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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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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, 1998
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 NO.)
INCORPORATION OR ORGANIZATION)
ONE ICON
FOOTHILL RANCH, CALIFORNIA 92610
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (949) 951-0991
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the 90 days. Yes [X] No [ ]
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. [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on March 10, 1999: $190,813,830.
Number of shares of common stock, $.01 par value, outstanding as of the
close of business on March 10, 1999: 70,678,057 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's 1999 Annual
Shareholders Meeting are incorporated by reference into Part III herein.
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OAKLEY, INC.
TABLE OF CONTENTS
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PART I
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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
</TABLE>
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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 consumer products, including high-performance eyewear,
footwear, watches and athletic equipment. The Company's principal strength is
its ability to develop products which demonstrate superior performance and
comfort through the combination of patented and other proprietary technology and
unique styling. The Company has focused on eyewear 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 sunglasses (e.g.,
Frogskins(R), M Frames(R), Zeros(R), Wires(TM), Jackets(R), X Metal(R),
Fives(TM) and Topcoat(R)), goggles, face shields for use with sports helmets,
sunglass accessories, gear bags and a limited range of athletic footwear,
technical apparel and premium timepieces.
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. 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.
PRODUCT DESIGN AND DEVELOPMENT
Oakley has built a legacy on the aesthetics of science by merging form and
function through a philosophy called sculptural physics. As inventions wrapped
in art, the Company's breakaway designs and engineering innovations are
protected by more than 400 legal patents worldwide and have inspired a loyal
following around the globe. With focus on consumers for the next generation, the
Company has established itself as a legitimate world brand with unique expertise
in product design, performance and production.
State-of-the-art technology allows the Company to shorten dramatically its
product development cycle. Stereolithographic computer modeling is combined with
CAD/CAM liquid laser prototyping to create fully detailed, wearable prototypes
of eyewear and footwear. 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 tooling. Utilizing these processes, the
Company is capable of introducing a new product line within four months of
initial concept.
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The American National Standards Institute (ANSI) has established specific
standards for eyewear testing. Known as Z87.1, these tests analyze product
safety and provide quantitative measure of optical quality. The Company conducts
ANSI tests at its own facilities on a regular basis, and all eyewear products
meet or exceed ANSI Z87.1 standards. Sports-application eyewear featuring
Oakley's patented polaric ellipsoid(TM) lens geometry (M Frame, Pro M Frame(R),
Zero and A Frame(TM) Goggle) 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(TM),
demonstrates comparable superiority.
In addition to ANSI Z87.1 analysis, the Company performs tests to ensure product
durability. These tests include cranial expansion/pull testing, which simulates
the act of removing eyewear 25 times a day, 365 days a year, for 110 years;
accelerated weathering in extremes o of ultraviolet light, heat, condensation
and humidity within an environmental simulation chamber; thermal shock and
endurance in temperatures ranging from -30(Degree)F to 200(Degree)F; and
real-world use to determine the detrimental effects of cosmetics, sunscreens,
perspiration and chemicals that may come in contact with the product during
normal use.
With strict guidelines from the American Society for Testing and Materials
(ASTM) and other industry authorities, Oakley footwear and apparel undergo
extensive testing to ensure quality, performance and durability. Abrasion tests
are performed on the outsole and shoe upper, as well as on clothing that
utilizes rubber compounds in high-abrasion areas. These include Taber Abrasion
(ASTM D3884), Wyzenbeetz Abrasion (ASTM D457), DIN Abrasion (DIN 53516 and ISO
4649), and Ross Flex/Cut Growth (ASTM D1052). ASTM E96, the analysis of Moisture
Vapor Transport Rate (MVTR), is performed to ensure textile breathability.
Quantitative examination of durability and shock absorption is performed on the
shoe midsole, including a full Compression Set (ASTM D395) and Dynamic Fatigue
Test (ASTM D3574). Additional analyses include the traction performance of
outsoles via the Coefficient of Dynamic Friction (ASTM E303) and the bond
strength between shoe components via T-Peel on an Instron (ASTM D1876).
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.
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. To that end, the Company strives to develop methods of
production that provide greater precision and less cost than its competition. By
maintaining an in-house design staff, the Company has been able to consolidate
and focus a broad range of expertise, achieving consistent vision as its
develops notable breakthroughs in product form and function.
Among the Company's most significant developments, Iridium(R) coatings and
Plutonite(R) 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 acquired
a patent which covers certain Iridium coatings. Plutonite is a proprietary
material used to produce lenses of exceptional optical clarity. The material
provides 100% protection against UVA, UVB, UVC and harmful blue light. It meets
all ANSI Z87.1
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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 enhance peripheral
vision and protection against sun and wind.
Oakley has applied prescription lens technology to all of its frame models.
Called Oakley Rx, the technology utilizes computer modeling to reconfigure the
curvature of corrective lenses, shaping them to the wrapped curvature of Oakley
frames. Custom grinding and specialized equipment for cutting and edging give
the Company proprietary control of this precision lens tailoring, which now has
universal application. This has enabled Oakley to attract high profile athletes
that would not otherwise have been available to promote the Company's brand.
The prescription program is expanding its reach beyond the Company's own eyewear
frames in 1999. Oakley prescription lenses can now be made to fit any brand of
ophthalmic frame, regardless of model or manufacturer. By combining the
precision vectoring technology with the many attributes of Oakley lenses -
including impact protection, UV protection, low weight and exceptional clarity -
the Company's new prescription program has created an inroad for new customers,
even as they purchase frame styles from competitors.
In February 1997, Oakley introduced its first sunglass in the X Metal line: a
family of eyewear named for a proprietary blend of metals that exhibits an
extraordinary strength-to-weight ratio. In addition to a unique metallurgical
process, X Metal utilizes breakthroughs in architectural mechanics. Built with
more than two dozen parts, each titanium alloy frame is engineered with flex
couplers, temple shocks and interchangeable nose bombs to provide a comfortable,
natural fit. With the success of the original style, Romeo(TM), a second line
called Mars(TM) was added in 1998. In early 1999, Juliet(TM) was added to the X
Metal family.
In 1998, the Company introduced several significant new products. Recent eyewear
releases include: Racing Jacket(TM), a hingeless frame with vented, ergonomic
contouring; Minute(TM), a blend of fluid curvature and condensed cranial
geometry to accommodate smaller faces; a Wire(TM), an addition to the Wire
family that alloys five metal compounds to produce ultra lightweight frames;
Tens(TM), a balance between the condensed cranial geometry of the Oakley Five
and the full-size Frogskin frame; A Frame, a high-performance goggle that
incorporates defogging ventilation with optically correct dual-lens
architecture; and Moon(TM), an O Matter(R) frame that incorporates select design
elements of X Metal Mars.
Establishing itself as a global brand, the Company has diversified beyond the
eyewear market. The utilization of advanced technologies in fabrics and
fabrication has placed Oakley at the forefront of innovation in the design and
production of apparel. In addition to clothing, Oakley has also entered the
performance footwear market. The initial footwear release was marked by a
reinvention of current styles and sciences. Vulcanized rubber was discarded for
a unique synthetic, a composite of Kevlar(R) and Unobtanium(TM) that parallels
the traction technology of racing tires. A breathable lattice of high-tenacity O
Matter was interwoven with Kevlar(R) for the shoe upper, and breakthroughs such
as three-point triangulated sole geometry, independent torsion response and
stabilized lateral control were added to enhance performance. The footwear is
manufactured at the Company's Foothill Ranch facility.
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The Company continues to expand the limits of today's technologies, most
recently by introducing wristwatches that merge critical innovations in gearing,
bearings and microcircuitry from around the world. Rendered with cutting-edge
styling, each timepiece utilizes a precision flywheel mechanism to drive an
inertial generator(TM) and charge a lithium capacitor. With the means to convert
motion into electricity, the Company has produced a perpetual chronometer that
performs with the accuracy of quartz calibration.
Oakley intends to introduce other product line extensions and new product lines
in the future, innovations targeted to attract additional consumers to the brand
and support efforts to further diversify the Company as a global brand.
To take advantage of unique opportunities, the Company may, from time to time,
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 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 has a different radius
from the top to bottom than from side to side and is 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(R), Jackets,
Wires, Frogskins, X Metal, Topcoat, Minutes, Tens and Moons. The Company's
spherical lenses are corrected and oriented so as to minimize distortion in the
"as-worn" position, a feature which differentiates the Company's dual-lens
sunglasses from those of its competitors. The Company 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.
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The Company's current products are set forth below:
<TABLE>
<CAPTION>
DATE INTRODUCED U.S. SUGGESTED
RETAIL PRICE
SUNGLASSES
<S> <C> <C>
M Frames Late 1989 $ 90.00 - 145.00
Zeros Late 1993 80.00 - 105.00
Wires Late 1993 130.00 - 225.00
Eye jackets(R) Late 1994 90.00 - 125.00
Trenchcoats Late 1995 90.00 - 130.00
Straight Jackets(R) May 1996 100.00
Square Wires(R) 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 - 130.00
Racing Jackets January 1998 110.00 - 150.00
X Metal Mars March 1998 275.00 - 315.00
Minutes May 1998 90.00 - 125.00
a Wires May 1998 135.00
Moons July 1998 100.00 - 130.00
Tens August 1998 75.00 - 120.00
GOGGLES
Motocross 1980 26.00 - 56.50
Ski 1983 25.00 - 102.00
H20 1990 25.75 - 61.00
A Frame 1998 85.00 - 120.00
</TABLE>
* The Company's original Frogskin line was introduced in 1985 and was
discontinued after the new style was introduced in 1996.
The Company also offers polarized lenses in its Jackets, Minutes, Wires, Fives
and Tens sunglasses. By eliminating glare, the polarized polycarbonate lens
enhance color recognition and greatly reduce eye strain.
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(TM) zippers and reinforced rivets, to
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provide added strength and durability in the backpack; fully taped double-needle
seams and nailhead cordura(R) for added durability on the arms and shoulders of
the ballistic jacket; and venting to control excess heat and moisture in the
fleece pullover.
Footwear
The Company's first model in its performance footwear line was introduced in May
1998, with initial shipments to the U.S. market beginning in July 1998 and
subsequent international shipments later in 1998. By approaching athletic shoes
from the perspective of design innovation, the Company has reconfigured every
detail of footwear design, combining function and form and utilizing material
combinations which have never before been used in footwear. Vulcanized rubber
was discarded for a unique synthetic, a composite of Kevlar(R) and Unobtanium
that parallels the traction technology of racing tires. A breathable lattice of
high-tenacity O Matter was interwoven with Kevlar(R) for the shoe upper, and
breakthroughs such as three-point triangulated sole geometry, independent
torsion response and stabilized lateral control were added to enhance
performance. The footwear is manufactured at the Company's Foothill Ranch
facility.
Watch
The Oakley Time Bomb(TM) incorporates the Company's zeal for sculptural design
with innovation in watch quality and construction. With unique casings in an X
Metal(TM) alloy, Ion-plated stainless steel and solid gold, the Time Bomb
appeals to Oakley's loyal customer following, a group of people who expect
quality as well as progressive styling. The timepiece's movement is a
culmination of the best technologies available, including a new Oakley
invention: the O Engine(TM). The O Engine powers Oakley's Inertial Generator,
converting human motion into an endless electric current that fires a quartz
tuner. Advances in gearings, bearings, and microcircuitry from across the globe
- -- called World Movement(TM) - are incorporated to produce a timepiece that has
precision quartz accuracy with the benefits of automatic movement.
To date, the Company has designed its footwear, watch, apparel and other
accessories using its own 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.
Kevlar(R) and Nailhead Cordura(R) are Dupont registered trademarks.
YKK(TM) is a YKK Corporation registered trademark.
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
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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 and
an increase in new product introductions, 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. In the event of the loss of
the source for lens blanks, the Company has identified an alternate source which
may be available. The effect of the loss of any of these sources or a disruption
in their business will depend primarily upon the length of time necessary to
find a suitable alternative source 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 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.
DISTRIBUTION
The Company sells Oakley eyewear in the United States through a carefully
selected base of approximately 7,800 active accounts as of December 31, 1998
with approximately 11,500 locations comprised of optical stores, sunglass
retailers and specialty sports stores, including bike, surf, ski and golf shops
and motorcycle, running and sporting goods stores. Unlike most of its
competitors, the Company has elected not to sell its products through 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 1998, 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 discount stores, drug stores and traditional
mail-order catalogs has contributed to the Company's exclusive, high-quality
image.
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 and
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Central America 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 April 1998, the Company acquired the Oakley
division of its exclusive Canadian distributor which enables the Company to
market and sell its products on a direct basis in Canada. 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.
