<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 September 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 92618
------------------ -----
(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 71,057,804 Shares
- -------------------------------------- -----------------
(Class) (Outstanding on November 6, 1996)
<PAGE>
OAKLEY, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of December 31, 1995
and September 30, 1996 (unaudited)........................................ 3
Consolidated Statements of Income for the three-month and nine-month periods
ended September 30, 1995 and 1996 (unaudited).............................. 4
Consolidated Statements of Cash Flows for the nine-month periods
ended September 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, EXCEPT SHARE DATA)
ASSETS
December 31, 1995 September 30, 1996
----------------- ------------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 9,760 $ 22,996
Accounts receivable, less allowance
for doubtful accounts of $591
(1995), $517 (1996) 19,288 24,128
Inventories 20,488 21,237
Other receivables 348 2,101
Deferred income taxes 3,562 3,494
Prepaid expenses 1,731 3,751
----------------- ------------------
Total current assets 55,177 77,707
PROPERTY AND EQUIPMENT, net 38,888 61,809
OTHER ASSETS 316 671
DEFERRED TAX ASSET 190 190
DEPOSITS 3,154 2,941
----------------- ------------------
TOTAL ASSETS $ 97,725 $ 143,318
----------------- ------------------
----------------- ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
S distribution notes $ 263 $ -
Accounts payable 7,123 10,068
Accrued expenses and other
current liabilities 6,601 7,731
Income taxes payable 2,029 1,505
----------------- ------------------
Total current liabilities 16,016 19,304
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; 71,400,000 (1995),
71,409,972 (1996) issued and
outstanding 714 714
Additional paid-in capital 64,427 64,558
Retained earnings 16,641 59,005
Foreign currency translation adjustment (73) (263)
----------------- ------------------
Total shareholders' equity 81,709 124,014
TOTAL LIABILITIES AND ----------------- ------------------
SHAREHOLDERS' EQUITY $ 97,725 $ 143,318
----------------- ------------------
----------------- ------------------
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 Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1995 1996 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 47,499 $ 67,785 $ 129,800 $ 179,255
Cost of goods sold 14,140 20,080 37,091 52,831
---------- ---------- ---------- ----------
Gross profit 33,359 47,705 92,709 126,424
Operating expenses:
Research and development 814 1,374 15,924 3,335
Selling 10,369 14,482 27,507 37,039
Shipping and warehousing 1,388 1,820 3,506 4,780
General and administrative 3,721 4,908 11,912 12,947
Gain on disposition of property and equipment (4,833) - (4,833) -
---------- ---------- ---------- ----------
Total operating expenses 11,459 22,584 54,016 58,101
---------- ---------- ---------- ----------
Operating income 21,900 25,121 38,693 68,323
Interest expense (income), net 363 (290) 637 (592)
---------- ---------- ---------- ----------
Income before provision for income taxes 21,537 25,411 38,056 68,915
Provision for income taxes 1,309 9,758 2,100 26,551
---------- ---------- ---------- ----------
Net income $ 20,228 $ 15,653 $ 35,956 $ 42,364
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per share $ 0.22 $ 0.59
---------- ----------
---------- ----------
Weighted average common shares used in the 71,946 71,925
calculation of net income per share ---------- ----------
---------- ----------
Supplemental data:
Historical income before provision for income taxes 21,537 38,056
Supplemental provision for income taxes 8,376 15,016
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Supplemental net income 13,161 23,040
Supplemental net income per share $ 0.19 $ 0.35
---------- ----------
---------- ----------
Weighted average common shares used in the
calculation of supplemental net income per share 69,054 66,512
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
OAKLEY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1995 1996
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 35,956 $ 42,364
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 5,507 5,932
(Gain) or loss on disposition of equipment (4,833) 18
Deferred compensation - 25
Changes in assets and liabilities:
Accounts receivable (2,093) (4,840)
Inventories (10,225) (749)
Deferred income taxes (1,637) 68
Other receivables 338 (1,753)
Prepaid expenses (1,423) (2,020)
Other assets (285) -
Accounts payable (3,022) 2,945
Accrued expenses and other current liabilities 3,109 1,130
Income taxes payable 2,508 (524)
--------------- ---------------
Net cash provided by operating activities 23,900 42,596
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits 1,722 213
Acquisitions of property and equipment (27,335) (29,126)
Proceeds from sale of equipment - 255
Other assets - (355)
--------------- ---------------
Net cash used in investing activities (25,613) (29,013)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings 57,049 -
Repayments of bank borrowings (60,300) -
Net proceeds from issuance of common stock 69,788 -
Exercise of stock options - 106
Contribution of capital 918 -
Dividends paid (51,000) (263)
--------------- ---------------
Net cash provided by (used in) financing activities 16,455 (157)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 36 (190)
--------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 14,778 13,236
CASH AND CASH EQUIVALENTS, beginning of period 1,692 9,760
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 16,470 $ 22,996
--------------- ---------------
--------------- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 790 $ -
--------------- ---------------
--------------- ---------------
Income taxes $ 81 $ 26,939
--------------- ---------------
--------------- ---------------
SUPPLEMENTAL DISCLOSURES OF NON-CASH FLOW INFORMATION:
During the nine month period ended September 30, 1996, $357 was
reclassified from retained earnings to common stock to reflect the
Company's stock split effected on September 11, 1996.
