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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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 NO. 0-22446
DECKERS OUTDOOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-3015862
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
495-A SOUTH FAIRVIEW AVENUE, GOLETA, CALIFORNIA 93117
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 967-7611
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of the Common Stock of the registrant held by
nonaffiliates of the registrant on February 26, 1999 based on the closing price
of the Common Stock on the NASDAQ National Market System on such date was
$12,366,053.
The number of shares of the registrant's Common Stock outstanding at
February 26, 1999 was 8,522,679.
Portions of registrant's definitive proxy statement relating to
registrant's 1999 annual meeting of shareholders, which will be filed pursuant
to Regulation 14A within 120 days after the end of registrant's fiscal year
ended December 31, 1998, are incorporated by reference in Part III of this Form
10-K.
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DECKERS OUTDOOR CORPORATION
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
INDEX TO ANNUAL REPORT ON FORM 10-K
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 17
Item 3. Legal Proceedings........................................... 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 18
Item 6. Selected Financial Data..................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 20
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 27
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 49
Item 11. Executive Compensation...................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 49
Item 13. Security Relationships and Related Transactions............. 49
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 49
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PART I
ITEM 1. BUSINESS
GENERAL
The Company designs and markets innovative, function-oriented footwear and
apparel that have been developed for high-performance outdoor, sports and other
lifestyle related activities, as well as for casual use. Currently, the Company
offers four primary product lines under the following recognized brand names:
Teva(R) -- high-performance sports sandals with a unique, patented strapping
system, as well as casual footwear for everyday use and a line of casual
apparel; Simple(R) -- innovative shoes that combine the comfort elements of
athletic footwear with casual styling; Ugg(R) -- authentic sheepskin boots and
other footwear; and Picante(R) -- casual, hand-woven apparel for men and women.
Teva is a registered trademark of Mark Thatcher, the inventor and licensor of
Teva Sport Sandals. Simple, Ugg and Picante are registered trademarks of the
Company and its subsidiaries. All of the Company's footwear and apparel possess
the common features of high quality with a primary focus on functionality and
comfort. In 1998, the Company sold approximately 3,941,000 pairs of footwear.
Revenues from sales (domestic and international) of Teva products have been
$67,916,000, $61,863,000 and $43,898,000 during 1998, 1997 and 1996,
representing 66.5%, 58.0% and 43.1% of net sales, respectively. For financial
information regarding the Company's industry segments, see note 12 to the
accompanying consolidated financial statements.
MARKET OVERVIEW
The casual, outdoor and athletic footwear market is comprised of footwear
worn for casual everyday use and for outdoor and athletic activities such as
hiking, boating, basketball, tennis, fitness and jogging. The market for such
footwear has grown significantly during the last decade, and even more recently
there appears to be a shift from traditional athletic footwear toward more
casual and outdoor footwear. This shift has occurred as consumers have accepted
the more understated look in contrast to the traditional athletic shoes that had
gained popularity in previous years. The Company believes that the principal
reasons for the growth in sales of such footwear have been the growing
acceptance of casual wear including the increasing casualization of the
workplace, increasingly active consumer lifestyles, as well as the aging
demographics and the related growing emphasis on comfort.
A recent development in the overall footwear market has been the
significant growth of the outdoor segment as well as the growing emphasis on
comfort. Outdoor footwear includes shoes, boots and sandals for outdoor
recreational activities such as hiking, river rafting, camping and casual wear.
Companies engaged in the outdoor footwear market include Nike, Adidas,
Timberland, Merrell, Wolverine and Hi-Tec U.S.A. The Company believes that the
growth in outdoor footwear is driven by several factors including a general
shift in consumer preferences and lifestyles to include more outdoor, sports and
recreational activities such as hiking and camping. As consumers engage in
outdoor activities, they typically desire footwear specifically designed for
these purposes, yet demand the same level of quality and high performance that
they have come to expect from traditional athletic footwear. In addition, with
the aging demographics, more consumers are turning to an emphasis on casual and
comfortable footwear and apparel. The Company believes that its products have
benefited from this growing trend and that its footwear addresses consumers'
demands for highly functional footwear that is durable as well as comfortable
and fashionable.
The casual, outdoor and athletic footwear markets are generally
characterized by a high level of recognition of brand names, logos and
trademarks. Unique and identifying features create brand awareness among
consumers and allow a favorable reputation to be transferred to new products.
The manufacture of casual, outdoor and athletic footwear is typically conducted
overseas through independent manufacturers. Casual and athletic footwear is
distributed through athletic footwear stores, department stores and specialty
retailers. Outdoor footwear is generally distributed through these channels as
well but is to a large extent distributed through outdoor specialty retailers.
Retailers may purchase footwear on a "futures" basis (orders placed in advance
of a season) or an "at once" basis (orders placed and filled immediately).
Futures orders allow the Company to more accurately predict its manufacturing
and sourcing needs. By placing futures
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orders, retailers are also able to reduce the risk that the Company will be
unable to meet the retailer's delivery requirements. Retailers are generally
encouraged to purchase goods on a futures basis by receiving discounts or
special payment terms not otherwise available.
RISK FACTORS
This Annual Report on Form 10-K contains a variety of forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 including forward-looking statements in this "Risk Factors" section, the
"Outlook" section, the last paragraph under "Liquidity and Capital Resources",
the discussion under "Seasonality" and other statements in this Annual Report.
These forward-looking statements relate to sales and operating expense
expectations, the potential imposition of certain customs duties, the potential
impact of the Teva license expiration, the potential impact of certain
litigation, the potential impact of the Year 2000 issue on the Company and the
impact of seasonality on the Company's operations. These forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievement of the Company,
or industry results, to differ materially from any future results, performance
or achievements expressed or implied by such forward-looking statements. The
factors listed below represent certain important factors the Company believes
could cause such results to differ. These factors are not intended to represent
a complete list of the general or specific risks that may affect the Company. It
should be recognized that other risks may be significant, presently or in the
future, and the risks set forth below may affect the Company to a greater extent
than indicated.
TEVA LICENSE AGREEMENTS
The Company manufactures and sells its Teva sport sandals and clothing line
pursuant to two exclusive licensing agreements with Mark Thatcher, the inventor
of the Teva sport sandal and owner of the Teva patents and trademark. One
license agreement applies to the United States, Canada and the Caribbean, and
the other covers certain countries in Europe and Asia. The current term of each
such licensing agreement continues through August 2001. Mr. Thatcher may
terminate the licensing agreement if specific minimum annual sales targets
(which levels are substantially below the Company's sales during the past
several years) are not met, if the Company breaches its obligations under the
agreements or upon the occurrence of certain other circumstances. Sales of Teva
footwear and apparel accounted for approximately 66.5%, 58.0% and 43.1% of the
Company's net sales for fiscal years 1998, 1997 and 1996, respectively. The
termination of the licenses would have a material adverse effect on the
Company's results of operations.
As announced in November 1998, Mr. Thatcher has engaged a financial advisor
to explore various strategic options for the Teva brand. The Company is in
continuing negotiations with Mr. Thatcher, pursuing various options including a
renewal of the existing license. The Company is hopeful that it will be able to
successfully negotiate a favorable arrangement with Mr. Thatcher. However, there
can be no assurances that such arrangements can be secured. In the event that
the Company does not come to a favorable arrangement with Mr. Thatcher, the
Company will not be able to sell Teva products beyond August 31, 2001, which
would result in a material adverse impact on the Company's results of
operations, financial condition and cash flows.
BRANDS STRENGTH; CHANGES IN FASHION TRENDS
The Company's success is largely dependent on the continued strength of the
Teva, Simple and Ugg brands (collectively, "Deckers Brands") and on its ability
to anticipate the rapidly changing fashion tastes of its customers and to
provide merchandise that appeals to their preferences in a timely manner. There
can be no assurance that consumers will continue to prefer the Deckers Brands or
that the Company will respond in a timely manner to changes in consumer
preferences or that the Company will successfully introduce new
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models and styles of footwear and apparel. Achieving market acceptance for new
products will also likely require substantial marketing and product development
efforts and the expenditure of significant funds to create consumer demand.
Decisions with respect to product designs often need to be made many months in
advance of the time when consumer acceptance can be determined. As a result, the
Company's failure to anticipate, identify or react appropriately to changes in
styles and features could lead to, among other things, excess inventories and
higher markdowns and lower gross margins due to the necessity of providing
discounts to retailers. Conversely, failure by the Company to anticipate
consumer demand could result in inventory shortages, which can adversely affect
the timing of shipments to customers, negatively impacting retailer and
distributor relationships and diminishing brand loyalty. The failure to
introduce new products that gain market acceptance would have a material adverse
effect on the Company's business, financial condition and results of operations,
and could adversely affect the image of the Deckers Brands.
INVENTORY RISK
The footwear industry has relatively long lead times for design and
production of product and, thus, the Company must commit to production tooling
and to production in advance of orders. If the Company fails to accurately
forecast consumer demand or if there are changes in consumer preference or
market demand after the Company has made such production commitments, the
Company may encounter difficulty in filling customer orders or in liquidating
excess inventory, which may have an adverse effect on the Company's sales,
margins and brand image.
QUALITY AND PERFORMANCE
In response to consumer demand, the Company also uses certain specialized
fabrics and materials in its footwear and apparel. The failure of footwear or
apparel using such fabrics and materials to perform to customer satisfaction
could result in a higher rate of customer returns and could adversely affect the
image of the Deckers Brands, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
ECONOMIC CYCLICALITY AND FOOTWEAR RETAILING
The footwear industry historically has been subject to cyclical variation,
with purchases of footwear tending to decline during recessionary periods. This
cyclicality could adversely affect the Company's business. In addition, various
retailers, including some of the Company's customers, have experienced financial
difficulties during the past several years, thereby increasing the risk that
such retailers may not pay for the Company's products in a timely manner. No
assurance can be given that the Company's bad debt expense will not increase
relative to net sales in the future. Any significant increase in the Company's
bad debt expense relative to net sales would adversely impact the Company's net
income and cash flow, and could affect the Company's ability to pay its
obligations as they become due.
DEPENDENCE ON FOREIGN MANUFACTURERS
Virtually all of the Deckers footwear products are manufactured by third
party suppliers in the Far East, Costa Rica, Australia and New Zealand, with the
vast majority of production occurring in China. There can be no assurance that
the Company will not experience difficulties with such manufacturers, including
reduction in the availability of production capacity, errors in complying with
product specifications, inability to obtain sufficient raw materials,
insufficient quality control, failure to meet production and delivery deadlines
or increases in manufacturing costs. In addition, if the Company's relationship
with any of its manufacturers were to be interrupted or terminated, alternative
manufacturing sources will have to be located. The establishment of new
manufacturing relationships involves numerous uncertainties, and there can be no
assurance that the Company would be able to obtain alternative manufacturing
sources on terms satisfactory to it. Should a change in its suppliers become
necessary, the Company would likely experience increased costs, as well as
substantial disruption and a resulting loss of sales.
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Foreign manufacturing is subject to a number of risks, including work
stoppage, transportation delays and interruptions, political instability,
foreign currency fluctuations, changing economic conditions, expropriation,
nationalization, imposition of tariffs, import and export controls and other
non-tariff barriers (including quotas) and restrictions on the transfer of
funds, environmental regulation and other changes in governmental policies. The
Company may also experience general risks associated with managing operations
effectively and efficiently from a far distance and understanding and complying
with local laws, regulations and customs. There can be no assurance that such
factors will not materially adversely affect the Company's business, financial
conditions and result of operations.
Products manufactured overseas and imported into the United States and
other countries are subject to duties collected by the Customs Service in the
applicable country. Customs information submitted by the Company is subject to
review by the Customs Service. The Company is unable to predict whether
additional customs duties, quotas or restrictions may be imposed on the
importation of its products in the future. The enactment of any such duties,
quotas or restrictions could result in increases in the cost of such products
generally and might adversely affect the sales or profitability of the Company.
The European Commission has enacted anti-dumping duties of 49.2% on certain
types of footwear imported into Europe from China and Indonesia. Dutch Customs
has issued an opinion to the Company that certain popular Teva styles are
covered by this anti-dumping duty legislation. The Company does not believe that
these styles are covered by the legislation and is working with Dutch Customs to
resolve the situation. In the event that Dutch Customs makes a final
determination that such styles are covered by the anti-dumping provisions, the
Company expects that it would have an exposure to prior anti-dumping duties for
1997 of approximately $500,000. In addition, if Dutch Customs determines that
these styles are covered by the legislation, the duty amounts could cause such
products to be too costly to import into Europe from China in the future. As a
result, the Company could have to cease shipping such styles from China into
Europe in the future or could have to begin to source these styles from
countries not covered by the legislation. As a precautionary measure, the
Company has obtained alternative sourcing for the majority of the potentially
impacted products from sources outside of China in an effort to reduce the
potential risk in the future. See "Risks of Foreign Operations/Restrictions on
Imports."
COMPETITION AND INFRINGING PRODUCTS
The outdoor and footwear industries are both highly competitive, and the
recent growth in the markets for sports sandals and casual footwear has
encouraged the entry of many new competitors as well as increased competition
from established companies. Many of the Company's competitors have substantially
greater financial, distribution and marketing resources, as well as greater
brand awareness in the footwear market, than the Company. In addition, the
general availability of offshore manufacturing capacity allows rapid expansion
by competitors and new market entrants. The Company believes that it has been
able to compete successfully because of the brand recognition, quality and
selective distribution of its products. From time to time, the Company also
discovers products in the marketplace that infringe upon patent and trademark
rights held by or licensed to the Company. Under the Company's licensing
arrangements with the licensor of the Teva products, Mark Thatcher, Mr. Thatcher
initially may bring proceedings to halt infringement of the Teva patents and
trademark. If Mr. Thatcher elects not to bring such proceedings within one year
after discovery, the Company may initiate such proceedings. To date, Mr.
Thatcher has vigorously pursued infringements following discovery. To the extent
permitted in its agreement with Mr. Thatcher, the Company will vigorously pursue
infringements in the event Mr. Thatcher elects not to do so. However, if Mr.
Thatcher or the Company is unsuccessful in challenging a third party's products
on the basis of patent and trademark infringement, continued sales of such
products by that or any other third party could adversely impact the Company's
business, financial condition and results of operations. See
"Business -- Competition" and "Business -- Legal Proceedings."
DEPENDENCE ON KEY PERSONNEL
The Company's continued success will depend upon its ability to retain
Douglas B. Otto, its Chairman of the Board, Chief Executive Officer and
President, and a core group of key executive officers and employees.
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Mr. Otto has an employment agreement with the Company through 2001. Mr. Otto's
agreement prohibits him from competing with the Company for one year following
termination. However, none of the other executive officers is subject to
agreements that restrict his or her ability to compete with the Company
following termination of employment. The Company believes that its future
success will depend in large part on its ability to attract and retain highly
skilled personnel. Competition for such personnel is intense, and there can be
no assurance that the Company will be successful in attracting and retaining
such personnel. The loss of certain key employees or the Company's inability to
attract and retain other qualified employees could have an adverse impact on the
Company's business.
INTELLECTUAL PROPERTY
The Company believes that its trademarks, technologies and designs are of
great value. From time to time, the Company has been, and may in the future be,
the subject of litigation challenging its ownership of certain intellectual
property. Loss of the Company's Simple or Ugg trademark rights or the ability to
use the licensed Teva trademarks could have a serious impact on the Company's
business. Because of the importance of such intellectual property rights, the
Company's business is subject to the risk of counterfeiting, parallel trade or
intellectual property infringement.
ECONOMIC FACTORS
The Company's business is subject to economic conditions in the Company's
major markets, including, without limitation, recession, inflation, general
weakness in retail markets and changes in consumer purchasing power and
preferences. Adverse changes in such economic factors could have a negative
effect on the Company's business.
TAX RATE CHANGES
If the Company was to encounter significant tax rate changes in the major
markets in which its operates, it could have an adverse effect on its business.
SUBSTANTIAL OWNERSHIP OF THE COMPANY
At December 31, 1998, Douglas B. Otto and all executive officers and
directors of the Company, as a group, owned approximately 43.7% and 49.5%,
respectively of the outstanding shares of the Company's Common Stock. Due to
such ownership position, Mr. Otto, whether acting alone or together with one or
more of the other executive officers of the Company, would likely be able to
control the affairs and policies of the Company and would likely be able to
elect a sufficient number of directors to control the Company's Board of
Directors and to approve or disapprove any matter submitted to a vote of the
stockholders. The ownership positions of Mr. Otto and of the executive officers
of the Company, as a group, together with the anti-takeover effects of certain
provisions in the Delaware General Corporation Law (the "DGCL"), in the
Company's Certificate of Incorporation and Bylaws, and in the Company's
shareholder rights plan would likely have the effect of delaying, deferring or
preventing a change in control of the Company. Such factors could have a
negative effect on the market price of the Company's Common Stock.
BUSINESS STRATEGY
Management's business strategy is to offer diverse lines of footwear and
apparel that emphasize functionality, quality, comfort and technical performance
tailored to a variety of activities and demographic groups. Specifically, the
Company's business strategy emphasizes the following elements:
Acquire or Develop New Brands. The Company intends to continue to focus
on identifying and building brands for growth. The Company has been successful
in taking the concepts of entrepreneurs for innovative, fashionable footwear
targeted at niche markets and building the products into viable brands. The
Company intends to continue to identify concepts for potential future niche
products which have the potential of developing into successful brands or
product lines.
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Introduce New Products under Existing Brands. The Company intends to
leverage consumer recognition of its existing brands by developing and
introducing additional innovative footwear products that satisfy the Company's
standards of practicality, comfort and quality. The Company believes the
introduction of additional products, such as the variety of new models in its
Teva, Simple and Ugg lines which are offered in the Company's 1999 product
offerings, have broadened the Company's customer base, further diversified the
Company's product lines, and helped reduce the effects of seasonality on the
Company's sales. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Seasonality." Relying on the public
awareness and demand for the Teva name, the Company has expanded this brand into
the casual footwear market, with increased offerings of leather and other casual
footwear in recent years. The 1999 Teva line includes many new upper
constructions and outsole designs. Additions to the Teva line for 1999 include a
Bluewater Series of technical deck sandals designed specifically for boating
enthusiasts, several styles of closed amphibious footwear for use in and out of
the water and a range of styles of closed leather casual footwear for women,
among many others. In addition, in 1997, the Company further leveraged the Teva
brand, introducing a line of casual apparel under the Teva brand name. As part
of the Company's strategy for the Simple brand, the 1999 product line has an
increased focus on leather casuals and sandals, in addition to a variety of
sneakers and clogs. In 1999, the Company expects its Ugg product line to be
expanded beyond its heritage boots and slippers by adding a variety of new, more
streetwise products including clogs, driving moccasins and apres ski boots, as
well as more weather-resistant boots with water resistant leathers.
Exercise Selective Distribution. The Company has exercised a policy of
selective distribution of its product offerings. The Company has implemented
this strategy by generally limiting its distribution to those retailers who
market products that are consistent with the Company's standards and that
provide a high level of customer service and expertise. This distribution
network includes outdoor retailers, athletic footwear stores, specialty
retailers and upscale department stores. The Company may review or modify its
distribution for Teva in the event it is not able to obtain a favorable
arrangement with respect to Teva beyond the expiration of the existing Teva
licenses. The Company maintains its retailer relationships through an emphasis
on customer service and support. The Company and its independent sales
representatives and technical representatives also provide in-store, technical
training and support, and offer distinctive point-of-purchase displays and other
promotional materials.
Pursue Additional Market Opportunities. Management intends to continue to
explore new markets for its existing line of products. The Company continues to
pursue expansion in international markets. For the years ended December 31,
1998, 1997 and 1996 international net sales totaled $24,194,000, $26,704,000 and
$24,061,000, representing 23.7%, 25.0% and 23.6% of net sales, respectively.
Management believes that significant opportunities exist to market its products
abroad, especially in Europe, and intends to selectively expand its distribution
worldwide. To bolster these efforts, in 1997 the Company opened a European
office, managed by the Company's senior sales executive, to service the
international markets and formed Deckers Japan, a subsidiary to concentrate on
the Japanese market. The Company also has the exclusive distribution rights for
Teva sports sandals in certain countries in Europe, including France, Germany
and the United Kingdom, as well as in Asia and the Caribbean. As a precautionary
measure in response to the European Commission's 1997 enactment of anti-dumping
duty provisions on certain types of footwear produced in China, the Company has
obtained alternative sourcing for the majority of the potentially impacted
products from suppliers outside of China in an effort to reduce the risk of
anti-dumping duties in the future. See "Risks of Foreign Operations/Restrictions
on Imports".
PRODUCTS
The Company currently offers four principal product lines: (1) Teva sports
sandals and apparel; (2) Simple casual footwear; (3) Ugg sheepskin footwear; and
(4) Picante casual apparel. Each of these lines, as well as individual models
within these lines, is designed to appeal to various demographic groups. The
Company's footwear products emphasize function, comfort and technical
performance, and are suitable for a variety of demanding outdoor and athletic
activities, as well as casual and everyday use. The Company's products are
designed and marketed to promote a high level of brand name recognition and
consumer appeal by combining functional and creative designs with quality
materials and construction. The Teva footwear and
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apparel lines and the Simple footwear line are generally previewed twice per
year, once in the summer for deliveries that commence in the fall and once in
the winter for the following back to school and fall season. The Ugg line of
sheepskin footwear is generally previewed in the winter with most deliveries
occurring in the following fall and winter. The Picante line of casual apparel
has been less seasonal than the Company's footwear lines and is previewed
year-round. The following sets forth a summary description of each of the
Company's primary product lines along with the Company's domestic suggested
retail price for adult models.
Teva Sports Sandals and Apparel. The Teva sport sandal is one of the
first sport sandals to be developed and is popular among outdoor enthusiasts and
the general public. The Company licenses the Teva patents and trademark from
Mark Thatcher, a professional river guide who invented the Teva sport sandal.
The terms of such licenses run through August 31, 2001. Certain styles of the
Teva sport sandal incorporate a proprietary strapping configuration ideally
suited for outdoor activities such as hiking, boating and river rafting. This
strapping system consists of high-quality nylon webbing or leather, is fully
adjustable, and holds the foot firmly to the sandal's durable, cellular rubber,
molded EVA, polyurethane or leather footbed. Teva sports sandals are extremely
durable and many of the styles are water resistant. The Spring 1999 line
includes 58 different models designed for a variety of uses. The Wilderness
Series, a category of sandals built for high performance and rugged outdoor use,
includes 14 models of men's and women's sandals. The Utility Series includes 21
styles, combining elements of sport performance with casual everyday comfort.
This series includes a variety of sandals, slides and thongs, as well as the
newly introduced XPDition collection of sandals with new patterned uppers of
performance air-mesh, water-resistant suede, nylon webbing and Dri-Tec linings.
The Circuit, a woman's walking sandal, was designed to deliver performance,
stability and comfort for moderate and brisk fitness walking. The Circuit, which
was introduced in the fall of 1998, is offered in both a nylon and a leather
version. Continuing on the success of recent years, the Spring 1999 line
includes 17 styles of men's and women's leather casuals, including an updated
version of the City Sport collection of women's casual sandals. The Spring 1999
Children's category has been expanded to include six different styles of nylon
and leather sandals. The domestic manufacturer's suggested retail prices for
adult sizes of Teva footwear products range from $19.95 to $79.95.
Teva Apparel and Accessories is a natural extension of the Company's sport
sandal business. The Spring 1999 line is comprised of two very distinctive
collections, the "Wilderness Collection" and the "Utility Collection." Each
collection reflects the same product philosophy, design and functional features
of the corresponding Teva sport sandal categories, and satisfies a broad range
of technical and lifestyle product requirements of the target customer. The line
includes men's and women's shirts, shorts, pants and jackets, among other
apparel and accessory items. Consistent with Teva sports sandals, Teva apparel
is made of high quality, durable fabrics and is designed for outdoor activities
as well as for casual everyday use. The domestic manufacturer's suggested retail
prices range from $12.00 to $96.00.
Simple Casual Footwear. The Simple line consists of casual shoes that
combine the comfort and function of athletic footwear construction with the
simple, understated styling of "back-to-basics," casual lifestyle footwear. The
Simple line is designed to appeal to men and women between the ages of 20-35 and
others who are looking for comfortable, fashionable, basic shoes. The Fall 1999
line includes an emphasis on men's and women's leather casuals, as well as a
variety of sneakers, clogs and sandals. For Fall 1999, Simple is offering 39
models. The variety of styles offered in the Fall 1999 line reflects the
Company's strategy to focus the Simple brand toward men's and women's leather
casuals, while reducing the number of styles offered in the highly competitive
sneaker market. In addition, the Simple Fall 1999 line no longer offers styles
specifically for the children's market due to the high competition and low
margins previously experienced in this area. The domestic manufacturer's
suggested retail prices for adult sizes for the Fall 1999 line range from $40.00
to $90.00.
Ugg Sheepskin Footwear. Ugg is a line of authentic sheepskin footwear,
popularized in Australia in the 1960's and 1970's. These sheepskin boots,
slippers and other footwear styles have high-grade fleece linings which act as a
natural insulator, keeping feet warm and comfortable. The 1999 Ugg line offers a
range of 28 models of casual, fashionable and streetwise styles of sheepskin
footwear in various colors, including several new styles of shoes and boots for
men and women. The 1999 line includes several styles with new innovative
fashionable uppers and several styles with water resistant leather treatments to
address more inclement
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weather conditions. The 1999 line also includes a new "Street Collection" with
products designed for more fashionable and functional everyday use in both warm
and cold climates. This collection includes a variety of boots, clogs and
driving moccasins. The domestic manufacturer's suggested retail prices for adult
sizes for the Ugg line range from $65.00 to $250.00.
Picante Casual Apparel. Picante casual apparel is a line of imported
hand-woven long and short sleeve cotton camp shirts and other casual apparel for
men and women, which are sold through many of the same retail channels as the
Teva and Simple lines. Picante clothing is designed using classic silhouettes
and colorations that are expected to appeal to the same demographic groups as
the Company's footwear lines. The unique fabrication and the quality workmanship
are consistent with the high standards associated with the Company's other
products and are complementary to those products. The domestic manufacturer's
suggested retail prices for this line of apparel range from $20.00 to $120.00.
MARKETING AND DISTRIBUTION
The Company's products are distributed throughout North America by a
network of approximately 51 independent sales representatives, organized
geographically, who make sales, visit retail stores to train personnel and
review sales of the Company's footwear on a periodic basis. The Company's
Vice-Presidents of sales manage this network of representatives, recruit
experienced sales representatives in the industry and coordinate sales to
national accounts. The Company currently sells its products internationally,
through a combination of independent distributors and independent sales
representatives. The Company's goal is to promote retail sales of the Company's
products at attractive profit margins for its customers through selective
distribution and marketing, targeted toward distinct groups of consumers. As a
result of this approach, the Company's accounts have a strong incentive to
devote greater selling space to the Company's products, and the Company is
better able to assess consumer preferences, the future ordering needs of its
customers and inventory requirements.
The Company's principal domestic customers include specialty retailers,
upscale department stores, outdoor retailers and athletic footwear stores which
market products consistent with the Company's standards. The Company's five
largest customers accounted for approximately 17.5% of the Company's net sales
for the year ended December 31, 1998, compared to 16.3% for the year ended
December 31, 1997. No single customer accounted for more than 10% of the
Company's net sales for the years ended December 31, 1998 or 1997.
In order to encourage accounts to place orders early in the season, the
Company has implemented a preseason discount program under which accounts are
offered discounts on preseason orders placed. The Company's strategy is to
emphasize this "futures" program, as compared to "at once" sales, in order to
reduce the risk of customer cancellations and to benefit from the significant
positive impact of the program on the Company's inventory costs, sourcing
schedule and allocation of marketing resources. In addition, as in 1997, the
Company offered a spring 1999 early delivery program that provided retailers an
incentive to order Teva product for delivery in the fourth quarter of 1998. This
early delivery program allows the Company to reduce the impact of peak inventory
warehouse utilization during the Spring and provides retailers the opportunity
to have earlier sell through, lengthening the retail selling season and
increasing the potential for inventory turns at retail. Domestic deliveries
generally originate from the Company's 126,000 square foot warehouse facility in
Ventura County, California. International deliveries also originate from
offshore factories or warehouses in Canada and the Netherlands.
ADVERTISING AND PROMOTION
The Company attempts to maximize the impact of its advertising, public
relations and promotional expenditures by utilizing media that provide high
visibility within targeted market segments. The Company's brand names are
generally advertised and promoted through a variety of consumer print
advertising campaigns in addition to highly visible editorial coverage in both
consumer and trade publications. Retail presence and "point of purchase"
materials along with production packaging provide additional visible brand
support. The
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Company's in-house marketing department works closely with certain accounts in
many aspects of these activities.
Historically, a majority of the Company's advertising has been related to
Teva and has been directed toward the outdoor markets. However, with the
broadened appeal of the Teva offerings, including the leather casual models, the
Company has increased its Teva advertising focus in more mainstream print
publications, including Men's Health, Details, Shape, Elle, Self, and Walking
Magazine, among others.
The national print advertising campaign which has been the focus of the
Company's Simple marketing approach in recent years has been replaced with a
less costly grass roots marketing approach. This new approach includes public
relations and product placement campaigns in addition to regional advertising
efforts. In-house marketing personnel work closely with a public relations firm
and a product placement agency to gain brand visibility in popular magazines,
television shows and feature films. Recent public relations efforts include
coverage in Footwear News, People Magazine, YM Magazine and Footwear Plus.
Simple product has also appeared on popular television programs including
Friends, Will and Grace, Dharma and Greg, and Dawson's Creek. These public
relations efforts have also resulted in Simple products appearing in feature
films including: The League, starring Al Pacino, Cameron Diaz and James Woods;
The Story of Us, starring Bruce Willis, Michelle Pfeiffer and Paul Reiser;
Sundowning, starring Kirk Douglas and Dan Aykroyd; and Kimberly, starring Robert
Mailhouse and Gabrielle Anwar.
In 1999, the Company plans to continue to build on the success of its Ugg
1998 national print advertising campaign. Targeting luxury consumers living or
vacationing in cold weather climates, the Company expects to advertise Ugg
products in upscale publications such as In Style, Elle, Self, Martha Stewart
Living, Fashions of the NY Times and Vanity Fair. In addition, the Company also
continues to support Ugg's core surf audience with ads in Surfing and Longboard
magazines. Regional advertising in local newspapers rounds out the Company's Ugg
print advertising program. In addition to this national print advertising
campaign, the Ugg brand is being supported by public relations and product
placement efforts. In-house marketing personnel work closely with a public
relations firm and a product placement agency to gain brand visibility in
popular magazines, television shows and feature films. Recent public relations
efforts include editorial coverage in magazines such as In Style, Footwear News,
Footwear Plus, Paper, Martha Stewart Living, Jane, YM Magazine, and Us.
Television coverage of Ugg product includes shows such as Dharma and Greg,
Suddenly Susan, X Files, Mad About You, Dawson's Creek, 3rd Rock from the Sun,
Friends, Will and Grace, Ally McBeal, 7th Heaven and Party of Five. These public
relations efforts have also resulted in Ugg product appearances in the following
feature films: Seven Girlfriends, starring Jamie Gertz and Mimi Rogers; Two
Goldsteins, starring Elliot Gould and Alicia Witt; Hanging Up, starring Meg
Ryan, Lisa Kudrow and Diane Keaton; Panic, starring William H. Macy and Neve
Campbell; Snow Day, starring Chevy Chase; and More Dogs Than Bones, starring
Whoopi Goldberg and Mercedes Ruehl.
In order to maintain the Company's historically high visibility among core
enthusiasts such as leading river rafters, kayakers, mountain bikers and rock
climbers, Teva products are given or sold at professional discounts to members
of this group. In order to further bolster the loyalty of these individuals, the
Company offers a line called the "Guide series," incorporating the latest
technological developments and highest quality materials. In 1996, Teva was the
official supplier to the United States Canoe and Kayak Team. Additionally, Ugg
was selected by Champion Sportswear to provide footwear for the winter 1994 and
the summer 1996 U.S. Olympic athletes. By outfitting these highly visible teams,
the Company creates awareness among targeted consumers at relatively low cost.
In addition, the Company has independent technical representatives who
travel to various festivals, outdoor sporting events and competitions including
the Ben and Jerry's Folk Festival in Rhode Island, the Gauley River Festival in
West Virginia, the National Cherry Festival in Michigan, the Mammoth Mountain
Bike Race in California and musical festivals such as the Teva Spirit of Unity
Tour, Reggae on the River and the Telluride Bluegrass Festival in Colorado,
among many others. These representatives promote the Teva products through
exhibits, demonstrations, sponsorships and product give-aways.
In 1998, 1997 and 1996, the Company incurred $5,847,000, $4,096,000 and
$4,738,000 respectively, for advertising, marketing and promotional expenses.
The Company is required under its Teva license agreements
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to spend a minimum amount for advertising and promoting the Teva products, which
ranged from 2.64% to 3.14%, depending on sales levels, of net sales during the
period from September 1995 to August 1997. Subsequent to August 1997, the
required advertising rates reverted to the 3.5% to 4.0% range that was in effect
prior to September 1995. However, the Company has historically spent more on
advertising than is contractually required. The Company may review or modify its
approach to advertising spending and may reduce future spending to approximate
the contractually required amounts in the event it is not able to obtain a
favorable arrangement with respect to Teva beyond the expiration of the existing
Teva licenses. The Company works closely with Mr. Thatcher, the Teva licensor,
in managing its advertising program for the Teva products.
DESIGN AND PRODUCT DEVELOPMENT
The Company's design and product development staff creates and introduces
new innovative footwear products that are consistent with the Company's
standards of high quality, combined with comfort and functionality. Research and
development costs aggregated $2,393,000, $1,780,000 and $1,546,000 in 1998, 1997
and 1996, respectively.
With respect to Teva, in order to ensure that the Company's high
performance technical products continue to satisfy the requirements of its
historical customer base of performance-oriented "core enthusiasts," the
Company's design staff solicits comments and feedback from these professional
outdoorsmen, as well as certain of its retailers, including REI, Track 'n Trail
and L.L. Bean. Certain models are modified and technical innovations are
developed in response to such comments and feedback. For example, certain styles
within the "Guide series" of high-performance Teva sandals employ quick release
buckles rather than "hook and loop" fasteners in response to such feedback. In
addition, for improved traction and durability, the Company recently
incorporated Spider Rubber(TM) into the high performance Wilderness Series.
While Teva continues to develop high performance sport sandals by
continually updating and designing new styles for this category, the Company
continues to increase its focus on the casual footwear market. The Company has
recently introduced several new styles of leather casual footwear for men and
women and has expanded its offering under its collection of children's sandals.
The Company has also expanded the leather casuals offering under the Simple line
for 1999. By monitoring changes in consumer lifestyles and preferences and then
focusing first on function and practicality, the Company develops footwear
designed to appeal to quality-minded consumers seeking comfortable casual
footwear.
Prior to and shortly after the Company's 1995 acquisition of Ugg Holdings,
Inc., the Ugg product was in need of updates and became subject to low cost
imitations. Since then, the Company has taken steps to update the Ugg products
and make them functional for use in cold and wet climates. For example, the
popular Ultra styles of men's and women's boots have been updated with new lug
outsoles to improve traction. In addition, the 1999 Ugg line includes a new
"Street Collection" with products designed for more fashionable and functional
everyday use in both warm and cold climates. New styles include clogs, driving
moccasins and apres ski type boots with water-resistant leathers. More
fashionable and unique upper styles help to differentiate Ugg from the low cost
imitation brands.
Integral factors in the design and product development process include an
evaluation of the availability and cost of raw materials, the capabilities of
the factories that will manufacture products and the target retail cost of new
models and lines. In recent years, the Company has directed significant efforts
and resources toward its design and product development functions. The Company
has been able to increase and strengthen its design and development staff in the
process. This staff works closely with brand management to develop new styles of
footwear and components for their various product lines. Drawings and prototypes
are utilized to produce samples of proposed new concepts. Throughout the
development process, the design staff coordinates closely with each other and
with the Company's product development, manufacturing and sourcing personnel
toward a common goal of developing and sourcing a high-quality product that will
be delivered on a timely basis. The Company endeavors to minimize the risk of
changing fashion trends by offering a diverse line of functional products and
monitoring sales to its accounts after introduction.
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PRODUCT SOURCING
The Company currently sources the majority of its Teva footwear from the
Far East, and to a lesser extent from Costa Rica. In addition, the Company
imports nearly all of its finished Simple footwear from independent contract
manufacturers in the Far East and imports the majority of its finished Ugg
footwear from independent contract manufacturers in Australia, New Zealand and
the Far East. The majority of Picante casual apparel is manufactured in
Guatemala at a wholly owned subsidiary of Heirlooms, Inc., a 50% owned
subsidiary of the Company.
Historically, the Company had manufactured a significant portion of its
Teva products in its company-owned manufacturing facilities in California and
Mexico. However, in efforts to improve its manufacturing cost structure, the
Company closed its California factory in Spring 1997 and closed its Mexican
factory in Fall 1998. The related production has since been reallocated to
independent subcontractors in the Far East and Costa Rica. As a result of the
closure of these facilities, the Company is no longer involved in the direct
manufacture of footwear, but rather sources completed footwear entirely from
independent subcontractors. As the Company continues to grow, it expects to
continue to rely heavily on its independent subcontractors for its sourcing
needs.
With the closure of the last remaining company-owned manufacturing facility
in 1998, the Company now sources completed footwear from a variety of
independent contract manufacturers. The manufacturing of footwear is performed
in accordance with detailed specifications provided by the Company and is
subject to quality control standards. In efforts to ensure the production of
high quality products, many of the materials and components used in production
are purchased from independent suppliers designated by the Company. The Company
believes that its completed footwear as well as the various raw materials and
components used in the manufacture of the footwear, including rubber, leather,
nylon webbing and sheepskin, are generally available from multiple sources at
competitive prices.