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. Approximately 90% of the Company's sales force are paid
solely by commissions based 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 25 sports
marketing experts domestically, with an additional 20 managers positioned in
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
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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 and baseball.
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. All authentic Oakley watches are warranted
for one-year against manufacturer defects when purchased from an authorized
Oakley watch dealer.
ADVERTISING AND PROMOTION
Oakley retains significant control over its promotional programs and 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, Japan and Canada. 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.
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 with its 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.
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 includes packaging, mailers, catalogs, billboards, the
Internet and other media. The Company considers many factors in evaluating the
effectiveness of these marketing opportunities. In addition to cost
effectiveness, analytical criteria include the ability to engage new market
opportunities, build image, enhance the stature of the brand and reinforce the
identity of the brand. During the past year, the Company has expanded its direct
marketing efforts by utilizing its cutting-edge Internet site and direct mail
campaigns to more closely connect with the consumer.
The Company maintains an intriguing and instructive presence on the Internet.
Oakley has made an extensive effort to continually enhance its virtual domain
site enriching dynamic visuals with engaging text. The Company's diverse
Internet offerings include: O StoreSM, a secure location for Internet commerce
where customers can make purchases and track order status; obtain Scope TourSM
information, including the ability to easily locate future tours within the
customer's area; and receive the latest information on Oakley athletes,
technologies and new inventions.
11
<PAGE> 12
Beyond its own Internet site, the Company utilizes alternative Internet sites,
such as Yahoo, for promotion and has purchased keywords such as "sunglasses,"
"optics," "Oakley" and others. When a customer visits the Yahoo site and
searches with one of these keywords, an Oakley banner is displayed at the top of
their screen; a double-click will take them to the Company's home page.
The emphasis placed on Internet promotion and commerce, combined with efforts in
attaining editorial coverage through the use of professional athletes, as well
as more immediate contact with the consumer through such vehicles as the Scope
Program and direct marketing, reflect the forward-thinking nature of the
Company's advertising and promotion strategies.
PRINCIPAL CUSTOMERS
During 1998, net sales to the Company's ten largest customers, which included
five international distributors, accounted for approximately 35.7% 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 26.0% of
the Company's 1998 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, 1998, Oakley independent
distributors serviced approximately 138 of the 1,768 Sunglass Hut locations
worldwide. 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 1998, two Oakley mail order catalogs were produced with Sunglass Hut.
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 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. 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 infringers. The Company 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, 1998 concerning the
Company's intellectual property:
<TABLE>
<CAPTION>
Number of Utility/Design Patents Number of Trademarks
-------------------------------- ---------------------
Issued Pending Issued Pending
------ ------- ------ -------
<S> <C> <C> <C> <C>
United States 89 34 75 65
International 352 233 599 258
</TABLE>
None of the patents that Oakley is currently using to enforce its property
rights have an expiration date before 2006.
12
<PAGE> 13
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 and assisting law enforcement
agencies. The Company's sales representatives are 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.
Within the athletic footwear and sports apparel market, the Company competes
with large, established brands such as Nike, Reebok, Adidas and Fila, which have
greater financial and other resources than the Company. In addition to these
dominant brands, the Company also competes with smaller niche brands, such as
Airwalk, Vans, Skechers and Timberland.
The upper-middle and luxury segments of the watch market (respectively
categorized by the price points $300-$900 and $1,000 plus) are dominated by
established Swiss brands, including Rolex, Breitling, Gucci, Omega, TAG-Heuer,
Movado, Rado and Hamilton.
DOMESTIC AND FOREIGN OPERATIONS
See Note 11 to the Notes to the Consolidated Financial Statements for discussion
regarding domestic and foreign operations.
13
<PAGE> 14
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 10,
1999, there were a total of approximately 1,100 full-time employees. In
addition, the Company utilizes as many as 675 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.
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. 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, France, South
Africa, Japan, Canada and the state of Washington. In 1997, the Company
purchased land in Mexico City on which it constructed an approximately 18,000
square foot business office and warehouse for its operations in Mexico and
Central America. The new facility was occupied in late 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
14
<PAGE> 15
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; (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.
15
<PAGE> 16
On December 28, 1998, plaintiffs filed the opening brief on their appeal from
the Judgment. None of the defendants has yet responded to plaintiffs' opening
brief on appeal.
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. The hearing on the
motion for class certification currently is scheduled for April 30, 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").
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
16
<PAGE> 17
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.
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 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
California Court of Appeal, Fourth Appellate District (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'
17
<PAGE> 18
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
<PAGE> 19
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 10, 1999, the
closing sales price for the Common Stock was $7.50. The following table sets
forth the high and low sales prices for the Common Stock for each quarter of
1997 and 1998 on the New York Stock Exchange Composite Tape:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
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
1998
First Quarter $ 12 3/8 $ 8 7/16
Second Quarter $ 14 5/8 $ 12
Third Quarter $ 14 7/8 $ 9 5/8
Fourth Quarter $ 10 7/8 $ 8 1/2
</TABLE>
The number of shareholders of record for Common Stock on March 10, 1999 was 675.
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.
19
<PAGE> 20
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, 1996, 1997, and 1998 and balance sheet data as of December 31, 1997 and 1998
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,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
(dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 123,952 $ 172,752 $ 218,566 $ 193,984 $ 231,934
Cost of goods sold 35,714 50,295 66,790 75,393 86,134
------------ ------------ ------------ ------------ ------------
Gross profit 88,238 122,457 151,776 118,591 145,800
Operating expenses:
Research and development 25,529 16,774 4,782 3,825 5,231
Selling 30,815 36,776 48,092 53,007 66,188
Shipping and warehousing 3,187 4,678 6,507 5,721 6,777
General and administrative 14,681 15,753 18,513 23,032 26,299
Gain on disposition of property
and equipment -- (4,794) -- -- --
------------ ------------ ------------ ------------ ------------
Total operating expenses 74,212 69,187 77,894 85,585 104,495
Operating income 14,026 53,270 73,882 33,006 41,305
Interest expense (income), net 232 273 (781) 1,181 2,109
------------ ------------ ------------ ------------ ------------
Income before provision for
income taxes 13,794 52,997 74,663 31,825 39,196
Provision for income taxes (1) 259 7,830 28,670 12,221 15,051
------------ ------------ ------------ ------------ ------------
Net income $ 13,535 $ 45,167 $ 45,993 $ 19,604 $ 24,145
============ ============ ============ ============ ============
Basic net income per share $ 0.64 $ 0.28 $ 0.34
============ ============ ============
Basic weighted average common shares 71,324,000 70,659,000 70,678,000
============ ============ ============
Diluted net income per share $ 0.64 $ 0.28 $ 0.34
============ ============ ============
Diluted weighted average common shares 71,728,000 70,700,000 70,851,000
============ ============ ============
SUPPLEMENTAL INCOME STATEMENT DATA (2):
Income before provision for income taxes $ 13,794 $ 52,997
Provision for income taxes 5,539 20,854
------------ ------------
Net income $ 8,255 $ 32,143
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1994 1995 1996 1997 1998
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 9,932 $ 39,161 $ 36,107 $ 41,688 $ 45,602
Total assets 49,694 97,725 158,245 181,291 225,815
Total debt 3,300 263 18,000 25,201 34,182
Shareholders' equity 33,133 81,709 121,437 136,961 161,976
</TABLE>
(footnotes on next page)
20
<PAGE> 21
(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.
21
<PAGE> 22
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 tables set forth operating results in dollars and as a percentage
of net sales for the periods indicated.
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 218,566 $ 193,984 $ 231,934
Cost of goods sold 66,790 75,393 86,134
--------- --------- ---------
Gross profit 151,776 118,591 145,800
Operating expenses:
Research and development 4,782 3,825 5,231
Selling 48,092 53,007 66,188
Shipping and warehousing 6,507 5,721 6,777
General and administrative 18,513 23,032 26,299
--------- --------- ---------
Total operating expenses 77,894 85,585 104,495
--------- --------- ---------
Operating income 73,882 33,006 41,305
Interest (income) expense, net (781) 1,181 2,109
--------- --------- ---------
Income before provision for income taxes 74,663 31,825 39,196
Provision for income taxes 28,670 12,221 15,051
--------- --------- ---------
Net income $ 45,993 $ 19,604 $ 24,145
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 30.6 38.9 37.1
--------- --------- ---------
Gross profit 69.4 61.1 62.9
Operating expenses:
Research and development 2.2 2.0 2.3
Selling 22.0 27.3 28.5
Shipping and warehousing 3.0 2.9 2.9
General and administrative 8.5 11.9 11.4
--------- --------- ---------
Total operating expenses 35.7 44.1 45.1
--------- --------- ---------
Operating income 33.7 17.0 17.8
Interest (income) expense, net (0.4) 0.6 0.9
--------- --------- ---------
Income before provision for income taxes 34.1 16.4 16.9
Provision for income taxes 13.1 6.3 6.5
--------- --------- ---------
Net income 21.0% 10.1% 10.4%
========= ========== =========
</TABLE>
22
<PAGE> 23
The Company's sunglass sales before discounts and defective returns were $212.8
million, $171.4 million and $197.0 million for the years ended December 31,
1996, 1997 and 1998, respectively. Sunglass unit sales were 4,310,846, 3,620,612
and 3,956,150 for the years ended December 31, 1996, 1997 and 1998,
respectively.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales
Net sales increased to $231.9 million for the year ended December 31, 1998 from
$194.0 million for the year ended December 31, 1997, an increase of $37.9
million, or 19.6%. This increase was the result of strong sales of Fives,
increased M Frame sales and sales of new products, partially offset by declines
in sales of more mature products. Sales of new sunglass products accounted for
21.0% of gross sunglass sales. New products for 1998 included Mars, introduced
in March 1998, the A Wire and Minute, introduced in May 1998 and Tens,
introduced in August 1998. For the year, the Company experienced a 9.4% increase
in sunglass unit volume and 5.2% increase in average selling prices. The
Company's U.S. sales increased 19.8% to $136.5 million from $113.9 million in
1997, principally as a result of a 41.1% increase in net sales to the Company's
largest customer, Sunglass Hut. This increase was attributable to increased
sales rates with this customer, a coordinated advertising effort between the
companies resulting in strong holiday sales and lower 1997 purchases by Sunglass
Hut due to its strategy to reduce inventory levels during the year. The
Company's international sales increased $15.4 million to $95.4 million in 1998
from $80.0 million in 1997, a 19.2% increase, principally as a result of
increased sales in all direct markets and most other regions other than Asia,
with significant increases in Europe, Canada and Japan. Southeast Asia and Latin
America sales represented 1.3% and 2.6%, respectively, of total net sales for
1998. The Company entered the athletic footwear market in July 1998 and recorded
net sales of $2.6 million, or 1.1% of net sales, during the year. Sales of other
product categories as a group increased 28.9% in 1998 over 1997 primarily due to
the Company's expanded apparel program, new A Frame goggle and new watch, the
Time Bomb, introduced in December 1998. Watch sales were $2.4 million in 1998.
Gross profit
Gross profit increased to $145.8 million for the year ended December 31, 1998
from $118.6 million for the year ended December 31, 1997, an increase of $27.2
million, or 22.9%. As a percentage of net sales, gross profit increased to 62.9%
in 1998 from 61.1% in 1997. Gross profit as a percentage of net sales increased
primarily due to improvements in goggle margins, a favorable margin effect from
watch sales, expansion of international direct distribution, reduced product
returns and the increased revenue volume contributing to reduced fixed overhead
costs per unit. These positive factors were partially offset by a negative
margin impact from a lower sunglass contribution, as well as increased sales
discounts and footwear start-up costs.
Operating expenses
Operating expenses increased to $104.5 million for the year ended December 31,
1998 from $85.6 million for the year ended December 31, 1997, an increase of
$18.9 million, or 22.1%. This increase is generally due to higher variable
expenses attributable to increased volume, operating expenses from the Company's
new direct distribution operations in Canada and Japan and initial footwear
operating expenses. Research and development expenses increased $1.4 million to
$5.2 million in 1998. 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 increased $0.5 million to $5.2 million in
1998, or 2.2% of net sales, from $4.7 million, or 2.4% of net sales, in 1997.
