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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER: 1-13848
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OAKLEY, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 95-3194947
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
ONE ICON 92610
FOOTHILL RANCH, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (714) 951-0991
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
Common stock, par value $.01 per share REGISTERED
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: NONE
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the 90 days. Yes / / No /X/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on March 13, 1998: $883,807,898
Number of shares of common stock, $.01 par value, outstanding as of the
close of business on March 13, 1998: 71,418,820 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's 1998 Annual
Shareholders Meeting are incorporated by reference into Part III herein.
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OAKLEY, INC.
TABLE OF CONTENTS
PART I
Item 1 - Business
Item 2 - Properties
Item 3 - Legal Proceedings
Item 4 - Submission of Matters to a Vote of Security Holders
PART II
Item 5 - Market for Registrant's Common Equity and Related Shareholder
Matters
Item 6 - Selected Financial Data
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Item 8 - Financial Statements and Supplementary Data
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10 - Directors and Executive Officers of the Registrant
Item 11 - Executive Compensation
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Item 13 - Certain Relationships and Related Transactions
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
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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 eyewear and athletic
equipment. The Company's principal strength is its ability to develop
eyewear which demonstrates superior optical performance and comfort through
the combination of patented technology and unique styling. The Company has
focused on innovations for sports applications, and its products are worn by
a variety of athletes, such as skiers, cyclists, runners, surfers, golfers,
tennis and baseball players and motocross riders. In addition, the Company's
products, which are currently sold in over 70 countries worldwide, have
become increasingly popular with fashion-oriented consumers in the larger
nonsports, or recreational, segment of the sunglass market. The Company's
products currently include eight lines of sunglasses (FROGSKINS, M FRAMES,
ZEROS, WIRES, JACKETS, X METAL, FIVES AND TOP COAT), three lines of goggles,
face shields for use with sports helmets, sunglass accessories, gear bags and
a limited range of apparel.
FORWARD-LOOKING STATEMENTS
WHEN USED IN THIS DOCUMENT, THE WORDS "BELIEVES", "ANTICIPATES", "EXPECTS"
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY IN CERTAIN CIRCUMSTANCES
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO A NUMBER OF RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED, INCLUDING RISKS RELATED TO THE DEPENDENCE ON SALES TO
SUNGLASS HUT; THE ACCEPTANCE IN THE MARKETPLACE OF NEW PRODUCTS; THE ABILITY
TO SOURCE RAW MATERIALS AT PRICES FAVORABLE TO THE COMPANY; THE ABILITY TO
DEVELOP AND INTRODUCE INNOVATIVE PRODUCTS; CURRENCY FLUCTUATIONS; AND OTHER
RISKS OUTLINED IN THE COMPANY'S PREVIOUSLY FILED PUBLIC DOCUMENTS, COPIES OF
WHICH MAY BE OBTAINED WITHOUT COST FROM THE COMPANY. GIVEN THESE
UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON SUCH STATEMENTS. THE COMPANY ALSO UNDERTAKES NO OBLIGATION TO
UPDATE THESE FORWARD-LOOKING STATEMENTS.
RECENT DEVELOPMENTS
In early 1998, the Company released MARS, its second eyewear model using the
Company's exclusive X METAL technology. A progression of X METAL, MARS is a
sculptural mechanical metal frame logically structured around a new circular
lens design.
In addition, the Company has developed new technology for application in
performance footwear and intends to release its first footwear products to
the market in mid-1998. The Company intends to manufacture all of its
footwear products in the United States, relying on foreign subcontractors.
Marketing and distribution for the new product intends to parallel Oakley's
strategies that have proved successful for performance eyewear.
PRODUCT DESIGN AND DEVELOPMENT
Developed by an in-house design staff, the Company's products are the end
result of efforts to find creative solutions to problems and wrap those
solutions in art. Innovation in the relation of form to function is a key
focus. With demonstrable improvements in performance, some of the Company's
breakaway designs--and many of the breakthroughs that led to their
creation--are patent protected.
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State-of-the-art technology allows the Company to shorten dramatically its
product development cycle. Stereo-lithographic computer modeling is combined
with CAD/CAM liquid laser prototyping to create fully detailed, wearable
prototypes within 20 hours. Rapid iteration of working models allows for
extensive testing and perfecting of product design before introduction to the
public. After the development stage is complete, the final sculpture can be
used directly in preparation of production molds. Utilizing these processes,
the Company is capable of introducing a new product line within four months
of initial concept.
The American National Standards Institute (ANSI) has established a series of
tests that measure eyewear performance according to specific industrial
standards. Known as Z87.1, these tests are conducted at independent
laboratories. The tests analyze product safety during high velocity impact
and high mass impact and provide a quantitative measure of optical quality.
The Company conducts ANSI tests at its own facilities on a regular basis, and
all products meet or exceed ANSI Z87.1 standards. Sports-application eyewear
featuring Oakley's patented polaric ellipsoid lens geometry (M FRAME, PRO M
FRAME and ZEROS) have demonstrated superior optical clarity when compared to
similar products of principal competitors. Eyewear featuring dual-spherical
lens design, which utilizes Oakley's patented XYZ OPTICS, demonstrates
comparable superiority.
Oakley has obtained hundreds of patents worldwide to protect its proprietary
manufacturing methods and product features. Among the Company's most
important patents are those which guard its achievements in toroidal
single-lens geometry and the associated manufacturing techniques,
dual-spherical lens technology and the associated optical advances, and
innovations in frame design and functionality. The proprietary technologies
employed in lens cutting, etching, and coating, as well as the Company's
significant investments in specialized equipment, are matched with exclusive
formulations of production materials to produce the superior optical quality,
safety, and performance of Oakley eyewear.
Designs that featured detachable components were a hallmark of the Company's
initial sunglass products. Interchangeable parts included lenses, frames,
temples, and nosepieces in various colors and shapes. The continuation of
this architecture in the sport-specific M FRAME and PRO M FRAME maintains
high appeal for the Company's products. Consumers are able to customize
eyewear to personal tastes and modify it for specific light conditions.
Among the Company's most significant developments, IRIDIUM coatings and
PLUTONITE lenses are prominent advances. IRIDIUM is a metallic oxide that
improves contrast and tunes color saturation, enhancing the wearer's
perception of detail in varying light conditions. The coating has become
very popular for eyewear used in demanding sports such as skiing and cycling,
and in high altitude use. The distinctive look of IRIDIUM-coated lenses adds
to their success in the recreational sunglass market. In March 1998, the
Company exercised its purchase option to acquire a patent for certain IRIDIUM
coatings. PLUTONITE is a proprietary material used to produce lenses of
exceptional optical clarity. The material provides 100% protection against
UVA, UVB and harmful blue light. It meets all ANSI Z87.1 industrial
standards for impact protection, producing lenses of extremely high
durability and low weight.
Oakley's patented XYZ OPTICS represents a major breakthrough in lens
technology. Precise geometric orientation provides optical correction on
three axes, not just two. The resulting lens allows light to be received
over essentially the full angular range of vision while minimizing distortion
caused by disparate refraction along that range--an advance that maximizes
clarity for all angles of view. The technology achieves this by protecting
the unique relationship between lens geometry and the as-worn orientation to
the wearer's eye. This allows for wrapped, raked-back lens configurations
that maximize peripheral vision and protection against sun and wind.
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Oakley has applied prescription lens technology to all of its frame models.
Computer modeling is used to adapt corrective implants to the wrapped
curvature of Oakley frames, precisely adjusting each individual's
prescription to the as-worn position of the lenses. Custom grinding is then
performed by an outside ophthalmic laboratory. The adaptation technology,
combined with Oakley's PLUTONITE lens material and the specialized equipment
needed for cutting and edging, makes the Company the exclusive provider of
these corrective lenses. The products have enabled Oakley to attract high
profile athletes that would not otherwise have been available to promote the
Company's brand.
In late 1996, Oakley began to expand its prescription business for frames and
lenses in both domestic and international markets under a program developed
with Gentex Optics ("Gentex"), the world's leading producer of
advanced-technology polycarbonate lenses, and its parent company, Essilor
International ("Essilor"). Under the program, Gentex manufactures
Oakley-branded prescription lenses for use in the Company's sunglass and
ophthalmic frames, with distribution through Essilor's wholesale laboratories
worldwide. All Oakley prescription products continue to be available only
through the Company's authorized retailers.
The Company's historical success is attributable, in part, to its
introduction of products that represent improvements in performance and style
over goods available on the market. The continued ability to develop and
introduce such innovations is a key factor in the Company's future success.
In February 1997, Oakley introduced its first sunglass in the X METAL line, a
family of eyewear named for a proprietary blend of metals. In addition to a
unique metallurgical process, X METAL utilizes breakthroughs in architectural
mechanics. Oakley intends to introduce other product line extensions and new
product lines in the future, innovations the Company believes will attract
additional consumers from the nonsports segment of the sunglass market.
To take advantage of unique opportunities, the Company may manufacture
private label or other sunglasses for other companies. The Company intends
to market and sell sunglasses under brand names other than "Oakley." In
addition, the Company has licensed, and may determine to further license, its
intellectual property rights to others in optical or other industries.
The success of any new product line including eyewear and footwear, depends
on various factors, including product demand, production capacity, and the
availability of raw materials and critical manufacturing equipment. Other
factors and assumptions are involved in preparing forward-looking information
related to product development and introduction. The uncertainty associated
with all these factors, and any change in such factors from the Company's
expectations, could result in cost increases, delays, or cancellations of
such new products and may also cause actual results to differ materially from
those projected.
PRODUCTS
The Company's first optical products, introduced in 1980, were goggles
developed for the ski and motorcycle industries. From the perspective of
"function first," the Company next introduced a hybrid goggle/sunglass design
for cycling and skiing, which led to other models for sport-specific uses.
The Company recognized that athletes in different sports needed different
types of protection to ensure clear vision, adequate impact-resistance and
deflection of wind, snow and other elements. The Company successfully
expanded its product line by educating the market about the individual
eyewear needs of a sport and marketing glasses perceived to be useful
athletic equipment. All of the Company's sunglass lines utilize one of two
lens geometries: toroidal (polaric ellipsoid) or spherical. The toroidal
geometry, which have a different radius from the top to bottom than from side
to side and are used in the Company's M FRAMES and ZEROS, provides superior
optical clarity and enhanced coverage and, therefore, represents the most
advanced technology for demanding sports applications. Spherical lenses,
which have a uniform radius in all directions, are used in the Company's
dual-lens sunglasses, the TRENCHCOATS, JACKETS, WIRES, FROGSKINS, X METAL,
AND TOPCOAT. The Company's
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spherical lenses are corrected and oriented so as to minimize distortion in
the "as-worn" position, a feature which differentiates the Company's
dual-lens sunglasses from those of its competitors. The Company incorporates
its patented XYZ OPTICS technology to achieve a superior level of optical
quality in a wrapped and raked non-prescription dual lens design that
maximizes peripheral vision and protection against sun and wind. The
Company's eyewear is popular with athletes in baseball, golf, tennis,
cycling, motorcycling, skiing, volleyball, marine sports, triathlons,
running, surfing, snowboarding and other sports.
The Company's current products are set forth below:
DATE INTRODUCED U.S. SUGGESTED
RETAIL PRICE
SUNGLASSES
M FRAMES Late 1989 $ 90.00 - 145.00
ZEROS Late 1993 80.00 - 105.00
WIRES Late 1993 130.00 - 225.00
EYE JACKETS Late 1994 90.00 - 125.00
TRENCHCOATS Late 1995 90.00 - 130.00
STRAIGHT JACKETS May 1996 100.00
SQUARE WIRES June 1996 150.00
PRO M FRAME October 1996 150.00
FROGSKINS* December 1996 55.00 - 65.00
X METAL ROMEO February 1997 250.00
FIVES April 1997 55.00 - 65.00
TOPCOAT August 1997 100.00 - 30.00
GOGGLES
MOTOCROSS 1980 26.00 - 56.50
SKI 1983 25.00 - 102.00
H20 1990 25.75 - 61.00
* The Company's original FROGSKIN line was introduced in 1985 and was
discontinued after the new style was introduced in 1996.
FACE SHIELDS
In June 1997, the Company acquired One Xcel, Inc., a company that designs,
markets and distributes the only optically-correct protective face shield for
use with sports helmets. The One Xcel polycarbonate optical shield is the
only sports shield officially endorsed by the National Hockey League (NHL)
and National Football League (NFL).
REPLACEMENT LENSES AND ACCESSORIES
By offering interchangeable lenses and other components of certain Oakley
sunglasses in various colors and shapes, Oakley has created a market for
replacement parts. Depending on the sunglass, an Oakley customer may have
several lenses for different light conditions and several nosepieces and
earpieces in a range of colors for variety.
CLOTHING AND GEAR BAGS
The Company has extended its invention-inspired product philosophy into the
apparel category, now selectively designing performance clothing and gear
bags. The clothing and gear bags are constructed with technical features and
materials, such as YKK zippers and reinforced rivets to provide added
strength and durability in the Backpack; fully taped double-needle seams and
nailhead cordura for added durability on the arms and shoulders of the
Ballistic Jacket; and grommet venting to control excess heat and moisture in
the Fleece Pullover.
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To date the Company has developed its apparel and other accessories using its
own design resources, declining licensing opportunities in order to preserve
the Oakley image, which the Company believes will bring greater respect and
demand for Oakley's products over the long term. The Company may in the
future consider the pursuit of additional brand extensions.
MANUFACTURING
In early 1997, the Company relocated to its newly constructed headquarters
and manufacturing facility in Foothill Ranch, Orange County, California,
where it manufactures and assembles most of its products. The Company owns,
operates and maintains most of the equipment used in the manufacture of its
products. The Company produces components and performs processes in-house
which contribute significantly to gross profit margins and provide protection
against piracy of the Company's proprietary information and processes.
In-house manufacturing enables the Company to produce products in accordance
with its strict quality control standards. Components and processes that are
unlikely to add significant value are contracted out to vendors. Much of the
equipment used in the manufacture of the Company's products has been
specially designed and adapted for the processes used by the Company. The
Company's proprietary manufacturing methods and equipment are protected by
special security measures employed at the Company's manufacturing facilities.
In addition, the Company believes that by manufacturing its own products, it
has the opportunity to experiment with new materials and technologies which
can lead to important discoveries, such as its IRIDIUM coating process (which
the Company believes is one of the most sophisticated coating processes in
the industry). The Company generally seeks to maintain a supply of finished
goods that is sufficient to ship domestic customer orders (other than
preseason orders for ski goggles and orders from certain sunglass specialty
chains) within one day of receipt. Due to significant increases in demand
for certain Oakley products, backorders may increase sharply from time to
time and may delay customer shipments for such products.
The Company has forged strong relationships with its major suppliers and
maintains agreements with most of them that prohibit such suppliers from
revealing any of the Company's proprietary information and technology to
third parties. Although the Company relies on outside suppliers for the
polycarbonate components of its glasses and goggles, the Company owns
substantially all the molds used in the production of the components. The
Company relies on a single source for the supply of several components,
including the uncoated lens blanks from which substantially all of the
Company's lenses are cut. The Company believes most of these components can
be obtained from one or more alternative sources within a relatively short
period of time. The loss of the source for lens blanks, however, or any
disruption in such source's business or failure by it to meet the Company's
product needs on a timely basis could cause, at a minimum, temporary
shortages in needed materials and could have a material adverse effect on the
Company's business. There can be no assurance that, if necessary, an
additional source of supply of lens blanks can be located or developed in a
timely manner. In March 1997, the Company entered into a reciprocal
exclusive dealing agreement with Gentex, its lens blank supplier, under which
Oakley has the exclusive right to purchase from such supplier decentered
sunglass lenses and a new scratch-resistant coating developed for use with
such lenses. In return, Oakley has agreed to purchase all of its decentered
lens requirements, subject to certain exceptions, from such supplier. The
Company's business interruption insurance policy reimburses the Company for
certain losses incurred by the Company, up to a maximum of $30 million, as a
result of an interruption in the supply of raw materials, including uncoated
lens blanks, resulting from direct physical loss or damage to a supplier's
premises, subject to certain exceptions. However, there can be no assurance
that such policy will be sufficient to compensate the Company for all losses
resulting from an interruption in the supply of raw materials.
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DISTRIBUTION
The Company sells Oakley eyewear in the United States through a carefully
selected base of approximately 7,100 active accounts as of December 31, 1997
with approximately 10,600 locations comprised of optical stores, sunglass
retailers and specialty sports stores, including bike, surf, ski and golf
shops and motorcycle, running and sporting goods stores. Unlike most of its
competitors, the Company has elected not to sell its products through
department stores (other than Nordstrom), discount stores, drug stores or
traditional mail-order companies.
The Company's current level of distribution, with the addition of key niche
retailers, most notably in the golf channel in 1997, and a limited number of
premium optical locations, is expected to be capable of accommodating
expanding sales, while maintaining the discoverability of Oakley products by
consumers. This distribution philosophy provides retailers with a degree of
exclusivity for Oakley products which has increased brand loyalty and has
encouraged retailers to display Oakley products in prominent shelf space.
The noticeable absence of the Company's products from department stores,
discount stores, drug stores and traditional mail-order catalogs has
contributed to the Company's exclusive, high-quality image. The Company
generally does not change its domestic wholesale prices during the life of a
product, which the Company believes creates a more stable retail environment.
The Company's products are currently sold in over 70 countries outside the
United States. In most of continental Europe, marketing and distribution are
handled directly by the Company's Oakley Europe subsidiary, located near
Paris, France, which is staffed by approximately 100 employees who perform
sports marketing, advertising, telemarketing, shipping and accounting
functions. Oakley Europe has an independent sales force in all major
continental European markets except in Switzerland and Austria. Since 1995,
the Company has been selling Oakley products to Mexico on a direct basis
through its subsidiary Oakley Mexico. In 1996, the Company acquired its
exclusive distributor in the United Kingdom ("Oakley UK") and established an
office in South Africa ("Oakley Africa") and began selling to those markets
on a direct basis in the fourth quarter of 1996. In May 1997, the Company
began selling to Japan ("Oakley Japan") on a direct basis through its own
operation. In those parts of the world not serviced by Oakley or its
subsidiaries, Oakley's products are sold through distributors with local
expertise which sell Oakley products either exclusively or with
complementary, noncompeting products. Such distributors agree to respect the
marketing philosophy and practices of the Company and receive extensive
training regarding such philosophies and practices. For information
regarding the Company's operations by geographic region, see Notes 10 and 11
of Notes to Consolidated Financial Statements.
The Company requires its retailers and distributors to agree not to resell or
divert Oakley products through unauthorized channels of distribution.
Products shipped from Oakley's headquarters are marked with a tracking code
that allows the Company to determine the source of diverted products sold by
unauthorized retailers or distributors, so it can better maintain the
integrity of its products at desired locations. When Oakley products are
found at undesirable locations or unauthorized retailers, the Company
purchases samples and, using the tracking device, determines the source of
the diversion. The Company then estimates the potential damage to the
Company's retail franchise and image and may require that the offending
account repurchase the diverted product or post a nonrefundable bond against
future diversion. In certain instances, the Company may terminate the
account. When an existing account has been terminated, the Company may
repurchase its own products from the retailer at the undesirable location to
protect the Oakley image and the exclusivity enjoyed by the Company's retail
account base. The Company employs similar anti-diversion techniques in
overseas markets.
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SALES AND MARKETING
The Company maintains a domestic sales force of approximately 90 independent
representatives. The primary functions of Oakley's sales force are to sell
to each retailer the appropriate mix and quantity of Oakley products, ensure
that products are displayed effectively and educate retailers about the
quality and features of Oakley products and Oakley's sales and marketing
philosophies. The Company believes that its relationships with its
customers, effective marketing and superior customer service are critical
elements of the Company's success. Through its sales representatives, the
Company tries to satisfy every customer's request for information or product
support. Sales representatives regularly visit each customer to educate the
customer about recent innovations in product designs, new product
applications and merchandising ideas. Each sales representative is managed
by one of the Company's in-house territory managers. The territory managers
work with the representatives in setting sales goals, providing sales
analyses, soliciting sales to complete customers' inventories and taking new
orders. The Company's sales force is paid solely by commissions on net sales.
While Oakley uses traditional marketing methods in some instances, the
Company attributes much of its success to the use of less conventional
methods, including sports marketing, targeted product allocation,
advertorials and in-store display aids. The Company has used sports
marketing extensively to achieve consistent, authentic exposure that equates
into strong brand recognition on a global level. Oakley utilizes the
exposure generated by its athletes as an "editorial" endorsement of Oakley's
eyewear rather than a commercial endorsement. The sports marketing division
consists of 22 sports marketing experts domestically, with an additional 20
managers positioned in our direct offices and with distributors
internationally. These experts specialize in each market segment and niche
to negotiate contracts with athletes, identify and develop relationships with
undiscovered talent, coordinate exposure with the media, educate and train
these Oakley "ambassadors" about Oakley products and support them at events
and public forums where they wear Oakley products. Oakley's sports marketing
staff is diverse enough to understand and effectively market all sports,
regardless of the sport's image and special equipment needs. Oakley earns the
respect of its athletes even in the most "core" of sports such as surf and
snowboard, yet continues to expand successfully into more traditional sports
such as golf, tennis, baseball and cricket.
PRODUCT SERVICES
Oakley strives to support its products with the best customer service in the
industry. The Company's approximately 100-person product services group
promptly and courteously responds to customer inquiries, concerns and
warranty claims. The Company provides a one-year warranty against
manufacturer's defects or breakage of its polycarbonate frames.
ADVERTISING AND PROMOTION
Oakley's primary method of enhancing brand recognition is sports marketing,
which places the Oakley brand before consumers through the endorsements of
influential athletes and other personalities, some of whom have formal
arrangements with the Company. Brand image and exposure are carefully
controlled. The effectiveness of this promotional strategy is believed to
outweigh that of direct advertising, which often carries a stigma and lacks
the impact and recognition of athletic endorsement. The Company believes
that direct advertising can be useful, but only in situations that do not
lead to competition with editorial coverage.
The Company has also developed a second level of promotion through its laser
scope program. Through demonstration and lecture, trained technicians
educate consumers on the health and performance benefits of Oakley products
by imparting technical information in layman's terms. Venues for these
presentations include key retailers, trade shows, high-traffic locations and
regional sporting events such as golf tournaments and tennis matches.
