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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-K x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended March 31, 2004 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. Yes x  No o As
of September 30, 2003, the aggregate market value of Common Stock held by
non-affiliates was approximately $510,000,000. 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 10, 2004, 32,189,156 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 2004 Annual Meeting of Stockholders are incorporated by
reference into Part III of this report. 2




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SOLA INTERNATIONAL INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 2004 PagePART IItem 1.
    
    Business
    
    
    4Item 2.
    
    Properties
    
    
    15Item 3.
    
    Legal Proceedings
    
    
    16Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    16PART IIItem 5.
    
    Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    17Item 6.
    
    Selected Financial Data
    
    
    18Item 7.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 8.
    
    Financial Statements and Supplementary Data
    
    
    39Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    39Item 9A.
    
    Controls and Procedures
    
    
    39PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    40Item 11.
    
    Executive Compensation
    
    
    42Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    42Item 13.
    
    Certain Relationships and Related Transactions
    
    
    42Item 14.
    
    Principal Accountant Fees and Services
    
    
    42PART IVItem 15.
    
    Exhibits, Financial Statement Schedule and Reports on Form 8-K
    
    
    43Signatures
    
    
    44EXHIBIT 1.1EXHIBIT 4.6EXHIBIT 10.14EXHIBIT 10.15EXHIBIT 12.1EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 32.1
  Our trademarks, service marks and trade names include SOLAOne, AO ProEasy,
AO bActive, AO Compact, Finalite, Percepta, SOLAMax and Spectralite, among
others. This report also contains trademarks, service marks, copyrights and
trade names of other companies. 3




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PART I Forward-Looking Information Certain of the matters discussed in this report or in the information
incorporated by reference may constitute forward-looking statements within the
meaning of the U.S. Private Securities Litigation Reform Act of 1995.
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 the federal, state,
or foreign level, 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 International Inc. and persons acting on our behalf are qualified in their
entirety by the cautionary statements contained in this report. 
 Item 1.Business The Company We believe that SOLA International Inc. (SOLA, we, our, us, or the
Company) is a leading designer, manufacturer and distributor of a broad range
of spectacle lenses. We hold a strong manufacturing and technology position
worldwide in the growing plastic lens segment of this market, and we believe we
occupy the global number two market position in terms of volume of plastic
lenses sold. We have extensive international presence with sales operations in
27 countries. We do not sell our products directly to the consumer but operate
through a variety of distribution systems that include sales to national and
international retail chains, sales to independent optometrists and opticians,
and sales to independent wholesalers. We offer a diverse range of lens designs
and plastic materials. In particular, we are focused on the following four key
value-added product segments:  
    
    progressive lenses, or lenses with a continuous gradient of differentiated corrective power;  
    
    photochromic lenses, or lenses that have a built-in adjustable tint that changes with the amount of available
natural light;  
    
    coated lenses, which include lenses with anti-reflective coatings and anti-scratch coatings; and  
    
    high-index specialty plastic lenses that are made from thin and light-weight materials, such as polycarbonate. We operate in three primary geographies: North America, Europe and Rest of
World (consisting primarily of Australia, Japan, China, and South America), and
our primary brands, SOLA and American Optical, are recognized by the trade in
most major regions of the world. Our top customers include several of the
leading North American and European retail chains, including Wal-Mart, Alain
Afflelou, Specsavers, LensCrafters and U.S. Vision, and some of the leading
managed care organizations, including Kaiser Permanente and Vision Service
Plan. Our Corporate Information We commenced operations in 1960 and were incorporated in Delaware in 1993.
Our principal executive offices are located at 10590 West Ocean Air Drive,
Suite 300, San Diego, California 92130, and our telephone number is (858)
509-9899. Our website address is www.sola.com. 4




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Industry Background Spectacle lenses are made of standard plastic (CR-39) or high-index
specialty plastics (including polycarbonate) that are produced from
petrochemical-based monomers, or glass. In addition to material, spectacle
lenses are differentiated by the type of vision correction, lens design and
coatings applied to the lens. There are three primary categories of spectacle
lens design, and they include:  
    
    Single-vision lenses (lenses which have a constant corrective power at all points and are used to correct single
refractive vision problems, including myopia (nearsightedness), presbyopia (reading difficulties) and hyperopia
(farsightedness));  
    
    Multifocal lenses (lenses which have more than one corrective power, including bifocal lenses, which have two distinct
areas of different corrective power, and progressive lenses, which have a continuous gradient of different corrective
power); and  
    
    Plano lenses (lenses which have no corrective power and are primarily used for protective eyewear, including sunglasses). Key highlights of the global spectacle lens market are as follows: Favorable demographics According to the United Nations, the number of people in the age group
45-64 is expected to grow approximately 3% per year worldwide through 2005.
This age group is the group primarily affected by presbyopia, a natural aging
process that limits the eyes ability to focus on near objects. Presbyopia
affects the vast majority of people above the age of 45 and is a major source
of demand for progressive and other multifocal lenses. We believe that
increased interest in healthcare, medical screening and the availability of
fashionable spectacle frames, all increase demand for spectacles and hence,
spectacle lenses. Significant barriers to entry We have grown our business by continually reinvesting to ensure that we
offer our customers a wide range of spectacle lenses to correct the majority of
vision defects, in a broad range of materials, with prompt delivery. Through
this process we have innovated lens designs and materials, constructed a
physical distribution system to virtually all major markets around the world
and formed trading relationships with many of the worlds major optical
retailers. The cost and time to build the Company to its current position
indicates that industry barriers are high and include the following:  
    
    patented materials and lens designs  we hold many patents that cover
lens designs and materials, which limits the scope of competitors and
potential competitors;  
    
    product development expertise  competitors that lack the ability to
innovate lens designs and/or materials generally find it difficult to
be considered as a primary vendor by their customers;  
    
    manufacturing know-how across a wide range of lens materials  we
manufacture lenses utilizing seven different plastic materials and a
range of different types of glass. Without this range of materials, we
would be unable to meet the diverse needs of our customer base. Since
some of these materials employ significantly different manufacturing
processes, competitors may find it both expensive and time consuming
to gain manufacturing competency in an equivalent range;  
    
    vertical integration  many of our products and those of our direct
competitors, require secondary fabrication before they can be used by
the consumer. This secondary processing is carried out in custom built
lens prescription laboratories. Some of the larger retail chains own
such laboratories and other laboratories exist that are independently
owned. We supply product to both of these customer types, but
increasingly carry out the secondary processing in our own network of
laboratories that we have established across Europe, the United States
of America (USA) and parts of Asia Pacific. The cost of establishing
these laboratories has been and will continue to be significant, but
their operation allows us to distribute to a larger number of
customers, increase the value of each lens sold and improve control of
product quality; 5




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
    
    global market presence and distribution capabilities  the majority of
our factory output is from facilities we have established in China,
Mexico and Brazil. These factories have been in operation for many
years and deliver product to a global standard. Their output, along
with production output from our other, smaller specialty factories is
stored in primary distribution centers that are located in the USA,
England, Australia and Brazil. From those distribution centers,
internal and external customers in neighboring geographies receive
overnight delivery of up to 65,000 different SKUs. We believe that
our supply chain competency is a competitive advantage that would take
considerable time and cost for a new competitior to replicate. In
addition, our investment in lens processing laboratories further
strengthens our competitive position and forms a barrier to new
entrants;  
    
    breadth of product range  the range of lens materials, designs and
lens powers that we offer results in approximately 65,000 SKUs. While
we continually seek to minimize a proliferation of SKUs, we recognize
that to participate fully in the global spectacle lens market, we must
offer a large choice of product alternatives to our customers to meet
their differing requirements. The establishment and maintenance of
such a large range may be unappealing to potential new entrants to the
market; and  
    
    recognized and dependable brands within the industry  through
effective management of all of the preceding areas, we have
established a reputation with our customers for reliability in both
products and services, innovation and value. This position has emerged
over many years and we believe that it serves as a barrier to new
entrants easily acquiring our customer base. Alternative vision correction treatments have not materially affected the
spectacle lens market Though other, newer vision care alternatives exist, including contact
lenses and laser surgery, they have not had a material impact on the spectacle
lens market for the following reasons:  
    
    contact lens wearers almost always own and buy spectacles for when
they are not wearing their contact lenses;  
    
    the number of laser surgery procedures has not grown as expected and
has been relatively stable over the past few years; trade estimates
suggest that in the USA, the number of procedures has settled at
approximately 1.2 million per year, while our management estimates
that currently, approximately 150 million people own eyeglasses; and  
    
    refractive surgery techniques for the treatment of presbyopia are
still experimental and have shown very limited success. 6




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Our Competitive Strengths Our extensive experience in the industry and leading global market
position enables us to enjoy strengths in our market. Global presence and geographical diversity We believe we hold the number two market position globally in terms of
volume of plastic lenses sold. Our primary brands, SOLA and AO, are recognized
throughout the world, and we believe global brand recognition is a significant
advantage in the highly competitive spectacle lens market. We sell our products
to customers in over 50 countries around the world, and our geographically
diverse customer base limits our dependence upon any particular customer or
geographic region. Our global presence enables us to serve both local customers
and the expanding global needs and requirements of our international customers.
In addition, our global scope and extensive manufacturing and logistics
capabilities enable us to meet customer demand for delivery of a broad range of
products in a timely and efficient manner. We have 9 manufacturing facilities
on 5 continents, 5 principal distribution centers located on 4 continents and
sales operations in 27 countries. Strength in North American market We believe we hold a leading position in terms of volume of lenses sold in
North America and we are continuing to expand our prescription laboratory
network to drive additional growth in this region. We have demonstrated seven
consecutive quarters of year-over-year revenue growth in North America in
excess of at least six percent, with the quarter ended March 31, 2004
demonstrating year-over-year revenue growth of six percent. Over the past three
years, we have acquired or opened eight prescription laboratories in the U.S.
The addition of these prescription laboratories, supported by strengthened
marketing programs, improved supply chain management and the launch of new
products, has increased our reach in the channel and helped drive North
American revenue growth. 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, specifically, from our strong
operations in Europe. The growth and success of our direct-to-retail business
in Europe are driven by our experienced commercial teams across the region
which are supported by our vertically integrated network of prescription
laboratories. We have eight primary prescription laboratories in Europe, which
allow us to directly meet the needs of the eyecare professionals in those
markets. Additionally, we believe that these laboratories will enable us to
introduce new products at a faster pace. Significant sales of valued-added products We focus our efforts on value-added products, including products that have
advanced design characteristics such as Progressive Addition Lenses, lens
coatings and treatments such as Teflon Easycare Lenses, lenses made of thin and
light-weight materials such as polycarbonate or Finalite, and photochromic
lenses that react to sunlight such as Transitions lenses. These products
accounted for approximately 73% and 71% of our net sales for the fiscal years
ended March 31, 2004 and 2003, respectively. We believe the quality and breadth
of our value-added products enable us to strengthen relationships with existing
customers and develop relationships with new customers. Research and development expertise We believe that we are a technological leader in the plastic lens segment
of the spectacle lens market, 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 and have successfully
developed and marketed a number of innovative new products. Most notable are
our progressive lens designs, including Percepta, SOLAMax, AO Compact and AO
bActive and our recently introduced AO ProEasy and SOLAOne, and our
proprietary thin and light-weight materials, Spectralite and Finalite. In
addition, we developed a high performance lens coating, launched in December
2002, that is marketed under the DuPont Teflon® brand as Teflon® EasyCare
lenses. We are also developing technology to supply customized progressive
lenses to our customers. Our technical expertise is demonstrated further by our
receipt of numerous Optical Laboratory Association awards for technical design
excellence. 7




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Strength in the growing chain retail channel We believe that we hold a strong market position in terms of volume of
plastic lenses sold in the North American and European chain retail channel. We
have established our strong position in these channels by providing a broad
product portfolio, differentiated new products, timely delivery and a
commitment to product quality, technical support and customer education. We
work with most major retail chains in North America, including Wal-Mart,
LensCrafters and U.S. Vision. In Europe, large retail chains such as Alain
Afflelou, Grand Vision, Specsavers, and Wal-Mart are significant customers. We
expect to continue to gain revenue growth in the chain retail channel as more
customers gravitate toward national retailers due to pricing and convenience. Experienced management team Our senior management team is led by President and Chief Executive Officer
Jeremy C. Bishop, who has substantial experience in the vision care sector. Mr.
Bishop has spent the majority of his career in the vision care industry and has
worked in numerous geographies, where he has held management positions with
companies operating retail chains, optical laboratories and mass manufacturing
and distribution facilities. 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. Under
Mr. Bishops leadership, we have reduced operating expenses as a percentage of
net sales, reorganized our supply chain and manufacturing base, expanded our
direct to retail business, and improved our financial performance. Mr. Bishop
and his senior management team have fostered a new culture geared toward
simplification of our business model, strengthened sales and marketing,
increased focus on new product development, continued cost reduction and
enhanced cash flow generation. Our Strategy Our strategy is to enhance our strong market position and to increase net
sales and cash flow by increasing the volume and value of products that we
process in our owned prescription laboratories while serving those customers
who operate their own prescription laboratories with a fast, reliable flow of
factory products through our established distribution system, at the lowest
possible cost; underpinning all of this through the continual innovation of new
products and technologies. 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
United Nations, the number of people in the age group 45-64 is expected to grow
approximately 3% per year through 2005. This age group is the group primarily
affected by presbyopia, a natural aging process that limits the eyes ability
to focus on near objects. 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. Progressive lenses provide a continuous gradual change in
the power from eye level to the bottom of the lens, providing the most natural
vision for presbyopic patients. We believe our leading position in the design
and manufacture of progressive lenses positions us favorably to realize the
benefit of this demographic trend. We have recently introduced two new
progressive lens products, and we will continue to focus on the further
development and enhancement of our progressive lens designs. For younger
persons with vision defects, we anticipate stability in the market as declining
birth rates in some geographies are offset by improved screening and higher
penetration rates. Further, continuous improvements in the range of lenses and
lens treatments that are available are increasing the value of the market for
all age groups and many geographies. Focus on marketing, sales and distribution We develop and manage our marketing strategy on a centralized basis while
employing local sales and marketing implementation and tactics. We market our
two primary brands, SOLA and AO, in most major regions of the world. We
differentiate our products from those of our competitors through innovative
lens designs, materials and coatings targeted to meet customer needs. For
instance, in April 2002 we announced a global licensing agreement with DuPont
Fluoroproducts under which we market a newly developed high performance coating
for ophthalmic lenses using the DuPont Teflon® brand. We seek to expand our
market share by further developing trade brand recognition for our products and
increasingly marketing to our customers the advantages of our value-added
products. In addition, we intend to continue with the expansion of our
direct-to-retail business through our prescription laboratory network, derive
growth by further developing partnerships with chain retailers, and support the
growth of independent laboratories, all through focusing marketing expenditures
on target products, services, markets and accounts. Our marketing efforts are
intended to help us compete on the basis of quality and service rather than
price. 8