In 1992, the Company entered into a long-term manufacturing relationship
with a third party, Prosperous Dragon Manufacturing Co., Ltd. ("Prosperous
Dragon"), for the processing of the Company's footwear and footwear components
in the People's Republic of China ("PRC"). Under the agreement, Prosperous
Dragon is prohibited from manufacturing any products for any person other than
the Company, without the Company's prior consent. In return, the Company agreed
to loan up to $4,000,000 on a revolving basis to Prosperous Dragon to finance
Prosperous Dragon's original start up and expansion, of which $2,282,000 was
outstanding at December 31, 1998 ($782,000 net of allowance). Under the terms of
the arrangement, the Company purchases goods from Prosperous Dragon for an
amount equal to its manufacturing costs plus a fixed percentage. A portion of
the payments that would otherwise be made to Prosperous Dragon by the Company
for products shipped are applied to reduce the balance of the loan. A key
employee of the Company's Hong Kong subsidiary, Holbrook Limited ("Holbrook"),
is the son of the owner of Prosperous Dragon. This employee is currently
entitled to receive up to 8% of certain net profits of Holbrook derived from the
sourcing of products from Prosperous Dragon. This percentage will increase to
16% when 50% or more of both the Company's investment in Holbrook and the
outstanding balance of the original loan from the Company to Prosperous Dragon
are repaid, and to 24% when the Company's investment in Holbrook and the
original loan are repaid in full. As a result of the closure of the last
remaining company-owned manufacturing facility, the Company no longer has a need
to purchase the footwear components previously supplied by Prosperous Dragon.
Accordingly, the Company ceased purchasing products from Prosperous Dragon
during the third quarter of 1998. The owner of Prosperous Dragon is pursuing a
possible sale of Prosperous Dragon or its underlying assets in order to generate
the cash to repay the remaining outstanding net receivable balance owed to the
Company. There are no assurances that this will occur.
The Company generally does not have any remaining long-term agreements with
the manufacturers or suppliers of its products, but does business based on
individual purchase orders.
QUALITY CONTROL
The Company has instituted inspections and other procedures to satisfy the
high quality demanded by users of the Company's products. The Company's quality
assurance program includes inspection procedures at
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the factory level as well as a final inspection upon arrival at the Company's
distribution center. The Company uses on-site inspectors at its independent
suppliers who oversee the production process and perform quality assurance
inspections. In addition, the products undergo further inspection procedures
prior to being accepted by the Company's distribution center.
LICENSES
Teva License. The Company manufactures its Teva footwear line pursuant to
two exclusive license agreements with Mark Thatcher, the inventor of the Teva
sport sandal and the owner of the Teva patents and trademark. Mr. Thatcher owns
two United States patents on strap designs used in Teva sport sandals and has a
United States trademark registration for the Teva mark. The first of these
agreements authorizes the Company to make, use and sell products using the Teva
patents and trademark and any other United States patents later issued to or
acquired by Mr. Thatcher relating to footwear in the United States, Canada,
Puerto Rico and the countries in the Caribbean. Any new sandal developed by Mr.
Thatcher that is not covered by the current patents may be added to the
agreement as a licensed product at the election of the Company. In addition, the
Company has a right of first refusal should Mr. Thatcher offer to license to any
third party the rights to develop, market and sell nonfootwear products that use
the Teva name. In 1996, the Company exercised its right of first refusal with
respect to the licensing of apparel under the Teva name and began selling Teva
apparel as the exclusive licensee in 1997.
In 1992, the Company and Mr. Thatcher entered into the second exclusive
license agreement allowing the Company to manufacture and sell Teva products in
eight countries in Europe in which Mr. Thatcher had registered the Teva
trademark, including France, Germany and the United Kingdom. As Mr. Thatcher
obtains registrations of the Teva trademark in other European countries, such
countries will be included in the license. The material provisions of the
European license agreement are substantially similar to the provisions in the
license agreement for the United States, Canada, Puerto Rico and the Caribbean
as described above and will be automatically terminated upon any termination of
the United States license agreement. Mr. Thatcher may also terminate the
European license agreement if certain minimum sales targets are not met. Upon
any termination of the European license agreement, the Company must cease the
manufacture of Teva sport sandals and, for a period of five years thereafter,
may not directly or indirectly engage in the licensed territory in the
manufacture of products using know-how specifically related only to Teva sport
sandals acquired during the term of the agreement.
As a result of the Company's selling a specified minimum of Teva sport
sandals in Europe for the year ended August 31, 1993, the European license by
its terms was extended to include various countries in the Far East and Pacific
Rim, if Mr. Thatcher registers the Teva trademark in those countries. Mr.
Thatcher has subsequently obtained the Teva registered trademark in the Peoples'
Republic of China, Japan and Australia and has also filed for trademark
protection for the Teva(R) brand name in Hong Kong, New Zealand, Indonesia,
Singapore, Korea, Tahiti and Fiji, among others. Mr. Thatcher and the Company
have separately agreed that the Company may continue to operate in other Pacific
Rim countries until written notice from Mr. Thatcher to the contrary.
The Company has the exclusive rights to manufacture and distribute the Teva
footwear line through August 2001. In conjunction with the exercise of its five
year extension of the license period through August 31, 2001, the Company paid
the licensor consideration of $2,000,000. The Company is required to pay
royalties to the licensor at rates ranging from 5% to 6 1/2% on the net sales of
most Teva products, depending on sales levels, and 3% to 4 1/2% of net sales of
certain styles, depending on sales levels. The Company is required to pay
minimum annual royalties ranging from $420,000 to $820,000 over the license
period. In addition, the Company is obligated to pay minimum annual advertising
costs which ranged from 2.64% to 3.14%, depending on sales levels, of net sales
during the period from September 1995 to August 1997. Subsequent to August 1997,
the required advertising rates reverted to the 3.5% to 4.0% range that was in
effect prior to September 1995.
The Teva license agreements require that the Company obtain the approval of
Mr. Thatcher for new product designs as well as changes in designs or materials.
Mr. Thatcher also has the right to inspect the
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Company's manufacturing facilities and product samples to assure that quality
standards are being maintained and may specify certain sizes and models to be
manufactured by the Company in reasonable quantities. The Company is obligated
to sell Teva sandals to Mr. Thatcher with certain guaranteed terms of delivery.
Either party may terminate the agreement upon a breach which is not cured by the
other, and Mr. Thatcher may terminate the agreement if minimum annual sales
levels (which levels are substantially below levels of the Company's sales
during the past several years) are not met, except if substantial trademark
infringement has occurred. In addition, the agreement will automatically
terminate upon the bankruptcy or insolvency of the Company or a sublicense or
assignment of the licensing agreement by the Company without Mr. Thatcher's
consent. Upon any termination of the agreement, the Company must cease the
manufacture of Teva sport sandals and, for a period of three years thereafter,
may not directly or indirectly engage anywhere in the manufacture of products
using know-how specifically related only to Teva sport sandals acquired during
the term of the agreement.
Such agreement also provides that the Company may not manufacture or sell
sandals during the term of the license that are "competitive" with Teva sport
sandals. "Competitive sandals" are defined as sandals with a secure fit and a
heel strap system with adjustable fasteners attached to the sole in a specified
area. Whether a particular sandal is "competitive" within the meaning of the
agreement is to be determined by Mr. Thatcher and the Company or, if they cannot
agree, by arbitration. To the extent any present or future sandal manufactured,
sold or planned by the Company is determined to be a "competitive sandal," the
Company's results of operations could be adversely affected. In addition, Mr.
Thatcher may not manufacture or sell, or enter into any other agreement for the
assembly, manufacture or sale, of Teva sport sandals within the territory
covered by the license agreement. Concurrent with the Company's acquisition of
the rights to manufacture and distribute Alp(R) sport sandals in February 1995,
the Company agreed with Mr. Thatcher to market such sandals under the Teva
trademark. The Company further agreed to pay a royalty to Mr. Thatcher on net
sales of such products at a rate of 3% to 4 1/2%, depending on sales volume, and
to pay minimum advertising costs similar to those for the other Teva footwear
products.
Under the Company's licensing arrangement with Mr. Thatcher, Mr. Thatcher
initially may elect to bring proceedings to halt infringement of the Teva
patents and trademark. In addition, if, within 365 days of notice of a possible
infringement, Mr. Thatcher declines to pursue an enforcement action against such
infringement, the Company may bring an enforcement action in its own name at its
own cost if the Company delivers to Mr. Thatcher an opinion of patent counsel
that an infringement has occurred. The Company would receive all of any recovery
from such an action. If there is substantial infringement and Mr. Thatcher does
not proceed with any action, the Company may terminate the license agreement
upon 365 days' notice. See "Legal Proceedings."
On May 23, 1996, the Company exercised its right of first refusal with
respect to the licensing of apparel under the Teva name and began selling Teva
apparel in 1997. Under the license agreement, the Company has the exclusive
rights to manufacture and sell Teva apparel in the United States, Canada,
Mexico, Japan and other countries in the world where Licensor has registered
Teva as a trademark and the Company has received Licensor's written approval.
The term of the Teva apparel license is through December 31, 1997, with one year
options to renew through December 31, 1999 provided that the Company meets
minimum annual sales requirements. The Company is required to pay royalties
ranging from 4% to 5% of sales of Teva apparel, depending on specified sales
levels, and is required to spend 5% of net sales on advertising. The agreement
provides for minimum annual sales requirements of $2,500,000 and $4,000,000 in
1997 and 1998, respectively, which the Company has not met. Although the
licensor has not taken any action as a result of the Company's non-compliance
with the minimum sales requirements, the Company cannot provide any assurance
that it will continue to sell Teva apparel products in the future.
As announced in November 1998, Mr. Thatcher has engaged a financial advisor
to explore various strategic options for the Teva brand. The Company is in
continuing negotiations with Mr. Thatcher, pursuing various options including a
renewal of the existing license or the purchase of the underlying Teva rights.
The Company is hopeful that it will be able to successfully negotiate a
favorable arrangement with Mr. Thatcher. However, there can be no assurances
that such arrangements can be secured. In the event that the Company does not
come to a favorable arrangement with Mr. Thatcher, the Company will not be able
to sell Teva
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products beyond August 31, 2001, which would result in a material adverse impact
on the Company's results of operations, financial condition and cash flows.
SIMPLE SHOES AGREEMENT
The Company was a party to an agreement with Eric Meyer, the founder of
Simple Shoes, Inc. under which Mr. Meyer provided consulting services to the
Company at a rate of $225,000 per year through December 31, 1998 for
advertising, marketing, brand image, strategic planning, pricing and product
line design, development and extension. The parties also agreed that the Company
would continue to use Mr. Meyer's name for advertising and promotional purposes
under a three year licensing agreement through December 31, 1998. Mr. Meyer also
received a licensing fee equal to 0.2% of net sales of Simple Shoes, Inc. plus
0.1% of the net sales resulting from any licensing of Simple products by the
Company to third parties. Upon the expiration of the agreement on December 31,
1998, the Company agreed with Mr. Meyer to license a Simple trademark which
incorporates Mr. Meyer's name from Mr. Meyer for $25,000 through December 31,
1999.
HEIRLOOMS, INC. AGREEMENT
The Company and Bob Eason, the designer and founder of Picante clothing,
entered into an agreement that became effective in December 1993, pursuant to
which the Company paid $125,000 and became a 50% owner of Heirlooms, Inc.
("Heirlooms"), the manufacturer and distributor of Picante clothing. Mr. Eason
transferred to Heirlooms all of his rights to the related products. The Company
has also agreed to extend credit to Heirlooms. All obligations of Heirlooms to
the Company under such credit arrangement are secured by the assets of
Heirlooms.
Pursuant to the agreement, as amended, Mr. Eason has granted the Company
the option to acquire all or part of his interest in Heirlooms, exercisable
through June 30, 1999. The purchase price for such shares is $2,000,000. Mr.
Eason may elect to retain a 20% interest in Heirlooms, in which case the
purchase price would be reduced proportionately. Mr. Eason is employed as
President of Heirlooms on an at-will basis.
PATENTS AND TRADEMARKS
Mr. Thatcher holds two United States patents and one patent in each of
Australia, New Zealand and Korea for the Teva strapping system. As a result of
the expiration of the applicable period during which foreign patent applications
were required to have been filed, Mr. Thatcher does not and cannot hold such
patent rights in other countries. Mr. Thatcher also currently holds Teva
trademark rights in the United States and in several other countries, including,
among others, France, Germany, the United Kingdom, Japan and Australia. Mr.
Thatcher's patent and trademark rights are licensed to the Company under the two
license agreements discussed previously. Both the Company and Mr. Thatcher
regard such proprietary rights as valuable assets, and the Company cooperates
with Mr. Thatcher in vigorously protecting such rights against infringement by
third parties. To date, Mr. Thatcher has successfully enforced his patent and
trademark rights in all 20 concluded lawsuits brought against such third
parties. Under certain circumstances, if Mr. Thatcher declines to challenge a
potential infringement, the Company may bring an infringement action at its own
cost. See "Licenses -- Teva License."
The Company also owns the Simple and Ugg trademarks and has applied for or
received registrations for them in the United States and several foreign
countries. In addition, the Company has filed for patent registrations on
several of its designs and has filed trademark applications for the names of
many of its models and features and for certain marketing slogans.
The Company has acquired the patent and trademarks for Alp(R)sport sandals
and holds the trademark on the Deckers(R) name. The trademark registrations for
the Picante mark in the United States and Benelux (Belgium, Netherlands and
Luxembourg) and the mark for Rancho Picante in the United States are currently
held by Heirlooms, Inc.
BACKLOG
Historically, the Company has encouraged and has received a significant
portion of its orders as preseason orders, which are generally placed by
customers approximately four to eight months prior to shipment date. The Company
emphasizes this "futures" business, as compared to "at once" sales, as it allows
the Company to better forecast its inventory requirements and assists with the
Company's sourcing schedule. As a result, the
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Company provides its customers with incentives to participate in such preseason
programs. Unfilled customer orders ("backlog"), as of any date, represent orders
scheduled to be shipped at a future date and do not represent firm sales. The
mix of future and immediate delivery orders can vary significantly from quarter
to quarter and year to year. The backlog as of a particular date is affected by
a number of factors, including seasonality and the scheduling of manufacture and
shipment of products as well as variations in the quarter to quarter and year to
year preseason incentive programs. As a result, comparisons of backlog from
period to period are not meaningful and the Company's backlog at any given time
is generally not indicative of sales levels expected to be achieved in the
future.
COMPETITION
The casual, outdoor and athletic footwear markets are highly competitive.
The Company believes that its largest current competitors for the Teva line are
Nike, Adidas, Timberland, Clarks and Salomon. The principal competitors for the
Simple line include Rockport, Clarks, Hush Puppy, Birkenstock, Ecco, Dr.
Martens, Naot, Vans and Airwalk. The Ugg line's most significant competitors
include Acorn, Aussie Dogs and Minnetonka, as well as retailers' private label
footwear. Many of the Company's competitors have substantially greater
financial, distribution and marketing resources than the Company.
Competition in the Company's footwear is primarily based on brand
awareness, product quality, design, pricing, fashion appeal, marketing,
distribution, performance and brand positioning. The Company's Teva line of
footwear competes primarily on the basis of its authenticity and consumer brand
recognition as one of the first sandals of its kind, as well as its high
performance nature and its diversity of styles offered. In addition, several of
the most popular styles employ a distinctive patented strapping system, which
contributes to performance and the brand's consumer recognition. The Company
competes through its Simple line by offering a diversity of styles designed for
a variety of recreational and leisure activities. Ugg competes with others
primarily on the basis of its authenticity as well as its brand name
recognition, identifiable with the United States sheepskin footwear market. The
Company believes that its business strategy has resulted in increasing brand
awareness. However, no assurance can be given that in the future the Company
will be able to further increase its brand awareness, increase its market share
or respond to changing consumer preferences.
RISKS OF FOREIGN OPERATIONS/RESTRICTIONS ON IMPORTS
The Company's operations are subject to the customary risks of doing
business abroad, including, but not limited to, currency fluctuations, customs
duties and related fees, various import controls and other non-tariff barriers
(e.g., quotas), the cost of transportation, restrictions on the transfer of
funds, labor unrest and strikes, and in certain parts of the world, political
instability. Countries where the Company's products are manufactured and sold
may, from time to time, seek to increase customs duties or impose other
non-tariff barriers (e.g., quotas), all of which have the potential to affect
the Company's operations and its ability to maintain or increase the current
level of importations of the Company's products. The Company is unable to
predict the likelihood or frequency of the occurrence of any of these events.
The products imported by the Company into the United States are subject to
various duty rates which are established by law. At the present time these
duties range between 8.5% and 10% of the entered value of footwear made
principally of leather, 7.5% and 37.5%, plus $.90 per pair, of the entered value
of footwear made of synthetic textiles, and 0% and 6.8% of the entered value of
footwear components of various materials. "Entered value" means the value taken
into account for purposes of determining the amount of any customs duties or any
other duties which may be imposed on the importation of any property. In
general, the entered value is normally based on the price paid or payable by the
Company to the seller of the imported merchandise. Certain footwear and
components manufactured in countries designated as beneficiary countries for
purposes of the Caribbean Basin Economic Recovery Act, using components and
ingredients of United States origin, may be imported without payment of duties.
Tariff preferences are also available pursuant to the North American Free Trade
Agreement for qualifying footwear products and components originating in Mexico
or Canada. Certain of the items imported by the Company are not finished
products, but are raw materials or components used by the Company's domestic
subcontractors. In most instances, raw materials or components have a lower duty
rate than finished footwear.
15
<PAGE> 18
From time to time, the Company may be subject to claims for additional
duties arising as a result of the United States Customs Service, or similar
agencies of foreign countries, disagreeing with the classification and/or
valuation used by the Company to enter various styles of footwear.
The United States Trade Representative ("USTR") is required by the Trade
Act of 1974, as amended by the Trade and Tariff Act of 1984, the Omnibus Trade
and Competitiveness Act of 1988 and the 1994 Uruguay Round Agreements Act to
submit an annual National Trade Estimates Report on Foreign Trade Barriers (the
"NTE Report") identifying significant restrictions or barriers on United States
access to foreign markets. In January 1999, the President reinstated, by
Executive Orders, the "Super 301" Provisions of the Trade Act. Relying on the
NTE Report, the USTR is required to report to Congress any trade barriers, trade
distorting practices and particular countries identified as priorities for trade
liberalization.
On April 30, 1997, the USTR designated China for monitoring under Section
306 of the 1974 Trade Act. This provision focuses on compliance with bilateral
trade agreements and allows the U.S. government to impose a variety of sanctions
if a party fails to comply with the terms of a bilateral agreement. The USTR
noted on April 30, 1998, "that China now has a functioning system to protect
intellectual property rights." The USTR will continue to monitor China's
commitment under the 1995 IPR Enforcement Agreement and the June 17, 1996 IPR
Accord to insure compliance. The Company is not in a position at this time to
determine whether or not a "Special 301" will be used in the future against
China.
In June 1998, President Clinton extended non-discriminating "normal trade
relations" ("NTR," formerly "most favored nation") trading status with China
through June 1999 and Congress supported this decision. While NTR status has
been extended for another year, this topic has traditionally been the subject of
vigorous debate and the Company is unable to predict if the United States will
revoke China's NTR status at some point in the future. If a revocation of NTR
status were to occur, it would result in significantly higher duties on imports
from China.
On April 30, 1998, the USTR announced that 31 countries had been placed on
the "special 301" watch list and 15 countries on the priority watch list because
of intellectual property protection concerns. Watch list countries include:
Australia, Canada, Denmark, Costa Rica, Hong Kong and Korea. The Company is
unable to predict whether or not additional countries will be added to the
priority watch list, or if any other actions will be imposed by the United
States and if such actions were taken, whether such actions would include
footwear imports or otherwise result in increased costs for the Company's
products or restrict the supply of footwear, generally, or of the Company's
footwear in particular.
The European Commission has enacted anti-dumping duties of 49.2% on certain
types of footwear imported into Europe from China and Indonesia. Dutch Customs
has issued an opinion to the Company that certain popular Teva styles are
covered by this anti-dumping duty legislation. The Company does not believe that
these styles are covered by the legislation and is working with Dutch Customs to
resolve the situation. In the event that Dutch Customs makes a final
determination that such styles are covered by the anti-dumping provisions, the
Company expects that it would have an exposure to prior anti-dumping duties for
1997 of up to approximately $500,000. In addition, if Dutch Customs determines
that these styles are covered by the legislation, the duty amounts could cause
such products to be too costly to import into Europe from China in the future.
As a result, the Company could have to cease shipping such styles from China
into Europe in the future or could have to begin to source these styles from
countries not covered by the legislation.
The European communities also impose quantitative limits on imports from
China of certain leather upper and textile upper footwear. The Company is unable
to predict how long the anti-dumping duty and import quota restrictions will
remain in effect or changes in the scope or severity of such restrictions.
EMPLOYEES
At December 31, 1998, the Company employed approximately 161 full-time
employees in its U.S. facilities, 13 at its European subsidiary and 30 at its
Hong Kong subsidiaries, none of whom is represented by a union. The Company
believes its relationship with its employees is good.
16
<PAGE> 19
ITEM 2. PROPERTIES
The Company leases approximately 30,000 square feet for its corporate
offices in Goleta, California and approximately 126,000 square feet for its
warehouse facility in Ventura County, California. In addition, through a
second-tier subsidiary, the Company leased an approximately 18,000 square foot
manufacturing facility in Mexico. However, in connection with the closure of the
Mexican production facility in 1998, the Company terminated the underlying
lease. The Company also leases approximately 10,000 square feet of office and
warehouse space in the Netherlands for its European sales and distribution
efforts and approximately 2,000 square feet of office space in Macau for its Far
East staff. The Company paid approximately $1,122,000 in rent for all of its
facilities in 1998. The terms of the leases for the Company's corporate offices
and its Ventura County warehouse expire in 2001. The lease for the Company's
European facilities expires in July 1999 and the lease for the Company's Macau
office space expires in August 2000. The Company's Ugg subsidiary leases
approximately 23,000 square feet of office and manufacturing space in Oregon
through 2000 which it has subleased, as Ugg's operations have been consolidated
with the Company's other facilities. The Company believes that its existing
corporate, manufacturing and warehousing space will be adequate to meet its
current and foreseeable requirements, and that suitable additional or
alternative space will be available as needed on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
An action was brought against the Company in 1995 in the United States
District Court, District of Montana (Missoula Division), by Molly Strong-Butts
and Yetti by Molly, Ltd. (collectively, "Molly") which alleged, among other
things, that the Company violated a non-disclosure agreement and obtained
purported trade secrets regarding a line of winter footwear which Deckers
stopped producing in 1994. The matter resulted in a jury verdict which was
announced in open court March 17, 1999. The various parts of the verdict
aggregated $1,785,000 for the two separate plaintiffs. Molly claimed specified
damages of $18 million, as well as other unspecified damages. The Company is
appealing the verdict and continues to believe such claims are without merit.
The Company intends to continue contesting this claim vigorously.
In October 1998, the Company was served in an action brought by a Plaintiff
claiming, among other things, breach of contract and misrepresentation related
to the Company's sale of its interest in Trukke Winter Sports Products, Inc.
("Trukke") to the founder of Trukke, rather than to the Plaintiff. The Plaintiff
contended, among other things, that a letter of intent between the Company and
the Plaintiff was a binding agreement. The Plaintiff was indebted to the Company
for approximately $270,000 for goods previously purchased by the Plaintiff from
the Company in the ordinary course of business. This action was to be heard in
the federal district court in Pocatello, Idaho. Effective February 1999, all
parties settled the matter and the action is expected to be dismissed with
prejudice. As full settlement, the terms provided that the Company extend the
due dates of the $270,000 of previous indebtedness, requiring periodic payments
through 2002.
The Company is also involved in routine litigation arising in the ordinary
course of business. Such routine matters, if decided adversely to the Company,
would not, in the opinion of management, have a material adverse effect on the
financial condition or results of operations of the Company. From time to time,
Mr. Thatcher and the Company are also involved in other legal proceedings to
protect the Teva patents and trademarks from infringement by third parties. Any
decision or settlement in any such infringement proceeding which allowed a third
party to continue to manufacture and sell the products at issue could have an
adverse effect on the Company's sales to the extent such other products are
purchased in lieu of the Company's products.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the National Market System of the
NASDAQ stock market (the "NMS") under the symbol "DECK."
As of February 28, 1999, the number of holders of record of the Common
Stock was 146, and the number of beneficial owners was approximately 2,300.
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
HIGH LOW HIGH LOW
----- ----- ----- -----
<S> <C> <C> <C> <C>
First Quarter............................................. $8.50 $7.13 $7.88 $6.25
Second Quarter............................................ 7.94 6.63 8.50 6.00
Third Quarter............................................. 7.50 4.56 8.44 6.88
Fourth Quarter............................................ 5.25 1.25 10.00 7.00
</TABLE>
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends in the foreseeable future. Payment
of dividends is within the discretion of the Company's Board of Directors and
will depend upon, among other factors, the Company's earnings, financial
condition and capital requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
18
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial data of the
Company for, and as of the end of, each of the years in the five-year period
ended December 31, 1998.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------------------
INCOME STATEMENT DATA 1998 1997 1996 1995 1994
--------------------- -------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales................................ $102,172 $106,713 $101,838 $102,334 $85,818
Cost of sales............................ 65,592 62,453 61,009 65,856 43,979
-------- -------- -------- -------- -------
Gross profit........................... 36,580 44,260 40,829 36,478 41,839
Selling, general and administrative
expenses............................... 39,378 35,648 32,989 32,373 24,287
Loss on factory closure.................. -- 500 -- -- --
-------- -------- -------- -------- -------
Earnings (loss) from operations........ (2,798) 8,112 7,840 4,105 17,552
Other (income) expense................... 1,320 143 1,241 1,382 (563)
-------- -------- -------- -------- -------
Earnings (loss) before income taxes.... (4,118) 7,969 6,599 2,723 18,115
Income taxes (benefit)................... (1,211) 3,445 2,943 1,287 7,609
-------- -------- -------- -------- -------
Net earnings (loss).................... $ (2,907) $ 4,524 $ 3,656 $ 1,436 $10,506
======== ======== ======== ======== =======
Net earnings (loss) per common share:
Basic.................................. $ (.34) $ .50 $ .40 $ .13 $ 1.09
Diluted................................ (.34) .50 .39 .13 1.09
-------- -------- -------- -------- -------
Weighted average common shares
outstanding:
Basic.................................. 8,632 8,961 9,248 9,324 9,630
Diluted................................ 8,632 9,012 9,292 9,352 9,673
======== ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------------------------------------
BALANCE SHEET DATA 1998 1997 1996 1995 1994
------------------ -------- -------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets........................... $ 59,309 $ 48,801 $ 49,348 $ 50,031 $53,987
Current liabilities...................... 17,174 9,579 9,618 6,262 5,731
Total assets............................. 84,373 74,693 74,897 74,917 62,651
Long-term debt, less current
installments........................... 15,199 7,983 10,290 15,170 --
Total stockholders' equity............... 52,000 57,131 54,989 53,485 56,920
======== ======== ======== ======== =======
</TABLE>
19
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table is derived from the Company's statement of operations
and sets forth, for the periods indicated, certain operating data as a
percentage of net sales.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 64.2 58.5 59.9
----- ----- -----
Gross profit.............................................. 35.8 41.5 40.1
Selling, general and administrative expenses................ 38.5 33.4 32.4
Loss on factory closure..................................... 0.0 0.5 0.0
----- ----- -----
Earnings (loss) from operations........................... (2.7) 7.6 7.7
Other expense............................................... 1.3 0.2 1.2
----- ----- -----
Earnings (loss) before income taxes....................... (4.0) 7.4 6.5
Income taxes (benefit)...................................... (1.2) 3.2 2.9
----- ----- -----
Net earnings (loss)......................................... (2.8)% 4.2% 3.6%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales decreased by $4,541,000, or 4.3%, between the years ended
December 31, 1998 and 1997. Sales of the Teva line increased to $67,916,000 for
the year ended December 31, 1998 from $61,863,000 for the year ended December
31, 1997, a 9.8% increase. The increase in Teva sales was partially due to an
increase in sales under the Company's early delivery program in 1998, compared
to that in 1997. Under this program, retailers are encouraged to take early
delivery of spring product in the fourth quarter in an effort to expand the
length of the selling season. In addition, the Company introduced several
successful new styles and experienced a general increase in demand for the Teva
products. Sales of Teva products represented 66.5% and 58.0% of net sales for
the years ended December 31, 1998 and 1997, respectively. Net sales of footwear
under the Simple product line decreased 31.0% to $19,939,000 from $28,901,000
between the years ended December 31, 1998 and 1997. Simple sales represented
19.5% of sales in 1998 and 27.1% of sales in 1997. The decrease in Simple sales
occurred due to a decline in demand for Simple products caused by a variety of
factors, including competition, an abundance of similar products at retail, and
a general decrease in the popularity of the products. Sales of Ugg footwear
increased 16.8% to $10,710,000 in 1998 from $9,169,000 in 1997, representing
10.5% of sales for the year ended December 31, 1998 and 8.6% for the year ended
December 31, 1997. The increase in Ugg sales was due to a general increase in
demand for the products, caused in part by an improved print advertising and
public relations campaign in 1998. In addition, the Company's overall sales
declined as the Company exited two businesses since 1997. The Company sold it's
interest in the Trukke line of winter sport boots effective December 31, 1997
and ceased its business of supplying footwear components for independent
factories in the Far East during the third quarter of 1998. In the aggregate,
the reduced sales contribution from these two businesses was $2,928,000.
Overall, international sales for all of the Company's products decreased 9.4% to
$24,194,000 from $26,704,000, representing 23.7% of net sales in 1998 and 25.0%
in 1997. This decrease in international sales was caused in part by the
reduction in sales of footwear components in the Far East, when the Company
exited that business in 1998. The volume of footwear sold worldwide increased
2.0% to 3,941,000 pairs during the year ended December 31, 1998 from 3,865,000
pairs during the year ended December 31, 1997, for the reasons discussed above.
The weighted average wholesale price per pair sold during the year ended
December 31, 1998 decreased by 4.4% to $24.84 from $25.97 for the year ended
December 31, 1997. The decrease occurred as a result of an increase in the
proportion of footwear sold at closeout prices in 1998 compared to 1997,
primarily related to the Simple line.
20
<PAGE> 23
Cost of sales increased by $3,139,000, or 5.0%, to $65,592,000 for the year
ended December 31, 1998, compared with $62,453,000 for the year ended December
31, 1997. Gross profit decreased by $7,680,000, or 17.4%, to $36,580,000 for the
year ended December 31, 1998 from $44,260,000 for the year ended December 31,
1997 and decreased as a percentage of net sales to 35.8% from 41.5%. The
decrease in gross margin during the period was due to several factors. As a
result of the Simple sales decline, the Company experienced inventory
write-downs on excess Simple inventory, as well as an increase in the volume of
Simple closeouts. In addition, the Company experienced write-downs of Teva raw
materials inventory, partially as a result of the Company's closure of its
Mexican manufacturing facility, the last remaining Company owned manufacturing
facility. The Company also experienced increased airfreight costs in 1998
compared to 1997. Lastly, the Company announced a product recall on the Teva
nylon infant sandals during 1998. The Company recorded a loss of approximately
$460,000 related to this recall, of which approximately $360,000 was included as
a reduction of gross profit and approximately $100,000 was included in selling,
general and administrative expenses.
Selling, general and administrative expenses increased by $3,730,000, or
10.5%, for the year ended December 31, 1998, compared with the year ended
December 31, 1997, and increased as a percentage of net sales to 38.5% in 1998
from 33.4% in 1997. In its continuing efforts to improve sales growth, the
Company increased its advertising and marketing and increased its research and
development to improve design as well as to improve the transition from design
to production. Accordingly, the Company incurred approximately $1,880,000 more
in advertising, marketing and promotion costs, including $130,000 of in-house
costs, and approximately $613,000 more in research and development costs in 1998
than in 1997. The Company also experienced an increase in warehouse costs of
approximately $730,000, an increase in Teva apparel operating costs of
approximately $340,000, an increase in costs associated with its management
information systems of approximately $460,000, an increase in sales sample
expenses of approximately $220,000, increased European office expenses of
approximately $140,000, product recall costs of approximately $100,000, and
severance costs of approximately $200,000 in conjunction with the closure of the
Mexican manufacturing facility in 1998.
Net interest expense was $1,171,000 for the year ended December 31, 1998
compared with net interest expense of $344,000 for the year ended December 31,
1997, primarily due to increased borrowings on the Company's credit facility in
1998 compared to 1997.
For the year ended December 31, 1998, the Company experienced an income tax
benefit of $1,211,000, as a result of the Company's loss for the period,
reflecting the Company's ability to recover income taxes previously paid. This
represents an effective income tax rate of 29.4%. For the year ended December
31, 1997, the Company had income tax expense of $3,445,000, representing an
effective income tax rate of 43.2%. The change in the effective income tax rate
is due to certain non-deductible expenses, primarily goodwill amortization,
which were a greater proportion of earnings (loss) before income taxes in 1998
than in 1997. In addition, for California state income tax purposes, net
operating losses cannot be carried back to offset income taxes previously paid
in prior years and, therefore, the income tax benefit is reduced accordingly.
The Company had a net loss of $2,907,000 for the year ended December 31,
1998 as compared with net earnings of $4,524,000 for the year ended December 31,
1997 due to the reasons discussed above.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales increased by $4,875,000 or 4.8% between the years ended December
31, 1997 and 1996. Sales of the Teva line increased to $61,863,000 for the year
ended December 31, 1997 from $43,898,000 for the year ended December 31, 1996, a
40.9% increase. Sales of Teva products represented 58.0% and 43.1% of net sales
for the years ended December 31, 1997 and 1996, respectively. The increase in
Teva sales was primarily due to increased demand for this line. In addition, in
early 1996, sales of the Teva line were adversely impacted by the excess
inventory at retail, which the retailers had carried into 1996 from the 1995
season. This situation did not recur in 1997. Also, in the fourth quarter of
1997, the Company implemented a spring 1998 early delivery program that provided
retailers an incentive to bring Teva products in for the fourth quarter and
expand the length of the selling season. Due to the success of this program
approximately $5 to $6 million of Teva product was shipped in the fourth quarter
of 1997, which the Company believes ordinarily would have
21
<PAGE> 24
shipped in the first quarter of 1998. Net sales of footwear under the Simple
product line decreased 19.8% to $28,901,000 for the year ended December 31, 1997
from $36,029,000 for the year ended December 31, 1996. This decrease was
primarily due to the continued repositioning of the Simple brand and its
distribution, and the non-recurrence of last year's demand for certain styles of
Simple clogs. Net sales of footwear under the Ugg product line decreased 38.2%
to $9,169,000 for the year ended December 31, 1997 from $14,831,000 for the year
ended December 31, 1996. This decrease was due to reduced demand for the
Company's product offering, resulting from pricing pressures, reduced
advertising spending and a carry-over of product at retail from 1996. Overall,
international sales for all of the Company's products increased 11.0% to
$26,704,000 from $24,061,000, representing 25.0% of net sales in 1997 and 23.6%
in 1996. Because the increase in the volume of sales of Teva footwear products
more than offset the decrease in the volume of sales of Simple and Ugg footwear
products, the volume of footwear sold increased 7.8% to 3,865,000 pairs for the
year ended December 31, 1997 from 3,587,000 pairs for the year ended December
31, 1996.
The weighted average wholesale price per pair sold during the years ended
December 31, 1997 and 1996 decreased 6.7% to $25.97 from $27.85. The decrease
was primarily due to a change in the sales mix resulting from the reduction in
sales of Ugg products in 1997, which have a significantly higher weighted
average selling price than the Company's other product lines. In addition, the
Company experienced a change in the sales mix for Simple products, with
significantly greater sales of the relatively higher priced clogs and fewer
close-outs during the year ended December 31, 1996 compared to the year ended
December 31, 1997. This decrease was partially offset by the lower volume of
Teva close-outs during the year ended December 31, 1997 compared to the year
ended December 31, 1996.
Cost of sales increased by $1,444,000 or 2.4% to $62,453,000 for the year
ended December 31, 1997, compared with $61,009,000 for the year ended December
31, 1996. Gross profit increased by $3,431,000, or 8.4% to $44,260,000 for the
year ended December 31, 1997 from $40,829,000 for the year ended December 31,
1996 and increased as a percentage of net sales to 41.5% from 40.1%. The
increase in gross profit margin as a percentage of net sales was primarily due
to significantly reduced levels of Teva and Ugg close-outs during the year ended
December 31, 1997 compared to the corresponding levels for the year ended
December 31, 1996. This increase was partially offset by higher levels of Simple
close-outs during this period.
Selling, general and administrative expenses increased by $2,659,000, or
8.1% for the year ended December 31, 1997, compared with the year ended December
31, 1996, and increased as a percentage of net sales to 33.4% in 1997 from 32.4%
in 1996. The increase was largely a result of increased royalties payable to the
licensor of the Teva patents and trademarks due to a change in the sales mix
toward Teva products. In addition the Company experienced increased legal costs
related to disputes with some of the former shareholders of Ugg Holdings, Inc.,
increased European operating expenses due to the opening and operation of the
European office in 1997, increased amortization of intangible assets, increased
costs associated with the Teva apparel line and an increase in research and
development spending. The increase in amortization of intangible assets was
primarily due to the amortization of Teva license fees for the five year period
beginning September 1996, as well as increased goodwill amortization associated
with the 1997 Ugg acquisition payments. These increases were partially offset by
a decrease in bad debt expense and Ugg advertising costs between the years ended
December 31, 1996 and December 31, 1997.
In 1997, the Company also incurred a loss on factory closure aggregating
$500,000 related to the March 1997 closure of its California manufacturing
facility. Upon closure, the Company moved the related production requirements to
its manufacturing facility in Mexico and to other independent subcontractors in
the Far East, Costa Rica and the United States. The $500,000 loss included
property and equipment write-downs, employee severance and other exit costs. No
similar closure occurred in 1996.
Other expense decreased to $143,000 in 1997 from $1,241,000 in 1996. The
decrease resulted from a $566,000 decrease in net interest expense, primarily
due to repayments on the Company's borrowings under its credit facility in 1997.
In addition, the Company had a net gain on disposal of assets of $51,000 in
1997, compared with a loss on disposal of assets aggregating $548,000 in 1996.
Income taxes were $3,445,000 for the year ended December 31, 1997,
representing an effective income tax rate of 43.2% compared with income taxes of
$2,943,000 for the year ended December 31, 1996,
22
<PAGE> 25
representing an effective income tax rate of 44.6%. The lower effective income
tax rate in 1997 compared to 1996 is due to certain non-deductible expenses and
losses being a lower proportion to earnings before income taxes in 1997 than in
1996. 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 $4,524,000 for the year ended December 31,
1997 as compared with net earnings of $3,656,000 for the year ended December 31,
1996, an increase of 23.7%, for the reasons discussed above.
