<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, 2000
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, 93117
Goleta, California ----------
- ---------------------------------------- (zip code)
(Address of principal executive offices)
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 9, 2000
--------------
<S> <C>
Common stock, $.01 par value 9,082,535
</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, 2000 and December 31,
1999 1
Condensed Consolidated Statements of Earnings for the Three-Month Periods
Ended March 31, 2000 and 1999 2
Condensed Consolidated Statements of Cash Flows for the Three-Month Periods
Ended March 31, 2000 and 1999 3-4
Notes to Condensed Consolidated Financial Statements 5-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-14
Part II. Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
</TABLE>
<PAGE> 3
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
<S> <C> <C>
Assets
Current assets:
Cash $ 2,256,000 1,633,000
Trade accounts receivable, less allowance
for doubtful accounts of $1,799,000 and
$1,813,000 as of March 31, 2000 and
December 31, 1999, respectively 36,845,000 24,396,000
Inventories 18,383,000 18,103,000
Prepaid expenses and other current assets 2,333,000 2,235,000
Refundable and deferred tax assets 1,053,000 2,677,000
----------- -----------
Total current assets 60,870,000 49,044,000
Property and equipment, at cost, net 2,263,000 2,125,000
Intangible assets, less applicable amortization 21,645,000 22,037,000
Other assets, net 274,000 276,000
----------- -----------
$85,052,000 73,482,000
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 128,000 125,000
Trade accounts payable 9,097,000 7,261,000
Accrued expenses 4,676,000 3,000,000
Income taxes payable 992,000 --
----------- -----------
Total current liabilities 14,893,000 10,386,000
----------- -----------
Long-term debt, less current installments 8,839,000 6,276,000
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 10,055,487
shares and outstanding 9,082,535 shares at
March 31, 2000; issued 10,037,957 shares
and outstanding 9,065,005 shares at
December 31, 1999 91,000 91,000
Additional paid-in capital 24,859,000 24,743,000
Retained earnings 36,994,000 32,610,000
----------- -----------
61,944,000 57,444,000
Less note receivable from stockholder/former
director 624,000 624,000
----------- -----------
Total stockholders' equity 61,320,000 56,820,000
----------- -----------
$85,052,000 73,482,000
=========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three-month period ended
March 31,
----------------------------
2000 1999
----------- ----------
<S> <C> <C>
Net sales $41,466,000 38,040,000
Cost of sales 22,084,000 20,817,000
----------- ----------
Gross profit 19,382,000 17,223,000
Selling, general and administrative expenses 11,318,000 12,669,000
----------- ----------
Earnings from operations 8,064,000 4,554,000
Other expense (income):
Interest expense, net 201,000 631,000
Other 171,000 (31,000)
----------- ----------
Earnings before income taxes 7,692,000 3,954,000
Income taxes 3,308,000 1,709,000
----------- ----------
Net earnings $ 4,384,000 2,245,000
=========== ==========
Net earnings per share:
Basic $ 0.48 0.26
Diluted 0.47 0.26
=========== ==========
Weighted average shares:
Basic 9,071,000 8,528,000
Diluted 9,360,000 8,732,000
=========== ==========
</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,
-------------------------------
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 4,384,000 2,245,000
----------- -----------
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization 734,000 733,000
Provision for doubtful accounts 343,000 433,000
Loss on disposal of assets 7,000 --
Non-cash stock compensation 78,000 --
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable (12,792,000) (18,318,000)
Inventories (280,000) (738,000)
Prepaid expenses and other current assets (98,000) 109,000
Note receivable from supplier -- (62,000)
Refundable and deferred tax assets 1,624,000 4,378,000
Other assets 2,000 129,000
Increase (decrease) in:
Accounts payable 1,836,000 (740,000)
Accrued expenses 1,676,000 1,559,000
Income taxes payable 992,000 --
----------- -----------
Total adjustments (5,878,000) (12,517,000)
----------- -----------
Net cash used in operating activities (1,494,000) (10,272,000)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (505,000) (390,000)
Proceeds from sale of property and equipment 18,000 --
----------- -----------
Net cash used in investing activities (487,000) (390,000)
----------- -----------
</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,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from financing activities:
Net proceeds from long-term debt 2,566,000 14,466,000
Cash received from issuances of common stock 38,000 53,000
---------- ----------
Net cash provided by financing activities 2,604,000 14,519,000
---------- ----------
Net increase in cash 623,000 3,857,000
Cash at beginning of period 1,633,000 263,000
---------- ----------
Cash at end of period $2,256,000 4,120,000
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 251,000 625,000
Income taxes 53,000 22,000
========== ==========
</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 annual 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, 1999 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, 2000 and 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 reconciliation of basic to diluted weighted-average shares are as
follows:
<TABLE>
<CAPTION>
Three-month period ended
March 31,
--------------------------
2000 1999
---------- ---------
<S> <C> <C>
Net earnings $4,384,000 2,245,000
========== =========
Weighted-average shares used in basic
computation 9,071,000 8,528,000
Dilutive stock options 289,000 204,000
---------- ---------
Weighted-average shares used for
diluted computation 9,360,000 8,732,000
========== =========
</TABLE>
Options to purchase 332,000 shares of common stock at prices ranging from
$3.50 to $13.75 were outstanding during the three months ended March 31,
2000 and options to purchase 967,000 shares of common stock at prices
ranging from $3.03 to $13.75 were outstanding during the three-month
period ended March 31, 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, were anti-dilutive.
