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 sunglasses and goggles. 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 six lines of sunglasses (FROGSKINS, M FRAMES, ZEROS, WIRES, JACKETS and X METAL) and three lines of goggles.
PRODUCT DESIGN AND DEVELOPMENT The Company's products are designed through the efforts of the Company's in-house design staff. In formulating design concepts and product ideas, the staff focuses on developing products with demonstrable improvements in performance, creating breakaway designs, some of which can be patent protected, and finding creative solutions to the functional problems of active sunglass wearers. Designers utilize state-of-the-art technology, including a three-dimensional CAD/CAM system and liquid laser prototyping, to create a fully detailed, wearable prototype within 20 hours. As a result, the Company has dramatically shortened its product development cycle by facilitating rapid iterations of working prototypes and components leading to a final model which can then be used directly in the preparation of a mold. This process allows for the extensive testing and perfecting of a product, before introducing it to the public. Through the use of such technology, the Company is capable of introducing a new product line within four months of initial concept.
The Company subjects its eyewear to a series of industrial standard tests, known as "Z87.1," established by American National Standards Institute ("ANSI") and conducted by an independent laboratory. The Company also conducts such ANSI tests in its own facilities on a regular basis. The Industrial Standard ANSI Z87.1 includes tests of sunglasses for optical quality, high velocity impact and high mass impact. When subjected to ANSI's test for optical quality, Oakley's sports-application sunglasses featuring its patented polaric ellipsoid lens geometry (including M FRAMES and ZEROS) have demonstrated superior optical clarity when compared to similar products of its principal competitors.
Oakley has obtained patents covering a number of its proprietary manufacturing methods and product features. Among the Company's most important patents and proprietary information are its toroidal single-lens geometry and associated manufacturing processes and certain of the Company's frame components and materials. The proprietary technology the Company employs in its lens-cutting, etching and coating processes and the Company's significant investment in specialized equipment, together with certain exclusive materials used in production, contribute to the superior optical quality and impact-resistance of Oakley products.
Another of Oakley's most significant developments has been the IRIDIUM coating on the PLUTONITE lens. IRIDIUM is a metallic oxide coating that increases contrast and color saturation, which enables the wearer to perceive details in shadows or low or bright light conditions. This coating has proven very popular in demanding sports, such as skiing and cycling, and in high altitude use. The
distinctive look of the IRIDIUM-coated lens has become popular with recreational sunglass wearers. Another hallmark of Oakley's initial sunglass products was their detachable and interchangeable components, including lenses, frames, temples and nosepieces in different colors and shapes. Interchangeable components for certain Oakley sunglasses contribute to the overall Oakley appeal by allowing consumers to customize their sunglasses to their personal tastes and to modify them for specific conditions such as low and bright light.
Oakley has developed sports-application sunglasses for the prescription/corrective lens segment of the market in its M FRAME and ZEROS lines. The Company's approach has been to develop products that integrate prescriptions lenses into Oakley's current lens geometry system. Because of the curvature of the Oakley lens, Oakley adjusts the corrective implants by a computer model to modify the athlete's prescription to an "as worn" position. This feature, and the specialized equipment needed to cut and edge the lenses, together with Oakley's PLUTONITE lens material, allow the Company to be the exclusive provider of these corrective lenses. The Company uses an outside ophthalmic laboratory to grind the corrective lenses. These products have enabled Oakley to attract several 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, the world's leading producer of advanced-technology polycarbonate lenses, and its parent, Essilor International, a large global optical company. Under the program, Gentex will manufacture Oakley-branded prescription lenses which will be distributed through Essilor's wholesale laboratories worldwide for use in Oakley's current and future sunglass and ophthalmic frames. All of Oakley's prescription products will continue to be available only in Oakley's authorized retailers.
