<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-22446
DECKERS OUTDOOR CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-3015862
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation IRS Employer Identification
or organization)
495A South Fairview Avenue, Goleta, California 93117
- --------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (805) 967-7611
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of the issuer's class of common stock,
as of the latest practicable date.
Outstanding at
CLASS October 31, 1997
---------------------------- ----------------
Common stock, $.01 par value 8,946,231
<PAGE> 2
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Table of Contents
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 1
Condensed Consolidated Statements of Earnings for the
Three-Month Period Ended September 30, 1997 and 1996 2
Condensed Consolidated Statements of Earnings for the Nine-Month
Period Ended September 30, 1997 and 1996 3
Condensed Consolidated Statements of Cash Flows for the Nine-Month
Period Ended September 30, 1997 and 1996 4-5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
</TABLE>
<PAGE> 3
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,449,000 1,287,000
Trade accounts receivable, less allowance for
doubtful accounts of
$1,091,000 and $1,292,000 as of September 30, 1997 17,568,000 17,866,000
and December 31, 1996, respectively
Inventories 14,303,000 24,930,000
Prepaid expenses and other current assets 2,368,000 3,643,000
Deferred tax assets 1,622,000 1,622,000
------------ ------------
Total current assets 44,310,000 49,348,000
Property and equipment, at cost, net 2,303,000 2,794,000
Intangible assets, less applicable amortization 22,529,000 20,805,000
Note receivable from supplier, net 1,080,000 1,838,000
Other assets 414,000 112,000
------------ ------------
$ 70,636,000 74,897,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,603,000 -----
Current maturities of long-term debt 130,000 99,000
Trade accounts payable 4,651,000 5,494,000
Accrued expenses 3,099,000 3,042,000
Income taxes payable 1,082,000 983,000
------------ ------------
Total current liabilities 11,565,000 9,618,000
------------ ------------
Long-term debt, less current maturities 711,000 10,290,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
5,000,000 shares; none issued ----- -----
Common stock, $.01 par value. Authorized 20,000,000
shares; issued 9,393,431 and outstanding 8,989,331
at September 30, 1997; issued 9,283,556 and
outstanding 8,983,556 at December 31, 1996 90,000 90,000
Additional paid-in capital 26,738,000 26,790,000
Retained earnings 32,156,000 28,109,000
------------ ------------
58,984,000 54,989,000
Less: note receivable from stockholder/officer 624,000 ----
------------ ------------
Total stockholders' equity 58,360,000 54,989,000
------------ ------------
$ 70,636,000 74,897,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
SEPTEMBER 30
-------------------------------
1997 1996
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<S> <C> <C>
Net sales $ 20,783,000 23,485,000
Cost of sales 13,453,000 14,291,000
------------ ------------
Gross profit 7,330,000 9,194,000
Selling, general and administrative expenses 6,454,000 7,965,000
------------ ------------
Earnings from operations 876,000 1,229,000
Other expense (income):
Interest, net (57,000) 215,000
Minority interest in net income of subsidiary 98,000 23,000
Loss on disposal of property, plant and equipment -- 140,000
Miscellaneous expense (income) 10,000 (173,000)
------------ ------------
Earnings before income taxes 825,000 1,024,000
Income taxes 357,000 457,000
------------ ------------
Net earnings $ 468,000 567,000
============ ============
Net earnings per common and common equivalent shares $ 0.05 0.06
============ ============
Weighted average common and common equivalent shares
outstanding 9,069,000 9,349,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 83,327,000 79,807,000
Cost of sales 48,515,000 46,928,000
------------ -----------
Gross profit 34,812,000 32,879,000
Selling, general and administrative expenses 26,838,000 26,354,000
Loss on factory closure 500,000 --
------------ -----------
Earnings from operations 7,474,000 6,525,000
Other expense (income):
Interest expense, net 324,000 723,000
Minority interest in net income (loss) of subsidiary 17,000 (58,000)
Loss on disposal of property, plant and equipment -- 489,000
Miscellaneous expense (income) 4,000 (170,000)
------------ -----------
Earnings before income taxes 7,129,000 5,541,000
Income taxes 3,082,000 2,471,000
------------ -----------
Net earnings $ 4,047,000 3,070,000
============ ===========
Net earnings per common and common equivalent shares $ 0.45 0.33
