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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1996 Commission File Number: 1-13848
OAKLEY, INC.
(Exact name of registrant as specified in its charter)
Washington 95-3194947
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(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
1 Icon
Foothill Ranch, California 92610
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(Address of principal Zip Code
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 REGISTERED
Common stock, par value $.01 per share New York Stock Exchange
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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 X No
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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 14, 1997: $706,560,120
Number of shares of common stock, $.01 par value, outstanding as of the close
of business on March 14, 1997: 70,656,012 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's 1997 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 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
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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 sunglasses and goggles. 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 six lines of sunglasses (FROGSKINS, M FRAMES, ZEROS, WIRES,
JACKETS and X METAL) and three lines of goggles.
PRODUCT DESIGN AND DEVELOPMENT
The Company's products are designed through the efforts of the Company's
in-house design staff. In formulating design concepts and product ideas, the
staff focuses on developing products with demonstrable improvements in
performance, creating breakaway designs, some of which can be patent
protected, and finding creative solutions to the functional problems of
active sunglass wearers. Designers utilize state-of-the-art technology,
including a three-dimensional CAD/CAM system and liquid laser prototyping, to
create a fully detailed, wearable prototype within 20 hours. As a result,
the Company has dramatically shortened its product development cycle by
facilitating rapid iterations of working prototypes and components leading to
a final model which can then be used directly in the preparation of a mold.
This process allows for the extensive testing and perfecting of a product,
before introducing it to the public. Through the use of such technology, the
Company is capable of introducing a new product line within four months of
initial concept.
The Company subjects its eyewear to a series of industrial standard tests,
known as "Z87.1," established by American National Standards Institute
("ANSI") and conducted by an independent laboratory. The Company also
conducts such ANSI tests in its own facilities on a regular basis. The
Industrial Standard ANSI Z87.1 includes tests of sunglasses for optical
quality, high velocity impact and high mass impact. When subjected to ANSI's
test for optical quality, Oakley's sports-application sunglasses featuring
its patented polaric ellipsoid lens geometry (including M FRAMES and ZEROS)
have demonstrated superior optical clarity when compared to similar products
of its principal competitors.
Oakley has obtained patents covering a number of its proprietary
manufacturing methods and product features. Among the Company's most
important patents and proprietary information are its toroidal single-lens
geometry and associated manufacturing processes and certain of the Company's
frame components and materials. The proprietary technology the Company
employs in its lens-cutting, etching and coating processes and the Company's
significant investment in specialized equipment, together with certain
exclusive materials used in production, contribute to the superior optical
quality and impact-resistance of Oakley products.
Another of Oakley's most significant developments has been the IRIDIUM
coating on the PLUTONITE lens. IRIDIUM is a metallic oxide coating that
increases contrast and color saturation, which enables the wearer to perceive
details in shadows or low or bright light conditions. This coating has
proven very popular in demanding sports, such as skiing and cycling, and in
high altitude use. The
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distinctive look of the IRIDIUM-coated lens has become popular with
recreational sunglass wearers. Another hallmark of Oakley's initial sunglass
products was their detachable and interchangeable components, including
lenses, frames, temples and nosepieces in different colors and shapes.
Interchangeable components for certain Oakley sunglasses contribute to the
overall Oakley appeal by allowing consumers to customize their sunglasses to
their personal tastes and to modify them for specific conditions such as low
and bright light.
Oakley has developed sports-application sunglasses for the
prescription/corrective lens segment of the market in its M FRAME and ZEROS
lines. The Company's approach has been to develop products that integrate
prescriptions lenses into Oakley's current lens geometry system. Because of
the curvature of the Oakley lens, Oakley adjusts the corrective implants by a
computer model to modify the athlete's prescription to an "as worn" position.
This feature, and the specialized equipment needed to cut and edge the
lenses, together with Oakley's PLUTONITE lens material, allow the Company to
be the exclusive provider of these corrective lenses. The Company uses an
outside ophthalmic laboratory to grind the corrective lenses. These products
have enabled Oakley to attract several 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, the world's leading producer of advanced-technology
polycarbonate lenses, and its parent, Essilor International, a large global
optical company. Under the program, Gentex will manufacture Oakley-branded
prescription lenses which will be distributed through Essilor's wholesale
laboratories worldwide for use in Oakley's current and future sunglass and
ophthalmic frames. All of Oakley's prescription products will continue to be
available only in Oakley's authorized retailers.
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. In February 1997, Oakley released its
first sunglass in the X METAL line. The X METAL line applies unique design
and manufacturing technology that Oakley believes is the first eyewear
company to incorporate such technology. In addition to the X METAL line, the
Company intends to introduce other sunglass line extensions and new lines of
sunglasses in 1997. The Company believes that these new products will
continue to attract additional consumers from the nonsports segment of the
sunglass market. The success of any new product line is dependent on various
factors, including product demand, production capacity and the availability
of raw materials and critical manufacturing equipment. Other factors and
assumptions not identified above were also involved in preparing
forward-looking information relating to product development and
introductions, including that contained above. The uncertainty associated
with all the above factors, and any change in such factors from the Company's
expectations, could result in cost increases, delays or cancellation of such
new products and may also cause actual results to differ materially from
those projected.
To take advantage of unique opportunities, the Company may manufacture private
label or other sunglasses for other companies and intends to market and sell
sunglasses under brand names other than "Oakley". In addition, the Company has
licensed, and may in the future determine to further license, its intellectual
property rights to others in the optical or other industries.
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
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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) and 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
and X METAL. The Company's 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'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:
<TABLE>
<CAPTION>
DATE INTRODUCED LENS GEOMETRY WHOLESALE PRICE SUGGESTED RETAIL
PRICE
<S> <C> <C> <C> <C>
SUNGLASSES
M FRAMES Late 1989 Toroidal $ 45.00 - 72.50 $ 90.00 - 145.00
ZEROS Late 1993 Toroidal 40.00 - 52.50 80.00 - 105.00
WIRES Late 1993 Spherical 65.00 - 112.50 130.00 - 225.00
EYE JACKETS Late 1994 Spherical 45.00 - 62.50 90.00 - 125.00
TRENCHCOATS Late 1995 Spherical 45.00 - 65.00 90.00 - 130.00
STRAIGHT JACKETS May 1996 Spherical 50.00 100.00
SQUARE WIRES June 1996 Spherical 75.00 150.00
PRO M FRAME October 1996 Toroidal 75.00 150.00
FROGSKINS* December 1996 Spherical 27.50 - 32.50 55.00 - 65.00
X METAL February 1997 Spherical 125.00 250.00
GOGGLES
MOTOCROSS 1980 - 15.00 - 33.50 26.00 - 56.50
SKI 1983 - 12.50 - 51.00 25.00 - 102.00
H20 1990 - 15.00 - 35.75 25.75 - 61.00
</TABLE>
* The Company's original FROGSKIN line was introduced in 1985 and was
discontinued after the new style was introduced in 1996.
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.
As the Oakley brand name has become increasingly popular, demand has also
grown for Oakley accessories. While the Company does not actively market
accessories, it does selectively put its logo on shirts, gear bags, hats and
other items. Management has repeatedly declined licensing opportunities in
order the 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
which in some cases may include limited licensing.
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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
that contribute significantly to gross profit margins, provide protection
against piracy of the Company's proprietary information and processes, and
enable the Company to manufacture products in accordance with its strict
quality control standards. Components and processes that are unlikely to add
significant value will continue to be 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. Due to a reduction
in the level of sales in late 1996, the Company's finished goods inventory at
December 31, 1996 was higher than historical inventory levels.
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 will receive 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 will purchase all of its decentered
lens requirements 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.
DISTRIBUTION
The Company sells Oakley eyewear in the United States through a carefully
selected base of approximately 7,100 active accounts with approximately
10,500 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. Most of the Company's
accounts, other than sunglass retail chains, have a single store. Unlike
most of its competitors, the Company has elected
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not to sell its products through department stores (other than Nordstrom),
discount stores, drug stores or traditional mail-order companies.
In an effort to preserve and enhance the Company's brand image, Oakley
stopped soliciting new retail accounts in the United States, with limited
exceptions, in November 1989. The Company's current level of distribution,
with the addition of key niche retailers 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 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 Europe, marketing and distribution is handled
directly by the Company's Oakley Europe subsidiary, located near Paris,
France, which is staffed by approximately 80 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 Switzerland and Austria. Since 1995, the Company has
been selling to Mexico on a direct market basis through its subsidiary Oakley
Mexico. In 1996, the Company acquired its exclusive distributor in the
United Kingdom ("Oakley UK") and South Africa ("Oakley Africa") and began
selling to those markets on a direct basis in the fourth quarter of 1996. In
those parts of the world not serviced by Oakley Europe, Oakley UK, Oakley
Africa or Oakley Mexico, 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. In February 1997, the
Company announced that it expects to begin selling to Japan on a direct basis
in May 1997. For information regarding the Company's operations by
geographic region, see Note 9 and Note 10 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. Each
product shipped from Oakley's headquarters is marked with a tracking code
that allows the Company to determine the source of diverted products sold by
unauthorized retailers, 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.
SALES AND MARKETING
The Company maintains a national sales force of approximately 83 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
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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 largely 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 20 sports marketing experts domestically, with an additional 15
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
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 90-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 obtaining brand recognition is through the use of
sports marketing, which places the Oakley brand before consumers through the
editorial endorsements of influential athletes and other personalities, some
of whom have formal arrangements with the Company. Oakley supports its
sports marketing with print advertising. The Company's print advertisements
often serve to educate consumers on the health and performance benefits of
Oakley products as well as to impart technical information in layman's terms.
The Company advertises and promotes its products through print media,
outdoor media, in-store visual displays and other point-of-sale materials.
The Company focuses its print media campaign in sport publications and also
focuses part of its print media campaign in lifestyle/music publications,
which target younger consumers. Oakley retains significant control over its
advertising programs and is able to deliver a consistent, well-recognized
advertising message at a substantial cost savings compared to complete
reliance upon outside advertising agencies.
PRINCIPAL CUSTOMERS
During 1996, net sales to the Company's ten largest customers, which included
international distributors, accounted for over 50% 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 31.0% of the Company's 1996
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
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December 31, 1996, approximately 235 of the 2,090 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 1996
three 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, 1996 concerning the
Company's intellectual property:
NUMBER OF UTILITY/DESIGN PATENTS
ISSUED PENDING TRADEMARKS
United States 60 29 76
International 233 158 320
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 suspect
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.
In mid-1995, the Company received a letter from an individual owner of a
United States patent, issued in late 1991, which he claims covers a
production process utilized by the Company for a portion of its products. On
the basis of the company's investigation completed to date and discussions
with the owner of such patent, the Company believes that it could, if
necessary, acquire or license the patent, or take other steps to resolve the
matter, without a material adverse effect on the Company. Many of the
Company's products on which the claim is based have been discontinued.
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
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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 and Lomb (which markets Killer Loop), Luxottica
(which markets Briko), Nike, Bolle and various niche brands, compete for the
Company's shelf space. In order to retain its market share, the Company must
continue to be competitive in the areas of quality and performance,
technology, method of distribution, style, brand image, intellectual property
protection and customer service.
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,
distribution channels and the number and range of products offered. A number
of established companies, including Bausch and Lomb (Ray Ban and Revo) and
Luxottica, compete in this wider market. The Company differs from many of its
competitors in that their 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.
