##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549





Form 10-K





FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13
OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2004


Commission file number: 1-13848





Oakley, Inc.


(Exact name of registrant as specified in its charter)


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

Registrants telephone number, including area code


(949) 951-0991


Securities registered pursuant to Section 12(b) of the
Act:


|                                        |  |                                          
|--------------------------------------- |  | -----------------------------------------
|Title of Each Class                     |  | Name of Each Exchange on Which Registered
|                                        |  |                                          
|Common Stock, par value $0.01 per share |  | New York Stock Exchange                  

Securities registered pursuant to section 12(g) of the
Act:


None


þ o


o


þ o






DOCUMENTS INCORPORATED BY REFERENCE












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TABLE OF CONTENTS  Part IBusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPart IIItem 5. Market for Registrants Common Equity and Related Shareholder MattersItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7a. Quantitative and Qualitative Disclosures about Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on AccountingItem 9A. Controls and ProceduresItem 9b. Other InformationPart IIIItem 10. Directors and Executive Officers of the RegistrantItem 8. Item 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and ManagementItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-KEXHIBIT 10.40EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1    Table of Contents
    Table of Contents  Part I 
 Business General

Oakley, Inc. (referenced here as the Company or Oakley) is a Washington corporation formed
in March 1994 to succeed to the assets and liabilities of Oakley, Inc., a California corporation
that commenced operations in 1977 and began to sell sunglasses in 1984. 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. The Company holds 524 patents and 1,059
trademarks worldwide that protect its designs and innovations. Forward-Looking Statements When used in this document, the words believes, anticipates, expects, estimates,
intends, may, plans, predicts, will or the negative thereof and similar expressions are
intended to identify, in certain circumstances, forward-looking statements.Such statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements, including but not limited to growth and strategies, future
operating and financial results, financial expectations and current business indicators are based
upon current information and expectations and are subject to change based on factors beyond the
control of the Company. Forward-looking statements typically are identified by the use of terms
such as may, will, should, might, believe, expect, anticipate, estimate and similar
words, although some forward-looking statements are expressed differently. 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 but not limited to:
risks related to the sale of Oakley Thumpand new product introductions in the Companys
electronics category;the Companys ability to maintain approved vendor status and continue to
receive product orders from the U.S. military; the Companys ability to manage rapid growth; risks
related to the limited visibility of future sunglass orders associated with the Companys at once
production and fulfillment business model; 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
Luxottica Group S.p.A, which, as a major competitor, 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; a weakening 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 and licensing
arrangements without adversely affecting operations and the success of such initiatives; 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 1
    Table of Contents  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 impact
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 a significant portion of the Companys operations are
based; the Companys ability to identify and execute successfully cost control initiatives; the
Companys ability to continue to grow its retail outlets; and other risks outlined in the Companys
SEC filings, including but not limited to the Annual Report on Form 10-K for the year ended
December 31, 2003 and other filings made periodically by the Company. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of the date hereof.
The Company undertakes no obligation to update this forward-looking information. Nonetheless, the
Company reserves the right to make such updates from time to time by press release, periodic report
or other method of public disclosure without the need for specific reference to this press release.
No such update shall be deemed to indicate that other statements not addressed by such update
remain correct or create an obligation to provide any other updates. The Company makes available through its corporate website at www.oakley.com, free of charge, its
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports as soon as reasonably practicable after such reports are filed or
furnished to the Securities and Exchange Commission (SEC). Also available at the Companys website are the following corporate governance materials: Code of
Business Conduct and Ethics; Code of Ethics for Chief Executive and Senior Financial Officers;
Corporate Governance Guidelines; and Charters of the Audit Committee, Compensation and Stock Option
Committee and Nominating and Corporate Governance Committee. Any of the foregoing materials may
also be obtained, free of charge, by written request to: Corporate Secretary, Oakley, Inc., One
Icon, Foothill Ranch, California 92610. Product Design and Development Oakley is a consumer products company that uses innovative technology for the design and
development of sunglasses, prescription eyewear, apparel and accessories, footwear, electronics,
watches, and goggles. To date, the Company has designed these categories using its own resources
in order to preserve brand image, which the Company believes will bring greater respect and demand
for Oakleys products over the long term. State-of-the-art technology maintains efficiency, precision and speed in the Companys product
development cycle. Stereolithographic computer modeling is combined with CAD/CAM liquid-laser
prototyping to create fully detailed prototypes of eyewear, footwear and accessories. Rapid
iteration of working models allows for extensive design testing before final production. After the
development stage is complete, the finalized sculpture can be used directly in preparation of
production tooling. The Companys products undergo extensive testing throughout development. The American National
Standards Institute (ANSI) and the American Society for Testing and Materials (ASTM) have
established specific testing criteria for eyewear. These tests analyze product safety and provide
quantitative measure of optical quality, UV protection, light transmission and impact resistance.
In addition, the Company performs a broad range of eyewear coatings durability testing and
mechanical integrity testing that includes extremes of UV, heat, condensation and humidity. With
strict guidelines from the ASTM and other industry authorities, Oakley footwear and apparel are
tested to ensure quality, performance and durability that meet or exceed these standards. Research
and development expense during the years ended December 31, 2004, 2003 and 2002 were $16.0
million, $14.3 million and $16.0 million, respectively. 2
    Table of Contents  Eyewear Technology and Products Among the Companys most important patents are those which guard its achievements in
dual-spherical lens technology and the associated optical advances, and innovations in frame design
and functionality. The proprietary technologies employed in lens cutting, etching and coating, as
well as the Companys significant investment in specialized equipment, are matched with exclusive
formulations of production materials to achieve the superior optical quality, safety and
performance of Oakley eyewear. Oakleys patented XYZ Optics® represents a major breakthrough in lens technology.
Precise geometric orientation provides optical correction on three axes, not just two. The
resulting lens allows light to be received over essentially the full angular range of vision while
minimizing distortion caused by disparate refraction along that range  an advance that
increases clarity for all angles of view. This allows for wrapped, raked-back lens configurations
that enhance peripheral vision and protection against sun, wind and side impact. High-performance sports application eyewear featuring Oakleys patented POLARIC
ELLIPSOID lens geometry (M Frame®, Pro M Frame®and
Zeros®) have demonstrated superior optical clarity when compared to similar products of
principal competitors. Developed specifically for toroidal lenses (which use different
measurements for top-to-bottom vs. side-to-side curvature), this proprietary geometry allows the
Company to produce single-lens sports shields that provide enhanced coverage and protection while
reducing distortion at all angles of vision. Although the Companys patent relating to this
proprietary geometry expired in 2004, the expiration of this patent is not expected to have a
material impact on the Company. See Intellectual Property below. Plutonite® lens material and Iridium® lens coatings are among the Companys
most prominent advances in eyewear. Plutonite® is a proprietary material used to
produce lenses of exceptional optical clarity. The material inherently blocks 100% of all UVA,
UVB, UVC and harmful blue light. Rendered as lenses of extremely high durability and low weight,
it offers superior impact protection when matched with the Companys eyewear frames.
Iridium® is a metallic oxide that improves contrast and thereby enhances perception of
detail. A full spectrum of available Iridium® lens coatings allows the wearer to tune
transmission for any given light condition. The coating has become very popular for eyewear used
in demanding sports such as skiing and cycling, and in high altitude use. In 1999, the Company introduced a polarized lens choice for consumers. Unlike most polarized
lenses, which stack multiple layers together using adhesive which compromises optical clarity,
durability and lens integrity, Oakley uses a patented lens technology to maintain precision optics
by molecular fusing of the polarized filter between thin Plutonite® surfaces. Oakley then
injection molds liquid Plutonite® onto the filter to create a true polarized lens with patented XYZ
Optics® and superior optical clarity. The Company continues to raise the bar of performance with innovative engineering in frame design.
A proprietary three-point fit serves to retain optical alignment while eliminating the discomfort
of ordinary frames that mount with unbalanced pressure points. The Wire® frames are
rendered from C-5 a durable, lightweight alloy of five metallic compounds. O Matter®
frames are composed of a lightweight synthetic that retains durability while allowing critical
flex. As the only 3-D sculptured, hypoallergenic, all-metal frames on earth, X Metal®
is a family of eyewear named for a proprietary metal blend that exhibits an extraordinary
strength-to-weight ratio. X Metal® frames are produced with a unique metallurgical
process and are designed to utilize breakthroughs in architectural mechanics that allow the
consumer to tailor the fit. Gross sunglass sales for 2004 were $314.5 million. Retail pricing for the Companys O Matter®
sunglass ranged from US$55 to US$250; the Wire® styles ranged from US$120 to US$315; the Magnesium
styles ranged from US$215 to US$235 and the X-Metal® styles ranged in retail price from US$275 to
US$400. 3
    Table of Contents  Prescription Eyewear Technology and Products In March 2001, the Company released its first line of ophthalmic-specific frames and currently
has a comprehensive prescription program encompassing both ophthalmic frames and corrective lenses.
The ophthalmic specific frame collection is a combination of sculpture, fit and function. There
are several shapes and sizes from which a consumer may choose and a variety of materials used C-5,
X Metal®, O Metaland Rx O Matter®.As part of the Companys prescription lens offering, the
Company sells a Plutonite® single lens product that is ideally suited for the sports enthusiast.
The Rx M Frame®utilizes a proprietary technology that enables the wearer to have the ultimate
protection and widest range of visual acuity. To complement the single lens product, the Company
also offers a dual lens program that is an ideal choice for the consumer who is interested in a
more traditional eyewear frame or one of Oakleys many high-wrap sunglass frames. Oakley
Plutonite®prescription lenses are surfaced and finished in the Companys prescription lens
processing labs in the United States, Ireland and Japan. This control over the lens processing
operation allows the Company to control the quality of the lens and process it within tolerances
that exceed industry standards. The Companys sunglass and clear prescription lenses are offered for any prescription-ready or
sunglass frame that eye care professionals have on display in their stores. The Company offers 19
colors from which the consumer may choose, including polarized, Iridium®and clear options. Single
vision and progressive lens designs are available. Prescription eyewear gross sales were $47.8
million for 2004. Approximately 77 percent of the Companys prescription eyewear sales were
generated by the prescription eyewear frame line, which now consists of 21 styles with retail
prices ranging from approximately US$125-US$295. The Companys prescription lenses accounted for
the remaining 23 percent of prescription eyewear sales with retail prices ranging from
approximately US$165-US$405. Apparel Technology and Products Addressing the apparel needs of men and women, the Company has invested in a world-class lab
that allows for in-house testing during research and development of garment products. Digital
technologies allow the Company to design and create in three dimensions. All pieces are engineered
to fit the body as contoured spatial forms  not flat cutouts  so articulation and fit can be
optimized. The Company utilizes core technologies to build technical apparel for professional
competition, and thereby achieves crossover into technical lifestyle. Innovations that enhance
product durability, performance and comfort for professional athletes are then made available to
the general public. The Company released 600 apparel styles during 2004. Spring apparel releases for 2004 totaled 233
new styles and fall 2004 apparel releases totaled 367 new styles. The Company expanded its
lifestyle product line and its womens product line. The womens line totaled 241 pieces and mens
totaled 359 pieces. Categories include: golf, mountain bike, surf, lifestyle, lifestyle athletic,
fleece and tees. At year end, the Company had a total of 115 accessory styles including 43 which
were new for 2004. Gross sales of apparel and apparel accessories were $94.9 million for the full year, with the
largest components being fleece, lifestyle and outerwear products, together with substantial sales
of the Companys accessories line. 4
    Table of Contents  Footwear Technology and Products With continued advancement in the design and manufacturing of footwear, the Company is
utilizing proprietary Net Shape technology to create shoes with superior fit throughout
the full range of motion. Instead of creating parts separately and forcing their consolidation,
true unibody construction is achieved with CAD/CAM engineering, allowing components to form an
integrated system. A design change in any part of the shoe is seamlessly integrated into other
components and finalized data is passed directly to production equipment. This translates to
improved functionality and comfort, as well as enhanced durability by preventing weaknesses that
could result from misaligned or mismatched components. Additionally, twenty new footwear styles were released in the year 2004. To leverage prior season
success in the sandals, golf, and military/industrial categories, the release of new styles like
the Split Smoke® sandal, Overdrive golf shoe, and Oakley Race Boot
were emphasized.Each of these products incorporates features that reinforce the Companys
position as a true innovator of technically advanced products. Seven new introductions in the
lifestyle category allowed the Company to reach the highly desirable young adult consumer via
existing action sports channels of distribution. Footwear gross sales were $32.2 million for the full year, with product retail prices ranging from
US$40-US$400. Electronic Technology and Products In July 2004, the Company announced the introduction of Oakley Thump, the worlds first
performance eyewear combining patented optics with an internally integrated MP3 music player. The
Company launched Oakley Thump in November for the 2004 holiday season under an exclusive
distribution arrangement with Circuit City Stores, Inc. for the consumer electronics channel.
Oakley Thump is also offered by Oakleys own O Stores® , Iacon sunglass specialty stores,
online at Oakley.com and through limited specialty retailers. Oakley Thump features pivoted speakers mounted to the eyewear frame with miniature extendible
booms. Volume, song selection and power are controlled via a convenient and intuitive five-button
interface located on the earstem. The new device plays MP3, WMA (DRM  both enabled and disabled)
and WAV file formats. Its 128MB or 256MB NAND flash memory minimizes power expenditure. File
transfer is completed with a simple drag & drop in Microsoft Windows® and Apple OS X operating
systems via a high-speed USB 2.0 connection that is backward compatible with USB 1.1. Although
available storage capacity varies, the device also can store non-song file formats of virtually any
kind, making it a convenient means of backing up important files and transferring files between
computers. The electronics are fully integrated within a lightweight O Matter® frame. The flip-up
lenses are raked-back with 8.75 base lens curvature, maximizing peripheral view and improving
protection against sun, wind and side impact. Oakleys patented XYZ Optics® maintains
precise clarity at all angles of vision, even at the lens periphery. Gross sales for the electronics category were $19.8 million for the full year related to the
introduction of Oakley Thump and its related accessories, with retail pricing from US$395 to
US$495. 5
    Table of Contents  Timepiece Technology and Products The Company offers a comprehensive line of premium timepieces with performance accuracy that
utilizes up to ten-jewel high precision Swiss movement. The Company currently produces true analog
quartz systems and a precision analog chronograph. In 2004, the Company remained focused on the
development and marketing of analog timepiece products with design emphasis on sculpture and
styling. Watch gross sales were $11.9 million for 2004, a year in which the Company continued to realign its
product development and sales efforts to focus on the design and distribution of its premium analog
timepiece lines. The Company achieved strong sales with the Blade wristwatch (introduced in May
2004), the Judge wristwatch (introduced in September 2004), and the continued strength of the GMT
and Detonator® timepiece offerings. The Companys wristwatch products are retail priced from
US$120 to US$1,500. Innovations in the Companys timepiece products range from the World City hand of GMT(a feature
that displays local time automatically, anywhere on earth), to the intuitive five-hand display of
Judge, a true chronograph. The Company utilizes 3-D CAD/CAM engineering and Computer Numeric
Control (CNC) machining to optimize fit and comfort, and to render the aesthetics of sculptural
metal. Durability is maximized with premium materials such as lightweight titanium, surgical grade
stainless steel and sapphire, the hardest crystal used in watchmaking. Goggle Technology and Products The culmination of more than 20 years in the goggle business has resulted in what the Company
believes to be the worlds most optically correct goggles for motocross, mountain bike, snow and
water recreation. Available in a number of styles, the Companys goggles include features such as
scratch-resistant LexanÒ lenses, conical frames and multi-layered face foams.
Updated in 2000, the Companys MX O FrameÒ continues to improve upon its
championship legacy in motocross. The A FrameÒ was the worlds first optically
correct dual-lens snow goggle and is engineered to optimize protection, as well as the clarity and
range of peripheral and downward vision. A triple layer of face foam insulates and cushions the
contact surface for the ultimate in thermal shielding and comfort. In 2002, the Company introduced
the Wisdom goggle, featuring increased lens sizing for greater visual range and interchangeable
strap connections to accommodate helmets. In 2004, the Company introduced a polarized lens for use
with its A FrameÒ goggle. The Companys goggle products as of December 31, 2004 target snow, motocross and water sports with
retail prices ranging from $29-$205. Goggle gross sales were $39.2 million for the full year,
driven by continued momentum of the Wisdomsnow goggle line and increased military sales. Face Shields and Hockey Gloves In June 1997, Oakley acquired One Xcel, Inc., a company that designed what the Company
believed to be the only optically correct protective face shield available for use with hockey and
football, thereby augmenting Oakleys own patent rights in this area. In 2001, the Company
discontinued the One Xcel brand name for football shields and began marketing those products under
the Oakley name. The Company transitioned its hockey shield products to the Oakley name in 2002
and also began marketing hockey gloves featuring the Oakley logo. In January 2003, the Company
entered into a license agreement with ITech, which subsequently merged with Mission Hockey to
become Mission/ITech. The Companys license agreement with Mission/ITech provides that
Mission/ITech may make and sell an ITech branded hockey face shield that utilizes Oakleys
patented technology, contingent upon paying Oakley a per-unit royalty. In December 2004, Oakley
entered into an exclusive distribution agreement with Sport Maska Inc., by which Sport Maska became
the Companys exclusive, worldwide distributor for hockey face shields. The distribution agreement
is expected to increase the Companys exposure in key markets, 6
    Table of Contents  tap new revenue streams, and allow the Company to focus on its core products. The Company licensed
none of its patent rights under its face shield patents to Sport Maska, and will continue to make
the Oakley hockey face shields, which it will sell to Sport Maska. The distribution agreement with
Sport Maska will run through December 31, 2015. The Company has retained all rights to the use,
manufacture, and sale of football shields that utilize its patented technology. Product Line and Brand Extension Oakley intends to introduce product line extensions and new product lines in the future and
develop innovations targeted to attract additional consumers to its global brand. To take
advantage of unique opportunities, the Company may, from time to time, manufacture private-label or
other sunglasses for other companies. The Company may also market and sell sunglasses under brand
names other than Oakley. The Company may also consider acquisition opportunities that will
enhance or complement the brand or add breadth to Oakleys product offerings. In addition, the
Company has licensed, and may determine to further license, its intellectual property rights to
others in optical or other industries. In September 2004, the Company announced that it signed an exclusive worldwide licensing agreement
with Fox Racing, Inc. (Fox) for sunglasses, goggles and prescription eyewear. As the exclusive
licensee in cooperation with Fox, Oakley will be responsible for the design, manufacturing,
marketing and distribution of these products worldwide. Manufacturing The Companys headquarters and principal manufacturing facility is located in Foothill Ranch,
Orange County, California, where it assembles and produces most of its eyewear products. The
Company uses state-of-the-art manufacturing practices, such as cellular eyewear production, which
allow for quick response to customer demand. The Company owns, operates and maintains most of the
equipment used in manufacturing its eyewear products. In-house production can contribute
significantly to gross profit margins and offers protection against piracy. It further enables the
Company to produce products in accordance with its strict quality-control standards. Components
and processes that are unlikely to add significant value are contracted to outside vendors. The
Company utilizes third-party manufacturers to produce its internally designed apparel, electronic
products, footwear, timepieces and certain goggles. Much of the equipment used in the manufacture of Oakley products has been specially designed and
adapted for the processes used by the Company. By manufacturing its own products, the Company has
the opportunity to experiment with new materials and technologies which can lead to important
discoveries, such as its patented Iridium® coating technology (which the Company
believes is one of the most sophisticated coating processes in the industry). Proprietary
manufacturing equipment and methodologies are protected by special security measures employed at
the Companys manufacturing facilities. The Company has a second manufacturing facility located in
Dayton, Nevada, where it produces all of its X-Metal® eyewear products. In January 2001, the Company began surfacing prescription lenses at the Foothill Ranch, California
facility with a prescription lens lab designed to achieve quick turnarounds, better quality control
and higher optical standards. In June 2002, a second prescription lens manufacturing facility was
opened in Ireland, which provides prescription lenses to Europe. In September 2004, a third
prescription eyewear manufacturing lens facility in Japan began shipping products to service the
Japanese market. The Company has built strong relationships with its major suppliers. With most suppliers, it
maintains agreements that prohibit disclosure of any of the Companys proprietary information or
technology to third parties. Although the Company relies on outside suppliers for most of the
specific molded components of its glasses, goggles, timepieces and footwear, the Company retains
substantial ownership of all molds used in the production of the components. The Company believes
that most components can 7
    Table of Contents  be obtained from one or more alternative sources within a relatively short period of time. In
addition, to further mitigate risk, the Company has developed an in-house injection molding
capability for sunglass frames. The Company relies on individual sources for the supply of several components, including the
uncoated lens blanks from which virtually all of the Companys lenses, with the exception of
polarized lenses, are cut. In the event of the loss of the source for lens blanks, the Company has
identified alternate sources that may be available. The effect of the loss of any of these sources
(including any possible disruption in business) will depend primarily upon the length of time
necessary to find a suitable alternative source and could have a material adverse effect on the
Companys business. There can be no assurance that, if necessary, an additional source of supply
for lens blanks can be located or developed in a timely manner. In March 1997, the Company entered into a reciprocal exclusive dealing agreement with Gentex, its
lens blank supplier, under which Oakley has the exclusive right to purchase, from such supplier,
decentered sunglass lenses and a scratch-resistant coating developed for use with such lenses. In
return, Oakley has agreed to purchase all of its decentered lens requirements, subject to certain
exceptions, from such supplier. The Company has expanded its in-house lens blank production
capabilities to manufacture some portion of its lenses directly. The Company has notified Gentex
of the termination of this agreement effective March 2006 and is renegotiating a new contract under
terms it believes will be more favorable to the Company. The Companys business interruption
policy reimburses the Company for certain losses incurred by the Company as a result of an
interruption in the supply of raw materials, including uncoated lens blanks, resulting from direct
physical loss or damage to a suppliers premises. Subject to certain exceptions, the amount of
coverage available for each affected supplier ranges from $3 million to $20 million. However,
there can be no assurance that such policy will be sufficient to compensate the Company for all
losses resulting from an interruption in the supply of raw materials. Distribution The Company sells Oakley eyewear in the United States through a carefully selected account
base that fluctuates between 8,500 and 10,000 accounts, and 15,000 to 17,000 doors, depending on
the seasonality of the Companys 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 department stores. Oakley
Thump is also offered by Oakleys own O Stores®, Iacon sunglass specialty stores, online at
Oakley.com, Circuit City stores and through limited specialty retailers. Unlike many of its
competitors, the Company has elected not to sell its current season products through discount
stores, drug stores or traditional mail-order companies. The Companys products are currently sold in over 100 countries outside the United States. In most
of continental Europe, marketing and distribution are handled directly by the Companys subsidiary
Oakley Europe, located in Paris, France, which is staffed by approximately 194 employees who
perform sales, sports marketing, advertising, customer service, shipping and accounting functions.
Since 1995, the Company has been selling Oakley products to Mexico and Central America on a direct
basis through its subsidiary, Oakley Mexico. In 1996, the Company acquired its exclusive
distributor in the United Kingdom (Oakley UK) and established an office in South Africa (Oakley
Africa) and began selling to those markets on a direct basis in the fourth quarter of 1996. In
May 1997, the Company began selling to Japan (Oakley Japan) on a direct basis through its own
operation. In April 1998, the Company acquired the Oakley division of its exclusive Canadian
distributor, enabling the Company to market and sell its products on a direct basis in Canada. In
November 1999, the Company acquired its exclusive Australian distributor and thereby assumed direct
responsibility for distribution of Oakley products in that market and in New Zealand. In June
2000, the Company assumed direct responsibility for distribution of Oakley products in the Austrian
market and opened a new office known as Oakley GmbH in Munich, Germany to serve the German
marketplace. In February 2002, the Company established an office in Brazil and began shipping
products to retailers there in the third quarter of 2002. 8
    Table of Contents  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. They agree to respect the marketing
philosophy and practices of the Company and to receive extensive training regarding such
philosophies and practices. For information regarding the Companys operations by geographic
region, see Note 12 in Notes to Consolidated Financial Statements. The Company requires its retailers and distributors to agree not to resell or divert Oakley
products through unauthorized channels of distribution. Products shipped from Oakleys
headquarters are marked with a tracking code that allows the Company to determine the source of
diverted products sold by unauthorized retailers or distributors. When Oakley products are found
at undesirable locations or unauthorized retailers, the Company purchases samples and, using the
tracking device, determines the source of the diversion. The Company then estimates the potential
damage to the Companys retail franchise and image and may require that the offending account
repurchase the diverted product. In certain instances, the Company may terminate the account.
When an existing account has been terminated, the Company may repurchase its own products from the
retailer to protect the Oakley image and the exclusivity enjoyed by the Companys retail account
base. The Company employs similar anti-diversion techniques in overseas markets. In August 2001, the Company established the Oakley Premium Dealer program to identify and reward
retailers that demonstrate superior support of the Oakley brand by, among other things,
consistently maintaining a broad assortment of products and quickly embracing the Companys latest
innovations. Retailers earning the Oakley Premium Dealerdesignation are eligible for cooperative
marketing and advertising support, exclusive products, dealer locator prioritization on Oakleys
website and favorable tagging in Oakleys annual print and outdoor advertising campaigns. At December 31, 2004, the Company operated 75 department store concept shops throughout the country
at retailers Dillards, Macys East, Macys West and Parisian. In addition to these locations, the
Company sells its footwear through Nordstrom. Advertising and Promotion Oakley retains significant control over its promotional and advertising programs and believes
it is able to deliver a more targeted consistent and well-recognized advertising message at
substantial cost savings compared to complete reliance on outside agencies. The Companys print
advertising consists of lifestyle, technical and athlete association campaigns highlighting its
products. While the Company uses traditional marketing methods in some instances, it attributes much of its
success to the use of less conventional methods, including sports marketing, grassroots sports
events, targeted product allocation and in-store display aids. The Company has used sports
marketing extensively to achieve consistent, authentic exposure that equates to strong brand
recognition on a global level. Oakley utilizes the exposure generated by its athletes as an
editorial endorsement of product performance and style, as opposed to a commercial endorsement. 9
    Table of Contents  The sports marketing division consists of 26 sports marketing managers domestically, with an
additional 28 managers positioned in direct offices and with distributors internationally. These
experts specialize in multiple sport and entertainment market segments and niches. The mission of
the Companys sports marketing experts is to identify and develop relationships with top athletes
and opinion leaders in the sports and entertainment industry, negotiate their endorsement
agreements and help them serve as ambassadors by educating them on the performance functions and
benefits of Oakley products. This strategy has proven to gain editorial exposure that ultimately
brings awareness and authenticity to the brand. The diverse knowledge of Oakleys sports marketing
experts earns the respect of pro athletes especially in youth lifestyle sports such as surf, skate,
motocross and snowboard, yet continues to successfully maintain leadership in more mainstream
sports such as golf. Another level of marketing is brand marketing. The Company will continue to support its products
through targeted consumer efforts. Advertising will be leveraged to drive eyewear, wearable
electronics, footwear, apparel and watch sales and will be used to introduce consumers to the
Companys other product categories. The 2005 campaign will include an integration of print media,
outdoor media, in-mall billboards and point-of-sale displays. Direct marketing programs will focus on O Store®,Iacon and Oakley Premium Dealers (OPD) and will
overlay the base advertising plans used to engage consumers during key selling periods. These
efforts are complemented by multiple brand catalogs, enhancements to the Companys website and
Internet tie-ins. Public relations programs are designed to complement advertising campaigns and
are centered on securing editorial exposure for new product inventions and technologies. Internationally, the Company retained BJK&E Media in London, England in 2001 to perform similar
services for the Companys United Kingdom subsidiary. For the remainder of the Companys foreign
offices, media services are retained in-house. Retail Operations At December 31, 2004, the Company operated 27 Oakley retail stores under the O
Store® name that offer a full range of Oakley products and feature marketing
enhancements to support the brand. In addition to these full-priced retail venues, the Company
operated nine Oakley Vaults®, the Companys outlet store concept, featuring discontinued and excess
seasonal merchandise in addition to newer products priced at full retail. The Companys retail
stores comprise high profile locations positioned in some of the top malls throughout the country.
The current roster includes stores located in the states of Florida, Texas, Colorado, California,
Arizona, North Carolina, Hawaii, Minnesota, Nevada, Illinois, Washington, Louisiana and Virginia.
The average size of each store is approximately 2,700 square feet. The Company prides itself on
educating the retail staff with extensive product and sales knowledge that support the sale of the
Companys products in its stores. On October 31, 2001, the Company completed the acquisition of Iacon, Inc. (Iacon), a sunglass
retailing chain headquartered in Scottsdale, Arizona. Iacon operates a chain of mall-based
sunglass specialty stores, using five separate retail concepts, under the names Sunglass Designs,
Sporting Eyes, Occhiali da Sole, Sunglass Cluband Oakley Iconlocated throughout the United
States, with a concentration primarily in the sunbelt regions. Oakley is the leading brand sold in
these multi-brand specialty sunglass boutiques. As of December 31, 2004, Iacon had 83 retail
stores. The Company intends to expand these retail concepts across the United States. 10
    Table of Contents  The Company opened its first licensed O Store®in December 2003, located in Santiago Chile,
making it the sixth international Oakley retail location. Oakley currently operates through its
South Pacific subsidiary, an O Store®in Torquay, Australia opened in November 2001 near the
Companys headquarters there; two Oakley Vaults®that opened under licensing agreements in March
2002 in Portsmouth and in April 2003 in York, United Kingdom; an Oakley Vault®that opened in
December 2003 under license in Calais, France; and an Oakley Vault®opened in April 2002 that is
operated by Oakleys South African subsidiary and is located near the Companys South African
headquarters there in Port Elizabeth, South Africa. In 2004, the Company opened two licensed O
Store®locations: one in Barcelona, Spain, opened in March 2004 and one in Sydney, Australia,
opened in November 2004. Additionally, the Company opened two new Oakley Vaults®:one in March
2004 under a licensing agreement in Parndorf, Austria and one in April 2004 that is operated by
Oakleys Japanese subsidiary. Internet Strategy and Systems The Company continues to execute a comprehensive Internet channel strategy designed to allow
more consumers to purchase Oakley products as efficiently as possible. The program utilizes the
World Wide Web as a complementary channel to retail and international distribution. Ultimate goals
include increased consumer awareness of the Oakley brand, improved customer service and increased
sales through retail and E-commerce channels by harnessing the unique interactive capabilities of
the Internet. The Companys corporate website (www.oakley.com) is fully e-commerce capable. The site
features a broad selection of Oakley eyewear, footwear, apparel, electronics, accessories and
watches for delivery to U.S., Canadian, Japanese and Australian customers. The site also features
a prominent dealer-locator function, including mapping, that directs consumers to local retailers
and highlights Oakley Premium Dealersthat showcase the widest selection of Oakley products. The Company generated approximately $14.1 million of direct internet gross sales and associated
telesales in 2004, an increase of $2.6 million, or 22.6 percent, over 2003. The Company has implemented SAPs order processing, manufacturing, inventory management,
distribution and finance modules in its key worldwide locations in the United States and most major
international offices. This has created an efficient, streamlined supply-chain process capable of
providing same-day or next-day shipping of in-stock orders. Principal Customers During 2004, net sales to the Companys largest ten customers, which included four
international distributors, accounted for approximately 18.9% of the Companys total net sales.
Net sales to one customer, Luxottica Group S.p.A. and its affiliates (Luxottica), accounted for
7.6% of the Companys 2004 net sales. Luxottica acquired Sunglass Hut International, the largest sunglass specialty retailer in the world
(referred to herein as Sunglass Hut or Watch Station), 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. In
December 2004, the Company and Luxottica entered into a new commercial agreement that establishes
the commercial terms applicable for 2005 between the two companies. There can be no assurances as
to the future of the relationship between the Company and Luxottica or as to the likelihood that a
new contract beyond 2005 will be agreed to by the parties. In October 2004, Luxottica acquired
Cole National Corporation (Cole), one of the largest optical retailers and chain providers of
managed vision care services worldwide. The Company currently sells to a small portion of Coles
retail locations and sales to this customer have been immaterial to the 11
    Table of Contents  Companys operations. 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 that offer some of the Companys products and
sales to this customer have been immaterial to the Companys operations. In September 2003,
Luxottica acquired 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 US$0.7
million based on the average exchange rate for 2003). These sales exclude a limited amount of
sales generated through the Companys international distributors. 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. During 2004, sales to the U.S. military and other governmental agencies accounted for 4.6% of the
Companys 2004 net sales. Such sales grew $10.3 million to $27.1 million, a 61 percent increase
over 2003. This increase was primarily attributed to sales of combat eyewear to the U.S. Army. Intellectual Property The Company aggressively asserts its rights under patent, trade secret, unfair competition,
trademark and copyright laws to protect its intellectual property, including product designs,
proprietary manufacturing processes and technologies, product research and concepts and recognized
trademarks. These rights are protected through patents and trademark registrations, the
maintenance of trade secrets, the development of trade dress, and where appropriate, litigation
against those who are, in the Companys opinion, infringing these rights. The Company has filed
suit against a number of its competitors to enforce certain of the Companys patents and
trademarks. While there are no guarantees in a litigation setting, the Companys legal team
aggressively seeks to protect the Companys patents and trademarks in an attempt to fully protect
the Companys proprietary information and technologies. The Company intends to continue asserting
its intellectual property rights against infringers. The Company has developed a reputation in the
consumer products industry as a vigorous defender of its intellectual property rights; this
reputation acts as a deterrent against the introduction of potentially infringing products by its
competitors and others. The following table reflects data as of December 31, 2004 concerning the Companys intellectual
property : Number of Utility/Design Patents
    
