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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER: 1-13848
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OAKLEY, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 95-3194947
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
ONE ICON 92610
FOOTHILL RANCH, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (714) 951-0991
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
Common stock, par value $.01 per share REGISTERED
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: NONE
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the 90 days. Yes / / No /X/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on March 13, 1998: $883,807,898
Number of shares of common stock, $.01 par value, outstanding as of the
close of business on March 13, 1998: 71,418,820 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's 1998 Annual
Shareholders Meeting are incorporated by reference into Part III herein.
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OAKLEY, INC.
TABLE OF CONTENTS
PART I
Item 1 - Business
Item 2 - Properties
Item 3 - Legal Proceedings
Item 4 - Submission of Matters to a Vote of Security Holders
PART II
Item 5 - Market for Registrant's Common Equity and Related Shareholder
Matters
Item 6 - Selected Financial Data
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Item 8 - Financial Statements and Supplementary Data
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10 - Directors and Executive Officers of the Registrant
Item 11 - Executive Compensation
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Item 13 - Certain Relationships and Related Transactions
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
2
PART I
ITEM 1. BUSINESS
GENERAL
Oakley, Inc. (the "Company" or "Oakley") is a Washington corporation formed
in March 1994 to succeed to the assets and liabilities of Oakley, Inc., a
California corporation, which commenced operations in 1977 and began to sell
sunglasses in 1984. The Company is an innovation-driven designer,
manufacturer and distributor of high-performance eyewear and athletic
equipment. The Company's principal strength is its ability to develop
eyewear which demonstrates superior optical performance and comfort through
the combination of patented technology and unique styling. The Company has
focused on innovations for sports applications, and its products are worn by
a variety of athletes, such as skiers, cyclists, runners, surfers, golfers,
tennis and baseball players and motocross riders. In addition, the Company's
products, which are currently sold in over 70 countries worldwide, have
become increasingly popular with fashion-oriented consumers in the larger
nonsports, or recreational, segment of the sunglass market. The Company's
products currently include eight lines of sunglasses (FROGSKINS, M FRAMES,
ZEROS, WIRES, JACKETS, X METAL, FIVES AND TOP COAT), three lines of goggles,
face shields for use with sports helmets, sunglass accessories, gear bags and
a limited range of apparel.
FORWARD-LOOKING STATEMENTS
WHEN USED IN THIS DOCUMENT, THE WORDS "BELIEVES", "ANTICIPATES", "EXPECTS"
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY IN CERTAIN CIRCUMSTANCES
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO A NUMBER OF RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED, INCLUDING RISKS RELATED TO THE DEPENDENCE ON SALES TO
SUNGLASS HUT; THE ACCEPTANCE IN THE MARKETPLACE OF NEW PRODUCTS; THE ABILITY
TO SOURCE RAW MATERIALS AT PRICES FAVORABLE TO THE COMPANY; THE ABILITY TO
DEVELOP AND INTRODUCE INNOVATIVE PRODUCTS; CURRENCY FLUCTUATIONS; AND OTHER
RISKS OUTLINED IN THE COMPANY'S PREVIOUSLY FILED PUBLIC DOCUMENTS, COPIES OF
WHICH MAY BE OBTAINED WITHOUT COST FROM THE COMPANY. GIVEN THESE
UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON SUCH STATEMENTS. THE COMPANY ALSO UNDERTAKES NO OBLIGATION TO
UPDATE THESE FORWARD-LOOKING STATEMENTS.
RECENT DEVELOPMENTS
In early 1998, the Company released MARS, its second eyewear model using the
Company's exclusive X METAL technology. A progression of X METAL, MARS is a
sculptural mechanical metal frame logically structured around a new circular
lens design.
In addition, the Company has developed new technology for application in
performance footwear and intends to release its first footwear products to
the market in mid-1998. The Company intends to manufacture all of its
footwear products in the United States, relying on foreign subcontractors.
Marketing and distribution for the new product intends to parallel Oakley's
strategies that have proved successful for performance eyewear.
PRODUCT DESIGN AND DEVELOPMENT
Developed by an in-house design staff, the Company's products are the end
result of efforts to find creative solutions to problems and wrap those
solutions in art. Innovation in the relation of form to function is a key
focus. With demonstrable improvements in performance, some of the Company's
breakaway designs--and many of the breakthroughs that led to their
creation--are patent protected.
3
State-of-the-art technology allows the Company to shorten dramatically its
product development cycle. Stereo-lithographic computer modeling is combined
with CAD/CAM liquid laser prototyping to create fully detailed, wearable
prototypes within 20 hours. Rapid iteration of working models allows for
extensive testing and perfecting of product design before introduction to the
public. After the development stage is complete, the final sculpture can be
used directly in preparation of production molds. Utilizing these processes,
the Company is capable of introducing a new product line within four months
of initial concept.
The American National Standards Institute (ANSI) has established a series of
tests that measure eyewear performance according to specific industrial
standards. Known as Z87.1, these tests are conducted at independent
laboratories. The tests analyze product safety during high velocity impact
and high mass impact and provide a quantitative measure of optical quality.
The Company conducts ANSI tests at its own facilities on a regular basis, and
all products meet or exceed ANSI Z87.1 standards. Sports-application eyewear
featuring Oakley's patented polaric ellipsoid lens geometry (M FRAME, PRO M
FRAME and ZEROS) have demonstrated superior optical clarity when compared to
similar products of principal competitors. Eyewear featuring dual-spherical
lens design, which utilizes Oakley's patented XYZ OPTICS, demonstrates
comparable superiority.
Oakley has obtained hundreds of patents worldwide to protect its proprietary
manufacturing methods and product features. Among the Company's most
important patents are those which guard its achievements in toroidal
single-lens geometry and the associated manufacturing techniques,
dual-spherical lens technology and the associated optical advances, and
innovations in frame design and functionality. The proprietary technologies
employed in lens cutting, etching, and coating, as well as the Company's
significant investments in specialized equipment, are matched with exclusive
formulations of production materials to produce the superior optical quality,
safety, and performance of Oakley eyewear.
Designs that featured detachable components were a hallmark of the Company's
initial sunglass products. Interchangeable parts included lenses, frames,
temples, and nosepieces in various colors and shapes. The continuation of
this architecture in the sport-specific M FRAME and PRO M FRAME maintains
high appeal for the Company's products. Consumers are able to customize
eyewear to personal tastes and modify it for specific light conditions.
Among the Company's most significant developments, IRIDIUM coatings and
PLUTONITE lenses are prominent advances. IRIDIUM is a metallic oxide that
improves contrast and tunes color saturation, enhancing the wearer's
perception of detail in varying light conditions. The coating has become
very popular for eyewear used in demanding sports such as skiing and cycling,
and in high altitude use. The distinctive look of IRIDIUM-coated lenses adds
to their success in the recreational sunglass market. In March 1998, the
Company exercised its purchase option to acquire a patent for certain IRIDIUM
coatings. PLUTONITE is a proprietary material used to produce lenses of
exceptional optical clarity. The material provides 100% protection against
UVA, UVB and harmful blue light. It meets all ANSI Z87.1 industrial
standards for impact protection, producing lenses of extremely high
durability and low weight.
Oakley's patented XYZ OPTICS represents a major breakthrough in lens
technology. Precise geometric orientation provides optical correction on
three axes, not just two. The resulting lens allows light to be received
over essentially the full angular range of vision while minimizing distortion
caused by disparate refraction along that range--an advance that maximizes
clarity for all angles of view. The technology achieves this by protecting
the unique relationship between lens geometry and the as-worn orientation to
the wearer's eye. This allows for wrapped, raked-back lens configurations
that maximize peripheral vision and protection against sun and wind.
4
Oakley has applied prescription lens technology to all of its frame models.
Computer modeling is used to adapt corrective implants to the wrapped
curvature of Oakley frames, precisely adjusting each individual's
prescription to the as-worn position of the lenses. Custom grinding is then
performed by an outside ophthalmic laboratory. The adaptation technology,
combined with Oakley's PLUTONITE lens material and the specialized equipment
needed for cutting and edging, makes the Company the exclusive provider of
these corrective lenses. The products have enabled Oakley to attract high
profile athletes that would not otherwise have been available to promote the
Company's brand.
In late 1996, Oakley began to expand its prescription business for frames and
lenses in both domestic and international markets under a program developed
with Gentex Optics ("Gentex"), the world's leading producer of
advanced-technology polycarbonate lenses, and its parent company, Essilor
International ("Essilor"). Under the program, Gentex manufactures
Oakley-branded prescription lenses for use in the Company's sunglass and
ophthalmic frames, with distribution through Essilor's wholesale laboratories
worldwide. All Oakley prescription products continue to be available only
through the Company's authorized retailers.
The Company's historical success is attributable, in part, to its
introduction of products that represent improvements in performance and style
over goods available on the market. The continued ability to develop and
introduce such innovations is a key factor in the Company's future success.
In February 1997, Oakley introduced its first sunglass in the X METAL line, a
family of eyewear named for a proprietary blend of metals. In addition to a
unique metallurgical process, X METAL utilizes breakthroughs in architectural
mechanics. Oakley intends to introduce other product line extensions and new
product lines in the future, innovations the Company believes will attract
additional consumers from the nonsports segment of the sunglass market.
To take advantage of unique opportunities, the Company may manufacture
private label or other sunglasses for other companies. The Company intends
to market and sell sunglasses under brand names other than "Oakley." In
addition, the Company has licensed, and may determine to further license, its
intellectual property rights to others in optical or other industries.
The success of any new product line including eyewear and footwear, depends
on various factors, including product demand, production capacity, and the
availability of raw materials and critical manufacturing equipment. Other
factors and assumptions are involved in preparing forward-looking information
related to product development and introduction. The uncertainty associated
with all these factors, and any change in such factors from the Company's
expectations, could result in cost increases, delays, or cancellations of
such new products and may also cause actual results to differ materially from
those projected.
PRODUCTS
The Company's first optical products, introduced in 1980, were goggles
developed for the ski and motorcycle industries. From the perspective of
"function first," the Company next introduced a hybrid goggle/sunglass design
for cycling and skiing, which led to other models for sport-specific uses.
The Company recognized that athletes in different sports needed different
types of protection to ensure clear vision, adequate impact-resistance and
deflection of wind, snow and other elements. The Company successfully
expanded its product line by educating the market about the individual
eyewear needs of a sport and marketing glasses perceived to be useful
athletic equipment. All of the Company's sunglass lines utilize one of two
lens geometries: toroidal (polaric ellipsoid) or spherical. The toroidal
geometry, which have a different radius from the top to bottom than from side
to side and are used in the Company's M FRAMES and ZEROS, provides superior
optical clarity and enhanced coverage and, therefore, represents the most
advanced technology for demanding sports applications. Spherical lenses,
which have a uniform radius in all directions, are used in the Company's
dual-lens sunglasses, the TRENCHCOATS, JACKETS, WIRES, FROGSKINS, X METAL,
AND TOPCOAT. The Company's
5
spherical lenses are corrected and oriented so as to minimize distortion in
the "as-worn" position, a feature which differentiates the Company's
dual-lens sunglasses from those of its competitors. The Company incorporates
its patented XYZ OPTICS technology to achieve a superior level of optical
quality in a wrapped and raked non-prescription dual lens design that
maximizes peripheral vision and protection against sun and wind. The
Company's eyewear is popular with athletes in baseball, golf, tennis,
cycling, motorcycling, skiing, volleyball, marine sports, triathlons,
running, surfing, snowboarding and other sports.
The Company's current products are set forth below:
DATE INTRODUCED U.S. SUGGESTED
RETAIL PRICE
SUNGLASSES
M FRAMES Late 1989 $ 90.00 - 145.00
ZEROS Late 1993 80.00 - 105.00
WIRES Late 1993 130.00 - 225.00
EYE JACKETS Late 1994 90.00 - 125.00
TRENCHCOATS Late 1995 90.00 - 130.00
STRAIGHT JACKETS May 1996 100.00
SQUARE WIRES June 1996 150.00
PRO M FRAME October 1996 150.00
FROGSKINS* December 1996 55.00 - 65.00
X METAL ROMEO February 1997 250.00
FIVES April 1997 55.00 - 65.00
TOPCOAT August 1997 100.00 - 30.00
GOGGLES
MOTOCROSS 1980 26.00 - 56.50
SKI 1983 25.00 - 102.00
H20 1990 25.75 - 61.00
* The Company's original FROGSKIN line was introduced in 1985 and was
discontinued after the new style was introduced in 1996.
FACE SHIELDS
In June 1997, the Company acquired One Xcel, Inc., a company that designs,
markets and distributes the only optically-correct protective face shield for
use with sports helmets. The One Xcel polycarbonate optical shield is the
only sports shield officially endorsed by the National Hockey League (NHL)
and National Football League (NFL).
REPLACEMENT LENSES AND ACCESSORIES
By offering interchangeable lenses and other components of certain Oakley
sunglasses in various colors and shapes, Oakley has created a market for
replacement parts. Depending on the sunglass, an Oakley customer may have
several lenses for different light conditions and several nosepieces and
earpieces in a range of colors for variety.
CLOTHING AND GEAR BAGS
The Company has extended its invention-inspired product philosophy into the
apparel category, now selectively designing performance clothing and gear
bags. The clothing and gear bags are constructed with technical features and
materials, such as YKK zippers and reinforced rivets to provide added
strength and durability in the Backpack; fully taped double-needle seams and
nailhead cordura for added durability on the arms and shoulders of the
Ballistic Jacket; and grommet venting to control excess heat and moisture in
the Fleece Pullover.
6
To date the Company has developed its apparel and other accessories using its
own design resources, declining licensing opportunities in order to preserve
the Oakley image, which the Company believes will bring greater respect and
demand for Oakley's products over the long term. The Company may in the
future consider the pursuit of additional brand extensions.
MANUFACTURING
In early 1997, the Company relocated to its newly constructed headquarters
and manufacturing facility in Foothill Ranch, Orange County, California,
where it manufactures and assembles most of its products. The Company owns,
operates and maintains most of the equipment used in the manufacture of its
products. The Company produces components and performs processes in-house
which contribute significantly to gross profit margins and provide protection
against piracy of the Company's proprietary information and processes.
