The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS Nos. 137 and 138 as of April 1, 2001. SFAS No. 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. It
further provides criteria for derivative instruments to be designated as fair
value, cash flow and foreign currency hedges and establishes respective
accounting standards for reporting changes in the fair value of the
instruments. All of the Companys derivative instruments are recorded at their
fair value in other current assets or other accrued liabilities. The transition
adjustment upon adoption of SFAS No. 133 was not material. The Company utilizes various hedge instruments, primarily forward
contracts, to hedge cash flows associated with certain purchase and sales
commitments and the related payables and receivables. The Company has elected
to designate its cash flow hedges as fair-value hedges in accordance with SFAS
No. 133 during fiscal 2003, fiscal 2002, and fiscal 2001. Accordingly, changes
in the fair value of these hedges are recorded immediately in other income and
expense to offset the changes in fair value of the assets or liabilities being
hedged. Earnings/(Loss) Per Share: The following table sets forth the computation of basic and diluted
earnings/(loss) per share for the fiscal years ended March 31, 2003, 2002 and
2001: Year Ended March 31,2003
    
    2002
    
    2001(Restated, Note 2)(in thousands,except per share data)Numerator:Income/(loss) before extraordinary item
    
    $
    3,966
    
    
    $
    19,118
    
    
    $
    (67,999
    )Extraordinary gain on early extinguishment of
debt, net of tax
    
    
    
    
    
    
    
    
    
    
    1,471Net income/(loss)
    
    $
    3,966
    
    
    $
    19,118
    
    
    $
    (66,528
    )Denominator:Weighted average common shares outstanding
    
    
    24,573
    
    
    
    24,067
    
    
    
    24,049Effect of dilutive securities   employee stock options
    
    
    283
    
    
    
    516
    
    
    
    Weighted average common shares and dilutive securities
outstanding
    
    
    24,856
    
    
    
    24,583
    
    
    
    24,049Net income/(loss) per sharebasic:Income/(loss) per share before extraordinary item
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    (2.83
    )Extraordinary gain on early extinguishment of debt, net of tax
    
    
    
    
    
    
    
    
    
    
    0.06Net income/(loss) per sharebasic
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    (2.77
    )Net income/(loss) per sharediluted:Income/(loss) per share before extraordinary item
    
    $
    0.16
    
    
    $
    0.78
    
    
    $
    (2.83
    )Extraordinary gain on early extinguishment of debt, net of tax
    
    
    
    
    
    
    
    
    
    
    0.06Net income/(loss) per sharediluted
    
    $
    0.16
    
    
    $
    0.78
    
    
    $
    (2.77
    )
 F-12




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SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Options to purchase 1.5 million shares of common stock at a range of $9.26
to $38.38 per share and 1.4 million shares of common stock at a range of $13.74
to $41.44 per share were outstanding as of March 31, 2003 and March 31, 2002,
respectively, but were not included in the computation of the diluted earnings
per share for fiscal 2003 and fiscal 2002 because the options exercise price
was greater than the average market price of the common shares. For the year
ended March 31, 2001, approximately 3.4 million weighted average shares with
exercise prices at a range of $4.63 to $41.44 per share were not included in
the calculation of diluted net loss per share because to do so would be
anti-dilutive for the period. Pro Forma Disclosures Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, Accounting for Stock-BasedCompensation
(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 2.19%-2.55%, 4.23%-4.50%, and 4.63%-5.90%, no dividend yield,
volatility factors of the expected market price of the Companys common stock
of 57.0%, 61.4%, and 51.9% to 87.7% and a weighted-average expected life of the
option of 4 years, for fiscal 2003, 2002, and 2001, 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 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
actual and pro forma information follows: Year Ended March 31,2003
    
    2002
    
    2001(Restated, Note 2)(in thousands, exceptper share data)ActualNet income/(loss)
    
    $
    3,966
    
    
    $
    19,118
    
    
    $
    (66,528
    )Net income/(loss) per share:Basic
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    (2.77
    )Diluted
    
    $
    0.16
    
    
    $
    0.78
    
    
    $
    (2.77
    )Pro formaPro forma net income/(loss)
    
    $
    1,703
    
    
    $
    16,529
    
    
    $
    (68,684
    )Pro forma net income/(loss) per share:Basic
    
    $
    0.07
    
    
    $
    0.69
    
    
    $
    (2.86
    )Diluted
    
    $
    0.07
    
    
    $
    0.67
    
    
    $
    (2.86
    )
 The pro forma effect on net income of SFAS 123 may not be representative
of the effects on pro forma net income/(loss) in future periods. Impact of Recently Issued Accounting Standards: In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF Issue No. 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of multiple products,
services and/or rights to use assets. The provisions of EITF Issue No. 00-21
will apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. We believe that the adoption of this standard will have
no material impact on our financial statements. F-13




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SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity
if the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. We believe that the adoption of this standard
will have no material impact on our financial statements. In March 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, Accounting for Certain Financial Instruments with Characteristics of
Liabilities and Equity (SFAS 149). This Statement establishes standards for
classification of certain financial instruments that have characteristics of
both liabilities and equity in the statement of financial position. This
Statement will be effective upon issuance for all contracts created or modified
after the date the Statement was issued and otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The
Company believes that the adoption of this standard will have no material
impact on its financial statements. 4. Inventories March 31,2003
    
    2002(in thousands)Raw materials
    
    $
    13,611
    
    
    $
    13,104Work in progress
    
    
    3,124
    
    
    
    3,510Finished goods
    
    
    74,707
    
    
    
    65,972$
    91,442
    
    
    $
    82,586
 5. Property, Plant and Equipment March 31,2003
    
    2002(in thousands)Land, buildings and leasehold improvements
    
    $
    38,509
    
    
    $
    34,997Machinery and office equipment
    
    
    202,895
    
    
    
    179,306Equipment under capital leases
    
    
    4,985
    
    
    
    2,790Molds
    
    
    60,783
    
    
    
    57,710307,172
    
    
    
    274,803Less accumulated depreciation and amortization
    
    
    134,724
    
    
    
