10-Q

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2002

or

o 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 (State or other jurisdiction of incorporation or organization)	95-3194947 (IRS Employer ID No.)
One Icon Foothill Ranch, California (Address of principal executive offices)	92610 (Zip Code)

(949) 951-0991
(Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        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
(Class) 68,908,381 shares
(Outstanding on May 10, 2002)

Oakley, Inc.
Index to Form 10-Q

PART I. FINANCIAL INFORMATION
ITEM 1—Condensed and Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited) as of March 31, 2002 and December 31, 2001	3
Consolidated Statements of Income (Unaudited) for the three-month periods ended March 31, 2002 and 2001	4
Consolidated Statements of Comprehensive Income (Unaudited) for the three-month periods ended March 31, 2002 and 2001	4
Consolidated Statements of Cash Flows (Unaudited) for the three-month periods ended March 31, 2002 and 2001	5
Notes to Unaudited Consolidated Financial Statements	6-9
ITEM 2—Management's Discussion and Analysis of Financial Condition and Results of Operations	8-15
ITEM 3—Quantitative and Qualitative Disclosures About Market Risk	15-16
PART II. OTHER INFORMATION
ITEM 1—Legal Proceedings	17
ITEM 2—Changes in Securities and Use of Proceeds	17
ITEM 3—Defaults Upon Senior Securities	17
ITEM 4—Submission of Matters to a Vote of Security Holders	17
ITEM 5—Other Information	17
ITEM 6—Exhibits and Reports on Form 8-K	17
Signatures	18

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PART I. FINANCIAL INFORMATION

ITEM 1—Financial Statements

OAKLEY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

			(Unaudited) March 31, 2002			December 31, 2001
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	8,761		$	5,612
	Accounts receivable, less allowance for doubtful accounts of $1,930 (2002) and $1,844 (2001)			83,908			74,775
	Inventories, net (Note 2)			78,503			77,270
	Other receivables			2,799			3,097
	Deferred and prepaid income taxes			8,717			8,734
	Income tax receivable			1,798			6,449
	Prepaid expenses and other			8,978			10,754
		Total current assets		193,464			186,691
Property and equipment, net				148,348			146,591
Deposits				2,818			1,378
Goodwill				20,931			20,682
Other assets				7,398			7,438
TOTAL ASSETS			$	372,959		$	362,780
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
	Lines of credit (Note 4)		$	39,466		$	40,533
	Accounts payable			22,191			19,025
	Accrued expenses and other current liabilities			15,905			15,293
	Accrued warranty			3,630			3,503
	Current portion of long-term debt (Note 4)			2,019			2,019
		Total current liabilities		83,211			80,373
Deferred income taxes				5,837			5,207
Long-term debt, net of current portion				16,137			16,490
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
	Preferred stock, par value $.01 per share; 20,000,000 shares authorized; no shares issued			—			—
	Common stock, par value $.01 per share; 200,000,000 shares authorized; 68,852,000 (2002) and 68,821,000 (2001) issued and outstanding			688			688
	Additional paid-in capital			41,137			40,805
	Retained earnings			233,210			227,648
	Accumulated other comprehensive income			(7,261	)		(8,431	)
		Total shareholders' equity		267,774			260,710
	TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	372,959		$	362,780

See accompanying Notes to Consolidated Financial Statements

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OAKLEY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share and per share data)

			Three months ended March 31,
			2002		2001		2001 Pro Forma(1)
Net sales			$	109,572	$	93,831	$	93,831
Cost of goods sold				51,889		39,420		39,420
	Gross profit			57,683		54,411		54,411
Operating expenses:
	Research and development			3,864		2,549		2,549
	Selling			27,475		24,376		24,376
	Shipping and warehousing			4,369		3,977		3,977
	General and administrative			12,758		9,635		9,326
		Total operating expenses		48,466		40,537		40,228
Operating income				9,217		13,874		14,183
Interest expense, net				659		843		843
Income before provision for income taxes				8,558		13,031		13,340
Provision for income taxes				2,996		3,909		4,002
Net income			$	5,562	$	9,122	$	9,338
Basic net income per common share			$	0.08	$	0.13	$	0.14
Basic weighted average common shares				68,829,000		68,638,000		68,638,000
Diluted net income per common share			$	0.08	$	0.13	$	0.13
Diluted weighted average common shares				69,655,000		69,800,000		69,800,000

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)

		Three months ended March 31,
		2002		2001			2001 Pro Forma(1)
Net income		$	5,562	$	9,122		$	9,338
Other comprehensive income:
	Net unrealized gain on derivative instruments		1,022		2,961			2,961
	Foreign currency translation adjustment		148		(2,822	)		(2,822	)
	Other comprehensive income, net of tax		1,170		139			139
Comprehensive income		$	6,732	$	9,261		$	9,477

(1)

Pro forma results for 2001 assume the adoption of SFAS 142 effective January 1, 2001, and that goodwill is no longer amortized as of that date (see Note 1).

See accompanying Notes to Consolidated Financial Statements

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OAKLEY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)

				Three months ended March 31,
				2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income			$	5,562		$	9,122
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			6,668			5,385
		Compensatory stock options			1			28
		Loss on disposition of equipment			11			2
		Deferred and prepaid income taxes, net			600			—
		Changes in assets and liabilities, net of effects of business acquisitions:
			Accounts receivable, net		(9,114	)		1,761
			Inventories		(1,063	)		(13,850	)
			Other receivables		332			(306	)
			Income taxes receivable		4,650			—
			Prepaid expenses and other		2,817			(5,079	)
			Accounts payable		3,232			255
			Accrued expenses, other current liabilities and accrued warranty		784			1,122
			Income taxes payable		—			(6,973	)
			Net cash provided by (used in) operating activities		14,480			(8,533	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Deposits				(1,446	)		(1,122	)
	Acquisitions of property and equipment				(8,224	)		(10,566	)
	Proceeds from sale of property and equipment				1			31
	Other assets				(389	)		(77	)
			Net cash used in investing activities		(10,058	)		(11,734	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from bank borrowings				36,035			43,126
	Repayments of bank borrowings				(37,580	)		(23,680	)
	Net proceeds from exercise of stock options				330			583
	Repurchase of common shares				—			(800	)
			Net cash (used in) provided by financing activities		(1,215	)		19,229
Effect of exchange rate changes on cash					(58	)		688
Net increase (decrease) in cash and cash equivalents					3,149			(350	)
Cash and cash equivalents, beginning of period					5,612			4,855
Cash and cash equivalents, end of period				$	8,761		$	4,505

See accompanying Notes to Consolidated Financial Statements

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Oakley, Inc.
Notes to Unaudited Consolidated Financial Statements

Note 1—Basis of Presentation

        The accompanying unaudited 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 unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement of the consolidated balance sheet as of March 31, 2002, and the consolidated statements of income, comprehensive income and cash flows for the three-month periods ended March 31, 2002 and 2001. The results of operations for the three-month period ended March 31, 2002 are not necessarily indicative of the results of operations for the entire year ending December 31, 2002.