5
<PAGE> 8
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(3) Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
<S> <C> <C>
Finished goods $18,155,000 17,841,000
Work in process 86,000 119,000
Raw materials 142,000 143,000
----------- ----------
Total inventories $18,383,000 18,103,000
=========== ==========
</TABLE>
(4) Credit Facility
The Company has a credit facility ("the Facility") which provides for
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 (8.75% at March 31,
2000) or, at the Company's election, an adjusted Eurodollar rate plus 2%.
The Facility is secured by substantially all assets of the Company and
expires 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, 2000, the Company was
in compliance with such covenant and the terms of the agreement.
(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, 2000, the Company had income tax expense of $3,308,000,
representing an effective income tax rate of 43.0%. 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%.
(6) New Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation" (FIN 44). FIN 44 provides guidance for issues arising
in applying APB Opinion No. 25, "Accounting for Stock Issued to
Employees". FIN 44 applies specifically to new awards, exchanges of awards
in a business combination, modification to outstanding awards, and changes
in grantee status that occur on or after July 1, 2000, except for the
provisions related to repricings and the definition of an employee which
apply to awards issued after December 15, 1998. Application of FIN 44 did
not have an affect on the Company's financial reporting.
6
<PAGE> 9
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(7) Business Segments
The Company's operating segments and the basis for segmentation are the
same as those at December 31, 1999, except that the Company does not
allocate income taxes or unusual items to segments. The Company evaluates
performance based on net revenues and profit or loss from operations. The
Company's reportable segments are strategic business units that offer
geographic brand images. They are managed separately because each business
requires different marketing, research and development, design, sourcing
and sales strategies.
The Teva-domestic, Simple-domestic and Ugg-domestic segments include all
sales shipped under those brand names from the Company's North American
distribution centers in California and Canada. The vast majority of those
sales are to customers located in North America. A portion, however, is
shipped from those North American distribution centers to overseas
customers. As a result, a portion of the Company's international sales is
included in the Teva-domestic, Simple-domestic and Ugg-domestic segments.
This presentation is consistent with the way management reviews and
analyzes its segment data.