============ ===========
Weighted average common and common equivalent shares
outstanding 9,062,000 9,317,000
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 4,047,000 3,070,000
------------ ------------
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 1,861,000 1,538,000
Provision for doubtful accounts 300,000 985,000
Minority interest in net income (loss) of 17,000 (58,000)
subsidiary
Loss on factory closure 500,000 --
Loss on disposal of property, plant and equipment -- 489,000
Changes in assets and liabilities
(Increase) decrease in:
Trade accounts receivable 498,000 194,000
Inventories 10,627,000 (1,785,000)
Prepaid expenses and other current assets 1,275,000 900,000
Note receivable from supplier 258,000 299,000
Refundable income taxes -- 2,969,000
Other assets (302,000) (879,000)
Increase (decrease) in:
Accounts payable (843,000) 1,062,000
Accrued expenses 305,000 1,265,000
Income taxes payable 99,000 1,062,000
------------ ------------
Total adjustments 14,595,000 8,041,000
------------ ------------
Net cash provided by operating activities 18,642,000 11,111,000
------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 13,000 5,000
Purchase of property, plant and equipment (1,218,000) (1,106,000)
Purchase of intangible assets (200,000) --
Payment for acquisition of Ugg (351,000) (495,000)
Cash paid to stockholder/officer for loan (624,000) --
------------ ------------
Net cash used in investing activities (2,380,000) (1,596,000)
------------ ------------
</TABLE>
(Continued)
4
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, Continued
(Unaudited)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Cash received from borrowings under credit $ -- 5,050,000
facility
Repayments of notes payable and long-term debt (9,048,000) (14,918,000)
Proceeds from issuances of common stock 625,000 --
Repurchase of common stock (728,000) --
Cash paid for repurchase of outstanding stock
options in a subsidiary -- (725,000)
Cash received from exercise of stock options 51,000 125,000
------------ ------------
Net cash used in financing activities (9,100,000) (10,468,000)
------------ ------------
Net increase (decrease) in cash and cash
equivalents 7,162,000 (953,000)
Cash and cash equivalents at beginning of period 1,287,000 3,222,000
------------ ------------
Cash and cash equivalents at end of period $ 8,449,000 2,269,000
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 449,000 736,000
Income taxes 2,263,000 249,000
============ ============
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
In connection with the repurchase of outstanding stock options of a subsidiary
from the Founder of the subsidiary during the nine-month period ended
September 30, 1996, the Company gave consideration of $2,111,000,
consisting of $725,000 of cash, notes payable to the Founder (net of
imputed interest) aggregating $1,011,000 and the forgiveness of a
$375,000 note receivable from the Founder. The Company allocated the
entire purchase price to goodwill.
In connection with its settlement with the former Ugg shareholders in September
1997, the Company recorded current notes payable of $2,603,000 and a
corresponding increase to goodwill.
See accompanying notes to condensed consolidated financial statements.
5
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) General
The unaudited condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial
statements and, in the opinion of management, reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair
presentation for each of the periods presented. The results of operations
for interim periods are not necessarily indicative of results to be
achieved for full fiscal years.
As contemplated by the Securities and Exchange Commission (SEC) under Rule
10-01 of Regulation S-X, the accompanying consolidated financial
statements and related footnotes have been condensed and do not contain
certain information that will be included in the Company's annual
consolidated financial statements and footnotes thereto. For further
information, refer to the consolidated financial statements and related
footnotes for the year ended December 31, 1996 included in the Company's
Annual Report on Form 10-K.
(2) Earnings per Share
Net earnings per share is based on the weighted average number of common
and common equivalent shares outstanding. Common stock equivalents
represent the number of shares which would be issued assuming the exercise
of common stock options and reduced by the number of shares which could be
purchased with the proceeds from the exercise of those options.
Fully diluted net earnings per share are not presented since the amounts
do not differ significantly from the primary net earnings per share
presented.