Note 2—Inventories

        Inventories consist of the following:

	March 31, 2002		December 31, 2001
Raw materials	$	21,926,000	$	23,137,000
Finished goods		56,577,000		54,133,000
	$	78,503,000	$	77,270,000

Note 3—Intangible Assets

        On January 1, 2002, the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets", which eliminated the amortization of purchased goodwill and other intangibles with indefinate useful lives. Upon adoption of SFAS No. 142, the Company performed an impairment test of its goodwill and intangible assets, and determined that no impairment existed. Under SFAS No. 142, goodwill and intangible assets will be tested for impairment at least annually and more frequently if an event occurs which indicates the goodwill or intangible assets may be impaired.

		As of March 31, 2002				As of December 31, 2001
		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Goodwill		$	25,472,000	$	4,541,000	$	25,223,000	$	4,541,000
Covenant not to compete			3,225,000		1,607,000		3,225,000		1,519,000
Reacquisition of distribution rights			3,067,000		1,096,000		3,067,000		1,045,000
Patents			3,575,000		1,119,000		3,575,000		1,038,000
Other identified intangible assets			751,000		16,000		645,000		6,000
	Total	$	36,090,000	$	8,379,000	$	35,735,000	$	8,149,000

        Pro forma information for the quarter ended March 31, 2001, reflecting the adoption of SFAS No. 142, is presented on the face of the accompanying financial statements.

        Intangible assets other than goodwill will continue to be amortized by the Company using estimated useful lives of 5 to 15 years and no residual values. Intangible amortization expense for the quarter ended March 31, 2002 was approximately $230,000 and is estimated to be, based on intangible

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assets at March 31, 2002, approximately $921,000 for fiscal 2002. Annual estimated amortization expense, based on intangible assets at March 31, 2002, is as follows:

Estimated Amortization Expense:
Fiscal 2003	$	921,000
Fiscal 2004		921,000
Fiscal 2005		921,000
Fiscal 2006		861,000
Fiscal 2007		567,000

Note 4—Financing Arrangements

Lines of Credit—In January 2001, the Company amended its unsecured line of credit with a bank syndicate which allows for borrowings up to $75 million and matures in August 2004. The amended line of credit bears interest at either LIBOR or IBOR plus 0.75% (2.7% at March 31, 2002) or the bank's prime lending rate minus 0.25% (4.5% at March 31, 2002). At March 31, 2002, the Company had $23.0 million outstanding under this credit agreement. At March 31, 2002, the Company was in compliance with all restrictive covenants and financial ratios in such agreement. Certain of the Company's foreign subsidiaries have negotiated local lines of credit to provide working capital financing. The aggregate borrowing limit on the foreign lines of credit is $20 million, of which $16.5 million was outstanding at March 31, 2002. In aggregate, at March 31, 2002, $39.5 million was outstanding under these credit facilities.

Long-Term Debt—The Company has a real estate term loan with an outstanding balance of $15.9 million at March 31, 2002, which matures September 2007. The term loan, which is collateralized by the Company's corporate headquarters, requires quarterly principal payments of approximately $380,000 ($1,519,000 annually), plus interest based upon LIBOR plus 1.00% (2.9% at March 31, 2002). In January 1999, the Company entered into an interest rate swap agreement that eliminates the Company's risk of fluctuations in the variable rate of its long-term debt by fixing the interest rate over the term of the loan at 6.31%.

Additionally, the Company has a note payable as a result of an acquisition in the amount of $2.2 million, net of discounts. The note is due in annual installments of $500,000 per year commencing in 2002 through 2006, with a portion of such payments contingent upon certain conditions.

Note 5—Litigation

        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 6—Derivative Financial Information

        The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," on January 1, 1999.

        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 and its subsidiaries use foreign exchange contracts in the form of forward contracts. In addition, as part of its overall strategy to manage the level of exposure to the risk of fluctuations in interest rates, in January 1999 the Company entered into an interest rate swap agreement that results in fixing the interest rate over the term of the Company's ten-year real estate term loan. At March 31, 2002, all of the Company's derivatives were designated

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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 could result in reclassifications of $2.0 million of gains to earnings over the next 12 months. The Company hedges forecasted transactions that are determined probable to occur within 21 months or less.

        On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company does not enter into derivative instruments that do not qualify as cash flow hedges as described in SFAS No. 133. The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. In this documentation, the Company specifically identifies the asset, liability, firm commitment or forecasted transaction that has been designated as a hedged item and states how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Company would discontinue hedge accounting prospectively (i) if it is determined that the derivative is no longer effective in offsetting change in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) when the derivative is designated as a hedge instrument, because it is probable that the forecasted transaction will not occur, (iv) because a hedged firm commitment no longer meets the definition of a firm commitment, or (v) if management determines that designation of the derivative as a hedge instrument is no longer appropriate. During the three months ended March 31, 2002, the Company reclassified into earnings a net gain of $0.3 million resulting from the expiration, sale, termination or exercise of foreign currency exchange contracts.

Note 7—Earnings Per Share

        Basic earnings per share is computed using the weighted average number of common shares outstanding during the reporting period. Earnings per share assuming dilution is computed using the weighted average number of common shares outstanding and the dilutive effect of potential common shares outstanding. For the three months ended March 31, 2002 and 2001, the diluted weighted average common shares outstanding included 825,000 and 1,162,000, respectively, of dilutive stock options.

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.

