-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LW2oAtyAON+5X9sSKIv6xlBCJcplCNBkaWoC5a3yVe0Yb9vdV6GghHzSly94YKEs LgSXPD8GAJK4AQvDLpY77A== 0000892569-99-003032.txt : 19991117 0000892569-99-003032.hdr.sgml : 19991117 ACCESSION NUMBER: 0000892569-99-003032 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OAKLEY INC CENTRAL INDEX KEY: 0000946356 STANDARD INDUSTRIAL CLASSIFICATION: OPHTHALMIC GOODS [3851] IRS NUMBER: 953194947 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13848 FILM NUMBER: 99751682 BUSINESS ADDRESS: STREET 1: 10 HOLLAND CITY: IRVINE STATE: CA ZIP: 92718 BUSINESS PHONE: 7149510991X3226 MAIL ADDRESS: STREET 1: 10 HOLLAND CITY: IRVINE STATE: CA ZIP: 92718 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-Q ------------------------ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER: 1-13848 OAKLEY, INC. (Exact name of registrant as specified in its charter) WASHINGTON 95-3194947 (State or other jurisdiction of (IRS Employer ID incorporation or organization) No.) ONE ICON 92610 FOOTHILL RANCH, CALIFORNIA (Zip Code) (Address of principal executive offices)
(949) 951-0991 (Registrant's telephone number, including area code) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK, PAR VALUE $.01 PER SHARE 70,678,057 SHARES (Class) (Outstanding on November 11, 1999)
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 OAKLEY, INC. INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION ITEM 1 - Financial Statements Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998................................................. 3 Consolidated Statements of Income for the three- and nine-month periods ended September 30, 1999 and 1998............................. 4 Consolidated Statements of Comprehensive Income for the three- and nine-month periods ended September 30, 1999 and 1998....... 4 Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 1999 and 1998...................................... 5 Notes to Consolidated Financial Statements............................... 6-8 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 9-14 ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk......15-16 PART II. OTHER INFORMATION ITEM 1 - Legal Proceedings...............................................17-20 ITEM 2 - Changes in Securities and Use of Proceeds....................... 20 ITEM 3 - Defaults Upon Senior Securities................................. 20 ITEM 4 - Submission of Matters to a Vote of Security Holders............. 20 ITEM 5 - Other Information............................................... 20 ITEM 6 - Exhibits and Reports on Form 8-K................................ 21 Signatures............................................................... 22 Exhibits................................................................. 23 2 3 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements OAKLEY, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
September 30, 1999 December 31, 1998 ------------------ ----------------- CURRENT ASSETS: Cash and cash equivalents $ 10,572 $ 4,553 Accounts receivable, less allowance for doubtful accounts of $585 (1999), $621 (1998) 41,999 33,867 Inventories, net (Note 2) 39,026 35,548 Other receivables 2,205 2,372 Deferred income taxes 6,179 6,074 Prepaid expenses and other 5,936 4,246 ------------- --------- Total current assets 105,917 86,660 Property and equipment, net 117,046 118,215 Deposits 2,157 2,513 Other assets 17,165 18,427 ------------- --------- TOTAL ASSETS $ 242,285 $ 225,815 ============= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Line of credit (Note 3) $ -- $ 13,300 Accounts payable 17,093 12,606 Accrued expenses and other current liabilities 9,395 6,646 Accrued warranty 4,443 4,420 Income taxes payable 3,474 2,567 Current portion of long-term debt (Note 3) 1,519 1,519 ------------- --------- Total current liabilities 35,924 41,058 Deferred income taxes 3,402 3,418 Long-term debt, net of current maturities (Note 3) 18,224 19,363 COMMITMENTS AND CONTINGENCIES (Note 4) SHAREHOLDERS' EQUITY Preferred stock, par value $.01 per share: 20,000,000 shares authorized; no shares issued -- -- Common stock, par value $.01 per share: 200,000,000 shares authorized; 70,678,000 shares issued and outstanding in 1999 and 1998 707 707 Additional paid-in capital 55,792 55,610 Retained earnings 128,732 106,383 Accumulated other comprehensive loss (496) (724) ------------- --------- Total shareholders' equity 184,735 161,976 ------------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 242,285 $ 225,815 ============= =========
See accompanying notes to consolidated financial statements. 3 4 OAKLEY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT SHARE DATA)
Three Months ended Nine Months ended September 30, September 30, ----------------------------- ----------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Net sales $ 70,819 $ 67,263 $ 191,616 $ 178,293 Cost of goods sold 26,692 25,360 72,032 66,111 ------------ ------------ ------------ ------------ Gross profit 44,127 41,903 119,584 112,182 Operating expenses: Research and development 1,737 1,288 4,682 3,800 Selling 17,600 18,428 52,541 49,184 Shipping and warehousing 1,845 2,020 4,641 5,266 General and administrative 6,707 6,293 21,829 18,930 ------------ ------------ ------------ ------------ Total operating expenses 27,889 28,029 83,693 77,180 ------------ ------------ ------------ ------------ Operating income 16,238 13,874 35,891 35,002 Interest expense, net 346 499 1,497 1,376 ------------ ------------ ------------ ------------ Income before provision for income taxes 15,892 13,375 34,394 33,626 Provision for income taxes 5,570 5,136 12,045 12,912 ------------ ------------ ------------ ------------ Net income $ 10,322 $ 8,239 $ 22,349 $ 20,714 ============ ============ ============ ============ Basic net income per common share $ 0.15 $ 0.12 $ 0.32 $ 0.29 ============ ============ ============ ============ Basic weighted average common shares 70,678,000 70,678,000 70,678,000 70,678,000 ============ ============ ============ ============ Diluted net income per common share $ 0.15 $ 0.12 $ 0.32 $ 0.29 ============ ============ ============ ============ Diluted weighted average common shares 70,678,000 71,027,000 70,678,000 70,960,000 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS)
Three Months ended Nine Months ended September 30, September 30, ----------------------------- ----------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Net income $ 10,322 $ 8,239 $ 22,349 $ 20,714 Other comprehensive (loss) income, before tax: Transition adjustment related to the adoption of SFAS 133 -- -- (103) -- Net unrealized (loss) gain on derivative instruments (1,326) -- 853 -- Foreign currency translation adjustment 525 (637) (522) 78 ------------ ------------ ------------ ------------ Other comprehensive (loss) income, before tax (801) (637) 228 78 Income tax related to items of other comprehensive income 280 245 (80) (30) ------------ ------------ ------------ ------------ Other comprehensive (loss) income, net of tax (521) (392) 148 48 ------------ ------------ ------------ ------------ Comprehensive income $ 9,801 $ 7,847 $ 22,497 $ 20,762 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 4 5 OAKLEY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Nine Months ended September 30, ------------------------------- 1999 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 22,349 $ 20,714 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,247 12,071 Compensatory stock options 182 75 Gain on disposition of equipment (18) (613) Deferred income taxes (121) -- Changes in assets and liabilities, net of effects of business acquisitions: Accounts receivable (8,325) (16,973) Inventories (3,992) (8,272) Other receivables 200 (422) Prepaid expenses and other (930) (444) Accounts payable 4,660 7,418 Accrued expenses, other current liabilities and accrued warranty 2,996 3,533 Income taxes payable 921 2,435 -------- -------- Net cash provided by operating activities 32,169 19,522 CASH FLOWS FROM INVESTING ACTIVITIES: Deposits 362 (80) Acquisitions of property and equipment (12,319) (24,060) Proceeds from sale of property and equipment 496 811 Other assets (66) (7,321) -------- -------- Net cash used in investing activities (11,527) (30,650) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bank borrowings 54,700 78,150 Repayments of bank borrowings (69,139) (66,089) Net proceeds from issuance of common shares -- 261 -------- -------- Net cash used in financing activities (14,439) 12,322 Effect of exchange rate changes on cash (184) 405 Net increase (decrease) in cash and cash equivalents 6,019 1,599 Cash and cash equivalents, beginning of period 4,553 2,657 -------- -------- Cash and cash equivalents, end of period $ 10,572 $ 4,256 ======== ========
See accompanying notes to consolidated financial statements. 5 6 OAKLEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying consolidated financial statements of Oakley, Inc. and its wholly-owned subsidiaries (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles ("GAAP") for complete financial statements. In the opinion of management, the consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement of the consolidated balance sheets as of September 30, 1999 and December 31, 1998, the consolidated statements of income and comprehensive income for the three- and nine-month periods ended September 30, 1999 and 1998 and the statements of cash flows for the nine-month periods ended September 30, 1999 and 1998. The results of operations for the three- and nine-month periods ended September 30, 1999 are not necessarily indicative of the results of operations for the entire year ending December 31, 1999. NOTE 2 - INVENTORIES Inventories consist of the following:
September 30, 1999 December 31, 1998 ------------------ ----------------- Raw Materials $15,278,000 $15,316,000 Finished Goods 23,748,000 20,232,000 ----------- ----------- $39,026,000 $35,548,000 =========== ===========
NOTE 3 - FINANCING ARRANGEMENTS Line of credit - The Company has a $50.0 million unsecured line of credit with a bank syndicate which bears interest at either the bank's prime lending rate (8.25% at September 30, 1999) or LIBOR plus 0.75% (6.08% at September 30, 1999), as defined in the credit agreement, and matures August 2001. At September 30, 1999, the Company did not have any borrowings under this credit agreement. The credit agreement contains various restrictive covenants including the maintenance of certain financial ratios. At September 30, 1999, the Company was in compliance with all restrictive covenants and financial ratios. Long-term debt - The Company has a real estate term loan which is due September 2007. The term loan, which is collateralized by the Company's corporate headquarters, requires quarterly principal payments of approximately $380,000 ($1,519,000 annually), plus interest based upon LIBOR plus 1.00% (6.05% at September 30, 1999) for ten years. In January 1999, the Company entered into an interest rate swap agreement that results in fixing the interest rate over the term of the note at 6.31%. At September 30, 1999, the outstanding balance under the term loan was $19.7 million. NOTE 4 - LITIGATION During December 1996, three putative class action lawsuits (the "California Securities Actions") were filed in the California Superior Court for the County of Orange (the "Superior Court") against the Company and three of its officers and directors alleging material misstatements and omissions in certain of the Company's public statements, SEC filings and reports of third-party analysts. The plaintiffs seek unspecified damages and other relief. In addition, one of the lawsuits also asserted claims against firms who served as underwriters of the June 6, 1996 offering of the Company's common stock by certain of its shareholders of (the "Secondary Offering"). Pursuant to certain provisions of the underwriting agreement between the Company and the firms, the Company agreed to indemnify the firms against certain liabilities, including liabilities under the Securities Act of 1933, as amended. On July 26, 1999, 6 7 the Superior Court entered a dismissal without prejudice of the California Securities Actions. In March 1997, the Company was named as a nominal defendant in a putative derivative action (the "California Derivative Action") filed in the Superior Court against two of the Company's officers and directors based on substantially the same allegations as those in the California Securities Actions. The derivative plaintiff seeks to recover damages and other relief on behalf of the Company. On February 4, 1998, the court entered a final order of dismissal of the putative derivative action. On April 8, 1998, the derivative plaintiff filed a notice of appeal in the Superior Court. In March 1999, the parties to the California Derivative Action entered into a stipulation of settlement regarding the derivative claims. On June 24, 1999, the California Court of Appeal, Fourth Appellate District, approved the settlement and entered a final judgment dismissing with prejudice the California Derivative Action and approving the Company's release of claims against defendants James Jannard and Mike Parnell. The settlement is not expected to have a material adverse effect on the Company. During October, November and December 1997, five putative class action lawsuits (the "Federal Securities Actions") were filed in the United States District Court for the Central District of California, Southern Division (the "District Court") against the Company, three of its officers and directors and firms that served as underwriters of the Secondary Offering, alleging material misstatements and omissions in certain of the Company's public statements, the reports of third-party analysts and/or certain of the Company's SEC filings. The plaintiffs in the Federal Securities Actions seek unspecified damages and other relief. On July 10, 1998, the Company and the other defendants filed motions to dismiss the Federal Securities Actions. On January 14, 1999, the District Court denied the motions to dismiss. On March 3, 1999, the defendants filed answers in the Federal Securities Actions. On June 29, 1999, the District Court approved stipulations for class certification that the parties had submitted and entered orders for class certification in the Federal Securities Actions. Although it is too soon to predict the outcome of the Federal Securities Actions with any certainty, based on its current understanding of the facts, the Company believes that the plaintiffs' claims are without merit and intends to vigorously defend the actions. In addition, the Company is currently involved in litigation incidental to the Company's business. In the opinion of management, the ultimate resolution of such litigation, in the aggregate, will not have a material adverse effect on the accompanying consolidated financial statements. NOTE 5 - CHANGES IN ACCOUNTING PRINCIPLES The Company adopted Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, on January 1, 1999. The adoption of SFAS 133 resulted in a transition adjustment recorded by the Company as a cumulative-effect type adjustment of a $103,000 charge to accumulated other comprehensive income to recognize the fair value of all derivatives that are designated as cash-flow hedges. The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions of its international subsidiaries as well as fluctuations in its variable rate debt. