<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 (IRS Employer Identification)
of 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 November 8, 1999
----- ----------------
<S> <C>
Common stock, $.01 par value 9,046,153
</TABLE>
<PAGE> 2
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 1
Condensed Consolidated Statements of Operations for the
Three-Month Period Ended September 30, 1999 and 1998 2
Condensed Consolidated Statements of Operations for the
Nine-Month Period Ended September 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows for the
Nine-Month Period Ended September 30, 1999 and 1998 4-5
Notes to Condensed Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-21
Part II. Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
</TABLE>
<PAGE> 3
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 1,647,000 263,000
Trade accounts receivable, less allowance for
doubtful accounts of $1,806,000 and $1,204,000
as of September 30, 1999 and December 31,
1998, respectively 18,227,000 27,180,000
Inventories 16,921,000 23,665,000
Prepaid expenses and other current assets 2,185,000 2,178,000
Refundable and deferred tax assets 2,267,000 6,023,000
----------- -----------
Total current assets 41,247,000 59,309,000
Property and equipment, at cost, net 2,437,000 2,994,000
Intangible assets, less applicable amortization 22,368,000 20,702,000
Note receivable from supplier, net -- 782,000
Other assets, net 480,000 586,000
----------- -----------
$66,532,000 84,373,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 123,000 6,236,000
Trade accounts payable 5,635,000 7,947,000
Accrued expenses 2,355,000 2,991,000
----------- -----------
Total current liabilities 8,113,000 17,174,000
----------- -----------
Long-term debt, less current installments 2,007,000 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
10,019,105 shares and outstanding 9,046,153 shares at September 30,
1999; issued 9,495,631 shares and outstanding 8,522,679 shares
at December 31, 1998 90,000 85,000
Additional paid-in capital 24,582,000 22,813,000
Retained earnings 32,364,000 29,726,000
----------- -----------
57,036,000 52,624,000
Less note receivable from stockholder/former director 624,000 624,000
----------- -----------
Total stockholders' equity 56,412,000 52,000,000
----------- -----------
$66,532,000 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
SEPTEMBER 30,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 18,244,000 13,558,000
Cost of sales 12,523,000 12,251,000
------------ ------------
Gross profit 5,721,000 1,307,000
Selling, general and administrative expenses 7,846,000 9,374,000
------------ ------------
Loss from operations (2,125,000) (8,067,000)
Other expense:
Interest expense, net 100,000 150,000
Miscellaneous expense 4,000 70,000
------------ ------------
Loss before income tax benefit (2,229,000) (8,287,000)
Income tax benefit (954,000) (3,154,000)
------------ ------------
Net loss $ (1,275,000) (5,133,000)
============ ============
Net loss per share:
Basic $ (0.14) (0.60)
Diluted (0.14) (0.60)
============ ============
Weighted average shares:
Basic 9,026,000 8,506,000
Diluted 9,026,000 8,506,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 87,644,000 76,877,000
Cost of sales 50,944,000 49,111,000
------------ ------------
Gross profit 36,700,000 27,766,000
Selling, general and administrative expenses 30,530,000 29,580,000
------------ ------------
Earnings (loss) from operations 6,170,000 (1,814,000)
Other expense (income):
Interest expense, net 1,230,000 836,000
Miscellaneous expense (income) (9,000) 73,000
------------ ------------
Earnings (loss) before income taxes 4,949,000 (2,723,000)
Income taxes (benefit) 2,311,000 (749,000)
------------ ------------
Net earnings (loss) $ 2,638,000 (1,974,000)
============ ============
Net earnings (loss) per share:
Basic $ 0.30 (0.23)
Diluted 0.30 (0.23)
============ ============
Weighted average shares:
Basic 8,761,000 8,673,000
Diluted 8,921,000 8,673,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 2,638,000 (1,974,000)
------------ ------------
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 2,406,000 1,998,000
Provision for doubtful accounts 1,409,000 550,000
Gain on disposal of assets (10,000) --
Stock compensation 34,000 84,000
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable 7,544,000 7,655,000
Inventories 6,744,000 2,508,000
Prepaid expenses and other current assets (7,000) 309,000
Refundable and deferred tax assets 3,756,000 (4,482,000)
Note receivable from supplier 782,000 369,000
Other assets 56,000 (32,000)
Increase (decrease) in:
Accounts payable (2,312,000) 176,000
