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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q

Commission File Number: 1-13848

Oakley, Inc.
(Exact name of registrant as specified in its charter)

        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 ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý    No o

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Oakley, Inc.
Index to Form 10-Q

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

OAKLEY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share and per share data)

See accompanying Notes to Consolidated Financial Statements

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OAKLEY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except share and per share data)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

See accompanying Notes to Consolidated Financial Statements

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OAKLEY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

See accompanying Notes to Consolidated Financial Statements

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Oakley, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 1—Basis of Presentation

        The accompanying unaudited consolidated financial statements of Oakley, Inc. and its subsidiaries (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles ("GAAP") for complete financial statements.

        In the opinion of management, the unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement of the consolidated balance sheet as of March 31, 2004, the consolidated statements of income, comprehensive income and cash flows for the three month periods ended March 31, 2004 and 2003. The results of operations for the three month period ended March 31, 2004 are not necessarily indicative of the results of operations for the entire year ending December 31, 2004.

Note 2—Stock Based Compensation

        SFAS No. 123 requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method in accounting for stock-based awards as of the beginning of fiscal 1995.

        Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option-pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option-pricing model with the following weighted average assumptions:

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        If the computed fair value of stock option awards during the three-months ended March 31, 2004 and 2003 had been amortized to expense over the vesting periods of the awards, net income would have been as follows:

Note 3—Inventories

        Inventories consist of the following:

Note 4—Goodwill and Intangible Assets

        On January 1, 2002, the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets," which eliminated the amortization of purchased goodwill and other intangibles with indefinite useful lives. Under SFAS No. 142, goodwill and non-amortizing intangible assets are tested for impairment at least annually and more frequently if an event occurs which indicates that goodwill or intangible assets may be impaired. As of March 31, 2004, no events have occurred which indicate that goodwill or non-amortizing intangible assets may be impaired.

        Included in other assets in the accompanying consolidated financial statements are the following amortizing intangible assets.

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        Intangible assets other than goodwill are amortized by the Company using estimated useful lives of 5 to 15 years and no residual values. Intangible amortization expense for the three months ended March 31, 2004 was approximately $321,000, and is estimated to be, based on intangible assets at March 31, 2004, approximately $1,284,000 for fiscal 2004. Annual estimated amortization expense, based on the Company's intangible assets at March 31, 2004, is as follows:

        Changes in goodwill are as follows:

Note 5—Accrued Expenses and Other Current Liabilities

        Accrued liabilities consist of the following:

Note 6—Accrued Warranty

        The Company provides a one-year limited warranty against manufacturer's defects in its eyewear. All authentic Oakley watches are warranted for one year against manufacturer's defects when purchased from an authorized Oakley watch dealer. Footwear is warranted for 90 days against manufacturer's defects, and apparel is warranted for 30 days against manufacturer's defects. The Company's standard warranties require the Company to repair or replace defective product returned to the Company during such warranty period. The Company maintains a reserve for its product warranty liability based on estimates calculated using historical warranty experience. While warranty costs have historically been within the Company's expectations, there can be no assurance that the Company will continue to experience the same warranty return rates or repair costs as in the prior years. A significant increase in product return rates, or a significant increase in the costs to repair product, could have a material adverse impact on the Company's operating results.

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        Warranty liability activity for the three months ended March 31 was as follows:

Note 7—Financing Arrangements

        Line of Credit—The Company's unsecured line of credit with a bank syndicate allows for borrowings up to $75 million and matures in August 2004. The line of credit bears interest at either LIBOR or IBOR plus 0.75% (1.82% at March 31, 2004) or the bank's prime lending rate minus 0.25% (3.75% at March 31, 2004). At March 31, 2004, the Company did not have any balance outstanding under such facility. The credit agreement contains various restrictive covenants including the maintenance of certain financial ratios. At March 31, 2004, the Company was in compliance with all restrictive covenants and financial ratios. The Company believes that it will be able to extend or replace its existing credit facility prior to its maturity without significant changes in terms. Certain of the Company's foreign subsidiaries have negotiated local lines of credit to provide working capital financing. These foreign lines of credit bear interest from 0.73% to 6.40%. Some of the Company's foreign subsidiaries have bank overdraft accounts that renew annually and bear interest from 2.60% to 11.5%. The aggregate borrowing limit on the foreign lines of credit and overdraft accounts is $23.9 million, of which $13.7 million was outstanding at March 31, 2004.

        Long-Term Debt—The Company has a real estate term loan with an outstanding balance of $12.9 million at March 31, 2004, which matures in September 2007. The term loan, which is collateralized by the Company's corporate headquarters, requires quarterly principal payments of approximately $380,000 ($1,519,000 annually), plus interest based upon LIBOR plus 1.00% (2.12% at March 31, 2004). In January 1999, the Company entered into an interest rate swap agreement that hedges the Company's risk of fluctuations in the variable rate of its long-term debt by fixing the interest rate over the term of the note at 6.31%. As of March 31, 2004, the fair value of the Company's interest rate swap agreement was a loss of approximately $1.1 million.

