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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, 1999
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)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 951-0991
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
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. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on March 20, 2000: $196,678,916.
Number of shares of common stock, $.01 par value, outstanding as of the
close of business on March 20, 2000: 69,554,157 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's 2000 Annual
Shareholders Meeting are incorporated by reference into Part III herein.
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OAKLEY, INC.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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PART I
ITEM 1. BUSINESS
GENERAL
Oakley, Inc. (referenced here as 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 that commenced operations in 1977 and
began to sell sunglasses in 1984. The Company is an innovation-driven designer,
manufacturer and distributor of consumer products that include high-performance
eyewear, footwear, watches, apparel and accessories. The Company's believes its
principal strength is its ability to develop products that demonstrate superior
performance and aesthetics through proprietary technology and styling. Its
designs and innovations are protected by more than 520 legal patents worldwide.
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 this report and in the Company's previously filed public
documents, copies of which may be obtained without cost from the Company. In
addition, 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. these
uncertainties, prospective investors are cautioned not to place undue reliance
on such statements. The Company undertakes no obligation to update these
forward-looking statements.
PRODUCT LINE AND BRAND EXTENSION
Oakley intends to introduce product line extensions and new product lines in the
future and develop innovations targeted to attract additional consumers and will
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.
To date, the Company has designed its footwear, watch, apparel and other
accessories using its own resources in order to preserve brand 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.
PRODUCT DESIGN AND DEVELOPMENT
At its core, Oakley is a technology company, in business to seek out problems
with existing consumer products and solve them in ways that redefine product
categories. The foundation of the Company is built on three fundamental
precepts: Find opportunity. Solve with technology. Wrap in art.
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State-of-the-art technology maintains efficiency, precision and speed in the
Company's product development cycle. Stereolithographic computer modeling is
combined with CAD/CAM liquid-laser prototyping to create fully detailed,
wearable prototypes of eyewear, footwear and accessories. Rapid iteration of
working models allows for extensive design testing before final production.
After the development stage is complete, the finalized sculpture can be used
directly in preparation of production tooling. Utilizing these processes, the
Company is capable of introducing new eyewear product lines within four months
of initial concept.
The Company's products undergo extensive testing throughout development. The
American National Standards Institute (ANSI) has established specific testing
criteria for eyewear. 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. In addition, the Company performs a broad range of
eyewear durability testing that includes extremes of UV, heat, condensation and
humidity. With strict guidelines from the American Society for Testing and
Materials (ASTM) and other industry authorities, Oakley footwear and apparel are
tested to ensure quality, performance and durability. Abrasion tests are
performed on the outsole and shoe upper, and on clothing that utilizes rubber
compounds in high-abrasion areas. Analyses of the traction performance of
outsoles, the bond strength between shoe components and the breathability of
textiles are also performed.
EYEWEAR - TECHNOLOGY
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.
Oakley's patented XYZ Optics(R) 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 increases clarity
for all angles of view. This allows for wrapped, raked-back lens configurations
that enhance peripheral vision and protection against sun, wind and side impact.
High-performance sports application eyewear featuring Oakley's patented POLARIC
ELLIPSOID(TM) lens geometry (M Frame(R), Pro M Frame(R), Zeroes(R) and A
Frame(TM) goggle) have demonstrated superior optical clarity when compared to
similar products of principal competitors. Developed specifically for toroidal
lenses (which use different measurements for top-to-bottom vs. side-to-side
curvature), this proprietary geometry allows the Company to produce single-lens
sports shields that provide enhanced coverage and protection while reducing
distortion at all angles of vision.
Plutonite(R) lens material and Iridium(R) lens coatings are among the Company's
most prominent advances in eyewear. Plutonite is a proprietary material used to
produce lenses of exceptional optical clarity. The material inherently blocks
100% of all UVA, UVB, UVC and harmful blue light. Rendered in lenses of
extremely high durability and low weight, it offers superior impact protection.
Iridium is a metallic oxide that improves contrast by allowing the wearer to
tune transmission (and thereby enhance perception of detail) for any given light
condition. The coating has become very popular for eyewear used in demanding
sports such as skiing and cycling, and in high altitude use.
The distinctive hues of Oakley lenses add to their popularity in the
recreational sunglass market. By offering interchangeable lenses and other
components in various colors and shapes, the Company 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.
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The Company has applied prescription lens technology to all its frame models.
Oakley Rx is an adaptive geometry that utilizes computer modeling to reconfigure
the contours of corrective lenses, shaping them to the wrapped curvature of the
Company's frames. Custom grinding and specialized equipment for cutting and
edging give Oakley proprietary control of this precision lens tailoring. The
Company's proprietary prescription lenses can be made to fit any brand of
ophthalmic frame, regardless of model or manufacturer. Options that include
polarization and clear lenses with anti-reflective coating offer customers added
incentive to select Oakley Rx prescription lenses.
EYEWEAR - PRODUCTS
During the past year, the Company expanded its X Metal(R) line, a family of
eyewear named for a proprietary metal blend that exhibits an extraordinary
strength-to-weight ratio. The frames are created with a unique metallurgical
process and are designed to utilize breakthroughs in architectural mechanics.
Juliet(TM) joined the initial X Metal(R) releases, Romeo(TM) and Mars(TM), in
early 1999. Introduced later in the year, X Metal(R) XX further expanded this
branch of performance eyewear, a product line that can rightfully claim to be
the only 3-D sculptured, hypoallergenic, all-metal frames on earth.
Additional new eyewear products were introduced during 1999. The reengineered O
Frame(R) Snow Goggle represents the rebirth of a 20-year legacy. Zeros(R), a
style of ultra-lightweight eyewear favored in sports applications, was
redesigned and joined by a new golf-specific model. Enhanced aesthetics and key
advances in frame technology led to new releases during 1999 of Straight
Jackets(R), Eye Jackets(R), and the Company's popular M Frame(R). Two entirely
new lines of eyewear reached the market during 1999. OO(TM) ("double-O") was
inspired by the styling eye of Oakley Board Member Michael Jordan. Available in
two distinctive lens shapes, the new eyewear represents a departure from the
Company's traditional geometries of wrapped, raked-back frames and is thereby
intended to address previously untapped markets. The second new line, Racing
Jackets(TM), features a unique sculpt of defogging vents in a lightweight,
hingeless frame.
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The Company's eyewear products are listed below:
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FROGSKINS(R) DATE INTRODUCED U.S. SUGGESTED RETAIL PRICE
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Frogskins(R) December 1996 $60-120
Fives(TM) April 1997 $60-120
Tens(TM) August 1998 $75-145
JACKETS(R) DATE INTRODUCED U.S. SUGGESTED RETAIL PRICE
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Minute(TM) May 1998 $80-150
Moon(TM) July 1998 $100-130
Eye Jacket(R) Late 1994 (updated August 1999) $80-150
Racing Jacket(R) January 1998 $125-150
Topcoat(R) August 1997 $100-130
Trenchcoat(R) Late 1995 $90-100
Straight Jacket(R) May 1996 (updated November 1999) $95-150
M FRAMES(R) DATE INTRODUCED U.S. SUGGESTED RETAIL PRICE
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M Frame(R) Late 1989 (updated May 1999) $100-170
Pro M Frame(R) October 1996 $100-140
ZEROS(R) DATE INTRODUCED U.S. SUGGESTED RETAIL PRICE
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Zeros(R) Late 1993 (updated May 1999) $95-125
OO(TM) DATE INTRODUCED U.S. SUGGESTED RETAIL PRICE
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OO(TM) June 1999 $170-190
WIRES DATE INTRODUCED U.S. SUGGESTED RETAIL PRICE
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E Wire(TM) October 1993 (updated May 1999) $135
T Wire(TM) August 1994 (updated May 1999) $225
Square Wire(R) June 1996 (updated May 1999) $135-190
A Wire(TM) May 1998 $125-190
X METAL(R) DATE INTRODUCED U.S. SUGGESTED RETAIL PRICE
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Romeo(R) February 1997 $250
Mars(TM) March 1998 $265-315
Juliet(TM) February 1999 $250
XX(TM) December 1999 $250-325
GOGGLES DATE INTRODUCED U.S. SUGGESTED RETAIL PRICE
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Motocross 1980 $26-56.50
Ski 1983 $25-120
H20 1990 $28-61
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FACE SHIELDS
In June 1997, Oakley acquired One Xcel, Inc., a company that designs, markets
and distributes the only optically-correct protective face shield available for
use with sports helmets. Oakley continues to maintain a licensing relationship
with the National Hockey League (NHL) for this product line.
FOOTWEAR
The Company's first model in its performance footwear line was introduced in
June 1998. With the goal of reinventing the concept of performance footwear, the
Company utilized materials that have never before been applied in the industry.
Vulcanized rubber was discarded for a unique synthetic, a
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composite of Kevlar(R) and Oakley Unobtainium(R) 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 and independent torsion response were
added to enhance performance.
Two new footwear styles were released during 1999. ShoeTwo(TM) and ShoeThree(TM)
are the product of Computer Assisted Design/Computer Assisted Manufacturing
(CAD/CAM) engineering. Computer mastering of outsole and midsole components
allowed the Company to translate 3-D digital information directly to production
tools, maximizing precision and fidelity. Carefully selected for durability and
comfort, footwear materials include water-wicking synthetics for comprehensive
moisture control and high-grade urethane for insoles with superior shape
retention and shock absorption. The ergonomic designs are engineered to maximize
performance and are styled with aesthetics that equal the Company's
groundbreaking eyewear creations. The Company's current footwear products are
listed below:
Kevlar(R) is a registered trademark of DuPont.
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FOOTWEAR DATE INTRODUCED U.S. SUGGESTED RETAIL PRICE
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O Shoe June 1998 $125
ShoeTwo June 1999 $90
ShoeThree November 1999 $99
</TABLE>
WATCHES
The Company's Time Bomb(TM) wristwatch features World Movement(TM), the
culmination of advances in gearing, bearings and microcircuitry from around the
globe. The product combines digital quartz accuracy with an intuitive analog
design. It includes a new Oakley invention, a precision flywheel mechanism
called the O Engine(TM) which operates an Inertial Generator(TM). With the means
to convert motion into electricity, the Company has created a self-powering
timepiece that runs without springs or batteries. Precision crafting was
extended to the full-metal band, with unique positional geometry applied to each
segment to enhance ergonomic flex. Sculptural metal casings are available in
three distinctive finishes: X Metal(TM) Titanium, Ion-Plated Stainless and Hand
Polished Titanium. Limited editions are available also, including a version
rendered fully in 18-karat gold.
Three new versions of the premier style were released in 1999: a Cannon Yellow
Limited Edition, a Rusty Wallace Limited Edition and an Ion-Plated edition. Two
entirely new lines featuring a unique chassis design of reduced geometry were
also released: ICON(TM) and ICON Small. The Company's current timepiece products
are listed below:
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WATCH DATE INTRODUCED U.S. SUGGESTED RETAIL PRICE
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Time Bomb December 1998 $1300-1500
Icon November 1999 $1300
Icon Small November 1999 $1200
</TABLE>
APPAREL AND ACCESSORIES
Advanced technologies and unique designs have placed the Company at the
forefront of innovation and style in the production of apparel and accessories.
Considerable emphasis has been placed on the engineering and development of
textile fibers and coatings that maximize UV protection, repel water and provide
breathability to maintain the comfort of moisture control. Using these advanced
materials, final products are assembled with performance features that range
from critical venting to refined ergonomics.
In addition to spring and fall lines, the Company's first summer apparel line
was introduced in 1999. Over the course of the year, apparel releases included
ten new styles of outerwear, fourteen new styles of men's base-layer technical
wear, eleven new styles of women's base-layer technical wear,
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two new styles of sweats, four new styles of women's basics, eleven new styles
of men's and women's T-shirts, three new styles of caps, and the introduction of
crew and quarter-length socks. Technical accessory releases include performance
backpacks (O Pack and PackTwo) and eyewear cases (M Case and Goggle Case).
MANUFACTURING
The Company's headquarters and manufacturing facility is located in Foothill
Ranch, Orange County, California, where it assembles and produces most of its
products. The Company owns, operates and maintains most of the equipment used in
manufacturing its eyewear products. In-house production can contribute
significantly to gross profit margins and offers protection against piracy. It
further 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 to outside vendors. For example, the Company
utilizes third party manufacturing to produce its internally designed apparel.
The Company performs final assembly on its current watch line
Much of the equipment used in the manufacture of Oakley products has been
specially designed and adapted for the processes used by the Company. By
manufacturing its own products, the Company has the opportunity to experiment
with new materials and technologies which can lead to important discoveries,
such as its Iridium coating technology (which the Company believes is one of the
most sophisticated coating processes in the industry). Proprietary manufacturing
equipment and methodologies are protected by special security measures employed
at the Company's manufacturing facilities.
The Company has built strong relationships with its major suppliers. With most
suppliers, it maintains agreements that prohibit disclosure of any of the
Company's proprietary information or technology to third parties. Although the
Company relies on outside suppliers for the specific molded components of its
glasses and goggles, the Company retains substantial ownership of all molds used
in the production of the components. The Company believes that most components
can be obtained from one or more alternative sources within a relatively short
period of time.
The Company relies on a single source for the supply of several components,
including the uncoated lens blanks from which virtually all of the Company's
lenses are cut. In the event of the loss of the source for lens blanks, the
Company has identified an alternate source that may be available. The effect of
the loss of any of these sources or a disruption in 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 for 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.
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As announced in late 1999, the Company is restructuring its footwear business in
order to reduce its in-house manufacturing investment and supplement it with
select manufacturers for component and complete-unit production. Partners are
being chosen on the basis of their ability to leverage the Company's integrated
CAD/CAM technologies, their flexibility and capability to support future product
developments and their ability to maintain the levels of quality and innovation
synonymous with the Oakley brand. The Company believes that partnering with
select manufacturers will limit risk and accelerate the development of future
footwear lines. In connection with restructuring, the Company recorded an $8.2
million after-tax charge in the fourth quarter of 1999 to reflect the disposal
of excess footwear manufacturing equipment, the write-down of footwear inventory
and raw materials, and other charges incidental to this restructuring. For
information on the Company's restructuring charge, see Note 12 in Notes to
Consolidated Financial Statements.
DISTRIBUTION
The Company sells Oakley eyewear in the United States through a carefully
selected base of approximately 8,500 active accounts as of December 31, 1999
with approximately 12,000 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 and a limited number of premium
optical locations recently -- 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 that has increased brand loyalty and 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 image as an
exclusive producer of high-quality products.
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 120 employees who perform sports
marketing, advertising, telemarketing, shipping and accounting functions. Since
1995, the Company has been selling Oakley products to Mexico and 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, enabling the Company to market and sell its
products on a direct basis in Canada. In February 1999, the Company negotiated
the assumption of distribution rights from its Austrian distributor, to become
effective in April 2000. In November 1999, the Company acquired its exclusive
Australian distributor to assume direct responsibility for distribution of
Oakley products in that market.
In those parts of the world not serviced by the Company or its subsidiaries,
Oakley products are sold through distributors who possess local expertise. These
distributors sell the Company's products either exclusively or with
complementary, non-competing products. They agree to respect the marketing
philosophy and practices of the Company and to receive extensive training
regarding such philosophies and practices. For information regarding the
Company's operations by geographic region, see Notes 10 and 11 in 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. When Oakley products are found at undesirable
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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 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.
CUSTOMER SERVICE
Oakley strives to support its products with the best customer service in the
industry. With a staff of approximately 110 employees, the Customer Service
group promptly and courteously responds to customer inquiries, concerns and
warranty claims.
The Company provides a one-year limited warranty against manufacturer's defects
in its polycarbonate frames. All authentic Oakley watches are warranted for one
year against manufacturer's defects when purchased from an authorized Oakley
watch dealer.
ADVERTISING AND PROMOTION
Oakley retains significant control over its promotional programs and believes it
is able to deliver a consistent, well-recognized advertising message at
substantial cost savings compared to complete reliance on outside agencies.
While the Company uses traditional marketing methods in some instances, it
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 to strong brand recognition
on a global level. Oakley utilizes the exposure generated by its athletes as an
"editorial" endorsement of product performance and style, as opposed to a
commercial endorsement.
The sports marketing division consists of 15 sports marketing experts
domestically, with an additional 27 managers positioned in direct offices and
with distributors internationally. These experts specialize in multiple sport
and entertainment market segments and niches. The mission of the Company's
sports marketing experts is to identify and develop relationships with top
athletes and opinion leaders in the sports industry, negotiate their endorsement
agreements and help them serve as ambassadors by educating them on the
performance functions and benefits of Oakley products. This strategy has proven
to gain editorial exposure that ultimately brings awareness and authenticity to
the brand. The diverse knowledge of Oakley's sports marketing experts earns the
respect of pro athletes even in fringe sports such as surf and snowboard, yet
continues to successfully expand the Company's reach in more mainstream sports
such as golf.
The Company has developed a secondary 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 retail
stores, trade shows, high-traffic locations and regional sporting events.
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 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 brand identity.
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In August 1999, the Company announced the selection of San Diego-based
VitroRobertson as its advertising agency of record. Through a strategically
developed print advertising campaign, the agency plans to reintroduce Oakley to
both new and existing customers and strengthen the brand's emotional connection
with consumers around the world.