Business segment information for the three months ended March 31, 2000 and
1999 is summarized as follows:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Sales to external customers:
Teva, domestic $ 22,173,000 27,190,000
Simple, domestic 3,312,000 2,586,000
Ugg, domestic 514,000 324,000
Other, primarily international 15,467,000 7,940,000
------------ ------------
$ 41,466,000 38,040,000
============ ============
Intersegment sales:
Teva, domestic $ 523,000 496,000
Simple, domestic 1,000 --
Ugg, domestic -- --
Other, primarily international 1,054,000 827,000
------------ ------------
$ 1,578,000 1,323,000
============ ============
Earnings (loss) from operations:
Teva, domestic $ 6,416,000 4,403,000
Simple, domestic 1,259,000 294,000
Ugg, domestic (149,000) (777,000)
Other, primarily international 612,000 608,000
------------ ------------
$ 8,138,000 4,528,000
============ ============
</TABLE>
7
<PAGE> 10
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(7) Business Segments (Continued)
The reconciliations of earnings from operations from segment information
to the consolidated financial statements are as follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Total earnings from operations for
reportable segments $ 8,138,000 4,528,000
Intersegment profit change
in beginning and ending inventory (74,000) 26,000
----------- -----------
Consolidated earnings from operations $ 8,064,000 4,554,000
=========== ===========
</TABLE>
Business segment information as of March 31, 2000 and December 31, 1999 is
summarized as follows:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Total assets:
Teva, domestic $ 65,668,000 56,184,000
Simple, domestic 8,558,000 7,509,000
Ugg, domestic 19,379,000 25,947,000
Other, primarily international 11,780,000 8,355,000
------------ ------------
$105,385,000 97,995,000
============ ============
</TABLE>
The reconciliations of total assets from segment information to the
consolidated financial statements are as follows:
<TABLE>
<CAPTION>
2000 1999
------------- -----------
<S> <C> <C>
Total assets for reportable segments $ 105,385,000 97,995,000
Elimination of profit in ending
inventories (96,000) (22,000)
Elimination of intersegment
investments (14,905,000) (14,905,000)
Elimination of intersegment
receivables (6,385,000) (12,263,000)
Unallocated refundable income
taxes and deferred tax assets 1,053,000 2,677,000
------------- -----------
Consolidated total assets $ 85,052,000 73,482,000
============= ===========
</TABLE>
8
<PAGE> 11
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(8) Contingencies
An action was brought against the Company in 1995 by Molly Strong-Butts
and Yetti by Molly, Ltd. (collectively, "Molly") which alleged, among
other things, that the Company violated a certain nondisclosure agreement
and obtained purported trade secrets regarding a line of winter footwear
which Deckers stopped producing in 1994. A jury verdict was obtained
against the Company in March 1999 aggregating $1,785,000 for the two
plaintiffs. The Company is appealing the verdict and continues to believe
such claims are without merit. The Company intends to continue contesting
this claim vigorously. The Company, based on advice from legal counsel,
does not anticipate that the ultimate outcome will have a material adverse
effect upon its financial condition, results of operations or cash flows.
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 antidumping duty legislation. The Company
believes that this opinion is inappropriate and is working with Customs to
resolve the situation. In the event that Customs makes a final
determination that the antidumping provisions cover such styles, the
Company expects that it would have an exposure to prior unpaid antidumping
duties during 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 precautionary measure, the Company
has obtained, and is using, alternative sourcing for the potentially
impacted products from sources outside of China in an effort to reduce the
potential risk in the future. The Company is unable to predict the outcome
of this matter and the effect, if any, on the Company's consolidated
financial statements.
The Company is currently involved in various other legal claims arising
from the ordinary course of business. Management does not believe that the
disposition of these matters will have a material effect on the Company's
financial position or results of operations.
(9) Subsequent Event
On May 9, 2000 the Company entered into an agreement for the sale of its
50% interest in Heirlooms, Inc. (Heirlooms), the manufacturer and
distributor of the Picante brand of apparel. The purchase price, inclusive
of the repayment of outstanding notes, which is to be paid in cash, is an
amount which approximates the net book value of Heirlooms' assets at March
31, 2000. The operations of Heirlooms were immaterial to the consolidated
financial statements for the three months ended March 31, 2000 and the
year ended December 31, 1999. The purchase price is subject to adjustment
for the net cash advances and repayments made to Heirlooms between
December 31, 1999 and the closing date. The closing date for the
transaction will occur on the date of payment of the purchase price, but
not later than August 31, 2000.