Selling expenses increased $13.2 million to $66.2 million in 1998, or 28.5% of
net sales, from $53.0 million, or 27.3% of net sales, in 1997 primarily as a
result of increased sales commissions attributable to increased
23
<PAGE> 24
sales and higher sports marketing expenses to increase awareness for Oakley
products. Additional increases in selling expenses resulted from higher
depreciation on in-store product displays due to increased product display
investments to accommodate the Company's growing eyewear product line and new
product categories, and increased professional fees for intellectual property
protection. Shipping and warehousing expenses were 2.9% of net sales for 1998
and 1997. General and administrative expenses increased $3.3 million to $26.3
million, or 11.3% of net sales, in 1998 from $23.0 million, or 11.9% of net
sales, in 1997 primarily due to increased personnel and related costs, increased
amortization of intangible assets related to acquisitions completed in 1997 and
1998 and operating expenses associated with the Company's integrated information
system. For the year ended December 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
headquarters 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).
Operating income
The Company's operating income increased to $41.3 million for the year ended
December 31, 1998 from $33.0 million for the year ended December 31, 1997, an
increase of $8.3 million. As a percentage of net sales, operating income
increased to 17.8% in 1998 from 17.0% in 1997. This increase was the result of
increased gross profit margin, partially offset by slightly higher operating
expenses as a percentage of net sales. Excluding footwear start-up costs, the
Company's 1998 operating margin would have been 19.5% versus 17.0% in 1997.
Interest expense, net
The Company had net interest expense of $2.1 million in 1998, as compared with
net interest expense of $1.2 million for 1997. Net interest expense for 1997
excludes $0.5 million of interest costs which were capitalized in the period as
part of the construction of the Company's new headquarters facility. 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.
Income taxes
The Company recorded a provision for income taxes of $15.1 million for the year
ended December 31, 1998 and $12.2 million for 1997. The Company's effective
income tax rate of 38.4% remained consistent for the years ended December 31,
1998 and 1997. The Company's international expansion and a reduction in
statutory rates for certain foreign jurisdictions, have contributed in a number
of ways in reducing the Company's effective tax rate. As a result, in 1999, the
Company's effective income tax rate will be reduced to approximately 35%.
Net income
The Company's net income increased to $24.1 million for the year ended December
31, 1998 from $19.6 million for the year ended December 31, 1997, an increase of
$4.5 million, or 23.0%.
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
24
<PAGE> 25
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 U.S. 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
U.S. 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.
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 and warehousing 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 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.
25
<PAGE> 26
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.
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 $28.6 million for the year ended
December 31, 1998 and $36.3 million for the comparable period of 1997. At
December 31, 1998, working capital was $45.6 million. Working capital may vary
from time to time as a result of seasonality, new product introductions and
changes in accounts receivable and inventory levels. Accounts receivable days at
December 31, 1998 were 46 compared to 42 at December 31, 1997. This increase in
receivable days is attributable to the customary terms for new product
categories being longer than terms in eyewear and increased direct expansion
into international markets that also carry longer customary terms. Inventories
increased to $35.5 million at December 31, 1998 compared to $26.2 million at
December 31, 1997 to accommodate new and expanded product categories in addition
to higher sunglass and goggle inventories consistent with their increased
revenues. In August 1998, the Company amended its unsecured line of credit to
increase its borrowing limits from $30.0 million to $50.0 million, extended the
due date from June 1999 to August 2001 and improved the borrowing rate. At
December 31, 1998, the Company had an outstanding balance of $13.3 million under
such facility. Additionally, in August 1998, the Company amended its real estate
term loan lowering the borrowing rate by 0.15% and extending the due date to
September 2007. The term loan, which is collateralized by the Company's
corporate headquarters, requires quarterly principal payments of approximately
$380,000 plus interest based on LIBOR plus 1.00% (6.26% at December 31, 1998)
for ten years. At December 31, 1998, the outstanding balance on the term loan
was $20.9 million.
Capital expenditures for the year ended December 31, 1998 included $16.2 million
for furniture, equipment and computers, $8.9 million for in-store displays and
new product tooling and $3.8 million for building improvements and a new
international office for a total of $28.9 million net of retirements. During
1998, the Company acquired the Oakley division of its exclusive Canadian
distributor and certain patented technology for an aggregate purchase price of
approximately $7.3 million. As of December 31, 1998, the Company had commitments
of approximately $1.3 million for future capital purchases.
26
<PAGE> 27
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, 1998, the Company had repurchased 756,000 shares at an aggregate
cost of approximately $9.6 million.
No purchases were made in 1998.
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.
SEASONALITY
The following table sets forth certain unaudited quarterly data for the periods
shown:
<TABLE>
<CAPTION>
1997 1998
--------------------------------------- ----------------------------------------
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 $ 34,403 $55,150 $59,418 $45,013 $41,000 $70,030 $67,263 $53,641
Gross profit 19,656 36,055 36,048 26,832 24,818 45,461 41,903 33,618
</TABLE>
Historically, the Company's sales, in the aggregate, have been 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 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 U.S. 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 December 31, 1998, the Company had a backlog of $3.6
million, including backorders (merchandise remaining unshipped beyond its
scheduled shipping date) of $1.2 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 this 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 no longer places future shipment orders
for these products except in anticipation of major seasonal sales increases.
These system enhancements are the result of joint efforts by the two companies
to achieve long-term benefits of lower overall inventory levels, increased
inventory turns and higher 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.
27
<PAGE> 28
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
June 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 December 31, 1998, the Company
has 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.
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.
28
<PAGE> 29
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 any 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 slight 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.
RECENT ACCOUNTING DEVELOPMENTS
In 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued and is effective for fiscal years beginning after June
15, 1999. The Company is reviewing the impact SFAS No. 133 will have on its
financial statements.
ITEM 7A. 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 - Oakley has direct operations in Europe, Japan, Canada, Mexico
and South Africa which collect at future dates in the customers' local
currencies and purchase raw materials and 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.
The Company and its foreign subsidiaries may enter into derivative financial
instruments, including foreign currency forward exchange contracts and foreign
currency option 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 associated with forward exchange
contracts related to hedges of firmly committed transactions are deferred and
recognized when the hedged transaction occurs. Gains and losses resulting from
foreign exchange contracts which are not hedges of firmly committed transactions
are recorded each period to the consolidated statement of income. Unrealized
gains associated with option contracts are recorded each period. Unrealized
losses associated with option contracts are recorded each period to the extent
of gains on such contracts previously recorded. Premiums associated with option
contracts are amortized on a straight line basis over the life of the option
contract.
29
<PAGE> 30
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------
U.S. Dollar Fair
Equivalent Maturity Value
------------ --------- ----------
<S> <C> <C> <C>
Forward Contracts:
British pounds $ 481,175 Jan. 1999 $ 485,000
British pounds 544,166 Feb. 1999 548,000
British pounds 765,116 Mar. 1999 770,000
British pounds 984,368 May 1999 990,000
British pounds 795,783 Aug. 1999 800,000
British pounds 472,609 Nov. 1999 475,000
Canadian dollars 846,189 Mar. 1999 838,710
Canadian dollars 1,171,646 Jun. 1999 1,161,740
Canadian dollars 1,952,744 Sep. 1999 1,936,983
Canadian dollars 1,562,195 Dec. 1999 1,550,287
Japanese yen 577,060 Mar. 1999 577,060
Japanese yen 381,747 Jun. 1999 381,747
Japanese yen 674,716 Sep. 1999 674,716
Japanese yen 1,917,614 Dec. 1999 1,917,614
French francs 2,142,283 Mar. 1999 2,142,283
French francs 3,570,472 Jun. 1999 3,570,472
French francs 4,855,842 Sep. 1999 4,855,842
French francs 4,284,567 Dec. 1999 4,284,567
Option Contracts:
British pounds 1,265,625 Mar. 1999 1,250,000
British pounds 2,531,250 Jun. 1999 2,500,000
British pounds 2,531,250 Sep. 1999 2,500,000
Japanese yen 1,669,034 Mar. 1999 1,424,242
Japanese yen 1,775,568 Jun. 1999 1,353,272
Japanese yen 1,811,080 Sep. 1999 1,420,217
Japanese yen 1,873,224 Dec. 1999 1,468,950
French francs 269,660 Mar. 1999 265,000
French francs 447,737 Jun. 1999 440,000
French francs 610,551 Sep. 1999 600,000
French francs 534,232 Dec. 1999 525,000
----------- -----------
$43,299,503 $41,706,702
=========== ============
</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, 1998, outstanding contracts
were recorded at fair market value (except for certain option contracts with
unrealized losses) and the resulting gains and losses were recorded in the
consolidated financial statements pursuant to the policy set forth above.
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
30
<PAGE> 31
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 $34.2 million outstanding at December 31, 1998, bear interest based
on the bank's lending rate or LIBOR. The weighted average interest rate at
December 31, 1998 was 6.36%. If interest rates were to increase by 10%, the
estimated impact on the Company's consolidated financial statements would be to
reduce net income by approximately $134,000 after taxes based on amounts
outstanding and rates in effect at December 31, 1998. In January 1999, the
Company entered into an interest rate swap agreement that reduces the Company's
risk of fluctuations in the variable rate of the long-term debt.
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.
31
<PAGE> 32
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 11, 1999 to be
filed with the Securities and Exchange Commission within 120 days after December
31, 1998 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 11, 1999 to be
filed with the Securities and Exchange Commission within 120 days after December
31, 1998 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 11, 1999 to be
filed with the Securities and Exchange Commission within 120 days after December
31, 1998 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 11, 1999 to be
filed with the Securities and Exchange Commission within 120 days after December
31, 1998 and is incorporated herein by reference.
32
<PAGE> 33
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 shown in the
financial statements or are inapplicable, and therefore have been
omitted.
(a)(3) The following exhibits are included in this report.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
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(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
10.2(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
10.3(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
10.4(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
10.5(14) 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
10.6(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
10.7(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
10.8(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
10.9(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.
10.10(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.
10.11(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
10.12(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
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C>
10.13(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
10.14(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
10.15(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
10.16(1) Employment Agreement, dated as of August 1, 1995, between Oakley, Inc. and Jim Jannard
10.17(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
10.18(1) Employment Agreement, dated as of August 1, 1995, between Oakley, Inc. and Mike Parnell
10.19(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
10.20(6) Amendment No. 2 to employment agreement, dated February 1, 1997, between Oakley, Inc. and
Mike Parnell
10.21(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
10.22(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
10.23(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
10.24(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
10.25(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
10.26(2) Agreement, dated July 17, 1995, between Oakley, Inc. and Michael Jordan
10.27(1) Purchase Agreement and Escrow Instructions, dated December 9, 1994, between Oakley, Inc.
and Foothill Ranch Development Corporation
10.28(3) Oakley, Inc. 1995 Stock Incentive Plan
10.29(3) Oakley, Inc. Amended and Restated 1995 Stock Incentive Plan
10.30(3) Oakley, Inc. Executive Officer Performance Bonus Plan
10.31(1) Employment Agreement, dated as of April 1, 1995, between Oakley, Inc. and Link Newcomb
10.32(6) Employment Agreement, dated as of January 31, 1997, between Oakley, Inc. and Link Newcomb
10.33(6) Amendment No. 1 to employment agreement, dated February 1, 1997, between Oakley, Inc. and
Link Newcomb
10.34(3) Indemnification Agreement, dated August 1, 1995, between Oakley, Inc. and Jim Jannard
10.35(1) Schedule of indemnification agreements between Oakley, Inc. and each of its directors and
executive officers
10.36(1) Standard Form of Agreement between Owner and Project Manager, dated December 30, 1994,
between Oakley, Inc. and Snyder Langston
</TABLE>
34
<PAGE> 35
<TABLE>
<S> <C>
10.37(1) Lease Agreement, dated January 26, 1995, between Oakley Europe, sarl and Investipierre 7
(In French with English translation)
10.38(3) Aircraft Lease Agreement, dated August 10, 1995, between Oakley, Inc. and X, Inc.
10.39(3) Aircraft Lease Agreement, dated August 10, 1995, between Oakley, Inc. and Time Tool
Incorporated
10.40(1) Registration Rights Agreement, dated August 1, 1995, between Oakley, Inc., Jim Jannard and
the M. and M. Parnell Revocable Trust
10.41(3) Indemnification Agreement, dated August 9, 1995, between Oakley, Inc., Jim Jannard and the
M. and M. Parnell Revocable Trust
10.42(4) Indemnification Agreement, dated June 6, 1996, between Oakley, Inc., Jim Jannard and the
M. and M. Parnell Revocable Trust
10.43(6) Employment Agreement, dated as of January 16, 1997, between Oakley, Inc. and Robert
Bruning
10.44(6) Pledge Agreement, dated as of January 1997, between Oakley, Inc. and Wells Fargo Bank,
National Association, as agent and the Lenders named therein
10.45(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)
10.46(6) Promissory Note, dated March 20, 1997, between Oakley, Inc. and Bank of America National
Trust and Savings Association
10.47(8) Consultant Agreement, dated as of August 1, 1997, between Oakley, Inc. and Mike Parnell
10.48(8) Consultant Agreement, dated as of August 1, 1997, between Oakley, Inc. and Jim Jannard
10.49(8) Promissory Note, dated August 7, 1997, between Oakley, Inc. and Bank of America National
Trust and Savings Association
10.50(8) Amendment No. 1 to Promissory Note, dated August 14, 1997, between Oakley, Inc. and Bank
of America National Trust and Savings Association
10.51(8) Amendment No. 2 to Promissory Note, dated August 14, 1997, between Oakley, Inc. and Bank
of America National Trust and Savings Association
10.52(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
10.53(8) Standing Loan Agreement , dated August 7, 1997 between Oakley, Inc. and Bank of America
National Trust and Savings Association
10.54(9) First Amendment to Standing Loan Agreement, dated January 12, 1998, between Oakley, Inc.
and Bank of America National Trust and Savings Association
10.55(9) Indemnification Agreement, dated October 3, 1997, between Oakley, Inc. and William D.