During the past year, the Company significantly expanded its direct marketing
efforts. The first Official Oakley Catalog was produced and the first Oakley
retail store was christened. The catalog is a comprehensive sales tool that
features the full range of product categories. Although catalogs have been
created in the past -- most notably with partners such as Sunglass Hut -- this
marks the premier of a marketing tool that solely represents the Company. In
retail, the first O Store opened its doors in July 1999 for business in Irvine,
California. As the first official Oakley retail outlet, it sells the full range
of Oakley products and features marketing enhancements such as displays of the
proprietary technologies that are the hallmark of the brand.
COMPREHENSIVE INTERNET STRATEGY
The Company has embarked on a comprehensive Internet channel strategy designed
to allow more consumers to purchase Oakley products as efficiently as possible.
The program utilizes the World Wide Web as a complementary channel to retail and
international distributors. Ultimate goals include increased consumer awareness
of the Oakley brand, improved customer service, and increased sales through
retail and E-commerce channels by harnessing the unique interactive capabilities
of the Internet.
The newest initiative began in October 1999 when the Company's corporate Web
site, www.oakley.com, was extensively redesigned. Now fully E-commerce capable,
the re-launched site features the entire line of Oakley eyewear, footwear,
apparel, accessories and wristwatches for delivery to U.S. customers, with plans
to offer shipping to key international markets in 2000. The site also features a
prominent dealer-locator function that directs consumers to local retailers.
With improvements in place, the Company is capitalizing on the diverse
opportunities offered by Internet commerce. A recent example is the
Build-To-Order program, a Web shop where customers can specify desired color
combinations of frames and lenses for the custom assembly of Racing Jackets(R),
M Frame(R) and Pro M Frame(R) eyewear.
The Company's fully integrated technology platform and operational capabilities
place it in a strong position as a manufacturer equipped for in-house order
processing and timely fulfillment. The Internet strategy is enabled by a
front-end technology platform featuring servers and hardware from Sun
Microsystems, database management tools from Oracle Corp., content management
tools from Vignette, and hosting services by Exodus Communications. These tools
allow the Company to utilize the power of the Internet without relying on
outsourced fulfillment operations or building a fulfillment and customer service
center from scratch. Front-end technologies have been integrated with its
Enterprise Resource Planning (ERP) systems provided by SAP AG. The Company has
implemented SAP's order processing, manufacturing, inventory management,
distribution and finance modules in its key worldwide locations in the United
States, Canada, Japan and France. This has created an efficient, streamlined
supply-chain process capable of providing same-day shipping of in-stock orders.
The Company is also utilizing three additional storefronts for commerce. The
first involves "click-and-mortar" partners who currently offer a select
assortment of Oakley products on their Web sites and in their retail stores.
These currently include Sunglass Hut, Recreational Equipment Inc., Fusion.com,
Volleyhut.com and Chaparral Racing. The next virtual storefront consists of
select pure E-tailers that sell exclusively over the Internet. In December 1999,
the Company chose Fogdog Sports (www.fogdog.com) for the first partnership of
this nature. Oakley is currently evaluating additional E-tail partners for
inclusion in this program and plans to make future announcements as they are
selected. The final storefront includes carefully chosen affiliates. Under this
program, qualifying partners will be authorized to place on their Web site a
hyperlink which will take a visitor directly to Oakley's corporate Web site,
www.oakley.com.
11
<PAGE> 12
PRINCIPAL CUSTOMERS
During 1999, net sales to the Company's ten largest customers, which included
six international distributors, accounted for approximately 29.9% 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 23.0% of
the Company's 1999 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, 1999, Oakley independent
distributors serviced approximately 15 of the 1,674 Sunglass Hut locations
worldwide.
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, 1999 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 102 30 94 41
International 418 180 679 207
</TABLE>
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 to be 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 Luxottica, Marchon, Safilo and various smaller niche brands
compete for the Company's shelf space.
12
<PAGE> 13
The Company also competes in the broader non-sports, 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 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 Notes 10 and 11 in Notes to the Consolidated Financial Statements for
discussion regarding domestic and foreign operations.
EMPLOYEES
The Company believes that its employees are among its most valuable resources
and have been a key factor in the success of Oakley's products. As of March 20,
2000, the total count of full-time permanent employees worldwide was 1,128. In
addition, the Company may utilize as many as 500 temporary personnel from time
to time, especially during peak 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
The Company's principal corporate and manufacturing facility is located in
Foothill Ranch, Orange County, California. The facility is approximately 400,000
square feet, with potential to expand into an additional 100,000 square feet. In
June 1996, the Company purchased a facility in Nevada of approximately 63,000
square feet for the production of its X Metal(R) eyewear. In addition, the
Company leases office and warehouse space as necessary to support its operations
worldwide, including offices in the UK, France, Australia, South Africa, Japan,
Canada and the state of Washington. The Company owns a business office and
warehouse of approximately 18,000 square feet in Mexico City for its operations
in Mexico and Central America. The facility was first 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
13
<PAGE> 14
certain circumstances without regard to fault. The Company's manufacturing
operations routinely involve the handling of chemicals and wastes, some of which
are or may become regulated as hazardous substances. The Company has not
incurred, and does not expect to incur, any significant expenditures or
liabilities for environmental matters. As a result, the Company believes that
its environmental obligations will not have a material adverse effect on its
operations or financial position.
ITEM 3. LEGAL PROCEEDINGS
THE CALIFORNIA SECURITIES ACTIONS
The Company and certain of its officers and directors have been named as
defendants in three putative class action lawsuits (the "California Securities
Actions") filed in December 1996 in the California Superior Court for the County
of Orange (the "Superior Court"). The cases are captioned:
Yosef S. Rosenshein v. Oakley, Inc., Mike Parnell, Link Newcomb and Jim
Jannard, Case No. 773051 (filed December 17, 1996);
Herschel Harman v. Oakley, Inc., Mike Parnell, Link Newcomb and Jim
Jannard, Case No. 773053 (filed December 17, 1996); and
Eric Sher, Harold Baron and David O. Eckert v. Oakley, Inc., Mike
Parnell, Link Newcomb, Jim Jannard, Merrill Lynch & Co. and Alex. Brown
& Sons, Inc., Case No. 773366 (filed December 24, 1996).
By order dated January 30, 1997, the Superior Court ordered that the California
Securities Actions be assigned to the Superior Court's Complex Litigation Panel,
where they have since been consolidated. On April 18, 1997, the plaintiffs filed
a consolidated amended complaint in the California Securities Actions. The
plaintiffs seek to represent a class of persons who purchased the Company's
common stock between March 22, 1996 and December 5, 1996.
The complaint in the California Securities Actions alleges claims for violations
of the antifraud provisions of the California Corporations Code, unfair business
practices and false advertising in violation of certain provisions of the
California Business and Professions Code, fraud and negligent 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).
14
<PAGE> 15
On July 7, 1999, the parties submitted to the Superior Court a stipulated
request for dismissal without prejudice if the California Securities Actions. On
July 26, 1999, the Superior Court entered a dismissal without prejudice of 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 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
15
<PAGE> 16
prospects and quality control standards. The plaintiffs seek unspecified damages
and other relief against the Company and the other defendants. Plaintiffs in the
Lister and Chait Actions filed a motion to consolidate the Lister and Chait
Actions and the Rosenshein Federal Action, to appoint certain persons as lead
plaintiffs for the purported plaintiff class and for the selection of lead
counsel to the purported plaintiff class.
On January 26, 1998, the District Court granted the plaintiffs' motions for
appointment of lead plaintiffs and for the selection of lead counsel to the
purported plaintiff classes. The District Court further ordered that all of the
Federal Securities Actions be consolidated for pretrial purposes. On April 3,
1998, plaintiffs filed consolidated amended complaints in the Federal Securities
Actions.
On July 10, 1998, the Company and defendants Mike Parnell, Link Newcomb and Jim
Jannard filed motions to dismiss the Federal Securities Actions. Merrill Lynch
and Alex. Brown also filed motions to dismiss the Federal Securities Actions. On
January 14, 1999, the District Court denied the motions to dismiss filed by the
Company and the other defendants. On March 3, 1999, the defendants filed answers
to the consolidated amended complaints in the Federal Securities Actions. On
April 2, 1999, plaintiffs filed motions for class certification in the Federal
Securities Actions. On June 24, 1999, the parties submitted to the District
Court stipulations and proposed orders for class certification in the Federal
Securities Actions. On June 29, 1999, the District Court approved the
stipulations and entered orders for class certification in the Federal
Securities Actions.
Although it is too soon to predict the outcome of the Federal Securities Actions
with any certainty, based on its current knowledge of the facts, the Company
believes that the plaintiffs' claims are without merit and intends to defend the
Federal Securities actions vigorously.
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.
After sustaining the defendants' demurrer to the plaintiff's second amended
complaint, 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"). Pursuant to the proposed settlement, a committee of
independent members of Oakley's board of directors (the "Independent
Committee"), comprised of non-employee directors Irene Miller and Orin Smith,
investigated the allegations of insider trading asserted in the California
Derivative Action against defendants James Jannard and Mike Parnell. The
Independent Committee was assisted by counsel, Norman Blears, Esq. of the law
firm of Heller, Erhman, White & McAuliffe. The Independent Committee determined
that the insider trading claims lacked merit and recommended that the action be
dismissed and the claims against Messrs. Jannard and Parnell released in
accordance with the terms of the proposed settlement. The Independent Committee
also reported its findings and recommendations respecting the allegations of
insider trading to plaintiff's counsel and a copy of its report was filed with
the Court of Appeal.
16
<PAGE> 17
On June 24, 1999, the Court of Appeal approved the settlement and entered a
final judgment dismissing with prejudice the California Derivative Action and
approving the Company's release of claims against Messrs. Jannard and Parnell.
The settlement is not expected to have a material adverse effect on the Company.
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.
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"). As of March 20, 2000,
the closing sales price for the Common Stock was $8.50. The following table sets
forth the high and low sales prices for the Common Stock for each quarter of
1998 and 1999 on the New York Stock Exchange Composite Tape:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1998
First Quarter $ 12.375 $ 8.4375
Second Quarter $ 14.625 $ 12.625
Third Quarter $ 14.875 $ 9.625
Fourth Quarter $ 10.875 $ 8.5
1999
First Quarter $ 8.375 $ 6.9375
Second Quarter $ 8.5625 $ 6.875
Third Quarter $ 7.0625 $ 5.9375
Fourth Quarter $ 6.875 $ 5.3125
</TABLE>
The number of shareholders of record for Common Stock on March 20, 2000 was 658.
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.
17
<PAGE> 18
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, income statement excluding the restructure charge
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, 1999, 1998 and 1997 and balance
sheet data as of December 31, 1999 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,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(dollars in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 257,872 $ 231,934 $ 193,984 $ 218,566 $ 172,752
Cost of goods sold 109,338 86,134 75,393 66,790 50,295
------------ ------------ ------------ ------------ ------------
Gross profit 148,534 145,800 118,591 151,776 122,457
Operating expenses:
Research and development 6,304 5,231 3,825 4,782 16,774
Selling 72,184 66,188 53,007 48,092 36,776
Shipping and warehousing 6,592 6,777 5,721 6,507 4,678
General and administrative 30,977 26,299 23,032 18,513 15,753
Gain on disposition of property
and equipment -- -- -- -- (4,794)
------------ ------------ ------------ ------------ ------------
Total operating expenses 116,057 104,495 85,585 77,894 69,187
Operating income 32,477 41,305 33,006 73,882 53,270
Interest expense (income), net 1,951 2,109 1,181 (781) 273
------------ ------------ ------------ ------------ ------------
Income before provision for income taxes 30,526 39,196 31,825 74,663 52,997
Provision for income taxes 10,684 15,051 12,221 28,670 7,830(1)
------------ ------------ ------------ ------------ ------------
Net income $ 19,842 $ 24,145 $ 19,604 $ 45,993 $ 45,167
============ ============ ============ ============ ============
Basic net income per share $ 0.28 $ 0.34 $ 0.28 $ 0.64
============ ============ ============ ============
Basic weighted average common shares 70,660,000 70,678,000 70,659,000 71,324,000
============ ============ ============ ============
Diluted net income per share $ 0.28 $ 0.34 $ 0.28 $ 0.64
============ ============ ============ ============
Diluted weighted average common shares 70,662,000 70,851,000 70,700,000 71,728,000
============ ============ ============ ============
SUPPLEMENTAL INCOME STATEMENT DATA(2):
Income before provision for income taxes $ 52,997
Provision for income taxes 20,854
------------
Net income $ 32,143
============
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
Year ended
December 31,
1999
-------------
<S> <C>
INCOME STATEMENT DATA EXCLUDING RESTRUCTURE CHARGE (3):
Net sales $ 257,872
Cost of goods sold 96,738
-----------
Gross profit 161,134
Operating expenses:
Research and development 6,304
Selling 72,184
Shipping and warehousing 6,592
General and administrative 30,977
Gain on disposition of property and equipment --
-----------
Total operating expenses 116,057
Operating income 45,077
Interest expense (income), net 1,951
-----------
Income before provision for income taxes 43,126
Provision for income taxes 15,094
-----------
Net income $ 28,032
===========
Basic net income per share $ 0.40
===========
Basic weighted average common shares 70,660,000
===========
Diluted net income per share $ 0.40
===========
Diluted weighted average common shares 70,662,000
===========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 59,247 $ 45,602 $ 41,688 $ 36,107 $ 39,161
Total assets 239,350 225,815 181,291 158,245 97,725
Total debt 25,060 34,182 25,201 18,000 263
Shareholders' equity 177,837 161,976 136,961 121,437 81,709
</TABLE>
(1) For the portion of 1995 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.
(3) Amounts reflect adjustments for the elimination of the $12.6 million
charge recorded in 1999 to cost of goods sold in connection with the
restructuring of the Company's footwear operations, see Note 12 in Notes
to Consolidated Financial Statements.
19
<PAGE> 20
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.
RESTRUCTURING CHARGE
In October 1999, the Company's Board of Directors approved strategic initiatives
(the "Restructuring Plan") to restructure and refocus the Company's footwear
business. Under the Restructuring Plan, the Company will substantially reduce
its current in-house footwear manufacturing capabilities and will partner with
select third-party manufacturers to assist in the development and manufacture of
the Company's complete footwear product line. The Company believes this strategy
will limit the financial risk associated with its footwear product line.
Additionally, the Company intends to increase its emphasis on direct-sales
channels to augment sales throughout traditional retail accounts and to broaden
accessibility of the Company's products to its customers.
Related to this Restructuring Plan, the Company recorded a charge of $12.6
million ($8.2 million, or $0.12 per share, on an after-tax basis) during the
fourth quarter of the fiscal year ended December 31, 1999. This charge is
included in cost of goods sold and is comprised of the following components:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
Writedown of excess inventories (including
inventory associated with product returns) $ 8,502
Writedown of production equipment to estimated
net realizable value 3,592
Other costs associated with Restructuring Plan 506
-------
$12,600
=======
</TABLE>
The Company will incur no material incremental employee separation costs
associated with the Restructuring Plan. The Company believes the restructuring
of the Company's footwear operations will be complete by October 2000. The $12.6
million charge includes reserves related to inventory, aggregating $6.5 million,
which the Company anticipates will be utilized upon ultimate disposal of the
inventory during the restructuring period, see Note 12 in Notes to Consolidated
Financial Statements.
20
<PAGE> 21
RESULTS OF OPERATIONS
The following tables set forth operating results in dollars and as a percentage
of net sales for the periods indicated. Operating results for 1999 reflect an
adjustment for the elimination of the $12.6 million charge recorded in 1999 to
cost of goods sold in connection with the restructuring of the Company's
footwear operations, see Note 12 in Notes to Consolidated Financial Statements.
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Net sales $ 257,872 $ 231,934 $ 193,984
Cost of goods sold 96,738 86,134 75,393
------------- ------------ ------------
Gross profit 161,134 145,800 118,591
Operating expenses:
Research and development 6,304 5,231 3,825
Selling 72,184 66,188 53,007
Shipping and warehousing 6,592 6,777 5,721
General and administrative 30,977 26,299 23,032
------------- ------------ ------------
Total operating expenses 116,057 104,495 85,585
------------- ------------ ------------
Operating income 45,077 41,305 33,006
Interest expense, net 1,951 2,109 1,181
------------- ------------ ------------
Income before provision for income taxes 43,126 39,196 31,825
Provision for income taxes 15,094 15,051 12,221
------------- ------------ ------------
Net income $ 28,032 $ 24,145 $ 19,604
============= ============ ============
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 37.5 37.1 38.9
------ ------ ------
Gross profit 62.5 62.9 61.1
Operating expenses:
Research and development 2.4 2.3 2.0
Selling 28.0 28.5 27.3
Shipping and warehousing 2.6 2.9 2.9
General and administrative 12.0 11.4 11.9
------ ------ ------
Total operating expenses 45.0 45.1 44.1
------ ------ ------
Operating income 17.5 17.8 17.0
Interest expense, net 0.8 0.9 0.6
------ ------ ------
Income before provision for income taxes 16.7 16.9 16.4
Provision for income taxes 5.8 6.5 6.3
------ ------ ------
Net income 10.9% 10.4% 10.1%
====== ====== ======
</TABLE>
The Company's sunglass sales before discounts and defective returns were $212.7
million, $197.0 million and $171.4 million for the years ended December 31,
1999, 1998 and 1997, respectively. Sunglass unit sales were 4,037,113;
3,956,150; and 3,620,612 for the years ended December 31, 1999, 1998 and 1997,
respectively.