Accrued expenses (636,000) (1,790,000)
Income taxes payable -- (22,000)
------------ ------------
Total adjustments 19,766,000 7,323,000
------------ ------------
Net cash provided by operating activities 22,404,000 5,349,000
------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 10,000 147,000
Purchase of property and equipment (857,000) (1,582,000)
Cash paid in connection with Ugg acquisition -- (2,000,000)
Cash paid in connection with Teva license (1,000,000) --
------------ ------------
Net cash used in investing activities (1,847,000) (3,435,000)
------------ ------------
</TABLE>
(Continued)
4
<PAGE> 7
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, Continued
(Unaudited)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Net proceeds from (repayments of) long-term debt (19,305,000) 1,091,000
Cash paid for repurchases of common stock -- (2,529,000)
Cash received from issuances of common stock 132,000 116,000
------------ ------------
Net cash used in financing activities
(19,173,000) (1,322,000)
------------ ------------
Net increase in cash 1,384,000 592,000
Cash at beginning of period 263,000 3,238,000
------------ ------------
Cash at end of period $ 1,647,000 3,830,000
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,257,000 834,000
Income taxes 1,260,000 3,780,000
============ ============
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
In connection with the Teva License Agreement, dated June 7, 1999, the
Company recorded an increase in intangible assets of $2,608,000 for the
value of the Teva license paid for with cash of $1,000,000 and issuance
of 428,743 shares of common stock valued at approximately $1,608,000.
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 8
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 (Loss) per Share
Basic earnings (loss) per share represents net earnings (loss) divided by
the weighted average number of common shares outstanding for the period.
Diluted earnings (loss) per share represents net earnings (loss) divided
by the weighted average number of shares outstanding, inclusive of the
dilutive impact of common stock equivalents. For the three-month period
ended September 30, 1999 and for the three and nine-month periods ended
September 30, 1998, the Company had a net loss and accordingly, inclusion
of the stock options would be anti-dilutive. As a result, the impact of
stock options was not included in the computations for these periods and
the resulting weighted average number of shares used in the basic
computation and the diluted computation are the same. For the nine-month
period ended September 30, 1999, 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 reconciliations of basic to diluted weighted average shares are as
follows:
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
SEPTEMBER 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net loss $(1,275,000) (5,133,000)
=========== ===========
Weighted average shares used in basic
computation 9,026,000 8,506,000
Dilutive stock options -- --
----------- -----------
Weighted average shares used for diluted
computation 9,026,000 8,506,000
=========== ===========
</TABLE>
6
<PAGE> 9
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(2) Earnings (Loss) per Share (Continued)
Options to purchase 794,000 shares of common stock at prices ranging
from $1.56 to $13.75 were outstanding during the three-month period
ended September 30, 1999, and options to purchase 743,000 shares of
common stock at prices ranging from $5.50 to $15.00 were outstanding
during the three-month period ended September 30, 1998, but were not
included in the computation of diluted earnings (loss) per share because
the options were anti-dilutive, as the Company incurred a net loss.
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net earnings (loss) $2,638,000 (1,974,000)
========== ==========
Weighted average shares used in basic
computation 8,761,000 8,673,000
Dilutive stock options 160,000 --
---------- ----------
Weighted average shares used for diluted
computation 8,921,000 8,673,000
========== ==========
</TABLE>
Options to purchase 284,000 shares of common stock at prices ranging
from $3.00 to $13.75 were outstanding during the nine-month period ended
September 30, 1999, 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, the options were anti-dilutive. Options to purchase
691,000 shares of common stock at prices ranging from $5.50 to $15.00
were outstanding during the nine-month period ended September 30, 1998,
but were not included in the computation of diluted earnings (loss) per
share because the options were anti-dilutive, as the Company incurred a
net loss.
