Edgar Filing: SOLA INTERNATIONAL INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2001
or
( ) TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-13606

SOLA INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)

DELAWARE 94-3189941
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)

1290 OAKMEAD PARKWAY, SUITE 230, SUNNYVALE, CA 94085
(Address of principal executive offices)
(zip code)

(408) 735-1982
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----

As of November 1, 2001, 24,095,653 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.

SOLA INTERNATIONAL INC.

Table of Contents
Form 10-Q for the Quarterly Period
Ended September 30, 2001

PART I FINANCIAL INFORMATION PAGE
------ --------------------- ----

Item 1. Financial Statements

Unaudited Consolidated Condensed Balance Sheet as of September 30, 2001 3

Consolidated Condensed Balance Sheet as of March 31, 2001 (derived from
audited financial statements) 3

Unaudited Consolidated Condensed Statements of Operations for the three and
six month periods ended September 30, 2001 and September 30, 2000 4

Unaudited Consolidated Condensed Statements of Cash Flows for the six month
periods ended September 30, 2001 and September 30, 2000 5

Notes to Consolidated Condensed Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 12

Item 3. Quantitative and Qualitative Disclosures About Market Risk 21

PART II OTHER INFORMATION
------- -----------------

Item 1. Legal Proceedings 24

Item 2. Changes in Securities and Use of Proceeds 24

Item 3. Defaults upon Senior Securities 24

Item 4. Submission of Matters to a Vote of Security Holders 24

Item 5. Other Information 24

Item 6. Exhibits and Reports on Form 8-K 24

PART I FINANCIAL INFORMATION
Item 1. Financial Statements

SOLA INTERNATIONAL INC.

Consolidated Condensed Balance Sheets
(in thousands, except per share data)

March 31, 2001
(derived from
ASSETS September 30, audited
2001 financial
(unaudited) statements)
----------- -----------
Current assets:

Cash and cash equivalents ................................................... $ 55,276 $ 26,149
Trade accounts receivable, less allowance for doubtful
accounts of $9,238 and $9,201 at September 30, 2001
and March 31, 2001, respectively .......................................... 105,624 123,478
Inventories, net ............................................................ 102,689 94,741
Deferred taxes, current .................................................... 24,377 24,508
Other current assets ........................................................ 18,636 15,589
--------- ---------
Total current assets ...................................................... 306,602 284,465
Property, plant and equipment, net ............................................. 150,059 152,712
Goodwill, net .................................................................. 190,691 190,443
Deferred taxes, long-term ...................................................... 22,220 22,191
Other long-term assets ......................................................... 29,181 12,564
--------- ---------
Total assets .............................................................. $ 698,753 $ 662,375
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Notes payable to banks ...................................................... $ 435 $ 402
Current portion of long-term debt ........................................... 1,280 4,076
Accounts payable ............................................................ 54,862 63,578
Accrued liabilities ......................................................... 56,560 45,919
Accrued payroll and related compensation .................................... 31,025 32,323
Other current liabilities ................................................... 2,853 2,918
--------- ---------
Total current liabilities ................................................. 147,015 149,216
Long-term debt, less current portion ........................................... 3,651 10,180
Bank debt ...................................................................... 8,000 150,000
Senior notes ................................................................... 281,607 94,730
Other long-term liabilities .................................................... 22,432 22,874
--------- ---------
Total liabilities ......................................................... 462,705 427,000
--------- ---------

Commitments and contingencies

Shareholders' equity:

Preferred stock, $0.01 par value; 5,000 shares authorized;
no shares issued ......................................................... -- --
Common stock, $0.01 par value; 50,000 shares authorized;
24,938 shares issued as of September 30, 2001 and March 31, 2001, and
24,044 and 23,709 shares outstanding as of September 30, 2001 and March 31,

2001, respectively ........................................................ 249 249
Additional paid-in capital ..................................................... 282,915 281,434
Retained earnings .............................................................. 7,466 4,791
Cumulative other comprehensive loss ............................................ (48,720) (43,069)
Common stock in treasury, at cost - 895 shares and 1,229
shares outstanding at September 30, 2001 and March
31, 2001, respectively ................................................... (5,862) (8,030)
--------- ---------
Total shareholders' equity ................................................ 236,048 235,375
--------- ---------
Total liabilities and shareholders' equity ................................ $ 698,753 $ 662,375
========= =========

The accompanying notes are an integral part of these consolidated condensed
financial statements

SOLA INTERNATIONAL INC.

Unaudited Consolidated Condensed Statements of Operations
(in thousands, except per share data)

Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----

Net sales .............................................. $ 129,444 $ 134,846 $ 265,400 $ 276,837
Cost of sales .......................................... 78,356 80,202 159,503 162,949
--------- --------- --------- ---------
Gross profit ........................................ 51,088 54,644 105,897 113,888
--------- --------- --------- ---------
Research and development expenses ...................... 3,350 3,871 6,394 7,900
Selling and marketing expenses ......................... 25,263 25,220 52,050 51,782
General and administrative expenses .................... 12,367 11,660 25,377 25,452
Amortization of goodwill and other intangibles ......... 11 1,583 22 3,168
Special charges ........................................ -- 4,827 -- 10,915
--------- --------- --------- ---------
Operating expenses .................................. 40,991 47,161 83,843 99,217
--------- --------- --------- ---------
Operating income ................................. 10,097 7,483 22,054 14,671
Interest income ........................................ 760 375 1,201 925
Interest expense ....................................... (7,711) (6,291) (15,347) (12,333)
Foreign currency gain/(loss) ........................... (9,215) 302 (4,127) (54)
--------- --------- --------- ---------
Income/(loss) before benefit/(provision) for
income taxes, minority interest and
extraordinary item .............................. (6,069) 1,869 3,781 3,209
Benefit/(provision) for income taxes ................... 2,093 (625) (1,059) (1,080)
Minority interest ...................................... (27) (10) (47) (13)
--------- --------- --------- ---------
Income/(loss) before extraordinary item ........... (4,003) 1,234 2,675 2,116
Extraordinary item, net of tax ......................... -- -- -- 1,471
--------- --------- --------- ---------
Net income/(loss) ................................... $ (4,003) $ 1,234 $ 2,675 $ 3,587
========= ========= ========= ==========

Earnings/(loss) per share - basic:

Earnings/(loss) per share before extraordinary item $ (0.17) $ 0.05 $ 0.11 $ 0.09
Extraordinary item ................................. -- -- -- 0.06
--------- --------- --------- ---------
Earnings/(loss) per share - basic ................. $ (0.17) $ 0.05 $ 0.11 $ 0.15
========= ========= ========= ==========

Weighted average common shares outstanding ............. 23,901 23,966 23,823 24,403
========= ========= ========= ==========

Earnings/(loss) per share - diluted:

Earnings/(loss) per share before extraordinary item $ (0.17) $ 0.05 $ 0.11 $ 0.09
Extraordinary item ................................ -- -- -- 0.06
--------- --------- --------- ---------
Earnings/(loss) per share - diluted ............... $ (0.17) $ 0.05 $ 0.11 $ 0.15
========= ========= ========= ==========

Weighted average common and dilutive securites
outstanding .......................................... 23,901 24,084 24,302 24,452
========= ========= ========= ==========

The accompanying notes are an integral part of these consolidated condensed
financial statements

SOLA INTERNATIONAL INC.

Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)

Six Months Ended Six Months Ended
September 30, September 30,
------------- -------------
2001 2000
---- ----
Cash flows from operating activities:

Net income ......................................... $ 2,675 $ 3,587
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Minority interest in earnings ...................... 47 13
Depreciation ....................................... 10,443 9,975
Amortization ....................................... 621 3,840
Provision for excess and obsolete inventory ........ 587 92
Provision for doubtful accounts .................... 1,225 543

Tax benefit from exercise of stock options ......... 556 4
Deferred taxes .................................... 516 453
Translation effect of revaluation of senior notes .. 4,849 --

(Gain)/loss on disposal/sale of property, plant and
equipment ....................................... 22 (5)

Changes in assets and liabilities:
Trade accounts receivable ....................... 15,362 (2,991)
Inventories ..................................... (9,490) (13,270)
Other assets .................................... (19,095) (1,980)
Accounts payable--trade ......................... (11,242) 5,224
Accrued and other current liabilities ........... 6,422 2,741
Other long-term liabilities ..................... (696) 3,202
--------- ---------
Net cash provided by operating activities
2,802 11,428
--------- ---------
Cash flows from investing activities:
Purchases of businesses ............................ -- (2,480)
Disposal of/(investment in) trade investments and
joint ventures .................................. 1,409 (1,313)
Capital expenditures ............................... (9,801) (12,586)
Other investing activities ......................... 90 32
--------- ---------
Net cash used in investing activities ......... (8,302) (16,347)
--------- ---------
Cash flows from financing activities:
Payments on equity participation loans/exercise of
stock options ................................... 3,094 34
Net receipts/(payments) under notes payable to banks
1,561 (11,666)
Borrowings on long-term debt ....................... 716 1,078
Payments on long-term debt ......................... (10,826) (2,945)
Proceeds from bank debt ............................ 17,500 36,900
Repayment of bank debt ............................. (159,500) --
Issuance of senior notes ........................... 182,009 --
Purchase of treasury stock ......................... -- (8,166)
Repurchase of senior subordinated notes ............ -- (4,984)
--------- ---------
Net cash provided by financing activities ..... 34,554 10,251
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents ..................................... 73 (789)
--------- ---------
Net increase in cash and cash equivalents .......... 29,127 4,543
Cash and cash equivalents at beginning of period ... 26,149 18,852
--------- ---------
Cash and cash equivalents at end of period ......... $ 55,276 $ 23,395
========= =========

The accompanying notes are an integral part of these consolidated condensed
financial statements

SOLA INTERNATIONAL INC.

Notes to Consolidated Condensed Financial Statements
(unaudited)

1. Basis of Presentation

The accompanying consolidated financial statements of the Company have been
prepared without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles in the United States of America have been condensed or
omitted pursuant to such rules and regulations. The consolidated balance sheet
as of March 31, 2001 was derived from audited financial statements. The
accompanying consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the Company's annual report on Form 10-K for the fiscal year ended March 31,
2001.

The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
period. The results of operations for the six months ended September 30, 2001
are not necessarily indicative of the results to be expected for the full year.
Certain prior year items have been reclassified to conform with the current
year's presentation.

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, 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.

The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 133 Accounting for Derivative Instruments and Hedging Activities, as amended
by SFAS No. 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 measures 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.
Effective July 27, 2001, the Company transacted two foreign exchange contracts
to hedge its interest expense exposure associated with the semi-annual coupon
payments due September 15, 2001 and March 15, 2002 on our (euro)205 million 11%
Notes. As of September 30, 2001, the Company had the one foreign exchange
contract due March 15, 2002 outstanding. The Company recognizes the gain or loss
on its foreign exchange contracts in the period incurred. The transition
adjustments upon adoption of SFAS No. 133 were not material. We do not hold
derivative financial instruments for speculative or trading purposes.

the purchase method. The provisions of this Statement apply to all business
combinations initiated after June 30, 2001, and also apply to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. The Company has adopted SFAS No. 141 with
the first quarter of fiscal 2002, and the adoption of SFAS No. 141 had no
material impact on the financial reporting and related disclosures.

In July 2001, the FASB issued SFAS No. 142 Goodwill and Other Intangible
Assets, which establishes financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition, and after they have been initially recognized in the financial
statements. The provisions of this Statement are effective starting with fiscal
years beginning after December 15, 2001. Early adoption is permitted for
entities with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements have not previously been issued. Accordingly,
the Company has elected to early adopt SFAS No.142 beginning with the first
quarter of fiscal 2002 and has disclosed the impact of adopting SFAS No.142 on
its consolidated financial statements in Note 3 to the consolidated financial
statements.

In August 2001, the FASB issued SFAS No. 144 Accounting for the Impairment
or Disposal of Long-Lived Assets, which establishes financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of and APB Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. In addition, SFAS No. 144 amends Accounting Research Bulletin No.
51, Consolidated Financial Statements. SFAS No. 144 addresses the accounting for
a segment of a business accounted for as a discontinued operation not previously
addressed by SFAS No. 121. In addition, SFAS No. 144 also resolves significant
implementation issues related to SFAS No. 121. The provisions of this Statement
are effective starting with fiscal years beginning after December 15, 2001. The
Company believes that the adoption of SFAS No. 144 will have no material impact
on the financial reporting and related disclosures.

2. Inventories

September 30, March 31,
2001 2001
(in thousands) (in thousands)
-------------- --------------
Raw Materials $ 15,134 $ 16,084
Work In Progress 4,335 3,744
Finished Goods 83,220 74,913
-------- --------
$102,689 $ 94,741
======== ========

3. Goodwill and Intangibles

In July 2001, the Financial Accounting Standards Board issued SFAS No. 142
Goodwill and Other Intangible Assets, which establishes financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, Intangible Assets. The Company has elected to early adopt SFAS
No. 142 beginning with the first quarter of fiscal 2002. SFAS 142 requires that
goodwill and intangible assets that have indefinite useful lives will not be
amortized but rather they will be tested at least annually for impairment.
Intangible assets that have finite useful lives will continue to be amortized
over their useful lives. The goodwill test for impairment consists of a two-step
process that begins with an estimation of the fair value of a reporting unit.
The first step is a screen for potential

impairment and the second step measures the amount of impairment, if any. SFAS
142 requires an entity to complete the first step of the transitional goodwill
impairment test within six months of adopting the Statement. As of September 30,
2001 the Company had completed both steps and had determined that there was no
impairment of goodwill at this time.