Schmidt
10.56(9) Employment Agreement, dated October 6, 1997 between Oakley, Inc. and Thomas A. George
10.57(9) Indemnification Agreement, dated October 6, 1997 between Oakley, Inc. and Thomas A. George
10.58(10) Tenth Amendment to Amended and Restated Credit Agreement dated March 28, 1998 by and among
Oakley, Inc., and Bank of America National Trust and Savings Association and Union Bank of
California N.A.
10.59(11) Amended and Restated Consultant Agreement, dated May 12, 1998, between Jim Jannard and
Oakley, Inc.
10.60(11) Amended and Restated Consultant Agreement, dated May 12, 1998, between Mike Parnell and
Oakley, Inc.
</TABLE>
35
<PAGE> 36
<TABLE>
<S> <C>
10.61(11) Amended and Restated Employment Agreement, dated May 12, 1998, between Link Newcomb and
Oakley, Inc.
10.62(11) Amended and Restated Employment Agreement, dated May 12, 1998, between Thomas George and
Oakley, Inc.
10.63(12) Second Amended and Restated Credit Agreement, dated August 25, 1998, between Oakley, Inc.
and Bank of America National Trust and Savings Association, as agent, and the Lenders
named herein
10.64(12) Modification Agreement (Short Form), dated August 10, 1998, between Oakley, Inc. and Bank
of America National Trust and Savings Association
10.65(12) Modification Agreement (Long Form), dated August 10, 1998, between Oakley, Inc. and Bank
of America National Trust and Savings Association
10.66(13) Amendment #1 to Section 1 and Sections 3a through 3f of Article IV of the Amended and
Restated Bylaws of Oakley, Inc.
21.1(13) List of Material Subsidiaries
23.1(13) Consent of Deloitte & Touche, LLP, independent auditors
27.1(13) Financial Data Schedule
</TABLE>
- ----------
(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.
(9) Previously filed with the Form 10-K of Oakley, Inc. for the year ended
December 31, 1997.
(10) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended
March 31, 1998.
(11) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended
June 30, 1998.
(12) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended
September 30, 1998.
(13) Filed herewith.
(14) To be filed.
(b) Reports on Form 8-K The Company did not file any reports on Form 8-K during
the quarter ended December 31, 1998.
(c) See (a) (2) above for a listing of the exhibits included as a part of this
report.
36
<PAGE> 37
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report......................................................... 38
Consolidated Balance Sheets as of December 31, 1997 and 1998......................... 39
Consolidated Statements of Income and Consolidated Statements of Comprehensive
Income for the Years Ended December 31, 1996, 1997 and 1998.......................... 40
Statements of Shareholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998..................................................... 41
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998..................................................... 42
Notes to Consolidated Financial Statements........................................... 43-57
</TABLE>
37
<PAGE> 38
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, 1997 and 1998 and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. 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, 1997 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, 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.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
February 5, 1999
Costa Mesa, California
38
<PAGE> 39
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1998
------------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,657 $ 4,553
Accounts receivable, less allowance for
doubtful accounts of $551 (1997) and $621 (1998) 24,015 33,867
Inventories, net (Note 3) 26,200 35,548
Other receivables 2,427 2,372
Deferred income taxes (Note 5) 4,829 6,074
Prepaid expenses and other 2,978 4,246
------------- ---------
Total current assets 63,106 86,660
Property and equipment, net (Note 4) 104,230 118,215
Deposits 1,519 2,513
Other assets 12,436 18,427
------------- ---------
TOTAL ASSETS $ 181,291 $ 225,815
============= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit (Note 6) $ 2,800 $ 13,300
Accounts payable 6,762 12,606
Accrued expenses and other current liabilities 5,033 6,646
Accrued warranty 3,633 4,420
Income taxes payable (Note 5) 1,671 2,567
Current portion long-term debt (Note 6) 1,519 1,519
------------- ---------
Total current liabilities 21,418 41,058
Deferred income taxes (Note 5) 2,030 3,418
Long-term debt, net of current maturities (Note 6 ) 20,882 19,363
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; 70,659,000 (1997) and
70,678,000 (1998) issued and outstanding 707 707
Additional paid-in capital 55,170 55,610
Retained earnings 82,238 106,383
Accumulated other comprehensive income (1,154) (724)
------------- ---------
Total shareholders' equity 136,961 161,976
------------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 181,291 $ 225,815
============= =========
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 40
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales (Note 10) $ 218,566 $ 193,984 $ 231,934
Cost of goods sold 66,790 75,393 86,134
------------ ------------ ------------
Gross profit 151,776 118,591 145,800
Operating expenses:
Research and development 4,782 3,825 5,231
Selling 48,092 53,007 66,188
Shipping and warehousing 6,507 5,721 6,777
General and administrative 18,513 23,032 26,299
------------ ------------ ------------
Total operating expenses 77,894 85,585 104,495
------------ ------------ ------------
Operating income 73,882 33,006 41,305
Interest (income) expense, net (781) 1,181 2,109
------------ ------------ ------------
Income before provision for income taxes 74,663 31,825 39,196
Provision for income taxes (Note 5) 28,670 12,221 15,051
------------ ------------ ------------
Net income $ 45,993 $ 19,604 $ 24,145
============ ============ ============
Basic net income per common share $ 0.64 $ 0.28 $ 0.34
============ ============ ============
Basic weighted average common shares 71,324,000 70,659,000 70,678,000
============ ============ ============
Diluted net income per common share $ 0.64 $ 0.28 $ 0.34
============ ============ ============
Diluted weighted average common shares 71,728,000 70,700,000 70,851,000
============ ============ ============
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net income $ 45,993 $ 19,604 $ 24,145
Other comprehensive (loss) income
Foreign currency translation adjustment,
net of tax (52) (1,029) 430
------------ ------------ ------------
Other comprehensive (loss) income (52) (1,029) 430
------------ ------------ ------------
Comprehensive income $ 45,941 $ 18,575 $ 24,575
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 41
OAKLEY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
-------------------------- Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income Total
---------- ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1996 71,400,000 $ 357 $ 64,427 $ 16,998 $ (73) $ 81,709
Stock split (Note 8) 357 -- (357) -- --
Exercise of stock options (Note 8) 12,000 -- 139 -- -- 139
Repurchase of common shares (Note 8) (452,000) (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 70,960,000 710 58,218 62,634 (125) 121,437
Exercise of stock options (Note 8) 3,000 -- 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 70,659,000 707 55,170 82,238 (1,154) 136,961
Exercise of stock options (Note 8) 19,000 -- 219 -- -- 219
Tax benefit related to exercise of
stock options -- -- 18 -- -- 18
Compensatory stock options -- -- 203 -- -- 203
Net income -- -- -- 24,145 -- 24,145
Foreign currency translation -- -- -- -- 430 430
---------- ------ -------- -------- -------- --------
Balance as of December 31, 1998 70,678,000 $ 707 $ 55,610 $106,383 $ (724) $161,976
========== ====== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 42
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 45,993 $ 19,604 $ 24,145
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,987 12,982 16,272
Compensatory stock options 45 113 203
(Gain) loss on disposition of equipment (156) 334 (600)
Deferred income taxes, net (606) 1,559 143
Changes in assets and liabilities, net of effects
of business acquisitions:
Accounts receivable 1,964 (2,921) (9,586)
Inventories (8,143) 3,727 (9,505)
Other receivables (1,117) (962) (53)
Prepaid expenses and other (4,091) 2,844 (1,229)
Accounts payable (637) (1,615) 5,735
Accrued expenses, other current liabilities
and accrued warranty 327 (1,067) 2,168
Income taxes payable (2,029) 1,671 896
-------- -------- --------
Net cash provided by operating activities 40,537 36,269 28,589
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits 961 674 (965)
Acquisitions of property and equipment (38,642) (43,796) (29,124)
Proceeds from sale of property and equipment 697 250 851
Acquisitions of business and technology (Note 2) (14,223) (2,600) (7,260)
Other assets (2,454) 789 (53)
-------- -------- --------
Net cash used in investing activities (53,661) (44,683) (36,551)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings 18,000 42,800 78,650
Repayments of bank borrowings -- (35,599) (69,669)
Repayments of S distribution notes (263) -- --
Net proceeds from issuance of common shares 139 36 237
Repurchase of common shares (6,397) (3,200) --
-------- -------- --------
Net cash provided by financing activities 11,479 4,037 9,218
Effect of exchange rate changes on cash (52) (1,029) 640
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (1,697) (5,406) 1,896
Cash and cash equivalents, beginning of period 9,760 8,063 2,657
-------- -------- --------
Cash and cash equivalents, end of period $ 8,063 $ 2,657 $ 4,553
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the yearfor:
Interest (net of amounts capitalized) $ 58 $ 1,390 $ 2,273
======== ======== ========
Income taxes (net of refunds received) $ 34,249 $ 6,550 $ 13,333
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE> 43
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
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 consumer products, including
eyewear, footwear, apparel, watches 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, 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
$10,870,000 (1997) and $17,267,000 (1998) included in other assets in the
accompanying balance sheet and 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 impairment of
intangible assets exists at December 31, 1998.
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, 1998, 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.
43
<PAGE> 44
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Segment Disclosures - In 1998, the Company implemented SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for reporting information about operating segments and
related disclosures about products, geographics and major customers. (Note 11)
Financial Instruments - The carrying amounts of financial instruments,
consisting of cash and cash equivalents, trade accounts receivable and accounts
payable, approximate 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. (Note 5)
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)
Comprehensive Income - The Company has adopted SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income represents the results of operations
adjusted to reflect all items recognized under accounting standards as
components of comprehensive earnings. All periods have been restated to conform
to SFAS No. 130.
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, 1997 and 1998, the diluted weighted average common
shares outstanding includes 41,000 and 173,000, respectively, of dilutive stock
options.
New Accounting Pronouncements - In June 1998, SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" was issued and is effective
for fiscal years beginning after June 15, 1999. SFAS No. 133 will require the
Company to record all derivatives on the balance sheet at fair value. For
derivatives that are hedges, changes in the fair value of the derivatives will
be offset by the change in fair value of the hedged assets, liabilities, or firm
commitments. The Company is reviewing the impact SFAS No. 133 will have on its
financial statements.
44
<PAGE> 45
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
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, 1998.
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 consumer products industry, including the
sunglass, apparel, footwear and watch industries, 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. These
industries are 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 uses a single
source for the supply of several components, including the uncoated lens blanks
from which substantially all of its sunglass lenses are cut. In the event of the
loss of the source for lens blanks, the Company has identified an alternate
source which may be available. The effect of the loss of any of these sources or
a disruption in their business will depend primarily upon the length of time
necessary to find a suitable alternative source 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 31.0%, 21.5% and 26.0% of net
sales for the years ended December 31, 1996, 1997 and 1998, respectively.