In-house manufacturing enables the Company to produce products in accordance
with its strict quality control standards. Components and processes that are
unlikely to add significant value are contracted out to vendors. Much of the
equipment used in the manufacture of the Company's products has been
specially designed and adapted for the processes used by the Company. The
Company's proprietary manufacturing methods and equipment are protected by
special security measures employed at the Company's manufacturing facilities.
In addition, the Company believes that by manufacturing its own products, it
has the opportunity to experiment with new materials and technologies which
can lead to important discoveries, such as its IRIDIUM coating process (which
the Company believes is one of the most sophisticated coating processes in
the industry). The Company generally seeks to maintain a supply of finished
goods that is sufficient to ship domestic customer orders (other than
preseason orders for ski goggles and orders from certain sunglass specialty
chains) within one day of receipt. Due to significant increases in demand
for certain Oakley products, backorders may increase sharply from time to
time and may delay customer shipments for such products.
The Company has forged strong relationships with its major suppliers and
maintains agreements with most of them that prohibit such suppliers from
revealing any of the Company's proprietary information and technology to
third parties. Although the Company relies on outside suppliers for the
polycarbonate components of its glasses and goggles, the Company owns
substantially all the molds used in the production of the components. The
Company relies on a single source for the supply of several components,
including the uncoated lens blanks from which substantially all of the
Company's lenses are cut. The Company believes most of these components can
be obtained from one or more alternative sources within a relatively short
period of time. The loss of the source for lens blanks, however, or any
disruption in such source's business or failure by it to meet the Company's
product needs on a timely basis could cause, at a minimum, temporary
shortages in needed materials 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 of lens blanks can be located or developed in a
timely manner. In March 1997, the Company entered into a reciprocal
exclusive dealing agreement with Gentex, its lens blank supplier, under which
Oakley has the exclusive right to purchase from such supplier decentered
sunglass lenses and a new scratch-resistant coating developed for use with
such lenses. In return, Oakley has agreed to purchase all of its decentered
lens requirements, subject to certain exceptions, from such supplier. The
Company's business interruption insurance policy reimburses the Company for
certain losses incurred by the Company, up to a maximum of $30 million, as a
result of an interruption in the supply of raw materials, including uncoated
lens blanks, resulting from direct physical loss or damage to a supplier's
premises, subject to certain exceptions. However, there can be no assurance
that such policy will be sufficient to compensate the Company for all losses
resulting from an interruption in the supply of raw materials.
7
DISTRIBUTION
The Company sells Oakley eyewear in the United States through a carefully
selected base of approximately 7,100 active accounts as of December 31, 1997
with approximately 10,600 locations comprised of optical stores, sunglass
retailers and specialty sports stores, including bike, surf, ski and golf
shops and motorcycle, running and sporting goods stores. Unlike most of its
competitors, the Company has elected not to sell its products through
department stores (other than Nordstrom), discount stores, drug stores or
traditional mail-order companies.
The Company's current level of distribution, with the addition of key niche
retailers, most notably in the golf channel in 1997, and a limited number of
premium optical locations, is expected to be capable of accommodating
expanding sales, while maintaining the discoverability of Oakley products by
consumers. This distribution philosophy provides retailers with a degree of
exclusivity for Oakley products which has increased brand loyalty and has
encouraged retailers to display Oakley products in prominent shelf space.
The noticeable absence of the Company's products from department stores,
discount stores, drug stores and traditional mail-order catalogs has
contributed to the Company's exclusive, high-quality image. The Company
generally does not change its domestic wholesale prices during the life of a
product, which the Company believes creates a more stable retail environment.
The Company's products are currently sold in over 70 countries outside the
United States. In most of continental Europe, marketing and distribution are
handled directly by the Company's Oakley Europe subsidiary, located near
Paris, France, which is staffed by approximately 100 employees who perform
sports marketing, advertising, telemarketing, shipping and accounting
functions. Oakley Europe has an independent sales force in all major
continental European markets except in Switzerland and Austria. Since 1995,
the Company has been selling Oakley products to Mexico on a direct basis
through its subsidiary Oakley Mexico. In 1996, the Company acquired its
exclusive distributor in the United Kingdom ("Oakley UK") and established an
office in South Africa ("Oakley Africa") and began selling to those markets
on a direct basis in the fourth quarter of 1996. In May 1997, the Company
began selling to Japan ("Oakley Japan") on a direct basis through its own
operation. In those parts of the world not serviced by Oakley or its
subsidiaries, Oakley's products are sold through distributors with local
expertise which sell Oakley products either exclusively or with
complementary, noncompeting products. Such distributors agree to respect the
marketing philosophy and practices of the Company and receive extensive
training regarding such philosophies and practices. For information
regarding the Company's operations by geographic region, see Notes 10 and 11
of Notes to Consolidated Financial Statements.
The Company requires its retailers and distributors to agree not to resell or
divert Oakley products through unauthorized channels of distribution.
Products shipped from Oakley's headquarters are marked with a tracking code
that allows the Company to determine the source of diverted products sold by
unauthorized retailers or distributors, so it can better maintain the
integrity of its products at desired locations. When Oakley products are
found at undesirable locations or unauthorized retailers, the Company
purchases samples and, using the tracking device, determines the source of
the diversion. The Company then estimates the potential damage to the
Company's retail franchise and image and may require that the offending
account repurchase the diverted product or post a nonrefundable bond against
future diversion. In certain instances, the Company may terminate the
account. When an existing account has been terminated, the Company may
repurchase its own products from the retailer at the undesirable location to
protect the Oakley image and the exclusivity enjoyed by the Company's retail
account base. The Company employs similar anti-diversion techniques in
overseas markets.
8
SALES AND MARKETING
The Company maintains a domestic sales force of approximately 90 independent
representatives. The primary functions of Oakley's sales force are to sell
to each retailer the appropriate mix and quantity of Oakley products, ensure
that products are displayed effectively and educate retailers about the
quality and features of Oakley products and Oakley's sales and marketing
philosophies. The Company believes that its relationships with its
customers, effective marketing and superior customer service are critical
elements of the Company's success. Through its sales representatives, the
Company tries to satisfy every customer's request for information or product
support. Sales representatives regularly visit each customer to educate the
customer about recent innovations in product designs, new product
applications and merchandising ideas. Each sales representative is managed
by one of the Company's in-house territory managers. The territory managers
work with the representatives in setting sales goals, providing sales
analyses, soliciting sales to complete customers' inventories and taking new
orders. The Company's sales force is paid solely by commissions on net sales.
While Oakley uses traditional marketing methods in some instances, the
Company attributes much of its success to the use of less conventional
methods, including sports marketing, targeted product allocation,
advertorials and in-store display aids. The Company has used sports
marketing extensively to achieve consistent, authentic exposure that equates
into strong brand recognition on a global level. Oakley utilizes the
exposure generated by its athletes as an "editorial" endorsement of Oakley's
eyewear rather than a commercial endorsement. The sports marketing division
consists of 22 sports marketing experts domestically, with an additional 20
managers positioned in our direct offices and with distributors
internationally. These experts specialize in each market segment and niche
to negotiate contracts with athletes, identify and develop relationships with
undiscovered talent, coordinate exposure with the media, educate and train
these Oakley "ambassadors" about Oakley products and support them at events
and public forums where they wear Oakley products. Oakley's sports marketing
staff is diverse enough to understand and effectively market all sports,
regardless of the sport's image and special equipment needs. Oakley earns the
respect of its athletes even in the most "core" of sports such as surf and
snowboard, yet continues to expand successfully into more traditional sports
such as golf, tennis, baseball and cricket.
PRODUCT SERVICES
Oakley strives to support its products with the best customer service in the
industry. The Company's approximately 100-person product services group
promptly and courteously responds to customer inquiries, concerns and
warranty claims. The Company provides a one-year warranty against
manufacturer's defects or breakage of its polycarbonate frames.
ADVERTISING AND PROMOTION
Oakley's primary method of enhancing brand recognition is sports marketing,
which places the Oakley brand before consumers through the endorsements of
influential athletes and other personalities, some of whom have formal
arrangements with the Company. Brand image and exposure are carefully
controlled. The effectiveness of this promotional strategy is believed to
outweigh that of direct advertising, which often carries a stigma and lacks
the impact and recognition of athletic endorsement. The Company believes
that direct advertising can be useful, but only in situations that do not
lead to competition with editorial coverage.
The Company has also developed a second level of promotion through its laser
scope program. Through demonstration and lecture, trained technicians
educate consumers on the health and performance benefits of Oakley products
by imparting technical information in layman's terms. Venues for these
presentations include key retailers, trade shows, high-traffic locations and
regional sporting events such as golf tournaments and tennis matches.
9
The third level of marketing is advertising. Products are promoted through
print media, outdoor media, in-store visual displays, and other
point-of-purchase materials. Promotion include packaging, mailers, catalogs,
billboards, the Internet, and more. The Company considers many factors in
evaluating the effectiveness of these marketing opportunities. In addition
to cost effectiveness, analytical criteria includes the ability to engage new
market opportunities, build image, enhance the stature of the brand, and
reinforce the identity of the brand.
Oakley retains significant control over its promotional programs and believes
it is able to deliver a consistent, well-recognized advertising message at
substantial cost savings compared to complete reliance on outside agencies.
Localized strategies of marketing and distribution are managed by direct
operations in Europe, South Africa, Mexico and Japan. In other parts of the
world, the integrity of the brand is safeguarded by carefully selected
distributors who present Oakley products to their markets with local
expertise.
PRINCIPAL CUSTOMERS
During 1997, net sales to the Company's ten largest customers, which included
seven international distributors, accounted for approximately 35% of the
Company's total net sales. Net sales to one customer, Sunglass Hut, the
largest sunglass specialty retailer in the world, accounted for approximately
21.5% of the Company's 1997 net sales. Such sales do not include those sales
to Sunglass Hut locations outside the United States that are made by the
Company's independent international distributors. At December 31, 1997,
approximately 250 of the 2,121 Sunglass Hut locations worldwide were serviced
by Oakley independent distributors. While the Company does not have any
minimum purchase agreements with Sunglass Hut, the Company believes that it
maintains a good relationship with Sunglass Hut. In early 1994, the Company
entered into an exclusive licensing agreement with Sunglass Hut to sell
Oakley products through mail order catalogs and in 1997 two Oakley catalogs
were produced under such arrangement.
INTELLECTUAL PROPERTY
The Company aggressively asserts its rights under patent, trade secret,
unfair competition, trademark and copyright laws to protect its intellectual
property, including product designs, proprietary manufacturing processes and
technologies, product research and concepts and recognized trademarks. These
rights are protected through the acquisition of patents and trademark
registrations, the maintenance of trade secrets, the development of trade
dress, and where appropriate, litigation against those who are, in the
Company's opinion, infringing these rights. The Company has filed suit
against a number of its competitors to enforce certain of the Company's
patents and trademarks. None of the Company's patents or trademarks has ever
been invalidated or limited. While there can be no assurance that the
Company's patents or trademarks fully protect the Company's proprietary
information and technologies, the Company intends to continue asserting its
intellectual property rights against any infringer. The Company believes
that it has developed a reputation in the sunglass industry as a vigorous
defender of its intellectual property rights; this reputation acts as a
deterrent against the introduction of potentially infringing products by its
competitors and others.
The following table reflects data as of December 31, 1997 concerning the
Company's intellectual property:
Number of Utility/Design Patents
------------------------------------
Issued Pending Trademarks
------ ------- ----------
United States 69 41 57
International 302 185 559
10
The Company dissuades counterfeiting through the active monitoring of the
marketplace by its anti-counterfeiting personnel and other employees and
through the services provided by outside firms that specialize in
anti-counterfeiting measures. The Company's sales representatives,
distributors and retailers have also proved effective watchdogs against
infringing products, frequently notifying the Company of any suspicious
products, confiscating counterfeit products and assisting law enforcement
agencies. The Company's sales representatives are also educated on Oakley's
patents and trade dress and assist in preventing infringers from obtaining
retail shelf space. The Company also etches its logo onto the lenses of its
single-lens sunglasses to assist its customers and consumers in detecting
counterfeit products.
COMPETITION
The Company is a leading designer, manufacturer and distributor of eyewear in
the sports segment of the nonprescription eyewear market. Within this
segment, the Company competes with mostly smaller sunglass and goggle
companies in various niches of the sports market and a limited number of
larger competitors, some of whom have greater financial and other resources
than the Company. Some of these niche markets are susceptible to rapid
changes in consumer preferences which could affect acceptance of the
Company's products. Oakley believes the vigorous protection of its
intellectual property rights has limited the ability of others to compete in
this segment. Accordingly, the Company believes that it is the established
leader in this segment of the market, although several companies, including
Bausch & Lomb (which markets Killer Loop), Luxottica (which markets Briko),
Bolle and various niche brands compete for the Company's shelf space.
The Company also competes in the broader nonsports, or recreational, segment
of the sunglass market, which is fragmented and highly competitive. The
major competitive factors include fashion trends, brand recognition,
marketing strategies, distribution channels and the number and range of
products offered. A number of established companies, including Bausch & Lomb
(Ray Ban and Revo) and Luxottica, compete in this wider market.
The Company differs from many of its competitors in that its competitors
generally only import or repackage eyewear products. Few sunglass companies
design, manufacture and assemble their own creations as many companies tend
to imitate successful sunglass models. In order to retain its market share,
the Company must continue to be competitive in quality and performance,
technology, method of distribution, style, brand image, intellectual property
protection and customer service.
DOMESTIC AND FOREIGN OPERATIONS
See Note 11 to the Notes to the Consolidated Financial Statements for
discussion regarding domestic and foreign operations.
EMPLOYEES
The Company believes that its employees are among its most valuable resources
and have been a key factor in the success of Oakley's products. At March 13,
1998, there were a total of approximately 930 full-time employees. In
addition, the Company utilizes as many as 450 temporary personnel,
particularly during the summer months.
The Company is not a party to any labor agreements and none of its employees
is represented by a labor union. The Company considers its relationship with
its employees to be good and has never experienced a work stoppage.