(3) Inventories
Inventories at September 30, 1997 and December 31, 1996 are summarized as
follows:
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
Raw materials $ 1,236,000 $ 3,239,000
Work in process 527,000 1,197,000
Finished goods 12,540,000 20,494,000
------------ ------------
Total inventory $ 14,303,000 24,930,000
============ ============
6
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, Continued
(Unaudited)
(4) Note Receivable from Stockholder/Officer
On April 18, 1997, the Company issued one of its officers a $624,000 loan
to purchase 100,000 shares of the Company's common stock at the fair
market value on that date. The loan bears interest at 6.39% and is secured
by the stock so acquired and by any severance pay, including any unpaid
bonuses.
(5) Income Taxes
Income taxes for the interim periods were computed using the effective tax
rate estimated to be applicable for the full fiscal year, which is subject
to ongoing review and evaluation by management.
(6) Settlement with Former Ugg Shareholders
In September 1997, the Company settled its on-going arbitration with a
group of former shareholders of Ugg Holdings, Inc., a corporation
purchased by the Company in August 1995. In addition, the remaining former
Ugg shareholders who were not a party to the arbitration agreed to accept
the same economic terms as those involved in the arbitration. Under the
terms of the settlement, the Company will make a final payment to all
former Ugg shareholders in the amount of $2.6 million on January 2, 1998.
This payment replaces all future earn-out payments that were to be paid
through the year 2000 in accordance with the original acquisition
agreement. The liability and corresponding increase to goodwill have been
reflected in the September 30, 1997 condensed consolidated financial
statements.
(7) Recently Issued Pronouncements
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"),
in February 1997. SFAS 128 is effective for both interim and annual
periods ending after December 15, 1997. The Company will adopt SFAS 128 in
the fourth quarter of 1997. SFAS 128 requires the presentation of "Basic"
earnings per share which represents income available to common
shareholders divided by the weighted average number of common shares
outstanding for the period. A dual presentation of "Diluted" earnings per
share will also be required. The Diluted presentation is similar to the
current earnings per share presentation. Management believes the adoption
of SFAS 128 will not have a material impact on the Company's earnings per
share.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for the reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full
set of general-purpose financial statements. SFAS 130 requires all items
that are required to be recognized under accounting standards as
components of comprehensive income to be reported in a financial statement
that is displayed with the same prominence as other financial statements.
SFAS 130 does not require a specific format for that financial statement
but requires that an enterprise display an amount representing total
comprehensive income for the period covered by that financial statement.
SFAS 130 requires an enterprise to (a) classify items of
7
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, Continued
(Unaudited)
other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. SFAS 130 is effective
for fiscal years beginning after December 15, 1997. Management has not
determined whether the adoption of SFAS 130 will have a material impact on
the Company's financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for public
business enterprises to report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. This statement supersedes FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise", but retains the
requirement to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries", to
remove the special disclosure requirements for previously unconsolidated
subsidiaries. SFAS 131 requires, among other items, that a public business
enterprise report a measure of segment profit or loss, certain specific
revenue and expense items and segment assets, information about the
revenues derived from the enterprise's products or services, and major
customers. SFAS 131 also requires that the enterprise report descriptive
information about the way that the operating segments were determined and
the products and services provided by the operating segments. SFAS 131 is
effective for financial statements for periods beginning after December
15, 1997. In the initial year of application, comparative information for
earlier years is to be restated. SFAS 131 need not be applied to interim
financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of
application is to be reported in financial statements for interim periods
in the second year of application. Management has not determined whether
the adoption of SFAS 131 will have a material impact on the Company's
segment reporting.
8
<PAGE> 11
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
Net sales decreased by $2,702,000, or 11.5% between the three months ended
September 30, 1997 and 1996. Sales of the Teva(R) line increased from
$3,573,000 for the three months ended September 30, 1996 to $4,365,000 for
the three months ended September 30, 1997, a 22.2% increase. Sales of
Teva(R) products represented 15.2% and 21.0% of net sales in the three
months ended September 30, 1996 and 1997, respectively. Net sales of
footwear under the Simple(R) product line decreased 26.2%, from
$14,279,000 to $10,542,000, between the three months ended September 30,
1996 and 1997. This decrease was due to the continued repositioning of the
Simple(R) brand and its distribution, the non-recurrence of last year's
demand for certain styles of Simple(R) clogs, sluggish demand for the
sneaker line and late deliveries of some key styles. Net sales of footwear
under the Ugg(R) product line decreased 11.3%, from $3,827,000 to
$3,396,000, between the three months ended September 30, 1996 and 1997.