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The third level of marketing is advertising. Products are promoted through
print media, outdoor media, in-store visual displays, and other
point-of-purchase materials. Promotion include packaging, mailers, catalogs,
billboards, the Internet, and more. The Company considers many factors in
evaluating the effectiveness of these marketing opportunities. In addition
to cost effectiveness, analytical criteria includes the ability to engage new
market opportunities, build image, enhance the stature of the brand, and
reinforce the identity of the brand.
Oakley retains significant control over its promotional programs and believes
it is able to deliver a consistent, well-recognized advertising message at
substantial cost savings compared to complete reliance on outside agencies.
Localized strategies of marketing and distribution are managed by direct
operations in Europe, South Africa, Mexico and Japan. In other parts of the
world, the integrity of the brand is safeguarded by carefully selected
distributors who present Oakley products to their markets with local
expertise.
PRINCIPAL CUSTOMERS
During 1997, net sales to the Company's ten largest customers, which included
seven international distributors, accounted for approximately 35% of the
Company's total net sales. Net sales to one customer, Sunglass Hut, the
largest sunglass specialty retailer in the world, accounted for approximately
21.5% of the Company's 1997 net sales. Such sales do not include those sales
to Sunglass Hut locations outside the United States that are made by the
Company's independent international distributors. At December 31, 1997,
approximately 250 of the 2,121 Sunglass Hut locations worldwide were serviced
by Oakley independent distributors. While the Company does not have any
minimum purchase agreements with Sunglass Hut, the Company believes that it
maintains a good relationship with Sunglass Hut. In early 1994, the Company
entered into an exclusive licensing agreement with Sunglass Hut to sell
Oakley products through mail order catalogs and in 1997 two Oakley catalogs
were produced under such arrangement.
INTELLECTUAL PROPERTY
The Company aggressively asserts its rights under patent, trade secret,
unfair competition, trademark and copyright laws to protect its intellectual
property, including product designs, proprietary manufacturing processes and
technologies, product research and concepts and recognized trademarks. These
rights are protected through the acquisition of patents and trademark
registrations, the maintenance of trade secrets, the development of trade
dress, and where appropriate, litigation against those who are, in the
Company's opinion, infringing these rights. The Company has filed suit
against a number of its competitors to enforce certain of the Company's
patents and trademarks. None of the Company's patents or trademarks has ever
been invalidated or limited. While there can be no assurance that the
Company's patents or trademarks fully protect the Company's proprietary
information and technologies, the Company intends to continue asserting its
intellectual property rights against any infringer. The Company believes
that it has developed a reputation in the sunglass industry as a vigorous
defender of its intellectual property rights; this reputation acts as a
deterrent against the introduction of potentially infringing products by its
competitors and others.
The following table reflects data as of December 31, 1997 concerning the
Company's intellectual property:
<TABLE>
<CAPTION>
Number of Utility/Design Patents
------------------------------------
Issued Pending Trademarks
------ ------- ----------
<S> <C> <C> <C>
United States 69 41 57
International 302 185 559
</TABLE>
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The Company dissuades counterfeiting through the active monitoring of the
marketplace by its anti-counterfeiting personnel and other employees and
through the services provided by outside firms that specialize in
anti-counterfeiting measures. The Company's sales representatives,
distributors and retailers have also proved effective watchdogs against
infringing products, frequently notifying the Company of any suspicious
products, confiscating counterfeit products and assisting law enforcement
agencies. The Company's sales representatives are also educated on Oakley's
patents and trade dress and assist in preventing infringers from obtaining
retail shelf space. The Company also etches its logo onto the lenses of its
single-lens sunglasses to assist its customers and consumers in detecting
counterfeit products.
COMPETITION
The Company is a leading designer, manufacturer and distributor of eyewear in
the sports segment of the nonprescription eyewear market. Within this
segment, the Company competes with mostly smaller sunglass and goggle
companies in various niches of the sports market and a limited number of
larger competitors, some of whom have greater financial and other resources
than the Company. Some of these niche markets are susceptible to rapid
changes in consumer preferences which could affect acceptance of the
Company's products. Oakley believes the vigorous protection of its
intellectual property rights has limited the ability of others to compete in
this segment. Accordingly, the Company believes that it is the established
leader in this segment of the market, although several companies, including
Bausch & Lomb (which markets Killer Loop), Luxottica (which markets Briko),
Bolle and various niche brands compete for the Company's shelf space.
The Company also competes in the broader nonsports, or recreational, segment
of the sunglass market, which is fragmented and highly competitive. The
major competitive factors include fashion trends, brand recognition,
marketing strategies, distribution channels and the number and range of
products offered. A number of established companies, including Bausch & Lomb
(Ray Ban and Revo) and Luxottica, compete in this wider market.
The Company differs from many of its competitors in that its competitors
generally only import or repackage eyewear products. Few sunglass companies
design, manufacture and assemble their own creations as many companies tend
to imitate successful sunglass models. In order to retain its market share,
the Company must continue to be competitive in quality and performance,
technology, method of distribution, style, brand image, intellectual property
protection and customer service.
DOMESTIC AND FOREIGN OPERATIONS
See Note 11 to the Notes to the Consolidated Financial Statements for
discussion regarding domestic and foreign operations.
EMPLOYEES
The Company believes that its employees are among its most valuable resources
and have been a key factor in the success of Oakley's products. At March 13,
1998, there were a total of approximately 930 full-time employees. In
addition, the Company utilizes as many as 450 temporary personnel,
particularly during the summer months.
The Company is not a party to any labor agreements and none of its employees
is represented by a labor union. The Company considers its relationship with
its employees to be good and has never experienced a work stoppage.
11
<PAGE>
ITEM 2. PROPERTIES
In early 1997, the Company relocated to a newly constructed corporate and
manufacturing facility located in Foothill Ranch, Orange County, California.
The new facility is approximately 400,000 square feet, with potential to
expand into an additional 100,000 square feet. Prior to the relocation, the
company leased five facilities which totaled approximately 170,000 square
feet. All such leases have either expired or were terminated with no
material adverse financial effect. In June 1996, the Company purchased an
approximately 63,000 square foot facility in Nevada for the production of
metal eyewear. In addition, the Company leases office and warehouse space as
necessary to support its operations worldwide, including offices in the UK,
Europe, Mexico, South Africa, Japan and the state of Washington. In 1997,
the Company also purchased land in Mexico City on which it is constructing an
office for its operations in Mexico and Central America; the Company expects
this facility to be completed in mid-1998. The Company believes its current
and planned facilities are adequate to carry on its business as currently
contemplated.
The Company is subject to federal, state and local environmental laws,
regulations and ordinances that (i) govern activities or operations that may
have adverse environmental effects (such as emissions to air, discharges to
water, and the generation, handling, storage and disposal of solid and
hazardous wastes) or (ii) impose liability for the cost of cleanup or other
remediation of contaminated property, including damages from spills,
disposals or other releases of hazardous substances or wastes, in certain
circumstances without regard to fault. The Company's manufacturing
operations routinely involve the handling of chemicals and wastes, some of
which are or may become regulated as hazardous substances. The Company has
not incurred, and does not expect to incur, any significant expenditures or
liabilities for environmental matters. As a result, the Company believes that
its environmental obligations will not have a material adverse effect on its
operations or financial position.
ITEM 3. LEGAL PROCEEDINGS
THE CALIFORNIA SECURITIES ACTIONS
The Company and certain of its officers and directors have been named as
defendants in three putative class action lawsuits (the "California
Securities Actions") filed in December 1996 in the California Superior Court
for the County of Orange (the "Superior Court"). The cases are captioned:
YOSEF S. ROSENSHEIN V. OAKLEY, INC., MIKE PARNELL, LINK NEWCOMB AND JIM
JANNARD, Case No. 773051 (filed December 17, 1996);
HERSCHEL HARMAN V. OAKLEY, INC., MIKE PARNELL, LINK NEWCOMB AND JIM
JANNARD, Case No. 773053 (filed December 17, 1996); and
ERIC SHER, HAROLD BARON AND DAVID O. ECKERT V. OAKLEY, INC., MIKE PARNELL,
LINK NEWCOMB, JIM JANNARD, MERRILL LYNCH & CO. AND ALEX. BROWN & SONS,
INC., Case No. 773366 (filed December 24, 1996).
By order dated January 30, 1997, the Superior Court ordered that the
California Securities Actions be assigned to the Superior Court's Complex
Litigation Panel, where they have since been consolidated. On April 18,
1997, the plaintiffs filed a consolidated amended complaint in the California
Securities Actions. The plaintiffs seek to represent a class of persons who
purchased the Company's common stock between March 22, 1996 and December 5,
1996.
The complaint in the California Securities Actions alleges claims for
violations of the antifraud provisions of the California Corporations Code,
unfair business practices and false advertising in violation of certain
provisions of the California Business and Professions Code, fraud and
negligent
12
<PAGE>
misrepresentation. The plaintiffs' claims are based on alleged material
misstatements and omissions in certain of the Company's public statements,
Securities and Exchange Commission filings and in the reports of third-party
analysts regarding the Company's retail distribution practices, market
conditions, new product developments and extensions of existing product
lines, business with Sunglass Hut and earnings prospects. The plaintiffs
seek unspecified damages and other relief against the Company and the other
defendants.
The plaintiffs in the California Securities Actions have also asserted claims
against Merrill Lynch & Co. ("Merrill Lynch") and Alex. Brown and Sons, Inc.
("Alex. Brown"), which served as the U.S. Representatives of the U.S.
Underwriters of the June 6, 1996 offering of five million shares of common
stock of the Company by certain of its shareholders (the "Secondary
Offering"). By letter dated February 7, 1997, counsel for Merrill Lynch and
Alex. Brown gave the Company notice pursuant to the indemnification
provisions of the U.S. Purchase Agreement dated June 6, 1996, for the
Secondary Offering that they were asserting a claim for indemnification under
such provisions and requested that the Company reimburse Merrill Lynch and
Alex. Brown on a current basis for their attorneys' fees and expenses
incurred in defending the California Securities Actions. Counsel for Merrill
Lynch and Alex. Brown subsequently indicated that this claim for
indemnification also applies to attorneys' fees and expenses incurred in
defending the Federal Securities Actions (described below).
The Company and the other defendants filed demurrers to the California
Securities Actions and also filed a motion to stay proceedings in the
California Securities Actions pending the resolution of the Federal
Securities Actions (described below).
On November 14, 1997, the Superior Court (1) sustained the demurrers without
leave to amend with respect to the Company and defendants Link Newcomb,
Merrill Lynch and Alex. Brown on plaintiffs' cause of action for purported
violations of the antifraud provisions of the California Corporations Code;
(2) overruled the demurrer with respect to the Company and defendants Mike
Parnell, Link Newcomb and Jim Jannard, but sustained the demurrer with leave
to amend with respect to defendants Merrill Lynch and Alex. Brown, on
plaintiffs' cause of action for fraud and negligent misrepresentation; and
(3) sustained the demurrers with leave to amend with respect to the Company
and each of the other defendants on plaintiffs' cause of action for unfair
business practices and false advertising in violation of certain provisions
of the California Business and Professions Code. Subsequently, plaintiffs
agreed to dismiss all of their claims against each of the defendants, with
the exception of plaintiffs' cause of action for purported violations of the
antifraud provisions of the California Corporations Code with respect to
defendants Mike Parnell and Jim Jannard.
On January 22, 1998, the Superior Court denied the motion to stay proceedings
in the California Securities Actions pending the resolution of the Federal
Securities Actions described below. The plaintiffs in the California
Securities Actions have served document requests on the Company and others,
and documents have been produced in response to plaintiffs' demands.
THE FEDERAL SECURITIES ACTIONS
The Company and certain of its officers and directors have been named as
defendants in five putative class action lawsuits (the "Federal Securities
Actions") filed in October, November and December 1997 in the United States
District Court for the Central District of California, Southern Division.
The cases are captioned:
KENSINGTON CAPITAL MANAGEMENT V. OAKLEY, INC., MIKE PARNELL, LINK NEWCOMB,
JIM JANNARD, MERRILL LYNCH & CO. AND ALEX. BROWN & SONS INCORPORATED, No.
SACV 97-808 GLT (EEx) (filed October 10, 1997) (the "KENSINGTON CAPITAL
MANAGEMENT Action");
13
<PAGE>
FRANK LISTER, JAMES J. SCOTELLA, RAYMOND E. NEVEAU, JAMES S. LEWINSKI, JACK
ROSENSON AND LEE SPERLING V. OAKLEY, INC., MIKE PARNELL, LINK NEWCOMB, JIM
JANNARD, MERRILL LYNCH & CO. AND ALEX. BROWN & SONS INCORPORATED, No. SACV
97-809 LHM (EEx) (filed October 10, 1997) (the "LISTER Action");
STUART CHAIT AND MARILYN SCHWARTZ V. OAKLEY, INC., MIKE PARNELL, LINK
NEWCOMB, JIM JANNARD, MERRILL LYNCH & CO. AND ALEX. BROWN & SONS,
INCORPORATED, No. SACV 97-829 AHS (EEx) (filed October 20, 1997) (the
"CHAIT Action");
FICHERA V. OAKLEY, INC., MIKE PARNELL, LINK NEWCOMB, JIM JANNARD, MERRILL
LYNCH & CO. AND ALEX. BROWN AND SONS INCORPORATED, No. SACV 97-928 GLT
(Eex) (filed November 17, 1997 (the "FICHERA Action"); and
YOSEF J. ROSENSHEIN AND HERSHEL HARMAN V. OAKLEY, INC., MIKE PARNELL, LINK
NEWCOMB, JIM JANNARD, MERRILL LYNCH & CO. AND ALEX. BROWN & SONS
INCORPORATED, No. SACV 97-993 AHS (Eex) (filed December 5, 1997 (the
"ROSENSHEIN Federal Action").
The plaintiffs in the KENSINGTON CAPITAL MANAGEMENT and the FICHERA Actions
seek to represent a class of persons who purchased the Company's common stock
in the Secondary Offering and allege claims for violations of sections 11,
12(a)(2) and 15 of the Securities Act of 1933. The plaintiffs' claims are
based on alleged material misstatements and omissions in the prospectus
issued and registration statement filed in connection with the Secondary
Offering regarding the Company's retail distribution practices, market
conditions, new product developments and extensions of existing product
lines, business with Sunglass Hut and quality control standards. The
plaintiffs seek unspecified damages and other relief against the Company and
the other defendants. Plaintiffs in the KENSINGTON CAPITAL MANAGEMENT Action
filed a motion to consolidate that action with the FICHERA Action, and
plaintiffs in the KENSINGTON CAPITAL MANAGEMENT and the FICHERA Actions filed
competing motions to be appointed lead plaintiffs for the purported plaintiff
class and for the selection of lead counsel to the purported plaintiff class.
Plaintiff's motion in the FICHERA Action was later withdrawn.
The plaintiffs in the LISTER and CHAIT Actions and the ROSENSHEIN Federal
Action seek to represent a class of persons who purchased the Company's
common stock between March 22, 1996 and December 5, 1996, including in the
Secondary Offering, and allege claims for violations of sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The plaintiffs' claims are based on alleged material
misstatements and omissions in certain of the Company's public statements,
Securities and Exchange Commission filings and in the reports of third-party
analysts regarding the Company's retail distribution practices, market
conditions, new product developments and extensions of existing product
lines, business with Sunglass Hut, earnings prospects and quality control
standards. The plaintiffs seek unspecified damages and other relief against
the Company and the other defendants. Plaintiffs in the LISTER and CHAIT
Actions filed a motion to consolidate the LISTER and CHAIT Actions and the
ROSENSHEIN Federal Action, to appoint certain persons as lead plaintiffs for
the purported plaintiff class and for the selection of lead counsel to the
purported plaintiff class.
On January 26, 1998, the District Court granted the plaintiffs' motions for
appointment of lead plaintiffs and for the selection of lead counsel to the
purported plaintiff classes. The District Court further ordered that all of
the Federal Securities Actions be consolidated for pretrial purposes.
The Company has not yet responded to any of the Federal Securities Actions.
To date, no discovery has been taken in the Federal Securities Actions.
14
<PAGE>
The Company has been named as a nominal defendant in a putative derivative
lawsuit against certain of its directors and officers filed in March 1997 in
the Superior Court. The case is captioned BLACKMAN V. JAMES JANNARD, MIKE
PARNELL AND DOES 1 THROUGH 100, Case No. 777098 (filed March 27, 1997) (the
"California Derivative Action").
In the California Derivative Action, the plaintiff, purporting to sue on
behalf of the Company, alleges claims for breach of fiduciary duty,
constructive fraud, unjust enrichment and violations of the insider trading
provisions of the California Corporations Code. Like the California
Securities Actions, the plaintiff's claims in the California Derivative
Action are, among other things, based upon alleged material misstatements and
omissions in certain of the Company's public statements and Securities and
Exchange Commission filings regarding the Company, its operation and future
prospects. The plaintiff seeks to recover damages and other relief on behalf
of the Company. The defendants filed a demurrer to the original complaint in
the California Derivative Action, and the plaintiff subsequently filed an
amended complaint. The defendants filed a demurrer to the amended complaint
in the California Derivative Action, and the Superior Court sustained the
demurrer with leave to amend in September 1997. The plaintiff subsequently
filed a second amended complaint in the California Derivative Action. The
defendants then filed a demurrer to the second amended complaint in the
California Derivative Action and the Superior Court sustained the demurrer
without leave to amend on December 19, 1997. On February 4, 1998, the
Superior Court entered a final order of dismissal of the California
Derivative Action. The Company does not know whether the plaintiff plans to
appeal the Superior Court's final order.
Although it is too soon to predict the outcome of any of the litigations
described above with any certainty, based on its current knowledge of the
facts, the Company believes that the plaintiffs' claims are without merit and
intends to defend the actions vigorously.
In addition, the Company is a party to various claims, complaints and other
legal actions that have arisen in the normal course of business from time to
time. The Company believes the outcome of these pending legal proceedings,
in the aggregate, will not have a material adverse effect on the operations
or financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<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 on the New York Stock Exchange on August 10, 1995 upon completion of
the Company's initial public offering (trading symbol "OO"). On March 13,
1998, the closing sales price for the Common Stock was $12 3/8. The
following table sets forth the high and low sales prices for the Common Stock
for each quarter of 1996 and 1997 on the New York Stock Exchange Composite
Tape:
High Low
---- ---
1996
- ----
First Quarter $ 19 3/8 $ 15 1/2
Second Quarter $ 27 3/16 $ 17 7/16
Third Quarter $ 24 1/2 $ 14 11/16
Fourth Quarter $ 24 1/2 $ 9 7/8
1997
- ----
First Quarter $ 11 5/8 $ 8 3/8
Second Quarter $ 14 3/8 $ 8 3/4
Third Quarter $ 14 1/16 $ 10 1/2
Fourth Quarter $ 11 3/16 $ 8 9/16
On September 11, 1996, the Company declared a two-for-one stock split
effected in the form of a one-share dividend per share of its Common Stock.
The new shares were distributed on October 10, 1996 to shareholders of record
at the close of business at September 25, 1996. All sale prices have been
restated retroactively to reflect the stock split.
The number of shareholders of record for Common Stock on March 13, 1998 was
586.
DIVIDEND POLICY
The Company currently does not pay any dividends on its Common Stock. Any
future determination as to the payment of dividends will be at the discretion
of the Company's Board of Directors and will depend upon the Company's
results of operations, financial condition, contractual restrictions and
other factors deemed relevant by the Board of Directors.
16
<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, 1995, 1996, and 1997 and balance sheet data as of December 31,
1996 and 1997 included herein have been audited by Deloitte and Touche LLP,
the Company's independent auditors, as indicated in their report included
elsewhere herein. The selected supplemental income statement data set forth
herein are for informational purposes only and may not necessarily be
indicative of the Company's future results of operations.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------- ------------- ------------- ------------ ------------
(dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 92,714 $ 123,952 $ 172,752 $ 218,566 $ 193,984
Cost of goods sold 27,667 35,714 50,295 66,790 75,393
-------------- ------------- ------------- ------------ ------------
Gross profit 65,047 88,238 122,457 151,776 118,591
Operating expenses:
Research and development 15,455 25,529 16,774 4,782 3,825
Selling 21,750 30,815 36,776 48,092 53,007
Shipping and warehousing 2,334 3,187 4,678 6,507 5,721
General and administrative 11,801 14,681 15,753 18,513 23,032
Gain on disposition of property and equipment - - (4,794) - -
-------------- ------------- ------------- ------------ ------------
Total operating expenses 51,340 74,212 69,187 77,894 85,585
Operating income 13,707 14,026 53,270 73,882 33,006
Interest expense (income), net 69 232 273 (781) 1,181
-------------- ------------- ------------- ------------ ------------
Income before provision for income taxes 13,638 13,794 52,997 74,663 31,825
Provision for income taxes (1) 308 259 7,830 28,670 12,221
-------------- ------------- ------------- ------------ ------------
Net income $ 13,330 $ 13,535 $ 45,167 $ 45,993 $ 19,604
-------------- ------------- ------------- ------------ ------------
-------------- ------------- ------------- ------------ ------------
Basic net income per share $ 0.64 $ 0.28
------------ ------------
------------ ------------
Basic weighted average common shares 71,324,000 70,659,000
------------ ------------
------------ ------------
Diluted net income per share $ 0.64 $ 0.28
------------ ------------
------------ ------------
Diluted weighted average common shares 71,728,000 70,700,000
------------ ------------
------------ ------------
SUPPLEMENTAL INCOME STATEMENT DATA (2):
Income before provision for income taxes $ 13,638 $ 13,794 $ 52,997
Provision for income taxes 5,476 5,539 20,854
-------------- ------------- -------------
Net income $ 8,162 $ 8,255 $ 32,143
-------------- ------------- -------------
-------------- ------------- -------------
At December 31,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 16,872 $ 9,932 $ 39,161 $ 36,107 $ 41,688
Total assets 43,592 49,694 97,725 158,245 181,291
Total debt 6,339 3,300 263 18,000 25,201
Shareholders' equity 32,775 33,133 81,709 121,437 136,961
</TABLE>
(1) For periods prior to the Company's conversion to C corporation status,
represents California state franchise taxes and foreign taxes accrued by
Oakley Europe.
(2) Amounts reflect adjustment for Federal and state income taxes as if the
Company had been taxed as a C corporation rather than as an S corporation.
