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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 March 31, 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
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(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
One Icon
Foothill Ranch, California 92610
-------------------------- -----
(Address of principal (Zip Code)
executive offices)
(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 68,491,877 shares
- -------------------------------------- -----------------
(Class) (Outstanding on May 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 March 31, 2000
and December 31, 1999..................................................... 3
Consolidated Statements of Income for the three-month
periods ended March 31, 2000 and 1999..................................... 4
Consolidated Statements of Comprehensive Income for the
three-month periods ended March 31, 2000 and 1999......................... 4
Consolidated Statements of Cash Flows for the three-month periods
ended March 31, 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.................................................. 9-12
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk.......... 13-15
PART II. OTHER INFORMATION
ITEM 1 - Legal Proceedings................................................... 16-18
ITEM 2 - Changes in Securities and Use of Proceeds........................... 18
ITEM 3 - Defaults Upon Senior Securities..................................... 18
ITEM 4 - Submission of Matters to a Vote of Security Holders................. 18
ITEM 5 - Other Information................................................... 18
ITEM 6 - Exhibits and Reports on Form 8-K.................................... 19
Signatures................................................................... 20
Exhibits..................................................................... 21
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
ASSETS
March 31, 2000 December 31, 1999
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,911 $ 5,499
Accounts receivable, less allowance for doubtful accounts
of $985 (2000) and $598 (1999) 37,944 39,113
Inventories, net (Note 2) 40,847 35,061
Other receivables 1,473 1,776
Deferred income taxes 11,709 11,698
Prepaid expenses and other 8,086 5,561
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Total current assets 105,970 98,708
Property and equipment, net 114,294 113,695
Deposits 2,209 2,281
Other assets 22,382 24,666
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TOTAL ASSETS $ 244,855 $ 239,350
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit (Note 3) $ 9,400 $ 5,000
Accounts payable 16,030 16,592
Accrued expenses and other current liabilities 9,917 10,485
Accrued warranty 4,504 4,483
Income taxes payable 3,072 1,382
Current portion of long-term debt (Note 3) 1,519 1,519
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Total current liabilities 44,442 39,461
Deferred income taxes 3,401 3,511
Long-term debt, net of current portion 18,223 18,541
COMMITMENTS AND CONTINGENCIES
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; 69,468,000 (2000) and
70,037,000 (1999) issued and outstanding 695 700
Additional paid-in capital 47,004 51,851
Retained earnings 131,697 126,225
Accumulated other comprehensive income (607) (939)
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Total shareholders' equity 178,789 177,837
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TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 244,855 $ 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
March 31,
---------
2000 1999
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<S> <C> <C>
Net sales $ 63,086 $ 48,726
Cost of goods sold 24,011 20,053
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Gross profit 39,075 28,673
Operating expenses:
Research and development 1,641 1,454
Selling 18,036 15,674
Shipping and warehousing 1,631 1,244
General and administrative 8,791 7,536
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Total operating expenses 30,099 25,908
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Operating income 8,976 2,765
Interest expense, net 558 597
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Income before provision for income taxes 8,418 2,168
Provision for income taxes 2,946 759
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Net income $ 5,472 $ 1,409
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Basic net income per common share $ 0.08 $ 0.02
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Basic weighted average common shares 69,901,000 70,678,000
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Diluted net income per common share $ 0.08 $ 0.02
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Diluted weighted average common shares 69,930,000 70,678,000
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</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
2000 1999
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<S> <C> <C>
Net income $ 5,472 $ 1,409
Other comprehensive (loss) income:
Transition adjustment related to the adoption
of SFAS 133 - (103)
Net unrealized gain on derivative instruments 1,120 754
Foreign currency translation adjustment (788) (798)
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Other comprehensive (loss) income, net of tax 332 (147)
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Comprehensive income $ 5,804 $ 1,262
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</TABLE>
See accompanying Notes to Consolidated Financial Statements
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OAKLEY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,472 $ 1,409
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 4,890 4,533
Compensatory stock options 48 55
Gain on disposition of equipment 1 10
Deferred income taxes (122) 14
Changes in assets and liabilities, net of effects of business acquisitions:
Accounts receivable 450 (2,026)
Inventories (6,231) 3,403
Other receivables 301 240
Prepaid expenses and other (1,424) 260
Accounts payable (398) (228)
Accrued expenses, other current liabilities and accrued warranty (282) (1,022)
Income taxes payable 2,004 341
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Net cash provided by operating activities 4,709 6,989
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits 72 (1,277)
Acquisitions of property and equipment (5,113) (3,407)
Proceeds from sale of property and equipment 5 113
Other assets 759 83
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Net cash used in investing activities (4,277) (4,488)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings 25,000 12,600
Repayments of bank borrowings (20,869) (14,780)
Repurchase of common shares (4,900) -
-------- --------
Net cash used in financing activities (769) (2,180)
Effect of exchange rate changes on cash 749 310
Net increase in cash and cash equivalents 412 631
Cash and cash equivalents, beginning of period 5,499 4,553
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Cash and cash equivalents, end of period $ 5,911 $ 5,184
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</TABLE>
See accompanying Notes to Consolidated Financial Statements
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OAKLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements of Oakley, Inc. and its
wholly-owned subsidiaries (the "Company") have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles ("GAAP") for complete financial
statements.