(3) Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Finished goods $16,504,000 22,396,000
Work in process 22,000 35,000
Raw materials 395,000 1,234,000
----------- -----------
Total inventories $16,921,000 23,665,000
=========== ===========
</TABLE>
7
<PAGE> 10
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(4) 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 September 30, 1999, the Company had an income tax benefit
of $954,000, representing an effective income tax rate of 42.8%. For the
three months ended September 30, 1998, the Company had an income tax
benefit of $3,154,000, representing an effective income tax rate of
38.1%. For the nine months ended September 30, 1999, the Company had
income tax expense of $2,311,000, representing an effective income tax
rate of 46.7%. For the nine months ended September 30, 1998, the Company
had an income tax benefit of $749,000, representing an effective income
tax rate of 27.5%.
(5) Computer Software Costs
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 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.
(6) Comprehensive Income
The Company adopted Statement of Financial Accounting Standards (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 and nine-month periods ended September 30, 1999 and 1998.
(7) Start-Up Activities
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. 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.
8
<PAGE> 11
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(8) Recently Issued Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 modifies the accounting for derivative and hedging activities and is
effective for all fiscal quarters of fiscal years beginning after June
15, 2000. Since the Company does not presently invest in derivatives or
engage in hedging activities, SFAS No. 133 is not expected to impact the
Company's financial position or results of operations.
(9) 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 unit requires different marketing, research and
development, design, sourcing and sales strategies.
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.
Business segment information for the nine months ended September 30,
1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Sales to external customers:
Teva, domestic $50,052,000 44,119,000
Simple, domestic 8,881,000 11,793,000
Ugg, domestic 5,221,000 2,815,000
Other 23,490,000 18,150,000
----------- -----------
$87,644,000 76,877,000
=========== ===========
Intersegment sales:
Teva, domestic $ 721,000 1,057,000
Simple, domestic -- 150,000
Other 1,980,000 5,066,000
----------- -----------
$ 2,701,000 6,273,000
=========== ===========
</TABLE>
9
<PAGE> 12
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(9) Business Segments (Continued)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Earnings (loss) from
operations:
Teva, domestic $ 3,081,000 (883,000)
Simple, domestic 1,511,000 (1,422,000)
Ugg, domestic (599,000) (1,651,000)
Other 2,123,000 1,962,000
------------ ------------
$ 6,116,000 (1,994,000)
============ ============
Total assets:
Teva, domestic $ 51,514,000 51,939,000
Simple, domestic 8,071,000 9,011,000
Ugg, domestic 25,979,000 22,657,000
Other 1,828,000 9,946,000
------------ ------------
$ 87,392,000 93,553,000
============ ============
</TABLE>
The reconciliation of segment earnings (loss) from operations to
consolidated earnings (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Total earnings (loss) from
operations for
reportable segments $ 6,116,000 (1,994,000)
Intersegment profit change
in beginning and ending
inventory 54,000 180,000
----------- -----------
Consolidated earnings
(loss) from operations 6,170,000 (1,814,000)
Interest expense, net 1,230,000 836,000
Other expense (income) (9,000) 73,000
----------- -----------
Consolidated earnings
(loss) before income
taxes $ 4,949,000 (2,723,000)
=========== ===========
</TABLE>
10
<PAGE> 13
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(10) 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 filed a motion to increase
their damage award, but the court denied that motion. 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.
(11) License Agreement
On June 7, 1999, the Company signed a new license agreement (the
"License Agreement") for Teva, which becomes effective January 1, 2000.