OUTLOOK
This "Outlook" section, the "Risk Factors" section, the last paragraph
under "Liquidity and Capital Resources," the discussion under "Seasonality" and
other statements in this Annual Report contain a number of forward-looking
statements including forward-looking statements relating to sales and operating
expense expectations, the potential imposition of certain customs duties, the
potential impact of the Teva license expiration, the potential impact of certain
litigation, the potential impact of the Year 2000 on the Company and the impact
of seasonality on the Company's operations. All of the forward-looking
statements are based on current expectations. Actual results may differ
materially for a variety of reasons, including the reasons discussed below and
under "Risk Factors."
Sales and Operating Expense Expectations. The Company's sales under the
Teva and Ugg product lines increased in 1998 compared to 1997. The Company
expects sales for both of these lines to increase in 1999.
The Company experienced a 31.0% decrease in Simple sales in 1998 compared
to 1997. The Company expects sales under the Simple line to be lower in 1999
than in 1998.
The Company's selling, general and administrative expenses increased to
38.5% of sales in 1998, for a variety of reasons. The Company expects that these
costs will decrease as a percentage of sales in 1999.
The foregoing forward-looking statements represent the Company's current
analysis of trends and information. Actual results could vary as a result of
numerous 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 and the
necessity of selling products at significantly reduced selling prices, all of
which would 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. The Company's sales can be
adversely impacted by the ability of the Company's suppliers to manufacture and
deliver products in time for the Company to meet its customers' orders. In
addition, sales of each of the Company's different lines have historically been
higher in different seasons, with the highest percentage of Teva sales occurring
in the first and second quarter of each year, the highest percentage of Simple
sales occurring in the third quarter and the highest percentage of Ugg sales
occurring in the fourth quarter. Consequently, the results for these product
lines are highly dependent on results during these specified periods.
In addition, the Company's results of operations, financial condition and
cash flows are subject to risks and uncertainties with respect to the following:
overall economic and market conditions; competition; demographic changes; the
loss of significant customers or suppliers; the performance and reliability of
the Company's products; customer service; the Company's ability to secure and
maintain intellectual property rights; the Company's ability to secure and
maintain adequate financing; the Company's ability to forecast and subsequently
achieve those forecasts; its ability to attract and retain key employees; and
the general risks associated with doing international business including foreign
exchange risks, duties, quotas and political instability.
Sales of the Company's products, particularly those under the Teva and Ugg
lines, are very sensitive to weather conditions. Extended periods of unusually
cold weather during the spring and summer could adversely impact demand for the
Company's Teva line. Likewise, unseasonably warm weather during the fall and
winter months could adversely impact demand for the Company's Ugg product line.
23
<PAGE> 26
Year 2000 Issue. The Year 2000 issue results from computer hardware or
software programs written using two digits to identify the year. These computer
programs and hardware were designed and developed without consideration of the
impact of the upcoming change in the century. As a result, such systems may not
be able to properly distinguish between years that begin with a "20" and years
that begin with a "19". If not corrected, such hardware and software programs
could create erroneous information by or at the year 2000, causing the Company,
or its customers or suppliers, to become unable to process normal business
transactions accurately or at all.
State of Readiness. The Company's Year 2000 compliance strategy includes
several overlapping phases, which the Company has defined as follows:
Identification -- This phase involves the identification of the hardware
and software systems used by the Company which could be adversely impacted by
the Year 2000 issue. It includes identification of information technology ("IT")
systems and non-IT systems (including telecommunications systems and systems
associated with facilities -- such as utilities and security, among others), as
well as identification of the impact that Year 2000 issues may have on the
Company's key third party relationships (including customers, suppliers and
financing sources, among others).
Analysis -- This phase involves the determination of the likelihood, impact
and magnitude of potential Year 2000 non-compliance for each of the items in the
areas previously identified in the Identification phase.
Conversion -- This phase involves the development and execution of a plan
to bring the previously identified items into Year 2000 compliance.
Testing -- This phase involves the testing of the various systems to
ascertain that the conversion procedures were successful at bringing the systems
into compliance.
Implementation -- This phase involves putting the various Year 2000
compliant systems into use in the Company's operations.
The Company is continuing to assess the readiness of its various systems
for handling the Year 2000 issue. The Company determined that the version of the
software that operated the Company's enterprise business systems prior to 1999
was not Year 2000 compliant. These enterprise business systems include the
Company's systems for order entry and processing, allocations, inventory,
accounts receivable, accounts payable and financial reporting. In late 1998, the
Company received the current version of the underlying software, which the
software vendor has stated is Year 2000 compliant. The Company has completed the
Conversion phase of its Year 2000 strategy with respect to its enterprise
business systems, and is currently in the Testing phase. The Company currently
anticipates that it will complete the Testing and Implementation phases for its
enterprise business systems by June 30, 1999.
With respect to the Company's remaining IT systems, including desktops,
networks and several departmental hardware and software systems, and its non-IT
systems, the Company has recently completed the Analysis phase and has begun the
Conversion phase. The Company currently expects completion of the Conversion
phase for the majority of the remaining IT and non-IT systems by June 30, 1999
and currently anticipates completion of the Testing and Implementation phases by
September 30, 1999. The Company's plan for addressing the readiness of its key
external business partners includes requesting information from these partners
regarding their own readiness to address their Year 2000 issues, and an
assessment of the potential impact that any non-compliance might have on the
Company's operations. The Company has requested compliance information from key
business partners and has begun to receive responses. The Company may add
additional business partners to its Year 2000 program as the Company's Year 2000
readiness plan progresses. The various phases for this segment are expected to
continue throughout 1999.
Estimated Costs. The Company currently estimates that total costs related
to all phases of the Year 2000 strategy with respect to its enterprise business
systems will aggregate $350,000. This estimate is for outside goods and service
providers only. The estimate does not include the time and costs associated with
its in-house employees, the amount of which is not currently determinable In
addition, the estimated costs to
24
<PAGE> 27
bring the remaining IT and non-IT systems into compliance and to address and
remedy any non-compliance issues at its key business partners are not yet
determinable, but will likely exceed $200,000. These costs are expected to be
funded through operating cash flows and the Company's bank facility. The Company
does not currently anticipate using any independent verification or validation
processes. The Company anticipates that the Year 2000 compliance efforts will
ultimately result in the deferral of other IT projects. However, the deferral of
such projects is not expected to have a material adverse impact on the Company's
results of operations, financial condition or cash flows. The estimated Year
2000 compliance costs are based on the Company's current assessment of its Year
2000 situation and could change significantly as the Year 2000 compliance
strategy progresses. As of December 31, 1998, the Company had incurred Year 2000
compliance costs of approximately $100,000.
Risks and Contingency Plan. Although the Company is not aware of any
material operational issues associated with preparing its internal systems for
the year 2000, there can be no assurance that there will not be a delay in, or
increased costs associated with, the implementation of the necessary systems and
changes to address the Year 2000 issues, and the Company's inability to
implement such systems and changes in a timely manner could have a material
adverse effect on future results of operations, financial condition and cash
flows.
The potential inability of the Company's business partners to address their
own Year 2000 issues sufficiently and timely remains a risk which is difficult
to assess. Among other things, the Company is currently highly dependent on the
combination of approximately 12 key suppliers, primarily located in the Far
East, for the production of its footwear products. The failure of one or more of
these suppliers to adequately address their own Year 2000 issues could cause
them to be unable to manufacture or deliver product to the Company on a timely
basis, materially adversely impacting the Company's results of operations,
financial condition and cash flows. In addition, the inability of one or more of
the Company's significant customers to become compliant could adversely impact
the customers' operations, thus impacting the Company's sales and subsequent
collections with respect to those customers.
The Company's Year 2000 compliance efforts are subject to many additional
risks including the following, among others: the Company's failure to adequately
identify and analyze issues, convert to compliant systems, fully test converted
systems, and implement compliant systems; unanticipated issues or delays in any
of the phases of the Company's strategy; the inability of customers, suppliers
and other business partners to become compliant; and the breakdown of local and
global infrastructures resulting from the non-compliance of utilities, banking
systems, transportation, government and communications systems.
As the Company has not yet completed various phases of its internal
readiness and has not yet determined the readiness of its key business partners,
the Company cannot yet fully and accurately identify and quantify the most
reasonably likely worst case Year 2000 scenario at this time. However, the
Company is currently assessing scenarios and will take steps to mitigate the
impact of these scenarios if they were to occur. This contingency planning has
been completed for certain areas while the contingency plans for most areas are
still in process. the Company expects to more fully address such contingencies
by the end of the second quarter of 1999.
The Company's above assessment of the risks associated with Year 2000
issues is forward-looking. Actual results may vary for a variety of reasons
including those described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity consists primarily of cash, trade accounts
receivable, inventories and a revolving credit facility. At December 31, 1998,
working capital was $42,135,000 including $263,000 of cash. Cash used in
operating activities aggregated $10,156,000 for the year ended December 31,
1998. Trade accounts receivable increased 18.0% since December 31, 1997 as a
result of the increase in sales in the fourth quarter of 1998 compared to 1997,
an increase in the amount of receivables with extended payment terms at
year-end, and the impact of a general decline in the average collection periods.
Inventories increased 24.7% since December 31, 1998 primarily as the Company
requested its suppliers to deliver its Spring 1999 Teva inventory earlier than
it had done in the prior year. This acceleration of inventory deliveries was
intended to increase
25
<PAGE> 28
available inventory to improve the Company's ability to fulfill its customers'
orders on a timely basis and to improve the Company's ability to address its
Spring Teva fill-in business.
At December 31, 1998, the Company had outstanding borrowings of $20,380,000
under its existing credit facility and had outstanding letters of credit
aggregating $4,419,000.
On January 21, 1999, the Company replaced the existing credit facility with
a new revolving credit facility (the "Facility") with a new lender. The new
Facility provides a maximum availability of $50,000,000, subject to a borrowing
base of up to 85% of eligible accounts receivables, as defined, and 65% of
eligible inventory, as defined. Up to $15,000,000 of borrowings may be in the
form of letters of credit. The Facility bears interest at the lender's prime
rate (7.75% at December 31, 1998), or at the Company's election at an adjusted
Eurodollar rate plus 2%. The Facility is secured by substantially all assets of
the Company. The agreement underlying the Facility includes a tangible net worth
covenant, requiring the Company to maintain tangible net worth, as defined, of
$30,000,000. At December 31, 1998, the actual tangible net worth, as defined,
was approximately $31,300,000. The Facility expires July 1, 2001. However, in
the event that the Teva license agreements are extended beyond August 31, 2001
on terms acceptable to the lender, the Facility will be extended through the
earlier of 60 days preceding the expiration of any new license arrangement or
January 21, 2002.
Under the terms of the Facility, if the Company terminates the arrangement
prior to the expiration date of the Facility, the Company may be required to pay
the lender an early termination fee ranging between 1% and 3% of the Facility's
commitment amount, depending upon when such termination occurs.
The Company has an agreement with a supplier, Prosperous Dragon, to provide
financing for the supplier's operations, of which $2,282,000 was outstanding at
December 31, 1998 ($782,000 net of allowance). The note is secured by all assets
of the supplier and bears interest at the prime rate (7.75% at December 31,
1998) plus 1%. See "Business -- Manufacturing."
Capital expenditures totaled $1,916,000 for the year ended December 31,
1998. The Company's capital expenditures related primarily to a new warehouse
management system at the Company's Ventura County, California distribution
center, molds purchased for production, upgrades to corporate computer systems
and a new booth for European tradeshows. The Company currently has no material
future commitments for capital expenditures.
In December 1998, the Company's Board of Directors approved an increase in
the number of shares of common stock authorized for repurchase under its
existing stock repurchase program from 1,200,000 shares to 2,200,000 shares.
Such repurchases are authorized to be made from time to time in open market or
in privately negotiated transactions, subject to price and market conditions as
well as the Company's cash availability. Under this program, the Company
repurchased 300,000 shares in 1996 for cash consideration of $2,390,000, 330,000
shares in 1997 for cash consideration of $2,581,000 and 343,000 shares in 1998
for cash consideration of $2,528,000. At December 31, 1998, 1,227,000 shares
remained available for repurchase under the program.
The Company is endeavoring to come to an agreement with the Teva licensor
which would provide the Company with the ability to continue to sell the Teva
products beyond the expiration of the current license terms. Among the possible
arrangements, the Company may pursue the purchase of the underlying Teva rights,
a renewal of the existing licenses or a variety of other possibilities. Certain
of these possible arrangements may require a significant amount of additional
financing. There are no assurances that the additional financing will be
available or that a favorable arrangement with the licensor can be achieved.
The Company believes that internally generated funds, the available
borrowings under its existing credit facility, and the cash on hand will provide
sufficient liquidity to enable it to meet its current and foreseeable working
capital requirements. However, risks and uncertainties which could impact the
Company's ability to maintain its cash position include the Company's growth
rate, its ability to collect its receivables in a timely manner, the Company's
ability to effectively manage its inventory, and the volume of letters of credit
used to purchase product, among others. See also the discussion regarding
forward-looking statements in the preceding "Outlook" section.
26
<PAGE> 29
SEASONALITY
Financial results for the outdoor and footwear industries are generally
seasonal. Sales of each of the Company's different product lines have
historically been higher in different seasons, with the highest percentage of
Teva sales occurring in the first and second quarter of each year, the highest
percentage of Simple sales occurring in the third quarter and the highest
percentage of Ugg sales occurring in the fourth quarter.
Based on the Company's historical experience, the Company would expect
greater sales in the first and second quarters than in the third and fourth
quarters. The actual results could differ materially depending upon consumer
preferences, availability of product, competition, and the Company's customers
continuing to carry and promote it's various product lines, among other risks
and uncertainties. See also the discussion regarding forward-looking statements
under "Outlook".
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
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (FAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." FAS No. 133 modifies the accounting for
derivative and hedging activities and is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Since the Company does not presently
invest in derivatives or engage in hedging activities, the Company expects that
the adoption of SFAS No. 133 will not impact the Company's financial position or
results of operations.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." The Company
will adopt SOP 98-1 effective in 1999. The adoption of SOP 98-1 will require the
Company to modify its method of accounting for software. Based on information
currently available, the Company does not expect the adoption of SOP 98-1 to
have a significant impact on its financial position or results of operations.
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires that costs of start-up activities, including
organization costs and retail store openings, be expensed as incurred. SOP 98-5
is effective for financial statements for fiscal years beginning after December
15, 1998. Earlier application is encouraged. Restatement of previously issued
financial statements is not permitted. In the fiscal year in which the SOP is
first adopted, the application should be reported as a cumulative effect of a
change in accounting principle. The Company has not yet determined whether the
application of SOP 98-5 will have a material impact upon the Company's financial
position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) and page 28 for an index to the consolidated financial
statements and supplementary information included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
27
<PAGE> 30
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report................................ 29
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... 30
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 1998.......... 31
Consolidated Statements of Stockholders' Equity for each of
the years in the three-year period ended December 31,
1998...................................................... 32
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1998.......... 33
Notes to Consolidated Financial Statements.................. 34
Consolidated Financial Statement Schedule:
Valuation and Qualifying Accounts......................... 48
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the Company's consolidated financial statements
or the related notes thereto.
28
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Deckers Outdoor Corporation:
We have audited the accompanying consolidated financial statements of
Deckers Outdoor Corporation and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Deckers
Outdoor Corporation and subsidiaries as of December 31, 1998 and 1997 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles. Also, in our opinion, the related consolidated 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.
KPMG LLP
Los Angeles, California
February 24, 1999, except
for the fourth paragraph
of note 11, which is
as of March 17, 1999.
29
<PAGE> 32
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 263,000 $ 3,238,000
Trade accounts receivable, less allowance for doubtful
accounts of $1,204,000 and $1,092,000 as of December
31, 1998 and 1997, respectively........................ 27,180,000 23,037,000
Inventories (note 4)...................................... 23,665,000 18,979,000
Prepaid expenses and other current assets................. 2,178,000 2,190,000
Refundable income taxes (note 8).......................... 4,267,000 --
Deferred tax assets (note 8).............................. 1,756,000 1,357,000
----------- -----------
Total current assets.............................. 59,309,000 48,801,000
Property and equipment, at cost, net (note 5)............... 2,994,000 2,509,000
Intangible assets, less applicable amortization............. 20,702,000 21,866,000
Note receivable from supplier, net (note 7)................. 782,000 966,000
Other assets, net........................................... 586,000 551,000
----------- -----------
$84,373,000 $74,693,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (note 2).................................... $ -- $ 2,000,000
Current installments of long-term debt (note 6)........... 6,236,000 107,000
Trade accounts payable.................................... 7,947,000 3,629,000
Accrued bonuses........................................... 66,000 1,095,000
Other accrued expenses.................................... 2,925,000 2,726,000
Income taxes payable (note 8)............................. -- 22,000
----------- -----------
Total current liabilities......................... 17,174,000 9,579,000
----------- -----------
Long-term debt, less current installments (note 6).......... 15,199,000 7,983,000
Commitments and contingencies (notes 10 and 11)
Stockholders' equity (note 9):
Preferred stock, $.01 par value. Authorized 5,000,000
shares; none issued.................................... -- --
Common stock, $.01 par value. Authorized 20,000,000
shares; issued 9,495,631 and outstanding 8,522,679 at
December 31, 1998; issued 9,419,431 and outstanding
8,789,431 at December 31, 1997......................... 85,000 88,000
Additional paid-in capital.................................. 22,813,000 25,034,000
Retained earnings........................................... 29,726,000 32,633,000
----------- -----------
52,624,000 57,755,000
Less note receivable from stockholder/officer............... 624,000 624,000
----------- -----------
Total stockholders' equity........................ 52,000,000 57,131,000
----------- -----------
$84,373,000 $74,693,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 33
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales (notes 10 and 12)...................... $102,172,000 $106,713,000 $101,838,000
Cost of sales.................................... 65,592,000 62,453,000 61,009,000
------------ ------------ ------------
Gross profit.............................. 36,580,000 44,260,000 40,829,000
Selling, general and administrative expenses..... 39,378,000 35,648,000 32,989,000
Loss on factory closure (note 3)................. -- 500,000 --
------------ ------------ ------------
Earnings (loss) from operations........... (2,798,000) 8,112,000 7,840,000
Other expense (income):
Interest expense, net.......................... 1,171,000 344,000 910,000
(Gain) loss on disposal of assets.............. 13,000 (51,000) 548,000
Minority interest in net loss of unconsolidated
subsidiary.................................. -- (45,000) (55,000)
Miscellaneous expense (income)................. 136,000 (105,000) (162,000)
------------ ------------ ------------
Earnings (loss) before income taxes....... (4,118,000) 7,969,000 6,599,000
Income taxes (benefit) (note 8).................. (1,211,000) 3,445,000 2,943,000
------------ ------------ ------------
Net earnings (loss)....................... $ (2,907,000) $ 4,524,000 $ 3,656,000
============ ============ ============
Net earnings (loss) per share:
Basic.......................................... $ (0.34) $ 0.50 $ 0.40
Diluted........................................ (0.34) 0.50 0.39
============ ============ ============
Weighted average shares:
Basic.......................................... 8,632,000 8,961,000 9,248,000
Diluted........................................ 8,632,000 9,012,000 9,292,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 34
DECKER OUTDOOR CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCKHOLDER/ TOTAL
------------------- PAID-IN RETAINED OFFICER NOTE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE EQUITY
--------- ------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995.................... 9,242,375 $92,000 $28,940,000 $24,453,000 $ -- $53,485,000
Common stock
repurchased............. (300,000) (2,000) (2,388,000) -- -- (2,390,000)
Common stock issuance
under stock incentive
plan.................... 11,000 -- 66,000 -- -- 66,000
Common stock issued under
the employee stock
purchase plan........... 17,008 -- 86,000 -- -- 86,000
Noncash stock
compensation............ 13,173 -- 86,000 -- -- 86,000
Net earnings.............. -- -- -- 3,656,000 -- 3,656,000
--------- ------- ----------- ----------- --------- -----------
Balance at December 31,
1996.................... 8,983,556 90,000 26,790,000 28,109,000 -- 54,989,000
Common stock
repurchased............. (330,000) (3,000) (2,578,000) -- -- (2,581,000)
Common stock issuance
under stock incentive
plan.................... 126,000 1,000 771,000 -- (624,000) 148,000
Common stock issued under
the employee stock
purchase plan........... 9,875 -- 51,000 -- -- 51,000
Net earnings.............. -- -- -- 4,524,000 -- 4,524,000
--------- ------- ----------- ----------- --------- -----------
Balance at December 31,
1997.................... 8,789,431 88,000 25,034,000 32,633,000 (624,000) 57,131,000
Common stock
repurchased............. (342,952) (3,000) (2,525,000) -- -- (2,528,000)
Common stock issuance
under stock incentive
plan.................... 57,572 -- 213,000 -- -- 213,000
Common stock issued under
the employee stock
purchase plan........... 18,628 -- 91,000 -- -- 91,000
Net loss.................. -- -- -- (2,907,000) -- (2,907,000)
--------- ------- ----------- ----------- --------- -----------
Balance at December 31,
1998.................... 8,522,679 $85,000 $22,813,000 $29,726,000 $(624,000) $52,000,000
========= ======= =========== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 35
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................................... $ (2,907,000) $ 4,524,000 $ 3,656,000
------------ ----------- -----------
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation of property and equipment.............. 1,276,000 1,235,000 1,338,000
Amortization of intangible assets................... 1,362,000 1,271,000 965,000
Provision for doubtful accounts..................... 589,000 966,000 2,587,000
(Gain) loss on disposal of assets................... 13,000 (51,000) 548,000
Loss on factory closure............................. -- 500,000 --
Stock compensation.................................. 166,000 84,000 86,000
Minority interest in net loss of unconsolidated
subsidiary....................................... -- (45,000) (55,000)
Changes in assets and liabilities (net of effects of
acquisitions and dispositions):
(Increase) decrease in:
Trade accounts receivable........................ (4,732,000) (5,575,000) 263,000
Inventories...................................... (4,686,000) 5,951,000 (5,374,000)
Prepaid expenses and other current assets........ 12,000 1,448,000 (1,101,000)
Deferred tax assets.............................. (399,000) 265,000 403,000
Refundable income taxes.......................... (4,267,000) -- 2,969,000
Note receivable from supplier.................... 184,000 372,000 1,000
Other assets..................................... (233,000) (159,000) (877,000)
Increase (decrease) in:
Trade accounts payable........................... 4,318,000 (1,870,000) 2,474,000
Accrued expenses................................. (830,000) 948,000 55,000
Income taxes payable............................. (22,000) (963,000) 983,000
------------ ----------- -----------
Total adjustments.............................. (7,249,000) 4,377,000 5,265,000
------------ ----------- -----------
Net cash provided by (used in) operating
activities................................... (10,156,000) 8,901,000 8,921,000
------------ ----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment.......... 142,000 -- --
Purchase of property and equipment.................... (1,916,000) (1,731,000) (1,407,000)
Cash paid for acquisitions, net of cash received...... (2,000,000) (954,000) (495,000)
------------ ----------- -----------
Net cash used in investing activities.......... (3,774,000) (2,685,000) (1,902,000)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds from (repayments of) notes payable and
long-term debt...................................... 13,345,000 (1,799,000) (4,891,000)
Cash received from issuances of common stock.......... 138,000 739,000 152,000
Cash paid for repurchases of common stock............. (2,528,000) (2,581,000) (2,390,000)
Cash paid for purchase of stock option................ -- -- (1,825,000)
Cash paid to stockholder/officer...................... -- (624,000) --
------------ ----------- -----------
Net cash provided by (used in) financing
activities................................... 10,955,000 (4,265,000) (8,954,000)
------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents.................................. (2,975,000) 1,951,000 (1,935,000)
Cash and cash equivalents at beginning of year.......... 3,238,000 1,287,000 3,222,000
------------ ----------- -----------
Cash and cash equivalents at end of year................ $ 263,000 $ 3,238,000 $ 1,287,000
============ =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................ $ 1,092,000 $ 524,000 $ 874,000
Income taxes........................................ $ 3,800,000 $ 3,437,000 $ 480,000
============ =========== ===========
</TABLE>
Supplemental disclosure of noncash investing and financing activities -- In
connection with the Ugg shareholder settlement in 1997, the Company incurred
$2,000,000 of debt which was allocated to goodwill.
See accompanying notes to consolidated financial statements.
33
<PAGE> 36
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) The Company and Basis of Presentation
The consolidated financial statements include the accounts of Deckers
Outdoor Corporation and its subsidiaries (collectively referred to as the
Company). All significant intercompany balances and transactions have been
eliminated in consolidation.
The Company designs, manufactures and markets innovative function-oriented
footwear and apparel, developed specifically for high-performance outdoor,
sports and other lifestyle-related activities as well as for casual use. The
Company's products are offered under the Teva, Simple, Ugg and Picante brand
names.
(b) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
(c) Revenue Recognition
Revenue is recognized upon shipment of the merchandise. Allowances for
estimated returns and discounts are provided when related revenue is recorded.
(d) Long-Lived Assets
It is the Company's policy to account for long-lived assets, including
intangibles, at amortized cost. As part of an ongoing review of the valuation
and amortization of long-lived assets, management assesses the carrying value of
such assets if facts and circumstances suggest that it may be impaired. If this
review indicates that the long-lived assets will not be recoverable, as
determined by a non-discounted cash flow analysis over the remaining
amortization period, the carrying value of the Company's long-lived assets would
be reduced to its estimated fair market value based on discounted cash flows. As
a result, the Company has determined that its long-lived assets are not impaired
as of December 31, 1998 and 1997.
(e) Depreciation and Amortization
Depreciation of property and equipment is computed using the straight-line
method based on estimated useful lives ranging from three to ten years.
Leasehold improvements are amortized on the straight-line basis over their
estimated economic useful lives or the lease term, whichever is shorter.
Goodwill and other intangibles are amortized on the straight-line basis
over periods of 20 to 30 years, and 5 to 15 years, respectively. Accumulated
amortization at December 31, 1998 and 1997 was $4,042,000 and $2,676,000,
respectively.
(f) Fair Value of Financial Instruments
The fair values of the Company's cash, trade accounts receivable, prepaid
expenses, refundable income taxes and other current assets, trade accounts
payable, accrued expenses and current notes payable approximate the carrying
values due to the relatively short maturities of these instruments.
The fair value of the Company's revolving credit line approximates the
carrying value due to variable interest rates associated with the credit line.
The fair values of the Company's other notes payable are estimated by
discounting future cash flows of each instrument at rates currently available to
the Company for similar debt instruments of comparable maturities by the
Company's bankers. The fair values of these notes approximate the carrying
value.
34
<PAGE> 37
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(g) Stock Compensation
The Company accounts for stock-based compensation under the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). Under the provisions of SFAS 123, the Company has
elected to continue to measure compensation cost under APBO No. 25 and comply
with the pro forma disclosure requirements.
(h) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues and expenses and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates.
(i) Research and Development Costs
Research and development costs are charged to expense as incurred. Such
costs amounted to $2,393,000, $1,780,000, $1,546,000 in 1998, 1997 and 1996,
respectively.
(j) Advertising, Marketing and Promotion Costs
The Company expenses the cost of advertising, marketing and promotion as
incurred. These expenses charged to operations for the years ended 1998, 1997
and 1996 were $5,847,000, $4,096,000 and $4,738,000, respectively.
(k) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
(l) Earnings per Share
The Company accounts for earnings per share under the provisions of SFAS
No. 128, "Earnings per Share." SFAS 128 specifies the computation, presentation
and disclosure requirements for earnings (loss) per share (EPS).
The reconciliations of basic to diluted weighted average shares are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Net earnings (loss) used for basic and diluted
earnings (loss) per share................... $(2,907,000) $4,524,000 $3,656,000
=========== ========== ==========
Weighted average shares used in basic
computation................................. 8,632,000 8,961,000 9,248,000
Dilutive stock options........................ -- 51,000 44,000
----------- ---------- ----------
Weighted average shares used for
diluted computation............... 8,632,000 9,012,000 9,292,000
=========== ========== ==========
</TABLE>
35
<PAGE> 38
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Options to purchase 698,000 shares of common stock at prices ranging from
$5.50 to $13.75 were outstanding during 1998, but were not included in the
computation of diluted loss per share because the options' exercise price was
greater than the average market price of the common shares. Options to purchase
811,000 shares of common stock at a price of $1.56 per share were outstanding
during 1998, but were not included in the computation of diluted loss per share
because the options were anti-dilutive, as the Company incurred a net loss for
the period.
Options to purchase 572,000 and 430,000 shares of common stock at prices
ranging from $7.50 to $15.00 and $7.00 to $15.00 were outstanding during 1997
and 1996, respectively, but were not included in the computation of diluted EPS
because the options' exercise price was greater than the average market price of
the common shares.
(m) Foreign Currency Translation
Assets and liabilities of the foreign operations denominated in local
currencies are translated at the rate of exchange at the balance sheet date.
Expenses have been translated at the weighted average rate of exchange during
the period of existence. Foreign currency translation adjustments were
immaterial to the accompanying consolidated financial statements.
(n) Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" on
January 1, 1998. SFAS No. 130 establishes standards to measure all changes in
equity that result from transactions and other economic events other than
transactions with owners. Comprehensive income is the total of net earnings
(loss) and all other non-owner changes in equity. Except for net earnings (loss)
and foreign currency translation adjustments, the Company does not have any
transactions and other economic events that qualify as comprehensive income as
defined under SFAS No. 130. As foreign currency translation adjustments were
immaterial to the Company's consolidated financial statements, net earnings
(loss) approximated comprehensive income for each of the years in the three year
period ended December 31, 1998.
(o) Business Segment Reporting
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," effective in 1998. SFAS No. 131 establishes
new standards for reporting information about business segments and related
disclosures about products and services, geographic areas and major customers,
if applicable. Management of the Company has determined its reportable segments
are strategic business units that offer geographic brand images. Significant
reportable business segments are the domestic Teva, Simple and Ugg brands.
Information related to these segments is summarized in Note 12.
(2) ACQUISITION
Effective August 1, 1995, the Company acquired all of the issued and
outstanding shares of Ugg Holdings, Inc. and subsidiaries (Ugg), which
manufactures and markets a line of sheepskin footwear, for cash consideration of
$12.2 million (including out-of-pocket expense of $200,000) and a note payable
to sellers of $500,000. Additionally, the Company was required to make future
payments equal to 2 1/2% of net sales of Ugg, as defined in the agreement for
the years ended March 31, 1996 through March 31, 2000, plus an amount equal to
earnings before income taxes for Ugg for the year ended March 31, 1996
(collectively referred to as the earn-out payments). Pursuant to this provision,
the Company paid additional cash consideration of $351,000 in 1997. During 1997,
the former stockholders of Ugg gave notice of a demand for arbitration regarding
the earn-out payments, asserting that additional payments were due them. In
September 1997, the
36
<PAGE> 39
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Company and the former Ugg stockholders reached an agreement. In addition, the
remaining Ugg stockholders who were not a party to the arbitration agreed to
accept the same economic terms as those involved in the arbitration. The
settlement called for total payments of $2.6 million to be made to the former
stockholders, thus eliminating any future due payments. As of December 31, 1997,
the Company had unpaid notes payable to the former stockholders of $2 million,
which were paid in full in January 1998. These amounts are included in the
overall purchase price and allocated to goodwill. During 1997, the Company
incurred legal and other administrative costs associated with the arbitration
aggregating $607,000. Such costs were charged to operations as incurred. This
acquisition was accounted for as a purchase and the results of Ugg's operations
are included in the Company's consolidated financial statements from the date of
acquisition. The excess of the purchase price over the estimated fair values of
the net assets acquired aggregating $17,505,000 has been recorded as goodwill
and is being amortized over 30 years.
(3) FACTORY CLOSURE
In March 1997, the Company closed its California manufacturing facility.
The Company moved the related production requirements to its manufacturing
facility in Mexico and to other independent subcontractors in the Far East,
Costa Rica and the United States. In connection with the closure, the Company
incurred property and equipment write-downs, employee severance and other exit
costs aggregating $500,000.
(4) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Finished goods...................................... $22,396,000 $14,081,000
Work in process..................................... 35,000 1,189,000
Raw materials....................................... 1,234,000 3,709,000
----------- -----------
Total inventories......................... $23,665,000 $18,979,000
=========== ===========
</TABLE>
(5) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Machinery and equipment............................... $5,185,000 $4,328,000
Furniture and fixtures................................ 616,000 529,000
Leasehold improvements................................ 535,000 560,000
---------- ----------
6,336,000 5,417,000
Less accumulated depreciation and amortization........ 3,342,000 2,908,000
---------- ----------
Net property and equipment.................. $2,994,000 $2,509,000
========== ==========
</TABLE>
37
<PAGE> 40
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(6) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Revolving credit line, secured by all the assets of
the Company........................................ $20,751,000 $7,300,000
Unsecured note payable in quarterly installments of
$41,700, including interest at a rate of 7.93%, due
December 2003...................................... 684,000 790,000
----------- ----------
21,435,000 8,090,000
Less current installments............................ 6,236,000 107,000
----------- ----------
$15,199,000 $7,983,000
=========== ==========
</TABLE>
The aggregate maturities of long-term debt as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999............................ $ 6,236,000
2000............................ 126,000
2001............................ 14,767,000
2002............................ 147,000
2003............................ 159,000
-----------
$21,435,000
===========
</TABLE>
The Company's revolving credit agreement with a bank at December 31, 1998,
as amended, permitted borrowings up to $40,000,000 through May 31, 1999,
reducing to $25,000,000 on June 1, 1999, and expiring July 31, 1999. This
revolving credit facility was for working capital and general corporate
purposes. The borrowing availability was subject to a borrowing base of eligible
assets, as defined. Borrowings bear interest at the bank's prime rate (7.75% at
December 31, 1998) plus up to 1%, depending on whether the Company satisfied
certain financial ratios. Alternatively, the Company may have elected borrowings
bear interest at LIBOR plus 1.5% to 1.75%, depending on whether the Company
satisfied such financial ratios.
On January 21, 1999, the Company replaced its existing revolving credit
agreement with a new financial institution. Under the new agreement, the Company
is permitted borrowings up to $50,000,000, subject to a borrowing base up to 85%
of eligible accounts receivable and 65% of eligible inventory, as defined. Up to
$15,000,000 of borrowings may be in the form of letters of credit. The agreement
bears interest at the lenders' prime rate (7.75% at December 31, 1998) or, at
the Company's election, an adjusted Eurodollar rate plus 2%, is secured by
substantially all assets of the Company and expires July 1, 2001. However, in
the event that the Teva license agreements are extended beyond August 31, 2001
on terms acceptable to the lender, the agreement will be extended through the
earlier of 60 days preceding the expiration of any new license arrangement or
January 21, 2002. Additionally, under the terms of the agreement, should the
Company terminate the arrangement prior to the expiration date, the Company may
be required to pay the lender an early termination fee ranging between 1% and 3%
of the commitment amount, depending upon when such termination occurs. The new
agreement underlying the credit facility includes a tangible net worth covenant.
At December 31, 1998, the Company was in compliance with the terms of the new
agreement.
(7) NOTE RECEIVABLE FROM SUPPLIER
The Company has an Equipment Purchase and Loan Agreement, as amended, with
a Hong Kong supplier (the Supplier) to provide up to $4,000,000 of financing.
The Supplier produces completed footwear and footwear components for sale to
Holbrook, Ltd., a wholly owned subsidiary of the Company (Holbrook).
38
<PAGE> 41
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
The note is secured by all the assets of the Supplier and bears interest at
prime (8.25% at December 31, 1998) plus 1%. The outstanding balance of the note
is being repaid primarily through Company purchases of goods from the Supplier.
In connection with this agreement, the Supplier is prohibited from manufacturing
any products for any person other than Holbrook without Holbrook's prior
consent. In addition, a key employee of Holbrook is the son of the owner of the
Supplier. This employee is entitled to receive a bonus of up to 24% of certain
net profits of Holbrook when the loan is fully repaid. The outstanding balance
under the note at December 31, 1998 and 1997 was $2,282,000 and $2,466,000,
respectively. Additionally, the Company has a valuation allowance related to the
note of $1,500,000 at December 31, 1998 and 1997.
(8) INCOME TAXES
Components of income taxes (benefit) are as follows:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
---------- --------- -----------
<S> <C> <C> <C>
1996:
Current................................. $2,018,000 $ 614,000 $ 2,632,000
Deferred................................ 263,000 48,000 311,000
---------- --------- -----------
$2,281,000 $ 662,000 $ 2,943,000
========== ========= ===========
1997:
Current................................. $3,108,000 $ 900,000 $ 4,008,000
Deferred................................ (509,000) (54,000) (563,000)
---------- --------- -----------
$2,599,000 $ 846,000 $ 3,445,000
========== ========= ===========
1998:
Current................................. $ (866,000) $ 54,000 $ (812,000)
Deferred................................ (105,000) (294,000) (399,000)
---------- --------- -----------
$ (971,000) $(240,000) $(1,211,000)
========== ========= ===========
</TABLE>
Actual income taxes differ from that obtained by applying the statutory
Federal income tax rate to earnings (loss) before income taxes (benefit) as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense
(benefit)............................... $(1,400,000) $2,710,000 $2,244,000
State income taxes, net of Federal income
tax benefit............................. (288,000) 492,000 405,000
Losses of subsidiary not deductible....... 241,000 -- --
Other..................................... 236,000 243,000 294,000
----------- ---------- ----------
$(1,211,000) $3,445,000 $2,943,000
=========== ========== ==========
</TABLE>
39
<PAGE> 42
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
Deferred income tax (benefit) expense resulted from the following for the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Inventory obsolescence...................... $ (30,000) $ 8,000 $ 401,000
State income taxes.......................... 314,000 (134,000) (100,000)
Accrued expenses............................ (215,000) (211,000) (213,000)
Goodwill.................................... 18,000 18,000 18,000
Bad debt reserve............................ (343,000) (282,000) 214,000
Net operating losses........................ (193,000) -- --
Other....................................... 50,000 38,000 (9,000)
--------- --------- ---------
$(399,000) $(563,000) $ 311,000
========= ========= =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Uniform capitalization adjustment to inventory...... $ 171,000 $ 144,000
Inventory obsolescence reserve...................... 9,000 --
Bad debt and other reserves......................... 1,445,000 1,547,000
Amortization........................................ 518,000 (248,000)
Net operating loss carryforwards.................... 620,000 268,000
---------- ----------
Total gross deferred tax assets............. 2,763,000 1,711,000
Less valuation allowance............................ (509,000) (268,000)
---------- ----------
Net deferred tax assets..................... 2,254,000 1,443,000
---------- ----------
Deferred tax liabilities:
Depreciation........................................ 319,000 27,000
State taxes......................................... 179,000 (275,000)
Accounts receivable................................. -- 334,000
---------- ----------
Total deferred tax liabilities.............. 498,000 86,000
---------- ----------
Net deferred tax assets..................... $1,756,000 $1,357,000
========== ==========
</TABLE>
Although the Company incurred an operating loss in 1998, management
believes it is more likely than not that the results of future operations will
generate sufficient taxable income to realize the net deferred tax assets.
