ITEM 1. BUSINESS
GENERAL
Oakley, Inc. (the "Company" or "Oakley") is a Washington corporation formed in March 1994 to succeed to the assets and liabilities of Oakley, Inc., a California corporation, which commenced operations in 1977 and began to sell sunglasses in 1984. The Company is an innovation-driven designer, manufacturer and distributor of high-performance eyewear and athletic equipment. The Company's principal strength is its ability to develop eyewear which demonstrates superior optical performance and comfort through the combination of patented technology and unique styling. The Company has focused on innovations for sports applications, and its products are worn by a variety of athletes, such as skiers, cyclists, runners, surfers, golfers, tennis and baseball players and motocross riders. In addition, the Company's products, which are currently sold in over 70 countries worldwide, have become increasingly popular with fashion-oriented consumers in the larger nonsports, or recreational, segment of the sunglass market. The Company's products currently include eight lines of sunglasses (FROGSKINS, M FRAMES, ZEROS, WIRES, JACKETS, X METAL, FIVES AND TOP COAT), three lines of goggles, face shields for use with sports helmets, sunglass accessories, gear bags and a limited range of apparel.
FORWARD-LOOKING STATEMENTS
WHEN USED IN THIS DOCUMENT, THE WORDS "BELIEVES", "ANTICIPATES", "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY IN CERTAIN CIRCUMSTANCES FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED, INCLUDING RISKS RELATED TO THE DEPENDENCE ON SALES TO SUNGLASS HUT; THE ACCEPTANCE IN THE MARKETPLACE OF NEW PRODUCTS; THE ABILITY TO SOURCE RAW MATERIALS AT PRICES FAVORABLE TO THE COMPANY; THE ABILITY TO DEVELOP AND INTRODUCE INNOVATIVE PRODUCTS; CURRENCY FLUCTUATIONS; AND OTHER RISKS OUTLINED IN THE COMPANY'S PREVIOUSLY FILED PUBLIC DOCUMENTS, COPIES OF WHICH MAY BE OBTAINED WITHOUT COST FROM THE COMPANY. GIVEN THESE UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH STATEMENTS. THE COMPANY ALSO UNDERTAKES NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
RECENT DEVELOPMENTS
In early 1998, the Company released MARS, its second eyewear model using the Company's exclusive X METAL technology. A progression of X METAL, MARS is a sculptural mechanical metal frame logically structured around a new circular lens design.
In addition, the Company has developed new technology for application in performance footwear and intends to release its first footwear products to the market in mid-1998. The Company intends to manufacture all of its footwear products in the United States, relying on foreign subcontractors. Marketing and distribution for the new product intends to parallel Oakley's strategies that have proved successful for performance eyewear.
PRODUCT DESIGN AND DEVELOPMENT
Developed by an in-house design staff, the Company's products are the end result of efforts to find creative solutions to problems and wrap those solutions in art. Innovation in the relation of form to function is a key focus. With demonstrable improvements in performance, some of the Company's breakaway designs--and many of the breakthroughs that led to their creation--are patent protected.
State-of-the-art technology allows the Company to shorten dramatically its product development cycle. Stereo-lithographic computer modeling is combined with CAD/CAM liquid laser prototyping to create fully detailed, wearable prototypes within 20 hours. Rapid iteration of working models allows for extensive testing and perfecting of product design before introduction to the public. After the development stage is complete, the final sculpture can be used directly in preparation of production molds. Utilizing these processes, the Company is capable of introducing a new product line within four months of initial concept.
The American National Standards Institute (ANSI) has established a series of tests that measure eyewear performance according to specific industrial standards. Known as Z87.1, these tests are conducted at independent laboratories. The tests analyze product safety during high velocity impact and high mass impact and provide a quantitative measure of optical quality. The Company conducts ANSI tests at its own facilities on a regular basis, and all products meet or exceed ANSI Z87.1 standards. Sports-application eyewear featuring Oakley's patented polaric ellipsoid lens geometry (M FRAME, PRO M FRAME and ZEROS) have demonstrated superior optical clarity when compared to similar products of principal competitors. Eyewear featuring dual-spherical lens design, which utilizes Oakley's patented XYZ OPTICS, demonstrates comparable superiority.
Oakley has obtained hundreds of patents worldwide to protect its proprietary manufacturing methods and product features. Among the Company's most important patents are those which guard its achievements in toroidal single-lens geometry and the associated manufacturing techniques, dual-spherical lens technology and the associated optical advances, and innovations in frame design and functionality. The proprietary technologies employed in lens cutting, etching, and coating, as well as the Company's significant investments in specialized equipment, are matched with exclusive formulations of production materials to produce the superior optical quality, safety, and performance of Oakley eyewear.
Designs that featured detachable components were a hallmark of the Company's initial sunglass products. Interchangeable parts included lenses, frames, temples, and nosepieces in various colors and shapes. The continuation of this architecture in the sport-specific M FRAME and PRO M FRAME maintains high appeal for the Company's products. Consumers are able to customize eyewear to personal tastes and modify it for specific light conditions.
Among the Company's most significant developments, IRIDIUM coatings and PLUTONITE lenses are prominent advances. IRIDIUM is a metallic oxide that improves contrast and tunes color saturation, enhancing the wearer's perception of detail in varying light conditions. The coating has become very popular for eyewear used in demanding sports such as skiing and cycling, and in high altitude use. The distinctive look of IRIDIUM-coated lenses adds to their success in the recreational sunglass market. In March 1998, the Company exercised its purchase option to acquire a patent for certain IRIDIUM coatings. PLUTONITE is a proprietary material used to produce lenses of exceptional optical clarity. The material provides 100% protection against UVA, UVB and harmful blue light. It meets all ANSI Z87.1 industrial standards for impact protection, producing lenses of extremely high durability and low weight.
Oakley's patented XYZ OPTICS represents a major breakthrough in lens technology. Precise geometric orientation provides optical correction on three axes, not just two. The resulting lens allows light to be received over essentially the full angular range of vision while minimizing distortion caused by disparate refraction along that range--an advance that maximizes clarity for all angles of view. The technology achieves this by protecting the unique relationship between lens geometry and the as-worn orientation to the wearer's eye. This allows for wrapped, raked-back lens configurations that maximize peripheral vision and protection against sun and wind.
Oakley has applied prescription lens technology to all of its frame models. Computer modeling is used to adapt corrective implants to the wrapped curvature of Oakley frames, precisely adjusting each individual's prescription to the as-worn position of the lenses. Custom grinding is then performed by an outside ophthalmic laboratory. The adaptation technology, combined with Oakley's PLUTONITE lens material and the specialized equipment needed for cutting and edging, makes the Company the exclusive provider of these corrective lenses. The products have enabled Oakley to attract high profile athletes that would not otherwise have been available to promote the Company's brand.
In late 1996, Oakley began to expand its prescription business for frames and lenses in both domestic and international markets under a program developed with Gentex Optics ("Gentex"), the world's leading producer of advanced-technology polycarbonate lenses, and its parent company, Essilor International ("Essilor"). Under the program, Gentex manufactures Oakley-branded prescription lenses for use in the Company's sunglass and ophthalmic frames, with distribution through Essilor's wholesale laboratories worldwide. All Oakley prescription products continue to be available only through the Company's authorized retailers.
The Company's historical success is attributable, in part, to its introduction of products that represent improvements in performance and style over goods available on the market. The continued ability to develop and introduce such innovations is a key factor in the Company's future success. In February 1997, Oakley introduced its first sunglass in the X METAL line, a family of eyewear named for a proprietary blend of metals. In addition to a unique metallurgical process, X METAL utilizes breakthroughs in architectural mechanics. Oakley intends to introduce other product line extensions and new product lines in the future, innovations the Company believes will attract additional consumers from the nonsports segment of the sunglass market.
To take advantage of unique opportunities, the Company may manufacture private label or other sunglasses for other companies. The Company intends to market and sell sunglasses under brand names other than "Oakley." In addition, the Company has licensed, and may determine to further license, its intellectual property rights to others in optical or other industries.
The success of any new product line including eyewear and footwear, depends on various factors, including product demand, production capacity, and the availability of raw materials and critical manufacturing equipment. Other factors and assumptions are involved in preparing forward-looking information related to product development and introduction. The uncertainty associated with all these factors, and any change in such factors from the Company's expectations, could result in cost increases, delays, or cancellations of such new products and may also cause actual results to differ materially from those projected.
PRODUCTS
The Company's first optical products, introduced in 1980, were goggles developed for the ski and motorcycle industries. From the perspective of "function first," the Company next introduced a hybrid goggle/sunglass design for cycling and skiing, which led to other models for sport-specific uses. The Company recognized that athletes in different sports needed different types of protection to ensure clear vision, adequate impact-resistance and deflection of wind, snow and other elements. The Company successfully expanded its product line by educating the market about the individual eyewear needs of a sport and marketing glasses perceived to be useful athletic equipment. All of the Company's sunglass lines utilize one of two lens geometries: toroidal (polaric ellipsoid) or spherical. The toroidal geometry, which have a different radius from the top to bottom than from side to side and are used in the Company's M FRAMES and ZEROS, provides superior optical clarity and enhanced coverage and, therefore, represents the most advanced technology for demanding sports applications. Spherical lenses, which have a uniform radius in all directions, are used in the Company's dual-lens sunglasses, the TRENCHCOATS, JACKETS, WIRES, FROGSKINS, X METAL, AND TOPCOAT. The Company's
spherical lenses are corrected and oriented so as to minimize distortion in the "as-worn" position, a feature which differentiates the Company's dual-lens sunglasses from those of its competitors. The Company incorporates its patented XYZ OPTICS technology to achieve a superior level of optical quality in a wrapped and raked non-prescription dual lens design that maximizes peripheral vision and protection against sun and wind. The Company's eyewear is popular with athletes in baseball, golf, tennis, cycling, motorcycling, skiing, volleyball, marine sports, triathlons, running, surfing, snowboarding and other sports.
The Company's current products are set forth below:
DATE INTRODUCED U.S. SUGGESTED RETAIL PRICE
SUNGLASSES M FRAMES Late 1989 $ 90.00 - 145.00 ZEROS Late 1993 80.00 - 105.00 WIRES Late 1993 130.00 - 225.00 EYE JACKETS Late 1994 90.00 - 125.00 TRENCHCOATS Late 1995 90.00 - 130.00 STRAIGHT JACKETS May 1996 100.00 SQUARE WIRES June 1996 150.00 PRO M FRAME October 1996 150.00 FROGSKINS* December 1996 55.00 - 65.00 X METAL ROMEO February 1997 250.00 FIVES April 1997 55.00 - 65.00 TOPCOAT August 1997 100.00 - 30.00
GOGGLES MOTOCROSS 1980 26.00 - 56.50 SKI 1983 25.00 - 102.00 H20 1990 25.75 - 61.00
* The Company's original FROGSKIN line was introduced in 1985 and was discontinued after the new style was introduced in 1996.