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Expand prescription laboratory network Approximately 24 months ago, we launched an initiative to increase our
presence and strengthen our position in the wholesale distribution (independent
prescription laboratory) channel, primarily in the North American market. Since
the beginning of fiscal 2003, we have invested approximately $35 million for
the acquisition of certain net assets and/or stock of seven 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 continued focus on supplying value-added products requires that
we possess a robust distribution system for their delivery. Laboratories, both
wholly owned and independent, are a vital component of that solution. We
currently have twenty-eight prescription laboratories, including eight in the
U.S., and we intend to pursue additional acquisitions of prescription
laboratories in the U.S. and overseas. Introduce new products We invest significant resources in the development of new and innovative
products. Over our history, we have successfully developed and marketed a
number of innovative products. Most notable are our progressive lens designs,
including Percepta, AO Compact, SOLAMax, AO bActive and our recently
introduced AO ProEasy and SOLAOne, and our proprietary thin and light-weight
materials, Spectralite and Finalite. In addition, in April 2002 we announced a
global licensing agreement with DuPont Fluoroproducts under which we market a
newly developed high performance coating for ophthalmic lenses using the
DuPont Teflon® brand. We have also developed a range of progressive products
and associated dispensing tools that enable our customers to deliver
progressive lenses that are both design and prescription customized. These
designs are direct-cut onto lens blanks using proprietary third generation and
polishing technologies. Improve cash flow performance We are focused on executing key business fundamentals and managing our
business for improved financial performance, including cash flow generation.
During fiscal 1999 through the end of fiscal 2001, we implemented strategic
initiatives aimed at streamlining and standardizing our operations globally.
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. During fiscal 2004, management implemented a plan to further efforts
initiated under the fiscal 1999 strategic initiatives. Charges incurred under
these new initiatives totaled $13.7 million during the year ended March 31,
2004, and related primarily to work force reductions, facility closures and
asset impairment. Management expects to incur additional charges of
approximately $3 million through September 2004 primarily related to facility
closures, workforce reductions and asset impairment in Asia and Europe.
Initiatives to improve the efficiency of the business are always being
evaluated. Therefore, it is possible that future initiatives may be
contemplated resulting in additional charges. 9




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Products We focus primarily on value-added products, including products with
advanced design characteristics (such as progressive lenses), lens coatings and
treatments (such as photochromic and anti-reflection coated lenses) and thin
and light-weight materials (such as polycarbonate). We manufacture lenses using
both plastic and glass materials, with plastic lenses generating approximately
96% of our lens sales. Our plastic lens materials are comprised of the
following:  
    
    conventional hard resin plastic (including CR-39);  
    
    high-index specialty materials including Finalite, Spectralite and 1.67; and  
    
    polycarbonate, a thin and light-weight high-index specialty material with greater impact resistance. High-index lenses provide significant advantages over standard plastic or
glass lenses. High-index lenses are thinner and often lighter, providing the
wearer with improved comfort and cosmetics. The term index refers to the
index of refraction, or degree to which the lens refracts light. A higher
index of refraction enables the material to bend light to a greater degree and
requires less curvature in the lens to achieve a specific prescription power.
Polycarbonate is an increasingly used material that provides a thin and light
substrate with high impact resistance. We also market and produce a variety of lens coatings and treatments that
significantly enhance the performance of our lens products. These coatings and
treatments include:  
    
    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 it is exposed to direct sunlight. Our key product categories are highlighted below: Progressive Lenses Progressive lenses are best-suited to correct presbyopia, a natural aging
process that limits the eyes ability to focus on near objects. Presbyopia is
the principal driver behind the need for multi-focal vision correction, and it
affects a majority of individuals over the age of 45. Progressive lenses have
no visible lines and provide a gradual change in power from eye level to the
bottom of the lens. Our most notable progressive lenses are Percepta, AO
Compact, SOLAMax and AO bActive. In addition, we have recently introduced two
new progressive lenses, AO ProEasy and SOLAOne. Photochromic Lenses Photochromic lenses are available in almost every lens style, and most
have built-in scratch-resistance and ultraviolet protection. This market
represents a niche market where we have achieved strong growth. Our primary
photochromic product, Transitions, has a built-in adjustable tint that changes
with the amount of available natural light. In bright sunlight, the lenses
darken, and indoors, they become clear. Advanced CoatingsTeflon® EasyCare lenses In April 2002, following an extensive internal research and development
program, we announced a global licensing agreement with DuPont Fluoroproducts
for a high performance coating for ophthalmic lenses using the DuPont Teflon®
brand. Our Teflon® EasyCare lenses are anti-scratch, anti-reflective,
anti-static, hydrophobic coated lenses, and they offer the wearer cosmetic
elegance, enhanced clarity and easy maintenance. 10




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High-Index Specialty Plastics We manufacture several high-index specialty plastic lens materials,
including polycarbonate, 1.67, Spectralite and Finalite 1.6. Spectralite and
Finalite 1.6 are proprietary materials developed by our internal research and
development group. In addition, we have substantial polycarbonate manufacturing
capacity following the expansion of our polycarbonate capabilities in our Rhode
Island and Tijuana, Mexico facilities. Marketing and Sales Our sales offices are located in 27 countries worldwide. As of March 31,
2004, there were approximately 778 employees involved in our sales and
marketing efforts. Our sales and marketing expenditures for fiscal 2004 were
$116.9 million, representing 18% 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 trade 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 by the trade throughout
the world include SOLAOne, AO ProEasy, Percepta, AO Compact, SOLAMax and AO
bActive. Distribution We market and distribute our spectacle lens products globally through
three primary channels:  
    
    national chain retail;
    
    small and medium retail outlets; and
    
    wholesale distributors (i.e., independent processing laboratories). In the United States, we also sell directly to managed care organizations,
a growing segment of the spectacle lens market. In addition, we place
particular emphasis on our vertically integrated prescription laboratory
network. This network has served customers in Europe for many years and is now
being extended into North America to service independent retailers in this
important market. Customers During fiscal 2004, our ten largest customers accounted for 26% of net
sales, and our largest customer accounted for less than 6% of net sales. During
fiscal 2004, five of our ten largest customers were located in North America
and accounted for 12% of net sales. For the year ended March 31, 2004, sales to
our top 20 customers, excluding competitors, increased by 7% as compared to the
prior year. Manufacturing Operations We currently operate nine facilities, three primary and six 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. 11




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Research We continue to invest in research in order to introduce new and innovative
products. As of March 31, 2004, there were 89 employees involved in our
research efforts. Our research expenditures for fiscal 2004 were $9.4 million,
representing 1.4% of net sales, for fiscal 2003 were $12.2 million,
representing 2.2% of net sales, and for fiscal 2002 were $13.1 million,
representing 2.5% of net sales. Our primary research center is located in
Lonsdale, Australia. Our research focuses on the design and development of higher margin,
value-added products and on technology that will support or facilitate the sale
of our products by the retailer. 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 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. Our future performance is dependent on our continuing ability to
develop and market new products, the quality of our products, and the
effectiveness of our supply chain. 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, 2004, we had filed, or applied for, patents for 74 discrete
inventions or technologies. Many of our patents have been filed in multiple
countries, and they include 65 patents, or patent applications, filed in the
United States. We have been granted, or are licensed to use, 1,030 trademarks
in various countries, representing rights to 255 discrete names. These include
80 trademarks granted in the United States. Further, there are 68 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, 2004, we had 6,634 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 Up to 1998, our organization had 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. 12




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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. During fiscal 2004, management implemented a plan to further efforts
initiated under the fiscal 1999 strategic initiatives. Charges incurred under
these new initiatives totaled $13.7 million during the year ended March 31,
2004, and related primarily to work force reductions, facility closures and
asset impairment. Management further expects to incur additional charges of
approximately $3 million through September 2004 primarily related to facility
closures, workforce reductions and asset impairment in Asia and Europe.
Initiatives to improve the efficiency of the business are always being
evaluated. Therefore, it is possible that future initiatives may be
contemplated resulting in additional charges. 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 within compliance of local, national, and international environmental
regulations 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. 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. Financial Information About Geographic Areas For information about our geographic areas, see Note 18 of Notes to
Consolidated Financial Statements. 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. 13




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14




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Item 2.Properties Our principal properties are set forth in the following table: Owned orRegion and Location
    
    Leased
    
    Principal Operations
    
    Square FootageNorth AmericaTempe, AZ
    
    Leased
    
    Laboratory
    
    
    10,000San Diego, CA
    
    Leased
    
    Corporate Offices; Distribution Center
    
    
    130,336Petaluma, CA
    
    Leased
    
    Sales and Marketing
    
    
    120,480Clearwater, FL
    
    Leased
    
    Manufacturing
    
    
    8,960Iowa City, IA
    
    Leased
    
    Laboratory
    
    
    150,570Sheldon, IA
    
    Leased
    
    Laboratory
    
    
    2,100Hebron, KY
    
    Leased
    
    Laboratory; Distribution Center
    
    
    4,584Southbridge, MA
    
    Leased
    
    Research and Development; Sales Office
    
    
    22,492Troy, MI
    
    Leased
    
    Laboratory
    
    
    22,772Baltimore, MD
    
    Leased
    
    Laboratory
    
    
    9,600Independence, MO
    
    Leased
    
    Laboratory
    
    
    4,000Portland, OR
    
    Owned
    
    Laboratory
    
    
    12,300Warwick, RI
    
    Leased
    
    Manufacturing; Sales and Administrative Offices
    
    
    50,581Roanoke, VA
    
    Leased
    
    Laboratory
    
    
    10,095Tijuana, Mexico
    
    Leased
    
    Manufacturing
    
    
    279,189Mexico City, Mexico
    
    Leased
    
    Laboratory and Sales Office
    
    
    33,000EuropeGhent, Belgium
    
    Leased
    
    Laboratory; Sales and Marketing
    
    
    4,800Copenhagen, Denmark
    
    Leased
    
    Sales Office
    
    
    948Goetzenbruck, France
    
    Owned
    
    Manufacturing
    
    
    89,029Fougeres, France
    
    Both
    
    Laboratory; Sales and Marketing
    
    
    54,530Wexford, Ireland
    
    Owned
    
    Manufacturing; Laboratory
    
    
    129,168Varese, Italy
    
    Leased
    
    Laboratory; Manufacturing; Sales and Marketing
    
    
    118,404Setubal, Portugal
    
    Leased
    
    Laboratory
    
    
    19,967Birmingham, UK
    
    Leased
    
    Laboratory; Sales and Marketing; Administrative Offices
    
    
    44,500London, UK
    
    Leased
    
    Sales and Marketing; Distribution Center;
    
    
    27,660Basel, Switzerland
    
    Owned
    
    Sales Office
    
    
    9,236Barcelona, Spain
    
    Leased
    
    Sales Office
    
    
    5,081South AmericaBuenos Aires, Argentina
    
    Owned
    
    Sales Office
    
    
    4,642Petropolis, Brazil
    
    Owned
    
    Manufacturing; Sales and Marketing; Distribution
Center; Administrative Offices
    
    
    222,729Villa de Cura, Venezuela
    
    Owned
    
    Manufacturing
    
    
    37,000AsiaKowloon Bay, Hong Kong
    
    Leased
    
    Sales Office
    
    
    18,893Guangzhou, China
    
    Both
    
    Manufacturing; Laboratory, Administrative Office
    
    
    136,606Osaka, Japan
    
    Leased
    
    Laboratory; Sales and Marketing
    
    
    3,433Singapore
    
    Leased
    
    Manufacturing; Sales and Marketing; Laboratory
    
    
    39,534Selangor, Malaysia
    
    Leased
    
    Sales and Marketing; Laboratory
    
    
    9,025AustraliaLonsdale, Australia
    
    Both
    
    Manufacturing; Research and Development; Laboratory;
Sales, Marketing and Distribution Center; Administrative offices
    
    
    206,852Auckland, New Zealand
    
    Leased
    
    Laboratory and Sales
    
    
    4,345
 15




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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. For further information concerning our leased properties, see Note 16 of
Notes to Consolidated Financial Statements. Our operating leases have
expirations ranging from 2005 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 and anticipated future needs. 
 Item 3.Legal Proceedings 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. 
 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 2004. 16




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PART II 
 Item 5.Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Public Market for Common Stock Our common stock trades on the New York Stock Exchange under the symbol
SOL. The following table sets forth the range of high and low reported sale
prices of the common stock on the New York Stock Exchange Composite Tape for
the fiscal quarters indicated. High
    
    LowFiscal Year Ended March 31, 2004:First Quarter ended June 30, 2003
    
    $
    18.20
    
    
    $
    12.22Second Quarter ended September 30, 2003
    
    
    18.42
    
    
    
    15.40Third Quarter ended December 31, 2003
    
    
    19.89
    
    
    
    15.82Fourth Quarter ended March 31, 2004
    
    
    23.54
    
    
    
    18.68Fiscal Year Ended March 31, 2003:First Quarter ended June 30, 2002
    
    $
    15.25
    
    
    $
    8.90Second Quarter ended September 30, 2002
    
    
    11.50
    
    
    
    7.61Third Quarter ended December 31, 2002
    
    
    13.99
    
    
    
    8.81Fourth Quarter ended March 31, 2003
    
    
    13.10
    
    
    
    10.10
 On November 24, 2003, we issued 6.9 million shares of common stock at
$17.50 per share for gross proceeds of $120.7 million. On June 10, 2004, the closing price per share of our common stock on the
New York Stock Exchange was $19.33. As of June 10, 2004, we had 266 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 Indenture governing our 6 7/8% Senior Notes restricts and
limits 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. 17




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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, 2004 and the balance sheet data
as of March 31, 2004, 2003, 2002, 2001 and 2000 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 31,2004(1)
    
    2003
    
    2002
    
    2001(4)
    
    2000(5)(in thousands, except per share data)Statements of Operations DataNet sales
    
    $
    650,109
    
    
    $
    562,746
    
    
    $
    529,505
    
    
    $
    545,432
    
    
    $
    543,445Net income/(loss)
    
    $
    (13,480
    )
    
    $
    3,966
    
    
    $
    19,118
    
    
    $
    (66,528
    )
    
    $
    741Earnings/(Loss) Per Share Data, BasicNet income/(loss)
    
    $
    (0.49
    )
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    (2.77
    )
    
    $
    0.03Weighted average common shares
outstanding
    
    
    27,337
    
    
    
    24,573
    
    
    
    24,067
    
    
    
    24,049
    
    
    
    24,887Earnings/(Loss) Per Share Data, DilutedNet income/(loss)
    
    $
    (0.49
    )
    
    $
    0.16
    
    
    $
    0.78
    
    
    $
    (2.77
    )
    
    $
    0.03Weighted average common and
dilutive
securities outstanding
    
    
    27,337
    
    
    
    24,856
    
    
    
    24,583
    
    
    
    24,049
    
    
    
    25,069
 As of March 31,2004(2)
    
    2003(3)
    
    2002
    
    2001
    
    2000Balance Sheet Data
    
    (in thousands)Total assets
    
    $
    848,437
    
    
    $
    744,985
    
    
    $
    696,804
    
    
    $
    662,375
    
    
    $
    715,033Long-term debt, less current
portion
    
    
    275,450
    
    
    
    324,204
    
    
    
    278,245
    
    
    
    254,910
    
    
    
    209,234Total stockholders equity
    
    
    395,341
    
    
    
    264,360
    
    
    
    261,362
    
    
    
    235,375
    
    
    
    327,802
   (1)
    
    In fiscal 2004, we recorded restructuring and impairment charges of $16.7
million, or $12.6 million, net of tax, related to charges for workforce
reductions, facility closures and asset impairments. See Note 12 of Notes
to Consolidated Financial Statements.(2)
    
    The reduction in long-term debt during fiscal 2004 was a result of our
recapitalization, which included the replacement of our existing $90
million credit facility with a new credit facility, consisting of a
six-year $175 million term loan and a five-year $50 million revolving
credit facility; and a tender offer and consent solicitation with respect
to our EUR 205.0 million principal amount of 11% Senior Notes due 2008.
See Notes 8 and 9 of Notes to Consolidated Financial Statements.(3)
    
    Increase in long-term debt from fiscal 2002 to fiscal 2003 is due
primarily 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.(4)
    
    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.
Included in net income for fiscal 2001 is amortization of goodwill of $4.5
million, net of tax. Beginning in fiscal 2002, goodwill was no longer
being amortized into expense.(5)
    
    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.
Included in net income for fiscal 2000 is amortization of goodwill of $4.1
million. Beginning in fiscal 2002, goodwill was no longer being amortized
into expense. 18