    110,338$
    172,448
    
    
    $
    164,465
 Depreciation expense for fiscal 2003, 2002 and 2001 was $19.7 million,
$18.5 million and $20.0 million, respectively. Accumulated amortization on
equipment under capital leases was $0.4 million at March 31, 2003 and 2002. 6. Derivative Instruments As a result of its global operations, the Companys foreign subsidiaries
are exposed to exchange rate fluctuations on certain assets and liabilities,
primarily accounts payable, accounts receivable, and intercompany indebtedness,
denominated in non-functional currencies. In addition, the parent company has
foreign currency exposure on its Euro-denominated third party debt. The
Company utilizes various hedge instruments, primarily forward contracts, to
hedge cash flows associated with certain purchase and sales commitments and the
related payables and receivables. The Company has elected to designate its
cash flow hedges as fair-value hedges in accordance with SFAS No. 133 during
fiscal 2003, fiscal 2002, and fiscal 2001. Accordingly, changes in the fair
value of these hedges are recorded immediately in other income and expense to
offset the changes in fair value of the assets or liabilities being hedged. F-14




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SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) During fiscal 2003 and 2002, the Company had various contracts in place to
hedge the semi-annual interest payments on its Euro-denominated third party
debt. Such hedges were designated as fair-value hedges in accordance with SFAS
No. 133. The Company had 92 and 30 foreign exchange contracts outstanding as of
March 31, 2003 and 2002, respectively. The Company does not hold derivative
financial instruments for speculative or trading purposes. 7. Accrued Liabilities March 31,2003
    
    2002(in thousands)Liabilities associated with strategic initiatives
    
    $
    870
    
    
    $
    6,296Marketing and promotional accrual
    
    
    12,632
    
    
    
    10,348Other accrued liabilities
    
    
    28,190
    
    
    
    26,826$
    41,692
    
    
    $
    43,470
 8. Notes Payable to Banks Notes payable to banks at March 31, 2003 and 2002 represent borrowings
denominated in foreign currencies under foreign credit agreements with lenders.
The weighted average interest rates on these borrowings as of March 31, 2003
and 2002 were 2.17% and 5.5%, respectively. As of March 31, 2003, the Company
had total unused lines of credit amounting to $17.5 million and there were no
restrictive covenants on the borrowings. F-15




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9. Long-Term Debt

March 31,2003
    
    2002(in thousands)Uncollateralized promissory note, interest rate at 7.5% at March 31, 2002, principal and interest
payable through January 2003
    
    $
    
    
    
    $
    2,000Uncollateralized term loans, interest rates varying from 4.0% to 7.5% at March 31, 2003 and 2002,
principal and interest payable through March 2006
    
    
    1,765
    
    
    
    1,703Loans collateralized by equipment and other assets, interest rates varying from 0.2% to 12.0% at
March 31, 2003, principal and interest payable through August 2011
    
    
    6,292
    
    
    
    4,076Loans collateralized by equipment and other assets, interest rates indexed to LIBOR and Bank Base
Rate (LIBOR 1.3% and Bank Base Rate 3.75% at March 31, 2003), principal and interest payable
through March 2007
    
    
    592
    
    
    
    629Uncollateralized term loan, interest 1.85% at March 31, 2003 and 2002, principal and interest
payable through June 2008
    
    
    484
    
    
    
    481Uncollateralized interest free government loan, principal payable June 2007 through June
2011
    
    
    339
    
    
    
    2939,472
    
    
    
    9,182Less current portion
    
    
    3,510
    
    
    
    4,140Long-term debt, less current portion
    
    $
    5,962
    
    
    $
    5,042


Aggregate annual maturities of long-term debt over the next five years and
thereafter are as follows:

Period Ending March 31,
    
    (in thousands)2004
    
    $
    3,5102005
    
    
    1,9232006
    
    
    1,9172007
    
    
    1,3352008
    
    
    344Thereafter
    
    
    443Total
    
    $
    9,472


As of March 31, 2003, the carrying value and fair value of the Companys
long-term debt including current maturities approximates $9.5 million and $8.1
million, respectively. The fair value of its long-term debt including current
maturities is based on discounted future cash flows. Long-term debt includes
capital lease obligations of $5.3 million and $3.0 million at March 31, 2003
and 2002, respectively. Future minimum capital lease principal payments at
March 31, 2003 consist of $1.5 million, $1.4 million, $1.4 million, $0.9
million, and $0.2 million for fiscal 2004 through fiscal 2008, respectively.
Interest on capital lease obligations is approximately $0.5 million.



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SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 10. Bank Credit Agreement On October 29, 2002, the Company entered into a $90 million collateralized
revolving credit facility expiring on October 31, 2005. This credit agreement
replaced a previous $45 million credit agreement. The new credit agreement
contains a number of covenants substantially similar to the prior credit
agreement including, among others, covenants restricting the Company and its
subsidiaries with respect to the incurrence of indebtedness, the creation of
liens, the making of certain investments and loans, the payment of dividends,
and the ability to enter into certain transactions with affiliates. In
addition, the new credit agreement requires the Company to maintain certain
interest coverage, net worth and leverage ratios and places certain
restrictions on capital expenditures. Interest on the new credit agreement is
payable at a rate based upon the London Interbank Offered Rate (LIBOR) plus
2.75% per annum. As of March 31, 2003, the Company was in compliance with all
covenants. At March 31, 2003, there was no debt outstanding under this
agreement. In connection with the Credit Agreement, the Company entered into a
Security Agreement that grants a security interest in and pledges the rights to
certain of the Companys assets, including domestic accounts receivable,
domestic inventory and 65% of the pledged stock of certain significant foreign
subsidiaries, for the payment and performance of the Companys obligations
under the Credit Agreement. During fiscal 2003, the Company borrowed and repaid $10 million under this
facility. 11. Senior Notes Following is the detail of Senior Notes: March 31,2003
    
    2002(in thousands)6 7/8% Senior Notes
    
    $
    94,809
    
    
    $
    94,77111% Senior Notes
    
    
    223,433
    
    
    