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
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 September 30, 1996, the statements of income for the three and nine
months ended September 30, 1995 and 1996 and the statements of cash flows for
the nine months ended September 30, 1995 and 1996. The results of operations
for the three and nine months ended September 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 (before adjustment for the stock split referred to in Note 5).
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 that allows maximum borrowings of $18.0
million. At September 30, 1996, there was no balance outstanding on the line of
credit.
NOTE 5 - 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 have
been restated retroactively to reflect the stock split. In addition, an amount
equal to the $.01 par value of the shares outstanding have been transferred from
retained earnings to common stock at each period presented.
6
<PAGE>
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, (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 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 Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1995 1996 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 47,499 $ 67,785 $ 129,800 $ 179,255
Cost of goods sold 14,140 20,080 37,091 52,831
---------- ---------- ---------- ----------
Gross profit 33,359 47,705 92,709 126,424
Operating expenses:
Research and development 928 1,374 2,435 3,335
Selling 10,437 14,482 26,533 37,039
Shipping and warehousing 1,388 1,820 3,506 4,780
General and administrative 3,490 4,908 9,241 12,947
---------- ---------- ---------- ----------
Total operating expenses 16,243 22,584 41,715 58,101
---------- ---------- ---------- ----------
Operating income 17,116 25,121 50,994 68,323
Interest expense (income), net 363 (290) 637 (592)
---------- ---------- ---------- ----------
Income before provision for income taxes 16,753 25,411 50,357 68,915
Provision for income taxes 6,522 9,758 19,964 26,551
---------- ---------- ---------- ----------
Net income $ 10,231 $ 15,653 $ 30,393 $ 42,364
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per share $ 0.15 $ 0.22 $ 0.46 $ 0.59
Weighted average shares outstanding 68,636 71,946 66,094 71,925
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
7
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET SALES
Net sales increased to $67.8 million for the three months ended September 30,
1996 from $47.5 million for the three months ended September 30, 1995, an
increase of $20.3 million, or 42.7%. 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,
STRAIGHT JACKETS in May 1996 and SQUARE WIRES in June 1996. These increases
were partially offset by moderate 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 domestic sales grew 44.1% to $47.4 million in the 1996 period from
$32.9 million in the comparable 1995 period. The Company's international
sales grew 39.0% to $20.3 million, or 29.9% of net sales, in the 1996 period
from $14.6 million, or 30.7% of net sales, in the comparable 1995 period.
This increase was principally a result of substantially increased sales to
distributors throughout the world with the strongest growth in Japan,
Southeast Asia and Australia and higher sales from the Company's direct
operations in continental Europe.
GROSS PROFIT
Gross profit increased to $47.7 million for the three months ended September
30, 1996 from $33.4 million for the three months ended September 30, 1995, an
increase of $14.3 million, or 42.8%. As a percentage of net sales, gross
profit increased to 70.4% in the 1996 period from 70.3% in the 1995 period as
a result of a higher average selling price, shift in product mix and
improvements in manufacturing efficiencies, partially offset by 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.
OPERATING EXPENSES
Operating expenses increased to $22.6 million for the three months ended
September 30, 1996 from $11.5 million for the three months ended September
30, 1995, an increase of $11.1 million. The 1995 period included a $4.8
million gain on the disposition of aircraft. On a pro forma basis as
discussed previously, operating expenses increased to $22.6 million in the
1996 period from $16.2 million in the 1995 period, an increase of $6.4
million, or 39.5%. Selling expenses increased $4.1 million in the 1996
period principally as a result of higher advertising costs, additional sales
and marketing personnel and higher depreciation on the Company's store
displays, partially offset by lower commissions as a percentage of net sales
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 and
$0.2 million in the 1995 period. Shipping expenses increased $0.4 million in
the 1996 period to $1.8 million from $1.4 million in the 1995 period. As a
percentage of net sales, shipping expenses decreased to 2.7% in the 1996
period from 2.9% in the 1995 period. General and administrative expenses
increased $1.4 million in the 1996 period from the 1995 period as the Company
added the personnel and infrastructure necessary in response to its growth,
resulting in increased salaries, higher costs associated with management
information systems, increased insurance and increased office supplies. As a
percentage of net sales, general and administrative expenses decreased to
7.2% of net sales in the 1996 period from 7.3% in the 1995 period as the
Company leveraged its expenses on higher sales.