In the opinion of management, the consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair statement of the consolidated balance sheets as of March
31, 2000 and December 31, 1999, the consolidated statements of income,
comprehensive income and cash flows for the three-month periods ended March 31,
2000 and 1999. The results of operations for the three-month period ended March
31, 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>
March 31, 2000 December 31, 1999
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<S> <C> <C>
Raw Materials $17,955,000 $14,801,000
Finished Goods 22,892,000 20,260,000
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$40,847,000 $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 (9.00% at March 31, 2000) or LIBOR plus 0.75% (6.88% at March 31, 2000). At
March 31, 2000, the Company had $9.4 million outstanding under the credit
agreement. At March 31, 2000, 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 $19.0 million at March 31, 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% (7.11% at March 31, 2000).
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 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
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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 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 transition adjustment recorded by the Company as a cumulative-effect type
adjustment of a $103,000 charge to accumulated other comprehensive income to
recognize the fair value of all derivatives that are designated as cash-flow
hedges.
The Company is exposed to gains and losses resulting from fluctuations in
foreign currency exchange rates relating to transactions of its international
subsidiaries as well as fluctuations in its variable rate debt. As part of its
overall strategy to manage the level of exposure to the risk of fluctuations in
foreign currency exchange rates, the Company uses foreign exchange contracts in
the form of forward contracts and option contracts. In addition, as part of its
overall strategy to manage the level of exposure to the risk of fluctuations in
interest rates, the Company has entered into an interest rate swap agreement. At
March 31, 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 March 31, 2000 remain
constant, are expected to result in reclassifications of $1.3 million of gains
to earnings over the next nine 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 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 three months ended
March 31, 2000, the Company reclassified into earnings a net loss of $461,000
resulting from the expiration, sale, termination or exercise of foreign currency
exchange contracts.
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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
was comprised of the following components:
(in thousands)
---------------
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
=======
The Company expects to complete the restructuring of its footwear operations by
October 2000. For the three months ended March 31, 2000, the Company utilized
$3.6 million of its restructuring reserves primarily for the disposal of certain
excess inventories. Restructuring reserves as of March 31, 2000 were $2.9
million, which the Company anticipates will be utilized upon ultimate disposal
of the inventory during the restructure period.
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 and the dilutive effect of potential common shares outstanding. For
the three months ended March 31, 2000, the diluted weighted average common
shares outstanding included 29,000 dilutive stock options while at March 31,
1999, the diluted weighted average common shares 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
subsidiaries for each of the periods discussed.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
- ------------------------------------------
Net sales
Net sales increased to $63.1 million for the three months ended March 31, 2000
from $48.7 million for the three months ended March 31, 1999, an increase of
$14.4 million, or 29.5%. The increase in net sales was primarily attributable to
a 24.5%, or $10.5 million, increase in gross sunglass sales. Gross sunglass
sales were $52.6 million for the first quarter of 2000 compared to $42.1 million
for the first quarter of 1999. For the quarter ended March 31, 2000, the Company
experienced an 18.8% increase in sunglass unit volume and a 5.2% increase in
average selling prices. The increase in gross sunglass sales was driven by
strong sales of the Company's Jackets line, including the Minutes and the new
Straight Jacket introduced in November 1999, and the X Metal line, including the
Romeo, as well as newer models, Juliet, introduced in February 1999 and the XX,
introduced in December 1999. Sales of the Company's polarized styles for the
three months ended March 31, 2000 also contributed to the increase in gross
sunglass sales with a 66.4%, or $0.8 million, increase over the three months
ended March 31, 1999. The Company's prescription eyewear gross sales increased
184%, or $1.3 million, to $2.0 million for the three months ended March 31, 2000
from $0.7 million for comparable 1999 period. As a group, gross sales of
goggles, apparel, footwear, watches and sunglass accessories increased 19.6%, or
$2.1 million, during the quarter ended March 31, 2000 over the quarter ended
March 31, 1999, primarily due to increased goggle sales, including sales from
the Company's new motocross goggle introduced during this first quarter of 2000.