    178,432Total Senior Notes
    
    $
    318,242
    
    
    $
    273,203
 On April 17, 2001, the Company completed the sale of 205 million ($182.0
million at date of sale) of 11% Senior Notes due March 15, 2008 through a
private placement to qualified institutional buyers pursuant to Rule 144A and
to persons outside of the United States in compliance with Regulation S. The
notes are senior unsecured obligations and rank equally with all existing and
future unsecured debt. Interest on the notes is payable semi-annually on each
September 15 and March 15. The Company may redeem these Senior Notes in whole or in part, at any
time, on or after March 15, 2005, at a redemption price equal to 100% of their
principal amount plus a premium declining ratably to par plus accrued and
unpaid interest and liquidation damages, if any. Prior to March 15, 2004, the
Company may redeem up to 35% of the original aggregate principal amount of
these Notes with the proceeds of qualified equity offerings at a redemption
price of 111% of their principal amount plus accrued and unpaid interest and
liquidation damages, if any. The indenture governing the notes contains certain
covenants that, among other things, limit the Companys ability to incur
additional indebtedness or liens, make investments, sell assets, pay dividends
or make other distributions. F-16




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 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. During fiscal
2001 the Company repurchased $5.0 million principal amount of its Notes. As a
result, the Company recorded an extraordinary gain, net of tax, of $1.5 million
resulting from the difference between the carrying value of the Notes and the
purchase price. 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
$333.1 million and $276.3 million at March 31, 2003 and March 31, 2002,
respectively, and the carrying amounts were $318.2 million and $273.2 million,
respectively. The fair value estimates do not necessarily reflect the values
the Company could realize in the current market. 12. Guarantees, Including Indirect Guarantees of Indebtedness of Others The Company has issued a $1.6 million standby letter of credit, which
approximates fair value, maturing on April 25, 2005 to guarantee third party
debt. In the event that certain obligors default on their payment obligations
that are subject to the Companys standby letters of credit, the Company would
be required to guarantee such obligations. If the obligors default on their
payment obligations, the Company has recourse provisions that would enable it
to recover fixed assets with an estimated net book value of approximately $1.1
million. 13. 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, 2001, all loans have been repaid. On May 3, 2000 the Companys
Board of Directors authorized a stock repurchase program in which up to
1,250,000 shares of the Companys common stock may be repurchased in the open
market from time to time. Accordingly, the Company repurchased 1,250,000 shares
of its common stock in the open market for approximately $8.2 million during
the year ended March 31, 2001. The Company reissued 882,000 common shares from
treasury stock cumulatively through March 31, 2003. 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. 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. F-17




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 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). Shares available for future grants
under the International Plan were 315,448 at March 31, 2003. 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 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. F-18




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Option Activity A summary of the Companys stock option activity and related information
for fiscal 2001, 2002 and 2003 follows: Number of
    
    
    
    
    
    WeightedSecurities
    
    
    
    
    
    AverageUnderlying
    
    
    
    
    
    ExerciseOptions
    
    
    
    
    
    Price(in thousands, exceptper share data)Options outstanding as of March 31, 2000
    
    
    2,873
    
    
    
    
    
    
    $
    19.62Options granted during fiscal 2001 with an exercise price equal to the market
price on the date of grant
    
    
    1,025
    
    
    
    
    
    
    
    5.19Options granted during fiscal 2001 with an exercise price greater than the market
price on the date of grant
    
    
    44
    
    
    
    
    
    
    
    7.88Options exercised in fiscal 2001
    
    
    (22
    )
    
    
    
    
    
    
    4.75Options cancelled in fiscal 2001
    
    
    (569
    )
    
    
    
    
    
    
    18.25Options outstanding as of March 31, 2001
    
    
    3,351
    
    
    
    
    
    
    
    15.36Options granted during fiscal 2002 with an exercise price equal to the market
price on the date of
grant
    
    
    386
    
    
    
    
    
    
    
    14.30Options exercised in fiscal
2002
    
    
    (823
    )
    
    
    
    
    
    
    9.32Options cancelled in fiscal
2002
    
    
    (331
    )
    
    
    
    
    
    
    23.47Options outstanding as of March 31,
2002
    
    
    2,583
    
    
    
    
    
    
    
    16.06Options granted during fiscal 2003 with an exercise price equal to the market
price on the date of
grant
    
    
    315
    
    
    
    
    
    
    
    12.24Options exercised in fiscal
2003
    
    
    (92
    )
    
    
    
    
    
    
    11.45Options cancelled in fiscal
2003
    
    
    (387
    )
    
    
    
    
    
    
    20.32Options outstanding as of March 31,
2003
    
    
    2,419
    
    
    
    
    
    
    $
    15.25Options exercisable at:March 31, 2003
    
    
    1,658
    
    
    
    
    
    
    $
    17.47March 31, 2002
    
    
    1,567
    
    
    
    
    
    
    $
    19.62March 31, 2001
    
    
    2,088
    
    
    
    
    
    
    $
    17.87Weighted average fair value per share of options granted during fiscal year:2003
    
    
    
    
    
    $
    5.612002
    
    
    
    
    
    $
    7.242001
    
    
    
    
    
    $
    3.13
 The following table summarizes stock options outstanding at March 31,
2003: Outstanding
    
    ExercisableWeightedShares
    
    Weighted
    
    Average Contractual
    
    SharesRange of Exercise Price
    
    (in thousands)
    
    Price
    
    Life
    
    (in thousands)
    
    Price$4.63-$6.25
    
    
    636
    
    
    $
    5.34
    
    
    
    7.14
    
    
    
    341
    
    
    $
    5.41$7.88-$13.74
    
    
    487
    
    
    
    11.48
    
    
    
    7.91
    
    
    
    239
    
    
    
    10.66$13.81-$16.50
    
    
    612
    
    
    
    15.10
    
    
    
    5.87
    
    
    
    444
    
    
    
    15.37$16.88-$30.13
    
    
    499
    
    
    
    24.64
    
    
    
    5.04
    
    
    
    449
    
    
    
    25.42$30.19-$38.38
    
    
    185
    
    
    
    34.38
    
    
    
    3.90
    
    
    
    185
    
    
    
    34.37Total
    
    
    2,419
    
    
    $
    15.25
    
    
    
    6.29
    
    
    