11
ITEM 2. PROPERTIES
In early 1997, the Company relocated to a newly constructed corporate and
manufacturing facility located in Foothill Ranch, Orange County, California.
The new facility is approximately 400,000 square feet, with potential to
expand into an additional 100,000 square feet. Prior to the relocation, the
company leased five facilities which totaled approximately 170,000 square
feet. All such leases have either expired or were terminated with no
material adverse financial effect. In June 1996, the Company purchased an
approximately 63,000 square foot facility in Nevada for the production of
metal eyewear. In addition, the Company leases office and warehouse space as
necessary to support its operations worldwide, including offices in the UK,
Europe, Mexico, South Africa, Japan and the state of Washington. In 1997,
the Company also purchased land in Mexico City on which it is constructing an
office for its operations in Mexico and Central America; the Company expects
this facility to be completed in mid-1998. The Company believes its current
and planned facilities are adequate to carry on its business as currently
contemplated.
The Company is subject to federal, state and local environmental laws,
regulations and ordinances that (i) govern activities or operations that may
have adverse environmental effects (such as emissions to air, discharges to
water, and the generation, handling, storage and disposal of solid and
hazardous wastes) or (ii) impose liability for the cost of cleanup or other
remediation of contaminated property, including damages from spills,
disposals or other releases of hazardous substances or wastes, in certain
circumstances without regard to fault. The Company's manufacturing
operations routinely involve the handling of chemicals and wastes, some of
which are or may become regulated as hazardous substances. The Company has
not incurred, and does not expect to incur, any significant expenditures or
liabilities for environmental matters. As a result, the Company believes that
its environmental obligations will not have a material adverse effect on its
operations or financial position.
ITEM 3. LEGAL PROCEEDINGS
THE CALIFORNIA SECURITIES ACTIONS
The Company and certain of its officers and directors have been named as
defendants in three putative class action lawsuits (the "California
Securities Actions") filed in December 1996 in the California Superior Court
for the County of Orange (the "Superior Court"). The cases are captioned:
YOSEF S. ROSENSHEIN V. OAKLEY, INC., MIKE PARNELL, LINK NEWCOMB AND JIM
JANNARD, Case No. 773051 (filed December 17, 1996);
HERSCHEL HARMAN V. OAKLEY, INC., MIKE PARNELL, LINK NEWCOMB AND JIM
JANNARD, Case No. 773053 (filed December 17, 1996); and
ERIC SHER, HAROLD BARON AND DAVID O. ECKERT V. OAKLEY, INC., MIKE PARNELL,
LINK NEWCOMB, JIM JANNARD, MERRILL LYNCH & CO. AND ALEX. BROWN & SONS,
INC., Case No. 773366 (filed December 24, 1996).
By order dated January 30, 1997, the Superior Court ordered that the
California Securities Actions be assigned to the Superior Court's Complex
Litigation Panel, where they have since been consolidated. On April 18,
1997, the plaintiffs filed a consolidated amended complaint in the California
Securities Actions. The plaintiffs seek to represent a class of persons who
purchased the Company's common stock between March 22, 1996 and December 5,
1996.
The complaint in the California Securities Actions alleges claims for
violations of the antifraud provisions of the California Corporations Code,
unfair business practices and false advertising in violation of certain
provisions of the California Business and Professions Code, fraud and
negligent
12
misrepresentation. The plaintiffs' claims are based on alleged material
misstatements and omissions in certain of the Company's public statements,
Securities and Exchange Commission filings and in the reports of third-party
analysts regarding the Company's retail distribution practices, market
conditions, new product developments and extensions of existing product
lines, business with Sunglass Hut and earnings prospects. The plaintiffs
seek unspecified damages and other relief against the Company and the other
defendants.
The plaintiffs in the California Securities Actions have also asserted claims
against Merrill Lynch & Co. ("Merrill Lynch") and Alex. Brown and Sons, Inc.
("Alex. Brown"), which served as the U.S. Representatives of the U.S.
Underwriters of the June 6, 1996 offering of five million shares of common
stock of the Company by certain of its shareholders (the "Secondary
Offering"). By letter dated February 7, 1997, counsel for Merrill Lynch and
Alex. Brown gave the Company notice pursuant to the indemnification
provisions of the U.S. Purchase Agreement dated June 6, 1996, for the
Secondary Offering that they were asserting a claim for indemnification under
such provisions and requested that the Company reimburse Merrill Lynch and
Alex. Brown on a current basis for their attorneys' fees and expenses
incurred in defending the California Securities Actions. Counsel for Merrill
Lynch and Alex. Brown subsequently indicated that this claim for
indemnification also applies to attorneys' fees and expenses incurred in
defending the Federal Securities Actions (described below).
The Company and the other defendants filed demurrers to the California
Securities Actions and also filed a motion to stay proceedings in the
California Securities Actions pending the resolution of the Federal
Securities Actions (described below).
On November 14, 1997, the Superior Court (1) sustained the demurrers without
leave to amend with respect to the Company and defendants Link Newcomb,
Merrill Lynch and Alex. Brown on plaintiffs' cause of action for purported
violations of the antifraud provisions of the California Corporations Code;
(2) overruled the demurrer with respect to the Company and defendants Mike
Parnell, Link Newcomb and Jim Jannard, but sustained the demurrer with leave
to amend with respect to defendants Merrill Lynch and Alex. Brown, on
plaintiffs' cause of action for fraud and negligent misrepresentation; and
(3) sustained the demurrers with leave to amend with respect to the Company
and each of the other defendants on plaintiffs' cause of action for unfair
business practices and false advertising in violation of certain provisions
of the California Business and Professions Code. Subsequently, plaintiffs
agreed to dismiss all of their claims against each of the defendants, with
the exception of plaintiffs' cause of action for purported violations of the
antifraud provisions of the California Corporations Code with respect to
defendants Mike Parnell and Jim Jannard.
On January 22, 1998, the Superior Court denied the motion to stay proceedings
in the California Securities Actions pending the resolution of the Federal
Securities Actions described below. The plaintiffs in the California
Securities Actions have served document requests on the Company and others,
and documents have been produced in response to plaintiffs' demands.
THE FEDERAL SECURITIES ACTIONS
The Company and certain of its officers and directors have been named as
defendants in five putative class action lawsuits (the "Federal Securities
Actions") filed in October, November and December 1997 in the United States
District Court for the Central District of California, Southern Division.
The cases are captioned:
KENSINGTON CAPITAL MANAGEMENT V. OAKLEY, INC., MIKE PARNELL, LINK NEWCOMB,
JIM JANNARD, MERRILL LYNCH & CO. AND ALEX. BROWN & SONS INCORPORATED, No.
SACV 97-808 GLT (EEx) (filed October 10, 1997) (the "KENSINGTON CAPITAL
MANAGEMENT Action");
13
FRANK LISTER, JAMES J. SCOTELLA, RAYMOND E. NEVEAU, JAMES S. LEWINSKI, JACK
ROSENSON AND LEE SPERLING V. OAKLEY, INC., MIKE PARNELL, LINK NEWCOMB, JIM
JANNARD, MERRILL LYNCH & CO. AND ALEX. BROWN & SONS INCORPORATED, No. SACV
97-809 LHM (EEx) (filed October 10, 1997) (the "LISTER Action");
STUART CHAIT AND MARILYN SCHWARTZ V. OAKLEY, INC., MIKE PARNELL, LINK
NEWCOMB, JIM JANNARD, MERRILL LYNCH & CO. AND ALEX. BROWN & SONS,
INCORPORATED, No. SACV 97-829 AHS (EEx) (filed October 20, 1997) (the
"CHAIT Action");
FICHERA V. OAKLEY, INC., MIKE PARNELL, LINK NEWCOMB, JIM JANNARD, MERRILL
LYNCH & CO. AND ALEX. BROWN AND SONS INCORPORATED, No. SACV 97-928 GLT
(Eex) (filed November 17, 1997 (the "FICHERA Action"); and
YOSEF J. ROSENSHEIN AND HERSHEL HARMAN V. OAKLEY, INC., MIKE PARNELL, LINK
NEWCOMB, JIM JANNARD, MERRILL LYNCH & CO. AND ALEX. BROWN & SONS
INCORPORATED, No. SACV 97-993 AHS (Eex) (filed December 5, 1997 (the
"ROSENSHEIN Federal Action").
The plaintiffs in the KENSINGTON CAPITAL MANAGEMENT and the FICHERA Actions
seek to represent a class of persons who purchased the Company's common stock
in the Secondary Offering and allege claims for violations of sections 11,
12(a)(2) and 15 of the Securities Act of 1933. The plaintiffs' claims are
based on alleged material misstatements and omissions in the prospectus
issued and registration statement filed in connection with the Secondary
Offering regarding the Company's retail distribution practices, market
conditions, new product developments and extensions of existing product
lines, business with Sunglass Hut and quality control standards. The
plaintiffs seek unspecified damages and other relief against the Company and
the other defendants. Plaintiffs in the KENSINGTON CAPITAL MANAGEMENT Action
filed a motion to consolidate that action with the FICHERA Action, and
plaintiffs in the KENSINGTON CAPITAL MANAGEMENT and the FICHERA Actions filed
competing motions to be appointed lead plaintiffs for the purported plaintiff
class and for the selection of lead counsel to the purported plaintiff class.
Plaintiff's motion in the FICHERA Action was later withdrawn.
The plaintiffs in the LISTER and CHAIT Actions and the ROSENSHEIN Federal
Action seek to represent a class of persons who purchased the Company's
common stock between March 22, 1996 and December 5, 1996, including in the
Secondary Offering, and allege claims for violations of sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The plaintiffs' claims are based on alleged material
misstatements and omissions in certain of the Company's public statements,
Securities and Exchange Commission filings and in the reports of third-party
analysts regarding the Company's retail distribution practices, market
conditions, new product developments and extensions of existing product
lines, business with Sunglass Hut, earnings prospects and quality control
standards. The plaintiffs seek unspecified damages and other relief against
the Company and the other defendants. Plaintiffs in the LISTER and CHAIT
Actions filed a motion to consolidate the LISTER and CHAIT Actions and the
ROSENSHEIN Federal Action, to appoint certain persons as lead plaintiffs for
the purported plaintiff class and for the selection of lead counsel to the
purported plaintiff class.
On January 26, 1998, the District Court granted the plaintiffs' motions for
appointment of lead plaintiffs and for the selection of lead counsel to the
purported plaintiff classes. The District Court further ordered that all of
the Federal Securities Actions be consolidated for pretrial purposes.
The Company has not yet responded to any of the Federal Securities Actions.
To date, no discovery has been taken in the Federal Securities Actions.
14
The Company has been named as a nominal defendant in a putative derivative
lawsuit against certain of its directors and officers filed in March 1997 in
the Superior Court. The case is captioned BLACKMAN V. JAMES JANNARD, MIKE
PARNELL AND DOES 1 THROUGH 100, Case No. 777098 (filed March 27, 1997) (the
"California Derivative Action").
In the California Derivative Action, the plaintiff, purporting to sue on
behalf of the Company, alleges claims for breach of fiduciary duty,
constructive fraud, unjust enrichment and violations of the insider trading
provisions of the California Corporations Code. Like the California
Securities Actions, the plaintiff's claims in the California Derivative
Action are, among other things, based upon alleged material misstatements and
omissions in certain of the Company's public statements and Securities and
Exchange Commission filings regarding the Company, its operation and future
prospects. The plaintiff seeks to recover damages and other relief on behalf
of the Company. The defendants filed a demurrer to the original complaint in
the California Derivative Action, and the plaintiff subsequently filed an
amended complaint. The defendants filed a demurrer to the amended complaint
in the California Derivative Action, and the Superior Court sustained the
demurrer with leave to amend in September 1997. The plaintiff subsequently
filed a second amended complaint in the California Derivative Action. The
defendants then filed a demurrer to the second amended complaint in the
California Derivative Action and the Superior Court sustained the demurrer
without leave to amend on December 19, 1997. On February 4, 1998, the
Superior Court entered a final order of dismissal of the California
Derivative Action. The Company does not know whether the plaintiff plans to
appeal the Superior Court's final order.
Although it is too soon to predict the outcome of any of the litigations
described above with any certainty, based on its current knowledge of the
facts, the Company believes that the plaintiffs' claims are without merit and
intends to defend the actions vigorously.
In addition, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock, par value $.01 per share ("Common Stock"), began
trading on the New York Stock Exchange on August 10, 1995 upon completion of
the Company's initial public offering (trading symbol "OO"). On March 13,
1998, the closing sales price for the Common Stock was $12 3/8. The
following table sets forth the high and low sales prices for the Common Stock
for each quarter of 1996 and 1997 on the New York Stock Exchange Composite
Tape:
High Low
---- ---
1996
- ----
First Quarter $ 19 3/8 $ 15 1/2
Second Quarter $ 27 3/16 $ 17 7/16
Third Quarter $ 24 1/2 $ 14 11/16
Fourth Quarter $ 24 1/2 $ 9 7/8
1997
- ----
First Quarter $ 11 5/8 $ 8 3/8
Second Quarter $ 14 3/8 $ 8 3/4
Third Quarter $ 14 1/16 $ 10 1/2
Fourth Quarter $ 11 3/16 $ 8 9/16
On September 11, 1996, the Company declared a two-for-one stock split
effected in the form of a one-share dividend per share of its Common Stock.
The new shares were distributed on October 10, 1996 to shareholders of record
at the close of business at September 25, 1996. All sale prices have been
restated retroactively to reflect the stock split.
The number of shareholders of record for Common Stock on March 13, 1998 was
586.
DIVIDEND POLICY
The Company currently does not pay any dividends on its Common Stock. Any
future determination as to the payment of dividends will be at the discretion
of the Company's Board of Directors and will depend upon the Company's
results of operations, financial condition, contractual restrictions and
other factors deemed relevant by the Board of Directors.
16
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data regarding the
Company which is qualified by reference to, and should be read in conjunction
with, the Consolidated Financial Statements and Notes thereto (see "Index to
Consolidated Financial Statements") and "Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations." The income
statement, supplemental income statement and balance sheet data presented
below have been derived from the Company's consolidated financial statements.
