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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2000
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From To
Commission File Number: 1-13848
OAKLEY, INC.
(Exact name of registrant as specified in its charter)
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)
(949) 951-0991
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 69,380,025 shares
-------------------------------------- -----------------
(Class) (Outstanding on November 10, 2000)
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OAKLEY, INC.
INDEX TO FORM 10-Q
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 ........................................................ 3
Consolidated Statements of Income for the three- and nine-month
periods ended September 30, 2000 and 1999 .................................... 4
Consolidated Statements of Comprehensive Income for the
three- and nine-month periods ended September 30, 2000 and 1999 ............. 4
Consolidated Statements of Cash Flows for the nine-month periods
ended September 30, 2000 and 1999 ............................................ 5
Notes to Consolidated Financial Statements ..................................... 6-8
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................... 9-15
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk ............ 15-16
PART II. OTHER INFORMATION
ITEM 1 - Legal Proceedings ..................................................... 17-19
ITEM 2 - Changes in Securities and Use of Proceeds ............................. 19
ITEM 3 - Defaults Upon Senior Securities ....................................... 19
ITEM 4 - Submission of Matters to a Vote of Security Holders ................... 19
ITEM 5 - Other Information ..................................................... 19
ITEM 6 - Exhibits and Reports on Form 8-K ...................................... 20
Signatures ..................................................................... 21
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,279 $ 5,499
Accounts receivable, less allowance for
doubtful accounts of $1,442 (2000), $598 (1999) 58,693 39,113
Inventories, net (Note 2) 63,402 35,061
Other receivables 1,390 1,776
Deferred income taxes 11,702 11,698
Prepaid expenses and other 8,525 5,561
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Total current assets 151,991 98,708
Property and equipment, net 115,054 113,695
Deposits 1,791 2,281
Other assets 21,419 24,666
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TOTAL ASSETS $ 290,255 $ 239,350
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</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT LIABILITIES
Line of credit (Note 3) $ 9,900 $ 5,000
Accounts payable 18,135 16,592
Accrued expenses and other current liabilities 14,625 10,485
Accrued warranty 4,554 4,483
Income taxes payable 13,202 1,382
Current portion of long-term debt (Note 3) 1,519 1,519
-------------- -------------
Total current liabilities 61,935 39,461
Deferred income taxes 3,853 3,511
Long-term debt, net of current maturities(Note 3) 17,394 18,541
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share:20,000,000
shares authorized; no shares issued - -
Common stock, par value $.01 per share:200,000,000
shares authorized; 68,877,000 (2000) and
70,037,000 (1999) issued and outstanding 689 700
Additional paid-in capital 41,031 51,851
Retained earnings 167,592 126,225
Accumulated other comprehensive loss (2,239) (939)
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Total shareholders' equity 207,073 177,837
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TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 290,255 $ 239,350
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</TABLE>
See accompanying Notes to Consolidated Financial Statements
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OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 107,044 $ 70,819 $ 270,143 $ 191,616
Cost of goods sold 41,912 26,692 99,192 72,032
----------- ----------- ----------- -----------
Gross profit 65,132 44,127 170,951 119,584
Operating expenses:
Research and development 2,121 1,737 5,891 4,682
Selling 23,768 17,600 65,842 52,541
Shipping and warehousing 2,795 1,845 6,773 4,641
General and administrative 8,858 6,707 26,692 21,829
----------- ----------- ----------- -----------
Total operating expenses 37,542 27,889 105,198 83,693
----------- ----------- ----------- -----------
Operating income 27,590 16,238 65,753 35,891
Interest expense, net 762 346 2,111 1,497
----------- ----------- ----------- -----------
Income before provision for income taxes 26,828 15,892 63,642 34,394
Provision for income taxes 9,390 5,570 22,275 12,045
----------- ----------- ----------- -----------
Net income $ 17,438 $ 10,322 $ 41,367 $ 22,349
=========== =========== =========== ===========
Basic net income per common share $ 0.25 $ 0.15 $ 0.60 $ 0.32
=========== =========== =========== ===========
Basic weighted average common shares 68,636,000 70,678,000 69,007,000 70,678,000
=========== =========== =========== ===========
Diluted net income per common share $ 0.25 $ 0.15 $ 0.60 $ 0.32
=========== =========== =========== ===========
Diluted weighted average common shares 69,725,000 70,678,000 69,346,000 70,678,000
=========== =========== =========== ===========
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 17,438 $ 10,322 $ 41,367 $ 22,349
Other comprehensive (loss) income:
Transition adjustment related to the
adoption of SFAS 133 -- -- -- (103)
Net unrealized (loss) gain on derivative instruments (75) (1,046) 1,853 773
Foreign currency translation adjustment (1,394) 525 (3,153) (522)
----------- ----------- ----------- -----------
Other comprehensive (loss) income, net of tax (1,469) (521) (1,300) 148
----------- ----------- ----------- -----------
Comprehensive income $ 15,969 $ 9,801 $ 40,067 $ 22,497
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
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OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months ended September 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 41,367 $ 22,349
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 15,148 14,247
Compensatory stock options 107 182
Gain on disposition of equipment (1,086) (18)
Deferred income taxes 339 (121)
Changes in assets and liabilities, net of effects of business acquisitions:
Accounts receivable, net (21,916) (8,325)
Inventories (29,927) (3,992)
Other receivables 352 200
Prepaid expenses and other (1,180) (930)
Accounts payable 2,046 4,660
