<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1996
or
( )Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From ________To ________
Commission File Number: 1-13848
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)
10 Holland
Irvine, California 92718
------------------ -----
(Address of principal (Zip Code)
executive offices)
(714) 951-0991
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---------- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 35,701,525 Shares
- -------------------------------------- -----------------
(Class) (Outstanding on August 5, 1996)
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OAKLEY, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of December 31, 1995
and June 30, 1996 (unaudited) . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income for the three-month and six-month periods
ended June 30, 1995 and 1996 (unaudited) . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the six-month periods
ended June 30, 1995 and 1996 (unaudited) . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 6
ITEM 2 - Management's Discussion and Analysis of Results of Operations
and Financial Condition. . . . . . . . . . . . . . . . . . . . . . . 7-12
PART II. OTHER INFORMATION
ITEM 1 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 13
ITEM 2 - Changes in Securities . . . . . . . . . . . . . . . . . . . 13
ITEM 3 - Defaults Upon Senior Securities . . . . . . . . . . . . . . 13
ITEM 4 - Submission of Matters to a Vote of Security Holders . . . . 13
ITEM 5 - Other Information . . . . . . . . . . . . . . . . . . . . . 13
ITEM 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 14-15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2
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OAKLEY, INC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
----------------- -------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,760 $ 9,590
Accounts receivable, less allowance for
doubtful accounts of $591 (1995), $436 (1996) 19,288 28,836
Inventories 20,488 21,641
Other receivables 348 1,364
Deferred income taxes 3,562 3,494
Prepaid expenses 1,731 3,017
------------ ------------
Total current assets 55,177 67,942
PROPERTY AND EQUIPMENT, net 38,888 55,743
OTHER ASSETS 316 319
DEFERRED TAX ASSET 190 190
DEPOSITS 3,154 1,777
------------ ------------
TOTAL ASSETS $ 97,725 $ 125,971
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
S distribution notes $ 263 $ -
Accounts payable 7,123 9,052
Accrued expenses and other current liabilities 6,601 6,995
Income taxes payable 2,029 1,537
------------ ------------
Total current liabilities 16,016 17,584
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share: 10,000,000
shares authorized; no shares issued - -
Common stock, par value $.01 per share: 100,000,000
shares authorized; 35,700,000 (1995),
35,700,525 (1996) issued and outstanding 357 357
Additional paid-in capital 64,427 64,436
Retained earnings 16,998 43,709
Foreign currency translation adjustment (73) (115)
------------ ------------
Total shareholders' equity 81,709 108,387
TOTAL LIABILITIES AND ------------ ------------
SHAREHOLDERS' EQUITY $ 97,725 $ 125,971
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
3
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OAKLEY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
1995 1996 1995 1996
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net sales $ 45,686 $ 62,764 $ 82,301 $ 111,470
Cost of goods sold 11,595 18,109 22,951 32,751
--------- --------- --------- ---------
Gross profit 34,091 44,655 59,350 78,719
Operating expenses:
Research and development 8,450 1,012 15,110 1,961
Selling 9,668 12,466 17,138 22,557
Shipping and warehousing 1,117 1,537 2,118 2,960
General and administrative 4,499 4,091 8,191 8,039
--------- --------- --------- ---------
Total operating expenses 23,734 19,106 42,557 35,517
--------- --------- --------- ---------
Operating income 10,357 25,549 16,793 43,202
Interest expense (income), net 244 (113) 274 (302)
--------- --------- --------- ---------
Income before provision for income taxes 10,113 25,662 16,519 43,504
Provision for income taxes 521 9,924 791 16,793
--------- --------- --------- ---------
Net income $ 9,592 $ 15,738 $ 15,728 $ 26,711
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share $ 0.44 $ 0.74
--------- ---------
--------- ---------
Weighted average common shares used in the 35,994 35,958
calculation of net income per share --------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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OAKLEY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,728 $ 26,711