    
    Number of TrademarksIssued
    
    
    Pending
    
    
    Issued
    
    
    PendingUnited States
    
    168
    
    
    33
    
    
    149
    
    
    44International
    
    356
    
    
    89
    
    
    910
    
    
    143
 Over the next four years, 28 U.S. patents and 58 international patents that the Company
currently holds will expire. Although the Company may continue to use the technology underlying
some of these patents, the expiration of these patents is not expected to have a material impact on
the Company for a variety of reasons, including that many of the patents relate to the design or
production of products that are either no longer produced by the Company or do not represent a
significant portion of the Companys revenues. In the case of the Toroidal Lens (POLARIC
ELLIPSOID) patent, which expired in 2004, advancements in optical properties arising from the
Companys XYZ Optics® patents, the Companys dominant position in the sports eyewear segment and
the adoption of alternative lens geometries by the Companys competitors reduce the likelihood of
any negative financial consequences from the expiration of this patent. In addition, the Company
utilizes other proprietary technologies and precision manufacturing processes in the production of
its products which also reduce the risks associated with the 12
    Table of Contents  expiration of the Companys patents. The remainder of the Companys patents will expire on dates
from 2009 and after. The Company dissuades counterfeiting through the active monitoring of the marketplace by its
anti-counterfeiting personnel and other employees and through the services provided by outside
firms that specialize in anti-counterfeiting measures. The Companys sales representatives,
distributors and retailers have also proved to be effective watchdogs against infringing products,
frequently notifying the Company of any suspicious products and assisting law enforcement agencies.
The Companys sales representatives are educated on Oakleys patents and trade dress, and assist
in preventing infringers from obtaining retail shelf space. Competition The Company is a leading designer, manufacturer and distributor of eyewear in the sports
category of the nonprescription eyewear market. Within this category, the Company competes with
mostly smaller sunglass and goggle companies in various niches of the sports market and a limited
number of larger competitors, some of whom have greater financial and other resources than the
Company. Some of these niche markets are susceptible to rapid changes in consumer preferences,
which could affect acceptance of the Companys products. Oakley believes the vigorous protection
of its intellectual property rights has limited the ability of others to compete in this segment.
Accordingly, the Company believes that it is the established leader in this segment of the market,
although several companies, including Luxottica, Marchon, Safilo and various smaller niche brands,
compete with the Company for shelf space. The Company also competes in the broader non-sports, or recreational, category of the sunglass
market, which is fragmented and highly competitive. The major competitive factors include fashion
trends, brand recognition, marketing strategies, distribution channels and the number and range of
products offered. A number of established companies, including Luxottica, compete in this wider
market. In order to retain its market share, the Company must continue to be competitive in
quality and performance, technology, method of distribution, style, brand image, intellectual
property protection and customer service. In April 2001, Luxottica acquired Sunglass Hut, the
Companys largest customer. See Principal Customers. The Company-owned Iacon chain of sunglass specialty stores competes primarily with mall-based
sunglass specialty retailers, the largest being Sunglass Hut, which is owned by competitor
Luxottica. Within the athletic footwear market, the Company competes with large, established brands such as
Nike, FootJoy, Reebok, Adidas and Timberland, among others, which have greater financial and other
resources than the Company. In addition to these dominant brands, the Company also competes with
smaller niche brands, such as Vans, Reef and Teva, among others. The Companys technical apparel
outerwear competes primarily with Burton, North Face, Columbia Sportswear and Patagonia. The
Companys sports and lifestyle apparel competes primarily with Nike, Quiksilver, Billabong,
Ashworth and various smaller niche brands. The Companys luxury timepiece products compete in the upper-middle and luxury segments of the
watch market (respectively categorized by the retail price points $300-$900 and $1,000 plus) which
is dominated by established Swiss brands, including Rolex, Breitling, Omega, TAG-Heuer, Movado,
Rado and Hamilton. The Companys performance watches compete in the middle segment of the watch
market which is characterized by sports watches from Nike, Adidas, Timex and Casio. In addition,
the Companys performance watches compete with other fashion brands from the Swatch Group, Swiss
Army and Fossil with retail price points of $50-$299. Domestic and Foreign Operations See Note 12 in Notes to the Consolidated Financial Statementsfor discussion regarding
domestic and foreign operations. 13
    Table of Contents  Employees The Company believes that its employees are among its most valuable resources and have been a
key factor in the success of Oakleys products. As of December 31, 2004, the total count of
worldwide full-time regular employees was 2,612. In addition, the Company may utilize as many as
682 temporary personnel from time to time, especially during peak summer months. The Company is not a party to any labor agreements and none of its employees are represented by a
labor union. The Company considers its relationship with its employees to be good and has never
experienced a work stoppage. 
 Item 2. 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 states of Arizona and
Washington. The Company owns a business office and warehouse of approximately 18,000
square feet in Mexico City to support operations there. The facility was first occupied
in late 1998. Since late 2000, the Company has leased approximately 150,000 square of space in
Ontario, California to support the expanding distribution needs of its footwear and apparel lines.
This space was recently expanded to 186,000 square feet. 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. 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. Submission of Matters to a Vote of Security Holders None. 14
    Table of Contents  Part II 
 Item 5. Market for Registrants Common Equity and Related
Shareholder Matters The Companys common stock, par value $0.01 per share (Common Stock), began trading on the
New York Stock Exchange (NYSE) on August 10, 1995 upon completion of the Companys initial public
offering (trading symbol OO). As of March 9, 2005, the closing sales price for the Common Stock
was $13.19. The following table sets forth the high and low sales prices for the Common Stock for
each quarter of 2004 and 2003 on the NYSE Composite Tape: High
    