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses foreign exchange contracts in the form of forward contracts and option contracts. In addition, as part of its overall strategy to manage the level of exposure to the risk of fluctuations in interest rates, the Company has entered into an interest rate swap agreement. At September 30, 1999, all of the Company's derivatives were designated and qualified as cash flow hedges. For all qualifying and highly effective cash flow hedges, the changes in the fair value of the derivative are recorded in other comprehensive income. The Company is currently hedging forecasted foreign currency transactions that, assuming exchange rates at September 30, 1999 remain constant, are expected to result in reclassifications of $0.9 million of gains to earnings over the next fifteen months. The Company hedges forecasted transactions that are determined probable to occur within 18 months or less. 7 8 On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company does not enter into derivative instruments that do not qualify as cash flow hedges. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. In this documentation, the Company specifically identifies the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and states how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Company would discontinue hedge accounting prospectively (i) if it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) when the derivative is designated as a hedge instrument, because it is probable that the forecasted transaction will not occur, (iv) because a hedged firm commitment no longer meets the definition of a firm commitment or (v) if management determines that designation of the derivative as a hedge instrument is no longer appropriate. During the three- and nine-months ended September 30, 1999, the Company reclassified into earnings a net gain of $407,000 and $1,098,000, respectively, resulting from the expiration, sale, termination or exercise of foreign exchange contracts. NOTE 6 - EARNINGS PER SHARE Basic earnings per share is computed using the weighted average number of common shares outstanding during the reporting period. Earnings per share assuming dilution is computed using the weighted average number of common shares outstanding and the dilutive effect of potential common shares outstanding. For the three and nine months ended September 30, 1999, the diluted weighted average common shares outstanding did not include any dilutive options while for the three and nine months ended September 30, 1998 the diluted weighted average common shares outstanding included 349,000 and 282,000, respectively, of dilutive stock options. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion includes the operations of Oakley, Inc. and its subsidiaries for each of the periods discussed. RESULTS OF OPERATIONS Three Months Ended September 30, 1999 and 1998 Net sales Net sales increased to $70.8 million for the three months ended September 30, 1999 from $67.3 million for the three months ended September 30, 1998, an increase of $3.5 million, or 5.3%. This increase was primarily the result of increased sales of the Company's prescription eyewear, apparel, watch and footwear lines which were partially offset by a decline in sunglass sales. Gross sunglass revenue represented 70.3% of gross sales for the quarter ended September 30, 1999, down from 75.0% of gross sales for the quarter ended September 30, 1998, primarily as a result of a decline in sales to Sunglass Hut, the Company's largest customer. Revenue from new sunglass products introduced by the Company in 1999, including the Juliet(TM), the new Zero(R), M Frame(R) and Eye Jacket(R) and the new OO(TM) ("Double O") line, contributed over 30% of the Company's total gross sunglass revenue for the quarter ended September 30, 1999. The Company's net sales in the United States decreased 3.2% to $37.3 million for the three months ended September 30, 1999 from $38.5 million in the comparable 1998 period principally as a result of a 27.9% decrease in net sales to Sunglass Hut. This decrease was a result, in part, of Sunglass Hut's decision to delay shipment of certain new products until the latter part of the 1999 third quarter, in order to deplete its inventories of older styles. Sales to the Company's other U.S. retail customers increased 10.0% over the comparable 1998 period, offsetting a substantial portion of the Sunglass Hut decline in sales. The Company's international sales increased 16.7% to $33.5 million for the three months ended September 30, 1999 from $28.7 million for the comparable period in 1998, principally as a result of increased sales from direct operations, particularly in continental Europe, United Kingdom, Canada, Japan and South Africa, partially offset by a slight decline in sales to independent distributors. Footwear net sales were $1.4 million, or 1.9% of net sales, for the quarter ended September 30, 1999. As a group, gross sales of goggles, apparel, watches and sunglass accessories increased 14.6%, or $2.4 million, during the quarter ended September 30, 1999 over the quarter ended September 30, 1998 primarily due to increased sales in the Company's expanded apparel line, sunglass accessories and new watch line. Gross profit Gross profit increased to $44.1 million for the three months ended September 30, 1999 from $41.9 million for the three months ended September 30, 1998, an increase of $2.2 million, or 5.3%. As a percentage of net sales, gross profit remained constant at 62.3% for the three months ended September 30, 1999 and 1998. Excluding the impact of footwear, gross profit for the three months ended September 30, 1999 increased to $44.9 million compared to $43.1 million for the three months ended September 30, 1998. Operating expenses Operating expenses decreased to $27.9 million for the three months ended September 30, 1999 from $28.0 million for the three months ended September 30, 1998, a decrease of $0.1 million, or 0.5%. Research and development expenses were $1.7 million, or 2.5% of net sales, for the three months ended September 30, 1999 as compared to $1.3 million, or 1.9% of net sales, for the three months ended September 30, 1998, an increase of $0.4 million due to increased new product development efforts. 