21
<PAGE> 22
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net sales
Net sales increased to $257.9 million for the year ended December 31, 1999 from
$231.9 million for the year ended December 31, 1998, an increase of $26.0
million, or 11.2%. This increase was the result of strong sales of the Company's
Minutes and A Wire models introduced in 1998 and sales of new products,
partially offset by declines in sales of more mature products. Sales of the
Company's polarized styles also contributed to the increase in net sales with an
28.4%, or $1.5 million, increase over 1998 polarized sunglass sales. Sales of
new sunglass products accounted for 22.1% of gross sunglass sales. New products
for 1999 included the X Metal Juliet, introduced in February 1999, the New Zero
and M Frame, introduced in May 1999, the OO ("Double O"), introduced in June
1999, the New Eye Jacket, introduced in August 1999, the New Straight Jacket,
introduced in November 1999, and the X-Metal XX, introduced in December 1999.
For the year ended December 31, 1999, the Company experienced a 2.0% increase in
sunglass unit volume and a 6.2% increase in average selling prices. The
Company's prescription eyewear gross sales increased approximately 100%, or $2.9
million, to $5.8 million for the year ended December 31, 1999 from $2.9 million
for the year ended December 31, 1998. Footwear net sales were $3.0 million, or
1.2% of net sales, in 1999, compared to $2.6 million, or 1.1% of net sales, in
1998. As a group, gross sales of goggles, apparel and watches increased 29.1%,
or approximately $9.0 million during the year ended December 31, 1999 over the
year ended December 31, 1998, primarily due to the Company's expanded apparel
program and increased goggle sales attributable to the Company's new A Frame
goggle introduced in 1998 and new O Frame goggle introduced in 1999. The
Company's U.S. net sales increased 3.8% to $141.8 million in 1999 from $136.5
million in 1998, principally as a result of a 11.4% increase in net sales to the
Company's broad specialty store account base, while sales to the Company's
largest U.S. customer, Sunglass Hut, decreased 7.3% to $51.3 million in 1999
from $55.3 million in 1998. The Company's international sales increased $20.7
million to $116.1 million in 1999 from $95.4 million in 1998, a 21.7% increase,
as a result of increased sales in all regions with significant sales increases
from the Company's direct operations in Europe, United Kingdom, Japan, South
Africa, and Canada. Additionally, effective November 1, 1999, the Company
acquired its Australian distributor, which contributed to the increase in
international sales in the fourth quarter of 1999. Sales from the Company's
direct international offices represented 75.8% of total international sales for
the year ended December 31, 1999.
Gross profit
Gross profit increased to $148.5 million for the year ended December 31, 1999
from $145.8 million for the year ended December 31, 1998, an increase of $2.7
million, or 1.9%. In the fourth quarter of 1999, the Company announced a
restructuring of its footwear operations which resulted in a $12.6 million
pre-tax charge to cost of goods sold, see Note 12 in Notes to Consolidated
Financial Statements. Excluding the footwear restructuring charge of $12.6
million, gross profit increased to $161.1 million, or 62.5% of net sales, in
1999 from $145.8 million, or 62.9% of net sales, in 1998, an increase of $15.3
million, or 10.5%. Gross profit as a percentage of net sales, prior to the
restructuring charge, decreased primarily due to increases in sales of lower
margin apparel and goggles, footwear startup costs and increases in provisions
for sales returns. These reductions to gross profit as a percentage of net sales
were partially offset by positive effects of increased sales volume, the
acquisitions of the Company's Canadian and Australian distributors and foreign
exchange gains.
Operating expenses
Operating expenses increased to $116.1 million for the year ended December 31,
1999 from $104.5 million for the year ended December 31, 1998, an increase of
$11.6 million, or 11.1%. This increase is generally due to higher variable
expenses attributable to increased volume, additional footwear operating
expenses, and incremental expenses due to the shift to direct operations in
Canada and Australia. Research and development expenses increased $1.1 million
to $6.3 million in 1999 primarily attributable to expanded new product
development efforts. Selling expenses increased $6.0
22
<PAGE> 23
million to $72.2 million, or 28.0% of net sales, in 1999, from $66.2 million, or
28.5% of net sales, in 1998, primarily as a result of increased sales
commissions attributable to increased sales and higher advertising expenditures
utilized to increase awareness for Oakley products. Shipping and warehousing
expenses decreased to $6.6 million, or 2.6% of net sales, in 1999 from $6.8
million, or 2.9% of net sales, for 1998. This decrease is principally due to
positive results from various initiatives to reduce shipping costs worldwide.
General and administrative expenses increased $4.7 million to $31.0 million, or
12.0% of net sales, in 1999 from $26.3 million, or 11.4% of net sales, in 1998,
due primarily to severance payments related to the resignation of an officer of
the Company, increased personnel costs necessary to manage the Company's growth,
and increased amortization of intangible assets related to acquisitions
completed in 1998 and 1999. Additionally, 1998 general and administrative
expenses included a gain on the sale of a fixed asset and favorable effects of
changes in foreign exchange rates which did not occur in 1999.
Operating income
The Company's operating income decreased to $32.5 million for the year ended
December 31, 1999 from $41.3 million for the year ended December 31, 1998, a
decrease of $8.8 million. Excluding the footwear restructure charge of $12.6
million, operating income increased to $45.1 million for the year ended December
31, 1999 from $41.3 million for the year ended December 31, 1998, an increase of
$3.8 million. As a percentage of net sales, operating income, prior to the
restructuring charge, decreased to 17.5% in 1999 from 17.8% in 1998, primarily
attributable to the decrease in gross margin.
Interest expense, net
The Company had net interest expense of $2.0 million in 1999, as compared with
net interest expense of $2.1 million in 1998.
Income taxes
The Company recorded a provision for income taxes of $10.7 million for the year
ended December 31, 1999 compared with $15.1 million for the year ended December
31, 1998. Due to the Company's international expansion and a reduction in
statutory rates for certain foreign jurisdictions, the Company's effective tax
rate for the year ended December 31, 1999 was reduced to 35.0% from 38.4% in
1998.
Net income
The Company's net income decreased to $19.8 million for the year ended December
31, 1999 from $24.1 million for the year ended December 31, 1998, a decrease of
$4.3 million, or 17.8%. Excluding the footwear restructuring after-tax charge of
$8.2 million, net income increased to $28.0 million for 1999 from $24.1 million
for 1998, an increase of $3.9 million, or 16.1%.
23
<PAGE> 24
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
21.6% 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. During 1998, the Company experienced a 9.4% increase
in sunglass unit volume and a 5.2% increase in average selling prices. 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 1998. As a group, sales of
goggles, apparel and watches increased 34.3% 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. 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.
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, or
2.2% of net sales, in 1998, from $4.7 million, or 2.4% of net sales, in 1997.
Selling expenses increased $13.2 million to $66.2 million, or 28.5% of net
sales, in 1998, from $53.0 million, or 27.3% of net sales, in 1997, primarily as
a result of increased sales commissions attributable to increased 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 11.4% 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
24
<PAGE> 25
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 in Notes to 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 in 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.
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%.
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 $38.8 million for the year ended
December 31, 1999 and $28.6 million for the comparable period of 1998. At
December 31, 1999, working capital was $59.2 million compared to $45.6 million
at December 31, 1998. Working capital may vary from time to time as a result of
seasonality, new product category introductions, and changes in accounts
receivable and inventory levels. Accounts receivable balances increased to $39.1
million at December 31, 1999 compared to $33.9 million at December 31, 1998.
This increase in receivable levels is attributable to the customary terms for
new product categories being longer than terms in eyewear, increased direct
expansion into international markets that also carry longer customary terms, and
an increase in international content, including an increase in receivables
associated with the Company's acquisition of its Australian distributor in
November 1999. Accounts receivable days outstanding at December 31, 1999 were 53
compared to 57 at December 31, 1998. Inventories decreased slightly to $35.1
million at December 31, 1999 compared to $35.5 million at December 31, 1998.
Inventory turns improved 22% to 2.8 at December 31, 1999 compared to 2.3 at
December 31, 1998.
25
<PAGE> 26
In August 1998, the Company amended its unsecured line of credit to increase its
borrowing limits from $30.0 million to $50.0 million, extend the due date from
June 1999 to August 2001, and improve the borrowing rate. At December 31, 1999,
the Company had an outstanding balance of $5.0 million under such facility. The
credit agreement contains various restrictive covenants including the
maintenance of certain financial ratios. At December 31, 1999, the Company was
in compliance with all restrictive covenants and financial ratios. 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% (7.11% at December 31, 1999) for ten years. At December 31,
1999, the outstanding balance on the term loan was $19.4 million.
Capital expenditures, net of retirements, and purchases of businesses and
technology for the year ended December 31, 1999 were $23.9 million compared to
$35.6 million in 1998. Fiscal year 1999 capital expenditures decreased
approximately 42.6% from fiscal year 1998 primarily due to the Company's
requirements now generally being limited to incremental production equipment to
support new product categories and international expansion. Included in capital
expenditures for 1999 were $7.4 million for equipment and computers, $7.0
million for in-store displays and new product tooling and $1.8 million for
building improvements. As of December 31, 1999, the Company had commitments of
approximately $0.6 million for future capital purchases.
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. Under
this program, the Company bought approximately 756,000 shares of common stock
from the three million share authorization between October 1996 and March 1997.
During December 1999, the Company purchased an additional 641,000 shares of its
common stock under such program at an aggregate cost of approximately $4.1
million. As of December 31, 1999, total stock repurchased was 1,397,000 shares
at an aggregate cost of approximately $13.7 million.
The Company believes that existing capital, anticipated cash flow from
operations, and current and anticipated credit facilities will be sufficient to
meet operating needs and capital expenditures for the foreseeable future.
SEASONALITY
The following table sets forth certain unaudited quarterly data for the periods
shown:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------ -------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- ------- ------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $48,726 $72,071 $70,819 $66,256 $41,000 $70,030 $67,263 $53,641
Gross profit 28,673 46,784 44,127 28,950(1) 24,818 45,461 41,903 33,618
</TABLE>
(1) Cost of sales includes a $12.6 million charge recorded in 1999 in
connection with the restructuring of the Company's footwear operations,
see Note 12 in Notes to Consolidated Financial Statements.
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 profits at lower levels than sunglasses, are
26
<PAGE> 27
lowest in the second quarter. This seasonal trend contributes to the Company's
gross profit 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 category introductions, such as apparel, footwear and watches, and
the Company's international expansion have partially mitigated the impact of
seasonality.
BACKLOG
Historically, the Company has generally shipped most eyewear orders within one
day of receipt, with longer lead times for its other pre-booked product
categories. At December 31, 1999, the Company had a backlog of $6.6 million,
including backorders (merchandise remaining unshipped beyond its scheduled
shipping date) of $2.6 million as of such date.
INFLATION
The Company does not believe inflation has had a material impact on the Company
in the past, although there can be no assurance that this will be the case in
the future.
RECENT ACCOUNTING DEVELOPMENTS
The Company adopted Statement of Financial Accounting Standards No. 133 (SFAS
No. 133), "Accounting for Derivative Instruments and Hedging Activities," on
January 1, 1999. The adoption of SFAS No. 133 resulted in a transition
adjustment recorded by the Company as a cumulative-effect type adjustment of
$103,000 as a charge to accumulated other comprehensive income to recognize the
fair value of all derivatives that are designated as cash-flow hedges, see Note
8 in Notes to Consolidated Financial Statements.
YEAR 2000
The Company established a Year 2000 Project Team to review 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.
Year 2000 compliant updates were completed in December 1999 and the Company's
information technology and non-information technology computer systems have
completed the transition to the year 2000 without any material issues or
problems.
In addition, the Company has been in contact with its key business partners to
determine the extent to which they may be vulnerable to Year 2000 issues. This
assessment is essentially complete and no matters have come to the Company's
attention which could give rise to remedial measures.
The cost associated with the Company's Year 2000 Project have not been budgeted
or tracked as separate projects, but have been occurring in conjunction with
normal operating activities. These costs have been funded through operating cash
flows and did not materially impact the Company's operating results.
The Company cannot currently predict the future effect of third parties' Year
2000 issues on its business. The Company has not been made aware of any matters
which would materially impact the Company's business from its third parties.
27
<PAGE> 28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates affecting the cost of its debt.
Foreign currency
The Company has direct operations in Europe, Japan, Canada, Mexico, South Africa
and Australia which collect at future dates in the customers' local currencies
and purchase finished goods in U.S. dollars. Accordingly, the Company is exposed
to transaction gains and losses that could result from changes in foreign
currency exchange rates.
As more fully described in Note 8 of the Company's Notes to Consolidated
Financial Statements, the Company is exposed to gains and losses resulting from
fluctuations in foreign currency exchange rates relating to foreign currency
transactions. As part of its overall strategy to manage the level of exposure to
the risk of fluctuations in foreign currency exchange rates, the Company and its
subsidiaries use foreign exchange contracts in the form of forward contracts and
option contracts. All of the Company's derivatives were designated and qualified
as cash flow hedges at December 31, 1999.
On the date the Company enters into a derivative contract, management designates
the derivative as a hedge of the identified exposure. The Company only enters
into derivative instruments that qualify as cash flow hedges as described in
SFAS No. 133. For all instruments qualifying as highly effective cash flow
hedges, the changes in the fair value of the derivative are recorded in other
comprehensive income. The following is a summary of the outstanding foreign
currency exchange contracts outstanding at December 31, 1999:
28
<PAGE> 29
<TABLE>
<CAPTION>
U.S. Dollar Fair
Equivalent Maturity Value
------------ -------- -----------
<S> <C> <C> <C>
Forward Contracts:
British pounds $ 989,995 Mar. 2000 $ 1,000,355
British pounds 2,143,105 Jun. 2000 2,165,001
British pounds 4,014,890 Sep. 2000 4,052,180
British pounds 3,192,855 Dec. 2000 3,219,347
Canadian dollars 1,263,201 Mar. 2000 1,208,639
Canadian dollars 835,922 Mar. 2000 818,741
Canadian dollars 1,819,562 Jun. 2000 1,783,491
Canadian dollars 2,565,058 Sep. 2000 2,516,763
Canadian dollars 1,535,169 Dec. 2000 1,507,286
Japanese yen 263,466 Mar. 2000 240,214
Japanese yen 829,430 Jun. 2000 766,940
Japanese yen 1,014,832 Sep. 2000 951,510
Japanese yen 2,771,272 Dec. 2000 2,635,731
French francs 774,443 Jan. 2000 800,000
French francs 774,443 Feb. 2000 800,000
French francs 1,258,470 Mar. 2000 1,300,000
French francs 774,443 Apr. 2000 800,000
French francs 871,249 May 2000 900,000
French francs 1,449,776 Jun. 2000 1,500,000
French francs 1,353,125 Jul. 2000 1,400,000
French francs 1,546,428 Aug. 2000 1,600,000
French francs 1,933,035 Sep. 2000 2,000,000
French francs 1,739,732 Oct. 2000 1,800,000
French francs 1,643,080 Nov. 2000 1,700,000
French francs 1,449,776 Dec. 2000 1,500,000
----------- -----------
$38,806,757 $38,966,198
=========== ===========
</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, 1999, outstanding contracts
were recorded at fair market value 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 information systems are currently 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.
29
<PAGE> 30
Interest rates
The Company's line of credit, with a balance of $5.0 million outstanding at
December 31, 1999, bears interest at either the bank's prime lending rate or
LIBOR plus 0.75%. Based on the weighted average interest rate of 7.59% on the
line of credit during the year ended December 31, 1999, if interest rates on the
line of credit were to increase by 10%, and to the extent that borrowings were
outstanding, for every $1.0 million outstanding on the Company's line of credit,
net income would be reduced by approximately $5,000 per year.
The Company's long-term debt, with a balance of $19.4 million outstanding at
December 31, 1999, bears interest at LIBOR plus 1.0%. In January 1999, the
Company entered into an interest rate swap agreement that eliminates the
Company's risk of fluctuations in the variable rate of its 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.
30
<PAGE> 31
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 9, 2000, to be
filed with the Securities and Exchange Commission within 120 days after December
31, 1999, 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 9, 2000, to be
filed with the Securities and Exchange Commission within 120 days after December
31, 1999, 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 9, 2000, to be
filed with the Securities and Exchange Commission within 120 days after December
31, 1999, 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 9, 2000, to be
filed with the Securities and Exchange Commission within 120 days after December
31, 1999, and is incorporated herein by reference.
31
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) See page 36 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>
<S> <C>
3.1(1) Articles of Incorporation of the Company
3.2(1) Bylaws of the Company
3.3(4) Amendment No. 1 to the Articles of Incorporation as filed with
the Secretary of State of the State of Washington on September
26, 1996
3.4 Amendment #1 to Section 1 and Sections 3a through 3f of Article
IV of the (10) Amended and Restated Bylaws of Oakley, Inc.