During the quarter ended March 31, 2000, the Company's U.S. net sales increased
17.9%, or $5.1 million, to $33.6 million from $28.5 million in the comparable
1999 period, principally as a result of a 44.5% increase in net sales to the
Company's broad specialty store account base. Sales to the Company's largest
U.S. customer, Sunglass Hut, decreased 19.8% to $9.5 million for the three
months ended March 31, 2000 from $11.8 million for the three months ended March
31, 1999. The Company's international sales increased 45.9% to $29.5 million
during the first quarter of 2000 from $20.2 million in 1999, principally as a
result of increased sales in all direct operations, including significant
increases in continental Europe, United Kingdom, Australia, Japan and South
Africa. On November 1, 1999, the Company acquired its Australian distributor,
which contributed to the increase in direct international sales during the
quarter ended March 31, 2000. Sales from the Company's direct international
offices represented 83.4% of total international sales for the quarter ended
March 31, 2000, compared to 77.1% for the comparable 1999 quarter. On a constant
dollar basis, international sales increased 51.4% from the quarter ended March
31, 2000 when compared to the quarter ended March 31, 1999.
Gross profit
Gross profit increased to $39.1 million for the three months ended March 31,
2000 from $28.7 million for the three months ended March 31, 1999, an increase
of $10.4 million, or 36.3%. As a percentage of net sales, gross profit increased
to 61.9% for the three months ended March 31, 2000 from 58.8% for the three
months ended March 31, 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 and
thereby generating positive leverage, reduced sales returns and discounts,
improved footwear operations and the Company's acquisition of its Australian
distributor in November 1999.
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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
was comprised of the following components:
(in thousands)
---------------
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
=======
The Company expects to complete the restructuring of its footwear operations by
October 2000. For the three months ended March 31, 2000, the Company utilized
$3.6 million of its restructuring reserves primarily for the disposal of certain
excess inventories. Restructuring reserves as of March 31, 2000 were $2.9
million, which the Company anticipates will be utilized upon ultimate disposal
of the inventory during the restructure period.
Operating expenses
Operating expenses increased to $30.1 million for the three months ended March
31, 2000 from $25.9 million for the three months ended March 31, 1999, an
increase of $4.2 million, or 16.2%. Operating expenses, as a percentage of net
sales declined to 47.7% for the quarter ended March 31, 2000 from 53.2% for the
quarter ended March 31, 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
effective November 1999. As a percentage of net sales, research and development
expenses decreased to 2.6% of net sales for the three months ended March 31,
2000 compared to 3.1% of net sales for the three months ended March 31, 1999.
Selling expenses increased $2.3 million to $18.0 million, or 28.6 % of net
sales, for the three months ended March 31, 2000 from $15.7 million, or 32.2% of
net sales, for the three months ended March 31, 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 the strategic decision to increase print
advertising for the Oakley brand. This increase resulted from the use of an
outside agency for media planning with a collaboration between the agency and
the Company's in-house creative team for advertising content. As a percentage of
net sales, shipping and warehousing expenses remained at 2.6% of net sales for
the three months ended March 31, 2000 as in the comparable 1999 period. General
and administrative expenses for the three months ended March 31, 2000 were $8.8
million, or 13.9% of net sales, compared to $7.5 million, or 15.4% 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 general and
administrative expenses related to the Company's acquisition of its Australian
distributor which did not occur until November 1999.
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Operating income
The Company's operating income increased to $9.0 million for the three months
ended March 31, 2000 from $2.8 million for the three months ended March 31,
1999, an increase of $6.2 million, or 224.7%, over the same period in the
previous year. As a percentage of net sales, operating income increased to 14.2%
for the three months ended March 31, 2000 from 5.7% for the three months ended
March 31, 1999 primarily as a result of the improved gross margin and positive
operating expense leverage on higher sales volume.
Interest expense, net
The Company incurred interest expense of $0.6 million for the three months ended
March 31, 2000 and 1999.
Net income
The Company's net income increased to $5.5 million for the three months ended
March 31, 2000 from $1.4 million for the three months ended March 31, 1999, an
increase of $4.1 million, or 288.4%, over the comparable 1999 quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations almost entirely with cash
flow generated from operations and borrowings from its credit facilities. Cash
provided by operating activities totaled $4.7 million for the three months ended
March 31, 2000 and $7.0 million for the comparable 1999 period. At March 31,
2000, working capital was $61.5 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 at
March 31, 2000 were $37.9 million compared to $39.1 million at December 31, 1999
and $35.3 million at March 31, 1999. Accounts receivable days outstanding at
March 31, 2000 were 54 compared to 65 at March 31, 1999. Inventories increased
to $40.8 million at March 31, 2000 from $35.1 million at December 31, 1999 and
$31.6 million at March 31, 1999. The 29.2% year over year increase in
inventories was driven by the 29.5% increase in net sales as well as the
Company's decision to systematically increase its inventories in order to
improve order fulfillment rates. As a result of the improved gross margin,
inventory turns decreased only slightly to 2.4 at March 31, 2000 versus 2.5 at
March 31, 1999.
The Company has an unsecured line of credit of $50.0 million which expires
August 2001. At March 31, 2000, the Company had an outstanding balance of $9.4
million under such facility. 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 base on LIBOR plus 1.00% (7.11% at March
31, 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 March 31, 2000, the outstanding balance on the term loan
was $19.0 million.