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. In February 1997, Oakley released its first sunglass in the X METAL line. The X METAL line applies unique design and manufacturing technology that Oakley believes is the first eyewear company to incorporate such technology. In addition to the X METAL line, the Company intends to introduce other sunglass line extensions and new lines of sunglasses in 1997. The Company believes that these new products will continue to attract additional consumers from the nonsports segment of the sunglass market. The success of any new product line is dependent on various factors, including product demand, production capacity and the availability of raw materials and critical manufacturing equipment. Other factors and assumptions not identified above were also involved in preparing forward-looking information relating to product development and introductions, including that contained above. The uncertainty associated with all the above factors, and any change in such factors from the Company's expectations, could result in cost increases, delays or cancellation of such new products and may also cause actual results to differ materially from those projected.
To take advantage of unique opportunities, the Company may manufacture private label or other sunglasses for other companies and intends to market and sell sunglasses under brand names other than "Oakley". In addition, the Company has licensed, and may in the future determine to further license, its intellectual property rights to others in the optical or other industries.
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) and 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 and X METAL. 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'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:
* The Company's original FROGSKIN line was introduced in 1985 and was discontinued after the new style was introduced in 1996.
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.
As the Oakley brand name has become increasingly popular, demand has also grown for Oakley accessories. While the Company does not actively market accessories, it does selectively put its logo on shirts, gear bags, hats and other items. Management has repeatedly declined licensing opportunities in order the 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 which in some cases may include limited licensing.
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 that contribute significantly to gross profit margins, provide protection against piracy of the Company's proprietary information and processes, and enable the Company to manufacture products in accordance with its strict quality control standards. Components and processes that are unlikely to add significant value will continue to be 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. Due to a reduction in the level of sales in late 1996, the Company's finished goods inventory at December 31, 1996 was higher than historical inventory levels.
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 will receive 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 will purchase all of its decentered lens requirements 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 with approximately 10,500 locations comprised of optical stores, sunglass retailers and specialty sports stores, including bike, surf, ski and golf shops and motorcycle, running and sporting goods stores. Most of the Company's accounts, other than sunglass retail chains, have a single store. 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.
In an effort to preserve and enhance the Company's brand image, Oakley stopped soliciting new retail accounts in the United States, with limited exceptions, in November 1989. The Company's current level of distribution, with the addition of key niche retailers 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 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 Europe, marketing and distribution is handled directly by the Company's Oakley Europe subsidiary, located near Paris, France, which is staffed by approximately 80 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 Switzerland and Austria. Since 1995, the Company has been selling to Mexico on a direct market basis through its subsidiary Oakley Mexico. In 1996, the Company acquired its exclusive distributor in the United Kingdom ("Oakley UK") and South Africa ("Oakley Africa") and began selling to those markets on a direct basis in the fourth quarter of 1996. In those parts of the world not serviced by Oakley Europe, Oakley UK, Oakley Africa or Oakley Mexico, 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. In February 1997, the Company announced that it expects to begin selling to Japan on a direct basis in May 1997. For information regarding the Company's operations by geographic region, see Note 9 and Note 10 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. Each product shipped from Oakley's headquarters is marked with a tracking code that allows the Company to determine the source of diverted products sold by unauthorized retailers, 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 national sales force of approximately 83 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 largely 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 20 sports marketing experts domestically, with an additional 15 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 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 90-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 obtaining brand recognition is through the use of sports marketing, which places the Oakley brand before consumers through the editorial endorsements of influential athletes and other personalities, some of whom have formal arrangements with the Company. Oakley supports its sports marketing with print advertising. The Company's print advertisements often serve to educate consumers on the health and performance benefits of Oakley products as well as to impart technical information in layman's terms. The Company advertises and promotes its products through print media, outdoor media, in-store visual displays and other point-of-sale materials. The Company focuses its print media campaign in sport publications and also focuses part of its print media campaign in lifestyle/music publications, which target younger consumers. Oakley retains significant control over its advertising programs and is able to deliver a consistent, well-recognized advertising message at a substantial cost savings compared to complete reliance upon outside advertising agencies.
PRINCIPAL CUSTOMERS During 1996, net sales to the Company's ten largest customers, which included international distributors, accounted for over 50% 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 31.0% of the Company's 1996 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, 1996, approximately 235 of the 2,090 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 1996 three 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, 1996 concerning the Company's intellectual property:
NUMBER OF UTILITY/DESIGN PATENTS ISSUED PENDING TRADEMARKS United States 60 29 76 International 233 158 320
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 suspect 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.