The following table reconciles the Company's net income for the three and six
months ended September 30, 2001 and 2000 adjusted to exclude goodwill
amortization pursuant to SFAS No. 142 to amounts previously reported: (in
thousands, except per share data)

Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----

Reported income/(loss) before extraordinary item $ (4,003) $ 1,234 $ 2,675 $ 2,116
Add back: Goodwill amortization, net of tax effect -- 1,045 -- 2,091
--------- -------- ------- -------
Adjusted income/(loss) before extraordinary item $ (4,003) $ 2,279 $ 2,675 $ 4,207
========= ======== ======= =======

Reported net income/(loss) $ (4,003) $ 1,234 $ 2,675 $ 3,587
Add back: Goodwill amortization, net of tax effect -- 1,045 -- 2,091
--------- -------- ------- -------
Adjusted net income/(loss) $ (4,003) $ 2,279 $ 2,675 $ 5,678
========= ======== ======= =======

Earnings/(loss) per share - basic
Reported income/(loss) before extraordinary item $ (0.17) $ 0.05 $ 0.11 $ 0.09
Goodwill amortization -- 0.05 -- 0.08
--------- -------- ------- -------
Adjusted income/(loss) before extraordinary item $ (0.17) $ 0.10 $ 0.11 $ 0.17
========= ======== ======== =======

Earnings/(loss) per share - basic
Reported net income/(loss) $ (0.17) $ 0.05 $ 0.11 $ 0.15
Goodwill amortization -- 0.05 -- 0.08
--------- -------- ------- -------
Adjusted net income/(loss) $ (0.17) $ 0.10 $ 0.11 $ 0.23
========= ======== ======== =======

Earnings/(loss) per share - diluted
Reported income/(loss) before extraordinary item $ (0.17) $ 0.05 $ 0.11 $ 0.09
Goodwill amortization -- 0.04 -- 0.08
--------- -------- ------- -------
Adjusted income/(loss) before extraordinary item $ 0.17) $ 0.09 $ 0.11 $ 0.17
========= ======== ======== =======

Earnings/(loss) per share diluted
Reported net income/(loss) $ (0.17) $ 0.05 $ 0.11 $ 0.15
Goodwill amortization -- 0.04 -- 0.08
--------- -------- ------- -------
Adjusted net income/(loss) $ (0.17) $ 0.09 $ 0.11 $ 0.23
========= ======== ======== =======

Following are patent costs classified as intangible assets that continue to be
subject to amortization: (in thousands)

As of As of
September 30, 2001 March 31, 2001
------------------ --------------
Gross carrying amount $ 476 $ 476
Accumulated amortization (79) (57)
----- ------
Net carrying amount $ 397 $ 419
===== ======

Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Aggregate Amortization Expense $ 11 $ 7 $ 22 $ 14

Estimated amortization expense for fiscal year ending:

March 31, 2002 $ 43
March 31, 2003 43
March 31, 2004 43
March 31, 2005 43
March 31, 2006 43

For the six months ended September 30, 2001, goodwill increased $0.2 million
due to an adjustment for goodwill acquired during the year.

4. Senior Notes

Following is the detail of Senior Notes:

September 30, 2001 March 31, 2001
(in thousands) (in thousands)
-------------- --------------
6 7/8% Senior Notes $ 94,749 $ 94,730
11% Senior Notes 186,858 --
--------- --------
Total Senior Notes $ 281,607 $ 94,730
========= ========

On April 17, 2001, the Company completed the sale of (euro)205 million
($182.0 million at date of sale) of 11% Notes due March 15, 2008 through a
private placement to qualified institutional buyers pursuant to Rule 144A and to
persons outside of the United States in compliance with Regulation S. The notes
are senior unsecured obligations and will rank equally with all existing and
future unsecured debt. Interest on the notes is payable semi-annually on each
September 15 and March 15, commencing on September 15, 2001.

The Company may redeem these Notes in whole or in part, at any time, on or
after March 15, 2005, at a redemption price equal to 100% of their principal
amount plus a premium declining ratably to par plus accrued and unpaid interest
and liquidation damages, if any. Prior to March 15, 2004, the Company may redeem
up to 35% of the original aggregate principal amount of these Notes at a
redemption price of 111% of their principal amount plus accrued and unpaid
interest and liquidation damages, if any. The indenture governing the notes
contains certain covenants that, among other things, will limit the Company's
ability to incur additional indebtedness or liens, make investments, sell
assets, pay dividends or make other distributions.

The net proceeds from the sale of these Notes were used to repay fully the
Company's outstanding bank borrowings and for general corporate purposes.

5. Credit Agreement

On July 26, 2001, the Company entered into a three-year $45 million secured
revolving credit facility ("Credit Agreement") maturing on July 27, 2004.
Borrowings under the Credit Agreement may be made as either US Dollar Alternate
Base Rate ("ABR") loans or Eurodollar loans. ABR loans bear interest at a rate
per annum equal to the greater of (a) the Prime Rate in effect on such day, or
(b) the Federal Funds Effective Rate in effect on such day plus 0.50%, plus an
applicable percentage based on the Company's adjusted leverage ratio. The
Eurodollar loans bear interest at a rate per annum equal to the LIBOR Rate plus
an applicable percentage based on the Company's adjusted leverage ratio.

The Credit Agreement contains a number of covenants, including, among
others, covenants restricting the Company and its subsidiaries with respect to
the incurrence of indebtedness, the creation of liens, the making of certain
investments and loans, the payment of dividends, and the ability to enter into
certain transactions with affiliates. In addition, the Credit Agreement requires
the Company to maintain certain interest coverage, net worth and leverage ratios
and places certain restrictions on capital expenditures.

In connection with the Credit Agreement the Company entered into a Security
Agreement that grants a security interest in and pledges the rights to certain
of the Company's assets, including domestic accounts receivable, domestic
inventory and 65% of the pledged stock of certain significant foreign
subsidiaries, for the payment and performance of the Company's obligations under
the Credit Agreement.

The proceeds from the Credit Agreement will be used for working capital and
general corporate purposes. The balance available at September 30, 2001 is $37
million.

6. 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 plc., Pilkington plc. 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 sites is likely to result in a liability that
will have a material adverse effect on its results of operations, financial
condition or cash flows.

The Company's policy is to meet or exceed all applicable environmental,
health and safety laws and regulations. The complexity and continuing evolution
of environmental regulation, including certain programs for which implementing
regulations have not yet been finalized, preclude precise estimation of future
environmental expenditures.

In the ordinary course of business, various legal actions and claims pending
have been filed against the Company. While it is reasonably possible that such
contingencies may result in a cost greater than that provided for in the
financial statements, it is the opinion of management that the ultimate
liability, if any, with respect to these matters, will not materially affect the
consolidated operations, cash flows, or financial position of the Company.