9
<PAGE> 12
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, 1999. 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 impact of
seasonality on the Company's operations and the potential impact of the
Year 2000 on the Company. 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 March 31, 2000 Compared to Three Months Ended March 31,
1999
Net sales increased by $3,426,000, or 9.0%, from the comparable three
months ended March 31, 1999. Sales of the Teva brand increased to
$34,781,000 for the three months ended March 31, 2000 from $32,944,000 for
the three months ended March 31, 1999, a 5.6% increase. This increase was
a result of the continued strength in international markets and in the
sandal market in general. Sales of Teva footwear represented 83.9% and
86.6% of net sales in the three months ended March 31, 2000 and 1999,
respectively. Net sales of footwear under the Simple product line
increased 36.8% to $5,392,000 from $3,942,000 for the comparable three
months ended March 31, 1999. The increase in Simple sales was driven by a
resurgence in the popularity and strength of the brand. Net sales of Ugg
footwear were $514,000 for the three months ended March 31, 2000, compared
to net sales of $324,000 for the three months ended March 31, 1999. 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 62.0% to $17,159,000 from
$10,589,000, representing 41.4% of net sales in 2000 and 27.8% in 1999.
The volume of footwear sold increased 20.5% to 1,691,000 pairs during the
three months ended March 31, 2000 from 1,403,000 pairs during the three
months ended March 31, 1999, for the reasons discussed above.
The weighted average wholesale price per pair sold during the three months
ended March 31, 2000 decreased 9.2% to $23.80 from $26.21 for the three
months ended March 31, 1999. The decrease was primarily due to an overall
shift in sales mix toward international sales, which are generally at
lower average wholesale prices as well as a change in domestic sales mix
during the quarter away from styles with higher average wholesale prices
toward styles with lower average prices.
Cost of sales increased by $1,267,000, or 6.1%, to $22,084,000 for the
three months ended March 31, 2000, compared with $20,817,000 for the three
months ended March 31, 1999 and decreased as a percentage of net sales
from 54.7% to 53.3%. Gross profit increased by $2,159,000, or 12.5%, to
$19,382,000 for the three months ended March 31, 2000 from $17,223,000 for
the three months ended March 31, 1999 and increased as a percentage of net
sales to 46.7% from 45.3%. The increase in gross margin was primarily the
result of improved pricing and sourcing for the Spring 2000 product line
and a reduced impact of sales returns.
Selling, general and administrative expenses decreased by $1,351,000, or
10.7%, for the three months ended March 31, 2000, compared with the three
months ended March 31, 1999, and decreased as a percentage of net sales to
27.3% in 2000 from 33.3% in 1999. The decrease in selling, general and
administrative expenses as a percentage of net sales was primarily the
result of several factors, including the non-recurrence of the $1 million
of special charges incurred in the first quarter of 1999 related to
severance costs and litigation, as well as reductions in payroll costs,
apparel costs, sales commissions and warehouse costs. These cost
reductions were partially offset by an increase in marketing costs for the
three months ended March 31, 2000 versus the three months ended March 31,
1999.
10
<PAGE> 13
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Net interest expense was $201,000 for the three months ended March 31,
2000 compared with $631,000 for the three months ended March 31, 1999,
primarily due to decreased borrowings on the Company's credit facility in
the current year, partially offset by higher interest rates.
For the three months ended March 31, 2000 the Company had an income tax
expense of $3,308,000, representing an effective income tax rate of 43.0%.
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%.
Net earnings increased 95.3% to $4,384,000, or $0.47 per share - diluted,
for the three months ended March 31, 2000 versus net earnings of
$2,245,000, or $0.26 per share - diluted, for the three months ended March
31, 1999 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 certain litigation, the impact of seasonality on the
Company's operations and the potential impact of the Year 2000 on the
Company. 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 calendar year 2000, the
Company expects net sales of Teva to be relatively flat compared to 1999,
reflecting the effects of two offsetting factors. Domestically, the
Company expects lower sales to retailers in the athletic footwear channels
as a result of apparent weakness in this segment of the market. The
Company expects this decrease to be offset by continued expansion in its
international markets and through its greatly expanded Fall 2000 product
offering of closed footwear.
The Company currently expects an increase in Ugg sales for 2000 of
approximately 10% to 15%, as the Company focuses on geographical expansion
outside of California and product diversification in its casual footwear
offering.
The Simple brand is gaining popularity as it has been refocused toward the
teen and twenty-something market, where the Simple brand had been
successful years ago. The Company currently expects sales under the Simple
line to increase approximately 15% to 20% in 2000 compared to 1999.