Accrued expenses, other current liabilities and accrued warranty 4,751 2,996
Income taxes payable 12,455 921
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Net cash provided by operating activities 22,456 32,169
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits 556 362
Acquisitions of property and equipment (15,568) (12,319)
Proceeds from sale of property and equipment 1,208 496
Other assets 1,503 (66)
------------ ------------
Net cash used in investing activities (12,301) (11,527)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings 93,100 54,700
Repayments of bank borrowings (89,228) (69,139)
Net proceeds from exercise of stock options 4,955 --
Repurchase of common shares (15,893) --
------------ ------------
Net cash used in financing activities (7,066) (14,439)
Effect of exchange rate changes on cash (309) (184)
Net increase in cash and cash equivalents 2,780 6,019
Cash and cash equivalents, beginning of period 5,499 4,553
------------ ------------
Cash and cash equivalents, end of period $ 8,279 $ 10,572
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
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OAKLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements of Oakley, Inc. and its
wholly-owned subsidiaries (the "Company") have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles ("GAAP") for complete financial
statements.
In the opinion of management, the consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair statement of the consolidated balance sheets as of
September 30, 2000 and December 31, 1999, the consolidated statements of income
and comprehensive income for the three- and nine-month periods ended September
30, 2000 and 1999 and the statements of cash flows for the nine-month periods
ended September 30, 2000 and 1999. The results of operations for the three- and
nine-month periods ended September 30, 2000 are not necessarily indicative of
the results of operations for the entire year ending December 31, 2000.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
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<S> <C> <C>
Raw Materials $ 22,591,000 $ 14,801,000
Finished Goods 40,811,000 20,260,000
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$ 63,402,000 $ 35,061,000
================== =================
</TABLE>
NOTE 3 - FINANCING ARRANGEMENTS
Line of credit - The Company has an unsecured line of credit with a bank
syndicate, which expires in August 2001, allowing for borrowings up to $50
million. The line of credit bears interest at either the bank's prime lending
rate (9.50% at September 30, 2000) or LIBOR plus 0.75% (7.37% at September 30,
2000). At September 30, 2000, the Company had $9.9 million outstanding under the
credit agreement and was in compliance with all restrictive covenants and
financial ratios of the line of credit.
Long-term debt - The Company has a real estate term loan with an outstanding
balance of $18.2 million at September 30, 2000, which matures 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% (7.84% at September 30,
2000) for ten years. In January 1999, the Company entered into an interest rate
swap agreement that results in fixing the interest rate over the term of the
note at 6.31%.
NOTE 4 - LITIGATION
During December 1996, three putative class action lawsuits (the "California
Securities Actions") were filed in the California Superior Court for the County
of Orange (the "Superior Court") against the Company and three of its officers
and directors alleging material misstatements and omissions in certain of the
Company's public statements, SEC filings and reports of third-party analysts.
The plaintiffs seek unspecified damages and other relief. In addition, one of
the lawsuits also asserted claims against firms who served as underwriters of
the June 6, 1996 offering of the Company's common stock by certain of its
shareholders (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
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California Securities Actions. During October, November, and December 1997, five
putative class action lawsuits (the "Federal Securities Actions") were filed in
the United States District Court for the Central District of California,
Southern Division (the "District Court"), against the Company, three of its
officers and directors, and firms that served as underwriters of the Secondary
Offering, alleging material misstatements and omissions in certain of the
Company's public statements, the reports of third-party analysts and/or certain
of the Company's SEC filings. The plaintiffs in the Federal Securities Actions
seek unspecified damages and other relief. On July 10, 1998, the Company and the
other defendants filed motions to dismiss the Federal Securities Actions. On
January 14, 1999, the District Court denied the motions to dismiss filed by the
Company and the other defendants. 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. In July 2000,
an agreement in principle was reached to settle the Federal Securities Action. A
written stipulation of settlement was signed by the parties and preliminarily
approved by the District Court on October 27, 2000. The proposed settlement,
which is subject to final approval by the District Court, will be funded
entirely by the Company's insurance carrier and will completely resolve the
Federal Securities Actions. In the event the proposed settlement does not become
effective, 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 5 - DERIVATIVE FINANCIAL INFORMATION
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 $103,000 transition adjustment charge recorded by the Company as a
cumulative-effect type adjustment 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
September 30, 2000, 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 September 30, 2000 remain
constant, are expected to result in reclassifications of $2.4 million of gains
to earnings over the next fifteen 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. 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
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expires or is sold, terminated, or exercised, (iii) when the derivative is
designated as a hedge instrument, if it is probable that the forecasted
transaction will not occur, (iv) when 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 three and nine months ended September 30, 2000, the Company
reclassified into earnings net gains of $1,227,000 and $2,150,000, respectively,
resulting from the expiration, sale, termination or exercise of foreign currency
exchange contracts.