    
    Low2004First Quarter
    
    $
    15.91
    
    
    $
    13.24Second Quarter
    
    $
    16.18
    
    
    $
    12.45Third Quarter
    
    $
    13.00
    
    
    $
    9.85Fourth Quarter
    
    $
    13.85
    
    
    $
    11.362003First Quarter
    
    $
    10.62
    
    
    $
    7.37Second Quarter
    
    $
    12.13
    
    
    $
    7.81Third Quarter
    
    $
    12.28
    
    
    $
    10.00Fourth Quarter
    
    $
    14.10
    
    
    $
    10.11
 The number of shareholders of record of the Companys Common Stock on March 9, 2005 was 531. Dividend Policy On October 1, 2004, the Company announced that its Board of Directors had declared the
Companys regular annual cash dividend of $0.15 per share, an increase of $0.01 per share over the
Companys initial dividend of $0.14 per share declared during 2003. The $0.15 per share dividend,
totaling $10.2 million, was paid on October 29, 2004 to shareholders of record as of the close of
business on October 15, 2004. Any future dividends are at the discretion, and subject to the
approval, of the Companys 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: (c)Number of securities(a)
    
    
    
    
    
    
    remaining available forNumber of securities
    
    
    (b)
    
    
    future issuance underto be issued upon
    
    
    Weighted-average
    
    
    equity compensationexercise of
    
    
    exercise price of
    
    
    plans (excludingoutstanding options,
    
    
    outstanding options,
    
    
    securities reflected inPlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    
    column (a))Equity
compensation plans approved by security holders
    
    4,339,963
    
    
    
    $12.52
    
    
    1,919,693Equity compensation plans not approved
by security holders
    
    Not applicable
    
    Not applicable
    
    Not applicable
 The Company did not repurchase any equity securities during the quarter ended December 31,
2004. 15
    Table of Contents  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 Statementsand Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations.The income
statement data and balance sheet data presented below have been derived from the consolidated
financial statements of the Company. The Companys consolidated income statements for the fiscal
years ended December 31, 2004, 2003 and 2002 and consolidated balance sheets as of December 31,
2004 and 2003 included herein have been audited by Deloitte & Touche LLP, the Companys independent
registered public accounting firm, as indicated in their report included elsewhere herein. The
selected income statement data set forth herein are for informational purposes only and may not
necessarily be indicative of the Companys future results of operations. Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(dollars in thousands, except share and per share data)Income Statement Data:Net sales (1)
    
    $
    585,468
    
    
    $
    528,034
    
    
    $
    496,091
    
    
    $
    429,267
    
    
    $
    363,474Cost of goods sold (1)
    
    
    265,104
    
    
    
    237,788
    
    
    
    222,845
    
    
    
    174,332
    
    
    
    138,408Gross profit (1)
    
    
    320,364
    
    
    
    290,246
    
    
    
    273,246
    
    
    
    254,935
    
    
    
    225,066Operating expenses:Research and development
    
    
    15,962
    
    
    
    14,308
    
    
    
    16,016

    
    
    
    11,318
    
    
    
    7,894Selling
    
    
    159,366
    
    
    
    142,365
    
    
    
    126,995
    
    
    
    108,948
    
    
    
    90,291Shipping and warehousing (1)
    
    
    17,087
    
    
    
    14,620
    
    
    
    13,739
    
    
    
    16,997
    
    
    
    10,005General and administrative
    
    
    65,511
    
    
    
    58,918
    
    
    
    52,335
    
    
    
    43,606
    
    
    
    35,612Total operating expenses (1)
    
    
    257,926
    
    
    
    230,211
    
    
    
    209,085
    
    
    
    180,869
    
    
    
    143,802Operating income
    
    
    62,438
    
    
    
    60,035
    
    
    
    64,161
    
    
    
    74,066
    
    
    
    81,264Interest expense, net
    
    
    1,037
    
    
    
    1,272
    
    
    
    1,643
    
    
    
    3,108
    
    
    
    2,723Income before provision for income taxes
    
    
    61,401
    
    
    
    58,763
    
    
    
    62,518
    
    
    
    70,958
    
    
    
    78,541Provision for income taxes
    
    
    19,851
    
    
    
    20,567
    
    
    
    21,881
    
    
    
    20,587
    
    
    
    27,489Net income
    
    $
    41,550
    
    
    $
    38,196
    
    
    $
    40,637
    
    
    $
    50,371
    
    
    $
    51,052Basic net income per share
    
    $
    0.61
    
    
    $
    0.56
    
    
    $
    0.59
    
    
    $
    0.73
    
    
    $
    0.74Basic weighted average common shares
    

    
    67,953,000
    
    
    
    68,006,000
    
    
    
    68,732,000
    
    
    
    68,856,000
    
    
    
    69,041,000Diluted net income per share
    
    $
    0.60
    
    
    $
    0.56
    
    
    $
    0.59
    
    
    $
    0.72
    
    
    $
    0.73Diluted weighted average common shares
    
    
    68,832,000
    
    
    
    68,282,000
    
    
    
    69,333,000
    
    
    
    69,751,000
    
    
    
    69,709,000Dividend per share
    
    $
    0.15
    
    
    $
    0.14
    
    
    $
    
    
    
    $
    
    
    
    $
    
 At December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Balance Sheet Data:Working capital
    
    $
    195,457
    
    
    $
    154,532
    
    
    $
    129,008
    
    
    $
    106,318
    
    
    $
    84,176Total assets
    
    
    480,877
    
    
    
    434,884
    
    
    
    383,950
    
    
    
    362,780
    
    
    
    302,986Total debt
    
    
    30,248
    
    
    
    28,700
    
    
    
    30,757
    
    
    
    59,042
    
    
    
    35,746Shareholders equity
    
    
    366,011
    
    
    
    326,604
    
    
    
    293,831
    
    
    
    260,710
    
    
    
    208,173
   (1)
    
    The years ended December 31, 2004, 2003 and 2002 reflect the reclassification to net sales
and cost of sales from shipping and warehousing expenses of certain shipping and handling fees
charged to customers and related freight costs. See Note 1  Reclassifications. No
reclassifications have been made to such items for the years ended December 31, 2001 and 2000. 16
    Table of Contents  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
(Oakley or the Company) for each of the periods discussed. The Companys net sales, cost of goods sold, shipping and warehousing expenses, and any ratio
calculated therefrom, as used throughout this Annual Report for the years ended December 31, 2004,
2003 and 2002, reflect the reclassification to net sales and cost of sales from shipping and
warehousing expenses of certain shipping and handling fees charged to customers and related freight
costs incurred. See Note 1  Reclassifications. Overview Oakley is an innovation-driven designer, manufacturer and distributor of consumer products
that include high-performance eyewear, apparel, apparel accessories, electronics, footwear and
watches. At December 31, 2004, the Companys products are sold in the United States through a
carefully selected base of accounts which fluctuates between 8,500 and 10,000 accounts, and 15,000
to 17,000 doors, depending on seasonality of summer and winter products. Oakleys 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 department
stores. The Company also operates 36 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 83 sunglass specialty retail stores at December 31,
2004. Internationally, the Company sells its products through its direct offices in Australia, Brazil,
Canada, France, Germany, Italy, Japan, Mexico, New Zealand, South Africa and the United Kingdom.
Additionally, 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 comply with 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 to manage the level
of exposure to the risk of fluctuations in foreign currency exchange rates. Critical Accounting Policies The Companys historical success is attributable, in part, to its introduction of products
that 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 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, apparel accessories, electronics, footwear
and watches, some of which have greater financial and marketing resources than the Company. 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. 17
    Table of Contents  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. 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 and title 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 150 days, depending on the product category and the
customer. 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 that 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. 18
    Table of Contents  Long-Lived Assets In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144), the Company evaluates the carrying
value of long-lived assets for impairment whenever events or change in circumstances indicate that
such carrying values may not be recoverable. Under 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. 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. At December 31, 2004, the Company
determined that no impairment loss was necessary. Goodwill In accordance Statement of Financial Accounting Standards No. 142, Goodwill and Intangible
Assets, (SFAS No. 142), goodwill and non-amortizing intangible assets with indefinite lives are no
longer amortized but are tested for impairment annually and also tested in the event of an
impairment indicator. As required by SFAS No. 142, the Company evaluates the recoverability of
goodwill 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. The Company completed
its annual impairment test for the fiscal year ended December 31, 2004, and determined that no
impairment loss was necessary. 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. Oakley electronic
products are warranted for 90 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 with proof of purchase from an authorized Oakley dealer. 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 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. 19
    Table of Contents  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. The Company believes it has adequately provided for income tax issues not yet resolved with
federal, state and foreign tax authorities. At December 31, 2004, $3.7 million was accrued for such
matters. Although not probable, the most adverse resolution of these issues could result in
additional charges to earnings in future periods. Based upon a consideration of all relevant facts
and circumstances, the Company does not believe the ultimate resolution of tax issues for all open
tax periods will have a materially adverse effect upon its results of operations or financial
condition. See Note 6 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 for claims incurred during the period of $2,265,000. The Company
records a liability for the actuarially 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 its actual
experience dictates. A significant change in the number or dollar amount of claims or other
actuarial assumptions 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 Australia, Brazil, Canada, France, Germany, Italy, Japan,
Mexico, New Zealand, South Africa and the United Kingdom, 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 9 in Notes to Consolidated Financial
Statements. 20
    Table of Contents  Certain Risks and Uncertainties Vulnerability Due to Supplier Concentrations The Company has an exclusive agreement with a single source for the supply of uncoated lens blanks
from which a majority of its sunglass lenses are cut. This agreement gives the Company the
exclusive right to purchase decentered sunglass lenses in return for the Companys agreement to
fulfill all of its lens requirements from such supplier, subject to certain conditions. The
Company has expanded its in-house lens blank production capabilities to manufacture some portion of
its lenses directly. In addition, the Company has terminated this agreement effective in March
2006 and is renegotiating a new contract under terms it believes will be more favorable to the
Company. In the event of the loss of its source for lens blanks, the Company has identified an
alternate source that 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 and use a suitable alternative source and could have a material adverse impact 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 could be located or developed in a timely manner. 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. Vulnerability Due to Customer Concentrations Net sales to the retail group of Luxottica, which include Sunglass Hut locations worldwide, were
approximately 7.6%, 8.9% and 12.0% of the Companys net sales for the years ended December 31,
2004, 2003 and 2002, 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
new commercial agreement that establishes the commercial terms applicable for 2005 between the two
companies. There can be no assurances as to the future of the relationship between the Company and
Luxottica or as to the likelihood that a new contract beyond 2005 will be agreed to by the parties.
In October 2004, Luxottica acquired Cole, one of the largest optical retailers and chain providers
of managed vision care services worldwide. The Company currently sells to a small portion of
Coles retail locations and sales to this customer have been immaterial to the Companys
operations. In November 2003, Luxottica completed the acquisition of New Zealand eyewear retailer
SSNZ, the Companys largest customer in New Zealand. SSNZ operates in New Zealand with 16 retail
locations that offer some of the Companys products and sales to this customer have been immaterial
to the Companys operations. In September 2003, Luxottica acquired all the shares of Australian
eyewear retailer 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 US$0.7 million based on the average exchange rate for 2003).
These sales exclude a limited amount of sales generated through the Companys international
distributors. 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. Dependence on Key Personnel 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. 21
    Table of Contents  Competition 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, apparel accessories, electronics, footwear
and watches, some of which have greater financial and marketing resources than the Company.
Management 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 apparel and footwear industries could
reduce the Companys sales and prices and adversely affect its business and financial condition. Changes in Fashion Trends The eyewear, apparel, apparel accessories, electronics, footwear and watch industries are
characterized by constant product innovation due to changing consumer preferences. As a result,
the Companys 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. 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 could adversely affect retail and consumer acceptance of the
Companys products, limit sales growth or other conditions which could have a material adverse
effect on the Company. Protection of Proprietary Rights 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. 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. 22
    Table of Contents  Risks Relating to International Operations Sales outside the United States accounted for approximately 47.9%, 50.5% and 47.8% of the Companys
net sales for the years ended December 31, 2004, 2003 and 2002, respectively. While the Company
expects international sales to continue to account for a significant portion of its sales, 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; 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. Nature of Endorsement Contracts A key element of the Companys marketing strategy has been to establish contacts with, and obtain
endorsement from, prominent athletes and public personalities. Management believes that this has
proven an effective means of gaining international brand exposure and broad product appeal. 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
glasses 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 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. Control by Principal Shareholder The Companys current Chairman and Chief Executive Officer, Jim Jannard (Mr. Jannard),
beneficially owned approximately 63.2% of the outstanding Common Stock of the Company at February
28, 2005. Consequently, Mr. 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.
Such concentration of ownership may have the effect of delaying or preventing a change in control
of the Company. 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. 23
    Table of Contents  Factors that may have a significant impact on the market price of the Companys stock include:  
    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 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; or
    rumors or allegations regarding the Companys financial disclosures or practices. 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 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. Impact of Potential Future Acquisitions From time to time, the Company may engage in strategic transactions with the goal of maximizing
shareholder value. 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 acquisitions, spinoffs,
strategic partnerships, joint ventures, restructurings, divestitures, business combinations and
equity or debt investments. Although managements goal is to maximize shareholder value, such
transactions may impair shareholder value or otherwise adversely affect the Companys business and
the trading price of its stock. Any such transaction may require the Company to incur
non-recurring or other charges and/or to consolidate or record its equity in losses and may pose
significant integration challenges and/or management and business disruptions, any of which could
harm the Companys operating results and business. Compliance with Changing Regulation of Corporate Governance and Public Disclosure Changing laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NYSE rules, are
creating uncertainty for companies. These new or changed laws, regulations and standards are
subject to varying interpretations in many cases due to their lack of specificity, and as a result,
their application in practice may evolve over time as new guidance is provided by regulatory and
governing bodies, which could result in continuing uncertainty regarding compliance matters and
higher costs necessitated by ongoing revisions to disclosure and governance practices. The Company
is committed to maintaining high standards of corporate governance and public disclosure. As a
result, managements efforts to comply with evolving laws, regulations and standards have resulted
in, and are likely to continue to result in, increased general and administrative expenses and a
diversion of management time and attention from revenue-generating activities to compliance
activities. In particular, managements efforts to comply with Section 404 of the Sarbanes-Oxley
Act of 2002 and the related regulations regarding the required assessment of the Companys internal
controls over financial reporting and its external auditors audit of that assessment has required
the commitment of significant financial and managerial resources. Management expects these efforts
to require the continued commitment of significant resources. Further, the Companys board
members, chief executive 24
    Table of Contents  officer and chief financial officer could face an increased risk of personal liability in
connection with the performance of their duties. As a result, the Company may have difficulty
attracting and retaining qualified board members and executive officers, which could harm its
business. 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) Year Ended December 31,2004
    
    
    2003
    
    
    2002Net sales (1)
    
    $
    585,468
    
    
    $
    528,034
    
    
    $
    496,091Cost of goods sold (1)
    
    
    265,104
    
    
    
    237,788
    
    
    
    222,845Gross profit (1)
    
    
    320,364
    
    
    
    290,246
    
    
    
    273,246Operating expenses:Research and development
    
    
    15,962
    
    
    
    14,308
    
    
    
    16,016Selling
    
    
    159,366
    
    
    
    142,365
    
    
    
    126,995Shipping and warehousing (1)
    
    
    17,087
    
    
    
    14,620
    
    
    
    13,739General and administrative
    
    
    65,511
    
    
    
    58,918
    
    
    
    52,335Total operating expenses (1)
    
    
    257,926
    
    
    
    230,211
    
    
    
    209,085Operating income
    
    
    62,438
    
    
    
    60,035
    
    
    
    64,161Interest expense, net
    
    
    1,037
    
    
    
    1,272
    
    
    
    1,643Income before provision for income taxes
    
    
    61,401
    
    
    
    58,763
    
    
    
    62,518Provision for income taxes
    
    
    19,851
    
    
    
    20,567
    
    
    
    21,881Net income
    
    $
    41,550
    
    
    $
    38,196
    
    
    $
    40,637
 Year Ended December 31,2004
    
    
    2003
    
    
    2002Net sales (1)
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold (1)
    
    
    45.3
    
    
    
    45.0
    
    
    
    44.9Gross profit (1)
    
    
    54.7
    
    
    
    55.0
    
    
    
    55.1Operating expenses:Research and development
    
    
    2.7
    
    
    
    2.7
    
    
    
    3.2Selling
    
    
    27.2
    
    
    
    27.0
    
    
    
    25.6Shipping and warehousing (1)
    
    
    2.9
    
    
    
    2.8
    
    
    
    2.8General and administrative
    
    
    11.2
    
    
    
    11.2
    
    
    
    10.6Total operating expenses (1)
    
    
    44.0
    
    
    
    43.7
    
    
    
    42.2Operating income
    
    
    10.7
    
    
    
    11.3
    
    
    
    12.9Interest expense, net
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.3Income before provision for income taxes
    
    
    10.5
    
    
    
    11.1
    
    
    
    12.6Provision for income taxes
    
    
    3.4
    
    
    
    3.9
    
    
    
    4.4Net income
    
    
    7.1
    %
    
    
    7.2
    %
    
    
    8.2
    %
   (1)
    