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 14,
1997, there were a total of approximately 730 full-time employees. In
addition, the Company utilizes as many as 450 occasional 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.
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 will either expire or be terminated with no material
adverse financial effect. In June 1996, the Company purchased a facility in
Nevada for the production of metal eyewear which is approximately 63,000
square feet. In addition, the Company leases office and warehouse space as
necessary to support its operations worldwide, including offices in Europe,
Mexico and South Africa. The Company believes current 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
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Company believes that its environmental obligations will not have a material
adverse effect on its operations or financial position.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its officers 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 "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) (the "ROSENSHEIN
Action");
HERSCHEL HARMAN V. OAKLEY, INC., MIKE PARNELL, LINK NEWCOMB AND JIM
JANNARD, Case No. 773053 (filed December 17, 1996) (the "HARMAN Action");
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) (the "SHER Action," and
collectively with the Rosenshein and Harman Actions, the "California
Securities Actions").
In the ROSENSHEIN and HARMAN Actions, the plaintiffs seek to represent a
class of persons who purchased the Company's common stock between October 9,
1996 and December 4, 1996. In the SHER Action, 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 complaints in the California Securities Actions allege claims for
violations of the antifraud provisions and certain other 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 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 SHER Action 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 four 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 in the SHER Action
gave the Company notice of that action pursuant to the indemnification
provisions of the U.S. Purchase Agreement dated June 6, 1996, for the
Secondary Offering 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 SHER Action.
By order dated January 30, 1997, the Court ordered that the California
Securities Actions be assigned to the Court's Complex Litigation Panel. The
Company and the other defendants have not yet filed a response to any of the
California Securities Actions. The plaintiffs in each of the California
Securities Actions have served document requests on the Company and others.
To date, no discovery of defendants has been taken in these matters.
Although it is too soon to predict the outcome of the case with any
certainty, based on its current knowledge of the facts, the
11
<PAGE>
Company believes that the plaintiffs' claims are without merit and intends to
vigorously defend the actions.
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.
12
<PAGE>
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 August 10, 1995 on the New York Stock Exchange upon completion of the
Company's initial public offering (trading symbol "OO"). On March 14, 1997,
the closing sales price for the Common Stock was $10. The following table
sets forth the high and low sales prices for the Common Stock for each
quarterly period since such stock began trading on the New York Stock
Exchange Composite Tape:
HIGH LOW
---- ---
1995
----
Third Quarter (from August 10,1995) $16 15/16 $13 1/16
Fourth Quarter $19 5/8 $13 5/8
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
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 14, 1997 was
506.
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. For certain
information regarding distributions made by the Company in 1994 and 1995
(prior to its initial public offering in August 1995), see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
13
<PAGE>
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, 1994, 1995, and 1996 and balance sheet data as of December 31,
1995 and 1996 included herein have been audited by Deloitte and Touche LLP,
the Company's independent accountants, as indicated in their report included
elsewhere herein. The selected pro forma income statement data set forth
below is for informational purposes only and may not necessarily be
indicative of the results of operations of the Company as they may be in the
future.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
(dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 76,390 $ 92,714 $ 123,952 $ 172,752 $ 218,566
Cost of goods sold 19,584 27,667 35,714 50,295 66,790
---------- ---------- ---------- ---------- ----------
Gross profit 56,806 65,047 88,238 122,457 151,776
Operating expenses:
Research and development 12,904 15,455 25,529 16,774 4,782
Selling 19,812 21,750 30,815 36,776 48,092
Shipping and warehousing 2,339 2,334 3,187 4,678 6,507
General and administrative 6,741 11,801 14,681 15,753 18,513
Gain on disposition of property
and equipment - - - (4,794) -
---------- ---------- ---------- ---------- ----------
Total operating expenses 41,796 51,340 74,212 69,187 77,894
Operating income 15,010 13,707 14,026 53,270 73,882
Interest (income) expense, net (174) 69 232 273 (781)
---------- ---------- ---------- ---------- ----------
Income before provision for income
taxes 15,184 13,638 13,794 52,997 74,663
Provision for income taxes (1) 454 308 259 7,830 28,670
---------- ---------- ---------- ---------- ----------
Net income $ 14,730 $ 13,330 $ 13,535 $ 45,167 $ 45,993
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income per share $ 0.64
----------
----------
Weighted average common shares 71,728,000
----------
----------
SUPPLEMENTAL INCOME STATEMENT DATA (2):
Income before provision for income
taxes 15,184 13,638 13,794 52,997
Provision for income taxes 6,065 5,476 5,539 20,854
---------- ---------- ---------- ----------
Net income $ 9,119 $ 8,162 $ 8,255 $ 32,143
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Working capital $ 16,858 $ 16,872 $ 9,932 $ 39,161 $ 36,107
Total assets 49,257 43,592 49,694 97,725 158,245
Total debt 7,600 6,339 3,300 263 18,000
Shareholders' equity 28,650 32,775 33,133 81,709 121,437
</TABLE>
(footnotes on next page)
14
<PAGE>
(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 an S corporation.
15
<PAGE>
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 periods 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 periods.
Year Ended December 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
Net sales $123,952 $172,752 $218,566
Cost of goods sold 35,714 50,295 66,790
---------- ---------- ----------
Gross profit 88,238 122,457 151,776
Operating expenses:
Research and development 2,881 3,285 4,782
Selling 27,707 35,802 48,092
Shipping and warehousing 3,187 4,678 6,507
General and administrative 9,728 13,121 18,513
---------- ---------- ----------
Total operating expenses 43,503 56,886 77,894
---------- ---------- ----------
Operating income 44,735 65,571 73,882
Interest (income) expense, net 232 273 (781)
---------- ---------- ----------
Income before provision for income taxes 44,503 65,298 74,663
Provision for income taxes 17,870 25,694 28,670
---------- ---------- ----------
Net income $ 26,633 $ 39,604 $ 45,993
---------- ---------- ----------
---------- ---------- ----------
16
<PAGE>
The following table sets forth operating results (as a percentage of net sales)
for the periods indicated:
Year Ended December, 31
---------------------------------
1994 1995 1996
-------- -------- --------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 28.8 29.1 30.6
-------- -------- --------
Gross profit 71.2 70.9 69.4
Operating expenses:
Research and development 2.3 1.9 2.2
Selling 22.4 20.7 22.0
Shipping and warehousing 2.6 2.7 3.0
General and administrative 7.8 7.6 8.5
-------- -------- --------
Total operating expenses 35.1 32.9 35.7
-------- -------- --------
Operating income 36.1 38.0 33.7
Interest (income) expense, net 0.2 0.2 (0.4)
-------- -------- --------
Income before provision for income taxes 35.9 37.8 34.1
Provision for income taxes 14.4 14.9 13.1
-------- -------- --------
Net income 21.5% 22.9% 21.0%
-------- -------- --------
-------- -------- --------
The Company's sales before discounts for sunglasses were $110.6 million,
$158.2 million and $212.8 million for the years ended December 31, 1994, 1995
and 1996, respectively. Sunglass unit sales were 2,685,972, 3,465,817 and
4,310,846 for the years ended December 31, 1994, 1995 and 1996, respectively.
17
<PAGE>
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
ended December 31, 1996 from $43.0 million in the comparable 1995 period, a
decrease of $3.7 million, or 8.6%. Due to excess Oakley inventory at
Sunglass Hut, the Company expects net sales to Sunglass Hut in the first
quarter of 1997 to be substantially below the net sales for the comparable
period of 1996 and to remain the same or decrease for the full year 1997 as
compared to 1996.
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. The Company expects gross profit as a percentage of
net sales to continue to be affected by production inefficiencies through at
least the first quarter of 1997 resulting from an anticipated decline in net
sales from the prior year period.
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
18
<PAGE>
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. The Company expects its operating margin to
continue to be negatively impacted at least through the first quarter of 1997
resulting from an anticipated decline in net sales from the prior year
period.
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 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%.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET SALES
Net sales increased to $172.8 million for the year ended December 31, 1995
from $124.0 million for the year ended December 31, 1994, an increase of
$48.8 million, or 39.4%. This increase was principally the result of
substantial sales in 1995 for the EYE JACKET sunglasses, which were
introduced by the Company in December 1994, significant sales increases in
1995 of WIRES and ZEROS and moderate sales increases of M FRAME sunglasses.
These increases were partially offset by significant sales decreases in the
Company's most mature product offerings, BLADES and RAZOR BLADE sunglasses,
which were discontinued by the Company for 1996, as well as significant
decreases in the lower-priced FROGSKINS, and the withdrawal of the Company's
SUB ZERO product line in January 1995. The decline in sales of BLADE and
RAZOR BLADE sunglasses was attributable principally to a
19
<PAGE>
50% reduction for 1995 in the number of models offered and increased sales of
M FRAME sunglasses, which represent an advancement of the Company's
single-lens sports sunglasses. This change in the Company's product mix
contributed to an increase of 10.8% in the total average selling price of
sunglasses in 1995 on unit growth of 29.0%. The Company's international
sales grew 72.5% to $57.6 million, or 33.3% of net sales, in 1995 from $33.4
million, or 26.9% of net sales, in 1994, 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 in the Company's other foreign
markets.
GROSS PROFIT
Gross profit increased to $122.5 million for the year ended December 31, 1995
from $88.2 million for the year ended December 31, 1994, an increase of $34.3
million, or 38.9%. As a percentage of net sales, gross profit decreased
slightly to 70.9% in 1995 from 71.2% in 1994, principally as a result of
higher production costs resulting from multiple-shift seven-day continuous
production through most of 1995, increased prices for uncoated lens blanks,
increased inventory shrinkage and increased net sales to foreign distributors
which yield lower margins to the Company, partially offset by higher margins
on sales by Oakley Europe as a result of higher selling prices (translated
into dollars) due to favorable currency fluctuations, an improvement in the
Company's lens reject rate and a shift in product mix to higher margin items.
In addition, as part of the Company's continuing efforts to protect its brand
image, the Company purchased its products from two discount retail chains in
the United States to which such products were diverted. As a result, the
Company recorded returns of $2.1 million for the year ended December 31, 1995
for the costs incurred in connection with such purchases.
OPERATING EXPENSES
Operating expenses decreased to $69.2 million for the year ended December 31,
1995 from $74.2 million for the year ended December 31, 1994, a decrease of
$5.0 million. On a pro forma basis as discussed above, operating expenses
would have increased to $56.9 million in 1995 from $43.5 million in 1994, an
increase of $13.4 million, or 30.8%. Selling expenses increased $8.1 million
in 1995 principally as a result of salaries and commissions directly
associated with higher sales levels, increases in sports marketing and
advertising expenditures and higher depreciation from new store displays. As
a percentage of net sales, selling expenses decreased from 22.4% in 1994 to
20.7% in 1995 because sports marketing and advertising expenses, warranty
expense, trade show expenses and commissions grew more slowly than net sales.
Warranty expense in 1995 benefited from the initiation in mid-year of a
$9.39 warranty processing charge per unit, which contributed to warranty
income of $0.6 million in 1995. General and administrative expenses
increased $3.4 million in 1995 as the Company added the personnel and
infrastructure necessary in response to its growth, including increased
personnel, insurance and other expenses associated with being a public
company. As a percentage of net sales, general and administrative expenses
decreased to 7.6% for 1995 from 7.8% for 1994.