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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 believe we are a leading designer, manufacturer and distributor of a
broad range of spectacle lenses. We hold a strong manufacturing and technology
position worldwide in the growing plastic lens segment of this market, and we
believe we occupy the global number two market position in terms of volume of
plastic lenses sold. We have extensive global presence with sales operations in
27 countries. We do not sell our products directly to the consumer but operate
through a variety of distribution systems that include sales to national and
international retail chains, sales to independent optometrists and opticians,
and sales to independent wholesalers. We focus our efforts on products with
advanced design characteristics, lens coatings and treatments and thin and
light weight materials. We operate in three primary geographies: North America, Europe and Rest of
World (consisting primarily of Australia, Japan, China, and South America), and
our primary brands, SOLA and American Optical, are recognized by the trade in
most major regions of the world. Our top customers include several of the
leading North American and European retail chains, including Wal-Mart, Alain
Afflelou, Specsavers, LensCrafters and U.S. Vision, and some of the leading
managed care organizations, including Kaiser Permanente and Vision Service
Plan. For the fiscal year ended March 31, 2004, we generated approximately
41.7% of our net sales from North America, 40.0% from Europe and 18.3% 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. We have restated our 2003 financial statements to correct a computational
error in the fiscal 2003 tax provision. As a result of the restatement, the tax
provision for fiscal 2003 has been reduced by $2.4 million. These adjustments
affect previously reported amounts of net income and earnings per share for
fiscal 2003 as a result of the reduction in the 2003 tax provision. 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 2 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, 2004, the
allowance for doubtful accounts was $8.7 million and, at March 31, 2003, it was
$9.0 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 2004, our bad debt expense was $1.4
million compared to $1.6 million in fiscal 2003 and $2.3 million in fiscal
2002. 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 19




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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. 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, 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. 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. 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. 20




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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 foreign exchange
translation 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, 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 consider the
relevant subsidiarys local currency to be the functional currency for our
international subsidiaries. Accordingly, we had cumulative translation losses
of approximately $23.5 million and $48.1 million that were included in
accumulated other comprehensive loss within our balance sheet at March 31, 2004
and 2003, respectively. During fiscal 2004, 2003 and 2002, translation
adjustments of $24.5 million, $1.7 million and $3.3 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 adjustments 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, Mexican Peso and Australian and Canadian Dollars. Any future
translation gains or losses could be significantly higher than those noted in
each of these years. Revenue Recognition We recognize revenue pursuant to applicable accounting standards,
including Securities and Exchange Commission (SEC) Staff Accounting Bulletin
No. 104 (SAB 104), Revenue Recognition in FinancialStatements. SAB 104
summarizes certain of the SEC staffs views in applying accounting principles
generally accepted in the United States of America 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. Revenues include sales of merchandise inventory to outside customers,
including shipping and handling fees charged to customers, and other fees
associated with our vision care laboratories. Revenue from merchandise sales, net of estimated returns and allowances,
is recognized when the related goods are shipped to the customer (FOB shipping
point contract terms), as our significant obligations have been satisfied,
title and risk of loss has passed to the customer and collectibility is
probable. We do not maintain insurance to cover risk of loss while products
are in transit for those products sold to customers under FOB shipping point
contract terms. Remaining sales are recorded at the time of customer receipt
under FOB destination contract terms. 21




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##### Table of Contents



Our return policy generally allows for return of product up to 90 days
from the date of purchase, but may vary based on local country standards. Since
many of the merchandise sales are accompanied with the right of return, a
provision for estimated returns on sales is made at the time of sale based on
historical experience in accordance with Statement of Financial Accounting
Standards No. 48, Revenue recognition When Right of Return Exists. Due to the
nature of our business of selling spectacle lenses, our warranty liability
exposure is minimal and is included as part of the provision for merchandise
returns and allowances. We have various programs that allow certain customers to earn credits,
rebates or discounts based on their accumulated purchases. These credits,
rebates or discounts are recognized as a reduction of revenue based on the
rebates earned and the estimated future redemptions or payments in accordance
with EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products)". The cumulative liability for
unredeemed rebates is adjusted over time based on actual experience and trends
with respect to program compliance. Shipping and handling fees charged to customers are included in net sales
in accordance with EITF 00-10, Accounting for Shipping and Handling Fees and
Costs and the related costs of $30.8 million, $30.1 million and $32.6 million
for fiscal 2004, 2003 and 2002, respectively, are included in selling and
marketing expenses. We do not have post shipment obligations, customer acceptance, price
protection or special arrangements with any of our distributors or other
customers. Our accounting for revenue is consistently applied across all of
our distribution channels. 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, Mexican
Peso 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. 22




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##### Table of Contents



Results of Operations Fiscal 2004 Compared to Fiscal 2003 Net Sales. Our net sales were $650.1 million in fiscal 2004, reflecting an increase
of $87.4 million or 15.5% from $562.7 million in fiscal 2003. Using constant
exchange rates, net sales increased by 6.6%. 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. The increase
in net sales in the Rest of World region were primarily due to increases in
South America and the effect of the weakening U.S. Dollar against the
Australian Dollar. Excluding the effect of foreign currency, the increase in
net sales in South America was offset by sales declines in Australia and Asia.
Net sales performances by region were as follows:  
    
    North America increased by $21.9 million or 8.8%;
    
    Europe increased by $50.0 million or 23.8%; and
    
    Rest of World increased by $15.4 million or 14.9%. Using constant exchange rates, the regional performances were as follows:  
    
    North America increased by 9.1%;
    
    Europe increased by 6.2%; and
    
    Rest of World increased by 2.1%. 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 March
    
    twelve months endedRegion
    
    March 31, 2003
    
    Adjustment
    
    31, 2003
    
    March 31, 2004
    
    Percent increaseNorth America
    
    $
    249.2
    
    
    $
    (0.6
    )
    
    $
    248.6
    
    
    $
    271.1
    
    
    
    9.1
    %Europe
    
    
    210.3
    
    
    
    34.8
    
    
    
    245.1
    
    
    
    260.3
    
    
    
    6.2
    %Rest of World
    
    
    103.3
    
    
    
    12.9
    
    
    
    116.2
    
    
    
    118.7
    
    
    
    2.1
    %Total
    
    $
    562.8
    
    
    $
    47.1
    
    
    $
    609.9
    
    
    $
    650.1
    
    
    
    6.6
    %
 23




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##### Table of Contents



Gross Profit and Gross Margin. Our gross profit totaled $264.0 million for fiscal 2004 compared to gross
profit of $233.1 million for fiscal 2003, an increase of $30.9 million or
13.3%. Gross profit as a percentage of net sales or gross margin decreased to
40.6% for fiscal 2004 from 41.4% for fiscal 2003. Our gross margins depend
principally on our manufacturing costs and product and customer mix. Product
gross margins can vary from below 15% to over 70%. Customer gross margins
typically range from 20% to 50%, depending on the mix of products sold, the
quantity sold and the overall trading conditions applied to those sales. The
primary drivers of manufacturing costs are productivity, energy and labor
costs, and plant depreciation. We continually adjust the volume and mix of our
factory output to match changes in overall customer demand, changes in the
product mix that result from marketing initiatives and the launch of new
products. These routine adjustments enable us to control and minimize our
investment in finished goods inventories but result in the production cost of
an individual SKU varying from period to period. These periodic changes in cost
are reflected in gross margin when the product is sold. Operating Expenses. Our operating expenses in fiscal 2004 totaled $190.4 million compared to
$166.2 million for fiscal 2003. This increase was related primarily to the
inclusion of $16.7 million related to charges associated with strategic
initiatives and related work force reductions, facility closures and asset
impairments as discussed below. Excluding the impact of charges of $16.7
million associated with strategic initiatives and asset impairments, operating
expenses for fiscal 2004 were $173.7 million versus $166.2 million the same
period a year ago. Operating expenses for fiscal 2004 and 2003 as a percentage
of net sales were 33.0% and 29.5%, respectively. Excluding the impact of
charges associated with strategic initiatives and asset impairments, which
amounted to 6.3% of net sales for fiscal 2004, operating expenses as a
percentage of net sales were 26.7% and 29.5% for fiscal 2004 and 2003,
respectively. Research and development expenses were $9.4 million or 1.4% of
net sales in fiscal 2004 and were $12.2 million or 2.2% of net sales for fiscal
2003. The decrease of $2.8 million or 23.3% in our research and development
expenses was due to reduced spending and headcount reductions associated with
the strategic initiatives implemented in fiscal 2004. Selling and marketing
expenses were $116.9 million or 18.0% of net sales in fiscal 2004 and were
$106.9 million or 19.0% of net sales in fiscal 2003. The increase in selling
and marketing expenses was due primarily to increased sales and marketing
initiatives associated with new products during fiscal 2004. Our general and
administrative expenses were $64.2 million in fiscal 2004 and include the $16.7
million of restructuring and impairment charges noted above. Excluding these
restructuring and impairment charges, general and administrative expenses were
$47.5 million in fiscal 2004 and $47.1 million in fiscal 2003, an increase of
$0.4 million or 0.8%. General and administrative expenses increased 36.3% in
fiscal 2004 compared to the prior year and decreased 1.5%, excluding fiscal
2004 restructuring and impairment charges and fiscal 2003 curtailment of the
domestic pension fund. As a percentage of net sales and excluding restructuring
and impairment charges, general and administrative expenses decreased to 7.3%
for fiscal 2004 compared to 8.4% for fiscal 2003. We continue to place a high
level of attention on the management of operating expenses and anticipate that
cost containment will continue for future periods. During fiscal 2004, we recorded net pre-tax restructuring charges of $13.7
million related primarily to work force reductions, facility closures, asset
impairments and other initiatives. Included in the workforce reductions were
209 employees from manufacturing, 73 employees from sales and marketing, 15
employees from administration, and 42 employees from research and development. Impairment charges associated with restructuring related activities
resulting from asset write-downs totaled $2.8 million in fiscal 2004 due to
facility reductions. These charges primarily related to equipment write-downs
in Europe and Asia. 24




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##### Table of Contents



The following table presents details of the restructuring charges for
fiscal 2004, 2003 and 2002 and related liabilities associated with the
strategic initiatives as of March 31, 2004, 2003 and 2002 (in thousands): Workforce
    
    FacilityReductions
    
    Closures
    
    Impairments
    
    Other
    
    TotalStrategic 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
    
    
    
    
    
    
    
    
    
    
    
    870Cash utilization of fiscal 2003
strategic initiative liability
    
    
    (651
    )
    
    
    (219
    )
    
    
    
    
    
    
    
    
    
    
    (870
    )Fiscal 2004 Charge to operations
    
    
    8,357
    
    
    
    2,364
    
    
    
    2,754
    
    
    
    226
    
    
    
    13,701Utilization of fiscal 2004
strategic initiative liability:Non-cash
    
    
    
    
    
    
    (1,731
    )
    
    
    (2,754
    )
    
    
    47
    
    
    
    (4,438
    )Cash
    
    
    (4,745
    )
    
    
    (633
    )
    
    
    
    
    
    
    (273
    )
    
    
    (5,651
    )Strategic initiative liability as of
March 31, 2004
    
    $
    3,612
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,612
 Management expects to utilize the strategic initiative liability of $3.6
million through September 2004. In addition, management expects to incur
additional charges of approximately $3 million through September 2004 primarily
related to facility closures, workforce reductions and asset impairments in
Asia and Europe. In addition to restructuring related impairment charges, we recorded other
impairment charges of approximately $3 million related to a note receivable and
deposit under the provisions of SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. These charges are included in general and
administrative expenses in the accompanying financial statements. The following table presents the reconciliation of general and
administrative expenses to as reported results (in millions except percentage
data): Twelve months ended
    
    
    
    
    
    Twelve months endedMarch 31, 2003
    
    Percent of Sales
    
    March 31, 2004
    
    Percent of SalesNet sales, as reported
    
    $
    562.7
    
    
    
    100.0
    %
    
    $
    650.1
    
    
    
    100.0
    %General and administrative expenses, as reported
    
    $
    47.1
    
    
    
    8.4
    %
    
    $
    64.2
    
    
    
    9.9
    %Restructuring and impairment included in
general and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (16.7
    )
    
    
    (2.6
    %)General and administrative expenses, as adjusted
    
    $
    47.1
    
    
    
    8.4
    %
    
    $
    47.5
    
    
    
    7.3
    %
 Net Interest Expense and Foreign Currency Gain/(Loss). Our net interest expense totaled $29.3 million for fiscal 2004 compared to
$32.1 million for fiscal 2003, a decrease of $2.8 million. The decrease was due
primarily to the repurchase of the 11% Euro-denominated bonds pursuant to our
recapitalization during the quarter ended December 31, 2003, offset by the
impact of the Euro-U.S. Dollar exchange rates between periods. In fiscal 2004,
we recorded a net foreign exchange loss of $16.5 million compared to a $31.7
million net foreign exchange loss for fiscal 2003. Included in the $16.5
million foreign exchange loss recorded in fiscal 2004 were exchange losses on
Euro-denominated bonds of $27.4 million, offset by $10.9 million in net
proceeds from settlement of derivative contracts. Loss on Early Extinguishment of Debt. 25




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As a result of our recapitalization, a $41.5 million loss on early
extinguishment of debt was recorded in fiscal 2004. The components of this
charge included a loss of $32.5 million relating to the tender premium paid on
the repurchase of Euro 195 million principal amount of the Companys 11%
Euro-denominated notes and a loss of $9.0 million relating to tender fees. Provision for Income Taxes. Our combined state, federal and foreign tax rate was 4.8% benefit for
fiscal 2004 compared to a 47.6% benefit for fiscal 2003. We have deferred tax
assets less deferred tax liabilities on our balance sheet as of March 31, 2004
of $66.8 million, net of a valuation allowance of $18.6 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 $0.5 million for fiscal 2004 compared
to minority interest loss of $0.6 million for fiscal 2003, a decrease of $0.1
million. The decrease was due primarily to increased income during fiscal 2004
from several of our joint venture entities whose results are included in the
consolidated statements of operations. 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 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. The increase in North
America was due primarily 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%. The following table presents the reconciliation of constant currency
results to as reported results (in millions except percentage data): 26




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Net sales, as
    
    
    
    
    
    Adjusted net sales
    
    Net sales, asreported for the
    
    
    
    
    
    for the twelve
    
    reported for thetwelve months ended
    
    Constant Currency
    
    months ended March
    
    twelve months endedRegion
    
    March 31, 2003
    
    Adjustment
    
    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
due primarily to increased sales and marketing initiatives during fiscal 2003.
Our general and administrative expenses were $47.1 million in fiscal 2003 and
$47.8 million in fiscal 2002, a decrease of $0.7 million or 1.3%. General and
administrative expenses decreased 1.3% in fiscal 2003 compared to the prior
year and increased 0.8% excluding the credit of $1.1 million in fiscal 2003 for
curtailment of the domestic pension fund. 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 was a 47.6% benefit for
fiscal 2003 compared to 28.0% expense for fiscal 2002. We have net deferred tax
assets less deferred tax liabilities on our balance sheet as of March 31, 2003
of $51.1 million, net of valuation allowance of $13.7 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. 27