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 3,752 3,816
Gain on disposition of equipment - (99)
Deferred compensation - 9
Changes in assets and liabilities:
Accounts receivable (5,919) (9,548)
Inventories (6,571) (1,153)
Deferred income taxes - 68
Other receivables (176) (1,016)
Prepaid expenses (301) (1,286)
Other assets (285) (3)
Accounts payable (1,195) 1,929
Due to shareholders 9,284 -
Accrued expenses and other current liabilities 3,275 394
Income taxes payable - (492)
---------- ----------
Net cash provided by operating activities 17,592 19,330
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits (396) 1,377
Acquisitions of property and equipment (18,443) (20,792)
Proceeds from sale of equipment - 220
---------- ----------
Net cash used in investing activities (18,839) (19,195)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings 47,000 -
Repayments of bank borrowings (10,300) -
Dividends paid (36,000) (263)
---------- ----------
Net cash provided by (used in) financing activities 700 (263)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 55 (42)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (492) (170)
CASH AND CASH EQUIVALENTS, beginning of period 1,692 9,760
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 1,200 $ 9,590
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 318 $ 5
---------- ----------
---------- ----------
Income taxes $ - $ 17,217
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
5
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OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements of Oakley, Inc. and its
wholly-owned subsidiaries (the "Company") have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles ("GAAP") for complete financial
statements.
In the opinion of management, the consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair statement of the balance sheets as of December 31, 1995 and
June 30, 1996, the statements of income for the three and six month periods
ended June 30, 1995 and 1996 and the statements of cash flows for the six month
periods ended June 30, 1995 and 1996. The results of operations for the three
and six month period ended June 30, 1996 are not necessarily indicative of the
results of operations for the entire fiscal year ending December 31, 1996.
NOTE 2 - INITIAL PUBLIC OFFERING
In August 1995, the Company completed an initial public offering of 3,300,000
shares of the Company's common stock for $23.00 per share, netting proceeds to
the Company after underwriting discounts and expenses of approximately $69.1
million.
NOTE 3 - INCOME TAXES
Prior to August 14, 1995, Oakley, Inc. 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 Oakley,
Inc.'s pretax earnings plus the foreign taxes related to Oakley Europe.
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.
NOTE 4 - CREDIT AGREEMENT
Oakley, Inc. has a line of credit to allow maximum borrowings of $18.0 million.
At June 30, 1996, there was no balance outstanding on the line of credit.
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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 1996 periods and pro
forma operating results for the 1995 periods indicated. Pro forma operating
results reflect adjustments to the historical operating results for (i) the
elimination of bonuses paid to the two principal executive officers in excess of
$0.5 million per quarter in the aggregate (the estimated bonuses payable for
each quarter of 1995 under the Performance Bonus Plan adopted by the Company in
August 1995), (ii) the elimination of all depreciation expense associated with
aircraft owned by the Company, which aircraft were distributed to the two
principal shareholders in August 1995 as part of the S corporation distribution
and (iii) Federal and state income taxes as if the Company had been taxed as a C
corporation for all periods prior to the Company's initial public offering.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1996 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 45,686 $ 62,764 $ 82,301 $ 111,470
Cost of goods sold 11,595 18,109 22,951 32,751
---------- ---------- ---------- ----------
Gross profit 34,091 44,655 59,350 78,719
Operating expenses:
Research and development 778 1,012 1,508 1,961
Selling 8,980 12,466 16,096 22,557
Shipping and warehousing 1,117 1,537 2,118 2,960
General and administrative 3,141 4,091 5,750 8,039
---------- ---------- ---------- ----------
Total operating expenses 14,016 19,106 25,472 35,517
---------- ---------- ---------- ----------
Operating income 20,075 25,549 33,878 43,202