In mid-1995, the Company received a letter from an individual owner of a United States patent, issued in late 1991, which he claims covers a production process utilized by the Company for a portion of its products. On the basis of the company's investigation completed to date and discussions with the owner of such patent, the Company believes that it could, if necessary, acquire or license the patent, or take other steps to resolve the matter, without a material adverse effect on the Company. Many of the Company's products on which the claim is based have been discontinued.
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 and Lomb (which markets Killer Loop), Luxottica (which markets Briko), Nike, Bolle and various niche brands, compete for the Company's shelf space. In order to retain its market share, the Company must continue to be competitive in the areas of quality and performance, technology, method of distribution, style, brand image, intellectual property protection and customer service.
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, distribution channels and the number and range of products offered. A number of established companies, including Bausch and Lomb (Ray Ban and Revo) and Luxottica, compete in this wider market. The Company differs from many of its competitors in that their 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.
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 14, 1997, there were a total of approximately 730 full-time employees. In addition, the Company utilizes as many as 450 occasional 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 will either expire or be terminated with no material adverse financial effect. In June 1996, the Company purchased a facility in Nevada for the production of metal eyewear which is approximately 63,000 square feet. In addition, the Company leases office and warehouse space as necessary to support its operations worldwide, including offices in Europe, Mexico and South Africa. The Company believes current 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 Company and certain of its officers 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 "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) (the "ROSENSHEIN Action");
HERSCHEL HARMAN V. OAKLEY, INC., MIKE PARNELL, LINK NEWCOMB AND JIM JANNARD, Case No. 773053 (filed December 17, 1996) (the "HARMAN Action"); 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) (the "SHER Action," and collectively with the Rosenshein and Harman Actions, the "California Securities Actions").
In the ROSENSHEIN and HARMAN Actions, the plaintiffs seek to represent a class of persons who purchased the Company's common stock between October 9, 1996 and December 4, 1996. In the SHER Action, 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 complaints in the California Securities Actions allege claims for violations of the antifraud provisions and certain other 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 SHER Action 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 four 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 in the SHER Action gave the Company notice of that action pursuant to the indemnification provisions of the U.S. Purchase Agreement dated June 6, 1996, for the Secondary Offering 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 SHER Action.
By order dated January 30, 1997, the Court ordered that the California Securities Actions be assigned to the Court's Complex Litigation Panel. The Company and the other defendants have not yet filed a response to any of the California Securities Actions. The plaintiffs in each of the California Securities Actions have served document requests on the Company and others.
To date, no discovery of defendants has been taken in these matters. Although it is too soon to predict the outcome of the case with any certainty, based on its current knowledge of the facts, the
Company believes that the plaintiffs' claims are without merit and intends to vigorously defend the actions.
In addition, the Company is a party to various claims, complaints and other legal actions that have arisen in the normal course of business from time to time. The Company believes the outcome of these pending legal proceedings, in the aggregate, will not have a material adverse effect on the operations or financial position of the Company.
ITEM 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 August 10, 1995 on the New York Stock Exchange upon completion of the Company's initial public offering (trading symbol "OO"). On March 14, 1997, the closing sales price for the Common Stock was $10. The following table sets forth the high and low sales prices for the Common Stock for each quarterly period since such stock began trading on the New York Stock Exchange Composite Tape:
HIGH LOW ---- --- ---- Third Quarter (from August 10,1995) $16 15/16 $13 1/16 Fourth Quarter $19 5/8 $13 5/8
---- 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
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 14, 1997 was 506.
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. For certain information regarding distributions made by the Company in 1994 and 1995 (prior to its initial public offering in August 1995), see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
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, 1994, 1995, and 1996 and balance sheet data as of December 31, 1995 and 1996 included herein have been audited by Deloitte and Touche LLP, the Company's independent accountants, as indicated in their report included elsewhere herein. The selected pro forma income statement data set forth below is for informational purposes only and may not necessarily be indicative of the results of operations of the Company as they may be in the future.
(footnotes on next page)
(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 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 periods 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 periods.
