<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-22446
DECKERS OUTDOOR CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-3015862
- --------------------------------------------------------------------------------
(State or other jurisdiction of IRS Employer Identification
incorporation or organization)
495-A South Fairview Avenue,
Goleta, California 93117
- --------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (805) 967-7611
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of the issuer's class of common stock,
as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS MAY 7, 1999
---------------------------- --------------
<S> <C>
Common stock, $.01 par value 8,574,869
</TABLE>
<PAGE> 2
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 1
Condensed Consolidated Statements of Operations for the
Three-Month Period Ended March 31, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows for the
Three-Month Period Ended March 31, 1999 and 1998 3-4
Notes to Condensed Consolidated Financial Statements 5-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
</TABLE>
<PAGE> 3
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 4,120,000 263,000
Trade accounts receivable, less allowance for
doubtful accounts of $1,506,000 and $1,204,000
as of March 31, 1999 and December 31, 1998,
respectively 45,065,000 27,180,000
Inventories 24,403,000 23,665,000
Prepaid expenses and other current assets 2,069,000 2,178,000
Refundable and deferred tax assets 1,645,000 6,023,000
------------ ------------
Total current assets 77,302,000 59,309,000
Property and equipment, at cost, net 2,982,000 2,994,000
Intangible assets, less applicable amortization 20,371,000 20,702,000
Note receivable from supplier, net 844,000 782,000
Other assets, net 457,000 586,000
------------ ------------
$101,956,000 84,373,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 20,733,000 6,236,000
Trade accounts payable 7,207,000 7,947,000
Accrued expenses 4,550,000 2,991,000
------------ ------------
Total current liabilities 32,490,000 17,174,000
------------ ------------
Long-term debt, less current installments 15,168,000 15,199,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
5,000,000 shares; none issued -- --
Common stock, $.01 par value. Authorized 20,000,000
shares; issued 9,528,321 shares and outstanding
8,555,369 shares at March 31, 1999; issued
9,495,631 shares and outstanding 8,522,679 shares 86,000 85,000
at December 31, 1998
Additional paid-in capital 22,865,000 22,813,000
Retained earnings 31,971,000 29,726,000
------------ ------------
54,922,000 52,624,000
Less note receivable from stockholder/former director 624,000 624,000
------------ ------------
Total stockholders' equity 54,298,000 52,000,000
------------ ------------
$101,956,000 84,373,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
MARCH 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 38,040,000 32,177,000
Cost of sales 20,817,000 18,640,000
------------ ------------
Gross profit 17,223,000 13,537,000
Selling, general and administrative expenses 12,669,000 10,148,000
------------ ------------
Earnings from operations 4,554,000 3,389,000
Other expense (income):
Interest expense, net 631,000 294,000
Miscellaneous expense (income) (31,000) 7,000
------------ ------------
Earnings before income taxes 3,954,000 3,088,000
Income taxes 1,709,000 1,335,000
------------ ------------
Net earnings $ 2,245,000 1,753,000
============ ============
Net earnings per share:
Basic $ 0.26 0.20
Diluted 0.26 0.20
============ ============
Weighted average shares:
Basic 8,528,000 8,807,000
Diluted 8,732,000 8,832,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
MARCH 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,245,000 1,753,000
------------ ------------
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 733,000 633,000
Provision for doubtful accounts 433,000 160,000
Loss on disposal of assets -- 3,000
Non-cash stock compensation -- 84,000
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable (18,318,000) (14,476,000)
Inventories (738,000) (273,000)
Prepaid expenses and other current assets 109,000 (690,000)
Note receivable from supplier (62,000) 195,000
Refundable and deferred income taxes 4,378,000 --
Other assets 129,000 (11,000)
Increase (decrease) in:
Accounts payable (740,000) 230,000
Accrued expenses 1,559,000 1,214,000
Income taxes payable -- (22,000)
------------ ------------
Total adjustments (12,517,000) (12,953,000)
------------ ------------
Net cash used in operating activities (10,272,000) (11,200,000)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (390,000) (440,000)
Cash paid in connection with Ugg acquisition -- (2,000,000)
------------ ------------
Net cash used in investing activities (390,000) (2,440,000)
------------ ------------
</TABLE>
(Continued)
3
<PAGE> 6
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, Continued
(Unaudited)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
MARCH 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Net proceeds from long-term debt 14,466,000 12,975,000
Cash paid for repurchases of common stock -- (521,000)
Cash received from issuances of common stock 53,000 77,000
------------ ------------
Net cash provided by financing activities 14,519,000 12,531,000
------------ ------------
Net increase (decrease) in cash 3,857,000 (1,109,000)
Cash at beginning of period 263,000 3,238,000
------------ ------------
Cash at end of period $ 4,120,000 2,129,000
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 625,000 267,000
Income taxes 22,000 1,402,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 7
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) General
The unaudited condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial
statements and, in the opinion of management, reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair
presentation for each of the periods presented. The results of operations
for interim periods are not necessarily indicative of results to be
achieved for full fiscal years.
