| Risk Factors Our business involves numerous risks, many of which are beyond our control |
| The following is a description of some of those risks and their potential impact on our business |
| For additional information about factors that may affect our business, see Item 7 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| One of our largest customers is also a major competitor |
| Our sales to this customer may decline |
| Net sales to the retail group of Luxottica, which include Sunglass Hut locations worldwide, were approximately 7dtta0prca, 7dtta6prca and 8dtta9prca of the Company’s net sales for the years ended December 31, 2005, 2004 and 2003, respectively |
| Luxottica is also one of the Company’s largest competitors in the sunglass and optical frame markets |
| In December 2004, the Company and Luxottica entered into a commercial agreement that established the terms applicable for 2005 between the two companies |
| The term of the commercial agreement expired at the end of 2005 |
| We are currently engaged in discussions with Luxottica to establish a new commercial agreement, but there can be no assurances as to the future of our relationship with Luxottica or the likelihood that we will reach an agreement on acceptable terms |
| During the past several years, Luxottica has acquired certain customers of the Company which, in some cases, has adversely impacted the Company’s net sales to such customers |
| There can be no assurance that the recent acquisitions or future acquisitions by Luxottica, or the lack of a contract with Luxottica, will not have a material adverse impact on the Company’s financial position or results of operations |
| The industries in which we compete are highly competitive; we may not be successful in developing products that enable us to compete effectively |
| The consumer products industries are highly competitive and are subject to rapidly changing consumer demands and preferences |
| The Company competes with numerous domestic and foreign designers, brands and manufacturers of eyewear, apparel and accessories, electronics, footwear and watches, some of which have greater financial and marketing resources than the Company |
| The Company believes that its success depends in large part upon its ability to anticipate, gauge and respond to changing consumer demands in a timely manner and to continually appeal to consumers of the Oakley brand |
| Increased competition in the worldwide premium sunglass, prescription eyewear, apparel and accessories, electronics, footwear and watch industries could reduce the Company’s sales and prices and could adversely affect its business and financial condition |
| Our markets are characterized by frequent product innovation and changing consumer preferences |
| As a result, we could accumulate significant unsold inventory, which may require us to reduce prices and experience reduced sales, margins and consumer acceptance |
| The premium sunglass, prescription eyewear, apparel and accessories, electronics, footwear, goggles and watch industries are characterized by constant product innovation due to changing consumer preferences |
| As a result, the Company believes its success depends in large part on its ability to continuously develop, market and deliver innovative and stylish products at a pace, intensity and price competitive with other brands |
| In addition, the electronics category is generally subject to short product life cycles because of rapid technology innovation |
| As a result, sales of the Company’s products may be subject to rebates, markdown allowances, price reductions and other customer considerations in the relevant distribution channels |
| If the Company fails to regularly and rapidly develop innovative products and update core products or if fashion trends shift away from the Company’s products, or if the Company otherwise misjudges the market for its product lines, the Company may be faced with a significant amount of unsold finished goods inventory, and such conditions could adversely affect retail and consumer acceptance of 12 _________________________________________________________________ [63]Table of Contents the Company’s products, limit sales growth or cause other conditions which could have a material adverse effect on the Company |
| We could be significantly harmed if any of our key personnel were to depart |
| The Company’s operations depend to a great extent on the efforts of its key executive officers and other key qualified personnel, many of whom would be extremely difficult to replace |
| The loss of those key executive officers and qualified personnel may cause a significant disruption to the Company’s business and could adversely affect the Company’s operations |
| We may not be successful in protecting our proprietary rights, which could permit competitors to offer products that compete more effectively and could increase our enforcement costs |
| The Company relies in part on patent, trade secret, unfair competition, trade dress, trademark and copyright law to protect its right to certain aspects of its products, including product designs, proprietary manufacturing processes and technologies, product research and concepts and recognized trademarks, all of which the Company believes are important to the success of its products and its competitive position |
| There can be no assurance that any pending trademark or patent application will result in the issuance of a registered trademark or patent, or that any trademark or patent granted will be effective in thwarting competition or be held valid if subsequently challenged |