        As of March 31, 2004, the Company also has a note payable in the amount of $1.4 million, net of discounts, in connection with its acquisition of Iacon. Payments under the note are due in annual installments of $500,000 ending in 2006, with such payments contingent upon certain conditions.

        The Company's minimum annual principal payments on its long-term debt are as follows:

Note 8—Commitments and Contingencies

        Indemnities, Commitments and Guarantees—During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include indemnities to the Company's

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customers in connection with the sales of its products, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Washington. The Company has also issued a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain workers' compensation insurance policies. The durations of these indemnities, commitments and guarantees vary. Some of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets.

        Litigation—The Company is a party to various claims, complaints and litigation incidental to the Company's business. In the opinion of management, the ultimate resolution of such matters, individually and in the aggregate, will not have a material adverse effect on the accompanying consolidated financial statements.

Note 9—Derivative Financial Instruments

        The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions of its international subsidiaries as well as fluctuations in its variable rate debt. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company and its subsidiaries use foreign exchange contracts in the form of forward contracts. In addition, as part of its overall strategy to manage the level of exposure to the risk of fluctuations in interest rates, in January 1999 the Company entered into an interest rate swap agreement that resulted in a fixed interest rate over the term of the Company's ten-year real estate term loan. As of March 31, 2004, the fair value of the Company's interest rate swap agreement was a loss of approximately $1,061,000. At March 31, 2004, all of the Company's derivatives were designated and qualified as cash flow hedges. For all qualifying and highly effective cash flow hedges, the changes in the fair value of the derivative are recorded in other comprehensive income. Such gains or losses are recognized in earnings in the period the hedged item is also recognized in earnings. The Company is currently hedging forecasted foreign currency transactions that could result in the recognition of $9.5 million of losses over the next twelve months. The Company hedges forecasted transactions that are determined probable to occur before the end of the subsequent fiscal year.

        On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company does not enter into derivative instruments that do not qualify as cash flow hedges as described in SFAS No. 133. The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. In this documentation, the Company specifically identifies the asset, liability, firm commitment or forecasted transaction that has been designated as a hedged item and states how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Company would discontinue hedge accounting prospectively (i) if it is determined that the derivative is no longer effective in offsetting change in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) when the derivative is designated as a hedge instrument, because it is probable that the forecasted transaction will not occur, (iv) because a hedged firm commitment no longer meets the definition of a firm commitment, or (v) if management determines that designation of the derivative as a hedge instrument is no longer appropriate. During the three months ended March 31, 2004, the Company recognized losses of $2.1 million, net of taxes, resulting from the expiration, sale, termination or exercise of foreign currency exchange contracts.

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        The following is a summary of the foreign exchange contracts by currency at March 31, 2004:

        The Company is exposed to credit losses in the event of nonperformance by counterparties to its forward exchange contracts but has no off-balance sheet credit risk of accounting loss. The Company anticipates however, that the counterparties will be able to fully satisfy their obligations under the contracts. The Company does not obtain collateral or other security to support the forward exchange contracts subject to credit risk but monitors the credit standing of the counterparties. As of March 31, 2004, outstanding contracts were recorded at fair value and the resulting gains and losses were recorded in the consolidated financial statements pursuant to the policy set forth above.

Note 10—Earnings Per Share

        Basic earnings per share is computed using the weighted average number of common shares outstanding during the reporting period. Earnings per share assuming dilution is computed using the weighted average number of common shares outstanding and the dilutive effect of potential common shares outstanding. For the three months ended March 31, 2004 and 2003, the diluted weighted average common shares outstanding included 915,000 and 54,000, respectively, of dilutive stock options.

Note 11—Comprehensive Income

        Comprehensive income represents the results of operations adjusted to reflect all items recognized under accounting standards as components of comprehensive earnings.

        The components of comprehensive income for the Company include net income, unrealized gains or losses on foreign currency cash flow hedges, unrealized gains or losses on an interest rate swap, and foreign currency translation adjustments. The components of accumulated other comprehensive income, net of tax, are as follows:

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Note 12—Segment Information

        The Company evaluates its operations in two reportable segments: wholesale and U.S. retail. The wholesale segment consists of the design, manufacture and distribution of the Company's products to wholesale customers in the U.S. and internationally, together with all direct consumer sales other than U.S. retail. The U.S. retail segment reflects the operations of the Company's specialty retail stores located throughout the United States, including the operations of its Iacon subsidiary. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance and allocates resources of segments based on net sales and operating income, which represents income before interest and income taxes. Segment net sales and operating income for the Company's wholesale operations include Oakley product sales to its subsidiaries at transfer price and other intercompany corporate charges. Segment net sales and operating income for the Company's U.S. retail operations include Oakley product sales to its Iacon subsidiary at transfer price, and sales to Oakley retail stores at cost. The U.S. retail segment operating income excludes any allocations for corporate operating expenses as these expenses are included in the wholesale segment.

        Financial information for the Company's reportable segments is as follows:

        The following table sets forth sales by segment:

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Note 13—New Accounting Pronouncements

        In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS No. 146), which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF Issue 94-3 is recognized on the date of an entity's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The adoption of SFAS No. 146 on January 1, 2003 did not have a material impact on the Company's financial position or results of operations.

