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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER: 1-13848
OAKLEY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
WASHINGTON 95-3194947
(State or other jurisdiction of (IRS Employer ID
incorporation or organization) No.)
ONE ICON 92610
FOOTHILL RANCH, CALIFORNIA (Zip Code)
(Address of principal executive
offices)
</TABLE>
(949) 951-0991
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<S> <C>
COMMON STOCK, PAR VALUE $.01 PER SHARE 70,678,057 SHARES
(Class) (Outstanding on May 12, 1999)
</TABLE>
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OAKLEY, INC.
INDEX TO FORM 10-Q
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998......................................................... 3
Consolidated Statements of Income for the three-month
periods ended March 31, 1999 and 1998......................................... 4
Consolidated Statements of Comprehensive Income for the
three-month periods ended March 31, 1999 and 1998............................. 4
Consolidated Statements of Cash Flows for the three-month periods
ended March 31, 1999 and 1998................................................. 5
Notes to Consolidated Financial Statements...................................... 6-8
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 9-13
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk............. 13-14
PART II. OTHER INFORMATION
ITEM 1 - Legal Proceedings...................................................... 15-18
ITEM 2 - Changes in Securities and Use of Proceeds.............................. 18
ITEM 3 - Defaults Upon Senior Securities........................................ 18
ITEM 4 - Submission of Matters to a Vote of Security Holders.................... 18
ITEM 5 - Other Information...................................................... 18
ITEM 6 - Exhibits and Reports on Form 8-K....................................... 19
Signatures...................................................................... 20
Exhibits........................................................................ 21
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
OAKLEY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
March 31, 1999 December 31,1998
-------------- ----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,184 $ 4,553
Accounts receivable, less allowance for
doubtful accounts of $643 (1999), $621 (1998) 35,325 33,867
Inventories, net (Note 2) 31,621 35,548
Other receivables 2,155 2,372
Deferred income taxes 6,043 6,074
Prepaid expenses and other 4,600 4,246
------------- -------------
Total current assets 84,928 86,660
Property and equipment, net 117,211 118,215
Deposits 3,776 2,513
Other assets 17,903 18,427
------------- -------------
TOTAL ASSETS $ 223,818 $ 225,815
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit (Note 3) $ 11,500 $ 13,300
Accounts payable 12,170 12,606
Accrued expenses and other current liabilities 5,671 6,646
Accrued warranty 4,393 4,420
Income taxes payable 2,890 2,567
Current portion of long-term debt (Note 3) 1,519 1,519
------------- -------------
Total current liabilities 38,143 41,058
Deferred income taxes 3,399 3,418
Long-term debt, net of current maturities (Note 3) 18,983 19,363
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' EQUITY
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; 70,678,000 shares
issued and outstanding in 1999 and 1998 707 707
Additional paid-in capital 55,666 55,610
Retained earnings 107,791 106,383
Accumulated other comprehensive loss (871) (724)
------------- -------------
Total shareholders' equity 163,293 161,976
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 223,818 $ 225,815
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months ended
March 31,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 48,726 $ 41,000
Cost of goods sold 20,053 16,182
------------ ------------
Gross profit 28,673 24,818
Operating expenses:
Research and development 1,454 1,199
Selling 15,674 13,499
Shipping and warehousing 1,244 1,400
General and administrative 7,536 6,214
------------ ------------
Total operating expenses 25,908 22,312
Operating income 2,765 2,506
Interest expense, net 597 378
------------ ------------
Income before provision for income taxes 2,168 2,128
Provision for income taxes 759 817
------------ ------------
Net income $ 1,409 $ 1,311
============ ============
Basic net income per common share $ 0.02 $ 0.02
============ ============
Basic weighted average common shares 70,678,000 70,663,000