| In addition, there can be no assurance that the actions taken by the Company to protect its proprietary rights will be adequate to prevent imitation of its products, that the Company’s proprietary information will not become known to competitors, that the Company can meaningfully protect its right to unpatented proprietary information or that others will not independently develop substantially equivalent or better products that do not infringe on the Company’s intellectual property rights |
| The remainder of our patents will expire starting in 2009 |
| No assurance can be given that others will not assert rights in, and ownership of, the patents and other proprietary rights of the Company |
| Also, the laws of some foreign countries may not protect the Company’s intellectual property to the same extent as do the laws of the United States |
| Consistent with the Company’s strategy of vigorously defending its intellectual property rights, Oakley devotes substantial resources to the enforcement of patents issued and trademarks granted to the Company, to the protection of trade secrets, trade dress or other intellectual property rights owned by the Company and to the determination of the scope or validity of the proprietary rights of others that might be asserted against the Company |
| A substantial increase in the level of potentially infringing activities by others could require the Company to increase significantly the resources devoted to such efforts |
| In addition, an adverse determination in litigation could subject the Company to the loss of its rights to a particular patent, trademark, copyright or trade secret, could require the Company to grant licenses to third parties, could prevent the Company from manufacturing, selling or using certain aspects of its products or could subject the Company to substantial liability, any of which could have a material adverse effect on the Company’s results of operations |
| 13 _________________________________________________________________ [64]Table of Contents We are dependent upon a single source supplier for a major component |
| The loss of this or other major suppliers could materially adversely affect our business |
| In 2005, the Company executed a new exclusive agreement with a supplier that is the Company’s single source for the supply of uncoated lens blanks from which a majority of its sunglass lenses are cut |
| In the event of the loss of this supplier, the Company has identified an alternate source |
| There can be no assurance that, if necessary, an additional source of supply for lens blanks or other critical materials could be located or developed in a timely manner |
| The effect of the loss of this source (including any possible disruption in business) will depend primarily upon the length of time necessary to find and use a suitable alternative source and could have a material adverse impact on the Company’s business |
| If the Company were to lose the source for its lens blanks or other critical materials, it could have a materially adverse effect on the Company’s business |
| Our principal shareholder may exercise control over the Company |
| The Company’s Chairman, Jim Jannard, beneficially owned a majority of the outstanding Common Stock of the Company at December 31, 2005 |
| Jannard has majority control of the Company and the ability to control the election of directors and the results of other matters submitted to a vote of shareholders |
| This concentration of ownership may have various effects, including but not limited to, delaying or preventing a change in control of the Company |
| We have recently acquired, and may in the future acquire, other businesses |
| The integration of these businesses would require substantial time and resources and may not be successful |
| We completed an acquisition in February 2006, announced the signing of a definitive agreement of another acquisition in March 2006 which is expected to close by June 30, 2006, and plan to continue to consider strategic acquisitions now and in the future |
| Management will continue to evaluate potential strategic transactions and alternatives that it believes may enhance shareholder value |
| These potential future transactions may include a variety of different business arrangements, including spin-offs, strategic partnerships, joint ventures, licensing arrangements, restructurings, divestitures, business combinations and equity or debt investments |
| Integrating acquisitions is often costly, and delays or other operational or financial problems may result that interfere with our operations |
| If we fail to implement proper business controls for companies we acquire or fail to successfully integrate these acquired companies in our processes, our financial condition and results of operations could be adversely affected |
| In addition, it is possible that we may incur significant expenses in the evaluation and pursuit of potential transactions and that such transactions may not be successfully completed |
| In these events, we may incur substantial costs without any corresponding benefit |
| Other risks inherent in our acquisition strategy included diversion of management’s attention and resources, failure to retain key personnel and risks associated with unanticipated events or liabilities |
| In addition, in accordance with Statement of Financial Accounting Standards (SFAS) Nodtta 142, “Goodwill and Other Intangible Assets” we are required to test goodwill for impairment at least annually, or more frequently if events or circumstances exist which indicate that goodwill may be impaired |
| As a result of changes in circumstances after valuing assets in connection with acquisitions, we may be required to take write-downs of intangible assets, including goodwill, which could be significant |
| 14 _________________________________________________________________ [65]Table of Contents We are subject to numerous risks and uncertainties arising out of our substantial international operations |