        In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN No. 46) and in December 2003, issued Interpretation No. 46 (revised December 2003) "Consolidation of Variable Interest Entities—An Interpretation of APB No. 51." In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the 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 No. 46(R) clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" (APB No. 51), to certain entities in which equity investors 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 subordinated financial support from other parties. The consolidation requirements of FIN No. 46 applies immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. FIN No. 46(R) applies immediately to variable interest entities created after December 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies no later than the first reporting period ending after December 15, 2004, to variable interest entities in which an enterprise holds a variable interest (other than special purpose) that it acquired before January 1, 2004. FIN No. 46(R) applies to public enterprises as of the beginning of the applicable interim or annual period. The Company believes that the adoption of FIN No. 46 and FIN No. 46(R) will not have a material impact on its financial position or results of operations because the Company is not the beneficiary of any variable interest entities.

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

        The following discussion includes the operations of Oakley, Inc. and its subsidiaries for each of the periods discussed.

Overview

        Oakley is an innovation-driven designer, manufacturer and distributor of consumer products that include high-performance eyewear, footwear, watches, apparel and accessories. The Company's products are sold in the United States through a carefully selected base of accounts which fluctuates between 8,400 and 9,200 with approximately 14,500 to 15,600 locations depending on seasonality of summer and winter products. The store base is comprised of optical stores, sunglass retailers and specialty sports stores, including bike, surf, snow and golf shops, and motorcycle, athletic footwear and sporting goods stores and limited department store distribution. The Company also operates 28 Oakley retail stores in the United States that offer the full range of Oakley products. Additionally, the Company owns Iacon, Inc., a sunglass retailing chain headquartered in Scottsdale, Arizona, with 78 sunglass specialty retail stores at March 31, 2004.

        Internationally, the Company sells its products in over 100 countries outside the United States, with direct offices in France, Germany, United Kingdom, Italy, Japan, Mexico, South Africa, Canada, Australia, New Zealand and Brazil. In those parts of the world not serviced by the Company or its subsidiaries, Oakley products are sold through distributors who possess local expertise. These distributors sell the Company's products either exclusively or with complementary products and agree to respect the marketing philosophy and practices of the Company. Sales to the Company's distributors are denominated in U.S. dollars. The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions of its international subsidiaries. The Company and its subsidiaries use foreign exchange contracts in the form of forward contracts to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates.

Critical Accounting Policies and Certain Risks and Uncertainties

        The Company's historical success is attributable, in part, to its introduction of products which are perceived to represent an improvement in performance over products available in the market. The Company's future success will depend, in part, upon its continued ability to develop and introduce such innovative products, although there can be no assurance of the Company's ability to do so. The consumer products industry, including the eyewear, apparel, footwear and watch categories, is fragmented and highly competitive. In order to retain its market share, the Company must continue to be competitive in the areas of quality, technology, method of distribution, style, brand image, intellectual property protection and customer service. These industries are subject to changing consumer preferences and shifts in consumer preferences may adversely affect companies that misjudge such preferences.

        The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. As such, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenue and expense during the reporting periods. Actual results could significantly differ from such estimates. The Company believes that the following discussion addresses the Company's accounting policies, which are the most critical to aid in fully understanding and evaluating the Company's reported financial results.

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Revenue Recognition

        The Company recognizes wholesale revenue when merchandise is shipped to a customer and the risks and rewards of ownership have passed based on the terms of sale. Revenue from the Company's retail store operations is recognized upon purchase by customers at the point of sale. Generally, the Company extends credit to its wholesale customers and does not require collateral. The Company performs ongoing credit evaluations of those customers and historic credit losses have been within management's expectations. Sales agreements with dealers and distributors normally provide general payment terms of 30 to 120 days, depending on the product category. The Company's standard sales agreements with its customers do not provide for any rights of return by the customer other than returns for product warranty related issues. In addition to these product warranty related returns, the Company occasionally accepts other returns at its discretion. The Company records a provision for sales returns and claims based upon historical experience. Actual returns and claims in any future period may differ from the Company's estimates.

Accounts Receivable

        The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current creditworthiness, as determined by the Company's review of their current credit information. The Company regularly monitors its customer collections and payments and maintains a provision for estimated credit losses based upon the Company's historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within the expectations and the provisions established by the Company, there can be no assurances that the Company will continue to experience the same credit loss rates that have been experienced in the past.

Inventories

        Inventories are stated at the lower of cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. The Company regularly reviews its inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on the Company's estimated forecast of product demand and production requirements. Demand for the Company's products can fluctuate significantly. Factors which could affect demand for the Company's products include unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by retailers; continued weakening of economic conditions, which could reduce demand for products sold by the Company and which could adversely affect profitability; and future terrorist acts or war, or the threat or escalation thereof, which could adversely affect consumer confidence and spending, interrupt production and distribution of product and raw materials and, as a result, adversely affect the Company's operations and financial performance. Additionally, management's estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory.