9 10 Selling expenses decreased $0.8 million to $17.6 million, or 24.9% of net sales, for the three months ended September 30, 1999 from $18.4 million, or 27.3% of net sales, for the three months ended September 30, 1998 as a result of decreased warranty costs attributable to certain process improvements. Shipping and warehousing expenses decreased to $1.8 million, or 2.6% of net sales, for the three months ended September 30, 1999 from $2.0 million, or 3.0 % of net sales, for the comparable 1998 period due to positive results from various initiatives to reduce shipping costs implemented during the early part of 1999. General and administrative expenses for the three months ended September 30, 1999 were $6.7 million, or 9.5% of net sales, compared to $6.3 million, or 9.4% of net sales, in the same period in 1998. Operating income The Company's operating income increased to $16.2 million for the three months ended September 30, 1999 from $13.9 million for the three months ended September 30, 1998, an increase of $2.3 million, or 17.0%, over the same period in the previous year. As a percentage of net sales, operating income increased to 22.9% for the three months ended September 30, 1999 from 20.6% for the three months ended September 30, 1998. This increase in operating income as a percentage of net sales is due to a decrease in operating expenses, particularly lower selling and shipping and warehousing expenses. Excluding the Company's footwear line, operating income as a percentage of net sales for the quarter ended September 30, 1999 increased to 25.8% compared to 23.5% for the comparable 1998 period. Interest expense, net The Company had net interest expense of $0.3 million for the three months ended September 30, 1999 as compared with net interest expense of $0.5 million in the comparable 1998 period due to lower average balances on the Company's revolving line of credit. Net income The Company's net income increased to $10.3 million for the three months ended September 30, 1999 from $8.2 million for the three months ended September 30, 1998, an increase of $2.1 million, or 25.3%, over the comparable 1998 quarter. Net income reflects a reduction in the Company's tax rate to 35.0% in 1999 from 38.4% in 1998 resulting from the Company's international expansion and related tax planning initiatives. Nine Months Ended September 30, 1999 and 1998 Net sales Net sales increased to $191.6 million for the nine months ended September 30, 1999 from $178.3 million for the nine months ended September 30, 1998, an increase of $13.3 million, or 7.5%. This increase was primarily the result of increased sales of a Wires, Minutes, Pro M-Frames and Tens and sales of new sunglass products introduced during 1999 offsetting the natural decline in sales of more mature products. Revenue from new sunglasses launched during the nine months ended September 30, 1999, the X Metal(R) Juliet introduced in February 1999, new M-Frames and Zeros introduced in late May 1999, the Double O introduced in June 1999 and new Eye Jacket introduced in August 1999, contributed approximately 17% to the Company's total gross sunglass revenue. Sales from the Company's expanded prescription program and sales of the Company's polarized versions of selected sunglass lines contributed $4.6 million to increased revenue. The Company's net sales in the United States increased 1.9% to $109.8 million from $107.8 million in the comparable 1998 period. Net sales to the Company's largest customer, Sunglass Hut, decreased 7.2% during the nine months ended September 30, 1999 over the comparable 1998 period due to slower third quarter sales as described above. Sales to the Company's other U.S. retail customers increased 7.9% over the comparable 1998 period, contributing to the increase in U.S. sales. The Company's international sales increased 16.1% to $81.8 million for the nine months ended September 30, 1999 from $70.5 million for the comparable period in 1998, principally as a result of increased sales in all direct operations, particularly continental Europe, United Kingdom, Canada, South Africa and Japan, offset by a slight decline in sales to independent distributors. Footwear net sales were $2.1 million, or 1.1% of net sales, for the nine months ended September 30, 1999. As a group, 10 11 gross sales of goggles, apparel, watches and sunglass accessories increased 13.8% during the nine months ended September 30, 1999 over the comparable 1998 period primarily due to increased sales in the Company's expanded apparel line and new watch line. Gross profit Gross profit increased to $119.6 million for the nine months ended September 30, 1999 from $112.2 million for the nine months ended September 30, 1998, an increase of $7.4 million, or 6.6%. As a percentage of net sales, gross profit decreased to 62.4% for the nine months ended September 30, 1999 from 62.9% for the nine months ended September 30, 1998. The decline in gross profit as a percentage of net sales is primarily attributable to the Company's footwear start-up costs. Excluding the impact of footwear, gross profit for the nine months ended September 30, 1999 increased to 64.4% compared to 64.1% for the nine months ended September 30, 1998. Operating expenses Operating expenses increased to $83.7 million for the nine months ended September 30, 1999 from $77.2 million for the nine months ended September 30, 1998, an increase of $6.5 million, or 8.4%. Increased personnel related costs, variable expenses such as commissions, higher footwear operating expenses, increased advertising expenses and incremental expenses due to the shift to direct operations in Canada contributed to the increase in operating expenses. Research and development expenses were $4.7 million, or 2.4% of net sales, for the nine months ended September 30, 1999 as compared to $3.8 million, or 2.1% of net sales, for the nine months ended September 30, 1998, an increase of $0.9 million due to increased new product development efforts. Selling expenses increased $3.3 million to $52.5 million, or 27.4% of net sales, for the nine months ended September 30, 1999 from $49.2 million, or 27.6% of net sales, for the nine months ended September 30, 1998 as a result of increases in variable expenses such as commissions, higher advertising expenses and increased footwear selling expenses, offset by reduced warranty costs attributable to certain process improvements. Shipping and warehousing expenses decreased to $4.6 million, or 2.4% of net sales for the nine months ended September 30, 1999 from $5.3 million, or 3.0% of net sales for the comparable 1998 period due to positive results from various initiatives to reduce shipping costs. General and administrative expenses for the nine months ended September 30, 1999 increased to $21.8 million, or 11.4% of net sales, compared to $18.9 million, or 10.6% of net sales, in the same period in 1998. This increase in general and administrative expenses is primarily due to increased personnel costs and related expenses and higher professional fees. For the nine months ended September 30, 1998, general and administrative expenses included a $0.6 million non-recurring gain from the sale of certain assets. Operating income The Company's operating income increased to $35.9 million for the nine months ended September 30, 1999 from $35.0 million for the nine months ended September 30, 1998, an increase of $0.9 million, or 2.5%, from the same period in the previous year. As a percentage of net sales, operating income decreased to 18.7% for the nine months ended September 30, 1999 from 19.6% for the nine months ended September 30, 1998. This decrease in operating income as a percentage of net sales was primarily due to greater operating expenses associated with the Company's footwear line. Excluding the Company's footwear line, the Company's operating income as a percentage of net sales for the nine months ended September 30, 1999 increased to 21.7% compared to 21.3% for the comparable 1998 period. 