17
<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 the period prior to the Company's initial public offering in August 1995,
amounts reflect pro forma adjustments for (i) the elimination of bonuses paid
to the two principal executive officers prior to the Company's initial public
offering in excess of the estimated bonuses payable for 1995 under the
Company's Performance Bonus Plan, (ii) the elimination of all depreciation
expense associated with aircraft owned by the Company which were distributed
to the two principal shareholders in August 1995 as part of the S corporation
distribution, (iii) the elimination of the gain on the disposition of the
aircraft distributed to the two principal shareholders and (iv) Federal and
state income taxes as if the Company had been taxed as a C corporation for
such period.
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
Year Ended December 31,
-------------------------------------
1995 1996 1997
----------- ----------- ------------
Pro Forma
-----------
Net sales $ 172,752 $ 218,566 $ 193,984
Cost of goods sold 50,295 66,790 75,393
----------- ----------- ------------
Gross profit 122,457 151,776 118,591
Operating expenses:
Research and development 3,285 4,782 3,825
Selling 35,802 48,092 53,007
Shipping and warehousing 4,678 6,507 5,721
General and administrative 13,121 18,513 23,032
----------- ----------- ------------
Total operating expenses 56,886 77,894 85,585
----------- ----------- ------------
Operating income 65,571 73,882 33,006
Interest expense (income), net 273 (781) 1,181
----------- ----------- ------------
Income before provision for income taxes 65,298 74,663 31,825
Provision for income taxes 25,694 28,670 12,221
----------- ----------- ------------
Net income $ 39,604 $ 45,993 $ 19,604
----------- ----------- ------------
----------- ----------- ------------
18
<PAGE>
The following table sets forth operating results (as a percentage of net
sales) for the periods indicated:
Year Ended December 31,
----------------------------------
1995 1996 1997
--------- --------- --------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 29.1 30.6 38.9
--------- --------- --------
Gross profit 70.9 69.4 61.1
Operating expenses:
Research and development 1.9 2.2 2.0
Selling 20.7 22.0 27.3
Shipping and warehousing 2.7 3.0 2.9
General and administrative 7.6 8.5 11.9
--------- --------- --------
Total operating expenses 32.9 35.7 44.1
--------- --------- --------
Operating income 38.0 33.7 17.0
Interest expense (income), net 0.2 (0.4) 0.6
--------- --------- --------
Income before provision for income taxes 37.8 34.1 16.4
--------- --------- --------
Provision for income taxes 14.9 13.1 6.3
--------- --------- --------
Net income 22.9% 21.0% 10.1%
--------- --------- --------
--------- --------- --------
The Company's sales before discounts and returns for defective sunglasses
were $158.2 million, $212.8 million and $171.4 million for the years ended
December 31, 1995, 1996 and 1997, respectively. Sunglass unit sales were
3,465,817, 4,310,846 and 3,620,612 for the years ended December 31, 1995,
1996 and 1997, respectively.
19
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES
Net sales decreased to $194.0 million for the year ended December 31, 1997
from $218.6 million for the year ended December 31, 1996, a decrease of $24.6
million, or 11.3%. This decrease was the result of substantially lower sales
in existing styles of the Company's sunglasses, including WIRES, EYE JACKETS,
STRAIGHT JACKETS, M FRAMES, ZEROS, TRENCHCOATS and its original line of
FROGSKINS which was replaced by a new line of FROGSKINS in December 1996.
These decreases were partially offset by sales from the introduction of new
sunglasses, including SQUARE WIRES in June 1996, PRO M FRAMES in October
1996, a new line of FROGSKINS in December 1996, X METAL ROMEO in February
1997, FIVES in April 1997 and TOP COAT in August 1997, and an increase in
sales of clothing and other accessories. The success of the Company's recent
moderately-priced introductions (new FROGSKINS and FIVES) and the resulting
change in the Company's product mix contributed to a 4.1% decrease in the
average selling price of sunglasses in 1997 on a unit volume reduction of
16.0%. The Company's domestic sales declined 18.4% to $113.9 million from
$139.5 million in 1996, principally as a result of a 41.1% decline in net
sales to the Company's largest customer, Sunglass Hut, and slightly lower net
sales in 1997 to other domestic accounts. The decline in sales to Sunglass
Hut was due in part, to a reduction by Sunglass Hut in its total inventory
levels during the year, including Oakley inventory levels. The Company's
international sales increased $0.9 million to $80.0 million in 1997 from
$79.1 million in 1996, principally as a result of increased sales in Europe.
This increase was partially offset by a reduction in sales in Japan as the
Company transitioned to a direct operation there, as well as reduced sales in
Southeast Asia due to poor economic conditions and the strength of the U.S.
dollar compared to the relevant currencies. International net sales in 1997
were also negatively affected by the strength of the U.S. dollar compared to
the functional currency (French franc) of Oakley Europe.
GROSS PROFIT
Gross profit decreased to $118.6 million for the year ended December 31, 1997
from $151.8 million for the year ended December 31, 1996, a decrease of $33.2
million, or 21.9%. As a percentage of net sales, gross profit decreased to
61.1% in 1997 from 69.4% in 1996. Gross profit as a percentage of net sales
was negatively affected by higher fixed manufacturing costs spread over lower
sales volumes and a corresponding reduction in production levels, a lower
percentage of sales in the Company's highest-margin sports shield sunglasses,
a shift in product mix to lower-margin clothing and other accessories, a
devaluation in the functional currency of the Company's direct operation in
continental Europe and production inefficiencies associated with the start-up
of the X METAL product line. The Company expects gross profit as a
percentage of net sales to continue to be affected by certain of the factors
discussed above.
OPERATING EXPENSES
Operating expenses increased to $85.6 million for the year ended December 31,
1997 from $77.9 million for the year ended December 31, 1996, an increase of
$7.7 million. Research and development expenses decreased $1.0 million to
$3.8 million in 1997. The 1997 period included a $0.9 million reduction
related to the forfeiture of the Chairman and President's 1996 bonus which
had been accrued as of December 31, 1996. Excluding this non-recurring
adjustment, research and development expenses decreased $0.1 million to $4.7
million in 1997, or 2.4% of net sales, from $4.8 million, or 2.2% of net
sales, in 1996. Selling expenses increased $4.9 million to $53.0 million in
1997, or 27.3% of net sales, from $48.1 million, or 22.0% of net sales, in
1996 as a result of substantially higher warranty expenses, higher sports
marketing expenses and increased depreciation, partially offset by lower
advertising expenses and commissions. As a percentage of net sales, shipping
expenses decreased to 2.9% of net sales in 1997 from 3.0% of net sales in
1996. General and administrative expenses increased $4.5 million to $23.0
million, or 11.9% of net sales, in 1997 from $18.5 million, or 8.5% of net
sales, in 1996 primarily due to added personnel, increased amortization of
intangible assets related to acquisitions completed in late 1996 and 1997 and
higher operating expenses associated with the Company's new headquarters.
For the year ended December
20
<PAGE>
31, 1997, general and administrative expenses included income of $0.8 million
paid to the Company by Arnet Optic to settle litigation, $0.7 million of
relocation costs associated with the new facility and professional fees of
$0.5 million related to lawsuits filed by shareholders against the Company
and certain of its officers and directors (see Note 7 to the consolidated
financial statements). In addition, $5.3 million of the $7.7 million
increase in operating expenses for 1997 is attributable to operating expenses
and goodwill amortization of entities acquired or commenced in late 1996 and
1997. The Company expanded its direct international operations into three
new regions, and in June 1997, acquired One Xcel, a company that designs,
markets and distributes protective face shields for use with sports helmets.
OPERATING INCOME
The Company's operating income declined to $33.0 million for the year ended
December 31, 1997 from $73.9 million for the year ended December 31, 1996, a
decrease of $40.9 million. This decrease was the result of the Company's
decrease in net sales and gross profit and an increase in operating expenses
as a percentage of net sales.
INTEREST EXPENSE, NET
The Company had net interest expense of $1.2 million in the 1997 period, as
compared with net interest income of $0.8 million for the comparable 1996
period. The Company incurred interest expense primarily from long-term debt
associated with the Company's new facility.
INCOME TAXES
The Company recorded a provision for income taxes of $12.2 million for the
year ended December 31, 1997 and $28.7 million for 1996. The Company's
effective income tax rate of 38.4% remained consistent for the years ended
December 31, 1997 and 1996.
NET INCOME
The Company's net income decreased to $19.6 million for the year ended
December 31, 1997 from $46.0 million for the year ended December 31, 1996, a
decrease of $26.4 million.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES
Net sales increased to $218.6 million for the year ended December 31, 1996
from $172.8 million for the year ended December 31, 1995, an increase of
$45.8 million, or 26.5%. This increase was principally the result of
substantially higher sales in 1996 for the EYE JACKET and WIRES sunglasses
and the introduction of new sunglasses, including TRENCHCOATS in late 1995,
sports-specific M FRAMES and ZEROS in March 1996, STRAIGHT JACKETS in May
1996, SQUARE WIRES in June 1996, PRO M FRAMES in October 1996 and a new line
of FROGSKINS in December 1996. These increases were partially offset by
moderate sales decreases in existing styles of M FRAMES and ZEROS sunglasses
and significant sales decreases in the existing line of FROGSKINS, the
Company's most mature product offerings. The decline in sales of the existing
line of FROGSKINS was attributable in part to a 50% reduction in the number
of models offered. This change in the Company's product mix contributed to an
increase of 6.9% in the total average selling price of sunglasses in 1996 on
unit growth of 26.2%. The Company's domestic sales grew 21.1% to $139.5
million from $115.2 million in the comparable 1995 period. The Company's
international sales grew 37.3% to $79.1 million, or 36.2% of net sales, in
1996 from $57.6 million, or 33.3% of net sales, in 1995, principally as a
result of increased sales in the continental European markets in which the
Company sells on a direct basis and higher sales to distributors throughout
the rest of the world, with the strongest growth in Europe, Southeast Asia
and Brazil. Net sales for the three months ended December 31, 1996 reflect
declining sales and order cancellations from the Company's largest customer,
Sunglass Hut, as well as holiday business that was below the Company's
expectations. Net sales decreased to $39.3 million for the three months
21
<PAGE>
ended December 31, 1996 from $43.0 million in the comparable 1995 period, a
decrease of $3.7 million, or 8.6%.
GROSS PROFIT
Gross profit increased to $151.8 million for the year ended December 31, 1996
from $122.5 million for the year ended December 31, 1995, an increase of
$29.3 million, or 23.9%. As a percentage of net sales, gross profit
decreased to 69.4% in 1996 from 70.9% in 1995. Gross profit as a percentage
of net sales was negatively affected by inefficiencies in production during
the fourth quarter of 1996 caused by reduced sales; a higher percentage of
sales in lower margin goggles and clothing; a higher percentage of sales
internationally at slightly lower margins and an increase in sales returns
and discounts. These factors were partially offset by improvements in
manufacturing efficiencies during the first nine months of 1996 and by higher
average selling prices.
OPERATING EXPENSES
Operating expenses increased to $77.9 million for the year ended December 31,
1996 from $69.2 million for the year ended December 31, 1995, an increase of
$8.7 million. The 1995 period includes a $4.8 million gain on the
disposition of aircraft. On a pro forma basis in 1995 as discussed above,
operating expenses would have increased to $77.9 million in 1996 from $56.9
million in 1995, an increase of $21.0 million, or 36.9%. Research and
development costs increased $1.5 million in 1996 as a result of increased
salaries and higher depreciation which partially reflects the Company's
development costs associated with its X METAL line launched in early 1997.
Selling expenses increased $12.3 million in 1996 principally as a result of
higher advertising expenses, professional fees, and depreciation on store
displays, additional personnel in sports marketing, advertising and sales,
partially offset by, as a percentage of net sales, lower warranty costs and
commissions. Warranty expense in 1996 benefited from the initiation in
mid-year 1995 of a $9.39 warranty processing charge per unit, which
contributed offsetting income of $1.5 million in 1996 and $0.6 million in
1995. As a percentage of net sales, shipping expenses increased to 3.0% in
1996 from 2.7% in 1995 as a result of higher shipping costs in the Company's
European subsidiary. General and administrative expenses increased $5.4
million in 1996 as the Company added personnel and infrastructure to support
its growth. In addition, the Company experienced increases in insurance,
consulting fees and other expenses associated with being a public company.
As a percentage of net sales, general and administrative expenses increased
to 8.5% for 1996 from 7.6% for 1995. In general, the Company's operating
expenses for 1996, as a percentage of net sales, were adversely affected by
the negative leverage associated with the sales decrease in the fourth
quarter described above.
OPERATING INCOME
The Company's operating income grew to $73.9 million for the year ended
December 31, 1996 from $53.3 million for the year ended December 31, 1995, an
increase of $20.6 million. On a pro forma basis in 1995 as discussed above,
operating income would have increased to $73.9 million for 1996 from $65.6
million for 1995, an increase of $8.3 million, or 12.7%. This increase was
the result of the Company's net sales growth, partially offset by a decline
in the gross profit margin and an increase in operating expenses as a
percentage of net sales.
INTEREST EXPENSE, NET
The Company had interest expense of $0.1 million and interest income of $0.8
million for 1996, as compared with interest expense of $0.6 million and
interest income of $0.3 million for 1995.
INCOME TAXES
Prior to August 14, 1995, the Company elected to be treated as an S
corporation under the provisions of the Internal Revenue Code. Accordingly,
the provisions for income taxes for the periods through August 14, 1995 are
computed by applying the California franchise tax rate for S corporations of
1.5% to the Company's pretax earnings, plus any foreign taxes. Effective
August 14, 1995, the
22
<PAGE>
Company converted to a C corporation and became subject to regular Federal
and state income taxes on an ongoing basis. As a result, the Company
recorded $1.6 million of deferred income tax assets on August 14, 1995. The
Company recorded a provision for income taxes of $28.7 million for the year
ended December 31, 1996 and $7.8 million for 1995. On a pro forma basis as
discussed above, the Company's provision for income taxes was $25.7 million
for 1995.
NET INCOME
The Company's net income increased to $46.0 million for the year ended
December 31, 1996 from $45.2 million for the year ended December 31, 1995, an
increase of $0.8 million. On a pro forma basis, net income increased to
$46.0 million for 1996 from $39.6 million for 1995, an increase of $6.4
million, or 16.2%.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations almost entirely with
cash flow generated from operations and borrowings from its credit facility.
Cash provided by operating activities totaled $36.3 million for the year
ended December 31, 1997 and $40.5 million for the comparable period of 1996.
During the year ended December 31, 1997, the Company repurchased 304,000
shares of its common stock for $3.2 million. At December 31, 1997, working
capital was $41.7 million. Working capital may vary from time to time as a
result of seasonality, new product introductions, capital expenditures,
including purchases of equipment and changes in inventory levels. In January
1997, the Company amended its unsecured line of credit to increase its
borrowing limits from $18.0 million to $30.0 million. At December 31, 1997,
there was $2.8 million in borrowings outstanding under such facility. In
August 1997, the Company obtained a term loan collateralized by the Company's
new headquarters. The term loan requires quarterly principal payments of
approximately $380,000 plus interest based on LIBOR plus 1.15% (7.09% at
December 31, 1997) for five years. The then outstanding balance payable is
due in September 2002. At December 31, 1997, the outstanding balance on the
term loan was $22.4 million.
Capital expenditures (other than those relating to the Company's new
facility) for the year ended December 31, 1997 totaled $24.5 million. This
includes $4.9 million of investments in an integrated, enterprisewide
information system, $4.4 million for displays and new product tooling and
$15.2 million for equipment and computers. In March 1997, the Company
relocated to its new headquarters and manufacturing facility in Foothill
Ranch, California. The total cost to construct and equip such facility was
approximately $47.9 million. During 1997, the Company also completed an
acquisition for an aggregate purchase price of approximately $2.6 million.
The Company believes that existing capital, anticipated cash flow from
operations and current and anticipated credit facilities will be sufficient
to meet operating needs and capital expenditures for the foreseeable future.
23
<PAGE>
SEASONALITY
The following table sets forth certain unaudited quarterly data for the
periods shown:
<TABLE>
<CAPTION>
1996 1997
------------------------------------------------- --------------------------------------
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 $ 48,706 $ 62,764 $ 67,785 $ 39,311 $ 34,403 $ 55,150 $ 59,418 $ 45,013
Gross profit 34,064 44,655 47,705 25,352 19,656 36,055 36,048 26,832
</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, 1997, the Company had a backlog of $6.8 million,
including backorders (merchandise remaining unshipped beyond its scheduled
shipping date) of $1.1 million as of such date. In September 1997, the
Company implemented changes in its replenishment system with Sunglass Hut,
which affected its reported backlog. Under the new system, in an effort to
more closely match inventory replenishment with Sunglass Hut's sales, certain
high-volume Oakley products are shipped to Sunglass Hut weekly, based on the
previous week's retail sales. As a result, Sunglass Hut will no longer place
future shipment orders for these products except in anticipation of major
seasonal sales increases. These changes reduced the Company's reported
backlog at September 30, 1997 and December 31, 1997 and will continue to do
so for future periods. These system enhancements are the result of the joint
efforts of the two companies to achieve the long-term benefits of lower
overall inventory levels, while increasing inventory turns and sales at
retail.
INFLATION
The Company does not believe inflation has had a material impact on the
Company in the past, although there can be no assurance that this will be the
case in the future.
RECENT ACCOUNTING DEVELOPMENTS
In 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," were
issued and are effective for fiscal years beginning after December 15, 1997.
The Company is reviewing the impact of the statements on its financial
statements.
24
<PAGE>
OTHER MATTERS - YEAR 2000
The Company is assessing the internal readiness of its computer systems for
handling the year 2000. The Company expects to successfully implement the
systems and programming changes necessary to address year 2000 issues with
respect to its internal systems and does not believe that the cost of such
actions will have a material adverse effect on its results of operations or
financial condition. Although the Company is not aware of any material
operational issues or costs associated with preparing its internal systems
for the year 2000, there can be no assurance that there will not be a delay
in, or increased costs associated with, the implementation of the necessary
systems and changes to address the year 2000 issues, and the Company's
inability to implement such systems and changes could have an adverse effect
on future results of operations.
FORWARD-LOOKING STATEMENTS
When used in this document, the words "believes", "anticipates", "expects"
and similar expressions are intended to identify in certain circumstances
forward-looking statements. Such statements are subject to a number of risks
and uncertainties that could cause actual results to differ materially from
those projected, including risks related to the dependence on sales to
Sunglass Hut; the acceptance in the marketplace of new products; the ability
to source raw materials at prices favorable to the Company; the ability to
develop and introduce innovative products; currency fluctuations; and other
risks outlined in the Company's previously filed public documents, copies of
which may be obtained without cost from the Company. Given these
uncertainties, prospective investors are cautioned not to place undue
reliance on such statements. The Company also undertakes no obligation to
update these forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
See Note 9 to the Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial statements submitted as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
25
<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,
1998 to be filed with the Securities and Exchange Commission within 120 days
after December 31, 1997 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Shareholders Meeting to be held on June 19,
1998 to be filed with the Securities and Exchange Commission within 120 days
after December 31, 1997 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Shareholders Meeting to be held on June 19,
1998 to be filed with the Securities and Exchange Commission within 120 days
after December 31, 1997 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Shareholders Meeting to be held on June 19,
1998 to be filed with the Securities and Exchange Commission within 120 days
after December 31, 1997 and is incorporated herein by reference.
26
<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.
3.1 (1) Articles of Incorporation of the Company
3.2 (1) Bylaws of the Company
3.3 (5) Amendment No. 1 to the Articles of Incorporation as filed
with the Secretary of State of the State of Washington on
September 26, 1996
10.1 (1) Credit Agreement (the "Credit Agreement"), dated June 20,
1995, between Oakley, Inc., Wells Fargo Bank, National
Association, and the Lenders named therein
10.2 (2) Credit Agreement (the "Amended and Restated Credit
Agreement"), dated August 15, 1995, between Oakley, Inc.,
Wells Fargo Bank, National Association, as agent and the
Lenders named therein
10.3 (3) First Amendment to Amended and Restated Credit Agreement
dated November 22, 1995 by and among Oakley, Inc., Wells
Fargo Bank, National Association, as agent and the Lenders
named therein
10.4 (5) Second Amendment to Amended and Restated Credit Agreement
dated as of October 10, 1996 by and among Oakley, Inc.,
Wells Fargo Bank, National Association, as agent and the
Lenders named therein
10.5 (5) Third Amendment to Amended and Restated Credit Agreement
dated as of November 25, 1996 by and among Oakley, Inc.,
Wells Fargo Bank, National Association, as agent and the
Lenders named therein
10.6 Fourth Amendment to Amended and Restated Credit Agreement
dated as of January 29, 1997 by and among Oakley, Inc.,
Wells Fargo Bank, National Association, as agent and the
Lenders named therein
10.7 (6) Fifth Amendment to Amended and Restated Credit Agreement
dated as of March 31, 1997 by and among Oakley, Inc., Wells
Fargo Bank, National Association, as agent and the Lenders
named therein
10.8 (6) Sixth Amendment to Amended and Restated Credit Agreement
dated as of March 31, 1997 by and among Oakley, Inc., Wells
Fargo Bank, National Association, as agent and the Lenders
named therein
10.9 (7) Seventh Amendment to Amended and Restated Credit Agreement
dated May 14, 1997 by and among Oakley, Inc., Wells Fargo
Bank, National Association, as agent and the Lenders named
therein
10.10 (7) Eighth Amendment to Amended and Restated Credit Agreement
dated June 27, 1997 by and among Oakley, Inc., Bank of
America National Trust and Savings Association and Union
Bank of California N.A.
10.11 (8) Ninth Amendment to Amended and Restated Credit Agreement
dated September 30, 1997 by and among Oakley, Inc., Bank of
America National Trust and Savings Association and Union
Bank of California N.A.