============ ============
Diluted net income per common share $ 0.02 $ 0.02
============ ============
Diluted weighted average common shares 70,678,000 70,769,000
============ ============
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months ended
March 31,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net income $ 1,409 $ 1,311
Other comprehensive loss
Transition adjustment related to the adoption of SFAS 133 $ (103) $ --
Net unrealized gain on derivative instruments 966 --
Recognition of net unrealized gain on foreign currency exchange
contracts designated as gain from hedges (212) --
Foreign currency translation adjustment (798) (204)
------------ ------------
Other comprehensive loss, net of tax (147) (204)
------------ ------------
Comprehensive income $ 1,262 $ 1,107
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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OAKLEY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months ended March 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,409 $ 1,311
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 4,533 3,550
Compensatory stock options 55 33
Loss on disposition of equipment 10 3
Deferred income taxes 14 --
Changes in assets and liabilities, net of effects of business acquisitions:
Accounts receivable (2,026) (1,445)
Inventories 3,403 (514)
Other receivables 240 (325)
Prepaid expenses and other 260 191
Accounts payable (228) 7,497
Accrued expenses, other current liabilities and accrued warranty (1,022) (228)
Income taxes payable 341 693
-------- --------
Net cash provided by operating activities 6,989 10,766
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits (1,277) 962
Acquisitions of property and equipment (3,407) (6,523)
Proceeds from sale of property and equipment 113 --
Other assets 83 (2,009)
-------- --------
Net cash used in investing activities (4,488) (7,570)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings 12,600 --
Repayments of bank borrowings (14,780) (3,180)
Net proceeds from issuance of common shares -- 42
-------- --------
Net cash used in financing activities (2,180) (3,138)
Effect of exchange rate changes on cash 310 (204)
Net increase (decrease) in cash and cash equivalents 631 (146)
Cash and cash equivalents, beginning of period 4,553 2,657
-------- --------
Cash and cash equivalents, end of period $ 5,184 $ 2,511
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements of Oakley, Inc. and its
wholly-owned subsidiaries (the "Company") have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles ("GAAP") for complete financial
statements.
In the opinion of management, the consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair statement of the consolidated balance sheets as of March
31, 1999 and December 31, 1998, the consolidated statements of income,
comprehensive income and cash flows for the three-month periods ended March 31,
1999 and 1998. The results of operations for the three-month period ended March
31, 1999 are not necessarily indicative of the results of operations for the
entire year ending December 31, 1999.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Raw Materials $14,164,000 $15,316,000
Finished Goods 17,457,000 20,232,000
----------- -----------
$31,621,000 $35,548,000
=========== ===========
</TABLE>
NOTE 3 - FINANCING ARRANGEMENTS
Line of credit - The Company has a $50.0 million unsecured line of credit with a
bank syndicate which bears interest at either the bank's prime lending rate
(7.75% at March 31, 1999) or LIBOR plus 0.75% (5.69% at March 31, 1999), as
defined in the credit agreement, and matures August 2001. At March 31, 1999, the
Company had $11.5 million outstanding under the credit agreement. The credit
agreement contains various restrictive covenants including the maintenance of
certain financial ratios. At March 31, 1999, the Company was in compliance with
all restrictive covenants and financial ratios.
Long-term debt - The Company has a real estate term loan which is due September
2007. The term loan, which is collateralized by the Company's corporate
headquarters, requires quarterly principal payments of approximately $380,000
($1,519,000 annually), plus interest based upon LIBOR plus 1.00% (6.02% at March
31, 1999) for ten years. In January 1999, the Company entered into an interest
rate swap agreement that results in fixing the interest rate over the term of
the note at 6.31%. At March 31, 1999, the outstanding balance under the term
loan was $20.5 million.