10.1(2) Agreement, dated July 17, 1995, between Oakley, Inc. and
Michael Jordan
10.2(3) Oakley, Inc. 1995 Stock Incentive Plan
10.3(3) Oakley, Inc. Amended and Restated 1995 Stock Incentive Plan
10.4(3) Oakley, Inc. Executive Officer Performance Bonus Plan
10.5(5) Employment Agreement, dated as of January 31, 1997, between
Oakley, Inc. and Link Newcomb
10.6(5) Amendment No. 1 to Employment Agreement, dated February 1,
1997, between Oakley, Inc. and Link Newcomb
10.7(3) Indemnification Agreement, dated August 1, 1995, between
Oakley, Inc. and Jim Jannard
10.8(1) Schedule of indemnification agreements between Oakley, Inc. and
each of its directors and executive officers
10.9(3) Aircraft Lease Agreement, dated August 10, 1995, between
Oakley, Inc. and X, Inc.
10.10(3) Aircraft Lease Agreement, dated August 10, 1995, between
Oakley, Inc. and Time Tool Incorporated
10.11(1) Registration Rights Agreement, dated August 1, 1995, between
Oakley, Inc., Jim Jannard and the M. and M. Parnell Revocable
Trust
10.12(3) Indemnification Agreement, dated August 9, 1995, between
Oakley, Inc., Jim Jannard and the M. and M. Parnell Revocable
Trust
10.13(5) 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)
10.14(5) Promissory Note, dated March 20, 1997, between Oakley, Inc. and
Bank of America National Trust and Savings Association
10.15(6) Consultant Agreement, dated as of August 1, 1997, between
Oakley, Inc. and Mike Parnell
10.16(6) Consultant Agreement, dated as of August 1, 1997, between
Oakley, Inc. and Jim Jannard
10.17(6) Promissory Note, dated August 7, 1997, between Oakley, Inc. and
Bank of America National Trust and Savings Association
10.18(6) Amendment No. 1 to Promissory Note, dated August 14, 1997,
between Oakley, Inc. and Bank of America National Trust and
Savings Association
10.19(6) Amendment No. 2 to Promissory Note, dated August 14, 1997,
between Oakley, Inc. and Bank of America National Trust and
Savings Association
10.20(6) 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
</TABLE>
32
<PAGE> 33
<TABLE>
<S> <C>
10.21(6) Standing Loan Agreement , dated August 7, 1997 between Oakley,
Inc. and Bank of America National Trust and Savings Association
10.22(7) First Amendment to Standing Loan Agreement, dated January
12, 1998, between Oakley, Inc. and Bank of America National
Trust and Savings Association
10.23(7) Indemnification Agreement, dated October 3, 1997, between
Oakley, Inc. and William D. Schmidt
10.24(7) Employment Agreement, dated October 6, 1997 between Oakley,
Inc. and Thomas A. George
10.25(7) Indemnification Agreement, dated October 6, 1997 between
Oakley, Inc. and Thomas A. George
10.26(8) Amended and Restated Consultant Agreement, dated May 12, 1998,
between Jim Jannard and Oakley, Inc.
10.27(8) Amended and Restated Consultant Agreement, dated May 12, 1998,
between Mike Parnell and Oakley, Inc.
10.28(8) Amended and Restated Employment Agreement, dated May 12, 1998,
between Link Newcomb and Oakley, Inc.
10.29(8) Amended and Restated Employment Agreement, dated May 12, 1998,
between Thomas George and Oakley, Inc.
10.30(9) 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
10.31(9) Modification Agreement (Short Form), dated August 10, 1998,
between Oakley, Inc. and Bank of America National Trust and
Savings Association
10.32(9) Modification Agreement (Long Form), dated August 10, 1998,
between Oakley, Inc. and Bank of America National Trust and
Savings Association
10.33(11) Employment Agreement, dated May 1, 1999, between William
Schmidt and Oakley, Inc.
10.34(11) Amended and Restated Employment Agreement, dated May 1, 1999,
between Link Newcomb and Oakley, Inc.
10.35(11) Oakley, Inc. Amended and Restated 1995 Stock Incentive Plan.
10.36(11) Oakley, Inc. Amended and Restated Executive Officers
Performance Bonus Plan.
10.37(12) Severance and Release Agreement, dated October 6, 1999, between
William Schmidt and Oakley, Inc.
10.38(12) Amendment No. 1 to Amended and Restated Employment Agreement,
dated December 31, 1999, between Link Newcomb and Oakley, Inc.
10.39(12) Second Amended and Restated Employment Agreement, dated January
1, 2000, between Thomas George and Oakley, Inc.
21.1(12) List of Material Subsidiaries
23.1(12) Consent of Deloitte & Touche LLP, independent auditors
27.1(12) 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-K of Oakley, Inc. for the year ended
December 31, 1996.
(5) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter
ended March 31, 1997.
(6) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter
ended September 30, 1997.
(7) Previously filed with the Form 10-K of Oakley, Inc. for the year ended
December 31, 1997.
(8) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter
ended June 30, 1998.
33
<PAGE> 34
(9) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter
ended September 30, 1998.
(10) Previously filed with the Form 10-K of Oakley, Inc. for the year ended
December 31, 1998.
(11) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter
ended June 30, 1999.
(12) Filed herewith.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1999.
(c) See (a) (3) above for a listing of the exhibits included as a part of this
report.
34
<PAGE> 35
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report...................................................... 36
Consolidated Balance Sheets as of December 31, 1999 and 1998...................... 37
Consolidated Statements of Income and Consolidated Statements of Comprehensive
Income for the Years Ended December 31, 1999, 1998 and 1997................... 38
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997.............................................. 39
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.............................................. 40
Notes to Consolidated Financial Statements........................................ 41 - 56
</TABLE>
35
<PAGE> 36
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, 1999 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,
1999. Our audits also included the financial statement schedule listed in the
Index at Item 14(a)(2). These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 present fairly, in all
material respects, the financial position of Oakley, Inc. and subsidiaries as of
December 31, 1999 and 1998 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America. 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.
As described in Note 8 to the consolidated financial statements, effective
January 1, 1999, the Company adopted Statement of Financial Accounting Standards
No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging
Activities".
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
February 11, 2000
36
<PAGE> 37
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,499 $ 4,553
Accounts receivable, less allowance for doubtful accounts
of $598 (1999) and $621 (1998) 39,113 33,867
Inventories, net (Note 3) 35,061 35,548
Other receivables 1,776 2,372
Deferred income taxes (Note 5) 11,698 6,074
Prepaid expenses and other 5,561 4,246
------------- -------------
Total current assets 98,708 86,660
Property and equipment, net (Note 4) 113,695 118,215
Deposits 2,281 2,513
Other assets 24,666 18,427
------------- -------------
TOTAL ASSETS $ 239,350 $ 225,815
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit (Note 6) $ 5,000 $ 13,300
Accounts payable 16,592 12,606
Accrued expenses and other current liabilities 10,485 6,646
Accrued warranty 4,483 4,420
Income taxes payable (Note 5) 1,382 2,567
Current portion of long-term debt (Note 6) 1,519 1,519
------------- -------------
Total current liabilities 39,461 41,058
Deferred income taxes (Note 5) 3,511 3,418
Long-term debt, net of current portion (Note 6) 18,541 19,363
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY (Note 9):
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; 70,037,000 (1999) and
70,678,000 (1998) issued and outstanding 700 707
Additional paid-in capital 51,851 55,610
Retained earnings 126,225 106,383
Accumulated other comprehensive income (939) (724)
------------- -------------
Total shareholders' equity 177,837 161,976
------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 239,350 $ 225,815
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
37
<PAGE> 38
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales (Note 10) $ 257,872 $ 231,934 $ 193,984
Cost of goods sold (Note 12) 109,338 86,134 75,393
----------- ----------- -----------
Gross profit 148,534 145,800 118,591
Operating expenses:
Research and development 6,304 5,231 3,825
Selling 72,184 66,188 53,007
Shipping and warehousing 6,592 6,777 5,721
General and administrative 30,977 26,299 23,032
----------- ----------- -----------
Total operating expenses 116,057 104,495 85,585
----------- ----------- -----------
Operating income 32,477 41,305 33,006
Interest expense, net 1,951 2,109 1,181
----------- ----------- -----------
Income before provision for income taxes 30,526 39,196 31,825
Provision for income taxes (Note 5) 10,684 15,051 12,221
----------- ----------- -----------
Net income $ 19,842 $ 24,145 $ 19,604
=========== =========== ===========
Basic net income per common share $ 0.28 $ 0.34 $ 0.28
=========== =========== ===========
Basic weighted average common shares 70,660,000 70,678,000 70,659,000
=========== =========== ===========
Diluted net income per common share $ 0.28 $ 0.34 $ 0.28
=========== =========== ===========
Diluted weighted average common shares 70,662,000 70,851,000 70,700,000
=========== =========== ===========
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income $ 19,842 $ 24,145 $ 19,604
Other comprehensive (loss) income:
Transition adjustment related to the adoption of SFAS 133 (103) -- --
Net unrealized gain on derivative instruments 1,120 -- --
Foreign currency translation adjustment (1,232) 430 (1,029)
-------- -------- --------
Other comprehensive (loss) income, net of tax (215) 430 (1,029)
-------- -------- --------
Comprehensive income $ 19,627 $ 24,575 $ 18,575
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
38
<PAGE> 39
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock Additional
---------------------------- Paid-in Retained
Shares Amount Capital Earnings
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance as of January 1, 1997 70,960,000 $ 710 $ 58,218 $ 62,634
Exercise of stock options (Note 9) 3,000 -- 36 --
Repurchase of common shares (Note 9) (304,000) (3) (3,197) --
Compensatory stock options -- -- 113 --
Net income -- -- -- 19,604
Foreign currency translation -- -- -- --
----------- ----------- ----------- -----------
Balance as of December 31, 1997 70,659,000 707 55,170 82,238
Exercise of stock options (Note 9) 19,000 -- 219 --
Tax benefit related to exercise of
stock options -- -- 18 --
Compensatory stock options -- -- 203 --
Net income -- -- -- 24,145
Foreign currency translation -- -- -- --
----------- ----------- ----------- -----------
Balance as of December 31, 1998 70,678,000 707 55,610 106,383
Repurchase of common shares (Note 9) (641,000) (7) (4,097) --
Compensatory stock options -- -- 238 --
Capital contributions -- -- 100 --
Net income -- -- -- 19,842
Other comprehensive loss -- -- -- --
----------- ----------- ----------- -----------
Balance as of December 31, 1999 70,037,000 $ 700 $ 51,851 $ 126,225
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income Total
----------- -----------
<S> <C> <C>
Balance as of January 1, 1997 $ (125) $ 121,437
Exercise of stock options (Note 9) -- 36
Repurchase of common shares (Note 9) -- (3,200)
Compensatory stock options -- 113
Net income -- 19,604
Foreign currency translation (1,029) (1,029)
----------- -----------
Balance as of December 31, 1997 (1,154) 136,961
Exercise of stock options (Note 9) -- 219
Tax benefit related to exercise of
stock options -- 18
Compensatory stock options -- 203
Net income -- 24,145
Foreign currency translation 430 430
----------- -----------
Balance as of December 31, 1998 (724) 161,976
Repurchase of common shares (Note 9) -- (4,104)
Compensatory stock options -- 238
Capital contributions -- 100
Net income -- 19,842
Other comprehensive loss (215) (215)
----------- -----------
Balance as of December 31, 1999 $ (939) $ 177,837
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
39
<PAGE> 40
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,842 $ 24,145 $ 19,604
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 19,164 16,272 12,982
Compensatory stock options and capital contributions 338 203 113
(Gain) loss on disposition of equipment 3,719 (600) 334
Deferred income taxes, net (5,531) 143 1,559
Changes in assets and liabilities, net of effects of
business acquisitions:
Accounts receivable (5,879) (9,586) (2,921)
Inventories 1,164 (9,505) 3,727
Other receivables 602 (53) (962)
Prepaid expenses and other (288) (1,229) 2,844
Accounts payable 4,303 5,735 (1,615)
Accrued expenses, other current liabilities and
accrued warranty 2,709 2,168 (1,067)
Income taxes payable (1,298) 896 1,671
-------- -------- --------
Net cash provided by operating activities 38,845 28,589 36,269
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits 255 (965) 674
Acquisitions of property and equipment (16,792) (29,124) (43,796)
Proceeds from sale of property and equipment 566 851 250
Acquisitions of businesses and technology (Note 2) (7,720) (7,260) (2,600)
Other assets (9) (53) 789
-------- -------- --------
Net cash used in investing activities (23,700) (36,551) (44,683)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings 82,600 78,650 42,800
Repayments of bank borrowings (92,419) (69,669) (35,599)
Net proceeds from issuance of common shares -- 237 36
Repurchase of common shares (4,104) -- (3,200)
-------- -------- --------
Net cash (used in) provided by financing activities (13,923) 9,218 4,037
Effect of exchange rate changes on cash (276) 640 (1,029)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 946 1,896 (5,406)
Cash and cash equivalents, beginning of period 4,553 2,657 8,063
-------- -------- --------
Cash and cash equivalents, end of period $ 5,499 $ 4,553 $ 2,657
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 2,233 $ 2,273 $ 1,390
======== ======== ========
Income taxes (net of refunds received) $ 16,194 $ 13,333 $ 6,550
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
40
<PAGE> 41
OAKLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
Description of Business - The Company is an innovation-driven designer,
manufacturer and distributor of consumer products that include high-performance
eyewear, footwear, watches, apparel and accessories. The Company's principal
strength is its ability to develop products that demonstrate superior
performance and aesthetics through proprietary technology and styling. Its
designs and innovations are protected by more than 520 legal patents worldwide.
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
$21,126,000 (1999) and $17,267,000 (1998) included in other assets in the
accompanying balance sheet are amortized on a straight-line basis over periods
ranging from ten to fifteen years. The carrying value of intangible assets is
periodically reviewed by the Company based on the estimated future operating
income of each acquired entity on an undiscounted cash flow basis. Based upon
its most recent analysis, the Company believes that no impairment of intangible
assets exists at December 31, 1999.
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, 1999, no impairment has been indicated (Note
12).
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.
41
<PAGE> 42
OAKLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Segment Disclosures - The Company has adopted 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
approximates 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 are
provided for temporary differences between basis of assets and liabilities for
financial statement 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 from translation of
foreign subsidiary financial statements are included in accumulated other
comprehensive income. Gains and losses on short-term intercompany foreign
currency transactions are recognized as incurred (Note 8).
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 (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees."
Earnings Per Share - Basic earnings per share is computed using the
weighted average number of common shares outstanding during the reporting
period. Earnings per share assuming dilution is computed using the weighted
average number of common shares outstanding and the dilutive effect of potential
common shares outstanding. For the years ended December 31, 1999, 1998 and 1997,
the diluted weighted average common shares outstanding includes 2,000, 173,000
and 41,000, respectively, of dilutive stock options.
New Accounting Pronouncements - The Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," on January 1,
1999. The adoption of SFAS No. 133 resulted in a transition adjustment recorded
by the Company as a cumulative-effect type adjustment of $103,000 as a charge to
accumulated other comprehensive income to recognize the fair value of all
derivatives that are designated as cash-flow hedges.
42
<PAGE> 43
OAKLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The Company is exposed to gains and losses resulting from fluctuations in
foreign currency exchange rates relating to transactions of its international
subsidiaries as well as fluctuations in its variable rate debt. As part of its
overall strategy to manage the level of exposure to the risk of fluctuations in
foreign currency exchange rates, the Company uses foreign exchange contracts in
the form of forward contracts and option contracts. In addition, as part of its
overall strategy to manage the level of exposure to the risk of fluctuations in
interest rates, the Company has entered into an interest rate swap agreement. At
December 31, 1999, all of the Company's derivatives were designated and
qualified as cash flow hedges. For all qualifying and highly effective cash flow
hedges, the changes in the fair value of the derivative are recorded in other
comprehensive income. The Company is currently hedging forecasted foreign
currency transactions that, assuming exchange rates at December 31, 1999 remain
constant, are expected to result in reclassifications of $0.3 million of losses
to earnings over the next twelve months. The Company hedges forecasted
transactions that are determined probable to occur within 18 months or less.
On the date the Company enters into a derivative contract, management designates
the derivative as a hedge of the identified exposure. The Company does not enter
into derivative instruments that do not qualify as cash flow hedges.
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. In this documentation, the Company
specifically identifies the asset, liability, firm commitment, or forecasted
transaction that has been designated as a hedged item and states how the hedging
instrument is expected to hedge the risks related to the hedged item. The
Company formally measures effectiveness of its hedging relationships both at the
hedge inception and on an ongoing basis in accordance with its risk management
policy.
The Company would discontinue hedge accounting prospectively (i) if it is
determined that the derivative is no longer effective in offsetting changes in
the cash flows of a hedged item, (ii) when the derivative expires or is sold,
terminated, or exercised, (iii) when the derivative is designated as a hedge
instrument, because it is probable that the forecasted transaction will not
occur, (iv) because a hedged firm commitment no longer meets the definition of a
firm commitment, or (v) if management determines that designation of the
derivative as a hedge instrument is no longer appropriate. During the twelve
months ended December 31, 1999, the Company reclassified into earnings a net
gain of $1,693,000, resulting from the expiration, sale, termination, or
exercise of foreign exchange contracts.