Under the License Agreement, the Company receives the exclusive
worldwide rights for the manufacture and distribution of Teva footwear
through 2004. The License Agreement is automatically renewable through
2008 and through 2011 under two renewal options, provided that minimum
required sales levels are achieved. As with the previous arrangement,
the new license agreement provides for a sliding scale of royalty rates,
depending on sales levels. Additionally, the Company has agreed to
increase the contractual marketing expenditure, depending on sales
levels and varying by territory, effective June 7, 1999. As additional
consideration, the Company paid the licensor a licensing fee of
$1,000,000 and issued the licensor 428,743 shares of its previously
unissued common stock. The Company has recorded the license as an
intangible asset equal to the cash and fair market value of the stock
issued on the date of the License Agreement. These shares are subject to
various contractual and other holding period requirements. In addition,
the Company has agreed to grant the licensor not less than 50,000 stock
options on the Company's common stock annually, at the fair market value
on the date of grant.
11
<PAGE> 14
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(11) License Agreement (Continued)
The Company also received an option to buy Teva and all of its assets,
including all worldwide rights to all Teva products. The option price is
based on formulas tied to net sales of Teva products and varies
depending on when the option is exercised. The Company's option is
exercisable during the period from January 1, 2000 to December 31, 2001
or during the period from January 1, 2006 to December 31, 2008. If the
Company does not exercise its option to acquire Teva, the licensor has
the option to acquire the Teva distribution rights from the Company for
the period from January 1, 2010 to December 31, 2011, the end of the
license term, and the option price is based on a formula tied to the
Company's earnings before interest, taxes, depreciation and
amortization.
Apparel and other non-footwear products are not covered by the License
Agreement. However, the Company intends to continue to deliver its
Spring 2000 Teva apparel line under the previous apparel license
agreement. Following the Spring 2000 season, the Company intends to
transition out of Teva apparel.
12
<PAGE> 15
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto, as well
as our Annual Report on Form 10-K for the year ended December 31, 1998.
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934
that involve risk and uncertainty, such as forward-looking statements
relating to sales and operating expense expectations, the potential
imposition of certain customs duties, 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. Actual results may
vary. Some of the factors that could cause actual results to differ
materially from those in the forward-looking statements are identified
in the accompanying "Outlook" section of this Quarterly Report on Form
10-Q.
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
For the three months ended September 30, 1999, net sales increased by
$4,686,000, or 34.6%, from the comparable three months ended September
30, 1998. Aggregate net sales of Teva increased to $7,575,000 for the
three months ended September 30, 1999 from $4,219,000 for the three
months ended September 30, 1998, a 79.5% increase. This increase was a
result of overall strength in the sandal market, the introduction of a
fall line in 1999 and increased demand for Teva products. Aggregate net
sales of Teva represented 41.5% and 31.1% of net sales in the three
months ended September 30, 1999 and 1998, respectively. Aggregate net
sales of footwear under the Simple product line decreased 9.7% to
$5,281,000 from $5,849,000 from the comparable three months ended
September 30, 1998. The decrease in Simple sales from the prior year's
sales was due to a lower demand for the product as well as a decrease in
the volume of closeout sales. Aggregate net sales of Ugg increased 86.2%
to $4,797,000 for the three months ended September 30, 1999 from
$2,576,000 for the three months ended September 30, 1998. This increase
was primarily due to the positive response to the early delivery program
in 1999. Overall, international sales for all of the Company's products
increased 63.3% to $5,421,000 from $3,320,000, representing 29.7% of net
sales in 1999 and 24.5% in 1998. The volume of footwear sold increased
25.8% to 672,000 pairs during the three months ended September 30, 1999
from 534,000 pairs during the three months ended September 30, 1998, for
the reasons discussed above.
The weighted average wholesale price per pair sold during the three
months ended September 30, 1999 increased 8.8% to $25.89 from $23.80 for
the three months ended September 30, 1998. The increase was primarily
due to the introduction of Teva's new fall footwear line which has a
higher average wholesale price than the other Teva sandals and a
significant increase in Ugg sales which also have a higher average
wholesale price than Teva or Simple.
Cost of sales increased by $272,000, or 2.2%, to $12,523,000 for the
three months ended September 30, 1999, compared with $12,251,000 for the
three months ended September 30, 1998. Gross profit increased by
$4,414,000, or 337.7%, to $5,721,000 for the three months ended
September 30, 1999 from $1,307,000 for the three months ended September
30, 1998 and increased as a percentage of net sales to 31.4% from 9.6%.