Capital expenditures for the three months ended March 31, 2000 totaled $5.1
million. These expenditures were primarily attributable to building improvements
and new product production tooling and equipment, product displays and expansion
of the Company's information technology capabilities. As of March 31, 2000, the
Company had commitments of approximately $2.2 million for future capital
purchases.
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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 1,397,000 shares of common stock
from the three million share authorization between October 1996 and December
1999. During the three months ended March 31, 2000, the Company purchased an
additional 569,000 shares of its common stock under such program at an aggregate
cost of approximately $4.9 million. In April 2000, the Company repurchased an
additional 987,000 shares of its common stock at an aggregate cost of
approximately $10.1 million. As of May 10, 2000, total common stock repurchased
was 2,953,000 shares at an aggregate cost of approximately $28.7 million.
The Company expects temporary increases in inventories and accounts receivables
due to seasonal windows for the Company's year 2000 goggle, apparel and footwear
businesses. This activity, in addition to share repurchases in the second
quarter of 2000, will result in temporary increases in short-term borrowings for
the quarter ending June 30, 2000.
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
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 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 domestic orders (other than
preseason orders for ski goggles, apparel and footwear and orders from certain
sunglass specialty chains) within one day of receipt and international orders
within one week of receipt. At March 31, 2000, the Company had a backlog of
$22.3 million, including backorders (merchandise remaining unshipped beyond its
scheduled shipping date) of $4.3 million compared to a backlog of $6.0 million,
including backorders of $2.9 million at March 31, 1999. Approximately 27% of the
backlog at March 31, 2000 is attributable to sunglass and prescription eyewear
orders with the remaining backlog attributable to the Company's other product
categories.
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.
12
<PAGE> 13
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 Company's dependence on eyewear sales to Sunglass Hut;
unanticipated cancellations of advance orders; 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. 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 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 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 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 March 31, 2000.
13
<PAGE> 14
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 March 31, 2000:
<TABLE>
<CAPTION>
March 31, 2000
-------------------------------------------------------
U.S. Dollar Fair
Equivalent Maturity Value
------------------ -------------- -----------------
<S> <C> <C> <C>
Forward Contracts:
- ------------------
British pounds $ 2,117,229 Jun. 2000 $ 2,165,001
British pounds 3,966,413 Sep. 2000 4,052,180
British pounds 3,154,304 Dec. 2000 3,219,347
Canadian dollars 1,815,552 Jun. 2000 1,783,491
Canadian dollars 2,559,405 Sep. 2000 2,516,763
Canadian dollars 1,531,786 Dec. 2000 1,507,286
Japanese yen 829,187 Jun. 2000 766,940
Japanese yen 1,014,535 Sep. 2000 951,510
Japanese yen 2,770,461 Dec. 2000 2,635,731
French francs 736,153 Apr. 2000 800,000
French francs 828,172 May 2000 900,000
French francs 1,378,097 Jun. 2000 1,500,000
French francs 1,286,223 Jul. 2000 1,400,000
French francs 1,469,970 Aug. 2000 1,600,000
French francs 1,837,462 Sep. 2000 2,000,000
French francs 1,653,716 Oct. 2000 1,800,000
French francs 1,561,843 Nov. 2000 1,700,000
French francs 1,378,097 Dec. 2000 1,500,000
Australian dollars 2,188,080 May 2000 2,416,680
Australian dollars 243,120 Jun. 2000 262,920
Australian dollars 1,033,260 Sep. 2000 1,117,410
Australian dollars 3,464,460 Dec. 2000 3,745,470
------------ ------------
$ 38,817,525 $ 40,340,729
============ ============
</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 March 31, 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.
14
<PAGE> 15
Interest Rates - The Company's line of credit, with a balance of $9.4 million
outstanding at March 31, 2000, bears interest at either the bank's prime lending
rate or LIBOR plus 0.75%. Based on the weighted average interest rate of 8.88%
on the line of credit during the three months ended March 31, 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 $6,000 per year.
The Company's long-term real estate term loan, with a balance of $19.0 million
outstanding at March 31, 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.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
THE CALIFORNIA SECURITIES ACTIONS
The Company and certain of its officers and directors have been named as
defendants in three putative class action lawsuits (the "California Securities
Actions") filed in December 1996 in the California Superior Court for the County
of Orange (the "Superior Court"). The cases are captioned:
Yosef S. Rosenshein v. Oakley, Inc., Mike Parnell, Link Newcomb and Jim Jannard,
Case No. 773051 (filed December 17, 1996);
Herschel Harman v. Oakley, Inc., Mike Parnell, Link Newcomb and Jim Jannard,
Case No. 773053 (filed December 17, 1996); and
Eric Sher, Harold Baron and David O. Eckert v. Oakley, Inc., Mike Parnell, Link
Newcomb, Jim Jannard, Merrill Lynch & Co. and Alex. Brown & Sons, Inc., Case No.