Year Ended December 31, ---------------------------------- 1994 1995 1996 ---------- ---------- ---------- Net sales $123,952 $172,752 $218,566 Cost of goods sold 35,714 50,295 66,790 ---------- ---------- ---------- Gross profit 88,238 122,457 151,776
Operating expenses: Research and development 2,881 3,285 4,782 Selling 27,707 35,802 48,092 Shipping and warehousing 3,187 4,678 6,507 General and administrative 9,728 13,121 18,513 ---------- ---------- ---------- Total operating expenses 43,503 56,886 77,894 ---------- ---------- ---------- Operating income 44,735 65,571 73,882
Interest (income) expense, net 232 273 (781) ---------- ---------- ---------- Income before provision for income taxes 44,503 65,298 74,663 Provision for income taxes 17,870 25,694 28,670 ---------- ---------- ---------- Net income $ 26,633 $ 39,604 $ 45,993 ---------- ---------- ---------- ---------- ---------- ----------
The following table sets forth operating results (as a percentage of net sales) for the periods indicated:
Year Ended December, 31 --------------------------------- 1994 1995 1996 -------- -------- -------- Net sales 100.0% 100.0% 100.0% Cost of goods sold 28.8 29.1 30.6 -------- -------- -------- Gross profit 71.2 70.9 69.4
Operating expenses: Research and development 2.3 1.9 2.2 Selling 22.4 20.7 22.0 Shipping and warehousing 2.6 2.7 3.0 General and administrative 7.8 7.6 8.5 -------- -------- -------- Total operating expenses 35.1 32.9 35.7 -------- -------- -------- Operating income 36.1 38.0 33.7
Interest (income) expense, net 0.2 0.2 (0.4) -------- -------- -------- Income before provision for income taxes 35.9 37.8 34.1 Provision for income taxes 14.4 14.9 13.1 -------- -------- -------- Net income 21.5% 22.9% 21.0% -------- -------- -------- -------- -------- --------
The Company's sales before discounts for sunglasses were $110.6 million, $158.2 million and $212.8 million for the years ended December 31, 1994, 1995 and 1996, respectively. Sunglass unit sales were 2,685,972, 3,465,817 and 4,310,846 for the years ended December 31, 1994, 1995 and 1996, respectively.
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%. Due to excess Oakley inventory at Sunglass Hut, the Company expects net sales to Sunglass Hut in the first quarter of 1997 to be substantially below the net sales for the comparable period of 1996 and to remain the same or decrease for the full year 1997 as compared to 1996.
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. The Company expects gross profit as a percentage of net sales to continue to be affected by production inefficiencies through at least the first quarter of 1997 resulting from an anticipated decline in net sales from the prior year period.
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. The Company expects its operating margin to continue to be negatively impacted at least through the first quarter of 1997 resulting from an anticipated decline in net sales from the prior year period.
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%.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET SALES Net sales increased to $172.8 million for the year ended December 31, 1995 from $124.0 million for the year ended December 31, 1994, an increase of $48.8 million, or 39.4%. This increase was principally the result of substantial sales in 1995 for the EYE JACKET sunglasses, which were introduced by the Company in December 1994, significant sales increases in 1995 of WIRES and ZEROS and moderate sales increases of M FRAME sunglasses. These increases were partially offset by significant sales decreases in the Company's most mature product offerings, BLADES and RAZOR BLADE sunglasses, which were discontinued by the Company for 1996, as well as significant decreases in the lower-priced FROGSKINS, and the withdrawal of the Company's SUB ZERO product line in January 1995. The decline in sales of BLADE and RAZOR BLADE sunglasses was attributable principally to a
50% reduction for 1995 in the number of models offered and increased sales of M FRAME sunglasses, which represent an advancement of the Company's single-lens sports sunglasses. This change in the Company's product mix contributed to an increase of 10.8% in the total average selling price of sunglasses in 1995 on unit growth of 29.0%. The Company's international sales grew 72.5% to $57.6 million, or 33.3% of net sales, in 1995 from $33.4 million, or 26.9% of net sales, in 1994, 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 in the Company's other foreign markets.