Interest expense (income), net 244 (113) 274 (302)
---------- ---------- ---------- ----------
Income before provision for income taxes 19,831 25,662 33,604 43,504
Provision for income taxes 7,935 9,924 13,442 16,793
---------- ---------- ---------- ----------
Net income $ 11,896 $ 15,738 $ 20,162 $ 26,711
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per share $ 0.37 $ 0.44 $ 0.62 $ 0.74
Weighted average shares outstanding 32,400 35,994 32,400 35,958
</TABLE>
7
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THREE MONTHS ENDED JUNE 30, 1996 AND 1995
NET SALES
Net sales increased to $62.8 million for the three months ended June 30, 1996
from $45.7 million for the three months ended June 30, 1995, an increase of
$17.1 million, or 37.4%. This increase was principally the result of
substantially higher sales in the 1996 period 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 and STRAIGHT JACKETS in
May 1996. These increases were partially offset by moderate sales decreases in
existing styles of M FRAMES and significant sales decreases in FROGSKINS, the
Company's most mature product offering. The decline in FROGSKINS sales was
attributable in part to a 50% reduction in the number of models offered. The
Company's international sales grew 42.2% to $20.9 million, or 33.3% of net
sales, in the 1996 period from $14.7 million, or 32.2% of net sales, in the
comparable 1995 period. This increase was principally a result of substantially
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 and Southeast Asia.
GROSS PROFIT
Gross profit increased to $44.7 million for the three months ended June 30, 1996
from $34.1 million for the three months ended June 30, 1995, an increase of
$10.6 million, or 31.1%. As a percentage of net sales, gross profit decreased
to 71.2% in the 1996 period from 74.6% in the 1995 period as a result of a shift
in product mix, higher prices on raw materials, an inventory writeoff of $0.6
million (principally unusable raw materials), increases in sales to
international distributors at lower margins and higher sales returns and
discounts as a percentage of net sales, partially offset by improvements in
manufacturing efficiencies.
OPERATING EXPENSES
Operating expenses decreased to $19.1 million for the three months ended June
30, 1996 from $23.8 million for the three months ended June 30, 1995, a decrease
of $4.7 million. This decrease resulted primarily from the reduction in the
level of bonuses payable since the Company's initial public offering in August
1995. On a pro forma basis as discussed previously, operating expenses
increased to $19.1 million in the 1996 period from $14.0 million in the 1995
period, an increase of $5.1 million, or 36.4%. Selling expenses increased $3.5
million in the 1996 period principally as a result of higher advertising costs,
additional personnel in sports marketing, advertising and sales and higher
depreciation on the Company's store displays, partially offset by, as a
percentage of net sales, lower sports marketing costs, lower commissions and
lower warranty costs. 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 $0.3 million in the 1996 period. Shipping expenses
increased $0.4 million in the 1996 period to $1.5 million from $1.1 million in
the 1995 period. As a percentage of net sales, shipping expenses were unchanged
at 2.4% in the 1996 period from the 1995 period. General and administrative
expenses increased $1.0 million in the 1996 period from the 1995 period as the
Company added the personnel and infrastructure necessary in response to its
growth, including increased salaries, higher costs associated with management
information systems, increased insurance and other expenses associated with
being a public company. As a percentage of net sales, general and
administrative expenses decreased to 6.5% of net sales in the 1996 period from
6.9% in the 1995 period as the Company leveraged its expenses on higher sales.
OPERATING INCOME
The Company's operating income grew to $25.5 million for the three months ended
June 30, 1996 from $10.4 million for the three months ended June 30, 1995, an
increase of $15.1 million. On a pro forma basis as discussed previously,
operating income increased to $25.5 million for the 1996 period from $20.1
million for the comparable 1995 period, an increase of $5.4 million, or 26.9%.
This
8
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increase was a result of the Company's net sales growth and a reduction in
operating expenses as a percentage of net sales, partially offset by higher cost
of goods sold as a percentage of net sales.