As contemplated by the Securities and Exchange Commission (SEC) under Rule
10-01 of Regulation S-X, the accompanying condensed consolidated financial
statements and related footnotes have been condensed and do not contain
certain information that will be included in the Company's annual
consolidated financial statements and footnotes thereto. For further
information, refer to the consolidated financial statements and related
footnotes for the year ended December 31, 1998 included in the Company's
Annual Report on Form 10-K.
(2) Earnings per Share
Basic earnings per share represents net earnings divided by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share represents net earnings divided by the
weighted-average number of shares outstanding, inclusive of the dilutive
impact of common stock equivalents. During the three-month periods ended
March 31, 1999 and 1998, the difference between the weighted average
number of shares used in the basic computation compared to that used in
the diluted computation was due to the dilutive impact of options to
purchase common stock.
The reconciliation of basic to diluted weighted average shares are as
follows:
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
MARCH 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net earnings $2,245,000 1,753,000
---------- ----------
Weighted average shares used in basic
computation 8,528,000 8,807,000
Dilutive stock options 204,000 25,000
---------- ----------
Weighted average shares used for diluted
computation 8,732,000 8,832,000
========== ==========
</TABLE>
5
<PAGE> 8
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(2) Earnings per Share (Continued)
Options to purchase 967,000 shares of common stock at prices ranging
from $3.03 to $13.75 were outstanding during the three months ended
March 31, 1999 and options to purchase 675,000 shares of common stock at
prices ranging from $7.50 to $15.00 were outstanding during the three
month period ended March 31, 1998, but were not included in the
computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares
during the period and, therefore, were anti-dilutive.
(3) Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ----------
<S> <C> <C>
Finished goods $ 23,761,000 22,396,000
Work in process 81,000 35,000
Raw materials 561,000 1,234,000
------------ ----------
Total inventories $ 24,403,000 23,665,000
============ ==========
</TABLE>
(4) Credit Facility
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 March 31, 1999) 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
agreement underlying the credit facility includes a tangible net worth
covenant. At March 31, 1999, the Company was in compliance with the
terms of the agreement.
6
<PAGE> 9
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(5) Income Taxes
Income taxes for the interim periods were computed using the effective
tax rate estimated to be applicable for the full fiscal year, which is
subject to ongoing review and evaluation by management. For the three
months ended March 31, 1999, the Company had income tax expense of
$1,709,000, representing an effective income tax rate of 43.2%. For the
three months ended March 31, 1998, the Company had income tax expense of
$1,335,000, representing an effective income tax rate of 43.2%.
(6) Computer Software Costs
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." The
adoption of SOP 98-1 requires the Company to modify its method of
accounting for software. The Company adopted SOP 98-1 effective January
1, 1999. The adoption of SOP 98-1 did not have a significant impact on
the Company's financial position or results of operations.
(7) 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 and all other non-owner changes in equity. Except
for net earnings 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 approximated
comprehensive income for each of the three month periods ended March 31,
1999 and 1998.
(8) Start-Up Activities
The American Institute of Certified Public Accountants ("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. 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 adopted SOP 98-5 on January 1, 1999.
The adoption of this statement did not have a material impact on the
Company's financial position or results of operations.
(9) Recently Issued Pronouncements
The Financial Accounting Standards Board has 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, FAS No. 133 is not expected to impact the Company's
financial position or results of operations.
7
<PAGE> 10
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(10) Business Segments
The Company's accounting policies of the segments and the basis for
segmentation are the same as those at December 31, 1998. 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 for the three months ended March 31, 1999
and 1998 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Sales to external
customers:
Teva, domestic $ 24,734,000 19,309,000
Simple, domestic 2,586,000 4,013,000
Ugg, domestic 324,000 361,000
Other 10,396,000 8,494,000
------------- ------------
$ 38,040,000 32,177,000
============= ============
Intersegment sales:
Teva, domestic $ 496,000 597,000
Simple, domestic -- 97,000
Ugg, domestic -- --
Other 140,000 2,255,000
------------- ------------
$ 636,000 2,949,000
============= ============
Earning from operations:
Teva, domestic $ 2,730,000 2,680,000
Simple, domestic 265,000 114,000
Ugg, domestic (777,000) (770,000)
Other 2,310,000 1,440,000
------------- ------------
$ 4,528,000 3,464,000
============= ============
Total assets:
Teva, domestic $ 87,734,000 69,651,000
Simple, domestic 8,321,000 10,965,000
Ugg, domestic 20,194,000 19,050,000
Other 13,593,000 15,537,000
------------- ------------
$ 129,842,000 115,203,000
============= ============
</TABLE>
8
<PAGE> 11
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The reconciliation of segment earnings from operations to consolidated
earnings before income taxes is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Total earnings from
operations for $4,528,000 3,464,000
reportable segments
Intersegment profit change
in beginning and ending
inventory 26,000 (75,000)
---------- ----------
Consolidated earnings from
operations 4,554,000 3,389,000
Interest expense, net 631,000 294,000
Other expense (income) (31,000) 7,000
---------- ----------
Consolidated earnings
before income taxes $3,954,000 3,088,000
========== ==========
</TABLE>
(11) Contingencies
A judgment aggregating $1,785,000 was entered against the Company in May
1999 in an action brought against the Company in 1995 in the United
States District Court, District of Montana (Missoula Division). The
judgment was for breach of a non-disclosure contract, among other
things. The Company is appealing the judgment and continues to believe
such claims are without merit. The plaintiffs have filed a motion to
enhance their damages, which the Company has opposed. 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.