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, 1999.
43
<PAGE> 44
OAKLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
General Business - The Company's historical success is attributable, in
part, to its introduction of products which are perceived to represent an
improvement in performance over products available in the market. The Company's
future success will depend, in part, upon its continued ability to develop and
introduce such innovative products, and there can be no assurance of the
Company's ability to do so. The 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 23.0%, 26.0% and 21.5% of net
sales for the years ended December 31, 1999, 1998 and 1997, respectively.
44
<PAGE> 45
OAKLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 2 - ACQUISITIONS
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 cost of approximately $7.3 million. During
1999, the Company acquired its Australian distributor and paid approximately
$7.7 million for goodwill. 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 1999, 1998 and 1997
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 periods ranging from
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>
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $14,801,000 $15,316,000
Finished goods 20,260,000 20,232,000
----------- -----------
$35,061,000 $35,548,000
=========== ===========
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Land $ 9,017,000 $ 8,999,000
Buildings 56,268,000 55,268,000
Automobiles and vans 1,103,000 972,000
Equipment and furniture 96,711,000 89,161,000
Tooling 12,282,000 10,777,000
Building and leasehold improvements 1,556,000 942,000
------------ ------------
176,937,000 166,119,000
Less accumulated depreciation
and amortization 63,242,000 47,904,000
------------ ------------
$113,695,000 $118,215,000
============ ============
</TABLE>
45
<PAGE> 46
OAKLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 5 - INCOME TAXES
The provision for income taxes for the years ended December 31, consists of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal $ 10,406,000 $ 10,900,000 $ 7,228,000
State 2,540,000 1,840,000 2,234,000
Foreign 3,269,000 2,168,000 1,200,000
------------ ------------ ------------
16,215,000 14,908,000 10,662,000
Deferred:
Federal (4,626,000) 16,000 1,538,000
State (905,000) 127,000 21,000
------------ ------------ ------------
(5,531,000) 143,000 1,559,000
------------ ------------ ------------
$ 10,684,000 $ 15,051,000 $ 12,221,000
============ ============ ============
</TABLE>
A reconciliation of income tax expense computed at U.S. Federal statutory rates
to income tax expense for the years ended December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rates $ 10,684,000 $ 13,719,000 $ 11,138,000
State income taxes, net 1,080,000 1,278,000 1,466,000
Foreign sales corporation benefit,
net of foreign tax rate differential (1,308,000) (879,000) (928,000)
Other, net 228,000 933,000 545,000
------------ ------------ ------------
$ 10,684,000 $ 15,051,000 $ 12,221,000
============ ============ ============
</TABLE>
46
<PAGE> 47
OAKLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31, are as
follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Warranty reserve $ 1,599,000 $ 1,603,000
Uniform capitalization 624,000 789,000
Sales returns reserve 1,156,000 481,000
State taxes 448,000 647,000
Inventory reserve 1,684,000 959,000
Allowance for doubtful accounts 230,000 213,000
Accrued vacation 415,000 407,000
Restructuring reserve 4,723,000 --
Other 819,000 975,000
------------ ------------
Total deferred tax assets 11,698,000 6,074,000
Deferred tax liabilities:
Depreciation and amortization (3,511,000) (3,418,000)
------------ ------------
Net deferred tax assets $ 8,187,000 $ 2,656,000
============ ============
</TABLE>
NOTE 6 - DEBT
Line of Credit - The Company has an unsecured line of credit with a bank
syndicate, which matures in August 2001, allowing for borrowings up to $50
million. The line of credit bears interest at either the bank's prime lending
rate (8.50% at December 31, 1999) or LIBOR plus 0.75% (6.58% at December 31,
1999). At December 31, 1999 and 1998, the Company had $5.0 million and $13.3
million outstanding under the credit agreement, respectively. The credit
agreement contains various restrictive covenants including the maintenance of
certain financial ratios. At December 31, 1999, the Company was in compliance
with all restrictive covenants and financial ratios.
Long-Term Debt - The Company has a real estate term loan with an
outstanding balance of $19.4 million at December 31, 1999, which expires
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% (7.11%
at December 31, 1999).
47
<PAGE> 48
OAKLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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>
2000 $ 91,000 $1,135,000 $1,226,000
2001 10,000 1,042,000 1,052,000
2002 -- 581,000 581,000
2003 -- 419,000 419,000
2004 -- 396,000 396,000
Thereafter -- 547,000 547,000
---------- ---------- ----------
Total $ 101,000 $4,120,000 $4,221,000
========== ========== ==========
</TABLE>
Rent expense for the years ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Related parties $ 125,000 $ 124,000 $ 114,000
Other 1,126,000 1,023,000 1,378,000
---------- ---------- ----------
Total $1,251,000 $1,147,000 $1,492,000
========== ========== ==========
</TABLE>
Purchase Commitments - In March 1997, the Company entered into a
four-year exclusive dealing agreement with its lens blank supplier and the
supplier's French parent, pursuant to which the Company received the exclusive
right to purchase decentered sunglass lenses, in return for the Company's
agreement to fulfill all its lens requirements, subject to certain exceptions,
from such supplier. The Company expects its minimum obligations under the term
of this agreement to be 18.5 million units, with an aggregate estimated purchase
price of between $50.0 million and $55.0 million.
Employment and Consulting Agreements - The Company has entered into
employment and consulting agreements with certain 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.
48
<PAGE> 49
OAKLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Endorsement Contracts - The Company has entered into several endorsement
contracts with selected athletes and others who endorse the Company's products.
Under the contracts, the Company has agreed to pay certain incentives based on
performance and is required to pay minimum annual payments as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
- -------------
<S> <C>
2000 $4,651,000
2001 1,982,000
2002 1,088,000
2003 942,000
2004 500,000
Thereafter 500,000
----------
Total $9,663,000
==========
</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. On July 26,
1999, the Superior Court entered a dismissal without prejudice of the California
Securities Actions. In March 1997, the Company was named as a nominal defendant
in a putative derivative action (the "California Derivative Action") filed in
the Superior Court against two of the Company's officers and directors based on
substantially the same allegations as those in the California Securities
Actions. The derivative plaintiff seeks to recover damages and other relief on
behalf of the Company. On February 4, 1998, the court entered a final order of
dismissal of the putative derivative action. On April 8, 1998, the derivative
plaintiff filed a notice of appeal in the Superior Court. In March 1999, the
parties to the California Derivative Action entered into a stipulation of
settlement regarding the derivative claims. On June 24, 1999, the California
Court of Appeal, Fourth Appellate District, approved the settlement and entered
a final judgement dismissing with prejudice the California Derivative Action and
approving the Company's release of claims against defendants James Jannard and
Mike Parnell. The settlement is not expected to have a material adverse effect
on the Company. During October, November, and December 1997, five putative class
action lawsuits (the "Federal Securities Actions") were filed in the United
States District Court for the Central District of California, Southern Division
(the "District Court"), against the Company, three of its officers and
directors, and firms that served as underwriters of the Secondary Offering,
alleging material misstatements and omissions in certain of the Company's public
statements, the reports of third-party analysts and/or certain of the Company's
SEC filings. The plaintiffs in the Federal
49
<PAGE> 50
OAKLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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. On March 3, 1999, the
defendants filed answers in the Federal Securities Actions. On June 29, 1999,
the District Court approved stipulations for class certification that the
parties had submitted and entered orders for class certification in the Federal
Securities Actions. Although it is too soon to predict the outcome of 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 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," on January 1, 1999. The adoption of SFAS No. 133 resulted
in a transition adjustment recorded by the Company as a cumulative-effect type
adjustment of a $103,000 charge to accumulated other comprehensive income to
recognize the fair value of all derivatives that are designated as cash-flow
hedges.
The Company is exposed to gains and losses resulting from fluctuations in
foreign currency exchange rates relating to transactions of its international
subsidiaries as well as fluctuations in its variable rate debt. As part of its
overall strategy to manage the level of exposure to the risk of fluctuations in
foreign currency exchange rates, the Company uses foreign exchange contracts in
the form of forward contracts and option contracts. In addition, as part of its
overall strategy to manage the level of exposure to the risk of fluctuations in
interest rates, the Company has entered into an interest rate swap agreement. At
December 31, 1999, all of the Company's derivatives were designated and
qualified as cash flow hedges. For all qualifying and highly effective cash flow
hedges, the changes in the fair value of the derivative are recorded in other
comprehensive income. The Company is currently hedging forecasted foreign
currency transactions that, assuming exchange rates at December 31, 1999 remain
constant, are expected to result in reclassifications of $0.3 million of losses
to earnings over the next twelve months. The Company hedges forecasted
transactions that are determined probable to occur within 18 months or less.
On the date the Company enters into a derivative contract, management designates
the derivative as a hedge of the identified exposure. The Company does not enter
into derivative instruments that do not qualify as cash flow hedges. The Company
formally documents all relationships between hedging instruments and hedged
items, as well as risk-management objective and strategy for undertaking various
hedge transactions. In this documentation, the Company specifically identifies
the asset, liability, firm commitment, or forecasted transaction that has been
designated as a hedged item and states how the hedging instrument is expected to
hedge the risks related to the hedged item. The Company formally measures
effectiveness of its hedging relationships both at the hedge inception and on an
ongoing basis in accordance with its risk management policy.
50
<PAGE> 51
OAKLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The Company would discontinue hedge accounting prospectively (i) if it is
determined that the derivative is no longer effective in offsetting change in
the cash flows of a hedged item, (ii) when the derivative expires or is sold,
terminated, or exercised, (iii) when the derivative is designated as a hedge
instrument, because it is probable that the forecasted transaction will no
occur, (iv) because a hedged firm commitment no longer meets the definition of a
firm commitment, or (v) if management determines that designation of the
derivative as a hedge instrument is no longer appropriate. During the twelve
months ended December 31, 1999, the Company reclassified into earnings a net
gain of $1,693,000 resulting from the expiration, sale, termination, or exercise
of foreign currency exchange contracts.
The following is a summary of the foreign currency contracts outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
U.S. Dollar Fair
Equivalent Maturity Value
------------ -------- -----------
<S> <C> <C> <C>
Forward Contracts:
British pounds $ 989,995 Mar. 2000 $ 1,000,355
British pounds 2,143,105 Jun. 2000 2,165,001
British pounds 4,014,890 Sep. 2000 4,052,180
British pounds 3,192,855 Dec. 2000 3,219,347
Canadian dollars 1,263,201 Mar. 2000 1,208,639
Canadian dollars 835,922 Mar. 2000 818,741
Canadian dollars 1,819,562 Jun. 2000 1,783,491
Canadian dollars 2,565,058 Sep. 2000 2,516,763
Canadian dollars 1,535,169 Dec. 2000 1,507,286
Japanese yen 263,466 Mar. 2000 240,214
Japanese yen 829,430 Jun. 2000 766,940
Japanese yen 1,014,832 Sep. 2000 951,510
Japanese yen 2,771,272 Dec. 2000 2,635,731
French francs 774,443 Jan. 2000 800,000
French francs 774,443 Feb. 2000 800,000
French francs 1,258,470 Mar. 2000 1,300,000
French francs 774,443 Apr. 2000 800,000
French francs 871,249 May 2000 900,000
French francs 1,449,776 Jun. 2000 1,500,000
French francs 1,353,125 Jul. 2000 1,400,000
French francs 1,546,428 Aug. 2000 1,600,000
French francs 1,933,035 Sep. 2000 2,000,000
French francs 1,739,732 Oct. 2000 1,800,000
French francs 1,643,080 Nov. 2000 1,700,000
French francs 1,449,776 Dec. 2000 1,500,000
------------ -----------
$ 38,806,757 $38,966,198
============ ===========
</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
51
<PAGE> 52
OAKLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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, 1999, outstanding contracts
were recorded at fair market value and the resulting gains and losses were
recorded in the consolidated financial statements pursuant to the policy set
forth above.
NOTE 9 - SHAREHOLDERS' EQUITY
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. Under this program, the Company bought approximately
756,000 shares of common stock between October 1996 and March 1997. During
December 1999, the Company purchased an additional 641,000 shares of its common
stock at an aggregate cost of approximately $4.1 million. As of December 31,
1999, total common stock repurchased was 1,397,000 shares at an aggregate cost
of approximately $13.7 million.
Stock Incentive Plan - The Company's 1995 Stock Incentive Plan (the
"Plan") provides for stock-based incentive awards, including incentive stock
options, nonqualified stock options, restricted stock, performance shares, stock
appreciation rights and deferred stock to Company officers, employees, advisors
and consultants. A total of 6,712,000 shares have been reserved for issuance
under the Plan. At December 31, 1999, stock options for 2,065,019 shares were
exercisable and 3,104,745 shares were available for issuance pursuant to new
stock option grants.
The following table summarizes information with respect to the Plan for the
years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Outstanding shares at January 1 3,335,436 3,320,324 2,015,792
Granted 991,255 159,141 1,445,329
Cancelled (753,593) (125,058) (137,723)
Exercised -- (18,971) (3,074)
------------- ------------- -------------
Outstanding shares at December 31 3,573,098 3,335,436 3,320,324
============= ============= =============
Exercisable shares at December 31 2,065,019 1,478,729 761,872
============= ============= =============
Average exercise price at January 1 $ 10.88 $ 10.85 $ 11.73
Granted 7.56 11.58 9.65
Cancelled 8.54 10.96 11.07
Exercised -- 11.55 11.50
Average exercise price at December 31 $ 10.45 $ 10.88 $ 10.85
Weighted average exercise price of
exercisable options at December 31 $ 11.82 $ 11.27 $ 11.75
Weighted average fair value of
options granted during the year $ 3.23 $ 5.07 $ 4.99
</TABLE>
52
<PAGE> 53
OAKLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Additional information regarding options outstanding as of December 31, 1999 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>
$ 5.56 - 8.75 788,832 8.49 $ 7.90 168,808 $ 8.50
$ 9.06 - 10.81 925,519 7.93 $ 9.88 455,932 $ 16.20
$ 11.50 - 12.50 1,766,784 7.22 $ 11.56 1,368,017 $ 11.55
$ 13.06 - 25.19 91,963 8.08 $ 16.49 72,262 $ 16.89
</TABLE>
During the years ended December 31, 1999, 1998 and 1997, the Company recorded
stock compensation expense of $238,000, $203,000 and $113,000, respectively,
associated with stock options issued to non-employees.
As disclosed in Note 1, the Company applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock-based awards. No compensation expense has been recognized in the financial
statements for employee stock arrangements. SFAS No. 123, "Accounting for
Stock-Based Compensation," requires the disclosure of pro forma net income and
earnings per share had the Company adopted the fair value method in accounting
for stock-based awards as of the beginning of fiscal 1995. Under SFAS No. 123,
the fair value of stock-based awards to employees is calculated through the use
of option-pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the 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>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Stock volatility 39.8%-51.5% 39.3%-54.0% 54.5%-71.3%
Risk-free interest rate 5.5% 5.5% 5.5%
Expected dividend yield 0% 0% 0%
Expected life of option 3-4 years 3-4 years 3-5 years
</TABLE>
If the computed fair value of the 1999, 1998 and 1997 awards had been amortized
to expense over the vesting period of the awards, net income would have been as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net income:
As reported $ 19,842,000 $ 24,145,000 $ 19,604,000
Pro forma $ 17,498,000 $ 22,052,000 $ 18,117,000
Basic and diluted net income per share:
As reported $ 0.28 $ 0.34 $ 0.28
Pro forma $ 0.25 $ 0.31 $ 0.26
</TABLE>
53
<PAGE> 54
OAKLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 10 - NET SALES
The Company's net sales to U.S. and international customers for the years ended
December 31, are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
United States $141,767,000 $136,546,000 $113,942,000
International 116,105,000 95,388,000 80,042,000
------------ ------------ ------------
$257,872,000 $231,934,000 $193,984,000
============ ============ ============
</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>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Sunglasses 77.9% 79.0% 81.6%
Other Consumer Products 21.0 20.0 18.4
Footwear 1.1 1.0 --
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
54
<PAGE> 55
OAKLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Consumer product information related to domestic and foreign operations is as
follows:
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------
(in thousands)
United Continental
States Europe Other Countries Consolidated
-------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
Net sales $169,887 $ 40,880 $ 47,105 $257,872
Operating income 23,750 2,903 5,825 32,478
Net income 14,174 1,890 3,778 19,842
Identifiable assets 177,600 15,919 45,831 239,350
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------
(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>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------
(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>
NOTE 12 - RESTRUCTURE CHARGE
In October 1999, the Company's Board of Directors approved strategic initiatives
(the "Restructuring Plan") to restructure and refocus the Company's footwear
business. Under the Restructuring Plan, the Company will substantially reduce
its current in-house footwear manufacturing capabilities and will partner with
select third-party manufacturers to assist in the development and manufacture of
the Company's complete footwear product line. Additionally, the Company intends
to increase its emphasis on direct-sales channels to augment sales throughout
traditional retail accounts and to broaden accessibility of the Company's
products to its customers.