INTEREST EXPENSE, NET
The Company had interest expense of $2,000 and interest income of $115,000 for
the three months ended June 30, 1996, as compared with interest expense of
$282,000 and interest income of $38,000 for the comparable 1995 period.
INCOME TAXES
Prior to August 14, 1995, Oakley, Inc. 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 Oakley,
Inc.'s pretax earnings plus the foreign taxes related to Oakley Europe.
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. The Company recorded a provision for income taxes of $9.9
million for the three months ended June 30, 1996, as compared to $0.5 million
for the comparable 1995 period. On a pro forma basis as discussed above, the
Company's provision for income taxes was $7.9 million for the 1995 period.
NET INCOME
The Company's net income increased to $15.7 million for the three months ended
June 30, 1996 from $9.6 million for the three months ended June 30, 1995, an
increase of $6.1 million. On a pro forma basis as discussed previously, net
income increased to $15.7 million for the 1996 period from $11.9 million for the
1995 period, an increase of $3.8 million, or 31.9%.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NET SALES
Net sales increased to $111.5 million for the six months ended June 30, 1996
from $82.3 million for the six months ended June 30, 1995, an increase of $29.2
million, or 35.5%. This increase was principally the result of substantially
higher sales in the 1996 period 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 and STRAIGHT JACKETS in May of 1996.
These increases were partially offset by moderate sales decreases in existing
styles of M FRAMES and ZEROS sunglasses and significant sales decreases in
FROGSKINS, the Company's most mature product offering. The decline in FROGSKINS
sales was attributable in part to a 50% reduction in the number of models
offered. The Company's international sales grew 54.5% to $39.1 million, or
35.1% of net sales, in the 1996 period from $25.3 million, or 30.7% of net
sales, in the comparable 1995 period. This increase was principally a result of
substantially 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
Australia.
GROSS PROFIT
Gross profit increased to $78.7 million for the six months ended June 30, 1996
from $59.4 million for the six months ended June 30, 1995, an increase of $19.3
million, or 32.5%. As a percentage of net sales, gross profit decreased to
70.6% in the 1996 period from 72.1% in the 1995 period as a result of a shift in
product mix, higher prices on raw materials, increases in sales to international
distributors at lower margins and higher sales returns and discounts as a
percentage of net sales, partially offset by higher average selling prices and
greater manufacturing throughput.
9
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OPERATING EXPENSES
Operating expenses decreased to $35.5 million for the six months ended June 30,
1996 from $42.6 million for the six months ended June 30, 1995, a decrease of
$7.1 million. This decrease resulted primarily from the reduction in the level
of bonuses payable since the Company's initial public offering in August 1995.
On a pro forma basis as discussed previously, operating expenses increased to
$35.5 million in the 1996 period from $25.5 million in the 1995 period, an
increase of $10.0 million, or 39.2%. Selling expenses increased $6.5 million in
the 1996 period principally as a result of higher advertising costs, additional
personnel in sports marketing, advertising and sales and higher depreciation on
the Company's store displays, partially offset by, as a percentage of net sales,
lower sports marketing costs, lower commissions and lower warranty costs.
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 $0.5 million in the 1996 period. Shipping expenses increased $0.9 million in
the 1996 period to $3.0 million from $2.1 million in the 1995 period. As a
percentage of net sales, shipping expenses increased to 2.7% in the 1996 period
from 2.6% in the 1995 period as a result of higher average shipping costs in the
Company's direct European operation, partially offset by lower average shipping
costs in domestic markets. General and administrative expenses increased $2.3
million in the 1996 period from the 1995 period as the Company added the
personnel and infrastructure necessary in response to its growth, including
increased salaries, higher costs associated with management information systems,
increased insurance and other expenses associated with being a public company.
As a percentage of net sales, general and administrative expenses increased to
7.1% of net sales in the 1996 period from 7.0% in the 1995 period.