10.12 (1) Collateral Account Agreement, dated June 20, 1995, between
Oakley, Inc. and Wells Fargo Bank, National Association, as
agent for the Lenders party to the Credit Agreement
27
<PAGE>
10.13 (2) Collateral Account Agreement, dated August 15, 1995, between
Oakley, Inc. and Wells Fargo Bank, National Association, as
agent for the Lenders party to the Amended and Restated
Credit Agreement
10.14 (1) Security Agreement and Chattel Mortgage, dated June 20,
1995, between Oakley, Inc. and Wells Fargo Bank, National
Association, as agent for the Lenders party to the Credit
Agreement
10.15 (1) Trademark Collateral Security Agreement, dated June 20,
1995, between Oakley, Inc. and Wells Fargo Bank, National
Association, as agent for the Lenders party to the Credit
Agreement
10.16 (1) Patent Collateral Security Agreement, dated June 20, 1995,
between Oakley, Inc. and Wells Fargo Bank, National
Association, as agent for the Lenders party to the Credit
Agreement
10.17 (1) Subordination Agreement, dated June 20, 1995, between
Oakley, Inc., Buffalo Works, Inc., James H. Jannard and Mike
D. Parnell
10.18 (1) Employment Agreement, dated as of August 1, 1995, between
Oakley, Inc. and Jim Jannard
10.19 (5) Amendment No. 1 dated as of July 22, 1996 to Employment
Agreement dated as of August 1, 1995, between Oakley, Inc.
and Jim Jannard
10.20 (1) Employment Agreement, dated as of August 1, 1995, between
Oakley, Inc. and Mike Parnell
10.21 (5) Amendment No. 1 dated as of May 23, 1996 to Employment
Agreement dated as of August 1, 1995, between Oakley, Inc.
and Mike Parnell
10.22 (6) Amendment No. 2 to employment agreement, dated February 1,
1997, between Oakley, Inc. and Mike Parnell
10.23 (2) Guaranty, dated August 15, 1995, by the Guarantors named
therein and Wells Fargo Bank, National Association, as agent
for the Lenders party to the Amended and Restated Credit
Agreement
10.24 (2) Shareholder Pledge Agreement (original and English
translation), dated August 15, 1995 between Oakley, Inc. and
Wells Fargo Bank, National Association, as agent for the
Lenders party to the Amended and Restated Credit Agreement
10.25 (2) Subordination Agreement, dated August 15, 1995 between the
Initial Subordinated Creditors named therein and Wells Fargo
Bank, National Association, as agent for the Lenders party
to the Amended and Restated Credit Agreement
10.26 (2) Promissory Note, dated August 8, 1995 between Oakley, Inc.
and James H. Jannard
10.27 (2) Promissory Note, dated August 8, 1995 between Oakley, Inc.
and M. and M. Parnell Revocable Trust
10.28 (3) Termination and Release Agreement, dated as of August 15,
1995 between Oakley, Inc. and Wells Fargo Bank, National
Association, as agents for the Lenders party to the Credit
Agreement
10.29 (5) Counterpart Subordination Agreement executed by Oakley
(U.K.) Ltd. to the Subordination Agreement, dated as of
August 15, 1995 between the Initial Subordinated Creditors
and Wells Fargo Bank, National Association, as Agent under
the Credit Agreement
10.30 (2) Agreement, dated July 17, 1995, between Oakley, Inc. and
Michael Jordan
10.31 (1) Lease, dated September 15, 1988, between OO Partnership and
Oakley, Inc.
10.32 (3) First Amendment to Lease dated December 31, 1995, by and
between Oakley, Inc., and OO Partnership
10.33 (1) Agreement, dated July 31, 1995, between OO Partnership and
Oakley, Inc.
10.34 (1) Lease, dated March 5, 1990, between Weyerhauser Mortgage
Company and Oakley, Inc., as amended
10.35 (1) Sublease, dated August 17, 1992, between Western Digital
Corporation and Oakley, Inc., as amended
28
<PAGE>
10.36 (1) Purchase Agreement and Escrow Instructions, dated December
9, 1994, between Oakley, Inc. and Foothill Ranch Development
Corporation
10.37 (3) Oakley, Inc. 1995 Stock Incentive Plan
10.38 (3) Oakley, Inc. Amended and Restated 1995 Stock Incentive Plan
10.39 (3) Oakley, Inc. Executive Officer Performance Bonus Plan
10.40 (1) Employment Agreement, dated as of April 1, 1995, between
Oakley, Inc. and Link Newcomb
10.41 (6) Employment Agreement, dated as of January 31, 1997, between
Oakley, Inc. and Link Newcomb
10.42 (6) Amendment No. 1 to employment agreement, dated February 1,
1997, between Oakley, Inc. and Link Newcomb
10.43 (3) Indemnification Agreement, dated August 1, 1995, between
Oakley, Inc. and Jim Jannard
10.44 (1) Schedule of indemnification agreements between Oakley, Inc.
and each of its directors and executive officers
10.45 (1) Standard Form of Agreement between Owner and Project
Manager, dated December 30, 1994, between Oakley, Inc. and
Snyder Langston
10.46 (1) Lease Agreement, dated January 26, 1995, between Oakley
Europe, sarl and Investipierre 7 (In French with English
translation)
10.47 (3) Aircraft Lease Agreement, dated August 10, 1995, between
Oakley, Inc. and X, Inc.
10.48 (3) Aircraft Lease Agreement, dated August 10, 1995, between
Oakley, Inc. and Time Tool Incorporated
10.49 (1) Registration Rights Agreement, dated August 1, 1995, between
Oakley, Inc., Jim Jannard and the M. and M. Parnell
Revocable Trust
10.50 (3) Indemnification Agreement, dated August 9, 1995, between
Oakley, Inc., Jim Jannard and the M. and M. Parnell
Revocable Trust
10.51 (4) Indemnification Agreement, dated June 6, 1996, between
Oakley, Inc., Jim Jannard and the M. and M. Parnell
Revocable Trust
10.52 (6) Employment Agreement, dated as of January 16, 1997, between
Oakley, Inc. and Robert Bruning
10.53 (6) Pledge Agreement, dated as of January 1997, between Oakley,
Inc. and Wells Fargo Bank, National Association, as agent
and the Lenders named therein
10.50 (6) Reciprocal Exclusive Dealing Agreement dated March 11, 1997
among Oakley, Inc., Gentex Optics, Inc. and Essilor
International Compagnie Generale D'Optique, S.A. (portions
of this document have been omitted pursuant to a request for
confidential treatment)
10.54 (6) Promissory Note, dated March 20, 1997, between Oakley, Inc.
and Bank of America National Trust and Savings Association
10.55 (8) Consultant Agreement, dated as of August 1, 1997, between
Oakley, Inc. and Mike Parnell
10.56 (8) Consultant Agreement, dated as of August 1, 1997, between
Oakley, Inc. and Jim Jannard
10.57 (8) Promissory Note, dated August 7, 1997, between Oakley, Inc.
and Bank of America National Trust and Savings Association
10.58 (8) Amendment No. 1 to Promissory Note, dated August 14, 1997,
between Oakley, Inc. and Bank of America National Trust and
Savings Association
10.59 (8) Amendment No. 2 to Promissory Note, dated August 14, 1997,
between Oakley, Inc. and Bank of America National Trust and
Savings Association
29
<PAGE>
10.59 (8) Deed of Trust with Assignment of Rents, Security Agreement
and Fixture Filing, dated August 7, 1997, between Oakley,
Inc. and Bank of America National Trust and Savings
Association
10.60 (8) Standing Loan Agreement , dated August 7, 1997 between
Oakley, Inc. and Bank of America National Trust and Savings
Association
10.61 First Amendment to Standing Loan Agreement, dated January
12, 1998, between Oakley, Inc. and Bank of America National
Trust and Savings Association
10.62 Indemnification Agreement, dated October 3, 1997, between
Oakley, Inc. and William D. Schmidt
10.63 Employment Agreement, dated October 6, 1997 between Oakley,
Inc. and Thomas A. George
10.64 Indemnification Agreement, dated October 6, 1997 between
Oakley, Inc. and Thomas A. George
21.1 List of Material Subsidiaries
23.1 Consent of Deloitte & Touche, LLP, independent auditors
27.1 Financial Data Schedule
(1) Previously filed with the Registration Statement on Form S-1 of Oakley,
Inc. (Registration No. 33-93080)
(2) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended
September 30, 1995.
(3) Previously filed with the Form 10-K of Oakley, Inc. for the year ended
December 31, 1995.
(4) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended
September 30, 1996.
(5) Previously filed with the Form 10-K of Oakley, Inc. for the year ended
December 31, 1996.
(6) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended
March 31, 1997.
(7) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended
June 30, 1997.
(8) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended
September 30, 1997.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of 1997.
(c) See (a) (2) above for a listing of the exhibits included as a part of this
report.
30
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report...........................................
Consolidated Balance Sheets as of December 31, 1996 and 1997 ..........
Consolidated Statements of Income for the Years ended December 31,
1995, 1996 and 1997....................................................
Consolidated Statements of Changes in Shareholders' Equity for the
Years ended December 31, 1995, 1996 and 1997...........................
Consolidated Statements of Cash Flows for the Years ended
December 31, 1995, 1996 and 1997.......................................
Notes to Consolidated Financial Statements.............................
31
<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 1997 and the
related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a)(2). These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Oakley,
Inc. and subsidiaries as of December 31, 1996 and 1997 and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
February 6, 1998
Costa Mesa, California
32
<PAGE>
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,063 $ 2,657
Accounts receivable, less allowance for
doubtful accounts of $590 (1996) and
$551 (1997) 21,084 24,015
Inventories (Note 3) 29,553 26,200
Other receivables 1,465 2,427
Deferred income taxes (Note 5) 5,643 4,829
Prepaid expenses and other 5,822 2,978
----------- ------------
Total current assets 71,630 63,106
Property and equipment, net (Note 4) 72,942 104,230
Deposits 2,193 1,519
Other assets 11,480 12,436
----------- ------------
TOTAL ASSETS $158,245 $181,291
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit (Note 6) $ 18,000 $ 2,800
Accounts payable 7,997 6,762
Accrued expenses and other current liabilities 9,526 8,666
Income taxes payable (Note 5) - 1,671
Current portion long-term debt (Note 6) - 1,519
----------- ------------
Total current liabilities 35,523 21,418
Deferred income taxes 1,285 2,030
Long-term debt, net of current maturities (Note 6) - 20,882
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY (Note 8):
Preferred stock, par value $.01 per share; 20,000,000
shares authorized; no shares issued - -
Common stock, par value $.01 per share; 200,000,000
shares authorized; 70,960,012 (1996) and
70,659,086 (1997) issued and outstanding 710 707
Additional paid-in capital 58,218 55,170
Retained earnings 62,634 82,238
Foreign currency translation adjustment (125) (1,154)
----------- ------------
Total shareholders' equity 121,437 136,961
----------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $158,245 $181,291
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales (Note 10) $ 172,752 $ 218,566 $ 193,984
Cost of goods sold 50,295 66,790 75,393
------------ ------------ ------------
Gross profit 122,457 151,776 118,591
Operating expenses:
Research and development 16,774 4,782 3,825
Selling 36,776 48,092 53,007
Shipping and warehousing 4,678 6,507 5,721
General and administrative 15,753 18,513 23,032
Gain on disposition of
property and equipment (Note 8) (4,794) - -
------------ ------------ ------------
Total operating expenses 69,187 77,894 85,585
------------ ------------ ------------
Operating income 53,270 73,882 33,006
Interest expense (income), net 273 (781) 1,181
------------ ------------ ------------
Income before provision for income taxes 52,997 74,663 31,825
Provision for income taxes (Note 5) 7,830 28,670 12,221
------------ ------------ ------------
Net income $ 45,167 $ 45,993 $ 19,604
------------ ------------ ------------
------------ ------------ ------------
Basic net income per common share $ 0.64 $ 0.28
------------ ------------
------------ ------------
Basic weighted average common shares 71,324,000 70,659,000
------------ ------------
------------ ------------
Diluted net income per common share $ 0.64 $ 0.28
------------ ------------
------------ ------------
Diluted weighted average common shares 71,728,000 70,700,000
------------ ------------
------------ ------------
Supplemental data (unaudited) (Note 1):
Historical income before provision
for income taxes $ 52,997
Supplemental provision for income taxes 20,854
------------
Supplemental net income $ 32,143
------------
------------
</TABLE>
34
<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, 1995 65,002,000 $ 18 $ - $ 33,204 $ (89) $ 33,133
Issuance of common shares 6,600,000 347 68,713 - - 69,060
Reclassification of undistributed
taxable S corporation earnings (Note 8) - - (5,080) 5,080 - -
Contributed capital (202,000) (8) 794 - - 786
Net income - - - 45,167 - 45,167
S corporation dividends - - - (66,453) - (66,453)
Foreign currency translation - - - - 16 16
------------ ---------- --------------- ----------- ------------- ----------
Balance as of December 31, 1995 71,400,000 357 64,427 16,998 (73) 81,709
Stock split (Note 8) 357 - (357) - -
Exercise of stock options (Note 8) 12,112 - 139 - - 139
Repurchase of common shares (Note 8) (452,100) (4) (6,393) - - (6,397)
Compensatory stock options - - 45 - - 45
Net income - - - 45,993 - 45,993
Foreign currency translation - - - - (52) (52)
------------ ---------- --------------- ----------- ------------- ----------
Balance as of December 31, 1996 70,960,012 710 58,218 62,634 (125) 121,437
Exercise of stock options (Note 8) 3,074 - 36 - - 36
Repurchase of common shares (Note 8) (304,000) (3) (3,197) - - (3,200)
Compensatory stock options - - 113 - - 113
Net income - - - 19,604 - 19,604
Foreign currency translation - - - - (1,029) (1,029)
------------ ---------- --------------- ----------- ------------- ----------
Balance as of December 31, 1997 70,659,086 $ 707 $ 55,170 $ 82,238 $ (1,154) $ 136,961
------------ ---------- --------------- ----------- ------------- ----------
------------ ---------- --------------- ----------- ------------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1995 1996 1997
---------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 45,167 $ 45,993 $ 19,604
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,393 8,987 12,982
Deferred compensation - 45 113
(Loss) gain on disposition of equipment (5,286) (156) 334
Deferred income taxes, net (3,752) (606) 1,559
Changes in assets and liabilities, net of
effects of business acquisitions:
Accounts receivable (4,885) 1,964 (2,921)
Inventories (12,035) (8,143) 3,727
Other receivables 621 (1,117) (962)
Prepaid expenses and other (1,071) (4,091) 2,844
Accounts payable (2,562) (637) (1,615)
Accrued expenses and other current liabilities 3,025 327 (1,067)
Income taxes payable 2,029 (2,029) 1,671
---------- --------- ----------
Net cash provided by operating activities 28,644 40,537 36,269
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits 689 961 674
Acquisitions of property and equipment (33,239) (38,642) (43,796)
Proceeds from sale of property and equipment 412 697 250
Acquisitions (Note 2) - (14,223) (2,600)
Other assets - (2,454) 789
---------- --------- ----------
Net cash used in investing activities (32,138) (53,661) (44,683)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings 57,049 18,000 42,800
Repayments of bank borrowings (60,349) - (35,599)
Repayments of S distribution notes - (263) -
Net proceeds from issuance of common shares 69,060 139 36
Contribution of capital 786 - -
Repurchase of common shares - (6,397) (3,200)
S corporation dividends paid (55,000) - -
---------- --------- ----------
Net cash provided by financing activities 11,546 11,479 4,037
Effect of exchange rate changes on cash 16 (52) (1,029)
---------- --------- ----------
Net increase (decrease) in cash and cash equivalents 8,068 (1,697) (5,406)
Cash and cash equivalents, beginning of period 1,692 9,760 8,063
---------- --------- ----------
Cash and cash equivalents, end of period $ 9,760 $ 8,063 $ 2,657
---------- --------- ----------
---------- --------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 585 $ 58 $ 1,390
---------- --------- ----------
---------- --------- ----------
Income taxes (net of refunds received) $ 9,257 $ 34,249 $ 6,550
---------- --------- ----------
---------- --------- ----------
</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.
36
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS - The Company is an innovation-driven designer,
manufacturer and distributor of high-performance eyewear and athletic
equipment. The Company's principal strength is its ability to develop eyewear
which demonstrates superior optical performance and comfort through the
combination of patented technology and unique styling. The Company has
focused on innovation for sports application eyewear, and its products are
worn by a variety of athletes, such as skiers, cyclists, runners, surfers,
golfers, basketball and baseball players and motocross riders. In addition,
the Company's products, which are currently sold in over 70 countries
worldwide, have become increasingly popular in the larger nonsports, or
recreational, segment of the sunglass market.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Oakley, Inc. (a Washington corporation, which
succeeded to all the assets and liabilities of Oakley, Inc., a California
corporation) and its subsidiaries (collectively, the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS - For purposes of the consolidated financial
statements, investments purchased with an original maturity of three months
or less are considered cash equivalents.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, net
of accumulated depreciation and amortization. Depreciation and amortization
are provided for using the straight-line method over the estimated useful
lives (generally three to seven years for property and equipment and 39 years
for buildings) of the respective assets or, as to leasehold improvements, the
term of the related lease if less than the estimated service life.
INTANGIBLE ASSETS - The excess of cost over fair market value of net
identifiable assets of acquired companies and other intangible assets of
$8,767,000 in 1996 and $10,870,000 in 1997 included in other assets in the
accompanying balance sheet are amortized on a straight-line basis over
periods ranging from ten to fifteen years. The carrying value of intangible
assets is periodically reviewed by the Company based on the estimated future
operating income of each acquired entity on an undiscounted cash flow basis.
Based upon its most recent analysis, the Company believes that no material
impairment of intangible assets exists at December 31, 1997.
LONG-LIVED ASSETS - The Company accounts for the impairment and
disposition of long-lived assets in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In
accordance with SFAS No. 121, long-lived assets to be held are reviewed for
events or changes in circumstances which indicate that their carrying value
may not be recoverable. As of December 31, 1997, no impairment has been
indicated.
REVENUE RECOGNITION - Revenue is recognized when merchandise is shipped
to a customer. Generally the Company extends credit to its customers and
does not require collateral. The Company performs ongoing credit evaluations
of its customers and historic credit losses have been within management's
expectations.
37
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
FINANCIAL INSTRUMENTS - The carrying amounts of financial instruments,
consisting of cash and cash equivalents, trade accounts receivables and
accounts payable, approximates fair value due to the short period of time
between origination of the instruments and their expected realization.
Management also believes the carrying amount of balances outstanding under
the credit agreements equals fair value as the underlying interest rates
reflect market rates.
INCOME TAXES - The Company accounts for income taxes under the
provisions of SFAS No. 109, "Accounting for Income Taxes." Deferred taxes on
income result from temporary differences between the reporting of income for
financial statements and tax reporting purposes. Prior to August 14, 1995,
the Company elected to be treated as an S corporation under the provisions of
the Internal Revenue Code. Accordingly, the provision for income taxes for
the periods through August 14, 1995 are computed by applying the California
franchise tax rate for S corporations of 1.5% to the Company's pretax
earnings, plus any foreign taxes. Effective August 14, 1995, the Company
converted to a C corporation and became subject to regular Federal and state
income taxes on an ongoing basis. As a result, the Company recorded $1.6
million of deferred income tax assets on August 14, 1995 through a benefit
recorded on the statement of income.
FOREIGN CURRENCY TRANSLATION - The Company's primary functional currency
is the U.S. dollar, while the functional currency of each of the Company's
subsidiaries is the local currency of the subsidiary. Assets and liabilities
of the Company denominated in foreign currencies are translated at the rate
of exchange on the balance sheet date. Revenues and expenses are translated
using the average exchange rate for the period. Gains and losses on
short-term intercompany foreign currency transactions are recognized as
incurred. (Note 9)
SUPPLEMENTAL NET INCOME - Supplemental net income represents the results
of operations adjusted to reflect a provision for income tax on historical
income before provision for income taxes which gives effect to the change in
the Company's income tax status to a C corporation subsequent to the public
sale of its common stock. The difference between the pro forma income tax
rates utilized and the Federal statutory rate of 35% relates primarily to
state income taxes (approximately 5%, net of federal tax benefit).
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
EARNINGS PER SHARE - The Company has adopted SFAS No. 128, "Earnings Per
Share." All earnings per share amounts have been restated to conform to SFAS
No. 128. Basic earnings per share is computed using the weighted average
number of common shares outstanding during the reporting period. Earnings
per share assuming dilution is computed using the weighted average number of
common shares outstanding and the dilutive effect of potential common shares
outstanding. For the years ended December 31, 1996 and 1997, the diluted
weighted average common shares outstanding includes 404,000 and 41,000,
respectively, of dilutive stock options.
NEW ACCOUNTING PRONOUNCEMENTS - In 1997, SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," were issued and are effective for fiscal
years beginning after December 15, 1997. The Company is reviewing the impact
of these statements on its financial statements.
38
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
RECLASSIFICATIONS - Certain reclassifications have been made to prior
period financial statements to conform to the presentation for the financial
statements for the period ended December 31, 1997.
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
GENERAL BUSINESS - The Company's historical success is attributable, in
part, to its introduction of products which are perceived to represent an
improvement in performance over products available in the market. The
Company's future success will depend, in part, upon its continued ability to
develop and introduce such innovative products, and there can be no assurance
of the Company's ability to do so. The sunglass industry is fragmented and
highly competitive. In order to retain its market share, the Company must
continue to be competitive in the areas of quality, technology, method of
distribution, style, brand image, intellectual property protection and
customer service. The eyewear industry is subject to changing consumer
preferences; shifts in consumer preferences may adversely affect companies
that misjudge such preferences.
In addition, the Company has experienced significant growth under several
measurements which has placed, and could continue to place, a significant
strain on its employees and operations. If management is unable to
anticipate or manage growth effectively, the Company's operating results
could be materially adversely affected.
USE OF ESTIMATES - The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles necessarily requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the balance sheet dates and the reported amounts of
revenue and expense during the reporting periods. Actual results could
differ from such estimates.
VULNERABILITY DUE TO SUPPLIER CONCENTRATIONS - The Company relies on a
single source for the supply of several components, including the uncoated
lens blanks from which substantially all of its sunglass lenses are cut. The
effect of the loss of any of these sources or of a disruption in their
business will depend primarily upon the length of time necessary to find a
suitable alternative source. The loss of the source for lens blanks or a
disruption in such source's business or failure by it to meet the Company's
product needs on a timely basis could cause, at a minimum, temporary
shortages in needed materials and could have a material adverse effect on the
Company's results of operations.