OPERATING INCOME
The Company's operating income grew to $53.3 million for the year ended
December 31, 1995 from $14.0 million for the year ended December 31, 1994, an
increase of $39.3 million. On a pro forma basis as discussed above,
operating income would have increased to $65.6 million for 1995 from $44.7
million for 1994, an increase of $20.9 million, or 46.8%. This increase was
the result of the Company's net sales growth and a reduction of operating
expenses as a percentage of net sales, partially offset by a slight decline
in the gross profit margin.
INTEREST EXPENSE, NET
The Company had interest expense of $0.6 million and interest income of $0.3
million for 1995, as compared with interest expense of $0.4 million and
interest income of $0.2 million for 1994.
20
<PAGE>
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 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 has recorded a provision for income taxes of $7.8 million
for the year ended December 31, 1995 and $0.3 million for 1994. On a pro
forma basis as discussed above, the Company's provision for income taxes was
$25.7 million for 1995 and $17.9 million for 1994. The Company's
consolidated effective tax rate as a C corporation for the period from August
14, 1995 to December 31, 1995 was 38.6%.
NET INCOME
The Company's net income increased to $45.2 million for the year ended
December 31, 1995 from $13.5 million for the year ended December 31, 1994, an
increase of $31.7 million. On a pro forma basis, net income would have
increased to $39.6 million for 1995 from $26.6 million for 1994, an increase
of $13.0 million, or 48.9%.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations almost entirely with
cash flow generated from operations. Cash provided by operating activities
totaled $40.5 million for the year ended December 31, 1996 and $28.6 million
for 1995. At December 31, 1996, working capital was $36.1 million compared to
$39.2 million at December 31, 1995. 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, 1996, there were $18.0 million in borrowings outstanding under
such facility. To supplement the Company's current line of credit, the
Company is in discussions with financial lenders to obtain additional
financing of approximately $25.0 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.
Capital expenditures (other than those relating to the Company's new
facility) for the year ended December 31, 1996 totaled $15.1 million. In
addition, 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. In April 1995, the Company purchased
land for $8.2 million on which it is completing construction of a larger
headquarters and manufacturing facility. The Company currently estimates
that the cost to construct and equip such facility will be approximately
$48.5 million, which includes design and engineering fees, furniture and
other build-out costs of approximately $8.5 million. Of such amounts, $5.1
million was spent in 1995 and $23.5 million was spent in 1996. The remainder
is expected to be spent in early 1997. The Company began to relocate to the
new facility in early 1997. The Company expects capital expenditures for
1997 to total approximately $21.0 million, excluding those expenditures
relating to the Company's new facility.
21
<PAGE>
SEASONALITY
The following table sets forth certain unaudited quarterly data for the periods
shown:
<TABLE>
<CAPTION>
1995 1996
----------------------------------- ------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $36,615 $45,686 $47,499 $42,952 $48,706 $62,764 $67,785 $39,311
Gross profit 25,259 34,091 33,359 29,748 34,064 44,655 47,705 25,352
</TABLE>
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, 1996, the Company had a backlog of $4.3 million,
which reflects all order cancellations received by the Company from its
largest customer, Sunglass Hut, through such date. The backlog includes
backorders (merchandise remaining unshipped beyond its scheduled shipping
date) of $1.3 million as of such date.
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
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; currency
fluctuations; unanticipated change orders, weather delays and transitional
costs associated with the construction of, and relocation to, the Company's
new headquarters and manufacturing facility; 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.
22
<PAGE>
RECENT ACCOUNTING DEVELOPMENTS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which requires adoption of the disclosure provisions no later
than for fiscal years beginning after December 15, 1995 and adoption of the
recognition and measurement provisions for nonemployee transactions no later
than December 15, 1995. The new standard defines a fair value method of
accounting for stock options and other equity instruments. Under the fair
value method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period, which is
usually the vesting period.
Pursuant to the new standard, companies are encouraged, but are not required,
to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," but are required to disclose in a note to the
financial statements pro forma net income and, if presented, earnings per
share as if the company had applied the new method of accounting.
The Company has determined that it will not change to the fair value method
and will continue to use Accounting Principles Board Opinion No. 25 for
measurement and recognition of employee stock- based transactions.
(See Note 8)
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.
23
<PAGE>
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,
1997 to be filed with the Securities and Exchange Commission within 120 days
after December 31, 1996 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,
1997 to be filed with the Securities and Exchange Commission within 120 days
after December 31, 1996 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,
1997 to be filed with the Securities and Exchange Commission within 120 days
after December 31, 1996 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,
1997 to be filed with the Securities and Exchange Commission within 120 days
after December 31, 1996 and is incorporated herein by reference.
24
<PAGE>
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.
<TABLE>
<S> <C>
* 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
</TABLE>
25
<PAGE>
<TABLE>
<S> <C>
***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
10.17 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
10.18 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
10.19 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
***10.20 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
**10.21 Agreement, dated July 17, 1995, between Oakley, Inc. and Michael
Jordan
*10.22 Lease, dated September 15, 1988, between OO Partnership and
Oakley, Inc.
***10.23 First Amendment to Lease dated December 31, 1995, by and between
Oakley, Inc., and OO Partnership
*10.24 Agreement, dated July 31, 1995, between OO Partnership and
Oakley, Inc.
*10.25 Lease, dated March 5, 1990, between Weyerhauser Mortgage Company
and Oakley, Inc., as amended
*10.26 Sublease, dated August 17, 1992, between Western Digital
Corporation and Oakley, Inc., as amended
*10.27 Purchase Agreement and Escrow Instructions, dated December 9,
1994, between Oakley, Inc. and Foothill Ranch Development
Corporation
***10.28 Oakley, Inc. 1995 Stock Incentive Plan
***10.29 Oakley, Inc. Amended and Restated 1995 Stock Incentive Plan
***10.30 Oakley, Inc. Executive Officer Performance Bonus Plan
**10.31 Employment Agreement, dated as of August 1, 1995, between Oakley,
Inc. and Jim Jannard
**10.32 Employment Agreement, dated as of August 1, 1995, between Oakley,
Inc. and Mike Parnell
10.33 Amendment No. 1 dated as of May 23, 1996 to Employment Agreement
dated as of August 1, 1995, between Oakley, Inc. and Mike Parnell
10.34 Amendment No. 1 dated as of July 22, 1996 to Employment Agreement
dated as of August 1, 1995, between Oakley, Inc. and Jim Jannard
*10.35 Employment Agreement, dated as of April 1, 1995, between Oakley,
Inc. and Link Newcomb
***10.36 Indemnification Agreement, dated August 1, 1995, between Oakley,
Inc. and Jim Jannard
*10.37 Schedule of indemnification agreements between Oakley, Inc. and
each of its directors and executive officers
*10.38 Standard Form of Agreement between Owner and Project Manager,
dated December 30, 1994, between Oakley, Inc. and Snyder Langston
*10.39 Lease Agreement, dated January 26, 1995, between Oakley Europe,
sarl and Investipierre 7 (In French with English translation)
***10.40 Aircraft Lease Agreement, dated August 10, 1995, between Oakley,
Inc. and X, Inc.
***10.41 Aircraft Lease Agreement, dated August 10, 1995, between Oakley,
Inc. and Time Tool Incorporated
</TABLE>
26
<PAGE>
<TABLE>
<S> <C>
*10.42 Registration Rights Agreement, dated August 1, 1995, between
Oakley, Inc., Jim Jannard and the M. and M. Parnell Revocable
Trust
***10.43 Indemnification Agreement, dated August 9, 1995, between Oakley,
Inc., Jim Jannard and the M. and M. Parnell Revocable Trust
****10.44 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
21.1 List of Material Subsidiaries
23.1 Consent of Deloitte & Touche, LLP, independent auditors
27.1 Financial Data Schedule
</TABLE>
* 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.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of 1996.
(c) See (a) (2) above for a listing of the exhibits included as a part of
this report.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................... 29
Consolidated Balance Sheets as of December 31, 1995 and 1996.......... 30
Consolidated Statements of Income for the Years ended
December 31, 1994, 1995 and 1996.................................... 31
Consolidated Statements of Changes in Shareholders' Equity for the
Years ended December 31, 1994, 1995 and 1996........................ 32
Consolidated Statements of Cash Flows for the Years ended
December 31, 1994, 1995 and 1996.................................... 33
Notes to Consolidated Financial Statements............................ 34-44
</TABLE>
28
<PAGE>
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 1995 and the
related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also included the consolidated financial statement schedule listed in
the Index at Item 14(a)(2). These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Oakley, Inc.
and subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, such consolidated 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 5, 1997
Costa Mesa, California
29
<PAGE>
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1996
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,760 $ 8,063
Accounts receivable, less allowance for
doubtful accounts of $591 (1995) and
$590 (1996) 19,288 21,084
Inventories (Note 3) 20,488 29,553
Other receivables 348 1,465
Deferred income taxes (Note 5) 3,562 5,643
Prepaid expenses and other 1,731 5,822
---------- ----------
Total current assets 55,177 71,630
Property and equipment, net (Note 4) 38,888 72,942
Deferred income taxes (Note 5) 190 -
Deposits 3,154 2,193
Other assets 316 11,480
---------- ----------
TOTAL ASSETS $ 97,725 $ 158,245
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit (Note 6) $ - $ 18,000
S distribution notes 263 -
Accounts payable 7,123 7,997
Accrued expenses and other current liabilities 6,601 9,526
Income taxes payable (Note 5) 2,029 -
---------- ----------
Total current liabilities 16,016 35,523
Deferred income taxes - 1,285
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; 71,400,000 (1995) and
70,960,012 (1996) issued and outstanding 357 710
Additional paid-in capital 64,427 58,218
Retained earnings 16,998 62,634
Foreign currency translation adjustment (73) (125)
---------- ----------
Total shareholders' equity 81,709 121,437
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 97,725 $ 158,245
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Net sales (Note 9) $ 123,952 $ 172,752 $ 218,566
Cost of goods sold 35,714 50,295 66,790
---------- ---------- ----------
Gross profit 88,238 122,457 151,776
Operating expenses:
Research and development 25,529 16,774 4,782
Selling 30,815 36,776 48,092
Shipping and warehousing 3,187 4,678 6,507
General and administrative 14,681 15,753 18,513
Gain on disposition of property and
equipment (Note 8) - (4,794) -
---------- ---------- ----------
Total operating expenses 74,212 69,187 77,894
Operating income 14,026 53,270 73,882
Interest expense (income), net 232 273 (781)
---------- ---------- ----------
Income before provision for income taxes 13,794 52,997 74,663
Provision for income taxes (Note 5) 259 7,830 28,670
---------- ---------- ----------
Net income $ 13,535 $ 45,167 $ 45,993
---------- ---------- ----------
---------- ---------- ----------
Net income per common share $ 0.64
----------
----------
Weighted average shares 71,728,000
----------
----------
Supplemental data (unaudited) (Note 1):
Historical income before provision for
income taxes $ 13,794 $ 52,997
Supplemental provision for income taxes 5,539 20,854
--------- ---------
Supplemental net income $ 8,255 $ 32,143
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
OAKLEY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Cumulative
foreign
Common Stock currency
---------------------- Additional Retained translation
Shares Amount Paid-in Capital Earnings gain(loss) Total
------------ -------- ----------------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1994 65,002,000 $ 18 $ - $ 32,833 $ (76) $ 32,775
Net income - - - 13,535 - 13,535
S corporation dividends - - - (13,164) - (13,164)
Foreign currency translation - - - - (13) (13)
------------ -------- ----------------- ---------- ------------ ---------
Balance as of December 31, 1994 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
------------ -------- ----------------- ---------- ------------ ----------
------------ -------- ----------------- ---------- ------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,535 $ 45,167 $ 45,993
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,606 7,393 8,987
Deferred compensation - - 45
Gain on disposition of equipment (31) (5,286) (156)
Deferred income taxes, net - (3,752) (606)
Changes in assets and liabilities, net
of effects of business acquisitions:
Accounts receivable (5,772) (4,885) 1,964
Inventories 364 (12,035) (8,143)
Other receivables 239 621 (1,117)
Prepaid expenses and other (150) (1,071) (4,091)
Accounts payable 7,008 (2,562) (637)
Accrued expenses and other current
liabilities 2,012 3,025 327
Income taxes payable - 2,029 (2,029)
---------- ---------- ----------
Net cash provided by operating activities 24,811 28,644 40,537
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits (3,093) 689 961
Acquisitions of property and equipment (6,972) (33,239) (38,642)
Proceeds from sale of property and equipment 69 412 697
Acquisitions of facility and distributor (Note 2) - - (14,223)
Other assets - - (2,454)
---------- ---------- ----------
Net cash used in investing activities (9,996) (32,138) (53,661)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings 3,300 57,049 18,000
Repayments of bank borrowings (6,339) (60,349) -
Repayments of S distribution notes - - (263)
Net proceeds from issuance of common shares - 69,060 139
Contribution of capital - 786 -
Repurchase of common shares - - (6,397)
S corporation dividends paid (13,401) (55,000) -
---------- ---------- ----------
Net cash provided by (used in)
financing activities (16,440) 11,546 11,479
Effect of exchange rate changes on cash (13) 16 (52)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (1,638) 8,068 (1,697)
Cash and cash equivalents, beginning of period 3,330 1,692 9,760
---------- ---------- ----------
Cash and cash equivalents, end of period $ 1,692 $ 9,760 $ 8,063
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 358 $ 585 $ 58
---------- ---------- ----------
---------- ---------- ----------
Income taxes $ 275 $ 9,257 $ 34,249
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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.