NOTE 4 - 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 (the "Superior Court") 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 of 1933, as amended. Pursuant to a court order sustaining
demurrers to certain claims and to plaintiffs' dismissal without prejudice of
certain other claims, the only claim remaining in the Superior Court in the
California Securities Actions is a claim for
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purported violations of the antifraud provision of the California Corporation
Code with respect to two of the Company's officers and directors. On April 1,
1998, the Superior Court entered a judgment (the "Judgment") in the California
Securities Actions in favor of the Company, one of the Company's officers and
directors and the firms who served as underwriters of the Secondary Offering. On
April 15, 1998, plaintiffs filed a notice of appeal from the Judgment in the
Superior Court, which concerns plaintiffs' cause of action for purported
violations of the antifraud provisions of the California Corporations Code. On
March 31, 1999, the parties to the appeal filed a stipulation and request for
dismissal of appeal in the California Court of Appeal, Fourth Appellate District
(the "Court of Appeal"). On April 1, 1999, the Court of Appeal entered an order
dismissing the appeal from the Judgement. In March 1997, the Company was named
as a nominal defendant in a putative derivative action (the "California
Derivative Action") filed in the Superior Court 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. On
April 8, 1998, the derivative plaintiff filed a notice of appeal in the Superior
Court. In March 1999, the parties to the California Derivative Action entered
into a stipulation of settlement regarding the derivative claims that is subject
to approval by the Court of Appeal. The settlement, if approved, is not expected
to have a material adverse effect on the Company. 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 (the "District Court") 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. On
July 10, 1998, the Company and the other defendants filed motions to dismiss the
Federal Securities Actions. On January 14, 1999, the District Court denied the
motions to dismiss. On March 3, 1999, the defendants filed answers in the
Federal Securities Actions. Although it is too soon to predict the outcome of
the California Securities Actions, the California Derivative Action 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 (including the
California Derivative Action should the settlement not be approved).
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 material adverse effect on
the accompanying consolidated financial statements.
NOTE 5 - CHANGES IN ACCOUNTING PRINCIPLES
The Company adopted Statement of Financial Accounting Standards No. 133 (SFAS
133), Accounting for Derivative Instruments and Hedging Activities, on January
1, 1999. The adoption of SFAS 133 resulted in a transition adjustment recorded
by the Company as a cumulative-effect type adjustment of a $103,000 charge to
accumulated other comprehensive income to recognize the fair value of all
derivatives that are designated as cash-flow hedges.
The Company is exposed to gains and losses resulting from fluctuations in
foreign currency exchange rates relating to transactions of its international
subsidiaries as well as fluctuations in its variable rate debt. As part of its
overall strategy to manage the level of exposure to the risk of fluctuations in
foreign currency exchange rates, the Company uses foreign exchange contracts in
the form of forward contracts and option contracts. In addition, as part of its
overall strategy to manage the level of exposure to the risk of fluctuations in
interest rates, the Company has entered into an interest rate swap agreement. At
March 31, 1999, all of the Company's derivatives are designated and qualify as
cash flow hedges. For all qualifying and highly effective cash flow hedges, the
changes in the fair value of the derivative are recorded in other comprehensive
income. The Company is currently hedging forecasted transactions that
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<PAGE> 8
are expected to result in reclassifications of $1.2 million of gains to earnings
over the next nine months. The Company hedges forecasted transactions that are
determined probable to occur within 12 months or less.
On the date the Company enters into a derivative contract, management designates
the derivative as a hedge of the identified exposure. The Company does not enter
into derivative instruments that do not qualify as cash flow hedges.
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. In this documentation, the Company
specifically identifies the asset, liability, firm commitment, or forecasted
transaction that has been designated as a hedged item and states how the hedging
instrument is expected to hedge the risks related to the hedged item. The
Company formally measures effectiveness of its hedging relationships both at the
hedge inception and on an ongoing basis in accordance with its risk management
policy.
The Company would discontinue hedge accounting prospectively if it is determined
that the derivative is no longer effective in offsetting changes in the cash
flows of a hedged item; when the derivative expires or is sold, terminated, or
exercised; when the derivative is designated as a hedge instrument, because it
is probable that the forecasted transaction will not occur; because a hedged
firm commitment no longer meets the definition of a firm commitment; or if
management determines that designation of the derivative as a hedge instrument
is no longer appropriate. During the three-months ended March 31, 1999, the
Company reclassified into earnings a net gain of $212,000, resulting from the
expiration, sale, termination or exercise of foreign exchange contracts.