VULNERABILITY DUE TO CUSTOMER CONCENTRATIONS - Net sales to a sunglass
specialty retail chain accounted for approximately 28.8%, 31.0% and 21.5% of
such sales for the years ended December 31, 1995, 1996 and 1997, respectively.
39
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 2 - ACQUISITIONS
During 1996, the Company acquired its exclusive distributor for the Company's
products in the United Kingdom and Ireland ("Oakley U.K.") and a facility for
the production of a new product line for an aggregate purchase price of
approximately $14.2 million. During 1997, the Company acquired One Xcel, a
company that designs, markets and distributes protective face shields for use
with sports helmets, for an aggregate purchase price of approximately $2.6
million. All such acquisitions were recorded using the purchase method of
accounting and the results of operations from the date of acquisition have
been included in the Company's respective 1996 and 1997 financial statements.
The excess of the purchase price over the fair values of the net assets
acquired has been allocated to intangible assets, which are included in the
caption "Other assets" in the accompanying consolidated balance sheet and are
being amortized on a straight-line basis over a period of ten to fifteen
years. Had the acquisitions occurred on January 1, 1995, combined pro forma
net sales, net income and net income per common share would not have been
materially different from that currently being reported.
NOTE 3 - INVENTORIES
Inventories consist of the following at December 31,:
<TABLE>
<CAPTION>
1996 1997
--------------- ----------------
<S> <C> <C>
Raw materials $ 16,039,000 $ 11,814,000
Finished goods 13,514,000 14,386,000
--------------- ----------------
$ 29,553,000 $ 26,200,000
--------------- ----------------
--------------- ----------------
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31,:
<TABLE>
<CAPTION>
1996 1997
--------------- ----------------
<S> <C> <C>
Land $ 9,008,000 $ 8,999,000
Buildings 2,191,000 51,915,000
Automobiles and vans 772,000 752,000
Furniture and equipment 52,044,000 70,473,000
Tooling 4,880,000 6,490,000
Leasehold improvements 3,713,000 511,000
Construction in progress 28,580,000 -
--------------- ----------------
101,188,000 139,140,000
Less accumulated depreciation
and amortization 28,246,000 34,910,000
--------------- ----------------
$ 72,942,000 $104,230,000
--------------- ----------------
--------------- ----------------
</TABLE>
40
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 5 - INCOME TAXES
The provision for income taxes consists of the following for the years ended
December 31,:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal $ 6,756,000 $22,535,000 $ 7,228,000
State 2,063,000 5,727,000 2,234,000
Foreign 1,443,000 1,082,000 1,200,000
------------- ------------- -------------
10,262,000 29,344,000 10,662,000
Deferred:
Federal (2,081,000) (956,000) 1,538,000
State (351,000) 282,000 21,000
------------- ------------- -------------
(2,432,000) (674,000) 1,559,000
------------- ------------- -------------
$ 7,830,000 $28,670,000 $12,221,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rates $ 18,549,000 $26,132,000 $ 11,138,000
State income taxes, net 1,316,000 3,905,000 1,466,000
Recording of deferred income tax assets
in connection with the conversion to C Corporation (1,600,000)
S corporation earnings not subject to Federal tax (10,301,000)
Foreign sales corporation benefit,
net of foreign tax rate differential - (1,807,000) (928,000)
Other, net (134,000) 440,000 545,000
------------- ------------- -------------
$ 7,830,000 $28,670,000 $ 12,221,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
41
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities at December
31, are as follows:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Warranty reserve $ 1,267,000 $ 1,434,000
Uniform capitalization 509,000 609,000
Sales returns reserve 736,000 810,000
State taxes 1,880,000 601,000
Inventory reserve 258,000 730,000
Allowance for doubtful accounts 179,000 172,000
Other 814,000 473,000
------------- -------------
Total deferred tax assets 5,643,000 4,829,000
Deferred tax liabilities:
Depreciation (1,285,000) (2,030,000)
------------- -------------
Net deferred tax assets $ 4,358,000 $ 2,799,000
------------- -------------
------------- -------------
</TABLE>
NOTE 6 - DEBT
LINE OF CREDIT - The Company has a $30.0 million unsecured line of
credit with a bank syndicate which bears interest at either the bank's prime
lending rate (8.50% at December 31, 1997) or LIBOR plus 1.00% (6.94% at
December 31, 1997), as defined in the credit agreement, and matures June
1999. At December 31, 1997, there was $2.8 million in borrowings outstanding
under the credit agreement. The credit agreement contains various
restrictive covenants including the maintenance of certain financial ratios.
At December 31, 1997, the Company was in compliance with all restrictive
covenants and financial ratios.
LONG TERM DEBT - In August 1997, the Company obtained a term loan
collateralized by the Company's corporate facility. The term loan requires
quarterly principal payments of approximately $380,000 ($1,519,000 annually),
plus interest based upon LIBOR plus 1.15% (7.09% at December 31, 1997) for
five years. The then outstanding balance payable is due in September 2002.
At December 31, 1997, the outstanding balance under the term loan was $22.4
million.
42
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 7 - COMMITMENTS AND CONTINGENCIES
LEASES - The Company is committed under noncancelable operating leases
expiring at various dates through 2001 for certain offices, warehouse
facilities, production facilities and aircraft. The aircraft are leased from
entities controlled by officers and shareholders of the Company. Minimum
future annual rentals under these leases are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Related Party Other Total
- ----------------------------- -------------- ------------ -----------
<S> <C> <C> <C>
1998 $ 124,000 $ 732,000 $ 856,000
1999 124,000 644,000 768,000
2000 91,000 308,000 399,000
2001 10,000 1,000 11,000
-------------- ------------ -----------
Total $ 349,000 $1,685,000 $2,034,000
-------------- ------------ -----------
-------------- ------------ -----------
</TABLE>
Prior to the Company's relocation in 1997, certain offices were leased on a
month-to-month basis from an officer and a shareholder. Rent expense is
summarized as follows for the years ended December 31,:
<TABLE>
<CAPTION>
1995 1996 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Related parties $ 421,500 $ 383,000 $ 114,000
Other 819,500 1,219,000 1,378,000
--------------- ------------- -------------
Total $ 1,241,000 $1,602,000 $ 1,492,000
--------------- ------------- -------------
--------------- ------------- -------------
</TABLE>
PURCHASE COMMITMENTS - In March 1997, the Company entered into a
four-year exclusive dealing agreement with its lens blank supplier and the
supplier's French parent, pursuant to which the Company received the
exclusive right to purchase decentered sunglass lenses, in return for the
Company's agreement to fulfill all its lens requirements, subject to certain
exceptions, from such supplier. The Company expects its minimum obligations
under the term of this agreement to be 18.5 million units, with an aggregate
estimated purchase price of between $50.0 million and $55.0 million.
EMPLOYMENT AND CONSULTING AGREEMENTS - The Company has entered into
employment and consulting agreements with certain employees of the Company
which have terms of two to four years. The agreements require minimum
aggregate compensation to the respective officers. Additionally, the
officers participate in a performance bonus plan, and the employment
agreements establish minimum bonus targets for such employees.
43
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
ENDORSEMENT CONTRACTS - The Company has entered into several endorsement
contracts with selected athletes and others who endorse the Company's
products. Under the contracts, the Company has agreed to pay certain
incentives based on performance and is required to pay minimum annual
payments as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
- --------------
<S> <C>
1998 $ 3,870,000
1999 2,282,000
2000 929,000
2001 505,000
2002 500,000
Thereafter 1,000,000
-------------
Total $ 9,086,000
-------------
-------------
</TABLE>
Included in such amounts is an annual retainer of $0.5 million through 2005
for a director of the Company.
LITIGATION - During December 1996, three putative class action lawsuits
("the California Securities Actions") were filed in the California Superior
Court for the County of Orange against the Company and three of its officers
and directors alleging material misstatements and omissions in certain of the
Company's public statements, SEC filings and reports of third-party analysts.
The plaintiffs seek unspecified damages and other relief. In addition, one
of the lawsuits also asserted claims against firms who served as underwriters
of the June 6, 1996 offering of the Company's common stock by certain of its
shareholders of (the "Secondary Offering"). Pursuant to certain provisions
of the underwriting agreement between the Company and the firms, the Company
agreed to indemnify the firms against certain liabilities, including
liabilities under the Securities Act. Pursuant to a court order sustaining
demurrers to certain claims and to an agreement with plaintiffs to dismiss
certain other claims, the only claim remaining in the California Securities
Actions is a claim for purported violations of the antifraud provision of the
California Corporation Code with respect to two of the Company's officers and
directors. In March 1997, the Company was named as a nominal defendant in a
putative derivative action against two of the Company's officers and
directors based on substantially the same allegations as those in the
California Securities Actions. The derivative plaintiff seeks to recover
damages and other relief on behalf of the Company. On February 4, 1998, the
court entered a final order of dismissal of the putative derivative action.
The Company does not know whether the derivative plaintiff plans to appeal
the court's final order. During October, November and December 1997, five
putative class action lawsuits (the "Federal Securities Actions") were filed
in the United States District Court for the Central District of California,
Southern Division against the Company, three of its officers and directors
and firms that served as underwriters of the Secondary Offering, alleging
material misstatements and omissions in certain of the Company's public
statements, the reports of third-party analysts and/or certain of the
Company's SEC filings. The plaintiffs in the Federal Securities Actions seek
unspecified damages and other relief. Although it is too soon to predict the
outcome of the California Securities Actions or the Federal Securities
Actions with any certainty, based on its current understanding of the facts,
the Company believes that the plaintiffs' claims are without merit and
intends to vigorously defend the actions.
44
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
In addition, the Company is currently involved in litigation incidental to
the Company's business. In the opinion of management, the ultimate
resolution of such litigation, in the aggregate, will not have a significant
effect on the accompanying consolidated financial statements.
NOTE 8 - SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING - In August 1995, the Company completed an
initial public offering of 6,600,000 shares of the Company's common stock for
$11.50 per share, netting proceeds to the Company after underwriting
discounts and expenses of approximately $69.1 million.
S CORPORATION DISTRIBUTION - Prior to the consummation of the public
offering, the Company distributed to Oakley's shareholders certain fixed
assets and a portion of previously earned undistributed taxable S corporation
earnings. In conjunction with the distribution of assets, the Company
recorded a gain of $4.9 million for the year ended December 31, 1995,
representing the excess of the fair value of the assets distributed over
their respective net book values. Additionally, concurrently with the
consummation of the initial public offering, Oakley shareholders contributed
certain assets totaling $0.8 million to the Company. Upon consummation of
its initial public offering, in accordance with a regulation of the
Securities and Exchange Commission, the Company reclassified $5.1 million of
retained earnings to additional paid-in capital. This amount represents for
financial reporting purposes previously earned and undistributed taxable S
corporation earnings.
STOCK SPLIT - On September 11, 1996, the Company declared a two-for-one
stock split to be effected in the form of a one-share dividend per share of
its common stock. The new shares were distributed on October 10, 1996 to
shareholders of record at the close of business at September 25, 1996. All
share and per share amounts included in the accompanying consolidated
financial statements and footnotes have been restated to give retroactive
recognition to the stock split in prior periods by reclassifying from
retained earnings to common stock the par value of the additional shares
arising from the split.
STOCK REPURCHASE - In October 1996, the Company's Board of Directors
authorized the repurchase by the Company of up to three million shares of the
Company's common stock. As of December 31, 1997, the Company had repurchased
756,100 shares at an aggregate cost of approximately $9.6 million.
STOCK INCENTIVE PLAN - The Company's 1995 Stock Incentive Plan (the
"Plan") provides for stock-based incentive awards, including incentive stock
options, nonqualified stock options, restricted stock, performance shares,
stock appreciation rights and deferred stock to Company officers, employees,
advisors and consultants. A total of 5,712,000 shares have been reserved for
issuance under the Plan. At December 31, 1997, stock options for 760,822
shares were exercisable and 2,423,808 shares were available for issuance
pursuant to stock option grants.
45
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
The following table summarizes information with respect to the Plan for the
years ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
Option Weighted Average
shares Exercise Price
----------- --------------
<S> <C> <C>
Outstanding at January 1, 1995 -
Granted (weighted average fair value $1.88) 1,254,154 $ 11.53
Canceled (3,732) $ 11.50
----------
Exercised -
Outstanding at December 31, 1995 1,250,422 $ 11.53
Granted (weighted average fair value $5.54) 856,436 $ 12.17
Canceled (78,954) $ 13.78
Exercised (12,112) $ 11.50
----------
Outstanding at December 31, 1996 2,015,792 $ 11.73
Granted (weighted average fair value $4.99) 1,445,329 $ 9.65
Canceled (137,723) $ 11.07
Exercised (3,074) $ 11.50
----------
Outstanding at December 31, 1997 3,320,324 $ 10.85
----------
----------
</TABLE>
Additional information regarding options outstanding as of December 31, 1997
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>
$ 8.50 - 10.81 1,362,315 9.73 $ 9.53 8,499 $ 8.50
$ 11.50 - 12.50 1,892,290 8.14 $ 11.55 726,163 $ 11.53
$ 14.25 - 25.19 65,719 8.51 $ 17.86 27,210 $ 18.81
</TABLE>
As disclosed in Note 1, the Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based awards. No compensation
expense has been recognized in the financial statements for employee stock
arrangements. SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires the disclosure of pro forma net income and earnings per share had
the Company adopted the fair value method in accounting for stock-based
awards as of the beginning of fiscal 1995. Under SFAS No. 123, the fair
value of stock-based awards to employees is calculated through the use of
option-pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the
46
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option-pricing model with the
following weighted average assumptions: expected life: 36 to 60 months;
stock volatility, 9.4% - 63.5% in 1995, 45.7% - 77.4% in 1996 and 54.5% -
71.3% in 1997; risk-free interest rates, 5.5% in 1995, 1996 and 1997; no
dividends during the expected term and forfeitures are recognized as they
occur.
If the computed fair value of the 1995, 1996 and 1997 awards had been
amortized to expense over the vesting period of the awards, net income would
have been $45,017,000 in 1995, $45,531,000 in 1996 and $18,117,000 in 1997.
The basic and diluted earnings per share on such basis would have been $0.64
in 1996 and $0.26 in 1997.
NOTE 9 - HEDGING ACTIVITIES
Certain of the Company's foreign subsidiaries enter into derivative financial
instruments, including foreign currency forward exchange contracts, to manage
foreign exchange risk on foreign currency transactions and do not use the
contracts for trading purposes. These financial instruments are used to
protect the Company from the risk that the eventual net cash inflows from the
foreign currency transactions will be adversely affected by changes in
exchange rates. Gains and losses related to hedges of firmly committed
transactions are deferred and recognized when the hedged transaction occurs.
Gains and losses resulting from foreign currency contracts which are not
hedges of firmly committed transactions are recorded each period to the
consolidated statement of income.
A summary of forward exchange contracts is as follows:
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------
U.S. Dollar Fair
Equivalent Maturity Value
------------- -------------- -----------
<S> <C> <C> <C>
French francs $ 150,000 January 1998 $ 153,000
French francs 600,000 February 1998 613,000
French francs 600,000 March 1998 613,000
German marks 1,200,000 January 1998 1,222,000
German marks 1,200,000 February 1998 1,222,000
German marks 1,050,000 March 1998 1,069,000
British pounds 700,000 April 1998 699,000
British pounds 1,900,000 July 1998 1,903,000
British pounds 1,650,000 October 1998 1,657,000
British pounds 750,000 January 1999 755,000
------------- -----------
$ 9,800,000 $9,906,000
------------- -----------
------------- -----------
</TABLE>
The Company is exposed to credit losses in the event of nonperformance by
counterparties to its forward exchange contracts but has no off-balance sheet
credit risk of accounting loss. The Company anticipates, however, that the
counterparties will be able to fully satisfy their obligations under the
contracts. The Company does not obtain collateral or other security to
support the forward exchange contracts subject to credit risk but monitors
the credit standing of the counterparties. As of December 31, 1997, each of
the contracts was recorded at fair market value and the resulting gains and
losses were recorded to the consolidated statements of income.
47
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 10 - NET SALES
Net sales are summarized as follows for the years ended December 31,:
1995 1996 1997
------------ ------------ ------------
Domestic $115,202,000 $139,459,000 $113,942,000
International 57,550,000 79,107,000 80,042,000
------------ ------------ ------------
$172,752,000 $218,566,000 $193,984,000
------------ ------------ ------------
------------ ------------ ------------
NOTE 11 - DOMESTIC AND FOREIGN OPERATIONS
The Company has one business segment which consists of the design,
manufacture and sale of high-performance eyewear and athletic equipment.
Information related to domestic and foreign operations is as follows:
<TABLE>
<CAPTION>
1995
----------------------------------------------------------------------------
(in thousands)
Continental
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
1996
----------------------------------------------------------------------------
(in thousands)
Continental
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
1997
----------------------------------------------------------------------------
(in thousands)
Continental
U.S. Europe Other Countries Eliminations Consolidated
----------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales $ 167,555 $ 30,442 $ 16,300 $(20,313) $193,984
Operating income 29,230 1,224 1,950 602 33,006
Net income 16,753 850 1,399 602 19,604
Identifiable assets 174,813 10,638 10,074 (14,234) 181,291
</TABLE>
48
<PAGE>
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Net sales $ 48,706 $ 62,764 $ 67,785 $ 39,311
Gross profit 34,064 44,655 47,705 25,352
Income before provision for income taxes 17,842 25,662 25,411 5,748
Net income 10,973 15,738 15,653 3,629
Basic net income per share $ 0.15 $ 0.22 $ 0.22 $ 0.05
Diluted net income per share $ 0.15 $ 0.22 $ 0.22 $ 0.05
Year ended December 31, 1997:
Net sales $ 34,403 $ 55,150 $ 59,418 $ 45,013
Gross profit 19,656 36,055 36,048 26,832
Income before provision for income taxes 893 14,363 11,064 5,505
Net income 550 8,848 6,815 3,391
Basic net income per share $ 0.01 $ 0.13 $ 0.10 $ 0.05
Diluted net income per share $ 0.01 $ 0.13 $ 0.10 $ 0.05
</TABLE>
49
<PAGE>
OAKLEY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFIYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, 1997
<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, 1995:
Allowance for doubtful accounts $ 271,000 $ 406,000 $ (86,000) $ - $ 591,000
---------- ----------- ------------ ------------ -----------
---------- ----------- ------------ ------------ -----------
Inventory reserve $ - $ 400,000 $ - $ - $ 400,000
---------- ----------- ------------ ------------ -----------
---------- ----------- ------------ ------------ -----------
For the year ended December 31, 1996:
Allowance for doubtful accounts $ 591,000 $ - $ (1,000) $ - $ 590,000
---------- ----------- ------------ ------------ -----------
---------- ----------- ------------ ------------ -----------
Inventory reserve $ 400,000 $ 200,000 $ - $ - $ 600,000
---------- ----------- ------------ ------------ -----------
---------- ----------- ------------ ------------ -----------
For the year ended December 31, 1997:
Allowance for doubtful accounts $ 590,000 $ 12,000 $ (31,000) $ (20,000) $ 551,000
---------- ----------- ------------ ------------ -----------
---------- ----------- ------------ ------------ -----------
Inventory reserve $ 600,000 $1,125,000 $ - $ - $1,725,000
---------- ----------- ------------ ------------ -----------
---------- ----------- ------------ ------------ -----------
</TABLE>
50
<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 19, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Jim Jannard Chairman and President March 19, 1998
- --------------------- (Principal Executive Officer)
Jim Jannard
/s/ Mike Parnell Vice Chairman and Director March 19, 1998
- ---------------------
Mike Parnell
/s/ Link Newcomb Chief Executive Officer March 19, 1998
- --------------------- and Director
Link Newcomb
/s/ Thomas George Chief Financial Officer March 19, 1998
- --------------------- (Principal Accounting Officer)
Thomas George
/s/ Irene Miller Director March 19, 1998
- ---------------------
Irene Miller
/s/ Orin Smith Director March 19, 1998
- ---------------------
Orin Smith
/s/ Michael Jordan Director March 19, 1998
- ---------------------
Michael Jordan
/s/ William Schmidt Director March 19, 1998
- ---------------------
William Schmidt
51
<PAGE>
OAKLEY, INC.
FOURTH AMENDMENT
TO AMENDED AND RESTATED CREDIT AGREEMENT
This FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
(this "AMENDMENT") is dated as of January 29, 1997 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, for purposes of Section 5, the Consenting Parties (as defined
therein), 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, the Second Amendment to
Amended and Restated Credit Agreement, dated as of October 10, 1996, by and
among Company, Lenders and Agent, and the Third Amendment to Amended and
Restated Credit Agreement, dated as of November 25, 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 and Lenders desire to amend the Credit Agreement to
increase the Revolving Loan Commitment to $30,000,000.
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 2.1A: COMMITMENTS.
Subsection 2.1A of the Credit Agreement is hereby amended by
deleting the reference to "$18,000,000" contained therein and substituting
"$30,000,000" therefor.
1.2 AMENDMENT TO SUBSECTION 7.6: FINANCIAL COVENANTS
Subsections 7.6A, 7.6B and 7.6C of the Credit Agreement are hereby
amended and restated as follows:
"A. MINIMUM CASH FLOW COVERAGE RATIO.
<PAGE>
Company shall not permit the ratio of (i) an amount equal to EBITDA
minus the sum of (a) taxes paid or to be paid in cash, (b) Capital
Expenditures paid in cash or other consideration and Stock
Payments (determined as of the last day of any fiscal
quarter of Company for the four consecutive fiscal quarters
then ended in each case with respect to the Company and its
Subsidiaries on a consolidated basis in conformity with
GAAP) to (ii) the sum of Interest Expense (determined as of
the last day of such fiscal quarter for such four fiscal
quarter period then ended) plus the current portion of
Funded Debt (determined as of the last day of such fiscal
quarter) to be less than 2.0 to 1.00. For purposes hereof,
"Stock Payment" means (i) any dividend or other
distribution, direct or indirect, on account of any shares
of any class of stock of Company now or hereafter
outstanding, except a dividend or distribution payable
solely in shares of capital stock that is not subject to
mandatory redemption or payment or (ii) any redemption,
retirement, sinking fund or similar payment, purchase or
other acquisition for value, direct or indirect, of any
shares of any class of stock of Company, or of any warrants,
options or other rights to acquire any such shares of stock,
now or hereafter outstanding.
