Item 2. Properties
The Company's principal corporate and manufacturing facility is located in Foothill Ranch, Orange County, California. The facility, which is owned by the Company, is approximately 500,000 square feet, with potential to expand into an additional 100,000 square feet. In June 1996, the Company purchased a facility in Nevada of approximately 63,000 square feet for the production of its X Metal® eyewear. In addition, the Company leases office and warehouse space as necessary to support its operations worldwide, including offices in the United Kingdom, Germany, France, Italy, Australia, South Africa, Japan, Canada, New Zealand, Brazil and the state of Washington. The Company owns a business office and warehouse of approximately 18,000 square feet in Mexico City for its operations in Mexico and Central America. The facility was first occupied in late 1998. Since late 2000, the Company has leased approximately 150,000 square feet of space in Ontario, California to support the expanding distribution needs of its footwear and apparel lines. The new facility began shipping the Company's spring footwear and apparel lines to retailers in early 2001. In June 2002, a third manufacturing facility which provides prescription lenses to Europe was opened in Ireland. In 2003, the Company established a centralized footwear and apparel third-party warehouse arrangement in the Netherlands. The Company believes its current and planned facilities are adequate to carry on its business as currently contemplated.
The Company is subject to federal, state and local environmental laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects (such as emissions to air, discharges to water, and the generation, handling, storage and disposal of solid and hazardous wastes) or (ii) impose liability for the cost of cleanup or other remediation of contaminated property, including damages from spills, disposals or other releases of hazardous substances or wastes, in certain circumstances without regard to fault. The Company's manufacturing operations routinely involve the handling of chemicals and wastes, some of which are or may become regulated as hazardous substances. The Company has not incurred, and does not expect to incur, any significant expenditures or liabilities for environmental matters. As a result, the Company believes that its environmental obligations will not have a material adverse effect on its operations or financial position.
Item 3.
Item 3. Legal Proceedings
The 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, is not likely to have a material adverse effect on the operations or financial position of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's common stock, par value $.01 per share ("Common Stock"), began trading on the New York Stock Exchange on August 10, 1995 upon completion of the Company's initial public offering (trading symbol "OO"). As of March 8, 2004, the closing sales price for the Common Stock was $15.45. The following table sets forth the high and low sales prices for the Common Stock for each quarter of 2003 and 2002 on the New York Stock Exchange Composite Tape:
The number of shareholders of record of the Company's Common Stock on March 8, 2004 was 501.
Dividend Policy
On August 12, 2003, the Company's Board of Directors announced the initiation of an annual dividend policy and declared an initial annual cash dividend of $0.14 per share. This dividend, totaling $9.5 million, was paid on October 31, 2003 to shareholders of record as of the close of business on October 15, 2003. Any future dividends are at the discretion, and subject to the approval, of the Company's Board of Directors and will depend upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors.
Securities Authorized for Issuance Under Equity Compensation Plans
Securities authorized for issuance under the Company's equity compensation plans are as follows:
Item 6.
Item 6. Selected Financial Data
The following table sets forth certain selected financial data regarding the Company which is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto. See Index to Consolidated Financial Statements and Item 7.
Item 7. 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 accounts which fluctuates between 8,400 and 9,200 with approximately 14,500 to 15,600 locations depending on seasonality of summer and winter products. The store base is comprised of optical stores, sunglass retailers and specialty sports stores, including bike, surf, snow and golf shops, and motorcycle, athletic footwear and sporting goods stores and limited department store distribution. The Company also operates 27 Oakley retail stores in the United States that offer a full range of Oakley products. Additionally, the Company owns Iacon, Inc., a sunglass retailing chain headquartered in Scottsdale, Arizona, with 76 sunglass specialty retail stores at December 31, 2003.
Internationally, the Company sells its products in over 100 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 products and agree to respect the marketing philosophy and practices of the Company. Sales to the 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, although 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 and 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 of America. 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 wholesale revenue when merchandise is shipped to a customer and the risks and rewards of ownership have passed based on the terms of sale. Revenue from the Company's retail store operations is recognized upon purchase by customers at the point of sale. Generally, the Company extends credit to its wholesale customers and does not require collateral. The Company performs ongoing credit evaluations of those customers and historic credit losses have been within management's expectations. Sales agreements with dealers and distributors normally provide general payment terms of 30 to 120 days, depending on the product category. The Company's standard sales agreements with its customers do not provide for any rights of return by the customer other than returns for product warranty related issues. In addition to these product warranty related returns, the Company occasionally accepts other returns at its discretion. The Company records a provision for sales returns and claims based upon historical experience. Actual returns and claims in any future period may differ from the Company's estimates.
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 regularly 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.
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. Demand for the Company's products can fluctuate significantly. 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 future terrorist acts or war, or the threat or escalation thereof, which could adversely affect consumer confidence and spending, interrupt production and distribution of product and raw materials and, 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.
Long-Lived Assets
In the normal course of business, the Company acquires tangible and intangible assets. The Company periodically evaluates the recoverability of the carrying amount of its long-lived assets (including property, plant and equipment, and other intangible assets) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment is assessed when the undiscounted expected future cash flows derived from an asset are less than its carrying amount. Impairments are recognized in operating earnings. The Company uses its best judgment based on the most current facts and circumstances surrounding its business when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows
used to assess impairments and the fair value of a potentially impaired asset. Changes in assumptions used could have a significant impact on the Company's assessment of recoverability. Numerous factors, including changes in the Company's business, industry segment or the global economy could significantly impact management's decision to retain, dispose of or idle certain of its long-lived assets.
Goodwill
The Company evaluates the recoverability of goodwill at least annually based on a two-step impairment test. The first step compares the fair value of each reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds fair value, then the second step of the impairment test is performed to measure the amount of any impairment loss. Fair value is determined based on estimated future cash flows, discounted at a rate that approximates the Company's cost of capital. Such estimates are subject to change and the Company may be required to recognize impairment losses in the future.
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. The Company maintains a reserve for its product warranty liability based on estimates calculated using historical warranty experience. 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.
Income Taxes
Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. The Company considers future taxable income and ongoing, prudent and feasible tax planning strategies in assessing the value of its deferred tax assets. If the Company determines that it is more likely than not that these assets will not be realized, the Company will reduce the value of these assets to their expected realizable value, thereby decreasing net income. Evaluating the value of these assets is necessarily based on the Company's judgment. If the Company subsequently determined that the deferred tax assets, which had been written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made. See Note 7 in Notes to Consolidated Financial Statements.
Insurance Coverage
The Company is partially self-insured for its workers' compensation insurance coverage. Under this insurance program, the Company is liable for a deductible of $250,000 for each individual claim and an aggregate annual liability of $1,368,000. The Company records a liability for the estimated cost of claims both reported and incurred but not reported based upon its historical experience. The estimated costs include the estimated future cost of all open claims. The Company will continue to adjust the estimates as the actual experience dictates. A significant change in the number or dollar amount of claims could cause the Company to revise its estimate of potential losses and affect its reported results.
Foreign Currency Translation
The Company has direct operations in Continental 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 (loss). 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. See Note 10 in Notes to Consolidated Financial Statements.
Vulnerability Due to Supplier Concentrations
The Company relies on a single source for the supply of several product components, including the uncoated lens blanks from which substantially all of its sunglass lenses are cut. In the event of the loss of its 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 or other critical materials can be located or developed in a timely manner.
Vulnerability Due to Customer Concentrations
Net sales to the retail group of Luxottica S.p.A ("Luxottica"), which include Sunglass Hut locations worldwide, were approximately 9.0%, 12.2% and 12.0% of the Company's net sales for the years ended December 31, 2003, 2002 and 2001, respectively. Luxottica is also one of the Company's largest competitors in the sunglass and optical frame markets. Luxottica acquired Sunglass Hut in April 2001 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 which marked the resumption of the business relationship between the two companies after a short disruption that began in August 2001. The arrangements between the companies do 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. In September 2003, Luxottica completed the acquisition of all the shares of Australian eyewear retailer OPSM Group Ltd ("OPSM"). OPSM operates in the South Pacific and Southeast Asia regions with approximately 600 retail locations, a portion of which currently offer some of the Company's products. For 2003, the Company's net sales to OPSM prior to the acquisition were approximately AUD $1.1 million (or approximately $0.7 million in U.S. dollars based on the average exchange rate for 2003). For 2002, the Company's net sales to OPSM were approximately AUD $2.8 million (or approximately $1.5 million in U.S. dollars based on the average exchange rate for 2002). These sales exclude a limited amount of sales generated through the Company's international distributors. In November 2003, Luxottica completed the acquisition of New Zealand eyewear retailer Sunglass Store New Zealand ("SSNZ"), the Company's largest customer in New Zealand. SSNZ operates in New Zealand with 16 retail locations which offer some of the Company's products. In January 2004, Luxottica entered into a definitive merger agreement with Cole National Corporation ("Cole"), one of the largest optical retailers and largest chain providers of managed vision care services worldwide. This merger is expected to close in the second half of 2004
pending the approval of Cole's stockholders and its compliance with applicable antitrust requirements. The Company currently sells to a small portion of Cole's retail locations and sales to this customer have been immaterial. There can be no assurance that the recent acquisitions or future acquisitions by Luxottica will not have a material adverse impact on the Company's financial position or results of operations.