FACE SHIELDS
In June 1997, the Company acquired One Xcel, Inc., a company that designs, markets and distributes the only optically-correct protective face shield for use with sports helmets. The One Xcel polycarbonate optical shield is the only sports shield officially endorsed by the National Hockey League (NHL) and National Football League (NFL).
REPLACEMENT LENSES AND ACCESSORIES
By offering interchangeable lenses and other components of certain Oakley sunglasses in various colors and shapes, Oakley has created a market for replacement parts. Depending on the sunglass, an Oakley customer may have several lenses for different light conditions and several nosepieces and earpieces in a range of colors for variety.
CLOTHING AND GEAR BAGS
The Company has extended its invention-inspired product philosophy into the apparel category, now selectively designing performance clothing and gear bags. The clothing and gear bags are constructed with technical features and materials, such as YKK zippers and reinforced rivets to provide added strength and durability in the Backpack; fully taped double-needle seams and nailhead cordura for added durability on the arms and shoulders of the Ballistic Jacket; and grommet venting to control excess heat and moisture in the Fleece Pullover.
To date the Company has developed its apparel and other accessories using its own design resources, declining licensing opportunities in order to preserve the Oakley image, which the Company believes will bring greater respect and demand for Oakley's products over the long term. The Company may in the future consider the pursuit of additional brand extensions.
MANUFACTURING
In early 1997, the Company relocated to its newly constructed headquarters and manufacturing facility in Foothill Ranch, Orange County, California, where it manufactures and assembles most of its products. The Company owns, operates and maintains most of the equipment used in the manufacture of its products. The Company produces components and performs processes in-house which contribute significantly to gross profit margins and provide protection against piracy of the Company's proprietary information and processes. In-house manufacturing enables the Company to produce products in accordance with its strict quality control standards. Components and processes that are unlikely to add significant value are contracted out to vendors. Much of the equipment used in the manufacture of the Company's products has been specially designed and adapted for the processes used by the Company. The Company's proprietary manufacturing methods and equipment are protected by special security measures employed at the Company's manufacturing facilities. In addition, the Company believes that by manufacturing its own products, it has the opportunity to experiment with new materials and technologies which can lead to important discoveries, such as its IRIDIUM coating process (which the Company believes is one of the most sophisticated coating processes in the industry). The Company generally seeks to maintain a supply of finished goods that is sufficient to ship domestic customer orders (other than preseason orders for ski goggles and orders from certain sunglass specialty chains) within one day of receipt. Due to significant increases in demand for certain Oakley products, backorders may increase sharply from time to time and may delay customer shipments for such products.
The Company has forged strong relationships with its major suppliers and maintains agreements with most of them that prohibit such suppliers from revealing any of the Company's proprietary information and technology to third parties. Although the Company relies on outside suppliers for the polycarbonate components of its glasses and goggles, the Company owns substantially all the molds used in the production of the components. The Company relies on a single source for the supply of several components, including the uncoated lens blanks from which substantially all of the Company's lenses are cut. The Company believes most of these components can be obtained from one or more alternative sources within a relatively short period of time. The loss of the source for lens blanks, however, or any disruption in such source's business or failure by it to meet the Company's product needs on a timely basis could cause, at a minimum, temporary shortages in needed materials and could have a material adverse effect on the Company's business. There can be no assurance that, if necessary, an additional source of supply of lens blanks can be located or developed in a timely manner. In March 1997, the Company entered into a reciprocal exclusive dealing agreement with Gentex, its lens blank supplier, under which Oakley has the exclusive right to purchase from such supplier decentered sunglass lenses and a new scratch-resistant coating developed for use with such lenses. In return, Oakley has agreed to purchase all of its decentered lens requirements, subject to certain exceptions, from such supplier. The Company's business interruption insurance policy reimburses the Company for certain losses incurred by the Company, up to a maximum of $30 million, as a result of an interruption in the supply of raw materials, including uncoated lens blanks, resulting from direct physical loss or damage to a supplier's premises, subject to certain exceptions. However, there can be no assurance that such policy will be sufficient to compensate the Company for all losses resulting from an interruption in the supply of raw materials.
DISTRIBUTION
The Company sells Oakley eyewear in the United States through a carefully selected base of approximately 7,100 active accounts as of December 31, 1997 with approximately 10,600 locations comprised of optical stores, sunglass retailers and specialty sports stores, including bike, surf, ski and golf shops and motorcycle, running and sporting goods stores. Unlike most of its competitors, the Company has elected not to sell its products through department stores (other than Nordstrom), discount stores, drug stores or traditional mail-order companies.
The Company's current level of distribution, with the addition of key niche retailers, most notably in the golf channel in 1997, and a limited number of premium optical locations, is expected to be capable of accommodating expanding sales, while maintaining the discoverability of Oakley products by consumers. This distribution philosophy provides retailers with a degree of exclusivity for Oakley products which has increased brand loyalty and has encouraged retailers to display Oakley products in prominent shelf space. The noticeable absence of the Company's products from department stores, discount stores, drug stores and traditional mail-order catalogs has contributed to the Company's exclusive, high-quality image. The Company generally does not change its domestic wholesale prices during the life of a product, which the Company believes creates a more stable retail environment.
The Company's products are currently sold in over 70 countries outside the United States. In most of continental Europe, marketing and distribution are handled directly by the Company's Oakley Europe subsidiary, located near Paris, France, which is staffed by approximately 100 employees who perform sports marketing, advertising, telemarketing, shipping and accounting functions. Oakley Europe has an independent sales force in all major continental European markets except in Switzerland and Austria. Since 1995, the Company has been selling Oakley products to Mexico on a direct basis through its subsidiary Oakley Mexico. In 1996, the Company acquired its exclusive distributor in the United Kingdom ("Oakley UK") and established an office in South Africa ("Oakley Africa") and began selling to those markets on a direct basis in the fourth quarter of 1996. In May 1997, the Company began selling to Japan ("Oakley Japan") on a direct basis through its own operation. In those parts of the world not serviced by Oakley or its subsidiaries, Oakley's products are sold through distributors with local expertise which sell Oakley products either exclusively or with complementary, noncompeting products. Such distributors agree to respect the marketing philosophy and practices of the Company and receive extensive training regarding such philosophies and practices. For information regarding the Company's operations by geographic region, see Notes 10 and 11 of Notes to Consolidated Financial Statements.
The Company requires its retailers and distributors to agree not to resell or divert Oakley products through unauthorized channels of distribution. Products shipped from Oakley's headquarters are marked with a tracking code that allows the Company to determine the source of diverted products sold by unauthorized retailers or distributors, so it can better maintain the integrity of its products at desired locations. When Oakley products are found at undesirable locations or unauthorized retailers, the Company purchases samples and, using the tracking device, determines the source of the diversion. The Company then estimates the potential damage to the Company's retail franchise and image and may require that the offending account repurchase the diverted product or post a nonrefundable bond against future diversion. In certain instances, the Company may terminate the account. When an existing account has been terminated, the Company may repurchase its own products from the retailer at the undesirable location to protect the Oakley image and the exclusivity enjoyed by the Company's retail account base. The Company employs similar anti-diversion techniques in overseas markets.
SALES AND MARKETING
The Company maintains a domestic sales force of approximately 90 independent representatives. The primary functions of Oakley's sales force are to sell to each retailer the appropriate mix and quantity of Oakley products, ensure that products are displayed effectively and educate retailers about the quality and features of Oakley products and Oakley's sales and marketing philosophies. The Company believes that its relationships with its customers, effective marketing and superior customer service are critical elements of the Company's success. Through its sales representatives, the Company tries to satisfy every customer's request for information or product support. Sales representatives regularly visit each customer to educate the customer about recent innovations in product designs, new product applications and merchandising ideas. Each sales representative is managed by one of the Company's in-house territory managers. The territory managers work with the representatives in setting sales goals, providing sales analyses, soliciting sales to complete customers' inventories and taking new orders. The Company's sales force is paid solely by commissions on net sales.
While Oakley uses traditional marketing methods in some instances, the Company attributes much of its success to the use of less conventional methods, including sports marketing, targeted product allocation, advertorials and in-store display aids. The Company has used sports marketing extensively to achieve consistent, authentic exposure that equates into strong brand recognition on a global level. Oakley utilizes the exposure generated by its athletes as an "editorial" endorsement of Oakley's eyewear rather than a commercial endorsement. The sports marketing division consists of 22 sports marketing experts domestically, with an additional 20 managers positioned in our direct offices and with distributors internationally. These experts specialize in each market segment and niche to negotiate contracts with athletes, identify and develop relationships with undiscovered talent, coordinate exposure with the media, educate and train these Oakley "ambassadors" about Oakley products and support them at events and public forums where they wear Oakley products. Oakley's sports marketing staff is diverse enough to understand and effectively market all sports, regardless of the sport's image and special equipment needs. Oakley earns the respect of its athletes even in the most "core" of sports such as surf and snowboard, yet continues to expand successfully into more traditional sports such as golf, tennis, baseball and cricket.
PRODUCT SERVICES
Oakley strives to support its products with the best customer service in the industry. The Company's approximately 100-person product services group promptly and courteously responds to customer inquiries, concerns and warranty claims. The Company provides a one-year warranty against manufacturer's defects or breakage of its polycarbonate frames.
ADVERTISING AND PROMOTION
Oakley's primary method of enhancing brand recognition is sports marketing, which places the Oakley brand before consumers through the endorsements of influential athletes and other personalities, some of whom have formal arrangements with the Company. Brand image and exposure are carefully controlled. The effectiveness of this promotional strategy is believed to outweigh that of direct advertising, which often carries a stigma and lacks the impact and recognition of athletic endorsement. The Company believes that direct advertising can be useful, but only in situations that do not lead to competition with editorial coverage.
The Company has also developed a second level of promotion through its laser scope program. Through demonstration and lecture, trained technicians educate consumers on the health and performance benefits of Oakley products by imparting technical information in layman's terms. Venues for these presentations include key retailers, trade shows, high-traffic locations and regional sporting events such as golf tournaments and tennis matches.
The third level of marketing is advertising. Products are promoted through print media, outdoor media, in-store visual displays, and other point-of-purchase materials. Promotion include packaging, mailers, catalogs, billboards, the Internet, and more. The Company considers many factors in evaluating the effectiveness of these marketing opportunities. In addition to cost effectiveness, analytical criteria includes the ability to engage new market opportunities, build image, enhance the stature of the brand, and reinforce the identity of the brand.