773366 (filed December 24, 1996).
By order dated January 30, 1997, the Superior Court ordered that the California
Securities Actions be assigned to the Superior Court's Complex Litigation Panel,
where they have since been consolidated. On April 18, 1997, the plaintiffs filed
a consolidated amended complaint in the California Securities Actions. The
plaintiffs seek to represent a class of persons who purchased the Company's
common stock between March 22, 1996 and December 5, 1996.
The complaint in the California Securities Actions alleges claims for violations
of the antifraud provisions of the California Corporations Code, unfair business
practices and false advertising in violation of certain provisions of the
California Business and Professions Code, fraud and negligent misrepresentation.
The plaintiffs' claims are based on alleged material misstatements and omissions
in certain of the Company's public statements, Securities and Exchange
Commission filings and in the reports of third-party analysts regarding the
Company's retail distribution practices, market conditions, new product
developments and extensions of existing product lines, business with Sunglass
Hut and earnings prospects. The plaintiffs seek unspecified damages and other
relief against the Company and the other defendants.
The plaintiffs in the California Securities Actions have also asserted claims
against Merrill Lynch & Co. ( "Merrill Lynch") and Alex. Brown and Sons, Inc.
("Alex. Brown"), which served as the U.S. Representatives of the U.S.
Underwriters of the June 6, 1996 offering of five million shares of common stock
of the Company by certain of its shareholders (the "Secondary Offering"). By
letter dated February 7, 1997, counsel for Merrill Lynch and Alex. Brown gave
the Company notice pursuant to the indemnification provisions of the U.S.
Purchase Agreement dated June 6, 1996, for the Secondary Offering that they were
asserting a claim for indemnification under such provisions and requested that
the Company reimburse Merrill Lynch and Alex. Brown on a current basis for their
attorneys' fees and expenses incurred in defending the California Securities
Actions. Counsel for Merrill Lynch and Alex. Brown subsequently indicated that
this claim for indemnification also applies to attorneys' fees and expenses
incurred in defending the Federal Securities Actions (described below). 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.
16
<PAGE> 17
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 New-comb, 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.
17
<PAGE> 18
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.
In addition, the Company is a party to various claims, complaints and other
legal actions that have arisen in the normal course of business from time to
time. The Company believes the outcome of these pending legal proceedings, in
the aggregate, will not have a material adverse effect on the operations or
financial position of the Company.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security-Holders
None
ITEM 5. Other Information
None
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
3.1 (1) Articles of Incorporation of the Company
3.2 (3) Amended and Restated Bylaws of the Company
3.3 (2) Amendment No. 1 to the Articles of Incorporation as filed with
the Secretary of State of the State of Washington on
September 26, 1996
3.4 (3) Amendment No. 1 to Section 1 and Sections 3a through 3f of
Article IV of the Amended and Restated Bylaws of Oakley, Inc.
10.40 (4) Consultant Agreement dated February 14, 2000 between Mike
Parnell and Oakley, Inc.
10.41 (4) First Amendment dated March 6, 2000 to Second Amended and
Restated Credit Agreement Dated as of August 25, 1998 between
Oakley, Inc. and Bank of America National Trust and Savings
Association
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
March 31, 2000.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Oakley, Inc.
/s/ JIM JANNARD May 12, 2000
- -----------------------
Jim Jannard
Chief Executive Officer
/s/ THOMAS GEORGE May 12, 2000
- -----------------------
Thomas George
Chief Financial Officer
20
<PAGE> 21
EXHIBIT INDEX
-------------
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 Section 1 and Sections 3a through 3f of
Article IV of the Amended and Restated Bylaws of Oakley, Inc.
10.40 (4) Consultant Agreement dated February 14, 2000 between Mike
Parnell and Oakley, Inc.
10.41 (4) First Amendment dated March 6, 2000 to Second Amended and
Restated Credit Agreement Dated as of August 25, 1998 between
Oakley, Inc. and Bank of America National Trust and Savings
Association
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.
<PAGE> 1
EXHIBIT 10.40
CONSULTANT AGREEMENT
This Consultant Agreement is entered into by and between Oakley, Inc.,
a Washington corporation whose principal place of business is located at One
Icon, Foothill Ranch, CA ("Oakley") and Mike D. Parnell, whose address is 96
Main Street, Eastsound, WA 98245 ("Parnell"/"Consultant") effective this 14th
day of February, 2000.
WHEREAS, Parnell owns Oakley stock of substantial value and has been
employed by Oakley since 1985 in many capacities such as Chief Executive
Officer, Vice-President, Vice-Chairman of the Board and Consultant;
WHEREAS, the parties previously entered into an Amended and Restated
Consultant Agreement dated May 12, 1998 ("the 1998 Agreement");
WHEREAS, Parnell has terminated his employment with Oakley; and
WHEREAS, pursuant to paragraph 2 of the 1998 Agreement, Oakley and
Parnell desire that Parnell continue to provide consulting services to Oakley.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter
set forth, Parnell and Oakley have agreed and do hereby agree as follows:
1. CONSULTING SERVICES. Parnell agrees to provide consulting
services to Oakley within the scope of Parnell's training, expertise and
experience, including but not limited to, marketing and sales strategies.