    Reflects the reclassification to net sales and cost of sales from shipping and warehousing
expenses of certain shipping and handling fees charged to customers and related freight costs.
See Note 1  Reclassifications. 25
    Table of Contents  Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Net sales Net sales increased to $585.5 million for the year ended December 31, 2004 from $528.0 million for
the year ended December 31, 2003, an increase of $57.5 million, or 10.9%. Gross sales were $621.7
million in 2004 compared to $567.1 million for 2003. Gross sunglass sales increased $4.1 million to $314.5 million for the year ended December 31, 2004
compared to $310.4 million for the year ended December 31, 2003. This increase was due to strong
sales of polarized versions of the Companys sunglasses, sales of the Monster Dog, introduced in
2003, the Half Wire, introduced in 2002 and sales from newly introduced sunglasses such as the
Dartboard,and Why 8,partially offset by declines in sales of the Companys more mature
products. In addition, initial sales of combat eyewear to the U.S. Army and a 3.3% increase in the
average selling price contributed to the increase. The increase in average selling price is due to
the effect of a weak U.S. dollar on international sales, a higher contribution from polarized
styles that carry higher average prices and a greater contribution from the Companys retail store
operations. Sunglass units decreased 2.0% in 2004 compared to 2003 due to competitive pressures
from fashion and action sports brands. Gross sales from the Companys newer product categories, comprised of apparel, apparel accessories,
electronics, prescription eyewear, footwear, and watches, increased 25.1%, or $41.4 million, to
$206.5 million for 2004 from $165.1 million for 2003. As a percentage of gross sales, these new
product categories accounted for 33.2% of total gross sales for 2004 compared to 29.1% for 2003.
The largest contributors to this increase were gross sales from the launch of Oakley Thumpof
$19.8 million and increased gross sales from the Companys apparel and apparel accessories
categories which increased 24.7%, or $18.9 million, to $94.9 million for 2004 from $76.0 million
for 2003. Prescription eyewear gross sales increased 11.9%, or $5.1 million, to $47.8 million in
2004 from $42.7 million in 2003, primarily due to the introduction of new styles and increased
sales of lenses. Footwear gross sales declined 11.8%, or $4.3 million, to $32.2 million in 2004
from $36.5 million in 2003 as a result of declines in the Companys lifestyle footwear styles,
partially offset by stronger sales for the Companys golf shoes, sandals and military footwear.
Watch gross sales increased 20.2%, or $2.0 million, to $11.9 million in 2004 from $9.9 million in
2003, as the Company transitioned its product development and sales efforts to focus on premium
analog watch designs and distribution. Gross sales of the Companys goggles increased 8.3% to
$39.2 million in 2004 from $36.2 million at 2003, due to strong fourth quarter reorder activity.
Other revenue, consisting of sales of equipment, sunglass and goggle accessories, Iacons sales of
sunglass brands other than the Companys and shipping and handling fees charged to customers,
increased $6.0 million to $61.4 million for 2004 compared to $55.4 million for 2003. Although the
Company currently expects that these newer product categories will have a significant positive
contribution to the Companys gross sales, there can be no assurance that these newer product
categories will be well received by consumers and therefore no assurance that these newer product
categories will contribute significantly to future years results. The Companys U.S. net sales, excluding retail store operations, increased 11.7% for the year ended
December 31, 2004 to $232.5 million from $208.2 million in 2003 as a result of a 15.4% increase in
net sales to the Companys broad specialty store account base and other domestic sales, partially
offset by a 5.7% decrease in sales to the Companys largest U.S. customer, Sunglass Hut and its
affiliates. Sales to Sunglass Hut decreased $2.1 million to $35.0 million for the year ended
December 31, 2004 from $37.1 million for the year ended December 31, 2003. This decrease reflects
the first quarter effect of Sunglass Huts efforts to attain a more efficient Oakley inventory
level at their distribution center along with slower than expected Oakley product sales at Sunglass
Hut stores during the year. Sales from Oakley Thumpduring the fourth quarter of 2004 and sales
of combat eyewear to the U.S. Army were contributors to the increase in the Companys domestic
sales. 26
    Table of Contents  Net sales from the Companys retail store operations increased to $72.4 million for the year ended
December 31, 2004 as a result of increased store locations, compared to $53.2 million for the year
ended December 31, 2003, an increase of $19.2 million, or 36.1%. During 2004, the Company opened
nine new Oakley stores and eight Iacon stores. At December 31, 2004, the Company operated 36
Oakley stores and 83 Iacon stores compared to 27 Oakley stores and 76 Iacon stores at December 31,
2003. The increase in net sales from the Companys retail stores reflect an increase in stores and
increases in comparable store sales (stores opened at least twelve months) for both Oakley and
Iacon retail stores. During the year ended December 31, 2004, the Companys international net sales increased 5.2%, or
$13.9 million, to $280.5 million from $266.6 million for 2003. The weaker U.S. dollar accounted
for 7.6 percentage points, or $20.4 million, of sales benefit. The Company achieved growth in all
international regions other than the South Pacific. International sales benefited from the limited
release of the Oakley Thumpin key markets and increased sales of apparel and sunglass styles
introduced during 2004. The Company experienced a decline in sales in Australia in the fourth
quarter of 2004 and the total year. Additionally, the Companys Mexico subsidiary failed to
generate profits amid the challenges of the Mexican market, and the Company intends to reorganize
its operations there in 2005 to improve profitability. Sales from the Companys direct
international offices represented 86.0% of total international sales for 2004, compared to 88.0%
for 2003. Gross profit Gross profit increased to $320.4 million, or 54.7% of net sales, for the year ended December 31,
2004 from $290.2 million, or 55.0% of net sales, for the year ended December 31, 2003, an increase
of $30.2 million, or 10.4%. The decrease in gross profit as a percentage of net sales is due to a
lower mix of sunglass sales and lower average sunglass margins resulting from slightly reduced
production volumes, increased costs on new sunglass models, increased overhead costs, including
greater provisions for workers compensation expenses and higher labor overtime costs and
additional duties paid in one international market in 2004. These decreases were partially offset
by favorable foreign exchange effects, improved apparel product margins and reduced sales returns
and discounts. Operating expenses Operating expenses for the year ended December 31, 2004 increased to $257.9 million from $230.2
million for the year ended December 31, 2003, an increase of $27.7 million, or 12.0%. As a
percentage of net sales, operating expenses increased to 44.0% of net sales for the year ended
December 31, 2004 compared to 43.7% of net sales for 2003. The largest contributors to this
increase were expenses associated with increased sales volumes, higher foreign operating expenses
resulting from a weaker U.S. dollar and higher operating 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, accounted for approximately $8.5 million, or 30.7%, of the increase.
Operating expenses included $23.3 million of expenses for the Companys retail store operations, an
increase of $4.1 million from $19.2 million for the year ended December 31, 2003. Research and development expenses increased $1.7 million to $16.0 million, or 2.7% of net sales,
for the year ended December 31, 2004, from $14.3 million, or 2.7% of net sales, for the year ended
December 31, 2003. This increase is primarily due to increased design personnel and related benefit
costs of $0.7 million and increased product design expenses of $0.5 million, including those for
the Companys new electronics product category. 27
    Table of Contents  Selling expenses increased $17.0 million to $159.4 million, or 27.2% of net sales, for the year
ended December 31, 2004 from $142.4 million, or 27.0% of net sales, for the year ended December 31,
2003. The weakening of the U.S. dollar contributed $5.5 million, or 32.4%, to this increase along
with increased retail selling expense of $3.0 million over 2003. Excluding retail store
operations, itemized expenses contributing to the increase in selling expenses were $4.9 million in
increased sales personnel and related benefit costs, including restricted stock expense; $3.3
million for increased sports marketing expenses; $1.2 million for increased travel and trade show
expenses; $0.9 million for increased sales commissions; and $0.8 million for increased advertising
and marketing expenses. Shipping and warehousing expenses increased $2.5 million to $17.1 million for the year ended
December 31, 2004, from $14.6 million for the twelve months ended December 31, 2003. Approximately
$1.1 million, or 44.0%, of this increase was attributable to the weakening of the U.S. dollar. As
a percentage of net sales, shipping expenses increased to 2.9% of net sales for 2004 compared to
2.8% for 2003 primarily due to increased costs associated with the Companys international
distribution centers. General and administrative expenses increased $6.6 million to $65.5 million, or 11.2% of net sales,
for the year ended December 31, 2004, from $58.9 million, or 11.2% of net sales, for the year ended
December 31, 2003. Approximately $1.8 million, or 27.3%, of this increase was attributable to the
weakening of the U.S. dollar and $1.1 million was due to increased general and administrative
expense for the Companys retail store operations. During the fourth quarter of 2004, the Company
recorded a foreign exchange contract loss of $0.8 million related to the repatriation of profits by
the Companys subsidiary in the United Kingdom. This type of foreign exchange loss is not expected
to occur in the future as the Company changed its hedging practice to exclude the repatriation of
earnings, if the Company should decide to do so, where there is no offsetting increase in gross margin. Excluding retail operations,
itemized expenses contributing to the increase in general and administrative expenses were $3.6
million in greater personnel and related benefit costs, including increases in vacation and
workers compensation reserves; restricted stock expense and personnel expenses associated with
Sarbanes-Oxley compliance; $1.1 million in increased professional fees including greater internal
audit fees and fees associated with Sarbanes-Oxley compliance; and $0.5 million in greater bank
charges resulting from letters of credits and the Companys increased e-commerce and telesales
operations. There can be no assurance that general and administrative expenses will not increase
in the future, both in absolute terms and as a percentage of total net sales, and increases in
these expenses could adversely affect the Companys profitability. Operating income The Companys operating income increased to $62.4 million, or 10.7% of net sales, for the year
ended December 31, 2004 from $60.0 million, or 11.3% of net sales, an increase of $2.4 million. Interest expense, net The Companys net interest expense decreased to $1.0 million for the year ended December 31, 2004
from $1.3 million for the year ended December 31, 2003, principally because the Company had higher
average cash balances in 2004. Income taxes The Company recorded a provision for income taxes of $19.9 million for the year ended December 31,
2004, compared to $20.6 million for the year ended December 31, 2003. The Companys effective tax
rate for the year ended December 31, 2004 was 32.3% compared to 35% for 2003. The reduction
results from the favorable closure of prior year Internal Revenue Service (IRS) and French income
tax issues. 28
    Table of Contents  During 2004, the Company was under audit by the IRS for the years ended December 31, 2000 and 2001.
On August 2, 2004, the IRS notified the Company of a proposed audit adjustment related to advance
payment agreements executed by the Company in December 2000 with its foreign sales corporation,
Oakley International Inc., and two wholly-owned foreign subsidiaries, Oakley UK and Oakley Europe.
The adjustment could result in additional tax liability and penalties of approximately $11.2
million. The Company is currently contesting this adjustment with the IRS. Based on advice from
its outside legal and tax experts, management believes that Oakleys tax position with respect to
this issue will ultimately prevail on its merits and therefore does not expect to pay the
additional tax and penalties reflected in this adjustment. In the event that the Company does not
prevail under protest, management expects that the adjustment should not have a material impact on
the Companys financial results because the Company has insurance in place which it believes will
cover such adjustment and any associated expenses. Accordingly, the Company has not provided any
amounts in its financial statements for the settlement of this matter. Net income The Companys net income increased to $41.6 million for the year ended December 31, 2004 from $38.2
million for the year ended December 31, 2003, an increase of $3.4 million or 8.9%. Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Net sales Net sales increased to $528.0 million for the year ended December 31, 2003 from $496.1 million for
the year ended December 31, 2002, an increase of $31.9 million, or 6.4%. Gross sales were $567.1
million in 2003 compared to $535.3 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
SpliceÒ, introduced in 2002, as well as sales of the Companys new 2003 sunglass
styles including the Valve, Big Square WireÒ, 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 apparel, apparel accessories,
prescription eyewear, footwear and watches, 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 29.1% of total gross sales for 2003 compared to 25.1% 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. Although the Company currently expects that these newer
product categories will have a significant positive contribution to the Companys net sales, there
can be no assurance that these newer product categories will be well received by consumers and 29
    Table of Contents  therefore no assurance that these newer product categories will contribute significantly to future
years results. The Companys U.S. net sales, excluding retail store operations, decreased 8.0% for the year ended
December 31, 2003 to $208.2 million from $226.2 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
$29.3 million, to $266.6 million from $237.3 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 88.0%
of total international sales for 2003, compared to 84.9% for 2002. Gross profit Gross profit increased to $290.2 million, or 55.0% of net sales, for the year ended December 31,
2003 from $273.2 million, or 55.1% of net sales, for the year ended December 31, 2002, an increase
of $17.0 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. 30
    Table of Contents  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 13 in Notes to
Consolidated Financial Statements. Operating expenses for the year ended December 31, 2003
increased to $230.2 million from $209.1 million for the year ended December 31, 2002, an increase
of $21.1 million, or 10.1%. As a percentage of net sales, operating expenses increased to 43.7% of
net sales for the year ended December 31, 2003 compared to 42.2% of net sales for 2002. Excluding
the $2.8 million European restructuring charge recorded in 2002, operating expenses increased to
$230.2 million, or 43.7% of net sales, for the year ended December 31, 2003 from $206.3 million, or
41.5% of net sales, for the year ended December 31, 2002, an increase of $23.9 million, or 11.6%.
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 3.2% 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
27.0% of net sales, for the year ended December 31, 2003 from $127.0 million, or 25.6% 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 were
27.0% in 2003 compared to 25.1% for 2002. Shipping and warehousing expenses as a percentage of net
sales remained at 2.8% 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 2.8% of net sales in 2003 from 2.7% 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 11.2% of net sales, for the year ended
December 31, 2003, from $52.3 million, or 10.6% 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. 31
    Table of Contents  Operating income The Companys operating income decreased to $60.0 million, or 11.3% of net sales, for the year
ended December 31, 2003 from $64.2 million, or 12.9% 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 $6.9 million to $60.0 million for the year ended December 31, 2003 from $66.9 million for
the year ended December 31, 2002. As a percentage of net sales, operating income, prior to the
restructure charge, decreased to 11.3% for the year ended December 31, 2003 from 13.5% 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%. 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%. Liquidity and Capital Resources The Company historically has financed its operations almost entirely with cash flow generated
from operations and borrowings under its credit facilities. Cash provided by operating activities
totaled $44.9 million for the year ended December 31, 2004 compared to $76.1 million for the year
ended December 31, 2003. Cash flows from operating activities, compared to the preceding year,
were primarily impacted by the timing of receivables collections, the timing of vendor payments,
the payment of income taxes and increases in the Companys inventory. The Companys cash
balance was $51.7 million at December 31, 2004 compared to $49.2 million at December 31, 2003. At
December 31, 2004, working capital was $195.5 million compared to $154.5 million at December 31,
2003, a 26.5% 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 and reserves for sales returns, totaled
$102.8 million at December 31, 2004, compared to $78.0 million at December 31, 2003, with accounts
receivable days outstanding for the year ended December 31, 2004 of 57, compared to 50 for the year
ended December 31, 2003. The increase in accounts receivable days outstanding is due to a
significant portion of sales from Oakley Thumpand military sales occurring in late November 32
    Table of Contents  and December 2004 as well as increased snow goggle sales which carry longer terms consistent with
the industry. Inventories increased 16.6% to $115.1 million at December 31, 2004, compared to
$98.7 million at December 31, 2003, due to increased eyewear, apparel and electronics inventories.
Inventory turns were 2.5 at December 31, 2004, compared to 2.6 at December 31, 2003. Credit Facilities In August 2004, the Company amended its credit agreement with a bank syndicate. The amended credit
agreement allows for borrowings of up to $75 million and matures in August 2007. Borrowings under
the line of credit are unsecured and bear interest at either London Interbank Offered Rate
(LIBOR) or InterBank Offered Rate (IBOR) plus 0.75% (3.14% at December 31, 2004) or the banks
prime lending rate minus 0.25% (5.0% at December 31, 2004). At December 31, 2004, the Company did
not have any balance outstanding under the credit facility. The amended credit agreement contains
various restrictive covenants including the maintenance of certain financial ratios. At December
31, 2004, the Company was in compliance with all restrictive covenants and financial ratios.
Certain of the Companys foreign subsidiaries have negotiated local lines of credit to provide
working capital financing. These foreign lines of credit bear interest at rates ranging from 0.73%
to 6.07%. Some of the Companys foreign subsidiaries have bank overdraft accounts that renew
annually and bear interest at rates ranging from 2.60% to 11.00%. The aggregate borrowing limit on
the foreign lines of credit and overdraft accounts is $27.5 million, of which $17.5 million was
outstanding at December 31, 2004. The Company also has a real estate term loan with an outstanding balance of $11.8 million at
December 31, 2004, which matures 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% (3.40% at December 31, 2004). 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, 2004, the fair value of the Companys interest
rate swap agreement was a loss of approximately $0.5 million. Note Payable As of December 31, 2004, the Company also has a non-interest bearing note payable in the amount of
$0.9 million, net of discounts, in connection with its acquisition of Iacon, Inc. Payments under
the note are due in annual installments of $0.5 million ending in 2006, with such payments
contingent upon certain conditions. Capital Expenditures Capital expenditures for the year ended December 31, 2004 were $29.6 million, which included $5.9
million for retail store operations. Capital expenditures for 2004, excluding capital expenditures
for retail operations, included $7.0 million for production equipment and new product tooling, $5.9
million for information technology infrastructure, including software, computers and related
equipment, $5.7 million for in-store displays and $5.1 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
Common Stock to occur from time to time as market conditions warrant. Under this program, as of
December 31, 2004, the Company had purchased 1,344,900 shares of its common stock at an aggregate
cost of approximately $14.6 million, or an average cost of $10.83 per share. Approximately $5.4
million remains available for repurchases under the current authorization with total common shares
outstanding of 68,077,000 as of December 31, 2004. The Company intends to remain active with its
share repurchase program should the right market conditions exist. 33
    Table of Contents  Cash Dividend On October 1, 2004, the Company announced that its Board of Directors had declared the Companys
regular annual cash dividend of $0.15 per share, an increase of $0.01 per share over the Companys
initial dividend of $0.14 per share declared during the same 2003 period. The $0.15 per share
dividend, totaling $10.2 million, was paid on October 29, 2004 to shareholders of record as of the
close of business on October 15, 2004. 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, 2004: 2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterLines of credit
    
    $
    17,541
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt
    
    
    1,519
    
    
    
    1,519
    
    
    
    8,731
    
    
    
    
    
    
    
    
    
    
    
    Note payable
    
    
    500
    
    
    
    438
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Letters of credit
    
    
    5,215
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    18,556
    
    
    
    18,236
    
    
    
    16,727
    
    
    
    14,841
    
    
    
    13,259
    
    
    
    43,496Endorsement contracts
    
    
    6,735
    
    
    
    2,485
    
    
    
    1,240
    
    
    
    
    
    
    

    
    
    
    
    Capital expenditure purchase commitments
    
    
    2,575
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    52,641
    
    
    $
    22,678
    
    
    $
    26,698
    
    
    $
    14,841
    
    
    $
    13,259
    
    
    $
    43,496
 The Company expects 2005 capital expenditures to be approximately $35.0 million. As of
December 31, 2004, the Company had commitments of approximately $2.6 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: 2004
    
    
    2003
    
    
    2002(in thousands),Balance as of January 1,
    
    $
    2,921
    
    
    $
    3,537
    
    
    $
    3,503Warranty claims and expenses
    
    
    (3,959
    )
    
    
    (3,511
    )
    
    
    (4,224
    )Provisions for warranty expense
    
    
    4,124
    
    
    
    2,851
    
    
    
    4,224Changes due to foreign currency translation
    
    
    21
    
    
    
    44
    
    
    
    34Balance as of December 31,
    
    $
    3,107
    
    
    $
    2,921
    
    
    $
    3,537
 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, 2004, the Company
was in compliance with all restrictive covenants and financial ratios. The Company may consider certain strategic acquisitions. Any such acquisition completed by the
Company may have an impact on liquidity depending on the size of the acquisition. 34
    Table of Contents  Seasonality The following table sets forth certain unaudited quarterly data for the periods shown: 2004
    
    
    2003Mar. 31
    
    
    June 30
    
    
    Sept. 30
    
    
    Dec. 31
    
    
    Mar. 31
    
    
    June 30
    
    
    Sept. 30
    
    
    Dec. 31(in thousands)Net sales (1)
    
    $
    128,636
    
    
    $
    153,826
    
    
    $
    150,044
    
    
    $
    152,962
    
    
    $
    112,523
    
    
    $
    145,703
    
    
    $
    146,885
    
    
    $
    122,923Gross profit (1)
    
    
    67,714
    
    
    
    88,582
    
    
    
    83,335
    
    
    
    80,733
    
    
    
    58,455
    
    
    
    86,931
    
    
    
    81,417
    
    
    
    63,443
   (1)
    
    Reflects the reclassification to net sales and cost of sales from shipping and warehousing
expenses of certain shipping and handling fees charged to customers and related freight costs.
See Note 1  Reclassifications and Note 14  Quarterly Financial Data. 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, watches and electronics, 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, 2004, the
Company had a backlog of $55.3 million, including backorders (merchandise remaining unshipped
beyond its scheduled shipping date) of $10.5 million, compared to a backlog of $51.9 million,
including backorders of $5.3 million, at December 31, 2003. The increase in backlog reflects a
substantial increase in apparel orders, modest new electronics orders and a small increase in
goggles and watches, offset by declines in eyewear and footwear. U.S. backlog at December 31, 2004
was lower than the prior year due to lower eyewear orders at year end, offset by increases in the
Companys international backlog, which were greater in all categories except footwear. 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, 2004, which note is incorporated herein by
this reference. 35
    Table of Contents  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: Year ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)Gross sales
    