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 results of operations, financial condition and cash flows.
9
<PAGE> 12
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March
31, 1998
Net sales increased by $5,863,000, or 18.2%, from the comparable three
months ended March 31, 1998. Sales of the Teva footwear increased to
$32,944,000 for the three months ended March 31, 1999 from $23,473,000
for the three months ended March 31, 1998, a 40.3% increase. This
increase was a result of overall strength in the sandal market and an
aggressive strategy to ship product earlier in the season in 1999 than
in 1998. As product was shipped to retailers earlier in the season this
year, a portion of the sales which otherwise would have been shipped in
the second quarter were shipped in the first quarter this year. See
discussion under "Outlook." Sales of Teva footwear represented 86.6% and
73.0% of net sales in the three months ended March 31, 1999 and 1998,
respectively. Net sales of footwear under the Simple product line
decreased 40.4% to $3,942,000 from $6,612,000 from the comparable three
months ended March 31, 1998. The decrease in Simple sales occurred due
to a decline in demand for the 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. Net
sales of Ugg footwear were $324,000 for the three months ended March 31,
1999, compared to net sales of $361,000 for the three months ended March
31, 1998. Due to the highly seasonal nature of Ugg's business, the first
quarter is generally a low volume quarter for Ugg sales. Overall,
international sales for all of the Company's products increased 24.1% to
$10,589,000 from $8,532,000, representing 27.8% of net sales in 1999 and
26.5% in 1998. The volume of footwear sold increased 17.9% to 1,403,000
pairs during the three months ended March 31, 1999 from 1,190,000 pairs
during the three months ended March 31, 1998, for the reasons discussed
above.
The weighted average wholesale price per pair sold during the three
months ended March 31, 1999 increased 3.1% to $26.21 from $25.42 for the
three months ended March 31, 1998. The increase was primarily due to a
decrease in the volume of closeouts combined with improved selling
prices for closeouts sold.
Cost of sales increased by $2,177,000, or 11.7%, to $20,817,000 for the
three months ended March 31, 1999, compared with $18,640,000 for the
three months ended March 31, 1998. Gross profit increased by $3,686,000,
or 27.2%, to $17,223,000 for the three months ended March 31, 1999 from
$13,537,000 for the three months ended March 31, 1998 and increased as a
percentage of net sales to 45.3% from 42.1%. The increase in gross
margin during the quarter was due to several factors, including improved
product sourcing, the exiting of the components business which typically
carries a lower gross margin and a reduction in the impact of closeouts
versus the same period last year.
Selling, general and administrative expenses increased by $2,521,000, or
24.8%, for the three months ended March 31, 1999, compared with the
three months ended March 31, 1998, and increased as a percentage of net
sales to 33.3% in 1999 from 31.5% in 1998. The increase in selling,
general and administrative expenses as a percentage of net sales was
primarily due to nearly $1,000,000 of special charges incurred during
the three months ended March 31, 1999. These costs include legal and
other expenses associated with a lawsuit brought against the Company in
1995 in Montana, as well as severance costs in connection with a
corporate restructuring. See discussion under "Legal Proceedings."
Net interest expense was $631,000 for the three months ended March 31,
1999 compared with $294,000 for the three months ended March 31, 1998,
primarily due to increased borrowings on the Company's credit facility
in the current year.
10
<PAGE> 13
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
For the three months ended March 31, 1999 the Company experienced an
income tax expense of $1,709,000. This represents an effective income
tax rate of 43.2%. For the three months ended March 31, 1998, the
Company had income tax expense of $1,335,000, representing an effective
income tax rate of 43.2%.
Net earnings increased 28.1% to $2,245,000 for the three months ended
March 31, 1999 versus net earnings of $1,753,000 for the three months
ended March 31, 1998 due to the reasons discussed above.