Consultant will provide such consulting services by telephone, when possible, at
the offices of Oakley when necessary, or at other locations as needed for a
maximum of ten (10) hours per month, and shall report directly to Jim Jannard,
Chairman of the Board. Parnell shall not be required to follow a regular or
daily work schedule and Oakley will not have any control over the manner in
which Parnell provides his services to Oakley.
2. TERM. This Consultant Agreement shall be in effect for a
period of two (2) years from the date of its execution.
<PAGE> 2
3. COMPENSATION. In return for the consulting services as
provided for herein, Parnell or the M&M Parnell Revocable Trust dated 8/27/90
shall be paid $100,000. The $100,000 compensation will be paid during the first
year of this Consultant Agreement in twelve (12) equal monthly installments
beginning on the month after the execution of this Consultant Agreement.
4. ADDITIONAL COMPENSATION.
(a) As and for further compensation, Parnell shall be
entitled to the continued use of the Oakley Washington offices located in East
Sound, Washington, which shall include the services of Lyn Goula and Lisa Gage.
(b) As and for further compensation, Parnell shall have the
right to unlimited use to the TBM aircraft currently being leased by Oakley for
Parnell's use. Oakley shall continue to pay for the lease and for all
maintenance of the aircraft as provided for in the Lease Agreement between
Oakley and Parnell. The right to use the aircraft will continue until it is sold
or until the end of the year 2000, which ever first occurs.
(c) Oakley agrees to reimburse Parnell for all travel and
other reasonable expenses incurred by Parnell in the rendering of his services
under this Agreement. It is agreed, however, that until the TBM aircraft is
sold, the TBM aircraft shall be used for Parnell's travel when appropriate.
5. STOCK OPTIONS
Oakley and Parnell acknowledge that Parnell has received Stock Options
during his previous employment with Oakley (hereinafter referred to as "Parnell
Stock Options"). Any such Parnell Stock Option(s) that have not already vested
shall continue to vest during the term of this Consultant Agreement and any
extensions thereof as provided in the respective agreements for the Parnell
Stock Options as if Parnell had remained an employee of Oakley for such period.
Further, the terms of the Parnell Stock Options provide that they must be
exercised, if vested, within three months of the termination of Parnell's
employment with Oakley. Oakley and Parnell agree that this Consultant Agreement
extends the exercise date of the vested Parnell Stock Options to three months
following the termination of this Consultant Agreement or any extension thereof.
Oakley agrees to submit this Agreement to its Board of Directors for
<PAGE> 3
ratification of the change in terms for the Parnell Stock Options.
6. CONFIDENTIAL INFORMATION AND NON-COMPETITION.
(a) Confidentiality. Parnell acknowledges that in his
employment as a consultant hereunder, and during prior periods of employment
with Oakley, he has occupied and will continue to occupy a position of trust and
confidence. Parnell shall not, except as may be required 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 Parnell's unauthorized
disclosure, disclose to others or use, whether directly or indirectly, any
Confidential Information regarding Oakley. "Confidential Information" shall mean
information about Oakley, its subsidiaries and affiliates, and their respective
clients and customers that is not disclosed by Oakley for financial reporting
purposes and that was learned by Parnell in the course of his employment or
consultation with Oakley, 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. Parnell acknowledges that
such Confidential Information is specialized, unique in nature and of great
value to Oakley, and that such information gives Oakley a competitive advantage.
Oakley agrees to (i) deliver or return to Oakley, at Oakley's request at any
time or upon termination or expiration of this Agreement 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 Oakley or prepared by Parnell during the term of his employment and
consultation with Oakley and (B) all notebooks and other data relating to
research or experiments or other work conducted by Parnell in the scope of
employment or consultation or any inventions made, created, authored, conceived,
or reduced to practice by Parnell, either alone or jointly with others, and (ii)
make full disclosure relating to any inventions.
If Parnell would like to keep certain property, such as material
relating to professional societies or other non-confidential material, upon the
termination of employment with Oakley, he agrees to discuss such issues with
Oakley. Where such a request does not put Confidential Information of Oakley at
risk, Oakley will grant the request. In this regard, Oakley hereby grants
Parnell the right to keep his personal copy of the
<PAGE> 4
black "bound books", which chronicle the financial history of Oakley.