The Company's consolidated income statement data for the fiscal years ended
December 31, 1995, 1996, and 1997 and balance sheet data as of December 31,
1996 and 1997 included herein have been audited by Deloitte and Touche LLP,
the Company's independent auditors, as indicated in their report included
elsewhere herein. The selected supplemental income statement data set forth
herein are for informational purposes only and may not necessarily be
indicative of the Company's future results of operations.
Year Ended December 31,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------- ------------- ------------- ------------ ------------
(dollars in thousands, except share data)
INCOME STATEMENT DATA:
Net sales $ 92,714 $ 123,952 $ 172,752 $ 218,566 $ 193,984
Cost of goods sold 27,667 35,714 50,295 66,790 75,393
-------------- ------------- ------------- ------------ ------------
Gross profit 65,047 88,238 122,457 151,776 118,591
Operating expenses:
Research and development 15,455 25,529 16,774 4,782 3,825
Selling 21,750 30,815 36,776 48,092 53,007
Shipping and warehousing 2,334 3,187 4,678 6,507 5,721
General and administrative 11,801 14,681 15,753 18,513 23,032
Gain on disposition of property and equipment - - (4,794) - -
-------------- ------------- ------------- ------------ ------------
Total operating expenses 51,340 74,212 69,187 77,894 85,585
Operating income 13,707 14,026 53,270 73,882 33,006
Interest expense (income), net 69 232 273 (781) 1,181
-------------- ------------- ------------- ------------ ------------
Income before provision for income taxes 13,638 13,794 52,997 74,663 31,825
Provision for income taxes (1) 308 259 7,830 28,670 12,221
-------------- ------------- ------------- ------------ ------------
Net income $ 13,330 $ 13,535 $ 45,167 $ 45,993 $ 19,604
-------------- ------------- ------------- ------------ ------------
-------------- ------------- ------------- ------------ ------------
Basic net income per share $ 0.64 $ 0.28
------------ ------------
------------ ------------
Basic weighted average common shares 71,324,000 70,659,000
------------ ------------
------------ ------------
Diluted net income per share $ 0.64 $ 0.28
------------ ------------
------------ ------------
Diluted weighted average common shares 71,728,000 70,700,000
------------ ------------
------------ ------------
SUPPLEMENTAL INCOME STATEMENT DATA (2):
Income before provision for income taxes $ 13,638 $ 13,794 $ 52,997
Provision for income taxes 5,476 5,539 20,854
-------------- ------------- -------------
Net income $ 8,162 $ 8,255 $ 32,143
-------------- ------------- -------------
-------------- ------------- -------------
At December 31,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------- ------------- ------------- ------------ ------------
BALANCE SHEET DATA:
Working capital $ 16,872 $ 9,932 $ 39,161 $ 36,107 $ 41,688
Total assets 43,592 49,694 97,725 158,245 181,291
Total debt 6,339 3,300 263 18,000 25,201
Shareholders' equity 32,775 33,133 81,709 121,437 136,961
(1) For periods prior to the Company's conversion to C corporation status,
represents California state franchise taxes and foreign taxes accrued by
Oakley Europe.
(2) Amounts reflect adjustment for Federal and state income taxes as if the
Company had been taxed as a C corporation rather than as an S corporation.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes the operations of Oakley, Inc. and
subsidiaries for each of the periods discussed.
RESULTS OF OPERATIONS
The following table sets forth operating results for the periods indicated.
For the period prior to the Company's initial public offering in August 1995,
amounts reflect pro forma adjustments for (i) the elimination of bonuses paid
to the two principal executive officers prior to the Company's initial public
offering in excess of the estimated bonuses payable for 1995 under the
Company's Performance Bonus Plan, (ii) the elimination of all depreciation
expense associated with aircraft owned by the Company which were distributed
to the two principal shareholders in August 1995 as part of the S corporation
distribution, (iii) the elimination of the gain on the disposition of the
aircraft distributed to the two principal shareholders and (iv) Federal and
state income taxes as if the Company had been taxed as a C corporation for
such period.
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
Year Ended December 31,
-------------------------------------
1995 1996 1997
----------- ----------- ------------
Pro Forma
-----------
Net sales $ 172,752 $ 218,566 $ 193,984
Cost of goods sold 50,295 66,790 75,393
----------- ----------- ------------
Gross profit 122,457 151,776 118,591
Operating expenses:
Research and development 3,285 4,782 3,825
Selling 35,802 48,092 53,007
Shipping and warehousing 4,678 6,507 5,721
General and administrative 13,121 18,513 23,032
----------- ----------- ------------
Total operating expenses 56,886 77,894 85,585
----------- ----------- ------------
Operating income 65,571 73,882 33,006
Interest expense (income), net 273 (781) 1,181
----------- ----------- ------------
Income before provision for income taxes 65,298 74,663 31,825
Provision for income taxes 25,694 28,670 12,221
----------- ----------- ------------
Net income $ 39,604 $ 45,993 $ 19,604
----------- ----------- ------------
----------- ----------- ------------
18
The following table sets forth operating results (as a percentage of net
sales) for the periods indicated:
Year Ended December 31,
----------------------------------
1995 1996 1997
--------- --------- --------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 29.1 30.6 38.9
--------- --------- --------
Gross profit 70.9 69.4 61.1
Operating expenses:
Research and development 1.9 2.2 2.0
Selling 20.7 22.0 27.3
Shipping and warehousing 2.7 3.0 2.9
General and administrative 7.6 8.5 11.9
--------- --------- --------
Total operating expenses 32.9 35.7 44.1
--------- --------- --------
Operating income 38.0 33.7 17.0
Interest expense (income), net 0.2 (0.4) 0.6
--------- --------- --------
Income before provision for income taxes 37.8 34.1 16.4
--------- --------- --------
Provision for income taxes 14.9 13.1 6.3
--------- --------- --------
Net income 22.9% 21.0% 10.1%
--------- --------- --------
--------- --------- --------
The Company's sales before discounts and returns for defective sunglasses
were $158.2 million, $212.8 million and $171.4 million for the years ended
December 31, 1995, 1996 and 1997, respectively. Sunglass unit sales were
3,465,817, 4,310,846 and 3,620,612 for the years ended December 31, 1995,
1996 and 1997, respectively.
19
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES
Net sales decreased to $194.0 million for the year ended December 31, 1997
from $218.6 million for the year ended December 31, 1996, a decrease of $24.6
million, or 11.3%. This decrease was the result of substantially lower sales
in existing styles of the Company's sunglasses, including WIRES, EYE JACKETS,
STRAIGHT JACKETS, M FRAMES, ZEROS, TRENCHCOATS and its original line of
FROGSKINS which was replaced by a new line of FROGSKINS in December 1996.
These decreases were partially offset by sales from the introduction of new
sunglasses, including SQUARE WIRES in June 1996, PRO M FRAMES in October
1996, a new line of FROGSKINS in December 1996, X METAL ROMEO in February
1997, FIVES in April 1997 and TOP COAT in August 1997, and an increase in
sales of clothing and other accessories. The success of the Company's recent
moderately-priced introductions (new FROGSKINS and FIVES) and the resulting
change in the Company's product mix contributed to a 4.1% decrease in the
average selling price of sunglasses in 1997 on a unit volume reduction of
16.0%. The Company's domestic sales declined 18.4% to $113.9 million from
$139.5 million in 1996, principally as a result of a 41.1% decline in net
sales to the Company's largest customer, Sunglass Hut, and slightly lower net
sales in 1997 to other domestic accounts. The decline in sales to Sunglass
Hut was due in part, to a reduction by Sunglass Hut in its total inventory
levels during the year, including Oakley inventory levels. The Company's
international sales increased $0.9 million to $80.0 million in 1997 from
$79.1 million in 1996, principally as a result of increased sales in Europe.
This increase was partially offset by a reduction in sales in Japan as the
Company transitioned to a direct operation there, as well as reduced sales in
Southeast Asia due to poor economic conditions and the strength of the U.S.
dollar compared to the relevant currencies. International net sales in 1997
were also negatively affected by the strength of the U.S. dollar compared to
the functional currency (French franc) of Oakley Europe.
GROSS PROFIT
Gross profit decreased to $118.6 million for the year ended December 31, 1997
from $151.8 million for the year ended December 31, 1996, a decrease of $33.2
million, or 21.9%. As a percentage of net sales, gross profit decreased to
61.1% in 1997 from 69.4% in 1996. Gross profit as a percentage of net sales
was negatively affected by higher fixed manufacturing costs spread over lower
sales volumes and a corresponding reduction in production levels, a lower
percentage of sales in the Company's highest-margin sports shield sunglasses,
a shift in product mix to lower-margin clothing and other accessories, a
devaluation in the functional currency of the Company's direct operation in
continental Europe and production inefficiencies associated with the start-up
of the X METAL product line. The Company expects gross profit as a
percentage of net sales to continue to be affected by certain of the factors
discussed above.
OPERATING EXPENSES
Operating expenses increased to $85.6 million for the year ended December 31,
1997 from $77.9 million for the year ended December 31, 1996, an increase of
$7.7 million. Research and development expenses decreased $1.0 million to
$3.8 million in 1997. The 1997 period included a $0.9 million reduction
related to the forfeiture of the Chairman and President's 1996 bonus which
had been accrued as of December 31, 1996. Excluding this non-recurring
adjustment, research and development expenses decreased $0.1 million to $4.7
million in 1997, or 2.4% of net sales, from $4.8 million, or 2.2% of net
sales, in 1996. Selling expenses increased $4.9 million to $53.0 million in
1997, or 27.3% of net sales, from $48.1 million, or 22.0% of net sales, in
1996 as a result of substantially higher warranty expenses, higher sports
marketing expenses and increased depreciation, partially offset by lower
advertising expenses and commissions. As a percentage of net sales, shipping
expenses decreased to 2.9% of net sales in 1997 from 3.0% of net sales in
1996. General and administrative expenses increased $4.5 million to $23.0
million, or 11.9% of net sales, in 1997 from $18.5 million, or 8.5% of net
sales, in 1996 primarily due to added personnel, increased amortization of
intangible assets related to acquisitions completed in late 1996 and 1997 and
higher operating expenses associated with the Company's new headquarters.
For the year ended December
20
31, 1997, general and administrative expenses included income of $0.8 million
paid to the Company by Arnet Optic to settle litigation, $0.7 million of
relocation costs associated with the new facility and professional fees of
$0.5 million related to lawsuits filed by shareholders against the Company
and certain of its officers and directors (see Note 7 to the consolidated
financial statements). In addition, $5.3 million of the $7.7 million
increase in operating expenses for 1997 is attributable to operating expenses
and goodwill amortization of entities acquired or commenced in late 1996 and
1997. The Company expanded its direct international operations into three
new regions, and in June 1997, acquired One Xcel, a company that designs,
markets and distributes protective face shields for use with sports helmets.
OPERATING INCOME
The Company's operating income declined to $33.0 million for the year ended
December 31, 1997 from $73.9 million for the year ended December 31, 1996, a
decrease of $40.9 million. This decrease was the result of the Company's
decrease in net sales and gross profit and an increase in operating expenses
as a percentage of net sales.
INTEREST EXPENSE, NET
The Company had net interest expense of $1.2 million in the 1997 period, as
compared with net interest income of $0.8 million for the comparable 1996
period. The Company incurred interest expense primarily from long-term debt
associated with the Company's new facility.
INCOME TAXES
The Company recorded a provision for income taxes of $12.2 million for the
year ended December 31, 1997 and $28.7 million for 1996. The Company's
effective income tax rate of 38.4% remained consistent for the years ended
December 31, 1997 and 1996.
NET INCOME
The Company's net income decreased to $19.6 million for the year ended
December 31, 1997 from $46.0 million for the year ended December 31, 1996, a
decrease of $26.4 million.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES
Net sales increased to $218.6 million for the year ended December 31, 1996
from $172.8 million for the year ended December 31, 1995, an increase of
$45.8 million, or 26.5%. This increase was principally the result of
substantially higher sales in 1996 for the EYE JACKET and WIRES sunglasses
and the introduction of new sunglasses, including TRENCHCOATS in late 1995,
sports-specific M FRAMES and ZEROS in March 1996, STRAIGHT JACKETS in May
1996, SQUARE WIRES in June 1996, PRO M FRAMES in October 1996 and a new line
of FROGSKINS in December 1996. These increases were partially offset by
moderate sales decreases in existing styles of M FRAMES and ZEROS sunglasses
and significant sales decreases in the existing line of FROGSKINS, the
Company's most mature product offerings. The decline in sales of the existing
line of FROGSKINS was attributable in part to a 50% reduction in the number
of models offered. This change in the Company's product mix contributed to an
increase of 6.9% in the total average selling price of sunglasses in 1996 on
unit growth of 26.2%. The Company's domestic sales grew 21.1% to $139.5
million from $115.2 million in the comparable 1995 period. The Company's
international sales grew 37.3% to $79.1 million, or 36.2% of net sales, in
1996 from $57.6 million, or 33.3% of net sales, in 1995, principally as a
result of increased sales in the continental European markets in which the
Company sells on a direct basis and higher sales to distributors throughout
the rest of the world, with the strongest growth in Europe, Southeast Asia
and Brazil. Net sales for the three months ended December 31, 1996 reflect
declining sales and order cancellations from the Company's largest customer,
Sunglass Hut, as well as holiday business that was below the Company's
expectations. Net sales decreased to $39.3 million for the three months
21
ended December 31, 1996 from $43.0 million in the comparable 1995 period, a
decrease of $3.7 million, or 8.6%.
GROSS PROFIT
Gross profit increased to $151.8 million for the year ended December 31, 1996
from $122.5 million for the year ended December 31, 1995, an increase of
$29.3 million, or 23.9%. As a percentage of net sales, gross profit
decreased to 69.4% in 1996 from 70.9% in 1995. Gross profit as a percentage
of net sales was negatively affected by inefficiencies in production during
the fourth quarter of 1996 caused by reduced sales; a higher percentage of
sales in lower margin goggles and clothing; a higher percentage of sales
internationally at slightly lower margins and an increase in sales returns
and discounts. These factors were partially offset by improvements in
manufacturing efficiencies during the first nine months of 1996 and by higher
average selling prices.