    $
    621,652
    
    
    $
    567,077
    
    
    $
    535,320Discounts and returns
    
    
    (36,184
    )
    
    
    (39,043
    )
    
    
    (39,229
    )Net sales
    
    $
    585,468
    
    
    $
    528,034
    
    
    $
    496,091
 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. Such forward-looking statements, including but not limited to growth and strategies, future
operating and financial results, financial expectations and current business indicators are based
upon current information and expectations and are subject to change based on factors beyond the
control of the Company. Forward-looking statements typically are identified by the use of terms
such as may, will, should, might, believe, expect, anticipate, estimate and similar
words, although some forward-looking statements are expressed differently. 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 but not limited to:
risks related to the sale of Oakley Thumpand new product introductions in the Companys
electronics category;the Companys ability to maintain approved vendor status and continue to
receive product orders from the U.S. military; the Companys ability to manage rapid growth; risks
related to the limited visibility of future sunglass orders associated with the Companys at once
production and fulfillment business model; the ability to identify and maintain qualified
manufacturing partners; the ability to coordinate product development and production processes with
those manufacturing 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 Luxottica Group S.p.A, which, as a major competitor, 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; a weakening 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 and licensing arrangements without adversely affecting operations and the success of
such initiatives; 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 36
    Table of Contents  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 impact 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 a significant portion of the Companys
operations are based; the Companys ability to identify and execute successfully cost control
initiatives; the Companys ability to continue to grow its retail outlets; and other risks outlined
in the Companys SEC filings, including but not limited this Annual Report on Form 10-K for the
year ended December 31, 2004 and other filings made periodically by the Company. Readers are
cautioned not to place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to update this forward-looking information. 
 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 Australia, Brazil, Canada, France, Germany, Italy, Japan,
Mexico, New Zealand, South Africa and the United Kingdom, 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 9 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 and option contracts. All of the Companys derivatives were designated and qualified as
cash flow hedges at December 31, 2004. 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, 2004
(in thousands): U.S. Dollar
    
    
    
    
    
    
    FairEquivalent
    
    
    Maturity
    
    
    Value (loss)Exchange Contracts:Australian dollar
    
    $
    9,355
    
    
    Jan. 2005 - Dec. 2005
    
    $
    (760
    )British pound
    
    
    24,097
    
    
    Feb. 2005 - Dec. 2005
    
    
    (1,541
    )Canadian dollar
    
    
    18,680
    
    
    Jan. 2005 - Dec. 2005
    
    
    (2,152
    )Euro
    
    
    27,414
    
    
    Jan. 2005 - Dec. 2005
    
    
    (3,185
    )Japanese yen
    
    
    16,289
    
    
    Mar. 2005 - Dec. 2005
    
    
    (850
    )South African rand
    
    
    2,833
    
    
    Mar. 2005 - Dec. 2005
    
    
    (369
    )$
    98,668
    
    
    
    
    
    
    $
    (8,857
    )
 37
    Table of Contents  The Company is exposed to credit losses in the event of nonperformance by counterparties to
its 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.
At December 31, 2004, 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, 2004, bears
interest at either LIBOR or IBOR plus 0.75% (3.14% at December 31, 2004) or the banks prime
lending rate minus 0.25% (5.0% at December 31, 2004). Based on the weighted average interest rate
of 4.06% on the line of credit during the year ended December 31, 2004, 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 $2,700 per year. The Companys ten-year real estate term loan, with a balance of $11.8 million outstanding at
December 31, 2004, bears interest at LIBOR plus 1.0% (3.4% at December 31, 2004) 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, 2004, the fair value of the Companys interest rate swap
agreement was a loss of approximately $0.5 million. 
 Item 8. Financial Statements and Supplementary Data See Index to Consolidated Financial Statementsfor a listing of the consolidated financial
statements submitted as part of this report. 38
    Table of Contents  Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure None. 
 Item 9A. Controls and Procedures Disclosure Controls and Procedures The Companys management, with the participation of the Companys Chief Executive Officer and
Acting 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 and are effective in ensuring that information required to be
disclosed by the Company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Companys management, including the Companys Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. 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 year to
which this report relates that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting. Managements Report on Internal Control Over Financial Reporting The Companys management is responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Under the supervision and with the participation of the Companys management, including the
principal executive officer and principal financial officer, management has conducted an evaluation
of the effectiveness of its internal control over financial reporting as of December 31, 2004,
based on the framework in Internal Control  Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on managements evaluation under the
framework in Internal Control  Integrated Framework, management concluded that the Companys
internal control over financial reporting was effective as of December 31, 2004. The Companys independent registered public accounting firm has issued an audit report on our
assessment of the Companys internal control over financial reporting. This report appears under
the Report of Independent Public Accounting Firm which is included below. 39
    Table of Contents  Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Oakley, Inc.
Foothill Ranch, California: We have audited managements assessment, included in the accompanying Managements Report on
Internal Control over Financial Reportingappearing in Item 9A, that Oakley, Inc. (the Company)
maintained effective internal control over financial reporting as of December 31, 2004, based on
the criteria established in Internal Control  Integrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions. A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and is effected by the companys Board of Directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
these policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorization of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of the changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that the Company maintained effective internal control
over financial reporting as of December 31, 2004 is fairly stated, in all material respects, based
on the criteria established in Internal Control  Integrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31,
2004, based on the criteria established in Internal Control  Integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission. 40
    Table of Contents  We have also audited, in accordance with the standards of the Public Company Accounting Oversight

Board (United States), the consolidated financial statements and financial statement schedule as
of and for the year ended December 31, 2004 of the Company, and
our report dated March 14, 2005,
expressed an unqualified opinion on those financial statements and financial statement schedule. /s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 14, 2005 41
    Table of Contents  Item 9b. Other Information None. 
 Part III 
 Item 10. Directors and Executive Officers of the Registrant The information required by this item is incorporated herein by reference from the Companys
Proxy Statement for its Annual Shareholders Meeting to be held on June 3, 2005 (the 2005 Proxy
Statement), under the caption Board of Directors and Executive Officers, to be filed with the
Commission pursuant to Regulation 14A under the Exchange Act and mailed to the Companys
shareholders prior to the Companys Annual Meeting of Shareholders. 
 Item 11. Executive Compensation The information required by this item is incorporated herein by reference from the Companys
2005 Proxy Statement, under the caption Compensation of Executive Officers, to be filed with the
Commission pursuant to Regulation 14A under the Exchange Act and mailed to the Companys
shareholders prior to the Companys Annual Meeting of Shareholders. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is incorporated herein by reference from the Companys
2005 Proxy Statement, under the caption Security Ownership of Certain Beneficial Owners and
Management, to be filed with the Commission pursuant to Regulation 14A under the Exchange Act and
mailed to the Companys shareholders prior to the Companys Annual Meeting of Shareholders. 
 Item 13. Certain Relationships and Related Transactions The information required by this item is incorporated herein by reference from the Companys
2005 Proxy Statement, under the caption Certain Relationships and Related Transactions, to be
filed with the Commission pursuant to Regulation 14A under the Exchange Act and mailed to the
Companys shareholders prior to the Companys Annual Meeting of Shareholders. 
 Item 14. Principal Accountant Fees and Services The information required by this item is incorporated herein by reference from the Companys
2005 Proxy Statement, under the caption Fees of Independent Auditors, to be filed with the
Commission pursuant to Regulation 14A under the Exchange Act and mailed to the Companys
shareholders prior to the Companys Annual Meeting of Shareholders. 42
    Table of Contents  Part IV 
 Item 15.
Exhibits, Financial Statement Schedules and Reports on Form 8-K  (a)(1)
    See page 46 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 Company3.2 (8)
    
    Amended and Restated Bylaws of the Company3.3 (3)
    
    Amendment No. 1 to the Articles of Incorporation as filed with the Secretary of State of the State of Washington on
September 26, 19963.4 (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 Jordan10.2 (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 Association10.4 (5)
    
    Promissory Note, dated August 7, 1997, between Oakley, Inc. and Bank of America National Trust and Savings Association10.5 (5)
    
    Amendment No. 1 to Promissory Note, dated August 14, 1997, between Oakley, Inc. and Bank of America National Trust and
Savings Association10.6 (5)
    
    Amendment No. 2 to Promissory Note, dated August 14, 1997, between Oakley, Inc. and Bank of America National Trust and
Savings Association10.7 (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 Association10.8 (6)
    
    Amended and Restated Consultant Agreement, dated May 12, 1998, between Jim Jannard and Oakley, Inc.10.9 (7)
    
    Modification Agreement (Short Form), dated August 10, 1998, between Oakley, Inc. and Bank of America National Trust and
Savings Association10.10 (7)
    
    Modification Agreement (Long Form), dated August 10, 1998, between Oakley, Inc. and Bank of America National Trust and
Savings Association10.11 (9)
    
    Oakley, Inc. Amended and Restated 1995 Stock Incentive Plan10.12 (9)
    
    Oakley, Inc. Amended and Restated Executive Officers Performance Bonus Plan10.13 (10)
    
    Second Amended and Restated Employment Agreement, dated January 1, 2000, between Thomas George and Oakley, Inc.10.14 (11)
    
    Employment Agreement, dated October 1, 2000, between Tomas Rios and Oakley, Inc.10.15 (12)
    
    Lease Agreement, dated November 10, 2000, between Haven Gateway LLC and Oakley, Inc.10.16 (12)
    
    Trademark License Agreement and Assignment of Rights, dated March 31, 2000, between Y, LLC and Oakley, Inc.10.17 (13)
    
    Amendment to Trademark License Agreement, dated June 1, 2002, between Y, LLC and Oakley, Inc.10.18 (14)
    
    Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Jim Jannard.10.19 (14)
    
    Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Link Newcomb.10.20 (14)
    
    Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Colin Baden.10.21 (14)
    
    Indemnification Agreement, dated February 14, 2003, between Oakley, Inc. and Tommy Rios.
 43
    Table of Contents  10.22 (14)
    
    Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Tom George.10.23 (14)
    
    Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Donna Gordon.10.24 (14)
    
    Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Scott Bowers.10.25 (14)
    
    Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Jon Krause.10.26 (14)
    
    Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Kent Lane.10.27 (14)
    
    Indemnification Agreement, dated February 14, 2003, between Oakley, Inc. and Carlos Reyes.10.28 (15)
    
    Indemnification Agreement, dated March 26, 2003, between Oakley, Inc. and Irene Miller.10.29 (15)
    
    Indemnification Agreement, dated March 26, 2003, between Oakley, Inc. and Abbott Brown.10.30 (15)
    
    Indemnification Agreement, dated March 26, 2003, between Oakley, Inc. and Lee Clow.10.31 (16)
    
    Aircraft Lease Agreement, dated December 18, 2003, between Oakley, Inc. and N2T, Inc.10.32 (16)
    
    Indemnification Agreement, dated February 12, 2004, between Oakley, Inc. and Thomas Davin.10.33 (17)
    
    Agreement and Mutual Release, dated March 5, 2004, between N2T, Inc. and Oakley, Inc.10.34 (17)
    
    Severance Agreement, dated March 5, 2004, between Link Newcomb and Oakley, Inc.10.35 (17)
    
    Executive Severance Plan effective as of January 1, 200410.36 (17)
    
    Officer Severance Plan effective as of January 1, 200410.37 (18)
    
    Third Amended and Restated Credit Agreement, dated August 19, 2004 among Oakley, Inc., as borrower, and Bank of America,
N.A., as agent, Swing Line Lender and the lenders named therein.10.38 (18)
    
    Indemnification Agreement, dated September 29, 2004, between Oakley, Inc. and Cosmas N. Lykos.10.39 (18)
    
    Indemnification Agreement, dated September 29, 2004, between Oakley, Inc. and Mary George.10.40 (19)
    
    Indemnification Agreement, dated January 1, 2005, between Oakley, Inc. and Michael J. Puntoriero.21.1 (19)
    
    List of Material Subsidiaries23.1 (19)
    
    Consent of Deloitte & Touche LLP, independent registered public accounting firm.31.1 (19)
    
    Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2 (19)
    
    Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1 (19)
    
    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 September
30, 2000. 44
    Table of Contents  (12)
    Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31,
2000.(13)
    Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended June 30,
2002.(14)
    Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31,
2002.(15)
    Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended March 31,
2003.(16)
    Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31,
2003.(17)
    Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended March 31,
2004.(18)
    Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended September
30, 2004.(19)
    Filed herewith.  (b)
    Reports on Form 8-K The Company filed a Form 8-K on October 5, 2004 to announce a modification to the
compensation structure for its non-employee directors, the addition of Mary J. George to the
Companys Board of Directors, and the declaration of a regular annual cash dividend of $0.15 per
share. The Company furnished a Form 8-K on October 21, 2004, in connection with the press release
issued by the Company on October 21, 2004 announcing its financial results for the fiscal
quarter ended September 30, 2004. The Company filed a Form 8-K on December 10, 2004 to announce the planned resignation of
Irene Miller as a member of its Board of Directors. 45
    Table of Contents  Index To Consolidated Financial Statements PageIndependent Registered Public Accounting Firms Report
    
    
    47Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    48Consolidated Statements of Income and Consolidated Statements of Comprehensive
Income for the Years Ended December 31, 2004, 2003 and 2002
    
    
    49Consolidated Statements of Shareholders Equity for the Years Ended
December 31, 2004, 2003 and 2002
    
    
    50Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002
    
    
    51Notes to Consolidated Financial Statements
    
    
    52-78
 46
    Table of Contents  Report of Independent Registered Public Accounting Firm 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, 2004 and 2003, 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, 2004. 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 the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits 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, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in the period ended
December 31, 2004, 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. We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Companys internal control over financial reporting
as of December 31, 2004, based on the criteria established in Internal Control  Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated March 14, 2005 expressed an unqualified opinion on managements assessment of the
effectiveness of the Companys internal control over financial reporting and an unqualified opinion
on the effectiveness of the Companys internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 14, 2005 47
    Table of Contents  OAKLEY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
 (in thousands, except share and per share data)
 December 31, 2004
    
    
    December 31, 2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    51,738
    
    
    $
    49,211Accounts receivable, less allowances
of $11,045 (2004) and $9,672 (2003)
    
    
    102,817
    
    
    
    77,989Inventories, net (Note 2)
    
    
    115,061
    
    
    
    98,691Other receivables
    
    
    3,992
    
    
    
    3,368Deferred income taxes
    
    
    10,202
    
    
    
    9,965Prepaid expenses and other assets
    
    
    9,141
    
    
    
    8,062Total current assets
    
    
    292,951
    
    
    
    247,286Property and equipment, net
    
    
    152,993
    
    
    
    153,583Deposits
    
    
    1,828
    
    
    
    2,139Deferred income taxes
    
    
    1,027
    
    
    
    781Goodwill
    
    
    25,699
    
    
    
    24,609Other assets
    
    
    6,379
    
    
    
    6,486TOTAL ASSETS
    
    $
    480,877
    
    
    $
    434,884LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Line of credit (Note 7)
    
    $
    17,541
    
    
    $
    14,039Accounts payable
    
    
    32,838
    
    
    
    26,837Accrued expenses and other current liabilities (Note 5)
    
    
    39,583
    
    
    
    36,984Accrued warranty (Note 1)
    
    
    3,107
    
    
    
    2,921Income taxes payable
    
    
    2,406
    
    
    
    9,954Current portion of long-term debt (Note 7)
    
    
    2,019
    
    
    
    2,019Total current liabilities
    
    
    97,494
    
    
    
    92,754Deferred income taxes
    
    
    6,684
    
    
    
    2,884Long-term debt, net of current portion
    
    
    10,688
    
    
    
    12,642COMMITMENTS AND CONTINGENCIES (Note 8)SHAREHOLDERS EQUITY:Preferred stock, par value $.01 per share; 20,000,000
shares authorized; no shares issued
    
    
    
    
    
    
    Common stock, par value $.01 per share; 200,000,000
shares authorized; 68,077,000 (2004) and
67,948,000 (2003) issued and outstanding
    
    
    678
    
    
    
    679Additional paid-in capital
    
    
    30,042
    
    
    
    31,126Retained earnings
    
    
    328,312
    
    
    
    296,970Accumulated other comprehensive income (loss)
    
    
    6,979
    
    
    
    (2,171
    )Total shareholders equity
    
    
    366,011
    
    
    
    326,604TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
    
    $
    480,877
    
    
    $
    434,884
 See accompanying Notes
to Consolidated Financial Statements 48
    Table of Contents  OAKLEY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
 Year ended December 31,2004
    
    
    2003
    
    
    2002Net sales (Note 1)
    
    $
    585,468
    
    
    $
    528,034
    
    
    $
    496,091Cost of goods sold (Note 1)
    
    
    265,104
    
    
    
    237,788
    
    
    
    222,845Gross profit
    
    
    320,364
    
    
    
    290,246
    
    
    
    273,246Operating expenses:Research and development
    
    
    15,962
    
    
    
    14,308
    
    
    
    16,016Selling
    
    
    159,366
    
    
    
    142,365
    
    
    
    126,995Shipping and warehousing (Note 1)
    
    
    17,087
    
    
    
    14,620
    
    
    
    13,739General and administrative
    
    
    65,511
    
    
    
    58,918
    
    
    
    52,335Total operating expenses
    
    
    257,926
    
    
    
    230,211
    
    
    
    209,085Operating income
    
    
    62,438
    
    
    
    60,035
    
    
    
    64,161Interest expense, net
    
    
    1,037
    
    
    
    1,272
    
    
    
    1,643Income before provision for income taxes
    
    
    61,401
    
    
    
    58,763
    
    
    
    62,518Provision for income taxes
    
    
    19,851
    
    
    
    20,567
    
    
    
    21,881Net income
    
    $
    41,550
    
    
    $
    38,196
    
    
    $
    40,637Basic net income per common share
    
    $
    0.61
    
    
    $
    0.56
    
    
    $
    0.59Basic weighted average common shares
    
    
    67,953,000
    
    
    
    68,006,000
    
    
    
    68,732,000Diluted net income per common share
    
    $
    0.60
    
    
    $
    0.56
    
    
    $
    0.59Diluted weighted average common shares
    
    
    68,832,000
    
    
    
    68,282,000
    
    
    
    69,333,000
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands) Year ended December 31,2004
    
    
    2003
    
    
    2002Net income
    
    $
    41,550
    
    
    $
    38,196
    
    
    $
    40,637Other comprehensive income (loss):Net unrealized gain (loss) on derivative
instruments, net of tax
    
    
    2,220
    
    
    
    (4,088
    )
    
    
    (4,181
    )Foreign currency translation adjustment
    
    
    6,930
    
    
    
    12,151
    
    
    
    2,378Other comprehensive income (loss)
    
    
    9,150
    
    
    
    8,063
    
    
    
    (1,803
    )Comprehensive income
    
    $
    50,700
    
    
    $
    46,259
    
    
    $
    38,834
 See accompanying Notes
to Consolidated Financial Statements 49
    Table of Contents  OAKLEY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 (in thousands, except share data)
 AccumulatedOtherCommon Stock
    
    
    Additional
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Paid-in Capital
    
    
    Earnings
    
    
    (Loss) / Income
    
    
    TotalBalance as of January 1, 2002
    
    
    68,821,000
    
    
    $
    688
    
    
    $
    40,805
    
    
    $
    227,648
    
    
    $
    (8,431
    )
    
    $
    260,710Repurchase of common shares (Note 10)
    