Commitments and Contingencies
The Company has entered into operating leases, primarily for facilities and retail stores, and has commitments under endorsement contracts with selected athletes and others who endorse the Company's products. Minimum future payments under these leases and endorsement contracts are identified in Note 9 in Notes to Consolidated Financial Statements.
Restructure Charge
A restructure charge of $2.8 million ($1.8 million, or $0.02 per diluted share, on an after-tax basis) was recorded during the fourth quarter of fiscal 2002 to restructure (the "Restructuring Plan") the Company's European operations with significant changes to the regional sales and distribution organization. Pursuant to an approval of the Company's Board of Directors in December 2002, relationships with several outside sales agents have been modified or terminated, and changes have been implemented to rationalize other warehousing and distribution functions within the European markets. During 2003, the Company paid or settled almost all of the expenses associated with the Restructuring Plan. As of December 31, 2003, the Company had finalized all the restructuring charges and management believes the amount originally recorded will be sufficient to cover any remaining restructure liabilities. See Note 14 in Notes to Consolidated Financial Statements.
This charge is included in selling and shipping and warehousing expenses and is comprised of the following components:
Results of Operations
The following tables set forth operating results in dollars and as a percentage of net sales for the periods indicated.
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands)
The Company's gross sunglass sales, before discounts and defective returns, were $310.4 million, $330.2 million and $301.6 million for the years ended December 31, 2003, 2002 and 2001, respectively. Sunglass unit sales were 4,199,916; 4,707,822; and 4,721,387 for the years ended December 31, 2003, 2002 and 2001, respectively.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Net sales
Net sales increased to $521.5 million for the year ended December 31, 2003 from $489.6 million for the year ended December 31, 2002, an increase of $31.9 million, or 6.5%. Gross sales were $560.6 million in 2003 compared to $528.8 million for 2002. Gross sunglass sales decreased $19.8 million to $310.4 million for the year ended December 31, 2003 compared to $330.2 million for the year ended December 31, 2002. Sunglass unit shipments declined 10.8% due to a number of adverse factors including weak consumer spending related in part to the events in Iraq during the first part of the year, a reduction in sales contribution from new sunglass introductions, wet weather patterns in key markets during the peak sunglass selling season and competitive pressures from strong fashion brands in the southern European markets. The decrease in sunglass unit shipments was partially offset by a 5.4% increase in average selling price primarily as a result of favorable foreign exchange rates and a greater contribution from the Company's retail store operations. The Company experienced declines in sales of more mature products, which were partially offset by increased sales from the Half Jacket™, Half Wire™ and Splice®, introduced in 2002, as well as sales of the Company's new 2003 sunglass styles including the Valve™, Big Square Wire®, Monster Dog™ and Teaspoon™. In addition, the Company experienced increased sales of the Company's polarized styles for 2003. Gross sales from the Company's newer product categories, comprised of footwear, apparel, watches and prescription eyewear, increased 23.5%, or $31.4 million, to $165.1 million for 2003 from $133.7 million for 2002. As a percentage of gross sales, these new product categories accounted for 29.5% of total gross sales for 2003 compared to 25.3% for 2002. The strongest results were from the apparel and prescription eyewear categories where strong line introductions drove sales increases. Gross sales of the Company's goggles increased 30.2%, driven by the success of Wisdom™, the Company's most advanced snow goggle, introduced in the fourth quarter of 2002. While gross sales of the Company's footwear increased 17.0%, or $5.3 million, to $36.5 million for 2003 from $31.2 million for 2002, the Company experienced poor sell-through of its fall line of footwear products which the Company believes could have an adverse effect on its 2004 footwear business. Management believes these sales increases are a result of its expanded product lines, expanded distribution and retail initiatives, including its greater dealer base and increasing consumer acceptance of the Company's newer categories.
The Company's U.S. net sales, excluding retail store operations, decreased 7.9% for the year ended December 31, 2003 to $203.8 million from $221.4 million in 2002 as a result of a 26.2% decrease in sales to the Company's largest U.S. customer, Sunglass Hut and its affiliates, coupled with a 2.6% decrease in net sales to the Company's broad specialty store account base and other domestic sales. Sales to Sunglass Hut decreased $13.2 million to $37.1 million for the year ended December 31, 2003 from $50.3 million for the year ended December 31, 2002. The decline in U.S. net sales reflects the generally depressed retail environment during the first half of 2003, which had a more pronounced effect on the Company's mature sunglass category and contributed to the decline in sunglass sales. Additionally, unusual cooler weather conditions during the second quarter of 2003 adversely affected the Company's summer product sales, particularly sunglasses, sandals, the summer apparel line and the Company's prescription sunglasses which led to lower than expected U.S. sales. The decrease in the Company's U.S. sales was partially offset by a higher contribution from its retail store operations. In addition, the Company's U.S. net sales in 2003 benefited from strong growth in military sales and increased department store concept shop locations over 2002.
Net sales from the Company's retail store operations increased to $53.2 million for the year ended December 31, 2003 as a result of increased store locations, compared to $32.6 million for the year ended December 31, 2002, an increase of $20.6 million, or 63.2%. During 2003, the Company opened 13 new Oakley stores and 17 Iacon stores, including the acquisition of Celebrity Eyeworks Studio located at Downtown Disney in Orlando, Florida. At December 31, 2003, the Company operated 27 Oakley stores and 76 Iacon stores.
During the year ended December 31, 2003, the Company's international net sales increased 12.3%, or $29.0 million, to $264.5 million from $235.5 million for 2002. The weaker U.S. dollar accounted for 11.3 percentage points, or $26.5 million, of this increase. All product categories experienced growth with the largest growth occurring in apparel and prescription eyewear. Europe, Latin America, Japan, Canada and South Africa each achieved growth, partially offset by declines in the rest of Asia where concerns related to the SARS crisis affected travel and related retail businesses during the first part of 2003 and the Company's transition to new distribution adversely impacted sales in the fourth quarter. The Company's sales in Australia declined on a constant dollar basis in the fourth quarter of 2003 and the total year. These declines were due primarily to disruptions associated with Luxottica's acquisition of OPSM in Australia along with declining market share in the surf distribution channel. In addition, the Company's 2003 European sunglass sales were impacted by competitive pressures from strong fashion brands. Latin America experienced a large decrease in net sales in the 2002 period due to delays in the transition to direct distribution in Brazil from the previous independent distributor and overall weak economic conditions in the region. Sales from the Company's direct international offices represented 87.9% of total international sales for 2003, compared to 84.9% for 2002.
Gross profit
Gross profit increased to $294.7 million, or 56.5% of net sales, for the year ended December 31, 2003 from $277.6 million, or 56.7% of net sales, for the year ended December 31, 2002, an increase of $17.1 million, or 6.2%. The decrease in gross profit as a percent of net sales was due to lower sunglass margins due to the decline in sunglass unit volume, partially offset by the positive effects of improved footwear and apparel margins and the positive effect of a weaker U.S. dollar.
Operating expenses
A restructure charge of $2.8 million ($1.8 million, or $0.02 per diluted share, on an after-tax basis) was recorded during the fourth quarter of fiscal 2002 to restructure the Company's European operations with significant changes made to the regional sales and distribution organization. This charge, included in selling and shipping and warehousing expenses, was completed during the fourth quarter of 2003 with no revisions to the original charge recorded. See Note 14 in Notes to Consolidated Financial Statements. Operating expenses for the year ended December 31, 2003 increased to $234.7 million from $213.4 million for the year ended December 31, 2002, an increase of $21.3 million, or 10.0%. As a percentage of net sales, operating expenses increased to 45.0% of net sales for the year ended December 31, 2003 compared to 43.6% of net sales for 2002. Excluding the $2.8 million European restructuring charge recorded in 2002, operating expenses increased to $234.7 million, or 45.0% of net sales, for the year ended December 31, 2003 from $210.6 million, or 43.0% of net sales, for the year ended December 31, 2002, an increase of $24.1 million, or 11.4%. The increase is primarily due to higher foreign operating expenses resulting from a weaker U.S. dollar and higher selling expenses related to the Company's expanded retail store operations. The weakening of the U.S. dollar, compared to most other currencies in which the Company transacts, contributed approximately $10.4 million, or 43.2%, of the increase. Operating expenses included $19.2 million of expenses for the Company's retail store operations, an increase of $6.9 million from $12.3 million for the year ended December 31, 2002. Total increase in retail store operating expenses for 2003 represented 28.6% of the increase in total operating expenses over 2002 due to the increased store locations.