OPERATING INCOME
The Company's operating income grew to $43.2 million for the six months ended
June 30, 1996 from $16.8 million for the six months ended June 30, 1995, an
increase of $26.4 million. On a pro forma basis as discussed previously,
operating income increased to $43.2 million for the 1996 period from $33.9
million for the comparable 1995 period, an increase of $9.3 million, or 27.4%.
This increase was a result of the Company's net sales growth, partially offset
by higher cost of goods sold and operating expenses as a percentage of net
sales.
INTEREST EXPENSE, NET
The Company had interest expense of $5,000 and interest income of $307,000 for
the six months ended June 30, 1996, as compared with interest expense of
$318,000 and interest income of $44,000 for the comparable 1995 period.
INCOME TAXES
Prior to August 14, 1995, Oakley, Inc. 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 Oakley,
Inc.'s pretax earnings plus the foreign taxes related to Oakley Europe.
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. The Company recorded a provision for income taxes of $16.8
million for the six months ended June 30, 1996, as compared to $0.8 million for
the comparable 1995 period. On a pro forma basis as discussed above, the
Company's provision for income taxes was $13.4 million for the 1995 period.
NET INCOME
The Company's net income increased to $26.7 million for the six months ended
June 30, 1996 from $15.7 million for the six months ended June 30, 1995, an
increase of $11.0 million. On a pro forma basis as discussed previously, net
income increased to $26.7 million for the 1996 period from $20.2 million for the
1995 period, an increase of $6.5 million, or 32.2%.
10
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LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations almost entirely with cash
flow generated from operations. Cash provided by operating activities rose to
$19.3 million for the six months ended June 30, 1996 from $17.6 million for the
comparable 1995 period. On a pro forma basis as discussed previously, cash
provided by operating activities was $20.6 million for the six months ended June
30, 1995. At June 30, 1996, working capital was $50.4 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. To supplement cash flow from operations, if
necessary, the Company maintains an $18.0 million revolving credit facility to
be used for general working capital purposes. The credit agreement relating to
such facility contains typical covenants with respect to the conduct of the
Company's business and requires the maintenance of various financial levels and
ratios. At June 30, 1996, there was no balance outstanding on the line of
credit. The Company believes that available cash, cash flow from operations and
available borrowings will be sufficient to meet operating needs and capital
expenditures, including the cost of constructing the Company's new
headquarters/manufacturing facility, for the foreseeable future.
Capital expenditures (other than for the construction of the Company's new
facility) for the six months ended June 30, 1996 totaled $12.6 million. The
Company anticipates that capital expenditures (other than for the Company's new
facility) will total $17.5 million for 1996, including a facility for the
development and production of the X METAL line which was purchased in June 1996
for approximately $4.5 million. In April 1995, the Company purchased land for
$8.2 million on which it is constructing a larger headquarters/manufacturing
facility. The Company currently estimates that the cost to construct such
facility will be approximately $33.4 million. The Company also anticipates
incurring approximately $8.0 million of additional costs relating to the new
facility, including design and engineering fees and furniture and other
build-out costs. Of such amounts, $5.1 million was spent in 1995 and $8.2
million was spent in the first half of 1996. The remainder is expected to be
spent by late 1996 or early 1997 when the Company expects to relocate to such
facility.
Prior to the Company's initial public offering in August 1995, as a result
of the Company's treatment as an S Corporation for Federal and state income tax
purposes, the Company historically had provided its shareholders with funds for
the payment of income taxes on the earnings of the Company which have been
included in the taxable income of the shareholders. In addition, the Company
historically had paid dividends to shareholders to provide them with a return on
their investment. The Company paid dividends of $36.0 million for the six month
period ended June 30, 1995. Upon consummation of such offering, the Company's S
corporation status was terminated. In August 1995, the Company declared a
distribution of its previously undistributed S corporation earnings, which was
paid through the distribution of aircraft and S distribution notes. The actual
amount of the S distribution notes was $19.3 million, all of which had been
repaid by March 31, 1996.