Long-Lived Assets

        In the normal course of business, the Company acquires tangible and intangible assets. The Company periodically evaluates the recoverability of the carrying amount of its long-lived assets (including property, plant and equipment, and other intangible assets) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment is assessed when the undiscounted expected future cash flows derived from an asset are less than its carrying amount. Impairments are recognized in operating earnings. The Company uses its best judgment based on the most current facts and circumstances surrounding its business when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows

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used to assess impairments and the fair value of a potentially impaired asset. Changes in assumptions used could have a significant impact on the Company's assessment of recoverability. Numerous factors, including changes in the Company's business, industry segment or the global economy could significantly impact management's decision to retain, dispose of or idle certain of its long-lived assets.

Goodwill

        The Company evaluates the recoverability of goodwill at least annually based on a two-step impairment test. The first step compares the fair value of each reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds fair value, then the second step of the impairment test is performed to measure the amount of any impairment loss. Fair value is determined based on estimated future cash flows, discounted at a rate that approximates the Company's cost of capital. Such estimates are subject to change and the Company may be required to recognize impairment losses in the future.

Warranties

        The Company provides a one-year limited warranty against manufacturer's defects in its eyewear. All authentic Oakley watches are warranted for one year against manufacturer's defects when purchased from an authorized Oakley watch dealer. Footwear is warranted for 90 days against manufacturer's defects, and apparel is warranted for 30 days against manufacturer's defects. The Company's standard warranties require the Company to repair or replace defective product returned to the Company during such warranty period. The Company maintains a reserve for its product warranty liability based on estimates calculated using historical warranty experience. While warranty costs have historically been within the Company's expectations, there can be no assurance that the Company will continue to experience the same warranty return rates or repair costs as in the prior years. A significant increase in product return rates, or a significant increase in the costs to repair product, could have a material adverse impact on the Company's operating results.

Income Taxes

        Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. The Company considers future taxable income and ongoing, prudent and feasible tax planning strategies in assessing the value of its deferred tax assets. If the Company determines that it is more likely than not that these assets will not be realized, the Company will reduce the value of these assets to their expected realizable value, thereby decreasing net income. Evaluating the value of these assets is necessarily based on the Company's judgment. If the Company subsequently determined that the deferred tax assets, which had been written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.

Insurance Coverage

        The Company is partially self-insured for its workers' compensation insurance coverage. Under this insurance program, the Company is liable for a deductible of $250,000 for each individual claim and an aggregate annual liability of $1,368,000. The Company records a liability for the estimated cost of claims both reported and incurred but not reported based upon its historical experience. The estimated costs include the estimated future cost of all open claims. The Company will continue to adjust the estimates as the actual experience dictates. A significant change in the number or dollar amount of claims could cause the Company to revise its estimate of potential losses and affect its reported results.

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Foreign Currency Translation

        The Company has direct operations in Continental Europe, United Kingdom, Japan, Canada, Mexico, South Africa, Australia, New Zealand and Brazil which collect at future dates in the customers' local currencies and purchase finished goods in U.S. dollars. Accordingly, the Company is exposed to transaction gains and losses that could result from changes in foreign currency. Assets and liabilities of the Company denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using the average exchange rate for the period. Gains and losses from translation of foreign subsidiary financial statements are included in accumulated other comprehensive income (loss). Gains and losses on short-term intercompany foreign currency transactions are recognized as incurred. As part of the Company's overall strategy to manage its level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company and its subsidiaries have entered into various foreign exchange contracts in the form of forward contracts.

Vulnerability Due to Supplier Concentrations

        The Company relies on a single source for the supply of several product components, including the uncoated lens blanks from which substantially all of its sunglass lenses are cut. In the event of the loss of its source for lens blanks, the Company has identified an alternate source which may be available. The effect of the loss of any of these sources (including any possible disruption in business) will depend primarily upon the length of time necessary to find a suitable alternative source and could have a material adverse effect on the Company's business. There can be no assurance that, if necessary, an additional source of supply for lens blanks or other critical materials could be located or developed in a timely manner.

Vulnerability Due to Customer Concentrations

        Net sales to the retail group of Luxottica S.p.A ("Luxottica"), which include Sunglass Hut locations worldwide, were approximately 5.7%, and 8.2% of the Company's net sales for the three months ended March 31, 2004 and 2003, respectively. Luxottica is also one of the Company's largest competitors in the sunglass and optical frame markets. Luxottica acquired Sunglass Hut in April 2001 and implemented changes which adversely affected the Company's net sales to Sunglass Hut in 2001. In December 2001, the Company and Luxottica entered into a new three-year commercial agreement for the distribution of Oakley products through Sunglass Hut retail stores which marked the resumption of the business relationship between the two companies after a short disruption that began in August 2001. The arrangements between the companies do not obligate Luxottica to order product from the Company, and there can be no assurances as to the future of the relationship between the Company and Luxottica. In September 2003, Luxottica completed the acquisition of all the shares of Australian eyewear retailer OPSM Group Ltd ("OPSM"). OPSM operates in the South Pacific and Southeast Asia regions with approximately 600 retail locations, a portion of which currently offer some of the Company's products. For 2003, the Company's net sales to OPSM prior to the acquisition were approximately AUD $1.1 million (or approximately $0.7 million in U.S. dollars based on the average exchange rate for 2003). These sales exclude a limited amount of sales generated through the Company's international distributors. In November 2003, Luxottica completed the acquisition of New Zealand eyewear retailer Sunglass Store New Zealand ("SSNZ"), the Company's largest customer in New Zealand. SSNZ operates in New Zealand with 16 retail locations which offer some of the Company's products. In January 2004, Luxottica entered into a definitive merger agreement with Cole National Corporation ("Cole"), one of the largest optical retailers and chain providers of managed vision care services worldwide. This merger is expected to close in the second half of 2004 pending the approval of Cole's stockholders and its compliance with applicable antitrust requirements. The Company currently sells to a small portion of Cole's retail locations and sales to this customer have been immaterial to the Company's operations. There can be no assurance that the recent acquisitions