Research and development expenses decreased $1.7 million to $14.3 million, or 2.7% of net sales, for the year ended December 31, 2003, from $16.0 million, or 3.3% of net sales, for the year ended December 31, 2002, primarily due to leverage on footwear and apparel design expenses and reduced product design expenses in 2003. Selling expenses increased $15.4 million to $142.4 million, or 27.3% of net sales, for the year ended December 31, 2003 from $127.0 million, or 25.9% of net sales, for the year ended December 31, 2002. Excluding $2.3 million relating to the European restructuring charge,
selling expenses were $142.4 million for the year ended December 31, 2003, compared to $124.7 million for the year ended December 31, 2002, an increase of $17.7 million. This increase was a result of increased retail selling expenses, including sales personnel expenses, displays and display depreciation, sports marketing, sales promotion and sales commissions. As a percentage of net sales, selling expenses excluding the restructure charge was 27.3% in 2003 compared to 25.5% for 2002. Shipping and warehousing expenses as a percentage of net sales remained at 3.7% of net sales for the year ended December 31, 2003 and 2002. Excluding $0.5 million related to the 2002 European restructuring charge, shipping and warehousing expenses as a percentage of sales increased to 3.7% of net sales in 2003 from 3.6% of net sales in 2002 due to increased freight costs and footwear and apparel distribution costs, including the establishment of the Company's centralized European distribution facility in 2003. General and administrative expenses increased $6.6 million to $58.9 million, or 11.3% of net sales, for the year ended December 31, 2003, from $52.3 million, or 10.7% of net sales, for the year ended December 31, 2002. This increase in general and administrative expenses was principally a result of greater personnel-related costs, greater facility related costs, such as property taxes and insurance, depreciation, professional fees associated with tax audit support and the Company's Sarbanes-Oxley compliance, increases in provision for non-income taxes, as well as increased general and administrative expenses for retail store operations.
Operating income
The Company's operating income decreased to $60.0 million, or 11.5% of net sales, for the year ended December 31, 2003 from $64.2 million, or 13.1% of net sales, a decrease of $4.2 million. Excluding the European restructuring charge of $2.8 million in 2002, the Company's operating income decreased $7.0 million to $60.0 million for the year ended December 31, 2003 from $67.0 million for the year ended December 31, 2002. As a percentage of net sales, operating income, prior to the restructure charge, decreased to 11.5% for the year ended December 31, 2003 from 13.7% for the year ended December 31, 2002. For 2003, the net effect on operating income from foreign exchange was significantly positive as the beneficial effect on international sales from the weakening dollar more than offset the growth in international operating expenses and cost of goods sold items from stronger foreign currencies as well as losses on foreign exchange contracts, except in limited cases when the Company reduced pricing in foreign currencies.
Interest expense, net
The Company had net interest expense of $1.3 million for the year ended December 31, 2003, as compared with net interest expense of $1.6 million for the year ended December 31, 2002. The decrease in interest expense is primarily due to lower interest rates during 2003 and reduced short-term borrowing balances resulting from strong operating cash flows.
Income taxes
The Company recorded a provision for income taxes of $20.6 million for the year ended December 31, 2003, compared to $21.9 million for the year ended December 31, 2002. Excluding the tax effect of the 2002 restructuring charge, the Company's provision for income taxes was $20.6 million in 2003 compared to $22.9 million for 2002. The Company's effective tax rate for the years ended December 31, 2003 and 2002 was 35%. The Company expects its tax rate for 2004 to be 34%.
Net income
The Company's net income decreased to $38.2 million for the year ended December 31, 2003 from $40.6 million for the year ended December 31, 2002, a decrease of $2.4 million or 5.9%. Excluding the 2002 European restructuring after-tax charge of $1.8 million, net income decreased to $38.2 million for the year ended December 31, 2003 from $42.4 million for the year ended December 31, 2002, a decrease of $4.2 million, or 9.9%.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net sales
Net sales increased to $489.6 million for the year ended December 31, 2002 from $429.3 million for the year ended December 31, 2001, an increase of $60.3 million, or 14.0%. One factor contributing to the growth in net sales was a 9.5% increase in gross sunglass sales. Gross sunglass sales were $330.2 million for the year ended December 31, 2002 compared to $301.6 million for the year ended December 31, 2001. The growth in gross sunglass sales is composed of a 9.8% increase in average selling price slightly offset by a 0.3% decrease in sunglass unit volume. The increase in average selling price is attributable to the continued shift in product mix to more technical and premium-priced items, the weakening of the U.S. dollar, increasing contribution from the Company's retail stores and the impact of a $5 retail price increase in North America on most sunglasses in July 2001. Several factors contributed to the unit decline including soft consumer spending and reduced demand attributable to the weak retail environment, especially in the latter half of the year. In addition, delayed deliveries of 2002 summer sunglass introductions to retailers resulted in fewer inventory turns during the summer selling season and a reduction of the level of reorders during the holiday season. The delayed deliveries were a result of key raw material shortages caused in part by greater increases in summer demand than originally anticipated. In addition, Sunglass Hut's return as a customer negatively impacted demand from the Company's other retailers in the fourth quarter, compared to the prior year period when Sunglass Hut was not purchasing Oakley products. The increase in gross sunglass sales was driven by strong sunglass sales of the Company's newer sunglasses such as the Half Jacket, Splice, Wire Tap, and Half Wire, introduced in 2002, the Switch and E-Wire 2.1, introduced in 2001,and the Square Wire 2.0 introduced in 2000, offsetting declines in sales of more mature products. Sales of the Company's polarized styles for the year ended December 31, 2002 also contributed to the increase in gross sales with a 32.2%, or $5.8 million, increase over the year ended December 31, 2001. Gross sales from the Company's newer product categories, comprised of footwear, apparel, watches and prescription eyewear, represented 25.3% of the Company's total gross sales for 2002, compared to 22.4% in 2001. Sales from these newer product categories increased 32.7%, or $32.9 million, to $133.7 million for the year ended December 31, 2002 from $100.8 million for the year ended December 31, 2001. Apparel gross sales increased 49.3% to $56.6 million in 2002, compared with $37.9 million in 2001. Prescription eyewear revenue doubled in each of the three years prior to 2002. In 2002, prescription eyewear gross sales grew 38.5% to $34.3 million in 2002, compared to $24.7 million in 2001. Footwear gross sales grew 4.0% to $31.2 million in 2002 over $30.0 million in 2001. The growth rate for the Company's footwear business was more modest when compared to the other newer categories due to reduced orders and limited distribution for the Company's fall footwear line. Watch gross sales increased 41.5% to $11.6 million in 2002, compared to $8.2 million in 2001. Management believes these increases are a result of its expanded product lines, expanded distribution and retail initiatives, including its greater dealer base, and increasing consumer acceptance of the Company's newer categories.
The Company's total U.S. net sales increased 19.2% for the year ended December 31, 2002 to $254.0 million from $213.2 million in 2001. Excluding the Company's retail store operations, U.S. net sales increased 8.4% to $221.4 million in the year ended December 31, 2002 from $204.3 million in 2001, as a result of a 15.4% increase in sales to the Company's largest U.S. customer, Sunglass Hut and its affiliates, coupled with a 6.5% increase in net sales to the Company's broad specialty store account base and other domestic sales. Sales to Sunglass Hut increased $6.7 million to $50.3 million for the year ended December 31, 2002 from $43.6 million for the year ended December 31, 2001. 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 the latter half of 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 which marked the resumption of the business relationship between the two companies.
Net sales from the Company's retail store operations, including Iacon acquired on October 31, 2001, were $32.6 million for the year ended December 31, 2002, up from $8.9 million for the year ended December 31, 2001, an increase of $23.7 million. During the year ended December 31, 2002, the Company added 21 new Iacon stores, bringing the total stores to 64 at December 31, 2002, and eight new Oakley stores, bringing the total to 14. Retail sales represented 6.7% of total net sales for 2002.
During the year ended December 31, 2002, the Company's international net sales increased 9.0%, or $19.4 million, to $235.5 million from $216.1 million during the year ended December 31, 2001. On a constant dollar basis, international sales grew 7.5% for the year ended December 31, 2002 when compared to the year ended December 31, 2001. Although the Company's international sales during the year have been impacted by weak retail environments, especially in Europe and Japan, all major markets other than Latin America experienced growth during the year. During the second quarter of 2002, international net sales were more adversely affected than U.S. net sales by the sunglass delivery issues discussed above due to the longer lead times required for delivery outside the United States. In addition, the Company's 2002 European sunglass sales were impacted by competitive pressures from strong fashion brands. Latin America experienced a large decrease in net sales in the 2002 period due to delays in the transition to direct distribution in Brazil from the previous independent distributor and overall weak economic conditions in the region. Sales from the Company's direct international offices represented 84.9% of total international sales for 2002, compared to 82.0% for 2001.