OPERATING EXPENSES
Operating expenses increased to $77.9 million for the year ended December 31,
1996 from $69.2 million for the year ended December 31, 1995, an increase of
$8.7 million. The 1995 period includes a $4.8 million gain on the
disposition of aircraft. On a pro forma basis in 1995 as discussed above,
operating expenses would have increased to $77.9 million in 1996 from $56.9
million in 1995, an increase of $21.0 million, or 36.9%. Research and
development costs increased $1.5 million in 1996 as a result of increased
salaries and higher depreciation which partially reflects the Company's
development costs associated with its X METAL line launched in early 1997.
Selling expenses increased $12.3 million in 1996 principally as a result of
higher advertising expenses, professional fees, and depreciation on store
displays, additional personnel in sports marketing, advertising and sales,
partially offset by, as a percentage of net sales, lower warranty costs and
commissions. Warranty expense in 1996 benefited from the initiation in
mid-year 1995 of a $9.39 warranty processing charge per unit, which
contributed offsetting income of $1.5 million in 1996 and $0.6 million in
1995. As a percentage of net sales, shipping expenses increased to 3.0% in
1996 from 2.7% in 1995 as a result of higher shipping costs in the Company's
European subsidiary. General and administrative expenses increased $5.4
million in 1996 as the Company added personnel and infrastructure to support
its growth. In addition, the Company experienced increases in insurance,
consulting fees and other expenses associated with being a public company.
As a percentage of net sales, general and administrative expenses increased
to 8.5% for 1996 from 7.6% for 1995. In general, the Company's operating
expenses for 1996, as a percentage of net sales, were adversely affected by
the negative leverage associated with the sales decrease in the fourth
quarter described above.
OPERATING INCOME
The Company's operating income grew to $73.9 million for the year ended
December 31, 1996 from $53.3 million for the year ended December 31, 1995, an
increase of $20.6 million. On a pro forma basis in 1995 as discussed above,
operating income would have increased to $73.9 million for 1996 from $65.6
million for 1995, an increase of $8.3 million, or 12.7%. This increase was
the result of the Company's net sales growth, partially offset by a decline
in the gross profit margin and an increase in operating expenses as a
percentage of net sales.
INTEREST EXPENSE, NET
The Company had interest expense of $0.1 million and interest income of $0.8
million for 1996, as compared with interest expense of $0.6 million and
interest income of $0.3 million for 1995.
INCOME TAXES
Prior to August 14, 1995, the Company elected to be treated as an S
corporation under the provisions of the Internal Revenue Code. Accordingly,
the provisions for income taxes for the periods through August 14, 1995 are
computed by applying the California franchise tax rate for S corporations of
1.5% to the Company's pretax earnings, plus any foreign taxes. Effective
August 14, 1995, the
22
Company converted to a C corporation and became subject to regular Federal
and state income taxes on an ongoing basis. As a result, the Company
recorded $1.6 million of deferred income tax assets on August 14, 1995. The
Company recorded a provision for income taxes of $28.7 million for the year
ended December 31, 1996 and $7.8 million for 1995. On a pro forma basis as
discussed above, the Company's provision for income taxes was $25.7 million
for 1995.
NET INCOME
The Company's net income increased to $46.0 million for the year ended
December 31, 1996 from $45.2 million for the year ended December 31, 1995, an
increase of $0.8 million. On a pro forma basis, net income increased to
$46.0 million for 1996 from $39.6 million for 1995, an increase of $6.4
million, or 16.2%.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations almost entirely with
cash flow generated from operations and borrowings from its credit facility.
Cash provided by operating activities totaled $36.3 million for the year
ended December 31, 1997 and $40.5 million for the comparable period of 1996.
During the year ended December 31, 1997, the Company repurchased 304,000
shares of its common stock for $3.2 million. At December 31, 1997, working
capital was $41.7 million. Working capital may vary from time to time as a
result of seasonality, new product introductions, capital expenditures,
including purchases of equipment and changes in inventory levels. In January
1997, the Company amended its unsecured line of credit to increase its
borrowing limits from $18.0 million to $30.0 million. At December 31, 1997,
there was $2.8 million in borrowings outstanding under such facility. In
August 1997, the Company obtained a term loan collateralized by the Company's
new headquarters. The term loan requires quarterly principal payments of
approximately $380,000 plus interest based on LIBOR plus 1.15% (7.09% at
December 31, 1997) for five years. The then outstanding balance payable is
due in September 2002. At December 31, 1997, the outstanding balance on the
term loan was $22.4 million.
Capital expenditures (other than those relating to the Company's new
facility) for the year ended December 31, 1997 totaled $24.5 million. This
includes $4.9 million of investments in an integrated, enterprisewide
information system, $4.4 million for displays and new product tooling and
$15.2 million for equipment and computers. In March 1997, the Company
relocated to its new headquarters and manufacturing facility in Foothill
Ranch, California. The total cost to construct and equip such facility was
approximately $47.9 million. During 1997, the Company also completed an
acquisition for an aggregate purchase price of approximately $2.6 million.
The Company believes that existing capital, anticipated cash flow from
operations and current and anticipated credit facilities will be sufficient
to meet operating needs and capital expenditures for the foreseeable future.
23
SEASONALITY
The following table sets forth certain unaudited quarterly data for the
periods shown:
1996 1997
------------------------------------------------- --------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
---------- ----------- --------- --------- --------- -------- -------- --------
Net sales $ 48,706 $ 62,764 $ 67,785 $ 39,311 $ 34,403 $ 55,150 $ 59,418 $ 45,013
Gross profit 34,064 44,655 47,705 25,352 19,656 36,055 36,048 26,832
Historically, the Company's sales, in the aggregate, generally have been
higher in the period from March to September, the period during which
sunglass use is typically highest. As a result, operating margins are
typically lower in the first and fourth quarters, as fixed operating costs
are spread over generally lower sales volume. In anticipation of seasonal
increases in demand, the Company typically builds inventories in the fourth
quarter and first quarter when net sales have historically been lower. In
addition, the Company's shipments of goggles, which generate gross margins at
significantly lower levels than sunglasses, are lowest in the second quarter.
This seasonal trend contributes to the Company's gross margin in the second
quarter, which historically has been the highest of the year. Although the
Company's business generally follows this seasonal trend, the success of the
Company's products introduced since late 1993 and the Company's international
expansion have partially mitigated the impact of seasonality.
BACKLOG
Historically, the Company has generally shipped domestic orders (other than
preseason orders for ski goggles and orders from certain sunglass specialty
chains) within one day of receipt and international orders within two weeks
of receipt. At December 31, 1997, the Company had a backlog of $6.8 million,
including backorders (merchandise remaining unshipped beyond its scheduled
shipping date) of $1.1 million as of such date. In September 1997, the
Company implemented changes in its replenishment system with Sunglass Hut,
which affected its reported backlog. Under the new system, in an effort to
more closely match inventory replenishment with Sunglass Hut's sales, certain
high-volume Oakley products are shipped to Sunglass Hut weekly, based on the
previous week's retail sales. As a result, Sunglass Hut will no longer place
future shipment orders for these products except in anticipation of major
seasonal sales increases. These changes reduced the Company's reported
backlog at September 30, 1997 and December 31, 1997 and will continue to do
so for future periods. These system enhancements are the result of the joint
efforts of the two companies to achieve the long-term benefits of lower
overall inventory levels, while increasing inventory turns and sales at
retail.
INFLATION
The Company does not believe inflation has had a material impact on the
Company in the past, although there can be no assurance that this will be the
case in the future.
RECENT ACCOUNTING DEVELOPMENTS
In 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," were
issued and are effective for fiscal years beginning after December 15, 1997.
The Company is reviewing the impact of the statements on its financial
statements.
24
OTHER MATTERS - YEAR 2000
The Company is assessing the internal readiness of its computer systems for
handling the year 2000. The Company expects to successfully implement the
systems and programming changes necessary to address year 2000 issues with
respect to its internal systems and does not believe that the cost of such
actions will have a material adverse effect on its results of operations or
financial condition. Although the Company is not aware of any material
operational issues or costs associated with preparing its internal systems
for the year 2000, there can be no assurance that there will not be a delay
in, or increased costs associated with, the implementation of the necessary
systems and changes to address the year 2000 issues, and the Company's
inability to implement such systems and changes could have an adverse effect
on future results of operations.
FORWARD-LOOKING STATEMENTS
When used in this document, the words "believes", "anticipates", "expects"
and similar expressions are intended to identify in certain circumstances
forward-looking statements. Such statements are subject to a number of risks
and uncertainties that could cause actual results to differ materially from
those projected, including risks related to the dependence on sales to
Sunglass Hut; the acceptance in the marketplace of new products; the ability
to source raw materials at prices favorable to the Company; the ability to
develop and introduce innovative products; currency fluctuations; and other
risks outlined in the Company's previously filed public documents, copies of
which may be obtained without cost from the Company. Given these
uncertainties, prospective investors are cautioned not to place undue
reliance on such statements. The Company also undertakes no obligation to
update these forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
See Note 9 to the Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial statements submitted as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Shareholders Meeting to be held on June 19,
1998 to be filed with the Securities and Exchange Commission within 120 days
after December 31, 1997 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Shareholders Meeting to be held on June 19,
1998 to be filed with the Securities and Exchange Commission within 120 days
after December 31, 1997 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Shareholders Meeting to be held on June 19,
1998 to be filed with the Securities and Exchange Commission within 120 days
after December 31, 1997 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Shareholders Meeting to be held on June 19,
1998 to be filed with the Securities and Exchange Commission within 120 days
after December 31, 1997 and is incorporated herein by reference.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) See page F-1 for a listing of financial statements submitted as part
of this report.
(a)(2) All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required
under the related instructions, are shown in the financial statements
or are inapplicable, and therefore have been omitted.
(a)(3) The following exhibits are included in this report.
3.1 (1) Articles of Incorporation of the Company
3.2 (1) Bylaws of the Company
3.3 (5) Amendment No. 1 to the Articles of Incorporation as filed
with the Secretary of State of the State of Washington on
September 26, 1996
10.1 (1) Credit Agreement (the "Credit Agreement"), dated June 20,
1995, between Oakley, Inc., Wells Fargo Bank, National
Association, and the Lenders named therein
10.2 (2) Credit Agreement (the "Amended and Restated Credit
Agreement"), dated August 15, 1995, between Oakley, Inc.,
Wells Fargo Bank, National Association, as agent and the
Lenders named therein
10.3 (3) First Amendment to Amended and Restated Credit Agreement
dated November 22, 1995 by and among Oakley, Inc., Wells
Fargo Bank, National Association, as agent and the Lenders
named therein
10.4 (5) Second Amendment to Amended and Restated Credit Agreement
dated as of October 10, 1996 by and among Oakley, Inc.,
Wells Fargo Bank, National Association, as agent and the
Lenders named therein
10.5 (5) Third Amendment to Amended and Restated Credit Agreement
dated as of November 25, 1996 by and among Oakley, Inc.,
Wells Fargo Bank, National Association, as agent and the
Lenders named therein
10.6 Fourth Amendment to Amended and Restated Credit Agreement
dated as of January 29, 1997 by and among Oakley, Inc.,
Wells Fargo Bank, National Association, as agent and the
Lenders named therein
10.7 (6) Fifth Amendment to Amended and Restated Credit Agreement
dated as of March 31, 1997 by and among Oakley, Inc., Wells
Fargo Bank, National Association, as agent and the Lenders
named therein
10.8 (6) Sixth Amendment to Amended and Restated Credit Agreement
dated as of March 31, 1997 by and among Oakley, Inc., Wells
Fargo Bank, National Association, as agent and the Lenders
named therein
10.9 (7) Seventh Amendment to Amended and Restated Credit Agreement
dated May 14, 1997 by and among Oakley, Inc., Wells Fargo
Bank, National Association, as agent and the Lenders named
therein
10.10 (7) Eighth Amendment to Amended and Restated Credit Agreement
dated June 27, 1997 by and among Oakley, Inc., Bank of
America National Trust and Savings Association and Union
Bank of California N.A.
10.11 (8) Ninth Amendment to Amended and Restated Credit Agreement
dated September 30, 1997 by and among Oakley, Inc., Bank of
America National Trust and Savings Association and Union
Bank of California N.A.
10.12 (1) Collateral Account Agreement, dated June 20, 1995, between
Oakley, Inc. and Wells Fargo Bank, National Association, as
agent for the Lenders party to the Credit Agreement
27
10.13 (2) Collateral Account Agreement, dated August 15, 1995, between
Oakley, Inc. and Wells Fargo Bank, National Association, as
agent for the Lenders party to the Amended and Restated
Credit Agreement
10.14 (1) Security Agreement and Chattel Mortgage, dated June 20,
1995, between Oakley, Inc. and Wells Fargo Bank, National
Association, as agent for the Lenders party to the Credit
Agreement
10.15 (1) Trademark Collateral Security Agreement, dated June 20,
1995, between Oakley, Inc. and Wells Fargo Bank, National
Association, as agent for the Lenders party to the Credit
Agreement
10.16 (1) Patent Collateral Security Agreement, dated June 20, 1995,
between Oakley, Inc. and Wells Fargo Bank, National
Association, as agent for the Lenders party to the Credit
Agreement
10.17 (1) Subordination Agreement, dated June 20, 1995, between
Oakley, Inc., Buffalo Works, Inc., James H. Jannard and Mike
D. Parnell
10.18 (1) Employment Agreement, dated as of August 1, 1995, between
Oakley, Inc. and Jim Jannard
10.19 (5) Amendment No. 1 dated as of July 22, 1996 to Employment
Agreement dated as of August 1, 1995, between Oakley, Inc.
and Jim Jannard
10.20 (1) Employment Agreement, dated as of August 1, 1995, between
Oakley, Inc. and Mike Parnell
10.21 (5) Amendment No. 1 dated as of May 23, 1996 to Employment
Agreement dated as of August 1, 1995, between Oakley, Inc.
and Mike Parnell
10.22 (6) Amendment No. 2 to employment agreement, dated February 1,
1997, between Oakley, Inc. and Mike Parnell
10.23 (2) Guaranty, dated August 15, 1995, by the Guarantors named
therein and Wells Fargo Bank, National Association, as agent
for the Lenders party to the Amended and Restated Credit
Agreement
10.24 (2) Shareholder Pledge Agreement (original and English
translation), dated August 15, 1995 between Oakley, Inc. and
Wells Fargo Bank, National Association, as agent for the
Lenders party to the Amended and Restated Credit Agreement
10.25 (2) Subordination Agreement, dated August 15, 1995 between the
Initial Subordinated Creditors named therein and Wells Fargo
Bank, National Association, as agent for the Lenders party
to the Amended and Restated Credit Agreement
10.26 (2) Promissory Note, dated August 8, 1995 between Oakley, Inc.
and James H. Jannard
10.27 (2) Promissory Note, dated August 8, 1995 between Oakley, Inc.
and M. and M. Parnell Revocable Trust
10.28 (3) Termination and Release Agreement, dated as of August 15,
1995 between Oakley, Inc. and Wells Fargo Bank, National
Association, as agents for the Lenders party to the Credit
Agreement
10.29 (5) Counterpart Subordination Agreement executed by Oakley
(U.K.) Ltd. to the Subordination Agreement, dated as of
August 15, 1995 between the Initial Subordinated Creditors
and Wells Fargo Bank, National Association, as Agent under
the Credit Agreement
10.30 (2) Agreement, dated July 17, 1995, between Oakley, Inc. and
Michael Jordan
10.31 (1) Lease, dated September 15, 1988, between OO Partnership and
Oakley, Inc.