Overview

        Oakley is an innovation-driven designer, manufacturer and distributor of consumer products that include high-performance eyewear, footwear, watches, apparel and accessories. The Company's products are sold in the United States through a carefully selected base of approximately 9,000 active accounts with approximately 13,600 locations comprised of optical stores, sunglass retailers and specialty sports stores, including bike, surf, ski and golf shops, and motorcycle, athletic footwear and sporting goods stores. In November 2001, the Company acquired Iacon, Inc., a sunglass retailing chain headquartered in Scottsdale, Arizona with 45 retail stores at March 31, 2002.

        Internationally, the Company sells its products in over 70 countries outside the United States, with direct offices in France, Germany, United Kingdom, Italy, Japan, Mexico, South Africa, Canada, Australia, New Zealand and Brazil. In those parts of the world not serviced by the Company or its subsidiaries, Oakley products are sold through distributors who possess local expertise. These distributors sell the Company's products either exclusively or with complementary, non-competing products and agree to respect the marketing philosophy and practices of the Company. Sales to the

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Company's distributors are denominated in U.S. dollars. The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions of its international subsidiaries. The Company and its subsidiaries use foreign exchange contracts in the form of forward contracts to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates.

Significant Accounting Policies and Certain Risks and Uncertainties

        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 consumer products industry, including the eyewear, apparel, footwear and watch categories, 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. These industries are subject to changing consumer preferences; shifts in consumer preferences may adversely affect companies that misjudge such preferences.

        The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. As such, the Company is required 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 significantly differ from such estimates. The Company believes that the following discussion addresses the Company's most significant accounting policies, which are the most critical to aid in fully understanding and evaluating the Company's reported financial results.

Revenue Recognition

        The Company recognizes revenue 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. The Company's shipping terms with all customers are FOB shipping point. Sales agreements with dealers and distributors normally provide payment terms of 30 to 180 days, depending on the product category. None of the Company's sales agreements with any of its customers provides for any rights of return by the customer, except for product warranty related issues. In addition, although the Company, at its sole discretion, may repurchase its own products to protect the Company image, this practice is infrequent and, historically, the value of these repurchases has not been significant.

Accounts Receivable

        The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current creditworthiness, as determined by the Company's review of their current credit information. The Company continuously monitors its customer collections and payments and maintains a provision for estimated credit losses based upon the Company's historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within the expectations and the provisions established by the Company, there can be no assurances that the Company will continue to experience the same credit loss rates that have been experienced in the past.

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Inventories

        Inventories are stated at the lower of cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. The Company regularly reviews its inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on the Company's estimated forecast of product demand and production requirements. As experienced in 2001, the demand for the Company's products could fluctuate significantly. Other factors which could affect demand for the Company's products include unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by retailers; continued weakening of economic conditions, which could reduce demand for products sold by the Company and which could adversely affect profitability; and further terrorist acts, or the threat thereof, which could continue to adversely affect consumer confidence and spending, could interrupt production and distribution of product and raw materials and could, as a result, adversely affect the Company's operations and financial performance. Additionally, management's estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory.

Foreign Currency Translation

        The Company has direct operations in Europe, United Kingdom, Japan, Canada, Mexico, South Africa, Australia, New Zealand and Brazil 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. Assets and liabilities of the Company denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using the average exchange rate for the period. Gains and losses from translation of foreign subsidiary financial statements are included in accumulated other comprehensive income. Gains and losses on short-term intercompany foreign currency transactions are recognized as incurred. As part of the Company's overall strategy to manage its level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company and its subsidiaries have entered into various foreign exchange contracts in the form of forward contracts.

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. In the event of the loss of the source for lens blanks, the Company has identified an alternate source which may be available. The effect of the loss of any of these sources (including any possible disruption in business) will depend primarily upon the length of time necessary to find a suitable alternative source 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 for lens blanks can be located or developed in a timely manner.

Vulnerability Due to Customer Concentrations

        Net sales to Sunglass Hut accounted for approximately 10.9% and 16.8% of the Company's net sales for the quarters ended March 31, 2002 and 2001, respectively. In April 2001, Luxottica, one of the Company's largest competitors, acquired Sunglass Hut and implemented changes which adversely affected the Company's net sales to Sunglass Hut in 2001. In December 2001, the Company and Luxottica entered into a new three-year commercial agreement for the distribution of Oakley products through Sunglass Hut retail stores. The agreement applies to Sunglass Hut locations in the United States, Canada, the United Kingdom and Ireland, and marked the resumption of the business relationship between the two companies, which had been substantially reduced since August 2, 2001. Oakley and Luxottica also have resumed their business together on mutually agreed terms for the markets not specifically covered by this new agreement. The arrangements between the companies do

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not obligate Luxottica to order product from the Company, and there can be no assurances as to the future of the relationship between the Company and Luxottica.

Warranties

        The Company provides a one-year limited warranty against manufacturer's defects in its eyewear. All authentic Oakley watches are warranted for one year against manufacturer's defects when purchased from an authorized Oakley watch dealer. Footwear is warranted for 90 days against manufacturer's defects, and apparel is warranted for 30 days against manufacturer's defects. The Company's standard warranties require the Company to repair or replace defective product returned to the Company during such warranty period at a nominal cost to the customer. While warranty costs have historically been within the Company's expectations, there can be no assurance that the Company will continue to experience the same warranty return rates or repair costs as in the prior years. A significant increase in product return rates, or a significant increase in the costs to repair product, could have a material adverse impact on the Company's operating results.

Commitments and Contingencies

        The Company has entered into operating leases, primarily for facilities and retail real estate leases, and has commitments under endorsement contracts with selected athletes and others who endorse the Company's products.

Results of Operations

Three Months Ended March 31, 2002 and 2001

Net sales

        Net sales increased to $109.6 million for the three months ended March 31, 2002 from $93.8 million for the three months ended March 31, 2001, an increase of $15.8 million, or 16.8%. The increase in net sales was due to a 6.3%, or $4.3 million, increase in gross sunglass sales. Gross sunglass sales were $72.2 million for the first quarter of 2002 compared to $67.9 million for the first quarter of 2001. For the quarter ended March 31, 2002, the Company experienced a 3.3% decrease in sunglass unit volume as a result of an expected significant decline in unit sales to Sunglass Hut, partially offset by stronger sales to the Company's other retailers worldwide. Sunglass average selling prices increased 9.9% reflecting the continued shift in product mix to higher priced items in addition to the impact of the $5 retail price increase in North America on most sunglasses in July 2001. The increase in gross sunglass sales was driven by strong sunglass sales of the Company's Minutes and newer sunglasses such as the Switch and Scarintroduced in 2001, offsetting declines in sales of more mature products. Sales of the Company's polarized styles for the three months ended March 31, 2002 also contributed to the increase in gross sales with a 47%, or $1.8 million, increase over the three months ended March 31, 2001. Increased sales from the Company's new product categories, comprised of footwear, apparel, watches and prescription eyewear, also contributed to the overall sales increase as gross sales increased 50.9%, or $11.1 million, to $32.9 million for the three months ended March 31, 2002 from $21.8 million for the three months ended March 31, 2001.