GROSS PROFIT Gross profit increased to $122.5 million for the year ended December 31, 1995 from $88.2 million for the year ended December 31, 1994, an increase of $34.3 million, or 38.9%. As a percentage of net sales, gross profit decreased slightly to 70.9% in 1995 from 71.2% in 1994, principally as a result of higher production costs resulting from multiple-shift seven-day continuous production through most of 1995, increased prices for uncoated lens blanks, increased inventory shrinkage and increased net sales to foreign distributors which yield lower margins to the Company, partially offset by higher margins on sales by Oakley Europe as a result of higher selling prices (translated into dollars) due to favorable currency fluctuations, an improvement in the Company's lens reject rate and a shift in product mix to higher margin items. In addition, as part of the Company's continuing efforts to protect its brand image, the Company purchased its products from two discount retail chains in the United States to which such products were diverted. As a result, the Company recorded returns of $2.1 million for the year ended December 31, 1995 for the costs incurred in connection with such purchases.
OPERATING EXPENSES Operating expenses decreased to $69.2 million for the year ended December 31, 1995 from $74.2 million for the year ended December 31, 1994, a decrease of $5.0 million. On a pro forma basis as discussed above, operating expenses would have increased to $56.9 million in 1995 from $43.5 million in 1994, an increase of $13.4 million, or 30.8%. Selling expenses increased $8.1 million in 1995 principally as a result of salaries and commissions directly associated with higher sales levels, increases in sports marketing and advertising expenditures and higher depreciation from new store displays. As a percentage of net sales, selling expenses decreased from 22.4% in 1994 to 20.7% in 1995 because sports marketing and advertising expenses, warranty expense, trade show expenses and commissions grew more slowly than net sales. Warranty expense in 1995 benefited from the initiation in mid-year of a $9.39 warranty processing charge per unit, which contributed to warranty income of $0.6 million in 1995. General and administrative expenses increased $3.4 million in 1995 as the Company added the personnel and infrastructure necessary in response to its growth, including increased personnel, insurance and other expenses associated with being a public company. As a percentage of net sales, general and administrative expenses decreased to 7.6% for 1995 from 7.8% for 1994.
OPERATING INCOME The Company's operating income grew to $53.3 million for the year ended December 31, 1995 from $14.0 million for the year ended December 31, 1994, an increase of $39.3 million. On a pro forma basis as discussed above, operating income would have increased to $65.6 million for 1995 from $44.7 million for 1994, an increase of $20.9 million, or 46.8%. This increase was the result of the Company's net sales growth and a reduction of operating expenses as a percentage of net sales, partially offset by a slight decline in the gross profit margin.
INTEREST EXPENSE, NET The Company had interest expense of $0.6 million and interest income of $0.3 million for 1995, as compared with interest expense of $0.4 million and interest income of $0.2 million for 1994.
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 has recorded a provision for income taxes of $7.8 million for the year ended December 31, 1995 and $0.3 million for 1994. On a pro forma basis as discussed above, the Company's provision for income taxes was $25.7 million for 1995 and $17.9 million for 1994. The Company's consolidated effective tax rate as a C corporation for the period from August 14, 1995 to December 31, 1995 was 38.6%.
NET INCOME The Company's net income increased to $45.2 million for the year ended December 31, 1995 from $13.5 million for the year ended December 31, 1994, an increase of $31.7 million. On a pro forma basis, net income would have increased to $39.6 million for 1995 from $26.6 million for 1994, an increase of $13.0 million, or 48.9%.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations almost entirely with cash flow generated from operations. Cash provided by operating activities totaled $40.5 million for the year ended December 31, 1996 and $28.6 million for 1995. At December 31, 1996, working capital was $36.1 million compared to $39.2 million at December 31, 1995. 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, 1996, there were $18.0 million in borrowings outstanding under such facility. To supplement the Company's current line of credit, the Company is in discussions with financial lenders to obtain additional financing of approximately $25.0 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.