10.32 (3) First Amendment to Lease dated December 31, 1995, by and
between Oakley, Inc., and OO Partnership
10.33 (1) Agreement, dated July 31, 1995, between OO Partnership and
Oakley, Inc.
10.34 (1) Lease, dated March 5, 1990, between Weyerhauser Mortgage
Company and Oakley, Inc., as amended
10.35 (1) Sublease, dated August 17, 1992, between Western Digital
Corporation and Oakley, Inc., as amended
28
10.36 (1) Purchase Agreement and Escrow Instructions, dated December
9, 1994, between Oakley, Inc. and Foothill Ranch Development
Corporation
10.37 (3) Oakley, Inc. 1995 Stock Incentive Plan
10.38 (3) Oakley, Inc. Amended and Restated 1995 Stock Incentive Plan
10.39 (3) Oakley, Inc. Executive Officer Performance Bonus Plan
10.40 (1) Employment Agreement, dated as of April 1, 1995, between
Oakley, Inc. and Link Newcomb
10.41 (6) Employment Agreement, dated as of January 31, 1997, between
Oakley, Inc. and Link Newcomb
10.42 (6) Amendment No. 1 to employment agreement, dated February 1,
1997, between Oakley, Inc. and Link Newcomb
10.43 (3) Indemnification Agreement, dated August 1, 1995, between
Oakley, Inc. and Jim Jannard
10.44 (1) Schedule of indemnification agreements between Oakley, Inc.
and each of its directors and executive officers
10.45 (1) Standard Form of Agreement between Owner and Project
Manager, dated December 30, 1994, between Oakley, Inc. and
Snyder Langston
10.46 (1) Lease Agreement, dated January 26, 1995, between Oakley
Europe, sarl and Investipierre 7 (In French with English
translation)
10.47 (3) Aircraft Lease Agreement, dated August 10, 1995, between
Oakley, Inc. and X, Inc.
10.48 (3) Aircraft Lease Agreement, dated August 10, 1995, between
Oakley, Inc. and Time Tool Incorporated
10.49 (1) Registration Rights Agreement, dated August 1, 1995, between
Oakley, Inc., Jim Jannard and the M. and M. Parnell
Revocable Trust
10.50 (3) Indemnification Agreement, dated August 9, 1995, between
Oakley, Inc., Jim Jannard and the M. and M. Parnell
Revocable Trust
10.51 (4) Indemnification Agreement, dated June 6, 1996, between
Oakley, Inc., Jim Jannard and the M. and M. Parnell
Revocable Trust
10.52 (6) Employment Agreement, dated as of January 16, 1997, between
Oakley, Inc. and Robert Bruning
10.53 (6) Pledge Agreement, dated as of January 1997, between Oakley,
Inc. and Wells Fargo Bank, National Association, as agent
and the Lenders named therein
10.50 (6) Reciprocal Exclusive Dealing Agreement dated March 11, 1997
among Oakley, Inc., Gentex Optics, Inc. and Essilor
International Compagnie Generale D'Optique, S.A. (portions
of this document have been omitted pursuant to a request for
confidential treatment)
10.54 (6) Promissory Note, dated March 20, 1997, between Oakley, Inc.
and Bank of America National Trust and Savings Association
10.55 (8) Consultant Agreement, dated as of August 1, 1997, between
Oakley, Inc. and Mike Parnell
10.56 (8) Consultant Agreement, dated as of August 1, 1997, between
Oakley, Inc. and Jim Jannard
10.57 (8) Promissory Note, dated August 7, 1997, between Oakley, Inc.
and Bank of America National Trust and Savings Association
10.58 (8) Amendment No. 1 to Promissory Note, dated August 14, 1997,
between Oakley, Inc. and Bank of America National Trust and
Savings Association
10.59 (8) Amendment No. 2 to Promissory Note, dated August 14, 1997,
between Oakley, Inc. and Bank of America National Trust and
Savings Association
29
10.59 (8) Deed of Trust with Assignment of Rents, Security Agreement
and Fixture Filing, dated August 7, 1997, between Oakley,
Inc. and Bank of America National Trust and Savings
Association
10.60 (8) Standing Loan Agreement , dated August 7, 1997 between
Oakley, Inc. and Bank of America National Trust and Savings
Association
10.61 First Amendment to Standing Loan Agreement, dated January
12, 1998, between Oakley, Inc. and Bank of America National
Trust and Savings Association
10.62 Indemnification Agreement, dated October 3, 1997, between
Oakley, Inc. and William D. Schmidt
10.63 Employment Agreement, dated October 6, 1997 between Oakley,
Inc. and Thomas A. George
10.64 Indemnification Agreement, dated October 6, 1997 between
Oakley, Inc. and Thomas A. George
21.1 List of Material Subsidiaries
23.1 Consent of Deloitte & Touche, LLP, independent auditors
27.1 Financial Data Schedule
(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-Q of Oakley, Inc. for the quarter ended
September 30, 1995.
(3) Previously filed with the Form 10-K of Oakley, Inc. for the year ended
December 31, 1995.
(4) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended
September 30, 1996.
(5) Previously filed with the Form 10-K of Oakley, Inc. for the year ended
December 31, 1996.
(6) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended
March 31, 1997.
(7) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended
June 30, 1997.
(8) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended
September 30, 1997.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of 1997.
(c) See (a) (2) above for a listing of the exhibits included as a part of this
report.
30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report...........................................
Consolidated Balance Sheets as of December 31, 1996 and 1997 ..........
Consolidated Statements of Income for the Years ended December 31,
1995, 1996 and 1997....................................................
Consolidated Statements of Changes in Shareholders' Equity for the
Years ended December 31, 1995, 1996 and 1997...........................
Consolidated Statements of Cash Flows for the Years ended
December 31, 1995, 1996 and 1997.......................................
Notes to Consolidated Financial Statements.............................
31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Oakley, Inc.:
We have audited the accompanying consolidated balance sheets of Oakley, Inc.
and subsidiaries (the Company) as of December 31, 1996 and 1997 and the
related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a)(2). These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Oakley,
Inc. and subsidiaries as of December 31, 1996 and 1997 and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
February 6, 1998
Costa Mesa, California
32
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
December 31,
------------------------
1996 1997
----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 8,063 $ 2,657
Accounts receivable, less allowance for
doubtful accounts of $590 (1996) and
$551 (1997) 21,084 24,015
Inventories (Note 3) 29,553 26,200
Other receivables 1,465 2,427
Deferred income taxes (Note 5) 5,643 4,829
Prepaid expenses and other 5,822 2,978
----------- ------------
Total current assets 71,630 63,106
Property and equipment, net (Note 4) 72,942 104,230
Deposits 2,193 1,519
Other assets 11,480 12,436
----------- ------------
TOTAL ASSETS $158,245 $181,291
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit (Note 6) $ 18,000 $ 2,800
Accounts payable 7,997 6,762
Accrued expenses and other current liabilities 9,526 8,666
Income taxes payable (Note 5) - 1,671
Current portion long-term debt (Note 6) - 1,519
----------- ------------
Total current liabilities 35,523 21,418
Deferred income taxes 1,285 2,030
Long-term debt, net of current maturities (Note 6) - 20,882
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY (Note 8):
Preferred stock, par value $.01 per share; 20,000,000
shares authorized; no shares issued - -
Common stock, par value $.01 per share; 200,000,000
shares authorized; 70,960,012 (1996) and
70,659,086 (1997) issued and outstanding 710 707
Additional paid-in capital 58,218 55,170
Retained earnings 62,634 82,238
Foreign currency translation adjustment (125) (1,154)
----------- ------------
Total shareholders' equity 121,437 136,961
----------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $158,245 $181,291
----------- ------------
----------- ------------
See accompanying notes to consolidated financial statements.
33
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
Year Ended December 31,
--------------------------------------
1995 1996 1997
------------ ------------ ------------
Net sales (Note 10) $ 172,752 $ 218,566 $ 193,984
Cost of goods sold 50,295 66,790 75,393
------------ ------------ ------------
Gross profit 122,457 151,776 118,591
Operating expenses:
Research and development 16,774 4,782 3,825
Selling 36,776 48,092 53,007
Shipping and warehousing 4,678 6,507 5,721
General and administrative 15,753 18,513 23,032
Gain on disposition of
property and equipment (Note 8) (4,794) - -
------------ ------------ ------------
Total operating expenses 69,187 77,894 85,585
------------ ------------ ------------
Operating income 53,270 73,882 33,006
Interest expense (income), net 273 (781) 1,181
------------ ------------ ------------
Income before provision for income taxes 52,997 74,663 31,825
Provision for income taxes (Note 5) 7,830 28,670 12,221
------------ ------------ ------------
Net income $ 45,167 $ 45,993 $ 19,604
------------ ------------ ------------
------------ ------------ ------------
Basic net income per common share $ 0.64 $ 0.28
------------ ------------
------------ ------------
Basic weighted average common shares 71,324,000 70,659,000
------------ ------------
------------ ------------
Diluted net income per common share $ 0.64 $ 0.28
------------ ------------
------------ ------------
Diluted weighted average common shares 71,728,000 70,700,000
------------ ------------
------------ ------------
Supplemental data (unaudited) (Note 1):
Historical income before provision
for income taxes $ 52,997
Supplemental provision for income taxes 20,854
------------
Supplemental net income $ 32,143
------------
------------
34
OAKLEY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
Cumulative
foreign
Common Stock currency
---------------------------- Additional Retained translation
Shares Amount Paid-in Capital Earnings gain(loss) Total
------------ ---------- --------------- ----------- ------------- ----------
Balance as of January 1, 1995 65,002,000 $ 18 $ - $ 33,204 $ (89) $ 33,133
Issuance of common shares 6,600,000 347 68,713 - - 69,060
Reclassification of undistributed
taxable S corporation earnings (Note 8) - - (5,080) 5,080 - -
Contributed capital (202,000) (8) 794 - - 786
Net income - - - 45,167 - 45,167
S corporation dividends - - - (66,453) - (66,453)
Foreign currency translation - - - - 16 16
------------ ---------- --------------- ----------- ------------- ----------
Balance as of December 31, 1995 71,400,000 357 64,427 16,998 (73) 81,709
Stock split (Note 8) 357 - (357) - -
Exercise of stock options (Note 8) 12,112 - 139 - - 139
Repurchase of common shares (Note 8) (452,100) (4) (6,393) - - (6,397)
Compensatory stock options - - 45 - - 45
Net income - - - 45,993 - 45,993
Foreign currency translation - - - - (52) (52)
------------ ---------- --------------- ----------- ------------- ----------
Balance as of December 31, 1996 70,960,012 710 58,218 62,634 (125) 121,437
Exercise of stock options (Note 8) 3,074 - 36 - - 36
Repurchase of common shares (Note 8) (304,000) (3) (3,197) - - (3,200)
Compensatory stock options - - 113 - - 113
Net income - - - 19,604 - 19,604
Foreign currency translation - - - - (1,029) (1,029)
------------ ---------- --------------- ----------- ------------- ----------
Balance as of December 31, 1997 70,659,086 $ 707 $ 55,170 $ 82,238 $ (1,154) $ 136,961
------------ ---------- --------------- ----------- ------------- ----------
------------ ---------- --------------- ----------- ------------- ----------
See accompanying notes to consolidated financial statements.
35
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year ended December 31,
---------------------------------------
1995 1996 1997
---------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 45,167 $ 45,993 $ 19,604
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,393 8,987 12,982
Deferred compensation - 45 113
(Loss) gain on disposition of equipment (5,286) (156) 334
Deferred income taxes, net (3,752) (606) 1,559
Changes in assets and liabilities, net of
effects of business acquisitions:
Accounts receivable (4,885) 1,964 (2,921)
Inventories (12,035) (8,143) 3,727
Other receivables 621 (1,117) (962)
Prepaid expenses and other (1,071) (4,091) 2,844
Accounts payable (2,562) (637) (1,615)
Accrued expenses and other current liabilities 3,025 327 (1,067)
Income taxes payable 2,029 (2,029) 1,671
---------- --------- ----------
Net cash provided by operating activities 28,644 40,537 36,269
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits 689 961 674
Acquisitions of property and equipment (33,239) (38,642) (43,796)
Proceeds from sale of property and equipment 412 697 250
Acquisitions (Note 2) - (14,223) (2,600)
Other assets - (2,454) 789
---------- --------- ----------
Net cash used in investing activities (32,138) (53,661) (44,683)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings 57,049 18,000 42,800
Repayments of bank borrowings (60,349) - (35,599)
Repayments of S distribution notes - (263) -
Net proceeds from issuance of common shares 69,060 139 36
Contribution of capital 786 - -
Repurchase of common shares - (6,397) (3,200)
S corporation dividends paid (55,000) - -
---------- --------- ----------
Net cash provided by financing activities 11,546 11,479 4,037
Effect of exchange rate changes on cash 16 (52) (1,029)
---------- --------- ----------
Net increase (decrease) in cash and cash equivalents 8,068 (1,697) (5,406)
Cash and cash equivalents, beginning of period 1,692 9,760 8,063
---------- --------- ----------
Cash and cash equivalents, end of period $ 9,760 $ 8,063 $ 2,657
---------- --------- ----------
---------- --------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 585 $ 58 $ 1,390
---------- --------- ----------
---------- --------- ----------
Income taxes (net of refunds received) $ 9,257 $ 34,249 $ 6,550
---------- --------- ----------
---------- --------- ----------
During the year ended December 31, 1995, the Company distributed aircraft to
shareholders with a fair value of $11.2 million in the form of a dividend. At
December 31, 1995, the Company had unpaid S distribution notes with an estimated
balance of $0.3 million.