    1,658
    
    
    $
    17.47
 F-19




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 14. Special Charges and Transition Costs Commencing in the third quarter of fiscal 1999, the Company implemented
strategic initiatives designed to streamline manufacturing and logistics,
reduce operating costs worldwide and write-off inventory SKUs that are no
longer being manufactured. As a result of these strategic initiatives, during
fiscal 2002 and fiscal 2001 the Company recorded pretax special charges of
$28,000 and $91.1 million, respectively. No special charges were recorded for
fiscal 2003. During fiscal 2002, the Company recorded net pretax special charges of
$28,000 comprised of $0.8 million associated with additional facility closure
costs, offset by a gain on the sale of land in North America of $0.8 million,
also associated with facility closures. During fiscal 2001, the Company recorded net pretax special charges of
$91.1 million. The Company incurred $19.7 million associated with workforce
reductions in North America, Europe and Australia. Included in the workforce
reductions were 780 employees from manufacturing, 91 employees from sales and
marketing, 75 employees from administration, and 46 employees from research and
development. At March 31, 2002, $25.1 million cash had been paid related to
workforce reductions incurred since fiscal 1999. The special charges include
$24.3 million related to the write-off of molds, which were discontinued as a
result of the Companys efforts to globally standardize product specifications.
Also, the Company continued the transfer of high-volume production to low-cost
manufacturing locations and the consolidation of manufacturing expertise into
fewer production facilities that commenced in the fourth quarter of fiscal
2000. As a result, special charges of $28.2 million related to redundant
equipment write-off and facility closure costs were incurred. Additionally, as
a result of the discontinuation of the development of the polycarbonate Matrix
product line, the Company incurred $7.66 7 million in asset write-offs
including equipment ($7.0 million) and related commitments ($0.6 million).
Lastly, the Company recognized a gain on the sale of land in North America of
$5.8 million associated with facility closures. Also included in special
charges is $17.00 1 million related to the impairment of goodwill associated
with a prior acquisition of a lens manufacturing business. This impairment wais
recorded pursuant to SFAS 121, Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of, as the Company decided to
discontinue and exit operations of this lens manufacturing business and
completely close-down the facility. In addition to the special charges of $91.1 million recorded during fiscal
2001, the Company wrote-down approximately $25.6 million in inventory due to
product discontinuance resulting from the Companys efforts to globally
standardize product specifications. These write-downs have been accounted for
in cost of sales. The following table presents details of the special charges for fiscal
2002 and 2001 and related liabilities associated with the strategic initiatives
as of March 31, 2003, 2002 and 2001 (in thousands): AssetWrite-offsAssociatedwithDiscontinued
    
    Gain onWorkforce
    
    Mold
    
    Facility
    
    Goodwill
    
    Product
    
    sale ofReductions
    
    Write-offs
    
    Closures
    
    Impairment
    
    Line
    
    Land
    
    TotalStrategic initiative liability as of
March 31, 2000
    
    $
    6,268
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    6,268Fiscal 2001 Charge to operations
    
    
    19,681
    
    
    
    24,256
    
    
    
    28,235
    
    
    
    17,057
    
    
    
    7,690
    
    
    
    (5,854
    )
    
    
    91,065Utilized:Non-cash
    
    
    
    
    
    
    (24,256
    )
    
    
    (25,286
    )
    
    
    (17,057
    )
    
    
    (7,690
    )
    
    
    
    
    
    
    (74,289
    )Cash
    
    
    (12,267
    )
    
    
    
    
    
    
    (510
    )
    
    
    
    
    
    
    
    
    
    
    5,854
    
    
    
    (6,923
    )Strategic initiative liability as of
March 31, 2001
    
    
    13,682
    
    
    
    
    
    
    
    2,439
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,121Fiscal 2002 Charge to operations
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28Utilized:Non-cash
    
    
    
    
    
    
    
    
    
    
    (767
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (767
    )Cash
    
    
    (8,812
    )
    
    
    
    
    
    
    (274
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,086
    )Strategic initiative liability as of
March 31, 2002
    
    
    4,870
    
    
    
    
    
    
    
    1,426
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,296Utilized:Cash
    
    
    (4,219)
    
    
    
    
    
    
    
    (1,207
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,426
    )Strategic initiative liability as of
March 31, 2003
    
    $
    651
    
    
    $
    
    
    
    $
    219
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    870
 F-20




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) At March 31, 2003, the Companys strategic initiatives have been
substantially completed and the Company does not anticipate any additional
special charges related to its strategic initiatives. The liability associated
with the strategic initiatives as of March 31, 2003 is included in accrued
liabilities. The Company anticipates that substantially all of the accrued
liability will be paid in fiscal 2004 and will be funded through cash provided
by operations. 15. Defined Contribution Plans The Company sponsors several defined contribution plans covering
substantially all U.S. and U.K. employees. Under the U.S. 401(k) retirement
plan, the Company provides 50% matching contributions up to a maximum of 6% of
the employees compensation during the plan year. Contributions for the years
ended March 31, 2003, 2002 and 2001 were $0.7 million, $0.7 million and $1.0
million, respectively. Under the U.K. plan, the Company matches pension
contributions of up to 8% of the employees pensionable salary. The
contribution was $0.1 million in each of the years ended March 31, 2003, 2002
and 2001. 16. 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). 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. Domestic Pension
    
    International PensionPlan
    
    PlanYear ended March 31, (in thousands)
    
    2003
    
    2002
    
    2003
    
    2002Reconciliation of benefit obligation:Benefit obligation-beginning of year
    
    $
    22,354
    
    
    $
    22,703
    
    
    $
    10,508
    
    
    $
    11,857Service cost
    
    
    1,269
    
    
    
    1,308
    
    
    
    1,541
    
    
    
    1,536Interest cost
    
    
    1,464
    
    
    
    1,303
    
    
    
    683
    
    
    
    627Participant contributions
    
    
    
    
    
    
    
    
    
    
    121
    
    
    
    128Actuarial gain/(loss)
    
    
    368
    
    
    
    (2,516
    )
    
    
    1,056
    
    
    
    (2,570
    )Curtailments
    
    
    (5,153
    )
    
    
    
    
    
    
    121
    
    
    
    128Benefit payments
    
    
    (727
    )
    
    
    (444
    )
    
    
    (1,674
    )
    
    
    (2,134
    )Other
    
    
    
    
    
    
    
    
    
    
    69
    
    
    
    29Effect of exchange rates
    
    
    
    
    
    
    
    
    
    
    1,454
    
    
    
    1,035Benefit obligation-end of year
    
    $
    19,593
    
    
    $
    22,354
    
    
    $
    13,758
    
    
    $
    10,508
 F-21




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Domestic Pension
    
    International PensionPlan
    
    PlanYear ended March 31, (in thousands)
    
    2003
    
    2002
    
    2003
    
    2002Reconciliation of fair value of plan assets:Fair value of plan assets-beginning of year
    