Related to this Restructuring Plan, the Company recorded a charge of $12.6
million ($8.2 million, or $0.12 per share, on an after-tax basis) during the
fourth quarter of the fiscal year ended December 31, 1999. This charge is
included in cost of goods sold and is comprised of the following components:
55
<PAGE> 56
OAKLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
(in thousands)
------------
<S> <C>
Writedown of excess inventories (including
inventory associated with product returns) $ 8,502
Writedown of production equipment to estimated
net realizable value 3,592
Other costs associated with Restructuring Plan 506
-------
$12,600
=======
</TABLE>
The Company will incur no material incremental employee separation costs
associated with the Restructuring Plan. The Company believes the restructuring
of the Company's footwear operations will be complete by October 2000. The $12.6
million charge includes reserves related to inventory, aggregating $6.5 million,
which the Company anticipates will be utilized upon ultimate disposal of
inventory during the restructure period.
NOTE 13 - 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, 1999:
Net sales $ 48,726 $ 72,071 $ 70,819 $ 66,256
Gross profit 28,673 46,784 44,127 28,950(1)
Income (loss) before provision for income taxes 2,168 16,334 15,892 (3,868)
Net income (loss) 1,409 10,617 10,322 (2,506)
Basic net income (loss) per share $ 0.02 $ 0.15 $ 0.15 $ (0.04)
Diluted net income (loss) per share $ 0.02 $ 0.15 $ 0.15 $ (0.04)
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
Year ended December 31, 1997:
Net sales $ 34,403 $ 55,150 $ 59,418 $ 45,013
Gross profit 19,656 36,055 36,048 26,832
Income before provision for income taxes 893 14,363 11,064 5,505
Net income 550 8,848 6,815 3,391
Basic net income per share $ 0.01 $ 0.13 $ 0.10 $ 0.05
Diluted net income per share $ 0.01 $ 0.13 $ 0.10 $ 0.05
</TABLE>
(1) Cost of goods sold includes a $12.6 million charge recorded in 1999 in
connection with the restructuring of the Company's footwear, see Note 12
in Notes to Consolidated Financial Statements.
56
<PAGE> 57
OAKLEY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
OAKLEY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFIYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, 1997
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance
beginning costs and at end of
of period expense Deductions Adjustments period
----------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1999:
Allowance for doubtful accounts $ 621,000 $ 12,000 $ (35,000) $ -- $ 598,000
=========== ========== ========== =========== ===========
Inventory reserve $ 2,322,000 $ 6,950,000 $ -- $ -- $ 9,272,000(1)
=========== ========== ========== =========== ===========
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
=========== ========== ========== =========== ===========
For the year ended December 31, 1997:
Allowance for doubtful accounts $ 590,000 $ 12,000 $ (31,000) $ (20,000) $ 551,000
=========== ========== ========== =========== ===========
Inventory reserve $ 600,000 $ 1,125,000 $ -- $ -- $ 1,725,000
=========== ========== ========== =========== ===========
</TABLE>
(1) Includes inventory reserves related to the $12.6 million restructuring
charge recorded in 1999 in connection with the restructuring of the
Company's footwear operations.
57
<PAGE> 58
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 and Chief Executive Officer
Date: March 29, 2000
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 and CEO March 29, 2000
- -------------------------------- (Principal Executive Officer)
Jim Jannard
/s/ Link Newcomb Chief Operating Officer and Director March 29, 2000
- --------------------------------
Link Newcomb
/s/ Colin Baden President March 29, 2000
- --------------------------------
Colin Baden
/s/ Thomas George Chief Financial Officer March 29, 2000
- -------------------------------- (Principal Accounting Officer)
Thomas George
/s/ Michael Jordan Director March 29, 2000
- --------------------------------
Michael Jordan
/s/ Irene Miller Director March 29, 2000
- --------------------------------
Irene Miller
/s/ Mike Parnell Director March 29, 2000
- --------------------------------
Mike Parnell
/s/ Orin Smith Director March 29, 2000
- --------------------------------
Orin Smith
</TABLE>
58
<PAGE> 59
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(4) Amendment No. 1 to the Articles of Incorporation as filed with
the Secretary of State of the State of Washington on September
26, 1996
3.4(10) Amendment #1 to Section 1 and Sections 3a through 3f of Article
IV of the (10) Amended and Restated Bylaws of Oakley, Inc.
10.1(2) Agreement, dated July 17, 1995, between Oakley, Inc. and
Michael Jordan
10.2(3) Oakley, Inc. 1995 Stock Incentive Plan
10.3(3) Oakley, Inc. Amended and Restated 1995 Stock Incentive Plan
10.4(3) Oakley, Inc. Executive Officer Performance Bonus Plan
10.5(5) Employment Agreement, dated as of January 31, 1997, between
Oakley, Inc. and Link Newcomb
10.6(5) Amendment No. 1 to Employment Agreement, dated February 1,
1997, between Oakley, Inc. and Link Newcomb
10.7(3) Indemnification Agreement, dated August 1, 1995, between
Oakley, Inc. and Jim Jannard
10.8(1) Schedule of indemnification agreements between Oakley, Inc. and
each of its directors and executive officers
10.9(3) Aircraft Lease Agreement, dated August 10, 1995, between
Oakley, Inc. and X, Inc.
10.10(3) Aircraft Lease Agreement, dated August 10, 1995, between
Oakley, Inc. and Time Tool Incorporated
10.11(1) Registration Rights Agreement, dated August 1, 1995, between
Oakley, Inc., Jim Jannard and the M. and M. Parnell Revocable
Trust
10.12(3) Indemnification Agreement, dated August 9, 1995, between
Oakley, Inc., Jim Jannard and the M. and M. Parnell Revocable
Trust
10.13(5) 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)
10.14(5) Promissory Note, dated March 20, 1997, between Oakley, Inc. and
Bank of America National Trust and Savings Association
10.15(6) Consultant Agreement, dated as of August 1, 1997, between
Oakley, Inc. and Mike Parnell
10.16(6) Consultant Agreement, dated as of August 1, 1997, between
Oakley, Inc. and Jim Jannard
10.17(6) Promissory Note, dated August 7, 1997, between Oakley, Inc. and
Bank of America National Trust and Savings Association
10.18(6) Amendment No. 1 to Promissory Note, dated August 14, 1997,
between Oakley, Inc. and Bank of America National Trust and
Savings Association
10.19(6) Amendment No. 2 to Promissory Note, dated August 14, 1997,
between Oakley, Inc. and Bank of America National Trust and
Savings Association
10.20(6) 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
</TABLE>
<PAGE> 60
<TABLE>
<S> <C>
10.21(6) Standing Loan Agreement , dated August 7, 1997 between Oakley,
Inc. and Bank of America National Trust and Savings Association
10.22(7) First Amendment to Standing Loan Agreement, dated January
12, 1998, between Oakley, Inc. and Bank of America National
Trust and Savings Association
10.23(7) Indemnification Agreement, dated October 3, 1997, between
Oakley, Inc. and William D. Schmidt
10.24(7) Employment Agreement, dated October 6, 1997 between Oakley,
Inc. and Thomas A. George
10.25(7) Indemnification Agreement, dated October 6, 1997 between
Oakley, Inc. and Thomas A. George
10.26(8) Amended and Restated Consultant Agreement, dated May 12, 1998,
between Jim Jannard and Oakley, Inc.
10.27(8) Amended and Restated Consultant Agreement, dated May 12, 1998,
between Mike Parnell and Oakley, Inc.
10.28(8) Amended and Restated Employment Agreement, dated May 12, 1998,
between Link Newcomb and Oakley, Inc.
10.29(8) Amended and Restated Employment Agreement, dated May 12, 1998,
between Thomas George and Oakley, Inc.
10.30(9) 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
10.31(9) Modification Agreement (Short Form), dated August 10, 1998,
between Oakley, Inc. and Bank of America National Trust and
Savings Association
10.32(9) Modification Agreement (Long Form), dated August 10, 1998,
between Oakley, Inc. and Bank of America National Trust and
Savings Association
10.33(11) Employment Agreement, dated May 1, 1999, between William
Schmidt and Oakley, Inc.
10.34(11) Amended and Restated Employment Agreement, dated May 1, 1999,
between Link Newcomb and Oakley, Inc.
10.35(11) Oakley, Inc. Amended and Restated 1995 Stock Incentive Plan.
10.36(11) Oakley, Inc. Amended and Restated Executive Officers
Performance Bonus Plan.
10.37(12) Severance and Release Agreement, dated October 6, 1999, between
William Schmidt and Oakley, Inc.
10.38(12) Amendment No. 1 to Amended and Restated Employment Agreement,
dated December 31, 1999, between Link Newcomb and Oakley, Inc.
10.39(12) Second Amended and Restated Employment Agreement, dated January
1, 2000, between Thomas George and Oakley, Inc.
21.1(12) List of Material Subsidiaries
23.1(12) Consent of Deloitte & Touche LLP, independent auditors
27.1(12) 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-K of Oakley, Inc. for the year ended
December 31, 1996.
(5) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter
ended March 31, 1997.
(6) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter
ended September 30, 1997.
(7) Previously filed with the Form 10-K of Oakley, Inc. for the year ended
December 31, 1997.
(8) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter
ended June 30, 1998.
<PAGE> 61
(9) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter
ended September 30, 1998.
(10) Previously filed with the Form 10-K of Oakley, Inc. for the year ended
December 31, 1998.
(11) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter
ended June 30, 1999.
(12) Filed herewith.
<PAGE> 1
Exhibit 10.37
SEVERANCE AGREEMENT
AND GENERAL AND SPECIAL RELEASE
This Severance Agreement and General Release ("Agreement") is entered into as of
this 6th day of October, 1999 by and between William Schmidt ("Executive"), on
the one hand, and Oakley, Inc., a Washington corporation ("Company"), on the
other hand (collectively, the "Parties").
RECITALS
WHEREAS, Executive has been employed by the Company as Chief
Executive Officer, pursuant to an employment agreement with the Company dated
May 1, 1999 (the "Employment Agreement");
WHEREAS, Executive wishes to voluntarily terminate his employment
with the Company effective October 6, 1999;
WHEREAS, pursuant to the terms of the Employment Agreement the
Company is not obligated to pay and Executive is not entitled to receive any
severance payment whatsoever upon his resignation from the Company; and
WHEREAS, the Company has determined that it would be in the best
interest of the Company and its shareholders to offer Executive a severance
package, in exchange for Executive's full release of claims against the Company
and the other covenants and agreements contained herein.
NOW THEREFORE, in consideration of the promises and mutual
covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are expressly acknowledged, the Parties agree
and promise as follows:
1. EXECUTIVE'S TERMINATION.
Pursuant to this Agreement, Executive's employment with
Company is terminated effective October 6, 1999 (the "Separation Date").
2. SEVERANCE PAYMENT.
a. In consideration of Executive's release of claims and
Executive's other covenants and agreements contained herein, except as provided
in clause (B) below, ten (10) days after the later to occur of (i) the
Separation Date, and (ii) Executive's execution of this Agreement and delivery
to the Company, and provided that Executive has not exercised any revocation
rights as provided in Section 4, below, the Company shall pay Executive as a
severance benefit (the "Severance Benefit") (A) his First Year Base Salary (as
defined in the Employment Agreement) through May 1, 2001, in a lump sum payment,
less all applicable federal, state or local taxes and other normal payroll
deductions, (B) a bonus (the "1999 Performance Bonus") equal to either (1) 60%
of his First Year Base Salary if the Company's diluted net income per common
share ("EPS"), as determined by the Company's independent accountants in
accordance with generally accepted accounting principles, for the calendar year
ended December 31, 1999, equals or exceeds $0.45 per share (without giving
effect to any rounding to the nearest whole cent) or (2) $64,898 (which amount
equals the product of $100,000 and a fraction, the numerator of which is 159
(the number of days between May 1, 1999, and the Separation Date) and the
denominator of which is 245 (the number of days between May 1, 1999, and
December 31, 1999)) if the Company's EPS is less than $0.45 per share, which
bonus shall be paid as soon as practicable following March 31, 2000, and (C) a
one-time lump sum payment of $5,000, which amount shall be used at Executive's
discretion to obtain outplacement services for Executive's benefit. In addition,
as a Severance Benefit, the Company
1
<PAGE> 2
shall continue to make lease payments of $1,168.48 per month for Executive's
leased automobile for a period of three months from October 6, 1999, provided
that within three days following the end of such three month period Executive
shall deliver the automobile to the Company in similar condition to when he
first received the leased the automobile in September 1999.
b. Except for (i) the Severance Benefit pursuant to
Section 2(a) above, and (ii) Executive's salary and all other compensation
through the Separation Date, including any earned but unpaid vacation pay,
Executive shall not be entitled to receive any other compensation or benefits of
any sort including, without limitation, salary, vacation, bonuses, stock
options, short-term or long-term disability benefits, or health care coverage
(except as provided under applicable state or federal law), from the Company,
its affiliates, or their respective partners, principals, officers, directors,
shareholders, managers, employees, agents, representatives, or insurance
companies, or their respective predecessors, successors or assigns at any time;
and
c. Executive acknowledges and agrees that the Severance
Benefit provided under Section 2(a) above, constitutes consideration which, but
for the mutual covenants set forth in this Agreement, Company is not otherwise
obligated to provide, nor is Executive otherwise entitled to receive.
3. MUTUAL RELEASE. In consideration of the payment made pursuant
to Section 2, above, and the Company's and Executive's other covenants and
agreements contained herein, the Parties hereby release and discharge each
other, and Executive hereby releases and discharges the Company's past and
present shareholders, and the officers, directors, managers, employees, agents,
attorneys, servants, affiliates, predecessors, successors and assigns of each of
them, and its and their insurers, employee welfare benefit plans, and pension or
deferred compensation plans, along with their respective trustees,
administrators, and fiduciaries (collectively, the "Released Parties") from any
and all claims, charges, complaints, liens, demands, causes of action,
obligations, damages and liabilities, known or unknown, suspected or
unsuspected, that the Parties had, now have, or may hereafter claim to have
against the Released Parties, arising out of or relating in any way to
Executive's hiring by, employment with, or separation from the Company or
otherwise relating to any of the Released Parties from the beginning of time
through the later to occur of (i) the Separation Date, and (ii) the date on
which Executive actually receives the Severance Benefit. This release
specifically extends to, without limitation, claims or causes of action for
wrongful termination, impairment of ability to compete in the open labor market,
breach of an express or implied contract, breach of any collective bargaining
agreement, breach of the covenant of good faith and fair dealing, breach of
fiduciary duty, fraud, misrepresentation, defamation, slander, infliction of
emotional distress, disability, loss of future earnings, and claims under the
California constitution, the United States Constitution, and applicable state
and federal fair employment laws, federal equal employment opportunity laws, and
federal and state labor statutes and regulations, including, but not limited to,
the Civil Rights Act of 1964, as amended, the Fair Labor Standards Act, as
amended, the National Labor Relations Act, as amended, the Labor-Management
Relations Act, as amended, the Worker Retraining and Notification Act of 1988,
as amended, the Americans With Disabilities Act of 1990, as amended, the
Rehabilitation Act of 1973, as amended, the Executive Retirement Income Security
Act of 1974, as amended, the Age Discrimination in Employment Act of 1967, as
amended, and the California Fair Employment and Housing Act, as amended; and
The Parties expressly waive all rights afforded by Section 1542
of the Civil Code of the State of California ("Section 1542") with respect to
the Released Parties. Section 1542 states as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
2
<PAGE> 3
Notwithstanding the provisions of Section 1542, and for the purpose of
implementing a full and complete release, each of the Parties understands and
agrees that this Agreement is intended to include all claims, if any, which each
of the Parties may have and which each of the Parties does not now know or
suspect to exist against the Released Parties and this Agreement extinguishes
those claims.
4. REVIEW AND REVOCATION PERIOD. Executive acknowledges that the
Company has advised Executive that he may consult with an attorney of
Executive's choosing prior to signing this Agreement and that Executive has
twenty-one (21) days during which to consider the provisions of this Agreement,
although Executive may sign and return it sooner. Executive further acknowledges
that Executive has been advised by the Company that Executive has the right to
revoke this Agreement for a period of seven (7) days after signing it and that
this Agreement shall not become effective or enforceable until such seven
(7)-day revocation period has expired. Executive acknowledges and agrees that if
Executive wishes to revoke this Agreement, Executive must do so in writing, and
that such revocation must be signed by Executive and received by the Company no
later than 5:00 p.m. Pacific Daylight Time on the seventh (7th) day after
Executive has signed this Agreement. Executive acknowledges and agrees that, in
the event that Executive revokes this Agreement, Executive shall have no right
to receive any benefits hereunder, including the Severance Payment. Executive
represents that Executive has read this Agreement and understands its terms and
enters into this Agreement freely, voluntarily, and without coercion.
5. NO DISPARAGEMENTS. Executive and the Company agree that
neither Executive nor the Company shall make any oral or written, public or
private, statements that are disparaging of Executive or the Company, its
affiliates, or their respective partners, principals, officers, directors,
shareholders, managers, employees, agents, representatives, or their respective
predecessors, successors or assigns at any time; provided, however, nothing in
this Section 5 shall preclude Executive or the Company from making truthful
factual statements regarding Executive or former officers, directors or
employees of the Company.