        The Company's U.S. net sales, excluding the Company's retail store operations, increased 13.5% to $52.4 million in the first quarter of 2002 from $46.1 million in the first quarter of 2001, as a result of a 29.1% increase in net sales to the Company's broad specialty store account base and other domestic sales, while sales to the Company's largest U.S. customer, Sunglass Hut, decreased 24.4% to $10.2 million for the three months ended March 31, 2002 from $13.5 million for the three months ended March 31, 2001. In April 2001, Luxottica, one of the Company's largest competitors, acquired Sunglass Hut, the Company's largest customer. In December 2001, the Company and Luxottica entered into a new three-year commercial agreement for the distribution of Oakley products through Sunglass

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Hut retail stores. The agreement marked the resumption of the business relationship between the two companies, which had been substantially reduced. Net sales from the Company's retail store operations, including Iacon stores acquired October 31, 2001, and the five new Oakley retail stores opened during the past 12 months, were $5.8 million for the quarter ended March 31. 2002, up from $0.7 million for the quarter ended March 31, 2001, an increase of $5.1 million. During the quarter ended March 31, 2002, the Company opened two new Iacon stores, bringing the total to 45, and one new Oakley store, bringing the total to seven. Total U.S. net sales increased 24.1% in the first quarter of 2002 to $58.2 million from $46.9 million in the comparable quarter in 2001. During the three months ended March 31, 2002, the Company's international net sales increased 9.4%, or $4.4 million, to $51.4 million from $46.9 million during the first quarter of 2001. This increase reflected the steady recovery of business in several major markets, especially those dependent on leisure travel activity, partially offset by declines in the South Pacific and Japan, where retail conditions continue to reflect weaknesses in the overall economy. Sales in South America also declined in the first quarter of 2002 from the comparable 2001 period; however, the Company expects to recover these sales as a new direct Brazilian office will begin operation in the second quarter of 2002. Sales from the Company's direct international offices represented 81% of total international sales for the three months ended March 31, 2002, compared to 80% for the comparable 2001 period.

Gross profit

        Gross profit increased to $57.7 million, or 52.6% of net sales, for the three months ended March 31, 2002 from $54.4 million, or 58.0% of net sales, for the three months ended March 31, 2001, an increase of $3.3 million, or 6.1%. The decrease in gross profit as a percentage of net sales reflects a higher concentration from footwear and apparel products which carry lower gross margins than the Company's eyewear products, coupled with higher sales discounts and successful efforts to reduce inventory levels of prior season close-out products at reduced margins.

Operating expenses

        Operating expenses increased to $48.5 million for the three months ended March 31, 2002 from $40.5 million for the three months ended March 31, 2002, an increase of $8.0 million, or 19.8%. As a percentage of net sales, operating expenses increased to 44.3% of net sales for the three months ended March 31, 2002 compared to 43.2% of net sales for the comparable period, as the Company continued to develop the infrastructure, both personnel and systems, to grow its new product categories, prudently increase its retail presence, expand distribution, including further expanding the Company's national specialty footwear and apparel accounts and premium dealer programs, and manage the growth of the business. Operating expenses included $2.4 million of expenses for the Company's retail operations, of which $1.7 million is attributable to Iacon.

        Research and development expenses increased $1.4 million to $3.9 million, or 3.6% of net sales, for the three months ended March 31, 2001, from $2.5 million, or 2.7% of net sales for the three months ended March 31, 2001, primarily as a result of greater new product development efforts. Selling expenses increased $3.1 million to $27.5 million, for the three months ended March 31, 2002, from $24.4 million for the three months ended March 31, 2001. As a percentage of net sales, selling expenses decreased to 25.1% of net sales for the first quarter of 2002 compared to 26.0% for the comparable prior year period as a result of the Company's cost management efforts. Shipping and warehousing expenses as a percentage of sales decreased to 4.0% of net sales for the three months ended March 31, 2002 from 4.3% of net sales for the three months ended March 31, 2001 as the Company leveraged its shipping expenses over higher sales. This leverage resulted from labor and freight cost efficiencies offsetting increased distribution center costs. General and administrative expenses increased $3.2 million to $12.8 million, or 11.7% of net sales, for the three months ended March 31, 2002, from $9.6 million, or 10.2% of net sales, for the three months ended March 31, 2001. This increase in

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general and administrative expenses was principally a result of greater personnel-related costs and information technology costs necessary to support and manage the Company's growth, as well as increased retail general and administrative expenses.

Operating income

        The Company's operating income decreased to $9.2 million for the three months ended March 31, 2002 from $13.9 million for the three months ended March 31, 2001, a decrease of $4.7 million. As a percentage of net sales, operating income decreased to 8.4% for the three months ended March 31, 2002 from 14.8% for the three months ended March 31, 2001.

Interest expense, net

        The Company had net interest expense of $0.7 million for the three months ended March 31, 2002, as compared with net interest expense of $0.8 million for the three months ended March 31, 2001. The decrease in interest expense is due to lower interest rates during the first quarter of 2002 offsetting increased average borrowings.

Income taxes

        The Company recorded a provision for income taxes of $3.0 million for the three months ended March 31, 2002 compared to $3.9 million for the three months ended March 31, 2001. The Company's effective tax rate for the quarter ended March 31, 2002 was 35%, compared to 30% for the comparable quarter in 2001 as a result of a one-time tax benefit associated with the Company's foreign operations in 2001. The Company expects the 35% tax rate to continue for the full year 2002.

Net income

        The Company's net income decreased to $5.6 million for the three months ended March 31, 2002 from $9.1 million for the three months ended March 31, 2001, a decrease of $3.5 million, or 39%.