    $
    15,070
    
    
    $
    14,610
    
    
    $
    11,762
    
    
    $
    11,189Actual return on plan assets
    
    
    (2,320
    )
    
    
    904
    
    
    
    (1,068
    )
    
    
    292Employer contributions
    
    
    
    
    
    
    
    
    
    
    1,311
    
    
    
    1,217Participant contributions
    
    
    
    
    
    
    
    
    
    
    121
    
    
    
    128Benefit payments
    
    
    (727
    )
    
    
    (444
    )
    
    
    (1,674
    )
    
    
    (2,134
    )Other
    
    
    
    
    
    
    
    
    
    
    69
    
    
    
    29Effect of exchange rates
    
    
    
    
    
    
    
    
    
    
    1,392
    
    
    
    1,041Fair value of plan assets-end of year
    
    $
    12,023
    
    
    $
    15,070
    
    
    $
    11,913
    
    
    $
    11,762
 Domestic Pension
    
    International PensionPlan
    
    PlanYear ended March 31, (in thousands)
    
    2003
    
    2002
    
    2003
    
    2002Funded status:Funded status at March 31
    
    $
    (7,571
    )
    
    $
    (7,284
    )
    
    $
    (1,846
    )
    
    $
    1,253Unrecognized transition asset
    
    
    
    
    
    
    
    
    
    
    (43
    )
    
    
    (58
    )Unrecognized (gain) loss
    
    
    
    
    
    
    (51
    )
    
    
    145
    
    
    
    (2,913
    )Accrued pension cost
    
    $
    (7,571
    )
    
    $
    (7,335
    )
    
    $
    (1,744
    )
    
    $
    (1,718
    )
 The assumptions used in the measurement of the Companys benefit
obligation are shown in the following table: Domestic Pension
    
    International PensionPlan
    
    PlanYear ended March 31,
    
    2003
    
    2002
    
    2003
    
    2002Discount rate
    
    
    6.50
    %
    
    
    6.50
    %
    
    
    6.50
    %
    
    
    6.50
    %Expected long-term rate of return on plan assets
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    7.50
    %
    
    
    7.50
    %Rate of increase in future compensation levels
    
    
    5.00
    %
    
    
    5.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
 Net periodic pension costs include the following components: Domestic Pension Plan
    
    International Pension PlanYear ended March 31, (in thousands)
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Service cost
    
    $
    1,269
    
    
    $
    1,308
    
    
    $
    2,220
    
    
    $
    1,541
    
    
    $
    1,536
    
    
    $
    1,555Interest cost
    
    
    1,464
    
    
    
    1,303
    
    
    
    1,429
    
    
    
    683
    
    
    
    627
    
    
    
    676Expected return on plan assets
    
    
    (1,188
    )
    
    
    (1,195
    )
    
    
    (1,700
    )
    
    
    (924
    )
    
    
    (909
    )
    
    
    (1,009
    )Amortization of transition asset
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    (19
    )
    
    
    (21
    )Amortization of gain
    
    
    
    
    
    
    
    
    
    
    (345
    )
    
    
    (151
    )
    
    
    
    
    
    
    (118
    )Net periodic pension cost
    
    $
    1,545
    
    
    $
    1,416
    
    
    $
    1,604
    
    
    $
    1,128
    
    
    $
    1,235
    
    
    $
    1,083
 Effective March 31, 2003, the Company discontinued any further accruals to
the participants of its pension plan and all benefit levels as of a normal
retirement date were frozen for all participants. As a result, and in
accordance with FASB Statement No. 88, Employers Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for TerminationBenefits
(SFAS 88), income of $1.3 million was recognized as of March 31, 2003. The
$1.3 million income consists of a projected benefit obligation (PBO) gain of
$5.2 million due to the curtailment offset by unrecognized losses of $3.9
million as of the curtailment. F-22




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 17. Income Taxes The domestic and foreign components of income/(loss) before
provision/(benefit) for income taxes, minority interest and extraordinary item
are as follows: Year Ended March 31,2003
    
    2002
    
    2001(in thousands)Domestic
    
    $
    (27,482
    )
    
    $
    (297
    )
    
    $
    (89,087
    )Foreign
    
    
    30,577
    
    
    
    25,332
    
    
    
    (11,405
    )$
    3,095
    
    
    $
    25,035
    
    
    $
    (100,492
    )
 The components of the provision/(benefit) for income taxes are as follows: Year Ended March 312003(Restated, Note 2)
    
    2002
    
    2001(in thousands)Current:Federal and State
    
    $
    200
    
    
    $
    141
    
    
    $
    (561
    )Foreign
    
    
    13,370
    
    
    
    5,714
    
    
    
    (702
    )Deferred:Federal and State
    
    
    (10,035
    )
    
    
    (1,817
    )
    
    
    (33,821
    )Foreign
    
    
    (2,410
    )
    
    
    (1,490
    )
    
    
    307Valuation allowance adjustment
    
    
    (2,599
    )
    
    
    4,462
    
    
    
    2,571$
    (1,474
    )
    
    $
    7,010
    
    
    $
    (32,206
    )
 During fiscal 2003, 2002, and 2001, the Company recognized $150,000, $2.5
million, and $27,000 of certain tax benefits related to the exercise of stock
options. Such benefits were recorded as a reduction of income taxes payable and
an increase in additional paid-in capital. A reconciliation between income tax provisions/(benefits) computed at the
U.S. federal statutory rate and the effective rate reflected in the statements
of operations is as follows: Year Ended March 31,2003(Restated, Note 2)
    
    2002
    
    2001Provision/(benefit) at statutory federal rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    (35.0
    )%State tax provision, net of federal effect
    
    
    2.0
    
    
    
    1.0
    
    
    
    (1.0
    )Change in valuation allowance
    
    
    (84.0
    )
    
    
    17.8
    
    
    
    2.6Tax credits
    
    
    (53.8
    )
    
    
    (4.9
    )
    
    
    (3.5
    )Special charges at differing statutory rates
    
    
    
    
    
    
    
    
    
    
    3.6Income of foreign subsidiaries at differing statutory rates
    
    
    43.1
    
    
    
    (20.8
    )
    
    
    (1.0
    )Revision of prior years
estimates
    
    
    (25.4
    )
    
    
    
    
    
    
    Permanent items and other
    
    
    35.5
    
    
    