(b) Non-Competition. During the term of this Agreement,
Parnell shall not directly or indirectly, without the prior written consent of
Oakley, provide consultant 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 Oakley, including any entity engaged in the
design, manufacture and/or distribution of eyewear, footwear, watches or
clothing or such other commercial products that Oakley shall design, manufacture
and/or distribute during the term of his Consultant Agreement (each such
competitor a "Competitor of Oakley"); provided, however, that the "beneficial
ownership" by Parnell, 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. It is further
expressly agreed that Oakley will or would suffer irreparable injury if Parnell
were to compete with Oakley or any subsidiary or affiliate of Oakley in
violation of this Agreement and that Oakley would by reason of such competition
be entitled to injunctive relief in a court of appropriate jurisdiction, and
Parnell further consents and stipulates to the entry of such injunctive relief
in such a court prohibiting Parnell from competing with Oakley or any subsidiary
or affiliate of Oakley in violation of this Agreement. Parnell and Oakley
acknowledge and agree that the business of Oakley is global in nature, and that
the terms of the non-competitive agreement set forth herein shall apply on a
worldwide basis. This Agreement does not prohibit Consultant, however, from
obtaining either full or part-time employment outside the scope of this contract
and specifically does not prohibit Parnell from engaging in his activities
relating to the Nephrogenic Diabetes Insipidus Foundation.
(c) Non-Solicitation of Customers and Suppliers. During
the term of this Consultant Agreement and any extensions hereof, Parnell shall
not, directly or indirectly, influence or attempt to influence customers or
suppliers of Oakley or any of its subsidiaries or affiliates, to divert their
business to any Competitor of Oakley.
<PAGE> 5
(d) Non-Solicitation of Employees. Parnell recognizes that
he possesses and will possess confidential information about employees of Oakley
relating to their education, experience, skills, abilities, compensation and
benefits, and inter-personal relationships with customers of Oakley. Parnell
recognizes that the information he possesses and will possess about these other
employees is not generally known, is of substantial value to Oakley in
developing its business and in securing and retaining customers, and has been
and will be acquired by him because of his business position with Oakley.
Parnell agrees that, during the term of this Consultant Agreement and any
extensions hereof he will not, directly or indirectly, solicit or recruit any
employee of Oakley for the purpose of being employed by him or by any Competitor
of Oakley on whose behalf he is acting as an agent, representative or employee
and that he will not convey any such confidential information or trade secrets
about other employees of Oakley to any other person.
(e) Survival of Provisions. The obligations contained in
this section shall survive the expiration of the Consultant Agreement hereunder
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 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.
7. FRINGE BENEFITS. As provided in the parties' previous
Employment Agreement, from and after the date of Parnell's termination of
employment with Oakley (including the term of the Consultant Agreement), Parnell
shall be entitled during his lifetime, to full company paid medical and health
insurance for himself and his immediate family at a level no less favorable than
that in effect for the benefit of Oakley's senior executive officers.
8. PRODUCTS. From and after the date of Parnell's termination of
employment with Oakley (including the term of the Consultant Agreement), Parnell
shall be entitled, during his lifetime, to purchase from Oakley, at employee
prices, any and all Oakley products in an annual amount of $25,000.00.
9. 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
<PAGE> 6
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 Oakley: Oakley, Inc.
One Icon
Foothill Ranch, CA 92610
Attention: Secretary
Phone: (714) 951-0991
Fax: (714) 951-8326
If to Parnell: Mike D. Parnell
P.O. Box 1390
96 Main Street
Eastsound, WA 98245
Phone: (360) 376-6355
Either party may change such party's address for notices by notice duly given
pursuant hereto.
10. EFFECT UPON PRIOR AGREEMENTS. Prior agreements between
Parnell and Oakley remain in effect only to the extent that they are not
modified by the terms of this Consultant Agreement.
11. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its
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 Oakley with or to any other individual
or entity, this Agreement shall, subject to the provisions hereof, be binding
upon and inure to the benefit of such successor and such successor shall
discharge and perform all of the promises, covenants, duties and obligations of
Oakley hereunder.
12. 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. The parties further
agree that any dispute arising under the terms of this Agreement shall be
subject to the exclusive jurisdiction of the State or Federal Courts located in
Orange County, California and both parties agree to submit to the personal
jurisdiction of those courts and the parties waive their right to have any
dispute hereunder brought or tried elsewhere.
<PAGE> 7
13. 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.
14. 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.
15. INDEMNIFICATION. Oakley shall indemnify and hold Parnell
harmless for acts and omissions in his capacity as an officer, director,
employee or consultant of Oakley as provided in the separate written
indemnification agreement between Oakley and Parnell.
<PAGE> 8
IN WITNESS WHEREOF, Oakley has caused this Consultant Agreement to be
executed by its duly authorized officer and Parnell has hereunto signed this
Agreement as of the date first above written.