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or future acquisitions by Luxottica will not have a material adverse impact on the Company's financial position or results of operations.

Commitments and Contingencies

        The Company has entered into operating leases, primarily for facilities and retail stores, and has commitments under endorsement contracts with selected athletes and others who endorse the Company's products.

Results of Operations

Three Months Ended March 31, 2004 and 2003

Net sales

        Net sales increased to $127.1 million for the three months ended March 31, 2004 from $111.2 million for the three months ended March 31, 2003, an increase of $15.9 million, or 14.3%. Gross sales were $132.8 million in the first three months of 2004 compared to $117.9 million for the comparable 2003 period.

        Gross sunglass sales increased slightly to $64.0 million for the three months ended March 31, 2004 from $63.9 million for the three months ended March 31, 2003. Sunglass unit shipments declined 3.6%, offset by a 3.9% increase in average selling price primarily from the effect of a weak U.S. dollar on international sales, a greater contribution from the Company's retail store operations and a higher contribution from polarized styles that carry higher average prices. Gross sunglass sales reflect increased sales of the Half Jacket, strong sales of polarized versions of the Company's sunglasses, increased sales of the Monster Dog and Half Wire and improving trends for some of the Company's more significant older styles, including several in the Wire family. Reception of the Company's 2004 new sunglass styles has been favorable, and current demand for these new 2004 styles, particularly the Dartboard and Why-8, has exceeded the Company's forecasts. While the Company may experience some short term backorders in the near future on certain new styles, plans have already been initiated to increase capacities in response to this demand.

        Gross sales from the Company's newer product categories, comprised of footwear, apparel, watches and prescription eyewear, increased 33.6%, or $13.2 million, to $52.2 million for the first quarter of 2004 from $39.0 million for the comparable 2003 period. As a percentage of gross sales, these new product categories accounted for 39.3% of total gross sales for the first quarter of 2004 compared to 33.1% for the first quarter of 2003. The strongest results were from the apparel and prescription eyewear categories where strong spring line introductions drove sales increases. The Company experienced mixed results during the first quarter of 2004 with its spring footwear business as the poor sell-through of the 2003 fall line of footwear products affected portions of the Company's spring footwear sales.

        The Company's U.S. net sales, excluding retail store operations, were $46.8 million for the three months ended March 31, 2004, equal to the three months ended March 31, 2003. Net sales, excluding retail operations, reflect a 6.3% increase in net sales to the Company's broad specialty store account base and other domestic sales which the Company believes is due to an improved retail environment which boosted sales across most of the Company's product categories. This increase was offset by a 32.2% decrease in sales to the Company's largest U.S. customer, Sunglass Hut and its affiliates. Sales to Sunglass Hut decreased $2.4 million to $5.1 million for the three months ended March 31, 2004 from $7.5 million for the three months ended March 31, 2003 which reflects Sunglass Hut's efforts to attain a more efficient Oakley inventory level at their distribution center.

        Net sales from the Company's retail store operations increased 55.2% to $13.8 million for the three months ended March 31, 2004, compared to $8.9 million for the three months ended March 31,

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2003. Net sales from the Company's retail stores reflect double-digit increases in comparable store sales (stores opened at least twelve months) for both Oakley and Iacon retail stores. During the first quarter of 2004, the Company opened 1 new Oakley store and 2 Iacon stores bringing the total to 28 Oakley stores and 78 Iacon stores at March 31, 2004 compared to 15 Oakley stores and 66 Iacon stores at March 31, 2003.

        During the three months ended March 31, 2004, the Company's international net sales increased 19.8%, or $11.0 million, to $66.5 million from $55.5 million for the comparable 2003 period. The weaker U.S. dollar accounted for 13.4 percentage points, or $7.5 million, of this increase. The Company's operations in Latin America, Europe, Canada, Asia and Japan each achieved double-digit growth driven by currency benefits and strong new category momentum. The Company's sales in Australia declined 8.5% in the first quarter of 2004, due in part to a reduction in orders resulting from Luxottica's integration of OPSM, following the acquisition completed in September 2003.