| Sales outside the United States accounted for approximately 47dtta0prca, 47dtta9prca, and 50dtta5prca of the Company’s net sales for the years ended December 31, 2005, 2004 and 2003, respectively |
| There can be no assurance that the Company will be able to maintain or increase its international sales |
| The Company’s international operations and international commerce are influenced by many factors, including: • currency exchange rate fluctuations or restrictions; • local economic and political instability; • wars, civil unrest, acts of terrorism and other conflicts; • natural disasters; • changes in legal or regulatory requirements affecting foreign investment, loans, tariffs and taxes; and • less protective foreign laws relating to intellectual property • changes in the fair value of foreign currency derivative instruments |
| The occurrence or consequences of any of these factors may restrict the Company’s ability to operate in the affected region and/or decrease the profitability of its operations in that region |
| Pursuant to the World Trade Organization (WTO) Agreement, effective January 1, 2005, the United States and other WTO member countries removed quotas from WTO members |
| As the removal of quotas resulted in an import surge from China, the US took action in May 2005 and imposed safeguard quotas on seven categories of goods |
| Exports of each specified product category will continue to be admitted into the United States in the ordinary course until the restraint level for that category is reached, after which further exports will be embargoed and will not be cleared until after January 2006 |
| Additionally, on June 10, 2005, in response to the surge of Chinese imports into the European Union (EU), the EU Commission signed a Memorandum of Understanding (MOU) with China in which ten categories of textiles and apparel will be subject to restraints |
| Certain of the Company’s apparel products fall within the categories subject to the safeguards in the US and the EU, which could adversely affect the Company’s ability to import these products from China and make them available to sell |
| At this time, based on expected US and EU actions and other mitigating factors, the Company believes that such safeguard measures will not have a material impact on its sales in the US and EU, but no assurance can be given with respect to the impact on its sales |
| There can be no assurance that additional trade restrictions will not be imposed on the imports of the Company’s products in the future |
| Such actions could result in increases in the cost of its products generally and may adversely affect the Company’s results of operations |
| We are dependent upon endorsement contracts with athletes and personalities, who may discontinue arrangements that may not be replaced suitable alternatives |
| A key element of the Company’s marketing strategy has been to establish contacts with, and obtain endorsement from, prominent athletes and public personalities |
| These endorsement contracts generally have terms from one to four years |
| The Company also furnishes its products at a reduced cost or without charge to selected athletes and personalities who wear Oakley products without any formal arrangement |
| There can be no assurance that any of these relationships with athletes and personalities will continue, that such contracts will be renewed, and that the athletes and personalities selected will remain popular or successful, or that the Company will be able to attract new athletes to wear or endorse its products |
| If Oakley were unable in the future to arrange endorsements of its products by athletes and/or public personalities on terms it deems reasonable, it would be required to modify its marketing plans and could be forced to rely more heavily on other forms of advertising and promotion, which might not prove to be as effective as endorsements |
| 15 _________________________________________________________________ [66]Table of Contents Possible Volatility of Stock Price The market price for shares of the Company’s Common Stock may be volatile and may fluctuate based upon a number of factors, including, without limitation, business performance, news announcements or changes in general market conditions |
| Other factors, in addition to the those risks included in this section, that may have a significant impact on the market price of the Company’s Common Stock include, but are not limited to: • receipt of substantial orders or order cancellations of products; • quality deficiencies in services or products; • international developments, such as technology mandates, political developments or changes in economic policies; • changes in recommendations of securities analysts; • shortfalls in the Company’s backlog, revenues or earnings in any given period relative to the levels expected by securities analysts or projected by the Company; • government regulations, including stock option accounting and tax regulations; • energy blackouts; • acts of terrorism and war; • widespread illness; • proprietary rights or product or patent litigation; • strategic transactions, such as acquisitions and divestitures; • rumors or allegations regarding the Company’s financial disclosures or practices; • currency exchange rate fluctuations or changes in the fair value of foreign currency derivative instruments; • natural disasters; or • earthquakes concentrated in Southern California where a significant portion of the Company’s operations are based and could result in a disruption of its operations, manufacturing and information systems |
| In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities |
| Due to changes in the volatility of the Company’s Common Stock price, the Company may be the target of securities litigation in the future |
| Securities litigation could result in substantial costs and divert management’s attention and resources |