Oakley retains significant control over its promotional programs and believes it is able to deliver a consistent, well-recognized advertising message at substantial cost savings compared to complete reliance on outside agencies. Localized strategies of marketing and distribution are managed by direct operations in Europe, South Africa, Mexico and Japan. In other parts of the world, the integrity of the brand is safeguarded by carefully selected distributors who present Oakley products to their markets with local expertise.
PRINCIPAL CUSTOMERS
During 1997, net sales to the Company's ten largest customers, which included seven international distributors, accounted for approximately 35% of the Company's total net sales. Net sales to one customer, Sunglass Hut, the largest sunglass specialty retailer in the world, accounted for approximately 21.5% of the Company's 1997 net sales. Such sales do not include those sales to Sunglass Hut locations outside the United States that are made by the Company's independent international distributors. At December 31, 1997, approximately 250 of the 2,121 Sunglass Hut locations worldwide were serviced by Oakley independent distributors. While the Company does not have any minimum purchase agreements with Sunglass Hut, the Company believes that it maintains a good relationship with Sunglass Hut. In early 1994, the Company entered into an exclusive licensing agreement with Sunglass Hut to sell Oakley products through mail order catalogs and in 1997 two Oakley catalogs were produced under such arrangement.
INTELLECTUAL PROPERTY
The Company aggressively asserts its rights under patent, trade secret, unfair competition, trademark and copyright laws to protect its intellectual property, including product designs, proprietary manufacturing processes and technologies, product research and concepts and recognized trademarks. These rights are protected through the acquisition of patents and trademark registrations, the maintenance of trade secrets, the development of trade dress, and where appropriate, litigation against those who are, in the Company's opinion, infringing these rights. The Company has filed suit against a number of its competitors to enforce certain of the Company's patents and trademarks. None of the Company's patents or trademarks has ever been invalidated or limited. While there can be no assurance that the Company's patents or trademarks fully protect the Company's proprietary information and technologies, the Company intends to continue asserting its intellectual property rights against any infringer. The Company believes that it has developed a reputation in the sunglass industry as a vigorous defender of its intellectual property rights; this reputation acts as a deterrent against the introduction of potentially infringing products by its competitors and others.
The following table reflects data as of December 31, 1997 concerning the Company's intellectual property:
The Company dissuades counterfeiting through the active monitoring of the marketplace by its anti-counterfeiting personnel and other employees and through the services provided by outside firms that specialize in anti-counterfeiting measures. The Company's sales representatives, distributors and retailers have also proved effective watchdogs against infringing products, frequently notifying the Company of any suspicious products, confiscating counterfeit products and assisting law enforcement agencies. The Company's sales representatives are also educated on Oakley's patents and trade dress and assist in preventing infringers from obtaining retail shelf space. The Company also etches its logo onto the lenses of its single-lens sunglasses to assist its customers and consumers in detecting counterfeit products.
COMPETITION
The Company is a leading designer, manufacturer and distributor of eyewear in the sports segment of the nonprescription eyewear market. Within this segment, the Company competes with mostly smaller sunglass and goggle companies in various niches of the sports market and a limited number of larger competitors, some of whom have greater financial and other resources than the Company. Some of these niche markets are susceptible to rapid changes in consumer preferences which could affect acceptance of the Company's products. Oakley believes the vigorous protection of its intellectual property rights has limited the ability of others to compete in this segment. Accordingly, the Company believes that it is the established leader in this segment of the market, although several companies, including Bausch & Lomb (which markets Killer Loop), Luxottica (which markets Briko), Bolle and various niche brands compete for the Company's shelf space.
The Company also competes in the broader nonsports, or recreational, segment of the sunglass market, which is fragmented and highly competitive. The major competitive factors include fashion trends, brand recognition, marketing strategies, distribution channels and the number and range of products offered. A number of established companies, including Bausch & Lomb (Ray Ban and Revo) and Luxottica, compete in this wider market.
The Company differs from many of its competitors in that its competitors generally only import or repackage eyewear products. Few sunglass companies design, manufacture and assemble their own creations as many companies tend to imitate successful sunglass models. In order to retain its market share, the Company must continue to be competitive in quality and performance, technology, method of distribution, style, brand image, intellectual property protection and customer service.
DOMESTIC AND FOREIGN OPERATIONS
See Note 11 to the Notes to the Consolidated Financial Statements for discussion regarding domestic and foreign operations.
EMPLOYEES
The Company believes that its employees are among its most valuable resources and have been a key factor in the success of Oakley's products. At March 13, 1998, there were a total of approximately 930 full-time employees. In addition, the Company utilizes as many as 450 temporary personnel, particularly during the summer months.
The Company is not a party to any labor agreements and none of its employees is represented by a labor union. The Company considers its relationship with its employees to be good and has never experienced a work stoppage.
ITEM 2.
ITEM 2. PROPERTIES
In early 1997, the Company relocated to a newly constructed corporate and manufacturing facility located in Foothill Ranch, Orange County, California. The new facility is approximately 400,000 square feet, with potential to expand into an additional 100,000 square feet. Prior to the relocation, the company leased five facilities which totaled approximately 170,000 square feet. All such leases have either expired or were terminated with no material adverse financial effect. In June 1996, the Company purchased an approximately 63,000 square foot facility in Nevada for the production of metal eyewear. In addition, the Company leases office and warehouse space as necessary to support its operations worldwide, including offices in the UK, Europe, Mexico, South Africa, Japan and the state of Washington. In 1997, the Company also purchased land in Mexico City on which it is constructing an office for its operations in Mexico and Central America; the Company expects this facility to be completed in mid-1998. The Company believes its current and planned facilities are adequate to carry on its business as currently contemplated.
The Company is subject to federal, state and local environmental laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects (such as emissions to air, discharges to water, and the generation, handling, storage and disposal of solid and hazardous wastes) or (ii) impose liability for the cost of cleanup or other remediation of contaminated property, including damages from spills, disposals or other releases of hazardous substances or wastes, in certain circumstances without regard to fault. The Company's manufacturing operations routinely involve the handling of chemicals and wastes, some of which are or may become regulated as hazardous substances. The Company has not incurred, and does not expect to incur, any significant expenditures or liabilities for environmental matters. As a result, the Company believes that its environmental obligations will not have a material adverse effect on its operations or financial position.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
THE CALIFORNIA SECURITIES ACTIONS
The Company and certain of its officers and directors have been named as defendants in three putative class action lawsuits (the "California Securities Actions") filed in December 1996 in the California Superior Court for the County of Orange (the "Superior Court"). The cases are captioned:
YOSEF S. ROSENSHEIN V. OAKLEY, INC., MIKE PARNELL, LINK NEWCOMB AND JIM JANNARD, Case No. 773051 (filed December 17, 1996);
HERSCHEL HARMAN V. OAKLEY, INC., MIKE PARNELL, LINK NEWCOMB AND JIM JANNARD, Case No. 773053 (filed December 17, 1996); and
ERIC SHER, HAROLD BARON AND DAVID O. ECKERT V. OAKLEY, INC., MIKE PARNELL, LINK NEWCOMB, JIM JANNARD, MERRILL LYNCH & CO. AND ALEX. BROWN & SONS, INC., Case No. 773366 (filed December 24, 1996).
By order dated January 30, 1997, the Superior Court ordered that the California Securities Actions be assigned to the Superior Court's Complex Litigation Panel, where they have since been consolidated. On April 18, 1997, the plaintiffs filed a consolidated amended complaint in the California Securities Actions. The plaintiffs seek to represent a class of persons who purchased the Company's common stock between March 22, 1996 and December 5, 1996.
The complaint in the California Securities Actions alleges claims for violations of the antifraud provisions of the California Corporations Code, unfair business practices and false advertising in violation of certain provisions of the California Business and Professions Code, fraud and negligent
misrepresentation. The plaintiffs' claims are based on alleged material misstatements and omissions in certain of the Company's public statements, Securities and Exchange Commission filings and in the reports of third-party analysts regarding the Company's retail distribution practices, market conditions, new product developments and extensions of existing product lines, business with Sunglass Hut and earnings prospects. The plaintiffs seek unspecified damages and other relief against the Company and the other defendants.
The plaintiffs in the California Securities Actions have also asserted claims against Merrill Lynch & Co. ("Merrill Lynch") and Alex. Brown and Sons, Inc. ("Alex. Brown"), which served as the U.S. Representatives of the U.S. Underwriters of the June 6, 1996 offering of five million shares of common stock of the Company by certain of its shareholders (the "Secondary Offering"). By letter dated February 7, 1997, counsel for Merrill Lynch and Alex. Brown gave the Company notice pursuant to the indemnification provisions of the U.S. Purchase Agreement dated June 6, 1996, for the Secondary Offering that they were asserting a claim for indemnification under such provisions and requested that the Company reimburse Merrill Lynch and Alex. Brown on a current basis for their attorneys' fees and expenses incurred in defending the California Securities Actions. Counsel for Merrill Lynch and Alex. Brown subsequently indicated that this claim for indemnification also applies to attorneys' fees and expenses incurred in defending the Federal Securities Actions (described below).
The Company and the other defendants filed demurrers to the California Securities Actions and also filed a motion to stay proceedings in the California Securities Actions pending the resolution of the Federal Securities Actions (described below).
On November 14, 1997, the Superior Court (1) sustained the demurrers without leave to amend with respect to the Company and defendants Link Newcomb, Merrill Lynch and Alex. Brown on plaintiffs' cause of action for purported violations of the antifraud provisions of the California Corporations Code; (2) overruled the demurrer with respect to the Company and defendants Mike Parnell, Link Newcomb and Jim Jannard, but sustained the demurrer with leave to amend with respect to defendants Merrill Lynch and Alex. Brown, on plaintiffs' cause of action for fraud and negligent misrepresentation; and (3) sustained the demurrers with leave to amend with respect to the Company and each of the other defendants on plaintiffs' cause of action for unfair business practices and false advertising in violation of certain provisions of the California Business and Professions Code. Subsequently, plaintiffs agreed to dismiss all of their claims against each of the defendants, with the exception of plaintiffs' cause of action for purported violations of the antifraud provisions of the California Corporations Code with respect to defendants Mike Parnell and Jim Jannard.
On January 22, 1998, the Superior Court denied the motion to stay proceedings in the California Securities Actions pending the resolution of the Federal Securities Actions described below. The plaintiffs in the California Securities Actions have served document requests on the Company and others, and documents have been produced in response to plaintiffs' demands.
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 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 LHM (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 AHS (EEx) (filed October 20, 1997) (the "CHAIT Action");
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 AHS (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 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.