Certain federal and state tax laws reduce the availability of net operating
losses generated outside the group which is consolidated for tax purposes.
Accordingly, management has provided a full valuation allowance against such
losses. Any subsequently recognized tax benefits related to the portion of the
valuation allowance of $268,000, which relates to preacquisition net operating
loss carryforwards will be applied to reduce the related goodwill.
Refundable income taxes as of December 31, 1998 arise primarily from the
overpayment of estimated taxes.
40
<PAGE> 43
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(9) STOCKHOLDERS' EQUITY
In February 1998, the Company amended the 1993 Stock Incentive Plan (1993
Plan). Under the terms of the amended 1993 Plan, 2,000,000 shares of common
stock are reserved for issuance to officers, directors, employees and
consultants of the Company. Awards to 1993 Plan participants are not restricted
to any specified form and may include stock options, securities convertible into
or redeemable for stock, stock appreciation rights, stock purchase warrants or
other rights to acquire stock. Under the 1993 Plan, 57,572, 126,000 and 24,173
shares of common stock were issued in 1998, 1997 and 1996, respectively,
including 100,000 shares in 1997 issued to an officer of the Company, which was
financed through the issuance of a note receivable to such officer (bearing
interest at 6.39%, secured by the underlying Company stock as well as any
accrued bonuses or severance, with principal and interest due April 18, 2002 or
upon termination of employment) and common stock options exercised as noted
below.
Common stock option activity under the 1993 Plan for the years ended
December 31, 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1995...................... 744,250 $ 5.38
Granted............................................... 98,500 6.98
Exercised............................................. (11,000) 5.95
Canceled.............................................. (218,000) 10.75
---------
Outstanding at December 31, 1996...................... 613,750 8.59
Granted............................................... 237,500 7.96
Exercised............................................. (26,000) 5.65
Canceled.............................................. (108,000) 9.08
---------
Outstanding at December 31, 1997...................... 717,250 8.42
Granted............................................... 925,000 2.23
Exercised............................................. (34,250) 1.40
Canceled.............................................. (99,000) 9.17
---------
Outstanding at December 31, 1998...................... 1,509,000 4.73
========= ======
Options exercisable at December 31, 1998.............. 574,650 $ 7.11
========= ======
</TABLE>
The per share weighted average fair value of stock options granted during
1996, 1997 and 1998 was $3.92, $4.44 and $1.25, respectively, on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions: 1996 -- expected dividend yield of 0%, stock volatility of
48.4%, risk-free interest rate of 5.9%, and an expected life of seven years.
1997 -- expected dividend yield of 0%, stock volatility of 43.3%, risk-free
interest rate of 6.1%, and an expected life of seven years. 1998 -- expected
dividend yield of 0%, stock volatility of 48.5%, risk-free interest rate of
4.7%, and an expected life of seven years.
41
<PAGE> 44
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
The Company applies APB Opinion No. 25 in accounting for its plans. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS 123, the Company's net earnings (loss) would
have been changed to the pro forma amounts below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Pro forma net earnings (loss)............. $(3,400,000) 4,318,000 3,281,000
=========== ========== ==========
Pro forma net earnings (loss) per share:
Basic................................... $ (.39) $ .48 $ .35
Diluted................................. (.39) .48 .35
=========== ========== ==========
</TABLE>
Pro forma net earnings reflect only options granted in 1998, 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma amounts presented above
because compensation cost is reflected over the options' vesting period of up to
five years and compensation cost for options granted prior to January 1, 1995 is
not considered.
In August 1995, the Company adopted the 1995 Employee Stock Purchase Plan
(1995 Plan). The 1995 Plan is intended to qualify as an Employee Stock Purchase
Plan under Section 423 of the Internal Revenue Code. Under the terms of the 1995
Plan, 100,000 shares of common stock are reserved for issuance to employees who
have been employed by the Company for at least six months. The 1995 Plan
provides for employees to purchase the Company's common stock at a discount
below fair market value, as defined by the 1995 Plan. Under the 1995 Plan,
18,628, 9,875 and 17,008 shares were issued in 1998, 1997 and 1996,
respectively.
In December 1998, the Company's Board of Directors approved an increase in
the number of shares of common stock authorized for repurchase under its
existing stock repurchase program, from 1,200,000 shares to 2,200,000 shares.
Under this program, the Company repurchased 300,000 shares in 1996 for cash
consideration of $2,390,000, 330,000 shares in 1997 for cash consideration of
$2,581,000 and 343,000 shares in 1998 for cash consideration of $2,528,000. At
December 31, 1998, 1,227,000 shares remained available for repurchase under the
program.
On October 9, 1998, the Company adopted a stockholder rights plan. The
Company adopted the plan to protect stockholders against unsolicited attempts to
acquire control of the Company that do not offer what the Company believes to be
an adequate price to all stockholders. As part of the plan, the Board of
Directors of the Company declared a dividend of one preferred share purchase
right (a "Right") for each outstanding share of common stock, par value $0.01
per share (the "Common Shares"), of the Company.
The dividend is payable to stockholders of record on December 1, 1998 (the
"Record Date"). In addition, one Right shall be issued with each Common Share
that becomes outstanding (i) between the Record Date and the earliest of the
Distribution Date, the Redemption Date and the Final Expiration Date (as such
terms are defined in the Rights Agreement) or (ii) following the Distribution
Date and prior to the Redemption Date or Final Expiration Date, pursuant to the
exercise of stock options or under any employee plan or arrangement or upon the
exercise, conversion or exchange of other securities of the Company, which
options or securities were outstanding prior to the Distribution Date, in each
case upon the issuance of the Company's common stock in connection with any of
the foregoing. Each Right entitles the registered holder to purchase from the
Company one one-hundredth of a share of Series B Junior Participating Preferred
Stock, par value $0.01 per share (the "Preferred Shares"), of the Company, at a
price of $50.00, subject to adjustment.
The rights have no voting power and expire on November 11, 2008. The rights
may be redeemed by the Company for $.01 per right until the right becomes
exercisable.
42
<PAGE> 45
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(10) LICENSING AGREEMENT
The Company has the exclusive rights to manufacture and distribute the Teva
product line through August 31, 2001. The Company is required to pay royalties
to Teva Sports Sandals, Inc. ("licensor") at rates ranging from 5% to 6 1/2% on
the net sales of most Teva products, depending on sales levels and 3% to 4 1/2%
of net sales of certain styles, depending on sales levels. The Company is
required to pay minimum annual royalties ranging from $420,000 to $820,000 over
the license period. In addition, the Company is obligated to pay minimum annual
advertising costs of 3.5% to 4% of net sales of Teva products, depending on
sales levels.
Royalty expense related to Teva sales is included in selling, general and
administrative expenses in the accompanying consolidated financial statements
and was $3,657,000, $3,503,000 and $2,281,000 during the years ended December
31, 1998, 1997 and 1996, respectively. Advertising expense, which is included in
selling, general and administrative expenses in the accompanying consolidated
financial statements, related to Teva sales was $3,261,000, $1,960,000 and
$2,177,000 during the years ended December 31, 1998, 1997 and 1996,
respectively.
The owner of Teva Sports Sandals, Inc., has engaged a financial advisor to
explore various strategic option for the Teva brand. The Company is in
continuing negotiations with the owner, pursuing various options including a
renewal of the existing license or the purchase of the underlying Teva rights.
The Company is hopeful that it will be able to successfully negotiate a
favorable arrangement with the owner. In the event that the Company does not
come to a favorable arrangement with the owner, the Company will not be able to
sell Teva products beyond August 31, 2001, which would result in a material
adverse impact on the Company's results of operations, financial condition, and
cash flows.
(11) COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under operating lease agreements which
expire through December 2001.
Future minimum commitments under the lease agreements are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999............................ $959,000
2000............................ 904,000
2001............................ 830,000
========
</TABLE>
Total rent expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $1,122,000, $1,153,000 and $1,207,000, respectively.
An action was brought against the Company in 1995 in the United States
District Court, District of Montana (Missoula Division), by Molly Strong-Butts
and Yetti by Molly, Ltd. (collectively, "Molly") which alleged, among other
things, that the Company violated a certain non-disclosure agreement and
obtained purported trade secrets regarding a line of winter footwear which
Deckers stopped producing in 1994. Molly claimed specified damages of $18
million, as well as other unspecified damages. The matter resulted in a jury
verdict which was announced in open court March 17, 1999. The various parts of
the verdict aggregated $1,785,000 for the two separate plaintiffs. The Company
is appealing the verdict and continues to believe such claims are without merit.
The Company intends to continue contesting this claim vigorously. The Company,
based on advice from legal counsel, does not anticipate that the ultimate
outcome will have a material adverse effect upon its financial condition,
results of operations or cash flows.
43
<PAGE> 46
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
The European Commission has enacted anti-dumping duties of 49.2% on certain
types of footwear imported into Europe from China and Indonesia. Dutch Customs
has issued an opinion to the Company that certain popular Teva styles are
covered by this anti-dumping duty legislation. The Company does not believe that
these styles are covered by the legislation and is working with Customs to
resolve the situation. In the event that Customs makes a final determination
that such styles are covered by the anti-dumping provisions, the Company expects
that it would have an exposure to prior anti-dumping duties from 1997 of up to
approximately $500,000. In addition, if Customs determines that these styles are
covered by the legislation, the duty amounts could cause such products to be too
costly to import into Europe from China in the future. As a result, the Company
may have to cease shipping such styles from China into Europe in the future or
may have to begin to source these styles from countries not covered by the
legislation. As a precautionary measure, the Company has obtained alternative
sourcing for the potentially impacted products from sources outside of China in
an effort to reduce the potential risk in the future. The Company is unable to
predict the outcome of this matter and the effect, if any, on the Company's
consolidated financial statements.
The Company is currently involved in various other legal claims arising
from the ordinary course of business. Management does not believe that the
disposition of these matters will have a material effect on the Company's
financial position or results of operations.
(12) BUSINESS SEGMENTS, CONCENTRATION OF BUSINESS AND CREDIT RISK AND
SIGNIFICANT CUSTOMERS
The Company's accounting policies of the segments below are the same as
those described in the summary of significant accounting policies, except that
the Company does not allocate income taxes or unusual items to segments. The
Company evaluates performance based on net revenues and profit or loss from
operations. The Company's reportable segments are strategic business units that
offer geographic brand images. They are managed separately because each business
requires different marketing, sourcing and sales strategies. Business segment
information is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Sales to external customers:
Teva, domestic................... $ 54,775,000 $ 50,573,000 $ 34,830,000
Simple, domestic................. 13,699,000 21,554,000 30,110,000
Ugg, domestic.................... 10,710,000 9,169,000 14,831,000
Other............................ 22,988,000 25,417,000 22,067,000
------------ ------------ ------------
$102,172,000 $106,713,000 $101,838,000
============ ============ ============
Intersegment sales:
Teva, domestic................... $ 1,171,000 $ 1,539,000 $ 2,036,000
Simple, domestic................. 150,000 315,000 --
Ugg, domestic.................... -- -- --
Other............................ 8,702,000 8,732,000 7,246,000
------------ ------------ ------------
$ 10,023,000 $ 10,586,000 $ 9,282,000
============ ============ ============
Earning (loss) from operations:
Teva, domestic................... $ (1,473,000) $ 2,363,000 $ (1,476,000)
Simple, domestic................. (1,973,000) 1,823,000 6,509,000
Ugg, domestic.................... (1,091,000) (321,000) (721,000)
Other............................ 1,551,000 4,388,000 3,674,000
------------ ------------ ------------
$ (2,986,000) $ 8,253,000 $ 7,986,000
============ ============ ============
</TABLE>
44
<PAGE> 47
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Depreciation and amortization:
Teva, domestic................... $ 1,326,000 $ 1,057,000 $ 701,000
Simple, domestic................. 267,000 244,000 244,000
Ugg, domestic.................... 635,000 575,000 624,000
Other............................ 410,000 630,000 734,000
------------ ------------ ------------
$ 2,638,000 $ 2,506,000 $ 2,303,000
============ ============ ============
Net interest expense (income):
Teva, domestic................... $ 229,000 $ (597,000) $ (684,000)
Simple, domestic................. 51,000 154,000 511,000
Ugg, domestic.................... 938,000 803,000 1,105,000
Other............................ (47,000) (16,000) (22,000)
------------ ------------ ------------
$ 1,171,000 $ 344,000 $ 910,000
============ ============ ============
Capital expenditures:
Teva, domestic................... $ 1,382,000 $ 1,241,000
Other............................ 534,000 490,000
------------ ------------
$ 1,916,000 $ 1,731,000
============ ============
Total assets:
Teva, domestic................... $ 67,467,000 $ 53,833,000
Simple, domestic................. 8,358,000 11,693,000
Ugg, domestic.................... 24,680,000 23,530,000
Other............................ 7,255,000 14,996,000
------------ ------------
$107,760,000 $104,052,000
============ ============
</TABLE>
45
<PAGE> 48
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
The Teva-domestic operating segment includes shared costs of the
consolidated group, including domestic payroll costs, facilities costs,
warehouse costs and other administrative costs. The Company has allocated costs
to the Simple-domestic, Ugg-domestic and other segments based on a percentage of
revenues for each of these segments. Because each segment's sales volume and the
resulting allocation of shared costs continually change, the allocations to
individual segments may or may not be reflective of the actual costs directly
attributable to each segment.
In addition, virtually all shared assets, capital expenditures and the
related depreciation of these assets are generally included in the Teva-domestic
segment. As a result, this segment has a disproportionately high amount of these
items, while the other segments have a disproportionately low amount.
Reconciliations of net sales, earnings (loss) from operations and total
assets from segment information to the consolidated financial statements are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Total sales for reportable segments...... $112,195,000 $117,299,000 $111,120,000
Elimination of intersegment revenues..... 10,023,000 10,586,000 9,282,000
------------ ------------ ------------
Consolidated net sales................... $102,172,000 $106,713,000 $101,838,000
============ ============ ============
Total earnings (loss) from operations for
reportable segments.................... $ (2,986,000) $ 8,253,000 $ 7,986,000
Intersegment profit change in beginning
and ending inventories................. 188,000 359,000 (146,000)
Unallocated loss on factory closure...... -- (500,000) --
------------ ------------ ------------
Consolidated earnings (loss) from
operations............................. $ (2,798,000) $ 8,112,000 $ 7,840,000
============ ============ ============
Total assets for reportable segments..... $107,760,000 104,052,000
Elimination of profit in ending
inventories............................ (118,000) (306,000)
Elimination of intersegment
investments............................ (15,268,000) (16,601,000)
Elimination of intersegment
receivables............................ (14,024,000) (13,809,000)
Unallocated refundable income taxes and
deferred tax assets.................... 6,023,000 1,357,000
------------ ------------
Consolidated total assets................ $ 84,373,000 $ 74,693,000
============ ============
</TABLE>
The Company sells its footwear products principally to customers throughout
the United States. The Company also sells its footwear products to foreign
customers located in Europe, Canada, Australia and Asia, among other regions.
Export sales to unaffiliated customers were 23.7%, 25.0% and 23.6% of net sales
for the years ended December 31, 1998, 1997 and 1996, respectively. Management
performs regular evaluations concerning the ability of its customers to satisfy
their obligations and records a provision for doubtful accounts based upon these
evaluations. For the years ended December 31, 1998, 1997 and 1996, the Company
had no single customer exceeding 10% of net sales. As of December 31, 1998 and
1997, the Company had no single customer exceeding 10% of trade accounts
receivable.
The Company's operations are subject to the customary risks of doing
business abroad, including, but not limited to, currency fluctuations, customs
duties and related fees, various import controls and other non-tariff barriers,
restrictions on the transfer of funds, labor unrest and strikes and, in certain
parts of the world, political instability.
46
<PAGE> 49
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(13) QUARTERLY SUMMARY OF INFORMATION (UNAUDITED)
Summarized unaudited financial data are as follows:
<TABLE>
<CAPTION>
1998
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales........................... $32,177,000 $31,142,000 $13,558,000 $25,295,000
Gross profit........................ 13,537,000 12,922,000 1,307,000 8,814,000
Net earnings (loss)................. 1,753,000 1,406,000 (5,133,000) (933,000)
=========== =========== =========== ===========
Net earnings (loss) per share:
Basic............................. $ .20 $ .16 $ (.60) $ (.11)
Diluted........................... .20 .16 (.60) (.11)
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales........................... $34,441,000 $28,103,000 $20,783,000 $23,386,000
Gross profit........................ 14,950,000 12,532,000 7,330,000 9,448,000
Net earnings........................ 1,990,000 1,589,000 468,000 477,000
=========== =========== =========== ===========
Net earnings per share:
Basic............................. $ .22 $ .18 $ .05 $ .05
Diluted........................... .22 .18 .05 .05
=========== =========== =========== ===========
</TABLE>
47
<PAGE> 50
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF BALANCE AT
DESCRIPTION PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
----------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts......... $2,625,000 $1,587,000 $2,920,000 $1,292,000
Reserve for sales discounts............. 214,000 482,000 555,000 141,000
Reserve for inventory obsolescence...... 3,815,000 574,000 3,375,000 1,014,000
Allowance for doubtful note
receivable........................... -- 1,000,000 -- 1,000,000
========== ========== ========== ==========
Year ended December 31, 1997:
Allowance for doubtful accounts......... $1,292,000 $ 466,000 $ 666,000 $1,092,000
Reserve for sales discounts............. 141,000 492,000 377,000 256,000
Reserve for inventory obsolescence...... 1,014,000 1,594,000 1,040,000 1,568,000
Allowance for doubtful note
receivable........................... 1,000,000 500,000 -- 1,500,000
========== ========== ========== ==========
Year ended December 31, 1998:
Allowance for doubtful accounts......... $1,092,000 $ 589,000 $ 477,000 $1,204,000
Reserve for sales discounts............. 256,000 1,053,000 655,000 654,000
Reserve for inventory obsolescence...... 1,568,000 2,543,000 1,221,000 2,890,000
Allowance for doubtful note
receivable........................... 1,500,000 -- -- 1,500,000
========== ========== ========== ==========
</TABLE>
48
<PAGE> 51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to Directors and Executive Officers of the Registrant
is set forth in the Company's definitive proxy statement relating to the
Registrant's 1999 annual meeting of shareholders, which will be filed pursuant
to Regulation 14A within 120 days after the end of the Company's fiscal year
ended December 31, 1998, and such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to Executive Compensation is set forth in the
Company's definitive proxy statement relating to the Registrant's 1999 annual
meeting of shareholders, which will be filed pursuant to Regulation 14A within
120 days after the end of the Company's fiscal year ended December 31, 1998, and
such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to Security Ownership of Certain Beneficial Owners and
Management is set forth in the Company's definitive proxy statement relating to
the Registrant's 1999 annual meeting of shareholders, which will be filed
pursuant to Regulation 14A within 120 days after the end of the Company's fiscal
year ended December 31, 1998, and such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to Certain Relationships and Related Transactions is
set forth in the Company's definitive proxy statement relating to the
Registrant's 1999 annual meeting of shareholders, which will be filed pursuant
to Regulation 14A within 120 days after the end of the Company's fiscal year
ended December 31, 1998, and such information is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements and Schedules required to be filed
hereunder are indexed on page 28 hereof.
(b) Reports on Form 8-K. The Company filed the following Current Reports
on Form 8-K:
(1) Form 8-K filed on November 6, 1998 (Item 5 -- On November 2, 1998, the
Company issued a press release announcing that Mark Thatcher, owner of
Teva Sport Sandals, Inc., has engaged an investment firm for purposes
of exploring various strategic options for the Teva brand).
(c) Consolidated Financial Statements and Schedules required to be filed
hereunder are indexed on page 28 hereof.
(d) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
2.1 Certificate of Ownership and Merger Merging Deckers
Corporation into Deckers Outdoor Corporation. (Exhibit 2.1
to the Registrant's Registration Statement on Form S-1, File
No. 33-67248 and incorporated by reference herein)
3.1 Amended and Restated Certificate of Incorporation of Deckers
Outdoor Corporation. (Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1, File No. 33-67248 and
incorporated by reference herein)
3.2 Restated Bylaws of Deckers Outdoor Corporation. (Exhibit 3.2
to the Registrant's Registration Statement on Form S-1, File
No. 33-67248 and incorporated by reference herein)
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
10.1 License Agreement, dated as of March 13, 1991, by and
between Mark Thatcher d/b/a Teva Sport Sandals and Deckers
Corporation. (Exhibit 10.1 to the Registrant's Registration
Statement on Form S-1, File No. 33-67248 and incorporated by
reference herein)
10.2 License Agreement for Europe, dated as of November 15, 1991,
by and between Mark Thatcher d/b/a Teva Sport Sandals and
Deckers Corporation. (Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1, File No. 33-67248 and
incorporated by reference herein)
10.3 Letter Amendment to License Agreement, dated as of December
3, 1992, by and between Mark Thatcher d/b/a Teva Sport
Sandals and Deckers Corporation. (Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1, File No.
33-67248 and incorporated by reference herein)
10.4 License Agreement Amendment for U.S. License, dated as of
August 5, 1993, by and between Mark Thatcher d/b/a Teva
Sport Sandals and Deckers Corporation. (Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1, File No.
33-67248 and incorporated by reference herein)
10.5 License Agreement Amendment for Europe, dated as of August
5, 1993, by and between Mark Thatcher d/b/a Teva Sport
Sandals and Deckers Corporation. (Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1, File No.
33-67248 and incorporated by reference herein)
10.6 Subsidiary Agreement, dated as of August 5, 1993, by and
between Mark Thatcher d/b/a Teva Sport Sandals and Deckers
Corporation. (Exhibit 10.6 to the Registrant's Registration
Statement on Form S-1, File No. 33-67248 and incorporated by
reference herein)
10.7 1993 Employee Stock Incentive Plan. (Exhibit 99 to the
Registrant's Registration Statement on Form S-8, File No.
33-47097 and incorporated by reference herein)
10.8 Form of Incentive Stock Option Agreement under 1993 Employee
Stock Incentive Plan. (Exhibit 10.9 to the Registrant's
Registration Statement on Form S-1, File No. 33-67248 and
incorporated by reference herein)
10.9 Form of Non-Qualified Stock Option Agreement under 1993
Employee Stock Incentive Plan. (Exhibit 10.10 to the
Registrant's Registration Statement on Form S-1, File No.
33-67248 and incorporated by reference herein)
10.10 Form of Restricted Stock Agreement. (Exhibit 10.11 to the
Registrant's Registration Statement on Form S-1, File No.
33-67248 and incorporated by reference herein)
10.11 Employment Agreement with Douglas B. Otto. (Exhibit 10.13 to
the Registrant's Registration Statement on Form S-1, File
No. 33-67248 and incorporated by reference herein)
10.12 First Amendment to Employment Agreement with Douglas B.
Otto. (Exhibit 10.14 to the Registrant's Registration
Statement on Form S-1, File No. 33-67248 and incorporated by
reference herein)
10.13 Second Amendment to Employment Agreement with Douglas B.
Otto. (Exhibit 10.15 to the Registrant's Registration
Statement on Form S-1, File No. 33-67248 and incorporated by
reference herein)
10.14 Modification Agreement, dated August 9, 1993, by and between
Mark Thatcher d/b/a Teva Sport Sandals and Deckers
Corporation. (Exhibit 10.25 to the Registrant's Registration
Statement on Form S-1, File No. 33-67248 and incorporated by
reference herein)
10.15 Loan and Guarantee Agreement, dated as of June 1, 1993,
among Holbrook Limited, Prosperous Dragon Manufacturing
Company Limited, Zhongshan Prosperous Dragon Shoes Co. Ltd.
and Robin Huang. (Exhibit 10.26 to the Registrant's
Registration Statement on Form S-1, File No. 33-67248 and
incorporated by reference herein)
10.16 Assignment and Assumption of Loan and Guarantee Agreement
and Promissory Note, dated as of July 1, 1993, among
Holbrook Limited, Prosperous Dragon Manufacturing Company
Limited, Zhongshan Prosperous Dragon Shoes Co. Ltd., Robin
Huang and Deckers Corporation. (Exhibit 10.27 to the
Registrant's Registration Statement on Form S-1, File No.
33-67248 and incorporated by reference herein)
10.17 Third Amendment to Employment Agreement with Douglas B.
Otto. (Exhibit 10.30 to the Registrant's Registration
Statement on Form S-1, File No. 33-67248 and incorporated by
reference herein)
10.18 Adjustment Agreement, dated March 21, 1994, between Mark
Thatcher and Deckers Outdoor Corporation. (Exhibit 10.35 to
the Registrant's Form 10-K for the period ended December 31,
1993 and incorporated by reference herein)
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
10.19 Agreement for Sales of Assets, dated January 26, 1995,
between Ken and Nancy Young and Deckers Acquisition
Corporation. (Exhibit 10.36 to the Registrant's Form 10-K
for the period ended December 31, 1994 and incorporated by
reference herein)
10.20 Amendment of Loan and Guarantee Agreement and Promissory
Note, dated December 31, 1994, among Holbrook Limited,
Prosperous Dragon Manufacturing Company Limited, Zhongshan
Prosperous Dragon Shoes Company Limited, Robin Huang and
Deckers Outdoor Corporation. (Exhibit 10.38 to the
Registrant's Form 10-K for the period ended December 31,
1994 and incorporated by reference herein)
10.21 Consent and Agreement re: Alp Sport Sandals, dated December
30, 1994, between Mark Thatcher and Deckers Outdoor
Corporation. (Exhibit 10.39 to the Registrant's Form 10-K
for the period ended December 31, 1994 and incorporated by
reference herein)
10.22 Credit Agreement for Deckers Outdoor Corporation and First
Interstate Bank, dated July 27, 1995. (Exhibit 10.41 to the
Registrant's Form 10-Q for the period ended September 30,
1995 and incorporated by reference herein)
10.23 Promissory Note for Deckers Outdoor Corporation and First
Interstate Bank, dated July 27, 1995. (Exhibit 10.42 to the
Registrant's Form 10-Q for the period ended September 30,
1995 and incorporated by reference herein)
10.24 Pledge Agreement for Deckers Outdoor Corporation and First
Interstate Bank, dated July 27, 1995. (Exhibit 10.43 to the
Registrant's Form 10-Q for the period ended September 30,
1995 and incorporated by reference herein)
10.25 Security Agreement for Deckers Outdoor Corporation and First
Interstate Bank, dated July 27, 1995. (Exhibit 10.44 to the
Registrant's Form 10-Q for the period ended September 30,
1995 and incorporated by reference herein)
10.26 Deckers Outdoor Corporation 1995 Employee Stock Purchase
Plan. (Exhibit 4.4 to the Registrant's Registration
Statement on Form S-8, File No. 33-96850 and incorporated by
reference herein)
10.27 Letter agreement dated March 5, 1996 between Deckers Outdoor
Corporation and First Interstate Bank. (Exhibit 10.39 to the
Registrant's Form 10-K for the period ended December 31,
1995 and incorporated by reference herein)
10.28 Employment Agreement between Diana M. Wilson and Deckers
Outdoor Corporation, dated December 12, 1995. (Exhibit 10.40
to the Registrant's Form 10-K for the period ended December
31, 1995 and incorporated by reference herein)
10.29 Amended Compensation Plan for Outside Members of the Board
of Directors. (Exhibit 10.42 to the Registrant's Form 10-Q
for the period ended September 30, 1996 and incorporated by
reference herein)
10.30 Extension Agreement to Employment Agreement with Douglas B.
Otto. (Exhibit 10.36 to the Registrant's Form 10-K for the
period ended December 31, 1996 and incorporated by reference
herein)
10.31 Extension and Restatement of Employment Agreement between
Diana M. Wilson and Deckers Outdoor Corporation, dated April
18, 1997. (Exhibit 10.37 to the Registrant's Form 10-Q for
the period ended March 31, 1997 and incorporated by
reference herein)
10.32 Limited Recourse Secured Promissory Note between Diana M.
Wilson and Deckers Outdoor Corporation, dated April 18,
1997. (Exhibit 10.38 to the Registrant's Form 10-Q for the
period ended March 31, 1997 and incorporated by reference
herein)
10.33 Stock Pledge Agreement between Diana M. Wilson and Deckers
Outdoor Corporation, dated April 18, 1997. (Exhibit 10.39 to
the Registrant's Form 10-Q for the period ended March 31,
1997 and incorporated by reference herein)
10.34 Third Amendment to Credit Agreement between Deckers Outdoor
Corporation and Wells Fargo Bank, dated March 24, 1998.
(Exhibit 10.35 to the Registrant's Form 10-K for the period
ended December 31, 1998 and incorporated by reference
herein).
10.35 Fourth Amendment to Credit Agreement between Deckers Outdoor
Corporation and Wells Fargo Bank, dated March 25, 1998.
(Exhibit 10.36 to the Registrant's Form 10-K for the period
ended December 31, 1998 and incorporated by reference
herein).
10.36 Fifth Amendment to Credit Agreement between Deckers Outdoor
Corporation and Wells Fargo Bank, dated May 29, 1998.
(Exhibit 10.37 to the Registrant's Form 10-Q for the period
ended June 30, 1998 and incorporated by reference herein)
</TABLE>
51
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
10.37 Sixth Amendment to Credit Agreement between Deckers Outdoor
Corporation and Wells Fargo Bank, dated July 22, 1998.
(Exhibit 10.38 to the Registrant's Form 10-Q for the period
ended June 30, 1998 and incorporated by reference herein)
10.38 Shareholder Rights Agreement, dated as of November 12, 1998.
(Exhibit 10.39 to the Registrant's Form 10-Q for the period
ended September 30, 1998 and incorporated by reference
herein)
10.39 Letter agreement between Deckers Outdoor Corporation and
Wells Fargo Bank, dated November 20, 1998. (Exhibit 10.40 to
the Registrant's 10-Q for the period ended September 30,
1998 and incorporated by reference herein).
10.40 Loan and Security Agreement by and among Congress Financial
Corporation (Western) and Deckers Outdoor Corporation,
Deckers Outdoor Corporation International, Simple Shoes,
Inc., Ugg Holdings, Inc. and Heirlooms, Inc., dated January
21, 1999.
21.1 Subsidiaries of Registrant.
23.1 Independent Auditors' Consent.
</TABLE>
52
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DECKERS OUTDOOR CORPORATION
(Registrant)
/s/ DOUGLAS B. OTTO
--------------------------------------
Douglas B. Otto
Chief Executive Officer
Date:
Pursuant to the requirements 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.
<TABLE>
<C> <S> <C>
/s/ DOUGLAS B. OTTO Chairman of the Board, President and
- --------------------------------------------- Chief Executive Officer (Principal
Douglas B. Otto Executive Officer)
/s/ M. SCOTT ASH Chief Financial Officer
- --------------------------------------------- (Principal Financial and Accounting Officer)
M. Scott Ash
/s/ RONALD D. PAGE Director
- ---------------------------------------------
Ronald D. Page
/s/ KARL F. LOPKER Director
- ---------------------------------------------
Karl F. Lopker
/s/ GENE E. BURLESON Director
- ---------------------------------------------
Gene E. Burleson
/s/ REX A. LICKLIDER Director
- ---------------------------------------------
Rex A. Licklider
Director
- ---------------------------------------------
Diana M. Wilson
</TABLE>
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Exhibit 10.40
LOAN AND SECURITY AGREEMENT
by and among
CONGRESS FINANCIAL CORPORATION (WESTERN)
as Lender
and
DECKERS OUTDOOR CORPORATION,
DECKERS OUTDOOR CORPORATION INTERNATIONAL,
SIMPLE SHOES, INC.,
UGG HOLDINGS, INC.
and
HEIRLOOMS, INC.
collectively, as Borrowers
Dated: January 21, 1999
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TABLE OF CONTENTS
<TABLE>
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SECTION 1. DEFINITIONS....................................................................1
SECTION 2. CREDIT FACILITIES.............................................................11
2.1 Revolving Loans.............................................................11
2.2 Letter of Credit Accommodations.............................................15
SECTION 3. INTEREST AND FEES.............................................................17
3.1 Interest....................................................................17
3.2 Closing Fee.................................................................18
3.3 Loan Servicing Fee..........................................................18
3.4 Unused Line Fee.............................................................19
3.5 Compensation Adjustment.....................................................19
SECTION 4. CONDITIONS PRECEDENT AND SUBSEQUENT...........................................21
4.1 Conditions Precedent to Initial Loans and the Letter of Credit
Accommodations..............................................................21
4.2 Conditions Precedent to All Loans and Letter of Credit Accommodations.......23
4.3 Condition Subsequent to All Loans and Letter of Credit Accommodations.......24
SECTION 5. GRANT OF SECURITY INTEREST....................................................24
SECTION 6. COLLECTION AND ADMINISTRATION.................................................25
6.1 Borrowers' Loan Accounts....................................................25
6.2 Statements..................................................................25
6.3 Collection of Accounts......................................................25
6.4 Payments....................................................................26
6.5 Authorization to Make Loans.................................................27
6.6 Use of Proceeds.............................................................27
SECTION 7. COLLATERAL REPORTING AND COVENANTS............................................27
7.1 Collateral Reporting........................................................27
7.2 Accounts Covenants..........................................................28
7.3 Inventory Covenants.........................................................29
7.4 Equipment Covenants.........................................................31
7.5 Power of Attorney...........................................................31
7.6 Right to Cure...............................................................32
7.7 Access to Premises..........................................................32
</TABLE>
ii
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TABLE OF CONTENTS
(continued)
<TABLE>
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<S> <C> <C>
SECTION 8. REPRESENTATIONS AND WARRANTIES................................................32
8.1 Corporate Existence, Power and Authority; Subsidiaries......................33
8.2 Financial Statements; No Material Adverse Change............................33
8.3 Chief Executive Office; Collateral Locations................................33
8.4 Priority of Liens; Title to Properties......................................33
8.5 Tax Returns.................................................................34
8.6 Litigation..................................................................34
8.7 Compliance with Other Agreements and Applicable Laws........................34
8.8 Bank Accounts...............................................................34
8.9 Environmental Compliance....................................................34
8.10 Employee Benefits...........................................................35
8.11 Accuracy and Completeness of Information....................................36
8.12 Survival of Warranties; Cumulative..........................................36
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS............................................36
9.1 Maintenance of Existence....................................................36
9.2 New Collateral Locations....................................................36
9.3 Compliance with Laws, Regulations, Etc......................................37
9.4 Payment of Taxes and Claims.................................................37
9.5 Insurance...................................................................38
9.6 Financial Statements and Other Information..................................38
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc.....................39
9.8 Encumbrances................................................................40
9.9 Indebtedness................................................................40
9.10 Loans, Investments, Guarantees, Etc.........................................41
9.11 Dividends and Redemptions...................................................42
9.12 Transactions with Affiliates................................................42
9.13 Additional Bank Accounts....................................................42
9.14 Compliance with ERISA.......................................................43
9.15 Year 2000 Compliance........................................................43
9.16 Adjusted Net Worth..........................................................43
9.17 Costs and Expenses..........................................................44
</TABLE>
iii
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TABLE OF CONTENTS
(continued)
<TABLE>
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9.18 Further Assurances..........................................................44
SECTION 10. EVENTS OF DEFAULT AND REMEDIES................................................45
10.1 Events of Default...........................................................45
10.2 Remedies....................................................................47
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS;
GOVERNING LAW..........................................................48
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver.......48
11.2 Waiver of Notices...........................................................49
11.3 Amendments and Waivers......................................................49
11.4 Indemnification.............................................................50
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS..............................................50
12.1 Term........................................................................50
12.2 Notices.....................................................................51
12.3 Partial Invalidity..........................................................52
12.4 Successors..................................................................52
12.5 Entire Agreement............................................................52
12.6 Publicity...................................................................52
SECTION 13. JOINT AND SEVERAL LIABILITY AND SURETYSHIP WAIVERS............................52
13.1 Independent Obligations; Subrogation........................................52
13.2 Authority to Modify Obligations and Security................................53
13.3 Waiver of Defenses..........................................................53
13.4 Exercise of Lender's Rights.................................................54
13.5 Additional Waivers..........................................................54
13.6 Additional Indebtedness.....................................................54
13.7 Notices, Demands, Etc.......................................................54
13.8 Subordination...............................................................55
13.9 Revival.....................................................................55
13.10 Understanding of Waivers....................................................55
13.11 Limited Liability...........................................................56
</TABLE>
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<TABLE>
<S> <C>
Exhibit A Information Certificate
Schedule 8.4 Other Liens
Schedule 8.8 Bank Accounts
Schedule 8.9 Environmental Disclosure
</TABLE>
<PAGE> 6
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement dated January 21, 1999 is entered into
by and among CONGRESS FINANCIAL CORPORATION (WESTERN), a California corporation
("Lender") and DECKERS OUTDOOR CORPORATION, a Delaware corporation ("DOC"),
DECKERS OUTDOOR CORPORATION INTERNATIONAL, a Delaware corporation ("DOCI"),
SIMPLE SHOES, INC., a California corporation ("SSI"), UGG HOLDINGS, INC., a
California corporation ("UHI"), and HEIRLOOMS, INC., a California corporation
("Heirlooms") (DOC, DOCI, SSI, UHI and Heirlooms, collectively referred to
herein as "Borrowers" and individually, a "Borrower").