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 $14.5 million for the quarter ended March 31, 2002 compared to cash used in operating activities of $8.5 million for the comparable period in 2001. At March 31, 2002, working capital was $110.3 million compared to $87.9 million at March 31, 2001, a 25% increase. Working capital may vary from time to time as a result of seasonality, new product category introductions and changes in accounts receivable and inventory levels. Accounts receivable balances, less allowance for doubtful accounts, increased to $83.9 million at March 31, 2002 compared to $74.8 million at December 31, 2001 with accounts receivable days outstanding at March 31, 2002 of 60 compared to 59 at December 31, 2001. Inventories increased to $78.5 million at March 31, 2002 compared to $77.3 million at December 31, 2001 and $74.2 million at March 31, 2001. This inventory reflects a 1.6% and 5.8% increase from December 31, 2001 and March 31, 2001, respectively, compared to revenue increases of 21.5% and 16.8%, respectively, for the quarter then ended. The increase in inventory from March 31, 2001 to March 31, 2002, is attributable to the increased inventory in the third party warehouse located in Japan and for the Company's retail store operations. Inventory turns, based on trailing twelve month cost of sales and average inventory balance, remained unchanged at 2.5 at March 31, 2002 and December 31, 2001.

        In January 2001, the Company amended its unsecured line of credit with a bank syndicate which allows for borrowings up to $75 million and matures in August 2004. The amended line of credit bears interest at either LIBOR or IBOR plus 0.75% (2.7% at March 31, 2002) or the bank's prime lending rate minus 0.25% (4.5% at March 31, 2002). At March 31, 2002, the Company had an outstanding

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balance of $23.0 million under such facility. The credit agreement contains various restrictive covenants including the maintenance of certain financial ratios. At March 31, 2002, the Company was in compliance with all restrictive covenants and financial ratios. Certain of the Company's foreign subsidiaries have negotiated local lines of credit to provide working capital financing. The aggregate borrowing limit on the foreign lines of credit is $20 million, of which $16.5 million was outstanding at March 31, 2002. In aggregate, at March 31, 2002, $39.5 million was outstanding under these credit facilities. The Company also has a ten-year real estate term loan, which 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% (2.9% at March 31, 2002). In January 1999, the Company entered into an interest rate swap agreement that results in fixing the interest rate over the term of the loan at 6.31%. At March 31, 2002, the outstanding balance on the term loan was $15.9 million. The term loan is due in September 2007.

        Capital expenditures, net of retirements, for the three months ended March 31, 2002 were $8.2 million, which included $1.1 million for retail store operations. For 2002, the Company expects lower capital expenditure levels from 2001, with capital expenditures for its retail store operations to be an increasing percentage of total capital expenditures. As of March 31, 2002, the Company had commitments of approximately $0.2 million for future capital purchases.

        During December 2000, the Company's Board of Directors authorized another stock repurchase program by the Company of up to $20 million of the Company's common stock from time to time as market conditions warrant. As of March 31, 2002, the Company had repurchased under this program 1,128,000 shares for approximately $16.2 million, at an average price of $14.32. Approximately $3.8 million remains available under the current authorization with total common shares outstanding of 68,852,493 as of March 31, 2002.

        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. The Company's short-term funding comes from its current revolving line of credit which contains various restrictive covenants including the maintenance of certain financial ratios. At March 31, 2002, the Company was in compliance with all restrictive covenants and financial ratios. In the second quarter of 2002, based on positive trends in cash flow performance, the Company elected not to pursue the long-term financing previously disclosed, but instead intends to rely on short-term financing capacities at more attractive rates for its capital needs.

Seasonality

        Historically, the Company's sales, in the aggregate, have been highest in the period from March to September, the period during which sunglass use is typically highest. As a result, operating margins are typically lower in the first and fourth quarters, as fixed operating costs are spread over lower sales volume. In anticipation of seasonal increases in demand, the Company typically builds inventories in the fourth quarter and first quarter when net sales have historically been lower. In addition, the Company's shipments of goggles, which generate gross profits at lower levels than sunglasses, are lowest in the second quarter. This seasonal trend contributes to the Company's gross profit in the second quarter, which historically has been the highest of the year. Although the Company's business generally follows this seasonal trend, new product category introductions, such as apparel, footwear and watches, and the Company's international expansion have partially mitigated the impact of seasonality.

Backlog

        Historically, the Company has generally shipped most eyewear orders within one day of receipt, with longer lead times for its other pre-booked product categories. At March 31, 2002, the Company had a backlog of $59.1 million, including backorders (merchandise remaining unshipped beyond its

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scheduled shipping date) of $10.0 million, compared to a backlog of $52.8 million, including backorders of $7.3 million at March 31, 2001. The backlog reflects higher eyewear orders, largely attributable to a change in Sunglass Hut's ordering patterns resulting in more advance orders for sunglass products compared to weekly replenishment orders of a year ago, and higher futures orders from retailers for the Company's spring and summer footwear and apparel lines, partially offset by lower futures orders for fall footwear and apparel products.

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

        This document contains certain statements of a forward-looking nature. Such statements are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The accuracy of such statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including: risks related to the Company's ability to manage rapid growth; the ability to identify qualified manufacturing partners; the ability to coordinate product development and production processes with those partners; the ability of those manufacturing partners to increase production volumes in a timely fashion in response to increasing demand and enable the Company to achieve timely delivery of finished goods to its retail customers; the ability to provide adequate fixturing to existing and future retail customers to meet anticipated needs and schedules; the dependence on eyewear sales to Sunglass Hut which is owned by a major competitor and, accordingly, could materially alter or terminate its relationship with the Company; the Company's ability to expand distribution channels and its own retail operations in a timely manner; unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by retailers; continued weakening of economic conditions which could reduce demand for products sold by the Company and could adversely affect profitability, especially of the Company's retail operations; further terrorist acts, or the threat thereof, which could continue to adversely affect consumer confidence and spending, could interrupt production and distribution of product and raw materials and could, as a result, adversely affect the Company's operations and financial performance; the ability of the Company to integrate acquisitions; the ability to continue to develop and produce innovative new products and introduce them in a timely manner; the acceptance in the marketplace of the Company's new products and changes in consumer preferences; reductions in sales of products, either as the result of economic or other conditions or reduced consumer acceptance of a product, which could result in a buildup of inventory; the ability to source raw materials and finished products at favorable prices to the Company; the potential effect of periodic power crises on the Company's operations including temporary blackouts at the Company's facilities; foreign currency exchange rate fluctuations; and other risks outlined in the Company's SEC filings, including but not limited to the Annual Report on Form 10-K for the year ended December 31, 2001 and other filings made periodically by the Company. The Company undertakes no obligation to update this forward-looking information.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

        The Company is exposed to a variety of risks, including foreign currency fluctuations and changes in interest rates affecting the cost of its debt.