NOTE 6 - RESTRUCTURE CHARGE
A restructure charge of $12.6 million ($8.2 million, or $0.12 per share, on an
after-tax basis) was recorded in the fourth quarter of fiscal 1999 as part of
the strategic initiatives (the "Restructuring Plan") approved in October 1999 by
the Company's Board of Directors. Under the Restructuring Plan, the Company has
reduced its in-house footwear manufacturing capabilities and selected
third-party partners to assist in the development and manufacture of the
Company's complete footwear line. The charge was included in cost of sales 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>
For the three and nine months ended September 30, 2000, the Company utilized
$0.1 million and $3.9 million, respectively, of its restructuring reserves
primarily for the write-down of excess inventories. Restructuring reserves as of
September 30, 2000 were $3.8 million. As of October 31, 2000, the Company has
completed the restructuring of its footwear operations and expects to utilize
the full amount of the $3.8 million reserve remaining at September 30, 2000.
NOTE 7 - 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 plus the dilutive effect of potential common shares outstanding. For
the three and nine months ended September 30, 2000, the diluted weighted average
common shares were 1,089,000 and 339,000, respectively, while the diluted
weighted average common shares outstanding for the three and nine months ended
September 30, 1999 did not include any dilutive options.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes the operations of Oakley, Inc. and its
subsidiaries for each of the periods discussed.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 and 1999
Net sales
Net sales increased to $107.0 million for the three months ended September 30,
2000 from $70.8 million for the three months ended September 30, 1999, an
increase of $36.2 million, or 51.2%. The increase in net sales was primarily
attributable to a 50.6%, or $26.5 million, increase in gross sunglass sales.
Gross sunglass sales were $78.9 million for the third quarter of 2000 compared
to $52.4 million for the third quarter of 1999. For the quarter ended September
30, 2000, the Company experienced a 33.7% increase in sunglass unit volume and a
12.7% increase in average selling prices. The increase in gross sunglass sales
was driven by strong sunglass sales of the Company's new Straight Jacket
introduced in late 1999, the Minutes and the X-Metal line. New sunglass products
introduced in 2000, including the Twenty, the C-Wire, the new Square Wire and
the Eye Jacket 2.0 also contributed significantly to the increase in sales. The
Company's polarized styles also contributed to the increase in gross sunglass
sales for the three months ended September 30, 2000, more than doubling over the
three months ended September 30, 1999. Sales from the Company's other product
categories, including footwear, apparel, goggles, watches and prescription
eyewear, showed continued growth with gross sales increasing 48.8%, or $10.8
million, during the quarter ended September 30, 2000 over the quarter ended
September 30, 1999. Introductions of the Company's fall footwear and apparel
lines and the Company's launching of its performance series D-1 watch during the
quarter ended September 30, 2000 contributed significantly to the increase in
the Company's newer product categories. The Company also experienced substantial
growth in snow goggle sales, as a result of improved customer fulfillment rates
during the quarter ended September 30, 2000 as compared to the same period in
1999. Additionally, continued growth in the Company's prescription business
contributed to the increase in sales during the quarter ended September 30,
2000, with plans to expand this business by introducing a number of frames
exclusively for the prescription market in early 2001. During the quarter ended
September 30, 2000, the Company's U.S. net sales increased 47.3%, or $17.7
million, to $55.0 million from $37.3 million in the comparable 1999 period,
principally as a result of higher sales to the Company's largest customer,
Sunglass Hut, increasing 63.1% in the U.S. to $15.8 million for the three months
ended September 30, 2000 from $9.7 million for the three months ended September
30, 1999 and a 41.8% increase in net sales to the Company's broad specialty
store account base and higher sales from the internet and other direct channels.
The Company's international sales increased 55.4% to $52.1 million during the
third quarter of 2000 from $33.5 million in the third quarter of 1999,
principally as a result of increased sales in all direct operations, including
increases in net sales in Australia, the United Kingdom, Japan, Canada and
continental Europe. On November 1, 1999, the Company acquired its Australian
distributor, which contributed to the increase in direct international sales
during the quarter ended September 30, 2000. Sales from the Company's direct
international offices represented 82.9% of total international sales for the
quarter ended September 30, 2000, compared to 71.2% for the comparable 1999
quarter. On a constant dollar basis, international sales increased 67.7% in the
quarter ended September 30, 2000 when compared to the quarter ended September
30, 1999.