Overall, international sales for all of the Company's products decreased
17.9% from $6,459,000 to $5,301,000, representing 27.5% of net sales in
1996 and 25.5% in 1997. Because the increase in the volume of sales of
Teva(R) footwear products did not offset the decrease in the volume of
sales of Simple(R) and Ugg(R) footwear products, the volume of footwear
sold decreased 10.2% from 776,000 pairs during the three months ended
September 30, 1996 to 697,000 pairs during the three months ended
September 30, 1997.
The weighted average wholesale price per pair sold during these respective
periods decreased 5.9% from $28.94 to $27.23. The decrease was primarily
due to an increase in the number of pairs of Simple(R) footwear sold at
discounted prices during the three months ended September 30, 1997.
Cost of sales decreased by $838,000, or 5.9%, to $13,453,000 for the three
months ended September 30, 1997, compared with $14,291,000 for the three
months ended September 30, 1996. Gross profit decreased by $1,864,000, or
20.3% to $7,330,000 for the three months ended September 30, 1997 from
$9,194,000 for the three months ended September 30, 1996 and decreased as
a percentage of net sales to 35.3% from 39.1%. The decrease in gross
profit margin as a percentage of net sales was primarily due to the
increase in the number of pairs of Simple(R) footwear sold at discounted
prices during the three months ended September 30, 1997.
Selling, general and administrative expenses decreased by $1,511,000, or
19.0% between the three months ended September 30, 1996 and September 30,
1997, and decreased as a percentage of net sales from 33.9% in 1996 to
31.1% in 1997. The decrease was primarily due to decreases in management
bonuses, bad debt expense, warehouse costs and sales samples expenses. The
decrease as a percentage of net sales also occurred as certain selling,
general and administrative expenses include certain fixed costs and,
therefore, total selling, general and administrative expenses do not
fluctuate proportionately with changes in sales volume.
Net interest income was $57,000 for the three months ended September 30,
1997 compared with net interest expense of $215,000 for the three months
ended September 30, 1996, primarily due to the repayment of the Company's
borrowings under its credit facility in 1997. Miscellaneous
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
expense was $10,000 for the three months ended September 30, 1997 compared
with miscellaneous income of $173,000 for the three months ended September
30, 1996, primarily due to insurance proceeds related to an insured loss
in the third quarter of 1996.
Income taxes were $357,000 for the three months ended September 30, 1997,
representing an effective income tax rate of 43.3% compared with income
taxes of $457,000 for the three months ended September 30, 1996,
representing an effective income tax rate of 44.6%. The higher effective
income tax rate in 1996 compared to 1997 is due to certain non-deductible
expenses and losses being a greater proportion to earnings before income
taxes in 1996 than in 1997. Such non-deductible items include the
amortization of goodwill and losses at certain subsidiaries which are
consolidated for financial reporting purposes but which are not
consolidated for income tax reporting purposes.
The Company had net earnings of $468,000 for the three months ended
September 30, 1997 as compared with net earnings of $567,000 for the three
months ended September 30, 1996, a decrease of 17.5%, for the reasons
discussed above.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Net sales increased by $3,520,000 or 4.4% between the nine months ended
September 30, 1997 and 1996. Sales of the Teva(R) line increased from
$39,587,000 for the nine months ended September 30, 1996 to $49,370,000
for the nine months ended September 30, 1997, a 24.7% increase. Sales of
Teva(R) products represented 49.6% and 59.3% of net sales in the nine
months ended September 30, 1996 and 1997, respectively. Net sales of
footwear under the Simple(R) product line decreased 18.0% from $31,403,000
to $25,766,000 between the nine months ended September 30, 1996 and 1997.
This decrease was due to the continued repositioning of the Simple(R)
brand and its distribution, the non-recurrence of last year's demand for
certain styles of Simple(R) clogs, sluggish demand for the sneaker line
and late deliveries of some key styles. Net sales of footwear under the
Ugg(R) product line decreased 26.2%, from $4,158,000 to $3,069,000,
between the nine months ended September 30, 1996 and 1997. Overall,
international sales for all of the Company's products decreased 3.8% from
$20,315,000 to $19,541,000 representing 25.5% of net sales in 1996 and
23.5% in 1997. Because the increase in the volume of sales of Teva(R)
footwear products more than offset the decrease in the volume of sales of
Simple(R) and Ugg(R) footwear products, the volume of footwear sold
increased 3.2% from 2,993,000 pairs during the nine months ended September
30, 1996 to 3,090,000 pairs during the nine months ended September 30,
1997.