The Company has not yet responded to any of the Federal Securities Actions. To date, no discovery has been taken in the Federal Securities Actions.
The Company has been named as a nominal defendant in a putative derivative lawsuit against certain of its directors and officers filed in March 1997 in the Superior Court. The case is captioned BLACKMAN V. JAMES JANNARD, MIKE PARNELL AND DOES 1 THROUGH 100, Case No. 777098 (filed March 27, 1997) (the "California Derivative Action").
In the California Derivative Action, the plaintiff, purporting to sue on behalf of the Company, alleges claims for breach of fiduciary duty, constructive fraud, unjust enrichment and violations of the insider trading provisions of the California Corporations Code. Like the California Securities Actions, the plaintiff's claims in the California Derivative Action are, among other things, based upon alleged material misstatements and omissions in certain of the Company's public statements and Securities and Exchange Commission filings regarding the Company, its operation and future prospects. The plaintiff seeks to recover damages and other relief on behalf of the Company. The defendants filed a demurrer to the original complaint in the California Derivative Action, and the plaintiff subsequently filed an amended complaint. The defendants filed a demurrer to the amended complaint in the California Derivative Action, and the Superior Court sustained the demurrer with leave to amend in September 1997. The plaintiff subsequently filed a second amended complaint in the California Derivative Action. The defendants then filed a demurrer to the second amended complaint in the California Derivative Action and the Superior Court sustained the demurrer without leave to amend on December 19, 1997. On February 4, 1998, the Superior Court entered a final order of dismissal of the California Derivative Action. The Company does not know whether the plaintiff plans to appeal the Superior Court's final order.
Although it is too soon to predict the outcome of any of the litigations described above with any certainty, based on its current knowledge of the facts, the Company believes that the plaintiffs' claims are without merit and intends to defend the actions vigorously.
In addition, the Company is a party to various claims, complaints and other legal actions that have arisen in the normal course of business from time to time. The Company believes the outcome of these pending legal proceedings, in the aggregate, will not have a material adverse effect on the operations or financial position of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock, par value $.01 per share ("Common Stock"), began trading on the New York Stock Exchange on August 10, 1995 upon completion of the Company's initial public offering (trading symbol "OO"). On March 13, 1998, the closing sales price for the Common Stock was $12 3/8. The following table sets forth the high and low sales prices for the Common Stock for each quarter of 1996 and 1997 on the New York Stock Exchange Composite Tape:
High Low ---- ---
- ---- First Quarter $ 19 3/8 $ 15 1/2 Second Quarter $ 27 3/16 $ 17 7/16 Third Quarter $ 24 1/2 $ 14 11/16 Fourth Quarter $ 24 1/2 $ 9 7/8
- ---- First Quarter $ 11 5/8 $ 8 3/8 Second Quarter $ 14 3/8 $ 8 3/4 Third Quarter $ 14 1/16 $ 10 1/2 Fourth Quarter $ 11 3/16 $ 8 9/16
On September 11, 1996, the Company declared a two-for-one stock split effected in the form of a one-share dividend per share of its Common Stock. The new shares were distributed on October 10, 1996 to shareholders of record at the close of business at September 25, 1996. All sale prices have been restated retroactively to reflect the stock split.
The number of shareholders of record for Common Stock on March 13, 1998 was 586.
DIVIDEND POLICY
The Company currently does not pay any dividends on its Common Stock. Any future determination as to the payment of dividends will be at the discretion of the Company's Board of Directors and will depend upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data regarding the Company which is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto (see "Index to Consolidated Financial Statements") and "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations." The income statement, supplemental income statement and balance sheet data presented below have been derived from the Company's consolidated financial statements. The Company's consolidated income statement data for the fiscal years ended December 31, 1995, 1996, and 1997 and balance sheet data as of December 31, 1996 and 1997 included herein have been audited by Deloitte and Touche LLP, the Company's independent auditors, as indicated in their report included elsewhere herein. The selected supplemental income statement data set forth herein are for informational purposes only and may not necessarily be indicative of the Company's future results of operations.
(1) For periods prior to the Company's conversion to C corporation status, represents California state franchise taxes and foreign taxes accrued by Oakley Europe.
(2) Amounts reflect adjustment for Federal and state income taxes as if the Company had been taxed as a C corporation rather than as an S corporation.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes the operations of Oakley, Inc. and subsidiaries for each of the periods discussed.
RESULTS OF OPERATIONS
The following table sets forth operating results for the periods indicated. For the period prior to the Company's initial public offering in August 1995, amounts reflect pro forma adjustments for (i) the elimination of bonuses paid to the two principal executive officers prior to the Company's initial public offering in excess of the estimated bonuses payable for 1995 under the Company's Performance Bonus Plan, (ii) the elimination of all depreciation expense associated with aircraft owned by the Company which were distributed to the two principal shareholders in August 1995 as part of the S corporation distribution, (iii) the elimination of the gain on the disposition of the aircraft distributed to the two principal shareholders and (iv) Federal and state income taxes as if the Company had been taxed as a C corporation for such period.
OAKLEY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS)
Year Ended December 31, ------------------------------------- 1995 1996 1997 ----------- ----------- ------------ Pro Forma ----------- Net sales $ 172,752 $ 218,566 $ 193,984 Cost of goods sold 50,295 66,790 75,393 ----------- ----------- ------------ Gross profit 122,457 151,776 118,591
Operating expenses: Research and development 3,285 4,782 3,825 Selling 35,802 48,092 53,007 Shipping and warehousing 4,678 6,507 5,721 General and administrative 13,121 18,513 23,032 ----------- ----------- ------------ Total operating expenses 56,886 77,894 85,585 ----------- ----------- ------------ Operating income 65,571 73,882 33,006
Interest expense (income), net 273 (781) 1,181 ----------- ----------- ------------ Income before provision for income taxes 65,298 74,663 31,825 Provision for income taxes 25,694 28,670 12,221 ----------- ----------- ------------ Net income $ 39,604 $ 45,993 $ 19,604 ----------- ----------- ------------ ----------- ----------- ------------
The following table sets forth operating results (as a percentage of net sales) for the periods indicated:
Year Ended December 31, ---------------------------------- 1995 1996 1997 --------- --------- --------
Net sales 100.0% 100.0% 100.0% Cost of goods sold 29.1 30.6 38.9 --------- --------- -------- Gross profit 70.9 69.4 61.1
Operating expenses: Research and development 1.9 2.2 2.0 Selling 20.7 22.0 27.3 Shipping and warehousing 2.7 3.0 2.9 General and administrative 7.6 8.5 11.9 --------- --------- -------- Total operating expenses 32.9 35.7 44.1 --------- --------- --------
Operating income 38.0 33.7 17.0
Interest expense (income), net 0.2 (0.4) 0.6 --------- --------- --------
Income before provision for income taxes 37.8 34.1 16.4 --------- --------- -------- Provision for income taxes 14.9 13.1 6.3 --------- --------- --------
Net income 22.9% 21.0% 10.1% --------- --------- -------- --------- --------- --------
The Company's sales before discounts and returns for defective sunglasses were $158.2 million, $212.8 million and $171.4 million for the years ended December 31, 1995, 1996 and 1997, respectively. Sunglass unit sales were 3,465,817, 4,310,846 and 3,620,612 for the years ended December 31, 1995, 1996 and 1997, respectively.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES
Net sales decreased to $194.0 million for the year ended December 31, 1997 from $218.6 million for the year ended December 31, 1996, a decrease of $24.6 million, or 11.3%. This decrease was the result of substantially lower sales in existing styles of the Company's sunglasses, including WIRES, EYE JACKETS, STRAIGHT JACKETS, M FRAMES, ZEROS, TRENCHCOATS and its original line of FROGSKINS which was replaced by a new line of FROGSKINS in December 1996. These decreases were partially offset by sales from the introduction of new sunglasses, including SQUARE WIRES in June 1996, PRO M FRAMES in October 1996, a new line of FROGSKINS in December 1996, X METAL ROMEO in February 1997, FIVES in April 1997 and TOP COAT in August 1997, and an increase in sales of clothing and other accessories. The success of the Company's recent moderately-priced introductions (new FROGSKINS and FIVES) and the resulting change in the Company's product mix contributed to a 4.1% decrease in the average selling price of sunglasses in 1997 on a unit volume reduction of 16.0%. The Company's domestic sales declined 18.4% to $113.9 million from $139.5 million in 1996, principally as a result of a 41.1% decline in net sales to the Company's largest customer, Sunglass Hut, and slightly lower net sales in 1997 to other domestic accounts. The decline in sales to Sunglass Hut was due in part, to a reduction by Sunglass Hut in its total inventory levels during the year, including Oakley inventory levels. The Company's international sales increased $0.9 million to $80.0 million in 1997 from $79.1 million in 1996, principally as a result of increased sales in Europe. This increase was partially offset by a reduction in sales in Japan as the Company transitioned to a direct operation there, as well as reduced sales in Southeast Asia due to poor economic conditions and the strength of the U.S. dollar compared to the relevant currencies. International net sales in 1997 were also negatively affected by the strength of the U.S. dollar compared to the functional currency (French franc) of Oakley Europe.
GROSS PROFIT
Gross profit decreased to $118.6 million for the year ended December 31, 1997 from $151.8 million for the year ended December 31, 1996, a decrease of $33.2 million, or 21.9%. As a percentage of net sales, gross profit decreased to 61.1% in 1997 from 69.4% in 1996. Gross profit as a percentage of net sales was negatively affected by higher fixed manufacturing costs spread over lower sales volumes and a corresponding reduction in production levels, a lower percentage of sales in the Company's highest-margin sports shield sunglasses, a shift in product mix to lower-margin clothing and other accessories, a devaluation in the functional currency of the Company's direct operation in continental Europe and production inefficiencies associated with the start-up of the X METAL product line. The Company expects gross profit as a percentage of net sales to continue to be affected by certain of the factors discussed above.