8
<PAGE>
OPERATING INCOME
The Company's operating income grew to $25.1 million for the three months
ended September 30, 1996 from $21.9 million for the three months ended
September 30, 1995, an increase of $3.2 million. On a pro forma basis as
discussed previously, operating income increased to $25.1 million for the
1996 period from $17.1 million for the comparable 1995 period, an increase of
$8.0 million, or 46.8%. This increase was a result of the Company's net
sales growth, improvement in gross profit and a reduction in operating
expenses as a percentage of net sales.
INTEREST EXPENSE, NET
The Company had no interest expense and interest income of $0.3 million for the
three months ended September 30, 1996, as compared with interest expense of $0.5
million and interest income of $0.1 million 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 $9.8
million for the three months ended September 30, 1996, as compared to $1.3
million for the comparable 1995 period. On a pro forma basis as discussed
previously, the Company's provision for income taxes was $6.5 million for the
1995 period.
NET INCOME
The Company's net income decreased to $15.7 million for the three months ended
September 30, 1996 from $20.2 million for the three months ended September 30,
1995, a decrease of $4.5 million. On a pro forma basis as discussed previously,
net income increased to $15.7 million for the 1996 period from $10.2 million for
the 1995 period, an increase of $5.5 million, or 53.9%.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET SALES
Net sales increased to $179.3 million for the nine months ended September 30,
1996 from $129.8 million for the nine months ended September 30, 1995, an
increase of $49.5 million, or 38.1%. 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, STRAIGHT JACKETS in May
1996 and SQUARE WIRES in June 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 domestic sales grew
33.3% to $119.8 million from $89.9 million in the comparable 1995 period. The
Company's international sales grew 49.1% to $59.5 million, or 33.2% of net
sales, in the 1996 period from $39.9 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.
9
<PAGE>
GROSS PROFIT
Gross profit increased to $126.4 million for the nine months ended September 30,
1996 from $92.7 million for the nine months ended September 30, 1995, an
increase of $33.7 million, or 36.4%. As a percentage of net sales, gross
profit decreased to 70.5% in the 1996 period from 71.4% in the 1995 period as a
result of 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 efficiencies.
OPERATING EXPENSES
Operating expenses increased to $58.1 million for the nine months ended
September 30, 1996 from $54.0 million for the nine months ended September 30,
1995, an increase of $4.1 million. The 1995 period includes a $4.8 million gain
on the disposition of aircraft. On a pro forma basis as discussed previously,
operating expenses increased to $58.1 million in the 1996 period from $41.7
million in the 1995 period, an increase of $16.4 million, or 39.3%. Selling
expenses increased $10.5 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 $1.0 million in the 1996 period and $0.4
million in the 1995 period. Shipping expenses increased $1.3 million in the
1996 period to $4.8 million from $3.5 million in the 1995 period. As a
percentage of net sales, shipping expenses were unchanged at 2.7% in the 1996
period and the 1995 period. General and administrative expenses increased $3.7
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
7.2% of net sales in the 1996 period from 7.1% in the 1995 period.
OPERATING INCOME
The Company's operating income grew to $68.3 million for the nine months ended
September 30, 1996 from $38.7 million for the nine months ended September 30,
1995, an increase of $29.6 million. On a pro forma basis as discussed
previously, operating income increased to $68.3 million for the 1996 period from
$51.0 million for the comparable 1995 period, an increase of $17.3 million, or
33.9%. This increase was a result of the Company's net sales growth, partially
offset by higher cost of goods sold as a percentage of net sales.
INTEREST EXPENSE, NET
The Company had interest expense of $5,000 and interest income of $0.6 million
for the nine months ended September 30, 1996, as compared with interest expense
of $0.8 million and interest income of $0.2 million 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 $26.6
million for the nine months ended September 30, 1996, as compared to $2.1
million for the comparable 1995 period. On a pro forma basis as discussed
previously, the Company's provision for income taxes was $20.0 million for the
1995 period.