    (0.1
    )
    
    
    2.3(47.6
    )%
    
    
    28.0
    %
    
    
    (32.0
    )%
 F-23




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below: March 312003(Restated, Note 2)
    
    2002(in thousands)Deferred tax assets:Accounts receivable, principally due to allowances for doubtful accounts
    
    $
    2,172
    
    
    $
    2,390Inventories, principally due to reserves
    
    
    7,810
    
    
    
    14,655Accruals for employee benefits, current
    
    
    4,089
    
    
    
    3,703Other current assets
    
    
    3,807
    
    
    
    612Deferred tax assets, current
    
    
    17,878
    
    
    
    21,360Property, plant and equipment, principally due to differences in
depreciation
    
    
    2,601
    
    
    
    2,619Accruals for employee benefits, long term
    
    
    4,534
    
    
    
    4,941In-process research and development
    
    
    6,745
    
    
    
    8,057Other long-term assets
    
    
    29,525
    
    
    
    4,784Net operating losses (NOL)
    
    
    46,435
    
    
    
    50,962Total deferred tax assets
    
    
    107,718
    
    
    
    92,723Less: valuation allowance
    
    
    13,663
    
    
    
    16,262Net deferred tax assets
    
    $
    94,055
    
    
    $
    76,461Deferred tax liabilities:Inventories
    
    $
    3,752
    
    
    $
    4,218Other current liabilities
    
    
    1,651
    
    
    
    2,920Deferred tax liabilities, current
    
    
    5,403
    
    
    
    7,138Property, plant and equipment, principally due to differences in
depreciation
    
    
    16,808
    
    
    
    16,218Amortization of goodwill
    
    
    10,633
    
    
    
    14,102Other long-term liabilities
    
    
    10,085
    
    
    
    2,920Net deferred tax liabilities
    
    
    42,929
    
    
    
    40,378Net deferred tax assets less net deferred tax liabilities
    
    $
    51,126
    
    
    $
    36,083
 The deferred tax assets valuation allowance at March 31, 2003 and 2002 is
primarily attributable to deferred tax assets, which resulted primarily from
foreign net operating loss carryovers. It is the opinion of management that it
is more likely than not that the realization of these deferred tax assets will
not be assured in the years presented. For tax purposes, the Company and its foreign subsidiaries, at March 31,
2003, had net operating loss (NOL) carryforwards of $76.6 million attributable
to U.S. Federal NOL carryforwards, which expire between 2020 and 2022; and
approximately $66.6 million of foreign NOL carryforwards, of which $20.5
million expire between 2004 and 2018, and $46.1 million have no expiration
date. The deferred tax assets reflected in the Companys accounts as of March
31, 2003 before valuation allowances include these NOLs. The Company has not provided for U.S. federal income and foreign
withholding taxes on $155.2 million of non-U.S. subsidiaries undistributed
earnings as of March 31, 2003 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. F-24




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 18. Commitments The Company leases certain warehouse and office facilities, office
equipment and automobiles under noncancelable operating leases which expire in
2004 through 2014. The Company is responsible for taxes, insurance and
maintenance expenses related to the leased facilities. Under the terms of
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)2004
    
    $
    7,0292005
    
    
    5,4962006
    
    
    4,5652007
    
    
    3,6082008
    
    
    1,645Thereafter
    
    
    6,024
 The Company subleases certain of its office and warehouse facilities.
Future minimum rental receipts under noncancelable subleases are as follows: Period Ending March 31,
    
    (in thousands)2004
    
    $
    6602005
    
    
    1362006
    
    
    2007
    
    
    2008
    
    
    Thereafter
    
    
    
 Rent expense for fiscal 2003, 2002, and 2001 was $8.7 million, $6.8
million and $7.8 million, respectively. 19. Extraordinary Item In June 2000, the Company purchased $5.0 million of its 6 7/8% Senior
Notes due 2008. As a result, the Company recorded an extraordinary gain of $1.5
million, net of tax of $0.9 million, resulting from the difference between the
carrying value of the Notes and the purchase price. The purchase was funded by
the Companys Credit Agreement and resulted in a decline in net borrowings. 20. 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. 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. 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. In 1997, the Company submitted to
the EPA a report on contamination levels and the impact of curtailed activities
that indicates no significant impact on the site from the curtailed activities.
The EPA has consented to continued curtailment of clean-up activities. The
Company expects continued reduction of clean-up activities due to relatively
low levels of contamination existing at the site. In connection with the
acquisition from Pilkington, Pilkington has agreed to indemnify the Company
with respect to environmental losses relating to
certain then existing facts, events, conditions, matters or issues, for
(1) 50% of the losses to the extent they exceed $1 million but are less than or
equal to $5 million, and (2) 100% of the losses in excess of $5 million. In
March 2001, the Company completed the sale of the affected property and
indemnified the buyer with respect to certain then-existing facts, events,
conditions, matters or issues. F-25




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) It is possible that the Company may be involved in other similar
investigations and actions under state, federal or foreign laws in the future.
Based on currently available information, the Company does not believe that its
share of costs at the existing is likely to result in a liability that will
have a material adverse effect on its results of operations, financial
condition or cash flows. The Companys policy is 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 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, cash flows, or financial position of the Company. 21. Worldwide Operations The Companys senior management reviews financial information presented on
a consolidated basis for purposes of making operating decisions and assessing
financial performance. Disaggregated information by geographic region is
reviewed to monitor subsidiaries results. Accordingly, the Company considers
itself to be a single industry segment, specifically, operating 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: North
    
    
    
    
    
    Rest ofAmerica
    
    Europe
    
    World(b)
    
    Eliminations
    
    Total(in thousands)Year Ended March 31, 2003
(Restated, Note 2)Net sales (a):External
    
    $
    249,185
    
    
    $
    210,302
    
    
    $
    103,259
    
    
    $
    
    
    
    $
    562,746Internal
    
    
    42,491
    
    
    
    96,470
    
    
    
    74,527
    
    
    
    (213,488
    )
    
    
    Identifiable assets
    
    
    379,887
    
    
    
    207,655
    
    
    
    158,526
    
    
    
    (1,083
    )
    
    
    744,985Year Ended March 31, 2002Net sales (a):External
    
    $
    236,785
    
    
    $
    185,806
    
    
    $
    106,914
    
    
    $
    
    
    