11 12 Interest expense, net The Company had net interest expense of $1.5 million for the nine months ended September 30, 1999 as compared with net interest expense of $1.4 million in the comparable 1998 period. Net income The Company's net income increased to $22.3 million for the nine months ended September 30, 1999 from $20.7 million for the nine months ended September 30, 1998, an increase of $1.6 million, or 7.9%, over the comparable 1998 nine month period. Net income reflects a reduction in the Company's tax rate to 35.0% in 1999 from 38.4% in 1998 resulting from the Company's international expansion and related tax planning initiatives. LIQUIDITY AND CAPITAL RESOURCES The Company historically has financed its operations almost entirely with cash flow generated from operations and borrowings from its credit facilities. Cash provided by operating activities totaled $32.2 million for the nine months ended September 30, 1999 and $19.5 million for the comparable period of 1998. At September 30, 1999, working capital was $70.0 million. Working capital may vary from time to time as a result of seasonality, new product introductions and changes in inventory levels. Accounts receivable were $42.0 million at September 30, 1999 as compared to $33.9 million at December 31, 1998 and $41.1 million at September 30, 1998. The increase in accounts receivable from December 31, 1998 was expected because the Company's third quarter business has a higher concentration of revenue from product categories, such as goggles and apparel, which carry extended terms. Inventories were $39.0 million at September 30, 1999 compared to $35.5 million at December 31, 1998 and $34.5 million at September 30, 1998. The higher inventory level is the result of an increase inventory investment overseas to accommodate the Company's international expansion. In addition, the Company has increased its inventory levels for longer lead time products to minimize the risk of lost revenue and to improve order fulfillment rates. The Company has an unsecured line of credit of $50.0 million which matures August 2001. At September 30, 1999, the Company did not have any borrowings under such facility. The Company has a real estate term loan which matures September 2007. The term loan is collateralized by the Company's corporate headquarters and requires quarterly principal payments of approximately $380,000 plus interest based on LIBOR plus 1.00% (6.05% at September 30, 1999) for ten years. In January 1999, the Company entered into an interest rate swap agreement that results in fixing the interest rate over the term of the term loan at 6.31%. At September 30, 1999, the outstanding balance on the term loan was $19.7 million. Capital expenditures, net of retirements, for the nine months ended September 30, 1999 totaled $11.8 million. These expenditures were primarily attributable to new product production tooling, production equipment, building improvements, the expansion of the Company's information technology capabilities and new in-store product displays. At September 30, 1999, the Company had commitments of approximately $1.8 million for future capital purchases. The Company believes that existing capital, anticipated cash flow from operations and current and anticipated credit facilities will be sufficient to meet operating needs and capital expenditures for the foreseeable future. 12 13 SEASONALITY Historically, the Company's sales, in the aggregate, have been the highest in the period from March to September, the period during which sunglass use is typically highest. As a result, operating margins are typically lower in the first and fourth quarters, as fixed operating costs are spread over lower sales volume. In anticipation of seasonal increases in demand, the Company typically builds inventories in the fourth quarter and first quarter when net sales have historically been lower. In addition, the Company's shipments of goggles, which generate gross margins at significantly lower levels than sunglasses, are lowest in the second quarter. This seasonal trend contributes to the Company's gross margin in the second quarter, which historically has been the highest of the year. Although the Company's business generally follows this seasonal trend, new product introductions and the Company's international expansion have partially mitigated the impact of seasonality. BACKLOG Historically, the Company has generally shipped domestic orders (other than preseason orders for ski goggles and apparel and orders from certain sunglass specialty chains) within one day of receipt and international orders within two weeks of receipt. At September 30, 1999, the Company had a backlog of $14.2 million, including backorders (merchandise remaining unshipped beyond its scheduled shipping date) of $7.0 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. YEAR 2000 The Company has established a Year 2000 Project Team that has completed the review of the readiness of its computer systems and business practices for handling Year 2000 issues. These issues involve systems that are date sensitive and may not be able to properly process the transition from year 1999 to year 2000 and beyond, resulting in miscalculations and software failures. The Company's Year 2000 compliance strategy involves several phases: Inventory, Assessment, Remediation, and Testing. STATE OF READINESS The Company has completed its internal inventory and assessment and is currently in the remediation and testing phase. Critical information technology ("IT") systems, which include the Company's enterprisewide information system, time clocks, e-mail and phone systems, are stated Year 2000 compliant and have been tested for compliance. The Company is currently implementing Year 2000 compliant solutions on its non-IT systems, such as manufacturing equipment and those systems involved with facility management (security systems, air/heating systems, fire suppression systems). All phases for IT and non-IT systems are targeted to be completed by November 1999 with ongoing testing to continue through the end of 1999. The Company's Year 2000 Project Team is coordinating the global effort and monitoring progress of the Year 2000 readiness with respect to its subsidiaries. Assessment of each subsidiary's internal systems is in progress with key personnel at each subsidiary identified to locally manage the compliance project and collect local business partner compliance statements. The Company has initiated communications with all of its key business partners to determine their extent and plans for Year 2000 compliance. As part of this process, the Company has requested written assurances from its key external business partners as to their Year 2000 readiness status and their plans to become Year 2000 compliant when necessary. As of September 30, 1999, the Company had received responses from a majority of its key business partners acknowledging their compliance or intent to comply with Year 2000 issues. This process is ongoing and is expected to continue throughout 1999. 13 14 COSTS TO ADDRESS YEAR 2000 ISSUES Based on analysis completed to date, management believes its current staff will be sufficient to address the Year 2000 issues and that the staff time required to address these issues should not have a material adverse effect on other projects. The costs associated with the Year 2000 project have not been budgeted and tracked as separate projects, but have been occurring in conjunction with normal operating activities. These costs are being funded through operating cash flows and are not expected to materially impact the Company's operating results. Risks and Contingency Plans of Year 2000 Issues The timing of a Year 2000 related disruption, if it were to occur, would coincide with a seasonal low in the Company's business cycle, therefore having less impact on the business. The most reasonably likely worst case Year 2000 scenario and the associated contingency plan would be: 1. A portion of non-core IT systems experience disruption. Such disruption is not expected to have a material impact on the Company's ability to function. A contingency plan would be developed if the perceived risk increases, which management is reviewing on a monthly basis. 