Gross profit

        Gross profit increased to $68.8 million, or 54.1% of net sales, for the three months ended March 31, 2004 from $59.4 million, or 53.4% of net sales, for the three months ended March 31, 2003, an increase of $9.4 million, or 15.8%. The increase in gross profit as a percentage of net sales was due to the positive effects of improved footwear and apparel product margins, lower sales discounts and the positive effect of a weaker U.S. dollar. These positive factors were partially offset by the negative effects of a lower mix of sunglass sales and lower average sunglass margins compared with last year's first quarter as a result of production inefficiencies and other start-up costs associated with new sunglass styles.

Operating expenses

        Operating expenses for the three months ended March 31, 2004 increased to $62.1 million from $54.1 million for the three months ended March 31, 2003, an increase of $8.0 million, or 14.7%. As a percentage of net sales, operating expenses increased slightly to 48.8% of net sales for the three months ended March 31, 2004 compared to 48.7% of net sales for the comparable period in 2003. The increase is primarily due to higher foreign operating expenses resulting from a weaker U.S. dollar and higher selling expenses related to the Company's retail store operations. The weakening of the U.S. dollar, compared to most other currencies in which the Company transacts business, contributed approximately $3.4 million, or 42.5%, of the increase. Operating expenses included $5.3 million of expenses for the Company's retail store operations, an increase of $1.5 million from $3.8 million for the three months ended March 31, 2003. Research and development expenses remained stable at $3.7 million for the three months ended March 31, 2004 and 2003. As a percentage of net sales, research and development expenses were 2.9% of net sales for the three months ended March 31, 2004, compared to 3.3% of net sales for the three months ended March 31, 2003, primarily due to leverage on product design expenses. Selling expenses increased $5.4 million to $37.1 million, or 29.2% of net sales, for the three months ended March 31, 2004 from $31.7 million, or 28.5% of net sales, for the three months ended March 31, 2003. This increase was a result of increased retail selling expenses, including sales personnel expenses, sales commissions, sports marketing, travel and trade show expenses. Shipping and warehousing expenses as a percentage of net sales increased to 4.3% of net sales for the three months ended March 31, 2004 compared to 4.0% for the three months ended March 31, 2003 due to increased mix of footwear and apparel which carry greater freight costs as well as increased international footwear and apparel distribution costs, including the establishment of the Company's centralized European distribution facility since the first quarter of 2003. General and administrative expenses increased $1.5 million to $15.8 million, or 12.4% of net sales, for the three months ended March 31, 2004, from $14.3 million, or 12.8% of net sales, for the three months ended March 31, 2003. This increase in general and administrative expenses was principally a result of greater

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personnel-related costs, professional fees associated with the Company's Sarbanes-Oxley compliance, greater provisions for tax items such as property and sales taxes and international VAT taxes and increased insurance costs.

Operating income

        The Company's operating income increased to $6.8 million, or 5.3% of net sales, for the three months ended March 31, 2004 from $5.3 million, or 4.8% of net sales for the comparable period in 2003, an increase of $1.5 million or 27.3%.

Interest expense, net

        The Company's net interest expense remained relatively stable at $0.4 million for the three months ended March 31, 2004 and 2003.

Income taxes

        The Company recorded a provision for income taxes of $2.2 million for the three months ended March 31, 2004, compared to $1.7 million for the three months ended March 31, 2003. The Company's effective tax rate for the three months ended March 31, 2004 was 34%, compared to 35% for the three months ended March 31, 2003.

Net income

        The Company's net income increased to $4.2 million for the three months ended March 31, 2004 from $3.2 million for the three months ended March 31, 2003, an increase of $1.0 million or 31.6% due to higher net sales, improved gross margins, a lower income tax rate and the Company's management of its expenses.

Liquidity and Capital Resources

        The Company historically has financed its operations almost entirely with cash flow generated from operations and borrowings from its credit facilities. Cash used in operating activities totaled $10.9 million for the three months ended March 31, 2004 compared to cash provided by operating activities of $2.4 million for the comparable period in 2003. At March 31, 2004, working capital was $164.5 million compared to $128.1 million at March 31, 2003, a 28.4% increase. Working capital may vary from time to time as a result of seasonality, new product category introductions and changes in accounts receivable and inventory levels. Accounts receivable balances, less allowance for doubtful accounts, were $88.0 million at March 31, 2004 compared to $78.0 million at December 31, 2003 and $78.5 million at March 31, 2003, with accounts receivable days outstanding at March 31, 2004 of 63 compared to 59 at December 31, 2003 and 64 at March 31, 2003. Inventories increased to $104.3 million at March 31, 2004 compared to $98.7 million at December 31, 2003 and $91.8 million at March 31, 2003. This increase reflects the greater inventory levels in newer categories to support growth and expanded Company-owned retail store operations. Quarterly inventory turns remained stable at 2.3 at March 31, 2004 and 2003, and up from 2.2 at December 31, 2003. The increases in accounts receivables and inventories compared to the prior year were slightly less than the comparable sales increases.

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Capital Expenditures

        Capital expenditures, net of retirements, for the three months ended March 31, 2004 were $5.9 million, which included $1.3 million for retail store operations. As of March 31, 2004, the Company had commitments of approximately $0.3 million for future capital expenditures. For 2004, management expects total capital expenditures to be approximately $33 million.