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##### Table of Contents



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. Liquidity and Capital Resources Our operating activities generated $51.2 million in cash in the twelve
months ended March 31, 2004 compared to $34.0 million for the twelve months
ended March 31, 2003. The increase resulted primarily from an improved
operating performance in fiscal 2004. In fiscal 2004, we recorded a net foreign
exchange loss of $16.5 million, which included exchange losses on
Euro-denominated bonds of $27.4 million, offset by $10.9 million in net
proceeds from settlement of derivatives. Included in net income for fiscal
2003 was an unrealized $30.6 million foreign currency loss on net long-term
Euro-denominated debt, foreign exchange contracts and Euro-denominated cash
reserves (net of tax). Cash flow from operations was not impacted by the
unrealized currency loss since it was non-cash in nature and, as a result, it
has been added back to net income for cash flow reporting purposes. Also
included in net income for fiscal 2004 was $41.5 million related to the loss on
debt extinguishment. During fiscal 2004, management implemented a plan to further efforts
initiated under the fiscal 1999 strategic initiatives. Charges incurred under
these new initiatives totaled $13.7 million during the year ended March 31,
2004, and related primarily to work force reductions, facility closures and
asset impairment. These charges included $5.7 million of cash outlays during
fiscal 2004 with an additional $3.6 million in strategic initiative liabilities
remaining at March 31, 2004. Management expects to incur additional charges of
approximately $3 million through September 2004 primarily related to facility
closures, workforce reductions and asset impairment in Asia and Europe. As a
result of these initiatives, management estimates that the Company will
eliminate approximately $4 to $6 million in operating costs annually. Our inventories as a percentage of annualized net sales for the twelve
months ended March 31, 2004 and 2003 were 12.2% and 14.9%, respectively.
Inventories at March 31, 2004 decreased by $4.7 million when compared to the
previous year-end at March 31, 2003. This decrease was due to an increased
emphasis on managing working capital. Accounts receivable as a percentage of
annualized net sales for the twelve months ended March 31, 2004 increased to
20.5% compared to 20.0% for the same period a year ago. Accounts receivable at
March 31, 2004 increased by $20.3 million when compared to the previous
year-end at March 31, 2003 due primarily to the impact of exchange rates.
Excluding the impact of currency of $9.7 million, receivables increased $13.1
million, primarily as a result of a 12% increase in fourth quarter sales over
the prior year. The following table presents the reconciliation of accounts receivable,
exclusive of foreign currency impact, to as reported results (in thousands): March 31, 2003 net trade accounts receivable, as reported
    
    $
    123,088Impact of currency fluctuations on accounts receivable
during period
    
    
    9,710March 31, 2003 net trade accounts receivable, excluding
currency impact
    
    
    132,798March 31, 2004 net trade accounts receivable, as reported
    
    
    145,920Increase in trade accounts receivable, exclusive of foreign
currency impact during period
    
    $
    13,122
 During the twelve months ended March 31, 2004, net cash expended on
investing activities amounted to $20.5 million. This amount included $15.3
million related to the acquisition of an optical laboratory located in the U.S.
We incurred $15.4 million of capital expenditures and $3.8 million related to
investments in molds. In addition, we realized a gain of $11.0 million on the
hedge of senior notes, offset by breakage fees of $0.1 million for net proceeds
of $10.9 million. During the twelve months ended 28




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##### Table of Contents



March 31, 2003, net cash expended on investing activities amounted to $45.0
million. This amount included $21.0 million related to the acquisition of
certain assets of two optical laboratories located in the U.S., the acquisition
of the net assets of a fabricator of polycarbonate molds and inserts and a
Scandinavian distributor. We also incurred $21.9 million of capital
expenditures and $3.1 million related to investments in molds. We anticipate
capital expenditures, including molds, of approximately $20-$25 million in
fiscal year 2005. During the twelve months ended March 31, 2004, our net cash provided by
financing activities amounted to $11.1 million. Cash flows related to our
financing activities were significantly affected by our recapitalization, which
was completed during the third quarter of fiscal 2004. The primary purposes of
the recapitalization were to reduce our interest expense and financial leverage
and to increase the flexibility of our capital structure. The recapitalization
involved the following:  
    
    the sale of 6.9 million shares of our common stock at $17.50 per share
for aggregate gross proceeds of $120.7 million in a public offering
effected under a $400 million universal shelf registration statement;
    
    the replacement of our existing $90 million secured credit facility
with a new secured credit facility, consisting of a six-year $175
million term loan and a five-year $50 million revolving credit
facility;
    
    a tender offer and consent solicitation with respect to our EUR 205.0
million principal amount of 11% Senior Notes due 2008; and
    
    the reduction of interest expense, as the 11% Notes have been
repurchased with debt at LIBOR plus 250 basis points, equivalent to
3.62% at March 31, 2004. Our new credit facility is secured by a pledge of 100% of the stock of any
future domestic subsidiaries and 65% of the stock of our significant foreign
subsidiaries and a security interest in the accounts receivable, inventory and
certain other assets of the company and our domestic subsidiaries. On December 11, 2003, we completed a tender offer and consent solicitation
for our outstanding 11% Senior Notes due 2008. Proceeds from the issuance of
the $175 million six-year term loan, as well as a portion of the net proceeds
of $113.3 million from our public offering of 6.9 million shares of common
stock were used to fund the tender offer for the Notes. Pursuant to the offer,
EUR 185.0 million of the EUR 205.0 million principal amounts of Notes were
tendered. The total consideration paid in connection with the tender was $262.9
million, including $225.9 million for principal, $31.1 million for tender
premiums and $5.9 million for accrued interest. On December 19, 2003, we purchased an additional EUR 10.4 million of the
outstanding Notes in the open market. The total consideration paid in
connection with the purchase was $15.2 million, including $12.8 million for
principal, $2.0 million for tender premiums and $0.4 million for accrued
interest. During the fourth quarter of fiscal 2004, we purchased an additional EUR
2.1 million of the outstanding Notes in the open market. The total
consideration paid in connection with the purchase was $3.2 million, including
$2.7 million for principal, $0.4 million for tender premiums and $0.1 million
for accrued interest. As a result of the tender and open market purchases, we recorded a $41.5
million loss on the early debt extinguishment resulting from the difference
between the carrying value of the Notes and the total purchase price. This was
offset in part by $10.9 million net proceeds from settlement of derivatives. Our foreign subsidiaries maintain local credit facilities to provide
credit for overdraft, working capital and some fixed asset investment purposes.
As of March 31, 2004, the total borrowing capacity available to our foreign
subsidiaries under these local facilities was approximately $72.6 million, of
which $1.4 million had been utilized. On February 6, 2004, we acquired all of the outstanding stock of a Troy,
Michigan based coating laboratory, for approximately $17.2 million, which
included cash of $15.3 million and debt assumed of $1.9 million. Contingent
payments may total up to an additional $3.8 million and are expected to be
recorded as an increase in goodwill in the instance that such payments are
made. Under
the terms of our credit agreement, we are obligated to abide by
certain affirmative and negative covenants, including but not limited
to; interest coverage ratio, fixed charge coverage ratio, total
leverage ratio, minimum net worth, maximum senior secured debt ratio
and a minimum liquidity. As of March 31, 2004, we are in compliance
with all covenants contained in our bank credit agreement. 29




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In order to continue our operations and meet our significant liquidity
requirements, we must maintain profitable operations or obtain additional funds
through equity or debt financing, bank financing, and other sources. We believe
that our existing cash balances, 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. There can be no
assurance that we will be able to obtain additional debt or equity financing on
terms acceptable to us, or at all. If adequate funds 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, 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,
2004, 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
    
    2-3 years
    
    4-5 years
    
    After 5 years(in thousands)Long-term debt, including capital
leases
    
    $
    190,119
    
    
    $
    12,383
    
    
    $
    31,525
    
    
    $
    37,034
    
    
    $
    109,177Senior notes
    
    
    133,860
    
    
    
    7,446
    
    
    
    14,892
    
    
    
    111,522
    
    
    
    Operating leases
    
    
    27,230
    
    
    
    6,349
    
    
    
    9,725
    
    
    
    5,789
    
    
    
    5,367Total contractual obligations
    
    $
    351,209
    
    
    $
    26,178
    
    
    $
    56,142
    
    
    $
    154,345
    
    
    $
    114,544
 During the third quarter of fiscal 2004, we replaced our existing $90
million credit facility with a new credit facility, consisting of a six-year
$175 million term loan and a five-year $50 million revolving credit facility.
As of March 31, 2004, $1.4 million was outstanding under the revolving credit
facility. As of March 31, 2004, we have a $0.9 million standby letter of credit to
guarantee third party debt. We have recourse provisions that would enable us to
recover fixed assets with an estimated fair value of approximately $1.0 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, 2004, we have several
foreign exchange contracts outstanding to hedge portions of our accounts
payable and accounts receivable exposure. During fiscal 2004, 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 30




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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. Impact of Recently Issued Accounting Standards In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities (SFAS 149), which amends and
clarifies accounting for derivative instruments and hedging activities under
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS 149 provides guidance relating to decisions made (a) as part of the
Derivatives Implementation Group process, (b) in connection with other FASB
projects dealing with financial instruments and (c) regarding implementation
issues raised in the application of the definition of a derivative and the
characteristics of a derivative that contains financing components. SFAS 149
was effective for contracts entered into or modified and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 did not
have a material impact on our financial condition or results of operations. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS 150), which requires freestanding financial instruments such as
mandatorily redeemable shares, forward purchase contracts and written put
options to be reported as liabilities by their issuers. The provisions of SFAS
150 were effective for instruments entered into or modified after May 31, 2003
and to pre-existing instruments as of June 29, 2003. The adoption of SFAS 150
did not have a material impact on our financial condition or results of
operations. In May 2003, Emerging Issues Task Force (EITF) Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables (EITF 00-21),
was finalized. EITF 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 00-21 apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. In
December 2003, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition which codifies and rescinds
certain sections of SAB No. 101, Revenue Recognition, in order to make this
interpretive guidance consistent with EITF No. 00-21. The adoption of these
standards did not have a material impact on our financial condition or results
of operations. In January 2003, the FASB issued 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 was
effective for all new variable interest entities created or acquired after
January 31, 2003. In December 2003, the FASB issued FIN 46R, which supercedes
FIN 46. FIN 46R is applicable in financial statements of public entities that
have interests in variable interest entities or potential variable interest
entities commonly referred to as special-purpose entities for periods ending
after December 15, 2003. Application by public entities (other than small
business issuers) for all other types of entities is required in financial
statements for periods ending after March 15, 2004. The adoption of this
standard did not have a material impact on our results of operation or
financial position. In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers
Disclosures about Pensions and Other Postretirement Benefits. This statement
provides for additional disclosures regarding pension and other postretirement
benefits, generally effective for financial statements for fiscal years after
December 15, 2003. We have adopted the disclosure requirements of SFAS No. 132
(revised) effective December 31, 2003, as applicable. 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 31




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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, operating
expenses as a percentage of net sales, accounts receivable and general and
administrative expenses, which may be adjusted for the translation effect of
foreign currency, restructuring and impairment charges and/or costs associated
with SOLAs recapitalization. We believe that excluding these items provides
management and investors with insight into the underlying results of operations
by excluding the effects of significant, discrete items and facilitates
comparisons among SOLA and other companies. 32




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RISK FACTORS As discussed above under BusinessForward-Looking Information, certain
of the matters addressed in this report or in the information incorporated by
reference may constitute forward-looking statements. Accordingly, the actual
results of our business could differ materially from those described as a
result of the risks and uncertainties described below and elsewhere. In such
case, the trading price of our common stock could decline, and you may lose all
or part of the money you paid to buy our common stock. 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. 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 for the fiscal years ended March 31, 2004, 2003 and 2002 were
approximately 2.5%, 2.9% and 3.5%, respectively, of net sales. 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, Japan, China and South America). Approximately 58% and 56% of our
net sales for the fiscal years ended March 31, 2004 and 2003 were derived from
the sale of products outside of North America. As a result, a significant
portion of our sales and operations is 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 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. 33




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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. 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. As of March 31, 2004, approximately 40% of our manufacturing operations
are based in two 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 value-added products. We are continually developing new and value-added 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 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 may from time to time need to record special charges. Initiatives to improve the business are always being evaluated. Therefore,
it may be possible that additional future initiatives may be contemplated,
which would result in special charges. 34




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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, wastewater discharges and the generation,
handling, storage, transportation and disposal of hazardous wastes, and with
other federal, state, city, county, 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.
Although it is our intention to be in compliance with environmental and safety
regulations in all jurisdictions in which we operate, 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 inability 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 7.5
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. In addition, the $175 million tern loan
secured during fiscal 2004 is payable through December 2009. 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. If we are unable to effectively and efficiently implement our plan to improve our internal control over financial reporting, it could harm our operations, financial reporting or financial results. We have assigned a high priority to the short-term and long-term improvement of
our internal control over financial reporting. These actions respond to the
internal control evaluation and certification requirements of Section 404 of
the Sarbanes-Oxley Act that we will be subject to at the end of our 2005 fiscal
year and to the internal control deficiencies that
have been identified and characterized as a material weakness under current
auditing standards. We believe that we have developed a plan that addresses
the material weakness in our internal controls that has been identified and
that should provide for adequate financial reporting in future periods. We
completed a number of the steps in our plan in fiscal 2004 and are currently in
the process of completing the remaining steps. See Item 9A, Controls and
Procedures for a discussion of the material weakness and the corrective
actions we have taken and those that we propose to take. The Companys plans are
intended to improve our internal controls and to correct the material
weakness identified by our independent auditors. We may, however,
experience difficulty in hiring additional qualified personnel due to
a variety of factors, including, but not limited to, a general
shortage of workers who have the accounting background that meets our
needs. In addition, current employees who hold key accounting positions may leave our
company and we may be unable to replace them on a timely basis. We may
experience higher than anticipated operating expenses and
outside auditor fees during the implementation of these changes and thereafter.
If we are unable to implement these changes effectively or efficiently, it
could harm our operations, financial reporting or financial results and could
result in our being unable to obtain an unqualified opinion from our
independent registered public accounting firm. Our Charter and By-laws contain anti-takeover 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. Potential impairment of certain assets. We have assets related to specialty products that anticipate certain
levels of future sales. Pending the outcome of such future sales, there could
be potential impairment charges. 35




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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. In the past, companies that have
experienced volatility in the market price of their stock have been the object
of securities class action litigation. 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 our
third fiscal quarter as a result of lower sales during the holiday season and
strongest in our fourth fiscal quarter. For these and other reasons, we may not
meet the earnings estimates of securities analysts or investors, and our stock
price could suffer. 36




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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 2004, 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,
2004: Expected Maturity Date (as of March 31, 2004)Fiscal
    
    Fiscal
    
    Fiscal
    
    Fiscal
    
    Fiscal
    
    
    
    
    
    
    
    
    
    Fair2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    Total
    
    Value(Dollars in thousands)Long-term debt:Fixed rate debt
    
    $
    3,086
    
    
    $
    2,314
    
    
    $
    1,674
    
    
    $
    104,590
    
    
    $
    194
    
    
    $
    309
    
    
    $
    112,167
    
    
    $
    114,513Weighted average interest rate
    
    
    3.82
    %
    
    
    5.03
    %
    
    
    4.98
    %
    
    
    7.15
    %
    
    
    4.70
    %
    
    
    4.92
    %
    
    
    6.97
    %Long-term debt:Variable rate debt
    
    $
    8,847
    
    
    $
    13,195
    
    
    $
    13,174
    
    
    $
    17,500
    
    
    $
    17,500
    
    
    $
    105,000
    
    
    $
    175,216
    
    
    $
    175,216Weighted average interest rate
    
    
    3.64
    %
    
    
    3.66
    %
    
    
    3.66
    %
    
    
    3.67
    %
    
    
    3.67
    %
    
    
    3.67
    %
    
    
    3.67
    %
 Currency Rate Risk.We are exposed to currency exchange rate fluctuations
on the accounts receivable and accounts payable of our subsidiaries denominated
in currencies other than their local 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. Our exposure to currency rate fluctuations on our Euro-denominated 11%
Senior Notes is significantly reduced due to the repurchase of the notes
pursuant to our recapitalization. See Note 9 of Notes to Consolidated Financial
Statements. The following table presents the future principal cash flows and weighted
average interest rates expected on the remaining 7.5 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, 2004: Expected Maturity Date (as of March 31, 2004)Fiscal2005
    
    Fiscal 2006-2009
    
    Total
    
    Fair Value(Dollars in thousands)Long-term debt:Fixed rate debt
    
    $
    
    
    
    $
    9,238
    
    
    $
    9,238
    
    
    $
    10,162Weighted average
interest rate
    
    
    
    
    
    
    11
    %
    
    
    11
    %Forward exchange
contracts:Contract amounts
due April 2004.
    