W I T N E S S E T H:
WHEREAS, Borrowers have requested that Lender enter into certain
financing arrangements with each Borrower pursuant to which Lender may make
loans and provide other financial accommodations to each Borrower and each
Borrower shall be jointly and severally liable for the obligations of the other
Borrowers hereunder; and
WHEREAS, DOCI, SSI, UHI and Heirlooms are subsidiaries of DOC and DOC
with DOCI, SSI, UHI and Heirlooms are interrelated entities which, collectively
constitute an integrated footwear and apparel production and distribution
operation, with DOC operating such subsidiaries in coordination with its own
operations; and
WHEREAS, the directors of DOC, DOCI, SSI, UHI and Heirlooms view the
entities as sufficiently dependent upon each other and so interrelated that any
advances made by Lender hereunder to any of the constituent entities would
benefit all of the constituent entities as a result of their consolidated
operations and identity of interests; and
WHEREAS, DOC, DOCI, SSI, UHI and Heirlooms have each requested that
Lender treat them as co-Borrowers hereunder, jointly and severally responsible
for the obligations hereunder of each other Borrower except as provided in
Section 13.11 hereof; and
WHEREAS, Lender is willing to make such loans and provide such financial
accommodations on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Lender and each Borrower (with
each Borrower acting and being obligated jointly and severally with each other)
agree as follows:
SECTION 1. DEFINITIONS.
All terms used herein which are defined in Article 1 or Article 9 of the
California Uniform Commercial Code shall have the respective meanings given
therein unless otherwise defined in this Agreement. All references to the plural
herein shall also mean the singular and to the singular shall also mean the
plural. All references to a Borrower and Lender pursuant to the
<PAGE> 7
definitions set forth in the recitals hereto, or to any other person herein,
shall include their respective successors and assigns. The words "hereof",
"herein", "hereunder", "this Agreement" and words of similar import when used in
this Agreement shall refer to this Agreement as a whole and not any particular
provision of this Agreement and as this Agreement now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced. An
Event of Default shall exist or continue or be continuing until such Event of
Default is waived in accordance with Section 11.3. Any accounting term used
herein unless otherwise defined in this Agreement shall have the meaning
customarily given to such term in accordance with GAAP. For purposes of this
Agreement, the following terms shall have the respective meanings given to them
below:
1.1 "Accounts" shall mean all present and future rights of a Borrower to
payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance.
1.2 "Adjusted Eurodollar Rate" shall mean, with respect to each Interest
Period for any Eurodollar Rate Loan, the rate per annum (rounded upwards, if
necessary, to the next one-sixteenth (1/16) of one (1%) percent) determined by
dividing (a) the Eurodollar Rate for such Interest Period by (b) a percentage
equal to: (i) one (1) minus (ii) the Reserve Percentage. For purposes hereof,
"Reserve Percentage" shall mean the reserve percentage, expressed as a decimal,
prescribed by any United States or foreign banking authority for determining the
reserve requirement which is or would be applicable to deposits of United States
dollars in a non-United States or an international banking office of Reference
Bank used to fund a Eurodollar Rate Loan or any Eurodollar Rate Loan made with
the proceeds of such deposit, whether or not the Reference Bank actually holds
or has made any such deposits or loans. The Adjusted Eurodollar Rate shall be
adjusted on and as of the effective day of any change in the Reserve Percentage.
1.3 "Adjusted Net Worth" shall mean as to any Borrower, at any time, in
accordance with GAAP (except as otherwise specifically set forth below), on a
consolidated basis for such Borrower and its subsidiaries (if any), the amount
equal to: (a) the difference between: (i) the aggregate net book value of all
assets of such Borrower and its subsidiaries, calculating the book value of
inventory for this purpose on a first-in-first-out basis, after deducting from
such book values all appropriate reserves in accordance with GAAP (including all
reserves for doubtful receivables, obsolescence, depreciation and amortization)
and (ii) the aggregate amount of the indebtedness and other liabilities of such
Borrower and its subsidiaries (including tax and other proper accruals) plus (b)
indebtedness of such Borrower and its subsidiaries which is subordinated in
right of payment to the full and final payment of all of the Obligations on
terms and conditions acceptable to Lender less (c) intangibles of such Borrower
and its subsidiaries.
1.4 "Availability Reserves" shall mean, as of any date of determination,
such amounts as Lender may from time to time establish and revise in good faith
reducing the amount of Revolving Loans and Letter of Credit Accommodations which
would otherwise be available to a Borrower, under the lending formula(s)
provided for herein: (a) to reflect events, conditions, contingencies or risks
which, as determined by Lender in good faith, do or may affect either (i) the
Collateral or any other property which is security for the Obligations or its
value, including, without limitation, the mix in size, age or style of such
Borrower's Inventory, (ii) the assets,
2
<PAGE> 8
business or prospects of such Borrower or (iii) the security interests and other
rights of Lender in the Collateral (including the enforceability, perfection and
priority thereof) or (b) to reflect Lender's good faith belief that any
collateral report or financial information furnished by or on behalf of such
Borrower to Lender is or may have been incomplete, inaccurate or misleading in
any material respect or (c) to reflect any state of facts which Lender
determines in good faith constitutes an Event of Default or may, with notice or
passage of time or both, constitute an Event of Default. Without limiting the
generality of the foregoing, Lender shall establish an Availability Reserve in
the aggregate amount of Eight Hundred Thousand Dollars ($800,000) until such
time that Lender has received a lien search reflecting Lender's first priority
security interest in any and all Inventory located in Canada. Such Availability
Reserve shall be allocated among the Borrowers owning such Inventory.
1.5 "Blocked Account" shall have the meaning set forth in Section 6.3
hereof.
1.6 "Business Day" shall mean any day other than a Saturday, Sunday, or
other day on which commercial banks are authorized or required to close under
the laws of the State of New York or the State of North Carolina, and a day on
which the Reference Bank and Lender are open for the transaction of business,
except that if a determination of a "Business Day" shall relate to any
Eurodollar Rate Loan, the term "Business Day" shall also exclude any day on
which banks are closed for dealings in dollar deposits in the London interbank
market or other applicable Eurodollar market.
1.7 "Closing Date" shall mean the date of the first to occur of the
making of the initial Loans or the issuance of the initial Letter of Credit
Accommodation to or on behalf of any Borrower.
1.8 "Code" shall mean the Internal Revenue Code of 1986, as the same now
exists or may from time to time hereafter be amended, modified, recodified or
supplemented, together with all rules, regulations and interpretations
thereunder or related thereto.
1.9 "Collateral" shall have the meaning set forth in Section 5 hereof.
1.10 "Deckers Europe" shall mean Deckers Europe, B.V., a private company
with limited liability organized under the laws of the Netherlands.
1.11 "Deckers Japan" shall mean Deckers Japan, Inc., a corporation
organized under the laws of the State of California.
1.12 "Eligible Accounts" shall mean as to any Borrower, Accounts created
by such Borrower which are and continue to be acceptable to Lender based on the
criteria set forth below. Accounts of a Borrower shall be Eligible Accounts of
such Borrower if:
(a) such Accounts arise from the actual and bona fide sale and
delivery (based upon terms of shipment) of goods by such Borrower or rendition
of services by such Borrower in the ordinary course of its business which
transactions are completed in accordance with the terms and provisions contained
in any documents related thereto;
3
<PAGE> 9
(b) such Accounts are not unpaid more than sixty (60) days past
the original due date thereof or are not unpaid more than one hundred twenty
(120) days after the date of the original invoice for them (other than Accounts
described in Section 1.12(c) hereof);
(c) such Accounts are originally subject to extended payment
terms; provided, that (i) such Accounts are not unpaid more than thirty (30)
days past the original due date thereof or are not unpaid more than one hundred
fifty (150) days from the original invoice date and (ii) such Accounts are not
owed by an account debtor who has Accounts unpaid more than thirty (30) days
past the original due date thereof or unpaid more than one hundred fifty (150)
days from the original invoice for them which constitute more than fifty percent
(50%) of the total Accounts of such account debtor; provided, however, no more
than Eight Million Five Hundred Thousand Dollars ($8,500,000) of aggregate
Revolving Loans advanced against all such Eligible Accounts with extended
payment terms shall be outstanding at any time and Lender may reasonably
establish a minimum amount of each Account with extended payment terms in order
for it to be an Eligible Account;
(d) such Accounts comply with the terms and conditions contained
in Section 7.2(c) of this Agreement;
(e) such Accounts do not arise from sales on consignment,
guaranteed sale, sale and return, sale on approval, or other terms under which
payment by the account debtor may be conditional or contingent;
(f) the chief executive office of the account debtor with respect
to such Accounts is located in the United States of America or Canada, or if
either: (i) the account debtor has delivered to such Borrower an irrevocable
letter of credit issued or confirmed by a bank satisfactory to Lender and
payable only in the United States of America and in U.S. dollars, sufficient to
cover such Account, in form and substance satisfactory to Lender and, if
required by Lender, the original of such letter of credit has been delivered to
Lender or Lender's agent and the issuer thereof notified of the assignment of
the proceeds of such letter of credit to Lender, or (ii) such Account is subject
to credit insurance payable to Lender issued by an insurer and on terms and in
an amount acceptable to Lender, or (iii) with respect to an Account of an
account debtor whose chief executive office is located in Europe, such Account
is subject to credit insurance payable to Lender and on terms and in an amount
acceptable to Lender and is guaranteed as to payment or is factored and in
either case by a factor acceptable to Lender pursuant to a factoring agreement,
in form and substance reasonably satisfactory to Lender and such factor has
entered into an intercreditor agreement with Lender, in form and substance
reasonably satisfactory to Lender, or (iv) such Account is otherwise acceptable
in all respects to Lender (subject to the terms and conditions set forth in
Section 2.1(g) hereof and such lending formulas and sublimit amounts with
respect thereto as Lender may determine);
(g) such Accounts do not consist of progress billings, bill and
hold invoices or retainage invoices, except as to bill and hold invoices, if
Lender shall have received an agreement in writing from the account debtor, in
form and substance satisfactory to Lender, confirming the unconditional
obligation of the account debtor to take the goods related thereto and pay such
invoice;
4
<PAGE> 10
(h) the account debtor with respect to such Accounts has not
asserted a counterclaim, defense or dispute and does not have, and does not
engage in transactions which may give rise to, any right of setoff against such
Accounts (but the portion of the Accounts of such account debtor in excess of
the amount at any time and from time to time owed by all Borrowers collectively
to such account debtor or claimed owed by such account debtor will be deemed
Eligible Accounts of such Borrower);
(i) there are no facts, events or occurrences which would impair
the validity, enforceability or collectability of such Accounts or reduce the
amount payable or delay payment thereunder;
(j) such Accounts are subject to the first priority, valid and
perfected security interest of Lender and any goods giving rise thereto are not,
and were not at the time of the sale thereof, subject to any liens except those
permitted in this Agreement;
(k) neither the account debtor nor any officer or employee of the
account debtor with respect to such Accounts is an executive officer of such
Borrower directly or indirectly by virtue of family membership, ownership,
control, management or otherwise;
(l) the account debtors with respect to such Accounts are not any
foreign government, the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, unless, if the
account debtor is the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, upon Lender's
request, the Federal Assignment of Claims Act of 1940, as amended or any similar
State or local law, if applicable, has been complied with in a manner
satisfactory to Lender;
(m) there are no proceedings or actions which are threatened or
pending against the account debtors with respect to such Accounts which might
result in any material adverse change in any such account debtor's financial
condition;
(n) such Accounts of a single account debtor or its affiliates do
not constitute more than ten percent (10%) of all otherwise Eligible Accounts of
all Borrowers in the aggregate (but the portion of the Accounts of the Borrowers
not in excess of such percentage will be deemed Eligible Accounts of the
Borrowers);
(o) such Accounts are not owed by an account debtor who has
Accounts unpaid more than sixty (60) days past the original due date thereof or
unpaid more than one hundred twenty (120) days after the date of the original
invoice for them (other than Accounts described in Section 1.12(c) hereof) which
constitute more than fifty percent (50%) of the total Accounts of such account
debtor; and
(p) such Accounts are owed by account debtors deemed creditworthy
at all times by Lender, as reasonably determined by Lender.
Any Accounts which are not Eligible Accounts shall nevertheless be part of the
Collateral.
1.13 "Eligible Assignee" shall mean a financial institution acceptable
to Lender organized under (a) the laws of the United States of America, or any
State thereof or (b) the laws
5
<PAGE> 11
of any other country which is a member of the Organization for Economic
Corporation and Development, or a political subdivision of any such country,
provided that such bank is acting through a branch, subsidiary or agency located
in the United States of America.
1.14 "Eligible In-Transit Inventory" shall mean as to any Borrower,
Inventory owned by such Borrower consisting of footwear and apparel finished
goods in transit on the water from an overseas port of shipping to Borrower
which (a) are subject to bailee agreements, bills of lading, documents of title,
warehouse receipts or other documentation, which documentation is in possession
and control of Lender or its agent; (b) are insured in a manner acceptable to
Lender; and (c) meet all other eligibility criteria set forth in the definition
of "Eligible Inventory"; provided, however, the aggregate amount of Revolving
Loans outstanding advanced against all Eligible In-Transit Inventory of all
Borrowers shall not exceed Eight Million Dollars ($8,000,000) during the period
commencing November 15 and ending April 15 of each calendar year and Five
Million Dollars ($5,000,000) during the remaining portion of each calendar year.
General criteria for Eligible In-Transit Inventory may be established and
revised from time to time by Lender in its reasonable credit judgment. Any
Inventory in transit which is not Eligible In-Transit Inventory shall
nevertheless be part of the Collateral.
1.15 "Eligible Inventory" shall mean as to any Borrower, Inventory
consisting of footwear and apparel finished goods held for resale in the
ordinary course of the business of such Borrower which are acceptable to Lender
based on the criteria set forth below. In general, Eligible Inventory shall not
include (a) raw materials; (b) work-in-process; (c) components which are not
part of finished goods; (d) spare parts for equipment; (e) packaging and
shipping materials; (f) supplies used or consumed in such Borrower's business;
(g) Inventory at premises other than those owned and controlled by such
Borrower, except if Lender shall have received an agreement in writing from the
person in possession of such Inventory and/or the owner or operator of such
premises in form and substance satisfactory to Lender acknowledging Lender's
first priority security interest in the Inventory, waiving security interests
and claims by such person against the Inventory and permitting Lender access to,
and the right to remain on, the premises so as to exercise Lender's rights and
remedies and otherwise deal with the Collateral; (h) Inventory in transit (other
than Eligible In-Transit Inventory); (i) Inventory subject to a security
interest or lien in favor of any person other than Lender except those permitted
in this Agreement; (j) bill and hold goods; (k) unserviceable, obsolete or slow
moving Inventory; (l) Inventory which has been produced as finished goods and
remains unsold more than the lesser of six (6) months or one (1) selling season,
the period for which shall be determined by Lender in its reasonable discretion;
(m) Inventory which is not subject to the first priority, valid and perfected
security interest of Lender; (n) returned, damaged and/or defective Inventory;
(o) Inventory at premises located outside the United States of America or Canada
(provided, that, Inventory located in Canada must be located at a warehouse, the
owner or operator of which has entered into a bailee agreement in favor of
Lender, in form and substance satisfactory to Lender, in order for such
Inventory to be deemed Eligible Inventory); and (p) Inventory purchased or sold
on consignment. General criteria for Eligible Inventory may be established and
revised from time to time by Lender in its reasonable credit judgment. Any
Inventory which is not Eligible Inventory shall nevertheless be part of the
Collateral.
1.16 "Environmental Laws" shall mean all federal, state, district, local
and foreign laws, rules, regulations, ordinances, and consent decrees relating
to health, safety, hazardous
6
<PAGE> 12
substances, pollution and environmental matters, as now or at any time hereafter
in effect, applicable to any Borrower's business and facilities (whether or not
owned by it), including laws relating to emissions, discharges, releases or
threatened releases of pollutants, contamination, chemicals, or hazardous, toxic
or dangerous substances, materials or wastes into the environment (including,
without limitation, ambient air, surface water, ground water, land surface or
subsurface strata) or otherwise relating to the generation, manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, chemicals, or hazardous, toxic or
dangerous substances, materials or wastes.
1.17 "Equipment" shall mean all of a Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
1.18 "ERISA" shall mean the United States Employee Retirement Income
Security Act of 1974, as the same now exists or may hereafter from time to time
be amended, modified, recodified or supplemented, together with all rules,
regulations and interpretations thereunder or related thereto.
1.19 "ERISA Affiliate" shall mean any person required to be aggregated
with any Borrower or any of its affiliates under Sections 414(b), 414(c), 414(m)
or 414(o) of the Code.
1.20 "Eurodollar Rate" shall mean with respect to the Interest Period
for a Eurodollar Rate Loan, the interest rate per annum equal to the arithmetic
average of the rates of interest per annum (rounded upwards, if necessary, to
the next one-sixteenth (1/16) of one (1%) percent) at which Reference Bank is
offered deposits of United States dollars in the London interbank market (or
other Eurodollar Rate market selected collectively by Borrowers and approved by
Lender) on or about 9:00 a.m. (New York time) two (2) Business Days prior to the
commencement of such Interest Period in amounts substantially equal to the
aggregate principal amount of the Eurodollar Rate Loans requested by and
available to Borrowers in accordance with this Agreement, with a maturity of
comparable duration to the Interest Period selected by Borrowers.
1.21 "Eurodollar Rate Loans" shall mean any Loans or portion thereof on
which interest is payable based on the Adjusted Eurodollar Rate in accordance
with the terms hereof.
1.22 "Event of Default" shall mean the occurrence or existence of any
event or condition described in Section 10.1 hereof.
1.23 "Excess Availability" shall mean the amount, as determined by
Lender, calculated at any time, equal to:
(a) the lesser of (i) the aggregate amount of the Revolving Loans
available to Borrowers as of such time (based on the applicable advance rates
set forth in Sections 2.1(a)(i) or 2.1(a)(ii) hereof), subject to the sublimits
and Availability Reserves from time to time established by Lender hereunder and
(ii) the Maximum Credit, minus
7
<PAGE> 13
(b) the sum of: (i) the aggregate amount of all then outstanding
and unpaid Obligations, (ii) the aggregate amount of all trade payables of
Borrowers which are more than thirty (30) days past due as of such time, (iii)
the aggregate amount of Borrowers' book overdrafts, and (iv) the aggregate
amount of Borrowers' past due lease and notes payable.
1.24 "Financing Agreements" shall mean, collectively, this Agreement and
all notes, guarantees, security agreements and other agreements, documents and
instruments now or at any time hereafter executed and/or delivered by any
Borrower or Obligor in connection with this Agreement, as the same now exist or
may hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
1.25 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Boards which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Section 9.16 hereof, GAAP shall be determined on the basis of
such principles in effect on the date hereof and consistent with those used in
the preparation of the audited financial statements delivered to Lender prior to
the date hereof.
1.26 "Hazardous Materials" shall mean any hazardous, toxic or dangerous
substances, materials and wastes, including, without limitation, hydrocarbons
(including naturally occurring or man-made petroleum and hydrocarbons),
flammable explosives, asbestos, urea formaldehyde insulation, radioactive
materials, biological substances, polychlorinated biphenyls, pesticides,
herbicides and any other kind and/or type of pollutants or contaminants
(including, without limitation, materials which include hazardous constituents),
sewage, sludge, industrial slag, solvents and/or any other similar substances,
materials, or wastes and including any other substances, materials or wastes
that are or become regulated under any Environmental Law (including, without
limitation any that are or become classified as hazardous or toxic under any
Environmental Law).
1.27 "Holbrook" shall mean Holbrook, Ltd., a limited company organized
under the laws of Hong Kong.
1.28 "Information Certificate" shall mean as to any Borrower, the
Information Certificate of such Borrower collectively constituting Exhibit A
hereto containing material information with respect to such Borrower, its
business and assets provided by or on behalf of such Borrower to Lender in
connection with the preparation of this Agreement and the other Financing
Agreements and the financing arrangements provided for herein.
1.29 "Interest Period" shall mean for any Eurodollar Rate Loan, a period
of approximately one (1), two (2), or three (3) months duration as Borrowers may
collectively elect, the exact duration to be determined in accordance with the
customary practice in the applicable Eurodollar Rate market; provided, that,
Borrowers may not elect an Interest Period which will end after the last day of
the then-current term of this Agreement.
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1.30 "Interest Rate" shall mean, as to Prime Rate Loans, a rate per
annum equal to the Prime Rate and, as to Eurodollar Rate Loans, a rate of two
percent (2%) per annum in excess of the Adjusted Eurodollar Rate (based on the
Eurodollar Rate applicable for the Interest Period collectively selected by
Borrowers as in effect three (3) Business Days after the date of receipt by
Lender of the request of Borrowers for such Eurodollar Rate Loans in accordance
with the terms hereof, whether such rate is higher or lower than any rate
previously quoted to Borrowers); provided, that, the Interest Rate shall mean
the rate of two percent (2%) per annum in excess of the Prime Rate as to Prime
Rate Loans and the rate of four percent (4%) per annum in excess of the Adjusted
Eurodollar Rate as to Eurodollar Rate Loans, at Lender's option, without notice,
(a) for the period (i) from and after the date of termination or non-renewal
hereof until Lender has received full and final payment of all obligations
(notwithstanding entry of a judgment against any Borrower) and (ii) from and
after the date of the occurrence of an Event of Default for so long as such
Event of Default is continuing as determined by Lender, and (b) on the Revolving
Loans at any time outstanding in excess of the amounts available to a Borrower
under Section 2 (whether or not such excess(es), arise or are made with or
without Lender's knowledge or consent and whether made before or after an Event
of Default).
1.31 "Inventory" shall mean all of a Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.
1.32 "Inventory Advance Rate" shall mean as to any Borrower, the advance
rate applicable to the Eligible Inventory of such Borrower as determined in
accordance with Section 2.1 hereof.
1.33 "Inventory Maximum Credit" shall mean the amount of Twenty Five
Million Dollars ($25,000,000).
1.34 "Letter of Credit Accommodations" shall mean the letters of credit,
merchandise purchase or other guaranties which are from time to time either (a)
issued, opened or provided by Lender for the account of any Borrower or Obligor
or (b) with respect to which Lender has agreed to indemnify the issuer or
guaranteed to the issuer the performance by any Borrower of its obligations to
such issuer.
1.35 "Loans" shall mean the Revolving Loans.
1.36 "Maximum Credit" shall mean, with reference to the Revolving Loans
and the Letter of Credit Accommodations, the amount of Fifty Million Dollars
($50,000,000).
1.37 "Net Amount of Eligible Accounts" shall mean as to any Borrower,
the gross amount of Eligible Accounts of such Borrower less (a) sales, excise or
similar taxes included in the amount thereof and (b) returns, discounts, claims,
credits and allowances of any nature at any time issued, owing, granted,
outstanding, available or claimed with respect thereto.
1.38 "Obligations" shall mean any and all Revolving Loans, the Letter of
Credit Accommodations and all other obligations, liabilities and indebtedness of
every kind, nature and description owing by any Borrower (or Borrowers) to
Lender and/or its affiliates, including principal, interest, charges, fees,
costs and expenses, however evidenced, whether as principal,
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surety, endorser, guarantor or otherwise, whether arising under this Agreement
or otherwise, whether now existing or hereafter arising, whether arising before,
during or after the initial or any renewal term of this Agreement or after the
commencement of any case with respect to any Borrower (or Borrowers) under the
United States Bankruptcy Code or any similar statute (including, without
limitation, the payment of interest and other amounts which would accrue and
become due but for the commencement of such case), whether direct or indirect,
absolute or contingent, joint or several, due or not due, primary or secondary,
liquidated or unliquidated, secured or unsecured, and however acquired by
Lender.
1.39 "Obligor" shall mean Holbrook, Deckers Japan, Deckers Europe,
Phillipsburg, Picante and any other guarantor, endorser, acceptor, surety or
other person liable on or with respect to the Obligations or who is the owner of
any property which is security for the Obligations, other than a Borrower.
1.40 "OLV" shall mean, with respect to Inventory, the orderly
liquidation value (net of liquidation expenses) as determined by Lender and in
part based upon the written reports or appraisals as to Inventory heretofore
delivered to Lender and hereafter delivered to Lender pursuant to Section 7.3
(d) hereof.
1.41 "Participant" shall mean any Eligible Assignee which at any time
participates with Lender in respect of the Loans, the Letter of Credit
Accommodations or other Obligations or any portion thereof.
1.42 "Payment Account" shall have the meaning set forth in Section 6.3
hereof.
1.43 "Person" or "person" shall mean any individual, sole
proprietorship, partnership, corporation (including, without limitation, any
corporation which elects subchapter S status under the Internal Revenue Code of
1986, as amended), limited liability company, limited liability partnership,
business trust, unincorporated association, joint stock corporation, trust,
joint venture or other entity or any government or any agency or instrumentality
or political subdivision thereof.
1.44 "Phillipsburg" shall mean Phillipsburg, Limited, a limited company
organized under the laws of Hong Kong.
1.45 "Picante" shall mean Picante, S.A., a sociedad anonima organized
under the laws of Guatemala.
1.46 "Prime Rate" shall mean the rate from time to time publicly
announced by the Reference Bank from time to time as its prime rate, whether or
not such announced rate is the best rate available at such bank.
1.47 "Prime Rate Loans" shall mean any Loans or portion thereof on which
interest is payable based on the Prime Rate in accordance with the terms
thereof.
1.48 "Records" shall mean all of a Borrower's present and future books
of account of every kind or nature, purchase and sale agreements, invoices,
ledger cards, bills of lading and other shipping evidence, statements,
correspondence, memoranda, credit files and other data
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relating to the Collateral or any account debtor, together with the tapes,
disks, diskettes and other data and software storage media and devices, file
cabinets or containers in or on which the foregoing are stored (including any
rights of any Borrower with respect to the foregoing maintained with or by any
other person).
1.49 "Reference Bank" shall mean First Union National Bank, or its
successors, or such other bank as Lender may from time to time designate.
1.50 "Renewal Date" shall have the meaning set forth in Section 12.1(a)
hereof.
1.51 "Revolving Loans" shall mean the loans now or hereafter made by
Lender to or for the benefit of any Borrower on a revolving basis (involving
advances, repayments and readvances) as set forth in Section 2.1 hereof.
1.52 "Teva License Agreement" shall mean collectively (a) that certain
License Agreement dated as of March 13, 1991 between Mark Thatcher, an
individual doing business as TEVA Sport Sandals, and DOC and (b) that certain
License Agreement for Europe dated as of November 15, 1991 between Mark
Thatcher, an individual doing business as TEVA Sport Sandals, and DOC, as all of
the foregoing now exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
1.53 "Value" shall mean, as determined by Lender in good faith, with
respect to Inventory, the lower of (a) cost under the first-in-first-out method,
net of vendor discounts or (b) market value.
SECTION 2. CREDIT FACILITIES.
2.1 Revolving Loans.
(a) Subject to, and upon the terms and conditions contained
herein, Lender agrees to make Revolving Loans to DOC from time to time in
amounts requested by DOC up to the amount equal to the sum of:
(i) eighty-five percent (85%) of the Net Amount of
Eligible Accounts of DOC, plus
(ii) the lesser of: (A) sixty-five percent (65%) of the
Value of Eligible Inventory (including Eligible In-Transit Inventory) of DOC; or
(B) eighty-five percent (85%) of the OLV of Eligible Inventory (including
Eligible In-Transit Inventory) of DOC; minus
(iii) the then undrawn amounts of outstanding Letter of
Credit Accommodations for the account of DOC, multiplied by the applicable
percentages as provided for in Section 2.2(c)(i) or Section 2.2(c)(ii) hereof;
minus
(iv) any Availability Reserves with respect to DOC.
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(b) Subject to, and upon the terms and conditions contained
herein, Lender agrees to make Revolving Loans to DOCI from time to time in
amounts requested by DOCI up to the amount equal to the sum of:
(i) eighty-five percent (85%) of the Net Amount of
Eligible Accounts of DOCI, plus
(ii) the lesser of: (A) sixty-five percent (65%) of the
Value of Eligible Inventory (including Eligible In-Transit Inventory) of DOCI;
or (B) eighty-five percent (85%) of the OLV of Eligible Inventory (including
Eligible In-Transit Inventory) of DOCI; minus
(iii) the then undrawn amounts of outstanding Letter of
Credit Accommodations for the account of DOCI, multiplied by the applicable
percentages as provided for in Section 2.2(c)(i) or Section 2.2(c)(ii) hereof;
minus
(iv) any Availability Reserves with respect to DOCI.
(c) Subject to, and upon the terms and conditions contained
herein, Lender agrees to make Revolving Loans to SSI from time to time in
amounts requested by SSI up to the amount equal to the sum of:
(i) eighty-five percent (85%) of the Net Amount of
Eligible Accounts of SSI, plus
(ii) the lesser of: (A) sixty-five percent (65%) of the
Value of Eligible Inventory (including Eligible In-Transit Inventory) of SSI; or
(B) eighty-five percent (85%) of the OLV of Eligible Inventory (including
Eligible In-Transit Inventory) of SSI; minus
(iii) the then undrawn amounts of outstanding Letter of
Credit Accommodations for the account of SSI, multiplied by the applicable
percentages as provided for in Section 2.2(c)(i) or Section 2.2(c)(ii) hereof;
minus
(iv) any Availability Reserves with respect to SSI.
(d) Subject to, and upon the terms and conditions contained
herein, Lender agrees to make Revolving Loans to UHI from time to time in
amounts requested by UHI up to the amount equal to the sum of:
(i) eighty-five percent (85%) of the Net Amount of
Eligible Accounts of UHI, plus
(ii) the lesser of: (A) sixty-five percent (65%) of the
Value of Eligible Inventory (including Eligible In-Transit Inventory) of UHI; or
(B) eighty-five percent (85%) of the OLV of Eligible Inventory (including
Eligible In-Transit Inventory) of UHI; minus
(iii) the then undrawn amounts of outstanding Letter of
Credit Accommodations for the account of UHI, multiplied by the applicable
percentages as provided for in Section 2.2(c)(i) or Section 2.2(c)(ii) hereof;
minus
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(iv) any Availability Reserves with respect to UHI.
(e) Subject to, and upon the terms and conditions contained
herein, Lender agrees to make Revolving Loans to Heirlooms from time to time in
amounts requested by Heirlooms up to the amount equal to the sum of:
(i) eighty-five percent (85%) of the Net Amount of
Eligible Accounts of Heirlooms, plus
(ii) the lesser of: (A) sixty-five percent (65%) of the
Value of Eligible Inventory (including Eligible In-Transit Inventory) of
Heirlooms; or (B) eighty-five percent (85%) of the OLV of Eligible Inventory
(including Eligible In-Transit Inventory) of Heirlooms; minus
(iii) the then undrawn amounts of outstanding Letter of
Credit Accommodations for the account of Heirlooms, multiplied by the applicable
percentages as provided for in Section 2.2(c)(i) or Section 2.2(c)(ii) hereof;
minus
(iv) any Availability Reserves with respect to Heirlooms.
(f) Lender may, in its discretion, from time to time, upon not
less than ten (10) Business Days prior notice to Borrowers:
(i) reduce the lending formula(s) with respect to Eligible
Accounts of any Borrower to the extent that Lender determines in good faith
that: (A) the dilution with respect to the Accounts of such Borrower or the
aggregate Accounts of all Borrowers (based on the ratio of (1) the aggregate
amount of reductions in such Accounts other than as a result of payments in cash
to (2) the aggregate amount of total sales) has increased above five percent
(5%) in the aggregate during any three (3) month period ended on the last day of
the immediately preceding month as of the date of determination (in which case
the lending formula(s) with respect to Eligible Accounts of each Borrower shall
be reduced by one percent (1%) for each percent that dilution exceeds five
percent (5%)) or for which dilution may be reasonably anticipated to increase in
any material respect above historical levels; or (B) the general
creditworthiness of account debtors has declined; or
(ii) reduce the lending formula(s) with respect to
Eligible Inventory of any Borrower to the extent that Lender determines that:
(A) the number of days of the turnover, age or the mix, of the Inventory of such
Borrower or the aggregate Inventory of all Borrowers for any period has changed
in any materially adverse respect; or (B) the liquidation value of the Eligible
Inventory of such Borrower or the aggregate Inventory of all Borrowers, or any
category thereof, has decreased in any material respect; or (C) the nature and
quality of the Inventory of such Borrower or the aggregate Inventory of all
Borrowers has deteriorated in any material respect.
In determining whether to reduce the lending formula(s), Lender may consider
events, conditions, contingencies or risks which are also considered in
determining Eligible Accounts, Eligible Inventory or in establishing
Availability Reserves and may allocate any such consideration to such Borrower
or Borrowers that it deems appropriate.
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(g) Except in Lender's discretion, (i) the aggregate amount of
the Loans, the Letter of Credit Accommodations and other Obligations of all
Borrowers outstanding at any time shall not exceed the Maximum Credit, (ii) the
aggregate amount of Revolving Loans outstanding at any time advanced against all
Eligible Inventory of all Borrowers shall not exceed the Inventory Maximum
Credit and (iii) the aggregate amount of Revolving Loans outstanding at any time
advanced against all Eligible Inventory consisting of Inventory of all Borrowers
within the "Simple" product line shall not exceed Eight Million Dollars
($8,000,000). In the event that the outstanding amount of any component of the
Loans and Letter of Credit Accommodations, or the aggregate amount of the
outstanding Loans and Letter of Credit Accommodations and other Obligations,
exceeds the amounts available under the lending formulas set forth in Section
2.1(a) hereof, the sublimits for Letter of Credit Accommodations set forth in
Section 2.2(d), any other sublimits with respect to specific types of Eligible
Accounts or Eligible Inventory, the Inventory Maximum Credit or the Maximum
Credit, as applicable, such event shall not limit, waive or otherwise affect any
rights of Lender in that circumstance or on any future occasions and Borrowers
shall, upon demand by Lender, which may be made at any time or from time to
time, immediately repay to Lender the entire amount of any such excess(es) for
which payment is demanded.
(h) Lender may from time to time provide Revolving Loans advanced
against a Borrower's Inventory located in the Netherlands and a Borrower's
foreign Accounts, the account debtor of which is located outside the United
States of America or Canada, provided, that each Borrower and Lender shall have
entered into an Amendment to this Agreement, in form and substance satisfactory
to Lender, which shall set forth the terms and conditions to which Lender shall
provide such Revolving Loans, Lender and its counsel shall be satisfied that
Lender has valid, perfected and first priority security interests in and liens
upon such Inventory located in the Netherlands and such foreign Accounts,
subject only to the security interests and liens permitted herein or in the
other Financing Agreements, and such Inventory and Accounts meet the other
eligibility requirements for Eligible Inventory (other than the requirement that
the Inventory be located at a premises within the United States or Canada) and
Eligible Accounts, respectively, set forth herein.
2.2 Letter of Credit Accommodations.
(a) Subject to, and upon the terms and conditions contained
herein, at the request of any Borrower, Lender agrees to provide or arrange for
Letter of Credit Accommodations for the account of such Borrower containing
terms and conditions acceptable to Lender and the issuer thereof. Any payments
made by Lender to any issuer thereof and/or related parties in connection with
the Letter of Credit Accommodations shall constitute additional Revolving Loans
to such Borrower requesting such Letter of Credit Accommodation pursuant to this
Section 2.
(b) In addition to any charges, fees or expenses charged by any
bank or issuer in connection with the Letter of Credit Accommodations, each
Borrower shall pay to Lender a letter of credit fee at a rate equal to one and
one-quarter percent (1.25%) per annum on the daily aggregate outstanding balance
of all Letter of Credit Accommodations for such Borrower for the immediately
preceding month (or part thereof), payable in arrears as of the first day of
each succeeding month; provided, however, that such letter of credit fee shall
be increased, at
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Lender's option without notice, to three and one-quarter percent (3.25%) per
annum for the period on or after the date of termination or non-renewal of this
Agreement, or the date of the occurrence of an Event of Default. Such letter of
credit fee shall be calculated on the basis of a three hundred sixty (360) day
year and actual days elapsed and the obligation of each Borrower to pay such fee
shall survive the termination or non-renewal of this Agreement.
(c) No Letter of Credit Accommodations shall be available to a
Borrower requesting such Letter of Credit Accommodation unless on the date of
the proposed issuance of such Letter of Credit Accommodations, the Revolving
Loans available to such Borrower (subject to the Inventory Maximum Credit, the
Maximum Credit and any Availability Reserves) are equal to or greater than:
(i) if the proposed Letter of Credit Accommodation is for
the purpose of purchasing Eligible Inventory, the sum of: (A) the product of the
Value of such Eligible Inventory multiplied by one minus the Inventory Advance
Rate of such Borrower under Section 2.1 as applicable, plus (B) freight, taxes,
duty and other amounts which Lender estimates must be paid in connection with
such Inventory upon arrival and for delivery to one of such Borrower's locations
for Eligible Inventory within the United States of America or Canada; and
(ii) if the proposed Letter of Credit Accommodation is for
standby letters of credit guaranteeing the purchase of Eligible Inventory or for
any other purpose, an amount equal to one hundred percent (100%) of the face
amount thereof and all other commitments and obligations made or incurred by
Lender with respect thereto.
Effective on the issuance of each Letter of Credit Accommodation, the amount of
Revolving Loans which might otherwise be available to a Borrower requesting such
Letter of Credit Accommodation shall be reduced by the applicable amount set
forth in Section 2.2(c)(i) or Section 2.2(c)(ii); provided, however, with
respect to Letter of Credit Accommodations provided to indemnify Wells Fargo
Bank, N.A. for open documentary letters of credit issued prior to date hereof,
the amount of Revolving Loans available to a Borrower requesting such Letter of
Credit Accommodation shall be reduced by an amount equal to the face amount of
such Letter of Credit Accommodation allocated to such Borrower by Lender (based
upon the aggregate amount of Letters of Credit issued on behalf of such Borrower
as an account party) multiplied by one minus the applicable Inventory Advance
Rate of such Borrower under Section 2.1.
(d) Except in Lender's discretion, the aggregate amount of all
outstanding Letter of Credit Accommodations and all other commitments and
obligations made or incurred by Lender in connection therewith for all Borrowers
shall not at any time exceed Fifteen Million Dollars ($15,000,000). At any time
an Event of Default exists or has occurred and is continuing, upon Lender's
request, each Borrower will either furnish cash collateral to secure the
reimbursement obligations to the issuer in connection with any Letter of Credit
Accommodations or furnish cash collateral to Lender for the Letter of Credit
Accommodations, and in either case, the Revolving Loans otherwise available to
such Borrower shall not be reduced as provided in Section 2.2(c) to the extent
of such cash collateral.