2. A portion of manufacturing operations experience temporary disruption. Such disruption is not expected to have a material impact on the Company's ability to function, as normal stock levels would cover anticipated shortages. The Company will determine the appropriate level based on business conditions and perceived risk, which management is reviewing on a monthly basis. 3. A portion of the supplier base experiences disruption. The Company has access to alternate suppliers for most of its raw materials in the event of disruption of the supply of material or resource. It is expected that the Company would source from alternates until the normal supplier comes back on line. 4. A minor portion of the customer base experiences disruption. Such disruption could result in a temporary reduction in sales. However, this reduction is not readily quantifiable. A contingency plan would be developed if the perceived risk increases, which management is reviewing on a monthly basis. There can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of the necessary systems and changes to address the Year 2000 issues, and the Company's inability to implement such systems and changes in a timely manner could have a material adverse effect on future results of operations. In addition, the failure of certain of the Company's significant customers or vendors to appropriately address the Year 2000 issue in a timely manner could have a material adverse effect on the Company. FORWARD-LOOKING STATEMENTS When used in this document, the words "believes," "anticipates," "expects," "estimates," "intends," "may," "plans," "predicts," "will" or the negative thereof and similar expressions are intended to identify in certain circumstances forward-looking statements. Such statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected, including risks related to the dependence on sales to Sunglass Hut; the acceptance in the marketplace of new products; the ability to source raw materials at prices favorable to the Company; the ability to develop and introduce innovative products; currency fluctuations; and other risks outlined in 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. 14 15 ITEM 3. Quantitative and Qualitative Disclosures About Market Risks The Company is exposed to a variety of risks, including foreign currency fluctuations and changes in interest rates affecting the cost of its debt. Foreign Currency - The Company has direct operations in Europe, Japan, Canada, Mexico and South Africa which collect at future dates in the customers' local currencies and purchase finished goods in U.S. dollars. Accordingly, the Company is exposed to transaction gains and losses that could result from changes in foreign currency exchange rates. As more fully described in Note 5 to the Company's consolidated financial statements, the Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to foreign currency transactions. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses foreign exchange contracts in the form of forward contracts and option contracts. All of the Company's derivatives were designated and qualified as cash flow hedges at September 30, 1999. On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company only enters into derivative instruments that qualify as cash flow hedges as described in SFAS 133. For all instruments qualifying as highly effective cash flow hedges, the changes in the fair value of the derivative are recorded in other comprehensive income. The following is a summary of the outstanding foreign currency contracts outstanding at September 30, 1999:
September 30, 1999 ---------------------------------------------- U.S. Dollar Fair Equivalent Maturity Value ------------ --------- ----------- Forward Contracts: ------------------ British pounds $ 468,482 Nov. 1999 $ 475,000 British pounds 1,008,998 Mar. 2000 1,000,355 British pounds 2,184,242 Jun. 2000 2,165,001 British pounds 4,091,956 Sep. 2000 4,052,180 British pounds 3,254,142 Dec. 2000 3,219,347 Canadian dollars 1,635,212 Dec. 1999 1,550,287 Canadian dollars 1,246,849 Mar. 2000 1,208,639 Canadian dollars 825,100 Mar. 2000 818,741 Canadian dollars 1,796,007 Jun. 2000 1,783,491 Canadian dollars 2,531,853 Sep. 2000 2,516,763 Canadian dollars 1,515,296 Dec. 2000 1,507,286 Japanese yen 2,040,624 Dec. 1999 1,882,353 Japanese yen 255,078 Mar. 2000 240,214 Japanese yen 803,023 Jun. 2000 766,940 Japanese yen 982,522 Sep. 2000 951,510 Japanese yen 2,683,042 Dec. 2000 2,635,731 French francs 3,894,397 Dec. 1999 4,268,564 Option Contracts: ----------------- British pounds 2,597,388 Dec. 1999 2,603,700 Japanese yen 1,993,387 Dec. 1999 1,468,950 French francs 485,583 Dec. 1999 525,000 ------------- ----------- $ 36,293,181 $35,640,052 ============= ===========
15 16 The Company is exposed to credit losses in the event of nonperformance by counterparties to its forward exchange contracts but has no off-balance sheet credit risk of accounting loss. The Company anticipates, however, that the counterparties will be able to fully satisfy their obligations under the contracts. The Company does not obtain collateral or other security to support the forward exchange contracts subject to credit risk but monitors the credit standing of the counterparties. The Company sells direct and through its subsidiaries to various customers in the European Union which have adopted the Euro as a legal currency effective January 1, 1999. The Euro is expected to begin circulation after a three-year transition period on January 1, 2002. The Company has analyzed whether the conversion to the Euro will materially affect its business operations. The Company's information systems are capable of processing transactions in Euros. Additionally, the Company is planning to upgrade certain of its information systems through December 31, 2001 to enhance its capability to process transactions and keep records in Euros. While the Company is uncertain as to the ultimate impact of the conversion, the Company does not expect costs in connection with the Euro conversion to be material. Interest Rates - The Company's line of credit and long-term debt, with a total balance of $19.7 million outstanding at September 30, 1999, bear interest based on the bank's lending rate or LIBOR. In January 1999, the Company entered into an interest rate swap agreement, effective March 1, 1999, that eliminates the Company's risk of fluctuations in the variable rate of the long-term debt. During the quarter ended September 30, 1999, the Company's line of credit borrowings incurred interest based on the bank's reference rate. Based on the weighted average interest rate on the line of credit of 8.15% during the three months ended September 30, 1999, if interest rates on the line of credit were to increase by 10% and to the extent that borrowings were outstanding, for every $1.0 million outstanding on the Company's line of credit, net income would be reduced by approximately $5,000 per year. 16 17 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings THE CALIFORNIA SECURITIES ACTIONS The Company and certain of its officers and directors have been named as defendants in three putative class action lawsuits (the "California Securities Actions") filed in December 1996 in the California Superior Court for the County of Orange (the "Superior Court"). The cases are captioned: Yosef S. Rosenshein v. Oakley, Inc., Mike Parnell, Link Newcomb and Jim Jannard, Case No. 773051 (filed December 17, 1996); Herschel Harman v. Oakley, Inc., Mike Parnell, Link Newcomb and Jim Jannard, Case