    
    (666,000
    )
    
    
    (7
    )
    
    
    (7,986
    )
    
    
    
    
    
    
    
    
    
    
    (7,993
    )Exercise of stock options (Note 10)
    
    
    177,000
    
    
    
    2
    
    
    
    1,827
    
    
    
    
    
    
    
    
    
    
    
    1,829Compensatory stock options
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Tax benefit related to exercise of stock options
    
    
    
    
    
    
    
    
    
    
    448
    
    
    
    
    
    
    
    
    
    
    
    448Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,637
    
    
    
    
    
    
    
    40,637Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,803
    )
    
    
    (1,803
    )Balance as of December 31, 2002
    
    
    68,332,000
    
    
    
    683
    
    
    
    35,097
    
    
    
    268,285
    
    
    
    (10,234
    )
    
    
    293,831Repurchase of common shares (Note 10)
    
    
    (436,000
    )
    
    
    (4
    )
    
    
    (4,487
    )
    
    
    
    
    
    
    
    
    
    
    (4,491
    )Exercise of stock options (Note 10)
    
    
    52,000
    
    
    
    
    
    
    
    470
    
    
    
    
    
    
    
    
    
    
    
    470Compensatory stock options
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    11Tax benefit related to exercise of stock options
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    35Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,511
    )
    
    
    
    
    
    
    (9,511
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,196
    
    
    
    
    
    
    
    38,196Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,063
    
    
    
    8,063Balance as of December 31, 2003
    
    
    67,948,000
    
    
    
    679
    
    
    
    31,126
    
    
    
    296,970
    
    
    
    (2,171
    )
    
    
    326,604Repurchase of common shares (Note 10)
    
    
    (515,000
    )
    
    
    (5
    )
    
    
    (5,918
    )
    
    
    
    
    
    
    
    
    
    
    (5,923
    )Exercise of stock options (Note 10)
    
    
    352,000
    
    
    
    4
    
    
    
    3,454
    
    
    
    
    
    
    
    
    
    
    
    3,458Compensatory stock options
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    16Tax benefit related to exercise of stock options
    
    
    
    
    
    
    
    
    
    
    603
    
    
    
    
    
    
    
    
    
    
    
    603Issuance of restricted stock
    
    
    292,000
    
    
    
    
    
    
    
    761
    
    
    
    
    
    
    
    
    
    
    
    761Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,208
    )
    
    
    
    
    
    
    (10,208
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,550
    
    
    
    
    
    
    
    41,550Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,150
    
    
    
    9,150Balance as of December 31, 2004
    
    
    68,077,000
    
    
    $
    678
    
    
    $
    30,042
    
    
    $
    328,312
    
    
    $
    6,979
    
    
    $
    366,011
 See accompanying Notes
to Consolidated Financial Statements 50
    Table of Contents  OAKLEY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Year ended December 31,2004
    
    
    2003
    
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    41,550
    
    
    $
    38,196
    
    
    $
    40,637Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    31,879
    
    
    
    30,790
    
    
    
    28,578Provision for bad debt expense
    
    
    1,601
    
    
    
    1,738
    
    
    
    1,877Compensatory stock options and restricted stock expense
    
    
    777
    
    
    
    11
    
    
    
    3Tax benefit related to exercise of stock options
    
    
    603
    
    
    
    35
    
    
    
    448Loss on disposition of equipment
    
    
    639
    
    
    
    1,413
    
    
    
    1,353Deferred income taxes, net
    
    
    2,331
    
    
    
    885
    
    
    
    (533
    )Changes in assets and liabilities, net of effects of business acquisitions:Accounts receivable
    
    
    (23,717
    )
    
    
    (5,403
    )
    
    
    5,672Inventories
    
    
    (13,779
    )
    
    
    (5,847
    )
    
    
    (5,925
    )Other receivables
    
    
    (533
    )
    
    
    1,936
    
    
    
    (2,192
    )Income taxes receivable
    
    
    
    
    
    
    
    
    
    
    6,449Prepaid expenses and other
    
    
    (974
    )
    
    
    (1,558
    )
    
    
    3,243Deposits
    
    
    362
    
    
    
    670
    
    
    
    (1,218
    )Accounts payable
    
    
    5,751
    
    
    
    (42
    )
    
    
    6,034Accrued expenses and other current liabilities
    
    
    5,763
    
    
    
    4,446
    
    
    
    2,838Accrued warranty
    
    
    186
    
    
    
    (616
    )
    
    
    34Income taxes payable
    
    
    (7,580
    )
    
    
    9,458
    
    
    
    319Net cash provided by operating activities
    
    
    44,859
    
    
    
    76,112
    
    
    
    87,617CASH FLOWS FROM INVESTING ACTIVITIES:Acquisitions of property and equipment
    
    
    (29,615
    )
    
    
    (29,772
    )
    
    
    (32,992
    )Proceeds from sale of property and equipment
    
    
    311
    
    
    
    192
    
    
    
    162Acquisitions of businesses
    
    
    (450
    )
    
    
    (430
    )
    
    
    Other assets
    
    
    (491
    )
    
    
    (665
    )
    
    
    (288
    )Net cash used in investing activities
    
    
    (30,245
    )
    
    
    (30,675
    )
    
    
    (33,118
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from bank borrowings
    
    
    3,416
    
    
    
    19,037
    
    
    
    77,852Repayments of bank borrowings
    
    
    (2,853
    )
    
    
    (23,919
    )
    
    
    (107,714
    )Dividends
    
    
    (10,208
    )
    
    
    (9,511
    )
    
    
    Net proceeds from issuance of common shares
    
    
    3,458
    
    
    
    505
    
    
    
    2,277Repurchase of common shares
    
    
    (5,923
    )
    
    
    (4,491
    )
    
    
    (7,993
    )Net cash used in financing activities
    
    
    (12,110
    )
    
    
    (18,379
    )
    
    
    (35,578
    )Effect of exchange rate changes on cash
    
    
    23
    
    
    
    (95
    )
    
    
    (2,285
    )Net increase in cash and cash equivalents
    
    
    2,527
    
    
    
    26,963
    
    
    
    16,636Cash and cash equivalents, beginning of period
    
    
    49,211
    
    
    
    22,248
    
    
    
    5,612Cash and cash equivalents, end of period
    
    $
    51,738
    
    
    $
    49,211
    
    
    $
    22,248Supplemental cash flow information:Cash paid during the year for:Interest
    
    $
    1,511
    
    
    $
    1,526
    
    
    $
    2,700Income taxes (net of refunds received)
    
    $
    23,031
    
    
    $
    8,573
    
    
    $
    14,582Non-cash investing and financing activities:During 2002, the Company acquired certain assets through
the settlement of accounts receivable
    
    $
    
    
    
    $
    
    
    
    $
    (2,687
    )
 See accompanying Notes to Consolidated Financial Statements 51
    Table of Contents  OAKLEY, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 2004, 2003, 2002
 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 524 legal patents and 1,059 trademarks worldwide. The Company
operates in two segments: wholesale and U.S. retail with over 100 retail stores at December 31,
2004. 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. 52
    Table of Contents  OAKLEY, INC.
and SUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 1  Significant Accounting Policies and Description of Business (contd) Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation and amortization.
Depreciation and amortization are provided for using the straight-line method over the estimated
useful lives (generally 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. Beginning in 2004, certain tooling equipment used for
identifiable products is recorded at cost and depreciated over the estimated units to be produced. Long-Lived Assets In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144), the Company evaluates the carrying
value of long-lived assets for impairment whenever events or change in circumstances indicate that
such carrying values may not be recoverable. Under 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. 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. At December 31, 2004, the Company
determined that no impairment loss was necessary. Goodwill and Intangible Assets In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Intangible
Assets, (SFAS No. 142), goodwill and non-amortizing intangible assets with indefinite lives are no
longer amortized but are tested for impairment annually and also in the event of an impairment
indicator. As required by SFAS No. 142, the Company evaluates the recoverability of goodwill 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. The Company completed its annual impairment
test for the fiscal year ended December 31, 2004 and determined that no impairment loss was
necessary. 53
    Table of Contents  OAKLEY,
INC. and SUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 1  Significant Accounting Policies and Description of Business (contd) Revenue Recognition The Company recognizes wholesale revenue when merchandise is shipped to a customer and the risks
and rewards of ownership and title 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 150 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. Amounts billed to customers for shipping and handling fees are included in net sales, freight costs
incurred related to these fees are included in cost of sales and other warehousing costs are
included in shipping and warehousing. See Note 1  Reclassifications. 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 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. 54
    Table of Contents  OAKLEY,
INC. and SUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 1  Significant Accounting Policies and Description of Business (contd) 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 for claims incurred during the period of $2,265,000. The Company
records a liability for the actuarially 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 its 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. Oakley electronic
products are warranted for 90 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 with proof of purchase from an authorized Oakley dealer. 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 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: 2004
    
    
    2003
    
    
    2002(in thousands),Balance as of January 1,
    
    $
    2,921
    
    
    $
    3,537
    
    
    $
    3,503Warranty claims and expenses
    
    
    (3,959
    )
    
    
    (3,511
    )
    
    
    (4,224
    )Provisions for warranty expense
    
    
    4,124
    
    
    
    2,851
    
    
    
    4,224Changes due to foreign currency translation
    
    
    21
    
    
    
    44
    
    
    
    34Balance as of December 31,
    
    $
    3,107
    
    
    $
    2,921
    
    
    $
    3,537
 55
    Table of Contents  OAKLEY, INC.
and SUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 1  Significant Accounting Policies and Description of Business (contd) 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 Australia, Brazil, Continental Europe, Canada, Japan, Mexico,
New Zealand, South Africa and the United Kingdom, which collect receivables 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 (Loss) Comprehensive income (loss) represents the results of operations adjusted to reflect all items
recognized under accounting standards as components of comprehensive earnings. The components of comprehensive income (loss) 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 income (loss), net of tax, are as follows: Years ended December 31,2004
    
    
    2003(in thousands)Unrealized loss on foreign currency cash flow hedges, net of tax
    
    $
    (5,678
    )
    
    $
    (7,609
    )Unrealized loss on interest rate swap, net of tax
    
    
    (317
    )
    
    
    (606
    )Equity adjustment from foreign currency translation
    
    
    12,974
    
    
    
    6,044$
    6,979
    
    
    $
    (2,171
    )
 56
    Table of Contents  OAKLEY, INC.
and SUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 1  Significant Accounting Policies and Description of Business (contd) 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. Accordingly, no compensation expense has been recognized in
the Companys consolidated financial statements for incentive and non-qualified stock options
granted to employees. 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). Stock Options 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, among others, 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: 2004
    
    
    2003
    
    
    2002Stock volatility
    
    
    36.0
    %
    
    
    50.2
    %
    
    
    70.9
    %Risk-free interest rate
    
    
    3.1
    %
    
    
    2.1
    %
    
    
    2.8
    %Expected dividend yield
    
    
    1.1
    %
    
    
    1.4
    %
    
    
    0
    %Expected life of option
    
    5.0 years
    
    3.8 years
    
    3.6 years
 If the computed fair value of the 2004, 2003 and 2002 awards had been amortized to expense
over the vesting period of the awards, net income would have been as follows: 2004
    
    
    2003
    
    
    2002(in thousands)Net income:As reported
    
    $
    41,550
    
    
    $
    38,196
    
    
    $
    40,637Add: Stock based employee compensation
expense as reported, net of tax effects
    
    
    489
    
    
    
    
    
    
    
    Deduct: Total stock based employee
compensation expense determined under
fair value based method for all awards,
net of tax effects
    
    
    (3,582
    )
    
    
    (3,071
    )
    
    
    (3,639
    )Pro forma
    
    $
    38,457
    
    
    $
    35,125
    
    
    $
    36,998Basic net income per share:As reported
    
    $
    0.61
    
    
    $
    0.56
    
    
    $
    0.59Pro forma
    
    $
    0.57
    
    
    $
    0.52
    
    
    $
    0.54Diluted net income per share:As reported
    
    $
    0.60
    
    
    $
    0.56
    
    
    $
    0.59Pro forma
    
    $
    0.56
    
    
    $
    0.51
    
    
    $
    0.54
 57
    Table of Contents  OAKLEY, INC.
and SUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 1  Significant Accounting Policies and Description of Business (contd) In March 2004, the Compensation and Stock Option Committee of the Companys Board of Directors
approved the accelerated vesting, as of December 31, 2004, of all unvested stock options that have
an exercise price greater than $15.70. This accelerated vesting affected approximately 1,242,000
common stock options with a weighted average exercise price of $17.62. This acceleration resulted
in the recognition of additional stock-based employee compensation of approximately $438,000, net
of taxes, in the 2004 pro forma disclosure above and eliminates future compensation expense of
approximately $691,000 that the Company would otherwise have recognized in its statements of income
with respect to these options when FASB Statement No. 123 ® becomes effective on July 1, 2005.
No stock-based compensation pursuant to APB Opinion No. 25 was recorded in the Companys
consolidated financial statements as a result of the acceleration. Earnings Per Share Basic earnings per share is computed using the weighted average number of common shares vested and
outstanding during the reporting period. Earnings per share assuming dilution is computed using the
weighted average number of common shares outstanding, including non-vested restricted shares, and
the dilutive effect of potential common shares outstanding. For the years ended December 31, 2004,
2003 and 2002, the diluted weighted average common shares outstanding includes diluted shares for
stock options totaling 643,000, 276,000 and 601,000, respectively. Advertising Costs The Company advertises primarily through print media, catalogs and direct marketing. 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 2004, 2003
and 2002 were $18,372,000, $17,612,000 and $18,432,000, respectively. New Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (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 (FIN No. 46 ®), which amended FIN 46. 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 ® 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 adoption of FIN No. 46 and FIN No. 46 ®
did not have a material impact on the Companys financial position or results of operations because
the Company is not the beneficiary of any variable interest entities. 58
    Table of Contents  OAKLEY, INC.
and SUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 1  Significant Accounting Policies and Description of Business (contd) In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4, to clarify the accounting guidance related to abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage) costs. SFAS No. 151 specifies that
these costs should be recognized as current period charges, and that fixed production overhead
should be allocated to inventory based on normal capacity of production facilities. SFAS No. 151
is effective for fiscal years beginning after June 15, 2005. The Company is currently in the
process of evaluating the impact of the adoption of SFAS No. 151 on its overall results of
operations or financial position. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets  an amendment of
APB Opinion No. 29, Accounting for Nonmonetary Transactions. This statement amends APB Opinion
No. 29 to eliminate the exceptions for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of
the entity are expected to change significantly as a result of the exchange. The provisions for
SFAS No. 153 are effective for nonmonetary asset exchanges incurred during fiscal years beginning
after June 15, 2005. The Company is currently evaluating the effect, if any, of adopting SFAS No.
153. In December 2004, the FASB issued SFAS No. 123 ® which requires that companies recognize
compensation cost related to share based payment transactions in their financial statements.
Compensation cost is measured based on the grant-date fair value of the equity or liability
instruments and will be recognized over the period that an employee provides service (usually the
vesting period) in exchange for the award. This standard replaces SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS No. 123 ® is effective beginning July 1, 2005. The Company is currently in the
process of evaluating the impact of the adoption of SFAS No. 123 ®, which will result in
additional compensation expense for remaining unvested stock options and will be affected by the
number of future options granted. Reclassifications In the fourth quarter of 2004, the Company reclassified to net sales certain shipping and handling
fees charged to customers. The Company had previously included these fees as a reduction to
shipping and warehousing expenses. The reclassified shipping and handling fees totaled $6.7
million, $6.5 million and $6.5 million for the years ended December 31, 2004, 2003 and 2002,
respectively, and have not been allocated to any specific product category or customer. In
addition, the Company changed its accounting policy for freight costs resulting in the
reclassification of $10.7 million, $10.9 million and $10.9 million for the years ended December 31,
2004, 2003 and 2002, respectively, from shipping and warehousing expenses to cost of goods sold. The Companys net sales, cost of goods sold, shipping and warehousing expenses, and any ratio
calculated therefrom, as used throughout this Annual Report for the years ended December 31, 2004,
2003 and 2002, reflect the reclassifications described above. These reclassifications had no impact on the Companys net income for 2004 or any prior period, but
resulted in reductions in gross profit of 1.2%, 1.5% and 1.6% for the years ended December 31,
2004, 2003 and 2002, respectively. 59
    Table of Contents  OAKLEY, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 1  Significant Accounting Policies and Description of Business (contd) 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, apparel accessories,
electronics, footwear and watches, 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 that could affect demand
for the Companys products include: unanticipated changes in general market conditions and consumer
preferences 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 therefore 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, could 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 has an exclusive agreement with a single source for the supply of uncoated lens blanks
from which a majority of its sunglass lenses are profiled. This agreement gives the Company 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 conditions. The Company has expanded its
in-house lens blank production capabilities to manufacture some portion of its lenses directly. In
addition, the Company has terminated this agreement effective in March 2006 and is renegotiating a
new contract under terms it believes will be more favorable to the Company. In the event of the
loss of its source for lens blanks, the Company has identified an alternate source that 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 and use a suitable
alternative source and could have a material adverse impact 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 could be located or developed in a timely manner. If the Company were 60
    Table of Contents  OAKLEY, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 1  Significant Accounting Policies and Description of Business (contd) to lose the source for its lens blanks or other critical materials, it could have a materially
adverse effect on the Companys business. Vulnerability Due to Customer Concentrations Net sales to the retail group of Luxottica Group S.p.A (Luxottica), which include Sunglass Hut
locations worldwide, were approximately 7.6%, 8.9% and 12.0% of the Companys net sales for the
years ended December 31, 2004, 2003 and 2002, 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 new commercial agreement that establishes the commercial terms applicable
for 2005 between the two companies. There can be no assurances as to the future of the
relationship between the Company and Luxottica or as to the likelihood that a new contract beyond
2005 will be agreed to by the parties. In October 2004, Luxottica acquired Cole National
Corporation (Cole), one of the largest optical retailers and chain providers of managed vision
care services worldwide. The Company currently sells to a small portion of Coles retail locations
and sales to this customer have been immaterial to the Companys operations. 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 that offer some of the Companys products and sales to this customer have been
immaterial to the Companys operations. In September 2003, Luxottica acquired 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). These sales exclude a limited amount of sales generated through
the Companys international distributors. 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  Inventories Inventories at December 31, consist of the following: 2004
    
    
    2003(in thousands)Raw materials
    
    $
    29,219
    
    
    $
    21,310Finished goods
    
    
    85,842
    
    
    
    77,381$
    115,061
    
    
    $
    98,691
 61
    Table of Contents  OAKLEY, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 3  Property and Equipment Property and equipment at December 31, consist of the following: 2004
    
    
    2003(in thousands)Land
    
    $
    8,953
    
    
    $
    8,953Buildings and leasehold improvements
    
    
    100,042
    
    
    
    92,537Equipment and furniture
    
    
    201,700
    
    
    
    184,688Tooling
    
    
    26,995
    
    
    
    24,024337,690
    
    
    
    310,202Less accumulated depreciation and amortization
    
    
    (184,697
    )
    
    
    (156,619
    )$
    152,993
    
    
    $
    153,583
 Note 4  Goodwill and Intangible Assets Included in other assets in the accompanying consolidated financial statements are the following
amortizing intangible assets. As of December 31, 2004
    
    
    As of December 31, 2003Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amortization(in thousands)Covenants not to compete
    
    $
    4,290
    
    
    $
    2,948
    
    
    $
    4,284
    
    
    $
    2,452Distribution rights
    
    
    3,567
    
    
    
    1,921
    
    
    