(e) Each Borrower shall indemnify and hold Lender harmless from
and against any and all losses, claims, damages, liabilities, costs and expenses
which Lender may
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suffer or incur in connection with any Letter of Credit Accommodations and any
documents, drafts or acceptances relating thereto, including, but not limited
to, any losses, claims, damages, liabilities, costs and expenses due to any
action taken by any issuer or correspondent with respect to any Letter of Credit
Accommodation, unless such losses, claims, damages, liabilities, costs and
expenses arise from Lender's gross negligence or willful misconduct. Each
Borrower assumes all risks with respect to the acts or omissions of the drawer
under or beneficiary of any Letter of Credit Accommodation and for such purposes
the drawer or beneficiary shall be deemed such Borrower's agent. Each Borrower
assumes all risks for, and agrees to pay, all foreign, Federal, State and local
taxes, duties and levies relating to any goods subject to any Letter of Credit
Accommodations or any documents, drafts or acceptances thereunder. Each Borrower
hereby releases and holds Lender harmless from and against any acts, waivers,
errors, delays or omissions, whether caused by any Borrower, by any issuer or
correspondent or otherwise, unless caused by the gross negligence or willful
misconduct of Lender, with respect to or relating to any Letter of Credit
Accommodation. The provisions of this Section 2.2(e) shall survive the payment
of Obligations and the termination or non-renewal of this Agreement.
(f) Nothing contained herein shall be deemed or construed to
grant any Borrower any right or authority to pledge the credit of Lender in any
manner. Lender shall have no liability of any kind with respect to any Letter of
Credit Accommodation provided by an issuer other than Lender unless Lender has
duly executed and delivered to such issuer the application or a guarantee or
indemnification in writing with respect to such Letter of Credit Accommodation.
Each Borrower shall be bound by any interpretation made in good faith by Lender,
or any other issuer or correspondent under or in connection with any Letter of
Credit Accommodation or any documents, drafts or acceptances thereunder,
notwithstanding that such interpretation may be inconsistent with any
instructions of such Borrower. Lender shall have the sole and exclusive right
and authority to, and no Borrower shall: (i) at any time an Event of Default
exists or has occurred and is continuing, (A) approve or resolve any questions
of non-compliance of documents, (B) give any instructions as to acceptance or
rejection of any documents or goods or (C) execute any and all applications for
steamship or airway guaranties, indemnities or delivery orders, and (ii) at all
times, (A) grant any extensions of the maturity of, time of payment for, or time
of presentation of, any drafts, acceptances, or documents, and (B) agree to any
amendments, renewals, extensions, modifications, changes or cancellations of any
of the terms or conditions of any of the applications, Letter of Credit
Accommodations, or documents, drafts or acceptances thereunder or any letters of
credit included in the Collateral. Lender may take such actions either in its
own name or in any Borrower's name.
(g) Any rights, remedies, duties or obligations granted or
undertaken by any Borrower to any issuer or correspondent in any application for
any Letter of Credit Accommodation, or any other agreement in favor of any
issuer or correspondent relating to any Letter of Credit Accommodation, shall be
deemed to have been granted or undertaken by such Borrower to Lender. Any duties
or obligations undertaken by Lender to any issuer or correspondent in any
application for any Letter of Credit Accommodation, or any other agreement by
Lender in favor of any issuer or correspondent relating to any Letter of Credit
Accommodation, shall be deemed to have been undertaken by each Borrower to
Lender and to apply in all respects to each Borrower.
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SECTION 3. INTEREST AND FEES.
3.1 Interest.
(a) Borrowers shall pay to Lender interest on the outstanding
principal amount of the non-contingent Obligations at the Interest Rate. All
interest accruing hereunder on and after the date of any Event of Default or
termination or non-renewal hereof shall be payable on demand.
(b) Borrowers may from time to time request that Prime Rate Loans
be converted to Eurodollar Rate Loans or that any existing Eurodollar Rate Loans
continue for an additional Interest Period. Such request from Borrowers shall
specify the amount of the Prime Rate Loans which will constitute Eurodollar Rate
Loans (subject to the limits set forth below) and the Interest Period to be
applicable to such Eurodollar Rate Loans. Subject to the terms and conditions
contained herein, three (3) Business Days after receipt by Lender of such a
request from Borrowers, such Prime Rate Loans shall be converted to Eurodollar
Rate Loans or such Eurodollar Rate Loans shall continue, as the case may be,
provided, that, (i) no Event of Default, or event which with notice or passage
of time or both would constitute an Event of Default exists or has occurred and
is continuing, (ii) no party hereto shall have sent any notice of termination or
non-renewal of this Agreement, (iii) Borrowers shall have complied with such
customary procedures as are established by Lender and specified by Lender to
Borrowers from time to time for requests by Borrower for Eurodollar Rate Loans,
(iv) no more than four (4) Interest Periods may be in effect at any one time,
(v) the aggregate amount of the Eurodollar Rate Loans must be in an amount not
less than Five Million Dollars ($5,000,000) or an integral multiple of One
Million Dollars ($1,000,000) in excess thereof, (vi) the maximum amount of the
Eurodollar Rate Loans at any time requested by Borrowers shall not exceed the
amount equal to eighty percent (80%) of the lowest principal amount of the
Revolving Loans which it is anticipated will be outstanding in the aggregate
during the applicable Interest Period, in each case as determined by Lender (but
with no obligation of Lender to make such Revolving Loans) and (vii) Lender
shall have determined that the Interest Period or Adjusted Eurodollar Rate is
available to Lender through the Reference Bank and can be readily determined as
of the date of the request for such Eurodollar Rate Loan by Borrowers. Any
request by Borrowers to convert Prime Rate Loans to Eurodollar Rate Loans or to
continue any existing Eurodollar Rate Loans shall be irrevocable.
Notwithstanding anything to the contrary contained herein, Lender and Reference
Bank shall not be required to purchase United States Dollar deposits in the
London interbank market or other applicable Eurodollar Rate market to fund any
Eurodollar Rate Loans, but the provisions hereof shall be deemed to apply as if
Lender and Reference Bank had purchased such deposits to fund the Eurodollar
Rate Loans.
(c) Any Eurodollar Rate Loans shall automatically convert to
Prime Rate Loans upon the last day of the applicable Interest Period, unless
Lender has received and approved a request to continue such Eurodollar Rate Loan
at least three (3) Business Days prior to such last day in accordance with the
terms hereof. Any Eurodollar Rate Loans shall, at Lender's option, upon notice
by Lender to Borrowers, convert to Prime Rate Loans in the event that (i) an
Event of Default or event which, with the notice or passage of time, or both,
would constitute an Event of Default, shall exist, (ii) this Agreement shall
terminate or not be renewed, or (iii) the aggregate principal amount of the
Prime Rate Loans which have previously been
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converted to Eurodollar Rate Loans or existing Eurodollar Rate Loans continued,
as the case may be, at the beginning of an Interest Period shall at any time
during such Interest Period exceed either (A) the aggregate principal amount of
the Loans then outstanding, or (B) the Revolving Loans then available to any
Borrower under Section 2 hereof. Borrowers shall pay to Lender, upon demand by
Lender (or Lender may, at its option, charge any loan account of Borrower) any
amounts required to compensate Lender, the Reference Bank or any Participant
with Lender for any loss (including loss of anticipated profits), cost or
expense incurred by such person, as a result of the conversion of Eurodollar
Rate Loans to Prime Rate Loans pursuant to any of the foregoing.
(d) Interest shall be payable by Borrowers to Lender monthly in
arrears not later than the first day of each calendar month and shall be
calculated on the basis of a three hundred sixty (360) day year and actual days
elapsed. The interest rate on non-contingent Obligations (other than Eurodollar
Rate Loans) shall increase or decrease by an amount equal to each increase or
decrease in the Prime Rate effective on the first day of the month after any
change in such Prime Rate is announced based on the Prime Rate in effect on the
last day of the month in which any such change occurs. In no event shall charges
constituting interest payable by any Borrower to Lender exceed the maximum
amount or the rate permitted under any applicable law or regulation, and if any
such part or provision of this Agreement is in contravention of any such law or
regulation, such part or provision shall be deemed amended to conform thereto.
3.2 Closing Fee. Borrowers shall pay to Lender as a closing fee Two
Hundred Fifty Thousand Dollars ($250,000) which fee shall be fully earned as of
and payable on the Closing Date. Such closing fee shall be allocated among
Borrowers as determined by Lender and payable by Borrowers in accordance with
such allocation.
3.3 Loan Servicing Fee. Borrowers collectively shall pay to Lender a
monthly loan servicing fee in an aggregate amount equal to Two Thousand Dollars
($2,000) each month, plus reasonable out-of-pocket costs and expenses, in
respect of Lender's services for each month (or part thereof) while this
Agreement remains in effect and for so long thereafter as any of the Obligations
are outstanding, which fee shall be fully earned as of the date hereof and on
the first day of each month hereafter, and payable in advance, with the first of
such monthly payments payable on the date hereof and on the first day of each
month hereafter; provided, however, in the event that any Loans are advanced by
Lender to any Borrower against any factored Eligible Account or Eligible
Inventory located in Europe, such service fee shall increase to Four Thousand
Dollars ($4,000) per month. Such loan servicing fee shall be allocated among
Borrowers as determined by Lender and payable by Borrowers in accordance with
such allocation.
3.4 Unused Line Fee. Borrowers shall pay to Lender monthly an unused
line fee equal to a rate of one-quarter of one percent (0.25 %) per annum
calculated upon the amount by which the Maximum Credit exceeds the average daily
principal balance of the aggregate outstanding Revolving Loans and Letter of
Credit Accommodations for all Borrowers during the immediately preceding month
while this Agreement is in effect and for so long thereafter as any of the
Obligations are outstanding, which fee shall be payable on the first day of each
month in
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arrears. Such unused line fee shall be allocated among Borrowers as determined
by Lender and payable by Borrowers in accordance with such allocation.
3.5 Compensation Adjustment.
(a) If after the date of this Agreement the introduction of, or
any change in, any law or any governmental rule, regulation, policy, guideline
or directive (whether or not having the force of law), or any interpretation
thereof, or compliance by Lender or any Participant therewith:
(i) subjects Lender to any tax, duty, charge or
withholding on or from payments due from any Borrower (excluding franchise taxes
imposed upon, and taxation of the overall net income of, Lender or any
Participant), or changes the basis of taxation of payments, in either case in
respect of amounts due it hereunder, or
(ii) imposes or increases or deems applicable any reserve
requirement or other reserve, assessment, insurance charge, special deposit or
similar requirement against assets of, deposits with or for the account of, or
credit extended by Lender or any Participant, or
(iii) imposes any other condition the result of which is
to increase the cost to Lender or any Participant of making, funding or
maintaining the Loans or Letter of Credit Accommodations or reduces any amount
receivable by Lender or any Participant in connection with the Loans or Letter
of Credit Accommodations, or requires Lender or any Participant to make payment
calculated by references to the amount of loans held or interest received by it,
by an amount deemed material by Lender or any Participant, or
(iv) imposes or increases any capital requirement or
affects the amount of capital required or expected to be maintained by Lender or
any Participant or any corporation controlling Lender or any Participant, and
Lender or any Participant reasonably determines that such imposition or increase
in capital requirements or increase in the amount of capital expected to be
maintained is based upon the existence of this Agreement or the Loans or Letter
of Credit Accommodations hereunder, all of which may be determined by Lender's
reasonable allocation of the aggregate of its impositions or increases in
capital required or expected to be maintained, and the result of any of the
foregoing is to increase the cost to Lender or any Participant of making,
renewing or maintaining the Loans or Letter of Credit Accommodations, or to
reduce the rate of return to Lender or any Participant on the Loans or Letter of
Credit Accommodations, then upon demand by Lender, Borrowers shall pay to
Lender, and continue to make periodic payments to Lender or any Participant,
such additional amounts as may be necessary to compensate Lender or any
Participant for any such additional cost incurred or reduced rate of return
realized.
(b) A certificate of Lender claiming entitlement to compensation
as set forth above will be conclusive in the absence of manifest error. Such
certificate will set forth the nature of the occurrence giving rise to such
compensation, the additional amount or amounts to be paid and the compensation
and the method by which such amounts were determined. In determining any
additional amounts due from Borrowers under this Section 3.5, Lender shall act
reasonably and in good faith and will, to the extent that the increased costs,
reductions, or
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amounts received or receivable relate to the Lender's or a Participant's loans
or commitments generally and are not specifically attributable to the Loans and
commitments hereunder, use averaging and attribution methods which are
reasonable and equitable and which cover all loans and commitments under this
Agreement by the Lender or such Participant, as the case may be, whether or not
the loan documentation for such other loans and commitments permits the Lender
or such Participant to receive compensation costs of the type described in this
Section 3.5.
3.6 Changes in Laws and Increased Costs of Loans.
(a) Notwithstanding anything to the contrary contained herein,
all Eurodollar Rate Loans shall, upon notice by Lender to Borrowers, convert to
Prime Rate Loans in the event that (i) any change in applicable law or
regulation (or the interpretation or administration thereof) shall either (A)
make it unlawful for Lender, Reference Bank or any Participant to make or
maintain Eurodollar Rate Loans or to comply with the terms hereof in connection
with the Eurodollar Rate Loans, or (B) shall result in the increase in the costs
to Lender, Reference Bank or any Participant of making or maintaining any
Eurodollar Rate Loans by an amount deemed by Lender to be material, or (C)
reduce the amounts received or receivable by Lender in respect thereof, by an
amount deemed by Lender to be material or (ii) the cost to Lender, Reference
Bank or any Participant of making or maintaining any Eurodollar Rate Loans shall
otherwise increase by an amount deemed by Lender to be material. Borrowers shall
pay to Lender, upon demand by Lender (or Lender may, at its option, charge any
loan account of any Borrower) any amounts required to compensate Lender, the
Reference Bank or any Participant with Lender for any reasonable loss (including
loss of anticipated profits), cost or expense incurred by such person as a
result of the foregoing, including, without limitation, any such reasonable
loss, cost or expense incurred by reason of the liquidation or reemployment of
deposits or other funds acquired by such person to make or maintain the
Eurodollar Rate Loans or any portion thereof. A certificate of Lender setting
forth the basis for the determination of such amount necessary to compensate
Lender as aforesaid shall be delivered to Borrowers and shall be conclusive,
absent manifest error.
(b) If any payments or prepayments in respect of the Eurodollar
Rate Loans are received by Lender other than on the last day of the applicable
Interest Period (whether pursuant to acceleration, upon maturity or otherwise),
including any payments pursuant to the application of collections under Section
6.3 or any other payments made with the proceeds of Collateral, Borrowers shall
pay to Lender upon demand by Lender (or Lender may, at its option, charge any
loan account of any Borrower) any amounts required to compensate Lender, the
Reference Bank or any Participant with Lender for any additional reasonable loss
(including loss of anticipated profits), cost or expense incurred by such person
as a result of such prepayment or payment, including, without limitation, any
reasonable loss, cost or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by such person to make or
maintain such Eurodollar Rate Loans or any portion thereof.
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SECTION 4. CONDITIONS PRECEDENT AND SUBSEQUENT.
4.1 Conditions Precedent to Initial Loans and the Letter of Credit
Accommodations. Each of the following is a condition precedent to Lender making
the initial Loans and providing the initial Letter of Credit Accommodations
hereunder:
(a) Lender shall have received, in form and substance
satisfactory to Lender, all releases, terminations and such other documents as
Lender may request to evidence and effectuate the termination of any interest in
and to any assets and properties of each Borrower, duly authorized, executed and
delivered by it or each of them, including, but not limited to, UCC termination
statements for all UCC financing statements and Lender shall have satisfied
itself that it has valid, perfected and first priority security interests in and
liens upon the Collateral and any other property which is intended as security
for the Obligations or the liability of any Obligor in respect thereto, subject
only to the security interests and liens permitted herein or in the other
Financing Agreements;
(b) all requisite corporate action and proceedings in connection
with this Agreement and the other Financing Agreements shall be satisfactory in
form and substance to Lender, and Lender shall have received all information and
copies of all documents, including, without limitation, records of requisite
corporate action and proceedings which Lender may have requested in connection
therewith, such documents where requested by Lender or its counsel to be
certified by appropriate corporate officers or governmental authorities;
(c) no material adverse change shall have occurred in the assets,
business or prospects of any Borrower since the date of Lender's latest field
examination and no change or event shall have occurred which would impair the
ability of any Borrower or Obligor to perform its obligations hereunder or under
any of the other Financing Agreements to which it is a party or of Lender to
enforce the Obligations or realize upon the Collateral;
(d) Lender shall have completed an updated field review of the
Records and of such other financial information, projections, budgets, business
plans, cash flows as Lender shall reasonably request from time to time,
including, but not limited to, current agings of receivables, current perpetual
inventory records and/or rollforwards of Accounts and Inventory through the date
of closing (including test counts of the Inventory by a third party acceptable
to Lender), together with supporting documentation, including documentation with
respect to Inventory in-transit, goods in bonded warehouses or at other
third-party locations, that will enable Lender to accurately identify and verify
the Eligible Inventory at or before the Closing Date in a manner satisfactory to
Lender, the results of which shall be satisfactory to Lender;
(e) Lender shall have received, in form and substance
satisfactory to Lender, all consents, waivers, acknowledgments and other
agreements from third persons which Lender may deem necessary or desirable in
order to permit, protect and perfect its security interests in and liens upon
the Collateral or to effectuate the provisions or purposes of this Agreement and
the other Financing Agreements, including, without limitation, acknowledgments
by lessors, mortgagees and warehousemen of Lender's security interests in the
Collateral, waivers by such persons of any security interests, liens or other
claims by such persons to the Collateral and
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agreements permitting Lender access to, and the right to remain on, the premises
to exercise its rights and remedies and otherwise deal with the Collateral;
(f) each of Holbrook, Deckers Japan, Deckers Europe,
Phillipsburg, and Picante shall have duly executed and delivered to Lender, in
form and substance satisfactory to Lender, a guarantee of the Obligations;
(g) Lender shall have received, in form and substance
satisfactory to Lender, a Stock Pledge Agreement executed by Robert W. Eason, an
individual, pledging all of his capital stock of Heirlooms as security for the
Obligations;
(h) any holders of a security interest in any Borrower's assets,
including, without limitation, vendors of inventory of such Borrower, shall have
executed and delivered terminations, intercreditor and/or subordination
agreements in form and substance satisfactory to Lender;
(i) Lender shall have received audited financial statements of
each Borrower, on a consolidated basis, and the accompanying notes thereto, for
the fiscal year ended December 31, 1997, together with the unqualified opinion a
certified public accountant acceptable to Lender that such financial statements
have been prepared in accordance with GAAP, and present fairly the results of
operations and financial condition of such Borrower for the fiscal year then
ended;
(j) Lender shall have received unaudited financial statements of
each Borrower having any subsidiaries, on a consolidating basis, for the fiscal
year ended December 31, 1997, in detail reasonably satisfactory to Lender,
fairly presenting the financial position and the results of operations of such
Borrower and its subsidiaries for the fiscal year then ended;
(k) Lender shall have received, in form and substance
satisfactory to Lender, consolidated pro-forma balance sheets of each Borrower
reflecting the initial transactions contemplated hereunder, including, but not
limited to, the Loans and Letter of Credit Accommodations provided by Lender to
such Borrower on the Closing Date and the use of the proceeds of the initial
Loans as provided herein, accompanied by a certificate, dated of even date
herewith, of the chief financial officer of such Borrower, stating that such
pro-forma balance sheet represents the reasonable, good faith opinion of such
officer as to the subject matter thereof as of the date of such certificate;
(l) Lender shall have received the latest available certified
public accountant management letter;
(m) Lender shall have received and reviewed to its satisfaction
any and all licensing agreements to which any Borrower is a party, including
without limitation the Teva License Agreements, together with a schedule setting
forth the expiration dates of each of such licensing agreements and such
consents by any party thereto as Lender deems necessary to perfect Lender's
first priority security interests in such licensing agreements and to exercise
its remedies provided hereunder;
(n) Lender shall have received evidence of insurance and loss
payee endorsements required hereunder and under the other Financing Agreements,
in form and
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substance satisfactory to Lender, and certificates of insurance policies and/or
endorsements naming Lender as loss payee;
(o) Lender shall have received, in form and substance
satisfactory to Lender, such opinion letters of counsel to Borrowers and Deckers
Japan with respect to the Financing Agreements and such other matters as Lender
may request;
(p) the Excess Availability as determined by Lender as of the
Closing Date, shall be not less than an amount acceptable to Lender after giving
effect to the initial Loans made or to be made hereunder and the payment of all
fees and expenses payable upon the consummation of the initial transactions
contemplated by this Agreement;
(q) Lender shall have received, in form and substance
satisfactory to Lender and its counsel, the assignment of all of each Borrower's
rights in registered patents, trademarks, service marks and copyrights, as
Collateral hereunder, on Lender's standard forms of Collateral Assignments; and
(r) the other Financing Agreements and all instruments and
documents hereunder and thereunder shall have been duly executed and delivered
to Lender, in form and substance satisfactory to Lender.
4.2 Conditions Precedent to All Loans and Letter of Credit
Accommodations. Each of the following is an additional condition precedent to
Lender making Loans and/or providing Letter of Credit Accommodations to any
Borrower, including the initial Loans and Letter of Credit Accommodations and
any future Loans and Letter of Credit Accommodations:
(a) all representations and warranties contained herein and in
the other Financing Agreements shall be true and correct in all material
respects with the same effect as though such representations and warranties had
been made on and as of the date of the making of each such Loan or providing
each such Letter of Credit Accommodation and after giving effect thereto; and
(b) no Event of Default and no event or condition which, with
notice or passage of time or both, would constitute an Event of Default, shall
exist or have occurred and be continuing on and as of the date of the making of
such Loan or providing each such Letter of Credit Accommodation and after giving
effect thereto.
4.3 Condition Subsequent to All Loans and Letter of Credit
Accommodations. Performance of the following conditions shall be completed
within the time frame set forth below, and the failure to satisfy any condition
with the time frame will constitute an Event of Default hereunder:
(a) as soon as practicable, but in no event later than thirty
(30) days after the Closing Date, Borrowers shall deliver to Lender the bylaws
of UHI duly certified as the true, correct and complete bylaws of UHI by the
Secretary of UHI.
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(b) on or before January 30, 1999, Lender shall have received, in
form and substance satisfactory to Lender, executed copies of Blocked Account
Agreements with respect to each Borrower, pursuant to Section 6.3(a) hereof,
among Lender, such Borrower and Wells Fargo Bank, N.A.; and
(c) as soon as practicable, but in no event later than thirty
(30) days after the Closing Date, Borrowers shall deliver or cause to be
delivered to Lender all original stock certificates evidencing the shares issued
to Robert W. Eason, an individual, and pledged to Lender, together with undated
Stock Powers, executed in blank by Robert W. Eason with respect to such shares.
SECTION 5. GRANT OF SECURITY INTEREST.
To secure payment and performance of all Obligations, each Borrower
hereby grants to Lender a continuing security interest in, a lien upon, and a
right of set off against, and hereby assigns to Lender as security, the
following property and interests in property of such Borrower, whether now owned
or hereafter acquired or existing, and wherever located (collectively, the
"Collateral"):
5.1 Accounts and other indebtedness owed to such Borrower;
5.2 all present and future contract rights, general intangibles
(including, but not limited to, tax and duty refunds, registered and
unregistered patents, trademarks, service marks, copyrights, trade names,
applications for the foregoing, trade secrets, goodwill, processes, drawings,
blueprints, customer lists, licenses, whether as licensor or licensee, choses in
action and other claims and existing and future leasehold interests in
equipment, real estate and fixtures), chattel paper, documents, instruments,
investment property, federal and state tax refunds and credits, letters of
credit, proceeds of letters of credit, bankers' acceptances and guaranties;
5.3 all present and future monies, securities, credit balances,
deposits, deposit accounts and other property of such Borrower now or hereafter
held or received by or in transit to Lender or its affiliates or at any other
depository or other institution from or for the account of such Borrower,
whether for safekeeping, pledge, custody, transmission, collection or otherwise,
and all present and future liens, security interests, rights, remedies, title
and interest in, to and in respect of Accounts and other Collateral, including,
without limitation, (a) rights and remedies under or relating to guaranties,
contracts of suretyship, letters of credit and credit and other insurance
related to the Collateral, (b) rights of stoppage in transit, replevin,
repossession, reclamation and other rights and remedies of an unpaid vendor,
lienor or secured party, (c) goods described in invoices, documents, contracts
or instruments with respect to, or otherwise representing or evidencing,
Accounts or other Collateral, including, without limitation, returned,
repossessed and reclaimed goods, and (d) deposits by and property of account
debtors or other persons securing the obligations of account debtors;
5.4 Inventory;
5.5 Equipment;
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5.6 Records; and
5.7 all products and proceeds of the foregoing, in any form, including,
without limitation, insurance proceeds and all claims against third parties for
loss or damage to or destruction of any or all of the foregoing.
SECTION 6. COLLECTION AND ADMINISTRATION.
6.1 Borrowers' Loan Accounts. Lender shall maintain one or more loan
account(s) for each Borrower on its books in which shall be recorded (a) all
Loans, all Letter of Credit Accommodations and all other Obligations and the
Collateral with respect to such Borrower, (b) all payments made by or on behalf
of such Borrower and (c) all other appropriate debits and credits as provided in
this Agreement, including, without limitation, reasonable fees, charges, costs,
expenses and interest. All entries in the loan account(s) shall be made in
accordance with Lender's customary practices as in effect from time to time.
6.2 Statements. Lender shall render to Borrowers each month a statement
setting forth the balance in each Borrower's loan account(s) maintained by
Lender for such Borrower pursuant to the provisions of this Agreement, including
principal, interest, fees, costs and expenses. Each such statement shall be
subject to subsequent adjustment by Lender but shall, absent manifest errors or
omissions, be considered correct and deemed accepted by each Borrower and
conclusively binding upon each Borrower as an account stated except to the
extent that Lender receives a written notice from Borrowers of any specific
exceptions of any Borrower thereto within thirty (30) days after the date such
statement has been mailed by Lender. Until such time as Lender shall have
rendered to Borrowers a written statement as provided above, the balance in each
Borrower's loan account(s) shall be presumptive evidence of the amounts due and
owing to Lender by Borrowers.
6.3 Collection of Accounts.
(a) Each Borrower shall establish and maintain, at its expense, a
blocked account or lockboxes and related blocked accounts (in either case, each
a "Blocked Account" and collectively the "Blocked Accounts"), as Lender may
specify, with such bank or banks as are acceptable to Lender into which such
Borrower shall promptly deposit and direct its account debtors to directly remit
all payments on Accounts and all payments constituting proceeds of Inventory or
other Collateral (including, without limitation, any federal or state tax
refunds or credits) in the identical form in which such payments are made,
whether by cash, check or other manner. Each bank at which a Blocked Account is
established shall enter into an agreement, in form and substance satisfactory to
Lender, providing (unless otherwise agreed to by Lender) that all items received
or deposited in such Blocked Account are the Collateral of Lender, that the
depository bank has no lien upon, or right to setoff against, the Blocked
Accounts, the items received for deposit therein, or the funds from time to time
on deposit therein and that the depository bank will wire, or otherwise
transfer, in immediately available funds, on a daily basis, all funds received
or deposited into such Blocked Account to such bank account of Lender as Lender
may from time to time designate for such purpose (the "Payment Account"). Each
Borrower agrees that all amounts deposited in the Blocked Account(s) or other
funds received
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and collected by Lender, whether as proceeds of Inventory, the collection of
Accounts or other Collateral or otherwise shall be the Collateral of Lender.
(b) For purposes of calculating interest on the Obligations, such
payments or other funds received will be applied (conditional upon final
collection) to the Obligations one (1) Business Day following the date of
receipt of immediately available funds by Lender in the Payment Account, or one
(1) Business Day following the date of receipt of funds that are not immediately
available to Lender in the Payment Account, as applicable. For purposes of
calculating the amount of the Revolving Loans available to each Borrower such
payments will be applied (conditional upon final collection) to the Obligations
on the Business Day of receipt by Lender in the Payment Account, if such
payments are received within sufficient time (in accordance with Lender's usual
and customary practices as in effect from time to time) to credit such
Borrower's loan account on such day, and if not, then on the next Business Day.
(c) Each Borrower and all of its affiliates, subsidiaries,
shareholders, directors, employees or agents shall, acting as trustee for
Lender, receive, as the property of Lender, any monies, cash, checks, notes,
drafts or any other payment relating to and/or proceeds of Accounts or from
sales of Inventory or other Collateral which come into their possession or under
their control and immediately upon receipt thereof, shall deposit or cause the
same to be deposited in the Blocked Accounts, or remit the same or cause the
same to be remitted, in kind, to Lender. In no event shall any such monies,
checks, notes, drafts or other payments be commingled with any Borrower's own
funds. Each Borrower agrees to reimburse Lender on demand for any amounts owed
or paid to any bank at which a Blocked Account is established or any other bank
or person involved in the transfer of funds to or from the Blocked Accounts
arising out of Lender's payments to or indemnification of such bank or person,
unless such payment or indemnification obligation of Lender was a result of
Lender's gross negligence or willful misconduct. The obligation of each Borrower
to reimburse Lender for such amounts pursuant to this Section 6.3 shall survive
the termination or non-renewal of this Agreement.
6.4 Payments. All Obligations shall be payable to the Payment Account as
provided in Section 6.3 or such other place as Lender may designate from time to
time. Lender may apply payments received or collected from any Borrower or for
the account of any Borrower (including, without limitation, the monetary
proceeds of collections or of realization upon any Collateral) to such of the
Obligations owed by such Borrower, whether or not then due, in such order and
manner as Lender determines. At Lender's option, all principal, interest, fees,
costs, expenses and other charges provided for in this Agreement or the other
Financing Agreements and owed by a Borrower may be charged directly to the loan
account(s) of such Borrower. Each Borrower shall make all payments to Lender on
the Obligations free and clear of, and without deduction or withholding for or
on account of, any setoff, counterclaim, defense, duties, taxes, levies,
imposts, fees, deductions, withholding, restrictions or conditions of any kind.
If after receipt of any payment of, or proceeds of Collateral applied to the
payment of, any of the Obligations, Lender is required to surrender or return
such payment or proceeds to any Person for any reason, then the Obligations
intended to be satisfied by such payment or proceeds shall be reinstated and
continue and this Agreement shall continue in full force and effect as if such
payment or proceeds had not been received by Lender. Each Borrower shall be
liable to pay to Lender, and does hereby indemnify and hold Lender harmless for
the amount of any payments or proceeds surrendered or returned. This Section 6.4
shall remain effective notwithstanding any
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contrary action which may be taken by Lender in reliance upon such payment or
proceeds. This Section 6.4 shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
6.5 Authorization to Make Loans. Lender is authorized to make the Loans
and provide the Letter of Credit Accommodations to a Borrower based upon
telephonic or other instructions received from anyone purporting to be an
officer of such Borrower or other authorized person or, at the discretion of
Lender, if such Loans are necessary to satisfy any Obligations. All requests for
Loans or Letter of Credit Accommodations hereunder shall specify the date on
which the requested advance is to be made or Letter of Credit Accommodations
established (which day shall be a Business Day) and the amount of the requested
Loan. Requests received after 10:30 a.m. (Los Angeles time) on any day shall be
deemed to have been made as of the opening of business on the immediately
following Business Day. All Loans and Letter of Credit Accommodations under this
Agreement shall be conclusively presumed to have been made to, and at the
request of and for the benefit of, a Borrower when deposited to the credit of
such Borrower or otherwise disbursed or established in accordance with the
instructions of such Borrower or in accordance with the terms and conditions of
this Agreement.
6.6 Use of Proceeds. Borrowers shall use the initial proceeds of the
Loans provided by Lender to any Borrower hereunder only for: (a) payments to
each of the persons listed in the disbursement direction letter furnished by
Borrowers to Lender on or about the Closing Date and (b) reasonable costs,
expenses and fees in connection with the preparation, negotiation, execution and
delivery of this Agreement and the other Financing Agreements. All other Loans
made or Letter of Credit Accommodations provided by Lender to Borrower pursuant
to the provisions hereof shall be used by such Borrower only for general
operating, working capital and other proper corporate purposes of such Borrower
not otherwise prohibited by the terms hereof. None of the proceeds will be used,
directly or indirectly, for the purpose of purchasing or carrying any margin
security or for the purposes of reducing or retiring any indebtedness which was
originally incurred to purchase or carry any margin security or for any other
purpose which might cause any of the Loans to be considered a "purpose credit"
within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System, as amended.
SECTION 7. COLLATERAL REPORTING AND COVENANTS.
7.1 Collateral Reporting. Each Borrower shall provide Lender with the
following documents of such Borrower in a form satisfactory to Lender: (a) on a
regular basis as required by Lender, a schedule of Accounts, sales made, credits
issued and cash received; (b) on a monthly basis, on or before the tenth (10th)
Business Day of such month for the immediately preceding month or more
frequently as Lender may reasonably request, (i) perpetual inventory reports,
(ii) inventory reports by major category and (iii) agings of accounts payable,
lease payables and other payables; (c) within thirty (30) days after the end of
each fiscal quarter, a report setting forth any new patents, trademark
registrations or copyright registrations and any applications for any of the
foregoing; (d) upon Lender's request, (i) copies of customer statements and
credit memos, remittance advices and reports, and copies of deposit slips and
bank statements, (ii) copies of shipping and delivery documents, and (iii)
copies of purchase orders, invoices and delivery documents for Inventory and
Equipment acquired by such
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Borrower; (e) agings of accounts receivable on a monthly basis or more
frequently as Lender may reasonably request; and (f) such other reports as to
the Collateral or other property which is security for the Obligations as Lender
shall reasonably request from time to time. If any of a Borrower's records or
reports of the Collateral or other property which is security for the
Obligations are prepared or maintained by an accounting service, contractor,
shipper or other agent, such Borrower hereby irrevocably authorizes such
service, contractor, shipper or agent to deliver such records, reports, and
related documents to Lender and to follow Lender's instructions with respect to
further services at any time that an Event of Default exists or has occurred and
is continuing.
7.2 Accounts Covenants.
(a) Borrowers shall include in its collateral reporting to Lender
pursuant to Section 7.1 hereof: (i) any material delay in any Borrower's
performance of any of its obligations to account debtors or the assertion of any
claims, offsets, defenses or counterclaims by account debtors, or any disputes
with account debtors, or any settlement, adjustment or compromise thereof, (ii)
all material adverse information relating to the financial condition of any
account debtor and (iii) any event or circumstance which, to any Borrower's
knowledge would cause Lender to consider any then existing Accounts as no longer
constituting Eligible Accounts. No credit, discount, allowance or extension or
agreement for any of the foregoing shall be granted to any account debtor of a
Borrower except in the ordinary course of such Borrower's business in accordance
with its most recent past practices and policies. So long as no Event of Default
exists or has occurred and is continuing, any Borrower may settle, adjust or
compromise any claim, offset, counterclaim or dispute with any account debtor of
such Borrower in the ordinary course of such Borrower's business in accordance
with its most recent past practices and policies. At any time that an Event of
Default exists or has occurred and is continuing, Lender shall, at its option,
have the exclusive right to settle, adjust or compromise any claim, offset,
counterclaim or dispute with account debtors or grant any credits, discounts or
allowances.
(b) Without limiting the obligation of Borrowers to deliver any
other information to Lender, Borrowers shall include in its collateral reporting
to Lender pursuant to Section 7.1 hereof, any returns of Inventory by account
debtors. At any time that Inventory is returned, reclaimed or repossessed, the
Account (or portion thereof) which arose from the sale of such returned,
reclaimed or repossessed Inventory shall not be deemed an Eligible Account. In
the event any account debtor returns Inventory when an Event of Default exists
or has occurred and is continuing, each Borrower shall, upon Lender's request,
(i) hold the returned Inventory in trust for Lender, (ii) segregate all returned
Inventory from all of its other property, (iii) dispose of the returned
Inventory solely according to Lender's instructions, and (iv) not issue any
credits, discounts or allowances with respect thereto without Lender's prior
written consent.
(c) With respect to each Account: (i) the amounts shown on any
invoice delivered to Lender or schedule thereof delivered to Lender shall be
true and complete, (ii) no payments shall be made thereon except payments
delivered to Lender pursuant to the terms of this Agreement, (iii) no credit,
discount, allowance or extension or agreement for any of the foregoing shall be
granted to any account debtor except as reported to Lender in accordance with
this Agreement and except for credits, discounts, allowances or extensions made
or given in the ordinary course of Borrower's business in accordance with
practices and policies previously
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disclosed to Lender, (iv) there shall be no setoffs, deductions, contras,
defenses, counterclaims or disputes existing or asserted with respect thereto
except as reported to Lender in accordance with the terms of this Agreement, (v)
none of the transactions giving rise thereto will violate any applicable State
or Federal Laws or regulations, all documentation relating thereto will be
legally sufficient under such laws and regulations and all such documentation
will be legally enforceable in accordance with its terms.
(d) Lender shall have the right at any time or times, in Lender's
name or in the name of a nominee of Lender, to verify the validity, amount or
any other matter relating to any Account or other Collateral, by mail,
telephone, facsimile transmission or otherwise.
(e) Each Borrower shall deliver or cause to be delivered to
Lender, with appropriate endorsement and assignment, with full recourse to such
Borrower, all chattel paper and instruments which such Borrower now owns or may
at any time acquire immediately upon such Borrower's receipt thereof, except as
Lender may otherwise agree.
(f) Lender may, at any time or times that an Event of Default
exists or has occurred, (i) notify any or all account debtors that the Accounts
have been assigned to Lender and that Lender has a security interest therein and
Lender may direct any or all account debtors to make payments of Accounts
directly to Lender, (ii) extend the time of payment of, compromise, settle or
adjust for cash, credit, return of merchandise or otherwise, and upon any terms
or conditions, any and all Accounts or other obligations included in the
Collateral and thereby discharge or release the account debtor or any other
party or parties in any way liable for payment thereof without affecting any of
the Obligations, (iii) demand, collect or enforce payment of any Accounts or
such other obligations, but without any duty to do so, and Lender shall not be
liable for its failure to collect or enforce the payment thereof or for the
negligence of its agents or attorneys with respect thereto and (iv) take
whatever other action Lender may deem necessary or desirable for the protection
of its interests. At any time that an Event of Default exists or has occurred
and is continuing, at Lender's request, all invoices and statements sent to any
account debtor shall state that the Accounts due from such account debtor and
such other obligations have been assigned to Lender and are payable directly and
only to Lender and Borrowers shall deliver to Lender such originals of documents
evidencing the sale and delivery of goods or the performance of services giving
rise to any Accounts as Lender may require.