33
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
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. 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 original maturities 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 25 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 are
amortized on a straight-line basis over periods ranging from six to fifteen
years. The carrying value of intangible assets is periodically reviewed by the
Company based on the estimated future operating income of the Company 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,
1996.
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, 1996, 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.
34
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
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 line of credit
equals fair value as the underlying interest rate reflects 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. Assets and liabilities expressed in foreign currencies are
translated at exchange rates in effect at the balance sheet date. Revenue and
expense items are translated using the average exchange rate. Gains and losses
resulting from translation of foreign currency financial statements are reported
as a separate component of shareholders' equity. Gains and losses from foreign
currency exchanges are recognized as incurred.
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).
PER SHARE INFORMATION - Net income per common share has been computed by
using the weighted average number of shares of common stock and common stock
equivalents outstanding during all periods presented.
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees."
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, 1996.
35
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
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 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 26.6%, 28.8% and 31.0% of
such sales for the years ended December 31, 1994, 1995 and 1996, respectively.
In part as a result of order cancellations from such chain in the fourth quarter
of 1996, the Company's net sales for the period declined from the comparable
period in 1995.
36
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
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. The acquisition of Oakley U.K. was recorded using
the purchase method of accounting and the results of operations from the date of
acquisition, effective October 31, 1996, have been included in the Company's
1996 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
five to fifteen years. Had the acquisition of Oakley U.K. 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,:
1995 1996
------------- -------------
Raw materials $ 13,650,000 $ 16,039,000
Finished goods 6,838,000 13,514,000
------------- -------------
$ 20,488,000 $ 29,553,000
------------- -------------
------------- -------------
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31,:
1995 1996
------------ ------------
Land $ 8,245,000 $ 9,008,000
Buildings - 2,191,000
Automobiles and vans 573,000 772,000
Furniture and equipment 37,774,000 52,044,000
Tooling 3,941,000 4,880,000
Leasehold improvements 3,259,000 3,713,000
Construction in progress 5,096,000 28,580,000
------------ ------------
58,888,000 101,188,000
Less accumulated depreciation
and amortization 20,000,000 28,246,000
------------ ------------
$ 38,888,000 $ 72,942,000
------------ ------------
------------ ------------
37
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
NOTE 5 - INCOME TAXES
The provision for income taxes consists of the following for the years ended
December 31,:
1994 1995 1996
-------- ----------- ------------
Current:
Federal $ - $ 6,756,000 $22,535,000
State 191,000 2,063,000 5,727,000
Foreign 68,000 1,443,000 1,082,000
-------- ------------ ------------
259,000 10,262,000 29,344,000
Deferred:
Federal - (2,081,000) (956,000)
State - (351,000) 282,000
Foreign - - -
-------- ------------ ------------
- (2,432,000) (674,000)
-------- ------------ ------------
$259,000 $ 7,830,000 $28,670,000
-------- ------------ ------------
-------- ------------ ------------
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
----------- ------------
Tax at U.S. Federal statutory rates $18,549,000 $26,132,000
State income taxes, net 1,316,000 3,905,000
Recording of deferred income tax assets
in connection with the coversion to C corporation (1,600,000) -
S corporation earnings not subject to Federal tax (10,301,000) -
Foreign sales corporation benefit - (2,889,000)
Foreign taxes - 1,082,000
Other, net (134,000) 440,000
------------ ------------
$ 7,830,000 $28,670,000
------------ ------------
------------ ------------
38
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
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:
1995 1996
------------ ------------
Deferred tax assets:
Warranty reserve $ 1,303,000 $ 1,267,000
Uniform capitalization 531,000 509,000
Sales returns reserve 500,000 736,000
State taxes 359,000 1,880,000
Inventory reserve 172,000 258,000
Allowance for doubtful accounts 168,000 179,000
Depreciation 190,000 -
Other 529,000 814,000
------------ ------------
Total deferred tax assets 3,752,000 5,643,000
Deferred tax liabilities:
Depreciation - (1,285,000)
------------ ------------
Net deferred tax assets $ 3,752,000 $ 4,358,000
------------ ------------
------------ ------------
NOTE 6 - LINE OF CREDIT
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 (8.25% at December 31, 1996) or LIBOR plus 1.00% (6.5% at
December 31, 1996), as defined in the agreement, and matures June 1999. At
December 31, 1996, there was $18.0 million in borrowings outstanding under
the agreement. The agreement has various restrictive covenants and certain
other financial ratios. At December 31, 1996, the Company was in compliance
with all restrictive covenants and financial ratios.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
LEASES - The Company is committed under noncancelable operating leases
expiring at various dates through 2000 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
----------------- ------------- ---------- -----------
1997 $ 100,000 $ 303,000 $ 403,000
1998 100,000 206,000 306,000
1999 100,000 107,000 207,000
2000 67,000 82,000 149,000
------------ ---------- -----------
Total $ 367,000 $ 698,000 $1,065,000
------------- ---------- -----------
------------- ---------- -----------
Certain offices and warehouse facilities are leased on a month-to-month basis
from a partnership whose partners are officers and shareholders of the
Company.
39
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Rent expense is summarized as follows for the years ended December 31,:
1994 1995 1996
---------- ---------- -----------
Related parties $384,000 $ 421,500 $ 383,000
Other 525,000 819,500 1,219,000
---------- ---------- ----------
Total $909,000 $1,241,000 $1,602,000
---------- ---------- ----------
---------- ---------- ----------
PURCHASE COMMITMENTS - During 1996, the Company entered into a letter of
intent with its lens blank supplier and the supplier's French parent pursuant
to which the Company expects to enter into a reciprocal exclusive dealing
agreement for the purchase of its lens requirements. The Company expects its
minimum obligations under this agreement to be 19.5 million units and payment
of an exclusivity premium of $10.7 million over the next four years.
The Company has made certain commitments regarding the construction of a new
corporate headquarters and manufacturing facility in Foothill Ranch,
California. The facility, which is expected to cost approximately $48.5
million, excluding land, will be substantially completed by March 1997. A
total of $28.6 million had been incurred on this project through 1996.
EMPLOYMENT AGREEMENTS - The Company has entered into employment
agreements with certain employees of the Company which have terms of two to
three 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.
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,
------------
1997 $ 2,809,000
1998 2,165,000
1999 1,099,000
2000 746,000
2001 500,000
Thereafter 1,500,000
-------------
Total $ 8,819,000
-------------
-------------
Included in such amounts is an annual retainer of $0.5 million through 2005 for
a director of the Company.
40
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
LITIGATION - During December 1996, three class action lawsuits were
filed in the California Superior Court for the County of Orange against the
Company and three of its officers alleging material misstatements and
omissions in certain of the Company's public statements, Securities and
Exchange Commission filings and reports to 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. 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.
To date, no discovery of defendants has been taken in these matters.
Although it is too soon to predict the outcome of the cases 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.
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 financial statements.
NOTE 8 - SHAREHOLDERS' EQUITY
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.
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.
41
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
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, 1996, the Company had repurchased
452,100 shares at an aggregate cost of approximately $6.4 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, 1996, stock options for 329,087
shares were exercisable and 3,684,096 shares were available for issuance
pursuant to stock option grants.
The following table summarizes information with respect to the Plan for the
years ended December 31, 1995 and 1996:
Option Weighted Average
shares Exercise Price
--------- ----------------
Outstanding at January 1, 1995 -
Granted during 1995 1,254,154 $ 11.53
Canceled during 1995 (3,732) 11.50
Exercised during 1995 -
---------
Outstanding at December 31, 1995 1,250,422 11.53
Granted during 1996 856,436 12.17
Canceled during 1996 (78,954) 13.78
Exercised during 1996 (12,112) 11.50
---------
Outstanding at December 31, 1996 2,015,792 $ 11.73
---------
---------
Additional information regarding options outstanding as of December 31, 1996 is
as follows:
<TABLE>
<CAPTION>
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
--------------- ----------- --------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 9.88 - 11.63 1,943,983 9.11 $11.49 329,087 $11.50
$ 14.25 - 25.19 71,809 9.49 $17.76 - $ -
</TABLE>
As disclosed in Note 1, the Company applies Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based awards. Accordingly, no compensation expense has
been recognized in the financial statements for employee stock arrangements.
42
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
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 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
months; stock volatility, 9.4% - 63.5% in 1995 and 45.7% - 77.4% in 1996;
risk free interest rates, 5.5% in 1995 and 1996; no dividends during the
expected term and forfeitures are recognized as they occur.
If the computed fair value of the 1995 and 1996 awards had been amortized to
expense over the vesting period of the awards, net income would have been
$45,017,000 in 1995 and $45,531,000 in 1996. The earnings per share on such
basis would have been $0.64 in 1996.