The weighted average wholesale price per pair sold during these respective
periods decreased 4.0% from $26.57 to $25.50. The decrease was primarily
due to a change in the sales mix for Simple(R) products, with
significantly greater sales of the relatively higher priced clogs and
fewer close-outs during the nine months ended September 30, 1996 compared
to the nine months ended September 30, 1997. This decrease was partially
offset by the lower volume of Teva(R) close-outs during the nine months
ended September 30, 1997 compared to the nine months ended September 30,
1996.
Cost of sales increased by $1,587,000, or 3.4%, to $48,515,000 for the
nine months ended September 30, 1997, compared with $46,928,000 for the
nine months ended September 30, 1996.
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Gross profit increased by $1,933,000, or 5.9% to $34,812,000 for the nine
months ended September 30, 1997 from $32,879,000 for the nine months ended
September 30, 1996 and increased as a percentage of net sales to 41.8%
from 41.2%. The increase in gross profit margin as a percentage of net
sales was primarily due to significantly reduced levels of Teva(R)
close-outs and decreased freight costs during the nine months ended
September 30, 1997. This increase was partially offset by higher levels of
Simple(R) close-outs during this period.
Selling, general and administrative expenses increased by $484,000, or
1.8% between the nine months ended September 30, 1996 and September 30,
1997 and decreased as a percentage of net sales from 33.0% in 1996 to
32.2% in 1997. The increase of $484,000 was the result of increased
royalties due to a change in the sales mix and increased legal costs
related to disputes with some of the former shareholders of Ugg Holdings,
Inc. This increase was partially offset by a decrease in bad debt expense
between the nine months ended September 30, 1996 and September 30, 1997.
The decrease as a percentage of net sales occurred as certain selling,
general and administrative expenses include certain fixed costs and,
therefore, total selling, general and administrative expenses do not
fluctuate proportionately with changes in sales volume.
Net interest expense was $324,000 for the nine months ended September 30,
1997 compared with net interest expense of $723,000 for the nine months
ended September 30, 1996, primarily due to the repayment of the Company's
borrowings under its credit facility in 1997. Miscellaneous expense was
$4,000 for the nine months ended September 30, 1997 compared with
miscellaneous income of $170,000 for the nine months ended September 30,
1996, primarily due to insurance proceeds related to an insured loss in
the third quarter of 1996.
Income taxes were $3,082,000 for the nine months ended September 30, 1997,
representing an effective income tax rate of 43.2% compared with income
taxes of $2,471,000 for the nine months ended September 30, 1996,
representing an effective income tax rate of 44.6%. The higher effective
income tax rate in 1996 compared to 1997 is due to certain non-deductible
expenses and losses being a greater proportion to earnings before income
taxes in 1996 than in 1997. Such non-deductible items include the
amortization of goodwill and losses at certain subsidiaries which are
consolidated for financial reporting purposes but which are not
consolidated for income tax reporting purposes.
The Company had net earnings of $4,047,000 for the nine months ended
September 30, 1997 as compared with net earnings of $3,070,000 for the
nine months ended September 30, 1996, an increase of 31.8%, for the
reasons discussed above.
Outlook
This outlook section contains a number of forward-looking statements, all
of which are based on current expectations. Actual results may differ
materially.
Net sales of the Simple(R) product line for the nine months ended
September 30, 1997 decreased 18.0% from net sales for the nine months
ended September 30, 1996. The Company currently expects that net sales of
Simple(R) shoes in 1997 will be lower than sales in 1996. Net sales of the
Ugg(R) product line for the nine months ended September 30, 1997 decreased
26.2% from net sales for the nine months ended September 30, 1996. Net
sales of Ugg(R) footwear are expected to be lower in 1997 than net sales
of Ugg(R) footwear in 1996, which were approximately $14.8
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
million. The Company anticipates that any decrease in the net sales for
the Simple(R) and Ugg(R) lines will be mitigated by increased net sales of
the Teva(R) product line.