    3,567
    
    
    
    1,615Patents
    
    
    4,108
    
    
    
    2,032
    
    
    
    3,740
    
    
    
    1,689Other identified intangible assets
    
    
    1,604
    
    
    
    379
    
    
    
    877
    
    
    
    238Total
    
    $
    13,569
    
    
    $
    7,280
    
    
    $
    12,468
    
    
    $
    5,994
 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, 2004, 2003 and 2002 was approximately $1,286,000, $1,267,000 and
$1,119,000, respectively. Annual estimated amortization expense, based on the Companys intangible
assets at December 31, 2004, is as follows: Estimated Amortization Expense:
    
    (in thousands)Fiscal 2005
    
    $
    1,295Fiscal 2006
    
    
    1,236Fiscal 2007
    
    
    880Fiscal 2008
    
    
    772Fiscal 2009
    
    
    706
 62
    Table of Contents  OAKLEY, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 4  Goodwill and Intangible Assets (cont) Changes in goodwill are as follows: Wholesale
    
    
    RetailUnited
    
    
    Continental
    
    
    Other
    
    
    U.S. RetailStates
    
    
    Europe
    
    
    Countries
    
    
    Operations
    
    
    Consolidated(in thousands)Balance, December 31, 2002
    
    $
    1,574
    
    
    $
    
    
    
    $
    11,692
    
    
    $
    8,204
    
    
    $
    21,470Additions / adjustments:Goodwill additions (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    371
    
    
    
    371Changes due to foreign exchange rates
    
    
    
    
    
    
    
    
    
    
    2,768
    
    
    
    
    
    
    
    2,738Balance, December 31, 2003
    
    
    1,574
    
    
    
    
    
    
    
    14,460
    
    
    
    8,575
    
    
    
    24,609Additions / adjustments:Goodwill additions (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    422
    
    
    
    422Changes due to foreign exchange rates
    
    
    
    
    
    
    
    
    
    
    668
    
    
    
    
    
    
    
    668Balance, December 31, 2004
    
    $
    1,574
    
    
    $
    
    
    
    $
    15,128
    
    
    $
    8,997
    
    
    $
    25,699
   (1)
    
    Reflects insignificant acquisitions made by the Companys Iacon subsidiary in 2003 and 2004. Note 5  Accrued Liabilities Accrued liabilities consist of the following: Years ended December 31,2004
    
    
    2003(in thousands)Accrued employee compensation and benefits
    
    $
    15,689
    
    
    $
    14,188Derivative liability
    
    
    9,354
    
    
    
    12,784Other liabilities
    
    
    14,540
    
    
    
    10,012$
    39,583
    
    
    $
    36,984
 Note 6  Income Taxes The Companys income before income tax provision was subject to taxes in the following
jurisdictions for the years ended December 31: 2004
    
    
    2003
    
    
    2002(in thousands)United States
    
    $
    57,993
    
    
    $
    50,101
    
    
    $
    59,153Foreign
    
    
    3,408
    
    
    
    8,662
    
    
    
    3,365$
    61,401
    
    
    $
    58,763
    
    
    $
    62,518
 63
    Table of Contents  OAKLEY, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 6  Income Taxes (cont) The provision for income taxes for the years ended December 31, consists of the following: 2004
    
    
    2003
    
    
    2002(in thousands)Current:Federal
    
    $
    12,608
    
    
    $
    12,871
    
    
    $
    20,075State
    
    
    1,256
    
    
    
    1,554
    
    
    
    2,051Foreign
    
    
    2,670
    
    
    
    4,469
    
    
    
    1,39016,534
    
    
    
    18,894
    
    
    
    23,516Deferred:Federal
    
    
    3,350
    
    
    
    2,322
    
    
    
    (1,120
    )State
    
    
    49
    
    
    
    3
    
    
    
    79Foreign
    
    
    (82
    )
    
    
    (652
    )
    
    
    (594
    )3,317
    
    
    
    1,673
    
    
    
    (1,635
    )$
    19,851
    
    
    $
    20,567
    
    
    $
    21,881
 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 $23.4 million of undistributed
earnings of foreign subsidiaries as of December 31, 2004, which have been or are intended to be
permanently reinvested. On October 22, 2004, the American Jobs Creation Act (the AJCA) was signed into law. The AJCA
provides for a deduction of 85% of certain foreign earnings that are repatriated, as defined in the
AJCA. If applicable, the Company may elect to apply this provision to qualifying earnings
repatriations in either the calendar year 2004 or the calendar year 2005. In December 2004, the
FASB issued FASB Staff Position No. FAS 109-2 (FAS 109-2), Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004
which provided additional guidance surrounding the financial statement impact of the AJCA.
Although FAS 109-2 is effective immediately, we do not expect to be able to complete our evaluation
of the repatriation provision until after Congress or the Treasury Department provides additional
clarifying language on key elements of the provision. In January 2005, the Treasury Department
began to issue the first of a series of clarifying guidance documents related to this provision.
We expect to complete our evaluation of the effects of the repatriation provision within a
reasonable period of time following the publication of the additional clarifying language and may
decide to repatriate some level of earnings of our foreign subsidiaries in the future. 64
    Table of Contents  OAKLEY, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 6  Income Taxes (contd) 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: 2004
    
    
    2003
    
    
    2002(in thousands)Tax at U.S. Federal statutory rates
    
    $

    21,490
    
    
    $
    20,567
    
    
    $
    21,881State income taxes, net
    
    
    849
    
    
    
    1,012
    
    
    
    1,384U.S. export benefit,
net of foreign tax rate differential
    
    
    (1,668
    )
    
    
    (1,256
    )
    
    
    (1,268
    )Other, net
    
    
    (820
    )
    
    
    244
    
    
    
    (116
    )$
    19,851
    
    
    $
    20,567
    
    
    $
    21,881
 Certain wholly-owned foreign subsidiaries have generated net operating losses within the
foreign jurisdictions in which they operate. Total net operating losses, which relate to
continuing operations in Latin America, Germany and Australia, were approximately $15,288,000 as of
December 31, 2004 and $10,121,000 as of December 31, 2003. Approximately $4,821,000 of the net
operating loss balance on December 31, 2004, which relates to Latin America, will begin to expire
on December 31, 2006. The remaining $10,468,000 of the net operating loss balance at December 31,
2004, which relates to Germany and Australia, will carry forward indefinitely. The Companys
wholly-owned subsidiary in Mexico has generated tax credits related to asset taxes paid in lieu of
income taxes. These credits, approximately $149,000 on December 31, 2004 and $120,000 on December
31, 2003, will begin to expire on December 31, 2009. The Company has included a valuation
allowance against the entire balance of net operating losses and tax credits at December 31, 2004,
as we do not expect these attributes to be utilized in the foreseeable future. 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: 65
    Table of Contents  OAKLEY, INC. andSUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 6  Income Taxes (contd) 2004
    
    
    2003(in thousands)Deferred tax assets:Warranty reserve
    
    $
    1,090
    
    
    $
    1,038Uniform capitalization
    
    
    1,345
    
    
    
    1,177Sales returns reserve
    
    
    1,493
    
    
    
    2,016State taxes
    
    
    (956
    )
    
    
    63Inventory
    
    
    1,585
    
    
    
    1,932Allowance for doubtful accounts
    
    
    523
    
    
    
    481Accrued fringe benefits and compensation
    
    
    2,569
    
    
    
    1,720Foreign tax credit
    
    
    
    
    
    
    1,375Restricted stock
    
    
    342
    
    
    
    Other
    
    
    3,238
    
    
    
    944Total deferred tax assets
    
    
    11,229
    
    
    
    10,746Deferred tax liabilities:Depreciation and amortization
    
    
    (9,820
    )
    
    
    (7,788
    )Other comprehensive income
    
    
    2,570
    
    
    
    3,884Other
    
    
    566
    
    
    
    1,020Total deferred tax liability
    
    
    (6,684
    )
    
    
    (2,884
    )Net deferred tax assets
    
    $
    4,545
    
    
    $
    7,862
 The Company believes it has adequately provided for income tax issues not yet resolved with
federal, state and foreign tax authorities. At December 31, 2004, $3.7 million was accrued for such
matters. Although not probable, the most adverse resolution of these issues could result in
additional charges to earnings in future periods. Based upon a consideration of all relevant facts
and circumstances, the Company does not believe the ultimate resolution of tax issues for all open
tax periods will have a materially adverse effect upon its results of operations or financial
condition. During 2004, the Company was under audit by the IRS for the years ended December 31, 2000 and 2001.
On August 2, 2004, the IRS notified the Company of a proposed audit adjustment related to advance
payment agreements executed by the Company in December 2000 with its foreign sales corporation,
Oakley International Inc., and two wholly-owned foreign subsidiaries, Oakley UK and Oakley Europe.
The adjustment could result in additional tax liability and penalties of approximately $11.2
million. The Company is currently contesting this adjustment with the IRS. Based on advice from
its outside legal and tax experts, management believes that Oakleys tax position with respect to
this issue will ultimately prevail on its merits and therefore does not expect to pay the
additional tax and penalties reflected in this adjustment. In the event that the Company does not
prevail under protest, management expects that the adjustment should not have a material impact on
the Companys financial results because the Company has insurance in place which it believes will
cover such adjustment and any associated expenses. Accordingly, the Company has not provided any
amounts in its financial statements for the settlement of this matter. 66
    Table of Contents  OAKLEY, INC. andSUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 7  Debt Line of Credit In August 2004, the Company amended its credit agreement with a bank syndicate. The amended credit
agreement allows for borrowings up to $75 million and matures in August 2007. Borrowings under the
line of credit are unsecured and bear interest at either LIBOR or IBOR plus 0.75% (3.14% at
December 31, 2004) or the banks prime lending rate minus 0.25% (5.0% at December 31, 2004). At
December 31, 2004, the Company did not have any balance outstanding under the credit facility. The
amended credit agreement contains various restrictive covenants including the maintenance of
certain financial ratios. At December 31, 2004, the Company was in compliance with all restrictive
covenants and financial ratios. Certain of the Companys foreign subsidiaries have negotiated
local lines of credit to provide working capital financing. These foreign lines of credit bear
interest at rates ranging from 0.73% to 6.07%. Some of the Companys foreign subsidiaries have
bank overdraft accounts that renew annually and bear interest at rates ranging from 2.60% to
11.00%. The aggregate borrowing limit on the foreign lines of credit and overdraft accounts is
$27.5 million, of which $17.5 million was outstanding at December 31, 2004. Long-Term Debt The Company has a real estate term loan with an outstanding balance of $11.8 million at December
31, 2004, which matures 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% (3.4% at December 31, 2004). 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, 2004, the fair value of the Companys interest rate swap
agreement was a loss of approximately $0.5 million. As of December 31, 2004, the Company also has a non-interest bearing note payable in the amount of
$0.9 million, net of discounts, in connection with its acquisition of Iacon, Inc. Payments under
the note are due in annual installments of $0.5 million ending in 2006, with such payments
contingent upon certain conditions. The following schedule lists the Companys scheduled annual principal payments on its long-term
debt: Year EndingDecember 31,
    
    (in thousands)2005
    
    $
    2,0192006
    
    
    1,9572007
    
    
    8,7312008
    
    
    2009
    
    
    Thereafter
    
    
    $
    12,707
 67
    Table of Contents  OAKLEY, INC. andSUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 8  Commitments and Contingencies Operating Leases The Company is committed under noncancelable operating leases expiring at various dates through
2022 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, 2004: Year EndingDecember 31,
    
    (in thousands)2005
    
    $
    18,5562006
    
    
    18,2362007
    
    
    16,7272008
    
    
    14,8412009
    
    
    13,259Thereafter
    
    
    43,496Total
    
    $
    125,115
 Substantially all of the retail segment leases require the Company to pay maintenance,

insurance, property taxes and percentage rent ranging up to 9% based on sales volumes over certain
minimum sales levels. Rent expense for the years ended December 31, is summarized as follows: 2004
    
    
    2003
    
    
    2002(in thousands)Related Party
    
    $
    
    
    
    $
    90
    
    
    $
    60Other
    
    
    18,992
    
    
    
    14,741
    
    
    
    8,570Total
    
    $
    18,992
    
    
    $
    14,831
    
    
    $
    8,630
 Additionally, during the years ended December 31, 2004, 2003 and 2002, the Company paid an
officer and shareholder of the Company approximately $114,000, $142,000 and $42,000, respectively,
for the placement of the Companys trademarks on, and related marketing activities in connection
with, an automobile sponsored 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 March 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. The Company has notified this
supplier of its intent to terminate this current agreement and is in the process of renegotiating a
new contract with this supplier under terms more favorable to the Company. 68
    Table of Contents  OAKLEY, INC. andSUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 8  Commitments and Contingencies (contd) Employment and Consulting Agreements The Company generally has no employment agreements with its officers. The Company 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: Year EndingDecember 31,
    
    (in thousands)2005
    
    $
    6,7352006
    
    
    2,4852007
    
    
    1,2402008
    
    
    2009
    
    
    Thereafter
    
    
    $
    10,460
 Many of these contracts provide incentives based upon specific achievements. It is not
possible to predict with any certainty the amount of such performance awards the Company will be
required to pay in any given            year. Such expenses, however, are an ordinary part of the
Companys business and the Company does not believe that the payment of these performance awards
will have a material adverse effect upon 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. 69
    Table of Contents  OAKLEY, INC. andSUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 8  Commitments and Contingencies (contd) Litigation The Company is a party to various claims, complaints and litigation incidental to the Companys
business. In the opinion of management, the ultimate resolution of such matters, individually and
in the aggregate, will not have a material adverse impact on the accompanying consolidated
financial statements. Note 9  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 and option contracts. In addition, as part of its
overall strategy to manage the level of exposure to the risk of fluctuations in interest rates, in
January 1999, the Company entered into an interest rate swap agreement that resulted in a fixed
interest rate of 6.31% over the remaining term of the Companys ten-year real estate term loan. As
of December 31, 2004, the fair value of the Companys interest rate swap agreement was a loss of
approximately $497,000. At December 31, 2004, all of the Companys derivatives were designated and
qualified as cash flow hedges. For all qualifying and highly effective cash flow hedges, the
changes in the fair value of the derivative are recorded in other comprehensive income. Such gains
or losses are recognized in earnings in the period the hedged item is also recognized in earnings.
The Company is currently hedging forecasted foreign currency transactions that could result in the
recognition of $8.9 million of losses over the next twelve months. The Company has hedged
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 changes in the cash flows of a
hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) when the
derivative is no longer 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, 2004,
the Company recognized losses of $9.2 million, net of taxes, resulting from the expiration, sale,
termination or exercise of foreign currency exchange contracts. 70
    Table of Contents  OAKLEY, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 9  Derivative Financial Instruments (contd) The following is a summary of the foreign currency contracts outstanding by currency at December
31, 2004 (in thousands): U.S. Dollar
    
    
    
    
    
    
    FairEquivalent
    
    
    Maturity
    
    
    Value (loss)Exchange Contracts:Australian dollar
    
    $
    9,355
    
    
    Jan. 2005 - Dec. 2005
    
    $
    (760
    )British pound
    
    
    24,097
    
    
    Feb. 2005 - Dec. 2005
    
    
    (1,541
    )Canadian dollar
    
    
    18,680
    
    
    Jan. 2005 - Dec. 2005
    
    
    (2,152
    )Euro
    
    
    27,414
    
    
    Jan. 2005 - Dec. 2005
    
    
    (3,185
    )Japanese yen
    
    
    16,289
    
    
    Mar. 2005 - Dec. 2005
    
    
    (850
    )South African rand
    
    
    2,833
    
    
    Mar. 2005 - Dec. 2005
    
    
    (369
    )$
    98,668
    
    
    
    
    
    
    $
    (8,857
    )
 The Company is exposed to credit losses in the event of nonperformance by counterparties to
its 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, 2004, 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 10  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, 2004, the Company had purchased 1,344,900 shares of its common stock at
an aggregate cost of approximately $14.6 million, or an average cost of $10.83 per share.
Approximately $5.4 million remains available for repurchases under the current authorization. The
Company intends to remain active with its share repurchase program should the right market
conditions exist. 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
shares, performance shares, stock appreciation rights and deferred stock to Company officers,
employees, advisors and consultants. A total of 8,712,000 shares have been reserved for issuance
under the Plan and at December 31, 2004, 1,919,693 shares were available for issuance pursuant to
new stock option grants or other equity awards. Under the Plan, stock options 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. These options vest over periods ranging
from one to four years and expire ten years after the grant date. At December 31, 2004, stock
options for 3,553,968 shares were exercisable at prices ranging from $5.56 to $25.10. 71
    Table of Contents  OAKLEY, INC. andSUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 10  Shareholders Equity (cont) Stock option activity for each for the three fiscal years ended December 31, was as follows: 2003
    
    
    2003
    
    
    2002Outstanding shares at January 1
    
    
    4,808,020
    
    
    
    3,905,227
    
    
    
    3,495,306Granted
    
    
    58,332
    
    
    
    1,080,697
    
    
    
    702,250Cancelled
    
    
    (174,627
    )
    
    
    (125,485
    )
    
    
    (115,576
    )Exercised
    
    
    (351,762
    )
    
    
    (52,419
    )
    
    
    (176,753
    )Outstanding shares at December 31
    
    
    4,339,963
    
    
    
    4,808,020
    
    
    
    3,905,227Exercisable shares at December 31
    
    
    3,553,968
    
    
    
    2,778,479
    
    
    
    2,155,509Average exercise price at January 1
    
    $
    12.14
    
    
    $
    13.16
    
    
    $
    12.49Granted
    
    
    13.53
    
    
    
    8.50
    
    
    
    16.03Cancelled
    
    
    12.05
    
    
    
    13.92
    
    
    
    14.58Exercised
    
    
    9.76
    
    
    
    9.38
    
    
    
    10.20Average exercise price at December 31
    
    $
    12.52
    
    
    $
    12.14
    
    
    $
    13.16Weighted average exercise price of
exercisable options at December 31
    
    $
    12.98
    
    
    $
    12.25
    
    
    $
    11.67Weighted average fair value of
options granted during the year
    
    $
    4.53
    
    
    $
    3.07
    
    
    $
    8.33
 Additional information regarding options outstanding as of December 31, 2004 is as follows: Options Outstanding
    
    
    Options ExercisableWeighted AvgRemainingRange of
    
    Number
    
    
    Contractual
    
    
    Weighted Avg
    
    
    Number
    
    
    Weighted AvgExercise Prices
    
    Outstanding
    
    
    Life (yrs)
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$5.56 - 8.75
    
    
    1,102,157
    
    
    
    7.18
    
    
    $
    8.10
    
    
    
    466,903
    
    
    $
    7.09$9.06 - 11.00
    
    
    847,987
    
    
    
    4.17
    
    
    $
    10.39
    
    
    
    809,734
    
    
    $
    10.39$11.29 - 13.33
    
    
    1,160,620
    
    
    
    3.68
    
    
    $
    12.11
    
    
    
    1,078,306
    
    
    $
    12.08$14.00 - 25.10
    
    
    1,229,199
    
    
    
    6.60
    
    
    $
    17.74
    
    
    