NOTE 9 - NET SALES
Net sales are summarized as follows for the years ended December 31,:
1994 1995 1996
------------ ------------ ------------
Domestic $ 90,565,000 $115,202,000 $139,459,000
International 33,387,000 57,550,000 79,107,000
------------ ------------ ------------
$123,952,000 $172,752,000 $218,566,000
------------ ------------ ------------
------------ ------------ ------------
43
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
NOTE 10 - DOMESTIC AND FOREIGN OPERATIONS
The Company has one business segment which consists of the design,
manufacture and sale of high performance eyewear. Information related to
domestic and foreign operations is as follows:
<TABLE>
<CAPTION>
1994
-------------------------------------------------------------------
(in thousands)
U.S. Europe Other Countries Eliminations Consolidated
-------- ------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales $130,188 $ 9,079 $ - $ (15,315) $123,952
Operating income 13,683 408 - (65) 14,026
Net income 13,247 353 - (65) 13,535
Identifiable assets 46,385 5,527 - (2,218) 49,694
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------------------------------------------------------
(in thousands)
U.S. Europe Other Countries Eliminations Consolidated
-------- ------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------------
(in thousands)
U.S. Europe Other Countries Eliminations Consolidated
-------- ------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
NOTE 11 - QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- -------- --------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Net sales $36,615 $45,686 $47,499 $42,952
Gross profit 25,259 34,091 33,359 29,748
Income before provision for income taxes 6,406 10,113 21,537 14,941
Net income 6,136 9,592 20,228 9,211
Supplemental income data:
Income before provision for income taxes $ 6,406 $10,113 $21,537 $14,941
Supplemental net income 3,831 6,048 13,161 9,103
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
</TABLE>
44
<PAGE>
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 18, 1997
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jim Jannard Chairman and President March 18, 1997
- -------------------- (Principal Executive Officer)
Jim Jannard
/s/ Mike Parnell Chief Executive Officer and Director March 18, 1997
- --------------------
Mike Parnell
/s/ Link Newcomb Chief Operating Officer and Director March 18, 1997
- --------------------- (Principal Financial Officer)
Link Newcomb
/s/ Donna Gordon Vice President of Finance March 18, 1997
- --------------------- (Principal Accounting Officer)
Donna Gordon
/s/ Irene Miller Director March 18, 1997
- --------------------
Irene Miller
/s/ Orin Smith Director March 18, 1997
- --------------------
Orin Smith
- --------------------- Director
Michael Jordan
</TABLE>
45
<PAGE>
OAKLEY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, 1996
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance
beginning costs and at end of
of period expense Deductions Adjustments period
--------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1994
Allowance for doubtful accounts $262,000 $ 9,000 $ - $ - $271,000
--------- --------- ----------- ----------- ---------
--------- --------- ----------- ----------- ---------
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 $ - $ - $600,000
--------- --------- ----------- ----------- ---------
--------- --------- ----------- ----------- ---------
</TABLE>
<PAGE>
Exhibit 3.3
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION OF
OAKLEY, INC.
ARTICLES OF AMENDMENT of the Articles of Incorporation of Oakley, Inc.
(the "Corporation") are herein executed by said Corporation, pursuant to the
provision of RCW 23B.10.060, as follows:
FIRST: The name of the Corporation is Oakley, Inc.
SECOND: The first paragraph of Article II of the Corporation's Amended
and Restated Articles of Incorporation is amended to read as follows:
The total number of shares of stock which the corporation shall have
authority to issue is two hundred and ten million (210,000,000), which
shall consist of two hundred million (200,000,000) shares of Common
Stock, each having a par value of one penny ($.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 10.17
OAKLEY, INC.
SECOND AMENDMENT
TO AMENDED AND RESTATED CREDIT AGREEMENT
This SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"AMENDMENT") is dated as of October 10, 1996 and entered into by and among
OAKLEY, INC., a Washington corporation ("COMPANY"), THE FINANCIAL
INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF (each individually referred
to herein as a "LENDER" and collectively as "LENDERS") and WELLS FARGO BANK,
NATIONAL ASSOCIATION ("WELLS FARGO"), as agent for Lenders (in such capacity,
"AGENT"), and is made with reference to that certain Amended and Restated
Credit Agreement dated as of August 15, 1995, as amended by the First
Amendment to Amended and Restated Credit Agreement, dated as of November 22,
1995 (the "CREDIT AGREEMENT"), by and among Company, Lenders and Agent.
Capitalized terms used herein without definition shall have the same meanings
herein as set forth in the Credit Agreement.
RECITALS
A. Company has requested that Requisite Lenders amend subsection 7.3 to
permit Company to enter into certain Joint Venture arrangements as further
described in that certain letter of intent dated August, 1996 (the "Letter of
Intent") among Essilor International Compagnie Generale D'Optique, S.A.,
Essilor of America, Inc., Gentex Optics, Inc., Gentex Corporation and Company
and attached term sheet, copies of which have been distributed to the
Lenders, and also amend subsection 7.8 of the Credit Agreement to permit the
incurrence of up to $46,000,000 of Office Building Capital Expenditures (as
defined in subsection 7.8 and as otherwise provided herein).
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto agree as
follows:
SECTION 1. MODIFICATIONS TO THE CREDIT AGREEMENT
1.1 AMENDMENT TO SUBSECTION 7.3: INVESTMENTS; JOINT VENTURES.
Subsection 7.3 of the Credit Agreement is hereby amended by deleting the
word "and" appearing after clause (ix). Subsection 7.3 of the Credit
Agreement is amended further by deleting the period (.) appearing at the end
of clause (x) and substituting the following therefor:
"; and
(xi) Company and its Subsidiaries may enter into the Joint Ventures
described in that certain letter of intent dated August, 1996 among
Essilor International Compagnie Generale D'Optique, S.A., Essilor of
America, Inc., Gentex Optics, Inc., Gentex Corporation and Company and
attached term sheet, copies of which have been
1
<PAGE>
distributed to the Lenders (including, without limitation, definitive
legal documentation which Company deems appropriate to give effect to
any such Joint Ventures)."
1.2 AMENDMENT TO SUBSECTION 7.8: CAPITAL EXPENDITURES.
Subsection 7.8 of the Credit Agreement is hereby amended by deleting the
table set forth therein in its entirety and substituting the following
therefore:
Maximum
"Fiscal Year Capital Expenditures
------------ --------------------
1995 $20,000,000
1996 and each Fiscal Year thereafter $16,000,000"
Subsection 7.8 of the Credit Agreement is hereby amended by deleting
reference to "$32,000,000" contained therein and substituting "$46,000,000"
therefor.
SECTION 2. CONDITIONS TO EFFECTIVENESS
Section 1 of this Amendment shall become effective only upon the
satisfaction of all of the following conditions precedent (the date of
satisfaction of such conditions being referred to herein as the "SECOND
AMENDMENT EFFECTIVE DATE"):
A. Company shall deliver to Lenders (or to Agent for Lenders with
sufficient originally executed copies, where appropriate, for each Lender and
its counsel) a counterpart of this Amendment executed by a duly authorized
officer of Company and each Credit Support Party (defined below).
B. On or before the Second Amendment Effective Date, Agent, on behalf
of Lenders, shall have received a counterpart of this Amendment executed by a
duly authorized officer of each of Requisite Lenders.
SECTION 3. COMPANY'S REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Amendment and to amend the
Credit Agreement in the manner provided herein, Company represents and
warrants to each Lender that the following statements are true, correct and
complete:
A. CORPORATE POWER AND AUTHORITY. Company has all requisite corporate
power and authority to enter into this Amendment and to carry out the
transactions contemplated by, and perform its obligations under, the Credit
Agreement as amended by this Amendment (the "AMENDED AGREEMENT").
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this
Amendment and the performance of the Amended Agreement have been duly
authorized by all necessary corporate action on the part of Company.
C. NO CONFLICT. The execution and delivery by Company of this
Amendment and the performance by Company of the Amended Agreement do not and
will
2
<PAGE>
not (i) violate the Certificate or Articles of Incorporation or Bylaws of
Company or any of its Subsidiaries, (ii) violate any provision of any law or
any governmental rule or regulation applicable to Company or any of its
Subsidiaries or any order, judgment or decree of any court or other agency of
government binding on Company or any of its Subsidiaries, which violation
could reasonably be expected to have a Material Adverse Effect, (iii)
conflict with, result in a breach of or constitute (with due notice or lapse
of time or both) a default under any Contractual Obligation of Company or any
of its Subsidiaries in a manner that could reasonably be expected to have a
Material Adverse Effect, (iv) result in or require the creation or imposition
of any Lien upon any of the properties or assets of Company or any of its
Subsidiaries (other than any Liens created under any of the Loan Documents in
favor of Agent on behalf of Lenders), or (v) require any approval of
stockholders or any approval or consent of any Person under any Contractual
Obligation of Company or any of its Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by Company of
this Amendment and the performance by Company of the Amended Agreement do not
and will not require any registration with, consent or approval of, or notice
to, or other action to, with or by, any federal, state or other governmental
authority or regulatory body.
E. BINDING OBLIGATION. This Amendment and the Amended Agreement have
been duly executed and delivered by Company and are the legally valid and
binding obligations of Company, enforceable against Company in accordance
with their respective terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or
limiting creditors' rights generally or by equitable principles relating to
enforceability.
F. ABSENCE OF DEFAULT. No event has occurred and is continuing or will
result from the consummation of the transactions contemplated by this
Amendment that would constitute an Event of Default or a Potential Event of
Default, it being understood that nothing in this Amendment shall permit the
Carbondale acquisition referred to in the Letter of Intent and none of
Company's representations or warranties herein (including under this Section
3F) shall be deemed to refer thereto.
SECTION 4. ACKNOWLEDGEMENT AND CONSENT
Repeat Incorporated, an Arizona corporation ("REPEAT"), and Barter
Optical, Inc., a Washington corporation ("BARTER"), are parties to the
Guaranty, pursuant to which Repeat and Barter have guarantied the Obligations
of Company under the Credit Agreement. Repeat and Barter are collectively
referred to herein as the "CREDIT SUPPORT PARTIES".
Each Credit Support Party hereby acknowledges that it has reviewed the
terms and provisions of the Credit Agreement and this Amendment and consents
to the amendment of the Credit Agreement effected pursuant to this Amendment.
Each Credit Support Party hereby confirms that the Guaranty will continue to
guaranty to the fullest extent possible the payment and performance of all
"Guarantied Obligations" (as such term is defined in the Guaranty), including
without limitation the payment and performance of all such "Guarantied
Obligations", in respect of the Obligations of Company now or hereafter
existing under or in respect of the Amended Agreement and the Notes defined
therein.
Each Credit Support Party acknowledges and agrees that the Guaranty
shall continue in full force and effect and that all of its obligations
thereunder shall be valid and enforceable and shall not be impaired or
limited by the execution or effectiveness of this
3
<PAGE>
Amendment. Each Credit Support Party represents and warrants that all
representations and warranties contained in the Amended Agreement and the
Guaranty to which it is a party or otherwise bound are true, correct and
complete in all material respects on and as of the Second Amendment Effective
Date to the same extent as though made on and as of that date, except to the
extent such representations and warranties specifically relate to an earlier
date, in which case they were true, correct and complete in all material
respects on and as of such earlier date.
Each Credit Support Party acknowledges and agrees that
(i) notwithstanding the conditions to effectiveness set forth in this
Amendment, such Credit Support Party is not required by the terms of the
Credit Agreement or any other Loan Document to consent to the amendments to
the Credit Agreement effected pursuant to this Amendment and (ii) nothing in
the Credit Agreement, this Amendment or any other Loan Document shall be
deemed to require the consent of such Credit Support Party to any future
amendments to the Credit Agreement.
SECTION 5. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER
LOAN DOCUMENTS.