The foregoing forward-looking statements represent the Company's current
analysis of trends and information. Actual results could be affected by a
variety of factors. For example, the Company's results are directly
dependent on consumer preferences, which are difficult to assess and can
shift rapidly. Any shift in consumer preferences away from one or more of
the Company's product lines could result in lower sales as well as
obsolete inventory, both of which could adversely affect the Company's
results of operations, financial condition and cash flows. The Company is
also dependent on its customers continuing to carry and promote its
various lines. In addition, sales of each of the Company's different lines
have historically been higher in different seasons, with the highest
percentage of Teva(R) sales occurring in the first and second quarter of
each year, the highest percentage of Simple(R) sales occurring in the
third quarter and the highest percentage of Ugg(R) sales occurring in the
fourth quarter. Consequently, the results for these product lines are
highly dependent on results during these specified periods. The Company
cautions the reader not to rely on the forward-looking statements in this
section. They merely represent the Company's current assessment of trends
and information and may not be indicative of actual future results. The
Company disclaims any intent or obligation to update these forward-looking
statements.
Liquidity and Capital Resources
The Company's liquidity consists of cash and cash equivalents, trade
accounts receivable, inventories and a revolving credit facility. At
September 30, 1997, working capital was $32,745,000 including $8,449,000
of cash and cash equivalents. Cash provided by operating activities
aggregated $18,642,000 for the nine months ended September 30, 1997. Trade
accounts receivable decreased 1.7% from December 31, 1996 to September 30,
1997, largely due to the decline in sales in the third quarter of 1997
versus the fourth quarter of 1996. Inventories decreased 42.6% during this
period due to normal seasonality and management's ongoing efforts to
reduce inventory levels.
The Company has a revolving credit facility with a bank (the "Facility"),
providing a maximum borrowing availability of $25,000,000 based on certain
eligible assets, as defined. The Facility can be used for working capital
and general corporate purposes and expires August 1, 2000. Borrowings bear
interest at the bank's prime rate (8.50% at September 30, 1997) plus up to
0.25%, depending on whether the Company satisfies certain financial
ratios. Alternatively, the Company may elect to have borrowings bear
interest at LIBOR plus 1.5% to 1.75%, depending on whether the Company
satisfies such financial ratios. Up to $10,000,000 of borrowings may be in
the form of letters of credit. The Facility is secured by substantially
all assets of the Company. As of September 30, 1997, the Company had
repaid all of its borrowings under the Facility and had approximately
$10,186,000 available for borrowings.
The agreement underlying the Facility includes certain restrictive
covenants which, among other things, require the Company to maintain
certain financial tests. The Company was in compliance with all
requirements as of September 30, 1997.
The Company has an agreement with a supplier to provide financing for the
start-up and the expansion of the supplier's operations, of which
$1,080,000 (net of related allowance) was
12
<PAGE> 15
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
outstanding at September 30, 1997. The note is secured by all assets of
the supplier and bears interest at the prime rate (8.50% at September 30,
1997) plus 1%.
Capital expenditures totaled $1,218,000 for the nine months ended
September 30, 1997. The Company's capital expenditures related primarily
to leasehold improvements and equipment associated with the Company's move
to new facilities in Goleta, California. The Company currently has no
material future commitments for capital expenditures.
In connection with the acquisition of Ugg Holdings, Inc. in 1995, the
Company was required to make further future payments equal to 2 1/2% of
net sales of Ugg Holdings, Inc. for the years ending March 31, 1996
through March 31, 2000. In May 1997, the Company made a $351,000 payment
to the former shareholders related to its required payments for the year
ended March 31, 1997. In September 1997, the Company entered into
agreements with the former shareholders whereby the Company will make a
final payment to them of $2.6 million on January 2, 1998. This payment
replaces all future earn-out payments that were to be paid through the
year 2000 in accordance with the original acquisition agreement. The
liability and corresponding increase to goodwill have been reflected in
the September 30, 1997 condensed consolidated financial statements.