Gross profit
Gross profit increased to $277.6 million, or 56.7% of net sales, for the year ended December 31, 2002 from $254.9 million, or 59.4% of net sales, for the year ended December 31, 2001, an increase of $22.7 million, or 8.9%. The decrease in gross profit as a percentage of net sales reflects higher overall sales discounts, coupled with a lower concentration of sunglass and prescription eyewear products relative to sales of lower gross margin product categories. Iacon sales of sunglass brands other than Oakley, as well as the associated occupancy costs, have also had a negative impact on the Company's year over year gross margin comparison due to Iacon being included for only two months of the comparable 2001 period. Foreign exchange had a favorable impact on gross margin relative to the comparable period. The Company's footwear margins were lower in 2002 when compared to 2001 due to successful efforts to reduce inventory levels of prior season close-out products at reduced margins, increased tooling costs per unit and provisions for slow-moving inventory.
Operating expenses
In December 2002, the Company announced plans to restructure its European operations with significant changes to the regional sales and distribution organization. As part of this plan, relationships with several outside sales agents have been modified or terminated, and changes are being implemented to rationalize other warehousing and distribution functions within the European markets which resulted in a $2.8 million pre-tax charge to selling and shipping and warehousing expenses. See Note 14 in Notes to Consolidated Financial Statements. Operating expenses for the year ended December 31, 2002 increased to $213.4 million from $180.9 million for the year ended December 31, 2001, an increase of $32.5 million, or 18.0%. As a percentage of net sales, operating expenses increased to 43.6% of net sales for the year ended December 31, 2002 compared to 42.1% of net sales for 2001. Excluding the $2.8 million European restructuring charge, operating expenses increased to $210.6 million, or 43.0% of net sales, for the year ended December 31, 2002 from $180.9 million, or 42.1%, for the year ended December 31, 2001, an increase of $29.7 million, or 16.4%. Operating expenses included $12.3 million of expenses for the Company's retail store operations, an increase of $8.9 million from $3.4 million for the year ended December 31, 2001. Research and development expenses increased $4.7 million to $16.0 million, or 3.3% of net sales, for the year ended December 31, 2002, from $11.3 million, or 2.6% of net sales, for the year ended December 31, 2001, primarily as a
result of greater new product development efforts in all product categories. Selling expenses increased $18.1 million to $127.0 million, or 25.9% of net sales, for the year ended December 31, 2002 from $108.9 million, or 25.4% of net sales, for the year ended December 31, 2001. Excluding $2.3 million relating to the European restructuring charge, selling expenses were $124.7 million for the year ended December 31, 2002, compared to $108.9 million for the year ended December 31, 2001, an increase of $15.8 million. This increase was a result of (i) increased sales salaries primarily due to the increased retail operations, (ii) increased sports marketing expenses primarily for footwear and apparel and (iii) displays and display depreciation to support the new distribution initiatives, partially offset by reduced commissions due to a realigned commission structure. As a percentage of net sales, selling expenses excluding the restructure charge remained at 25.5% of net sales for the year ended December 31, 2002. Shipping and warehousing expenses as a percentage of net sales decreased to 3.7% of net sales for the year ended December 31, 2002 from 4.0% of net sales for the year ended December 31, 2001. Excluding $0.5 million related to the European restructuring charge, shipping and warehousing expenses as a percentage of sales decreased to 3.6% of net sales for the year ended December 31, 2002 from 4.0% of net sales for the year ended December 31, 2001 as the Company leveraged its shipping expenses over higher sales. This leverage resulted from labor and freight cost efficiencies offsetting increased international third party distribution costs. General and administrative expenses increased $8.7 million to $52.3 million, or 10.7% of net sales, for the year ended December 31, 2002, from $43.6 million, or 10.2% of net sales, for the year ended December 31, 2001. The increase in general and administrative expenses was principally a result of greater personnel-related and administrative costs and information technology costs necessary to support and manage the Company's growth, as well as increased retail store expenses. These increases were partially offset by the reduction of amortization expense for the year ended December 31, 2002 of approximately $1.2 million primarily due to the adoption of SFAS No. 142. See Note 5 in Notes to Consolidated Financial Statements.
Operating income
The Company's operating income decreased to $64.2 million, or 13.1% of net sales, for the year ended December 31, 2002 from $74.1 million, or 17.3% of net sales, a decrease of $9.9 million. Excluding the European restructuring charge of $2.8 million, the Company's operating income decreased $7.1 million to $67.0 million for the year ended December 31, 2002 from $74.1 million for the year ended December 31, 2001. As a percentage of net sales, operating income, prior to the restructure charge, decreased to 13.7% for the year ended December 31, 2002 from 17.3% for the year ended December 31, 2001.
Interest expense, net
The Company had net interest expense of $1.6 million for the year ended December 31, 2002, as compared with net interest expense of $3.1 million for the year ended December 31, 2001. The decrease in interest expense is due to lower interest rates during 2002, reduced short-term borrowing balances resulting from the improved balance sheet trends and a nonrecurring credit to interest expense of approximately $350,000 resulting from the favorable settlement of a treasury hedge entered into by the Company in connection with the previously announced long-term debt financing, which the Company elected not to pursue in the quarter ended June 30, 2002.
Income taxes
The Company recorded a provision for income taxes of $21.9 million for the year ended December 31, 2002 compared to $20.6 million for the year ended December 31, 2001. Excluding the tax effect of the restructuring charge, the Company's provision for income taxes was $22.9 million in 2002 compared to $20.6 million for 2001. The Company's effective tax rate for the year ended
December 31, 2002 was 35%, compared to 29% for the comparable period in 2001 which resulted from a one-time tax benefit associated with the Company's foreign operations in 2001.
Net income
The Company's net income decreased to $40.6 million for the year ended December 31, 2002 from $50.4 million for the year ended December 31, 2001, a decrease of $9.8 million or 19.4%. Excluding the European restructuring after-tax charge of $1.8 million, net income decreased to $42.4 million for the year ended December 31, 2002 from $50.4 million for the year ended December 31, 2001, a decrease of $8.0 million, or 15.9%.
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 $76.1 million for the year ended December 31, 2003 compared to $87.6 million for the year ended December 31, 2002. The Company's cash balance was $49.2 million at December 31, 2003 compared to $22.2 million at December 31, 2002. At December 31, 2003, working capital was $154.5 million compared to $129.0 million at December 31, 2002, a 19.8% 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, totaled $78.0 million at December 31, 2003, compared to $68.1 million at December 31, 2002, with accounts receivable days outstanding for the year ended December 31, 2003 of 51, compared to 53 for the year ended December 31, 2002. Inventories increased to $98.7 million at December 31, 2003, compared to $87.0 million at December 31, 2002. This inventory reflects the expanded Company-owned retail operations and increased apparel and footwear inventory to support the new spring releases. Inventory turns were 2.4 at December 31, 2003, compared to 2.6 at December 31, 2002.
Credit Facilities
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% (1.86% at December 31, 2003) or the bank's prime lending rate minus 0.25% (3.75% at December 31, 2003). At December 31, 2003, the Company did not have any balance outstanding under such facility. The credit agreement contains various restrictive covenants including the maintenance of certain financial ratios. At December 31, 2003, the Company was in compliance with all restrictive covenants and financial ratios. The Company believes that it will be able to extend or replace its existing credit facility prior to its maturity without significant changes in terms. Certain of the Company's foreign subsidiaries have negotiated local lines of credit to provide working capital financing. The aggregate U.S. dollar borrowing limit on the foreign lines of credit is approximately $24.1 million, of which $14.0 million was outstanding at December 31, 2003. The Company also has a 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% (2.17% at December 31, 2003). 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 December 31, 2003, the outstanding balance on the term loan was $13.3 million. The term loan is due in September 2007.
Note Payable
The Company also has a note in the amount of $1.4 million, net of discounts, as of December 31, 2003, payable as a result of an acquisition. Payments under the note are due in annual installments of $500,000 ending in 2006, with such payments contingent upon certain conditions.
Capital Expenditures
Capital expenditures, net of retirements, for the year ended December 31, 2003 were $28.2 million, which included $7.1 million for retail store operations. Included in 2003 capital expenditures, excluding capital expenditures for retail operations, were $5.7 million for production equipment and new product tooling, $5.3 million for information technology infrastructure, including software, computers and related equipment, $7.9 million for in-store displays and $6.3 million for facility building improvements, furniture and fixtures and autos.
Stock Repurchase
In September 2002, the Company's Board of Directors authorized the repurchase of $20 million of the Company's common stock to occur from time to time as market conditions warrant. Under this program, as of December 31, 2003, the Company had purchased 829,600 shares of its common stock at an aggregate cost of approximately $8.6 million, or an average cost of $10.37 per share. Approximately $11.4 million remains available for repurchases under the current authorization with total common shares outstanding of 67,948,482 as of December 31, 2003.
Dividends
On August 12, 2003, the Company's Board of Directors announced the initiation of an annual dividend policy and declared an initial annual cash dividend of $0.14 per share. This dividend, totaling $9.5 million, was paid on October 31, 2003 to shareholders of record as of the close of business on October 15, 2003. Any future dividends are at the discretion, and subject to the approval, of the Company's Board of Directors.