    $
    529,505Internal
    
    
    58,420
    
    
    
    74,481
    
    
    
    73,586
    
    
    
    (206,487
    )
    
    
    Identifiable assets
    
    
    344,668
    
    
    
    178,063
    
    
    
    174,910
    
    
    
    (837
    )
    
    
    696,804Year Ended March 31, 2001Net sales (a):External
    
    $
    245,397
    
    
    $
    182,919
    
    
    $
    117,116
    
    
    $
    
    
    
    $
    545,432Internal
    
    
    63,670
    
    
    
    65,895
    
    
    
    77,708
    
    
    
    (207,273
    )
    
    
    Identifiable assets
    
    
    330,058
    
    
    
    153,738
    
    
    
    168,376
    
    
    
    (1,713
    )
    
    
    650,459
   (a)
    
    Net sales are attributed to regions based on the location of SOLA and
its subsidiaries country or region of domicile.(b)
    
    The Rest of World consists primarily of Australia, Asia and South
America. 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/(loss). 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, 2003, Canadian and Mexican operations accounted for less
than 5.1% of external revenues and less than 1.6% 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. F-26




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SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 22. Supplementary Cash Flow Data Year Ended March 31,2003
    
    2002
    
    2001(in thousands)Supplemental disclosures of cash flow information:Interest paid
    
    $
    36,501
    
    
    $
    35,389
    
    
    $
    32,064Taxes paid/(received)
    
    $
    11,158
    
    
    $
    8,152
    
    
    $
    (4,018
    )Supplemental disclosures of non-cash investing and financing activities:Capital expenditures accrued but not paid
    
    $
    1,053
    
    
    $
    10,776
    
    
    $
    1,503
 F-27




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SOLA INTERNATIONAL INC.
SUPPLEMENTAL INFORMATION
QUARTERLY FINANCIAL DATA-UNAUDITED
(in thousands, except per share data) Quarter EndedMarch 31,June 30,
    
    Sept. 30,
    
    Dec. 31,
    
    20032002
    
    2002
    
    2002
    
    Restated, Note 2Net sales
    
    $
    135,177
    
    
    $
    138,486
    
    
    $
    135,241
    
    
    $
    153,842Gross profit
    
    
    55,416
    
    
    
    56,165
    
    
    
    56,041
    
    
    
    65,429Operating income
    
    
    15,028
    
    
    
    14,993
    
    
    
    14,018
    
    
    
    22,823Net income/(loss)
    
    
    (5,352
    )
    
    
    6,530
    
    
    
    (5,238
    )
    
    
    8,026Net income/(loss) per share-basic
    
    
    (0.22
    )
    
    
    0.27
    
    
    
    (0.21
    )
    
    
    0.33Net income/(loss) per share-diluted
    
    
    (0.22
    )
    
    
    0.26
    
    
    
    (0.21
    )
    
    
    0.32
 Quarter EndedJune 30,
    
    Sept. 30,
    
    Dec. 31,
    
    March 31,2001
    
    2001
    
    2001
    
    2002Net sales
    
    $
    135,956
    
    
    $
    129,444
    
    
    $
    126,330
    
    
    $
    137,775Gross profit
    
    
    54,809
    
    
    
    51,088
    
    
    
    51,678
    
    
    
    56,717Operating income
    
    
    11,957
    
    
    
    10,097
    
    
    
    12,693
    
    
    
    17,002Net income/(loss)
    
    
    6,678
    
    
    
    (4,003
    )
    
    
    7,272
    
    
    
    9,171Net income/(loss) per share-basic
    
    
    0.28
    
    
    
    (0.17
    )
    
    
    0.30
    
    
    
    0.37Net income/(loss) per share-diluted
    
    
    0.28
    
    
    
    (0.17
    )
    
    
    0.29
    
    
    
    0.37
 S-1




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##### Table of Contents



Schedule II SOLA INTERNATIONAL INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands) Balance,
    
    Charged
    
    
    
    
    
    
    
    
    
    Balance,Beginning
    
    to
    
    
    
    
    
    
    
    
    
    End ofAllowance for doubtful accounts
    of Period
    
    Expenses
    
    Deductions
    
    Other(1)
    
    PeriodYear ended March 31, 2003
    
    $
    8,395
    
    
    $
    1,611
    
    
    $
    (1,123
    )
    
    $
    89
    
    
    $
    8,972Year ended March 31, 2002
    
    $
    9,201
    
    
    $
    2,317
    
    
    $
    (3,106
    )
    
    $
    (17
    )
    
    $
    8,395Year ended March 31, 2001
    
    $
    8,873
    
    
    $
    2,992
    
    
    $
    (2,391
    )
    
    $
    (273
    )
    
    $
    9,201
   (1)
    
    Other relates primarily to foreign currency translation adjustments. S-2




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INDEX OF EXHIBITS Exhibit No.
    
    Description
    
    Reference3.1
    
    Amended and Restated Certificate of Incorporation
of the Company
    
    Filed as Exhibit 3.1 to the
Companys Annual Report on Form
10-K for the fiscal year ended
March 31, 1995 and incorporated
herein by
reference (File No. 1-13606)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 ended September 30,
1998 and incorporated herein by
reference (File No. 1-13606)4.1
    
    Rights Agreement dated as of August 27, 1998
between SOLA International Inc. and Bank Boston
N.A.
    
    Filed as Exhibit 1 to the
Companys Form 8-A dated August
27, 1998 and incorporated herein
by reference (File No. 1-13606)4.2
    
    Indenture by and between the Company and State
Street Bank and Trust Company of California, N.A.,
as Trustee, with respect to the 67/8% Notes due 2008
    
    Filed as Exhibit 10.21 to the
Companys Annual Report on Form
10-K for the fiscal year ended
March 31, 1998 and incorporated
herein by reference (File No.
1-13606)4.3
    
    Officers Certificate Related to Terms of Senior
Notes
    
    Filed as Exhibit 99.1 to the
Companys Quarterly Report on Form
10-Q for the period ended June 30,
1998 and incorporated herein by
reference (File No. 1-13606)4.4
    
    Indenture dated as of April 17, 2001 by and between
the Company and The Bank of New York, as
Trustee, with respect to the 11% Notes due 2008
    
    Filed as Exhibit 4.4 to the
Companys Annual Report on Form
10-K for the fiscal year ended
March 31, 2001 and incorporated
herein by reference4.5
    