B. MINIMUM LIQUIDITY. Company shall not permit the
sum of its Cash and Cash Equivalents plus the amount (if
any) by which the Commitments exceed the Total Utilization
of Revolving Loan Commitments as of the last day of any
fiscal quarter of Company on and after June 30, 1997 to be
less than $4,000,000.
C. MAXIMUM LEVERAGE. Company shall not permit the
ratio of (i) an amount equal to total Indebtedness and other
liabilities that would be reflected on the Company's balance
sheet in accordance with GAAP minus Subordinated Debt
(determined as of the last day of any fiscal quarter of
Company with respect to Company and its Subsidiaries on a
consolidated basis in conformity with GAAP) to (ii) an
amount equal to Tangible Net Worth plus Subordinated Debt
(determined as of the last day of any fiscal quarter of
Company with respect to Company and its Subsidiaries on a
consolidated basis in conformity with GAAP) to be more than
.75 to 1.00."
1.3 WAIVER OF SECTION 2.5A.
Section 2.5A of the Credit Agreement is hereby waived to the extent
necessary to permit Company during the 1996 and 1997 Fiscal Years to
repurchase Company Common Stock from shareholders of Company using proceeds
of Revolving Loans.
2
<PAGE>
1.4 MODIFICATION OF SCHEDULE
SCHEDULE 2.1: LENDERS' COMMITMENTS AND PRO RATA SHARES. SCHEDULE
2.1 to the Credit Agreement is hereby amended by deleting said SCHEDULE 2.1
in its entirety and substituting in its place thereof a new SCHEDULE 2.1 in
the form of ANNEX A to this Amendment.
SECTION 2. REPLACEMENT REVOLVING NOTES
Company agrees to execute and deliver to each Lender a new
Revolving Note (collectively, the "REPLACEMENT REVOLVING NOTES") in the
amount of such Lender's Revolving Loan Commitment in the form of EXHIBIT A
attached hereto. Each Lender hereby agrees that as promptly as practicable
after the Fourth Amendment Effective Date (as defined hereinafter) such
Lender shall return to Company for cancellation any Notes in such Lender's
possession evidencing Revolving Loans outstanding prior to the effectiveness
of this Amendment.
SECTION 3. 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 "FOURTH
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) the following, each, unless otherwise noted, dated the Fourth
Amendment Effective Date:
1. Copies of this Amendment executed by Company and each Consenting
Party;
2. Signature and incumbency certificates of Company's and each
Guarantor's officers executing this Amendment and, in the case of Company,
the Replacement Revolving Notes;
3. Resolutions of Company's and each Guarantor's Board of Directors
approving and authorizing the execution, delivery and performance of this
Amendment and, in the case of Company, approving and authorizing the
execution, delivery and payment of the Replacement Revolving Notes; and
4. Replacement Revolving Notes executed by the Company,
substantially in the form of EXHIBIT A to this Amendment, with appropriate
insertions for each Lender as provided for in this Amendment.
B. On or before the Fourth Amendment Effective Date, Agent, on
behalf of Lenders, shall have received a counterpart of this Amendment
executed by a duly authorized
3
<PAGE>
officer of each Lender.
C. Lenders and their respective counsel shall have received
originally executed copies of one or more favorable written opinions of
Skadden, Arps, Slate, Meagher & Flom LLP, counsel for Company and the
Guarantors, and Preston, Gates, & Ellis, special Washington counsel for
Company and Guarantors incorporated in Washington, in each case in form and
substance reasonably satisfactory to Agent and its counsel, dated as of the
date hereof.
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, as of the date hereof and as of the Fourth
Amendment Effective Date, 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 the
Replacement Revolving Notes, and to carry out the transactions contemplated
by, and perform its obligations under, the Credit Agreement as amended by
this Amendment (the "AMENDED AGREEMENT") and the Replacement Revolving Notes.
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 and each
Consenting Party. The issuance, delivery and payment of the Replacement
Revolving Notes have been duly authorized by all necessary corporate action
on the part of the Company.
C. NO CONFLICT. The execution and delivery by Company and each
Consenting Party of this Amendment and, in the case of Company, the
Replacement Revolving Notes, and the performance by Company and each
Consenting Party of the Loan Documents and, in the case of Company, the
Replacement Revolving Notes 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.
4
<PAGE>
D. GOVERNMENTAL CONSENTS. The execution and delivery by Company
and each Consenting Party of this Amendment and, in the case of Company, the
Replacement Revolving Notes, and the performance by Company and each
Consenting Party of the Loan Documents and, in the case of Company, the
Replacement Revolving Notes, 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. Each Loan Document and, in the case of
Company, the Replacement Revolving Notes have been duly executed and
delivered by Company and each Consenting Party, as applicable, and are the
legally valid and binding obligations of Company and each Consenting Party
thereto, enforceable against each such Person 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. All Subsidiaries of Company required to guaranty the
Obligations have guarantied the Obligations. All Persons required to enter
into the Subordination Agreement have entered into the Subordination
Agreement.
G. ABSENCE OF DEFAULT. Upon giving effect to this Amendment, 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
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, Barter, James H. Jannard
("JANNARD") and Mike D. Parnell ("PARNELL" and together with Repeat, Barter
and Jannard, the "CONSENTING PARTIES") are parties to the Subordination
Agreement pursuant to which the Consenting Parties have subordinated the
Subordinated Debt (as defined in the Subordination Agreement) to all Senior
Debt (as defined in the Subordination Agreement), including the Obligations.
Each Consenting 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,
including the increase in the Commitments pursuant hereto. Repeat and Barter
hereby confirm 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 all Notes. Each Consenting Party hereby confirms that
the Subordination Agreement will continue to subordinate to the fullest
extent possible all Subordinated Debt to all Senior Debt, including all
Obligations now or hereafter existing under or in respect of the
5
<PAGE>
Amended Agreement and all Notes and other Loan Documents.
Each Consenting Party acknowledges and agrees that the Guaranty and
the Subordination Agreement to which such Person is a party 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 Consenting Party represents and
warrants that all representations and warranties contained in the Guaranty
and the Subordination Agreement to which it is a party or otherwise bound are
true, correct and complete in all material respects on and as of the Fourth
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 Consenting Party acknowledges and agrees that (i)
notwithstanding the conditions to effectiveness set forth in this Amendment,
such Consenting 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 Consenting 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 Fourth 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.
6
<PAGE>
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]
7
<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 Consenting Party
By:
----------------------------
Title:
-------------------------
S-1
<PAGE>
REPEAT INCORPORATED, as a Consenting Party
By:
----------------------------
Title:
-------------------------
JAMES H. JANNARD, as a Consenting Party
- -----------------------------------
MIKE D. PARNELL, as a Consenting Party
- -----------------------------------
S-2
<PAGE>
ANNEX A
SCHEDULE 2.1
LENDERS' COMMITMENTS AND PRO RATA SHARES
Revolving Loan Pro Rata
Lender Commitment Share
- ------ ---------------- ---------
Wells Fargo Bank, N.A. $10,500,000 35.00%
Union Bank of $ 9,750,000 32.50%
California, N.A.
Bank of America $ 9,750,000 32.50%
N.T. & S.A.
------------- ------
TOTAL $30,000,000 100%
A-1
<PAGE>
EXHIBIT A
[FORM OF REPLACEMENT REVOLVING NOTE]
OAKLEY, INC.
PROMISSORY NOTE
$[1] Los Angeles, California
January __, 1997
FOR VALUE RECEIVED, Oakley, Inc., a Washington corporation
("COMPANY"), promises to pay to the order of [2] ("PAYEE") on or before the
Revolving Loan Commitment Termination Date, as defined in the Credit
Agreement referred to below, the lesser of (x) [3] ($[1]) and (y) the unpaid
principal amount of all advances made by Payee to Company as Revolving Loans
under the Credit Agreement referred to below.
Company also promises to pay interest on the unpaid principal
amount hereof, until paid in full, at the rates, from the dates and at the
times which shall be determined in accordance with the provisions of that
certain Amended and Restated Credit Agreement dated as of August 15, 1995 by
and among Company, the financial institutions listed therein as Lenders, and
Wells Fargo Bank, National Association, as Agent (said Amended and Restated
Credit Agreement, as it may be amended, supplemented or otherwise modified
from time to time, being the "CREDIT AGREEMENT", the terms defined therein
and not otherwise defined herein being used herein as therein defined).
This Note is one of Company's "Revolving Notes" in the aggregate
principal amount of $30,000,000 and is issued pursuant to and entitled to the
benefits of the Credit Agreement, to which reference is hereby made for a
more complete statement of the terms and conditions under which the Revolving
Loans evidenced hereby were made and are to be repaid.
All payments of principal and interest in respect of this Note
shall be made in lawful money of the United States of America in same day
funds at the Funding and Payment Office or at such other place as shall be
designated in writing for such purpose in accordance with the terms of the
Credit Agreement. Unless and until an Assignment Agreement effecting the
assignment or transfer of this Note shall have been accepted by Agent and
recorded in the Register as provided in subsection 10.1B(ii) of the Credit
Agreement, Company and Agent
- --------------------
[1] Insert amount of Lender's Revolving Loan Commitment in numbers.
[2] Insert Lender's name in capital letters.
[3] Insert amount of Lender's Revolving Loan Commitment in words.
Exh. A-1
<PAGE>
shall be entitled to deem and treat Payee as the owner and holder of this
Note and the Loans evidenced hereby. Payee hereby agrees, by its acceptance
hereof, that before disposing of this Note or any part hereof it will make a
notation hereon of all principal payments previously made hereunder and of
the date to which interest hereon has been paid; PROVIDED, HOWEVER, that the
failure to make a notation of any payment made on this Note shall not limit
or otherwise affect the obligations of Company hereunder with respect to
payments of principal of or interest on this Note.
Whenever any payment on this Note shall be stated to be due on a
day which is not a Business Day, such payment shall be made on the next
succeeding Business Day and such extension of time shall be included in the
computation of the payment of interest on this Note.
This Note is subject to mandatory prepayment as provided in
subsection 2.4A(iii) of the Credit Agreement and to prepayment at the option
of Company as provided in subsection 2.4A(i) of the Credit Agreement.
THE CREDIT AGREEMENT AND THIS NOTE 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.
Upon the occurrence of an Event of Default, the unpaid balance of
the principal amount of this Note, together with all accrued and unpaid
interest thereon, may become, or may be declared to be, due and payable in
the manner, upon the conditions and with the effect provided in the Credit
Agreement.
The terms of this Note are subject to amendment only in the manner
provided in the Credit Agreement.
This Note is subject to restrictions on transfer or assignment as
provided in subsections 10.1 and 10.16 of the Credit Agreement.
No reference herein to the Credit Agreement and no provision of
this Note or the Credit Agreement shall alter or impair the obligations of
Company, which are absolute and unconditional, to pay the principal of and
interest on this Note at the place, at the respective times, and in the
currency herein prescribed.
Company promises to pay all costs and expenses, including
reasonable attorneys' fees, all as provided in subsection 10.2 of the Credit
Agreement, incurred in the collection and enforcement of this Note. Company
and any endorsers of this Note hereby consent to renewals and extensions of
time at or after the maturity hereof, without notice, and hereby waive
diligence, presentment, protest, demand and notice of every kind and, to the
full extent permitted by law, the right to plead any statute of limitations
as a defense to any demand hereunder.
Exh. A-2
<PAGE>
IN WITNESS WHEREOF, Company has caused this Note to be duly
executed and delivered by its officer thereunto duly authorized as of the
date and at the place first written above.
OAKLEY, INC.
By:
--------------------------
Title:
-----------------------
Exh. A-3
<PAGE>
TRANSACTIONS
ON
REVOLVING NOTE
<TABLE>
<CAPTION>
Outstanding
Type of Amount of Amount of Principal
Loan Made Loan Made Principal Paid Balance Notation
Date This Date This Date This Date This Date Made By
---- --------- --------- --------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
</TABLE>
Exh. A-4
<PAGE>
OAKLEY, INC.
FIRST AMENDMENT TO STANDING LOAN
AGREEMENT
This FIRST AMENDMENT TO STANDING LOAN AGREEMENT (this "Amendment")
is dated as of January 12, 1998 and entered into by and among OAKLEY, INC., a
Washington corporation ("Company"), and BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION ("Bank"), and is made with reference to that certain
Standing Loan Agreement dated as of August 7, 1997 (the "Loan Agreement")
between Company and Bank. Capitalized terms used herein without definition
shall have the same meanings herein as set forth in the Credit Agreement.
RECITALS
A. Company and Bank desire to amend the Loan Agreement as
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.
Section 1.1 AMENDMENT OF SECTION 2.13(a). Section 2.13 (a) of the
Loan Agreement is hereby amended by inserting the following at the end of
such Section:
";provided that Company and its subsidiaries may engage in business
of the type described in those certain resolutions of Company's board of
directors dated June 19, 1997, copies of which have previously been
distributed to the Bank;"
SECTION 2. EFFECTIVENESS
Section 1 of this Amendment shall become effective as of September
30, 1997; provided that Company shall deliver to Bank a copy of this
Amendment executed by Company.
SECTION 3. MISCELLANEOUS
<PAGE>
B. REFERENCE TO AND EFFECT ON THE LOAN AGREEMENT AND THE OTHER
LOAN DOCUMENTS.
(ii) On and after the date hereof, each reference in the Loan
Agreement to "this Agreement", "hereunder", "hereof", "herein" or
words of like import referring to the Loan Agreement, and each
reference in the other Loan Documents to the "Loan Agreement",
"thereunder", "thereof" or words of like import referring to the Loan
Agreement shall mean and be a reference to the Loan Agreement, as
amended by this Amendment.
(iii) Except as specifically amended or waived by this
Amendment, the Loan Agreement and the other Loan Documents shall
remain in full force and effect and are hereby ratified and confirmed.
(iv) 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 Bank under, the Loan Agreement or any of the other Loan Documents.
B. 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.
C. 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.
D. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed
in any number of counterparts and by the 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.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed and delivered by their respective officers hereunto duly
authorized as of the date first written above.
OAKLEY, INC., as the Borrower
By:
---------------------------
Title:
------------------------
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as Bank
By:
---------------------------
Title:
------------------------
3
<PAGE>
INDEMNIFICATION AGREEMENT
This Indemnification Agreement is made as of this ___ day of September,
1997, by and between OAKLEY, INC., a Washington corporation (the "Company"),
and William D. Schmidt ("Indemnified Party").
WHEREAS, as of the date hereof, the Company has provisions for
indemnification of its directors and officers in Article V of its Amended and
Restated Articles of Incorporation (the "Articles of Incorporation") and
Article VII of its Bylaws (the "Bylaws") which provide for indemnification of
the Company's directors and officers to the fullest extent permitted by law;
WHEREAS, the indemnification provisions in the Bylaws provide that the
right of indemnification is a contract right of the covered parties;
WHEREAS, the Bylaws provide that the Company may maintain, at its
expense, insurance to protect itself and any of its directors and officers
against liability asserted against such persons incurred in such capacity
whether or not the Company has the power to indemnify such persons against
the same liability under Section 23B.08.510 or .520 of the Act (as defined
below) or a successor statute;
WHEREAS, the Company and the Indemnified Party recognize that the
officers and directors of publicly owned companies are frequently joined as
parties to Proceedings (as defined below) against their respective companies
as a result of their serving in such capacity; and
WHEREAS, in order to induce Indemnified Party to serve or continue to
serve the Company, the Company wishes to confirm the contract indemnification
rights provided in the Bylaws and agrees to provide Indemnified Party with
the benefits contemplated by this Agreement and to supplement the provisions
of this Agreement with directors' and officers' liability insurance
maintained by the Company.
NOW, THEREFORE, in consideration of the promises, conditions,
representations and warranties set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Company and Indemnified Party hereby agree as follows:
1. DEFINITIONS. The following terms, as used herein, shall have the
following respective meanings; other capitalized terms used and not
specifically defined in this Section 1 shall have the meanings provided
elsewhere in the Agreement and in the Bylaws:
(a) "Act" means the Washington Business Corporation Act RCW Title
23B, as amended from time to time.
<PAGE>
(b) "Adjudication" shall refer to a final, non-appealable decision
by a court of competent jurisdiction. "Adjudged" shall have a correlative
meaning.
(c) "Covered Amount" means any Loss, Fine and Expense, to the
extent such Loss, Fine or Expense, in type or amount, is not insured under
the D&O Insurance maintained by the Company from time to time.
(d) "Covered Act" means any act or omission of the Indemnified
Party in his or her capacity as a director, officer, employee, agent,
fiduciary or consultant of the Company alleged by any claimant or any claim
against Indemnified Party by reason of him or her serving in such a capacity,
or by reason of Indemnified Party serving, at the request of the Company, in
such capacity with another corporation, partnership, employee benefit plan,
trust or other enterprise, in all cases, whether such alleged act or omission
occurred before or after the date of this Agreement.
(e) "D&O Insurance" means the liability insurance which the
Company may purchase on behalf of Indemnified Party against liability
asserted against or incurred by Indemnified Party in connection with claims
arising from Covered Acts, whether or not the Company would have the power to
indemnify the individual against the same liability under Section 23B.08.510
or 23B.08.520 of the Act. .
(f) "Determination" means a determination, based on the facts
known at the time, made:
(i) by the Board of Directors by majority vote of a quorum
consisting of directors not at the time parties to the Proceeding;
(ii) if a quorum cannot be obtained under clause (i), by
majority vote of a duly designated committee of the Board of Directors, in
the manner provided by Section 23B.08.550(2)(b) of the Act;
(iii) by special legal counsel, selected in the manner
provided by Section 23B.08.550(2)(c) of the Act, in a written opinion; or
(iv) by a majority of the shareholders of the Company,
excluding shares owned or voted under the control of directors who are at the
time parties to the Proceeding.
"Determined shall have a correlative meaning.
(g) "Excluded Claim" means any payment for Losses or Expenses in
connection with any claim relating to or arising out of:
(i) acts or omissions of the Indemnified Party Adjudged to
be intentional misconduct or a knowing violation of law;
<PAGE>
(ii) conduct of the Indemnified Party Adjudged to be in
violation of Section 23B.08.310 of the Act; or
(iii) any transaction with respect to which it was Adjudged
that such Indemnified Party personally received a benefit in money, property,
or services to which the Indemnified Party was not legally entitled.
(h) "Expenses" means any reasonable expenses incurred by
Indemnified Party as a result of a claim or claims made against Indemnified
Party from Covered Acts, including, without limitation, reasonable counsel
fees and costs of investigative, judicial or administrative proceedings or
appeals.
(i) "Fines" means any fine or penalty including, with respect to
an employee benefit plan, any excise tax assessed with respect thereto.
(j) "Losses" means amounts, as determined by an Adjudication,
which the Indemnified Party is legally obligated to pay as a result of a
claim or claims arising from Covered Acts, including, without limitation,
Fines, damages and judgments and sums paid in settlement of such claim or
claims.
(k) "Proceeding" means any threatened, pending or completed
action, suit, proceeding or investigation, whether civil, criminal or
administrative whether formal or informal.
2. MAINTENANCE OF D&O INSURANCE.
(a) The Company hereby covenants and agrees that, so long as
Indemnified Party shall continue to serve as a director or executive officer
of the Company and thereafter, for so long as Indemnified Party shall be
subject to any possible Proceeding arising from any Covered Act, the Company,
subject to Section 2(c), shall maintain in full force and effect D&O
Insurance.
(b) In all policies of D&O Insurance, Indemnified Party shall be
named as an insured in such a manner as to provide Indemnified Party the same
rights and benefits, and the same limitations, as are accorded to the
Company's directors or executive officers most favorably insured by such
policy.
(c) The Company shall have no obligation to maintain D&O Insurance
if the Company, by majority vote of the Board of Directors, determines in
good faith that such insurance is not reasonably available, the premium costs
for such insurance are disproportionate to the amount of coverage provided,
or the coverage provided by such insurance is limited by exclusions so as to
provide an insufficient benefit; PROVIDED, HOWEVER, that such decision shall
not adversely affect coverage of D&O Insurance for periods prior to such
decision without the unanimous vote of all directors.
<PAGE>
3. INDEMNIFICATION. The Company shall indemnify Indemnified Party up
to the Covered Amount and shall advance or reimburse the Expenses incurred by
Indemnified Party in a Proceeding or in connection with any Covered Acts,
subject, in each case, to the further provisions of this Agreement. This
Agreement is made pursuant to and to effectuate the indemnification
provisions set forth in Article V of the Articles of Incorporation and
Article VII of the Bylaws. Notwithstanding any other provision of this
Agreement, the Company shall indemnify Indemnified Party to the extent
Indemnified Party is successful, on the merits or otherwise, in the defense
of any Proceeding to which Indemnified Party was a party because of being a
director, officer, employee, agent, fiduciary or consultant of the Company,
against reasonable Expenses incurred by Indemnified Party in connection with
the Proceeding.
4. EXCLUDED COVERAGE. The Company shall have no obligation to
indemnify Indemnified Party for any Losses or Expenses which arise from an
Excluded Claim.
5. INDEMNIFICATION PROCEDURES.
(a) Promptly after receipt by Indemnified Party of notice of the
commencement of or the threat of commencement of any Proceeding, Indemnified
Party shall, if indemnification or advancement or reimbursement of Expenses
with respect thereto may be sought from the Company under this Agreement,
notify the Company of the commencement or the threat of commencement thereof.
(b) If, at the time of the receipt of such notice, the Company has
D&O Insurance in effect, the Company shall give prompt notice of the
commencement or the threat of commencement of such Proceeding to the
appropriate insurers in accordance with the procedures set forth in the
respective policies in favor of Indemnified Party. The Company shall
thereafter take all necessary or desirable action to cause such insurers to
pay, on behalf of the Indemnified Party, all amounts (including, without
limitation, Losses and Expenses) payable as a result of such Proceeding in
accordance with the terms of such policies.
(c) To the extent the Company does not, at the time of the
commencement of or the threat of commencement of such Proceeding, have
applicable D&O Insurance, or if a Determination is made that any Loss, Fine
or Expense of the Indemnified Party arising out of such Proceeding will not
be payable under the D&O Insurance then in effect, the Company shall be
obligated to pay the Covered Amount with respect to any Proceeding and
provide counsel satisfactory to Indemnified Party, upon the delivery to
Indemnified Party of written notice of the Company's election to do so.