Stock Repurchase

        In September 2002, the Company's Board of Directors authorized the repurchase of $20 million of the Company's common stock to occur from time to time as market conditions warrant. Under this program, the Company had purchased 829,600 shares of its common stock at an aggregate cost of approximately $8.6 million, or an average cost of $10.37 per share. No repurchases were made during the first quarter of 2004. As of March 31, 2004, approximately $11.4 million remains available for repurchases under the current authorization with total common shares outstanding of 68,421,000. The Company intends to remain active with its share repurchase program should the right market conditions exist.

Credit Facilities

        The Company's unsecured line of credit with a bank syndicate allows for borrowings up to $75 million and matures in August 2004. The line of credit bears interest at either LIBOR or IBOR plus 0.75% (1.82% at March 31, 2004) or the bank's prime lending rate minus 0.25% (3.75% at March 31, 2004). At March 31, 2004, the Company did not have any balance outstanding under such facility. The credit agreement contains various restrictive covenants including the maintenance of certain financial ratios. At March 31, 2004, the Company was in compliance with all restrictive covenants and financial ratios. The Company believes that it will be able to extend or replace its existing credit facility prior to its maturity without significant changes in terms. Certain of the Company's foreign subsidiaries have negotiated local lines of credit to provide working capital financing. These foreign lines of credit bear interest from 0.73% to 6.40%. Some of the Company's foreign subsidiaries have bank overdraft accounts that renew annually and bear interest from 2.60% to 11.5%. The aggregate borrowing limit on the foreign lines of credit and overdraft accounts is $23.9 million, of which $13.7 million was outstanding at March 31, 2004.

        The Company also has a real estate term loan with an outstanding balance of $12.9 million at March 31, 2004, which matures in September 2007. The term loan, which is collateralized by the Company's corporate headquarters, requires quarterly principal payments of approximately $380,000 ($1,519,000 annually), plus interest based upon LIBOR plus 1.00% (2.12% at March 31, 2004). In January 1999, the Company entered into an interest rate swap agreement that hedges the Company's risk of fluctuations in the variable rate of its long-term debt by fixing the interest rate over the term of the note at 6.31%. As of March 31, 2004, the fair value of the Company's interest rate swap agreement was a loss of approximately $1.1 million.

Note Payable

        The Company also has a note in the amount of $1.4 million, net of discounts, as of March 31, 2004, payable as a result of an acquisition. Payments under the note are due in annual installments of $500,000 ending in 2006, with such payments contingent upon certain conditions.

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Contractual Obligations and Commitments

        The following table gives additional guidance related to the Company's future obligations and commitments as of March 31, 2004:

        The Company believes that existing capital, anticipated cash flow from operations, and current and potential future credit facilities will be sufficient to meet operating needs and capital expenditures for the foreseeable future.

Seasonality

        Historically, the Company's aggregate sales have been highest in the period from March to September, the period during which sunglass use is typically highest in the northern hemisphere. As a result, operating margins are typically lower in the first and fourth quarters, as fixed operating costs are spread over lower sales volume. In anticipation of seasonal increases in demand, the Company typically builds sunglass inventories in the fourth quarter and first quarter when net sales have historically been lower. In addition, sales of other products, which generate gross profits at lower levels than sunglasses, are generally lowest in the second quarter. This seasonal trend contributes to the Company's gross profit in the second quarter, which historically has been the highest of the year. Although the Company's business generally follows this seasonal trend, new product category introductions, such as apparel, footwear and watches, and the Company's retail and international expansion have partially mitigated the impact of seasonality.

Backlog

        Historically, the Company has generally shipped most eyewear orders within one day of receipt, with longer lead times for its other pre-booked product categories. At March 31, 2004, the Company had a backlog of $76.0 million, including backorders (merchandise remaining unshipped beyond its scheduled shipping date) of $9.7 million, compared to a backlog of $71.1 million, including backorders of $9.2 million, at March 31, 2003. The 6.9% increase in backlog reflects a large decline in seasonal orders from Sunglass Hut which were received in March last year but not until April this year. Excluding orders from Sunglass Hut, the Company's backlog increased 14.9% at March 31, 2004 over March 31, 2003. Prebook orders from retailers for the Company's fall footwear and apparel lines were $35.4 million at March 31, 2004, an increase of 13.8% over $31.1 million at March 31, 2003.

Inflation

        The Company does not believe inflation has had a material impact on the Company's operations in the past, although there can be no assurance that this will be the case in the future.