OAKLEY, INC. MIKE D. PARNELL
/s/ COLIN BADEN /s/ MIKE D. PARNELL
- ---------------- -------------------
BY: COLIN BADEN
ITS:PRESIDENT
<PAGE> 1
EXHIBIT 10.41
FIRST AMENDMENT
TO CREDIT AGREEMENT
This FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is dated as of March
6, 2000 and entered into by and among OAKLEY, INC., a Washington corporation
("Company"), the financial institutions listed on the signature pages hereof
(the "Lenders"), and BANK OF AMERICA, N.A. (formerly known as Bank of America
National Trust and Savings Association), as the agent for the Lenders (in such
capacity the "Agent") and is made with reference to that certain Second Amended
and Restated Credit Agreement dates as of August 25, 1998 (the "Credit
Agreement"), by and among Company, the lending institutions identified therein
and the Agent. Capitalized terms used herein without definition shall have the
same meanings herein as set forth in the Credit Agreement.
RECITAL
WHEREAS, Company and the Lenders desire to amend the Credit
Agreement as set forth below;
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:
1) AMENDMENT TO THE CREDIT AGREEMENT
1.1 Amendment to Subsection 3.1
Subsection 3.1(A)(ii) is hereby amended by deleting it in its
entirety and by replacing it with the following:
"(ii) any Standby Letter of Credit if, after giving
effect to such issuance, the Letter of Credit Usage with respect to
Standby Letters of Credit would exceed $5,000,000,"
2) COMPANY'S REPRESENTATIONS AND WARRANTIES
In order to induce the Lenders to enter into this Amendment,
to amend the Credit Agreement in the manner provided herein and to implement the
waiver provided herein, company represents and warrants to each lender that the
following statements are true, correct and complete:
(A) Corporate Power and Authority. Company has all
requisite corporate power and authority to enter into this Amendment and to
carry out the transactions contemplated by, and perform its obligations under,
the Credit Agreement as amended by this Amendment (the "Amended Agreement").
-1-
<PAGE> 2
(B) Authorization of Agreements. The execution and
delivery of this Amendment and the performance of the Amended Agreement have
been duly authorized by all necessary corporate action on the part of the
Company.
(C) Binding Obligation. This Amendment and the Amended
Agreement are the legal, valid and binding obligation of Company, enforceable
against it in accordance with their terms, and any instrument or agreement
required hereunder or by the Amended Agreement, when executed and delivered,
will be similarly valid, binding and enforceable.
(D) Incorporation of Representations and Warranties From
Credit Agreement. The representations and warranties contained in Section 5 of
the Credit Agreement are true, correct and complete in all material respects,
except to the extend such representations and warranties specifically relate to
an earlier date, in which case they were true, correct and complete in all
material respects on and as of such earlier date.
(E) Absence of Default. No event has occurred and is
continuing or will result from the consummation of this Amendment that would
constitute an Event of Default or a Default.
3. MISCELLANEOUS
(A) Reference to and Effect on the Credit Agreement and
the Other Loan Documents.
(i) On and after the First Amendment Effective Date, each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import referring to the Credit Agreement, and each
reference in the other documents entered pursuant to the Credit Agreement to the
"Credit Agreement", "thereunder", "thereof" or words of like import referring to
the Credit Agreement shall mean and be a reference to the Amended Agreement.
(ii) Except as specifically amended by this Amendment, the
Credit Agreement and the other documents entered pursuant to the Credit
Agreement shall remain in full force and effect and are hereby ratified and
confirmed.
(iii) The execution, delivery and performance of this
Amendment shall not, except as expressly provided herein, constitute a waiver of
any provision or, or operate as a waiver of any right, power or remedy of the
Agent or any Lender under, the Credit Agreement or any of the other Loan
Documents.
(B) Headings. Section and subsection headings in this
Amendment are included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose or be given any
substantive effect.
(C) California Law. This Agreement shall be governed by,
and shall be construed and enforced in accordance with, the internal laws of the
State of California, without regard to conflicts of laws principles.
-2-
<PAGE> 3
(D) Counterparts; Effectiveness. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed an original, but all such counterparts together shall constitute but one
and the same instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature pages
are physically attached to the same document. This Amendment shall become
effective upon the execution of a counterpart hereof by Company and the
Requisite Lenders and receipt by Company and the Agent of written or telephonic
notification of such execution and authorization of delivery thereof.
[Remainder of page intentionally left blank]
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
OAKLEY, INC.
By: /s/ Tom George
Name: Tom George
Title: Chief Financial Officer
S-1
<PAGE> 5
BANK OF AMERICA, N.A., as Agent
By: /s/ Patrick W. Zetzman
Name: Patrick W. Zetzman
Title: Vice President
S-2
<PAGE> 6
LENDERS: BANK OF AMERICA, N.A.
By: /s/ Joanne Toth
Name: Joanne Toth
Title: Vice President
S-3
<PAGE> 7
UNION BANK OF CALIFORNIA, N.A.
By:
Name:
Title:
S-4
<PAGE> 8
THE CHASE MANHATTAN BANK
By: /s/ Derek Holley
Name: Derek Holley
Title: Vice President
S-5
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