7. Cumulative Other Comprehensive Loss

Cumulative other comprehensive loss includes currency translation
adjustments that are not adjusted for income taxes as they relate to
indefinite investments in non-U.S. subsidiaries. Following is the detail of
cumulative other comprehensive loss: (in thousands)

Balance March 31, 2001 $(43,069)
Change in foreign currency translation
adjustment (5,651)
--------
Balance September 30, 2001 $(48,720)
========

8. Earnings Per Share

The following table sets forth the computation of basic and diluted
earnings/(loss) per share for the three and six months ended September 30, 2001
and 2000 (in thousands except per share data):

Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----

Numerator:
Income/(loss) before extraordinary item ...... $ (4,003) $ 1,234 $ 2,675 $ 2,116
Extraordinary item, net of tax ............... -- -- -- 1,471
-------- -------- -------- -------
Net income/(loss) ......................... $ (4,003) $ 1,234 $ 2,675 $ 3,587
======== ======== ======== =======

Denominator:
Denominator for basic earnings/(loss) per
share -
Weighted average common shares
Outstanding .............................. 23,901 23,966 23,823 24,403

Effect of dilutive securities:
Employee stock options .................. -- 118 479 49
-------- -------- -------- -------
Denominator for diluted earnings/(loss) per
share -
Weighted average common shares and
dilutive securities outstanding ....... 23,901 24,084 24,302 24,452
======== ======== ======== =======

Basic earnings/(loss) per share:
Earnings/(loss) per share before extraordinary
Item .................................... $ (0.17) $ 0.05 $ 0.11 $ 0.09
Extraordinary item, net of tax ............... -- -- -- 0.06
-------- -------- -------- -------
Earnings/(loss) per share ................. $ (0.17) $ 0.05 $ 0.11 $ 0.15
======== ======== ======== =======

Diluted earnings/(loss) per share:
Earnings/(loss) per share before extraordinary
Item .................................... $ (0.17) $ 0.05 $ 0.11 $ 0.09
Extraordinary item, net of tax ............... -- -- -- 0.06
-------- -------- -------- -------
Earnings/(loss) per share ................. $ (0.17) $ 0.05 $ 0.11 $ 0.15
======== ======== ======== =======

For the quarter ended September 30, 2001, approximately 0.5 million common
stock options with exercise prices at a range of $4.65 to $13.81 per share were
not included in the calculation of diluted net loss per share because to do so
would be anti-dilutive for the period. Weighted average shares issuable upon the
exercise of stock options of 1.6 million and 2.6 million at a range of $14.21 to
$38.38 per share and $7.88 to $41.44 per share, respectively, were not included
in the computation of the diluted earnings per share for the three months ended
September 2001 and 2000, respectively, because the options' exercise price was
greater than the average market price of the common shares. Weighted average
shares issuable upon the exercise of stock options of 1.6 million and 2.7
million at a range of $14.21 to $41.44 per share and $6.25 to $41.44 per share,
respectively, were not included in the computation of the diluted earnings per
share for the six months ended September 2001 and 2000, respectively, because
the options' exercise price was greater than the average market price of the
common shares.

9. Special Charges

Commencing in the third quarter of fiscal 1999, the Company implemented
strategic initiatives designed to streamline manufacturing and logistics, reduce
operating costs worldwide and write-off inventory SKUs that are no longer being
manufactured. As a result of these strategic initiatives, during

the three and six months ended September 30, 2000, the Company recorded pretax
special charges of $4.8 million and $10.9 million, respectively, associated with
work-force reductions in North America, Europe and Australia (91 employees and
219 employees, respectively).

No special charges were recorded during the six months ended September 30,
2001. The following table reconciles the remaining liabilities associated with
the strategic initiatives from April 1, 2001 to September 30, 2001: (in
thousands)

Workforce Facility
Reductions Closures Total
---------- -------- -----
Strategic initiative
liability as of

April 1, 2001 $13,682 $2,439 $16,121

Six months
Fiscal 2002

Cash utilized (3,563) (163) (3,726)
------- ------ -------
Strategic initiative
liability as of

September 30, 2001 $10,119 $2,276 $12,395
======= ====== =======

The liability associated with the strategic initiatives as of September 30,
2001 is included in accrued liabilities. The Company anticipates that
substantially all of the accrued liability will be paid in fiscal 2002 and will
be funded through future asset sales and cash provided by operations. Management
does not anticipate any additional special charges related to the Company's
current strategic initiatives.

10. Extraordinary Item

During the three months ended June 30, 2000 the Company purchased $5.0
million of its 6 7/8% Senior Notes due 2008. As a result, the Company recorded
an extraordinary gain of $1.5 million, net of tax of $0.9 million, resulting
from the difference between the carrying value of the notes and the purchase
price. The purchase was funded by the Company's credit facility and resulted in
a decline in net borrowings.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Company's consolidated
condensed financial statements and notes thereto included elsewhere herein.

Overview

We are a leading global designer, manufacturer and distributor of a broad
range of plastic and glass eyeglass lenses and hold a leading manufacturing and
technology position in the fast growing plastic lens segment of the global
spectacle lens market. We have sales offices in 30 countries worldwide and
operate in most major regions of the world. We believe that we hold a top three
market position in terms of volume of plastic eyeglass lenses sold in each major
region where we operate, including North America, Europe and Rest of World
(consisting primarily of Australia, Asia and South America). We focus our
efforts on value-added products, including products with advanced design
characteristics, lens coatings and treatments and thin and light weight
materials (e.g., polycarbonate). For the quarter ended September 30, 2001, 72.7%
of our net sales were represented by value-added products.

We market our spectacle lens products globally under the brands SOLA and
American Optical (AO) and distribute them globally through three primary
channels: (1) direct to national chain retail, (2) direct

to retail outlets, and (3) wholesale distributors (e.g., independent processing
laboratories). Additionally, in the United States we sell directly to managed
care organizations, a rapidly growing segment of the spectacle lens market.

Our business is organized into three primary markets: North America, Europe
and Rest of World. For the six months ended September 30, 2001, we generated
approximately 46% of our net sales from North America, 34% from Europe and 20%
from Rest of World.

Our organization has historically been managed on a decentralized basis
with each operating unit having its own manufacturing facilities, distribution
centers and inventory management systems. This decentralized approach resulted
in excess manufacturing capacity, redundant facilities in high cost regions and
excessive distribution centers. In the third quarter of fiscal 1999, we
initiated a strategic operating review designed to streamline manufacturing and
distribution, reduce operating costs worldwide and write-off inventory SKUs that
are no longer being manufactured. In April 2000, we appointed Jeremy Bishop as
our new President and Chief Executive Officer. Following his appointment, Mr.
Bishop expanded the scope of our strategic cost cutting program and accelerated
the implementation of our strategic initiatives begun in 1999. Following
completion of the strategic initiatives, operations will consist of four primary
and seven specialized manufacturing facilities, two primary research and
development centers, 12 primary prescription laboratories and five primary
distribution centers.

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, with a corresponding cash impact of approximately $47.0
million. In addition to special charges, we incurred transition costs associated
with executing our strategic initiatives. These costs totaled $17.5 million in
fiscal 2001 and $14.0 million in the first half of fiscal 2002 and largely
related to: (1) expenditures to execute the strategic actions (e.g., certain
employee and facility costs) and (2) expenses incurred that will be eliminated
upon completion of the strategic actions (e.g., manufacturing variances)
associated with the implementation of the strategic initiatives.