Capital expenditures (other than those relating to the Company's new facility) for the year ended December 31, 1996 totaled $15.1 million. In addition, 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. In April 1995, the Company purchased land for $8.2 million on which it is completing construction of a larger headquarters and manufacturing facility. The Company currently estimates that the cost to construct and equip such facility will be approximately $48.5 million, which includes design and engineering fees, furniture and other build-out costs of approximately $8.5 million. Of such amounts, $5.1 million was spent in 1995 and $23.5 million was spent in 1996. The remainder is expected to be spent in early 1997. The Company began to relocate to the new facility in early 1997. The Company expects capital expenditures for 1997 to total approximately $21.0 million, excluding those expenditures relating to the Company's new facility.
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, 1996, the Company had a backlog of $4.3 million, which reflects all order cancellations received by the Company from its largest customer, Sunglass Hut, through such date. The backlog includes backorders (merchandise remaining unshipped beyond its scheduled shipping date) of $1.3 million as of such date.
INFLATION The Company does not believe inflation has had a material impact on the Company in the past, although there can be no assurance that this will be the case in the future.
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; currency fluctuations; unanticipated change orders, weather delays and transitional costs associated with the construction of, and relocation to, the Company's new headquarters and manufacturing facility; 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 ACCOUNTING DEVELOPMENTS
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which requires adoption of the disclosure provisions no later than for fiscal years beginning after December 15, 1995 and adoption of the recognition and measurement provisions for nonemployee transactions no later than December 15, 1995. The new standard defines a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period.
Pursuant to the new standard, companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but are required to disclose in a note to the financial statements pro forma net income and, if presented, earnings per share as if the company had applied the new method of accounting.
The Company has determined that it will not change to the fair value method and will continue to use Accounting Principles Board Opinion No. 25 for measurement and recognition of employee stock- based transactions. (See Note 8)
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, 1997 to be filed with the Securities and Exchange Commission within 120 days after December 31, 1996 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, 1997 to be filed with the Securities and Exchange Commission within 120 days after December 31, 1996 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, 1997 to be filed with the Securities and Exchange Commission within 120 days after December 31, 1996 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, 1997 to be filed with the Securities and Exchange Commission within 120 days after December 31, 1996 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.
* Previously filed with the Registration Statement on Form S-1 of Oakley, Inc. (Registration No. 33-93080)
** Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended September 30, 1995.
*** Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31, 1995.
**** Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended June 30, 1996.
(b) Reports on Form 8-K There were no reports on Form 8-K filed during the fourth quarter of 1996.
(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
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 1995 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the consolidated financial statement schedule listed in the Index at Item 14(a)(2). These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Oakley, Inc. and subsidiaries as of December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated 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 5, 1997 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)
See accompanying notes to consolidated financial statements.
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, 1994, 1995 AND 1996
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. 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 original maturities 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 25 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 are amortized on a straight-line basis over periods ranging from six to fifteen years. The carrying value of intangible assets is periodically reviewed by the Company based on the estimated future operating income of the Company 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, 1996.
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, 1996, 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, 1994, 1995 AND 1996
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 line of credit equals fair value as the underlying interest rate reflects 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. Assets and liabilities expressed in foreign currencies are translated at exchange rates in effect at the balance sheet date. Revenue and expense items are translated using the average exchange rate. Gains and losses resulting from translation of foreign currency financial statements are reported as a separate component of shareholders' equity. Gains and losses from foreign currency exchanges are recognized as incurred.
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).
PER SHARE INFORMATION - Net income per common share has been computed by using the weighted average number of shares of common stock and common stock equivalents outstanding during all periods presented.
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees."
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, 1996.
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
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 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 26.6%, 28.8% and 31.0% of such sales for the years ended December 31, 1994, 1995 and 1996, respectively. In part as a result of order cancellations from such chain in the fourth quarter of 1996, the Company's net sales for the period declined from the comparable period in 1995.