In 1996, the Company's Board of Directors authorized the repurchase of up
to 300,000 shares of the Company's outstanding common stock from time to
time in open market or in privately negotiated transactions, subject to
price and market conditions. During 1996, the Company repurchased 300,000
shares for cash consideration of $2,390,000. In February 1997, the
Company's Board of Directors authorized the repurchase of up to an
additional 300,000 shares. During the nine months ended September 30,
1997, the Company repurchased 104,100 shares for cash consideration of
$728,000. From October 1, 1997 through October 31, 1997, the Company
repurchased 43,100 shares for cash consideration of $371,000.
The Company believes that internally generated funds, the available
borrowings under its existing credit facilities and the cash on hand will
provide sufficient liquidity to enable it to meet its current and
foreseeable working capital requirements.
Seasonality
Financial results for the outdoor and footwear industries are generally
seasonal. Based on the Company's historical product mix, the Company would
expect greater sales in the first and second quarters than in the third
and fourth quarters.
Other
The Company believes that the relatively moderate rates of inflation in
recent years have not had a significant impact on its net sales or
profitability.
Recently Issued Pronouncements
For recently issued pronouncements, see Note 7 to the Condensed
Consolidated Financial Statements.
13
<PAGE> 16
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In September 1997, the Company settled its on-going arbitration with a
group of former shareholders of Ugg Holdings, Inc. In addition, the
remaining former Ugg shareholders who were not a party to the
arbitration agreed to accept the same economic terms as those involved
in the arbitration. Under the terms of the settlement, the Company will
make a final payment to all former Ugg shareholders in the amount of
$2.6 million on January 2, 1998. This payment replaces all future
earn-out payments that were to be paid through the year 2000 in
accordance with the original acquisition agreement.
Item 2. Changes in Securities. Not applicable
Item 3. Defaults upon Senior Securities. Not applicable
Item 4. Submission of Matters to a Vote of Security Holders. Not applicable
Item 5. Other Information. Not applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 11.1 Statement of Computation of Earnings per Share.
(b) Reports on Form 8-K. The Company filed the following Current Reports
on Form 8-K:
(1) Form 8-K filed on October 1, 1997 (Item 5 - reporting the
settlement reached in arbitration involving a group of former
shareholders of Ugg Holdings, including the related press release
dated September 22, 1997).
14
<PAGE> 17
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Deckers Outdoor Corporation
Date: November 12, 1997 /s/ M. Scott Ash
----------------
M. Scott Ash, Chief Financial Officer
(Duly Authorized Officer and Principal Financial
and Accounting Officer)
15
<PAGE> 1
Exhibit 11.1
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Statement of Computation of Earnings per Share
(Unaudited)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
SEPTEMBER 30,
------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Net earnings available to common stockholders $ 468,000 567,000
========== ==========
Weighted average common stock outstanding 8,997,000 9,257,000
Common stock equivalents - stock options 72,000 92,000
---------- ----------
9,069,000 9,349,000
========== ==========
Net earnings per share $ 0.05 0.06
========== ==========
</TABLE>
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30,
------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Net earnings available to common stockholders $4,047,000 3,070,000
========== ==========
Weighted average common stock outstanding 8,996,000 9,252,000
Common stock equivalents - stock options 66,000 65,000
---------- ----------
9,062,000 9,317,000
========== ==========
Net earnings per share $ 0.45 0.33
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,449,000
<SECURITIES> 0
<RECEIVABLES> 18,659,000
<ALLOWANCES> 1,091,000
<INVENTORY> 14,303,000
<CURRENT-ASSETS> 44,310,000
<PP&E> 5,037,000
<DEPRECIATION> 2,734,000
<TOTAL-ASSETS> 70,636,000
<CURRENT-LIABILITIES> 11,565,000
<BONDS> 711,000
0
0
<COMMON> 90,000
<OTHER-SE> 58,270,000
<TOTAL-LIABILITY-AND-EQUITY> 70,636,000
<SALES> 83,327,000
<TOTAL-REVENUES> 83,327,000
<CGS> 48,515,000
<TOTAL-COSTS> 48,515,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 300,000
<INTEREST-EXPENSE> 324,000
<INCOME-PRETAX> 7,129,000
<INCOME-TAX> 3,082,000
<INCOME-CONTINUING> 4,047,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,047,000
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
</TABLE>