Results of Operations

Three months ended September 30, 2001 compared to three months ended September
30, 2000

Net Sales

Our net sales were $129.4 million in the three months ended September 30,
2001 compared to net sales of $134.8 million in the same period for the prior
year, a decrease of $5.4 million or 4.0%. Using constant exchange rates and on a
comparable basis, net sales decreased 1.8%. The decrease in net sales was
primarily due to the Rest of World and North America regions. Net sales in the
Rest of World region decreased due to our efforts to concentrate on higher
margin value-added sales. The decrease in the North America region was due
primarily to decreased sales to laboratory customers that are owned by and
aligned with two principal competitors. Net sales performance by region was as
follows:

. North America decreased by $4.1 million or 6.6%;
. Europe increased by $2.2 million or 5.4%; and
. Rest of World decreased by $3.5 million or 11.7%.

Using constant exchange rates and on a comparable basis the regional
performances were as follows:

. North America decreased by 6.6%;
. Europe increased by 6.9%; and
. Rest of World decreased by 3.9%.

Gross Profit and Gross Margin

Our gross profit totaled $51.1 million for the three months ended September
30, 2001 compared to $54.6 million for the same period in the prior year, a
decrease of $3.5 million or 6.4%. In calculating gross profit we wrote-off $2.3
million of inventory in the quarter ended September 30, 2000 and recorded $4.5
million of transition costs in the quarter ended September 30, 2001 associated
with our strategic initiatives. If these inventory write-offs and transition
costs were excluded, gross profit would have been $55.6 million and $56.9
million for the three months ended September 30, 2001 and 2000, respectively, a
decrease of $1.3 million or 2.3%. Gross profit as a percentage of net sales, or
gross margin, after adjusting for the inventory write-offs and transition costs,
increased to 43.0% for the three months ended September 30, 2001 from 42.3% in
the same period in the prior year. The increase in gross margin was due to
product mix as a result of higher sales of value-added products.

Operating Expenses

Our operating expenses in the three months ended September 30, 2001 totaled
$41.0 million compared to operating expenses of $47.2 million for the same
period in the prior year. Included in operating expenses for the three months
ended September 30, 2000 are special charges of $4.8 million. We also recorded
$2.6 million of transition costs related to our strategic initiatives in the
three months ended September 30, 2001. If these special charges and transition
costs were excluded from operating expenses, operating expenses would have been
$38.4 million for the three months ended September 30, 2001 and $42.4 million
for the same period in the prior year, a decrease of $4.0 million or 9.4%.
Operating expenses, excluding the special charges and transition costs, for the
three months ended September 30, 2001 and 2000 as a percentage of net sales were
29.7% and 31.5%, respectively. Research and development expenses of $3.3 million
for the three months ended September 30, 2001 represented 2.6% of net sales
compared to research and development expenses of $3.9 million or 2.9% of net
sales in the three months ended September 30, 2000. The $0.6 million or 15.4%
decrease in our research and development expenses was due mainly to headcount
reductions associated with the strategic initiatives. Selling and marketing
expenses for the three months ended September 30, 2001 and 2000 were $25.3
million and $25.2 million, respectively, representing 19.6% and 18.7% of net
sales, respectively. The increase in selling and marketing expenses as a percent
of net sales was primarily a result of spending associated with the recently
launched product, Enigma(TM), in North America and transition costs related to
strategic initiatives. Our general and administrative expenses were $12.4
million in the three months ended September 30, 2001 and $11.7 million for the
same period in the prior year, an increase of $0.7 million or 6.0%. As a
percentage of net sales, general and administrative expenses increased to 9.6%
for the three months ended September 30, 2001 compared to 8.7% for the three
months ended September 30, 2000. This increase in general and administrative
expenses is due mainly to additional relocation and other transition costs.
Included in operating expenses for the three months ended September 30, 2000 was
goodwill amortization of $1.6 million. Due to our adoption of Statement of
Financial Accounting Standards ("SFAS") No. 142, we are no longer required to
amortize goodwill as a charge to earnings; however, we are required on an annual
basis to review goodwill for potential impairment. If an impairment is found to
exist, a charge will be taken against earnings.

During the three months ended September 30, 2000, we recorded pretax
special charges of $4.8 million associated with work-force reductions in North
America, Europe and Australia (91 employees) related to our strategic
initiatives.

We did not record any special charges during the six months ended September
30, 2001. The following table reconciles the remaining liabilities associated
with the strategic initiatives from

April 1, 2001 to September 30, 2001: (in thousands)

Workforce Facility
Reductions Closures Total
---------- -------- -----
Strategic initiative
liability as of
April 1, 2001 $13,682 $2,439 $16,121
Fiscal 2002
YTD Cash utilized (3,563) (163) (3,726)
------- ------ -------
Strategic initiative
liability as of
September 30, 2001 $10,119 $2,276 $12,395
======= ====== =======

The liability associated with the strategic initiatives as of September 30,
2001 is included in accrued liabilities. We anticipate that substantially all of
the accrued liability will be paid in fiscal 2002 and will be funded through
future asset sales and cash provided by operations. We are in the process of
selling land and buildings made redundant by the strategic initiatives, which is
anticipated to generate pre-tax proceeds of approximately $10 million. We do not
anticipate any additional special charges related to our current strategic
initiatives.

Operating Income

Our operating income for the three months ended September 30, 2001 totaled
$10.1 million, an increase of $2.6 million, or 34.7%, from operating income of
$7.5 million for the three months ended September 30, 2000. Operating income,
excluding the transition costs of $7.1 million in the three months ended
September 30, 2001 and special charges of $4.8 million, inventory write-offs of
$2.3 million and goodwill amortization of $1.6 million in the three months ended
September 30, 2000, would have been $17.2 million and $16.2 million,
respectively, an increase of $1.0 million, or 6.2%.

Net Interest Expense and Foreign Currency Gain/(Loss)

Our net interest expense totaled $7.0 million for the three months ended
September 30, 2001 compared to $5.9 million for the three months ended September
30, 2000, an increase of $1.1 million. The increase in interest expense is due
primarily to increased average borrowing rates and increased borrowing levels.
For the three months ended September 30, 2001, we recorded a net foreign
exchange loss of $9.2 million compared to a net foreign exchange gain of $0.3
million for the same period in the prior year. Exchange losses on external and
intercompany notes of $10.0 million were recorded in the second quarter of
fiscal 2002 due primarily to the weakening of the US Dollar to the Euro and
strengthening of the US Dollar to the Brazilian Real and the impact this had on
our Euro denominated Notes and US Dollar denominated notes with our Brazilian
subsidiary.

Provision for Income Taxes

Our combined state, federal and foreign tax rate represents an effective
tax rate projected for the full fiscal 2002 year of 28.0%. For the first three
months of Fiscal 2002, we recorded an effective tax rate of 32.0%. As a result
of incurring an operating loss for second quarter of Fiscal 2002, we recorded an
effective tax benefit rate of 34.5%. For the three months ended September 30,
2000, we recorded an effective income tax rate of 33.4%, and for the full fiscal
2001 year we reported an effective tax rate of 32.0%. If the special charges
reported in fiscal 2001 are excluded from income before provision for income
taxes, and the tax benefit associated with the special charges is excluded from
the provision for income taxes, the resulting effective combined state, federal
and foreign tax rate for fiscal 2001 would have been 33.3%. We have deferred tax
assets on our balance sheet as of September 30, 2001 amounting to 46.6 million.
The ultimate utilization of these deferred tax assets is dependent on our
ability to generate taxable income in the future.