    Registration Rights Agreement dated as of April 17,
2001 by and among the Company and UBS AG
acting through its business group UBS Warburg, as
Initial Purchaser, with respect to the 11% Notes due
2008
    
    Filed as Exhibit 4.5 to the
Companys Annual Report on Form
10-K for the fiscal year ended
March 31, 2001 and incorporated
herein by reference10.1
    
    Purchase Agreement, dated as of September 1, 1993
by and between SOLA Holdings Inc., Pilkington plc
and certain of Pilkington plcs subsidiaries
    
    Filed as Exhibit 10.1 to the
Companys Registration Statement,
as amended, on Form S-1 (File No.
33-68824) and incorporated herein
by reference10.2*
    
    Employment Agreement between SOLA
International Inc. and Steven M. Neil, dated as of
September 2, 1997
    
    Filed as Exhibit 10.2 to the
Companys Registration Statement,
as amended, on Form S-3 (File No.
333-45929) and incorporated herein
by reference
 E-1




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Exhibit No.
    
    Description
    
    Reference10.3*
    
    Confidential Severance Agreement between SOLA
International Inc. and Steven M. Neil, dated as of
October 13, 1997
    
    Filed as Exhibit 10.5 to the Companys Annual Report on Form 10-K for the fiscal
year ended March 31, 1999 and incorporated herein by reference10.4
    
    Lease Agreement between Optical SOLA de Mexico
and Messrs. Salvadore Luttenroth-Camou and Carlos
Lutteroth-Lomeli (including English summary of
principal terms)
    
    Filed as Exhibit 10.10 to the Companys Registration Statement, as amended, on Form S-1 (File No. 33-68824) and
incorporated herein by reference10.5*
    
    SOLA Investors Inc. Stock Option Plan
    
    Filed as Exhibit 10.11 to the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 1994 (File
No. 1-13606) and incorporated herein by reference10.6*
    
    Amendment Number One to SOLA Investors Inc.
Stock Option Plan
    
    Filed as Exhibit 10.21 to the Companys Registration Statement, as amended, on Form S-1 (File No. 33-87892) and
incorporated herein by reference10.7*
    
    Amended and Restated 1998 SOLA International
Inc. Stock Option Plan
    
    Filed as Appendix A to the Companys
Fiscal 1998 Proxy Statement dated
June 30, 1998 and incorporated herein
by reference (File No. 1-13606)10.8
    
    Form of Indemnification Agreement between the
executive officers and directors of the Company and
the Company
    
    Filed as Exhibit 10.24 to the Companys Registration Statement,
as amended, on Form S-1 (File No. 33-87892) and incorporated
herein by reference10.9*
    
    SOLA International Inc. Management Incentive Plan
    
    Filed as Exhibit 10.25 to the Companys Registration Statement,
as amended, on Form S-1 (File No. 33-87892) and incorporated
herein by reference10.10*
    
    SOLA Optical 401(k) Savings Plan
    
    Filed as Exhibit 4.4 to the Companys Registration Statement on
Form S-8 (File No. 333-4489) filed with the Commission on May
23, 1996 and incorporated herein by reference10.11
    
    Trust Agreement entered into as of May 15, 1996
between SOLA Optical USA, Inc. and Chase
Manhattan Bank, N.A.
    
    Filed as Exhibit 4.5 to the Companys Registration Statement on
Form S-8 (File No. 333-4489) filed with the Commission on May
23, 1996 and incorporated herein by reference
 E-2




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##### Table of Contents



10.12*
    
    Employment Agreement between SOLA International
Inc. and Jeremy Charles Bishop, dated as of
November 6, 2000
    
    Filed as Exhibit 10.27 to the Companys
Quarterly Report on Form 10-Q for the period ended December 31,
2000 and incorporated herein by reference10.13*
    
    Confidential Severance Agreement between SOLA International Inc. and Barry J. Packham, dated January 1, 1997
    
    Filed as Exhibit 10.23 to the Companys
Annual Report on Form 10-K for the period ended March 31, 2002
and incorporated herein by reference10.14*
    
    Confidential Severance Agreement between SOLA International Inc. and Mark Ashcroft, dated April 6, 2002
    
    Filed as Exhibit 10.24 to the Companys
Annual Report on Form 10-K for the period ended March 31, 2002
and incorporated herein by reference10.15
    
    Credit Agreement dated as of July 26, 2001 among the Company, as Borrower, the Lenders named therein and UBS Warburg
LLC, as Sole Lead Arranger, ABN AMRO Bank, N.V. as Syndication Agent and UBS AG, Stamford Branch, as Administrative
Agent, and UBS AG Stamford Branch, as Collateral Agent, and Union Bank of California as Documentation Agent.
    
    Filed as Exhibit 10.1 to the Companys Quarterly Report on Form
10-Q for the period ended June 30, 2001 and incorporated herein
by reference10.16
    
    Amendment No. 1 and Waiver dated as of July 19, 2002 to the Credit Agreement dated as of July 25, 2001 among Sola
International Inc., the Lenders named therein, UBS Warburg LLC, as Sole Lead Arranger, UBS AG, Stamford Branch, as an
Issuing Bank and as Administrative Agent, ABN AMRO Bank, N.V., as Syndication Agent, UBS AG, Stamford Branch, as
Collateral Agent for the Lenders, and Union Bank of California, as Documentation Agent.
    
    Filed as Exhibit 10.1 to the Companys Quarterly Report on Form
10-Q for the period ended June 30, 2002 and incorporated herein
by reference10.17
    
    Credit Agreement dated as of October 28, 2002
among SOLA International Inc., the Lenders named therein, Union Bank of California, N.A., as Sole Lead Arranger,
as an Issuing Bank, as Administrative Agent, and as Collateral Agent for the Lenders.
    
    Filed as Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the
period ended December 31, 2002 and
incorporated herein by reference
 E-3




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Exhibit No.
    
    Description
    
    Reference12.1
21.1
23.1
31.1
32.1
    
    Statement regarding ratio of earnings/(loss) to fixed
charges
List of subsidiaries of the Company
Consent of PricewaterhouseCoopers LLP,
Independent Registered Public Accounting Firm
Rule 13a-14(a) Certifications
Section 1350 Certification
    
    Previously filed

Previously filed
   *Compensatory plan or management agreement E-4