(i) On and after the Second Amendment Effective Date, each reference
in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import referring to the Credit Agreement, and
each reference in the other Loan Documents to the "Credit Agreement",
"thereunder", "thereof" or words of like import referring to the Credit
Agreement shall mean and be a reference to the Amended Agreement.
(ii) Except as specifically amended or waived by this Amendment, the
Credit Agreement and the other Loan Documents shall remain in full force
and effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Amendment
shall not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of
Agent or any Lender under, the Credit Agreement or any of the other Loan
Documents.
B. FEES AND EXPENSES. Company acknowledges that all costs, fees and
expenses as described in subsection 10.2 of the Credit Agreement incurred by
Agent and its counsel with respect to this Amendment and the documents and
transactions contemplated hereby shall be for the account of Company.
C. HEADINGS. Section and subsection headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive
effect.
D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD
TO CONFLICTS OF LAWS PRINCIPLES.
4
<PAGE>
E. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature pages
are physically attached to the same document. This Amendment shall become
effective upon the execution of a counterpart hereof by Requisite Lenders and
each of the other parties hereto and receipt by Company and Agent of written
or telephonic notification of such execution and authorization of delivery
thereof.
[Remainder of page intentionally left blank]
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
OAKLEY, INC., as the Borrower
By:
-----------------------------------
Title:
--------------------------------
WELLS FARGO BANK, NATIONAL ASSOCIATION,
Individually and as Agent
By:
-----------------------------------
Title:
--------------------------------
UNION BANK OF CALIFORNIA, N.A.,
(formerly named Union Bank) as a Lender
By:
-----------------------------------
Title:
--------------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as a Lender
By:
-----------------------------------
Title:
--------------------------------
ACKNOWLEDGMENT AND CONSENT
BARTER OPTICAL, INC., as a Credit
Support Party
By:
---------------------------------
Title:
------------------------------
REPEAT INCORPORATED, as a Credit
Support Party
By:
---------------------------------
Title:
------------------------------
S-1
<PAGE>
EXHIBIT 10.18
OAKLEY, INC.
THIRD AMENDMENT
TO AMENDED AND RESTATED CREDIT AGREEMENT
This THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"AMENDMENT") is dated as of November 25, 1996 and entered into by and among
OAKLEY, INC., a Washington corporation ("COMPANY"), THE FINANCIAL
INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF (each individually referred
to herein as a "LENDER" and collectively as "LENDERS") and WELLS FARGO BANK,
NATIONAL ASSOCIATION ("WELLS FARGO"), as agent for Lenders (in such capacity,
"AGENT"), and is made with reference to that certain Amended and Restated
Credit Agreement dated as of August 15, 1995, as amended by the First
Amendment to Amended and Restated Credit Agreement, dated as of November 22,
1995, by and among Company, Lenders and Agent, and the Second Amendment to
Amended and Restated Credit Agreement, dated as of October 10, 1996 (as
amended, the "CREDIT AGREEMENT"), by and among Company, Lenders and Agent.
Capitalized terms used herein without definition shall have the same meanings
herein as set forth in the Credit Agreement.
RECITALS
A. Company has entered into that certain Share Purchase Agreement,
effective as of October 31, 1996 (the "SHARE PURCHASE AGREEMENT"), by and
among Company, Raymond George Tilbrook and Carl Ward, copies of which have
been distributed to the Lenders.
B. In connection with the effectiveness of the Share Purchase
Agreement, Company has requested that Requisite Lenders amend subsections
7.2, 7.3 and 7.4 of the Credit Agreement.
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto agree as
follows:
1
<PAGE>
SECTION 1. MODIFICATIONS TO THE CREDIT AGREEMENT
1.1 AMENDMENT TO SUBSECTION 7.2: LIENS AND RELATED MATTERS.
Subsection 7.2A of the Credit Agreement is hereby amended by
deleting the word "and" appearing after clause (vi). Subsection 7.2A of the
Credit Agreement is amended further by deleting the period (.) appearing at
the end of clause (vii) and substituting the following therefor:
"; and
(viii) Liens existing on accounts receivable of Oakley (U.K.) Ltd.
(formerly known as Serval Marketing Limited) (Company No. 1310079) ("OAKLEY
UK") securing Indebtedness incurred pursuant to that certain Advice of
Borrowing Terms, dated as of October 30, 1996, issued by National
Westminster Bank PLC, as the same may be amended, supplemented or renewed;
PROVIDED, that such Liens shall not secure Indebtedness in an outstanding
principal amount greater than $1,000,000 at any time."
1.2 AMENDMENT TO SUBSECTION 7.3: INVESTMENTS; JOINT VENTURES.
Subsection 7.3 of the Credit Agreement is hereby amended by deleting
the word "and" appearing after clause (x). Subsection 7.3 of the Credit
Agreement is amended further by deleting the period (.) appearing at the end of
clause (xi) and substituting the following therefor:
"; and
(xii) Company and its Subsidiaries may make the Investment described
in that certain Share Purchase Agreement, effective as of October 31, 1996,
(the "SHARE PURCHASE AGREEMENT"), by and among the Company, Raymond George
Tilbrook and Carl Ward, copies of which have been distributed to the
Lenders, relating to the purchase by Company of all of the issued shares of
Oakley UK."
1.3 AMENDMENT TO SUBSECTION 7.4: CONTINGENT OBLIGATIONS.
Subsection 7.4 of the Credit Agreement is hereby amended by deleting
clause (vi) in its entirety and substituting the following therefor:
"(vi) Company and its Subsidiaries may become and remain liable
with respect to Contingent Obligations under Currency Agreements entered
into in the ordinary course of business of Company and such Subsidiaries in
an aggregate notional amount not in excess of $15,000,000; PROVIDED, that
all amounts receivable or payable under such Currency Agreements shall be
received or paid within twelve (12) months after the date such Currency
Agreement is entered into."
1.4 MODIFICATION OF SCHEDULE
SCHEDULE 5.1: SUBSIDIARIES OF THE COMPANY. SCHEDULE 5.1 to the
Credit Agreement is hereby amended by adding thereto the information
contained in ANNEX A to this Amendment.
2
<PAGE>
SECTION 2. CONDITIONS TO EFFECTIVENESS
Section 1 of this Amendment shall become effective only upon the
satisfaction of all of the following conditions precedent (the date of
satisfaction of such conditions being referred to herein as the "THIRD AMENDMENT
EFFECTIVE DATE"):
A. Company shall deliver to Lenders (or to Agent for Lenders with
sufficient originally executed copies, where appropriate, for each Lender and
its counsel) a counterpart of this Amendment executed by a duly authorized
officer of Company and each Credit Support Party (defined below).
B. On or before the Third Amendment Effective Date, Company shall
pledge and deliver to Agent for the benefit of the Lenders 65% of the stock of
Oakley UK as security for the Obligations, upon such terms and conditions as
Agent may deem appropriate.
C. On or before the Third Amendment Effective Date, Oakley UK shall
deliver to Lenders (or to Agent for Lenders with sufficient originally executed
copies, where appropriate, for each Lender and its counsel) the following, each,
unless otherwise noted, dated Third Amendment Effective Date:
1. Signature and incumbency certificates of its officers
executing the Counterpart Subordination Agreement; and
2. Executed copies of the Counterpart Subordination Agreement.
D. On or before the Third Amendment Effective Date, Agent, on behalf
of Lenders, shall have received a counterpart of this Amendment executed by a
duly authorized officer of each of Requisite Lenders.
SECTION 3. WAIVER
A. Subject to the terms and conditions set forth herein, Requisite
Lenders hereby waive for the period through and including the Third Amendment
Effective Date any Event of Default or Potential Event of Default under the
Credit Agreement arising as a result of (i) the purchase by Company of all of
the issued shares of Oakley UK pursuant to the Share Purchase Agreement, (ii)
the existence of any Liens on accounts receivable of Oakley UK securing
Indebtedness incurred pursuant to that certain Advice of Borrowing Terms,
dated as of October 30, 1996, issued by National Westminster Bank PLC or
(iii) the Company or any of its Subsidiaries entering into any Currency
Agreements in an aggregate amount in excess of that permitted under the
Credit Agreement, it being understood that the waiver contained in this
Section 3A shall in any event expire and cease to be of force or effect as of
the close of business on the Third Amendment Effective Date.
B. The waiver set forth in Section 3A above shall be limited precisely
as written and nothing in this Section 3 shall be deemed to: (1) constitute
a waiver, modification or amendment of any other term, provision or condition
of the Credit Agreement or any other instrument or agreement referred to
therein; (2) prejudice any right or remedy that Agent or Lenders may now have
or may have in the future under or in connection with the Credit Agreement or
any other instrument or agreement referred to therein, except as otherwise
set forth in this Section 3; or (3) create any obligation or agreement on the
part of Agent or any Lender to renew or extend the waiver set forth in
Section 3A above. Except as expressly set forth herein, the terms, provisions
and conditions of the Credit Agreement and the other Loan
3
<PAGE>
Documents shall remain in full force and effect and in all other respects are
hereby ratified and confirmed.
SECTION 4. COMPANY'S REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Amendment and to amend
the Credit Agreement in the manner provided herein, Company represents and
warrants to each Lender that the following statements are true, correct and
complete:
A. CORPORATE POWER AND AUTHORITY. Company has all requisite
corporate power and authority to enter into this Amendment and to carry out the
transactions contemplated by, and perform its obligations under, the Credit
Agreement as amended by this Amendment (the "AMENDED AGREEMENT").
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of
this Amendment and the performance of the Amended Agreement have been duly
authorized by all necessary corporate action on the part of Company.
C. NO CONFLICT. The execution and delivery by Company of this
Amendment and the performance by Company of the Amended Agreement do not and
will not (i) violate the Certificate or Articles of Incorporation or Bylaws of
Company or any of its Subsidiaries, (ii) violate any provision of any law or any
governmental rule or regulation applicable to Company or any of its Subsidiaries
or any order, judgment or decree of any court or other agency of government
binding on Company or any of its Subsidiaries, which violation could reasonably
be expected to have a Material Adverse Effect, (iii) conflict with, result in a
breach of or constitute (with due notice or lapse of time or both) a default
under any Contractual Obligation of Company or any of its Subsidiaries in a
manner that could reasonably be expected to have a Material Adverse Effect,
(iv) result in or require the creation or imposition of any Lien upon any of the
properties or assets of Company or any of its Subsidiaries (other than any Liens
created under any of the Loan Documents in favor of Agent on behalf of Lenders),
or (v) require any approval of stockholders or any approval or consent of any
Person under any Contractual Obligation of Company or any of its Subsidiaries.
D. GOVERNMENTAL CONSENTS. The execution and delivery by Company of
this Amendment and the performance by Company of the Amended Agreement do not
and will not require any registration with, consent or approval of, or notice
to, or other action to, with or by, any federal, state or other governmental
authority or regulatory body.
E. BINDING OBLIGATION. This Amendment and the Amended Agreement
have been duly executed and delivered by Company and are the legally valid and
binding obligations of Company, enforceable against Company in accordance with
their respective terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or limiting creditors'
rights generally or by equitable principles relating to enforceability.
F. ABSENCE OF DEFAULT. Subject to the provisions of Section 3
hereof, no event has occurred and is continuing or will result from the
consummation of the transactions contemplated by this Amendment that would
constitute an Event of Default or a Potential Event of Default.