NOTE 6 - EARNINGS PER SHARE
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 three months ended March 31, 1999, the diluted weighted average common
shares outstanding did not include any dilutive options while at March 31, 1998,
the diluted weighted average common shares included 106,000 dilutive stock
options.
-8-
<PAGE> 9
ITEM 2.
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
Three Months Ended March 31, 1999 and 1998
Net sales
Net sales increased to $48.7 million for the three months ended March 31, 1999
from $41.0 million for the three months ended March 31, 1998, an increase of
$7.7 million, or 18.8%. This increase was primarily the result of strong
sunglass sales, including sales of a Wires, Minutes and Tens introduced during
the second and third quarters of 1998, increased sales from sport shield
sunglasses and Fives and initial sales from the newest addition to the Company's
X Metal line, Juliet, introduced in February 1999. Sales of the Company's new
polarized versions of selected sunglass lines also contributed to increased
revenue. The Company's domestic sales increased 18.3% to $28.5 million from
$24.1 million in the comparable 1998 period, principally as a result of a 29.2%
increase in net sales to the Company's largest customer, Sunglass Hut. The
Company's international sales increased 19.6% to $20.2 million in 1999 from
$16.9 million in 1998, principally as a result of increased sales in all direct
operations, particularly Europe, Canada, United Kingdom and Japan. Southeast
Asia and Latin America sales represented 1.7% and 2.6%, respectively, of total
net sales for the three months ended March 31, 1999. Footwear net sales were
$0.3 million, or 0.7% of net sales, for the first quarter of 1999. Sales of
other product categories as a group increased 22.1% during the quarter ended
March 31, 1999 over the quarter ended March 31, 1998 primarily due to increased
sales in the Company's expanded apparel line.
Gross profit
Gross profit increased to $28.7 million for the three months ended March 31,
1999 from $24.8 million for the three months ended March 31, 1998, an increase
of $3.9 million, or 15.7%. As a percentage of net sales, gross profit decreased
to 58.8% for the three months ended March 31, 1999 from 60.5% for the three
months ended March 31, 1998. The decline in gross profit as a percentage of net
sales is primarily attributable to the Company's continued investment in its
start-up footwear operations. Excluding the impact of footwear, gross profit in
the first quarter of 1999 would have been 60.6% compared with 60.8% in the first
quarter of 1998.
Operating expenses
Operating expenses increased to $25.9 million for the three months ended March
31, 1999 from $22.3 million for the three months ended March 31, 1998, an
increase of $3.6 million, or 16.1%. Increased variable expenses, higher footwear
operating expenses and incremental expenses due to the shift to direct
operations in Canada contributed to the increase in operating expenses. Research
and development expenses were $1.5 million, or 3.1% of net sales, for the three
months ended March 31, 1999 as compared to $1.2 million, or 2.9% of net sales,
for the three months ended March 31, 1998, an increase of $0.3 million. Selling
expenses increased $2.2 million to $15.7 million, or 32.2% of net sales, for the
three months ended March 31, 1999 from $13.5 million, or 32.9% of net sales, for
the three months ended March 31, 1998 as a result of increases in variable
expenses such as commissions. As a percentage of net sales, shipping and
warehousing expenses decreased to 2.6% of net sales for the three months ended
March 31, 1999 from 3.4% of net sales for the comparable 1998 period due to
positive results from various initiatives to reduce shipping costs. General and
administrative expenses for the three months ended March 31, 1999 were $7.5
million, or 15.4% of net sales, compared to $6.2 million,
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or 15.1% of net sales, in the same period in 1998. This increase in general and
administrative expenses was a result of increased personnel related costs and
professional fees.