Contractual Obligations and Commitments
The following table gives additional guidance related to the Company's future obligations and commitments as of December 31, 2003:
Additionally, the Company expects 2004 capital expenditures to be approximately $33.0 million, including approximately $8.0 million for expansion of both Oakley and Iacon retail operations. As of December 31, 2003, the Company had commitments of approximately $1.1 million for future capital purchases.
Warranty Provision
The Company provides warranties against manufacturer's defects for all of its products and maintains a reserve for its product warranty liability based on estimates calculated using historical warranty experience. Warranty liability activity for the years ended December 31, was as follows:
The Company believes that existing capital, anticipated cash flow from operations, and current and anticipated borrowings under its current or future 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 December 31, 2003, the Company was in compliance with all restrictive covenants and financial ratios.
Seasonality
The following table sets forth certain unaudited quarterly data for the periods shown:
Historically, the Company's aggregate sales have been highest in the period from March to September, the period during which sunglass use is typically highest in the northern hemisphere. 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 sunglass inventories in the fourth quarter and first quarter when net sales have historically been lower. In addition, sales of other products, which generate gross profits at lower levels than sunglasses, are generally 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 retail and 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 December 31, 2003, the Company had a backlog of $51.9 million, including backorders (merchandise remaining unshipped beyond its scheduled shipping date) of $5.3 million, compared to a backlog of $42.7 million, including backorders of $5.7 million, at December 31, 2002. Included in this backlog are orders for the Company's footwear and apparel lines, which totaled $43.8 million at December 31, 2003, up 22.0% compared with $35.9 million at December 31, 2002.
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.
New Accounting Pronouncements
Information regarding new accounting pronouncements is contained in Note 1 to the Consolidated Financial Statements for the year ended December 31, 2003, which note is incorporated herein by this reference.
GAAP and Non-GAAP Financial Measures
This document includes a discussion of gross sales and components thereof, each of which may be a non-GAAP financial measure. The Company believes that use of this financial measure allows management and investors to evaluate and compare the Company's operating results in a more meaningful and consistent manner. As required by Item 10 of Regulation S-K, a reconciliation of these measures is as follows:
Reconciliation of Gross Sales to Net Sales:
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 and the Company's internal production operations to increase production volumes on raw materials and finished goods 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 weakness of economic conditions could continue to reduce or further 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, 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 without adversely affecting operations; 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, 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; earthquakes or other natural disasters concentrated in Southern California where substantially all of the companies operations are based; the Company's ability to identify and execute successfully cost control initiatives; and other risks outlined herein and other filings made periodically by the Company. The Company cautions prospective investors not to place undue reliance of such statements and undertakes no obligation to update this forward-looking information.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
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 Continental 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. (See Note 10 in Notes to Consolidated Financial Statements). 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 December 31, 2003.
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 Company's foreign exchange contracts by currency at December 31, 2003 (in thousands):
The Company is exposed to credit losses in the event of nonperformance by counterparties to its forward exchange contracts but has no off-balance sheet credit risk of accounting loss. The Company anticipates, however, that the counterparties will be able to fully satisfy their obligations under the contracts. The Company does not obtain collateral or other security to support the forward exchange contracts subject to credit risk but monitors the credit standing of the counterparties. As of December 31, 2003, outstanding contracts were recorded at fair value and the resulting gains and losses were recorded in the consolidated financial statements pursuant to the policy set forth above.
Interest rates
The Company's principal line of credit, with no balance outstanding at December 31, 2003, bears interest at either LIBOR or IBOR plus 0.75% (1.86% at December 31, 2003) or the bank's prime lending rate minus 0.25% (3.75% at December 31, 2003). Based on the weighted average interest rate of 3.83% on the line of credit during the year ended December 31, 2003, 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 ten-year real estate term loan, with a balance of $13.3 million outstanding at December 31, 2003, bears interest at LIBOR plus 1.0% (2.17% at December 31, 2003) and is due in September 2007. 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 loan by fixing the rate at 6.31%. As of December 31, 2003, the fair value of the Company's interest rate swap agreement was a loss of approximately $1.0 million.
Item 8.
Item 8. Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements for a listing of the consolidated financial statements submitted as part of this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.
Internal Control Over Financial Reporting
There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information required by this item will be contained in the Company's Proxy Statement for its Annual Shareholders Meeting to be held on June 4, 2004, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2003, and is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The information required by this item will be contained in the Company's Proxy Statement for its Annual Shareholders Meeting to be held on June 4, 2004, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2003, and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be contained in the Company's Proxy Statement for its Annual Shareholders Meeting to be held on June 4, 2004, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2003, and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this item will be contained in the Company's Proxy Statement for its Annual Shareholders Meeting to be held on June 4, 2004, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2003, and is incorporated herein by reference.
Item 14.
Item 14. Principal Accountant Fees and Services
The information required by this item will be contained in the Company's Proxy Statement for its Annual Shareholders Meeting to be held on June 4, 2004, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2003, and is incorporated herein by reference.
Part IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) See page 41 for a listing of financial statements submitted as part of this report.
(a)(2) Schedule II-Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(a)(3) The following exhibits are included in this report.
3.1
(1 ) Articles of Incorporation of the Company
3.2
(8
)
Amended and Restated Bylaws of the Company
3.3
(3
)
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
(8
)
Amendment No. 1 to Section 1 and Sections 3a through 3f of Article IV of the Amended and Restated Bylaws of Oakley, Inc.
10.1
(2
)
Agreement, dated July 17, 1995, between Oakley, Inc. and Michael Jordan
10.2
(4
)
Reciprocal Exclusive Dealing Agreement dated March 11, 1997 among Oakley, Inc., Gentex Optics, Inc. and Essilor International Compagnie Generale D'Optique, S.A. (portions of this document have been omitted pursuant to a request for confidential treatment)
10.3
(4
)
Promissory Note, dated March 20, 1997, between Oakley, Inc. and Bank of America National Trust and Savings Association
10.4
(5
)
Promissory Note, dated August 7, 1997, between Oakley, Inc. and Bank of America National Trust and Savings Association
10.5
(5
)
Amendment No. 1 to Promissory Note, dated August 14, 1997, between Oakley, Inc. and Bank of America National Trust and Savings Association
10.6
(5
)
Amendment No. 2 to Promissory Note, dated August 14, 1997, between Oakley, Inc. and Bank of America National Trust and Savings Association
10.7
(5
)
Deed of Trust with Assignment of Rents, Security Agreement and Fixture Filing, dated August 7, 1997, between Oakley, Inc. and Bank of America National Trust and Savings Association
10.8
(6
)
Amended and Restated Consultant Agreement, dated May 12, 1998, between Jim Jannard and Oakley, Inc.
10.9
(7
)
Second Amended and Restated Credit Agreement, dated August 25, 1998, among Oakley, Inc. and Bank of America National Trust and Savings Association, as agent, and the Lenders named therein
10.10
(7
)
Modification Agreement (Short Form), dated August 10, 1998, between Oakley, Inc. and Bank of America National Trust and Savings Association
10.11
(7
)
Modification Agreement (Long Form), dated August 10, 1998, between Oakley, Inc. and Bank of America National Trust and Savings Association
10.12
(9
)
Amended and Restated Employment Agreement, dated May 1, 1999, between Link Newcomb and Oakley, Inc.
10.13
(9
)
Oakley, Inc. Amended and Restated 1995 Stock Incentive Plan
10.14
(9
)
Oakley, Inc. Amended and Restated Executive Officers Performance Bonus Plan
10.15
(10
)
Amendment No. 1 to Amended and Restated Employment Agreement, dated December 31, 1999, between Link Newcomb and Oakley, Inc.
10.16
(10
)
Second Amended and Restated Employment Agreement, dated January 1, 2000, between Thomas George and Oakley, Inc.
10.17
(11
)
First Amendment to Second Amended and Restated Credit Agreement, dated as of March 6, 2000, among Oakley, Inc. and Bank of America National Trust and Savings Association, as agent, and the Lenders named therein
10.18
(12
)
Employment Agreement, dated October 1, 2000, between Tomas Rios and Oakley, Inc.
10.19
(13
)
Second Amendment to Second Amended and Restated Credit Agreement, dated October 16, 2000, among Oakley, Inc. and Bank of America National Trust and Savings Association, as agent, and the Lenders named therein
10.20
(13
)
Third Amendment to Second Amended and Restated Credit Agreement, dated January 18, 2001, among Oakley, Inc. and Bank of America National Trust and Savings Association, as agent, and the Lenders named therein
10.21
(13
)
Lease Agreement, dated November 10, 2000, between Haven Gateway LLC and Oakley, Inc.
10.22
(13
)
Trademark License Agreement and Assignment of Rights, dated March 31, 2000, between Y, LLC and Oakley, Inc.