The increase was primarily due to the non-recurrence of the significant
charges incurred in the third quarter of 1998. These included raw
materials write-downs, partially as a result of the closure of the
Company's Mexican manufacturing facility in the third quarter of last
year, significant finished goods inventory write-downs, primarily
related to the Simple brand, and a product recall on the Teva nylon
infant sandals. In addition, the increase in gross margin during the
quarter was due to improved product sourcing and a reduction in
materials and finished goods write-downs.
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Selling, general and administrative expenses decreased by $1,528,000, or
16.3%, for the three months ended September 30, 1999, compared with the
three months ended September 30, 1998, and decreased as a percentage of
net sales to 43.0% in 1999 from 69.1% in 1998. The decrease in selling,
general and administrative expenses was primarily due to decreased
marketing costs during the third quarter as the Company improved its
efforts at controlling marketing spending and refocused its marketing
spending towards periods in which the Company believed such spending
could provide better benefits. The Company also experienced reductions
in payroll costs and apparel-related expenses and greatly improved its
cost control efforts, in general, since the third quarter of last year.
In addition, the Company did not have the recurrence of last year's
expenses associated with the closure of the Mexican manufacturing
facility and product recall. These decreases were partially offset by
increases in bad debt expense as well as costs associated with changes
in European distributors. Selling, general and administrative costs as a
percentage of sales also decreased as certain selling, general and
administrative expenses are fixed and did not fluctuate in proportion to
the sales increase during the quarter.
Net interest expense was $100,000 for the three months ended September
30, 1999 compared with $150,000 for the three months ended September 30,
1998, primarily due to decreased borrowings on the Company's credit
facility in the current year.
For the three months ended September 30, 1999, the Company experienced
an income tax benefit of $954,000, representing an effective income tax
rate of 42.8%. For the three months ended September 30, 1998, the
Company experienced an income tax benefit of $3,154,000, representing an
effective income tax rate of 38.1%. Income taxes for interim periods are
computed using the effective tax rate estimated to be applicable for the
full fiscal year, which is subject to ongoing review and evaluation by
the Company. The Company has certain non-deductible expenses, including
goodwill amortization associated with the acquisitions of Simple Shoes,
Inc. and Ugg Holdings, Inc. During periods of positive earnings before
income taxes, the impact of the non-deductible items results in an
increase in the effective tax rate; whereas, during periods of loss
before income taxes, the impact is a reduction in the tax benefit and
resulting tax rate. Because the Company experienced positive earnings
before income taxes year to date through September 30, 1999 versus a
loss before income taxes during the comparable period in 1998, the
effective income tax rate was higher during the 1999 period than during
the 1998 period.
The Company incurred a net loss of $1,275,000 for the three months ended
September 30, 1999 compared to a net loss of $5,133,000 for the three
months ended September 30, 1998, an improvement of 75.2%, for the
reasons discussed above.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
For the nine months ended September 30, 1999, net sales increased by
$10,767,000, or 14.0%, from the comparable nine months ended September
30, 1998. Aggregate net sales of Teva increased to $67,275,000 for the
nine months ended September 30, 1999 from $53,146,000 for the nine
months ended September 30, 1998, a 26.6% increase. This increase was a
result of overall strength in the sandal market, the introduction of
Teva's new fall footwear line and increased demand for the Teva
products. Aggregate net sales of Teva represented 76.8% and 69.1% of net
sales in the nine months ended September 30, 1999 and 1998,
respectively. Aggregate net sales of footwear under the Simple product
line decreased 24.1% to $12,863,000 from $16,940,000 from the comparable
nine months ended September 30, 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 and an abundance of similar
products at retail. In addition, there were fewer Simple closeout sales
in the current year versus the same period last year. Aggregate net
sales of Ugg footwear increased 85.4% to $5,221,000 for the nine months
ended September 30, 1999 from $2,815,000 for the nine months ended
September 30, 1998 largely due to the
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AND SUBSIDIARIES
positive response to Ugg's early delivery program in 1999. Overall,
international sales for all of the Company's products increased 26.6% to
$24,044,000 from $18,986,000, representing 27.4% of net sales in 1999
and 24.7% in 1998. The volume of footwear sold increased 14.9% to
3,325,000 pairs during the nine months ended September 30, 1999 from
2,893,000 pairs during the nine months ended September 30, 1998, for the
reasons discussed above.