In the fourth quarter of 1999, the Company restructured its European
business and began selling product entirely through distributors whereas
it used a combination of distributors and retailers a year ago. This has
the effect of shifting a portion of sales from the second quarter to the
first quarter, as the shipping window to distributors is generally earlier
than that for retailers. The Company believes that while this shift better
positions the Company for long-term growth and improved profits overseas,
in the short-term it is expected to result in slightly lower year over
year sales comparisons during the three months ended June 30, 2000.
The Company's selling, general and administrative expenses decreased to
35.0% of sales in fiscal year 1999 from 38.5% of sales in fiscal year
1998. The Company plans to continue to improve its operating efficiencies
in 2000 and expects that the resulting selling, general and administrative
expenses as a percentage of sales for fiscal year 2000 will be lower than
that for fiscal year 1999. However, the Company does not expect the
reduction in those expenses to be as dramatic as that experienced during
the three months ended March 31, 2000 compared to the year ago period, as
a significant portion of the improvements was due to the non-recurrence of
special charges for severance and litigation costs in the first quarter.
11
<PAGE> 14
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
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, 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
antidumping duty legislation. The Company believes that this opinion is
inappropriate and is working with Customs to resolve the situation. In the
event that Customs makes a final determination that the antidumping
provisions cover such styles, the Company expects that it would have an
exposure to prior unpaid antidumping 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 precautionary measure, the Company has obtained, and is using,
alternative sourcing for the potentially impacted products from sources
outside of China in an effort to reduce the potential risk in the future.
The Company is unable to predict the outcome of this matter and the
effect, if any, on the Company's consolidated financial statements.
Year 2000 Issue. The Company is not aware of any material Year 2000
failures which have occurred in its systems or at its key business
partners. While the Company believes that it has achieved Year 2000
compliance, the Company's Year 2000 compliance is still subject to
additional risks as discussed in the Company's Annual Report on Form 10-K
for the year ended December 31, 1999.
12
<PAGE> 15
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Liquidity and Capital Resources
The Company's liquidity consists of cash, trade accounts receivable,
inventories and a revolving credit facility. At March 31, 2000, working
capital was $45,977,000, including $2,256,000 of cash. Cash used in
operating activities aggregated $1,494,000 for the three months ended
March 31, 2000 compared to cash used in operating activities of
$10,272,000 for the three months ended March 31, 1999. Trade accounts
receivable increased 51.0% between December 31, 1999 and March 31, 2000 as
a result of normal seasonality, the high volume of net sales during the
quarter and outstanding receivables with extended payment terms.
Inventories increased 1.5% since December 31, 1999 due to normal
seasonality.
The Company has a credit facility ("the Facility") which provides for
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 (8.75% at March 31,
2000) or, at the Company's election, an adjusted Eurodollar rate plus 2 %.
The Facility is secured by substantially all assets of the Company and
expires 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, 2000, the Company was
in compliance with the terms and covenants of the agreement. On March 31,
2000, the Company had outstanding borrowings under the Facility of
$8,430,000, outstanding letters of credit aggregating $3,219,000 and
borrowing availability of $17,754,000.
Capital expenditures totaled $505,000 for the three months ended March 31,
2000. The Company's capital expenditures related primarily to trade show
booths for all brands and promotional trucks and trailers for the
traveling technical representatives for the Teva brand. 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 1999 or during the three-month period ended March
31, 2000. At March 31, 2000, 1,227,000 shares remained available for
repurchase under the program.
In June 1999, the Company obtained 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.
13
<PAGE> 16
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 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 for these specified periods
are highly dependent on the results for each of these product lines.
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.
14
<PAGE> 17
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
An action was brought against the Company in 1995 by Molly Strong-Butts
and Yetti by Molly, Ltd. (collectively, "Molly") which alleged, among
other things, that the Company violated a certain nondisclosure agreement
and obtained purported trade secrets regarding a line of winter footwear
which Deckers stopped producing in 1994. A jury verdict was obtained
against the Company in March 1999 aggregating $1,785,000 for the two
plaintiffs. The Company is appealing the verdict and continues to believe
such claims are without merit. The Company intends to continue contesting
this claim vigorously. The Company, based on advice from legal counsel,
does not anticipate that the ultimate outcome will have a material adverse
effect upon its financial condition, results of operations or cash flows.
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
15
<PAGE> 18
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 15, 2000 /s/ M. Scott Ash
-------------------------------------
M. Scott Ash, Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
16
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