OPERATING EXPENSES
Operating expenses increased to $85.6 million for the year ended December 31, 1997 from $77.9 million for the year ended December 31, 1996, an increase of $7.7 million. Research and development expenses decreased $1.0 million to $3.8 million in 1997. The 1997 period included a $0.9 million reduction related to the forfeiture of the Chairman and President's 1996 bonus which had been accrued as of December 31, 1996. Excluding this non-recurring adjustment, research and development expenses decreased $0.1 million to $4.7 million in 1997, or 2.4% of net sales, from $4.8 million, or 2.2% of net sales, in 1996. Selling expenses increased $4.9 million to $53.0 million in 1997, or 27.3% of net sales, from $48.1 million, or 22.0% of net sales, in 1996 as a result of substantially higher warranty expenses, higher sports marketing expenses and increased depreciation, partially offset by lower advertising expenses and commissions. As a percentage of net sales, shipping expenses decreased to 2.9% of net sales in 1997 from 3.0% of net sales in 1996. General and administrative expenses increased $4.5 million to $23.0 million, or 11.9% of net sales, in 1997 from $18.5 million, or 8.5% of net sales, in 1996 primarily due to added personnel, increased amortization of intangible assets related to acquisitions completed in late 1996 and 1997 and higher operating expenses associated with the Company's new headquarters. For the year ended December
31, 1997, general and administrative expenses included income of $0.8 million paid to the Company by Arnet Optic to settle litigation, $0.7 million of relocation costs associated with the new facility and professional fees of $0.5 million related to lawsuits filed by shareholders against the Company and certain of its officers and directors (see Note 7 to the consolidated financial statements). In addition, $5.3 million of the $7.7 million increase in operating expenses for 1997 is attributable to operating expenses and goodwill amortization of entities acquired or commenced in late 1996 and 1997. The Company expanded its direct international operations into three new regions, and in June 1997, acquired One Xcel, a company that designs, markets and distributes protective face shields for use with sports helmets.
OPERATING INCOME
The Company's operating income declined to $33.0 million for the year ended December 31, 1997 from $73.9 million for the year ended December 31, 1996, a decrease of $40.9 million. This decrease was the result of the Company's decrease in net sales and gross profit and an increase in operating expenses as a percentage of net sales.
INTEREST EXPENSE, NET
The Company had net interest expense of $1.2 million in the 1997 period, as compared with net interest income of $0.8 million for the comparable 1996 period. The Company incurred interest expense primarily from long-term debt associated with the Company's new facility.
INCOME TAXES
The Company recorded a provision for income taxes of $12.2 million for the year ended December 31, 1997 and $28.7 million for 1996. The Company's effective income tax rate of 38.4% remained consistent for the years ended December 31, 1997 and 1996.
NET INCOME
The Company's net income decreased to $19.6 million for the year ended December 31, 1997 from $46.0 million for the year ended December 31, 1996, a decrease of $26.4 million.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES
Net sales increased to $218.6 million for the year ended December 31, 1996 from $172.8 million for the year ended December 31, 1995, an increase of $45.8 million, or 26.5%. This increase was principally the result of substantially higher sales in 1996 for the EYE JACKET and WIRES sunglasses and the introduction of new sunglasses, including TRENCHCOATS in late 1995, sports-specific M FRAMES and ZEROS in March 1996, STRAIGHT JACKETS in May 1996, SQUARE WIRES in June 1996, PRO M FRAMES in October 1996 and a new line of FROGSKINS in December 1996. These increases were partially offset by moderate sales decreases in existing styles of M FRAMES and ZEROS sunglasses and significant sales decreases in the existing line of FROGSKINS, the Company's most mature product offerings. The decline in sales of the existing line of FROGSKINS was attributable in part to a 50% reduction in the number of models offered. This change in the Company's product mix contributed to an increase of 6.9% in the total average selling price of sunglasses in 1996 on unit growth of 26.2%. The Company's domestic sales grew 21.1% to $139.5 million from $115.2 million in the comparable 1995 period. The Company's international sales grew 37.3% to $79.1 million, or 36.2% of net sales, in 1996 from $57.6 million, or 33.3% of net sales, in 1995, principally as a result of increased sales in the continental European markets in which the Company sells on a direct basis and higher sales to distributors throughout the rest of the world, with the strongest growth in Europe, Southeast Asia and Brazil. Net sales for the three months ended December 31, 1996 reflect declining sales and order cancellations from the Company's largest customer, Sunglass Hut, as well as holiday business that was below the Company's expectations. Net sales decreased to $39.3 million for the three months
ended December 31, 1996 from $43.0 million in the comparable 1995 period, a decrease of $3.7 million, or 8.6%.
GROSS PROFIT
Gross profit increased to $151.8 million for the year ended December 31, 1996 from $122.5 million for the year ended December 31, 1995, an increase of $29.3 million, or 23.9%. As a percentage of net sales, gross profit decreased to 69.4% in 1996 from 70.9% in 1995. Gross profit as a percentage of net sales was negatively affected by inefficiencies in production during the fourth quarter of 1996 caused by reduced sales; a higher percentage of sales in lower margin goggles and clothing; a higher percentage of sales internationally at slightly lower margins and an increase in sales returns and discounts. These factors were partially offset by improvements in manufacturing efficiencies during the first nine months of 1996 and by higher average selling prices.
OPERATING EXPENSES
Operating expenses increased to $77.9 million for the year ended December 31, 1996 from $69.2 million for the year ended December 31, 1995, an increase of $8.7 million. The 1995 period includes a $4.8 million gain on the disposition of aircraft. On a pro forma basis in 1995 as discussed above, operating expenses would have increased to $77.9 million in 1996 from $56.9 million in 1995, an increase of $21.0 million, or 36.9%. Research and development costs increased $1.5 million in 1996 as a result of increased salaries and higher depreciation which partially reflects the Company's development costs associated with its X METAL line launched in early 1997. Selling expenses increased $12.3 million in 1996 principally as a result of higher advertising expenses, professional fees, and depreciation on store displays, additional personnel in sports marketing, advertising and sales, partially offset by, as a percentage of net sales, lower warranty costs and commissions. Warranty expense in 1996 benefited from the initiation in mid-year 1995 of a $9.39 warranty processing charge per unit, which contributed offsetting income of $1.5 million in 1996 and $0.6 million in 1995. As a percentage of net sales, shipping expenses increased to 3.0% in 1996 from 2.7% in 1995 as a result of higher shipping costs in the Company's European subsidiary. General and administrative expenses increased $5.4 million in 1996 as the Company added personnel and infrastructure to support its growth. In addition, the Company experienced increases in insurance, consulting fees and other expenses associated with being a public company. As a percentage of net sales, general and administrative expenses increased to 8.5% for 1996 from 7.6% for 1995. In general, the Company's operating expenses for 1996, as a percentage of net sales, were adversely affected by the negative leverage associated with the sales decrease in the fourth quarter described above.
OPERATING INCOME
The Company's operating income grew to $73.9 million for the year ended December 31, 1996 from $53.3 million for the year ended December 31, 1995, an increase of $20.6 million. On a pro forma basis in 1995 as discussed above, operating income would have increased to $73.9 million for 1996 from $65.6 million for 1995, an increase of $8.3 million, or 12.7%. This increase was the result of the Company's net sales growth, partially offset by a decline in the gross profit margin and an increase in operating expenses as a percentage of net sales.
INTEREST EXPENSE, NET
The Company had interest expense of $0.1 million and interest income of $0.8 million for 1996, as compared with interest expense of $0.6 million and interest income of $0.3 million for 1995.
INCOME TAXES
Prior to August 14, 1995, the Company elected to be treated as an S corporation under the provisions of the Internal Revenue Code. Accordingly, the provisions for income taxes for the periods through August 14, 1995 are computed by applying the California franchise tax rate for S corporations of 1.5% to the Company's pretax earnings, plus any foreign taxes. Effective August 14, 1995, the
Company converted to a C corporation and became subject to regular Federal and state income taxes on an ongoing basis. As a result, the Company recorded $1.6 million of deferred income tax assets on August 14, 1995. The Company recorded a provision for income taxes of $28.7 million for the year ended December 31, 1996 and $7.8 million for 1995. On a pro forma basis as discussed above, the Company's provision for income taxes was $25.7 million for 1995.
NET INCOME
The Company's net income increased to $46.0 million for the year ended December 31, 1996 from $45.2 million for the year ended December 31, 1995, an increase of $0.8 million. On a pro forma basis, net income increased to $46.0 million for 1996 from $39.6 million for 1995, an increase of $6.4 million, or 16.2%.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations almost entirely with cash flow generated from operations and borrowings from its credit facility. Cash provided by operating activities totaled $36.3 million for the year ended December 31, 1997 and $40.5 million for the comparable period of 1996. During the year ended December 31, 1997, the Company repurchased 304,000 shares of its common stock for $3.2 million. At December 31, 1997, working capital was $41.7 million. Working capital may vary from time to time as a result of seasonality, new product introductions, capital expenditures, including purchases of equipment and changes in inventory levels. In January 1997, the Company amended its unsecured line of credit to increase its borrowing limits from $18.0 million to $30.0 million. At December 31, 1997, there was $2.8 million in borrowings outstanding under such facility. In August 1997, the Company obtained a term loan collateralized by the Company's new headquarters. The term loan requires quarterly principal payments of approximately $380,000 plus interest based on LIBOR plus 1.15% (7.09% at December 31, 1997) for five years. The then outstanding balance payable is due in September 2002. At December 31, 1997, the outstanding balance on the term loan was $22.4 million.
Capital expenditures (other than those relating to the Company's new facility) for the year ended December 31, 1997 totaled $24.5 million. This includes $4.9 million of investments in an integrated, enterprisewide information system, $4.4 million for displays and new product tooling and $15.2 million for equipment and computers. In March 1997, the Company relocated to its new headquarters and manufacturing facility in Foothill Ranch, California. The total cost to construct and equip such facility was approximately $47.9 million. During 1997, the Company also completed an acquisition for an aggregate purchase price of approximately $2.6 million.
The Company believes that existing capital, anticipated cash flow from operations and current and anticipated credit facilities will be sufficient to meet operating needs and capital expenditures for the foreseeable future.
SEASONALITY
The following table sets forth certain unaudited quarterly data for the periods shown:
Historically, the Company's sales, in the aggregate, generally have been higher 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 generally 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, the success of the Company's products introduced since late 1993 and the Company's international expansion have partially mitigated the impact of seasonality.
BACKLOG
Historically, the Company has generally shipped domestic orders (other than preseason orders for ski goggles and orders from certain sunglass specialty chains) within one day of receipt and international orders within two weeks of receipt. At December 31, 1997, the Company had a backlog of $6.8 million, including backorders (merchandise remaining unshipped beyond its scheduled shipping date) of $1.1 million as of such date. In September 1997, the Company implemented changes in its replenishment system with Sunglass Hut, which affected its reported backlog. Under the new system, in an effort to more closely match inventory replenishment with Sunglass Hut's sales, certain high-volume Oakley products are shipped to Sunglass Hut weekly, based on the previous week's retail sales. As a result, Sunglass Hut will no longer place future shipment orders for these products except in anticipation of major seasonal sales increases. These changes reduced the Company's reported backlog at September 30, 1997 and December 31, 1997 and will continue to do so for future periods. These system enhancements are the result of the joint efforts of the two companies to achieve the long-term benefits of lower overall inventory levels, while increasing inventory turns and sales at retail.