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Gross profit
Gross profit increased to $65.1 million for the three months ended September 30,
2000 from $44.1 million for the three months ended September 30, 1999, an
increase of $21.0 million, or 47.6%. As a percentage of net sales, gross profit
decreased to 60.8% for the three months ended September 30, 2000 from 62.3% for
the three months ended September 30, 1999. The decrease in gross profit as a
percentage of net sales is attributable to the negative impact on the margins of
the Company's direct international sales from the strong U.S. dollar together
with lower apparel margins, offset by the positive impact of improved footwear
and X-Metal operations and the increased rate of gross profit derived from the
Company's acquisition of its Australian distributor in November 1999. Continued
increases in the strength of the U.S. dollar against key foreign currencies
could have an adverse effect on the Company's sales and gross profit from
international operations.
Operating expenses
Operating expenses increased to $37.5 million for the three months ended
September 30, 2000 from $27.9 million for the three months ended September 30,
1999, an increase of $9.6 million, or 34.6%. This increase is generally due to
higher variable expenses attributable to increased sales volume, together with
the operating expenses and goodwill amortization in 2000 resulting from the
Company's acquisition of its Australian distributor. Operating expenses, as a
percentage of net sales, decreased to 35.1% for the quarter ended September 30,
2000 from 39.4% for the quarter ended September 30, 1999, primarily due to the
increased sales volume generating significant leverage on operating expenses.
Research and development expenses increased $0.4 million to $2.1 million, or
2.0% of net sales, for the three months ended September 30, 2000 from $1.7
million, or 2.4% for the three months ended September 30, 1999. Selling expenses
increased $6.2 million to $23.8 million for the three months ended September 30,
2000 from $17.6 million for the three months ended September 30, 1999, as a
result of increased sales commissions and higher advertising expenditures. As a
percentage of sales, selling expenses for the quarter ended September 30, 2000
decreased to 22.2% from 24.9% for the comparable 1999 period primarily due to
leverage resulting from the increased sales volume and lower warranty costs.
Advertising expenses were higher in 2000 as a result of a strategic decision to
increase print advertising for the Oakley brand. Shipping and warehousing
expenses, as a percentage of net sales, remained at 2.6% for the three months
ended September 30, 2000 and 1999. General and administrative expenses for the
three months ended September 30, 2000 were $8.9 million, or 8.3% of net sales,
compared to $6.7 million, or 9.5% of net sales, in the same period in 1999. The
increase in general and administrative expenses was principally due to increased
personnel related expenses and an increase in provisions for bad debts resulting
from the Company's sales growth and general and administrative expenses for the
Company's Australian subsidiary.
Operating income
The Company's operating income increased to $27.6 million for the three months
ended September 30, 2000 from $16.2 million for the three months ended September
30, 1999, an increase of $11.4 million, or 69.9%, over the same period in the
previous year. As a percentage of net sales, operating income increased to 25.8%
for the three months ended September 30, 2000 from 22.9% for the three months
ended September 30, 1999 primarily as a result of significant positive operating
expense leverage on higher sales volume.
Interest expense, net
The Company incurred net interest expense of $0.8 million for the three months
ended September 30, 2000 as compared with net interest expense of $0.3 million
for the three months ended September 30, 1999 due to higher borrowing balances
on the Company's line of credit and higher average interest rates.
Net income
The Company's net income increased to $17.4 million for the three months ended
September 30, 2000 from $10.3 million for the three months ended September 30,
1999, an increase of $7.1 million, or 68.9%, over the comparable 1999 quarter.
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Nine Months Ended September 30, 2000 and 1999
Net sales
Net sales increased to $270.1 million for the nine months ended September 30,
2000 from $191.6 million for the nine months ended September 30, 1999, an
increase of $78.5 million, or 41.0%. The increase in net sales was primarily
attributable to a 35.1%, or $57.2 million, increase in gross sunglass sales.