10.23
(14
)
Amendment to Trademark License Agreement, dated June 1, 2002, between Y, LLC and Oakley, Inc.
10.24
(15
)
Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Jim Jannard.
10.25
(15
)
Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Link Newcomb.
10.26
(15
)
Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Colin Baden.
10.27
(15
)
Indemnification Agreement, dated February 14, 2003, between Oakley, Inc. and Tommy Rios.
10.28
(15
)
Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Tom George.
10.29
(15
)
Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Donna Gordon.
10.30
(15
)
Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Scott Bowers.
10.32
(15
)
Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Jon Krause.
10.33
(15
)
Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Kent Lane.
10.35
(15
)
Indemnification Agreement, dated February 14, 2003, between Oakley, Inc. and Carlos Reyes.
10.36
(16
)
Indemnification Agreement, dated March 26, 2003, between Oakley, Inc. and Irene Miller.
10.37
(16
)
Indemnification Agreement, dated March 26, 2003, between Oakley, Inc. and Abbott Brown.
10.38
(16
)
Indemnification Agreement, dated March 26, 2003, between Oakley, Inc. and Lee Clow.
10.39
(17
)
Aircraft Lease Agreement, dated December 18, 2003, between Oakley, Inc. and N2T, Inc.
10.40
(17
)
Indemnification Agreement, dated February 12, 2004, between Oakley, Inc. and Thomas Davin.
21.1
(17
)
List of Material Subsidiaries
23.1
(17
)
Consent of Deloitte & Touche LLP, independent auditors
31.1
(17
)
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
(17
)
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
(17
)
Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1)Previously filed with the Registration Statement on Form S-1 of Oakley, Inc. (Registration No. 33-93080)
(2)Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended September 30, 1995.
(3)Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31, 1996.
(4)Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended March 31, 1997.
(5)Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended September 30, 1997.
(6)Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended June 30, 1998.
(7)Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended September 30, 1998.
(8)Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31, 1998.
(9)Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended June 30, 1999.
(10)Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31, 1999.
(11)Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended March 30, 2000.
(12)Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended September 30, 2000.
(13)Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31, 2000.
(14)Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended June 30, 2002.
(15)Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31, 2002.
(16)Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended March 31, 2003.
(17)Filed herewith
(b)Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months ended December 31, 2003.
The Company furnished a Current Report on Form 8-K, dated October 22, 2003, in connection with the press release issued by the Company on October 22, 2003 announcing its financial results for the fiscal quarter ended September 30, 2003.
Index To Consolidated Financial Statements
Independent Auditors' Report
To the Board of Directors and Shareholders of Oakley, Inc.:
We have audited the accompanying consolidated balance sheets of Oakley, Inc. and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Oakley, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets during 2002 in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 4, 2004
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
See accompanying Notes to Consolidated Financial Statements
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
See accompanying Notes to Consolidated Financial Statements
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
See accompanying Notes to Consolidated Financial Statements
OAKLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See accompanying Notes to Consolidated Financial Statements
OAKLEY, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2003, 2002, 2001
Note 1-Significant Accounting Policies and Description of Business
Description of Business
The Company is an innovation-driven designer, manufacturer and distributor of consumer products that include high-performance eyewear, footwear, watches, apparel and accessories. The Company believes its principal strength is its ability to develop products that demonstrate superior performance and aesthetics through proprietary technology and styling. Its designs and innovations are protected by 545 legal patents and 976 trademarks worldwide. The Company operates in two segments: wholesale and U.S. retail with over 100 retail stores at December 31, 2003.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
Principles of Consolidation
The consolidated financial statements include the accounts of Oakley, Inc. and its subsidiaries (collectively, the "Company"). Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the balance sheet dates and the reported amounts of revenue and expense during the reporting periods. Actual results could significantly differ from such estimates.
Cash and Cash Equivalents
For purposes of the consolidated financial statements, investments purchased with an original maturity of three months or less are considered cash equivalents.
Inventories
Inventories are stated at the lower of cost 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.
Long-Lived Assets
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are provided for using the straight-line method over the estimated useful lives (generally two to seven years for property and equipment and 39 years for buildings) of the respective assets or, as to leasehold improvements, the term of the related lease if less than the estimated useful service life.
Effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144), which did not have a material impact on the Company's consolidated financial position or results of operations. In accordance with SFAS No. 144, the Company estimates the future undiscounted cash flows derived from an asset to assess whether or not a potential impairment exists when events or circumstances indicate the carrying value of a long-lived asset may differ. An impairment loss is recognized when the undiscounted future cash flows are less than its carrying amount.
Goodwill and Intangible Assets
The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets," (SFAS No. 142), which revises the accounting for purchased goodwill and intangible assets effective January 1, 2002. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are tested for impairment annually and also in the event of an impairment indicator. The Company completed the required transitional impairment test and the annual tests through 2003 and determined that no impairment loss was necessary. Any subsequent impairment losses will be reflected in operating income. With the adoption of SFAS No. 142, the Company discontinued amortization of goodwill with indefinite lives in 2002. (See Note 5)
Revenue Recognition
The Company recognizes wholesale revenue when merchandise is shipped to a customer and the risks and rewards of ownership have passed based on the terms of sale. Revenue from the Company's retail store operations is recognized upon purchase by customers at the point of sale. Generally, the Company extends credit to its wholesale customers and does not require collateral. The Company performs ongoing credit evaluations of those customers and historic credit losses have been within management's expectations. Sales agreements with dealers and distributors normally provide general payment terms of 30 to 120 days, depending on the product category. The Company's standard sales agreements with its customers do not provide for any rights of return by the customer other than returns for product warranty related issues. In addition to these product warranty related returns, the Company occasionally accepts other returns at its discretion. The Company records a provision for sales returns and claims based upon historical experience. Actual returns and claims in any future period may differ from the Company's estimates. 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.
Financial Instruments
The carrying amounts of financial instruments, consisting of cash and cash equivalents, trade accounts receivable and accounts payable, approximate fair value due to the short period of time between origination of the instruments and their expected realization. Management also believes the carrying amount of balances outstanding under the credit agreements approximates fair value as the underlying interest rates reflect market rates.
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.
Insurance Coverage
The Company is partially self-insured for its worker's compensation insurance coverage. Under this insurance program, the Company is liable for a deductible of $250,000 for each individual claim and an aggregate annual liability of $1,368,000. The Company records a liability for the estimated cost of claims both reported and incurred but not reported based upon its historical experience. The estimated costs include the estimated future cost of all open claims. The Company will continue to adjust the estimates as the actual experience dictates. A significant change in the number or dollar amount of claims could cause the Company to revise its estimate of potential losses and affect its reported results.
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. The Company maintains a reserve for its product warranty liability based on estimates calculated using historical warranty experience. 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.
Warranty liability activity for the years ended December 31, was as follows:
Income Taxes
The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. The Company considers future taxable income and ongoing, prudent and feasible tax planning strategies in assessing the value of its deferred tax assets. If the Company determines that it is more likely than not that these assets will not be realized, the Company will reduce the value of these assets to their expected realizable value, thereby decreasing net income. Evaluating the value of these assets is necessarily based on the Company's judgment. If the Company subsequently determined that the deferred tax assets, which had been written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.
Foreign Currency Translation
The Company has direct operations in Continental 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 (loss). 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.
Comprehensive Income
Comprehensive income represents the results of operations adjusted to reflect all items recognized under accounting standards as components of comprehensive earnings.
The components of comprehensive income for the Company include net income, unrealized gains or losses on foreign currency cash flow hedges, unrealized gains or losses on an interest rate swap, and
foreign currency translation adjustments. The components of accumulated other comprehensive loss, net of tax, are as follows:
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," under which no compensation expense is recognized for stock option awards granted with exercise prices at fair market value. Stock based awards to non-employees are accounted for using the fair value method in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123).
SFAS No. 123 requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method in accounting for stock-based awards as of the beginning of fiscal 1995.
Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option-pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option-pricing model with the following weighted average assumptions:
If the computed fair value of the 2003, 2002 and 2001 awards had been amortized to expense over the vesting period of the awards, net income would have been as follows:
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 years ended December 31, 2003, 2002 and 2001, the diluted weighted average common shares outstanding includes diluted shares for stock options totaling 276,000, 601,000 and 895,000, respectively.
Advertising Costs
The Company advertises primarily through print media, catalogs and in-house mailers. The Company's policy is to expense advertising costs associated with print media on the date the print media is released to the public. Costs associated with catalogs and direct mail materials are expensed as they are shipped to the Company's customers. Advertising costs also include posters and other point-of-purchase materials which are expensed as incurred. Advertising expenses for 2003, 2002 and 2001 were $17,612,000, $18,432,000 and $17,922,000, respectively.