Operating income
The Company's operating income increased to $2.8 million for the three months
ended March 31, 1999 from $2.5 million for the three months ended March 31,
1998, an increase of $0.3 million, or 12.0%, over the same period in the
previous year. As a percentage of net sales, operating income decreased to 5.7%
for the three months ended March 31, 1999 from 6.1% for the three months ended
March 31, 1998. This decrease in operating income as a percentage of net sales
was primarily due to greater operating expenses associated with the Company's
footwear line. Excluding these costs, the Company's operating income would have
been 9.0% as a percentage of net sales for the quarter ended March 31, 1999
compared to 6.6% for the comparable 1998 period.
Interest expense, net
The Company had net interest expense of $0.6 million for the three months ended
March 31, 1999 as compared with net interest expense of $0.4 million in the
comparable 1998 period. The Company incurred additional interest expense
primarily from its increased line of credit borrowing which was attributable to
the working capital and capital expenditures required for the Company's new
product categories.
Net income
The Company's net income increased to $1.4 million for the three months ended
March 31, 1999 from $1.3 million for the three months ended March 31, 1998, an
increase of $0.1 million, or 7.5%, over the comparable 1998 quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations almost entirely with cash
flow generated from operations and borrowings from its credit facilities. Cash
provided by operating activities totaled $7.0 million for the three months ended
March 31, 1999 and $10.8 million for the comparable period of 1998. At March 31,
1999, working capital was $47.0 million. Working capital may vary from time to
time as a result of seasonality, new product introductions and changes in
inventory levels. Accounts receivable days at March 31, 1999 were 43 compared to
40 for the comparable 1998 period. Inventories decreased to $31.6 million at
March 31, 1999 from $35.5 million at December 31, 1998. Additionally, the
Company has an unsecured line of credit of $50.0 million which matures August
2001. At March 31, 1999, the Company had an outstanding balance of $11.5 million
under such facility. The Company has a real estate term loan which matures
September 2007. The term loan is collateralized by the Company's corporate
headquarters and requires quarterly principal payments of approximately $380,000
plus interest base on LIBOR plus 1.00% (6.02% at March 31, 1999) for ten years.
In January 1999, the Company entered into an interest rate swap agreement that
results in fixing the interest rate over the term of the note at 6.31%. At March
31, 1999, the outstanding balance on the term loan was $20.5 million.
Capital expenditures for the three months ended March 31, 1999 totaled $3.4
million. These expenditures were primarily attributable to the expansion of the
Company's information technology capabilities, building improvements, new
product production tooling and footwear production equipment. As of March 31,
1999, the Company had commitments of approximately $2.2 million for future
capital purchases.
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.
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SEASONALITY
Historically, the Company's sales, in the aggregate, have been the highest 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 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, new
product introductions 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 apparel and orders from certain sunglass
specialty chains) within one day of receipt and international orders within two
weeks of receipt. At March 31, 1999, the Company had a backlog of $6.0 million,
including backorders (merchandise remaining unshipped beyond its scheduled
shipping date) of $2.9 million as of such date.
INFLATION
The Company does not believe inflation has had a material impact on the Company
in the past, although there can be no assurance that this will be the case in
the future.
YEAR 2000
The Company has established a Year 2000 Project Team that has completed the
review of the readiness of its computer systems and business practices for
handling Year 2000 issues. These issues involve systems that are date sensitive
and may not be able to properly process the transition from year 1999 to year
2000 and beyond, resulting in miscalculations and software failures. The
Company's Year 2000 compliance strategy involves several phases: Inventory,
Assessment, Remediation, and Testing.
STATE OF READINESS
The Company has completed its internal inventory and assessment and is currently
in the remediation and testing phase. Critical information technology ("IT")
systems, which include the Company's enterprisewide information system, time
clocks, e-mail and phone systems, are stated Year 2000 compliant with initial
testing of systems currently underway. The Company is currently performing
diagnostics and implementing Year 2000 compliant solutions on its non-IT
systems, such as manufacturing equipment and those systems involved with
facility management (security systems, air/heating systems, fire suppression
systems). All phases for IT and non-IT systems are targeted to be completed by
August 1999.