Gross sunglass sales were $220.3 million for the first nine months of 2000
compared to $163.1 million for the first nine months of 1999. For the nine
months ended September 30, 2000, the Company experienced a 24.2% increase in
sunglass unit volume and an 8.8% increase in average selling prices. The
increase in gross sunglass sales is a result of strong sunglass sales of the
Company's existing products such as the new Straight Jacket, Minutes, new
M-Frame, OO line, and X-Metal line. New sunglass products introduced in 2000,
including the Twenty and the C-Wire and the Square Wire, and sales of the
Company's polarized styles were also major factors in the increase in sales for
the nine months ended September 30, 2000. As a group, gross sales of
prescription eyewear, goggles, apparel, footwear, watches and sunglass
accessories increased 47.9%, or $21.4 million, during the nine months ended
September 30, 2000 over the nine months ended September 30, 1999. During the
nine months ended September 30, 2000, the Company's U.S. net sales increased
35.9%, or $39.5 million, to $149.3 million from $109.8 million in the comparable
1999 period, principally as a result of a 44.7% increase in net sales to the
Company's broad specialty store account base and higher sales from the internet
and other direct channels. Sales to the Company's largest customer, Sunglass
Hut, increased 20.7% in the U.S. to $48.3 million for the nine months ended
September 30, 2000 from $40.1 million for the nine months ended September 30,
1999. The Company's international sales increased 47.8% to $120.9 million during
the first nine months of 2000 from $81.8 million in the first nine months of
1999, principally as a result of increased sales in all direct operations,
including significant increases in net sales in Australia, continental Europe,
United Kingdom, Japan and Canada. On November 1, 1999, the Company acquired its
Australian distributor, which contributed to the increase in direct
international sales during the nine months ended September 30, 2000. Sales from
the Company's direct international offices represented 83.0% of total
international sales for the nine months ended September 30, 2000, compared to
75.2% for the comparable 1999 period. On a constant dollar basis, international
sales increased approximately 56.8% for the nine months ended September 30, 2000
when compared to the nine months ended September 30, 1999.
Gross profit
Gross profit increased to $171.0 million for the nine months ended September 30,
2000 from $119.6 million for the nine months ended September 30, 1999, an
increase of $51.4 million, or 43.0%. As a percentage of net sales, gross profit
increased to 63.3% for the nine months ended September 30, 2000 from 62.4% for
the nine months ended September 30, 1999. The increase in gross profit as a
percentage of net sales is attributable to several factors, including increased
sales volume resulting in better utilization of the Company's fixed-cost
infrastructure which generated positive leverage, improved X-Metal and footwear
margins and the Company's acquisition of its Australian distributor in November
1999, offset by the negative impact on the margins of the Company's direct
international sales from the strong U.S. dollar together with lower apparel
margins.
A restructure charge of $12.6 million ($8.2 million, or $0.12 per share, on an
after-tax basis) was recorded in the fourth quarter of fiscal 1999 as part of
the strategic initiatives (the "Restructuring Plan") approved in October 1999 by
the Company's Board of Directors. Under the Restructuring Plan, the Company has
reduced its in-house footwear manufacturing capabilities and selected
third-party partners to assist in the development and manufacture of the
Company's complete footwear line. The charge was included in cost of sales and
is comprised of the following components:
11
<PAGE> 12
<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>
For the nine months ended September 30, 2000, the Company utilized $3.9 million
of its restructuring reserves primarily for the write-down of excess
inventories.As of October 31, 2000, the Company has completed the restructuring
of its footwear operations and expects to utilize the full amount of the $3.8
million reserve remaining at September 30, 2000.
Operating expenses
Operating expenses increased to $105.2 million for the nine months ended
September 30, 2000 from $83.7 million for the nine months ended September 30,
1999, an increase of $21.5 million, or 25.7%. Operating expenses, as a
percentage of net sales, declined to 38.9% for the nine months ended September
30, 2000 from 43.7% for the nine months ended September 30, 1999, primarily due
to the increased sales volume generating significant leverage on operating
expenses. This increase in absolute dollars is generally due to higher variable
expenses attributable to increased sales volume, together with the operating
expenses and goodwill amortization in 2000 resulting from the Company's
acquisition of its Australian distributor. As a percentage of net sales,
research and development expenses decreased to 2.2% of net sales for the nine
months ended September 30, 2000 compared to 2.4% of net sales for the nine
months ended September 30, 1999. Selling expenses increased $13.3 million to
$65.8 million, or 24.4% of net sales, for the nine months ended September 30,
2000 from $52.5 million, or 27.4% of net sales, for the nine months ended
September 30, 1999 as a result of increased sales commissions and higher
advertising expenditures, offset by reduced warranty costs resulting from fewer
defective claims. Advertising expenses were higher in 2000 as a result of a
strategic decision to increase print advertising for the Oakley brand. This
increase resulted from the use of an outside agency for media planning with
collaboration between the agency and the Company's in-house creative team for
advertising content. Shipping and warehousing expenses increased to $6.8
million, or 2.5% of net sales for the nine months ended September 30, 2000 from
$4.6 million, or 2.4% of net sales, primarily due to increased footwear and
apparel sales with higher average shipping costs. General and administrative
expenses for the nine months ended September 30, 2000 were $26.7 million, or
9.9% of net sales, compared to $21.8 million, or 11.4% of net sales, in the same
period in 1999. This increase in general and administrative expenses was
principally a result of increased personnel-related costs and the general and
administrative expenses and goodwill amortization related to the Company's
acquisition of its Australian distributor and an increase in provisions for bad
debts as a result of the Company's sales growth.