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GAAP and Non-GAAP Financial Measures

        This document includes a discussion of gross sales and components thereof, each of which may be a non-GAAP financial measure. The Company believes that use of this financial measure allows management and investors to evaluate and compare the Company's operating results in a more meaningful and consistent manner. As required by Item 10 of Regulation S-K, a reconciliation of these measures is as follows:

Reconciliation of Gross Sales to Net Sales:

Forward-Looking Statements

        This document contains certain statements of a forward-looking nature. Such statements are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The accuracy of such statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including: risks related to the Company's ability to manage rapid growth; the ability to identify qualified manufacturing partners; the ability to coordinate product development and production processes with those partners; the ability of those manufacturing partners and the Company's internal production operations to increase production volumes on raw materials and finished goods in a timely fashion in response to increasing demand and enable the Company to achieve timely delivery of finished goods to its retail customers; the ability to provide adequate fixturing to existing and future retail customers to meet anticipated needs and schedules; the dependence on eyewear sales to Sunglass Hut which is owned by a major competitor and, accordingly, could materially alter or terminate its relationship with the Company; the Company's ability to expand distribution channels and its own retail operations in a timely manner; unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by retailers; continued weakness of economic conditions could continue to reduce or further reduce demand for products sold by the Company and could adversely affect profitability, especially of the Company's retail operations; further terrorist acts, or the threat thereof, could continue to adversely affect consumer confidence and spending, could interrupt production and distribution of product and raw materials and could, as a result, adversely affect the Company's operations and financial performance; the ability of the Company to integrate acquisitions without adversely affecting operations; the ability to continue to develop and produce innovative new products and introduce them in a timely manner; the acceptance in the marketplace of the Company's new products and changes in consumer preferences; reductions in sales of products, either as the result of economic or other conditions or reduced consumer acceptance of a product, could result in a buildup of inventory; the ability to source raw materials and finished products at favorable prices to the Company; the potential effect of periodic power crises on the Company's operations including temporary blackouts at the Company's facilities; foreign currency exchange rate fluctuations; earthquakes or other natural disasters concentrated in Southern California where substantially all of the companies operations are based; the Company's ability to identify and execute successfully cost control initiatives; and other risks outlined in the Company's SEC filings, including but not limited to the Annual Report on Form 10-K for the year ended December 31, 2003 and other

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filings made periodically by the Company. The Company undertakes no obligation to update this forward-looking information.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

        Foreign currency—The Company has direct operations in Continental Europe, United Kingdom, Japan, Canada, Mexico, South Africa, Australia, New Zealand and Brazil which collect at future dates in the customers' local currencies and purchase finished goods in U.S. dollars. Accordingly, the Company is exposed to transaction gains and losses that could result from changes in foreign currency exchange rates. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company and its subsidiaries use foreign exchange contracts in the form of forward contracts. All of the Company's derivatives were designated and qualified as cash flow hedges at March 31, 2004.

        On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company only enters into derivative instruments that qualify as cash flow hedges as described in SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." For all instruments qualifying as highly effective cash flow hedges, the changes in the fair value of the derivative are recorded in other comprehensive income. The following is a summary of the foreign exchange contracts by currency at March 31, 2004:

        The Company is exposed to credit losses in the event of nonperformance by counterparties to its forward exchange contracts but has no off-balance sheet credit risk of accounting loss. The Company anticipates, however, that the counterparties will be able to fully satisfy their obligations under the contracts. The Company does not obtain collateral or other security to support the forward exchange contracts subject to credit risk but monitors the credit standing of the counterparties. As of March 31, 2004, outstanding contracts were recorded at fair market value and the resulting gains and losses were recorded in the consolidated financial statements pursuant to the policy set forth above.

        Interest Rates—The Company's principal line of credit, with no outstanding balance at March 31, 2004, bears interest at either LIBOR or IBOR plus 0.75% or the bank's prime lending rate minus 0.25%. Based on the weighted average interest rate of 3.75% on the line of credit during the three months ended March 31, 2004, if interest rates on the line of credit were to increase by 10%, and to the extent that borrowings were outstanding, for every $1.0 million outstanding on the Company's line of credit, net income would be reduced by approximately $2,500 per year.

        The Company's long-term real estate loan, with a balance of $12.9 million outstanding at March 31, 2004, bears interest at LIBOR plus 1.0%. In January 1999, the Company entered into an interest rate swap agreement that eliminates the Company's risk of fluctuations in the variable rate of

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this long-term debt. At March 31, 2004, the fair value of the Company's interest rate swap agreement was a loss of approximately $1,061,000.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

        The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

Internal Control Over Financial Reporting

        There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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Part II—OTHER INFORMATION

Item 1. Legal Proceedings

        The Company is a party to various claims, complaints and other legal actions that have arisen in the normal course of business from time to time. The Company believes the outcome of these pending legal proceedings, in the aggregate, will not have a material adverse effect on the operations or financial position of the Company.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

        None

Item 3. Defaults Upon Senior Securities

        None

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

        None

Item 5. Other Information

        None

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

        The following exhibits are included herein:

(1)

Previously filed with the Registration Statement on Form S-1 of Oakley, Inc. (Registration No. 33-93080).

(2)

Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31, 1996.

(3)

Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31, 1998.

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(4)

Filed herewith.

(b)

Reports on Form 8-K

        The Company did not file any reports on Form 8-K during the three months ended March 31, 2004.

        The Company furnished a Current Report on Form 8-K, dated February 11, 2004, in connection with the press release issued by the Company on February 11, 2004 announcing its financial results for the fiscal quarter and fiscal year ended December 31, 2003.

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SIGNATURES

        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.

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QuickLinks

Item 1. Financial Statements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risks
Item 4. Controls and Procedures

Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security-Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K