Foreign currency—The Company has direct operations in Europe, United Kingdom, Japan, Canada, Mexico, South Africa, Australia, New Zealand and Brazil 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.

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        The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to foreign currency transactions. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company and its subsidiaries use foreign exchange contracts in the form of forward contracts. All of the Company's derivatives were designated and qualified as cash flow hedges at March 31, 2002.

        On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company only enters into derivative instruments that qualify as cash flow hedges as described in SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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 foreign exchange contracts by currency at March 31, 2002:

		March 31, 2002
		U.S. Dollar Equivalent		Maturity	Fair Value
Forward Contracts:
	British pounds	$	12,316,986	Apr. 2002 - Dec. 2002	$	12,639,136
	South African rand		343,915	Jun. 2002 - Sep. 2002		340,196
	Canadian dollar		7,694,288	Apr. 2002 - Dec. 2002		7,813,643
	Japanese yen		14,476,363	Mar. 2002 - Dec. 2003		15,635,841
	French francs		7,732,094	Apr. 2002 - Jun. 2002		7,817,659
	Euro		15,846,407	Jul. 2002 - Dec. 2002		16,637,935
	Australian dollar		12,937,999	Apr. 2002 - Dec. 2002		12,649,918
		$	71,348,052		$	73,534,328

        The Company is exposed to credit losses in the event of nonperformance by counterparties to its forward exchange contracts but has no off-balance sheet credit risk of accounting loss. The Company anticipates, however, that the counterparties will be able to fully satisfy their obligations under the contracts. The Company does not obtain collateral or other security to support the forward exchange contracts subject to credit risk but monitors the credit standing of the counterparties. As of March 31, 2002, outstanding contracts were recorded at fair market value and the resulting gains and losses were recorded in the consolidated financial statements pursuant to the policy set forth above.

        The Company sells direct and through its subsidiaries to various customers in the European Union which have adopted the Euro as a legal currency effective January 1, 1999. The Euro began circulation after a three-year transition period on January 1, 2002. The Company has upgraded certain of its information systems to enhance its capability to process transactions and keep records in Euros. The Company does not expect costs in connection with the Euro conversion, or other consequences of the Euro conversion, to have a material adverse affect on the Company.

Interest Rates—The Company's principal line of credit, with a balance of $23.0 million outstanding at March 31, 2002, bears interest at either LIBOR or IBOR plus 0.75% or the bank's prime lending rate minus 0.25%. Based on the weighted average interest rate of 3.0% on the line of credit during the three months ended March 31, 2002, 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 $2,000 per year.

        The Company's long-term debt, with a balance of $15.9 million outstanding at March 31, 2002, bears interest at LIBOR plus 1.0%. In January 1999, the Company entered into an interest rate swap agreement that eliminates the Company's risk of fluctuations in the variable rate of its long-term debt. At March 31, 2002, the fair value of the Company's interest rate swap agreement was a loss of approximately $141,000.

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Part II—OTHER INFORMATION

Item 1. Legal Proceedings

        The Company is a party to various claims, complaints and other legal actions that have arisen in the normal course of business from time to time. The Company believes the outcome of these pending legal proceedings, in the aggregate, will not have a material adverse effect on the operations or financial position of the Company.

Item 2. Changes in Securities and Use of Proceeds

        None

Item 3. Defaults Upon Senior Securities

        None

Item 4. Submission of Matters to a Vote of Security-Holders

        None

Item 5. Other Information

        None

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	(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
3.3	(3)	Amended and Restated Bylaws of the Company (amending Section 1 and Sections 3a through 3f of Article IV of the Bylaws of the Company)
10.27	(4)	Aircraft Lease Agreement, dated March 28, 2002, between Oakley, Inc. and X, Inc.

(1)

Previously filed with the Registration Statement on Form S-1 of Oakley, Inc. (Registration No. 33-93080)

(2)

Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31, 1996.

(3)

Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31, 1998.

(4)

Filed herewith

        The Company did not file any reports on Form 8-K during the three months ended March 31, 2002.

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Oakley, Inc.
/s/ JIM JANNARD Jim Jannard Chief Executive Officer	May 14, 2002
/s/ THOMAS GEORGE Thomas George Chief Financial Officer	May 14, 2002

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Oakley, Inc. Index to Form 10-Q

PART I. FINANCIAL INFORMATION
ITEM 1—Financial Statements

OAKLEY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
OAKLEY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except share and per share data)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (in thousands)
OAKLEY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
Oakley, Inc. Notes to Unaudited Consolidated Financial Statements

Item 2. Management's Discussion And Analysis of Financial Condition And Results Of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risks

Part II—OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security-Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

EX-10.27

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Exhibit 10.27

AIRCRAFT LEASE

        THIS LEASE is made effective as of this 4th day of April, 2001 ("Lease") by and between X, Inc., an Oregon corporation ("Lessor"), and Oakley, Inc., a Washington corporation, with its principal offices located at One Icon, Foothill Ranch, CA 92610 ("Lessee").

RECITALS

        WHEREAS, in April 2001, Lessor ordered a Global Express aircraft bearing serial number 9084 ("Aircraft 9084") which is currently being manufactured and which, because of manufacturing delays, will not be available for delivery to Lessor until May 2002;

        WHEREAS, pending the delivery of Aircraft 9084, Lessor has leased from the aircraft manufacturer, on a temporary basis, another Global Express aircraft bearing serial number 9005 and registration number N700HX (the "Aircraft");

        WHEREAS, Lessee wishes to lease the Aircraft from Lessor and pay for the maintenance and operating costs of the Aircraft pending execution of this Lease;

        WHEREAS, the Board of Directors of Lessee (the "Board") has ratified and approved these actions of Lessee; and

        WHEREAS, the Board believes it is in the best interest of Lessee to enter into this Lease to provide for flight operations service for Lessee from the effective date of this Lease until the delivery of Aircraft 9084 to Lessor, and the commencement of a separate lease of Aircraft 9084 to Lessee.