See accompanying notes to consolidated financial statements.
36
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS - The Company is an innovation-driven designer,
manufacturer and distributor of high-performance eyewear and athletic
equipment. The Company's principal strength is its ability to develop eyewear
which demonstrates superior optical performance and comfort through the
combination of patented technology and unique styling. The Company has
focused on innovation for sports application eyewear, and its products are
worn by a variety of athletes, such as skiers, cyclists, runners, surfers,
golfers, basketball and baseball players and motocross riders. In addition,
the Company's products, which are currently sold in over 70 countries
worldwide, have become increasingly popular in the larger nonsports, or
recreational, segment of the sunglass market.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Oakley, Inc. (a Washington corporation, which
succeeded to all the assets and liabilities of Oakley, Inc., a California
corporation) and its subsidiaries (collectively, the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS - For purposes of the consolidated financial
statements, investments purchased with an original maturity of three months
or less are considered cash equivalents.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, net
of accumulated depreciation and amortization. Depreciation and amortization
are provided for using the straight-line method over the estimated useful
lives (generally three to seven years for property and equipment and 39 years
for buildings) of the respective assets or, as to leasehold improvements, the
term of the related lease if less than the estimated service life.
INTANGIBLE ASSETS - The excess of cost over fair market value of net
identifiable assets of acquired companies and other intangible assets of
$8,767,000 in 1996 and $10,870,000 in 1997 included in other assets in the
accompanying balance sheet are amortized on a straight-line basis over
periods ranging from ten to fifteen years. The carrying value of intangible
assets is periodically reviewed by the Company based on the estimated future
operating income of each acquired entity on an undiscounted cash flow basis.
Based upon its most recent analysis, the Company believes that no material
impairment of intangible assets exists at December 31, 1997.
LONG-LIVED ASSETS - The Company accounts for the impairment and
disposition of long-lived assets in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In
accordance with SFAS No. 121, long-lived assets to be held are reviewed for
events or changes in circumstances which indicate that their carrying value
may not be recoverable. As of December 31, 1997, no impairment has been
indicated.
REVENUE RECOGNITION - Revenue is recognized when merchandise is shipped
to a customer. Generally the Company extends credit to its customers and
does not require collateral. The Company performs ongoing credit evaluations
of its customers and historic credit losses have been within management's
expectations.
37
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
FINANCIAL INSTRUMENTS - The carrying amounts of financial instruments,
consisting of cash and cash equivalents, trade accounts receivables and
accounts payable, approximates fair value due to the short period of time
between origination of the instruments and their expected realization.
Management also believes the carrying amount of balances outstanding under
the credit agreements equals fair value as the underlying interest rates
reflect market rates.
INCOME TAXES - The Company accounts for income taxes under the
provisions of SFAS No. 109, "Accounting for Income Taxes." Deferred taxes on
income result from temporary differences between the reporting of income for
financial statements and tax reporting purposes. Prior to August 14, 1995,
the Company elected to be treated as an S corporation under the provisions of
the Internal Revenue Code. Accordingly, the provision for income taxes for
the periods through August 14, 1995 are computed by applying the California
franchise tax rate for S corporations of 1.5% to the Company's pretax
earnings, plus any foreign taxes. Effective August 14, 1995, the Company
converted to a C corporation and became subject to regular Federal and state
income taxes on an ongoing basis. As a result, the Company recorded $1.6
million of deferred income tax assets on August 14, 1995 through a benefit
recorded on the statement of income.
FOREIGN CURRENCY TRANSLATION - The Company's primary functional currency
is the U.S. dollar, while the functional currency of each of the Company's
subsidiaries is the local currency of the subsidiary. 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 on
short-term intercompany foreign currency transactions are recognized as
incurred. (Note 9)
SUPPLEMENTAL NET INCOME - Supplemental net income represents the results
of operations adjusted to reflect a provision for income tax on historical
income before provision for income taxes which gives effect to the change in
the Company's income tax status to a C corporation subsequent to the public
sale of its common stock. The difference between the pro forma income tax
rates utilized and the Federal statutory rate of 35% relates primarily to
state income taxes (approximately 5%, net of federal tax benefit).
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
EARNINGS PER SHARE - The Company has adopted SFAS No. 128, "Earnings Per
Share." All earnings per share amounts have been restated to conform to SFAS
No. 128. 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 years ended December 31, 1996 and 1997, the diluted
weighted average common shares outstanding includes 404,000 and 41,000,
respectively, of dilutive stock options.
NEW ACCOUNTING PRONOUNCEMENTS - In 1997, SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," were issued and are effective for fiscal
years beginning after December 15, 1997. The Company is reviewing the impact
of these statements on its financial statements.
38
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
RECLASSIFICATIONS - Certain reclassifications have been made to prior
period financial statements to conform to the presentation for the financial
statements for the period ended December 31, 1997.
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
GENERAL BUSINESS - 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, and there can be no assurance
of the Company's ability to do so. The sunglass industry 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. The eyewear industry is subject to changing consumer
preferences; shifts in consumer preferences may adversely affect companies
that misjudge such preferences.
In addition, the Company has experienced significant growth under several
measurements which has placed, and could continue to place, a significant
strain on its employees and operations. If management is unable to
anticipate or manage growth effectively, the Company's operating results
could be materially adversely affected.
USE OF ESTIMATES - The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles necessarily requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the balance sheet dates and the reported amounts of
revenue and expense during the reporting periods. Actual results could
differ from such estimates.
VULNERABILITY DUE TO SUPPLIER CONCENTRATIONS - The Company relies on a
single source for the supply of several components, including the uncoated
lens blanks from which substantially all of its sunglass lenses are cut. The
effect of the loss of any of these sources or of a disruption in their
business will depend primarily upon the length of time necessary to find a
suitable alternative source. The loss of the source for lens blanks or a
disruption in such source's business or failure by it to meet the Company's
product needs on a timely basis could cause, at a minimum, temporary
shortages in needed materials and could have a material adverse effect on the
Company's results of operations.
VULNERABILITY DUE TO CUSTOMER CONCENTRATIONS - Net sales to a sunglass
specialty retail chain accounted for approximately 28.8%, 31.0% and 21.5% of
such sales for the years ended December 31, 1995, 1996 and 1997, respectively.
39
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 2 - ACQUISITIONS
During 1996, the Company acquired its exclusive distributor for the Company's
products in the United Kingdom and Ireland ("Oakley U.K.") and a facility for
the production of a new product line for an aggregate purchase price of
approximately $14.2 million. During 1997, the Company acquired One Xcel, a
company that designs, markets and distributes protective face shields for use
with sports helmets, for an aggregate purchase price of approximately $2.6
million. All such acquisitions were recorded using the purchase method of
accounting and the results of operations from the date of acquisition have
been included in the Company's respective 1996 and 1997 financial statements.
The excess of the purchase price over the fair values of the net assets
acquired has been allocated to intangible assets, which are included in the
caption "Other assets" in the accompanying consolidated balance sheet and are
being amortized on a straight-line basis over a period of ten to fifteen
years. Had the acquisitions occurred on January 1, 1995, combined pro forma
net sales, net income and net income per common share would not have been
materially different from that currently being reported.
NOTE 3 - INVENTORIES
Inventories consist of the following at December 31,:
1996 1997
--------------- ----------------
Raw materials $ 16,039,000 $ 11,814,000
Finished goods 13,514,000 14,386,000
--------------- ----------------
$ 29,553,000 $ 26,200,000
--------------- ----------------
--------------- ----------------
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31,:
1996 1997
--------------- ----------------
Land $ 9,008,000 $ 8,999,000
Buildings 2,191,000 51,915,000
Automobiles and vans 772,000 752,000
Furniture and equipment 52,044,000 70,473,000
Tooling 4,880,000 6,490,000
Leasehold improvements 3,713,000 511,000
Construction in progress 28,580,000 -
--------------- ----------------
101,188,000 139,140,000
Less accumulated depreciation
and amortization 28,246,000 34,910,000
--------------- ----------------
$ 72,942,000 $104,230,000
--------------- ----------------
--------------- ----------------
40
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 5 - INCOME TAXES
The provision for income taxes consists of the following for the years ended
December 31,:
1995 1996 1997
------------- ------------- -------------
Current:
Federal $ 6,756,000 $22,535,000 $ 7,228,000
State 2,063,000 5,727,000 2,234,000
Foreign 1,443,000 1,082,000 1,200,000
------------- ------------- -------------
10,262,000 29,344,000 10,662,000
Deferred:
Federal (2,081,000) (956,000) 1,538,000
State (351,000) 282,000 21,000
------------- ------------- -------------
(2,432,000) (674,000) 1,559,000
------------- ------------- -------------
$ 7,830,000 $28,670,000 $12,221,000
------------- ------------- -------------
------------- ------------- -------------
A reconciliation of income tax expense computed at U.S. Federal statutory
rates to income tax expense for the years ended December 31, is as follows:
1995 1996 1997
------------- ------------- -------------
Tax at U.S. Federal statutory rates $ 18,549,000 $26,132,000 $ 11,138,000
State income taxes, net 1,316,000 3,905,000 1,466,000
Recording of deferred income tax assets
in connection with the conversion to C Corporation (1,600,000)
S corporation earnings not subject to Federal tax (10,301,000)
Foreign sales corporation benefit,
net of foreign tax rate differential - (1,807,000) (928,000)
Other, net (134,000) 440,000 545,000
------------- ------------- -------------
$ 7,830,000 $28,670,000 $ 12,221,000
------------- ------------- -------------
------------- ------------- -------------
41
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities at December
31, are as follows:
1996 1997
------------- -------------
Deferred tax assets:
Warranty reserve $ 1,267,000 $ 1,434,000
Uniform capitalization 509,000 609,000
Sales returns reserve 736,000 810,000
State taxes 1,880,000 601,000
Inventory reserve 258,000 730,000
Allowance for doubtful accounts 179,000 172,000
Other 814,000 473,000
------------- -------------
Total deferred tax assets 5,643,000 4,829,000
Deferred tax liabilities:
Depreciation (1,285,000) (2,030,000)
------------- -------------
Net deferred tax assets $ 4,358,000 $ 2,799,000
------------- -------------
------------- -------------
NOTE 6 - DEBT
LINE OF CREDIT - The Company has a $30.0 million unsecured line of
credit with a bank syndicate which bears interest at either the bank's prime
lending rate (8.50% at December 31, 1997) or LIBOR plus 1.00% (6.94% at
December 31, 1997), as defined in the credit agreement, and matures June
1999. At December 31, 1997, there was $2.8 million in borrowings outstanding
under the credit agreement. The credit agreement contains various
restrictive covenants including the maintenance of certain financial ratios.
At December 31, 1997, the Company was in compliance with all restrictive
covenants and financial ratios.
LONG TERM DEBT - In August 1997, the Company obtained a term loan
collateralized by the Company's corporate facility. The term loan requires
quarterly principal payments of approximately $380,000 ($1,519,000 annually),
plus interest based upon LIBOR plus 1.15% (7.09% at December 31, 1997) for
five years. The then outstanding balance payable is due in September 2002.
At December 31, 1997, the outstanding balance under the term loan was $22.4
million.
42
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 7 - COMMITMENTS AND CONTINGENCIES
LEASES - The Company is committed under noncancelable operating leases
expiring at various dates through 2001 for certain offices, warehouse
facilities, production facilities and aircraft. The aircraft are leased from
entities controlled by officers and shareholders of the Company. Minimum
future annual rentals under these leases are as follows:
Year Ending
December 31, Related Party Other Total
- ----------------------------- -------------- ------------ -----------
1998 $ 124,000 $ 732,000 $ 856,000
1999 124,000 644,000 768,000
2000 91,000 308,000 399,000
2001 10,000 1,000 11,000
-------------- ------------ -----------
Total $ 349,000 $1,685,000 $2,034,000
-------------- ------------ -----------
-------------- ------------ -----------
Prior to the Company's relocation in 1997, certain offices were leased on a
month-to-month basis from an officer and a shareholder. Rent expense is
summarized as follows for the years ended December 31,:
1995 1996 1997
-------------- ------------- -------------
Related parties $ 421,500 $ 383,000 $ 114,000
Other 819,500 1,219,000 1,378,000
--------------- ------------- -------------
Total $ 1,241,000 $1,602,000 $ 1,492,000
--------------- ------------- -------------
--------------- ------------- -------------
PURCHASE COMMITMENTS - In March 1997, the Company entered into a
four-year exclusive dealing agreement with its lens blank supplier and the
supplier's French parent, pursuant to which the Company received the
exclusive right to purchase decentered sunglass lenses, in return for the
Company's agreement to fulfill all its lens requirements, subject to certain
exceptions, from such supplier. The Company expects its minimum obligations
under the term of this agreement to be 18.5 million units, with an aggregate
estimated purchase price of between $50.0 million and $55.0 million.
EMPLOYMENT AND CONSULTING AGREEMENTS - The Company has entered into
employment and consulting agreements with certain employees of the Company
which have terms of two to four years. The agreements require minimum
aggregate compensation to the respective officers. Additionally, the
officers participate in a performance bonus plan, and the employment
agreements establish minimum bonus targets for such employees.