After delivery of such notice, the Company will not be liable to Indemnified
Party under this Agreement for any legal or other Expenses subsequently
incurred by the Indemnified Party in connection with such defense other than
the reasonable Expenses of investigation of Indemnified Party; PROVIDED, that
Indemnified Party shall have the right to employ his or her own counsel in
connection with the defense of any such Proceeding, the fees and expenses of
such counsel incurred after delivery of notice from the Company of its
assumption of such defense to be at the Indemnified Party's sole expense.
Notwithstanding the foregoing, if (i) the employment of counsel by
Indemnified Party has been
<PAGE>
previously authorized by the Company, (ii) Indemnified Party shall have been
advised by counsel that there may be a conflict of interest between the
Company and Indemnified Party in the conduct of any such defense or (iii) the
Company shall not, in fact, have employed counsel to assume the defense of
such Proceeding, in each such case, the fees and expenses of such counsel
retained by Indemnified Party shall be at the expense of the Company.
(d) All payments on account of the Company's indemnification,
advancement and reimbursement obligations under this Agreement shall be made
within sixty (60) days of Indemnified Party's written request therefor unless
a Determination is made that the claims giving rise to Indemnified Party's
request are Excluded Claims or otherwise not payable under this Agreement;
PROVIDED, that all payments on account of the Company's obligations under
Paragraph 5(c) of this Agreement prior to the Adjudication of any Proceeding
shall be made within 20 days of Indemnified Party's written request therefor
and such obligation shall not be subject to any such Determination but shall
be subject to Paragraph 5(e) of this Agreement.
(e) Indemnified Party agrees that he or she will reimburse the
Company for all Losses and Expenses paid by the Company in connection with
any Proceeding against Indemnified Party in the event and only to the extent
that it is Adjudged that the Indemnified Party is not entitled to be
indemnified by the Company for such Losses or Expenses under this Agreement,
the Articles of Incorporation, the Bylaws or the Act.
6. SETTLEMENT. The Company shall have no obligation to indemnify
Indemnified Party under this Agreement for any amounts paid in settlement of
any Proceeding effected without the Company's prior written consent. The
Company shall not settle any claim in any manner which would impose any loss
or expense on Indemnified Party without Indemnified Party's prior written
consent, unless the Company provides a written undertaking to the Indemnified
Party to pay for such loss or expense on behalf of the Indemnified Party.
Neither the Company nor Indemnified Party shall unreasonably withhold their
consent to any proposed settlement.
7. RIGHTS NOT EXCLUSIVE. The rights provided hereunder shall be in
addition to any other rights to which Indemnified Party may be entitled under
the Articles of Incorporation, the Bylaws, the Act, any agreement or vote of
shareholders or directors or otherwise, both as to action in Indemnified
Party's official capacity and as to action in any other capacity, and such
rights shall continue after Indemnified Party ceases to serve the Company as
a director or officer.
8. ENFORCEMENT.
(a) Indemnified Party's rights to indemnification or reimbursement
or advancement of Expenses hereunder shall be enforceable by Indemnified
Party notwithstanding any adverse Determination, other than a Determination
which has been made by Adjudication. In any such action, if a prior adverse
Determination has been made, the burden of proving that indemnification or
reimbursement or advancement of Expenses is required under this Agreement,
the Articles of Incorporation, the Bylaws or the Act shall be on the
Indemnified Party. The Company shall have the burden of proving that
indemnification or reimbursement
<PAGE>
or advancement of Expenses is not required under this Agreement if no prior
adverse Determination shall have been made.
(b) In the event that any action is instituted by Indemnified
Party under this Agreement, or to enforce or interpret any of the terms of
this Agreement, Indemnified Party shall be entitled to be paid all court
costs and expenses, including reasonable counsel fees, incurred by
Indemnified Party with respect to such action, unless the court determines
that each of the material assertions made by Indemnified Party as a basis for
such action were not made in good faith or were frivolous.
9. NO PRESUMPTIONS. For purposes of this Agreement, the termination
of any Proceeding by judgment, order, settlement (whether with or without
court approval) or conviction, or upon a plea of nolo contendre, or its
equivalent, shall not create a presumption that the Indemnified Party did not
meet any particular standard of conduct or have any particular belief or that
a court has determined that indemnification or reimbursement or advancement
of Expenses by the Company is not permitted hereunder or by applicable law.
In addition, neither the absence of a Determination as to whether Indemnified
Party has met any particular standard of conduct or had any particular belief
or the existence of a Determination that Indemnified Party has not met such
standard of conduct or did not have such belief, prior to the commencement of
legal proceedings by Indemnified Party to secure an Adjudication that
Indemnified Party should be indemnified or advanced or reimbursed Expenses
hereunder or under applicable law, shall be a defense to Indemnified Party's
claim or create a presumption that Indemnified Party has not met any
particular standard of conduct or did not have any particular belief.
10. SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnified Party, who shall execute all papers
required and shall do everything that may be necessary to secure such rights,
including the execution of such documents necessary to enable the Company to
effectively bring suit to enforce such rights.
11. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under
this Agreement to make any payment in connection with any Proceeding against
Indemnified Party to the extent Indemnified Party has otherwise actually
received payment (under any D&O Insurance , the Articles of Incorporation,
the Bylaws, the Act or otherwise) of the amounts which may be paid hereunder.
12. SEVERABILITY. In the event that any provision of this Agreement is
determined by a court of competent jurisdiction to require the Company to do
or to fail to do an act which is in violation of the Articles of
Incorporation, the Bylaws or the Act or other applicable law, such provision
shall be limited or modified in its application to the minimum extent
necessary to avoid such violation, and, as so limited or modified, such
provision and the remainder of this Agreement shall be enforceable in
accordance with the respective terms.
<PAGE>
13. CHOICE OF LAW. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Washington.
14. SUCCESSORS AND ASSIGNS. This Agreement shall be (i) binding upon
all successors and assigns of the Company (including any transferee of all or
substantially all of the Company's assets and any successor by merger or
otherwise by operation of law) and (ii) binding on and inure to the benefit
of the heirs, personal representatives and estate of Indemnified Party.
Indemnified Party may not assign this Agreement or any of Indemnified Party's
rights hereunder without the prior written consent of the Company.
15. AMENDMENT. No amendment, modification, termination or cancellation
of this Agreement shall be effective unless made in a writing signed by each
of the parties hereto.
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
<PAGE>
IN WITNESS WHEREOF, the Company and Indemnified Party have executed this
Indemnification Agreement as of the date first above written.
OAKLEY, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
------------------------------------
William D. Schmidt, Indemnified Party
<PAGE>
EMPLOYMENT AGREEMENT
This EMPLYOMENT AGREEMENT ("Agreement"), effective as of the 6th
day of October, 1997 (the "Effective Date"), is entered into by and between
Thomas A. George ("Employee") and Oakley, Inc., a Washington corporation
("Company").
In consideration of the mutual agreements hereinafter set forth,
Employee and the Company have agreed and do hereby agree as follows:
1. EMPLOYMENT. The Company does hereby employ, engage and hire Employee as
Chief Financial Officer of the Company, and Employee does hereby accept and
agree to such hiring, engagement and employment. In such capacity, Employee
shall have such executive and managerial powers and duties with respect to
the Company as may be from time to time reasonably assigned to him by the
Board of Directors or the President, Chief Executive Officer or Chief
Operating Officer of the Company, including without limitation responsibility
for the accounting, finance and investor relations functions of the Company.
Except for sick leave, reasonable vacations and excused leaves of absence,
Employee shall, throughout his period of employment, devote substantially all
his working time, attention, knowledge and skills, diligently and to the best
of his ability, to the performance of such duties in furtherance of the
business of the Company.
1. TERM OF AGREEMENT. The term ("Term") of this Agreement shall commence on
the Effective Date and shall continue for a period of two (2) years;
PROVIDED, HOWEVER, that on each anniversary of the Effective Date the Term of
the Agreement shall automatically be extended for one additional year unless,
not less than three months prior to any such anniversary, either party shall
have given written notice to the other that it does not wish to extend the
Term of the Agreement.
1. COMPENSATION.
(a) BASE SALARY. The Company shall pay Employee an annual base salary no
less than at the rate of $195,000 per year, payable in equal biweekly
installments or at such other times as Employee and the Company shall agree.
Employee's base salary may be increased as determined by the Board of
Directors of the Company in its sole discretion.
<PAGE>
(b) BONUS. Commencing January 1, 1998, Employee shall be eligible to
participate in the Company's Performance Bonus Plan. Employee's annual
target bonus under the Performance Bonus Plan shall not be less than $80,000.
Employee shall not be eligible to receive an annual performance bonus with
respect to the year ending December 31, 1997.
(a) STOCK OPTION GRANT. The Board of Directors of the Company has determined
to grant Employee a stock option (the "Option") to purchase 90,000 shares of
Oakley common stock, par value $.01 per share (the "Common Stock"). The
Option shall (i) be an "incentive stock option" within the meaning of Section
422 of the Internal Revenue Code to the extent permitted by law, and a
non-qualified stock option otherwise, (ii) be effective as of
[the date hereof] (the "Date of Grant"), (iii) have a term of 10 years from
the Date of Grant, (iv) have an exercise price equal to the closing price of
the Common Stock on the New York Stock Exchange on the Date of Grant, (v)
vest and become exercisable in equal 25% installments on each of the first
four anniversaries of the Date of Grant, and (vi) contain such other terms
and conditions as generally apply to option grants made to the Company's
senior executives.
(a) RELOCATION. As a condition of his employment with the Company, Employee
agrees to relocate his principal residence from San Diego County to Orange
County, California as soon as reasonably practicable. In accordance
therewith, Employee agrees (i) to purchase a home in Orange County (the
"Orange County Residence") as soon as reasonably practicable (but in no event
later than January 31, 1998), (ii) to move his principal residence to the
Orange County Residence as soon as reasonably practicable after the date of
such purchase, and (iii) thereafter to maintain his principal residence in
Orange County throughout the remainder of the Term. In consideration
thereof, and to assist Employee in acquiring the Orange County Residence,
Company agrees to provide Employee with the following relocation benefits:
i) DATE OF HIRE BONUS. On Employee's first day of work at the
Company, the Company shall pay Employee a one-time cash bonus in the
amount of $10,000.
i) RELOCATION BONUS. If Employee purchases the Orange County
Residence on or before January 31, 1998 and moves his principal
residence to the Orange County Residence as soon as reasonably
practicable thereafter, then, within five (5) business days following
the date Executive begins permanent residence in the Orange County
<PAGE>
Residence, the Company shall pay Employee an additional one-time cash
bonus in the amount of $60,000.
i) ADVANCE. The Company agrees to provide Employee with an advance
(the "Advance") on his base salary in the amount of $50,000, such
amount to be paid to Employee within five (5) business days following
the date Employee commences employment with the Company. To offset
the Advance, Employee's base salary as set forth in Section 3(a)
shall be reduced on a pro rata basis during the two-year period
following the Effective Date, with the entire remaining amount of the
Advance to be repaid by Employee in full immediately in the event
Employee's employment with the Company is terminated under any
circumstances prior to the end of such two-year period. Employee
agrees that the Company shall have the right to offset the amount of
any remaining portion of the Advance against any severance or other
payments or obligations of the Company upon or following such
termination of employment.
i) HOUSING ALLOWANCE. During the Term, until such time as Employee
no longer reasonably requires a second residence in San Diego County,
California, the Company shall pay Employee a housing allowance in the
amount of $1,500 per month. It is expressly understood that
Employee's requirement of a San Diego residence relates solely to his
desire to permit his existing children to complete their primary
education in San Diego County, and that the housing allowance
provided for herein shall terminate at such time as none of such
children is attending junior or senior high school in San Diego
County. Employee agrees to provide the Company timely notice of any
change in circumstances relating to his requirement of a San Diego
residence.
(a) FRINGE BENEFITS. Employee shall be entitled to participate in any fringe
and other benefit programs adopted from time to time by the Company for the
benefit of its senior executives.
<PAGE>
1. TERMINATION OF EMPLOYMENT.
(a) DEATH. If Employee dies while employed by the Company, his employment
shall immediately terminate and the Company's obligation to pay Employee's
base salary shall cease as of the date of death. Within ten (10) days
following such death, the Company shall pay to Employee's estate an amount
equal to Employee's then current target bonus under the Performance Bonus
Plan, prorated through the date of death. Employee's beneficiaries or his
estate shall receive benefits in accordance with any Company plans then in
effect.
(a) DISABILITY. If as a result of Employee's incapacity due to physical or
mental illness ("Disability"), Employee shall have been absent from the
full-time performance of his duties with the Company for six consecutive
months, the Company may, upon 30 days' notice to Employee, terminate
Employee's employment. Within ten (10) days following such termination for
Disability, the Company shall pay Employee an amount equal to one year's base
salary plus an amount equal to Employee's target bonus under the Performance
Bonus Plan, prorated through the date of such termination. Such payment
shall not affect Employee's rights under any Company disability plan in which
Employee may then be a participant.
(a) TERMINATION FOR CAUSE. The Company shall have the right to terminate
Employee's employment for Cause by giving Employee written notice of the
effective date of such termination. For purposes of this Agreement, "Cause"
shall mean (i) fraud, misappropriation, embezzlement or other act of material
misconduct against the Company, or (ii) substantial or willful failure to
perform specific and lawful directives of the Board of Directors or the
President, Chief Executive Officer or Chief Operating Officer of the Company
consistent with Employee's employment or (iii) other material breach of this
Agreement by Employee. If the Company terminates Employee's employment for
Cause, the Company shall have no further obligation under this Agreement from
and after the date of termination.
(a) VOLUNTARY TERMINATION BY EMPLOYEE. In the event that Employee's
employment with the Company is voluntarily terminated by Employee other than
for Good Reason, the Company shall have no further obligation under this
Agreement from and after the date of termination. In addition, if such
termination occurs prior to the one year anniversary of the Effective Date,
Employee shall be required to repay to the Company immediately a pro rata
portion of the hiring and relocation bonuses provided for in Sections 3(d)(i)
and (ii) above, such proration to be calculated by multiplying the amount of
such bonuses by a fraction, the numerator of which is the number of days
between the date of such termination and October 6, 1998, and the denominator
of which is 365. For purposes of this Agreement, "Good Reason" shall mean
any material breach by the Company of any provision of this Agreement.
<PAGE>
(a) OTHER TERMINATION. If Employee's employment is terminated (i) by the
Company for any reason other than Employee's death or disability or for Cause
or (ii) by Employee for Good Reason, the Company shall pay Employee (x) his
base salary for a period equal to the lesser of twelve months or the
remaining Term of this Agreement (the "Severance Period"), in either case as
if Employee had remained in the Company's employ at an annual rate of
compensation equal to his base salary as of the date of termination, and (y)
an amount equal to the product of (A) Employee's annual target bonus under
the Performance Bonus Plan as in effect at the time of such termination and
(B) a fraction, the numerator of which is the number of full months in the
Severance Period, and the denominator of which is 12.
1. ASSIGNMENT OF INTELLECTUAL PROPERTY RIGHTS.
(a) DEFINITION OF "INVENTIONS". As used herein, the term "Inventions" shall
mean all inventions, discoveries, improvements, trade secrets, formulas,
techniques, data, programs, systems, specifications, documentation,
algorithms, flow charts, logic diagrams, source codes, processes, and other
information, including works-in-progress, whether or not subject to patent,
trade-mark, copyright, trade secret, or mask work protection, and whether or
not reduced to practice, which are made, created, authored, conceived, or
reduced to practice by Employee, either alone or jointly with others, during
the period of employment with the Company which (A) relate to the actual or
anticipated business, activities, research, or investigations of the Company
or (B) result from or is suggested by work performed by Employee for the
Company (whether or not made or conceived during normal working hours or on
the premises of the Company) or (C) which result, to any extent, from use of
the Company's premises or property.
(a) WORK FOR HIRE. Employee expressly acknowledges that all copyrightable
aspects of the Inventions are to be considered "works made for hire" within
the meaning of the Copyright Act of 1976, as amended (the "Act"), and that
the Company is to be the "author" within the meaning of such Act for all
purposes. All such copyrightable works, as well as all copies of such works
in whatever medium fixed or embodied, shall be owned exclusively by the
<PAGE>
Company as of its creation, and Employee hereby expressly disclaims any and
all interest in any of such copyrightable works and waives any right of DROIT
MORALE or similar rights.
(a) ASSIGNMENT. Employee acknowledges and agrees that all Inventions
constitute trade secrets of the Company and shall be the sole property of the
Company or any other entity designated by the Company. In the event that
title to any or all of the Inventions, or any part or element thereof, may
not, by operation of law, vest in the Company, or such Inventions may be
found as a matter of law not to be "works made for hire" within the meaning
of the Act, Employee hereby conveys and irrevocably assigns to the Company,
without further consideration, all his right, title and interest, throughout
the universe and in perpetuity, in all Inventions and all copies of them, in
whatever medium fixed or embodied, and in all written records, graphics,
diagrams, notes, or reports relating thereto in Employee's possession or
under his control, including, with respect to any of the foregoing, all
rights of copyright, patent, trademark, trade secret, mask work, and any and
all other proprietary rights therein, the right to modify and create
derivative works, the right to invoke the benefit of any priority under any
international convention, and all rights to register and renew same.
(a) PROPRIETARY NOTICES; NO FILINGS; WAIVER OF MORAL RIGHTS. Employee
acknowledges that all Inventions shall, at the sole option of the Company,
bear the Company's patent, copyright, trademark, trade secret, and mask work
notices.
Employee agrees not to file any patent, copyright, or trademark
applications relating to any Invention, except with prior written consent of
an authorized representative of the Company (other than Employee).
Employee hereby expressly disclaims any and all interest in any
Inventions and waives any right of DROIT MORALE or similar rights, such as
rights of integrity or the right to be attributed as the creator of the
Invention.
(a) FURTHER ASSURANCES. Employee agrees to assist the Company, or any party
designated by the Company, promptly on the Company's request, whether before
or after the termination of employment, however such termination may occur,
in perfecting, registering, maintaining, and enforcing, in any jurisdiction,
the Company's rights in the Inventions by performing all acts and executing
all documents and instruments deemed necessary or convenient by the Company,
including, by way of illustration and not limitation:
<PAGE>
i) Executing assignments, applications, and other documents and
instruments in connection with (A) obtaining patents, copyrights,
trademarks, mask works, or other proprietary protections for the
Inventions and (B) confirming the assignment to the Company of all
right, title, and interest in the Inventions or otherwise
establishing the Company's exclusive ownership rights therein.
i) Cooperating in the prosecution of patent, copyright, trademark and
mask work applications, as well as in the enforcement of the
Company's rights in the Inventions, including, but not limited to,
testifying in court or before any patent, copyright, trademark or
mask work registry office or any other administrative body.
Employee shall be reimbursed for all out-of-pocket costs incurred in
connection with the foregoing, if such assistance is requested by the Company
after the termination of Employee's employment. In addition, to the extent
that, after the termination of employment for whatever reason, Employee's
technical expertise shall be required in connection with the fulfillment of
the aforementioned obligations, the Company shall compensate Employee at a
reasonable rate for the time actually spent by Employee at the Company's
request rendering such assistance.
(a) POWER OF ATTORNEY. Employee hereby irrevocably appoints the Company to
be his Attorney-In-Fact to execute any document and to take any action in his
name and on his behalf and to generally use his name for the purpose of
giving to the Company the full benefit of the assignment provisions set forth
above.
(a) DISCLOSURE OF INVENTIONS. Employee shall make full and prompt disclosure
to the Company of all Inventions subject to assignment to the Company, and
all information relating thereto in Employee's possession or under his
control as to possible applications and use thereof.
1. NO VIOLATION OF THIRD-PARTY RIGHTS. Employee represents, warrants, and
covenants that he:
(a) will not, in the course of employment, infringe upon or violate any
proprietary rights of any third party (including, without limitation, any
third party confidential relationships, patents, copyrights, mask works,
trade secrets, or other proprietary rights);
<PAGE>
(a) is not a party to any conflicting agreements with third parties which
will prevent him from fulfilling the terms of employment and the obligations
of this Agreement;
(a) does not have in his possession any confidential or proprietary
information or documents belonging to others and will not disclose to the
Company, use, or induce the Company to use, any confidential or proprietary
information or documents of others; and
(a) agrees to respect any and all valid obligations which he may now have to
prior employers or to others relating to confidential information,
inventions, or discoveries which are the property of those prior employers or
others, as the case may be.
Employee has supplied or shall promptly supply to the Company a copy of
each written agreement to which Employee is subject (other than any agreement
to which the Company is a party) which includes any obligation of
confidentiality, assignment of Inventions, or non-competition.
Employee agrees to indemnify and save harmless the Company from any loss,
claim, damage, cost or expense of any kind (including without limitation,
reasonable attorney fees) to which the Company may be subjected by virtue of
a breach by Employee of the foregoing representations, warranties, and
covenants.
1. CONFIDENTIAL INFORMATION AND NON-COMPETITION.
(a) CONFIDENTIALITY. Employee acknowledges that in his employment hereunder
he will occupy a position of trust and confidence. Employee shall not, except
as may be required in the normal course of business to perform his duties
hereunder or as required by applicable law, without limitation in time or
until such information shall have become public other than by Employee's
unauthorized disclosure, disclose to others or use, whether directly or
indirectly, any Confidential Information regarding the Company, its
subsidiaries and affiliates. "Confidential Information" shall mean
information about the Company, its subsidiaries and affiliates, and their
respective clients and customers that is not disclosed by the Company for
financial reporting purposes and that was learned by Employee in the course
of his employment by the Company, its subsidiaries and affiliates, including
(without limitation) any proprietary knowledge, trade secrets, data,
formulae, information and client and customer lists and all papers, resumes,
and records (including computer records) of the documents containing such
Confi-
<PAGE>
dential Information. Employee acknowledges that such Confidential
Information is specialized, unique in nature and of great value to the
Company, its subsidiaries and affiliates, and that such information gives the
Company a competitive advantage. The Employee agrees to (i) deliver or
return to the Company, at the Company's request at any time or upon
termination or expiration of his employment or as soon thereafter as
possible, (A) all documents, computer tapes and disks, records, lists, data,
drawings, prints, notes and written information (and all copies thereof)
furnished by the Company, its subsidiaries and affiliates, or prepared by the
Employee during the term of his employment by the Company, its subsidiaries
and affiliates, and (B) all notebooks and other data relating to research or
experiments or other work conducted by Employee in the scope of employment or
any Inventions made, created, authored, conceived, or reduced to practice by
Employee, either alone or jointly with others, and (ii) make full disclosure
relating to any Inventions.