45
<PAGE> 46
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
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. During 1998, the Company acquired the Oakley division of its exclusive
Canadian distributor and certain patented technology for an aggregate purchase
price of approximately $7.3 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, 1997 and 1998
financial statements. The excess of the purchase prices over the fair values of
the net assets acquired have 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 at the beginning of the fiscal year
in which each acquisition was completed, or the beginning of the immediately
preceding year, 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 at December 31, consist of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Raw materials $11,814,000 $15,316,000
Finished goods 14,386,000 20,232,000
----------- -----------
$26,200,000 $35,548,000
=========== ===========
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, consist of the following:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Land $ 8,999,000 $ 8,999,000
Buildings 51,915,000 55,268,000
Automobiles and vans 752,000 972,000
Furniture and equipment 70,473,000 89,161,000
Tooling 6,490,000 10,777,000
Building and leasehold improvements 511,000 942,000
------------ ------------
139,140,000 166,119,000
Less accumulated depreciation
and amortization 34,910,000 47,904,000
------------ ------------
$104,230,000 $118,215,000
============ ============
</TABLE>
46
<PAGE> 47
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NOTE 5 - INCOME TAXES
The provision for income taxes for the years ended December 31, consist of the
following:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal $ 22,535,000 $ 7,228,000 $ 10,900,000
State 5,727,000 2,234,000 1,840,000
Foreign 1,082,000 1,200,000 2,168,000
------------ ------------ ------------
29,344,000 10,662,000 14,908,000
Deferred:
Federal (956,000) 1,538,000 16,000
State 282,000 21,000 127,000
------------ ------------ ------------
(674,000) 1,559,000 143,000
------------ ------------ ------------
$ 28,670,000 $ 12,221,000 $ 15,051,000
============ ============ ============
</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>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rates $ 26,132,000 $ 11,138,000 $ 13,719,000
State income taxes, net 3,905,000 1,466,000 1,278,000
Foreign sales corporation benefit,
net of foreign tax rate differential (1,807,000) (928,000) (879,000)
Other, net 440,000 545,000 933,000
------------ ------------ ------------
$ 28,670,000 $ 12,221,000 $ 15,051,000
============ ============ ============
</TABLE>
47
<PAGE> 48
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
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>
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Warranty reserve $ 1,434,000 $ 1,603,000
Uniform capitalization 609,000 789,000
Sales returns reserve 810,000 481,000
State taxes 601,000 647,000
Inventory reserve 730,000 959,000
Allowance for doubtful accounts 172,000 213,000
Accrued vacation 164,000 407,000
Other 309,000 975,000
----------- -----------
Total deferred tax assets 4,829,000 6,074,000
Deferred tax liabilities:
Depreciation and amortization (2,030,000) (3,418,000)
----------- -----------
Net deferred tax assets $ 2,799,000 $ 2,656,000
=========== ===========
</TABLE>
NOTE 6 - DEBT
Line of Credit - Effective August 25, 1998, the Company amended its
unsecured line of credit with a bank syndicate, increasing its borrowing limits
from $30.0 million to $50.0 million and extending the maturity date from June
1999 to August 2001. The amended line of credit bears interest at either the
bank's prime lending rate (7.75% at December 31, 1998) or LIBOR plus 0.75%
(6.38% at December 31, 1998). At December 31, 1998, the Company had $13.3
million outstanding under the credit agreement. The credit agreement contains
various restrictive covenants including the maintenance of certain financial
ratios. At December 31, 1998, the Company was in compliance with all restrictive
covenants and financial ratios.
Long term debt - Effective August 10, 1998, the Company amended its real
estate term loan by lowering the borrowing rate by 0.15% and extending the due
date from September 2002 to 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% (6.26% at December 31, 1998) for ten years.
At December 31, 1998, the outstanding balance under the term loan was $20.9
million.
48
<PAGE> 49
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Leases - The Company is committed under noncancelable operating leases
expiring at various dates through 2006 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>
1999 $ 125,000 $ 911,000 $ 1,036,000
2000 91,000 638,000 729,000
2001 10,000 410,000 420,000
2002 - 383,000 383,000
2003 - 373,000 373,000
Thereafter - 814,000 814,000
--------- ----------- -----------
Total $ 226,000 $ 3,529,000 $ 3,755,000
========= =========== ===========
</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 for the
years ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Related parties $ 383,000 $ 114,000 $ 124,000
Other 1,219,000 1,378,000 1,023,000
---------- ---------- ----------
Total $1,602,000 $1,492,000 $1,147,000
========== ========== ==========
</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 officers 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 officers.
49
<PAGE> 50
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
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>
1999 $ 3,650,000
2000 2,124,000
2001 766,000
2002 593,000
2003 570,000
Thereafter 1,000,000
-----------
Total $ 8,703,000
===========
</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 (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 (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 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 December 28,
1998, plaintiffs filed the opening brief on their appeal from the Judgment. On
September 24, 1998, plaintiffs filed a motion for class certification in the
Superior Court. 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 December 1998, the
parties to the California Derivative Action filed a joint status report and
proposal re: further proceedings with the California Court of Appeal, Fourth
Appellate District
50
<PAGE> 51
(the "Court of Appeal"), respecting proposed procedures to document and approve
a settlement conditionally agreed to by the parties. Among other things, any
settlement agreed to by the parties is subject to approval by both the Court of
Appeal and the Company's Board of Directors. 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 filed by the Company and the other defendants. 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.
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
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, 1998, the Company had repurchased
756,000 shares at an aggregate cost of approximately $9.6 million. No purchases
were made in 1998.
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, 1998, stock options for 1,478,729 shares were
exercisable and 2,342,407 shares were available for issuance pursuant to new
stock option grants.
51
<PAGE> 52
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
The following table summarizes information with respect to the Plan for the
years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Option Weighted Average
shares Exercise Price
---------- ----------------
<S> <C> <C>
Outstanding at January 1, 1996 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
Granted (weighted average fair value $5.07) 159,141 $ 11.58
Canceled (125,058) $ 10.96
Exercised (18,971) $ 11.55
----------
Outstanding at December 31, 1998 3,335,436 $ 10.88
==========
</TABLE>
Additional information regarding options outstanding as of December 31, 1998 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 1,359,698 8.75 $ 9.54 349,978 $ 9.52
$ 11.50 - 12.50 1,884,253 7.24 $ 11.56 1,084,650 $ 11.54
$ 13.06 - 25.19 91,485 8.08 $ 16.46 44,101 $ 18.44
</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
52
<PAGE> 53
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
option-pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes
option-pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Stock volatility 45.7%-77.4% 54.5%-71.3% 39.3%-54.0%
Risk-free interest rate 5.5% 5.5% 5.5%
Expected dividend yield 0% 0% 0%
Expected life of option 3-5 years 3-5 years 3-4 years
</TABLE>
If the computed fair value of the 1996, 1997 and 1998 awards had been amortized
to expense over the vesting period of the awards, net income would have been as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Net income:
As reported $ 45,993,000 $ 19,604,000 $ 24,145,000
Pro forma $ 45,531,000 $ 18,117,000 $ 22,052,000
Basic and diluted net income per share:
As reported $ 0.64 $ 0.28 $ 0.34
Pro forma $ 0.64 $ 0.26 $ 0.31
</TABLE>
NOTE 9 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company and its foreign subsidiaries may enter into derivative financial
instruments, including foreign currency forward exchange contracts and foreign
currency option 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 associated with forward exchange
contracts related to hedges of firmly committed transactions are deferred and
recognized when the hedged transaction occurs. Gains and losses resulting from
foreign exchange contracts which are not hedges of firmly committed transactions
are recorded each period to the consolidated statement of income. Unrealized
gains associated with option contracts are recorded each period. Unrealized
losses associated with option contracts are recorded each period to the extent
of gains on such contracts previously recorded. Premiums associated with option
contracts are amortized on a straight line basis over the life of the option
contract.
53
<PAGE> 54
A summary of forward exchange contracts is as follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------
U.S. Dollar Fair
Equivalent Maturity Value
--------------- ------------- --------------
<S> <C> <C> <C>
Forward Contracts:
British pounds $ 481,175 Jan. 1999 $ 485,000
British pounds 544,166 Feb. 1999 548,000
British pounds 765,116 Mar. 1999 770,000
British pounds 984,368 May 1999 990,000
British pounds 795,783 Aug. 1999 800,000
British pounds 472,609 Nov. 1999 475,000
Canadian dollars 846,189 Mar. 1999 838,710
Canadian dollars 1,171,646 Jun. 1999 1,161,740
Canadian dollars 1,952,744 Sep. 1999 1,936,983
Canadian dollars 1,562,195 Dec. 1999 1,550,287
Japanese yen 577,060 Mar. 1999 577,060
Japanese yen 381,747 Jun. 1999 381,747
Japanese yen 674,716 Sep. 1999 674,716
Japanese yen 1,917,614 Dec. 1999 1,917,614
French francs 2,142,283 Mar. 1999 2,142,283
French francs 3,570,472 Jun. 1999 3,570,472
French francs 4,855,842 Sep. 1999 4,855,842
French francs 4,284,567 Dec. 1999 4,284,567
Option Contracts:
British pounds 1,265,625 Mar. 1999 1,250,000
British pounds 2,531,250 Jun. 1999 2,500,000
British pounds 2,531,250 Sep. 1999 2,500,000
Japanese yen 1,669,034 Mar. 1999 1,424,242
Japanese yen 1,775,568 Jun. 1999 1,353,272
Japanese yen 1,811,080 Sep. 1999 1,420,217
Japanese yen 1,873,224 Dec. 1999 1,468,950
French francs 269,660 Mar. 1999 265,000
French francs 447,737 Jun. 1999 440,000
French francs 610,551 Sep. 1999 600,000
French francs 534,232 Dec. 1999 525,000
------------ ------------
$ 43,299,503 $ 41,706,702
============ ============
</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, 1998, outstanding contracts
were recorded at fair market value (except for certain option contracts with
unrealized losses) and the resulting gains and losses were recorded in the
consolidated financial statements pursuant to the policy set forth above.
54
<PAGE> 55
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NOTE 10 - NET SALES
The Company's net sales to U.S. and international customers for year years ended
December 31, are summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
United States $139,459,000 $113,942,000 $136,546,000
International 79,107,000 80,042,000 95,388,000
------------- ------------- -------------
$218,566,000 $193,984,000 $231,934,000
============= ============= =============
</TABLE>
NOTE 11 - SEGMENT AND GEOGRAPHIC INFORMATION
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief operating decision maker, or decision making group, in deciding
how to allocate resources and in assessing performance. The Company operates
exclusively in the consumer products industry in which the Company designs,
manufactures and sells performance eyewear, athletic equipment, apparel,
footwear and watches.
Although the Company operates in one industry segment, it derives revenues from
different product lines within the segment. Revenues as a percentage of gross
sales from external customers for each product line for the years ended December
31, are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Sunglasses 87.8% 81.6% 79.0%
Goggles, apparel,
accessories and equipment 12.2 18.4 19.0
Footwear -- -- 1.0
Watches -- -- 1.0
------- ------- -------
100.0% 100.0% 100.0%
======= ======= =======
</TABLE>
55
<PAGE> 56
Consumer product information related to domestic and foreign operations is as
follows:
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
(in thousands)
United Continental
States Europe Other Countries Consolidated
--------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 187,256 $ 28,816 $ 2,494 $ 218,566
Operating income 71,076 2,883 (77) 73,882
Net income 44,196 1,846 (49) 45,993
Identifiable assets 140,624 11,630 5,991 158,245
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
(in thousands)
United Continental
States Europe Other Countries Consolidated
--------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 147,242 $ 30,442 $ 16,300 $ 193,984
Operating income 29,832 1,224 1,950 33,006
Net income 17,598 730 1,276 19,604
Identifiable assets 160,579 10,638 10,074 181,291
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
(in thousands)
United Continental
States Europe Other Countries Consolidated
--------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 164,924 $ 34,835 $ 32,175 $ 231,934
Operating income 35,658 2,270 3,377 41,305
Net income 20,644 1,256 2,245 24,145
Identifiable assets 191,408 15,732 18,675 225,815
</TABLE>
56
<PAGE> 57
OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- --------- ---------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
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
Year ended December 31, 1998:
Net sales $41,000 $70,030 $67,263 $53,641
Gross profit 24,818 45,461 41,903 33,618
Income before provision for income taxes 2,128 18,123 13,375 5,570
Net income 1,311 11,164 8,239 3,431
Basic net income per share $ 0.02 $ 0.16 $ 0.12 $ 0.05
Diluted net income per share $ 0.02 $ 0.16 $ 0.12 $ 0.05
</TABLE>
57
<PAGE> 58
OAKLEY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFIYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, 1998
<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, 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
========== ============ ============ ============ ==========
For the year ended December 31, 1998:
Allowance for doubtful accounts $ 551,000 $ 70,000 -- -- $ 621,000
========== ============ ============ ============ ==========
Inventory reserve $1,725,000 $ 597,000 -- -- $2,322,000
========== ============ ============ ============ ==========
</TABLE>
58
<PAGE> 59
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 of the Board
Date: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jim Jannard Chairman of the Board March 29, 1999
Jim Jannard
/s/ Mike Parnell Vice Chairman and Director March 29, 1999
Mike Parnell
/s/ Link Newcomb Chief Executive Officer and Director March 29, 1999
Link Newcomb (Principal Executive Officer)
/s/ Colin Baden President March 29, 1999
Colin Baden
/s/ Thomas George Chief Financial Officer March 29, 1999
Thomas George (Principal Accounting Officer)
/s/ Irene Miller Director March 29, 1999
Irene Miller
/s/ Orin Smith Director March 29, 1999
Orin Smith
/s/ Michael Jordan Director March 29, 1999
Michael Jordan
/s/ William Schmidt Director March 29, 1999
William Schmidt
</TABLE>
59
<PAGE> 60
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
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(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
10.2(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
10.3(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
10.4(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
10.5(14) 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
10.6(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
10.7(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
10.8(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
10.9(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.