Net Income/(Loss)

Our net loss for the three months ended September 30, 2001 totaled $4.0
million compared to net income of $1.2 million for the same period in the prior
year. In the second quarter of fiscal 2002, excluding transition costs of $7.1
million and net exchange losses on external and intercompany notes of $10.0
million, net of the related tax effect, net income would have been $8.3 million
or $0.34 per share. In the second quarter of fiscal 2001, excluding inventory
write-offs of $2.3 million, special charges of $4.8 million, and goodwill
amortization of $1.6 million, net of the related tax effect, our net income
would have been $7.0 million or $0.29 per share.

Results of Operations

Six months ended September 30, 2001 compared to six months ended September 30,
2000

Net Sales

Our net sales were $265.4 million in the six months ended September 30,
2001 compared to net sales of $276.8 million in the same period for the prior
year, a decrease of $11.4 million or 4.1%. Using constant exchange rates and on
a comparable basis, net sales decreased 0.8%. The decrease in net sales was
primarily due to the Rest of World and North America regions. Net sales in the
Rest of World region decreased due to our efforts to concentrate on higher
margin value-added sales. The decrease in the North America region was due
primarily to decreased sales to laboratory customers that are owned by and
aligned with two principal competitors. Net sales performance by region was as
follows:

. North America decreased by $5.5 million or 4.4%;
. Europe increased by $0.9 million or 1.0%; and
. Rest of World decreased by $6.8 million or 11.3%.

Using constant exchange rates and on a comparable basis the regional
performances were as follows:

. North America decreased by 4.4%;
. Europe increased by 7.4%; and
. Rest of World decreased by 4.8%.

Gross Profit and Gross Margin

Our gross profit totaled $105.9 million for the six months ended September
30, 2001 compared to $113.9 million for the same period in the prior year, a
decrease of $8.0 million or 7.0%. In calculating gross profit we wrote-off $3.1
million of inventory in the six months ended September 30, 2000 and recorded
$8.4 million of transition costs in the quarter ended September 30, 2001
associated with our strategic initiatives. If these inventory write-offs and
transition costs were excluded, gross profit would have been $114.3 million and
$117.0 million for the six months ended September 30, 2001 and 2000,
respectively, a decrease of $2.7 million or 2.3%. Gross profit as a percentage
of net sales, or gross margin, after adjusting for the inventory write-offs and
transition costs, increased to 43.1% for the six months ended September 30, 2001
from 42.3% in the same period in the prior year. The increase in gross margin
was due to product mix as a result of higher sales of value-added products.

Operating Expenses

Our operating expenses in the six months ended September 30, 2001 totaled
$83.8 million compared to operating expenses of $99.2 million for the same
period in the prior year. Included in operating expenses for the six months

ended September 30, 2001. If these special charges and transition costs were
excluded from operating expenses, operating expenses would have been $78.2
million for the six months ended September 30, 2001 and $88.3 million for the
same period in the prior year, a decrease of $10.1 million or 10.2%. Operating
expenses, excluding the special charges and transition costs, for the six months
ended September 30, 2001 and 2000 as a percentage of net sales were 29.5% and
31.9%, respectively. Research and development expenses of $6.4 million for the
six months ended September 30, 2001 represented 2.4% of net sales compared to
research and development expenses of $7.9 million or 2.9% of net sales in the
six months ended September 30, 2000. The $1.5 million or 19.0% decrease in our
research and development expenses was due mainly to headcount reductions
associated with the strategic initiatives. Selling and marketing expenses for
the six months ended September 30, 2001 and 2000 were $52.0 million and $51.8
million, respectively, representing 19.6% and 18.7% of net sales, respectively.
The increase in selling and marketing expenses as a percent of net sales was
primarily a result of spending associated with the recently launched product,
Enigma(TM), in North America and transition costs related to strategic
initiatives. Our general and administrative expenses were $25.4 million in the
six months ended September 30, 2001 and $25.5 million for the same period in the
prior year, a decrease of $0.1 million or 0.3%. As a percentage of net sales,
general and administrative expenses increased to 9.6% for the six months ended
September 30, 2001 compared to 9.2% for the six months ended September 30, 2000.
This increase in general and administrative expenses is due mainly to additional
relocation and other transition costs. Included in operating expenses for the
six months ended September 30, 2000 was goodwill amortization of $3.2 million.
Due to our adoption of SFAS No. 142, we are no longer required to amortize
goodwill as a charge to earnings; however, we are required on an annual basis to
review goodwill for potential impairment. If an impairment is found to exist, a
charge will be taken against earnings.

During the six months ended September 30, 2000, we recorded pretax special
charges of $10.9 million associated with work-force reductions in North America,
Europe and Australia (310 employees) related to our strategic initiatives.

We did not record any special charges during the six months ended September
30, 2001.

Operating Income

Our operating income for the six months ended September 30, 2001 totaled
$22.1 million, an increase of $7.4 million, or 50.3%, from operating income of
$14.7 million for the six months ended September 30, 2000. Operating income,
excluding the transition costs of $14.0 million in six months ended September
30, 2001 and special charges of $10.9 million, inventory write-offs of $3.1
million and goodwill amortization of $3.2 million in the six months ended
September 30, 2000, would have been $36.1 million and $31.9 million,
respectively, an increase of $4.2 million, or 13.2%.

Net Interest Expense and Foreign Currency Gain/(Loss)

Our net interest expense totaled $14.1 million for the six months ended
September 30, 2001 compared to $11.4 million for the six months ended September
30, 2000, an increase of $2.7 million. The increase in interest expense is due
primarily to increased average borrowing rates and increased borrowing levels.
For the six months ended September 30, 2001, we recorded a net foreign exchange
loss of $4.1 million compared to a $54,000 net foreign exchange loss for the
same period in the prior year. Exchange losses on external and intercompany
notes of $4.5 million were recorded in the first half of fiscal 2002 due
primarily to the weakening of the US Dollar to the Euro and the strengthening of
the US Dollar to the Brazilian Real and the impact this had on our Euro
denominated Notes and US Dollar denominated notes with our Brazilian subsidiary.

Extraordinary Item

During the six months ended September 30, 2000, we purchased $5.0 million
of our 6 7/8% Senior Notes due 2008. As a result, we recorded an extraordinary
gain of $1.5 million, net of tax of $0.9 million, resulting from the difference
between the carrying value of the notes and the purchase price. The purchase was
funded by our credit facility and resulted in a decline in net borrowings.

Net Income

Net income for the six months ended September 30, 2001 totaled $2.7 million
compared to net income of $3.6 million for the same period in the prior year. In
the first half of fiscal 2002, excluding transition costs of $14.0 million and
net exchange losses on external and intercompany notes of $4.5 million, net of
the related tax effect, net income would have been $16.0 million or $0.66 per
share. In the first half of fiscal 2001, excluding inventory write-offs of $3.1
million, special charges of $10.9 million, goodwill amortization of $3.2
million, net of the related tax effect, and extraordinary gain of $1.5 million,
our net income would have been $13.4 million or $0.55 per share.