7.3 Inventory Covenants. With respect to the Inventory:
(a) each Borrower shall at all times maintain inventory records
reasonably satisfactory to Lender, keeping correct and accurate records
itemizing and describing the kind, type, quality and quantity of Inventory, such
Borrower's cost therefor and daily withdrawals therefrom and additions thereto;
(b) Borrowers shall cause a third party firm acceptable to Lender
to conduct a physical count of the Inventory, in form and detail reasonably
acceptable to Lender and consistent with Borrowers' past practices, at a minimum
of once every twelve (12) months but at any time as Lender may request upon the
occurrence of an Event of Default, and promptly following such physical count
such firm shall supply Lender with a report in the form and with such
specificity as may be reasonably satisfactory to Lender concerning such physical
count;
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(c) no Borrower shall remove any Inventory from the locations set
forth or permitted herein, without the prior written consent of Lender, except
for sales of Inventory in the ordinary course of such Borrower's business and
except to move Inventory directly from one location set forth or permitted
herein to another such location;
(d) upon Lender's request, Borrowers shall, at their expense, no
more than twice in any twelve (12) month period, but at any time or times as
Lender may request upon the occurrence of an Event of Default, deliver or cause
to be delivered to Lender written reports or appraisals as to the Inventory in
form, scope and methodology acceptable to Lender by an appraiser acceptable to
Lender, addressed to Lender or upon which Lender is expressly permitted to rely
(with the understanding that Lender may revise the definition of "Eligible
Inventory" hereunder or establish Availability Reserves as Lender may deem
advisable in its sole discretion based upon the results of such updated
appraisals);
(e) each Borrower shall produce, use, store and maintain the
Inventory, with all reasonable care and caution and in accordance with
applicable standards of any insurance and in conformity with applicable laws
(including, but not limited to, the requirements of the Federal Fair Labor
Standards Act of 1938, as amended and all rules, regulations and orders related
thereto);
(f) each Borrower assumes all responsibility and liability
arising from or relating to the production, use, sale or other disposition of
the Inventory;
(g) no Borrower shall sell Inventory to any customer on approval,
or any other basis which entitles the customer to return or may obligate a
Borrower to repurchase such Inventory;
(h) each Borrower shall keep the Inventory in good and marketable
condition;
(i) no Borrower shall, without prior written notice to Lender,
acquire or accept any Inventory on consignment or approval;
(j) each Borrower shall cause First Union National Bank (as
Lender's agent) to be named as consignee on any and all import documentation
relating to the Inventory, including, without limitation, all forwarder cargo
receipts and bills of lading, all in form and substance satisfactory to Lender
and adequate as determined by Lender, to perfect Lender's first priority
security interest in such documents of title and the Inventory relating thereto;
and
(k) upon the occurrence of an Event of Default, no Borrower shall
return any Inventory to its vendors without the prior consent of Lender.
7.4 Equipment Covenants. With respect to the Equipment:
(a) upon Lender's request, Borrowers shall, at their expense, at
any time or times as Lender may request on or after an Event of Default, deliver
or cause to be delivered to Lender written reports or appraisals as to the
Equipment in form, scope and methodology acceptable to Lender and by an
appraiser acceptable to Lender;
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(b) each Borrower shall keep the Equipment in good order, repair,
running and marketable condition (ordinary wear and tear excepted);
(c) each Borrower shall use the Equipment with all reasonable
care and caution and in accordance with applicable standards of any insurance
and in conformity with all applicable laws;
(d) the Equipment is and shall be used in a Borrower's business
and not for personal, family, household or farming use;
(e) no Borrower shall remove any Equipment from the locations set
forth or permitted herein, except to the extent necessary to have any Equipment
repaired or maintained in the ordinary course of the business of such Borrower
or to move Equipment directly from one such location set forth or permitted
herein to another such location and except for the movement of motor vehicles
used by or for the benefit of such Borrower in the ordinary course of business;
(f) the Equipment is now and shall remain personal property and
no Borrower shall permit any of the Equipment to be or become a part of or
affixed to real property; and
(g) each Borrower assumes all responsibility and liability
arising from the use of the Equipment.
7.5 Power of Attorney. Each Borrower hereby irrevocably designates and
appoints Lender (and all persons designated by Lender) as such Borrower's true
and lawful attorney-in-fact, and authorizes Lender, in such Borrower's or
Lender's name, to:
(a) at any time an Event of Default or event with notice or
passage of time or both would constitute an Event of Default exists or has
occurred and is continuing: (i) demand payment on Accounts or other proceeds of
Inventory or other Collateral; (ii) enforce payment of Accounts or other
Obligations included in the Collateral by legal proceedings or otherwise; (iii)
exercise all of such Borrower's rights and remedies to collect any Account or
other proceeds of Inventory or other Collateral; (iv) sell or assign any Account
upon such terms, for such amount and at such time or times as the Lender deems
advisable; (v) settle, adjust, compromise, extend or renew an Account; (vi)
discharge and release any Account or other Obligations included in the
Collateral; (vii) prepare, file and sign such Borrower's name on any proof of
claim in bankruptcy or other similar document against an account debtor; (viii)
notify the post office authorities to change the address for delivery of such
Borrower's mail to an address designated by Lender, and open and dispose of all
mail addressed to such Borrower; (ix) have access to any postal box into which
such Borrower's mail is deposited; and (x) do all acts and things which are
necessary, in Lender's determination, to fulfill such Borrower's obligations
under this Agreement and the other Financing Agreements; and
(b) at any time, subject to the terms of the agreement(s)
relating to the Blocked Account(s) to: (i) take control in any manner of any
item of payment or proceeds thereof; (ii) have access to any lockbox; (iii)
endorse such Borrower's name upon any items of payment or proceeds thereof and
deposit the same in the Lender's account for application to the Obligations;
(iv) endorse such Borrower's name upon any chattel paper, document, instrument,
invoice, or similar document or agreement relating to any Account or any goods
pertaining
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thereto or any other Collateral; (v) sign such Borrower's name on any
verification of Accounts and notices thereof to account debtors; and (vi)
execute in such Borrower's name and file any UCC financing statements or
amendments thereto.
Each Borrower hereby releases Lender and its officers, employees and designees
from any liabilities arising from any act or acts under this power of attorney
and in furtherance thereof, whether of omission or commission, except as a
result of an indemnified party's own gross negligence or willful misconduct as
determined pursuant to a final non-appealable order of a court of competent
jurisdiction.
7.6 Right to Cure. Lender may, at its option, (a) cure any default by
any Borrower under any agreement with a third party or pay or bond on appeal any
judgment entered against such Borrower, (b) discharge taxes, liens, security
interests or other encumbrances at any time levied on or existing with respect
to the Collateral and (c) pay any amount, incur any expense or perform any act
which, in Lender's judgment, is necessary or appropriate to preserve, protect,
insure or maintain the Collateral and the rights of Lender with respect thereto.
Lender may add any amounts so expended to the Obligations and charge a
Borrower's account therefor, such amounts to be repayable by such Borrower on
demand. Lender shall be under no obligation to effect such cure, payment or
bonding and shall not, by doing so, be deemed to have assumed any obligation or
liability of any Borrower. Any payment made or other action taken by Lender
under this Section 7.6 shall be without prejudice to any right to assert an
Event of Default hereunder and to proceed accordingly.
7.7 Access to Premises. From time to time as requested by Lender, at the
cost and expense of Borrowers, (a) Lender or its designee shall have complete
access to all of each Borrower's premises during normal business hours and after
notice to such Borrower, or at any time and without notice to such Borrower if
an Event of Default exists or has occurred and is continuing, for the purposes
of inspecting, verifying and auditing the Collateral and all of such Borrower's
books and records, including, without limitation, the Records, and (b) such
Borrower shall promptly furnish to Lender such copies of such books and records
or extracts therefrom as Lender may request to the extent that furnishing Lender
with such books and records or extracts therefrom does not impair such
Borrower's legal right to keep such books and records or extracts therefrom
privileged between such Borrower and the preparer of such books and records, and
(c) use during normal business hours such of any Borrower's personnel,
equipment, supplies and premises as may be reasonably necessary for the
foregoing and if an Event of Default exists or has occurred and is continuing
for the collection of Accounts and realization of other Collateral.
SECTION 8. REPRESENTATIONS AND WARRANTIES.
Each Borrower hereby represents and warrants to Lender the following
(which shall survive the execution and delivery of this Agreement), the truth
and accuracy of which are a continuing condition of the making of Loans and the
providing of Letter of Credit Accommodations by Lender to each Borrower:
8.1 Corporate Existence, Power and Authority; Subsidiaries. Each
Borrower is a corporation duly organized and in good standing under the laws of
its state of incorporation and
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is duly qualified as a foreign corporation and in good standing in all states or
other jurisdictions where the nature and extent of the business transacted by it
or the ownership of assets makes such qualification necessary, except for those
jurisdictions in which the failure to so qualify would not have a material
adverse effect on such Borrower's financial condition, results of operation or
business or the rights of Lender in or to any of the Collateral. The execution,
delivery and performance of this Agreement, the other Financing Agreements and
the transactions contemplated hereunder and thereunder are all within each
Borrower's corporate powers, have been duly authorized and are not in
contravention of law or the terms of such Borrower's certificate of
incorporation, by-laws, or other organizational documentation, or any indenture,
agreement or undertaking to which such Borrower is a party or by which such
Borrower or its property are bound. This Agreement and the other Financing
Agreements constitute legal, valid and binding obligations of each Borrower
enforceable in accordance with their respective terms. Each Borrower does not
have any subsidiaries except as set forth on the Information Certificate of such
Borrower.
8.2 Financial Statements; No Material Adverse Change. All financial
statements relating to any Borrower which have been or may hereafter be
delivered by any Borrower to Lender have been prepared in accordance with GAAP
and fairly present the financial condition and the results of operations of such
Borrower as at the dates and for the periods set forth therein. Except as
disclosed in any interim financial statements furnished by Borrowers to Lender
prior to the date of this Agreement, there has been no material adverse change
in the assets, liabilities, properties and condition, financial or otherwise, of
any Borrower, since the date of the most recent audited financial statements
furnished by such Borrower to Lender prior to the date of this Agreement.
8.3 Chief Executive Office; Collateral Locations. The chief executive
office of each Borrower and such Borrower's Records concerning Accounts are
located only at the address set forth below such Borrower's signature hereto and
its only other places of business and the only other locations of Collateral, if
any, are the addresses set forth in such Borrower's Information Certificate,
subject to the right of each Borrower to establish new locations in accordance
with Section 9.2 below. The Information Certificate of each Borrower correctly
identifies any of such locations which are not owned by such Borrower and sets
forth the owners and/or operators thereof and, to the best of such Borrower's
knowledge, the holders of any mortgages on such locations.
8.4 Priority of Liens; Title to Properties. The security interests and
liens granted to Lender under this Agreement and the other Financing Agreements
constitute valid and perfected first priority liens and security interests in
and upon the Collateral subject only to the liens indicated on Schedule 8.4
hereto and the other liens permitted under Section 9.8 hereof. Each Borrower has
good and marketable title to all of its properties and assets subject to no
liens, mortgages, pledges, security interests, encumbrances or charges of any
kind, except those granted to Lender and such others as are specifically listed
on Schedule 8.4 hereto or permitted under Section 9.8 hereof.
8.5 Tax Returns. Each Borrower has filed, or caused to be filed, in a
timely manner all tax returns, reports and declarations which are required to be
filed by it (without requests for extension except as previously disclosed in
writing to Lender). All information in such tax
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returns, reports and declarations is complete and accurate in all material
respects. Each Borrower has paid or caused to be paid all taxes due and payable
or claimed due and payable in any assessment received by it, except taxes the
validity of which are being contested in good faith by appropriate proceedings
diligently pursued and available to such Borrower and with respect to which
adequate reserves have been set aside on its books. Adequate provision has been
made for the payment of all accrued and unpaid Federal, State, county, local,
foreign and other taxes whether or not yet due and payable and whether or not
disputed.
8.6 Litigation. Except as set forth on the Information Certificate of a
Borrower, there is no present investigation by any governmental agency pending,
or to the best of any Borrower's knowledge threatened, against or affecting any
Borrower, its assets or business and there is no action, suit, proceeding or
claim by any Person pending, or to the best of any Borrower's knowledge
threatened, against any Borrower or its assets or goodwill, or against or
affecting any transactions contemplated by this Agreement, which if adversely
determined against such Borrower would result in any material adverse change in
the assets, business or prospects of such Borrower or would impair the ability
of such Borrower to perform its obligations hereunder or under any of the other
Financing Agreements to which it is a party or of Lender to enforce any
Obligations or realize upon any Collateral.
8.7 Compliance with Other Agreements and Applicable Laws. No Borrower is
in default in any material respect under, or in violation in any material
respect of any of the terms of, any agreement, contract, instrument, lease or
other commitment to which it is a party or by which it or any of its assets are
bound and each Borrower is in compliance in all material respects with all
applicable provisions of laws, rules, regulations, licenses, permits, approvals
and orders of any foreign, Federal, State or local governmental authority.
8.8 Bank Accounts. All of the deposit accounts, investment accounts or
other accounts in the name of or used by any Borrower maintained at any bank or
other financial institution are set forth on Schedule 8.8 hereto, subject to the
right of each Borrower to establish new accounts in accordance with Section 9.13
below.
8.9 Environmental Compliance.
(a) Except as set forth on Schedule 8.9 hereto, no Borrower has
generated, used, stored, treated, transported, manufactured, handled, produced
or disposed of any Hazardous Materials, on or off its premises (whether or not
owned by it) in any manner which at any time violates any applicable
Environmental Law or any license, permit, certificate, approval or similar
authorization thereunder and the operations of each Borrower complies in all
material respects with all Environmental Laws and all licenses, permits,
certificates, approvals and similar authorizations thereunder.
(b) Except as set forth on Schedule 8.9 hereto, there has been no
investigation, proceeding, complaint, order, directive, claim, citation or
notice by any governmental authority or any other person nor is any pending or
to the best of any Borrower's knowledge threatened, with respect to any
non-compliance with or violation of the requirements of any Environmental Law by
any Borrower or the release, spill or discharge, threatened or actual, of any
Hazardous Material or the generation, use, storage, treatment, transportation,
manufacture, handling,
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production or disposal of any Hazardous Materials or any other environmental,
health or safety matter, which affects any Borrower or its business, operations
or assets or any properties at which any Borrower has transported, stored or
disposed of any Hazardous Materials.
(c) No Borrower has material liability (contingent or otherwise)
in connection with a release, spill or discharge, threatened or actual, of any
Hazardous Materials or the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials.
(d) Each Borrower has all licenses, permits, certificates,
approvals or similar authorizations required to be obtained or filed in
connection with the operations of such Borrower under any Environmental Law and
all of such licenses, permits, certificates, approvals or similar authorizations
are valid and in full force and effect.
8.10 Employee Benefits.
(a) No Borrower has engaged in any transaction in connection with
which any Borrower or any of its ERISA Affiliates could be subject to either a
civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by
Section 4975 of the Code, including any accumulated funding deficiency described
in Section 8.10(c) hereof and any deficiency with respect to vested accrued
benefits described in Section 8.10(d) hereof.
(b) No liability to the Pension Benefit Guaranty Corporation has
been or is expected by any Borrower to be incurred with respect to any employee
pension benefit plan of any Borrower or any of its ERISA Affiliates. There has
been no reportable event (within the meaning of Section 4043(b) of ERISA) or any
other event or condition with respect to any employee pension benefit plan of
any Borrower or any of its ERISA Affiliates which presents a risk of termination
of any such plan by the Pension Benefit Guaranty Corporation.
(c) Full payment has been made of all amounts which any Borrower
or any of its ERISA Affiliates is required under Section 302 of ERISA and
Section 412 of the Code to have paid under the terms of each employee pension
benefit plan as contributions to such plan as of the last day of the most recent
fiscal year of such plan ended prior to the date hereof, and no accumulated
funding deficiency (as defined in Section 302 of ERISA and Section 412 of the
Code), whether or not waived, exists with respect to any employee pension
benefit plan, including any penalty or tax described in Section 8.10(a) hereof
and any deficiency with respect to vested accrued benefits described in Section
8.10(c) hereof.
(d) The current value of all vested accrued benefits under all
employee pension benefit plans maintained by any Borrower that are subject to
Title IV of ERISA does not exceed the current value of the assets of such plans
allocable to such vested accrued benefits, including any penalty or tax
described in Section 8.10(a) hereof and any accumulated funding deficiency
described in Section 8.10(c) hereof. The terms "current value" and "accrued
benefit" have the meanings specified in ERISA.
(e) No Borrower nor any of its ERISA Affiliates is or has ever
been obligated to contribute to any "multiemployer plan" (as such term is
defined in Section 4001(a)(3) of ERISA) that is subject to Title IV of ERISA.
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8.11 Accuracy and Completeness of Information. All information furnished
by or on behalf of any Borrower in writing to Lender in connection with this
Agreement or any of the other Financing Agreements or any transaction
contemplated hereby or thereby, including, without limitation, all information
on the Information Certificate is true and correct in all material respects on
the date as of which such information is dated or certified and does not omit
any material fact necessary in order to make such information not misleading. No
event or circumstance has occurred which has had or could reasonably be expected
to have a material adverse affect on the business, assets or prospects of any
Borrower, which has not been fully and accurately disclosed to Lender in
writing.
8.12 Survival of Warranties; Cumulative. All representations and
warranties contained in this Agreement or any of the other Financing Agreements
shall survive the execution and delivery of this Agreement and shall be deemed
to have been made again to Lender on the date of each additional borrowing or
other credit accommodation hereunder and shall be conclusively presumed to have
been relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
any Borrower shall now or hereafter give, or cause to be given, to Lender.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS.
9.1 Maintenance of Existence. Each Borrower shall at all times preserve,
renew and keep in full, force and effect its corporate existence and rights and
franchises with respect thereto and maintain in full force and effect all
permits, licenses, trademarks, trade names, approvals, authorizations, leases
and contracts necessary to carry on the business as presently or proposed to be
conducted. Borrowers shall give Lender thirty (30) days prior written notice of
any proposed change in any Borrower's corporate name, which notice shall set
forth the new name and Borrowers shall deliver to Lender a copy of the amendment
to the Certificate of Incorporation of such Borrower with the new corporate name
providing for the name change certified by the Secretary of State of the
jurisdiction of incorporation of such Borrower as soon as it is available.
9.2 New Collateral Locations. A Borrower may open any new location
within the continental United States provided Borrowers: (a) give Lender thirty
(30) days prior written notice of the intended opening of any such new location;
and (b) execute and deliver, or cause to be executed and delivered, to Lender
such agreements, documents, and instruments as Lender may deem reasonably
necessary or desirable to protect its interests in the Collateral at such
location, including, without limitation, UCC financing statements and, if such
Borrower leases such new location, provides a landlord waiver or subordination
reasonably acceptable to Lender.
9.3 Compliance with Laws, Regulations, Etc.
(a) Each Borrower shall, at all times, comply in all material
respects with all laws, rules, regulations, licenses, permits, approvals and
orders applicable to it and duly observe all requirements of any Federal, State
or local governmental authority, including, without limitation, the Employee
Retirement Security Act of 1974, as amended, the Occupational Safety and Hazard
Act of 1970, as amended, the Fair Labor Standards Act of 1938, as amended, and
all
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statutes, rules, regulations, orders, permits and stipulations relating to
environmental pollution and employee health and safety, including, without
limitation, all of the Environmental Laws.
(b) Each Borrower shall take prompt and appropriate action to
respond to any non-compliance with any of the Environmental Laws and shall
report to Lender on such response.
(c) Borrowers shall give both oral and written notice to Lender
immediately upon any Borrower's receipt of any notice of, or any Borrower's
otherwise obtaining knowledge of: (i) the occurrence of any event involving the
release, spill or discharge, threatened or actual, of any Hazardous Material; or
(ii) any investigation, proceeding, complaint, order, directive, claims,
citation or notice with respect to: (A) any non-compliance with or violation of
any Environmental Law by any Borrower; (B) the release, spill or discharge,
threatened or actual, of any Hazardous Material; (C) the generation, use,
storage, treatment, transportation, manufacture, handling, production or
disposal of any Hazardous Materials; or (D) any other environmental, health or
safety matter, which affects any Borrower or its business, operations or assets
or any properties at which any Borrower transported, stored or disposed of any
Hazardous Materials.
(d) Each Borrower shall indemnify and hold harmless Lender, its
directors, officers, employees, agents, invitees, representatives, successors
and assigns, from and against any and all losses, claims, damages, liabilities,
costs, and expenses (including reasonable attorneys' fees and legal expenses)
directly or indirectly arising out of or attributable to the use, generation,
manufacture, reproduction, storage, release, threatened release, spill,
discharge, disposal or presence of a Hazardous Material, including, without
limitation, the costs of any required or necessary repair, cleanup or other
remedial work with respect to any property of any Borrower and the preparation
and implementation of any closure, remedial or other required plans. All
representations, warranties, covenants and indemnifications in this Section 9.3
shall survive the payment of the Obligations and the termination or non-renewal
of this Agreement.
9.4 Payment of Taxes and Claims. Each Borrower shall duly pay and
discharge all taxes, assessments, contributions and governmental charges upon or
against it or its properties or assets, except for taxes the validity of which
are being contested in good faith by appropriate proceedings diligently pursued
and available to such Borrower and with respect to which adequate reserves have
been set aside on its books. Each Borrower shall be liable for any tax or
penalties imposed on Lender as a result of the financing arrangements provided
for herein and each Borrower agrees to indemnify and hold Lender harmless with
respect to the foregoing, and to repay to Lender on demand the amount thereof,
and until paid by Borrowers such amount shall be added and deemed part of the
Loans, provided, that, nothing contained herein shall be construed to require
Borrowers to pay any income or franchise taxes attributable to the income of
Lender from any amounts charged or paid hereunder to Lender. The foregoing
indemnity shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement.
9.5 Insurance. Each Borrower shall, at all times, maintain with
financially sound and reputable insurers insurance with respect to the
Collateral against loss or damage and all other insurance of the kinds and in
the amounts customarily insured against or carried by corporations of
established reputation engaged in the same or similar businesses and similarly
situated. Said policies of insurance shall be satisfactory to Lender as to form,
amount and insurer. Each
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Borrower shall furnish certificates, policies or endorsements to Lender as
Lender shall require as proof of such insurance, and, if any Borrower fails to
do so, Lender is authorized, but not required, to obtain such insurance at the
expense of such Borrower. All policies shall provide for at least thirty (30)
days prior written notice to Lender of any cancellation or reduction of coverage
and that Lender may act as attorney for each Borrower in obtaining, and at any
time an Event of Default exists or has occurred and is continuing, adjusting,
settling, amending and canceling such insurance. Each Borrower shall cause
Lender to be named as a loss payee and an additional insured (but without any
liability for any premiums) under such insurance policies and each Borrower
shall obtain non-contributory lender's loss payable endorsements to all
insurance policies in form and substance satisfactory to Lender. Such lender's
loss payable endorsements shall specify that the proceeds of such insurance
shall be payable to Lender as its interests may appear and further specify that
Lender shall be paid regardless of any act or omission by any Borrower or any of
its affiliates. At its option, Lender may apply any insurance proceeds received
by Lender at any time to the cost of repairs or replacement of Collateral and/or
to payment of the Obligations, whether or not then due, in any order and in such
manner as Lender may determine or hold such proceeds as cash collateral for the
Obligations.
9.6 Financial Statements and Other Information.
(a) Each Borrower shall keep proper books and records in which
true and complete entries shall be made of all dealings or transactions of or in
relation to the Collateral and the business of such Borrower and its
subsidiaries (if any) in accordance with GAAP and each Borrower shall furnish or
cause to be furnished to Lender: (i) within thirty (30) days after the end of
each fiscal month, (A) monthly unaudited consolidated financial statements of
such Borrower, and, if such Borrower has any subsidiaries, unaudited
consolidating financial statements of such Borrower and its subsidiaries
(including in each case balance sheets and statements of income and loss), all
in detail satisfactory to Lender, fairly presenting the financial position and
the results of the operations of such Borrower and its subsidiaries as of the
end of and through such fiscal month and (B) a monthly report setting forth the
amount of any transfer of money or property to another Borrower during the
preceding fiscal month; (ii) within thirty (30) days after the end of each
fiscal quarter, a consolidated balance sheet of such Borrower, which shall
reflect in each case, without limitation, any outstanding indebtedness owed to
or owing by another Borrower, all in detail satisfactory of Lender, fairly
presenting the financial position and the results of the operations of such
Borrower as of the end of and for such fiscal quarter; and (iii) within ninety
(90) days after the end of each fiscal year, (A) audited consolidated financial
statements of such Borrower (including in each case balance sheets and
statements of income and loss), and the accompanying notes thereto, all in
detail satisfactory to Lender, fairly presenting the financial position and the
results of the operations of such Borrower as of the end of and for such fiscal
year, together with the opinion of independent certified public accountants,
which accountants shall be an independent accounting firm selected by Borrowers
and reasonably acceptable to Lender, that such financial statements have been
prepared in accordance with GAAP, and present fairly the results of operations
and financial condition of such Borrower and its subsidiaries as of the end of
and for the fiscal year then ended and (B) if such Borrower has any
subsidiaries, unaudited consolidating financial statements of such Borrower and
its subsidiaries (including in each case balance sheets and statements of income
and loss), all in detail satisfactory to Lender, fairly presenting the financial
position and the
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results of the operations of such Borrower and its subsidiaries as of the end of
and for such fiscal year.
(b) Borrowers shall promptly notify Lender in writing of the
details of (i) any loss, damage, investigation, action, suit, proceeding or
claim relating to the Collateral or any other property which is security for the
Obligations or which would result in any material adverse change in any
Borrower's business, properties, assets, goodwill or condition, financial or
otherwise and (ii) the occurrence of any Event of Default or event which, with
the passage of time or giving of notice or both, would constitute an Event of
Default.
(c) Each Borrower shall promptly after the sending or filing
thereof furnish or cause to be furnished to Lender copies of all financial
reports which such Borrower sends to its stockholders generally and copies of
all reports and registration statements which such Borrower files with the
Securities and Exchange Commission, any national securities exchange or the
National Association of Securities Dealers, Inc.
(d) Each Borrower shall furnish or cause to be furnished to
Lender such budgets, forecasts, projections and other information in respect of
the Collateral and the business of such Borrower, as Lender may, from time to
time, reasonably request. Lender is hereby authorized to deliver a copy of any
financial statement or any other information relating to the business of any
Borrower to any court or other government agency or to any Eligible Assignee or
prospective Eligible Assignee. Each Borrower hereby irrevocably authorizes and
directs all accountants or auditors to deliver to Lender upon Lender's request
to such Borrower, at such Borrower's expense, copies of the financial statements
of such Borrower and any reports or management letters prepared by such
accountants or auditors on behalf of such Borrower and to disclose to Lender
such information as they may have regarding the business of such Borrower so
long as such disclosure does not impair such Borrower's legal right to keep such
report or information privileged between such accountants or auditors and such
Borrower. Any documents, schedules, invoices or other papers delivered to Lender
may be destroyed or otherwise disposed of by Lender one (1) year after the same
are delivered to Lender, except as otherwise designated by Borrower to Lender in
writing.
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. No Borrower
shall, directly or indirectly, (a) merge into or with or consolidate with any
other Person or permit any other Person to merge into or with or consolidate
with it, or (b) sell, assign, lease, transfer, abandon or otherwise dispose of
any stock (except for stock issued pursuant to an employee stock option program
of such Borrower) or indebtedness to any other Person or any of its assets to
any other Person (except for (i) sales of its Inventory in the ordinary course
of business and (ii) the disposition of its worn-out or obsolete Equipment or
Equipment no longer used in the business of such Borrower so long as (A) if an
Event of Default exists or has occurred and is continuing, any proceeds are paid
to Lender and (B) such sales do not involve Equipment having an aggregate fair
market value in excess of One Hundred Fifty Thousand Dollars ($150,000) for all
such Equipment of all Borrowers disposed of in any fiscal year of Borrowers);
provided, however, upon Lender's prior written consent, which shall not be
unreasonably withheld, a Borrower may assign on a temporary basis its rights to
certain trademarks to a third party for the sole purpose of pursuing litigation
involving such trademarks, provided, that such trademarks shall be reassigned to
such Borrower immediately upon the conclusion of such litigation, or (c)
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form or acquire any subsidiaries, or (d) wind up, liquidate or dissolve or (e)
agree to do any of the foregoing.
9.8 Encumbrances. No Borrower shall create, incur, assume or suffer to
exist any security interest, mortgage, pledge, lien, charge or other encumbrance
of any nature whatsoever on any of its assets or properties, including, without
limitation, the Collateral, except:
(a) the liens and security interests of Lender;
(b) liens securing the payment of taxes, either not yet overdue
or the validity of which are being contested in good faith by appropriate
proceedings diligently pursued and available to such Borrower and with respect
to which adequate reserves have been set aside on its books;
(c) security deposits in the ordinary course of its business;
(d) non-consensual statutory liens (other than liens securing the
payment of taxes) arising in the ordinary course of such Borrower's business to
the extent: (i) such liens secure indebtedness which is not overdue; or (ii)
such liens secure indebtedness relating to claims or liabilities which are fully
insured and being defended at the sole cost and expense and at the sole risk of
the insurer (subject to applicable deductibles) or being contested in good faith
by appropriate proceedings diligently pursued and available to such Borrower, in
each case prior to the commencement of foreclosure or other similar proceedings
and with respect to which adequate reserves have been set aside on its books;
(e) zoning restrictions, easements, licenses, covenants and other
restrictions affecting the use of real property which do not interfere in any
material respect with the use of such real property or ordinary conduct of the
business of such Borrower as presently conducted thereon or materially impair
the value of the real property which may be subject thereto;
(f) purchase money security interests in Equipment (including
capital leases) and purchase money mortgages on real estate not so long as such
security interests and mortgages do not apply to any property of such Borrower
other than the Equipment or real estate so acquired, and the indebtedness
secured thereby does not exceed the cost of the Equipment or real estate so
acquired, as the case may be; and
(g) the security interests and liens set forth on Schedule 8.4
hereto.
9.9 Indebtedness. No Borrower shall incur, create, assume, become or be
liable in any manner with respect to, or permit to exist, any obligations or
indebtedness, except:
(a) the Obligations;
(b) trade obligations and normal accruals in the ordinary course
of its business not yet due and payable, or with respect to which such Borrower
is contesting in good faith the amount or validity thereof by appropriate
proceedings diligently pursued and available to such Borrower, and with respect
to which adequate reserves have been set aside on its books;
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(c) purchase money indebtedness (including capital leases) to the
extent not incurred or secured by liens (including capital leases) in violation
of any other provision of this Agreement;
(d) obligations or indebtedness owed to another Borrower;
provided, however, such obligations or indebtedness shall be (i) disclosed in
the financial statements provided to Lender pursuant to Section 9.6 hereof, (ii)
limited to amounts which would not render such Borrower insolvent, unable to pay
its debts as they mature or to have insufficient capital to carry on its
business, and (iii) on a basis subordinate to all other indebtedness of such
Borrower, and provided, further, however, after giving effect to such
obligations or indebtedness, no Event of Default, or event which with notice or
passage of time or both, would constitute an Event of Default, shall exist or
have occurred and be continuing; and
(e) obligations or indebtedness set forth on the Information
Certificate of such Borrower; provided, that, (i) such Borrower may only make
regularly scheduled payments of principal and interest in respect of such
indebtedness in accordance with the terms of the agreement or instrument
evidencing or giving rise to such indebtedness as in effect on the date hereof,
(ii) such Borrower shall not, directly or indirectly, (A) amend, modify, alter
or change the terms of such indebtedness or any agreement, document or
instrument related thereto as in effect on the date hereof, or (B) except as
otherwise permitted under this Agreement, redeem, retire, defease, purchase or
otherwise acquire such indebtedness, or set aside or otherwise deposit or invest
any sums for such purpose, and (iii) such Borrower shall furnish to Lender all
notices or demands in connection with such indebtedness either received by such
Borrower or on its behalf, promptly after the receipt thereof, or sent by such
Borrower or on its behalf, concurrently with the sending thereof, as the case
may be.
9.10 Loans, Investments, Guarantees, Etc. No Borrower shall, directly or
indirectly, make any loans or advance money or property to any Person, or invest
in (by capital contribution, dividend or otherwise) or purchase or repurchase
the stock or indebtedness or all or a substantial part of the assets or property
of any Person, or guarantee, assume, endorse, or otherwise become responsible
for (directly or indirectly) the indebtedness, performance, obligations or
dividends of any Person or agree to do any of the foregoing, except:
(a) the guarantee of another Borrower's Obligations hereunder to
the extent permitted under Section 13.11 hereof;
(b) loans or advances of money or property to another Borrower or
an Obligor; provided, however, such loans or advances shall be (i) disclosed in
the financial statements provided to Lender pursuant to Section 9.6 hereof, (ii)
limited to amounts which would not render the Borrower or Obligor receiving such
loans or advances insolvent, unable to pay its debts as they mature or to have
insufficient capital to carry on its business, (iii) on a basis subordinate to
all other indebtedness of the other Borrower or Obligor receiving such loans or
advances; (iv) with respect to advances to Holbrook, Deckers Japan, Deckers
Europe, Phillipsburg and Picante, limited to an aggregate amount not to exceed
Thirty Million Dollars ($30,000,000) at any time; provided, further, however,
after giving effect to such loans or advances of money or property, no Event of
Default, or event which with notice or passage of
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time or both, would constitute an Event of Default, shall exist or have occurred
and be continuing;
(c) the endorsement of instruments for collection or deposit in
the ordinary course of its business;
(d) investments in: (i) short-term direct obligations of the
United States Government; (ii) negotiable certificates of deposit issued by any
bank satisfactory to Lender, payable to the order of such Borrower or to bearer
and delivered to Lender; and (iii) commercial paper rated A1 or P1; provided,
that, as to any of the foregoing, unless waived in writing by Lender, each
Borrower shall take such actions as are deemed necessary by Lender to perfect
the security interest of Lender in such investments;
(e) the repurchase of its own stock, provided, that, after giving
effect to such repurchase, (i) no Event of Default, or event which with notice
or passage of time or both, would constitute an Event of Default, shall exist or
have occurred and be continuing and (ii) Excess Availability shall not be less
than One Hundred Thousand Dollars ($100,000) in the aggregate; and
(f) the guarantees set forth in the Information Certificate of
such Borrower.
9.11 Dividends and Redemptions. No Borrower shall, directly or
indirectly, declare or pay any dividends on account of any shares of any class
of capital stock of such Borrower now or hereafter outstanding other than
dividends paid in capital stock, or set aside or otherwise deposit or invest any
sums for such purpose, or redeem, retire, defease, purchase or otherwise acquire
any shares of any class of capital stock (or set aside or otherwise deposit or
invest any sums for such purpose) for any consideration other than common stock
and except as set forth in Section 9.10(e) hereof or apply or set apart any sum,
or make any other distribution (by reduction of capital or otherwise) in respect
of any such shares or agree to do any of the foregoing.
9.12 Transactions with Affiliates. No Borrower shall enter into any
transaction for the purchase, sale or exchange of property or the rendering of
any service to or by any affiliate, except in the ordinary course of and
pursuant to the reasonable requirements of such Borrower's business and upon
fair and reasonable terms no less favorable to such Borrower than such Borrower
would obtain in a comparable arm's length transaction with an unaffiliated
person.
9.13 Additional Bank Accounts. No Borrower shall, directly or
indirectly, open, establish or maintain any deposit account, investment account
or any other account with any bank or other financial institution, other than
the Blocked Accounts and the accounts set forth in Schedule 8.8 hereto, except:
(a) as to any new or additional Blocked Accounts and other such new or
additional accounts which contain any Collateral or proceeds thereof, with the
prior written consent of Lender and subject to such conditions thereto as Lender
may establish and (b) as to any accounts used by such Borrower to make payments
of payroll, taxes or other obligations to third parties, after prior written
notice to Lender.
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9.14 Compliance with ERISA.
(a) No Borrower shall with respect to any "employee pension
benefit plans" maintained by such Borrower or any of its ERISA Affiliates: (i)
terminate any of such employee pension benefit plans so as to incur any
liability to the Pension Benefit Guaranty Corporation established pursuant to
ERISA; (ii) allow or suffer to exist any prohibited transaction involving any of
such employee pension benefit plans or any trust created thereunder which would
subject any Borrower or such ERISA Affiliate to a tax or penalty or other
liability on prohibited transactions imposed under Section 4975 of the Code or
ERISA; (iii) fail to pay to any such employee pension benefit plan any
contribution which it is obligated to pay under Section 302 of ERISA, Section
412 of the Code or the terms of such plan; (iv) allow or suffer to exist any
accumulated funding deficiency, whether or not waived, with respect to any such
employee pension benefit plan; (v) allow or suffer to exist any occurrence of a
reportable event or any other event or condition which presents a material risk
of termination by the Pension Benefit Guaranty Corporation of any such employee
pension benefit plan that is a single employer plan, which termination could
result in any liability to the Pension Benefit Guaranty Corporation; or (vi)
incur any withdrawal liability with respect to any multiemployer pension plan.
(b) As used in this Section 9.14, the term "employee pension
benefit plans," "employee benefit plans", "accumulated funding deficiency" and
"reportable event" shall have the respective meanings assigned to them in ERISA,
and the term "prohibited transaction" shall have the meaning assigned to it in
Section 4975 of the Code and ERISA.
9.15 Year 2000 Compliance. Each Borrower agrees to perform all acts
reasonably necessary to ensure that: (a) each Borrower and any business in which
such Borrower holds a substantial interest; and (b) on a best efforts basis by
such Borrower, that all customers, suppliers and vendors that are material to
such Borrower's business, become Year 2000 Compliant in a timely manner. Such
acts shall include, without limitation, performing a comprehensive review and
assessment of all of each Borrower's systems and adopting a detailed plan, with
itemized budget, for the remediation, monitoring and testing of such systems. As
used herein, "Year 2000 Compliant" shall mean, in regard to any entity, that all
software, hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition of such entity, will
properly perform date sensitive functions before, during and after the year
2000. Borrowers shall, immediately upon request, provide to Lender such
certifications or other evidence of each Borrower's compliance with the terms
hereof as Lender may from time to time reasonably require.