6. RETURN OF THE COMPANY'S DOCUMENTS AND PROPERTY. Executive
agrees to return all records, documents, proposals, notes, lists, files and any
and all other materials including, without limitation, computerized and/or
electronic information that refers, relates or otherwise pertains to the
Company, its affiliates, and/or their respective partners, principals, officers,
directors, shareholders, managers, employees, agents, representatives, or
insurance companies, or their respective predecessors, successors or assigns at
any time. In addition, Executive shall return to the Company all property or
equipment that he has been issued during the course of his employment or which
he otherwise currently possesses. Executive shall deliver to the Company at its
offices in Foothill Ranch, California on or before the Separation Date at
Executive's expense all of the Company's records, documents, proposals, notes,
lists, files and materials and property and equipment that are in his
possession. Executive is not authorized to retain any copies of any such
records, documents, proposals, notes, lists, files or materials. Nor is he
authorized to retain any other of the Company's property or equipment.
7. PROPRIETARY INFORMATION. Executive acknowledges that Executive
has had or may have had access to proprietary information, trade secrets, and
confidential material of the Company or its affiliates, including, but not
limited to, all ideas, information and materials, tangible or intangible, not
generally known to the public, relating in any manner to the business of the
Company, its personnel (including partners, principals, employees and
contractors), its clients or others with whom it does business that Executive
learned or acquired during the period of Executive's employment with the Company
("Proprietary Information"). Proprietary Information includes, but is not
limited to, manuals, documents, computer programs, source code, users manuals,
algorithms, compilations of technical, financial, legal or other data, client or
prospective client lists, names of suppliers, specifications, designs, business
or marketing plans, forecasts, financial information, work in progress, and
other technical or business information. Executive agrees, without limitation in
time or until such Proprietary Information shall become public other than by
Executive's unauthorized disclosure, to maintain the confidentiality of such
information and to
3
<PAGE> 4
refrain from divulging, disclosing, or otherwise using said Proprietary
Information to the detriment of the Released Parties, or for any other purpose.
Executive further acknowledges and agrees that he continues to be bound by and
will abide by any and all prior confidentiality and/or non-disclosure agreements
entered into by and between Executive and the Company, and that nothing in this
Agreement in any way alters, amends, or waives any such duties and/or
obligations Executive has or may have under such other agreements.
8. COOPERATION IN LITIGATION. Executive shall cooperate with the
Company, its affiliates, and each of their respective attorneys, barristers,
solicitors or other legal representatives (collectively, "Attorneys") in
connection with any claim, litigation, or judicial or arbitral proceeding which
is now pending or may hereinafter be brought against the Company or its
affiliates by any third-party. Executive's duty of cooperation shall include,
but not be limited to, (a) meeting with the Company's and/or its affiliates'
Attorneys by telephone or in person at mutually convenient times and places in
order to state truthfully his knowledge of matters at issue and recollection of
events; (b) appearing at the Company's, its affiliates' and/or their Attorneys'
request (and, to the extent possible, at a time convenient to Executive that
does not conflict with the needs or requirements of his then-current employer)
as a witness at depositions or trials, without necessity of a subpoena, in order
to state truthfully Executive's knowledge of matters at issue; and (c) signing
at the Company's, its affiliates' and/or their Attorneys' request declarations
or affidavits that truthfully state matters of which Executive has knowledge.
The Company and/or its affiliates shall promptly reimburse Executive for his
actual and reasonable travel or other expenses that he may incur in cooperating
with the Company, its affiliates, and/or their Attorneys pursuant to this
Section 8.
9. NON-ADMISSION OF LIABILITY. Nothing in this Agreement shall be
construed as an admission of liability by Executive or the Released Parties;
rather, Executive and the Released Parties are resolving all matters arising out
of their employer-employee relationship and all other relationships between
Executive and the Released Parties, as to each of which each of the Released
Parties and Executive deny any liability.
10. CONFIDENTIALITY. Executive covenants and agrees that neither
he nor his attorneys or representatives shall reveal to anyone, except his
spouse, accountants for income tax and audit purposes, and attorneys for
purposes of the enforcement of this Agreement, any of the terms of this
Agreement, except as may be mutually agreed upon in writing or otherwise
required by law or court order.
11. BINDING EFFECT. This Agreement shall be binding upon the
Parties and their respective heirs, administrators, representatives, executors,
successors and assigns, and shall inure to the benefit of the Parties and their
respective heirs, administrators, representatives, executors, successors and
assigns.
12. SEVERABILITY. While the provisions contained in this
Agreement are considered by the Parties to be reasonable in all circumstances,
it is recognized that some provisions may fail for technical reasons.
Accordingly, it is hereby agreed and declared that if any one or more of such
provisions shall, either by itself or themselves or taken with others, be
adjudged to be invalid as exceeding what is reasonable in all circumstances for
the protection of the interests of the Company, but would be valid if any
particular restrictions or provisions were deleted or restricted or limited in a
particular manner, then the said provisions shall apply with any such deletions,
restrictions, limitations, reductions, curtailments, or modifications as may be
necessary to make them valid and effective and the remaining provisions shall be
unaffected thereby.
13. ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes
the entire understanding among the Parties and may not be modified without the
express written consent of the Parties. This Agreement supersedes all prior
written and/or oral and all contemporaneous oral agreements, understandings and
negotiations regarding the subject matter hereof. Notwithstanding the foregoing,
the provisions of the Employment Agreement shall remain in effect, except as
otherwise modified herein.
4
<PAGE> 5
14. GOVERNING LAW. This Agreement shall be governed by and
construed and enforced pursuant to the laws of the State of California
applicable to contracts made and entirely to be performed therein.
15. VOLUNTARY AGREEMENT; NO INDUCEMENTS. Each Party to this
Agreement acknowledges and represents that he or it (a) has fully and carefully
read this Agreement prior to signing it, (b) has been, or has had the
opportunity to be, advised by independent legal counsel of his or its own choice
as to the legal effect and meaning of each of the terms and conditions of this
Agreement, and (c) is signing and entering into this Agreement as a free and
voluntary act without duress or undue pressure or influence of any kind or
nature whatsoever and has not relied on any promises, representations or
warranties regarding the subject matter hereof other than as set forth in this
Agreement.
IN WITNESS WHEREOF, the Parties have set their hand as of the
date first written above.
EXECUTIVE:
/s/ William O. Schmidt
---------------------------------------
WILLIAM SCHMIDT
OAKLEY, INC.:
By: /s/ Link Newcomb
----------------------------------
Its: C.O.O.
---------------------------------
5
<PAGE> 1
Exhibit 10.38
AMENDMENT #1 TO AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
AMENDMENT, dated December 31, 1999 (the "Amendment"), to the Amended and
Restated Employment Agreement, dated May 1, 1999 (the "Employment Agreement"),
between R. Link Newcomb (the "Employee") and Oakley, Inc., a Washington
corporation (the "Company").
WHEREAS, the Employee and the Company have previously entered
into the Employment Agreement; and
WHEREAS, the Employee desires to continue to provide the Company
with his services and the Company desires to continue to employ the Employee on
the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual agreements
hereinafter set forth, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Employee and the
Company have agreed and do hereby agree to amend the Employment Agreement as
follows, effective as of the date first written above:
1. Termination of Employment. Section 4 of the Employment
Agreement is hereby amended in its entirety to read as follows:
"4. Termination of Employment
(a) Termination Generally. If Employee's employment with
the Company is terminated, Employee will be entitled to benefits as set forth
below.
i Death. If Employee dies while employed by the
Company, his employment shall immediately terminate and the Company's
obligation to pay Employee's base salary and bonus shall cease as of the
date of death; provided, however, that if Employee's death occurs on or
before January 31, 2002, the Company shall pay to Employee's
beneficiaries or his estate an amount equal to $500,000; provided,
further, that such amount shall be paid only from the proceeds, if any,
received by the Company pursuant to any life insurance on Employee's
life for the benefit of the Company. If Employee's death occurs after
January 31, 2002, Employee's beneficiaries or his estate shall receive
benefits in accordance with any Company plans then in effect.
ii Disability. If as a result of Employee's
incapacity due to physical or mental illness ("Disability"), Employee
shall have been absent from the full-time performance of his duties with
the Company for six consecutive months, the Company may, upon 30 days'
notice to Employee, terminate Employee's employment. Within ten days
following such termination for Disability, the Company shall pay
Employee an amount equal to one year's base salary; provided, however,
that if Employee is terminated for Disability on or before January 31,
2002, the Company shall only pay to Employee the sum of $500,000 in full
on the date of termination of employment in accordance with the
Company's normal payroll practices and procedures. Any payment pursuant
to this Section 4(a)(ii) shall not affect Employee's rights under any
Company disability plan in which Employee may then be a participant.
iii Termination for Cause. The Company shall have
the right to terminate Employee's employment for Cause by giving
Employee written notice of the
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effective date of such termination. For purposes of this Agreement,
"Cause" shall mean fraud, misappropriation, embezzlement or other act of
material misconduct against the Company, or substantial or willful
failure to perform specific and lawful directives of the Company's Board
of Directors consistent with Employee's employment. If the Company
terminates Employee's employment for Cause, the Company shall have no
further obligation under this Agreement from and after the date of
termination.
iv Voluntary Termination by Employee. In the event
that Employee's employment with the Company is voluntarily terminated by
Employee other than for Good Reason, the Company shall have no further
obligation under this Agreement from and after the date of termination;
provided, however, that if such termination occurs on or before January
31, 2002, the Company shall pay to Employee the sum of $500,000 in full
on the date of termination of employment in accordance with the
Company's normal payroll practices and procedures. For purposes of this
Agreement, "Good Reason" shall mean a material breach by the Company of
any provision of this Agreement. Any termination of employment pursuant
to this subsection (iv) shall relieve each party hereto from any
obligation pursuant to Section 1 hereof.
v Other Termination. If Employee's employment is
terminated (i) by the Company for any reason other than Employee's death
or disability or for Cause or (ii) by Employee for Good Reason, the
Company shall pay Employee the balance due under the Term of this
Agreement as if Employee had remained in the Company's employ at an
annual rate of compensation equal to his then base salary and, at the
end of each remaining fiscal year ending during the Term of this
Agreement, a bonus equal to the amount of Employee's annual target bonus
under the Performance Bonus Plan as in effect at the time of such
termination. In addition, the Company shall pay Employee his base salary
accrued through the date of termination and, with respect to any fiscal
year ended prior to the date of termination as to which no annual bonus
under the Performance Bonus Plan had yet been paid, an annual bonus
determined on the basis of the performance goals and objectives
applicable to Employee for such year.
(b) Acceleration of Stock Options. If Employee's
employment is terminated by the Company for any reason other than Employee's
death or disability or for Cause, the vesting of that portion of Employee's
stock options that are outstanding as of the date of Employee's termination, if
any, which would have vested within one year after the date of Employee's
termination shall be accelerated and such stock options shall be immediately
exercisable and shall remain exercisable pursuant to subsection (c) below.
(c) Extension of Exercise Period of Stock Options.
Notwithstanding anything to the contrary contained herein or in Employee's
existing or future stock option agreements, if Employee's employment is
terminated by the Employee or by the Company for any reason during the Term of
this Agreement, Employee shall be entitled to exercise his stock options to the
extent vested on the date of his termination (including any stock options
accelerated pursuant to subsection (b) above) for a period of two years from
such date of termination. If Employee does not exercise his incentive stock
options on or before the date three months following his termination of
employment with the Company, his incentive stock options will thereafter be
treated as non-qualified stock options in accordance with Section 422 of the
Code.
(d) Consulting Services. Upon termination of Employee's
employment with the Company for any reason other than by reason of Employee's
death or Disability, the Employee shall, at the election of the Company, which
election must be exercised in writing and received by Employee within fifteen
(15) days of the effective date of such termination, provide consulting services
to the Company on such projects or matters within the expertise of Employee
and/or in which he was involved or of which he had knowledge during his
employment with the Company that the Board of Directors or the Chairman of the
Board of the Company may reasonably request of him from time to time. The term
of the consulting period under this Agreement shall
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begin on the date of exercise (the "Exercise Date") of the option by the Company
and shall continue for a period of two (2) years from the Exercise Date. In
return for said consulting services, the Employee shall be compensated at the
rate of $50,000 per year, payable in equal bi-weekly installments or such other
time or times as the Company and Employee shall agree. The Company understands
and agrees that Employee's engagement to provide consulting services pursuant to
this subsection (d) shall be nonexclusive and limited in time so as to permit
Employee to perform duties on a full-time basis for one or more employers."
2 No Mitigation; No Offset. The second sentence of Section 10 of
the Employment Agreement is hereby amended in its entirety to read as follows:
"In addition, except as otherwise provided in Section 4(a)(i), nothing contained
herein shall be construed to limit in any way Employee's rights or interests in
or to accrued vacation, qualified or nonqualified compensatory arrangements in
accordance with the terms thereof (including the Company's 401(k) plan and
deferred compensation plan) or any other employee benefit vested on Employee's
date of termination."
3 Except as otherwise provided herein, the remaining terms of the
Employment Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer, and the Employee has hereunto signed
this Agreement, as of the date first above written.
OAKLEY, INC.
/s/ Jim Jannard
---------------------------------
By: Jim Jannard
Its: Chief Executive Officer
/s/ Link Newcomb
---------------------------------
R. LINK NEWCOMB
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<PAGE> 1
Exhibit 10.39
SECOND AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT
("Agreement"), effective as of the 1st day of January, 2000 (the "Effective
Date"), is entered into by and between Thomas A. George ("Employee") and Oakley,
Inc., a Washington corporation (the "Company").
WHEREAS, Employee and the Company have previously entered into
that certain employment agreement dated October 6, 1997, which agreement was
amended and restated effective May 12, 1998 (collectively, the "Old Employment
Agreement"); and
WHEREAS, Employee and the Company desire to amend and restate in
its entirety the Old Employment Agreement.
NOW, THEREFORE, in consideration of the mutual agreements
hereinafter set forth, Employee and the Company have agreed and do hereby agree
as follows:
1. Employment. The Company does hereby employ, engage and hire
Employee as Chief Financial Officer of the Company, and Employee does hereby
accept and agree to such hiring, engagement and employment. In such capacity,
Employee shall have such executive and managerial powers and duties with respect
to the Company as may be from time to time reasonably assigned to him by the
Board of Directors of the Company (the "Board") or the President, Chief
Executive Officer or Chief Operating Officer of the Company, including without
limitation responsibility for the accounting, finance and investor relations
functions of the Company. Except for sick leave, reasonable vacations and
excused leaves of absence, Employee shall, throughout his period of employment,
devote substantially all his working time, attention, knowledge and skills,
diligently and to the best of his ability, to the performance of such duties in
furtherance of the business of the Company.
2. Term of Agreement. The term ("Term") of this Agreement shall
commence on the Effective Date and shall continue for a period of two (2) years;
provided, however, that on each anniversary of the Effective Date at which time
the remaining term of the Agreement is one year, the Term of the Agreement shall
automatically be extended for one additional year unless, not less than three
months prior to any such anniversary, either party shall have given written
notice to the other that it does not wish to extend the Term of the Agreement.
3. Compensation.
(a) Base Salary. The Company shall pay Employee an annual
base salary no less than at the rate of $230,000 per year, payable in equal
biweekly installments or at such other times as Employee and the Company shall
agree. Employee's base salary may be increased as determined by the Board in its
sole discretion.
(b) Bonus. Employee shall be eligible to participate in
the Company's Performance Bonus Plan. Employee's annual target bonus under the
Performance Bonus Plan shall not be less than $80,000.
(c) Housing Allowance. During the Term, until such time as
Employee no longer reasonably requires a second residence in San Diego County,
California, the Company shall pay Employee a housing allowance in the amount of
$1,500 per month. It is expressly understood that Employee's requirement of a
San Diego residence relates solely to his desire to
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permit his existing children to complete their primary education in San Diego
County, and that the housing allowance provided for herein shall terminate at
such time as none of such children is attending junior or senior high school in
San Diego County. Employee agrees to provide the Company timely notice of any
change in circumstances relating to his requirement of a San Diego residence.
(d) Fringe Benefits. Employee shall be entitled to
participate in any fringe and other benefit programs adopted from time to time
by the Company for the benefit of its senior executives. In addition Employee
shall be entitled to accrue vacation benefits at the rate of no less than three
weeks per each twelve-month period.
4. Termination of Employment.
(a) Death. If Employee dies while employed by the Company,
his employment shall immediately terminate and the Company's obligation to pay
Employee's base salary shall cease as of the date of death. Within ten (10) days
following such death, the Company shall pay to Employee's estate an amount equal
to Employee's then current target bonus under the Performance Bonus Plan,
prorated through the date of Employee's death. Employee's beneficiaries or his
estate shall receive benefits in accordance with any Company plans then in
effect.