The weighted average wholesale price per pair sold during the nine
months ended September 30, 1999 was $25.22 which was comparable to
$25.24 for the nine months ended September 30, 1998. This occurred as a
result of several offsetting factors. The Company experienced a
reduction in European selling prices for several styles, increased sales
of lower priced styles and the reduction of the standard wholesale price
of a leading women's style in 1999 versus 1998. These reductions were
offset by the higher volume of Ugg sales in the third quarter of 1999 as
well as the introduction of Teva's new fall line, which carry a higher
average wholesale price.
Cost of sales increased by $1,833,000, or 3.7%, to $50,944,000 for the
nine months ended September 30, 1999, compared with $49,111,000 for the
nine months ended September 30, 1998. Gross profit increased by
$8,934,000, or 32.2%, to $36,700,000 for the nine months ended September
30, 1999 from $27,766,000 for the nine months ended September 30, 1998
and increased as a percentage of net sales to 41.9% from 36.1%. The
increase in gross margin was largely due to the non-recurrence of the
significant charges experienced in the nine months ended September 30,
1998. These charges included raw materials write-downs, partially as a
result of the closure of the company's Mexican manufacturing facility in
the third quarter of last year, significant finished goods inventory
write-downs, primarily related to the Simple brand, and a product recall
on the Teva nylon infant sandals. In addition, for the nine-month period
ended September 30, 1999, the Company experienced improved product
sourcing and lower inventory write-downs. The gross margin also improved
as a result of the Company's exit from the footwear components business,
which typically carried a lower margin.
Selling, general and administrative expenses increased by $950,000, or
3.2%, for the nine months ended September 30, 1999, compared with the
nine months ended September 30, 1998, and decreased as a percentage of
net sales to 34.8% in 1999 from 38.5% in 1998. The decrease in selling,
general and administrative expenses as a percentage of net sales was
primarily due to the $10,767,000 increase in net sales, without a
proportionate increase in selling, general and administrative expenses.
This occurred as certain selling, general and administrative expenses
are fixed costs and did not increase proportionately with sales
increases. The decrease was also due to decreases in payroll and related
costs associated with the 1999 corporate restructuring as well as
decreased marketing and promotional expenditures, partially offset by
increases in bad debt expense and the $1,000,000 of special charges
incurred in the first quarter of 1999. These special charges included
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 $1,230,000 for the nine months ended September
30, 1999 compared with $836,000 for the nine months ended September 30,
1998, primarily due to an increase in average outstanding borrowings on
the Company's credit facility in the current year.
For the nine months ended September 30, 1999, the Company recorded
income tax expense of $2,311,000, representing an effective income tax
rate of 46.7%. For the nine months ended September 30, 1998, the Company
recorded income tax benefit of $749,000, representing an effective
income tax rate of 27.5%. Income taxes for interim periods are computed
using the effective tax rate estimated to be applicable for the full
fiscal year, which is subject to ongoing review and evaluation by the
Company. The Company has certain non-deductible expenses, including
goodwill amortization associated with the acquisitions of Simple Shoes,
Inc. and Ugg Holdings, Inc. During periods of positive earnings before
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AND SUBSIDIARIES
income taxes, the impact of the non-deductible items results in an
increase in the effective tax rate; whereas, during periods of loss
before income taxes, the impact is a reduction in the tax benefit and
resulting tax rate. Because the Company experienced positive earnings
before income taxes during the nine months ended September 30, 1999
versus a loss before income taxes during the nine months ended September
30, 1998, the effective income tax rate was higher during the 1999
period than during the 1998 period.