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
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. The acquisition of Oakley U.K. was recorded using the purchase method of accounting and the results of operations from the date of acquisition, effective October 31, 1996, have been included in the Company's 1996 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 five to fifteen years. Had the acquisition of Oakley U.K. 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,:
1995 1996 ------------- ------------- Raw materials $ 13,650,000 $ 16,039,000 Finished goods 6,838,000 13,514,000 ------------- ------------- $ 20,488,000 $ 29,553,000 ------------- ------------- ------------- -------------
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31,:
1995 1996 ------------ ------------ Land $ 8,245,000 $ 9,008,000 Buildings - 2,191,000 Automobiles and vans 573,000 772,000 Furniture and equipment 37,774,000 52,044,000 Tooling 3,941,000 4,880,000 Leasehold improvements 3,259,000 3,713,000 Construction in progress 5,096,000 28,580,000 ------------ ------------ 58,888,000 101,188,000 Less accumulated depreciation and amortization 20,000,000 28,246,000 ------------ ------------ $ 38,888,000 $ 72,942,000 ------------ ------------ ------------ ------------
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
NOTE 5 - INCOME TAXES
The provision for income taxes consists of the following for the years ended December 31,:
1994 1995 1996 -------- ----------- ------------ Current: Federal $ - $ 6,756,000 $22,535,000 State 191,000 2,063,000 5,727,000 Foreign 68,000 1,443,000 1,082,000 -------- ------------ ------------ 259,000 10,262,000 29,344,000
Deferred: Federal - (2,081,000) (956,000) State - (351,000) 282,000 Foreign - - - -------- ------------ ------------ - (2,432,000) (674,000) -------- ------------ ------------ $259,000 $ 7,830,000 $28,670,000 -------- ------------ ------------ -------- ------------ ------------
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:
1995 1996 ----------- ------------ Tax at U.S. Federal statutory rates $18,549,000 $26,132,000 State income taxes, net 1,316,000 3,905,000 Recording of deferred income tax assets in connection with the coversion to C corporation (1,600,000) - S corporation earnings not subject to Federal tax (10,301,000) - Foreign sales corporation benefit - (2,889,000) Foreign taxes - 1,082,000 Other, net (134,000) 440,000 ------------ ------------ $ 7,830,000 $28,670,000 ------------ ------------ ------------ ------------
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
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:
1995 1996 ------------ ------------ Deferred tax assets: Warranty reserve $ 1,303,000 $ 1,267,000 Uniform capitalization 531,000 509,000 Sales returns reserve 500,000 736,000 State taxes 359,000 1,880,000 Inventory reserve 172,000 258,000 Allowance for doubtful accounts 168,000 179,000 Depreciation 190,000 - Other 529,000 814,000 ------------ ------------ Total deferred tax assets 3,752,000 5,643,000
Deferred tax liabilities: Depreciation - (1,285,000) ------------ ------------ Net deferred tax assets $ 3,752,000 $ 4,358,000 ------------ ------------ ------------ ------------
NOTE 6 - LINE OF CREDIT
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 (8.25% at December 31, 1996) or LIBOR plus 1.00% (6.5% at December 31, 1996), as defined in the agreement, and matures June 1999. At December 31, 1996, there was $18.0 million in borrowings outstanding under the agreement. The agreement has various restrictive covenants and certain other financial ratios. At December 31, 1996, the Company was in compliance with all restrictive covenants and financial ratios.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
LEASES - The Company is committed under noncancelable operating leases expiring at various dates through 2000 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:
Year Ending December 31, Related Party Other Total ----------------- ------------- ---------- ----------- 1997 $ 100,000 $ 303,000 $ 403,000 1998 100,000 206,000 306,000 1999 100,000 107,000 207,000 2000 67,000 82,000 149,000 ------------ ---------- ----------- Total $ 367,000 $ 698,000 $1,065,000 ------------- ---------- ----------- ------------- ---------- -----------
Certain offices and warehouse facilities are leased on a month-to-month basis from a partnership whose partners are officers and shareholders of the Company.
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Rent expense is summarized as follows for the years ended December 31,:
1994 1995 1996 ---------- ---------- ----------- Related parties $384,000 $ 421,500 $ 383,000 Other 525,000 819,500 1,219,000 ---------- ---------- ---------- Total $909,000 $1,241,000 $1,602,000 ---------- ---------- ---------- ---------- ---------- ----------
PURCHASE COMMITMENTS - During 1996, the Company entered into a letter of intent with its lens blank supplier and the supplier's French parent pursuant to which the Company expects to enter into a reciprocal exclusive dealing agreement for the purchase of its lens requirements. The Company expects its minimum obligations under this agreement to be 19.5 million units and payment of an exclusivity premium of $10.7 million over the next four years.