43
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
ENDORSEMENT CONTRACTS - The Company has entered into several endorsement
contracts with selected athletes and others who endorse the Company's
products. Under the contracts, the Company has agreed to pay certain
incentives based on performance and is required to pay minimum annual
payments as follows:
Year Ending
December 31,
- --------------
1998 $ 3,870,000
1999 2,282,000
2000 929,000
2001 505,000
2002 500,000
Thereafter 1,000,000
-------------
Total $ 9,086,000
-------------
-------------
Included in such amounts is an annual retainer of $0.5 million through 2005
for a director of the Company.
LITIGATION - During December 1996, three putative class action lawsuits
("the California Securities Actions") were filed in the California Superior
Court for the County of Orange against the Company and three of its officers
and directors alleging material misstatements and omissions in certain of the
Company's public statements, SEC filings and reports of third-party analysts.
The plaintiffs seek unspecified damages and other relief. In addition, one
of the lawsuits also asserted claims against firms who served as underwriters
of the June 6, 1996 offering of the Company's common stock by certain of its
shareholders of (the "Secondary Offering"). Pursuant to certain provisions
of the underwriting agreement between the Company and the firms, the Company
agreed to indemnify the firms against certain liabilities, including
liabilities under the Securities Act. Pursuant to a court order sustaining
demurrers to certain claims and to an agreement with plaintiffs to dismiss
certain other claims, the only claim remaining in the California Securities
Actions is a claim for purported violations of the antifraud provision of the
California Corporation Code with respect to two of the Company's officers and
directors. In March 1997, the Company was named as a nominal defendant in a
putative derivative action against two of the Company's officers and
directors based on substantially the same allegations as those in the
California Securities Actions. The derivative plaintiff seeks to recover
damages and other relief on behalf of the Company. On February 4, 1998, the
court entered a final order of dismissal of the putative derivative action.
The Company does not know whether the derivative plaintiff plans to appeal
the court's final order. During October, November and December 1997, five
putative class action lawsuits (the "Federal Securities Actions") were filed
in the United States District Court for the Central District of California,
Southern Division against the Company, three of its officers and directors
and firms that served as underwriters of the Secondary Offering, alleging
material misstatements and omissions in certain of the Company's public
statements, the reports of third-party analysts and/or certain of the
Company's SEC filings. The plaintiffs in the Federal Securities Actions seek
unspecified damages and other relief. Although it is too soon to predict the
outcome of the California Securities Actions or the Federal Securities
Actions with any certainty, based on its current understanding of the facts,
the Company believes that the plaintiffs' claims are without merit and
intends to vigorously defend the actions.
44
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
In addition, the Company is currently involved in litigation incidental to
the Company's business. In the opinion of management, the ultimate
resolution of such litigation, in the aggregate, will not have a significant
effect on the accompanying consolidated financial statements.
NOTE 8 - SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING - In August 1995, the Company completed an
initial public offering of 6,600,000 shares of the Company's common stock for
$11.50 per share, netting proceeds to the Company after underwriting
discounts and expenses of approximately $69.1 million.
S CORPORATION DISTRIBUTION - Prior to the consummation of the public
offering, the Company distributed to Oakley's shareholders certain fixed
assets and a portion of previously earned undistributed taxable S corporation
earnings. In conjunction with the distribution of assets, the Company
recorded a gain of $4.9 million for the year ended December 31, 1995,
representing the excess of the fair value of the assets distributed over
their respective net book values. Additionally, concurrently with the
consummation of the initial public offering, Oakley shareholders contributed
certain assets totaling $0.8 million to the Company. Upon consummation of
its initial public offering, in accordance with a regulation of the
Securities and Exchange Commission, the Company reclassified $5.1 million of
retained earnings to additional paid-in capital. This amount represents for
financial reporting purposes previously earned and undistributed taxable S
corporation earnings.
STOCK SPLIT - On September 11, 1996, the Company declared a two-for-one
stock split to be effected in the form of a one-share dividend per share of
its common stock. The new shares were distributed on October 10, 1996 to
shareholders of record at the close of business at September 25, 1996. All
share and per share amounts included in the accompanying consolidated
financial statements and footnotes have been restated to give retroactive
recognition to the stock split in prior periods by reclassifying from
retained earnings to common stock the par value of the additional shares
arising from the split.
STOCK REPURCHASE - In October 1996, the Company's Board of Directors
authorized the repurchase by the Company of up to three million shares of the
Company's common stock. As of December 31, 1997, the Company had repurchased
756,100 shares at an aggregate cost of approximately $9.6 million.
STOCK INCENTIVE PLAN - The Company's 1995 Stock Incentive Plan (the
"Plan") provides for stock-based incentive awards, including incentive stock
options, nonqualified stock options, restricted stock, performance shares,
stock appreciation rights and deferred stock to Company officers, employees,
advisors and consultants. A total of 5,712,000 shares have been reserved for
issuance under the Plan. At December 31, 1997, stock options for 760,822
shares were exercisable and 2,423,808 shares were available for issuance
pursuant to stock option grants.
45
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
The following table summarizes information with respect to the Plan for the
years ended December 31, 1995, 1996 and 1997:
Option Weighted Average
shares Exercise Price
----------- --------------
Outstanding at January 1, 1995 -
Granted (weighted average fair value $1.88) 1,254,154 $ 11.53
Canceled (3,732) $ 11.50
----------
Exercised -
Outstanding at December 31, 1995 1,250,422 $ 11.53
Granted (weighted average fair value $5.54) 856,436 $ 12.17
Canceled (78,954) $ 13.78
Exercised (12,112) $ 11.50
----------
Outstanding at December 31, 1996 2,015,792 $ 11.73
Granted (weighted average fair value $4.99) 1,445,329 $ 9.65
Canceled (137,723) $ 11.07
Exercised (3,074) $ 11.50
----------
Outstanding at December 31, 1997 3,320,324 $ 10.85
----------
----------
Additional information regarding options outstanding as of December 31, 1997
is as follows:
Options Outstanding Options Exercisable
----------------------------- ---------------------------
Weighted Avg
Remaining
Range of Number Contractual Weighted Avg Number Weighted Avg
Exercise Prices Outstanding Life (yrs) Exercise Price Exercisable Exercise Price
---------------- ----------- ------------- -------------- ----------- --------------
$ 8.50 - 10.81 1,362,315 9.73 $ 9.53 8,499 $ 8.50
$ 11.50 - 12.50 1,892,290 8.14 $ 11.55 726,163 $ 11.53
$ 14.25 - 25.19 65,719 8.51 $ 17.86 27,210 $ 18.81
As disclosed in Note 1, the Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based awards. No compensation
expense has been recognized in the financial statements for employee stock
arrangements. SFAS No. 123, "Accounting for Stock-Based Compensation,"
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
46
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
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: expected life: 36 to 60 months;
stock volatility, 9.4% - 63.5% in 1995, 45.7% - 77.4% in 1996 and 54.5% -
71.3% in 1997; risk-free interest rates, 5.5% in 1995, 1996 and 1997; no
dividends during the expected term and forfeitures are recognized as they
occur.
If the computed fair value of the 1995, 1996 and 1997 awards had been
amortized to expense over the vesting period of the awards, net income would
have been $45,017,000 in 1995, $45,531,000 in 1996 and $18,117,000 in 1997.
The basic and diluted earnings per share on such basis would have been $0.64
in 1996 and $0.26 in 1997.
NOTE 9 - HEDGING ACTIVITIES
Certain of the Company's foreign subsidiaries enter into derivative financial
instruments, including foreign currency forward exchange contracts, to manage
foreign exchange risk on foreign currency transactions and do not use the
contracts for trading purposes. These financial instruments are used to
protect the Company from the risk that the eventual net cash inflows from the
foreign currency transactions will be adversely affected by changes in
exchange rates. Gains and losses related to hedges of firmly committed
transactions are deferred and recognized when the hedged transaction occurs.
Gains and losses resulting from foreign currency contracts which are not
hedges of firmly committed transactions are recorded each period to the
consolidated statement of income.
A summary of forward exchange contracts is as follows:
December 31, 1997
---------------------------------------------
U.S. Dollar Fair
Equivalent Maturity Value
------------- -------------- -----------
French francs $ 150,000 January 1998 $ 153,000
French francs 600,000 February 1998 613,000
French francs 600,000 March 1998 613,000
German marks 1,200,000 January 1998 1,222,000
German marks 1,200,000 February 1998 1,222,000
German marks 1,050,000 March 1998 1,069,000
British pounds 700,000 April 1998 699,000
British pounds 1,900,000 July 1998 1,903,000
British pounds 1,650,000 October 1998 1,657,000
British pounds 750,000 January 1999 755,000
------------- -----------
$ 9,800,000 $9,906,000
------------- -----------
------------- -----------
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 December 31, 1997, each of
the contracts was recorded at fair market value and the resulting gains and
losses were recorded to the consolidated statements of income.
47
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 10 - NET SALES
Net sales are summarized as follows for the years ended December 31,:
1995 1996 1997
------------ ------------ ------------
Domestic $115,202,000 $139,459,000 $113,942,000
International 57,550,000 79,107,000 80,042,000
------------ ------------ ------------
$172,752,000 $218,566,000 $193,984,000
------------ ------------ ------------
------------ ------------ ------------
NOTE 11 - DOMESTIC AND FOREIGN OPERATIONS
The Company has one business segment which consists of the design,
manufacture and sale of high-performance eyewear and athletic equipment.
Information related to domestic and foreign operations is as follows:
1995
----------------------------------------------------------------------------
(in thousands)
Continental
U.S. Europe Other Countries Eliminations Consolidated
----------- ----------- --------------- ------------ -------------
Net sales $ 175,375 $ 20,482 $ 154 $ (23,259) $ 172,752
Operating income 49,830 3,718 18 (296) 53,270
Net income 43,126 2,319 18 (296) 45,167
Identifiable assets 92,406 7,918 619 (3,218) 97,725
1996
----------------------------------------------------------------------------
(in thousands)
Continental
U.S. Europe Other Countries Eliminations Consolidated
----------- ----------- --------------- ------------ -------------
Net sales $ 206,032 $ 28,816 $ 2,494 $(18,776) $218,566
Operating income 73,139 2,883 (77) (2,063) 73,882
Net income 46,276 1,729 (78) (1,934) 45,993
Identifiable assets 148,658 11,630 5,991 (8,034) 158,245
1997
----------------------------------------------------------------------------
(in thousands)
Continental
U.S. Europe Other Countries Eliminations Consolidated
----------- ----------- --------------- ------------ -------------
Net sales $ 167,555 $ 30,442 $ 16,300 $(20,313) $193,984
Operating income 29,230 1,224 1,950 602 33,006
Net income 16,753 850 1,399 602 19,604
Identifiable assets 174,813 10,638 10,074 (14,234) 181,291
48
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ----------
Year ended December 31, 1996:
Net sales $ 48,706 $ 62,764 $ 67,785 $ 39,311
Gross profit 34,064 44,655 47,705 25,352
Income before provision for income taxes 17,842 25,662 25,411 5,748
Net income 10,973 15,738 15,653 3,629
Basic net income per share $ 0.15 $ 0.22 $ 0.22 $ 0.05
Diluted net income per share $ 0.15 $ 0.22 $ 0.22 $ 0.05
Year ended December 31, 1997:
Net sales $ 34,403 $ 55,150 $ 59,418 $ 45,013
Gross profit 19,656 36,055 36,048 26,832
Income before provision for income taxes 893 14,363 11,064 5,505
Net income 550 8,848 6,815 3,391
Basic net income per share $ 0.01 $ 0.13 $ 0.10 $ 0.05
Diluted net income per share $ 0.01 $ 0.13 $ 0.10 $ 0.05
49
OAKLEY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFIYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, 1997
Additions
Balance at charged to Balance
beginning costs and at end of
of period expense Deductions Adjustments period
---------- ----------- ------------ ------------ -----------
For the year ended December 31, 1995:
Allowance for doubtful accounts $ 271,000 $ 406,000 $ (86,000) $ - $ 591,000
---------- ----------- ------------ ------------ -----------
---------- ----------- ------------ ------------ -----------
Inventory reserve $ - $ 400,000 $ - $ - $ 400,000
---------- ----------- ------------ ------------ -----------
---------- ----------- ------------ ------------ -----------
For the year ended December 31, 1996:
Allowance for doubtful accounts $ 591,000 $ - $ (1,000) $ - $ 590,000
---------- ----------- ------------ ------------ -----------
---------- ----------- ------------ ------------ -----------
Inventory reserve $ 400,000 $ 200,000 $ - $ - $ 600,000
---------- ----------- ------------ ------------ -----------
---------- ----------- ------------ ------------ -----------
For the year ended December 31, 1997:
Allowance for doubtful accounts $ 590,000 $ 12,000 $ (31,000) $ (20,000) $ 551,000
---------- ----------- ------------ ------------ -----------
---------- ----------- ------------ ------------ -----------
Inventory reserve $ 600,000 $1,125,000 $ - $ - $1,725,000
---------- ----------- ------------ ------------ -----------
---------- ----------- ------------ ------------ -----------
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
OAKLEY, INC.
By: /s/ Jim Jannard
----------------------
Jim Jannard
CHAIRMAN AND PRESIDENT
Date: March 19, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Jim Jannard Chairman and President March 19, 1998
- --------------------- (Principal Executive Officer)
Jim Jannard
/s/ Mike Parnell Vice Chairman and Director March 19, 1998
- ---------------------
Mike Parnell
/s/ Link Newcomb Chief Executive Officer March 19, 1998
- --------------------- and Director
Link Newcomb
/s/ Thomas George Chief Financial Officer March 19, 1998
- --------------------- (Principal Accounting Officer)
Thomas George
/s/ Irene Miller Director March 19, 1998
- ---------------------
Irene Miller
/s/ Orin Smith Director March 19, 1998
- ---------------------
Orin Smith
/s/ Michael Jordan Director March 19, 1998
- ---------------------
Michael Jordan
/s/ William Schmidt Director March 19, 1998
- ---------------------
William Schmidt
51