9.16 Adjusted Net Worth. Borrowers' Adjusted Net Worth, on a
consolidated basis, shall not, as of the end of each calendar quarter, be less
than Thirty Million Dollars ($30,000,000).
9.17 Amendments to Teva License Agreements. Without the prior written
consent of Lender, which consent shall not be unreasonably withheld, no Borrower
shall enter into or consent to any amendment, adjustment and/or modification to
the Teva License Agreements which would in Lender's determination (a) adversely
affect the economic terms of the Teva
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License Agreements for Borrowers, (b) shorten the duration or term of the Teva
License Agreements, (c) adversely affect the material benefits of any Borrower
under the Teva License Agreements; or (d) amend, modify or change in any way
paragraph 4 of that certain Letter Agreement dated November 4, 1994 between Mark
Thatcher and DOC, granting Lender the right to sell any Inventory subject to the
Teva License Agreements.
9.18 TEVA Acknowledgement. As soon as practicable, Borrowers shall use
their reasonable best efforts to deliver to Lender an acknowledgment, in form
and substance satisfactory to Lender, by Mark Thatcher, an individual, of
Lender's right to dispose of any Inventory subject to the Teva License
Agreements.
9.19 Costs and Expenses. Each Borrower shall pay to Lender on demand all
reasonable costs, expenses, filing fees and taxes paid or payable in connection
with the preparation, negotiation, execution, delivery, recording,
administration, collection, liquidation, enforcement and defense of the
Obligations, Lender's rights in the Collateral, this Agreement, the other
Financing Agreements and all other documents related hereto or thereto,
including any amendments, supplements or consents which may hereafter be
contemplated (whether or not executed) or entered into in respect hereof and
thereof, including, but not limited to:
(a) all costs and expenses of filing or recording (including
Uniform Commercial Code financing statement filing taxes and fees, documentary
taxes, intangibles taxes and mortgage recording taxes and fees, if applicable);
(b) all reasonable costs and expenses and fees for title
insurance and other insurance premiums, environmental audits, surveys,
assessments, engineering reports and inspections, appraisal fees and search
fees;
(c) all reasonable costs and expenses of remitting loan proceeds,
collecting checks and other items of payment, and establishing and maintaining
the Blocked Accounts, together with Lender's customary charges and fees with
respect thereto;
(d) all charges, fees or expenses charged by any bank or issuer
in connection with the Letter of Credit Accommodations;
(e) all reasonable costs and expenses of preserving and
protecting the Collateral;
(f) all reasonable costs and expenses paid or incurred in
connection with obtaining payment of the Obligations, enforcing the security
interests and liens of Lender, selling or otherwise realizing upon the
Collateral, and otherwise enforcing the provisions of this Agreement and the
other Financing Agreements or defending any claims made or threatened against
Lender arising out of the transactions contemplated hereby and thereby
(including, without limitation, preparations for and consultations concerning
any such matters);
(g) all reasonable out-of-pocket expenses and costs incurred by
Lender's examiners in the conduct of their periodic field examinations of the
Collateral and any Borrower's operations, plus a per diem charge at the rate of
Six Hundred Fifty Dollars ($650) per person per day for Lender's examiners in
the field; and
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(h) the reasonable fees and disbursements of counsel (including
legal assistants) to Lender in connection with any of the foregoing.
9.20 Further Assurances. At the request of Lender at any time and from
time to time, each Borrower shall, at its expense, duly execute and deliver, or
cause to be duly executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as may be necessary or
proper to evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions or
purposes of this Agreement or any of the other Financing Agreements. Lender may
at any time and from time to time request a certificate from an officer of any
Borrower representing on behalf of such Borrower that all conditions precedent
to the making of Loans and providing Letter of Credit Accommodations contained
herein are satisfied. In the event of such request by Lender, Lender may, at its
option, cease to make any further Loans or provide any further Letter of Credit
Accommodations until Lender has received such certificate and, in addition,
Lender has determined that such conditions are satisfied. Where permitted by
law, each Borrower hereby authorizes Lender to execute and file one or more UCC
financing statements signed only by Lender.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES.
10.1 Events of Default. The occurrence or existence of any one or more
of the following events are referred to herein individually as an "Event of
Default," and collectively as "Events of Default":
(a) any Borrower fails to pay when due any of the Obligations;
(b) any Borrower fails to perform any of the terms, covenants,
conditions or provisions contained in this Agreement or any of the other
Financing Agreements and such failure shall continue for five (5) Business Days;
provided; that, such five (5) Business Day period shall not apply in the case
of: (i) any failure to observe any such term, covenant, condition or provision
which is not capable of being cured at all or within such five (5) Business Day
period or which has previously been the subject of a prior failure or (ii) an
intentional breach by such Borrower of such term, covenant, condition or
provision;
(c) any representation, warranty or statement of fact made by any
Borrower to Lender in this Agreement, the other Financing Agreements or any
other agreement, schedule, confirmatory assignment or otherwise shall when made
or deemed made be false or misleading in any material respect;
(d) any Obligor revokes, terminates or fails to perform any of
the terms, covenants, conditions or provisions of any guarantee, endorsement or
other agreement of such party in favor of Lender and such failure shall continue
for five (5) Business Days; provided, that, such five (5) Business Day period
shall not apply in the case of: (i) any failure to observe any such term,
covenant, condition or provision which is not capable of being cured at all or
within such five (5) Business Day period or which has previously been the
subject of a prior failure or (ii) an intentional breach by such Obligor of such
term, covenant, condition or provision;
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(e) any judgment for the payment of money is rendered against any
Borrower in excess of One Hundred Thousand Dollars ($100,000) in any one case or
in excess of Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate with
respect to any one Borrower and shall remain undischarged or unvacated for a
period in excess of forty-five (45) days or execution shall at any time not be
effectively stayed, or any material judgment other than for the payment of
money, or injunction, attachment, garnishment or execution is rendered against
any Borrower or any of their assets;
(f) any Borrower dissolves or suspends or discontinues doing
business or without the prior written consent of Lender, which consent shall not
be unreasonably withheld, any Obligor if such Obligor is in possession of any
assets of any Borrower or is indebted to any Borrower, dissolves or suspends or
discontinues doing business;
(g) any Borrower becomes insolvent (however defined or
evidenced), makes an assignment for the benefit of creditors, makes or sends
notice of a bulk transfer, or without the prior written consent of Lender, which
consent shall not be unreasonably withheld, any Obligor if such Obligor is in
possession of any assets of any Borrower or is indebted to any Borrower becomes
insolvent (however defined or evidenced), makes an assignment for the benefit of
creditors, makes or sends notice of a bulk transfer;
(h) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed against any Borrower, or all or any part of its properties
and such petition or application is not dismissed within thirty (30) days after
the date of its filing or any such Borrower shall file any answer admitting or
not contesting such petition or application or indicates its consent to,
acquiescence in or approval of, any such action or proceeding or the relief
requested is granted sooner;
(i) without the prior written consent of Lender, which consent
shall not be unreasonably withheld, a case or proceeding under the bankruptcy
laws of the United States of America now or hereafter in effect or under any
insolvency, reorganization, receivership, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction now or hereafter in effect
(whether at law or in equity) is filed against any Obligor if such Obligor is in
possession of any assets of any Borrower or is indebted to any Borrower, or all
or any part of its properties and such petition or application is not dismissed
within thirty (30) days after the date of its filing or any such Obligor shall
file any answer admitting or not contesting such petition or application or
indicates its consent to, acquiescence in or approval of, any such action or
proceeding or the relief requested is granted sooner;
(j) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at a law
or equity) is filed by any Borrower, or for all or any part of its property or
without the prior written consent of Lender, which consent shall not be
unreasonably withheld, a case or proceeding under the bankruptcy laws of the
United States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt,
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dissolution or liquidation law or statute of any jurisdiction now or hereafter
in effect (whether at a law or equity) is filed by any Obligor if such Obligor
is in possession of any assets of any Borrower or is indebted to any Borrower,
or for all or any part of its property;
(k) any default by any Borrower under any agreement, document or
instrument relating to any indebtedness for borrowed money owing to any person
other than Lender, or any capitalized lease obligations, contingent indebtedness
in connection with any guarantee, letter of credit, indemnity or similar type of
instrument in favor of any person other than Lender, in any case in an amount in
excess of One Hundred Thousand Dollars ($100,000), which default continues for
more than the applicable cure period, if any, with respect thereto, or any
default by any Borrower under any material contract, lease, license or other
obligation to any person other than Lender, including without limitation, the
Teva License Agreement, which default continues for more than the applicable
cure period, if any, with respect thereto;
(l) Douglas Otto, an individual, ceases to be the largest
shareholder of DOC or without the prior written consent of Lender, DOCI, SSI, or
UHI ceases to be wholly owned subsidiaries of DOC;
(m) the indictment or threatened indictment of any Borrower under
any criminal statute, or the commencement or threatened commencement of criminal
or civil proceedings against any Borrower, pursuant to which statute or
proceedings the penalties or remedies sought or available include forfeiture of
any of the property of such Borrower;
(n) there shall be a material adverse change in the business,
assets or prospects of any Borrower after the date hereof; or
(o) there shall be an event of default under any of the other
Financing Agreements.
10.2 Remedies.
(a) At any time an Event of Default exists or has occurred and is
continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the California Uniform Commercial
Code, as the same now exists or may from time to time hereafter be amended,
modified, recodified or supplemented, and other applicable law, all of which
rights and remedies may be exercised without notice to or consent by any
Borrower or Obligor, except as such notice or consent is expressly provided for
hereunder or required by applicable law. All rights, remedies and powers granted
to Lender hereunder, under any of the other Financing Agreements, the Uniform
Commercial Code or other applicable law, are cumulative, not exclusive and
enforceable, in Lender's discretion, alternatively, successively, or
concurrently on any one or more occasions, and shall include, without
limitation, the right to apply to a court of equity for an injunction to
restrain a breach or threatened breach by any Borrower of this Agreement or any
of the other Financing Agreements. Lender may, at any time or times, proceed
directly against any Borrower or Obligor to collect the Obligations without
prior recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event of
Default exists or has occurred and is continuing, Lender may, in its discretion
and without limitation, (i)
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accelerate the payment of all Obligations and demand immediate payment thereof
to Lender (provided, that, upon the occurrence of any Event of Default described
in Sections 10.1(h) and 10.1(i), all Obligations shall automatically become
immediately due and payable), (ii) with or without judicial process or the aid
or assistance of others, enter upon any premises on or in which any of the
Collateral may be located and take possession of the Collateral or complete
processing, manufacturing and repair of all or any portion of the Collateral,
(iii) require any Borrower, at such Borrower's expense, to assemble and make
available to Lender any part or all of the Collateral at any place and time
designated by Lender, (iv) collect, foreclose, receive, appropriate, setoff and
realize upon any and all Collateral, (v) remove any or all of the Collateral
from any premises on or in which the same may be located for the purpose of
effecting the sale, foreclosure or other disposition thereof or for any other
purpose, (vi) sell, lease, transfer, assign, deliver or otherwise dispose of any
and all Collateral (including, without limitation, entering into contracts with
respect thereto, public or private sales at any exchange, broker's board, at any
office of Lender or elsewhere) at such prices or terms as Lender may deem
reasonable, for cash, upon credit or for future delivery, with the Lender having
the right to purchase the whole or any part of the Collateral at any such public
sale, all of the foregoing being free from any right or equity of redemption of
any Borrower, which right or equity of redemption is hereby expressly waived and
released by each Borrower and/or (vii) terminate this Agreement. If any of the
Collateral is sold or leased by Lender upon credit terms or for future delivery,
the Obligations shall not be reduced as a result thereof until payment therefor
is finally collected by Lender. If notice of disposition of Collateral is
required by law, five (5) days prior notice by Lender to only the Borrower whose
Collateral is to be sold or disposed, designating the time and place of any
public sale or the time after which any private sale or other intended
disposition of Collateral is to be made, shall be deemed to be reasonable notice
thereof and each Borrower waives any other notice. In the event Lender
institutes an action to recover any Collateral or seeks recovery of any
Collateral by way of prejudgment remedy, each Borrower waives the posting of any
bond which might otherwise be required. Each Borrower waives any right to
require Lender to marshall the Collateral or proceed among them in any manner.
(c) Lender may apply the cash proceeds of Collateral actually
received by Lender from any sale, lease, foreclosure or other disposition of the
Collateral to payment of the Obligations, in whole or in part and in such order
as Lender may elect, whether or not then due. Each Borrower shall remain liable
to Lender for the payment of any deficiency with interest at the highest rate
provided for herein and all reasonable costs and expenses of collection or
enforcement, including reasonable attorneys' fees and legal expenses. Lender may
allocate any payments received or amounts realized among the Borrowers in its
sole discretion.
(d) Without limiting the foregoing, upon the occurrence of an
Event of Default or an event which with notice or passage of time or both would
constitute an Event of Default, Lender may, at its option, without notice, (i)
cease making Loans or arranging Letter of Credit Accommodations or reduce the
lending formulas or amounts of Loans and Letter of Credit Accommodations
available to any Borrower and/or (ii) terminate any provision of this Agreement
providing for any future Loans or Letter of Credit Accommodations to be made by
Lender to any Borrower.
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SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW.
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial
Waiver.
(a) The validity, interpretation and enforcement of this
Agreement and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of California
(without giving effect to principles of conflicts of law).
(b) Each Borrower and Lender irrevocably consent and submit to
the non-exclusive jurisdiction of the state courts of the County of Los Angeles,
State of California and of the United States District Court for the Central
District of California and waive any objection based on venue or forum non
conveniens with respect to any action instituted therein arising under this
Agreement or any of the other Financing Agreements or in any way connected with
or related or incidental to the dealings of the parties hereto in respect of
this Agreement or any of the other Financing Agreements or the transactions
related hereto or thereto, in each case whether now existing or hereafter
arising, and whether in contract, tort, equity or otherwise, and agree that any
dispute with respect to any such matters shall be heard only in the courts
described above (except that Lender shall have the right to bring any action or
proceeding against any Borrower or its property in the courts of any other
jurisdiction which Lender deems necessary or appropriate in order to realize on
the Collateral or to otherwise enforce its rights against such Borrower or its
property).
(c) Each Borrower and Lender hereby consents that any and all
service of process may be made by certified mail (return receipt requested)
directed to its address set forth on the signature pages hereof and service so
made shall be deemed effective and to be completed five (5) days after the same
shall have been so deposited in the U.S. mails.
(d) EACH BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO
TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER
THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY
CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN
RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE
TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. EACH
BORROWER AND LENDER EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND
THAT ANY BORROWER OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS
AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES
HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to any Borrower (whether
in tort, contract, equity or otherwise) for losses suffered by any Borrower in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or
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any act, omission or event occurring in connection herewith, unless it is
determined by a final and non-appealable judgment or court order binding on
Lender, that the losses were the result of acts or omissions constituting gross
negligence or willful misconduct. In any such litigation, Lender shall be
entitled to the benefit of the rebuttable presumption that it acted in good
faith and with the exercise of ordinary care in the performance by it of the
terms of this Agreement.
11.2 Waiver of Notices. Each Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the Collateral
and this Agreement, except such as are expressly provided for herein. No notice
to or demand on any Borrower which Lender may elect to give shall entitle such
Borrower to any other or further notice or demand in the same, similar or other
circumstances.
11.3 Amendments and Waivers. Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender. Lender shall not, by any act, delay, omission or otherwise be deemed to
have expressly or impliedly waived any of its rights, powers and/or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Lender. Any such waiver shall be enforceable only to the extent specifically set
forth therein. A waiver by Lender of any right, power and/or remedy on any one
occasion shall not be construed as a bar to or waiver of any such right, power
and/or remedy which Lender would otherwise have on any future occasion, whether
similar in kind or otherwise.
11.4 Indemnification. Each Borrower shall indemnify and hold Lender, and
its directors, agents, employees and counsel, harmless from and against any and
all losses, claims, damages, liabilities, costs or expenses imposed on, incurred
by or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated hereby
or any act, omission, event or transaction related or attendant thereto,
including, without limitation, amounts paid in settlement, court costs, and the
reasonable fees and expenses of counsel, unless such losses, claims, damages,
liabilities, costs or expenses arose from an indemnified party's gross
negligence or willful misconduct. To the extent that the undertaking to
indemnify, pay and hold harmless set forth in this Section 11.4 may be
unenforceable because it violates any law or public policy, each Borrower shall
pay the maximum portion which it is permitted to pay under applicable law to
Lender in satisfaction of indemnified matters under this Section 11.4. The
foregoing indemnity shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
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SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS.
12.1 Term.
(a) This Agreement and the other Financing Agreements shall
become effective as of the date set forth on the first page hereof and shall
continue in full force and effect for an initial term ending sixty (60) days
prior to the expiration date of either Teva License Agreements, whichever date
is earlier, provided, however, if the expiration dates of both the Teva License
Agreements are extended beyond August 31, 2001 upon terms and conditions
acceptable to Lender, then the initial term of this Agreement shall end on the
earlier of sixty (60) days preceding the new expiration date of either Teva
License Agreements, whichever date is earlier or the date three (3) years from
the date hereof (the end of the initial term of this Agreement shall be referred
to herein as, the "Renewal Date"). Borrowers (collectively, but not
individually) or Lender may terminate this Agreement and the other Financing
Agreements effective on the Renewal Date or on the anniversary of the Renewal
Date in any year by giving to the other party at least sixty (60) days prior
written notice. Borrowers (collectively, but not individually) may terminate
this Agreement prior to the end of the then current term, including any renewal
term, for any reason upon sixty (60) days prior written notice to Lender, and in
such case Borrowers agree to pay to Lender the applicable early termination fee
provided for in Section 12.1(c) hereof; provided, however that no such fee shall
be payable if this Agreement is so terminated after the third anniversary date
of this Agreement. Regardless of the timing of termination, this Agreement and
all other Financing Agreements must be terminated simultaneously. Upon the
effective date of termination or non-renewal of the Financing Agreements,
Borrowers shall pay to Lender, in full, all outstanding and unpaid Obligations
and shall furnish cash collateral to Lender in such amounts as Lender determines
are reasonably necessary to secure Lender from loss, cost, damage or expense,
including reasonable attorneys' fees and legal expenses, in connection with any
contingent Obligations, including issued and outstanding Letter of Credit
Accommodations and checks or other payments provisionally credited to the
Obligations and/or as to which Lender has not yet received final and
indefeasible payment. Such cash collateral shall be remitted by wire transfer in
Federal funds to such bank account of Lender, as Lender may, in its discretion,
designate in writing to Borrowers for such purpose. Interest shall be due until
and including the next Business Day, if the amounts so paid by Borrowers to the
bank account designated by Lender are received in such bank account later than
10:30 a.m., Los Angeles time.
(b) No termination of this Agreement or the other Financing
Agreements shall relieve or discharge any Borrower of its respective duties,
obligations and covenants under this Agreement or the other Financing Agreements
until all Obligations have been fully and finally discharged and paid, and
Lender's continuing security interest in the Collateral and the rights and
remedies of Lender hereunder, under the other Financing Agreements and
applicable law, shall remain in effect until all such Obligations have been
fully and finally discharged and paid.
(c) If for any reason this Agreement is terminated prior to the
end of the then current term of this Agreement, in view of the impracticality
and extreme difficulty of
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ascertaining actual damages and by mutual agreement of the parties as to a
reasonable calculation of Lender's lost profits as a result thereof, Borrowers
agree to pay to Lender, upon the effective date of such termination, an early
termination fee in the amount set forth below if such termination is effective
in the period indicated:
<TABLE>
<CAPTION>
Amount Period
------ ------
<S> <C> <C>
(i) 3% of the Maximum Credit from the date of this Agreement to
and including the first anniversary
date of this Agreement;
(ii) 2% of the Maximum Credit from the date after the first
anniversary of this Agreement to and
including the second anniversary date
of this Agreement; or
(iii) 1% of the Maximum Credit from the date after the second
anniversary of this Agreement to and
including the third anniversary date
of this Agreement.
</TABLE>
Notwithstanding the foregoing, such early termination fee shall be waived by
Lender in the event that at any time after the first anniversary date of this
Agreement, the Obligations are satisfied in full with the proceeds of a
refinancing provided by First Union National Bank and no Event of Default or
event which with notice or passage of time or both would constitute an Event of
Default exists or has occurred and is continuing. Such early termination fee
shall be presumed to be the amount of damages sustained by Lender as a result of
such early termination and each Borrower agrees that it is reasonable under the
circumstances currently existing. The early termination fee provided for in this
Section 12.1 shall be deemed included in the Obligations.
12.2 Notices. All notices, requests and demands hereunder shall be in
writing and (a) made to Lender at its address set forth below and to Borrowers
at their respective chief executive offices set forth below, or to such other
address as either party may designate by written notice to the other in
accordance with this provision, and (b) deemed to have been given or made: if
delivered in person, immediately upon delivery; if by telex, telegram or
facsimile transmission, immediately upon sending and upon confirmation of
receipt; if by nationally recognized overnight courier service with instructions
to deliver the next Business Day, one (1) Business Day after sending; and if by
certified mail, return receipt requested, five (5) days after mailing. Notice by
Lender to one Borrower shall be effective notice to all Borrowers. Lender shall
use its best efforts to provide to DOC copies of any notices sent by Lender
hereunder to any other Borrower.
12.3 Partial Invalidity. If any provision of this Agreement is held to
be invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to
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be invalid or unenforceable and the rights and obligations of the parties shall
be construed and enforced only to such extent as shall be permitted by
applicable law.
12.4 Successors. This Agreement, the other Financing Agreements and any
other document referred to herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Lender, each Borrower and their respective
successors and assigns, except that no Borrower may assign its rights under this
Agreement, the other Financing Agreements and any other document referred to
herein or therein without the prior written consent of Lender. Lender may, after
notice to Borrowers, assign its rights and delegate its obligations under this
Agreement and the other Financing Agreements and further may assign, or sell
participations in, all or any part of the Loans, the Letter of Credit
Accommodations or any other interest herein to any Eligible Assignee, in which
event, the Eligible Assignee shall have, to the extent of such assignment or
participation, the same rights and benefits as it would have if it were the
Lender hereunder, except as otherwise provided by the terms of such assignment
or participation.
12.5 Entire Agreement. This Agreement, the other Financing Agreements,
any supplements hereto or thereto, and any instruments or documents delivered or
to be delivered in connection herewith or therewith represents the entire
agreement and understanding concerning the subject matter hereof and thereof
between the parties hereto, and supersede all other prior agreements,
understandings, negotiations and discussions, representations, warranties,
commitments, proposals, offers and contracts concerning the subject matter
hereof, whether oral or written.
12.6 Publicity. Each Borrower consents to Lender publishing a tombstone
or similar advertising material, the content of which shall be mutually
acceptable to Borrowers and Lender, relating to the financing transaction
contemplated by this Agreement.
SECTION 13. JOINT AND SEVERAL LIABILITY AND SURETYSHIP WAIVERS.
13.1 Independent Obligations; Subrogation. The obligations of each
Borrower, as guarantor of another Borrower's Obligations hereunder are joint and
several. To the maximum extent permitted by law, each Borrower hereby waives any
claim, right or remedy which either may now have or hereafter acquire against
any other Borrower that arises hereunder including, without limitation, any
claim, remedy or right of subrogation, reimbursement, exoneration, contribution,
indemnification, or participation in any claim, right or remedy of Lender
against any Borrower or any Collateral which Lender now has or hereafter
acquires, whether or not such claim, right or remedy arises in equity, under
contract, by statute, under common law or otherwise until the Obligations are
fully paid and finally discharged. In addition, each Borrower hereby waives any
right to proceed against the other Borrower, now or hereafter, for contribution,
indemnity, reimbursement, and any other suretyship rights and claims, whether
direct or indirect, liquidated or contingent, whether arising under express or
implied contract or by operation of law, which any Borrower may now have or
hereafter have as against the other Borrower with respect to the Obligations
until the Obligations are fully paid and finally discharged. Each Borrower also
hereby waives any rights of recourse to or with respect to any asset of the
other Borrower until the Obligations are fully paid and finally discharged.
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13.2 Authority to Modify Obligations and Security. Each Borrower
authorizes Lender, without notice or demand and without affecting any Borrower's
liability hereunder, from time to time, whether before or after any notice of
termination hereof or before or after any default in respect of the Obligations,
to: (i) renew, extend, accelerate, or otherwise change the time for payment of,
or otherwise change any other term or condition of, any document or agreement
evidencing or relating to any Obligations as such Obligations relate to the
other Borrower, including, without limitation, to increase or decrease the rate
of interest thereon; (ii) accept, substitute, waive, defease, increase, release,
exchange or otherwise alter any Collateral, in whole or in part, securing the
other Borrower's Obligations; (iii) apply any and all such Collateral and direct
the order or manner of sale thereof as Lender, in its sole discretion, may
determine; (iv) deal with the other Borrower as Lender may elect; (v) in
Lender's sole discretion, settle, release on terms satisfactory to Lender, or by
operation of law or otherwise, compound, compromise, collect or otherwise
liquidate any of the other Borrower's Obligations and/or any of the Collateral
in any manner, and bid and purchase any of the collateral at any sale thereof;
(vi) apply any and all payments or recoveries from the other Borrower as Lender,
in its sole discretion, may determine, whether or not such indebtedness relates
to the Obligations; all whether such Obligations are secured or unsecured or
guaranteed or not guaranteed by others; and (vii) apply any sums realized from
Collateral furnished by the other Borrower upon any of its indebtedness or
obligations to Lender as Lender, in its sole discretion, may determine, whether
or not such indebtedness relates to the Obligations; all without in any way
diminishing, releasing or discharging the liability of any Borrower hereunder.
13.3 Waiver of Defenses. Upon an Event of Default by any Borrower in
respect of any Obligations, Lender may, at its option and without notice to the
Borrowers, proceed directly against any Borrower to collect and recover the full
amount of the liability hereunder, or any portion thereof, and each Borrower
waives any right to require Lender to: (i) proceed against the other Borrower or
any other person whomsoever; (ii) proceed against or exhaust any Collateral
given to or held by Lender in connection with the Obligations; (iii) give notice
of the terms, time and place of any public or private sale of any of the
Collateral except as otherwise provided herein; or (iv) pursue any other remedy
in Lender's power whatsoever. A separate action or actions may be brought and
prosecuted against any Borrower whether or not action is brought against the
other Borrower and whether the other Borrower be joined in any such action or
actions; and each Borrower waives the benefit of any statute of limitations
affecting the liability hereunder or the enforcement hereof, and agrees that any
payment of any Obligations or other act which shall toll any statute of
limitations applicable thereto shall similarly operate to toll such statute of
limitations applicable to the liability hereunder.
13.4 Exercise of Lender's Rights. Each Borrower hereby authorizes and
empowers Lender in its sole discretion, without any notice or demand to such
Borrower whatsoever and without affecting the liability of such Borrower
hereunder, to exercise any right or remedy which Lender may have available to it
against the other Borrower.
13.5 Additional Waivers. Each Borrower waives any defense arising by
reason of any disability or other defense of the other Borrower or by reason of
the cessation from any cause whatsoever of the liability of the other Borrower
or by reason of any act or omission of Lender or others which directly or
indirectly results in or aids the discharge or release of the other Borrower or
any Obligations or any Collateral by operation of law or otherwise. The
Obligations
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shall be enforceable against each Borrower without regard to the validity,
regularity or enforceability of any of the Obligations with respect to any of
the other Borrower or any of the documents related thereto or any collateral
security documents securing any of the Obligations. No exercise by Lender of,
and no omission of Lender to exercise, any power or authority recognized herein
and no impairment or suspension of any right or remedy of Lender against any
Borrower or any Collateral shall in any way suspend, discharge, release,
exonerate or otherwise affect any of the Obligations or any Collateral furnished
by the Borrowers or give to the Borrowers any right of recourse against Lender.
The Borrowers specifically agree that the failure of Lender: (i) to perfect any
lien on or security interest in any property heretofore or hereafter given by
Borrowers to secure payment of the Obligations, or to record or file any
document relating thereto or (ii) to file or enforce a claim against the estate
(either in administration, bankruptcy or other proceeding) of any Borrower shall
not in any manner whatsoever terminate, diminish, exonerate or otherwise affect
the liability of any Borrower hereunder.
13.6 Additional Indebtedness. Additional Obligations may be created from
time to time at the request of any Borrower and without further authorization
from or notice to any other Borrower even though the borrowing Borrower's
financial condition may deteriorate since the date hereof. Each Borrower waives
the right, if any, to require Lender to disclose to such Borrower any
information it may now have or hereafter acquire concerning the other Borrower's
character, credit, Collateral, financial condition or other matters. Each
Borrower has established adequate means to obtain from the other Borrower on a
continuing basis financial and other information pertaining to such Borrower's
business and affairs, and assumes the responsibility for being and keeping
informed of the financial and other conditions of the other Borrower and of all
circumstances bearing upon the risk of nonpayment of the Obligations which
diligent inquiry would reveal. Lender need not inquire into the powers of any of
the Borrowers or the authority of any of their respective officers, directors,
partners or agents acting or purporting to act in their behalf, and any
obligations created in reliance upon the purported exercise of such power or
authority is hereby guaranteed. All obligations of Borrowers to Lender
heretofore, now or hereafter created shall be deemed to have been granted at
Borrowers' special insistence and request and in consideration of and in
reliance upon this Agreement.
13.7 Notices, Demands, Etc. Except as expressly provided by this
Agreement, Lender shall be under no obligation whatsoever to make or give to any
Borrower, and each Borrower hereby waives diligence, all rights of setoff and
counterclaim against Lender, all demands, presentments, protests, notices of
protests, notices of protests, notices of nonperformance, notices of dishonor,
and all other notices of every kind or nature, including notice of the
existence, creation or incurring of any new or additional Obligations.
13.8 Subordination. Except as otherwise provided in this Section 13.8,
any indebtedness of any Borrower now or hereafter owing to any other Borrower is
hereby subordinated to the Obligations, whether heretofore, now or hereafter
created, and whether before or after notice of termination hereof, and,
following the occurrence and during the continuation of an Event of Default, no
Borrower shall, without the prior consent of Lender, pay in whole or in part any
of such indebtedness nor will any such Borrower accept any payment of or on
account of any such indebtedness at any time while such Borrower remains liable
hereunder. At the request of Lender, after the occurrence and during the
continuance of an Event
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of Default, each Borrower shall pay to Lender all or any part of such
subordinated indebtedness and any amount so paid to Lender at its request shall
be applied to payment of the Obligations. Each payment on the indebtedness of
any Borrower to the other Borrower received in violation of any of the
provisions hereof shall be deemed to have been received by any other Borrower as
trustee for Lender and shall be paid over to Lender immediately on account of
the Obligations, but without otherwise affecting in any manner any such
Borrower's liability under any of the provisions of this Agreement. Each
Borrower agrees to file all claims against the other Borrower in any bankruptcy
or other proceeding in which the filing of claims is required by law in respect
of any indebtedness of the other Borrower to such Borrower, and Lender shall be
entitled to all of any such Borrower's rights thereunder. If for any reason any
such Borrower fails to file such claim at least thirty (30) days prior to the
last date on which such claim should be filed, Lender, as such Borrower's
attorney-in-fact, is hereby authorized to do so in Borrowers' name or, in
Lender's discretion, to assign such claim to, and cause a proof of claim to be
filed in the name of, Lender's nominee. In all such cases, whether in
administration, bankruptcy or otherwise, the person or persons authorized to pay
such claim shall pay to Lender the full amount payable on the claim in the
proceeding, and to the full extent necessary for that purpose any such Borrower
hereby assigns to Lender all such Borrower's rights to any payments or
distributions to which such Borrower otherwise would be entitled. If the amount
so paid is greater than any such Borrower's liability hereunder, Lender will pay
the excess amount to the party entitled thereto.
13.9 Revival. If any payments of money or transfers of property made to
Lender by any Borrower should for any reason subsequently be declared to be, or
in Lender's counsel's good faith opinion be determined to be, fraudulent (within
the meaning of any state or federal law relating to fraudulent conveyances),
preferential or otherwise voidable or recoverable in whole or in part for any
reason (hereinafter collectively called "voidable transfers") under the
Bankruptcy Code or any other federal or state law and Lender is required to
repay or restore, or in Lender's counsel's opinion may be so liable to repay or
restore, any such voidable transfer, or the amount or any portion thereof, then
as to any such voidable transfer or the amount repaid or restored and all
reasonable costs and expenses (including reasonable attorneys' fees) of Lender
related thereto, such Borrower's liability hereunder shall automatically be
revived, reinstated and restored and shall exist as though such voidable
transfer had never been made to Lender.
13.10 Understanding of Waivers. Each Borrower warrants and agrees that
the waivers set forth in this Section 13 are made with full knowledge of their
significance and consequences. If any of such waivers are determined to be
contrary to any applicable law or public policy, such waivers shall be effective
only to the maximum extent permitted by law.
13.11 Limited Liability. The Obligations of each Borrower shall be owed
and payable jointly and severally; provided, however, notwithstanding any other
provision of this Agreement, at Lender's option and upon Lender's acceleration
of the Obligations following an Event of Default, the aggregate liability of
each Borrower for Obligations owed by the other Borrowers (exclusive of the
Obligations owed by such Borrower directly to Lender which shall be unlimited
and not reduced in any way) shall be limited to the respective dollar amount set
forth below opposite such Borrower's name:
56
<PAGE> 62
<TABLE>
<CAPTION>
Borrower Liability Amount
-------- ----------------
<S> <C>
Deckers Outdoor Corporation $50,000,000
Deckers Outdoor Corporation International $ 5,000,000
Simple Shoes, Inc. $ 5,000,000
UGG Holdings, Inc. $10,000,000
Heirlooms, Inc. $ 5,000,000;
</TABLE>
it being understood that payments and prepayments of the Obligations by another
Borrower, any Obligor or any other Person, or the application of any proceeds
from foreclosure or other exercise of remedies against any Collateral, for
purposes of this Section 13.11, shall be applied by Lender in its sole
determination. Lender shall at any time have the right, without notice to any
Borrower, to reduce the limitation amount set forth above for any Borrower and
each Borrower hereby consents to any such unilateral reduction by Lender at any
time. No Borrower may benefit from such limitations set forth herein by Lender
except as agreed to by Lender in writing. Such limitations shall not be used by
any Borrower as a defense to or limitation of payment or in satisfaction of any
Obligation as asserted by Lender to be owed and do not alter, modify or limit
the terms of this Agreement except as to the extent as Lender agrees in writing.
57
<PAGE> 63
IN WITNESS WHEREOF, Lender and each Borrower have caused this Agreement
to be duly executed as of the day and year first above written.
LENDER BORROWER
CONGRESS FINANCIAL CORPORATION DECKERS OUTDOOR CORPORATION,
(WESTERN) a Delaware corporation
By: /s/ June M. Cowgill By: /s/ M. Scott Ash
----------------------------- --------------------------------
Name: June M. Cowgill Name: M. Scott Ash
----------------------------- --------------------------------
Title: Vice President Title:
----------------------------- --------------------------------
Address Chief Executive Office
225 South Lake Avenue, Suite 1000 495-A South Fairview Avenue
Pasadena, California 91101 Goleta, California 93117
DECKERS OUTDOOR CORPORATION
INTERNATIONAL, a Delaware corporation
By: /s/ M. Scott Ash
--------------------------------
Name: M. Scott Ash
--------------------------------
Title:
--------------------------------
Chief Executive Office
495-A South Fairview Avenue
Goleta, California 93117
58
<PAGE> 64
SIMPLE SHOES, INC.,
a California corporation
By: /s/ M. Scott Ash
--------------------------------
Name: M. Scott Ash
--------------------------------
Title:
--------------------------------
Chief Executive Office
495-A South Fairview Avenue
Goleta, California 93117
UGG HOLDINGS, INC.,
a California corporation
By: /s/ M. Scott Ash
--------------------------------
Name: M. Scott Ash
--------------------------------
Title:
--------------------------------
Chief Executive Office
495-A South Fairview Avenue
Goleta, California 93117
HEIRLOOMS, INC.,
a California corporation
By: /s/ M. Scott Ash
--------------------------------
Name: M. Scott Ash
--------------------------------
Title:
--------------------------------
Chief Executive Office
495-A South Fairview Avenue
Goleta, California 93117
59
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Registrant
<TABLE>
<S> <C>
Sensi, U.S.A., Inc. (California)
Simple Shoes, Inc. (California)
Deckers, Mexico, Inc. (California)
Deckers Baja, S.A. de C.V. (Mexico)
Holbrook Limited (Hong Kong)
Heirlooms, Inc. (California)
Deckers Outdoor Corporation International (Delaware)
Phillipsburg Limited (Hong Kong)
Picante, S.A. (Guatemala)
Ugg Holdings, Inc. (California)
Deckers Japan, Inc. (California)
Deckers Europe B.V. (The Netherlands)
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Deckers Outdoor Corporation:
We consent to incorporation by reference in the registration statement on Form
S-8 of Deckers Outdoor Corporation of our report dated February 24, 1999, except
for the fourth paragraph of note 11, which is as of March 17, 1999, relating to
the consolidated balance sheets of Deckers Outdoor Corporation and subsidiaries
as of December 31, 1997, and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998, and all related schedules, which
report appears in the December 31, 1998, annual report on Form 10-K of Deckers
Outdoor Corporation.
KPMG LLP
Los Angeles, California
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 236,000
<SECURITIES> 0
<RECEIVABLES> 28,384,000
<ALLOWANCES> 1,204,000
<INVENTORY> 23,665,000
<CURRENT-ASSETS> 59,309,000
<PP&E> 6,336,000
<DEPRECIATION> 3,342,000
<TOTAL-ASSETS> 84,373,000
<CURRENT-LIABILITIES> 17,174,000
<BONDS> 15,199,000
0
0
<COMMON> 85,000
<OTHER-SE> 51,915,000
<TOTAL-LIABILITY-AND-EQUITY> 84,373,000
<SALES> 102,172,000
<TOTAL-REVENUES> 102,172,000
<CGS> 65,592,000
<TOTAL-COSTS> 65,592,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 589,000
<INTEREST-EXPENSE> 1,171,000
<INCOME-PRETAX> (4,118,000)
<INCOME-TAX> (1,211,000)
<INCOME-CONTINUING> (2,907,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,907,000)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