10.10(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.
10.11(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
10.12(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
</TABLE>
<PAGE> 61
<TABLE>
<S> <C>
10.13(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
10.14(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
10.15(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
10.16(1) Employment Agreement, dated as of August 1, 1995, between Oakley, Inc. and Jim Jannard
10.17(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
10.18(1) Employment Agreement, dated as of August 1, 1995, between Oakley, Inc. and Mike Parnell
10.19(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
10.20(6) Amendment No. 2 to employment agreement, dated February 1, 1997, between Oakley, Inc. and
Mike Parnell
10.21(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
10.22(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
10.23(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
10.24(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
10.25(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
10.26(2) Agreement, dated July 17, 1995, between Oakley, Inc. and Michael Jordan
10.27(1) Purchase Agreement and Escrow Instructions, dated December 9, 1994, between Oakley, Inc.
and Foothill Ranch Development Corporation
10.28(3) Oakley, Inc. 1995 Stock Incentive Plan
10.29(3) Oakley, Inc. Amended and Restated 1995 Stock Incentive Plan
10.30(3) Oakley, Inc. Executive Officer Performance Bonus Plan
10.31(1) Employment Agreement, dated as of April 1, 1995, between Oakley, Inc. and Link Newcomb
10.32(6) Employment Agreement, dated as of January 31, 1997, between Oakley, Inc. and Link Newcomb
10.33(6) Amendment No. 1 to employment agreement, dated February 1, 1997, between Oakley, Inc. and
Link Newcomb
10.34(3) Indemnification Agreement, dated August 1, 1995, between Oakley, Inc. and Jim Jannard
10.35(1) Schedule of indemnification agreements between Oakley, Inc. and each of its directors and
executive officers
10.36(1) Standard Form of Agreement between Owner and Project Manager, dated December 30, 1994,
between Oakley, Inc. and Snyder Langston
</TABLE>
<PAGE> 62
<TABLE>
<S> <C>
10.37(1) Lease Agreement, dated January 26, 1995, between Oakley Europe, sarl and Investipierre 7
(In French with English translation)
10.38(3) Aircraft Lease Agreement, dated August 10, 1995, between Oakley, Inc. and X, Inc.
10.39(3) Aircraft Lease Agreement, dated August 10, 1995, between Oakley, Inc. and Time Tool
Incorporated
10.40(1) Registration Rights Agreement, dated August 1, 1995, between Oakley, Inc., Jim Jannard and
the M. and M. Parnell Revocable Trust
10.41(3) Indemnification Agreement, dated August 9, 1995, between Oakley, Inc., Jim Jannard and the
M. and M. Parnell Revocable Trust
10.42(4) Indemnification Agreement, dated June 6, 1996, between Oakley, Inc., Jim Jannard and the
M. and M. Parnell Revocable Trust
10.43(6) Employment Agreement, dated as of January 16, 1997, between Oakley, Inc. and Robert
Bruning
10.44(6) Pledge Agreement, dated as of January 1997, between Oakley, Inc. and Wells Fargo Bank,
National Association, as agent and the Lenders named therein
10.45(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)
10.46(6) Promissory Note, dated March 20, 1997, between Oakley, Inc. and Bank of America National
Trust and Savings Association
10.47(8) Consultant Agreement, dated as of August 1, 1997, between Oakley, Inc. and Mike Parnell
10.48(8) Consultant Agreement, dated as of August 1, 1997, between Oakley, Inc. and Jim Jannard
10.49(8) Promissory Note, dated August 7, 1997, between Oakley, Inc. and Bank of America National
Trust and Savings Association
10.50(8) Amendment No. 1 to Promissory Note, dated August 14, 1997, between Oakley, Inc. and Bank
of America National Trust and Savings Association
10.51(8) Amendment No. 2 to Promissory Note, dated August 14, 1997, between Oakley, Inc. and Bank
of America National Trust and Savings Association
10.52(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
10.53(8) Standing Loan Agreement , dated August 7, 1997 between Oakley, Inc. and Bank of America
National Trust and Savings Association
10.54(9) First Amendment to Standing Loan Agreement, dated January 12, 1998, between Oakley, Inc.
and Bank of America National Trust and Savings Association
10.55(9) Indemnification Agreement, dated October 3, 1997, between Oakley, Inc. and William D.
Schmidt
10.56(9) Employment Agreement, dated October 6, 1997 between Oakley, Inc. and Thomas A. George
10.57(9) Indemnification Agreement, dated October 6, 1997 between Oakley, Inc. and Thomas A. George
10.58(10) Tenth Amendment to Amended and Restated Credit Agreement dated March 28, 1998 by and among
Oakley, Inc., and Bank of America National Trust and Savings Association and Union Bank of
California N.A.
10.59(11) Amended and Restated Consultant Agreement, dated May 12, 1998, between Jim Jannard and
Oakley, Inc.
10.60(11) Amended and Restated Consultant Agreement, dated May 12, 1998, between Mike Parnell and
Oakley, Inc.
</TABLE>
<PAGE> 63
<TABLE>
<S> <C>
10.61(11) Amended and Restated Employment Agreement, dated May 12, 1998, between Link Newcomb and
Oakley, Inc.
10.62(11) Amended and Restated Employment Agreement, dated May 12, 1998, between Thomas George and
Oakley, Inc.
10.63(12) Second Amended and Restated Credit Agreement, dated August 25, 1998, between Oakley, Inc.
and Bank of America National Trust and Savings Association, as agent, and the Lenders
named herein
10.64(12) Modification Agreement (Short Form), dated August 10, 1998, between Oakley, Inc. and Bank
of America National Trust and Savings Association
10.65(12) Modification Agreement (Long Form), dated August 10, 1998, between Oakley, Inc. and Bank
of America National Trust and Savings Association
10.66(13) Amendment #1 to Section 1 and Sections 3a through 3f of Article IV of the Amended and
Restated Bylaws of Oakley, Inc.
21.1(13) List of Material Subsidiaries
23.1(13) Consent of Deloitte & Touche, LLP, independent auditors
27.1(13) Financial Data Schedule
</TABLE>
- ----------
(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.
(9) Previously filed with the Form 10-K of Oakley, Inc. for the year ended
December 31, 1997.
(10) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended
March 31, 1998.
(11) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended
June 30, 1998.
(12) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended
September 30, 1998.
(13) Filed herewith.
<PAGE> 1
Exhibit 10.66
AMENDMENT #1 TO
SECTION 1 AND SECTIONS 3A THROUGH 3F
OF ARTICLE IV OF THE
AMENDED AND RESTATED BYLAWS
OF
OAKLEY, INC.
ARTICLE I
SHAREHOLDERS
Section 1. Annual Meeting. An annual meeting of the shareholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held each year on the date and at the
time determined by the Board of Directors. The failure to hold an annual meeting
at the time stated in these Bylaws does not affect the validity of any corporate
action.
Section 2. Special Meetings. Except as otherwise provided by law,
special meetings of shareholders of this Corporation shall be held whenever
called by the Board of Directors or an authorized committee of the Board of
Directors in accordance with the provisions of these Bylaws.
Section 3. Place of Meetings. Meeting of shareholders shall be held at
such place within or without the State of Washington as determined by the Board
of Directors, pursuant to proper notice.
Section 4. Notice. Written notice of each shareholders' meeting stating
the date, time, and place and, in case of a special meeting, the purpose(s) for
which such meeting is called, shall be given by the Corporation not less than
ten (10) (unless a greater period of notice is required by law in a particular
case) nor more than sixty (60) days prior to the date of the meeting, to each
shareholder of record entitled to vote at such meeting unless required by law to
send notice to all shareholders regardless of whether or not such shareholders
are entitled to vote, to the shareholder's address as it appears on the current
record of shareholders of this Corporation.
Section 5. Waiver of Notice. A shareholder may waive any notice required
to be given by these Bylaws, the Articles of Incorporation of this Corporation,
as amended and restated from time to time (the "Articles of Incorporation"), or
the Washington Business Corporation Act, as amended from time to time (the
"Act"), before or after the meeting that is the subject of such notice. A valid
waiver is created by any of the following three methods: (a) in writing, signed
by the shareholder entitled to the notice and delivered to the Corporation for
inclusion in its corporate records; (b) attendance at the meeting, unless the
shareholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting; or (c) as to the consideration of a
particular matter that is not within the purpose or purposes described in the
meeting notice, the shareholders' failure to object at the time of presentation
of such matter for consideration.
Section 6. Quorum of Shareholders. At any meeting of the shareholders,
holders of a majority of the votes of all the shares entitled to vote on a
matter, represented by shareholders of record in person or by proxy, shall
constitute a quorum.
<PAGE> 2
Once a share is represented at a meeting, other than to object to
holding the meeting or transacting business, it is deemed to be present for
quorum purposes for the remainder of the meeting and for any adjournment of that
meeting unless a new record date is or must be set for the adjourned meeting. At
such reconvened meeting, any business may be transacted that might have been
transacted at the meeting as originally noticed.
If a quorum exists, action on a matter is approved if the votes cast
favoring the action exceed the votes cast opposing the action, unless the
question is one upon which by express provision of law or of the Articles of
Incorporation a different vote is required.
Section 7. Proxies. Shareholders of record may vote at any meeting
either in person or by proxy executed in writing. A proxy is effective when
received by the Secretary of the Corporation or another officer or agent of the
Corporation authorized to tabulate votes for the Corporation. A proxy is valid
for eleven (11) months unless a longer period is expressly provided in the
proxy.
Section 8. Voting. Subject to the provisions of the laws of the State of
Washington, and unless otherwise provided in the Articles of Incorporation, each
outstanding share is entitled to one (1) vote on each matter voted on at a
shareholders' meeting, with all shares voting together as a single class.
Section 9. Adjournment. A majority of the shares represented at the
meeting, even if less than a quorum, may adjourn any meeting of the shareholders
from time to time. At a reconvened meeting at which a quorum is present, any
business may be transacted at the meeting as originally noticed. If a meeting is
adjourned to a different date, time, or place, notice need not be given of the
new date, time, or place if a new date, time, or place is announced at the
meeting before adjournment; however, if a new record date of the adjourned
meeting is or must be fixed in accordance with the corporate laws of the State
of Washington, notice of the adjourned meeting must be given to persons who are
shareholders as of the new record date.
Section 10. Advance Notice Requirements for Shareholder Proposals and
Director Nominations. Any shareholder seeking to bring business before or to
nominate a director or directors at any meeting of shareholders, must provide
written notice thereof in accordance with this Section 10. The notice must be
delivered to, or mailed and received at, the principal executive offices of the
Corporation not less than (i) with respect to an annual meeting of shareholders,
120 calendar days in advance of the date that the Corporation's proxy statement
was released to shareholders in connection with the previous year's annual
meeting, except that if no annual meeting of shareholders was held in the
previous year or if the date of the annual meeting has been changed by more than
30 calendar days from the date contemplated at the time of the previous year's
proxy statement, such notice must be received by the Corporation a reasonable
time before the Corporation's proxy statement is to be released, and (ii) with
respect to a special meeting of shareholders, a reasonable time before the
Corporation's proxy statement is to be released.
ARTICLE II
BOARD OF DIRECTORS
Section 1. Powers of Directors. All corporate powers shall be exercised
by or under the authority of, and the business and affairs of the Corporation
shall be managed under the direction of, the Board of Directors, except as
otherwise provided by the Articles of Incorporation.
2
<PAGE> 3
Section 2. Number and Qualifications. The number of directors which
shall constitute the whole Board shall not be less than one (1) director nor
more than nine (9) directors. The number of directors may at any time be
increased or decreased within such range by the shareholders or by the Board of
Directors at any regular or special meeting. Directors must have reached the age
of majority. Until modified in accordance with the provisions of these Bylaws,
the Board of Directors shall consist of six (6) directors.