The Company reported net earnings of $2,638,000 for the nine months
ended September 30, 1999 versus a net loss of $1,974,000 for the nine
months ended September 30, 1998, for 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 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. 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. However, the Company expects the
annual increase in Teva sales to be less than that experienced for the
nine-month period ended September 30, 1999 as the Company's fourth
quarter 1999 early delivery program does not have as many retailer
incentives as last year's program. 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 for the year ended December
31, 1998 were 38.5% of net sales. The Company expects selling, general
and administrative expenses, excluding the special charges for
$1,000,000 incurred in the first quarter of 1999, to decrease as a
percentage of sales 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 and the highest percentage of Ugg sales occurring
in the fourth quarter, while the quarter with the highest percentage of
annual sales for Simple has varied from year to year. Consequently, the
results during these specified periods are highly dependent on results
for these product lines.
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;
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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 collect its accounts receivables; the
Company's ability to secure and maintain adequate financing; the
Company's ability to forecast and subsequently achieve those forecasts;
the Company's 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. To date, the fourth quarter 1999
weather has been unseasonably warm, especially in Southern California,
the geographic area with the greatest sales concentration for Ugg.
Continuation of these weather patterns could adversely impact Ugg sales.
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. 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.
Year 2000 Issue. The Year 2000 issue results primarily 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 or systems failures by or during the year
2000. Two other related issues could also lead to incorrect calculations
or failures: i) some systems' programming assigns special meaning to
certain dates, such as 9/9/99, and ii) the fact that the year 2000 is a
leap year. Any of these failures could cause 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 supply chain
and key third party relationships (including customers, suppliers,
transport systems and financing sources, among others).
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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 continues to assess the readiness of its various systems for
handling the Year 2000 issue. In 1998, the Company determined that the
version of the software that operated the Company's enterprise business
systems 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 stated was
Year 2000 compliant. The Company has completed the Implementation phase
of its Year 2000 strategy with respect to its enterprise business
systems. While the Company has performed successful testing and
implementation of this enterprise business system, the Company expects
to continue to perform additional testing, including integration testing
between its IT systems, through December 31, 1999.
With respect to the various components of the Company's remaining IT
systems, including desktops, networks and several departmental hardware
and software systems, and its non-IT systems, the Company has completed
the Implementation phase for the majority of these systems and is in
varying stages of the Conversion, Testing and Implementation phases for
the remainder. 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
received some responses. The Company intends to follow-up with the key
business partners who have not responded. The Company has begun to
assess the responses received and intends to continue to assess the
responses as they are received, determining and adjusting its plans
accordingly. 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, and possibly into 2000.
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 estimated at approximately $100,000, but the
Company may exceed that amount as it continues to assess the risks of
its key business partners. 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
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AND SUBSIDIARIES
change significantly as the Year 2000 compliance strategy progresses. As
of September 30, 1999, the Company had incurred Year 2000 compliance
costs of approximately $285,000.
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. In addition, the Company is dependent on various parties which
are involved in the transportation and delivery of the Company's
products to its worldwide distribution centers. The failure of one or
more of these suppliers or other parties 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'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 September 30, 1999,
working capital was $33,134,000, including $1,647,000 of cash. Cash
provided by operating activities aggregated $22,404,000 for the nine
months ended September 30, 1999. Trade accounts receivable decreased
32.9% from December 31, 1998 as a result of the normal seasonality of
the business. Inventories decreased 28.5% since December 31, 1998
primarily as a result of normal seasonality, in addition to a decrease
in raw materials inventory which is related to the Company's exit from
the footwear manufacturing business.
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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 (8.25% at September 30, 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. The Company was in compliance with the covenant at September
30, 1999. As a result of the Company's signing of the new Teva license
agreement, the expiration of the Facility has been extended through
January 21, 2002. On September 30, 1999, the Company had outstanding
borrowings under the Facility of $1,533,000, outstanding letters of
credit aggregating $2,785,000 and borrowing availability of $8,341,000.