SECTION 5. ACKNOWLEDGEMENT AND CONSENT
4
<PAGE>
Repeat Incorporated, an Arizona corporation ("REPEAT"), and Barter
Optical, Inc., a Washington corporation ("BARTER"), are parties to the Guaranty,
pursuant to which Repeat and Barter have guarantied the Obligations of Company
under the Credit Agreement. Repeat and Barter are collectively referred to
herein as the "CREDIT SUPPORT PARTIES".
Each Credit Support Party hereby acknowledges that it has reviewed
the terms and provisions of the Credit Agreement and this Amendment and
consents to the amendment of the Credit Agreement effected pursuant to this
Amendment. Each Credit Support Party hereby confirms that the Guaranty will
continue to guaranty to the fullest extent possible the payment and
performance of all "Guarantied Obligations" (as such term is defined in the
Guaranty), including without limitation the payment and performance of all
such "Guarantied Obligations", in respect of the Obligations of Company now
or hereafter existing under or in respect of the Amended Agreement and the
Notes defined therein.
Each Credit Support Party acknowledges and agrees that the Guaranty
shall continue in full force and effect and that all of its obligations
thereunder shall be valid and enforceable and shall not be impaired or
limited by the execution or effectiveness of this Amendment. Each Credit
Support Party represents and warrants that all representations and warranties
contained in the Amended Agreement and the Guaranty to which it is a party or
otherwise bound are true, correct and complete in all material respects on
and as of the Third Amendment Effective Date to the same extent as though
made on and as of that date, except to the extent such representations and
warranties specifically relate to an earlier date, in which case they were
true, correct and complete in all material respects on and as of such earlier
date.
Each Credit Support Party acknowledges and agrees that (i)
notwithstanding the conditions to effectiveness set forth in this Amendment,
such Credit Support Party is not required by the terms of the Credit
Agreement or any other Loan Document to consent to the amendments to the
Credit Agreement effected pursuant to this Amendment and (ii) nothing in the
Credit Agreement, this Amendment or any other Loan Document shall be deemed
to require the consent of such Credit Support Party to any future amendments
to the Credit Agreement.
SECTION 6. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER
LOAN DOCUMENTS.
(i) On and after the Third Amendment Effective Date, each
reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import referring to the Credit
Agreement, and each reference in the other Loan Documents to the
"Credit Agreement", "thereunder", "thereof" or words of like import
referring to the Credit Agreement shall mean and be a reference to
the Amended Agreement.
(ii) Except as specifically amended or waived by this Amendment,
the Credit Agreement and the other Loan Documents shall remain in full
force and effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Amendment
shall not,
5
<PAGE>
except as expressly provided herein, constitute a waiver of any provision
of, or operate as a waiver of any right, power or remedy of Agent or any
Lender under, the Credit Agreement or any of the other Loan Documents.
B. FEES AND EXPENSES. Company acknowledges that all costs, fees
and expenses as described in subsection 10.2 of the Credit Agreement incurred
by Agent and its counsel with respect to this Amendment and the documents and
transactions contemplated hereby shall be for the account of Company.
C. HEADINGS. Section and subsection headings in this Amendment
are included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose or be given any
substantive effect.
D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA,
WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
E. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature pages
are physically attached to the same document. This Amendment shall become
effective upon the execution of a counterpart hereof by Requisite Lenders and
each of the other parties hereto and receipt by Company and Agent of written
or telephonic notification of such execution and authorization of delivery
thereof.
[Remainder of page intentionally left blank]
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
OAKLEY, INC., as the Borrower
By: _______________________________
Title:_____________________________
WELLS FARGO BANK, NATIONAL ASSOCIATION,
Individually and as Agent
By:_________________________________
Title:______________________________
UNION BANK OF CALIFORNIA, N.A.,
(formerly named Union Bank) as a Lender
By:________________________________
Title:_____________________________
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as a Lender
By:________________________________
Title:_____________________________
ACKNOWLEDGMENT AND CONSENT
- --------------------------
BARTER OPTICAL, INC., as a Credit Support Party
By:________________________________
Title:_____________________________
REPEAT INCORPORATED, as a Credit Support Party
By:_________________________________
Title:______________________________
S-1
<PAGE>
ANNEX A
SUPPLEMENT TO SCHEDULE 5.1
Jurisdiction of Direct Parent(s) Ownership by (Each)
Entity Incorporation Direct Parent
- ------ --------------- ---------------- -------------------
Oakley (U.K.) Ltd. United Kingdom Oakley, Inc. 100.0%
(Company No.
1310079)
A-1
<PAGE>
ANNEX B
FORM OF COUNTERPART SUBORDINATION AGREEMENT
This COUNTERPART TO SUBORDINATION AGREEMENT (this "COUNTERPART") is
dated as of November 25, 1996 and is made with reference to that certain
Subordination Agreement, dated as of August 15, 1995, a copy of which is
annexed hereto (as amended, restated, supplemented or modified or as it may
in the future be amended, restated, supplemented or otherwise modified from
time to time, the "SUBORDINATION AGREEMENT"; capitalized terms used herein
without definition shall have the respective meanings set forth in the
Subordination Agreement), executed by each of the Initial Subordinated
Creditors as defined therein, in favor of Wells Fargo Bank, National
Association, as Agent under the Credit Agreement. Pursuant to Section 28 of
the Subordination Agreement, Oakley (U.K.) Ltd. (formerly known as Serval
Marketing Limited) (Company No. 1310079), a United Kingdom company (the "NEW
SUBORDINATED CREDITOR"), acknowledges that as of the date hereof it shall be
a Subordinated Creditor for all purposes under the Subordination Agreement
and hereby agrees to be bound by all of the terms and conditions of the
Subordination Agreement to the same extent as if it were an original
signatory thereof.
New Subordinated Creditor hereby represents and warrants to Agent
that the representations and warranties applicable to New Subordinated
Creditor under the Subordination Agreement are true, correct and complete in
all material respects to the same extent as though made on and as of the date
hereof, and as of the Counterpart Effective Date (as defined below), except
to the extent such representations and warranties specifically relate to an
earlier date, in which case they are true, correct and complete in all
material respects as of such earlier date.
THIS COUNTERPART SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA,
WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
This Counterpart may be executed in any number of counterparts and
by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument; signature pages
may be detached from multiple separate counterparts and attached to a single
counterpart so that all signature pages are physically attached to the same
document and, pursuant to the terms of the Subordination Agreement, all such
counterparts shall be attached to, and be a part of, the Subordination
Agreement.
This Counterpart shall become effective (such date being the
"COUNTERPART EFFECTIVE DATE") upon the execution of a counterpart hereof by
each of the parties hereto and receipt by Agent of written or telephone
notification of such execution and authorization of delivery thereof.
[Remainder of page intentionally left blank.]
B-1
<PAGE>
IN WITNESS WHEREOF, New Subordinated Creditor has caused this
Counterpart to be duly executed and delivered by its officer thereunto duly
authorized as of the first date written above.
OAKLEY (U.K.) LTD. (formerly known as
Serval Marketing Limited) (Company No.
1310079), a United Kingdom company
By: _________________________
Name: __________________________
Title: __________________________
Accepted this ____ day of
November, 1996.
WELLS FARGO BANK, NATIONAL ASSOCIATION,
as Agent
By: _________________________
Name: _________________________
Title: _________________________
B-2
<PAGE>
EXHIBIT 10.19
COUNTERPART SUBORDINATION AGREEMENT
This COUNTERPART TO SUBORDINATION AGREEMENT (this "COUNTERPART") is
dated as of November 25, 1996 and is made with reference to that certain
Subordination Agreement, dated as of August 15, 1995, a copy of which is
annexed hereto (as amended, restated, supplemented or modified or as it may
in the future be amended, restated, supplemented or otherwise modified from
time to time, the "SUBORDINATION AGREEMENT"; capitalized terms used herein
without definition shall have the respective meanings set forth in the
Subordination Agreement), executed by each of the Initial Subordinated
Creditors as defined therein, in favor of Wells Fargo Bank, National
Association, as Agent under the Credit Agreement. Pursuant to Section 28 of
the Subordination Agreement, Oakley (U.K.) Ltd. (formerly known as Serval
Marketing Limited) (Company No. 1310079), a United Kingdom company (the "NEW
SUBORDINATED CREDITOR"), acknowledges that as of the date hereof it shall be
a Subordinated Creditor for all purposes under the Subordination Agreement
and hereby agrees to be bound by all of the terms and conditions of the
Subordination Agreement to the same extent as if it were an original
signatory thereof.
New Subordinated Creditor hereby represents and warrants to Agent
that the representations and warranties applicable to New Subordinated
Creditor under the Subordination Agreement are true, correct and complete in
all material respects to the same extent as though made on and as of the date
hereof, and as of the Counterpart Effective Date (as defined below), except
to the extent such representations and warranties specifically relate to an
earlier date, in which case they are true, correct and complete in all
material respects as of such earlier date.
THIS COUNTERPART SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA,
WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
This Counterpart may be executed in any number of counterparts and
by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument; signature pages
may be detached from multiple separate counterparts and attached to a single
counterpart so that all signature pages are physically attached to the same
document and, pursuant to the terms of the Subordination Agreement, all such
counterparts shall be attached to, and be a part of, the Subordination
Agreement.
This Counterpart shall become effective (such date being the
"COUNTERPART EFFECTIVE DATE") upon the execution of a counterpart hereof by
each of the parties hereto and receipt by Agent of written or telephone
notification of such execution and authorization of delivery thereof.
[Remainder of page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, New Subordinated Creditor has caused this
Counterpart to be duly executed and delivered by its officer thereunto duly
authorized as of the first date written above.
OAKLEY (U.K.) LTD. (formerly known as Serval
Marketing Limited) (Company No. 1310079), a
United Kingdom company
By: /s/ Link Newcomb
------------------------------
Name: /s/ Link Newcomb
----------------------------
Title: Director
--------------------------
Accepted this 25th day of
November, 1996.
WELLS FARGO BANK, NATIONAL ASSOCIATION,
as Agent
By: /s/ Michael F. Sullivan
----------------------------
Name: /s/ Michael F. Sullivan
-------------------------
Title: Regional Vice President
-------------------------
2
<PAGE>
EXHIBIT 10.33
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
WHEREAS, Mike Parnell ("Executive") and Oakley, Inc., a
Washington corporation (the "Company"), have previously entered into that
certain employment agreement dated August 1, 1995 (the "Employment
Agreement");
WHEREAS, the Employment Agreement provides for the payment to
Executive of a base salary, a minimum target bonus and certain other
benefits; and
WHEREAS, as of the date hereof Executive has agreed to waive a
portion of his base salary and minimum target bonus for the balance of the
term of the Employment Agreement.
NOW, THEREFORE, in consideration of the mutual agreements
hereinafter set forth, Executive and the Company have agreed and do hereby
agree to amend the Employment Agreement as follows, effective as of the 26th
day of May, 1996:
1. BASE SALARY. Section 3(a) of the Employment Agreement is
hereby amended in its entirety to read as follows:
"BASE SALARY. The Company shall pay Executive an annual base
salary at the rate of $175,000 per year or such higher amount as the Company
may from time to time determine ("Base Salary"), payable in equal biweekly
installments or at such other time or times as Executive and the Company
shall agree. Except as otherwise provided herein, the Company's obligation
to pay Executive's Base Salary under this Agreement shall cease as of the
date of termination of Executive's employment."