No. 773053 (filed December 17, 1996); and Eric Sher, Harold Baron and David O. Eckert v. Oakley, Inc., Mike Parnell, Link Newcomb, Jim Jannard, Merrill Lynch & Co. and Alex. Brown & Sons, Inc., Case No. 773366 (filed December 24, 1996). By order dated January 30, 1997, the Superior Court ordered that the California Securities Actions be assigned to the Superior Court's Complex Litigation Panel, where they have since been consolidated. On April 18, 1997, the plaintiffs filed a consolidated amended complaint in the California Securities Actions. The plaintiffs seek to represent a class of persons who purchased the Company's common stock between March 22, 1996 and December 5, 1996. The complaint in the California Securities Actions alleges claims for violations of the antifraud provisions of the California Corporations Code, unfair business practices and false advertising in violation of certain provisions of the California Business and Professions Code, fraud and negligent misrepresentation. The plaintiffs' claims are based on alleged material misstatements and omissions in certain of the Company's public statements, Securities and Exchange Commission filings and in the reports of third-party analysts regarding the Company's retail distribution practices, market conditions, new product developments and extensions of existing product lines, business with Sunglass Hut and earnings prospects. The plaintiffs seek unspecified damages and other relief against the Company and the other defendants. The plaintiffs in the California Securities Actions have also asserted claims against Merrill Lynch & Co. ("Merrill Lynch") and Alex. Brown and Sons, Inc. ("Alex. Brown"), which served as the U.S. Representatives of the U.S. Underwriters of the June 6, 1996 offering of five million shares of common stock of the Company by certain of its shareholders (the "Secondary Offering"). By letter dated February 7, 1997, counsel for Merrill Lynch and Alex. Brown gave the Company notice pursuant to the indemnification provisions of the U.S. Purchase Agreement dated June 6, 1996, for the Secondary Offering that they were asserting a claim for indemnification under such provisions and requested that the Company reimburse Merrill Lynch and Alex. Brown on a current basis for their attorneys' fees and expenses incurred in defending the California Securities Actions. Counsel for Merrill Lynch and Alex. Brown subsequently indicated that this claim for indemnification also applies to attorneys' fees and expenses incurred in defending the Federal Securities Actions (described below). On July 7, 1999, the parties submitted to the Superior Court a stipulated request for dismissal without prejudice of the California Securities Actions. On July 26, 1999, the Superior Court entered a dismissal without prejudice of the California Securities Actions. THE FEDERAL SECURITIES ACTIONS The Company and certain of its officers and directors have been named as defendants in five putative 17 18 class action lawsuits (the "Federal Securities Actions") filed in October, November and December 1997 in the United States District Court for the Central District of California, Southern Division (the "District Court"). The cases are captioned: Kensington Capital Management v. Oakley, Inc., Mike Parnell, Link Newcomb, Jim Jannard, Merrill Lynch & Co. and Alex. Brown & Sons Incorporated, No. SACV 97-808 GLT (EEx) (filed October 10, 1997) (the "Kensington Capital Management Action"); Frank Lister, James J. Scotella, Raymond E. Neveau, James S. Lewinski, Jack Rosenson and Lee Sperling v. Oakley, Inc., Mike Parnell, Link Newcomb, Jim Jannard, Merrill Lynch & Co. and Alex. Brown & Sons Incorporated, No. SACV 97-809 GLT (EEx) (filed October 10, 1997) (the "Lister Action"); Stuart Chait and Marilyn Schwartz v. Oakley, Inc., Mike Parnell, Link Newcomb, Jim Jannard, Merrill Lynch & Co. and Alex. Brown & Sons, Incorporated, No. SACV 97-829 GLT (EEx) (filed October 20, 1997) (the "Chait Action"); Val Fichera v. Oakley, Inc., Mike Parnell, Link Newcomb, Jim Jannard, Merrill Lynch & Co. and Alex. Brown and Sons Incorporated, No. SACV 97-928 GLT (EEx) (filed November 17, 1997 (the "Fichera Action"); and Yosef J. Rosenshein and Hershel Harman v. Oakley, Inc., Mike Parnell, Link Newcomb, Jim Jannard, Merrill Lynch & Co. and Alex. Brown & Sons Incorporated, No. SACV 97-993 GLT (EEx) (filed December 5, 1997 (the "Rosenshein Federal Action"). The plaintiffs in the Kensington Capital Management and the Fichera Actions seek to represent a class of persons who purchased the Company's common stock in the Secondary Offering and allege claims for violations of sections 11, 12(a)(2) and 15 of the Securities Act of 1933. The plaintiffs' claims are based on alleged material misstatements and omissions in the prospectus issued and registration statement filed in connection with the Secondary Offering regarding the Company's retail distribution practices, market conditions, new product developments and extensions of existing product lines, business with Sunglass Hut and quality control standards. The plaintiffs seek unspecified damages and other relief against the Company and the other defendants. Plaintiffs in the Kensington Capital Management Action filed a motion to consolidate that action with the Fichera Action, and plaintiffs in the Kensington Capital Management and the Fichera Actions filed competing motions to be appointed lead plaintiffs for the purported plaintiff class and for the selection of lead counsel to the purported plaintiff class. Plaintiff's motion in the Fichera Action was later withdrawn. The plaintiffs in the Lister and Chait Actions and the Rosenshein Federal Action seek to represent a class of persons who purchased the Company's common stock between March 22, 1996 and December 5, 1996, including in the Secondary Offering, and allege claims for violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The plaintiffs' claims are based on alleged material misstatements and omissions in certain of the Company's public statements, Securities and Exchange Commission filings and in the reports of third-party analysts regarding the Company's retail distribution practices, market conditions, new product developments and extensions of existing product lines, business with Sunglass Hut, earnings prospects and quality control standards. The plaintiffs seek unspecified damages and other relief against the Company and the other defendants. Plaintiffs in the Lister and Chait Actions filed a motion to consolidate the Lister and Chait Actions and the Rosenshein Federal Action, to appoint certain persons as lead plaintiffs for the purported plaintiff class and for the selection of lead counsel to the purported plaintiff class. On January 26, 1998, the District Court granted the plaintiffs' motions for appointment of lead plaintiffs and for the selection of lead counsel to the purported plaintiff classes. The District Court further ordered 18 19 that all of the Federal Securities Actions be consolidated for pretrial purposes. On April 3, 1998, plaintiffs filed consolidated amended complaints in the Federal Securities Actions. On July 10, 1998, the Company and defendants Mike Parnell, Link Newcomb and Jim Jannard filed motions to dismiss the Federal Securities Actions. Merrill Lynch and Alex. Brown also filed motions to dismiss the Federal Securities Actions. On January 14, 1999, the District Court denied the motions to dismiss filed by the Company and the other defendants. On March 3, 1999, the defendants filed answers to the consolidated amended complaints in the Federal