The Company's Year 2000 Project Team is coordinating the global effort and
monitoring progress of the Year 2000 readiness with respect to its subsidiaries.
Assessment of each subsidiary's internal systems is in progress with key
personnel at each subsidiary being identified to locally manage the compliance
project and collect local business partner compliance statements.
The Company has initiated communications with all of its key business partners
to determine their extent and plans for Year 2000 compliance. As part of this
process, the Company has requested written assurances from its key external
business partners as to their Year 2000 readiness status and their plans to
become Year 2000 compliant when necessary. As of March 31, 1999, the Company had
received responses from substantially all of its key business partners
acknowledging their compliance or intent to comply with Year 2000 issues. This
process is ongoing and is expected to continue throughout 1999.
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COSTS TO ADDRESS YEAR 2000 ISSUES
Based on analysis completed to date, management believes its current staff will
be sufficient to address the Year 2000 issues and that the staff time required
to address these issues should not have a material adverse effect on other
projects. The costs associated with the Year 2000 project have not been budgeted
and tracked as separate projects, but have been occurring in conjunction with
normal operating activities. These costs are being funded through operating cash
flows and are not expected to materially impact the Company's operating results.
Risks and Contingency Plans of Year 2000 Issues
The timing of a Year 2000 related disruption, if it were to occur, would
coincide with a seasonal low in the Company's business cycle, therefore having
less impact on the business. The most reasonably likely worst case Year 2000
scenario and the associated contingency plan would be:
1. A portion of non-core IT systems experience disruption. Such
disruption is not expected to have a material impact on the
Company's ability to function. A contingency plan would be
developed if the perceived risk increases, which management is
reviewing on a monthly basis.
2. A portion of manufacturing operations experience temporary
disruption. Such disruption is not expected to have a material
impact on the Company's ability to function, as normal stock
levels would cover anticipated shortages. The Company will
determine the appropriate level based on business conditions
and perceived risk, which management is reviewing on a monthly
basis.
3. A portion of the supplier base experiences disruption. The
Company has access to alternate suppliers in the event of
disruption of the supply of material or resource. It is
expected that the Company would source from alternates until
the normal supplier comes back on line.
4. A minor portion of the customer base experiences disruption.
Such disruption could result in a temporary reduction in
sales. However, this reduction is not readily quantifiable. A
contingency plan would be developed if the perceived risk
increases, which management is reviewing on a monthly basis.
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 in a timely manner could have a material adverse effect on
future results of operations. In addition, the failure of certain of the
Company's significant customers or vendors to appropriately address the Year
2000 issue in a timely manner could have a material adverse effect on the
Company.
FORWARD-LOOKING STATEMENTS
When used in this document, the words "believes," "anticipates," "expects,"
"estimates," "intends," "may," "plans," "predicts," "will" or the negative
thereof 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.
-12-
<PAGE> 13
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 3. Quantitative and Qualitative Disclosures About Market Risks
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates affecting the cost of its debt.
Foreign Currency - The Company has direct operations in Europe, Japan, Canada,
Mexico and South Africa which collect at future dates in the customers' local
currencies and purchase finished goods in U.S. dollars. Accordingly, the Company
is exposed to transaction gains and losses that could result from changes in
foreign currency exchange rates.
As more fully described in Note 5 to the Company's consolidated financial
statements, the Company is exposed to gains and losses resulting from
fluctuations in foreign currency exchange rates relating to foreign currency
transactions. As part of its overall strategy to manage the level of exposure to
the risk of fluctuations in foreign currency exchange rates, the Company uses
foreign exchange contracts in the form of forward contracts and option
contracts. All of the Company's derivatives are designated and qualify as cash
flow hedges at March 31, 1999.