(b) Disability. If as a result of Employee's incapacity
due to physical or mental illness ("Disability"), Employee shall have been
absent from the full-time performance of his duties with the Company for six
consecutive months, the Company may, upon 30 days' notice to Employee, terminate
Employee's employment. Within ten (10) days following such termination for
Disability, the Company shall pay Employee an amount equal to one year's base
salary plus an amount equal to Employee's target bonus under the Performance
Bonus Plan, prorated through the date of such termination. Such payment shall
not affect Employee's rights under any Company disability plan in which Employee
may then be a participant.
(c) Termination for Cause. The Company shall have the
right to terminate Employee's employment for Cause by giving Employee written
notice of the effective date of such termination. For purposes of this
Agreement, "Cause" shall mean (i) fraud, misappropriation, embezzlement or other
act of material misconduct against the Company, or (ii) substantial or willful
failure to perform specific and lawful directives of the Board or the President,
Chief Executive Officer or Chief Operating Officer of the Company consistent
with Employee's employment or (iii) other material breach of this Agreement by
Employee. If the Company terminates Employee's employment for Cause, the Company
shall have no further obligation under this Agreement from and after the date of
termination.
(d) Voluntary Termination by Employee. In the event that
Employee's employment with the Company is voluntarily terminated by Employee
other than for Good Reason (as defined below), the Company shall have no further
obligation under this Agreement from and after the date of termination. For
purposes of this Agreement, "Good Reason" shall mean any material breach by the
Company of any provision of this Agreement.
(e) Other Termination. If Employee's employment is
terminated (i) by the Company for any reason other than Employee's death or
disability or for Cause or (ii) by Employee for Good Reason, the Company shall
pay Employee (x) his base salary for a period equal to the greater of eighteen
(18) months or the remaining Term of this Agreement (the "Severance Period"), in
either case as if Employee had remained in the Company's employ at an annual
rate of compensation equal to his base salary as of the date of termination, and
(y) an amount equal to the product of (A) Employee's annual target bonus under
the Performance Bonus Plan as in effect at the time of such termination and (B)
a fraction, the numerator of which is the number of full months in the Severance
Period, and the denominator of which is 12.
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5. Assignment of Intellectual Property Rights.
(a) Definition of "Inventions". As used herein, the term
"Inventions" shall mean all inventions, discoveries, improvements, trade
secrets, formulas, techniques, data, programs, systems, specifications,
documentation, algorithms, flow charts, logic diagrams, source codes, processes,
and other information, including works-in-progress, whether or not subject to
patent, trademark, copyright, trade secret, or mask work protection, and whether
or not reduced to practice, which are made, created, authored, conceived, or
reduced to practice by Employee, either alone or jointly with others, during the
period of employment with the Company (including, without limitation, all
periods of employment with the Company prior to the Effective Date) which (A)
relate to the actual or anticipated business, activities, research, or
investigations of the Company or (B) result from or is suggested by work
performed by Employee for the Company (whether or not made or conceived during
normal working hours or on the premises of the Company), or (C) which result, to
any extent, from use of the Company's premises or property, unless, in the case
of clause (C) only, (i) Employee has reimbursed the Company in an amount equal
to the value of the use of such premises or property (as determined by the
Company based upon the Company's all in cost, which shall include without
limitation compensation and overhead expense) and (ii) the Company approved the
use of its premises or property prior to the use thereof by Employee.
(b) Work for Hire. Employee expressly acknowledges that
all copyrightable aspects of the Inventions are to be considered "works made for
hire" within the meaning of the Copyright Act of 1976, as amended (the "Act"),
and that the Company is to be the "author" within the meaning of such Act for
all purposes. All such copyrightable works, as well as all copies of such works
in whatever medium fixed or embodied, shall be owned exclusively by the Company
as of its creation, and Employee hereby expressly disclaims any and all interest
in any of such copyrightable works and waives any right of droit morale or
similar rights.
(c) Assignment. Employee acknowledges and agrees that all
Inventions constitute trade secrets of the Company and shall be the sole
property of the Company or any other entity designated by the Company. In the
event that title to any or all of the Inventions, or any part or element
thereof, may not, by operation of law, vest in the Company, or such Inventions
may be found as a matter of law not to be "works made for hire" within the
meaning of the Act, Employee hereby conveys and irrevocably assigns to the
Company, without further consideration, all his right, title and interest,
throughout the universe and in perpetuity, in all Inventions and all copies of
them, in whatever medium fixed or embodied, and in all written records,
graphics, diagrams, notes, or reports relating thereto in Employee's possession
or under his control, including, with respect to any of the foregoing, all
rights of copyright, patent, trademark, trade secret, mask work, and any and all
other proprietary rights therein, the right to modify and create derivative
works, the right to invoke the benefit of any priority under any international
convention, and all rights to register and renew same. Employee understands that
Inventions do not include, and the obligations set forth above in this Section
5(c) do not apply to, subject matter that qualifies fully under the provisions
of Section 2870 of the California Labor Code.
(d) Proprietary Notices; No Filings; Waiver of Moral
Rights. Employee acknowledges that all Inventions shall, at the sole option of
the Company, bear the Company's patent, copyright, trademark, trade secret, and
mask work notices.
Employee agrees not to file any patent, copyright, or
trademark applications relating to any Invention, except with prior written
consent of an authorized representative of the Company (other than Employee).
Employee hereby expressly disclaims any and all interest
in any Inventions and waives any right of droit morale or similar rights, such
as rights of integrity or the right to be attributed as the creator of the
Invention.
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(e) Further Assurances. Employee agrees to assist the
Company, or any party designated by the Company, promptly on the Company's
request, whether before or after the termination of employment, however such
termination may occur, in perfecting, registering, maintaining, and enforcing,
in any jurisdiction, the Company's rights in the Inventions by performing all
acts and executing all documents and instruments deemed necessary or convenient
by the Company, including, by way of illustration and not limitation:
i) Executing assignments, applications, and other
documents and instruments in connection with (A) obtaining patents,
copyrights, trademarks, mask works, or other proprietary protections for
the Inventions and (B) confirming the assignment to the Company of all
right, title, and interest in the Inventions or otherwise establishing
the Company's exclusive ownership rights therein.
ii) Cooperating in the prosecution of patent,
copyright, trademark and mask work applications, as well as in the
enforcement of the Company's rights in the Inventions, including, but
not limited to, testifying in court or before any patent, copyright,
trademark or mask work registry office or any other administrative body.
Employee shall be reimbursed for all out-of-pocket costs
incurred in connection with the foregoing, if such assistance is requested by
the Company after the termination of Employee's employment. In addition, to the
extent that, after the termination of employment for whatever reason, Employee's
technical expertise shall be required in connection with the fulfillment of the
aforementioned obligations, the Company shall compensate Employee at a
reasonable rate for the time actually spent by Employee at the Company's request
rendering such assistance.
(f) Power of Attorney. Employee hereby irrevocably
appoints the Company to be his Attorney-In-Fact to execute any document and to
take any action in his name and on his behalf and to generally use his name for
the purpose of giving to the Company the full benefit of the assignment
provisions set forth above.
(g) Disclosure of Inventions. Employee shall make full and
prompt disclosure to the Company of all Inventions subject to assignment to the
Company, and all information relating thereto in Employee's possession or under
his control as to possible applications and use thereof.
6. No Violation of Third-Party Rights. Employee represents,
warrants, and covenants that he:
(a) will not, in the course of employment, infringe upon
or violate any proprietary rights of any third party (including, without
limitation, any third party confidential relationships, patents, copyrights,
mask works, trade secrets, or other proprietary rights);
(b) is not a party to any conflicting agreements with
third parties which will prevent him from fulfilling the terms of employment and
the obligations of this Agreement;
(c) does not have in his possession any confidential or
proprietary information or documents belonging to others and will not disclose
to the Company, use, or induce the Company to use, any confidential or
proprietary information or documents of others; and
(d) agrees to respect any and all valid obligations which
he may now have to prior employers or to others relating to confidential
information, inventions, or discoveries which are the property of those prior
employers or others, as the case may be.
Employee has supplied or shall promptly supply to the
Company a copy of each written agreement to which Employee is subject (other
than any agreement to which the
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<PAGE> 5
Company is a party) which includes any obligation of confidentiality, assignment
of Inventions, or non-competition.
Employee agrees to indemnify and save harmless the
Company from any loss, claim, damage, cost or expense of any kind (including
without limitation, reasonable attorney fees) to which the Company may be
subjected by virtue of a breach by Employee of the foregoing representations,
warranties, and covenants.
7. Confidential Information and Non-Competition.
(a) Confidentiality. Employee acknowledges that in his
employment hereunder he will occupy a position of trust and confidence. Employee
shall not, except as may be required in the normal course of business to perform
his duties hereunder or as required by applicable law, without limitation in
time or until such information shall have become public other than by Employee's
unauthorized disclosure, disclose to others or use, whether directly or
indirectly, any Confidential Information regarding the Company, its subsidiaries
and affiliates. "Confidential Information" shall mean information about the
Company, its subsidiaries and affiliates, and their respective clients and
customers that is not disclosed by the Company for financial reporting purposes
and that was learned by Employee in the course of his employment by the Company,
its subsidiaries and affiliates, including (without limitation) any proprietary
knowledge, trade secrets, data, formulae, information and client and customer
lists and all papers, resumes, and records (including computer records) of the
documents containing such Confidential Information. Employee acknowledges that
such Confidential Information is specialized, unique in nature and of great
value to the Company, its subsidiaries and affiliates, and that such information
gives the Company a competitive advantage. Employee agrees to (i) deliver or
return to the Company, at the Company's request at any time or upon termination
or expiration of his employment or as soon thereafter as possible, (A) all
documents, computer tapes and disks, records, lists, data, drawings, prints,
notes and written information (and all copies thereof) furnished by the Company,
its subsidiaries and affiliates, or prepared by Employee during the term of his
employment by the Company, its subsidiaries and affiliates, and (B) all
notebooks and other data relating to research or experiments or other work
conducted by Employee in the scope of employment or any Inventions made,
created, authored, conceived, or reduced to practice by Employee, either alone
or jointly with others, and (ii) make full disclosure relating to any
Inventions.
If Employee would like to keep certain property, such as
material relating to professional societies or other non-confidential material,
upon the termination of employment with the Company, he agrees to discuss such
issues with the Company. Where such a request does not put Confidential
Information of the Company at risk, the Company will customarily grant the
request.
(b) Non-Competition. During the Term of this Agreement and
for a period of two (2) years thereafter, Employee shall not, directly or
indirectly, without the prior written consent of the Company, provide
consultative services or otherwise provide services to (whether as an employee
or a consultant, with or without pay), own, manage, operate, join, control,
participate in, or be connected with (as a stockholder, partner, or otherwise),
any business, individual, partner, firm, corporation, or other entity that is
then a competitor of the Company, its subsidiaries and affiliates, including
without limitation any entity engaged in the design, manufacture and/or
distribution of eyewear (each such competitor a "Competitor of the Company");
provided, however, that the "beneficial ownership" by Employee, either
individually or as a member of a "group," as such terms are used in Rule 13d of
the General Rules and Regulations under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), of not more than five percent (5%) of the voting
stock of any publicly held corporation shall not alone constitute a violation of
this Agreement; provided, however, that if Employee's employment is terminated
(i) by the Company without Cause, (ii) by Employee for Good Reason or (iii) by
reason of the expiration of the Term of this Agreement, the non-competition
agreement provided for in this subparagraph (b) shall terminate as of the date
of such termination of employment. Employee and the Company acknowledge and
agree that the busin-
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ess of the Company is global in nature, and that the terms
of the non-competition agreement set forth herein shall apply on a worldwide
basis.
(c) Non-Solicitation of Customers and Suppliers. During
the Term of this Agreement and for a period of two (2) years thereafter,
Employee shall not, directly or indirectly, influence or attempt to influence
customers or suppliers of the Company or any of its subsidiaries or affiliates,
to divert their business to any Competitor of the Company; provided, however,
that if Employee's employment is terminated (i) by the Company without Cause,
(ii) by Employee for Good Reason or (iii) by reason of the expiration of the
Term of this Agreement, the non-solicitation agreement provided for in this
subparagraph (c) shall terminate as of the date of such termination of
employment.
(d) Non-Solicitation of Employees. Employee recognizes
that he possesses and will possess confidential information about other
employees of the Company, its subsidiaries and affiliates, relating to their
education, experience, skills, abilities, compensation and benefits, and
inter-personal relationships with customers of the Company, its subsidiaries and
affiliates. Employee recognizes that the information he possesses and will
possess about these other employees is not generally known, is of substantial
value to the Company, its subsidiaries and affiliates in developing their
business and in securing and retaining customers, and has been and will be
acquired by him because of his business position with the Company, its
subsidiaries and affiliates. Employee agrees that, during the Term of this
Agreement and for a period of two (2) years thereafter, he will not, directly or
indirectly, solicit or recruit any employee of the Company, its subsidiaries and
affiliates (i) for the purpose of being employed by him or by any Competitor of
the Company on whose behalf he is acting as an agent, representative or employee
and that he shall not convey any such confidential information or trade secrets
about other employees of the Company, its subsidiaries and affiliates to any
other person or (ii) for any other purpose or no purpose.
(e) Injunctive Relief. It is expressly agreed that the
Company will or would suffer irreparable injury if Employee were to compete with
the Company or any subsidiary or affiliate of the Company in violation of any of
the provisions of this Section 7 and that the Company would by reason of such
competition be entitled to injunctive relief in a court of appropriate
jurisdiction, and Employee further consents and stipulates to the entry of such
injunctive relief in such a court prohibiting Employee from so competing with
the Company or any subsidiary or affiliate of the Company in violation of this
Agreement.
(f) Survival of Provisions. The obligations contained in
this Section 7 shall survive the termination or expiration of Employee's
employment with the Company and shall be fully enforceable thereafter. If it is
determined by a court of competent jurisdiction in any state that any
restriction in this Section 7 is excessive in duration or scope or is
unreasonable or unenforceable under the laws of that state, it is the intention
of the parties that such restriction may be modified or amended by the court to
render it enforceable to the maximum extent permitted by the law of that state.
8. Notices. All notices and other communications under this
Agreement shall be in writing and shall be given by fax or first class mail,
certified or registered with return receipt requested, and shall be deemed to
have been duly given three (3) days after mailing or twenty-four (24) hours
after transmission of a fax to the respective persons named below:
If to Company: Oakley, Inc.
One Icon
Foothill Ranch, California 92610
If to Employee: Thomas A. George
[Address]
[City]
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Either party may change such party's address for notices by notice duly given
pursuant hereto.
9. Indemnification. The Company shall indemnify and hold Employee
harmless to the maximum extent permitted under applicable law.
10. No Mitigation; No Offset. Employee shall not be required in
any way to mitigate the amount of any payment provided for in this Agreement,
and such payments shall not be subject to offset against compensation earned as
the result of employment with another employer.
11. Attorneys' Fees. In the event judicial determination is
necessary of any dispute arising as to the parties' rights and obligations
hereunder, each party shall have the right, in addition to any other available
relief, to attorneys' fees based on a determination by the court of the extent
to which each party has prevailed as to the material issues raised in
determination of the dispute.
12. Assignment; Successors. This Agreement is personal in nature
and neither of the parties hereto shall, without the consent of the other,
assign or transfer this Agreement or any rights or obligations hereunder;
provided, that in the event of the merger, consolidation, transfer or sale of
all or substantially all of the assets of the Company with or to any other
individual or entity, this Agreement shall be binding upon and inure to the
benefit of such successor, and such successor shall discharge and perform all
the promises, covenants, duties and obligations of the Company hereunder.
13. Governing Law. This Agreement and the legal relations thus
created between the parties hereto shall be governed by and construed under and
in accordance with the laws of the State of California.
14. Waiver; Modification. Failure to insist upon strict
compliance with any of the terms, covenants, or conditions hereof shall not be
deemed a waiver of such term, covenant, or condition, nor shall any waiver or
relinquishment of, or failure to insist upon strict compliance with, any right
or power hereunder at any one or more times be deemed a waiver or relinquishment
of such right or power at any other time or times. This Agreement shall not be
modified in any respect except by a writing executed by each party hereto.
15. Severability. In the event that a court of competent
jurisdiction determines that any portion of this Agreement is in violation of
any statute or public policy, only the portions of this Agreement that violate
such statute or public policy shall be stricken. All portions of this Agreement
that do not violate any statute or public policy shall continue in full force
and effect. Further, any court order striking any portion of this Agreement
shall modify the stricken terms as narrowly as possible to give as much effect
as possible to the intentions of the parties under this Agreement.
16. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
17. Termination of Old Employment Agreement. The Old Employment
Agreement is hereby amended, restated and superseded in its entirety as of the
date hereof. Employee acknowledges and agrees that no rights or benefits that
Employee may have accrued in connection with a termination for Good Reason (as
such term was defined in the Old Employment Agreement) prior to the Amendment
Date shall have any force or effect following the Amendment Date.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer, and Employee has hereunto signed this
Agreement, as of the date referred to above.
OAKLEY, INC.
/s/ Link Newcomb
-----------------------------------
By: R. Link Newcomb
Its: Chief Operating Officer
/s/ Thomas A. George
------------------------------------
THOMAS A. GEORGE
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<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
11, 2000, appearing in this Annual Report on Form 10-K of Oakley, Inc. for the
year ended December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 24, 2000
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