INFLATION
The Company does not believe inflation has had a material impact on the Company in the past, although there can be no assurance that this will be the case in the future.
RECENT ACCOUNTING DEVELOPMENTS
In 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," were issued and are effective for fiscal years beginning after December 15, 1997. The Company is reviewing the impact of the statements on its financial statements.
OTHER MATTERS - YEAR 2000
The Company is assessing the internal readiness of its computer systems for handling the year 2000. The Company expects to successfully implement the systems and programming changes necessary to address year 2000 issues with respect to its internal systems and does not believe that the cost of such actions will have a material adverse effect on its results of operations or financial condition. Although the Company is not aware of any material operational issues or costs associated with preparing its internal systems for the year 2000, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of the necessary systems and changes to address the year 2000 issues, and the Company's inability to implement such systems and changes could have an adverse effect on future results of operations.
FORWARD-LOOKING STATEMENTS
When used in this document, the words "believes", "anticipates", "expects" and similar expressions are intended to identify in certain circumstances forward-looking statements. Such statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected, including risks related to the dependence on sales to Sunglass Hut; the acceptance in the marketplace of new products; the ability to source raw materials at prices favorable to the Company; the ability to develop and introduce innovative products; currency fluctuations; and other risks outlined in the Company's previously filed public documents, copies of which may be obtained without cost from the Company. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such statements. The Company also undertakes no obligation to update these forward-looking statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
See Note 9 to the Notes to Consolidated Financial Statements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements" for a listing of the consolidated financial statements submitted as part of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the Company's Proxy Statement for its Annual Shareholders Meeting to be held on June 19, 1998 to be filed with the Securities and Exchange Commission within 120 days after December 31, 1997 and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Company's Proxy Statement for its Annual Shareholders Meeting to be held on June 19, 1998 to be filed with the Securities and Exchange Commission within 120 days after December 31, 1997 and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Company's Proxy Statement for its Annual Shareholders Meeting to be held on June 19, 1998 to be filed with the Securities and Exchange Commission within 120 days after December 31, 1997 and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Company's Proxy Statement for its Annual Shareholders Meeting to be held on June 19, 1998 to be filed with the Securities and Exchange Commission within 120 days after December 31, 1997 and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) See page for a listing of financial statements submitted as part of this report.
(a)(2) All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are shown in the financial statements or are inapplicable, and therefore have been omitted.
(a)(3) The following exhibits are included in this report.
3.1 (1) Articles of Incorporation of the Company 3.2 (1) Bylaws of the Company 3.3 (5) Amendment No. 1 to the Articles of Incorporation as filed with the Secretary of State of the State of Washington on September 26, 1996 10.1 (1) Credit Agreement (the "Credit Agreement"), dated June 20, 1995, between Oakley, Inc., Wells Fargo Bank, National Association, and the Lenders named therein 10.2 (2) Credit Agreement (the "Amended and Restated Credit Agreement"), dated August 15, 1995, between Oakley, Inc., Wells Fargo Bank, National Association, as agent and the Lenders named therein 10.3 (3) First Amendment to Amended and Restated Credit Agreement dated November 22, 1995 by and among Oakley, Inc., Wells Fargo Bank, National Association, as agent and the Lenders named therein 10.4 (5) Second Amendment to Amended and Restated Credit Agreement dated as of October 10, 1996 by and among Oakley, Inc., Wells Fargo Bank, National Association, as agent and the Lenders named therein 10.5 (5) Third Amendment to Amended and Restated Credit Agreement dated as of November 25, 1996 by and among Oakley, Inc., Wells Fargo Bank, National Association, as agent and the Lenders named therein 10.6 Fourth Amendment to Amended and Restated Credit Agreement dated as of January 29, 1997 by and among Oakley, Inc., Wells Fargo Bank, National Association, as agent and the Lenders named therein 10.7 (6) Fifth Amendment to Amended and Restated Credit Agreement dated as of March 31, 1997 by and among Oakley, Inc., Wells Fargo Bank, National Association, as agent and the Lenders named therein 10.8 (6) Sixth Amendment to Amended and Restated Credit Agreement dated as of March 31, 1997 by and among Oakley, Inc., Wells Fargo Bank, National Association, as agent and the Lenders named therein 10.9 (7) Seventh Amendment to Amended and Restated Credit Agreement dated May 14, 1997 by and among Oakley, Inc., Wells Fargo Bank, National Association, as agent and the Lenders named therein 10.10 (7) Eighth Amendment to Amended and Restated Credit Agreement dated June 27, 1997 by and among Oakley, Inc., Bank of America National Trust and Savings Association and Union Bank of California N.A. 10.11 (8) Ninth Amendment to Amended and Restated Credit Agreement dated September 30, 1997 by and among Oakley, Inc., Bank of America National Trust and Savings Association and Union Bank of California N.A. 10.12 (1) Collateral Account Agreement, dated June 20, 1995, between Oakley, Inc. and Wells Fargo Bank, National Association, as agent for the Lenders party to the Credit Agreement
10.13 (2) Collateral Account Agreement, dated August 15, 1995, between Oakley, Inc. and Wells Fargo Bank, National Association, as agent for the Lenders party to the Amended and Restated Credit Agreement 10.14 (1) Security Agreement and Chattel Mortgage, dated June 20, 1995, between Oakley, Inc. and Wells Fargo Bank, National Association, as agent for the Lenders party to the Credit Agreement 10.15 (1) Trademark Collateral Security Agreement, dated June 20, 1995, between Oakley, Inc. and Wells Fargo Bank, National Association, as agent for the Lenders party to the Credit Agreement 10.16 (1) Patent Collateral Security Agreement, dated June 20, 1995, between Oakley, Inc. and Wells Fargo Bank, National Association, as agent for the Lenders party to the Credit Agreement 10.17 (1) Subordination Agreement, dated June 20, 1995, between Oakley, Inc., Buffalo Works, Inc., James H. Jannard and Mike D. Parnell 10.18 (1) Employment Agreement, dated as of August 1, 1995, between Oakley, Inc. and Jim Jannard 10.19 (5) Amendment No. 1 dated as of July 22, 1996 to Employment Agreement dated as of August 1, 1995, between Oakley, Inc. and Jim Jannard 10.20 (1) Employment Agreement, dated as of August 1, 1995, between Oakley, Inc. and Mike Parnell 10.21 (5) Amendment No. 1 dated as of May 23, 1996 to Employment Agreement dated as of August 1, 1995, between Oakley, Inc. and Mike Parnell 10.22 (6) Amendment No. 2 to employment agreement, dated February 1, 1997, between Oakley, Inc. and Mike Parnell 10.23 (2) Guaranty, dated August 15, 1995, by the Guarantors named therein and Wells Fargo Bank, National Association, as agent for the Lenders party to the Amended and Restated Credit Agreement 10.24 (2) Shareholder Pledge Agreement (original and English translation), dated August 15, 1995 between Oakley, Inc. and Wells Fargo Bank, National Association, as agent for the Lenders party to the Amended and Restated Credit Agreement 10.25 (2) Subordination Agreement, dated August 15, 1995 between the Initial Subordinated Creditors named therein and Wells Fargo Bank, National Association, as agent for the Lenders party to the Amended and Restated Credit Agreement 10.26 (2) Promissory Note, dated August 8, 1995 between Oakley, Inc. and James H. Jannard 10.27 (2) Promissory Note, dated August 8, 1995 between Oakley, Inc. and M. and M. Parnell Revocable Trust 10.28 (3) Termination and Release Agreement, dated as of August 15, 1995 between Oakley, Inc. and Wells Fargo Bank, National Association, as agents for the Lenders party to the Credit Agreement 10.29 (5) Counterpart Subordination Agreement executed by Oakley (U.K.) Ltd. to the Subordination Agreement, dated as of August 15, 1995 between the Initial Subordinated Creditors and Wells Fargo Bank, National Association, as Agent under the Credit Agreement 10.30 (2) Agreement, dated July 17, 1995, between Oakley, Inc. and Michael Jordan 10.31 (1) Lease, dated September 15, 1988, between OO Partnership and Oakley, Inc. 10.32 (3) First Amendment to Lease dated December 31, 1995, by and between Oakley, Inc., and OO Partnership 10.33 (1) Agreement, dated July 31, 1995, between OO Partnership and Oakley, Inc. 10.34 (1) Lease, dated March 5, 1990, between Weyerhauser Mortgage Company and Oakley, Inc., as amended 10.35 (1) Sublease, dated August 17, 1992, between Western Digital Corporation and Oakley, Inc., as amended
10.36 (1) Purchase Agreement and Escrow Instructions, dated December 9, 1994, between Oakley, Inc. and Foothill Ranch Development Corporation 10.37 (3) Oakley, Inc. 1995 Stock Incentive Plan 10.38 (3) Oakley, Inc. Amended and Restated 1995 Stock Incentive Plan 10.39 (3) Oakley, Inc. Executive Officer Performance Bonus Plan 10.40 (1) Employment Agreement, dated as of April 1, 1995, between Oakley, Inc. and Link Newcomb 10.41 (6) Employment Agreement, dated as of January 31, 1997, between Oakley, Inc. and Link Newcomb 10.42 (6) Amendment No. 1 to employment agreement, dated February 1, 1997, between Oakley, Inc. and Link Newcomb 10.43 (3) Indemnification Agreement, dated August 1, 1995, between Oakley, Inc. and Jim Jannard 10.44 (1) Schedule of indemnification agreements between Oakley, Inc. and each of its directors and executive officers 10.45 (1) Standard Form of Agreement between Owner and Project Manager, dated December 30, 1994, between Oakley, Inc. and Snyder Langston 10.46 (1) Lease Agreement, dated January 26, 1995, between Oakley Europe, sarl and Investipierre 7 (In French with English translation) 10.47 (3) Aircraft Lease Agreement, dated August 10, 1995, between Oakley, Inc. and X, Inc. 10.48 (3) Aircraft Lease Agreement, dated August 10, 1995, between Oakley, Inc. and Time Tool Incorporated 10.49 (1) Registration Rights Agreement, dated August 1, 1995, between Oakley, Inc., Jim Jannard and the M. and M. Parnell Revocable Trust 10.50 (3) Indemnification Agreement, dated August 9, 1995, between Oakley, Inc., Jim Jannard and the M. and M. Parnell Revocable Trust 10.51 (4) Indemnification Agreement, dated June 6, 1996, between Oakley, Inc., Jim Jannard and the M. and M. Parnell Revocable Trust 10.52 (6) Employment Agreement, dated as of January 16, 1997, between Oakley, Inc. and Robert Bruning 10.53 (6) Pledge Agreement, dated as of January 1997, between Oakley, Inc. and Wells Fargo Bank, National Association, as agent and the Lenders named therein 10.50 (6) Reciprocal Exclusive Dealing Agreement dated March 11, 1997 among Oakley, Inc., Gentex Optics, Inc. and Essilor International Compagnie Generale D'Optique, S.A. (portions of this document have been omitted pursuant to a request for confidential treatment) 10.54 (6) Promissory Note, dated March 20, 1997, between Oakley, Inc. and Bank of America National Trust and Savings Association 10.55 (8) Consultant Agreement, dated as of August 1, 1997, between Oakley, Inc. and Mike Parnell 10.56 (8) Consultant Agreement, dated as of August 1, 1997, between Oakley, Inc. and Jim Jannard 10.57 (8) Promissory Note, dated August 7, 1997, between Oakley, Inc. and Bank of America National Trust and Savings Association 10.58 (8) Amendment No. 1 to Promissory Note, dated August 14, 1997, between Oakley, Inc. and Bank of America National Trust and Savings Association 10.59 (8) Amendment No. 2 to Promissory Note, dated August 14, 1997, between Oakley, Inc. and Bank of America National Trust and Savings Association
10.59 (8) Deed of Trust with Assignment of Rents, Security Agreement and Fixture Filing, dated August 7, 1997, between Oakley, Inc. and Bank of America National Trust and Savings Association 10.60 (8) Standing Loan Agreement , dated August 7, 1997 between Oakley, Inc. and Bank of America National Trust and Savings Association 10.61 First Amendment to Standing Loan Agreement, dated January 12, 1998, between Oakley, Inc. and Bank of America National Trust and Savings Association 10.62 Indemnification Agreement, dated October 3, 1997, between Oakley, Inc. and William D. Schmidt 10.63 Employment Agreement, dated October 6, 1997 between Oakley, Inc. and Thomas A. George 10.64 Indemnification Agreement, dated October 6, 1997 between Oakley, Inc. and Thomas A. George 21.1 List of Material Subsidiaries 23.1 Consent of Deloitte & Touche, LLP, independent auditors 27.1 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-Q of Oakley, Inc. for the quarter ended September 30, 1995.