AGREEMENT

        NOW, THEREFORE, Lessor and Lessee agree as follows:

1.    LEASE OF THE AIRCRAFT

        Subject to the terms and conditions contained herein, Lessor agrees to lease to Lessee and Lessee agrees to lease from Lessor the Aircraft.

2.    TERM

        The "Lease Term" shall commence on the date as of which Lessee executes the Delivery and Acceptance Certificate (the "Delivery Date") and shall terminate at the time of delivery to Lessor (or its successor) of Aircraft 9084. Lessee will have the right for any reason whatsoever to terminate this Lease before the end of the Lease Term, by giving Lessor not less than sixty (60) days' prior written notice of its intention so to terminate this Lease.

3.    RENT

        Notwithstanding Lessee's obligations to pay for the maintenance and operating costs of the Aircraft under Section 4, Lessee and Lessor hereby agree that no rent is due or payable under this Lease.

4.    AIRCRAFT MAINTENANCE

        During the Lease Term and until such time as the Aircraft is returned to Lessor, Lessee agrees, at the direction of Lessor and at Lessee's expense, to cause the Aircraft to be maintained at all times in (A) fully operational, duly certified and airworthy condition and (B) condition adequate to comply with

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all regulations of the FAA or any other governmental agency having jurisdiction over the maintenance, use or operation of the Aircraft. All work required by this Section 4 shall be undertaken and completed only by properly trained, licensed and certified maintenance personnel. All replacement parts shall be of the type approved by the airframe manufacturer and be of the same quality as the replaced part.

        Notwithstanding the foregoing, Lessor shall pay any extraordinary costs of maintenance or complying with manufacturer's service bulletins or FAA airworthiness alerts and directives.

5.    INSURANCE

        (a)    Public Liability and Property Damage Insurance

        Lessee represents and warrants that it will maintain in effect, at its own expense with insurers of recognized responsibility reasonably satisfactory to Lessor, (i) public liability insurance, including bodily injury and property damage (including, without limitation, passenger legal liability) in an amount not less than $50,000,000 for each single occurrence and (ii) such other property damage insurance (exclusive of manufacturer's property liability insurance) with respect to the Aircraft as is of the type and in the amounts usually carried by corporations similarly situated with Lessee.

        (b)    Insurance Against Loss or Damage to the Aircraft

        Lessee represents and warrants that it will maintain in effect, at its own expense, with insurers of recognized responsibility reasonably satisfactory to Lessor, all-risk ground and flight aircraft hull insurance covering the Aircraft.

6.    RETURN

        (a)    Location

        Upon the termination or expiration of the Lease Term, Lessee shall return the Aircraft, in accordance with Section 6(b), at Windsor Locks, Connecticut or at such other location within the 48 contiguous United States as may be agreed between Lessor and Lessee. All expenses for delivery and return of the Aircraft shall be borne by Lessee.

        (b)    Return Condition

        Upon return and at Lessee's expense (or at Lessor's expense as specified in Section 4), the Aircraft must satisfy all of the following conditions:

(i)

The Aircraft must be in an airworthy and serviceable condition, meet all of the applicable regulations of the FAA, and have a valid and continuing FAA certificate of airworthiness;



(ii)

The Aircraft must be returned with all equipment, parts, components, passenger service items and other accessories that were on or in the Aircraft when delivered to Lessee in a serviceable condition (ordinary wear and tear excepted) or with an equivalent or better replacement thereof; and



(iii)

All exterior paint and interior components (including, without limitation, paint, carpet, fabric and wood paneling) must be in the same good appearance as when the Aircraft was delivered to Lessee (ordinary wear and tear excepted).

        If Lessee does not return the Aircraft in accordance with the above condition, Lessor may make (or cause to be made) any repairs reasonably necessary to restore the Aircraft to the required condition and Lessee shall reimburse Lessor, upon demand, for any costs, expenses and fees related to such restoration.

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7.    LESSOR'S DISCLAIMER

        EXCEPT AS SET FORTH ABOVE, LESSOR (AND ITS AFFILIATES) DOES NOT MAKE, HAS NOT MADE, NOR SHALL BE DEEMED TO MAKE OR HAVE MADE, ANY WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO THE AIRCRAFT LEASED HEREUNDER OR ANY ENGINE OR COMPONENT THEREOF, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY AS TO DESIGN, COMPLIANCE WITH SPECIFICATIONS, QUALITY OF MATERIALS OR WORKMANSHIP, MERCHANTABILITY, FITNESS FOR ANY PURPOSE, USE OR OPERATION, AIRWORTHINESS, SAFETY, PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT, OR TITLE. All such risks, as between Lessor (and its affiliates) and Lessee, are to be borne by Lessee. Without limiting the foregoing, Lessor and its affiliates shall have no responsibility or liability to Lessee or any other person with respect to any of the following, regardless of any negligence of Lessor or its affiliates: (i) any liability, loss or damage caused or alleged to be caused, directly or indirectly by the Aircraft, any inadequacy thereof, any deficiency or defect (latent or otherwise) therein, or any other circumstance in connection therewith; (ii) the use, operation or performance of the Aircraft or any risks relating thereto, (iii) any interruption of service, loss of business or anticipated profits or consequential damages, or (iv) the delivery, operation, servicing, maintenance, repair, improvement or replacement of the Aircraft.

8.    INDEMNIFICATION

        (a)    General Indemnity

        Lessee shall indemnify and save harmless Lessor, its affiliates, its successors and assigns, their directors, officers and employees (each, an "Indemnitee"), from and against any and all losses, claims (including, without limitation, claims involving strict or absolute liability in tort, damage, injury, death, liability and third party claims), suits, demands, costs and expenses of every nature (including, without limitation, reasonable attorneys' fees) arising directly or indirectly from or in connection with the possession, maintenance, condition, storage, use, operation or return of the Aircraft under this Lease (each, a "Claim"); provided, that the foregoing indemnity shall not extend to an Indemnitee with respect to any Claim to the extent such Claim is directly related to one or more of the following: (1) any breach of any representation or warranty by Lessor hereunder, or (2) the failure by Lessor to perform or observe any of its agreements, covenants or conditions herein, or (3) the willful misconduct or the gross negligence of any Indemnitee, or (4) the offer, sale or other disposition (voluntary or involuntary) of all or any part of Lessor's interest in the Aircraft or any part thereof, or (5) any tax, fee, Charge, or assessment or (6) except to the extent fairly attributable to the Lease Term, acts or events occurring, or circumstances or conditions existing, prior to, or after expiration or termination of, the Lease Term or actions taken (or required to be taken and not taken) prior to, or after expiration or termination of, the Lease Term or (7) any amount which Lessor expressly agrees to pay hereunder or any amount which is expressly stated to be a Claim that is not reimbursable by Lessee hereunder, or (8) any amounts relating to the deregistration with the FAA of the Aircraft as a result of the Lessor not being a Citizen of the United States. Lessee shall, upon request of Lessor defend any actions based on or arising out of any of the Claims that Lessee is responsible for. Lessor shall not pay or settle any Claim without the prior written consent of Lessee, which shall not be unreasonably withheld or delayed, or conditioned (except on contest).