Section 3. Election - Term of Office. Except as otherwise provided in
these Bylaws, the Board of Directors shall be classified with respect to the
time for which they shall severally hold office by dividing them into three
classes, as nearly equal in number as possible. At each Initial Classification
Meeting (as defined in the Articles of Incorporation), one class shall be
elected to serve for a term of office to expire at the next succeeding Annual
Meeting of Shareholders, a second class shall be elected to serve for a term of
office to expire at the second succeeding Annual Meeting of Shareholders, a
third class shall be elected to serve for a term of office to expire at the
third succeeding Annual Meeting of Shareholders. At each Annual Meeting of
Shareholders beginning with the meeting following an Initial Classification
Meeting, the class of Directors then being elected shall be elected to hold
office for a term of office to expire at the third succeeding Annual Meeting of
Shareholders after their election. Each director shall hold office for the term
for which elected and until his or her successor shall have been elected and
qualified. If, for any reason, the directors shall not have been elected at the
designated annual meeting, they may be elected at a special meeting of
shareholders called for that purpose in the manner provided by these Bylaws.
Section 4. Regular Meetings. Regular meetings of the Board of Directors
shall be held immediately following each annual meeting of shareholders and at
such other times and at such places as the Board may determine, and no notice
thereof need be given.
Section 5. Special Meetings. Special meetings of the Board of Directors
may be held at any time, whenever called by the Chairman of the Board,
President, Chief Executive Officer, or any director, notice thereof being given
to each director by the officer calling or directed to call the meeting.
Section 6. Notice. No notice is required for regular meetings of the
Board of Directors. Notice of special meetings of the Board of Directors,
stating the date, time, and place thereof, shall be given at least two (2) days
prior to the date of the meeting. The purpose of the meeting need not be given
in the notice. Such notice shall be given in the manner provided by Section 3 of
Article III of these Bylaws.
Section 7. Waiver of Notice. A director may waive notice of a special
meeting of the Board either before or after the meeting, and such waiver shall
be deemed to be the equivalent of giving notice. Attendance of a director at a
meeting shall constitute waiver of notice of that meeting unless said director,
at the beginning of the meeting, or promptly upon such director's arrival,
objects to holding the meeting or transacting business at the meeting and does
not thereafter vote for or assent to action taken at the meeting. Any waiver by
a non-attending director must be in writing, signed by the director entitled to
the notice and delivered to the Corporation for inclusion in its corporate
records.
Section 8. Quorum of Directors. A majority of the members of the Board
of Directors shall constitute a quorum for the transaction of business. When a
quorum is present at any meeting, a majority of the members present thereat
shall decide any question brought before such meeting, except as otherwise
provided by the Articles of Incorporation or by these Bylaws.
3
<PAGE> 4
Section 9. Adjournment. A majority of the directors present, even if
less than a quorum, may adjourn a meeting and continue it to a later time.
Notice of the adjourned meeting or of the business to be transacted thereat,
other than by announcement, shall not be necessary. At any adjourned meeting at
which a quorum is present, any business may be transacted which could have been
transacted at the meeting as originally called.
Section 10. Resignation and Removal. Any director of this Corporation
may resign at any time by giving written notice to the Board of Directors, its
Chairman, or the President or Secretary of this Corporation. Any such
resignation is effective when the notice is delivered, unless the notice
specifies a later effective date. A director, any class of directors, or the
entire Board of Directors may be removed as prescribed in the Articles of
Incorporation.
Section 11. Vacancies. Unless otherwise provided by law, vacancies in
the Board of Directors shall be filled by a majority of the directors then in
office, though less than a quorum, by the sole remaining director or by action
of the shareholders.
Section 12. Compensation. By resolution of the Board of Directors, each
director may be paid expenses, if any, of attendance at each meeting of the
Board of Directors (and each meeting of any committees thereof), and may be paid
a stated salary as director, or a fixed sum for attendance at each meeting of
the Board of Directors (and each meetings of any committee thereof), or both. No
such payment shall preclude any director from serving this Corporation in any
other capacity and receiving compensation therefor.
Section 13. Presumption of Assent. A director of this Corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless:
a. The director objects at the beginning of the meeting, or
promptly upon the director's arrival, to holding it or transacting business at
the meeting;
b. The directors dissent or abstention from the action taken is
entered in the minutes of the meeting; or
c. The director delivers written notice of dissent or abstention
to the presiding officer of the meeting before its adjournment or to the
Corporation within a reasonable time after adjournment.
The right of dissent or abstention is not available to a director who votes in
favor of the action taken.
Section 14. Committees of the Board of Directors. The Board of Directors
is expressly authorized to create one or more committees of directors in
accordance with the provisions of Section 23B.08.250 of the Act. Each committee
must have two or more members, who serve at the pleasure of the Board of
Directors. The creation of a committee and appointment of members to it must be
approved by a majority of all the directors in office when such action is taken
or such other number of directors as may be required by Section 23B.08.250(2) of
the Act. To the extent specified by the Board of Directors or in the Articles of
Incorporation or these Bylaws, each committee may exercise the authority of the
Board of Directors under Section 23B.08.010 of the Act; provided, however, a
committee may not: (a) authorize or approve a distribution except according to a
general formula or method prescribed by the Board of Directors, (b) approve or
propose to shareholders action that is required by the Act to be approved by
shareholders; (c) fill vacancies on the Board of Directors or on any of its
committees, (d) amend the Articles of Incorporation pursuant to Section
23B.10.020 of the Act, (e) adopt, amend or repeal these Bylaws, (f) approve a
plan of merger not requiring shareholder approval, or (g) authorize or
4
<PAGE> 5
approve the issuance or sale or contract for sale of shares, or determine the
designation and relative rights, preferences, and limitations of a class or
series of shares, except that, in the case of this cause (g), the Board of
Directors may authorize a committee, or a senior executive officer of the
corporation, to do so within limits specifically prescribed by the Board of
Directors.
Section 15. Suspension of Classified Board. As permitted by the
provisions of Section 2 of Article VIII of the Articles of Incorporation, the
Board of Directors shall consist of a single class of directors to be elected
annually at the annual shareholders' meeting and the provisions herein and in
the Articles of Incorporation with respect to a classified Board are hereby
suspended until such time as these Bylaws are amended to eliminate such
suspension.
ARTICLE III
SPECIAL MEASURES APPLYING TO
SHAREHOLDER AND/OR DIRECTOR ACTIONS
Section 1. Action by Written Consent. Any action required or permitted to
be taken at a meeting of the shareholders, or the Board of Directors may be
accomplished without a meeting if the action is taken by all the shareholders
entitled to vote thereon, or all the members of the Board, as the case may be.
The action must be evidenced by one or more written consents describing the
action taken, signed by all the shareholders entitled to vote thereon, or by all
directors, as the case may be, either before or after the action is taken, and
delivered to the Corporation for inclusion in the minutes or filing with the
Corporation's records.
Action taken by unanimous written consent of the shareholders is
effective when all consents are in the possession of the Corporation, unless the
consent specifies a later effective date. Action taken by unanimous written
consent of the Board of Directors is effective when the last director signs the
consent, unless the consent specifies a later effective date.
Section 2. Conference Telephone. Meetings of the shareholders and Board
of Directors may be effectuated by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other during the meeting. Participation by such means
shall constitute presence in person at such meeting.
Section 3. Oral and Written Notice. Oral notice of a meeting of the Board
of Directors may be communicated in person or by telephone, wire or wireless
equipment that does not transmit a facsimile of the notice. Oral notice is
effective when communicated.
Written notice may be transmitted by mail, reputable overnight or express
delivery service, or personal delivery; telegraph or teletype; or telephone,
wire, or wireless equipment that transmits a facsimile of the notice. Written
notice is effective at the earliest of the following:
(a) when dispatched by telegraph, teletype or facsimile equipment,
if such notice is sent to the person's address, telephone number or other number
appearing on the records of the Corporation;
(b) when received;
(c) five (5) days after its deposit in the U.S. mail if mailed with
first class postage;
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<PAGE> 6
(d) the day of delivery as shown on the delivery receipt or
acknowledgment if delivered by reputable overnight or express delivery
service; or
(e) on the date shown on the return receipt, if sent by registered
or certified mail, return receipt requested, and the receipt is signed by or
on behalf of the addressee.
ARTICLE IV
OFFICERS
Section l. Positions. The officers of this Corporation shall be a
Chairman of the Board of Directors, Vice Chairman of the Board of Directors,
President, Chief Executive Officer, one or more Vice Presidents, a Chief
Financial Officer, a Secretary, one or more Assistant Secretaries, a Controller
and a Treasurer, as appointed by the Board.
In addition, the Board of Directors may choose such other officers and
assistant officers to perform such duties as from time to time may be assigned
to them by the Board of Directors. The Board of Directors may delegate to any
other officer of the Corporation the power to choose such other officers and
assistant officers and to prescribe their respective duties and powers. No
officer need be a shareholder or a director of this Corporation. Any two or more
offices may be held by the same person.
Section 2. Appointment and Term of Office. The officers of this
Corporation shall be appointed annually by the Board of Directors at the first
meeting of the Board of Directors held after each annual meeting of the
shareholders. If officers are not appointed at such meeting, such appointment
shall occur as soon as possible thereafter. Each officer shall hold office until
a successor shall have been appointed and qualified or until said officer's
earlier death, resignation, or removal.
Section 3. Powers and Duties. If the Board of Directors appoints persons
to fill the following officer positions, such officer shall have the powers and
duties set forth below:
a. Chairman of the Board of Directors. The Chairman of the Board
of Directors shall preside at all meetings of the shareholders and of the Board
of Directors. The Chairman of the Board of Directors shall possess the same
power as the Chief Executive Officer and the President to sign all bonds, deeds,
mortgages and any other agreements, and such signature shall be sufficient to
bind this Corporation. The Chairman of the Board of Directors shall, subject to
the direction and control of the Board of Directors, have general supervision of
the business of the Corporation. The Chairman of the Board of Directors shall
also perform such other duties as the Board of Directors shall designate.
b. Vice Chairman of the Board of Directors. The Vice Chairman of
the Board of Directors shall possess the same power as the Chief Executive
Officer and the President to sign all bonds, deeds, mortgages and any other
agreements, and such signature shall be sufficient to bind this Corporation.
Unless the Chairman of the Board of Directors has been appointed and is present,
the Vice-Chairman of the Board of Directors shall preside at meetings of the
shareholders and the Board of Directors. The Vice Chairman of the Board of
Directors shall also perform such other duties as the Board of Directors, the
Chairman of the Board of Directors or the Chief Executive Officer shall
designate.
c. Chief Executive Officer. The Chief Executive Officer shall,
together with the Chairman of the Board of Directors, and subject to the
direction and control of the Board of Directors and the Chairman of the Board of
Directors, have general supervision of the business of the Corporation. The
Chief Executive Officer shall, in the absence of the Chairman of the Board of
Directors and the Vice
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<PAGE> 7
Chairman of the Board of Directors, preside at all meetings of the shareholders
and the Board of Directors.
The Chief Executive Officer may sign all bonds, deeds, mortgages, and
any other agreements, and such signature shall be sufficient to bind this
Corporation. The Chief Executive Officer shall perform such other duties as the
Board of Directors or the Chairman of the Board of Directors shall designate.
d. President. The President shall possess the power to sign all
bonds, deeds, mortgages, and any other agreements, and such signatures shall be
sufficient to bind this Corporation. The President shall perform such other
duties as the Board of Directors, the Chairman of the Board of Directors or the
Chief Executive Officer shall designate.
e. Chief Operating Officer. The Chief Operating Officer shall
possess the same power as the President and the Chief Executive Officer to sign
all bonds, deeds, mortgages and any other agreements, and such signature shall
be sufficient to bind this Corporation. The Chief Operating Officer shall also
perform such other duties as the Board of Directors, the Chairman of the Board
of Directors or the Chief Executive Officer shall designate.
f. Vice Presidents. Each Vice President shall have such powers
and discharge such duties as may be assigned from time to time to such Vice
President by the Board of Directors, the Chairman of the Board of Directors, the
Chief Executive Officer or the President. The Board of Directors may select a
specific title for a Vice President of this Corporation which such title shall
include the words "Vice President" together with such other term or terms which
may generally indicate such Vice President's rank and/or duties. During the
absence or disability of the Chairman of the Board of Directors (if one has been
elected), and the Chief Executive Officer, the President, the Vice President (or
in the event that there be more than one Vice President, the Vice Presidents in
the order designated by the Board of Directors) shall exercise all functions of
the Chairman of the Board of Directors, the Chief Executive Officer and the
President, except as limited by resolution of the Board of Directors.