The Company has made certain commitments regarding the construction of a new corporate headquarters and manufacturing facility in Foothill Ranch, California. The facility, which is expected to cost approximately $48.5 million, excluding land, will be substantially completed by March 1997. A total of $28.6 million had been incurred on this project through 1996.
EMPLOYMENT AGREEMENTS - The Company has entered into employment agreements with certain employees of the Company which have terms of two to three 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.
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:
Year Ending December 31, ------------ 1997 $ 2,809,000 1998 2,165,000 1999 1,099,000 2000 746,000 2001 500,000 Thereafter 1,500,000 ------------- Total $ 8,819,000 ------------- -------------
Included in such amounts is an annual retainer of $0.5 million through 2005 for a director of the Company.
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
LITIGATION - During December 1996, three class action lawsuits were filed in the California Superior Court for the County of Orange against the Company and three of its officers alleging material misstatements and omissions in certain of the Company's public statements, Securities and Exchange Commission filings and reports to 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. 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. To date, no discovery of defendants has been taken in these matters. Although it is too soon to predict the outcome of the cases with any certainty, based on its current understanding of the facts, the Company believes that the plaintiffs' claims are without merit and intends to vigorously defend the actions.
In addition, the Company is currently involved in litigation incidental to the Company's business. In the opinion of management, the ultimate resolution of such litigation, in the aggregate, will not have a significant effect on the accompanying financial statements.
NOTE 8 - SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING - In August 1995, the Company completed an initial public offering of 3,300,000 shares of the Company's common stock for $23.00 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.
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
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, 1996, the Company had repurchased 452,100 shares at an aggregate cost of approximately $6.4 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, 1996, stock options for 329,087 shares were exercisable and 3,684,096 shares were available for issuance pursuant to stock option grants.
The following table summarizes information with respect to the Plan for the years ended December 31, 1995 and 1996:
Option Weighted Average shares Exercise Price --------- ---------------- Outstanding at January 1, 1995 -
Granted during 1995 1,254,154 $ 11.53 Canceled during 1995 (3,732) 11.50 Exercised during 1995 - ---------
Outstanding at December 31, 1995 1,250,422 11.53
Granted during 1996 856,436 12.17 Canceled during 1996 (78,954) 13.78 Exercised during 1996 (12,112) 11.50 --------- Outstanding at December 31, 1996 2,015,792 $ 11.73 --------- ---------
Additional information regarding options outstanding as of December 31, 1996 is as follows:
As disclosed in Note 1, the Company applies Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock-based awards. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements.
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method in accounting for stock-based awards as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life: 36 months; stock volatility, 9.4% - 63.5% in 1995 and 45.7% - 77.4% in 1996; risk free interest rates, 5.5% in 1995 and 1996; no dividends during the expected term and forfeitures are recognized as they occur.
If the computed fair value of the 1995 and 1996 awards had been amortized to expense over the vesting period of the awards, net income would have been $45,017,000 in 1995 and $45,531,000 in 1996. The earnings per share on such basis would have been $0.64 in 1996.
NOTE 9 - NET SALES
Net sales are summarized as follows for the years ended December 31,:
1994 1995 1996 ------------ ------------ ------------ Domestic $ 90,565,000 $115,202,000 $139,459,000 International 33,387,000 57,550,000 79,107,000 ------------ ------------ ------------ $123,952,000 $172,752,000 $218,566,000 ------------ ------------ ------------ ------------ ------------ ------------
OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
NOTE 10 - DOMESTIC AND FOREIGN OPERATIONS
The Company has one business segment which consists of the design, manufacture and sale of high performance eyewear. Information related to domestic and foreign operations is as follows:
NOTE 11 - QUARTERLY FINANCIAL DATA (UNAUDITED)
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 18, 1997
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.
OAKLEY, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, 1996