    $
    62,831
    
    
    $
    
    
    
    $
    62,831
    
    
    $
    62,770Weighted average
settlement price
    
    
    1.223
    
    
    
    
    
    
    
    1.223
 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. 37




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The interest rate on our $95 million of 6 7/8% is fixed and is not
affected by changes in interest rates. However, changes in interest rates
could impact our anticipated interest income on cash equivalents and interest
expense on our $175 million of variable -rate debt. As a result, a 10% change
in interest rates from those in existence at March 31, 2004 could have a
material impact on our net interest expense. Currency Rate Risk.Our primary currency rate risk exposures relate to:  
    
    Our global operations, whereby approximately 60% of our revenues are
derived from operations outside the United States, denominated in
currencies other than the U.S. Dollar;
    
    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 such
as Brazil, Mexico, Venezuela and certain European and 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 response to this item is submitted as a separate section of this
report. See Item 15. 
 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 
 Item 9A.Controls and Procedures The Audit
Committee has been advised that deficiencies were identified during
the year in our
internal controls over financial reporting relating to limitations in the
capacity of our finance and accounting personnel, which impose restrictions on
our ability to gather, analyze and report information relative to our financial
statement assertions in a timely manner, including:  
    
    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. The
Audit Committee has been advised that these internal control deficiencies
constitute reportable conditions and, collectively, a material weakness as
defined in Statement of Auditing Standards No. 60 as a
reportable condition in which the design or operation of one or more
of the internal control components does not reduce to a relatively
low level the risk that misstatements caused by error or fraud in
amounts that would be material in relation to the financial
statements being audited may occur and not be detected within a
timely period by employees in the normal course of performing their
assigned functions. These internal control
deficiencies have caused our disclosure controls and procedures not to be
effective at a reasonable assurance level. 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 to be
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. As of March 31, 2004, management, including our Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13a-15(b)
of the Securities Exchange Act of 1934. Based on the foregoing, its Chief
Executive Officer and Chief Financial Officer determined that the deficiencies
described above identified caused its disclosure controls and procedures not to be
effective at a reasonable assurance level. However, the Chief Executive
Officer and Chief Financial Officer noted that the Company is actively seeking
to remedy the deficiencies identified herein and did not note any other
material weaknesses or significant deficiencies in the Companys disclosure
controls and procedures during their evaluation. 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. 38




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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 24, 2004. Name
    
    Age
    
    PositionMaurice J. Cunniffe
    
    
    71
    
    
    Chairman of the BoardJeremy C. Bishop
    
    
    54
    
    
    President and Chief Executive Officer, DirectorDouglas D. Danforth
    
    
    81
    
    
    DirectorRobert A. Muh
    
    
    66
    
    
    DirectorColombe M. Nicholas
    
    
    59
    
    
    DirectorJackson L. Schultz
    
    
    78
    
    
    DirectorCharles F. Smith
    
    
    71
    
    
    DirectorRonald F. Dutt
    
    
    57
    
    
    Executive Vice President, Finance, Chief Financial Officer,
Secretary and TreasurerBarry J. Packham
    
    
    56
    
    
    Executive Vice President and General Manager, North
America and Interim General Manager, Latin AmericaMark Ashcroft
    
    
    42
    
    
    Executive Vice President and General Manager, EuropeDavid Cross
    
    
    48
    
    
    Vice President and Managing Director, Asia Pacific
 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 Enivosource. He is 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. 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 Restaurant Concepts, Inc. and is a trustee of the
Massachusetts Institute of Technology and the Napa Valley Opera House. Colombe M. Nicholas was appointed a director in December 2003. Since 2002,
Colombe has been a consultant with Financo Global Consulting, a consulting firm
which assists companies to identify domestic and international expansion
opportunities. She was President and Chief Executive Officer of Anne Klein
Company from 1996 to 1999. Prior to this role she was Chief Operating Officer
of Giorgio Armani Fashion Corporation. In addition, Ms. Nicholas was Chief
Executive Officer of Christian Dior from 1980 to 1988. She is currently a
Trustee of the University of Dayton and serves as a director for Leader
Technology.com and Tandy Brand Accessories. 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. 39




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Charles F. Smith was appointed as director in December 2003. He is
President and Chef Executive Officer of Charles F. Smith & Company, Inc., an
investment banking firm specializing in mergers and acquisitions, which he
founded in 1983. He currently serves as a director for Anworth Mortgage Asset
Corporation, FirstFed Financial Corporation, Worldwide Restaurant Concepts,
Inc. and as a trustee for St. Johns Health Center. Ronald F. Dutt was appointed Executive Vice President, Finance, Chief
Financial Officer, Secretary and Treasurer in September 2003. Prior to joining
SOLA, Mr. Dutt was Chief Financial Officer and Senior Vice President of DHL
Americas, a division of Belgium-based DHL, the global air-express delivery
company. From May 1999 to May 2001 he served as Chief Financial Officer and
Executive Vice President of Fritz Companies. Barry J. Packham was appointed Executive Vice President and General
Manager, North America and Interim General Manager, Latin America in April
2004. From May 2000 to April 2004 he was Executive Vice President,
Manufacturing and Logistics. 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 Executive Vice President and General Manager,
Europe in April 2004. Prior to that he was President, American Commercial
Operations and Vice President, Europe. 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. David Cross was appointed Vice President and Managing Director, Asia
Pacific in April 2004. From April 2003 to April 2004 he served as Vice
President, business Planning and Development. He joined us in August 1993 as
Financial Director of Australia. From 1981to 1993, Mr. Cross held commercial
and finance positions with Clark Shoes and prior to that worked as a chartered
accountant for KPMG. Audit Committee Financial Expert Information regarding the audit committee financial expert is included
under the caption Board of Directors and Its Committees in our proxy
statement for the 2004 Annual Meeting of Stockholders and is incorporated by
reference herein. Identification and Composition of the Audit Committee Information regarding the Audit Committee members and the composition of
the Audit Committee is included under the caption Board of Directors and Its
Committees in our proxy statement for the 2004 Annual Meeting of Stockholders
and is incorporated by reference herein. Board Committee Charters Information regarding the charters for our Audit Committee, Compensation
Committee, Governance Committee and Nominating Committee is included under the
caption Board of Directors and Its Committees in our proxy statement for the
2004 Annual Meeting of Stockholders and is incorporated by reference herein. Corporate Governance Guidelines Information regarding our Corporate Governance Guidelines is included
under the caption Corporate Governance in our proxy statement for the 2004
Annual Meeting of Stockholders and is incorporated by reference herein. Code of Conduct Information regarding our Code of Conduct is included under the caption
Corporate Governance in our proxy statement for the 2004 Annual Meeting of
Stockholders and is incorporated by reference herein. 40




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##### Table of Contents



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 2004 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 2004 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 2004 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
2004 Annual Meeting of Stockholders and is incorporated by reference herein. 
 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 2004 Annual Meeting of Stockholders and is incorporated by reference
herein. 
 Item 14.Principal Accountant Fees and Services Information regarding principal accountant fees and services is included
under the caption Relationship with Independent Accountants in our proxy
statement for the 2004 Annual Meeting of Stockholders and is incorporated by
reference herein. 41




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PART IV 
 Item 15.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-1Consolidated Balance Sheets as of March 31, 2004 and 2003
    
    
    F-2Consolidated Statements of Operations for the years ended March 31,
2004, 2003 and 2002
    
    
    F-3Consolidated Statements of Stockholders Equity for the years ended
March 31, 2004, 2003 and 2002
    
    
    F-4Consolidated Statements of Cash Flows for the years ended March 31,
2004, 2003 and 2002
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-62.
    
    
    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, 2004, we furnished under Item 12 of Form 8-K our press
release dated February 12, 2004. This press release contained our earnings
information for the third quarter of fiscal 2004. 42




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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 report to be signed on its behalf by the undersigned, thereunto duly
authorized. Date: June 24, 2004
    SOLA INTERNATIONAL INC.
(Registrant)By:
    /s/  RONALD F. DUTTRonald F. DuttExecutive Vice President and Chief Financial Officer POWER OF ATTORNEY Each person whose signature appears below hereby appoints Jeremy C. Bishop
and Ronald F. Dutt and each of them severally, acting alone and without the
other, his true and lawful attorney-in-fact with authority to execute in the
name of each such person, and to file with the Securities and Exchange
Commission, together with any exhibits thereto and other documents therewith,
any and all amendments to this Annual Report onForm 10-Kfor the fiscal year
ended March 31, 2004 necessary or advisable to enable SOLA International Inc.
to comply with the Securities Exchange Act of 1934, any rules, regulations and
requirements of the Securities and Exchange Commission in respect thereof,
which amendments may make such other changes in the report as the aforesaid
attorney-in-fact executing the same deems appropriate. Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed below by the following
persons on behalf of the registrant and in the capacities indicated on this
23 day of June 2004. Signature
    
    Title/s/   MAURICE J. CUNNIFFEMaurice J. Cunniffe
    
    Chairman of the Board/s/   JEREMY C. BISHOPJeremy C. Bishop
    
    President and Chief Executive
Officer, Director (Principal
Executive Officer)/s/   RONALD F. DUTTRonald F. Dutt
    
    Executive Vice President,
Finance, Chief Financial
Officer, Secretary and
Treasurer (Principal Financial
and Accounting Officer)/s/   DOUGLAS D. DANFORTHDouglas D. Danforth
    
    Director
 43




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Signature
    
    Title/s/   ROBERT A. MUHRobert A. Muh
    
    Director/s/   COLOMBE M. NICHOLASColombe M. Nicholas
    
    Director/s/   JACKSON L. SCHULTZJackson L. Schultz
    
    Director/s/   CHARLES F. SMITHCharles F. Smith
    
    Director
 44




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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 15(a)(1) on page 42 present fairly, in all material
respects, the financial position of SOLA International Inc. and its
subsidiaries at March 31, 2004 and 2003, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2004 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 15(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 standards of
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. /s/ PricewaterhouseCoopers LLP San Jose, California June 22, 2004 F-1




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SOLA INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data) March 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    
    
    
    
    $
    102,604
    
    
    $
    58,679Trade accounts receivable, less allowance for doubtful accounts of $8,699 and
$8,972 at March 31, 2004 and 2003, respectively
    
    
    
    
    
    
    145,920
    
    
    
    123,088Inventories
    
    
    
    
    
    
    86,662
    
    
    
    91,442Deferred taxes, current
    
    
    
    
    
    
    15,191
    
    
    
    12,475Prepaid and other current assets
    
    
    
    
    
    
    22,511
    
    
    
    13,095Total current assets
    
    
    
    
    
    
    372,888
    
    
    
    298,779Property, plant and equipment, net
    
    
    
    
    
    
    181,021
    
    
    
    172,448Goodwill
    
    
    
    
    
    
    225,194
    
    
    
    208,809Deferred taxes, long-term
    
    
    
    
    
    
    51,621
    
    
    
    38,651Other long-term assets
    
    
    
    
    
    
    17,713
    
    
    
    26,298Total assets
    
    
    
    
    
    $
    848,437
    
    
    $
    744,985LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Notes payable to banks
    
    
    
    
    
    $
    
    
    
    $
    522Current portion of long-term debt
    
    
    
    
    
    
    11,933
    
    
    
    3,510Accounts payable
    
    
    
    
    
    
    63,280
    
    
    
    65,637Accrued liabilities
    
    
    
    
    
    
    49,043
    
    
    
    41,692Accrued payroll and related compensation
    
    
    
    
    
    
    36,390
    
    
    
    26,811Total current liabilities
    
    
    
    
    
    
    160,646
    
    
    
    138,172Long-term debt, less current portion
    
    
    
    
    
    
    171,364
    
    
    
    5,962Senior notes
    
    
    
    
    
    
    104,086
    
    
    
    318,242Other long-term liabilities
    
    
    
    
    
    
    17,000
    
    
    
    18,249Total liabilities
    
    
    
    
    
    
    453,096
    
    
    
    480,625Commitments and contingencies (Notes 16 and 17)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; 32,550 and 24,996 shares
issued
as of March 31, 2004 and March 31, 2003, and 32,182 and 24,628
shares outstanding as of March 31, 2004 and March 31, 2003, respectively
    
    
    
    
    
    
    325
    
    
    
    250Additional paid-in capital
    
    
    
    
    
    
    408,463
    
    
    
    286,677Retained earnings
    
    
    
    
    
    
    14,395
    
    
    
    27,875Accumulated other comprehensive loss
    
    
    
    
    
    
    (25,455
    )
    
    
    (48,055
    )Common stock
in treasury, at cost
368 shares at March 31, 2004 and March 31, 2003
    
    
    
    
    
    
    (2,387
    )
    
    
    (2,387
    )Total stockholders equity
    
    
    
    
    
    
    395,341
    
    
    
    264,360Total liabilities and stockholders equity
    
    
    
    
    
    $
    848,437
    
    
    $
    744,985
 The accompanying notes are an integral part of these consolidated financial statements F-2




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SOLA INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) Year Ended March 31,2004
    
    2003
    
    2002Net sales
    
    $
    650,109
    
    
    $
    562,746
    
    
    $
    529,505Cost of sales
    
    
    386,149
    
    
    
    329,695
    
    
    
    315,213Gross profit
    
    
    263,960
    
    
    
    233,051
    
    
    
    214,292Research and development expenses
    
    
    9,350
    
    
    
    12,190
    
    
    
    13,053Selling and marketing expenses
    
    
    116,859
    
    
    
    106,876
    
    
    
    101,735General and administrative expenses
    
    
    64,180
    
    
    
    47,123
    
    
    
    47,755Operating expenses
    
    
    190,389
    
    
    
    166,189
    
    
    
    162,543Operating income
    
    
    73,571
    
    
    
    66,862
    
    
    
    51,749Interest income
    
    
    1,510
    
    
    
    1,440
    
    
    
    2,302Interest expense
    
    
    (30,760
    )
    
    
    (33,540
    )
    
    
    (30,875
    )Loss on extinguishment of debt
    
    
    (41,467
    )
    
    
    
    
    
    
    Foreign currency gain/(loss)
    
    
    (16,482
    )
    
    
    (31,667
    )
    
    
    1,859Income/(loss) before (provision)/benefit for income
taxes and minority interest
    
    
    (13,628
    )
    
    
    3,095
    
    
    
    25,035(Provision)/benefit for income taxes
    
    
    658
    
    
    
    1,474
    
    
    
    (7,010
    )Minority interest
    
    
    (510
    )
    
    
    (603
    )
    
    
    1,093Net income/(loss)
    
    $
    (13,480
    )
    
    $
    3,966
    
    
    $
    19,118Net income/(loss) per sharebasic
    
    $
    (0.49
    )
    
    $
    0.16
    
    
    $
    0.79Weighted average common shares outstanding
    
    
    27,337
    
    
    
    24,573
    
    
    
    24,067Net income/(loss) per sharediluted
    
    $
    (0.49
    )
    
    $
    0.16
    
    
    $
    0.78Weighted average common and dilutive securities outstanding
    
    
    27,337
    
    
    
    24,856
    
    
    
    24,583
 The accompanying notes are an integral part of these consolidated financial statements F-3




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SOLA INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands, except per share data) Accumulated
    
    TreasuryCommon Stock
    
    Additional
    
    
    
    
    
    Other
    
    Stock
    
    TotalPaid-in
    
    Retained
    
    Comprehensive
    
    
    
    Stockholders'Shares
    
    Value
    
    Capital
    
    Earnings
    
    Loss
    
    Shares
    
    Value
    
    EquityBalances, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,966
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,966Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,726
    )
    
    
    
    
    
    
    
    
    
    
    (1,726
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    24,996
    
    
    
    250
    
    
    
    286,677
    
    
    
    27,875
    
    
    
    (48,055
    )
    
    
    (368
    )
    
    
    (2,387
    )
    
    
    264,360Comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,480
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,480
    )Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,505
    
    
    
    
    
    
    
    
    
    
    
    24,505Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,905
    )
    
    
    
    
    
    
    
    
    
    
    (1,905
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,120Common stock issued under stock option
plans
    
    
    654
    
    
    
    6
    
    
    
    7,439
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,445Common stock issued pursuant to the
recapitalization of the Company, net of
issuance costs
    