Liquidity and Capital Resources

Our operating activities generated $2.8 million in cash in the six months
ended September 30, 2001 compared to $11.4 million for the six months ended
September 30, 2000, a decrease of $8.6 million. The change from prior year is
mainly due to decreased trade accounts payable associated with lower raw
material purchases and deferred financing costs associated with debt
refinancings, partially offset by a decrease in accounts receivable.

Our inventories as a percentage of annualized net sales for the six months
ended September 30, 2001 and 2000 were 19.8% and 25.7%, respectively. This
decrease was a result of the strategic initiatives implemented during fiscal
2001 to reduce inventory levels. Accounts receivable as a percentage of
annualized net sales for the six months ended September 30, 2001 decreased to
20.4% compared to 22.9% for the same period a year ago as a result of improved
collections.

During the six months ended September 30, 2001, net cash expended on
investing activities, amounted to $8.3 million. Included in this amount were
$9.8 million of capital expenditures, of which $3.2 million related to
investments in molds, offset in part, by the disposal of a $1.4 million trade
investment. Net cash expended on investing activities in the six months ended
September 30, 2000 amounted to $16.3 million. Of this amount, $12.6 million
represented capital expenditures (of which $3.5 million related to investments
in molds), $2.5 million was for investment in acquisitions and $1.3 million
related to other trade investments. The $2.5 million spent on acquisitions
represents the purchase of the remaining 65% ownership interest in a wholesale
laboratory group located in Australia and New Zealand. We anticipate capital
expenditures of approximately $20-$25 million (excluding molds) in fiscal year
2002, of which approximately $5 million annually is viewed as discretionary.

During the six months ended September 30, 2001, our net cash provided by
financing activities amounted to $34.6 million primarily as a result of the net
impact of our issuance of 11% Notes, the proceeds of which were primarily used
to repay our credit facility. Net cash provided by financing activities in the
six months ended September 30, 2000 amounted to $10.3 million, primarily from
borrowings under our bank credit agreement. During the six months ended
September 30, 2000, we purchased $5.0 million of our 6 7/8% Senior Notes due
2008 and $8.2 million of treasury stock. The purchase was funded by our credit
facility and resulted in a decline in net borrowings.

On April 17, 2001, we completed the sale of (euro)205 million ($182.0
million at date of sale) of 11% Notes due March 15, 2008 through a private
placement to qualified institutional buyers pursuant to Rule 144A and to persons
outside of the United States in compliance with Regulation S. The notes are
senior unsecured obligations and will rank equally with all of our existing and
future unsecured debt. Interest on the notes is payable semi-annually on each
September 15 and March 15, commencing on September 15, 2001.

We may redeem these Notes in whole or in part, at any time, on or after
March 15, 2005, at a redemption price equal to 100% of their principal amount
plus a premium declining ratably to par plus accrued and unpaid interest and
liquidation damages, if any. Prior to March 15, 2004, we may redeem up to 35% of
the original aggregate principal amount of these Notes at a redemption price of
111% of their principal amount plus accrued and unpaid interest and liquidation
damages, if any. The indenture governing the notes contains certain covenants
that, among other things, will limit our ability to incur additional
indebtedness or liens, make investments, sell assets, pay dividends or make
other distributions.

In addition to our outstanding 6 7/8% Senior Notes and 11% Notes, our
foreign subsidiaries maintain local credit facilities to provide credit for
overdraft, working capital and some fixed asset investment purposes. As of
September 30, 2001, the total borrowing capacity available to our foreign
subsidiaries under such local facilities was approximately $14.8 million, of
which $0.4 million had been utilized.

On July 26, 2001, we entered into a three-year $45 million secured
revolving credit facility ("Credit Agreement") maturing on July 27, 2004.
Borrowings under the Credit Agreement may be made as either US Dollar Alternate
Base Rate ("ABR") loans or Eurodollar loans. ABR loans bear interest at a rate
per annum equal to the greater of (a) the Prime Rate in effect on such day, or
(b) the Federal Funds Effective Rate in effect on such day plus 0.5%, plus an
applicable percentage based on our adjusted leverage ratio. The Eurodollar loans
bear interest at a rate per annum equal to the LIBOR Rate plus an applicable
percentage based on our adjusted leverage ratio. The balance available at
September 30, 2001 was $37 million.

The Credit Agreement contains a number of covenants, including, among
others, covenants restricting us and our subsidiaries with respect to the
incurrence of indebtedness, the creation of liens, the making of certain
investments and loans, the payment of dividends, and our ability to enter into
certain transactions with affiliates. In addition, the Credit Agreement requires
us to maintain certain interest coverage, net worth and leverage ratios and
places certain restrictions on capital expenditures.

In connection with the Credit Agreement, we entered into a Security
Agreement that grants a security interest in and pledges the rights to certain
of our assets, including domestic accounts receivable, domestic inventory, and
65% of the pledged stock of certain significant foreign subsidiaries, for the
payment and performance of our obligations under the Credit Agreement.

The proceeds from the Credit Agreement will be used for working capital and
general corporate purposes.

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.

Impact of Recently Issued Accounting Standards

We adopted SFAS No. 133 Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 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 measures 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. Effective July 27, 2001,
we transacted two currency swaps to hedge our interest expense exposure
associated with the semi-annual coupon payments due September 15, 2001 and March
15, 2002 on our (euro)205 million 11% Notes. As of September 30, 2001, the
Company had the one currency swap due March 15, 2002 outstanding. The transition
adjustments upon adoption of SFAS No. 133 were not material. We do not hold
derivative financial instruments for speculative or trading purposes.

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141 Business Combinations, which establishes financial accounting and
reporting for business combinations and supersedes Accounting Principles Board
("APB") Opinion No. 16, Business Combinations, and FASB Statement No. 38,
Accounting for Preacquisition Contingencies of Purchased Enterprises. It
requires that all business combinations in the scope of this Statement are to be
accounted for using one method, the purchase method. The provisions of this
Statement apply to all business combinations initiated after June 30, 2001, and
also apply to all business combinations accounted for using the purchase method
for which the date of acquisition is July 1, 2001 or later. We have adopted SFAS
No. 141 with the first quarter of fiscal 2002, and the adoption of SFAS No. 141
had no material impact on our financial reporting and related disclosures.

In July 2001, the FASB issued SFAS No. 142 Goodwill and Other Intangible
Assets, which establishes financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition, and after they have been initially recognized in the financial
statements. The provisions of this Statement are effective starting with fiscal
years beginning after December 15, 2001. Early adoption is permitted for
entities with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements have not previously been issued. Accordingly,
we have elected to early adopt SFAS No.142 beginning with the first quarter of
fiscal 2002 and have disclosed the impact of adopting SFAS No.142 on our
consolidated financial statements in Note 3 to the consolidated financial
statements.