SEASONALITY
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
11
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success of the Company's products introduced since late 1993 and the
Company's international expansion have 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. The Company's backlog has increased since mid-1995 primarily due to an
increase in market demand. At June 30, 1996, the Company had a backlog of $34.9
million, including backorders (merchandise remaining unshipped beyond its
scheduled shipping date) of $9.7 million.
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.
FORWARD-LOOKING STATEMENTS
The preceding Management's Discussion and Analysis contains various
"forward-looking statements", within the meaning of Federal and state securities
laws including those identified by the words "believes," "anticipates,"
"expects" and similar expressions. Such statements are subject to a number of
risks and uncertainties that could cause actual results to differ materially
from those projected. Such factors include, but are not limited to, the
Company's continued ability to develop and introduce innovative products,
changing consumer preferences, actions by competitors, manufacturing capacity
constraints and the availability of raw materials, the effect of economic
conditions, dependence on certain customers and other risks identified from time
to time in the Company's Securities and Exchange Commission filings. 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.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) The Registrant's Annual Meeting of Shareholders was held on June 29, 1996.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934. There was no solicitation in
opposition to the management's nominees as listed in the proxy statement to
elect five Directors. All such nominees were elected.
(c) The matters voted at the meeting and the results were as follows:
(1) To elect five Directors to serve as such until the next Annual Meeting
of Shareholders and until their successors are elected and qualified.
For Withheld
--- --------
Director #1 - Jim Jannard 33,785,183 158,610
Director #2 - Mike Parnell 33,785,083 158,710
Director #3 - Irene Miller 33,784,983 158,810
Director #4 - Orin Smith 33,785,083 158,710
Director #5 - Michael Jordan 33,784,620 159,173
(2) To ratify the selection of Deloitte & Touche LLP to serve as
independent auditors of the Company for the fiscal year ending
December 31, 1996.
For Against Abstain
--- ------- -------
33,933,884 4,475 5,434
ITEM 5. OTHER INFORMATION
None
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
*3.1 Articles of Incorporation of the Company
*3.2 Bylaws of the Company
*10.1 Credit Agreement (the "Credit Agreement"), dated June 20, 1995,
between Oakley, Inc., Wells Fargo Bank, National Association, and
the Lenders named therein
*10.2 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
*10.3 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
*10.4 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
*10.5 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
*10.6 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
*10.7 Subordination Agreement, dated June 20, 1995, between Oakley,
Inc., Buffalo Works, Inc., James H. Jannard and Mike D. Parnell
**10.8 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
**10.9 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
**10.10 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
**10.11 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
**10.12 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
**10.13 Promissory Note, dated August 8, 1995 between Oakley, Inc. and
James H. Jannard
**10.14 Promissory Note, dated August 8, 1995 between Oakley, Inc. and M.
and M. Parnell Revocable Trust
***10.15 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
***10.16 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
**10.17 Agreement, dated July 17, 1995, between Oakley, Inc. and Michael
Jordan
*10.18 Lease, dated September 15, 1988, between OO Partnership and
Oakley, Inc.
***10.19 First Amendment to Lease dated December 31, 1995, by and between
Oakley, Inc., and OO Partnership
14
<PAGE>
*10.20 Agreement, dated July 31, 1995, between OO Partnership and
Oakley, Inc.