Securities Actions. On April 2, 1999, plaintiffs filed motions for class certification in the Federal Securities Actions. On June 24, 1999, the parties submitted to the District Court stipulations and proposed orders for class certification in the Federal Securities Actions. On June 29, 1999, the District Court approved the stipulations and entered orders for class certification in the Federal Securities Actions. Discovery in the Federal Securities Actions has commenced. Although it is too soon to predict the outcome of the Federal Securities Actions with any certainty, based on its current knowledge of the facts, the Company believes that the plaintiffs' claims are without merit and intends to defend the Federal Securities Actions vigorously. THE CALIFORNIA DERIVATIVE ACTION The Company has been named as a nominal defendant in a putative derivative lawsuit against certain of its directors and officers filed in March 1997 in the Superior Court. The case is captioned Blackman v. James Jannard, Mike Parnell and Does 1 through 100, Case No. 777098 (filed March 27, 1997) (the "California Derivative Action"). In the California Derivative Action, the plaintiff, purporting to sue on behalf of the Company, alleges claims for breach of fiduciary duty, constructive fraud, unjust enrichment and violations of the insider trading provisions of the California Corporations Code. Like the California Securities Actions, the plaintiff's claims in the California Derivative Action are, among other things, based upon alleged material misstatements and omissions in certain of the Company's public statements and Securities and Exchange Commission filings regarding the Company, its operation and future prospects. After sustaining the defendants' demurrer to the plaintiff's second amended complaint, on February 4, 1998, the Superior Court entered a final order of dismissal of the California Derivative Action. On April 8, 1998, the plaintiff in the California Derivative Action filed a notice of appeal in the Superior Court. In March 1999, the parties to the California Derivative Action entered into a stipulation of settlement regarding derivative claims that is subject to approval by the California Court of Appeal, Fourth Appellate District (the "Court of Appeal"). Pursuant to the proposed settlement, a committee of independent members of Oakley's board of directors (the "Independent Committee"), comprised of non-employee directors Irene Miller and Orin Smith, investigated the allegations of insider trading asserted in the California Derivative Action against defendants James Jannard and Mike Parnell. The Independent Committee was assisted by counsel, Norman Blears, Esq. of the law firm of Heller, Ehrman, White & McAuliffe. The Independent Committee determined that the insider trading claims lacked merit and recommended to Oakley's board of directors that the action be dismissed and the claims against Messrs. Jannard and Parnell released in accordance with the terms of the proposed settlement. The Independent Committee also reported its findings and recommendations respecting the allegations of insider trading to plaintiff's counsel and a copy of its report was filed with the Court of Appeal. On June 24, 1999, the Court of Appeal approved the settlement and entered a final judgment dismissing with prejudice the California Derivative Action and approving the Company's release of claims against Messrs. Jannard and Parnell. The settlement is not expected to have a material adverse effect on the Company. In addition, the Company is a party to various claims, complaints and other legal actions that have arisen in the normal course of business from time to time. The Company believes the outcome of these pending 19 20 legal proceedings, in the aggregate, will not have a material adverse effect on the operations or financial position of the Company. ITEM 2. Changes in Securities and Use of Proceeds None ITEM 3. Defaults Upon Senior Securities None ITEM 4. Submission of Matters to a Vote of Security-Holders None ITEM 5. Other Information RECENT DEVELOPMENTS On October 7, 1999, the Company's founder and Chairman, Jim Jannard, assumed the position of Chief Executive Officer, succeeding Bill Schmidt who resigned on October 6, 1999 as the Company's Chief Executive Officer and as a board member. On October 20, 1999, the Company announced its plans to restructure and refocus its footwear business. As a strategic response to continued net operating losses in its footwear business, the Company plans to reduce its in-house manufacturing investment to the capacity necessary to fulfill outstanding retailer orders for current and selected future footwear styles, create development prototypes and production samples for all future styles, fulfill consumer-direct on-line orders as demand warrants and will seek to establish relationships with select manufacturers for component and complete-unit production. As part of the restructuring plan, the Company expects to record an after-tax charge of between approximately $7 million and $10 million, or $0.10 to $0.14 per share, in the fourth quarter ending December 31, 1999. The amount includes the disposal of the Company's excess footwear manufacturing equipment, write-down of footwear inventory and raw materials and other charges incidental to the restructuring. 20 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K The following exhibits are included herein: 3.1 (1) Articles of Incorporation of the Company 3.2 (3) Amended and Restated Bylaws of the Company 3.3 (2) Amendment No. 1 to the Articles of Incorporation as filed with the Secretary of State of the State of Washington on September 26, 1996 3.4 (3) Amendment No. 1 to Sections 1 and Sections 3a through 3f of Article IV of the Amended and Restated Bylaws of Oakley, Inc. 27.1 (4) Financial Data Schedule (1) Previously filed with the Registration Statement on Form S-1 of Oakley, Inc. (Registration No. 33-93080) (2) Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31, 1996. (3) Previously filed as Exhibit 10.66 to the Form 10-K of Oakley, Inc. for the year ended December 31, 1998. (4) Filed herewith. The Company did not file any reports on Form 8-K during the three months ended September 30, 1999. 21 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Oakley, Inc. /s/ James Jannard November 11, 1999 - --------------------------- James Jannard Chief Executive Officer /s/ Thomas George November 11, 1999 - --------------------------- Thomas George Chief Financial Officer 22 23 EXHIBIT INDEX
Exhibit Index Description - ----- ----------- 3.1 (1) Articles of Incorporation of the Company 3.2 (3) Amended and Restated Bylaws of the Company 3.3 (2) Amendment No. 1 to the Articles of Incorporation as filed with the Secretary of State of the State of Washington on September 26, 1996 3.4 (3) Amendment No. 1 to Sections 1 and Sections 3a through 3f of Article IV of the Amended and Restated Bylaws of Oakley, Inc. 27.1 (4) Financial Data Schedule
- ---------- (1) Previously filed with the Registration Statement on Form S-1 of Oakley, Inc. (Registration No. 33-93080) (2) Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31, 1996. (3) Previously filed as Exhibit 10.66 to the Form 10-K of Oakley, Inc. for the year ended December 31, 1998. (4) Filed herewith. EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 JUN-30-1999 SEP-30-1999 10,572 0 41,999 585 39,026 105,917 117,046 0 242,285 35,924 0 0 0 707 184,028 242,285 70,819 70,819 26,692 26,692 27,889 0 346 15,892 5,570 10,322 0 0 0 10,322 0.15 0.15
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