New Accounting Pronouncements
In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS No. 146), which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF Issue 94-3 is recognized on the date of an entity's commitment to an exit plan. SFAS No. 146 also establishes that
the liability should initially be measured and recorded at fair value. The adoption of SFAS No. 146 on January 1, 2003 did not have a material impact on the Company's financial position or results of operation.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No. 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; the provisions of the disclosure requirements are effective for financial statements of interim or annual reports ending after December 15, 2002. The Company's adoption of FIN No. 45 has not had a material impact on the Company's financial position or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure" (SFAS No. 148). SFAS No. 148 amends Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), to provide new guidance concerning the transition when a company voluntarily elects to change from the intrinsic-value method to SFAS No. 123's fair value method of accounting for stock-based employee compensation (the "fair value method"). In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has elected not to voluntarily change to the fair value method of accounting for stock-based employee compensation and has followed the prescribed disclosure format and additional disclosures required by SFAS No. 148 under "Stock-Based Compensation."
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN No. 46) and in December 2003, issued Interpretation No. 46 (revised December 2003) "Consolidation of Variable Interest Entities-An Interpretation of APB No. 51." In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 (R) clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" (APB No. 51), to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without subordinated financial support from other parties. The consolidation requirements of FIN No. 46 applies immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was
established. FIN No. 46 (R) applies immediately to variable interest entities created after December 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies no later than the first reporting period ending after December 15, 2004, to variable interest entities in which an enterprise holds a variable interest (other than special purpose) that it acquired before January 1, 2004. FIN No. 46 (R) applies to public enterprises as of the beginning of the applicable interim or annual period. The Company believes that the adoption of FIN No. 46 and FIN No. 46 (R) will not have a material impact on its financial position or results of operations because the Company has no variable interest entities.
Reclassifications
Certain reclassifications have been made to prior period financial statements to conform to the presentation for the financial statements for the period ended December 31, 2003.
Certain Significant Risks and Uncertainties
General Business
The Company's historical success is attributable, in part, to its introduction of products which are perceived to represent an improvement in performance over products available in the market. The Company's future success will depend, in part, upon its continued ability to develop and introduce such innovative products, and there can be no assurance of the Company's ability to do so. The 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 and shifts in consumer preferences may adversely affect companies that misjudge such preferences.
In addition, the Company has experienced significant growth under several measurements which has placed, and could continue to place, a significant strain on its employees and operations. If management is unable to anticipate or manage growth effectively, the Company's operating results could be materially adversely affected.
Inventories
Demand for the Company's products can fluctuate significantly. 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 future terrorist acts or war, or the threat thereof, which could adversely affect consumer confidence and spending, interrupt production and distribution of product and raw materials and, 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.
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 its 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 or other critical materials can be located or developed in a timely manner.
Vulnerability Due to Customer Concentrations
Net sales to the retail group of Luxottica S.p.A ("Luxottica"), which include Sunglass Hut locations worldwide, were approximately 9.0%, 12.2% and 12.0% of the Company's net sales for the years ended December 31, 2003, 2002 and 2001, respectively. Luxottica is also one of the Company's largest competitors in the sunglass and optical frame markets. Luxottica acquired Sunglass Hut in April 2001 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 which marked the resumption of the business relationship between the two companies after a short disruption that began in August 2001. The arrangements between the companies do 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. In September 2003, Luxottica completed the acquisition of all the shares of Australian eyewear retailer OPSM Group Ltd ("OPSM"). OPSM operates in the South Pacific and Southeast Asia regions with approximately 600 retail locations, a portion of which currently offer some of the Company's products. For 2003, the Company's net sales to OPSM prior to the acquisition were approximately AUD $1.1 million (or approximately $0.7 million in U.S. dollars based on the average exchange rate for 2003). For 2002, the Company's net sales to OPSM were approximately AUD $2.8 million (or approximately $1.5 million in U.S. dollars based on the average exchange rate for 2002). These sales exclude a limited amount of sales generated through the Company's international distributors. In November 2003, Luxottica completed the acquisition of New Zealand eyewear retailer Sunglass Store New Zealand ("SSNZ"), the Company's largest customer in New Zealand. SSNZ operates in New Zealand with 16 retail locations which offer some of the Company's products. In January 2004, Luxottica entered into a definitive merger agreement with Cole National Corporation ("Cole"), one of the largest optical retailers and largest chain providers of managed vision care services worldwide. This merger is expected to close in the second half of 2004 pending the approval of Cole's stockholders and its compliance with applicable antitrust requirements. The Company currently sells to a small portion of Cole's retail locations and sales to this customer have been immaterial. There can be no assurance that the recent acquisitions or future acquisitions by Luxottica will not have a material adverse impact on the Company's financial position or results of operations.
Note 2-Acquisitions
During 2002, the Company transitioned its operations in Brazil to direct distribution from the previous independent distributor and acquired certain intangible assets on May 29, 2002. On October 31, 2001, the Company acquired one of its largest U.S. customers, Iacon, Inc., a sunglass specialty retailer. These acquisitions have been recorded using the purchase method of accounting and the results of operations from the date of acquisitions have been included in the Company's consolidated financial statements. The purchase price for these acquisitions were allocated on the respective date of acquisitions as follows:
The excess of the purchase prices over the fair values of the net assets acquired have been allocated to intangible assets and goodwill. Had the acquisitions occurred at the beginning of the fiscal year in which they were completed, or the beginning of the immediately preceding year, combined pro forma net sales, net income and net income per common share would not have been materially different from that currently being reported.
Note 3-Inventories
Inventories at December 31, consist of the following:
Note 4-Property and Equipment
Property and equipment at December 31, consist of the following:
Note 5-Goodwill and Intangible Assets
On January 1, 2002, the Company adopted SFAS No. 142 which eliminated the amortization of purchased goodwill and other intangibles with indefinite useful lives. Upon adoption of SFAS No. 142, the Company performed an impairment test of the carrying value of its goodwill and intangible assets, and determined that no impairment existed. Under SFAS No. 142, goodwill and non-amortizing intangible assets will be tested for impairment at least annually and more frequently if an event occurs which indicates that goodwill or intangible assets may be impaired.
Included in other assets in the accompanying consolidated balance sheets are the following amortizing intangible assets.
With the adoption of SFAS No. 142, the Company discontinued amortization of goodwill and other intangibles that were determined to have indefinite lives. Had amortization of goodwill and such other intangibles not been recorded in the fiscal year ended December 31, 2001, net income would have increased by $0.9 million, net of taxes, and diluted earnings per share would have increased by $0.01.
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 years ended December 31, 2003, 2002 and 2001 was approximately $1,267,000, $1,119,000 and
$840,000, respectively. Annual estimated amortization expense, based on the Company's intangible assets at December 31, 2003, is as follows:
Changes in goodwill is as follows:
Note 6-Accrued Liabilities
Accrued liabilities consist of the following:
Note 7-Income Taxes
The Company's income before income tax provision was subject to taxes in the following jurisdictions for the years ended December 31:
The provision for income taxes for the years ended December 31, consists of the following:
No provision has been made for U.S. Federal, state or additional foreign income taxes which would be due upon the actual or deemed distribution of approximately $26.3 million of undistributed earnings of foreign subsidiaries as of December 31, 2003, which have been or are intended to be permanently reinvested.
A reconciliation of income tax expense computed at U.S. Federal statutory rates to income tax expense for the years ended December 31, is as follows:
There were no prepaid taxes included in deferred and prepaid income taxes at December 31, 2003. At December 31, 2002, deferred and prepaid income taxes included prepaid taxes of $74,000. The deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities at December 31, are as follows:
Note 8-Debt
Line 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% (1.86% at December 31, 2003) or the bank's prime lending rate minus 0.25% (3.75% at December 31, 2003). At December 31, 2003, the Company did not have any balance outstanding under such facility. The credit agreement contains various restrictive covenants including the maintenance of certain financial ratios. At December 31, 2003, the Company was in compliance with all restrictive covenants and financial ratios. The Company believes that it will be able to extend or replace its existing credit facility prior to its maturity without significant changes in terms. Certain of the Company's foreign subsidiaries have negotiated local lines of credit to provide working capital financing. These foreign lines of credit bear interest from 0.74% to 6.41%. Some of the Company's foreign subsidiaries have bank overdraft accounts that renew annually and bear interest from 2.66% to 13.5%. The aggregate borrowing limit on the foreign lines of credit and overdraft accounts is $24.1 million, of which $14.0 million was outstanding at December 31, 2003.
Long-Term Debt
The Company has a real estate term loan with an outstanding balance of $13.3 million at December 31, 2003, which expires in 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% (2.17% at December 31, 2003). In January 1999, the Company entered into an interest rate swap agreement that hedges 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 note at 6.31%. As of December 31, 2003, the fair value of the Company's interest rate swap agreement was a loss of approximately $1.0 million.
As of December 31, 2003, the Company also has a note payable in the amount of $1.4 million, net of discounts, in connection with the Iacon acquisition. Payments under the note are due in annual installments of $500,000 ending in 2006, with such payments contingent upon certain conditions.