*10.21 Lease, dated March 5, 1990, between Weyerhauser Mortgage Company
and Oakley, Inc., as amended
*10.22 Sublease, dated August 17, 1992, between Western Digital
Corporation and Oakley, Inc., as amended
*10.23 Purchase Agreement and Escrow Instructions, dated December 9,
1994, between Oakley, Inc. and Foothill Ranch Development
Corporation
***10.24 Oakley, Inc. 1995 Stock Incentive Plan
***10.25 Oakley, Inc. Amended and Restated 1995 Stock Incentive Plan
***10.26 Oakley, Inc. Executive Officer Performance Bonus Plan
*10.27 Employment Agreement, dated as of August 1, 1995, between Oakley,
Inc. and Jim Jannard
*10.28 Employment Agreement, dated as of August 1, 1995, between Oakley,
Inc. and Mike Parnell
*10.29 Employment Agreement, dated as of August 1, 1995, between Oakley,
Inc. and Link Newcomb
***10.30 Indemnification Agreement, dated August 1, 1995, between Oakley,
Inc. and Jim Jannard
*10.31 Schedule of indemnification agreements between Oakley, Inc. and
each of its directors and executive officers
*10.32 Standard Form of Agreement between Owner and Project Manager,
dated December 30, 1994, between Oakley, Inc. and Snyder Langston
*10.33 Lease Agreement, dated January 26, 1995, between Oakley Europe,
sarl and Investipierre 7 (In French with English translation)
***10.34 Aircraft Lease Agreement, dated August 10, 1995, between Oakley,
Inc. and X, Inc.
***10.35 Aircraft Lease Agreement, dated August 10, 1995, between Oakley,
Inc. and Time Tool Incorporated
*10.36 Registration Rights Agreement, dated August 1, 1995, between
Oakley, Inc., Jim Jannard and the M. and M. Parnell Revocable
Trust
***10.37 Indemnification Agreement, dated August 9, 1995, between Oakley,
Inc., Jim Jannard and the M. and M. Parnell Revocable Trust
10.38 Indemnification Agreement, dated June 6, 1996, between Oakley,
Inc., Jim Jannard and the M. and M. Parnell Revocable Trust
27.1 Financial Data Schedule
* Previously filed with the Registration Statement on Form S-1 of Oakley,
Inc. (Registration No. 33-93080)
** Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended
September 30, 1995.
*** Previously filed with the Form 10-K of Oakley, Inc. for the year ended
December 31, 1995.
The Company did not file any reports on Form 8-K during the three months ended
June 30, 1996.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Oakley, Inc.
August 5, 1996 /s/ JIM JANNARD
--------------------
Jim Jannard
Chairman and President
August 5, 1996 /s/ LINK NEWCOMB
--------------------
Link Newcomb
Executive Vice President and
Chief Financial Officer
August 5, 1996 /s/ DONNA GORDON
--------------------
Donna Gordon
Vice President of Finance
16
<PAGE>
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT (the "Agreement"), dated June 6, 1996, among
the following parties (the "Parties"): OAKLEY, INC., a Washington corporation
(the "Company"), JIM JANNARD and the M. AND M. PARNELL REVOCABLE TRUST, a trust
organized under the laws of the State of California (the "Parnell Trust, and
together with Jim Jannard, the "Selling Shareholders").
R E C I T A L S
WHEREAS, the Parties, together with Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Alex. Brown & Sons Incorporated, as representatives of
the U.S. Underwriters named therein (the "U.S. Underwriters"), are parties to a
U.S. Purchase Agreement of even date herewith (the "U.S. Purchase Agreement")
and, together with Merrill Lynch International and Alex. Brown & Sons
Incorporated, as representatives of the Managers named therein (the "Managers"),
are parties to an International Purchase Agreement of even date herewith (the
"International Purchase Agreement," and, together with the U.S. Purchase
Agreement, the "Purchase Agreements");
WHEREAS, pursuant to the terms of the Purchase Agreements, the Selling
Shareholders may be required to indemnify the U.S. Underwriters or the Managers
(as the case may be) with respect to, or contribute to, certain liabilities
arising out of the sale of the common stock of the Company, par value $.01 per
share, contemplated by the Purchase Agreements;
WHEREAS, the Company wishes to indemnify and advance expenses to the
Selling Shareholders in connection with any proceedings and liabilities arising
from the obligations of the Selling Shareholders under the Purchase Agreements
in the manner provided for herein.