    
    6,900
    
    
    
    69
    
    
    
    113,281
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113,350Tax benefit from exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    1,066
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,066Balances, March 31, 2004
    
    
    32,550
    
    
    $
    325
    
    
    $
    408,463
    
    
    $
    14,395
    
    
    $
    (25,455
    )
    
    
    (368
    )
    
    $
    (2,387
    )
    
    $
    395,341
 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 CASH FLOWS
(in thousands) Year Ended March 31,2004
    
    2003
    
    2002Cash flows from operating activities:Net income/(loss)
    
    $
    (13,480
    )
    
    $
    3,966
    
    
    $
    19,118Adjustments to reconcile net income/(loss) to net cash provided by operating
activities:Minority interest in earnings
    
    
    510
    
    
    
    603
    
    
    
    (1,093
    )Depreciation
    
    
    23,300
    
    
    
    19,678
    
    
    
    18,542Amortization of other intangibles
    
    
    275
    
    
    
    44
    
    
    
    44Amortization of debt issuance costs
    
    
    2,759
    
    
    
    3,086
    
    
    
    2,543Loss on debt extinguishment
    
    
    41,467
    
    
    
    
    
    
    
    Allowance for doubtful accounts and notes
    
    
    3,724
    
    
    
    1,611
    
    
    
    2,317Tax benefit from exercise of stock options
    
    
    1,066
    
    
    
    150
    
    
    
    2,454Non-cash portion of special charges
    
    
    4,854
    
    
    
    
    
    
    
    767Deferred taxes
    
    
    (15,686
    )
    
    
    (14,877
    )
    
    
    1,155Foreign currency (gain)/loss
    
    
    16,392
    
    
    
    30,631
    
    
    
    (1,868
    )Loss on disposal/sale of property, plant and equipment
    
    
    56
    
    
    
    185
    
    
    
    167Changes in assets and liabilities, net of acquisitions:Trade accounts receivable
    
    
    (14,181
    )
    
    
    1,371
    
    
    
    3,931Inventories
    
    
    12,863
    
    
    
    201
    
    
    
    7,316Prepaid and other assets
    
    
    (8,648
    )
    
    
    758
    
    
    
    (14,294
    )Accounts payable
    
    
    (10,877
    )
    
    
    (6,734
    )
    
    
    (5,702
    )Accrued and other current liabilities
    
    
    9,438
    
    
    
    (6,980
    )
    
    
    (12,558
    )Other long-term liabilities
    
    
    (2,622
    )
    
    
    280
    
    
    
    721Net cash provided by operating activities
    
    
    51,210
    
    
    
    33,973
    
    
    
    23,560Cash flows from investing activities:Purchases of businesses
    
    
    (16,274
    )
    
    
    (21,024
    )
    
    
    Disposal of joint ventures
    
    
    87
    
    
    
    210
    
    
    
    1,183Capital expenditures
    
    
    (15,448
    )
    
    
    (21,897
    )
    
    
    (17,144
    )Mold expenditures
    
    
    (3,847
    )
    
    
    (3,073
    )
    
    
    (5,865
    )Net proceeds from the settlement of derivative contracts
    
    
    10,910
    
    
    
    
    
    
    
    Other investing activities
    
    
    4,111
    
    
    
    810
    
    
    
    6,178Net cash used in investing activities
    
    
    (20,461
    )
    
    
    (44,974
    )
    
    
    (15,648
    )Cash flows from financing activities:Proceeds from the exercise of stock options
    
    
    7,445
    
    
    
    578
    
    
    
    7,675Net proceeds/(payments) under notes payable to banks
    
    
    (522
    )
    
    
    302
    
    
    
    717Borrowings on long-term debt
    
    
    1,804
    
    
    
    1,252
    
    
    
    3,572Payments on long-term debt
    
    
    (6,126
    )
    
    
    (4,511
    )
    
    
    (9,461
    )Proceeds from term loan
    
    
    175,000
    
    
    
    10,000
    
    
    
    17,500Capitalized debt issuance costs
    
    
    (4,939
    )
    
    
    
    
    
    
    Repayment of bank debt
    
    
    
    
    
    
    (10,000
    )
    
    
    (167,500
    )Proceeds from the common stock, net of issuance costs
    
    
    113,350
    
    
    
    
    
    
    
    Proceeds from senior notes
    
    
    
    
    
    
    
    
    
    
    182,009Repayment of senior notes
    
    
    (274,883
    )
    
    
    
    
    
    
    Net cash provided by/(used in) financing activities
    
    
    11,129
    
    
    
    (2,379
    )
    
    
    34,512Effect of exchange rate changes on cash and cash equivalents
    
    
    2,047
    
    
    
    3,640
    
    
    
    (154
    )Net increase/ (decrease) in cash and cash equivalents
    
    
    43,925
    
    
    
    (9,740
    )
    
    
    42,270Cash and cash equivalents at beginning of year
    
    
    58,679
    
    
    
    68,419
    
    
    
    26,149Cash and cash equivalents at end of year
    
    $
    102,604
    
    
    $
    58,679
    
    
    $
    68,419
 The accompanying notes are an integral part of these consolidated financial statements F-5




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Business and Basis of Presentation SOLA International Inc. (the 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. 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. F-6




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SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued) Goodwill and Intangible Assets: 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. Goodwill as of March 31, 2004 and 2003 was $225.2 million and $208.8
million, respectively. The increase of $16.4 million primarily related to the
acquisition of Great Lakes Coating Laboratory. See Note 5. 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,
2004 and 2003, accumulated amortization was $8.7 million and $6.0 million,
respectively. The Companys debt issuance amortization costs were approximately
$2.8 million, $3.1 million and $2.5 million for fiscal 2004, 2003, and 2002,
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. F-7




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SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued) 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. 104 (SAB 104), Revenue Recognition in FinancialStatements. SAB
104, summarizes certain of the SEC staffs views in applying accounting
principles generally accepted in the United States of America 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. Revenues include sales of merchandise inventory to outside customers,
including shipping and handling fees charged to customers, and other fees
associated with the Companys vision care laboratories. Revenue from
merchandise sales, net of estimated returns and allowances, is recognized when
the related goods are shipped to the customer (FOB shipping point contract
terms), as significant obligations of the Company have been satisfied, title
and risk of loss has passed to the customer and collectibility is probable.
The Company does not maintain insurance to cover risk of loss while products
are in transit for those products sold to customers under FOB shipping point
contract terms. The remainder of sales are recorded at the time of customer
receipt under FOB destination contract terms. The Companys return policy generally allows for return of product up to
90 days from the date of purchase, but may vary based on local country
standards. Since many of the merchandise sales are accompanied with the right
of return, a provision for estimated returns on sales is made at the time of
sale based on historical experience in accordance with Statement of Financial
Accounting Standards No. 48, Revenue Recognition When Right of Return Exists.
Due to the nature of the Companys business of selling spectacle lenses, its
warranty liability exposure is minimal and is included as part of the provision
for merchandise returns and allowances. The Company has various programs that allow certain customers to earn
credits, rebates or discounts based on their accumulated purchases. These
credits, rebates or discounts are recognized as a reduction of revenue based on
the rebates earned and the estimated future redemptions or payments in
accordance with EITF 01-9, Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendors Products)". The cumulative
liability for unredeemed rebates is adjusted over time based on actual
experience and trends with respect to program compliance. Shipping and handling fees charged to customers are included in net sales
in accordance with EITF 00-10, Accounting for Shipping and Handling Fees and
Costs and the related costs of $30.8 million, $30.1 million and $32.6 million
for fiscal 2004, 2003 and 2002, respectively, are included in selling and
marketing expenses. The Company does not have post shipment obligations, customer acceptance,
price protection or special arrangements with any of its distributors or other
customers. The Companys accounting for revenue is consistently applied across
all of its distribution channels. 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 $7.4 million, $7.1 million and $6.1 million for fiscal 2004, 2003
and 2002, respectively. Research and development costs: Expenditures relating to the development of new products and processes,
including significant improvements to existing products, are expensed as
incurred. F-8




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SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued) 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 the minimum pension liability
associated with Pension Plans (see Note 14) and 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 stockholders
equity, 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 2004, the Companys ten largest customers accounted for
26.3% of net sales, and the largest customer accounted for less than 6% of net
sales. During fiscal 2004, five of the ten largest customers were located in
North America and accounted for 12.0% of net sales. No single customers
accounts receivable balance was greater than 1.9% of total accounts receivable. 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 were 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. F-9




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued) 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 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 2004, fiscal 2003, and fiscal 2002. 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, 2004, 2003 and
2002: Year Ended March 31,2004
    
    2003
    
    2002(in thousands,except per share data)Numerator:Net income/(loss)
    
    $
    (13,480
    )
    
    $
    3,966
    
    
    $
    19,118Denominator:Weighted average common shares outstanding
    
    
    27,337
    
    
    
    24,573
    
    
    
    24,067Effect of dilutive securities   employee stock options
    
    
    
    
    
    
    283
    
    
    
    516Weighted average common shares and dilutive securities
outstanding
    
    
    27,337
    
    
    
    24,856
    
    
    
    24,583Net income/(loss) per sharebasic
    
    $
    (0.49
    )
    
    $
    0.16
    
    
    $
    0.79Net income/(loss) per sharediluted
    
    $
    (0.49
    )
    
    $
    0.16
    
    
    $
    0.78
 Options to purchase approximately 1.6 million shares of common stock with
exercise prices at a range of $4.63 to $37.25 per share were outstanding as of
March 31, 2004, but were not included in the computation of the
diluted net loss per share for fiscal 2004, because to do so would be anti-dilutive. For
the years ended March 31, 2003 and 2002, approximately 1.5 million options to
purchase shares of common stock with exercise prices at a range of $9.26 to
$38.38 per share and 1.4 million options to purchase shares of common stock
with exercise prices at a range of $13.74 to $41.44 per share, respectively,
were not included in the calculation of diluted earnings per share because the
options exercise price was greater than the average market price of the common
shares. Stock-Based Compensation The Company accounts for its stock-based compensation plan under the
recognition and measurement criteria of Accounting Principles Board Opinion No
25, Accounting for Stock Issued to Employees, and related interpretations.
Pro forma information regarding net income and earnings per share is required
by Financial Accounting Standards Board (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 2.49%-2.86%, 2.19%-2.55%, and
4.23%-4.50%, no dividend yield, volatility factors of the expected market price
of the F-10




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SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued) Companys common stock of 58.7%, 57.0%, and 61.4% and a weighted-average
expected life of the option of 4 years, for fiscal 2004, 2003, and 2002,
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. At March 31, 2004, the Company has one stock-based compensation plan,
which is described more fully in Note 11. The Company accounts for this plan
under the recognition and measurement principles of APB Opinion No 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation is reflected in net income, as all options
granted under those plans had an exercise price equivalent to market value of
the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied fair value recognition provisions of SFAS 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation: Year Ended March 31,2004
    
    2003
    
    2002(in thousands, exceptper share data)ActualNet income/(loss) as reported
    
    $
    (13,480
    )
    
    $
    3,966
    
    
    $
    19,118Deduct: Total stock-based
employee compensation
determined under fair value
based method for all awards,
net of related tax effects
    
    
    2,650
    
    
    
    2,263
    
    
    
    2,589Pro forma net income/(loss)
    
    $
    (16,130
    )
    
    $
    1,703
    
    
    $
    16,529Net income/(loss) per share:Basic, as reported
    
    $
    (0.49
    )
    
    $
    0.16
    
    
    $
    0.79Basic, pro forma
    
    $
    (0.59
    )
    
    $
    0.07
    
    
    $
    0.69Diluted, as reported
    
    $
    (0.49
    )
    
    $
    0.16
    
    
    $
    0.78Diluted, pro forma
    
    $
    (0.59
    )
    
    $
    0.07
    
    
    $
    0.67
 Weighted average fair value per share of options granted during fiscal year:2004
    
    $
    9.662003
    
    $
    5.612002
    
    $
    7.24
 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 April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities, (SFAS 149) which amends and
clarifies accounting for derivative instruments and hedging activities under
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS 149 provides guidance relating to decisions made (a) as part of the
Derivatives Implementation Group process, (b) in connection with other FASB
projects dealing with financial instruments and (c) regarding implementation
issues raised in the application of the definition of a derivative and the
characteristics of a derivative that contains financing components. SFAS 149
was effective for contracts entered into or modified and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 did not
have a material impact on the Companys financial condition or results of
operations. F-11




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued) In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,
(SFAS 150) which requires freestanding financial instruments such as
mandatorily redeemable shares, forward purchase contracts and written put
options to be reported as liabilities by their issuers. The provisions of SFAS
150 were effective for instruments entered into or modified after May 31, 2003
and to pre-existing instruments as of June 29, 2003. The adoption of SFAS 150
did not have a material impact on the Companys financial condition or results
of operations. In May 2003, Emerging Issues Task Force (EITF) Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables, (EITF 00-21)
was finalized. EITF 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 00-21 apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. In
December 2003, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition which codifies and rescinds
certain sections of SAB No. 101, Revenue Recognition, in order to make this
interpretive guidance consistent with EITF No. 00-21. The adoption of these
standards did not have a material impact on the Companys financial condition
or results of operations. In January 2003, the FASB issued 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 was
effective for all new variable interest entities created or acquired after
January 31, 2003. In December 2003, the FASB issued FIN 46R, which supercedes
FIN 46. FIN 46R is applicable in financial statements of public entities that
have interests in variable interest entities or potential variable interest
entities commonly referred to as special-purpose entities for periods ending
after December 15, 2003. Application by public entities (other than small
business issuers) for all other types of entities is required in financial
statements for periods ending after March 15, 2004. The adoption of this
standard did not have a material impact on our results of operation or
financial position. In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers
Disclosures about Pensions and Other Postretirement Benefits. This statement
provides for additional disclosures regarding pension and other postretirement
benefits, generally effective for financial statements for fiscal years after
December 15, 2003. The Company has adopted the disclosure requirements of SFAS
No. 132 (revised) effective December 31, 2003, as applicable. 3. Inventories March 31,2004
    
    2003(in thousands)Raw materials
    
    $
    11,428
    
    
    $
    13,611Work in progress
    
    
    3,283
    
    
    
    3,124Finished goods
    
    
    71,951
    
    
    
    74,707$
    86,662
    
    
    $
    91,442
 4. Property, Plant and Equipment March 31,2004
    
    2003(in thousands)Land, buildings and leasehold improvements
    
    $
    45,316
    
    
    $
    38,509Machinery and office equipment
    
    
    232,487
    
    
    
    202,895Equipment under capital leases
    
    
    5,193
    
    
    
    4,985Molds
    
    
    64,510
    
    
    
    60,783347,506
    
    
    
    307,172Less accumulated depreciation and amortization
    
    
    166,485
    
    
    