10
<PAGE>
NET INCOME
The Company's net income increased to $42.4 million for the nine months ended
September 30, 1996 from $36.0 million for the nine months ended September 30,
1995, an increase of $6.4 million. On a pro forma basis as discussed
previously, net income increased to $42.4 million for the 1996 period from $30.4
million for the 1995 period, an increase of $11.9 million, or 39.1%.
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
$42.6 million for the nine months ended September 30, 1996 from $23.9 million
for the comparable 1995 period. On a pro forma basis as discussed previously,
cash provided by operating activities was $21.5 million for the nine months
ended September 30, 1995. At September 30, 1996, working capital was $58.4
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 September 30, 1996, there was no balance
outstanding on the credit facility. 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 nine months ended September 30, 1996 totaled $13.4 million.
The Company anticipates that capital expenditures (other than for the
Company's new facility) will total $16.0 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 $36.0 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 $13.7 million was spent in the first nine months 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 $51.0 million for the nine month period ended September 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.
11
<PAGE>
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 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 September 30, 1996, the Company had a
backlog of $19.3 million, adjusted for all order revisions received by the
Company from Sunglass Hut through October 16, 1996. The backlog includes
backorders (merchandise remaining unshipped beyond its scheduled shipping
date) of $1.6 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
None
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
3.3 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 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 April 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
11.1 Computation of Earnings per Common Share
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.
**** Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended
June 30, 1996.
The Company did not file any reports on Form 8-K during the three months ended
September 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.
November 6, 1996 /s/ JIM JANNARD
------------------------
Jim Jannard
Chairman and President
November 6, 1996 /s/ LINK NEWCOMB
------------------------
Link Newcomb
Executive Vice President and
Chief Financial Officer
November 6, 1996 /s/ DONNA GORDON
------------------------
Donna Gordon
Vice President of Finance
16
<PAGE>
EXHIBIT 3.3
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION OF
OAKLEY, INC.
ARTICLES OF AMENDMENT of the Articles of Incorporation of Oakley, Inc.
(the "Corporation") are herein executed by said Corporation, pursuant to the
provisions of RCW 23B.10.060, as follows:
FIRST: The name of the Corporation is Oakley, Inc.
SECOND: The first paragraph of Article II of the Corporation's Amended
and Restated Articles of Incorporation is amended to read as follows:
The total number of shares of stock which the corporation
shall have authority to issue is two hundred and ten million
(210,000,000), which shall consist of two hundred million
(200,000,000) shares of Common Stock, each having a par value of
one penny ($.01) (the "Common Stock"), and ten million (10,000,000)
shares of Preferred Stock, each having a par value of one penny
($.01) (the "Preferred Stock").
THIRD: This amendment does not provide for an exchange,
reclassification or cancellation of issued shares.
FOURTH: The effective date of the adoption of said Amendment by the
Directors of said Corporation was the 10th day of September, 1996.
FIFTH: The amendment was approved by resolution of the Board of
Directors without shareholder action. Pursuant to RCW 23B.10.020(4),
shareholder action is not required.
The foregoing is executed under penalty of perjury by the undersigned,
who is authorized to do so on behalf of the Corporation.
DATED this 26th day of September, 1996.
OAKLEY, INC.
By: /s/ Link Newcomb
-------------------------------------
Link Newcomb
Executive Vice President and
Chief Financial Officer
<PAGE>
Exhibit 11.1
OAKLEY, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Three Months Ended
September 30, 1996
------------------
Common Shares and common share equivalents:
Number of shares outstanding at beginning of period 71,401
Weighted average common shares issued
from the exercise of stock options 6
Shares issuable upon the exercise of common stock
options net of shares assumed to be repurchased
from proceeds obtained therefrom 539
------------------
Weighted average common and common
equivalent shares at end of period 71,946
------------------
------------------
Net income for primary net income per share $ 15,653
Primary net income per common
and common equivalent shares $ 0.22
------------------
------------------
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 have been restated retroactively to reflect the stock split.
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 22,996
<SECURITIES> 0
<RECEIVABLES> 24,645
<ALLOWANCES> 517
<INVENTORY> 21,237
<CURRENT-ASSETS> 77,707
<PP&E> 61,809
<DEPRECIATION> 0
<TOTAL-ASSETS> 143,318
<CURRENT-LIABILITIES> 19,304
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0
0
<COMMON> 714
<OTHER-SE> 123,300
<TOTAL-LIABILITY-AND-EQUITY> 143,318
<SALES> 179,255
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