Operating income
The Company's operating income increased to $65.8 million for the nine months
ended September 30, 2000 from $35.9 million for the nine months ended September
30, 1999, an increase of $29.9 million, or 83.2%, over the same period in the
previous year. As a percentage of net sales, operating income increased to 24.3%
for the nine months ended September 30, 2000 from 18.7% for the nine months
ended September 30, 1999, as a result of the improved gross margin and
significant positive operating expense leverage on higher sales volume.
12
<PAGE> 13
Interest expense, net
The Company incurred interest expense of $2.1 million for the nine months ended
September 30, 2000 as compared with net interest expense of $1.5 million for the
nine months ended September 30, 1999. The increase in interest expense is due to
greater balances on the Company's line of credit which was used to finance the
share repurchase program earlier in the year.
Net income
The Company's net income increased to $41.4 million for the nine months ended
September 30, 2000 from $22.3 million for the nine months ended September 30,
1999, an increase of $19.1 million, or 85.7%, over the comparable first nine
months of 1999.
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 $22.5 million for the nine months ended
September 30, 2000 and $32.2 million for the comparable 1999 period. At
September 30, 2000, working capital was $90.1 million. 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, less allowance for doubtful accounts, at September 30, 2000 were $58.7
million compared to $39.1 million at December 31, 1999 and $42.0 million at
September 30, 1999. Accounts receivable days outstanding at September 30, 2000
were 49 compared to 53 at September 30, 1999. Inventories increased to $63.4
million at September 30, 2000 from $35.1 million at December 31, 1999 and $39.0
million at September 30, 1999 primarily as a result of the Company's sales
growth. Other factors contributing to the increased inventories include the
Company's decision to systematically increase inventories in order to improve
order fulfillment rates and corresponding turns at retail, rapid international
growth and new category expansion, which require increased inventory levels. As
a result of the improved gross margin and inventory increases described above,
inventory turns decreased slightly to 2.6 at September 30, 2000 versus 2.7 at
September 30, 1999.
The Company has an unsecured line of credit of $50.0 million which expires
August 2001. At September 30, 2000, the Company had an outstanding balance of
$9.9 million under such facility. The Company is currently in negotiation with
its lenders to expand this facility on terms no less favorable to the Company
and expects to do so in early 2001. Additionally, the Company has a real estate
term loan which matures 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% (7.84% at
September 30, 2000) for ten years. In January 1999, the Company entered into an
interest rate swap agreement that results in fixing the interest rate over the
term of the note at 6.31%. At September 30, 2000, the outstanding balance on the
term loan was $18.2 million.
Capital expenditures, net of retirements, for the nine months ended September
30, 2000 totaled $14.4 million. These expenditures were primarily attributable
to facility improvements and new product production tooling and equipment,
product displays and expansion of the Company's information technology
capabilities. As of September 30, 2000, the Company had commitments of
approximately $1.8 million for future capital purchases.
The Company believes that existing capital, anticipated cash flow from
operations, and current and anticipated credit facilities will be sufficient to
meet operating needs and capital expenditures for the foreseeable future.
13
<PAGE> 14
SEASONALITY
Historically, the Company's sales, in the aggregate, have been the highest in
the period from March to September, the period during which sunglass use is
typically greatest. As a result, operating margins are typically lower in the
first and fourth quarters, as fixed operating costs are spread over lower sales
volume. In anticipation of seasonal increases in demand, the Company typically
builds inventories in the fourth quarter and first quarter when net sales have
historically been lower. In addition, the Company's shipments of goggles, which
generate gross margins at significantly lower levels than sunglasses, are lowest
in the second quarter. This seasonal trend contributes to the Company's gross
margin in the second quarter, which historically has been the highest of the
year. Although the Company's business generally follows this seasonal trend, new
product introductions and the Company's international expansion have partially
mitigated the impact of seasonality.
BACKLOG
Historically, the Company has generally shipped domestic orders (other than
seasonal orders for ski goggles, apparel, and footwear and orders from certain
sunglass specialty chains) within one day of receipt and international orders
within two weeks of receipt. At September 30, 2000, the Company had a backlog of
$35.7 million, including backorders (merchandise remaining unshipped beyond its
scheduled shipping date) of $14.6 million as of such date. Backorders were
largely comprised of unfulfilled orders for the Company's X-Metal line.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin #101 (SAB 101) "Revenue Recognition in Financial
Statements." Management of the Company has determined that the application of
SAB 101 will not have any material impact on the Company's consolidated
financial statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 of Accounting Principles Board Opinion No. 25, "Accounting
for Certain Transactions Involving Stock Compensation", which, among other
things, addressed accounting consequences of a modification that reduces the
exercise price of a fixed stock option award (otherwise known as a repricing).