    1,199,025
    
    
    $
    17.83
 During the years ended December 31, 2004, 2003 and 2002, the Company recorded stock compensation
expense of $16,000, $11,000 and $3,000, respectively, associated with the fair value of stock
options issued to non-employees. 72
    Table of Contents  OAKLEY, INC.andSUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 10  Shareholders Equity (cont) Restricted stock awards are grants that entitle the holder to shares of common stock as the award
vests. For the year ended December 31, 2004, a total of 312,500 restricted stock shares were
granted to employees, the Board of Directors and a consultant of the Company at a weighted average
fair value of $14.98 per share. The Company expenses the value of its restricted stock over the
estimated or scheduled vesting period of the stock based upon the market value on the date of the
grant. During the year ended December 31, 2004, the Company recognized approximately $761,000 of
expense related to these restricted stock grants. Note 11  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 401 (k) Plan were approximately $889,000, $758,000 and
$695,000 for the years ended December 31, 2004, 2003 and 2002, respectively, and is included in
general and administrative expenses. Note 12  Segment and Geographic Information The Company evaluates its operations in 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 those through Company-owned U.S. retail store operations. The U.S. retail segment reflects
the operations of the Company-owned 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 the Companys 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. 73
    Table of Contents  OAKLEY, INC. andSUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 12  Segment and Geographic Information (cont) Financial information for the Companys reportable segments is as follows: 2004Inter-segment
    
    
    TotalWholesale
    
    
    U.S. Retail
    
    
    transactions
    
    
    consolidatedNet sales
    
    $
    530,589
    
    
    $
    72,409
    
    
    $
    (17,530
    )
    
    $
    585,468Operating income
    
    
    53,749
    
    
    
    8,796
    
    
    
    (107
    )
    
    
    62,438Identifiable assets
    
    
    446,772
    
    
    
    45,969
    
    
    
    (11,864
    )
    
    
    480,877Acquisitions of property and equipment
    
    
    23,478
    
    
    
    6,137
    
    
    
    
    
    
    
    29,615Depreciation and amortization
    
    
    28,897
    
    
    
    2,982
    
    
    
    
    
    
    
    31,879
 2003Inter-segment
    
    
    TotalWholesale
    
    
    U.S. Retail
    
    
    transactions
    
    
    consolidatedNet sales
    
    $
    487,767
    
    
    $
    53,206
    
    
    $
    (12,939
    )
    
    $
    528,034Operating income
    
    
    55,917
    
    
    
    4,266
    
    
    
    (148
    )
    
    
    60,035Identifiable assets
    
    
    405,688
    
    
    
    40,280
    
    
    
    (11,084
    )
    
    
    434,884Acquisitions of property and equipment
    
    
    22,670
    
    
    
    7,102
    
    
    
    
    
    
    
    29,772Depreciation and amortization
    
    
    28,551
    
    
    
    2,239
    
    
    
    
    
    
    
    30,790
 2002Inter-segment
    
    
    TotalWholesale
    
    
    U.S. Retail
    
    
    transactions
    
    
    consolidatedNet sales
    
    $
    471,492
    
    
    $
    32,623
    
    
    $
    (8,024
    )
    
    $
    496,091Operating income
    
    
    63,301
    
    
    
    1,706
    
    
    
    (846
    )
    
    
    64,161Identifiable assets
    
    
    364,581
    
    
    
    29,805
    
    
    
    (10,436
    )
    
    
    383,950Acquisitions of property and equipment
    
    
    25,796
    
    
    
    7,196
    
    
    
    
    
    
    
    32,992Depreciation and amortization
    
    
    27,140
    
    
    
    1,438
    
    
    
    
    
    
    
    28,578
 74
    Table of Contents  OAKLEY, INC. andSUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 12  Segment and Geographic Information (cont) The following table sets forth sales by segment: 2004TotalWholesale
    
    
    U.S. Retail
    
    
    consolidatedSales to third parties
    
    $
    513,059
    
    
    $
    72,409
    
    
    $
    585,468Inter-segment revenue
    
    
    17,530
    
    
    
    
    
    
    
    17,530Gross sales
    
    
    530,589
    
    
    
    72,409
    
    
    
    602,998Less: eliminations
    
    
    (17,530
    )
    
    
    
    
    
    
    (17,530
    )Total consolidated net sales
    
    $
    513,059
    
    
    $
    72,409
    
    
    $
    585,468
 2003TotalWholesale
    
    
    U.S. Retail
    
    
    consolidatedSales to third parties
    
    $
    474,828
    
    
    $
    53,206
    
    
    $
    528,034Inter-segment revenue
    
    
    12,939
    
    
    
    
    
    
    
    12,939Gross sales
    
    
    487,767
    
    
    
    53,206
    
    
    
    540,973Less: eliminations
    
    
    (12,939
    )
    
    
    
    
    
    
    (12,939
    )Total consolidated net sales
    
    $
    474,828
    
    
    $
    53,206
    
    
    $
    528,034
 2003TotalWholesale
    
    
    U.S. Retail
    
    
    consolidatedSales to third parties
    
    $
    463,468
    
    
    $
    32,623
    
    
    $
    496,091Inter-segment revenue
    
    
    8,024
    
    
    
    
    
    
    
    8,024Gross sales
    
    
    471,492
    
    
    
    32,623
    
    
    
    504,115Less: eliminations
    
    
    (8,024
    )
    
    
    
    
    
    
    (8,024
    )Total consolidated net sales
    
    $
    463,468
    
    
    $
    32,623
    
    
    $
    496,091
 Geographical regions representing 10% or more of consolidated net sales are summarized as follows: Year ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)United States
    
    $
    304,955
    
    
    $
    261,423
    
    
    $
    258,775Continental Europe
    
    
    94,171
    
    
    
    91,473
    
    
    
    81,879Other international
    
    
    186,342
    
    
    
    175,138
    
    
    
    155,437Consolidated total net sales
    
    $
    585,468
    
    
    $
    528,034
    
    
    $
    496,091
 The Companys identifiable assets by geographical region are as follows: Year ended December 31,2004
    
    
    2003(in thousands)United States
    
    $
    335,667
    
    
    $
    294,663Continental Europe
    
    
    43,237
    
    
    
    44,233Other international
    
    
    101,973
    
    
    
    95,988Consolidated total identifiable assets
    
    $
    480,877
    
    
    $
    434,884
 75
    Table of Contents  OAKLEY, INC. andSUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 12  Segment and Geographic Information (cont) The Company derives revenues from different product lines within its segments. Gross sales from
external customers for each product line are as follows: Year ended December 31,(in thousands)
    
    2004
    
    
    2003
    
    
    2002Sunglasses
    
    $
    314,515
    
    
    $
    310,410
    
    
    $
    330,154Apparel and accessories
    
    
    94,859
    
    
    
    76,018
    
    
    
    56,625Footwear
    
    
    32,211
    
    
    
    36,520
    
    
    
    31,245Watches
    
    
    11,931
    
    
    
    9,862
    
    
    
    11,620Prescription eyewear
    
    
    47,750
    
    
    
    42,669
    
    
    
    34,253Goggles
    
    
    39,177
    
    
    
    36,156
    
    
    
    27,776Electronics
    
    
    19,773
    
    
    
    
    
    
    
    Other
    
    
    61,436
    
    
    
    55,442
    
    
    
    43,647Total gross sales
    
    
    621,652
    
    
    
    567,077
    
    
    
    535,320Discounts and returns
    
    
    (36,184
    )
    
    
    (39,043
    )
    
    
    (39,229
    )Total consolidated net sales
    
    $
    585,468
    
    
    $
    528,034
    
    
    $
    496,091
 Other consists of revenue derived from the sales of equipment, sunglass and goggle
accessories, Iacons sales of sunglass brands other than the Companys and shipping and handling
fees charged to customers. Note 13  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 and 2004, the Company paid or settled almost all of the expenses
associated with the Restructuring Plan. As of December 31, 2004, the Company had finalized all the
restructuring charges and management believes the amount originally recorded will be sufficient to
cover any remaining restructure liabilities. 76
    Table of Contents  OAKLEY, INC. andSUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 13  Restructure Charge (contd) This charge was included in selling and shipping and warehousing expenses and is comprised of the
following components: Accrued
    
    
    
    
    
    
    Changes duerestructure
    
    
    
    
    
    
    to foreignliability
    
    
    
    
    
    
    exchange ratesbalance at
    
    
    
    
    
    
    and
    
    
    Balance as ofDec. 31, 2003
    
    
    Amounts paid
    
    
    adjustments
    
    
    Dec. 31, 2004(in thousands)Termination
and modification of
sales agent
contracts and
employee contracts
    
    $
    258
    
    
    $
    (100
    )
    
    $
    12
    
    
    $
    170Rationalization of
warehousing and
distribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    258
    
    
    $
    (100
    )
    
    $
    12
    
    
    $
    170
 Accrued
    
    
    
    
    
    
    Changes duerestructure
    
    
    
    
    
    
    to foreignliability
    
    
    
    
    
    
    exchange ratesbalance at
    
    
    
    
    
    
    and
    
    
    Balance as ofDec. 31, 2002
    
    
    Amounts paid
    
    
    adjustments
    
    
    Dec. 31, 2003(in thousands)Termination
and modification of
sales agent
contracts and
employee contracts
    
    $
    2,249
    
    
    $
    (1,960
    )
    
    $
    (31
    )
    
    $
    258Rationalization of
warehousing and
distribution
    
    
    539
    
    
    
    (864
    )
    
    
    325
    
    
    
    $
    2,788
    
    
    $
    (2,824
    )
    
    $
    294
    
    
    $
    258
 77
    Table of Contents  OAKLEY, INC. andSUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 Note 14  Quarterly Financial Data (unaudited) First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(in thousands, except per share data)Year ended December 31, 2004:Net sales (1)
    
    $
    128,636
    
    
    $
    153,826
    
    
    $
    150,044
    
    
    $
    152,962Gross profit (1)
    
    
    67,714
    
    
    
    88,582
    
    
    
    83,335
    
    
    
    80,733Income before provision for income taxes
    
    
    6,399
    
    
    
    24,186
    
    
    
    17,232
    
    
    
    13,584Net income
    
    
    4,223
    
    
    
    15,963
    
    
    
    11,373
    
    
    
    9,991Basic net income per share
    
    $
    0.06
    
    
    $
    0.23
    
    
    $
    0.17
    
    
    $
    0.15Diluted net income per share
    
    $
    0.06
    
    
    $
    0.23
    
    
    $
    0.17
    
    
    $
    0.15Year ended December 31, 2003:Net sales (1)
    
    $
    112,523
    
    
    $
    145,703
    
    
    $
    146,885
    
    
    $
    122,923Gross profit (1)
    
    
    58,455
    
    
    
    86,931
    
    
    
    81,417
    
    
    
    63,443Income before provision for income taxes
    
    
    4,935
    
    
    
    28,049
    
    
    
    20,794
    
    
    
    4,985Net income
    
    
    3,208
    
    
    
    18,232
    
    
    
    13,516
    
    
    
    3,240Basic net income per share
    
    $
    0.05
    
    
    $
    0.27
    
    
    $
    0.20
    
    
    $
    0.05Diluted net income per share
    
    $
    0.05
    
    
    $
    0.27
    
    
    $
    0.20
    
    
    $
    0.05
   (1)
    
    In connection with the Companys reclassification of shipping and handling fees
charged to customers (see Note 1  Reclassifications) $1.5 million, $1.8 million and $1.9
million for the three quarters in the period ended September 30, 2004 and $1.3 million, $1.9
million, $1.9 million, and $1.4 million for the four quarters in the period ended December 31,
2003 were reclassified to net sales. As a result of this reclassification and the
reclassification of certain freight costs to cost of sales, gross profit decreased by $1.1
million, $1.1 million and $0.8 million for the three quarters in the period ended September
30, 2004 and $1.0 million, $1.0 million, $1.1 million and $1.4 million for the four quarters
in the period ended December 31, 2003, from amounts previously reported. These
reclassifications had no impact on net income for 2004 or any prior period. 78
    Table of Contents  OAKLEY, INC. andSUBSIDIARIES Notes to Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002 AdditionsBalance at
    
    
    charged to
    
    
    
    
    
    
    
    
    
    
    Balancebeginning
    
    
    costs and
    
    
    
    
    
    
    
    
    
    
    at end ofof period
    
    
    expense
    
    
    Deductions
    
    
    Adjustments
    
    
    period(in thousands)For the year ended December 31, 2004:Allowance for doubtful accounts
    
    $
    2,623
    
    
    $
    1,601
    
    
    $
    (1,602
    )
    
    $
    
    
    
    $
    2,622Sales return reserve
    
    $
    7,049
    
    
    $
    3,964
    
    
    $
    (2,590
    )
    
    $
    
    
    
    $
    8,423Inventory reserve
    
    $
    7,250
    
    
    $
    3,652
    
    
    $
    (581
    )
    
    $
    
    
    
    $
    10,321For the year ended December 31, 2003:Allowance for doubtful accounts
    
    $
    2,606
    
    
    $
    1,738
    
    
    $
    (1,721
    )
    
    $
    
    
    
    $
    2,623Sales return reserve
    
    $
    5,825
    
    
    $
    4,707
    
    
    $
    (3,483
    )
    
    $
    
    
    
    $
    7,049Inventory reserve
    
    $
    7,158
    
    
    $
    1,501
    
    
    $
    (1,409
    )
    
    $
    
    
    
    $
    7,250For the year ended December 31, 2002:Allowance for doubtful accounts
    
    $
    1,844
    
    
    $
    1,877
    
    
    $
    (1,115
    )
    
    $
    
    
    
    $
    2,606Sales return reserve
    
    $
    4,111
    
    
    $
    5,108
    
    
    $
    (3,394
    )
    
    $
    
    
    
    $
    5,825Inventory reserve
    
    $
    8,074
    
    
    $
    1,630
    
    
    $
    (2,546
    )
    
    $
    
    
    
    $
    7,158
 79
    Table of Contents  SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized. OAKLEY, INC. By:
    /s/ Jim JannardJim JannardChairman of the Board and Chief Executive Officer Date: March 11, 2005 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
    
    DateChairman of the Board and CEO/s/ Jim Jannard
    
    (Principal Executive Officer)
    
    March 11, 2005Jim JannardChief Operating Officer and Director,Acting Chief Financial Officer,/s/ Link Newcomb
    
    (Principal Accounting Officer)
    
    March 11, 2005Link Newcomb/s/ Abbott Brown
    
    Director
    
    March 11, 2005Abbott Brown/s/ Lee Clow
    
    Director
    
    March 11, 2005Lee Clow/s/ Thomas Davin
    
    Director
    
    March 11, 2005Thomas Davin/s/ Mary George
    
    Director
    
    March 11, 2005Mary George/s/ Michael J. Puntoriero
    
    Director
    
    March 11, 2005Michael J. Puntoriero
 80
    Table of Contents  EXHIBIT INDEX 3.1 (1)
    
    Articles of Incorporation of the Company3.2 (8)
    
    Amended and Restated Bylaws of the Company3.3 (3)
    
    Amendment No. 1 to the Articles of Incorporation as filed with the Secretary of State of
the State of Washington on September 26, 19963.4 (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 Jordan10.2 (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 Association10.4 (5)
    
    Promissory Note, dated August 7, 1997, between Oakley, Inc. and Bank of America National
Trust and Savings Association10.5 (5)
    
    Amendment No. 1 to Promissory Note, dated August 14, 1997, between Oakley, Inc. and Bank
of America National Trust and Savings Association10.6 (5)
    
    Amendment No. 2 to Promissory Note, dated August 14, 1997, between Oakley, Inc. and Bank
of America National Trust and Savings Association10.7 (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
Association10.8 (6)
    
    Amended and Restated Consultant Agreement, dated May 12, 1998, between Jim Jannard and
Oakley, Inc.10.9 (7)
    
    Modification Agreement (Short Form), dated August 10, 1998, between Oakley, Inc. and Bank
of America National Trust and Savings Association10.10 (7)
    
    Modification Agreement (Long Form), dated August 10, 1998, between Oakley, Inc. and Bank
of America National Trust and Savings Association10.11 (9)
    
    Oakley, Inc. Amended and Restated 1995 Stock Incentive Plan10.12 (9)
    
    Oakley, Inc. Amended and Restated Executive Officers Performance Bonus Plan10.13 (10)
    
    Second Amended and Restated Employment Agreement, dated January 1, 2000, between Thomas
George and Oakley, Inc.10.14 (11)
    
    Employment Agreement, dated October 1, 2000, between Tomas Rios and Oakley, Inc.10.15 (12)
    
    Lease Agreement, dated November 10, 2000, between Haven Gateway LLC and Oakley, Inc.10.16 (12)
    
    Trademark License Agreement and Assignment of Rights, dated March 31, 2000, between Y,
LLC and Oakley, Inc.10.17 (13)
    
    Amendment to Trademark License Agreement, dated June 1, 2002, between Y, LLC and Oakley,
Inc.10.18 (14)
    
    Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Jim Jannard.10.19 (14)
    
    Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Link Newcomb.10.20 (14)
    
    Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Colin Baden.10.21 (14)
    
    Indemnification Agreement, dated February 14, 2003, between Oakley, Inc. and Tommy Rios.
    Table of Contents  10.22 (14)
    
    Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Tom George.10.23 (14)
    
    Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Donna Gordon.10.24 (14)
    
    Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Scott Bowers.10.25 (14)
    
    Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Jon Krause.10.26 (14)
    
    Indemnification Agreement, dated February 7, 2003, between Oakley, Inc. and Kent Lane.10.27 (14)
    
    Indemnification Agreement, dated February 14, 2003, between Oakley, Inc. and Carlos Reyes.10.28 (15)
    
    Indemnification Agreement, dated March 26, 2003, between Oakley, Inc. and Irene Miller.10.29 (15)
    
    Indemnification Agreement, dated March 26, 2003, between Oakley, Inc. and Abbott Brown.10.30 (15)
    
    Indemnification Agreement, dated March 26, 2003, between Oakley, Inc. and Lee Clow.10.31 (16)
    
    Aircraft Lease Agreement, dated December 18, 2003, between Oakley, Inc. and N2T, Inc.10.32 (16)
    
    Indemnification Agreement, dated February 12, 2004, between Oakley, Inc. and Thomas Davin.10.33 (17)
    
    Agreement and Mutual Release, dated March 5, 2004, between N2T, Inc. and Oakley, Inc.10.34 (17)
    
    Severance Agreement, dated March 5, 2004, between Link Newcomb and Oakley, Inc.10.35 (17)
    
    Executive Severance Plan effective as of January 1, 200410.36 (17)
    
    Officer Severance Plan effective as of January 1, 200410.37 (18)
    
    Third Amended and Restated Credit Agreement, dated August 19, 2004 among Oakley, Inc., as
borrower, and Bank of America, N.A., as agent, Swing Line Lender and the lenders named
therein.10.38 (18)
    
    Indemnification Agreement, dated September 29, 2004, between Oakley, Inc. and Cosmas N.
Lykos.10.39 (18)
    
    Indemnification Agreement, dated September 29, 2004, between Oakley, Inc. and Mary George.10.40 (19)
    
    Indemnification Agreement, dated January 1, 2005, between Oakley, Inc. and Michael J.
Puntoriero.21.1 (19)
    
    List of Material Subsidiaries23.1 (19)
    
    Consent of Deloitte & Touche LLP, independent registered public accounting firm.31.1 (19)
    
    Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2 (19)
    
    Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1 (19)
    
    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 September
30, 2000.
    Table of Contents  (12)
    
    Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31,
2000.(13)
    
    Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended June 30,
2002.(14)
    
    Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31,
2002.(15)
    
    Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended March 31,
2003.(16)
    
    Previously filed with the Form 10-K of Oakley, Inc. for the year ended December 31,
2003.(17)
    
    Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended March 31,
2004.(18)
    
    Previously filed with the Form 10-Q of Oakley, Inc. for the quarter ended September
30, 2004.(19)
    
    Filed herewith.