NOW THEREFORE, in consideration of the foregoing recitals, the
agreements contained herein and other good and valuable consideration, the
sufficiency and
<PAGE>
receipt of which are hereby acknowledged, the Parties hereby agree as follows:
2
<PAGE>
A G R E E M E N T
SECTION 1. INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. In respect
of any proceeding by any Indemnified Party (as defined in the U.S. Purchase
Agreement or the International Purchase Agreement, as the case may be) against a
Selling Shareholder in respect of indemnification under Section 7 or
contribution under Section 8 of the U.S. Purchase Agreement or the International
Purchase Agreement:
(a) Subject to the provisions of paragraph (b) of this Section 1,
i) the Company agrees to advance the reasonable expenses
incurred by such Selling Shareholder in respect of such proceeding including
those incurred by such Selling Shareholder for separate counsel and to reimburse
any such reasonable expenses not advanced by the Company in the first instance;
ii) the Company agrees to indemnify such Selling Shareholder in
respect of any liability incurred in or as a result of such proceeding; and
iii) the authorization by the Company's shareholders of the
agreement to indemnify contained herein and the execution of this Agreement
constitute a conclusive determination that indemnification is due to such
Selling Shareholder in such circumstances and the specific shareholder
authorization for such indemnification.
(b) The Company shall not indemnify such Selling Shareholder from or
on account of:
i) such individual's acts or omissions finally adjudged to be
intentional misconduct or a knowing violation of law;
ii) such individual's conduct finally adjudged to be in
violation of Washington RCW 23B.08.310; or
iii) any transaction with respect to which it was finally
adjudged that such individual personally
3
<PAGE>
received a benefit in money, property, or services to which such individual was
not legally entitled.
Section 2. SUCCESSORS AND ASSIGNS. This Agreement and all
obligations, rights and remedies of the Parties hereunder shall be binding upon
and inure to the benefit of their respective legal representatives, successors
and assigns.
Section 3. ENTIRE AGREEMENT. Each of the Parties acknowledge that
there are no other agreements or representations, either oral or written,
express or implied, not embodied or referenced in this Agreement, which
represents a complete integration of all prior and contemporaneous agreements
and understandings of the parties hereto with respect to the subject matter
hereof.
Section 4. GOVERNING LAW. This agreement shall be construed in
accordance with the laws of the State of New York, without regard to the choice
of law rules thereof, and the obligations, rights and remedies of the parties
hereunder shall be determined in accordance with such laws.
Section 5. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, and all of which
together shall constitute one and the same instrument.
4
<PAGE>
IN WITNESS WHEREOF, the Parties have caused their names to be signed
hereto, all as of the day and year first above written.
OAKLEY, INC.,
a Washington corporation
By:____________________
Name:
Title:
JIM JANNARD
_______________________
M. AND M. PARNELL REVOCABLE
TRUST
By:____________________
Name: Mike Parnell
Title: Co-Trustee, and as Attorney-in-Fact
for Melissa Parnell, Co-Trustee
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 9,590
<SECURITIES> 0
<RECEIVABLES> 29,272
<ALLOWANCES> 436
<INVENTORY> 21,641
<CURRENT-ASSETS> 67,942
<PP&E> 55,743
<DEPRECIATION> 0
<TOTAL-ASSETS> 125,971
<CURRENT-LIABILITIES> 17,584
<BONDS> 0
0
0
<COMMON> 357
<OTHER-SE> 108,030
<TOTAL-LIABILITY-AND-EQUITY> 125,971
<SALES> 111,470
<TOTAL-REVENUES> 111,470
<CGS> 32,751
<TOTAL-COSTS> 32,751
<OTHER-EXPENSES> 35,517
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (302)
<INCOME-PRETAX> 43,504
<INCOME-TAX> 16,793
<INCOME-CONTINUING> 26,711
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<NET-INCOME> 26,711
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