2. PERFORMANCE BONUS. Section 3(b) of the Employment Agreement
is hereby amended in its entirety to read as follows:
"PERFORMANCE BONUS. Executive shall be entitled to
participate in the Company's Performance Bonus Plan (which is attached
hereto as Exhibit A) and to receive an annual performance bonus in
accordance with the terms thereof. Executive's minimum target bonus under
the Performance Bonus Plan shall be not less than $400,000 per year."
3. BENEFITS UPON TERMINATION OF EMPLOYMENT. Section 4 of the
Employment Agreement is hereby amended in its entirety to read as follows:
"4. TERMINATION OF EXECUTIVE'S EMPLOYMENT.
<PAGE>
(a) DEATH. In the event Executive's employment
hereunder is terminated by reason of Executive's death, the Company shall pay
to Executive's estate, within ten (10) days thereof, a lump sum equal to
(i) twelve (12) times Executive's highest monthly Base Salary paid during the
Term of the Agreement plus (ii) an amount equal to Executive's highest annual
target bonus under the Performance Bonus Plan in effect at any time during
the Term of this Agreement, prorated through the date of death.
(b) DISABILITY. If, as a result of Executive's
incapacity due to physical or mental illness ("Disability"), Executive shall
have been absent from the full-time performance of his duties with the
Company for a period of six (6) consecutive months and, within thirty (30)
days after written notice is provided to him by the Company, he shall not
have returned to the full-time performance of his duties, Executive's
employment under this Agreement may be terminated by the Company for
Disability. During any period prior to such termination during which
Executive is absent from the full-time performance of his duties with the
Company due to Disability, the Company shall continue to pay Executive his
Base Salary at the rate in effect at the commencement of such period of
Disability. Within ten (10) days following termination for Disability, the
Company shall pay Executive a lump sum in an amount equal to twelve (12)
times Executive's highest monthly Base Salary paid during the Term of the
Agreement.
(c) TERMINATION FOR CAUSE. The Company may terminate
Executive's employment under this Agreement for "Cause," at any time prior to
expiration of the Term of this Agreement, but only in the event of
Executive's conviction for fraud, misappropriation or embezzlement. In the
event of termination for Cause, Executive's employment may be terminated
immediately without advance written notice, whereupon this Agreement shall
terminate without further obligation by the Company, except for payment of
amounts of Base Salary accrued through the date of termination.
(d) TERMINATION BY THE COMPANY OTHER THAN FOR DEATH,
DISABILITY OR CAUSE. If Executive's employment is terminated by the Company
for any reason other than Executive's death or Disability or for Cause, the
Company shall pay Executive (i) a monthly severance payment for each month
remaining in the Term of the Agreement at a rate equal to his highest monthly
Base Salary paid during the Term of this Agreement and (ii) at the end of
each remaining fiscal year of the Company ending during the Term of this
Agreement, a bonus equal to the amount of Executive's highest annual target
bonus under the Performance Bonus Plan as in effect at any time during the
Term.
(e) NO MITIGATION REQUIRED. Executive
2
<PAGE>
shall not be required in any way to mitigate the amount of any payment or
benefit provided for under Section 3(c) or in this Section 4, including, but
not limited to, by seeking other employment, nor shall the amount of any
payment or benefit provided for under Section 3(c) or in this Section 4 be
reduced by any compensation earned by Executive as the result of employment
with or services provided to another employer after the date of Executive's
termination, or otherwise; provided, however, that in the event Executive
shall breach the provisions of Section 7 hereof or any other confidentiality
agreement between the Company and Executive, the Company shall have the
right, in addition to any other remedies it may have with respect to such
breach, to offset any amounts payable hereunder or otherwise owing to
Executive by the amount of any compensation earned by Executive as the result
of employment with or other services provided to another employer after the
date of Executive's termination, or otherwise."
4. Except as otherwise provided herein, the remaining terms of the
Employment Agreement shall remain in full force and effect.
3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer, and the Executive has hereunto
signed this Agreement, as of the date first above written.
OAKLEY, INC.
By:___________________________
Its:__________________________
/s/ Mark Parnell
_______________________________
MIKE PARNELL
4
<PAGE>
SPOUSAL CONSENT
The undersigned, MELISSA PARNELL represents that she has reviewed
the attached "Amendment No. 1 to Employment Agreement" of her husband,
MIKE PARNELL, and hereby acknowledges the effect of and voluntarily consents
to such waiver as of the 26th day of May, 1996.
/s/ Melissa Parnell
_______________________
MELISSA PARNELL
5
<PAGE>
EXHIBIT 10.34
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
WHEREAS, Jim Jannard ("Executive") and Oakley, Inc., a Washington
corporation (the "Company"), have previously entered into that certain
employment agreement dated August 1, 1995 (the "Employment Agreement");
WHEREAS, the Employment Agreement provides for the payment to
Executive of a base salary and certain other benefits; and
WHEREAS, as of the date hereof Executive has agreed to waive the
payment of his base salary for the balance of the term of the Employment
Agreement.
NOW, THEREFORE, in consideration of the mutual agreements
hereinafter set forth, Executive and the Company have agreed and do hereby
agree to amend the Employment Agreement as follows, effective as of the 22nd
day of July, 1996:
1. BASE SALARY. Section 3(a) of the Employment Agreement is
hereby amended to reduce Executive's annual base salary to zero.
2. BENEFITS UPON TERMINATION OF EMPLOYMENT. Section 4 of the
Employment Agreement is hereby amended in its entirety to read as follows:
"4. TERMINATION OF EXECUTIVE'S EMPLOYMENT.
(a) DEATH. In the event Executive's employment
hereunder is terminated by reason of Executive's death, the Company shall pay
to Executive's estate, within ten (10) days thereof, a lump sum equal to
(i) twelve (12) times Executive's highest monthly Base Salary paid during the
Term of the Agreement plus (ii) the amount of Executive's target bonus under
the Performance Bonus Plan for the fiscal year in which such death occurs,
prorated through the date of death.
(b) DISABILITY. If, as a result of Executive's
incapacity due to physical or mental illness ("Disability"), Executive shall
have been absent from the full-time performance of his duties with the
Company for a period of six (6) consecutive months and, within thirty (30)
days after written notice is provided to him by the Company, he shall not
have returned to the full-time performance of his duties, Executive's
employment under this Agreement may be terminated by the Company for
Disability. During any period prior to such termination during which
Executive is absent from the full-time performance of his duties with the
<PAGE>
Company due to Disability, the Company shall continue to pay Executive his
Base Salary, if any, at the rate in effect at the commencement of such period
of Disability. Within ten (10) days following termination for Disability,
the Company shall pay Executive a lump sum in an amount equal to twelve (12)
times Executive's highest monthly Base Salary paid during the Term of the
Agreement.
(c) TERMINATION FOR CAUSE. The Company may terminate
Executive's employment under this Agreement for "Cause," at any time prior to
expiration of the Term of this Agreement, but only in the event of
Executive's conviction for fraud, misappropriation or embezzlement. In the
event of termination for Cause, Executive's employment may be terminated
immediately without advance written notice, whereupon this Agreement shall
terminate without further obligation by the Company, except for payment of
amounts of Base Salary, if any, accrued through the date of termination.
(d) TERMINATION BY THE COMPANY OTHER THAN FOR DEATH,
DISABILITY OR CAUSE. If Executive's employment is terminated by the Company
for any reason other than Executive's death or Disability or for Cause, the
Company shall pay Executive (i) a monthly severance payment for each month
remaining in the Term of the Agreement at a rate equal to his highest monthly
Base Salary paid during the Term of this Agreement and (ii) at the end of
each remaining fiscal year of the Company ending during the Term of this
Agreement, a bonus equal to the amount of Executive's target bonus under the
Performance Bonus Plan for the fiscal year in which such termination occurs.
(e) NO MITIGATION REQUIRED. Executive shall not
be required in any way to mitigate the amount of any payment or benefit
provided for under Section 3(c) or in this Section 4, including, but not
limited to, by seeking other employment, nor shall the amount of any payment
or benefit provided for under Section 3(c) or in this Section 4 be reduced by
any compensation earned by Executive as the result of employment with or
services provided to another employer after the date of Executive's
termination, or otherwise; provided, however, that in the event Executive
shall breach the provisions of Section 7 hereof or any other confidentiality
agreement between the Company and Executive, the Company shall have the
right, in addition to any other remedies it may have with respect to such
breach, to offset any amounts payable hereunder or otherwise owing to
Executive by the amount of any compensation earned by Executive as the result
of employment with or other services provided to another employer after the
date of Executive's termination, or otherwise."
3. Except as otherwise provided herein, the remaining terms of the
Employment Agreement shall remain in full force and effect.
2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer, and the Executive has hereunto
signed this Agreement, as of the date first above written.
OAKLEY, INC.
By:___________________________
Its:__________________________
/s/ Jim Jannard
______________________________
JIM JANNARD
3
<PAGE>
SPOUSAL CONSENT
The undersigned, BARBARA JANNARD, represents that she has reviewed
the attached "Amendment No. 1 to Employment Agreement" of her husband,
JIM JANNARD, and hereby acknowledges the effect of and voluntarily consents
to such waiver as of the 22nd day of July, 1996.
/s/ Barbara Jannard
_______________________
BARBARA JANNARD
4
<PAGE>
Exhibit 11.1
OAKLEY, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Year Ended
December 31, 1996
-------------------
Common Shares and common share equivalents:
Number of shares outstanding at beginning of period 71,400
Weighted average number of shares issued during the period 12
Weighted average shares issuable upon the exercise of common
stock options net of shares assumed to be repurchased from
proceeds obtained therefrom 404
Weighted average purchase of common shares (88)
--------------
Weighted average common and common equivalent shares
at end of period 71,728
--------------
--------------
Net income for primary net income per share $ 45,993
Net income per common and common equivalent shares $ 0.64
--------------
--------------
46
<PAGE>
Exhibit 21.1
OAKLEY, INC.
List of Material Subsidiaries
Oakley Europe
Oakley UK
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-98690 of Oakley, Inc. on Form S-8 of our report dated February 5, 1997,
appearing in this Annual Report on Form 10-K of Oakley, Inc. for the year
ended December 31, 1996.
Deloitte & Touche LLP
Costa Mesa, California
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 9,760 8,063
<SECURITIES> 0 0
<RECEIVABLES> 19,288 21,084
<ALLOWANCES> 591 590
<INVENTORY> 20,488 29,553
<CURRENT-ASSETS> 55,177 71,630
<PP&E> 38,888 72,942
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 97,725 158,245
<CURRENT-LIABILITIES> 16,016 35,523
<BONDS> 0 0
0 0
0 0
<COMMON> 357 710
<OTHER-SE> 81,352 120,727
<TOTAL-LIABILITY-AND-EQUITY> 97,725 158,245
<SALES> 172,752 218,566
<TOTAL-REVENUES> 172,752 218,566
<CGS> 50,295 66,790
<TOTAL-COSTS> 50,295 66,790
<OTHER-EXPENSES> 69,187 77,894
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 273 (781)
<INCOME-PRETAX> 52,997 74,663
<INCOME-TAX> 7,830 28,670
<INCOME-CONTINUING> 32,143 45,993
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 45,167 45,993
<EPS-PRIMARY> 0 0.64
<EPS-DILUTED> 0 0
</TABLE>