(3) Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31, 1995.
(4) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended September 30, 1996.
(5) Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31, 1996.
(6) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended March 31, 1997.
(7) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended June 30, 1997.
(8) Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended September 30, 1997.
(b) Reports on Form 8-K There were no reports on Form 8-K filed during the fourth quarter of 1997.
(c) See (a) (2) above for a listing of the exhibits included as a part of this report.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report...........................................
Consolidated Balance Sheets as of December 31, 1996 and 1997 ..........
Consolidated Statements of Income for the Years ended December 31, 1995, 1996 and 1997....................................................
Consolidated Statements of Changes in Shareholders' Equity for the Years ended December 31, 1995, 1996 and 1997...........................
Consolidated Statements of Cash Flows for the Years ended December 31, 1995, 1996 and 1997.......................................
Notes to Consolidated Financial Statements.............................
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Oakley, Inc.:
We have audited the accompanying consolidated balance sheets of Oakley, Inc. and subsidiaries (the Company) as of December 31, 1996 and 1997 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of Oakley, Inc. and subsidiaries as of December 31, 1996 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
February 6, 1998 Costa Mesa, California
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
See accompanying notes to consolidated financial statements.
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT SHARE DATA)
OAKLEY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share data)
See accompanying notes to consolidated financial statements.
OAKLEY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
During the year ended December 31, 1995, the Company distributed aircraft to shareholders with a fair value of $11.2 million in the form of a dividend. At December 31, 1995, the Company had unpaid S distribution notes with an estimated balance of $0.3 million.
See accompanying notes to consolidated financial statements.
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS - The Company is an innovation-driven designer, manufacturer and distributor of high-performance eyewear and athletic equipment. The Company's principal strength is its ability to develop eyewear which demonstrates superior optical performance and comfort through the combination of patented technology and unique styling. The Company has focused on innovation for sports application eyewear, and its products are worn by a variety of athletes, such as skiers, cyclists, runners, surfers, golfers, basketball and baseball players and motocross riders. In addition, the Company's products, which are currently sold in over 70 countries worldwide, have become increasingly popular in the larger nonsports, or recreational, segment of the sunglass market.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Oakley, Inc. (a Washington corporation, which succeeded to all the assets and liabilities of Oakley, Inc., a California corporation) and its subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS - For purposes of the consolidated financial statements, investments purchased with an original maturity of three months or less are considered cash equivalents.
INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are provided for using the straight-line method over the estimated useful lives (generally three to seven years for property and equipment and 39 years for buildings) of the respective assets or, as to leasehold improvements, the term of the related lease if less than the estimated service life.
INTANGIBLE ASSETS - The excess of cost over fair market value of net identifiable assets of acquired companies and other intangible assets of $8,767,000 in 1996 and $10,870,000 in 1997 included in other assets in the accompanying balance sheet are amortized on a straight-line basis over periods ranging from ten to fifteen years. The carrying value of intangible assets is periodically reviewed by the Company based on the estimated future operating income of each acquired entity on an undiscounted cash flow basis. Based upon its most recent analysis, the Company believes that no material impairment of intangible assets exists at December 31, 1997.
LONG-LIVED ASSETS - The Company accounts for the impairment and disposition of long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In accordance with SFAS No. 121, long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. As of December 31, 1997, no impairment has been indicated.
REVENUE RECOGNITION - Revenue is recognized when merchandise is shipped to a customer. Generally the Company extends credit to its customers and does not require collateral. The Company performs ongoing credit evaluations of its customers and historic credit losses have been within management's expectations.
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
FINANCIAL INSTRUMENTS - The carrying amounts of financial instruments, consisting of cash and cash equivalents, trade accounts receivables and accounts payable, approximates fair value due to the short period of time between origination of the instruments and their expected realization. Management also believes the carrying amount of balances outstanding under the credit agreements equals fair value as the underlying interest rates reflect market rates.
INCOME TAXES - The Company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes." Deferred taxes on income result from temporary differences between the reporting of income for financial statements and tax reporting purposes. Prior to August 14, 1995, the Company elected to be treated as an S corporation under the provisions of the Internal Revenue Code. Accordingly, the provision for income taxes for the periods through August 14, 1995 are computed by applying the California franchise tax rate for S corporations of 1.5% to the Company's pretax earnings, plus any foreign taxes. Effective August 14, 1995, the Company converted to a C corporation and became subject to regular Federal and state income taxes on an ongoing basis. As a result, the Company recorded $1.6 million of deferred income tax assets on August 14, 1995 through a benefit recorded on the statement of income.
FOREIGN CURRENCY TRANSLATION - The Company's primary functional currency is the U.S. dollar, while the functional currency of each of the Company's subsidiaries is the local currency of the subsidiary. Assets and liabilities of the Company denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using the average exchange rate for the period. Gains and losses on short-term intercompany foreign currency transactions are recognized as incurred. (Note 9)
SUPPLEMENTAL NET INCOME - Supplemental net income represents the results of operations adjusted to reflect a provision for income tax on historical income before provision for income taxes which gives effect to the change in the Company's income tax status to a C corporation subsequent to the public sale of its common stock. The difference between the pro forma income tax rates utilized and the Federal statutory rate of 35% relates primarily to state income taxes (approximately 5%, net of federal tax benefit).
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
EARNINGS PER SHARE - The Company has adopted SFAS No. 128, "Earnings Per Share." All earnings per share amounts have been restated to conform to SFAS No. 128. Basic earnings per share is computed using the weighted average number of common shares outstanding during the reporting period. Earnings per share assuming dilution is computed using the weighted average number of common shares outstanding and the dilutive effect of potential common shares outstanding. For the years ended December 31, 1996 and 1997, the diluted weighted average common shares outstanding includes 404,000 and 41,000, respectively, of dilutive stock options.
NEW ACCOUNTING PRONOUNCEMENTS - In 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," were issued and are effective for fiscal years beginning after December 15, 1997. The Company is reviewing the impact of these statements on its financial statements.
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
RECLASSIFICATIONS - Certain reclassifications have been made to prior period financial statements to conform to the presentation for the financial statements for the period ended December 31, 1997.
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
GENERAL BUSINESS - The Company's historical success is attributable, in part, to its introduction of products which are perceived to represent an improvement in performance over products available in the market. The Company's future success will depend, in part, upon its continued ability to develop and introduce such innovative products, and there can be no assurance of the Company's ability to do so. The sunglass industry is fragmented and highly competitive. In order to retain its market share, the Company must continue to be competitive in the areas of quality, technology, method of distribution, style, brand image, intellectual property protection and customer service. The eyewear industry is subject to changing consumer preferences; shifts in consumer preferences may adversely affect companies that misjudge such preferences.
In addition, the Company has experienced significant growth under several measurements which has placed, and could continue to place, a significant strain on its employees and operations. If management is unable to anticipate or manage growth effectively, the Company's operating results could be materially adversely affected.
USE OF ESTIMATES - The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the balance sheet dates and the reported amounts of revenue and expense during the reporting periods. Actual results could differ from such estimates.
VULNERABILITY DUE TO SUPPLIER CONCENTRATIONS - The Company relies on a single source for the supply of several components, including the uncoated lens blanks from which substantially all of its sunglass lenses are cut. The effect of the loss of any of these sources or of a disruption in their business will depend primarily upon the length of time necessary to find a suitable alternative source. The loss of the source for lens blanks or a disruption in such source's business or failure by it to meet the Company's product needs on a timely basis could cause, at a minimum, temporary shortages in needed materials and could have a material adverse effect on the Company's results of operations.
VULNERABILITY DUE TO CUSTOMER CONCENTRATIONS - Net sales to a sunglass specialty retail chain accounted for approximately 28.8%, 31.0% and 21.5% of such sales for the years ended December 31, 1995, 1996 and 1997, respectively.
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 2 - ACQUISITIONS
During 1996, the Company acquired its exclusive distributor for the Company's products in the United Kingdom and Ireland ("Oakley U.K.") and a facility for the production of a new product line for an aggregate purchase price of approximately $14.2 million. During 1997, the Company acquired One Xcel, a company that designs, markets and distributes protective face shields for use with sports helmets, for an aggregate purchase price of approximately $2.6 million. All such acquisitions were recorded using the purchase method of accounting and the results of operations from the date of acquisition have been included in the Company's respective 1996 and 1997 financial statements. The excess of the purchase price over the fair values of the net assets acquired has been allocated to intangible assets, which are included in the caption "Other assets" in the accompanying consolidated balance sheet and are being amortized on a straight-line basis over a period of ten to fifteen years. Had the acquisitions occurred on January 1, 1995, combined pro forma net sales, net income and net income per common share would not have been materially different from that currently being reported.