The following schedule lists the Company's minimum annual principal payments on its long-term debt:
Note 9-Commitments and Contingencies
Operating Leases
The Company is committed under noncancelable operating leases expiring at various dates through 2014 for certain offices, warehouse facilities, retail stores, production facilities and distribution centers. The following is a schedule of future minimum lease payments required under such leases as of December 31, 2003:
Substantially all of the retail segment leases require the Company to pay maintenance, insurance, property taxes and percentage rent ranging from 5% to 8% based on sales volumes over certain minimum sales levels.
Rent expense for the years ended December 31, is summarized as follows:
Additionally, during the years ended December 31, 2003, 2002 and 2001, the Company paid an officer and shareholder of the Company approximately $142,000, $42,000 and $170,000, respectively, for the placement of the Company's trademarks on, and related marketing activities in connection with, an automobile owned by the officer and shareholder that competes on the National Hot Rod Association drag racing circuit.
Purchase Commitments
The Company has an exclusive agreement through 2006, with its lens blank supplier and the supplier's French parent, pursuant to which the Company has the exclusive right to purchase decentered sunglass lenses, in return for the Company's agreement to fulfill all of its lens requirements, subject to certain exceptions, from such supplier.
Employment and Consulting Agreements
The Company has notified its officers of its decision not to extend the term of any existing employment agreement with its officers. In lieu of paying severance benefits pursuant to individual employment agreements, the Company has adopted two severance plans for the benefit of its officers that provide for, among other things, upon the termination of employment by the Company, (i) payment of a designated percentage of base salary and pro rata bonus; (ii) extension of Company-paid medical and benefits; and (iii) limited acceleration of vesting with respect to options. In addition, the Company entered into a severance agreement with one of its officers to provide for certain benefits in exchange for the cancellation of his employment agreement.
Endorsement Contracts
The Company has entered into several endorsement contracts with selected athletes and others who endorse the Company's products. The contracts are primarily of short duration. Under the
contracts, the Company has agreed to pay certain incentives based on performance and is required to pay minimum annual payments as follows:
Included in such amounts is an annual retainer of $0.5 million through 2005 for a former director of the Company.
Indemnities, Commitments and Guarantees
During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include indemnities to the Company's customers in connection with the sales of its products, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Washington. The Company has also issued a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain workers' compensation insurance policies. The durations of these indemnities, commitments and guarantees vary. Some of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets.
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 likely have a material adverse effect on the accompanying consolidated financial statements.
Note 10-Derivative Financial Instruments
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. As of December 31, 2003, the fair value of the Company's interest rate swap agreement was a loss of approximately $1.0 million. At December 31, 2003, all of the Company's derivative 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 could result in reclassifications of $11.8 million of losses to earnings over the next twelve months. The Company hedges forecasted transactions that are determined probable to occur before the end of the subsequent fiscal year.
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 twelve months ended December 31, 2003, the Company recognized losses of $9.6 million, net of taxes, resulting from the expiration, sale, termination, or exercise of foreign currency exchange contracts.
The following is a summary of the foreign currency contracts outstanding by currency at December 31, 2003 (in thousands):
The Company is exposed to credit losses in the event of nonperformance by counterparties to its forward exchange contracts but has no off-balance-sheet credit risk of accounting loss. The Company anticipates, however, that the counterparties will be able to fully satisfy their obligations under the
contracts. The Company does not obtain collateral or other security to support the forward exchange contracts subject to credit risk but monitors the credit standing of the counterparties. As of December 31, 2003, outstanding contracts were recorded at fair value and the resulting gains and losses were recorded in the consolidated financial statements pursuant to the policy set forth above.
Note 11-Shareholders' Equity
Stock Repurchase
In September 2002, the Company's Board of Directors authorized the repurchase of $20 million of the Company's common stock to occur from time to time as market conditions warrant. Under this program, as of December 31, 2003, the Company had purchased 829,600 shares of its common stock at an aggregate cost of approximately $8.6 million, or an average cost of $10.37 per share. Approximately $11.4 million remains available for repurchases under the current authorization.
Stock Incentive Plan
The Company's Amended and Restated 1995 Stock Incentive Plan (the "Plan") provides for stock-based incentive awards, including incentive stock options, nonqualified stock options, restricted stock, performance shares, stock appreciation rights and deferred stock to Company officers, employees, advisors and consultants. These shares are, in most cases, granted at an exercise price equal to the fair market value of the Company's stock at the time of grant. Options vest over periods ranging from one to four years and expire ten years after the grant date. A total of 8,712,000 shares have been reserved for issuance under the Plan. At December 31, 2003, stock options for 2,778,479 shares were exercisable and 2,095,398 shares were available for issuance pursuant to new stock option grants or other equity awards.
The following table summarizes information with respect to the Plan:
Additional information regarding options outstanding as of December 31, 2003 is as follows:
During the years ended December 31, 2003, 2002 and 2001, the Company recorded stock compensation expense of $11,000, $3,000 and $98,000, respectively, associated with the fair value of stock options issued to non-employees.
Note 12-Employee Benefit Plan
The Company maintains a voluntary employee savings plan under Section 401(k) of the Internal Revenue Code (the "401(k) Plan") for all domestic employees with at least six months of service. The Plan is funded by employee contributions with the Company matching a portion of the employee contribution. Company contributions to the Plan were $0.8 million, $0.7 million and $0.7 million for the years ended December 31, 2003, 2002 and 2001, respectively, and are included in general and administrative expenses.
Note 13-Segment and Geographic Information
In the fourth quarter of 2003, the Company's retail business met the quantitative threshold for segment disclosure. As a result, the Company has revised its segment disclosure for the current and prior periods to reflect two reportable segments: wholesale and U.S. retail. The wholesale segment consists of the design, manufacture and distribution of the Company's products to wholesale customers in the U.S. and internationally, together with all direct consumer sales other than U.S. retail. The U.S. retail segment reflects the operations of the Company's specialty retail stores located throughout the United States, including the operations of its Iacon subsidiary. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance and allocates resources of segments based on net sales and operating income, which represents income before interest and income taxes. Segment net sales and operating income for the Company's wholesale operations include Oakley product sales to its subsidiaries at transfer price and other intercompany corporate charges. Segment net sales and operating income for the Company's U.S. retail operations include Oakley product sales to its Iacon subsidiary at transfer price, and sales to Oakley retail stores at cost. The U.S. retail segment operating income excludes any allocations for corporate operating expenses as these expenses are included in the wholesale segment.
Financial information for the Company's reportable segments is as follows:
The following table sets forth sales by segment:
Geographical regions representing 10% or more of consolidated net sales are summarized as follows:
The Company's identifiable assets by geographical region are as follows:
The Company derives revenues from different product lines within its segments. Gross sales from external customers for each product line are as follows:
Other consists of revenue derived from the sales of equipment, sunglass and goggle accessories and Iacon sales of sunglass brands other than the Company's.
Note 14-Restructure Charge
A restructure charge of $2.8 million ($1.8 million, or $0.02 per diluted share, on an after-tax basis) was recorded during the fourth quarter of fiscal 2002 to restructure (the "Restructuring Plan") the Company's European operations with significant changes to the regional sales and distribution organization. Pursuant to an approval of the Company's Board of Directors in December 2002, relationships with several outside sales agents have been modified or terminated, and changes have been implemented to rationalize other warehousing and distribution functions within the European markets. During 2003, the Company paid or settled almost all of the expenses associated with the Restructuring Plan. As of December 31, 2003, the Company had finalized all the restructuring charges and management believes the amount originally recorded will be sufficient to cover any remaining restructure liabilities.
This charge was included in selling and shipping and warehousing expenses and is comprised of the following components:
Note 15-Quarterly Financial Data (unaudited)
Oakley, Inc. and Subsidiaries
Schedule II-Valuation and Qualifying Accounts
For the Years Ended December 31, 2003, 2002, 2001
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: March 5, 2004
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ JIM JANNARD Jim Jannard
Chairman of the Board and CEO
(Principal Executive Officer)
March 5, 2004
/s/ LINK NEWCOMB Link Newcomb
Chief Operating Officer and Director
March 5, 2004
/s/ THOMAS GEORGE Thomas George
Chief Financial Officer
(Principal Accounting Officer)
March 5, 2004
/s/ ABBOTT BROWN Abbott Brown
Director
March 5, 2004
/s/ LEE CLOW Lee Clow
Director
March 5, 2004
/s/ THOMAS DAVIN Thomas Davin
Director
March 5, 2004
/s/ IRENE MILLER Irene Miller
Director
March 5, 2004
Oakley, Inc. TABLE OF CONTENTS
Part I
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Index To Consolidated Financial Statements
Independent Auditors' Report
OAKLEY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
OAKLEY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share and per share data)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands)
OAKLEY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share data)
OAKLEY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
OAKLEY, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 2003, 2002, 2001
Schedule II-Valuation and Qualifying Accounts For the Years Ended December 31, 2003, 2002, 2001
Signatures