Outlook
This "Outlook" section, the last paragraph under "Liquidity and Capital
Resources," the discussion under "Seasonality" and other statements in
this Form 10-Q 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.
Sales and Operating Expense Expectations. The Company's net sales under
the Teva product line increased 40% during the three month period ended
March 31, 1999 compared to the same period last year as the Company
continued its strategy of an aggressive sell-in program. Under this
strategy, the Company shipped product earlier in the season this year
than it had done last year. As product was shipped to retailers earlier
in the season this year than in prior years, a portion of the sales
which otherwise would have been shipped in the second quarter were
shipped in the first quarter this year.
For the year ending December 31, 1999 the Company expects that net sales
for Teva will be greater than net sales for the previous year, but the
Company expects that increase to be significantly less than that
experienced for the three month period ended March 31, 1999. The Company
expects net sales under the Ugg product line to increase for the year
ending December 31, 1999 compared to last year and expects net sales of
the Simple product line to decrease in 1999 compared to 1998.
Selling, general and administrative expenses increased in 1998 to 38.5%
of net sales, for a variety of reasons. The Company expects selling,
general and administrative expenses as a percentage of sales to decrease
for the year ended December 31, 1999 compared to 1998 as a result of the
Company's restructuring as well as continued efforts to control
operating expenses.
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.
11
<PAGE> 14
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
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.
Potential Imposition of Duties. 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 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.
Potential Impact of Teva License Expiration. As announced in November
1998, Mark Thatcher, the inventor and licensor of Teva Sport Sandals,
has engaged a financial advisor to explore various strategic options for
the Teva brand following the expiration of the existing licenses with
the Company, which expire in August 2001. 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 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.
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:
12
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
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 continue to 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 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
13
<PAGE> 16
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
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
March 31, 1999, the Company had incurred Year 2000 compliance costs of
approximately $170,000.
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 of cash, trade accounts receivable,
inventories and a revolving credit facility. At March 31, 1999, working
capital was $44,812,000, including $4,120,000 of cash. Cash used in
operating activities aggregated $10,272,000 for the three months ended
March 31, 1999. Trade accounts receivable increased 65.8% from December
31, 1998 as a result of normal seasonality, the high volume of net sales
during the quarter, outstanding receivables with extended payment terms
and the impact of a general deterioration in the average collection
periods. Inventories increased 3.1% since
14
<PAGE> 17
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
December 31, 1998 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
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.
On January 21, 1999, the Company replaced the existing credit facility
with a new revolving credit facility (the "Facility") with a new lender.
The 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 March 31, 1999), 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. The Company was in compliance with the covenant at March
31, 1999. 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. On March 31, 1999, the Company had
outstanding borrowings under the Facility of $35,246,000, outstanding
letters of credit aggregating $165,000 and borrowing availability of
$3,314,000.
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 to the supplier's operations, of which $2,344,000 was
outstanding at March 31, 1999 ($844,000 net of allowance). The note is
secured by all assets of the supplier and bears interest at the prime
rate (7.75% at March 31, 1999) plus 1%.
Capital expenditures totaled $390,000 for the three-months ended March
31, 1999. The Company's capital expenditures related primarily to molds
purchased for use in the production process. The Company currently has
no material future commitments for capital expenditures.
The Company's Board of Directors has authorized the repurchase of
2,200,000 shares of common stock under a stock repurchase program. 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. No shares were repurchased during the three
month period ended March 31, 1999. At March 31, 1999, 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.
15
<PAGE> 18
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
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.
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
For recently issued pronouncements, see Note 9 to the Condensed
Consolidated Financial Statements.
16
<PAGE> 19
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. A judgment aggregating $1,785,000 was entered against
the Company in May 1999 in an action brought against the Company in 1995 in the
United States District Court, District of Montana (Missoula Division). The
judgment was for breach of a non-disclosure contract, among other things. The
Company is appealing the judgment and continues to believe such claims are
without merit. The plaintiffs have filed a motion to enhance their damages,
which the Company has opposed. 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.
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 in April 1999 the action was dismissed with
prejudice. As full settlement, the terms provided that the Company extended the
due dates of the $270,000 of previous indebtedness, requiring periodic payments
through 2002.
Item 2. Changes in Securities. Not applicable
Item 3. Defaults upon Senior Securities. Not applicable
Item 4. Submission of Matters to a Vote of Security Holders. Not applicable
Item 5. Other Information. Not applicable
Item 6. Exhibits and Reports on Form 8-K. Not applicable.
17
<PAGE> 20
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Deckers Outdoor Corporation
Date: May 14, 1999 /s/ M. Scott Ash
-------------------------------------------
M. Scott Ash, Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
18
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