    134,724$
    181,021
    
    
    $
    172,448
 F-12




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued) Depreciation expense for fiscal 2004, 2003 and 2002 was $23.3 million,
$19.7 million and $18.5 million, respectively. Accumulated amortization on
equipment under capital leases was $0.9 and $0.4 million at March 31, 2004 and
2003, respectively. 5. Acquisitions Effective February 6, 2004, the Company acquired 100% of the stock of
Great Lakes Coating Laboratory. The total purchase price of $17.2 million
consisted of $15.3 million in cash consideration and the assumption of $1.9
million in debt. The acquisition resulted in recording total assets of $3.6
million, including current assets of $1.8 million, and total liabilities of
$2.6 million, including current liabilities of $0.8 million. The Company
recorded goodwill of $16.0 million and intangible assets of $0.3 million as a
result of the acquisition. Contingent payments up to $3.8 million could result
in an increase to goodwill and will be recorded in the instance that such
payments are made. Goodwill is generally not tax deductible in a stock
purchase. However, the Company may file an election with the Internal Revenue
Service to convert the acquisition to an asset purchase, which allows the
Company to deduct the recorded goodwill over a 15-year period. Results of
operations from the acquisition included in the fiscal 2004 statement of
operations were not material. Great Lakes is a Troy, Michigan based coating laboratory, has had
historical annual sales of approximately $11.5 million and is considered by
many to be the premier coating lab in the United States. The Company
anticipates that this acquisition will further improve its ability to
distribute Teflon EasyCare lenses in North America. 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 derivative hedge instruments, primarily forward
contracts, to hedge cash flows associated with certain purchase and sales
commitments and the related payables and receivables. In accordance with SFAS
No. 133, certain derivative instruments are required to be recorded at fair
value. The Company does not designate derivative contracts as hedges.
Accordingly, changes in the fair value of such instruments are recorded
immediately in other income and expense. During fiscal 2004 the Company recorded $10.9 million in net proceeds from
the settlement of derivative contracts associated with the tender and open
market purchases of its 11% Senior Notes. These proceeds were recorded as a
foreign currency gain in the Consolidated Statements of Operations. Also during fiscal 2004 and 2003, the Company had various contracts in
place to hedge the semi-annual interest payments on its Euro-denominated third
party debt. The Company had 8 and 92 foreign exchange contracts outstanding as of
March 31, 2004 and 2003, respectively. None of the foreign exchange contracts
outstanding at March 31, 2004 or 2003 were designated as hedges. The Company
does not hold derivative financial instruments for speculative or trading
purposes. 7. Accrued Liabilities March 31,2004
    
    2003(in thousands)Liabilities associated with strategic initiatives
    
    $
    3,612
    
    
    $
    870Marketing and promotional accrual
    
    
    14,554
    
    
    
    12,632Other accrued liabilities
    
    
    30,877
    
    
    
    28,190$
    49,043
    
    
    $
    41,692
 F-13




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued) 8. Long-Term Debt March 31,2004
    
    2003(in thousands)Uncollateralized employee loans, interest rate at 0.37% at March 31, 2004, principal and interest
payable through March 2005
    
    $
    751
    
    
    $
    Uncollateralized term loans, interest rates varying from 3.8% to 7.6% at March 31, 2004 and 2003,
principal and interest payable through July 2006
    
    
    1,998
    
    
    
    1,765Loans collateralized by equipment and other assets, interest rates varying from 0.2% to 12.0% at
March 31, 2004 and 2003, principal and interest payable through August 2013
    
    
    4,391
    
    
    
    6,292Loans collateralized by equipment and other assets, interest rates indexed to LIBOR at March 31,
2004 and 2003, principal and interest payable through March 2007
    
    
    207
    
    
    
    592Uncollateralized term loan, interest 1.85% at March 31, 2004 and 2003, principal and interest
payable through June 2008
    
    
    472
    
    
    
    484Uncollateralized term loan, interest LIBOR plus 2.5% at March 31, 2004, principal and interest
payable through December 2009
    
    
    175,000
    
    
    
    Uncollateralized government loan, principal and interest
payable through February 2006
    
    
    478
    
    
    
    339183,297
    
    
    
    9,472Less current portion
    
    
    11,933
    
    
    
    3,510Long-term debt, less current portion
    
    $
    171,364
    
    
    $
    5,962Aggregate annual maturities of long-term debt over the next five years and
thereafter are as follows:
 Period Ending March 31,
    
    (in thousands)2005
    
    $
    11,9332006
    
    
    15,5092007
    
    
    14,8492008
    
    
    18,0142009
    
    
    17,694Thereafter
    
    
    105,298Total
    
    $
    183,297
 As of March 31, 2004 and 2003, the carrying value and fair value of the
Companys long-term debt including current maturities approximates $183.3
million. 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 $5.6 million and $5.3 million at March 31, 2004 and 2003,
respectively. Future minimum capital lease principal payments at March 31,
2004 consist of $1.4 million, $1.5 million, $1.0 million, $0.9 million, and
$0.8 million for fiscal 2004 through fiscal 2009, respectively. Interest on
capital lease obligations is approximately $0.2 and $0.5 million at March 31,
2004 and 2003, respectively. On December 11, 2003, the Company completed a new senior secured credit
facility consisting of a $175 million six-year term loan, bearing interest at
LIBOR plus 2.50%. In addition, the Company completed a $50 million five-year
revolving credit facility priced at LIBOR plus 3.00%. The Companys existing
$90 million revolving credit facility was terminated in connection with these
transactions. The credit facility is secured by a pledge of 100% of the stock
of any future domestic subsidiaries and 65% of the stock of the Companys
significant foreign subsidiaries and a security interest in the accounts
receivable, inventory and certain other assets of the Company and its domestic
subsidiaries. As of March 31, 2004, $1.4 million was utilized under the
revolving credit facility. The Company incurred debt issuance costs of $4.9
million as a result of the new credit agreement, which has been included in
other assets on the accompanying financial statements as of March 31, 2004. F-14




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Under
the terms of our credit agreement, we are obligated to abide by
certain affirmative and negative covenants, including but not limited
to; interest coverage ratio, fixed charge coverage ratio, total
leverage ratio, minimum net worth, maximum senior secured debt ratio
and a minimum liquidity. As of March 31, 2004, we are in
compliance with all covenants contained in our bank credit agreement. 9. Senior Notes On December 11, 2003, the Company completed a tender offer and consent
solicitation for its outstanding 11% Senior Notes due 2008. Proceeds from the
issuance of the $175 million six-year term loan, as well as a portion of the
net proceeds of $113.3 million from the Companys public offering of 6.9
million shares of common stock were used to fund the tender offer for the
Notes. Pursuant to the offer, EUR185.0 million of the EUR205.0 million
principal amounts of Notes were tendered. The total consideration paid in
connection with the tender was $262.9 million, including $225.9 million for
principal, $31.1 million for tender premiums and $5.9 million for accrued
interest. On December 19, 2003, the Company purchased an additional EUR10.4 million
of the outstanding Notes in the open market. The total consideration paid in
connection with the purchase was $15.2 million, including $12.8 million for
principal, $2.0 million for tender premiums and $0.4 million for accrued
interest. During the fourth quarter of fiscal 2004, we purchased an additional EUR
2.1 million of the outstanding Notes in the open market. The total
consideration paid in connection with the purchase was $3.2 million, including
$2.7 million for principal, $0.4 million for tender premiums and $0.1 million
for accrued interest. As a result of the tender and open market purchases, the Company recorded
a $41.5 million loss on the early debt extinguishment resulting from the
difference between the carrying value of the Notes, including unamortized debt
issuance costs, and the total purchase price. This was offset in part by $10.9
million net proceeds from settlement of derivatives. The following is the detail of the Senior Notes (in thousands): March 31, 2004
    
    March 31, 20036 7/8% Senior Notes due 2008
    
    $
    94,848
    
    
    $
    94,80911% Senior Notes due 2008
    
    
    9,238
    
    
    
    223,433Total Senior Notes
    
    $
    104,086
    
    
    $
    318,242
 10. Guarantees, Including Indirect Guarantees of Indebtedness of Others The Company has issued a $0.9 million standby letter of credit 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 fair value of approximately $1.0 million. F-15




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued) 11. Common Stock Common Stock On November 24, 2003, the Company issued 6.9 million shares of common
stock at $17.50 per share for gross proceeds of $120.7 million. Net proceeds,
which include transaction costs of $7.4 million, were $113.3 million. 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 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
4,691,087 shares. 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 456,195 at March 31, 2004. Pursuant to the International Plan, unless otherwise set forth in 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 under the International Plan 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-16




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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 2002, 2003 and 2004 follows: Number of
    
    WeightedSecurities
    
    AverageUnderlying
    
    ExerciseOptions
    
    Price(in thousands, exceptper share data)Options 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 granted during fiscal 2004 with an exercise price equal to the market
price on the date of
grant
    
    
    218
    
    
    
    20.46Options exercised in fiscal
2004
    
    
    (654
    )
    
    
    11.39Options cancelled in fiscal
2004
    
    
    (358
    )
    
    
    23.74Options outstanding as of March 31,
2004
    
    
    1,625
    
    
    $
    15.61Options exercisable at:March 31, 2004
    
    
    1,179
    
    
    $
    16.68March 31, 2003
    
    
    1,658
    
    
    $
    17.47March 31, 2002
    
    
    1,567
    
    
    $
    19.62
 The following table summarizes stock options outstanding at March 31,
2004: Outstanding
    
    ExercisableWeightedShares
    
    Weighted
    
    Average Contractual
    
    SharesRange of Exercise Price
    
    (in thousands)
    
    Price
    
    Life
    
    (in thousands)
    
    Price$4.63-$6.25
    
    
    420
    
    
    $
    5.64
    
    
    
    6.06
    
    
    
    302
    
    
    $
    5.73$7.88-$14.21
    
    
    415
    
    
    
    12.54
    
    
    
    8.15
    
    
    
    211
    
    
    
    12.30$14.22-$17.55
    
    
    339
    
    
    
    16.24
    
    
    
    5.94
    
    
    
    272
    
    
    
    16.00$23.10-$28.00
    
    
    332
    
    
    
    25.54
    
    
    
    5.99
    
    
    
    275
    
    
    
    26.04$29.81-$37.25
    
    
    119
    
    
    
    32.12
    
    
    
    3.30
    
    
    
    119
    
    
    
    32.12Total
    
    
    1,625
    
    
    $
    15.61
    
    
    
    6.35
    
    
    
    1,179
    
    
    $
    16.68
 F-17




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 12. Restructuring and Impairment Commencing in 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.
During fiscal 2004, management initiated a plan to further efforts initiated
under the fiscal 1999 strategic initiatives, including restructuring activities
and other efforts to streamline the business. Pursuant to the 2004 plan,
management expects to incur additional charges of approximately $3.0 million
through September 2004 primarily related to facility closures, workforce
reductions and asset impairment in Asia and Europe. Restructuring Charges Under SFAS 144 and SFAS 146 During fiscal 2004, the Company recorded net pre-tax restructuring charges
of $13.7 million related primarily to work force reductions, facility closures,
asset impairments and other initiatives. Included in the workforce reductions
were 209 employees from manufacturing, 73 employees from sales and marketing,
15 employees from administration, and 42 employees from research and
development. These charges are included in general and administrative expenses
in the accompanying financial statements. Impairment charges associated with restructuring related activities
resulting from asset write-downs totaled $2.8 million in fiscal 2004 due to
facility reductions. These charges primarily related to equipment write-downs
in Europe and Asia. These charges are included in general and administrative
expenses in the accompanying financial statements. The following table presents details of the restructuring charges for
fiscal 2004, 2003 and 2002 and related liabilities associated with the
strategic initiatives as of March 31, 2004, 2003 and 2002 (in thousands): Workforce
    
    FacilityReductions
    
    Closures
    
    Impairments
    
    Other
    
    TotalStrategic 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
    
    
    
    
    
    
    
    
    
    
    
    870Cash utilization of fiscal 2003
strategic initiative liability
    
    
    (651
    )
    
    
    (219
    )
    
    
    
    
    
    
    
    
    
    
    (870
    )Fiscal 2004 Charge to operations
    
    
    8,357
    
    
    
    2,364
    
    
    
    2,754
    
    
    
    226
    
    
    
    13,701Utilization of fiscal 2004
strategic initiative liability:Non-cash
    
    
    
    
    
    
    (1,731
    )
    
    
    (2,754
    )
    
    
    47
    
    
    
    (4,438
    )Cash
    
    
    (4,745
    )
    
    
    (633
    )
    
    
    
    
    
    
    (273
    )
    
    
    (5,651
    )Strategic initiative liability as of
March 31, 2004
    
    $
    3,612
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,612
 Management expects to utilize the strategic initiative liability of $3.6
million through September 2004. Other Impairment Charges In addition to restructuring related impairment charges, the Company
recorded other impairment charges of approximately $3.0 million related to a
note receivable and deposit under the provisions of SFAS No. 114, Accounting
by Creditors for Impairment of a Loan. These charges are included in general
and administrative expenses in the accompanying financial statements. F-18




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 13. 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, 2004, 2003 and 2002 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 $0.2 million for the year ended March 31, 2004 and $0.1
million in each of the years ended March 31, 2003 and 2002. 14. 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 contributory defined benefit pension plans
covering certain Australian employees (International Pension Plan) as well as
certain employees in Japan, Ireland and the U.K. (Other International Pension
Plans). Effective March 31, 2003, the Company discontinued any further
accruals to the participants of its Domestic Pension Plan and all benefit
levels as of a normal retirement date were frozen for all Domestic Pension Plan
participants. 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
    
    InternationalPension Plan
    
    Pension PlansYear ended March 31, (in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Reconciliation of benefit obligation:Benefit obligationbeginning of year
    
    $
    19,593
    
    
    $
    22,354
    
    
    $
    31,005
    
    
    $
    10,508Service cost
    
    
    
    
    
    
    1,269
    
    
    
    2,516
    
    
    
    1,541Interest cost
    
    
    1,259
    
    
    
    1,464
    
    
    
    1,863
    
    
    
    683Participant contributions
    
    
    
    
    
    
    
    
    
    
    603
    
    
    
    121Actuarial (gain)/loss
    
    
    (564
    )
    
    
    386
    
    
    
    829
    
    
    
    1,056Curtailment (gain)/loss
    
    
    2,431
    
    
    
    (5,153
    )
    
    
    
    
    
    
    Benefit payments
    
    
    (608
    )
    
    
    (727
    )
    
    
    (6,395
    )
    
    
    (1,674
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69Effect of exchange rates
    
    
    
    
    
    
    
    
    
    
    6,649
    
    
    
    1,454Benefit obligationend of year
    
    $
    22,111
    
    
    $
    19,593
    
    
    $
    37,070
    
    
    $
    13,758
 Domestic
    
    InternationalPension Plan
    
    Pension PlansYear ended March 31, (in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Reconciliation of fair value of plan assets:Fair value of plan assetsbeginning of year
    
    $
    12,023
    
    
    $
    15,070
    
    
    $
    23,890
    
    
    $
    11,762Actual return on plan assets
    
    
    4,163
    
    
    
    (2,320
    )
    
    
    3,725
    
    
    
    (1,068
    )Employer contributions
    
    
    1,626
    
    
    
    
    
    
    
    3,047
    
    
    
    1,311Participant contributions
    
    
    
    
    
    
    
    
    
    
    603
    
    
    
    121Benefit payments
    
    
    (608
    )
    
    
    (727
    )
    
    
    (5,300
    )
    
    
    (1,674
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69Effect of exchange rates
    
    
    
    
    
    
    
    
    
    
    5,276
    
    
    
    1,392Fair value of plan assetsend of year
    
    $
    17,204
    
    
    $
    12,023
    
    
    $
    31,241
    
    
    $
    11,913
 F-20




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The accumulated benefit obligation for the domestic defined benefit
pension plan was $22,111 and $19,593 at March 31, 2004 and 2003, respectively. DomesticPension PlanYear ended March 31, (in thousands)
    
    2004
    
    2003Amounts recognized in the Consolidated
Balance Sheet:Accrued benefit cost
    
    $
    (6,200
    )
    
    $
    (7,571
    )Intangible assets
    
    
    
    
    
    
    Accumulated other comprehensive income
    
    
    
    
    
    
    Net amount recognized
    
    $
    (6,200
    )
    
    $
    (7,571
    )
 The accumulated benefit obligation for the domestic defined benefit
pension plan was $22,111 and $19,593 at March 31, 2004 and 2003, respectively. DomesticPension PlanYear ended March 31, (in thousands)
    
    2004
    
    2003Information
for pension plans with an accumulated benefit obligation in excess
of plan assets:Projected benefit obligation
    
    $
    20,116
    
    
    $
    22,979Accumulated benefit obligation
    
    
    22,111
    
    
    
    19,593Fair value of plan assets
    
    
    17,204
    
    
    
    12,023
 DomesticPension PlanYear ended March 31, (in thousands)
    
    Projected
    
    2004
    
    2003Domestic pension plan
weighted-average asset
allocations, by asset category are
as follows:Equities
    