The adoption of this interpretation did not impact the Company's consolidated
financial statements.
FORWARD-LOOKING STATEMENTS
This document contains certain statements of a forward-looking nature. Such
statements are made pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. The accuracy of such statements may be
impacted by a number of business risks and uncertainties that could cause actual
results to differ materially from those projected or anticipated, including:
risks related to the Company's ability to identify qualified manufacturing
partners; the ability to coordinate product development and production processes
with those partners; the ability of those manufacturing partners to increase
production volumes in a timely fashion in response to increasing demand and
enable the Company to achieve timely delivery of finished goods to its retail
customers; the dependence on eyewear sales to Sunglass Hut; unanticipated
changes in general market conditions or other factors, which may result in
cancellations of advance orders or a reduction in the rate of reorders placed by
retailers; risks that the net realizable value of assets disposed of in the
footwear restructuring may differ from estimates used; the ability to continue
to develop and produce innovative new products and introduce them in a timely
manner; the acceptance in the marketplace of the Company's new products; the
ability to source raw materials and finished products at favorable prices to the
Company; foreign currency exchange rate fluctuations; and other risks outlined
in the Company's SEC filings, including but not limited to the Annual Report on
Form 10-K for the year ended December 31, 1999, and Quarterly Reports on
14
<PAGE> 15
Form 10-Q for the three-month periods ended March 31, 2000 and June 30, 2000.
The Company undertakes no obligation to update this forward-looking information.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates affecting the cost of its debt.
Foreign currency - The Company has direct operations in Europe, Japan, Canada,
Mexico, South Africa, Australia and New Zealand, which collect at future dates
in the customers' local currencies and purchase finished goods in U.S. dollars.
Accordingly, the Company is exposed to transaction gains and losses that could
result from changes in foreign currency exchange rates.
As more fully described in Note 5 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 uses
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 September 30, 2000.
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 September 30, 2000:
<TABLE>
<CAPTION>
September 30, 2000
------------------------------------------------
U.S. Dollar Fair
Equivalent Maturity Value
------------- ----------- -------------
<S> <C> <C> <C>
Forward Contracts:
------------------
British pounds $ 2,918,645 Dec. 2000 $ 3,219,347
Mexican pesos 211,808 Dec. 2000 188,519
Mexican pesos 158,856 Mar. 2001 146,406
Mexican pesos 158,856 Jun. 2001 143,472
South African rand 552,868 Dec. 2000 566,934
Canadian dollars 1,479,412 Dec. 2000 1,507,286
Canadian dollars 1,529,967 Mar. 2001 1,570,502
Canadian dollars 798,244 Jun. 2001 821,187
Canadian dollars 1,263,886 Jun. 2001 1,293,045
Canadian dollars 2,993,414 Sep. 2001 3,068,531
Canadian dollars 2,195,171 Dec. 2001 2,254,098
Japanese yen 2,627,197 Dec. 2000 2,635,731
Japanese yen 1,850,139 Mar. 2001 1,910,220
Japanese yen 925,069 Jun. 2001 971,534
Japanese yen 1,850,139 Sep. 2001 1,945,147
Japanese yen 3,237,743 Dec. 2001 3,457,473
French francs 1,525,629 Oct. 2000 1,800,000
French francs 1,440,872 Nov. 2000 1,700,000
French francs 1,271,358 Dec. 2000 1,500,000
Australian dollars 3,093,960 Dec. 2000 3,745,470
------------- -------------
$ 32,083,233 $ 34,444,902
============= =============
</TABLE>
15
<PAGE> 16
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 September 30, 2000, 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.
Interest Rates - The Company's line of credit, with a balance of $9.9 million
outstanding at September 30, 2000, bears interest at either the bank's prime
lending rate or LIBOR plus 0.75%. Based on the weighted average interest rate of
8.01% on the line of credit during the nine months ended September 30, 2000, 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 real estate term loan, with a balance of $18.2 million
outstanding at September 30, 2000, 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 this long-term debt.
16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
THE CALIFORNIA SECURITIES ACTIONS
The Company and certain of its officers and directors have been named as
defendants in three putative class action lawsuits (the "California Securities
Actions") filed in December 1996 in the California Superior Court for the County
of Orange (the "Superior Court"). The cases are captioned:
Yosef S. Rosenshein v. Oakley, Inc., Mike Parnell, Link Newcomb and Jim Jannard,
Case No. 773051 (filed December 17, 1996);
Herschel Harman v. Oakley, Inc., Mike Parnell, Link Newcomb and Jim Jannard,
Case No. 773053 (filed December 17, 1996); and
Eric Sher, Harold Baron and David O. Eckert v. Oakley, Inc., Mike Parnell, Link
Newcomb, Jim Jannard, Merrill Lynch & Co. and Alex. Brown & Sons, Inc., Case No.