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 had an agreement with a former supplier, Prosperous Dragon,
to provide financing for the former supplier's operations, of which
$405,000 was outstanding at September 30, 1999, and is included in
prepaid expenses and other current assets in the accompanying condensed
consolidated balance sheet at September 30, 1999. Prosperous Dragon has
entered into an agreement with a third party to sell certain assets to
the third party, with all proceeds to be sent directly to the Company in
satisfaction of the outstanding receivable. Under the terms of the
agreement, the balance of the note is to be repaid to the Company by
December 31, 1999.
Capital expenditures totaled $857,000 for the nine months ended
September 30, 1999. The Company's capital expenditures related primarily
to molds purchased for use in the production process as well as various
computer hardware and software purchases. The Company currently has no
material future commitments for capital expenditures.
The Company's Board of Directors has authorized the repurchase of up to
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 approximately 973,000 shares for
aggregate cash consideration of approximately $7,499,000 through
December 31, 1998. No shares were repurchased during the nine-month
period ended September 30, 1999. At September 30, 1999, approximately
1,227,000 shares remained available for repurchase under the program.
On June 7, 1999, the Company signed a new license agreement (the
"License Agreement") for Teva, which becomes effective January 1, 2000.
Under the License Agreement, the Company receives the exclusive
worldwide rights for the manufacture and distribution of Teva footwear
through 2004. The License Agreement is automatically renewable through
2008 and through 2011 under two renewal options, provided that minimum
required sales levels are achieved. As with the previous arrangement,
the new license agreement provides for a sliding scale of royalty rates,
depending on sales levels. Additionally, the Company has agreed to
increase the contractual marketing expenditure, depending on sales
levels and varying by territory, effective June 7, 1999. As additional
consideration, the Company paid the licensor a licensing fee of
$1,000,000 and issued the licensor 428,743 shares of its previously
unissued common stock. The Company has recorded the license as an
intangible asset equal to the cash and fair market value of the stock
issued on the date of the License Agreement. These shares are subject to
various contractual and other holding period requirements. In addition,
the Company has agreed to grant the licensor not less than 50,000 stock
options on the Company's common stock annually, at the fair market value
on the date of grant.
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AND SUBSIDIARIES
The Company also received an option to buy Teva and all of its assets,
including all worldwide rights to all Teva products. The option price is
based on formulas tied to net sales of Teva products and varies
depending on when the option is exercised. The Company's option is
exercisable during the period from January 1, 2000 to December 31, 2001
or during the period from January 1, 2006 to December 31, 2008. If the
Company does not exercise its option to acquire Teva, the licensor has
the option to acquire the Teva distribution rights from the Company for
the period from January 1, 2010 to December 31, 2011, the end of the
license term, and the option price is based on a formula tied to the
Company's earnings before interest, taxes, depreciation and
amortization. The exercise of either option will require a significant
amount of additional financing. There are no assurances that the
additional financing will be available.
Apparel and other non-footwear products are not covered by the License
Agreement. However, the Company intends to continue to deliver its
Spring 2000 Teva apparel line under the previous apparel license
agreement. Following the Spring 2000 season, the Company intends to
transition out of Teva apparel.
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 and the highest percentage of Ugg sales occurring in the
fourth quarter, while the quarter with the highest percentage of annual
sales for Simple has varied from year to year.
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 its 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 8 to the Condensed
Consolidated Financial Statements.
21
<PAGE> 24
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 filed a motion to increase
their damage award, but the court denied that motion. 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.
Item 2. Changes in Securities. Not applicable
Item 3. Defaults upon Senior Securities. Not applicable
Item 4. Submission of Matters to a Vote of Security Holders. Not applicable
Item 5. Other Information. Not applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. None
(b) Reports on Form 8-K. None
22
<PAGE> 25
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Deckers Outdoor Corporation
Date: November 12, 1999 /s/ M. Scott Ash
-----------------------------------
M. Scott Ash, Chief
Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting
Officer)
23
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<PERIOD-START> JAN-01-1999
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0
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