        (b)    Survival

        Lessee's obligations under this Section 8 shall survive termination of this Lease and shall remain in effect until all required indemnity payments have been made by Lessee to Lessor.

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9.    LESSEE'S DEFAULT

        An "Event of Default" shall arise hereunder if Lessee shall fail to perform or observe any covenant, condition or agreement to be performed or observed by it under this Lease or any agreement, document or certificate delivered by Lessee in connection herewith in any material respect, and such failure shall continue for ten (10) days after written notice thereof from Lessor to Lessee.

10.  LESSOR'S REMEDIES

        Upon the occurrence of any Event of Default, Lessor may, at its option, exercise any and or all remedies available at law or in equity, including, without limitation, any or all of the following remedies, as Lessor in its sole discretion shall elect:

(i)

By notice in writing terminate this Lease, whereupon all rights of Lessee to the use of the Aircraft or any part thereof shall absolutely cease and terminate and thereupon Lessee, if so requested by Lessor, shall at its expense promptly return the Aircraft as required by Section 6 hereof; and



(ii)

Perform or cause to be performed any obligation, covenant or agreement of Lessee hereunder. Lessee agrees to pay all costs and expenses incurred by Lessor for such performance hereunder and acknowledges that such performance by Lessor shall not be deemed to cure said Event of Default.

11.  NOTICES

        Unless specifically provided to the contrary herein all notices permitted or required by this Lease shall be in writing and shall be deemed given when sent by telecopy or by nationally recognized courier service to the address set forth herein below, or such other address as may hereafter be designated by the addressee in a written notice to the other party.

12.  ENTIRE AGREEMENT

        The terms and conditions of this Lease constitute the entire agreement between the parties as to the subject matter hereof and supersede all prior written and oral negotiations, representations and agreements, if any, between the parties on such matters and shall be binding upon the parties, their successors, assigns and legal representatives.

13.  MODIFICATION OF AGREEMENT

        No change or modification hereof or waiver of any term or condition hereof shall be effective unless the change or modification is in writing and signed by both parties.

14.  COUNTERPARTS

        This Lease may be executed by the parties hereto in separate counterparts each of which when so executed and delivered shall be deemed to be an original, but such counterparts shall together constitute but one and the same instrument.

15.  HEADINGS

        The headings of Sections and subsections of this Lease (other than Section 17) are included for convenience only and shall not be used in its construction or interpretation.

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16.  GOVERNING LAW

        THE PARTIES HERETO ACKNOWLEDGE THAT THIS LEASE SHALL BE GOVERNED BY AND CONSTRUED IN ALL RESPECTS IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK INCLUDING, WITHOUT LIMITATION, SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW.

17.  TRUTH-IN-LEASING

        (a)  LESSEE HAS REVIEWED THE AIRCRAFT'S MAINTENANCE AND OPERATING LOGS SINCE ITS DATE OF MANUFACTURE AND HAS FOUND THAT THE AIRCRAFT HAS BEEN MAINTAINED AND INSPECTED UNDER PART 91 OF THE FEDERAL AVIATION REGULATIONS DURING SUCH PERIOD. LESSEE CERTIFIES THAT THE AIRCRAFT PRESENTLY COMPLIES WITH THE APPLICABLE MAINTENANCE AND INSPECTION REQUIREMENTS OF PART 91 OF THE FEDERAL AVIATION REGULATIONS.

        (b)  LESSEE CERTIFIES THAT LESSEE, AND NOT LESSOR, IS RESPONSIBLE FOR OPERATIONAL CONTROL OF THE AIRCRAFT UNDER THIS LEASE DURING THE TERM HEREOF. LESSEE FURTHER CERTIFIES THAT LESSEE UNDERSTANDS ITS RESPONSIBILITY FOR COMPLIANCE WITH APPLICABLE FEDERAL AVIATION REGULATIONS.

        (c)  LESSEE CERTIFIES THAT THE AIRCRAFT WILL BE MAINTAINED AND INSPECTED UNDER PART 91 OF THE FEDERAL AVIATION REGULATIONS FOR OPERATIONS TO BE CONDUCTED UNDER THIS LEASE. LESSEE UNDERSTANDS THAT AN EXPLANATION OF FACTORS BEARING ON OPERATIONAL CONTROL AND PERTINENT FEDERAL AVIATION REGULATIONS CAN BE OBTAINED FROM THE NEAREST FAA FLIGHT STANDARDS DISTRICT OFFICE, GENERAL AVIATION DISTRICT OFFICE, OR AIR CARRIER DISTRICT OFFICE.

        Notwithstanding the forgoing, any inaccuracy in any statement or certification in Section 17(a) shall not in and of itself constitute an indemnifiable Claim or an Event of Default hereunder.

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        IN WITNESS WHEREOF, the parties hereto have each caused this Lease to be duly executed as of the year and day first above written.

LESSOR:		LESSEE:
X, INC.		OAKLEY, INC.
By:	/s/ James Jannard	By:	/s/ Link Newcomb
Title:	President and Chief Executive Officer	Title:	Chief Operating Officer
Date:	March 28, 2002	Date:	March 28, 2002

Address for Notices:	44 Club Road Suite 200 Eugene, OR 97401	Address for Notices:	462 Stevens Avenue Suite 310 Solana Beach, CA 92075
Attention:	Scott McLeery	Attention:	Greg Weeks

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Exhibit 10.27

AIRCRAFT LEASE
RECITALS
AGREEMENT