NOTE 3 - INVENTORIES
Inventories consist of the following at December 31,:
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31,:
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 5 - INCOME TAXES
The provision for income taxes consists of the following for the years ended December 31,:
A reconciliation of income tax expense computed at U.S. Federal statutory rates to income tax expense for the years ended December 31, is as follows:
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at December 31, are as follows:
NOTE 6 - DEBT
LINE OF CREDIT - The Company has a $30.0 million unsecured line of credit with a bank syndicate which bears interest at either the bank's prime lending rate (8.50% at December 31, 1997) or LIBOR plus 1.00% (6.94% at December 31, 1997), as defined in the credit agreement, and matures June 1999. At December 31, 1997, there was $2.8 million in borrowings outstanding under the credit agreement. The credit agreement contains various restrictive covenants including the maintenance of certain financial ratios. At December 31, 1997, the Company was in compliance with all restrictive covenants and financial ratios.
LONG TERM DEBT - In August 1997, the Company obtained a term loan collateralized by the Company's corporate facility. The term loan requires quarterly principal payments of approximately $380,000 ($1,519,000 annually), plus interest based upon LIBOR plus 1.15% (7.09% at December 31, 1997) for five years. The then outstanding balance payable is due in September 2002. At December 31, 1997, the outstanding balance under the term loan was $22.4 million.
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 7 - COMMITMENTS AND CONTINGENCIES
LEASES - The Company is committed under noncancelable operating leases expiring at various dates through 2001 for certain offices, warehouse facilities, production facilities and aircraft. The aircraft are leased from entities controlled by officers and shareholders of the Company. Minimum future annual rentals under these leases are as follows:
Prior to the Company's relocation in 1997, certain offices were leased on a month-to-month basis from an officer and a shareholder. Rent expense is summarized as follows for the years ended December 31,:
PURCHASE COMMITMENTS - In March 1997, the Company entered into a four-year exclusive dealing agreement with its lens blank supplier and the supplier's French parent, pursuant to which the Company received the exclusive right to purchase decentered sunglass lenses, in return for the Company's agreement to fulfill all its lens requirements, subject to certain exceptions, from such supplier. The Company expects its minimum obligations under the term of this agreement to be 18.5 million units, with an aggregate estimated purchase price of between $50.0 million and $55.0 million.
EMPLOYMENT AND CONSULTING AGREEMENTS - The Company has entered into employment and consulting agreements with certain employees of the Company which have terms of two to four years. The agreements require minimum aggregate compensation to the respective officers. Additionally, the officers participate in a performance bonus plan, and the employment agreements establish minimum bonus targets for such employees.
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
ENDORSEMENT CONTRACTS - The Company has entered into several endorsement contracts with selected athletes and others who endorse the Company's products. Under the contracts, the Company has agreed to pay certain incentives based on performance and is required to pay minimum annual payments as follows:
Included in such amounts is an annual retainer of $0.5 million through 2005 for a director of the Company.
LITIGATION - During December 1996, three putative class action lawsuits ("the California Securities Actions") were filed in the California Superior Court for the County of Orange against the Company and three of its officers and directors alleging material misstatements and omissions in certain of the Company's public statements, SEC filings and reports of third-party analysts. The plaintiffs seek unspecified damages and other relief. In addition, one of the lawsuits also asserted claims against firms who served as underwriters of the June 6, 1996 offering of the Company's common stock by certain of its shareholders of (the "Secondary Offering"). Pursuant to certain provisions of the underwriting agreement between the Company and the firms, the Company agreed to indemnify the firms against certain liabilities, including liabilities under the Securities Act. Pursuant to a court order sustaining demurrers to certain claims and to an agreement with plaintiffs to dismiss certain other claims, the only claim remaining in the California Securities Actions is a claim for purported violations of the antifraud provision of the California Corporation Code with respect to two of the Company's officers and directors. In March 1997, the Company was named as a nominal defendant in a putative derivative action against two of the Company's officers and directors based on substantially the same allegations as those in the California Securities Actions. The derivative plaintiff seeks to recover damages and other relief on behalf of the Company. On February 4, 1998, the court entered a final order of dismissal of the putative derivative action. The Company does not know whether the derivative plaintiff plans to appeal the court's final order. 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 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. Although it is too soon to predict the outcome of the California Securities Actions or the Federal Securities Actions with any certainty, based on its current understanding of the facts, the Company believes that the plaintiffs' claims are without merit and intends to vigorously defend the actions.
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
In addition, the Company is currently involved in litigation incidental to the Company's business. In the opinion of management, the ultimate resolution of such litigation, in the aggregate, will not have a significant effect on the accompanying consolidated financial statements.
NOTE 8 - SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING - In August 1995, the Company completed an initial public offering of 6,600,000 shares of the Company's common stock for $11.50 per share, netting proceeds to the Company after underwriting discounts and expenses of approximately $69.1 million.
S CORPORATION DISTRIBUTION - Prior to the consummation of the public offering, the Company distributed to Oakley's shareholders certain fixed assets and a portion of previously earned undistributed taxable S corporation earnings. In conjunction with the distribution of assets, the Company recorded a gain of $4.9 million for the year ended December 31, 1995, representing the excess of the fair value of the assets distributed over their respective net book values. Additionally, concurrently with the consummation of the initial public offering, Oakley shareholders contributed certain assets totaling $0.8 million to the Company. Upon consummation of its initial public offering, in accordance with a regulation of the Securities and Exchange Commission, the Company reclassified $5.1 million of retained earnings to additional paid-in capital. This amount represents for financial reporting purposes previously earned and undistributed taxable S corporation earnings.
STOCK SPLIT - On September 11, 1996, the Company declared a two-for-one stock split to be effected in the form of a one-share dividend per share of its common stock. The new shares were distributed on October 10, 1996 to shareholders of record at the close of business at September 25, 1996. All share and per share amounts included in the accompanying consolidated financial statements and footnotes have been restated to give retroactive recognition to the stock split in prior periods by reclassifying from retained earnings to common stock the par value of the additional shares arising from the split.
STOCK REPURCHASE - In October 1996, the Company's Board of Directors authorized the repurchase by the Company of up to three million shares of the Company's common stock. As of December 31, 1997, the Company had repurchased 756,100 shares at an aggregate cost of approximately $9.6 million.
STOCK INCENTIVE PLAN - The Company's 1995 Stock Incentive Plan (the "Plan") provides for stock-based incentive awards, including incentive stock options, nonqualified stock options, restricted stock, performance shares, stock appreciation rights and deferred stock to Company officers, employees, advisors and consultants. A total of 5,712,000 shares have been reserved for issuance under the Plan. At December 31, 1997, stock options for 760,822 shares were exercisable and 2,423,808 shares were available for issuance pursuant to stock option grants.
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
The following table summarizes information with respect to the Plan for the years ended December 31, 1995, 1996 and 1997:
Additional information regarding options outstanding as of December 31, 1997 is as follows:
As disclosed in Note 1, the Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock-based awards. No compensation expense has been recognized in the financial statements for employee stock arrangements. SFAS No. 123, "Accounting for Stock-Based Compensation," requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method in accounting for stock-based awards as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option-pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option-pricing model with the following weighted average assumptions: expected life: 36 to 60 months; stock volatility, 9.4% - 63.5% in 1995, 45.7% - 77.4% in 1996 and 54.5% - 71.3% in 1997; risk-free interest rates, 5.5% in 1995, 1996 and 1997; no dividends during the expected term and forfeitures are recognized as they occur.
If the computed fair value of the 1995, 1996 and 1997 awards had been amortized to expense over the vesting period of the awards, net income would have been $45,017,000 in 1995, $45,531,000 in 1996 and $18,117,000 in 1997. The basic and diluted earnings per share on such basis would have been $0.64 in 1996 and $0.26 in 1997.
NOTE 9 - HEDGING ACTIVITIES
Certain of the Company's foreign subsidiaries enter into derivative financial instruments, including foreign currency forward exchange contracts, to manage foreign exchange risk on foreign currency transactions and do not use the contracts for trading purposes. These financial instruments are used to protect the Company from the risk that the eventual net cash inflows from the foreign currency transactions will be adversely affected by changes in exchange rates. Gains and losses related to hedges of firmly committed transactions are deferred and recognized when the hedged transaction occurs. Gains and losses resulting from foreign currency contracts which are not hedges of firmly committed transactions are recorded each period to the consolidated statement of income.
A summary of forward exchange contracts is as follows:
The Company is exposed to credit losses in the event of nonperformance by counterparties to its forward exchange contracts but has no off-balance sheet credit risk of accounting loss. The Company anticipates, however, that the counterparties will be able to fully satisfy their obligations under the contracts. The Company does not obtain collateral or other security to support the forward exchange contracts subject to credit risk but monitors the credit standing of the counterparties. As of December 31, 1997, each of the contracts was recorded at fair market value and the resulting gains and losses were recorded to the consolidated statements of income.
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 10 - NET SALES
Net sales are summarized as follows for the years ended December 31,:
1995 1996 1997 ------------ ------------ ------------ Domestic $115,202,000 $139,459,000 $113,942,000 International 57,550,000 79,107,000 80,042,000 ------------ ------------ ------------ $172,752,000 $218,566,000 $193,984,000 ------------ ------------ ------------ ------------ ------------ ------------
NOTE 11 - DOMESTIC AND FOREIGN OPERATIONS
The Company has one business segment which consists of the design, manufacture and sale of high-performance eyewear and athletic equipment. Information related to domestic and foreign operations is as follows:
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED)
OAKLEY, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFIYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, 1997
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
OAKLEY, INC.
By: /s/ Jim Jannard ---------------------- Jim Jannard CHAIRMAN AND PRESIDENT
Date: March 19, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/ Jim Jannard Chairman and President March 19, 1998 - --------------------- (Principal Executive Officer) Jim Jannard
/s/ Mike Parnell Vice Chairman and Director March 19, 1998 - --------------------- Mike Parnell
/s/ Link Newcomb Chief Executive Officer March 19, 1998 - --------------------- and Director Link Newcomb
/s/ Thomas George Chief Financial Officer March 19, 1998 - --------------------- (Principal Accounting Officer) Thomas George
/s/ Irene Miller Director March 19, 1998 - --------------------- Irene Miller
/s/ Orin Smith Director March 19, 1998 - --------------------- Orin Smith
/s/ Michael Jordan Director March 19, 1998 - --------------------- Michael Jordan
/s/ William Schmidt Director March 19, 1998 - --------------------- William Schmidt