One the date the Company enters into a derivative contract, management
designates the derivative as a hedge of the identified exposure. The Company
does not enter into derivative instruments that do not qualify in hedging
relationships. For all instruments qualifying and highly effective cash flow
hedges, the changes in the fair value of the derivative are recorded in other
comprehensive income ("OCI"). The following is a summary of the outstanding
foreign currency contracts outstanding at March 31, 1999:
<TABLE>
<CAPTION>
March 31, 1999
------------------------------------------------
U.S. Dollar Fair
Equivalent Maturity Value
----------- --------- -----------
<S> <C> <C> <C>
Forward Contracts:
British pounds $ 956,625 May 1999 $ 990,000
British pounds 773,354 Aug. 1999 800,000
British pounds 459,289 Nov. 1999 475,000
Canadian dollars 1,191,028 Jun. 1999 1,161,740
Canadian dollars 1,985,046 Sep. 1999 1,936,983
Canadian dollars 1,588,037 Dec. 1999 1,550,287
Japanese yen 363,483 Jun. 1999 374,728
Japanese yen 642,434 Sep. 1999 662,309
Japanese yen 1,825,866 Dec. 1999 1,882,353
French francs 3,295,653 Jun. 1999 3,553,029
French francs 4,482,088 Sep. 1999 4,832,119
French francs 3,954,784 Dec. 1999 4,268,564
Option Contracts:
British pounds 2,459,908 Jun. 1999 2,500,000
British pounds 2,459,908 Sep. 1999 2,500,000
Japanese yen 1,690,617 Jun. 1999 1,353,272
Japanese yen 1,724,429 Sep. 1999 1,420,217
Japanese yen 1,783,601 Dec. 1999 1,468,950
French francs 413,275 Jun. 1999 440,000
French francs 563,557 Sep. 1999 600,000
French francs 493,112 Dec. 1999 525,000
----------- -----------
$33,106,094 $33,294,551
=========== ===========
</TABLE>
-13-
<PAGE> 14
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.
The Company sells direct and through its subsidiaries to various customers in
the European Union which have adopted the Euro as a legal currency effective
January 1, 1999. The Euro is expected to begin circulation after a three-year
transition period on January 1, 2002. The Company has analyzed whether the
conversion to the Euro will materially affect its business operations. The
Company's information systems are capable of processing transactions in Euros.
Additionally, the Company is planning to upgrade certain of its information
systems through December 31, 2001 to enhance its capability to process
transactions and keep records in Euros. While the Company is uncertain as to the
ultimate impact of the conversion, the Company does not expect costs in
connection with the Euro conversion to be material.
Interest Rates - The Company's line of credit and long-term debt, with a total
balance of $30.4 million outstanding at March 31, 1999, bear interest based on
the bank's lending rate or LIBOR. In January 1999, the Company entered into an
interest rate swap agreement, effective March 1, 1999, that eliminates the
Company's risk of fluctuations in the variable rate of the long-term debt. Based
on the weighted average interest rate on the line of credit at March 31, 1999 of
5.96%, if interest rates on the line of credit were to increase by 10%, the
estimated impact on the Company's consolidated financial statements would be to
reduce net income by approximately $45,000 after taxes.
-14-
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. 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 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. 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;
-15-
<PAGE> 16
(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 dismissed without prejudice their
causes of action for fraud and negligent misrepresentation and unfair business
practices and false advertising. The only claim remaining in the Superior Court
is 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 April 1, 1998, the Superior Court entered a judgment
(the "Judgment") in favor of the Company and defendants Link Newcomb, Merrill
Lynch and Alex. Brown. On April 15, 1998, plaintiffs filed a notice of appeal
from the Judgment in the Superior Court, which concerns plaintiffs' cause of
action for purported violations of the antifraud provisions of the California
Corporations Code with respect to the Company and defendants Link Newcomb,
Merrill Lynch and Alex. Brown. On December 28, 1998, plaintiffs filed the
opening brief on their appeal from the Judgment in the California Court of
Appeal, Fourth Appellate District (the "Court of Appeal"). On March 31, 1999,
plaintiffs, the Company and defendants Link Newcomb, Merrill Lynch and Alex.