If Employee would like to keep certain property, such as material
relating to professional societies or other non-confidential material, upon
the termination of employment with the Company, he agrees to discuss such
issues with the Company. Where such a request does not put Confidential
Information of the Company at risk, the Company will customarily grant the
request.
(a) NON-COMPETITION. During the Term of this Agreement and for a period of
two (2) years thereafter, Employee shall not, directly or indirectly, without
the prior written consent of the Company, provide consultative services or
otherwise provide services to (whether as an employee or a consultant, with
or without pay), own, manage, operate, join, control, participate in, or be
connected with (as a stockholder, partner, or otherwise), any business,
individual, partner, firm, corporation, or other entity that is then a
competitor of the Company, its subsidiaries and affiliates, including without
limitation any entity engaged in the design, manufacture and/or distribution
of eyewear (each such competitor a "Competitor of the Company"); PROVIDED,
HOWEVER, that the "beneficial ownership" by Employee, either individually or
as a member of a "group," as such terms are used in Rule 13d of the General
Rules and Regulations under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), of not more than five percent (5%) of the voting stock
of any publicly held corporation shall not alone constitute a violation of
this Agreement; provided, however, that if Employee's employment is
terminated (i) by the Company without Cause, (ii) by Employee for Good Reason
or (iii) by reason of the expiration of the Term of this Agreement, the
non-competition agreement provided for in this subparagraph (b) shall
terminate as of the date of such termination of employment. Employee and the
Company acknowledge and agree that the business of the Company is global in
<PAGE>
nature, and that the terms of the non-competition agreement set forth herein
shall apply on a worldwide basis.
(a) NON-SOLICITATION OF CUSTOMERS AND SUPPLIERS. During the Term of this
Agreement and for a period of two (2) years thereafter, Employee shall not,
directly or indirectly, influence or attempt to influence customers or
suppliers of the Company or any of its subsidiaries or affiliates, to divert
their business to any Competitor of the Company; PROVIDED, HOWEVER, that if
Employee's employment is terminated (i) by the Company without Cause, (ii) by
Employee for Good Reason or (iii) by reason of the expiration of the Term of
this Agreement, the non-solicitation agreement provided for in this
subparagraph (c) shall terminate as of the date of such termination of
employment.
(a) NON-SOLICITATION OF EMPLOYEES. Employee recognizes that he possesses and
will possess confidential information about other employees of the Company,
its subsidiaries and affiliates, relating to their education, experience,
skills, abilities, compensation and benefits, and inter-personal
relationships with customers of the Company, its subsidiaries and affiliates.
Employee recognizes that the information he possesses and will possess about
these other employees is not generally known, is of substantial value to the
Company, its subsidiaries and affiliates in developing their business and in
securing and retaining customers, and has been and will be acquired by him
because of his business position with the Company, its subsidiaries and
affiliates. Employee agrees that, during the Term of this Agreement and for
a period of two (2) years thereafter, he will not, directly or indirectly,
solicit or recruit any employee of the Company, its subsidiaries and
affiliates for the purpose of being employed by him or by any Competitor of
the Company on whose behalf he is acting as an agent, representative or
employee and that he will not convey any such confidential information or
trade secrets about other employees of the Company, its subsidiaries and
affiliates to any other person.
(a) INJUNCTIVE RELIEF. It is expressly agreed that the Company will or would
suffer irreparable injury if Employee were to compete with the Company or any
subsidiary or affiliate of the Company in violation of any of the provisions
of this Section 7 and that the Company would by reason of such competition be
entitled to injunctive relief in a court of appropriate jurisdiction, and
Employee further consents and stipulates to the entry of such injunctive
relief in such a court prohibiting Employee from so competing with the
Company or any subsidiary or affiliate of the Company in violation of this
Agreement.
<PAGE>
(a) SURVIVAL OF PROVISIONS. The obligations contained in this Section 7
shall survive the termination or expiration of Employee's employment with the
Company and shall be fully enforceable thereafter. If it is determined by a
court of competent jurisdiction in any state that any restriction in this
Section 7 is excessive in duration or scope or is unreasonable or
unenforceable under the laws of that state, it is the intention of the
parties that such restriction may be modified or amended by the court to
render it enforceable to the maximum extent permitted by the law of that
state.
1. NOTICES. All notices and other communications under this Agreement shall
be in writing and shall be given by fax or first class mail, certified or
registered with return receipt requested, and shall be deemed to have been
duly given three (3) days after mailing or twenty-four (24) hours after
transmission of a fax to the respective persons named below:
If to Company: Oakley, Inc.
One Icon
Foothill Ranch, California 97610
If to Employee: Thomas A. George
1465 Village View
Encinitas, California 92024
Either party may change such party's address for notices by notice duly given
pursuant hereto.
1. INDEMNIFICATION. The Company shall indemnify and hold Employee harmless
to the maximum extent permitted under applicable law.
1. NO MITIGATION; NO OFFSET. Except as provided in Section 3(d)(iii) hereof,
Employee shall not be required in any way to mitigate the amount
<PAGE>
of any payment provided for in this Agreement, and such payments shall not be
subject to offset against compensation earned as the result of employment
with another employer.
1. ATTORNEYS' FEES. In the event judicial determination is necessary of any
dispute arising as to the parties' rights and obligations hereunder, each
party shall have the right, in addition to any other available relief, to
attorneys' fees based on a determination by the court of the extent to which
each party has prevailed as to the material issues raised in determination of
the dispute.
1. ASSIGNMENT; SUCCESSORS. This Agreement is personal in nature and neither
of the parties hereto shall, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder; PROVIDED,
that in the event of the merger, consolidation, transfer or sale of all or
substantially all of the assets of the Company with or to any other
individual or entity, this Agreement shall be binding upon and inure to the
benefit of such successor, and such successor shall discharge and perform all
the promises, covenants, duties and obligations of the Company hereunder.
1. GOVERNING LAW. This Agreement and the legal relations thus created
between the parties hereto shall be governed by and construed under and in
accordance with the laws of the State of California.
1. WAIVER; MODIFICATION. Failure to insist upon strict compliance with any
of the terms, covenants, or conditions hereof shall not be deemed a waiver of
such term, covenant, or condition, nor shall any waiver or relinquishment of,
or failure to insist upon strict compliance with, any right or power
hereunder at any one or more times be deemed a waiver or relinquishment of
such right or power at any other time or times. This Agreement shall not be
modified in any respect except by a writing executed by each party hereto.
1. SEVERABILITY. In the event that a court of competent jurisdiction
determines that any portion of this Agreement is in violation of any statute
or public policy, only the portions of this Agreement that violate such
statute or public policy shall be stricken. All portions of this Agreement
that do not violate any statute or public policy shall continue in full force
and effect. Further, any court order striking any portion of this Agreement
shall modify the stricken terms as narrowly as possible to give as much
effect as possible to the intentions of the parties under this Agreement.
1. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together
will constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
by its duly authorized officer, and Employee has hereunto signed this
Agreement, as of the date referred to above.
OAKLEY, INC.
---------------------------------
By: R. Link Newcomb
Its: Chief Executive Officer
---------------------------------
THOMAS A. GEORGE
<PAGE>
INDEMNIFICATION AGREEMENT
This Indemnification Agreement is made as of this ___ day of October,
1997, by and between OAKLEY, INC., a Washington corporation (the "Company"),
and Thomas A. George ("Indemnified Party").
WHEREAS, as of the date hereof, the Company has provisions for
indemnification of its directors and officers in Article V of its Amended and
Restated Articles of Incorporation (the "Articles of Incorporation") and
Article VII of its Bylaws (the "Bylaws") which provide for indemnification of
the Company's directors and officers to the fullest extent permitted by law;
WHEREAS, the indemnification provisions in the Bylaws provide that the
right of indemnification is a contract right of the covered parties;
WHEREAS, the Bylaws provide that the Company may maintain, at its
expense, insurance to protect itself and any of its directors and officers
against liability asserted against such persons incurred in such capacity
whether or not the Company has the power to indemnify such persons against
the same liability under Section 23B.08.510 or .520 of the Act (as defined
below) or a successor statute;
WHEREAS, the Company and the Indemnified Party recognize that the
officers and directors of publicly owned companies are frequently joined as
parties to Proceedings (as defined below) against their respective companies
as a result of their serving in such capacity; and
WHEREAS, in order to induce Indemnified Party to serve or continue to
serve the Company, the Company wishes to confirm the contract indemnification
rights provided in the Bylaws and agrees to provide Indemnified Party with
the benefits contemplated by this Agreement and to supplement the provisions
of this Agreement with directors' and officers' liability insurance
maintained by the Company.
NOW, THEREFORE, in consideration of the promises, conditions,
representations and warranties set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Company and Indemnified Party hereby agree as follows:
1. DEFINITIONS. The following terms, as used herein, shall have the
following respective meanings; other capitalized terms used and not
specifically defined in this Section 1 shall have the meanings provided
elsewhere in the Agreement and in the Bylaws:
(a) "Act" means the Washington Business Corporation Act RCW Title
23B, as amended from time to time.
<PAGE>
(b) "Adjudication" shall refer to a final, non-appealable decision
by a court of competent jurisdiction. "Adjudged" shall have a correlative
meaning.
(c) "Covered Amount" means any Loss, Fine and Expense, to the
extent such Loss, Fine or Expense, in type or amount, is not insured under
the D&O Insurance maintained by the Company from time to time.
(d) "Covered Act" means any act or omission of the Indemnified
Party in his or her capacity as a director, officer, employee, agent,
fiduciary or consultant of the Company alleged by any claimant or any claim
against Indemnified Party by reason of him or her serving in such a capacity,
or by reason of Indemnified Party serving, at the request of the Company, in
such capacity with another corporation, partnership, employee benefit plan,
trust or other enterprise, in all cases, whether such alleged act or omission
occurred before or after the date of this Agreement.
(e) "D&O Insurance" means the liability insurance which the
Company may purchase on behalf of Indemnified Party against liability
asserted against or incurred by Indemnified Party in connection with claims
arising from Covered Acts, whether or not the Company would have the power to
indemnify the individual against the same liability under Section 23B.08.510
or 23B.08.520 of the Act. .
(f) "Determination" means a determination, based on the facts
known at the time, made:
(i) by the Board of Directors by majority vote of a quorum
consisting of directors not at the time parties to the Proceeding;
(ii) if a quorum cannot be obtained under clause (i), by
majority vote of a duly designated committee of the Board of Directors, in
the manner provided by Section 23B.08.550(2)(b) of the Act;
(iii) by special legal counsel, selected in the manner
provided by Section 23B.08.550(2)(c) of the Act, in a written opinion; or
(iv) by a majority of the shareholders of the Company,
excluding shares owned or voted under the control of directors who are at the
time parties to the Proceeding.
"Determined shall have a correlative meaning.
(g) "Excluded Claim" means any payment for Losses or Expenses in
connection with any claim relating to or arising out of:
(i) acts or omissions of the Indemnified Party Adjudged to
be intentional misconduct or a knowing violation of law;
<PAGE>
(ii) conduct of the Indemnified Party Adjudged to be in
violation of Section 23B.08.310 of the Act; or
(iii) any transaction with respect to which it was Adjudged
that such Indemnified Party personally received a benefit in money, property,
or services to which the Indemnified Party was not legally entitled.
(h) "Expenses" means any reasonable expenses incurred by
Indemnified Party as a result of a claim or claims made against Indemnified
Party from Covered Acts, including, without limitation, reasonable counsel
fees and costs of investigative, judicial or administrative proceedings or
appeals.
(i) "Fines" means any fine or penalty including, with respect to
an employee benefit plan, any excise tax assessed with respect thereto.
(j) "Losses" means amounts, as determined by an Adjudication,
which the Indemnified Party is legally obligated to pay as a result of a
claim or claims arising from Covered Acts, including, without limitation,
Fines, damages and judgments and sums paid in settlement of such claim or
claims.
(k) "Proceeding" means any threatened, pending or completed
action, suit, proceeding or investigation, whether civil, criminal or
administrative whether formal or informal.
2. MAINTENANCE OF D&O INSURANCE.
(a) The Company hereby covenants and agrees that, so long as
Indemnified Party shall continue to serve as a director or executive officer
of the Company and thereafter, for so long as Indemnified Party shall be
subject to any possible Proceeding arising from any Covered Act, the Company,
subject to Section 2(c), shall maintain in full force and effect D&O
Insurance.
(b) In all policies of D&O Insurance, Indemnified Party shall be
named as an insured in such a manner as to provide Indemnified Party the same
rights and benefits, and the same limitations, as are accorded to the
Company's directors or executive officers most favorably insured by such
policy.
(c) The Company shall have no obligation to maintain D&O Insurance
if the Company, by majority vote of the Board of Directors, determines in
good faith that such insurance is not reasonably available, the premium costs
for such insurance are disproportionate to the amount of coverage provided,
or the coverage provided by such insurance is limited by exclusions so as to
provide an insufficient benefit; PROVIDED, HOWEVER, that such decision shall
not adversely affect coverage of D&O Insurance for periods prior to such
decision without the unanimous vote of all directors.
<PAGE>
3. INDEMNIFICATION. The Company shall indemnify Indemnified Party up
to the Covered Amount and shall advance or reimburse the Expenses incurred by
Indemnified Party in a Proceeding or in connection with any Covered Acts,
subject, in each case, to the further provisions of this Agreement. This
Agreement is made pursuant to and to effectuate the indemnification
provisions set forth in Article V of the Articles of Incorporation and
Article VII of the Bylaws. Notwithstanding any other provision of this
Agreement, the Company shall indemnify Indemnified Party to the extent
Indemnified Party is successful, on the merits or otherwise, in the defense
of any Proceeding to which Indemnified Party was a party because of being a
director, officer, employee, agent, fiduciary or consultant of the Company,
against reasonable Expenses incurred by Indemnified Party in connection with
the Proceeding.
4. EXCLUDED COVERAGE. The Company shall have no obligation to
indemnify Indemnified Party for any Losses or Expenses which arise from an
Excluded Claim.
5. INDEMNIFICATION PROCEDURES.
(a) Promptly after receipt by Indemnified Party of notice of the
commencement of or the threat of commencement of any Proceeding, Indemnified
Party shall, if indemnification or advancement or reimbursement of Expenses
with respect thereto may be sought from the Company under this Agreement,
notify the Company of the commencement or the threat of commencement thereof.
(b) If, at the time of the receipt of such notice, the Company has
D&O Insurance in effect, the Company shall give prompt notice of the
commencement or the threat of commencement of such Proceeding to the
appropriate insurers in accordance with the procedures set forth in the
respective policies in favor of Indemnified Party. The Company shall
thereafter take all necessary or desirable action to cause such insurers to
pay, on behalf of the Indemnified Party, all amounts (including, without
limitation, Losses and Expenses) payable as a result of such Proceeding in
accordance with the terms of such policies.
(c) To the extent the Company does not, at the time of the
commencement of or the threat of commencement of such Proceeding, have
applicable D&O Insurance, or if a Determination is made that any Loss, Fine
or Expense of the Indemnified Party arising out of such Proceeding will not
be payable under the D&O Insurance then in effect, the Company shall be
obligated to pay the Covered Amount with respect to any Proceeding and
provide counsel satisfactory to Indemnified Party, upon the delivery to
Indemnified Party of written notice of the Company's election to do so.
After delivery of such notice, the Company will not be liable to Indemnified
Party under this Agreement for any legal or other Expenses subsequently
incurred by the Indemnified Party in connection with such defense other than
the reasonable Expenses of investigation of Indemnified Party; PROVIDED, that
Indemnified Party shall have the right to employ his or her own counsel in
connection with the defense of any such Proceeding, the fees and expenses of
such counsel incurred after delivery of notice from the Company of its
assumption of such defense to be at the Indemnified Party's sole expense.
Notwithstanding the foregoing, if (i) the employment of counsel by
Indemnified Party has been
<PAGE>
previously authorized by the Company, (ii) Indemnified Party shall have been
advised by counsel that there may be a conflict of interest between the
Company and Indemnified Party in the conduct of any such defense or (iii) the
Company shall not, in fact, have employed counsel to assume the defense of
such Proceeding, in each such case, the fees and expenses of such counsel
retained by Indemnified Party shall be at the expense of the Company.
(d) All payments on account of the Company's indemnification,
advancement and reimbursement obligations under this Agreement shall be made
within sixty (60) days of Indemnified Party's written request therefor unless
a Determination is made that the claims giving rise to Indemnified Party's
request are Excluded Claims or otherwise not payable under this Agreement;
PROVIDED, that all payments on account of the Company's obligations under
Paragraph 5(c) of this Agreement prior to the Adjudication of any Proceeding
shall be made within 20 days of Indemnified Party's written request therefor
and such obligation shall not be subject to any such Determination but shall
be subject to Paragraph 5(e) of this Agreement.
(e) Indemnified Party agrees that he or she will reimburse the
Company for all Losses and Expenses paid by the Company in connection with
any Proceeding against Indemnified Party in the event and only to the extent
that it is Adjudged that the Indemnified Party is not entitled to be
indemnified by the Company for such Losses or Expenses under this Agreement,
the Articles of Incorporation, the Bylaws or the Act.
6. SETTLEMENT. The Company shall have no obligation to indemnify
Indemnified Party under this Agreement for any amounts paid in settlement of
any Proceeding effected without the Company's prior written consent. The
Company shall not settle any claim in any manner which would impose any loss
or expense on Indemnified Party without Indemnified Party's prior written
consent, unless the Company provides a written undertaking to the Indemnified
Party to pay for such loss or expense on behalf of the Indemnified Party.
Neither the Company nor Indemnified Party shall unreasonably withhold their
consent to any proposed settlement.
7. RIGHTS NOT EXCLUSIVE. The rights provided hereunder shall be in
addition to any other rights to which Indemnified Party may be entitled under
the Articles of Incorporation, the Bylaws, the Act, any agreement or vote of
shareholders or directors or otherwise, both as to action in Indemnified
Party's official capacity and as to action in any other capacity, and such
rights shall continue after Indemnified Party ceases to serve the Company as
a director or officer.
8. ENFORCEMENT.
(a) Indemnified Party's rights to indemnification or reimbursement
or advancement of Expenses hereunder shall be enforceable by Indemnified
Party notwithstanding any adverse Determination, other than a Determination
which has been made by Adjudication. In any such action, if a prior adverse
Determination has been made, the burden of proving that indemnification or
reimbursement or advancement of Expenses is required under this Agreement,
the Articles of Incorporation, the Bylaws or the Act shall be on the
Indemnified Party. The Company shall have the burden of proving that
indemnification or reimbursement
<PAGE>
or advancement of Expenses is not required under this Agreement if no prior
adverse Determination shall have been made.
(b) In the event that any action is instituted by Indemnified
Party under this Agreement, or to enforce or interpret any of the terms of
this Agreement, Indemnified Party shall be entitled to be paid all court
costs and expenses, including reasonable counsel fees, incurred by
Indemnified Party with respect to such action, unless the court determines
that each of the material assertions made by Indemnified Party as a basis for
such action were not made in good faith or were frivolous.
9. NO PRESUMPTIONS. For purposes of this Agreement, the termination
of any Proceeding by judgment, order, settlement (whether with or without
court approval) or conviction, or upon a plea of nolo contendre, or its
equivalent, shall not create a presumption that the Indemnified Party did not
meet any particular standard of conduct or have any particular belief or that
a court has determined that indemnification or reimbursement or advancement
of Expenses by the Company is not permitted hereunder or by applicable law.
In addition, neither the absence of a Determination as to whether Indemnified
Party has met any particular standard of conduct or had any particular belief
or the existence of a Determination that Indemnified Party has not met such
standard of conduct or did not have such belief, prior to the commencement of
legal proceedings by Indemnified Party to secure an Adjudication that
Indemnified Party should be indemnified or advanced or reimbursed Expenses
hereunder or under applicable law, shall be a defense to Indemnified Party's
claim or create a presumption that Indemnified Party has not met any
particular standard of conduct or did not have any particular belief.
10. SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnified Party, who shall execute all papers
required and shall do everything that may be necessary to secure such rights,
including the execution of such documents necessary to enable the Company to
effectively bring suit to enforce such rights.
11. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under
this Agreement to make any payment in connection with any Proceeding against
Indemnified Party to the extent Indemnified Party has otherwise actually
received payment (under any D&O Insurance , the Articles of Incorporation,
the Bylaws, the Act or otherwise) of the amounts which may be paid hereunder.
12. SEVERABILITY. In the event that any provision of this Agreement is
determined by a court of competent jurisdiction to require the Company to do
or to fail to do an act which is in violation of the Articles of
Incorporation, the Bylaws or the Act or other applicable law, such provision
shall be limited or modified in its application to the minimum extent
necessary to avoid such violation, and, as so limited or modified, such
provision and the remainder of this Agreement shall be enforceable in
accordance with the respective terms.
<PAGE>
13. CHOICE OF LAW. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Washington.
14. SUCCESSORS AND ASSIGNS. This Agreement shall be (i) binding upon
all successors and assigns of the Company (including any transferee of all or
substantially all of the Company's assets and any successor by merger or
otherwise by operation of law) and (ii) binding on and inure to the benefit
of the heirs, personal representatives and estate of Indemnified Party.
Indemnified Party may not assign this Agreement or any of Indemnified Party's
rights hereunder without the prior written consent of the Company.
15. AMENDMENT. No amendment, modification, termination or cancellation
of this Agreement shall be effective unless made in a writing signed by each
of the parties hereto.
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
<PAGE>
IN WITNESS WHEREOF, the Company and Indemnified Party have executed this
Indemnification Agreement as of the date first above written.
OAKLEY, INC.
By:
-----------------------------
Name:
----------------------------
Title:
---------------------------
---------------------------------
Thomas A. George, Indemnified Party
<PAGE>
Exhibit 21.1
OAKLEY, INC.
List of Material Subsidiaries
Oakley Europe
<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 6, 1998,
appearing in this Annual Report on Form 10-K of Oakley, Inc. for the year
ended December 31, 1997.
Costa Mesa, California
March 25, 1998
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<PAGE>
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0
0
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