g. Secretary. The Secretary shall:
(1) Prepare minutes of the directors' and shareholders'
meetings and keep them in one or more books provided for that purpose;
(2) Authenticate records of the Corporation;
(3) See that all notices are duly given in accordance with
the provisions of these Bylaws or as required by law;
(4) Be custodian of the corporate records and of the seal
of the Corporation (if any), and affix the seal of the Corporation to all
documents as may be required;
(5) Keep a register of the post office address of each
shareholder which shall be furnished to the Secretary by such shareholder;
(6) Sign with the chairman of the Board of Directors, the
President, the Chief Executive Officer or a Vice President, certificates for
shares of the Corporation, the issuance of which shall have been authorized by
resolution of the Board of Directors;
(7) Have general charge of the stock transfer books of the
Corporation; and
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<PAGE> 8
(8) In general perform all the duties incident to the
office of Secretary and such other duties as from time to time may be assigned
to him or her by the Board of Directors, the Chairman of the Board of Directors,
the President or the Chief Executive Officer. In the Secretary's absence, an
Assistant Secretary shall perform the Secretary's duties.
h. Chief Financial Officer. The Chief Financial Officer shall
have custody of the funds and securities of the Corporation, shall keep full and
accurate accounts of receipts and disbursements of the Corporation in books
belonging to the Corporation and shall deposit all moneys and other valuable
effects of the Corporation in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors. The Chief
Financial Officer shall disburse the funds of the Corporation as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the Chairman of the Board, the President, the Chief Executive
Officer and the Board of Directors at its regular meetings, or when the Chairman
of the Board, the President, the Chief Executive Officer or the Board of
Directors so requires, an account of all of his or her transactions as Chief
Financial Officer and of the financial condition of the Corporation. If required
by the Board of Directors, the Chief Financial Officer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his or her office and for the restoration to the Corporation, in case
of his or her death, resignation, retirement or removal from office, of all
books, papers, vouchers, money and other property of whatever kind in his or her
possession or under his or her control belonging to the Corporation.
i. Controller. The Controller shall perform such duties and have
such powers as from time to time may be assigned to him or her by the Board of
Directors, the Chairman of the Board, the President, the Chief Executive
Officer, any Vice President, or the Chief Financial Officer, and in the absence
of the Chief Financial Officer or in the event of the Chief Financial Officer's
disability or refusal to act, shall perform the duties of the Chief Financial
Officer, and when so acting, shall have all the powers of and be subject to all
the restriction upon the Chief Financial Officer. If required by the Board of
Directors, the Controller shall give the Corporation a bond in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his or her office and for the
restoration to the Corporation, in the case of his or her death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his or her possession or under his or her
control belonging to the Corporation.
j. Treasurer. The Treasurer shall perform such duties and have
such responsibilities as from time to time may be assigned by the Board of
Directors.
Section 4. Salaries and Contract Rights. The Salaries, if any, of the
officers shall be fixed from time to time by the Board of Directors. The
appointment of an officer shall not of itself create contract right.
Section 5. Resignation or Removal. Any officer of this Corporation may
resign at any time by giving written notice to the Board of Directors. Any such
resignation is effective when the notice is delivered, unless the notice
specifies a later date, and shall be without prejudice to the contract rights,
if any, of such officer.
The Board of Directors, by majority vote, may remove any officer or
agent appointed by it, with or without cause. The removal shall be without
prejudice to the contract rights, if any, of the person so removed.
Section 6. Vacancies. If any office becomes vacant by any reason, the
directors may appoint a successor or successors who shall hold office for the
unexpired term.
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ARTICLE V
CERTIFICATES OF SHARES AND THEIR TRANSFER;
UNCERTIFICATED SHARES
Section 1. Issuance of Shares. No shares of this Corporation shall be
issued unless authorized by the Board of Directors. Such authorization shall
include the maximum number of shares to be issued and the consideration to be
received. A good faith determination by the Board that the consideration
received or to be received for the shares to be issued is adequate is conclusive
insofar s the adequacy of consideration relates to whether the shares are
validly issued, fully paid and nonassessable.
Section 2. Issuance of Certificated Shares. Unless the Board of
Directors determines that the Corporation's shares are to be uncertificated,
certificates for shares of the Corporation shall be in such form as is
consistent with the provisions of the Act. The certificate shall be signed by
original or facsimile signature of two officers of the Corporation, and the seal
of the Corporation may be affixed thereto.
Section 3. Transfer of Certificated Stock. Certificated shares of stock
may be transferred by delivery of the certificate accompanied by either an
assignment in writing on the back of the certificate or by a written power of
attorney to assign and transfer the same on the books of the Corporation, signed
by the record holder of the certificate. Shares shall be transferable on the
books of this Corporation, upon surrender thereof so assigned or endorsed.
Section 4. Loss or Destruction of Certificates. In case of the loss,
mutilation, or destruction of a certificate of stock, a duplicate certificate
may be issued upon such terms as the Board of Directors shall prescribe.
Section 5. Issuance of Uncertificated Shares. The Board of Directors may
authorize the issue of some or all of the shares of any or all of the
Corporation's classes or series of stock without certificates, provided,
however, that such authorization shall not affect shares already represented by
certificates until they are surrendered to the Corporation. Within a reasonable
time after the issue or transfer of shares without certificates, the Corporation
shall send the shareholders, a written statement of the information required on
certificates by the Act. Said statement shall be informational to the
shareholder, and not incontrovertible evidence of stock ownership.
The statement shall be signed by original or facsimile signature of two
officers of the Corporation, and the seal of the Corporation may be affixed
thereto.
Section 6. Transfer of Uncertificated Stock. Transfer of uncertificated
shares of stock may be accomplished by delivery of an assignment in writing or
by a written power of attorney to assign and transfer the same on the books of
the Corporation, signed by the record holder of the shares. Surrender of the
written statement shall not be a requirement for transfer of the shares so
represented.
Section 7. Record Date and Transfer Books. For the purpose of determining
shareholders who are entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the Board of Directors may fix in advance a record date for any
such determination of shareholders, such date in any case to be not more than
seventy (70) days and, in case of a meeting of shareholders, not less than ten
(10) days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken.
9
<PAGE> 10
If no record date is fixed for such purposes, the date on which notice of
the meeting is mailed or the date on which the resolution of the Board of
Directors declaring such dividend is adopted, as the case may be, shall be the
record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section, such determination shall
apply to any adjournment thereof, unless the Board of Directors fixes a new
record dace, which it must do if the meeting is adjourned more than one hundred
twenty (120) days after the date fixed for the original meeting.
Section 8. Voting Record. The officer or agent having charge of the stock
transfer books for shares of this Corporation shall make at least ten (10) days
before each meeting of shareholders a complete record of the shareholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each.
Such record shall be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any shareholder during the whole time
of the meeting for the purposes thereof.
ARTICLE VI
BOOKS AND RECORDS
Section 1. Books of Accounts, Minutes, and Share Register. The
Corporation:
a) Shall keep as permanent records minutes of all meetings of its
shareholders and Board of Directors, a record of all actions taken by the
shareholders or Board of Directors without a meeting, and a record of all
actions taken by a committee of the Board of Directors exercising the authority
of the Board of Directors on behalf of the Corporation;
b) Shall maintain appropriate accounting records;
c) Or its agent shall maintain a record of its shareholders, in a
format that permits preparation of a list of the names and addresses of all
shareholders, in alphabetical order by class of shares showing the number and
class of shares held by each; and
d) Shall keep a copy of the following records at its principal
office:
(1) The Articles of Incorporation;
(2) The Bylaws or Restated Bylaws and all amendments to
them currently in effect;
(3) The minutes of all shareholders' meetings, and records
of all actions taken by shareholders without a meeting, for the past three (3)
years;
(4) Its financial statements for the past three (3) years,
including balance sheets showing in reasonable detail the financial condition of
the Corporation as of the close of each fiscal year, and an income statement
showing the results of its operations during each fiscal year;
(5) All written communications to shareholders generally
within the past three (3) years;
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<PAGE> 11
(6) A list of the names and business addresses of its
current directors and officers; and
(7) Its most recent annual report delivered to the
Secretary of State of Washington.
Section 2. Copies of Resolutions. Any person dealing with the
Corporation may rely upon a copy of any of the records of the proceedings,
resolutions, or votes of the Board of Directors or shareholders, when certified
by the President or Secretary.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS
Section 1. Indemnification Rights of Directors, Officers, Employees and
Agents. The Corporation shall indemnify its directors and officers and may
indemnify its employees and agents (each an "Indemnified Party") to the full
extent permitted by the Act or other applicable law, as then in effect and the
Articles of Incorporation, against liability arising out of a proceeding to
which each such Indemnified Party was made a party because the Indemnified Party
is or was a director, officer, employee or agent of the Corporation. The
Corporation shall advance expenses incurred by each such Indemnified Party who
is a party to a proceeding in advance of final disposition of the proceeding, as
provided by applicable law, the Articles of Incorporation, or by written
agreement, which written agreement may allow any required determinations to be
made by any appropriate person or body consisting of a member or members of the
Board of Directors, or any other person or body appointed by the Board of
Directors, who is not a party to the particular claim for which an Indemnified
Party is seeking indemnification, or independent legal counsel.
The Corporation is not obligated to indemnify an Indemnified Party for
any amounts paid in settlement of any proceeding without the Corporation's prior
written consent to such settlement and payment. The Corporation shall not settle
any proceeding in any manner which would impose any penalty or limitation on an
Indemnified Party without such Indemnified Party's prior written consent.
Neither the Corporation nor an Indemnified Party may unreasonably withhold its
consent to a proposed settlement.
Section 2. Contract and Related Rights.
a. Contract Rights. The right of an Indemnified Party to
indemnification and advancement of expenses is a contract right upon which the
Indemnified Party shall be presumed to have relied in determining to serve or to
continue to serve in his or her capacity with the Corporation. Such right shall
continue as long as the Indemnified Party shall be subject to any possible
proceeding. Any amendment to or repeal of this Article shall not adversely
affect any right or protection of an Indemnified Party with respect to any acts
or omissions of such Indemnified Party occurring prior to such amendment or
repeal.
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<PAGE> 12
b. Optional Insurance, Contracts and Funding. The Corporation
may:
(1) Maintain insurance, at its expense, to protect itself
and any Indemnified Party against any liability, whether or not the Corporation
would have power to indemnify the Indemnified Party against the same liability
under Sections 23B.08.510 or .520 of the Act, or a successor section or statute:
(2) Enter into contracts with any Indemnified Party in
furtherance of this Article and consistent with the Act; and
(3) Create a trust fund, grant a security interest, or use
other means (including without limitation a letter of credit) to ensure the
payment of such amounts as may be necessary to effect indemnification provided
in this Article.
Section 3. Exceptions. Any other provision herein to the contrary
notwithstanding, the Corporation shall not be obligated pursuant to the terms of
these Bylaws to indemnify or advance expenses to an Indemnified Party with
respect to any proceeding:
a. initiated or brought voluntarily by an Indemnified Party and
not by way of defense, except with respect to proceedings brought to establish
or enforce a right to indemnification under these Bylaws, the Articles of
Incorporation or any statute or law; but such indemnification or advancement of
expenses may be provided by the Corporation in specific cases if the Board of
Directors finds it to be appropriate;
b. instituted by an Indemnified Party to enforce or interpret the
provisions hereof or the Articles of Incorporation, if a court of competent
jurisdiction determines that each of the material assertions made by such
Indemnified Party in such proceeding was not made in good faith or was
frivolous;
c. to the extent such Indemnified Party has otherwise actually
received payment (under any insurance policy or otherwise) of the amounts
otherwise indemnifiable hereunder; or
d. if the Corporation is prohibited by the Articles of
Incorporation, the Act or other applicable law as then in effect from paying
such indemnification and/or advancement of expenses.
ARTICLE VIII
AMENDMENT OF BYLAWS
Section 1. By the Shareholders. These Bylaws may be amended or repealed
by a resolution duly adopted by not less than a majority of the shares entitled
to vote thereon.
Section 2. By the Board of Directors. These Bylaws may be amended or
repealed by a resolution duly adopted by a majority of the whole Board of
Directors. However, the directors may not modify the Bylaws relating to filling
Board of Directors vacancies resulting form a removal by action of the
shareholders as specified herein or in the Articles of Incorporation.
12
<PAGE> 1
EXHIBIT 21.1
OAKLEY, INC.
List of Material Subsidiaries
Oakley Europe
<PAGE> 1
EXHIBIT 23.1
Independent Auditors' Consent
We consent to the incorporation by reference in Registration Statement Nos.
33-98690 and 333-07191 of Oakley, Inc. on Form S-8 of our report dated February
5, 1999, appearing in this Annual Report on Form 10-K of Oakley, Inc. for the
year ended December 31, 1998.
/s/ DELOITTE & TOUCHE LLP
- ---------------------------------
Deloitte & Touche LLP
Costa Mesa, California
March 26, 1999
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