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 translation adjustments for subsidiaries where the local
currency is the functional currency. Translation adjustments for functional
local currencies have been recorded to shareholders' equity. For the six months
ended September 30, 2001 and 2000, such translation adjustments were
approximately $(5.7) million and $(11.1) million, respectively.

Because a portion of our debt is non-U.S. dollar denominated, we may hedge
against certain currency fluctuations by entering into currency swaps. Effective
July 27, 2001, we transacted two foreign exchange contracts to hedge our
interest expense exposure associated with the semi-annual coupon payments due
September 15, 2001 and March 15, 2002 on our (euro)205 million 11% Notes.

Seasonality

Our business is somewhat seasonal, with fiscal third quarter results
generally weaker than the other three quarters as a result of lower sales during
the holiday season, and fiscal fourth quarter results generally the strongest.

Inflation

Inflation continues to affect the 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.

European Union Conversion to the "Euro"

We have instituted a "Euro" conversion team and begun preparation for the
conversion by twelve member states of the European Monetary Union to a common
currency, the "Euro". Conversion to the Euro by these member states of the
European Monetary Union will take place on a "no compulsion, no prohibition"
basis between January 1, 2000 and January 1, 2002. By January 1, 2002, all
companies operating in the twelve member states will be required to be fully
operational using the new currency. The Euro conversion team has primarily
addressed the accounting and information systems changes that are necessary to
facilitate trading in the Euro, the possible marketplace implications of a
common currency and the currency exchange rate risks, with the initial emphasis
placed on the system modifications. We believe that the financial impact of
conversion to a Euro based currency will not be material to our consolidated
financial position, results of operations or cash flows.

Information Relating to Forward-Looking Statements

This quarterly report, including "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Notes to Consolidated
Financial Statements", contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, including statements
regarding among other items, (i) the impact of events resulting from the
September 11, 2001 terrorist attacks, (ii) the impact of inflation, (iii) future
income tax rates and capital expenditures and, (iv) the costs and other
consequences related to conversion to the Euro. These forward-looking statements
reflect our current views with respect to future events and financial
performance. The words "believe", "expect", "anticipate" and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Actual results could differ materially from the
forward-looking statements as a result of "Risks Relating to Sola and the
Industry" included in our Form 10-K for the fiscal year ended March 31, 2001,
and the factors described in "Business-Environmental Matters", also included in
our Form 10-K for the fiscal year ended March 31, 2001.

Item 3. 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 the first half of
fiscal 2002, 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 September 30,
2001:

Expected Maturity Date (as of September 30, 2001)
------------------------------------------------

Fiscal Fiscal Fiscal Fiscal Fiscal
2002 2003 2004 2005 2006 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(dollars in thousands)

Long-term debt:
Fixed rate debt ......... $1,506 $2,095 $350 $353 $ 281 $281,593 $286,538 $284,485

Weighted average
interest rate ........... 5.56% 7.18% 4.36% 4.41% 3.64% 9.58% 9.51%

Long-term debt:
Variable rate debt ...... - $8,000 - - - - $8,000 $8,000

Weighted average
interest rate ........... - 7.06% - - - - 7.06%

Currency Rate Risk. We are exposed to currency exchange rate fluctuations
on our (euro)205 million 11% Notes, due 2008. At September 30, 2001, we had
outstanding a forward exchange contract to hedge our interest expense exposure
associated with the semi-annual coupon payment due March 15, 2002 on our
(euro)205 million 11% Notes. Our subsidiaries primarily operate in foreign
markets and predominantly have their local currencies as their functional
currencies. These subsidiaries do not have third party borrowings in currencies
other than their local currencies. Accordingly, there are no quantitative
disclosures related to borrowings by our subsidiaries.

The following table presents the future principal cash flows and weighted
average interest rates expected on the (euro)205 million 11% Notes, due 2008 as
well as the contract amount and weighted average settlement price of the
outstanding forward exchange contract. Fair values have been determined based on
quoted market prices as of September 30, 2001:

Expected Maturity Date (as of September 30, 2001)
------------------------------------------------

Fiscal Fiscal Fiscal Fiscal Fiscal
2002 2003 2004 2005 2006 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(dollars in thousands)

Long-term debt
Fixed rate debt ......... - - - - - $186,858 $186,858 $198,069

Weighted average
interest rate ........... - - - - - 11.00% 11.00%

Forward exchange
contract:
Contract amount ......... $9,854 - - - - - $ 9,854 $ 9,817

Weighted average
settlement price ........ .8740 - - - - - .8740

Qualitative Disclosures

Interest Rate Risk. Our primary interest rate risk exposures relate to:

. Our ability to pay or refinance long-term borrowings at maturity at
market rates;

. The impact of interest rate movements on our ability to meet
interest expense requirements and financial covenants; and

. The impact of interest rate movements on our ability to obtain
adequate financing to fund future operations or business
acquisitions.

We manage interest rate risk on our outstanding long-term borrowings
through the use of fixed rate debt. While we cannot predict our ability to
refinance existing debt, or the impact interest rate movements might have on
existing debt, we evaluate our financial position on an ongoing basis.

Currency Rate Risk. Our primary currency rate risk exposures relate to:

. Our global operations, whereby approximately 50% 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, primarily downwards in recent years such as European based
currencies and the Brazilian Real.

We manage our currency rate risks through a variety of measures. In certain
limited instances, subsidiaries, after obtaining 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, and are immaterial to the overall operations of the group. 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 (see "Currency Exchange Rates").

PART II OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable

Item 2. Changes in Securities and Use of Proceeds

Not applicable

Item 3. Defaults upon Senior Securities

Not applicable

Item 4. Submission of Matters to a Vote of Security Holders

The following matter was submitted to a vote of the security holders
at our Annual Meeting of Stockholders on August 17, 2001:

Election of Directors. Votes as follows:

--------------------------------------------------------------------------------------------

Total Vote for Each Total Vote Withheld from
Director Each Director
--------------------------------------------------------------------------------------------

Jeremy C. Bishop 19,053,873 2,527,828
--------------------------------------------------------------------------------------------
Maurice J. Cunniffe 20,773,802 807,899
--------------------------------------------------------------------------------------------
Douglas D. Danforth 21,348,595 233,106
--------------------------------------------------------------------------------------------
A. William Hamill 21,342,003 239,697
--------------------------------------------------------------------------------------------
Hamish Maxwell 21,348,595 233,106
--------------------------------------------------------------------------------------------
Neil E. Leach 21,354,503 227,197
--------------------------------------------------------------------------------------------
Jackson L. Schultz 21,338,003 243,698
--------------------------------------------------------------------------------------------

There were no abstention or broker non-votes.

Item 5. Other Information

Not applicable

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

None.

(b) Reports on Form 8-K

No Reports on Form 8-K were filed during the fiscal quarter ended
September 30, 2001.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Sola International Inc.
(Registrant)

Dated: November 6, 2001 By: /s/ Steven M. Neil
---------------- --------------------------
Steven M. Neil
Executive Vice President, Chief
Financial Officer, Secretary and
Treasurer (Duly Authorized Officer
and Principal Financial Officer)