    
    60
    %
    
    
    60
    %
    
    
    62
    %Fixed income
    
    
    31
    %
    
    
    31
    %
    
    
    30
    %Other
    
    
    9
    %
    
    
    9
    %
    
    
    8
    %
 Domestic
    
    InternationalPension Plan
    
    Pension PlansYear ended March 31, (in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Funded status:Funded status at March 31
    
    $
    (4,907
    )
    
    $
    (7,570
    )
    
    $
    (5,829
    )
    
    $
    (1,845
    )Unrecognized prior service cost
    
    
    
    
    
    
    
    
    
    
    223
    
    
    
    Unrecognized transition asset
    
    
    
    
    
    
    
    
    
    
    510
    
    
    
    (43
    )Unrecognized (gain)/loss
    
    
    (1,293
    )
    
    
    
    
    
    
    3,288
    
    
    
    145Additional liability
    
    
    
    
    
    
    
    
    
    
    (1,533
    )
    
    
    Accrued pension cost
    
    $
    (6,200
    )
    
    $
    (7,570
    )
    
    $
    (3,341
    )
    
    $
    (1,743
    )
 F-21




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Domestic
    
    InternationalPension Plan
    
    Pension PlansYear ended March 31, (in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Additional information:Increase in minimum liability
included in other comprehensive
income
    
    $
    
    
    
    $
    
    
    
    $
    (1,905
    )
    
    $
    
 The assumptions used in the measurement of the Companys benefit
obligation are shown in the following table: Domestic
    
    InternationalPension Plan
    
    Pension PlansYear ended March 31,
    
    2004
    
    2003
    
    2002
    
    2004
    
    2003
    
    2002Discount rate
    
    
    6.00
    %
    
    
    6.50
    %
    
    
    6.50
    %
    
    2.00% to 6.00%
    
    
    6.50
    %
    
    
    6.50
    %Expected long-term rate of return on plan
assets
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    7.00
    %
    
    
    7.50
    %
    
    
    7.50
    %Rate of increase in future compensation levels
    
    
    5.00
    %
    
    
    5.00
    %
    
    
    5.00
    %
    
    3.00% to 3.50%
    
    
    4.00
    %
    
    
    4.00
    %
 Net periodic pension costs include the following components: Domestic
    
    InternationalPension Plan
    
    Pension PlansYear ended March 31, (in thousands)
    
    2004
    
    2003
    
    2002
    
    2004
    
    2003
    
    2002Service cost
    
    $
    
    
    
    $
    1,269
    
    
    $
    1,308
    
    
    $
    2,516
    
    
    $
    1,541
    
    
    $
    1,536Interest cost
    
    
    1,259
    
    
    
    1,464
    
    
    
    1,303
    
    
    
    1,863
    
    
    
    683
    
    
    
    627Expected return on plan assets
    
    
    (1,003
    )
    
    
    (1,188
    )
    
    
    (1,195
    )
    
    
    (1,961
    )
    
    
    (924
    )
    
    
    (909
    )Amortization of transition asset
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    (21
    )
    
    
    (19
    )FAS 88 expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    Prior service cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    Amortization of gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144
    
    
    
    (151
    )
    
    
    Net periodic pension cost
    
    $
    256
    
    
    $
    1,545
    
    
    $
    1,416
    
    
    $
    2,476
    
    
    $
    1,128
    
    
    $
    1,235
 Effective March 31, 2003, the Company ceased all future benefit accruals
under its Defined Benefit Pension Plan, resulting in a curtailment under
Statement of Financial Accounting Standards No. 88 Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits(SFAS No. 88). Specifically, the Projected Benefit
Obligation (PBO) decreased by $5.2 million (i.e., there was a PBO gain). This
occurred because benefits projected by assumed salary increases for PBO
purposes were fixed as of the freeze date. The SFAS No. 88 net impact on
earnings was then determined as the amount, if any, by which this PBO gain
exceeded the existing Unrecognized Actuarial Losses accumulated at the time.
Since the latter amount was $3.9 million, the PBO gain was first used to
eliminate it, and income under SFAS No. 88 of $1.3 million was recognized as a
component of general and administrative expenses. F-22




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 15. Income Taxes The domestic and foreign components of income/(loss) before
provision/(benefit) for income taxes and minority interest are as follows: Year Ended March 31,2004
    
    2003
    
    2002(in thousands)Domestic
    
    $
    (52,187
    )
    
    $
    (27,482
    )
    
    $
    (297
    )Foreign
    
    
    38,559
    
    
    
    30,577
    
    
    
    25,332$
    (13,628
    )
    
    $
    3,095
    
    
    $
    25,035
 The components of the provision/(benefit) for income taxes are as follows: Year Ended March 312004
    
    2003
    
    2002(in thousands)Current:Federal and State
    
    $
    200
    
    
    $
    200
    
    
    $
    141Foreign
    
    
    13,762
    
    
    
    13,370
    
    
    
    5,714Deferred:Federal and State
    
    
    (19,043
    )
    
    
    (10,035
    )
    
    
    (1,817
    )Foreign
    
    
    (511
    )
    
    
    (2,410
    )
    
    
    (1,490
    )Valuation allowance adjustment
    
    
    4,934
    
    
    
    (2,599
    )
    
    
    4,462$
    (658
    )
    
    $
    (1,474
    )
    
    $
    7,010
 During fiscal 2004, 2003, and 2002, the Company recognized $1.1 million,
$150,000, and $2.5 million, of certain tax benefits related to the exercise of
stock options. Such benefits were recorded as an increase in long-term deferred
tax asset and an increase in additional paid-in capital. A reconciliation between income tax provision/(benefit) computed at the
U.S. federal statutory rate and the effective rate reflected in the statements
of operations is as follows: Year Ended March 31,2004
    
    2003
    
    2002Provision/(benefit) at statutory federal rate
    
    
    (35.0
    )%
    
    
    35.0
    %
    
    
    35.0
    %State tax provision, net of federal effect
    
    
    (3.0
    )
    
    
    2.0
    
    
    
    1.0Change in valuation allowance
    
    
    36.2
    
    
    
    (84.0
    )
    
    
    17.8Tax
credits
    
    
    (10.6
    )
    
    
    (53.8
    )
    
    
    (4.9
    )Income of foreign subsidiaries at differing statutory rates
    
    
    4.2
    
    
    
    43.1
    
    
    
    (20.8
    )Revision of prior years estimates
    
    
    2.9
    
    
    
    (25.4
    )
    
    
    Permanent items and other
    
    
    0.5
    
    
    
    35.5
    
    
    
    (0.1
    )(4.8
    )%
    
    
    (47.6
    )%
    
    
    28.0
    %
 F-22




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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 312004
    
    2003(in thousands)Deferred tax assets:Accounts receivable, principally due to allowances for doubtful accounts
    
    $
    2,349
    
    
    $
    2,172Inventories, principally due to reserves
    
    
    7,818
    
    
    
    7,810Accruals for employee benefits, current
    
    
    4,075
    
    
    
    4,089Other current assets
    
    
    7,209
    
    
    
    3,807Deferred tax assets, current
    
    
    21,451
    
    
    
    17,878Property, plant and equipment, principally due to differences in
depreciation
    
    
    2,570
    
    
    
    2,601Accruals for employee benefits, long term
    
    
    4,295
    
    
    
    4,534In-process research and development
    
    
    5,840
    
    
    
    6,745Other long-term assets
    
    
    14,422
    
    
    
    29,525Net operating losses (NOL)
    
    
    86,637
    
    
    
    46,435Total deferred tax assets
    
    
    135,215
    
    
    
    107,718Less: valuation allowance
    
    
    18,597
    
    
    
    13,663Net deferred tax assets
    
    $
    116,618
    
    
    $
    94,055Deferred tax liabilities:Inventories
    
    $
    4,531
    
    
    $
    3,752Other current liabilities
    
    
    1,729
    
    
    
    1,651Deferred tax liabilities, current
    
    
    6,260
    
    
    
    5,403Property, plant and equipment, principally due to differences in
depreciation
    
    
    16,605
    
    
    
    16,808Amortization of goodwill
    
    
    22,854
    
    
    
    10,633Other long-term liabilities
    
    
    4,087
    
    
    
    10,085Net deferred tax liabilities
    
    
    49,806
    
    
    
    42,929Net deferred tax assets less net deferred tax liabilities
    
    $
    66,812
    
    
    $
    51,126
 The deferred tax assets valuation allowance at March 31, 2004 and 2003 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,
2004, had net operating loss (NOL) carryforwards of $189.4 million attributable
to U.S. Federal NOL carryforwards, which expire between 2020 and 2024; and
approximately $59.9 million of foreign NOL carryforwards, of which $15.4
million expire between 2005 and 2019, and $44.5 million have no expiration
date. The deferred tax assets reflected in the Companys accounts as of March
31, 2004 before valuation allowances include these NOLs. The Company has not provided for U.S. federal income and foreign
withholding taxes on $194.0 million of non-U.S. subsidiaries undistributed
earnings as of March 31, 2004 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-23




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 16. Commitments The Company leases certain warehouse and office facilities, office
equipment and automobiles under noncancelable operating leases, which expire in
2005 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 EndingMarch 31,
    
    (in thousands)2005
    
    $
    6,3492006
    
    
    5,8702007
    
    
    3,8552008
    
    
    3,2112009
    
    
    2,579Thereafter
    
    
    5,367
 The Company subleases certain of its office and warehouse facilities.
Future minimum rental receipts under noncancelable subleases are as follows: Period EndingMarch 31,
    
    (in thousands)2005
    
    $
    1642006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    
 Rent expense for fiscal 2004, 2003, and 2002 was $11.1 million, $8.7
million and $6.8 million, respectively. 17. 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. 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. F-24




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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. 18. 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, 2004Net sales (a):External
    
    $
    271,078
    
    
    $
    260,347
    
    
    $
    118,684
    
    
    $
    
    
    
    $
    650,109Internal
    
    
    31,484
    
    
    
    115,393
    
    
    
    72,277
    
    
    
    (219,154
    )
    
    
    Identifiable assets
    
    
    436,839
    
    
    
    211,602
    
    
    
    199,996
    
    
    
    
    
    
    
    848,437Year
Ended March 31, 2003Net 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
    )
    
    
    696,804
   (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, Japan, China 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, 2004, Canadian and Mexican operations accounted for less
than 4.0% 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-25




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##### Table of Contents



SOLA INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 19. Supplementary Cash Flow Data Year Ended March 31,2004
    
    2003
    
    2002(in thousands)Supplemental disclosures of cash flow information:Interest paid
    
    $
    30,542
    
    
    $
    36,501
    
    
    $
    35,389Taxes paid
    
    $
    11,533
    
    
    $
    11,158
    
    
    $
    8,152Supplemental disclosures of non-cash investing and financing activities:Capital expenditures accrued but not paid
    
    $
    1,798
    
    
    $
    1,053
    
    
    $
    10,776
 F-26




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##### Table of Contents



SOLA INTERNATIONAL INC.
SUPPLEMENTAL INFORMATION
QUARTERLY FINANCIAL DATA-UNAUDITED
(in thousands, except per share data) Quarter EndedJune 30,
    
    Sept. 30,
    
    Dec. 31,
    
    March 31,2003
    
    2003
    
    2003 (1)
    
    2004 (2)Net sales
    
    $
    153,979
    
    
    $
    158,663
    
    
    $
    159,286
    
    
    $
    178,181Gross profit
    
    
    62,361
    
    
    
    62,674
    
    
    
    64,773
    
    
    
    74,152Operating income
    
    
    19,816
    
    
    
    20,639
    
    
    
    15,401
    
    
    
    17,715Net income/(loss)
    
    
    518
    
    
    
    6,683
    
    
    
    (25,330
    )
    
    
    4,649Net income/(loss) per sharebasic
    
    
    0.02
    
    
    
    0.27
    
    
    
    (0.91
    )
    
    
    0.15Net income/(loss) per sharediluted
    
    
    0.02
    
    
    
    0.26
    
    
    
    (0.91
    )
    
    
    0.14
 Quarter EndedJune 30,
    
    Sept30,
    
    Dec31,
    
    March 31,2002
    
    2002
    
    2002
    
    2003Net 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)
    
    In the third quarter of fiscal 2004, we recorded charges of $4.7
million, $3.3 million net of tax, related to workforce reductions,
facility closures and asset impairments. In addition, a $41.0 million
loss on early extinguishment of debt was recorded in third quarter
fiscal 2004.  (2)
    
    In the fourth quarter of fiscal 2004, we recorded charges of $12.0
million, $9.3 million net of tax, related to charges for workforce
reductions, facility closures and asset impairments. In addition, a $0.5
million loss on early extinguishment of debt was recorded in fourth
quarter fiscal 2004. S-1




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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, 2004
    
    $
    8,972
    
    
    $
    1,421
    (2)
    
    $
    (2,566
    )
    
    $
    872
    
    
    $
    8,699Year ended March 31, 2003
    
    $
    8,395
    
    
    $
    1,611
    
    
    $
    (1,123
    )
    
    $
    89
    
    
    $
    8,972Year ended March 31, 2002
    
    $
    9,201
    
    
    $
    2,317
    
    
    $
    (3,106
    )
    
    $
    (17
    )
    
    $
    8,395
   (1)
    
    Other relates primarily to foreign currency translation adjustments.(2)
    
    Note receivable for $2,303 written off as bad debt expense during
Fiscal 2004 excluded from allowance for doubtful account provision. S-2




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##### Table of Contents



INDEX OF EXHIBITS Exhibit No.
    
    Description
    
    Reference1.1
    
    Underwriting Agreement dated November 18, 2003 among the Company and UBS Securities LLC and J.P. Morgan
Securities Inc., as Representatives, and the other parties thereto.3.1
    
    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, dated as of March 19, 1998
    
    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 6 7/8 Senior
Notes due 2008
    
    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 reference4.6
    
    Supplemental Indenture dated as of December 11, 2003 among the Company and the Bank of New York, as Trustee,
with respect to the 11% Notes due 2008
 E-1




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Exhibit No.
    
    Description
    
    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
    
    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 reference10.3*
    
    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)10.4*
    
    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 reference10.5*
    
    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 reference10.6*
    
    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 reference10.7
    
    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 reference10.8*
    
    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 reference10.9*
    
    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 reference
 E-2




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##### Table of Contents



Exhibit No.
    
    Description
    
    Reference10.10*
    
    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 reference10.11
    
    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 reference10.12*
    
    Employment Agreement between SOLA International
Inc. and Ronald F. Dutt, dated as of
September 4, 2003
    
    Filed as Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the
period ended December 31, 2003 and
incorporated herein by reference10.13
    
    Credit Agreement dated as of December 11, 2003
among SOLA International Inc., the Lenders named therein, UBS Securities LLC and JP Morgan Securities Inc. as Joint Lead Arrangers and Bookrunners, UBS
Securities LLC and JP Morgan Chase Bank as Co-Syndication Agents, Union Bank of California, N.A., as Administrative Agent and Collateral Agent, and
U.S. Bank National Association, as Documentation Agent.
    
    Filed as Exhibit 10.2 to the Companys
Quarterly Report on Form 10-Q for the
period ended December 31, 2003 and
incorporated herein by reference10.14*
    
    Employment Agreement between SOLA International
Inc. and Gaetano Sciuto, dated as of June 15, 199810.15*
    
    Employment Agreement between SOLA International
Inc. and David Cross, dated as of February 2, 2004
 E-3




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Exhibit No.
    
    Description
    
    Reference12.1
    
    Statement regarding ratio of earnings/(loss) to fixed
charges21.1
    
    List of subsidiaries of the Company23.1
    
    Consent of PricewaterhouseCoopers LLP,
Independent Registered Public Accounting Firm24.1
    
    Power of Attorney (included on
Signature Page)31.1
    
    Rule 13a-14(a) Certifications32.1
    
    Section 1350 Certification
   *Compensatory plan or management agreement E-4