773366 (filed December 24, 1996).
By order dated January 30, 1997, the Superior Court ordered that the California
Securities Actions be assigned to the Superior Court's Complex Litigation Panel,
where they have since been consolidated. On April 18, 1997, the plaintiffs filed
a consolidated amended complaint in the California Securities Actions. The
plaintiffs seek to represent a class of persons who purchased the Company's
common stock between March 22, 1996 and December 5, 1996.
The complaint in the California Securities Actions alleges claims for violations
of the antifraud provisions of the California Corporations Code, unfair business
practices and false advertising in violation of certain provisions of the
California Business and Professions Code, fraud and negligent misrepresentation.
The plaintiffs' claims are based on alleged material misstatements and omissions
in certain of the Company's public statements, Securities and Exchange
Commission filings and in the reports of third-party analysts regarding the
Company's retail distribution practices, market conditions, new product
developments and extensions of existing product lines, business with Sunglass
Hut and earnings prospects. The plaintiffs seek unspecified damages and other
relief against the Company and the other defendants.
The plaintiffs in the California Securities Actions have also asserted claims
against Merrill Lynch & Co. ("Merrill Lynch") and Alex. Brown and Sons, Inc.
("Alex. Brown"), which served as the U.S. Representatives of the U.S.
Underwriters for 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).
On July 7, 1999, the parties submitted to the Superior Court a stipulated
request for dismissal without prejudice of the California Securities Actions. On
July 26, 1999, the Superior Court entered a dismissal without prejudice of the
California Securities Actions.
17
<PAGE> 18
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
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
18
<PAGE> 19
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.
In July 2000, an agreement in principle was reached to settle the Federal
Securities Action. A written stipulation of settlement was signed by the parties
and preliminarily approved by the District Court on October 27, 2000. The
proposed settlement, which is subject to final approval by the District Court,
will be funded entirely by the Company's insurance carrier and will completely
resolve the Federal Securities Actions. In the event the proposed settlement
does not become effective, 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 a party to various claims, complaints and other
legal actions that have arisen in the normal course of business from time to
time. The Company believes the outcome of these pending legal proceedings, in
the aggregate, will not have a material adverse effect on the operations or
financial position of the Company.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security-Holders
None
ITEM 5. Other Information
None
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
3.1(1) Articles of Incorporation of the Company
3.2(3) Amended and Restated Bylaws of the Company
3.3(2) Amendment No. 1 to the Articles of Incorporation as filed
with the Secretary of State of the State of Washington on
September 26, 1996
3.4(3) Amendment No. 1 to Sections 1 and Sections 3a through 3f of
Article IV of the Amended and (3) Restated Bylaws of Oakley, Inc.
10.42(4) Employment Agreement, dated October 1, 2000, between Tomas
Rios and Oakley, Inc.
27.1(4) Financial Data Schedule
(1) Previously filed with the Registration Statement on Form S-1 of Oakley,
Inc. (Registration No. 33-93080)
(2) Previously filed with the Form 10-K of Oakley, Inc. for the year ended
December 31, 1996.
(3) Previously filed with the Form 10-K of Oakley, Inc. for the year ended
December 31, 1998.
(4) Filed herewith.
The Company did not file any reports on Form 8-K during the three months ended
September 30, 2000.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Oakley, Inc.
/s/ Jim Jannard November 10, 2000
---------------------------
Jim Jannard
Chief Executive Officer
/s/ Thomas George November 10, 2000
------------------
Thomas George
Chief Financial Officer
21
<PAGE> 22
EXHIBIT INDEX
The following exhibits are included herein:
3.1(1) Articles of Incorporation of the Company
3.2(3) Amended and Restated Bylaws of the Company
3.3(2) Amendment No. 1 to the Articles of Incorporation as filed
with the Secretary of State of the State of Washington on
September 26, 1996
3.4(3) Amendment No. 1 to Sections 1 and Sections 3a through 3f of
Article IV of the Amended and (3) Restated Bylaws of Oakley, Inc.
10.42(4) Employment Agreement, dated October 1, 2000, between Tomas
Rios and Oakley, Inc.
27.1(4) Financial Data Schedule
(1) Previously filed with the Registration Statement on Form S-1 of Oakley,
Inc. (Registration No. 33-93080)
(2) Previously filed with the Form 10-K of Oakley, Inc. for the year ended
December 31, 1996.
(3) Previously filed with the Form 10-K of Oakley, Inc. for the year ended
December 31, 1998.
(4) Filed herewith.
The Company did not file any reports on Form 8-K during the three months ended
September 30, 2000.