Brown filed a stipulation and request for dismissal of appeal in the Court of
Appeal. On April 1, 1999, the Court of Appeal entered an order dismissing the
appeal from the Judgement.
On September 24, 1998, plaintiffs in the California Securities Actions filed a
motion for class certification in the Superior Court, and plaintiffs amended
their motion for class certification on January 28, 1999. Discovery is ongoing
in the California Securities Actions.
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
"District Court"). 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");
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 GLT (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 GLT (EEx) (filed October 20, 1997) (the "Chait Action");
Val 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 GLT (EEx) (filed December 5, 1997 (the "Rosenshein Federal
Action").
-16-
<PAGE> 17
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. On April 3,
1998, plaintiffs filed consolidated amended complaints in the Federal Securities
Actions.
On July 10, 1998, the Company and defendants Mike Parnell, Link Newcomb and Jim
Jannard filed motions to dismiss the Federal Securities Actions. Merrill Lynch
and Alex. Brown also filed motions to dismiss the Federal Securities Actions. On
January 14, 1999, the District Court denied the motions to dismiss filed by the
Company and the other defendants. On March 3, 1999, the defendants filed answers
to the consolidated amended complaints in the Federal Securities Actions. On
April 2, 1999, plaintiffs filed motions for class certification in the Federal
Securities Actions. The hearing on the motions for class certification currently
is scheduled for June 28, 1999. Discovery in the Federal Securities Actions has
commenced.
THE CALIFORNIA DERIVATIVE ACTION
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
-17-
<PAGE> 18
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. On April 8, 1998, the plaintiff in the
California Derivative Action filed a notice of appeal in the Superior Court. In
March 1999, the parties to the California Derivative Action entered into a
stipulation of settlement regarding derivative claims that is subject to
approval by the Court of Appeal. The settlement, if approved by the Court of
Appeal, is not expected to have a material adverse effect on the Company.
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 (including the California Derivative Action should the
settlement not be approved) 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 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security-Holders
None
ITEM 5. Other Information
None
-18-
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
3.1(1) Articles of Incorporation of the Company
3.2(3) Amended and Restated Bylaws of the Company
3.3(2) Amendment No. 1 to the Articles of Incorporation as filed
with the Secretary of State of the State of Washington on
September 26, 1996
3.4(3) Amendment No. 1 to Sections 1 and Sections 3a through 3f of
Article IV of the Amended and Restated Bylaws of Oakley, Inc.
27.1(4) 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-K of Oakley, Inc. for the year
ended December 31, 1996.
(3) Previously filed as Exhibit 10.66 to the Form 10-K of Oakley, Inc.
for the year ended December 31, 1998.
(4) Filed herewith.
The Company did not file any reports on Form 8-K during the three months ended
March 31, 1999.
-19-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Oakley, Inc.
/s/ WILLIAM SCHMIDT May 12, 1999
- ------------------------------
William Schmidt
Chief Executive Officer
/s/ THOMAS GEORGE May 12, 1999
- ------------------------------
Thomas George
Chief Financial Officer
-20-
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 5,184
<SECURITIES> 0
<RECEIVABLES> 35,325
<ALLOWANCES> 643
<INVENTORY> 31,621
<CURRENT-ASSETS> 85,192
<PP&E> 117,211
<DEPRECIATION> 0
<TOTAL-ASSETS> 224,082
<CURRENT-LIABILITIES> 38,143
<BONDS> 0
0
0
<COMMON> 707
<OTHER-SE> 162,850
<TOTAL-LIABILITY-AND-EQUITY> 224,082
<SALES> 48,726
<TOTAL-REVENUES> 48,726
<CGS> 20,053
<TOTAL-COSTS> 20,053
<OTHER-EXPENSES> 25,908
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 597
<INCOME-PRETAX> 2,168
<INCOME-TAX> 759
<INCOME-CONTINUING> 1,409
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,409
<EPS-PRIMARY> $0.02
<EPS-DILUTED> $0.02
</TABLE>
