<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, 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, 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, 2000
---------------------------- -----------------
<S> <C>
Common stock, $.01 par value 9,112,706
</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, 2000 and December 31, 1999 1
Condensed Consolidated Statements of Operations for the Three-Month Periods Ended September
30, 2000 and 1999 2
Condensed Consolidated Statements of Operations for the Nine-Month Periods Ended September
30, 2000 and 1999 3
Condensed Consolidated Statements of Cash Flows for the Nine-Month
Periods Ended September 30, 2000 and 1999 4-5
Notes to Condensed Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
</TABLE>
<PAGE> 3
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,038,000 1,633,000
Trade accounts receivable, less allowance for doubtful
accounts of $2,324,000 and $1,813,000 as of September 30, 2000 and
December 31, 1999, respectively 16,425,000 24,396,000
Inventories 14,630,000 18,103,000
Prepaid expenses and other current assets 1,382,000 2,235,000
Refundable and deferred tax assets 2,160,000 2,677,000
------------- -------------
Total current assets 49,635,000 49,044,000
Property and equipment, at cost, net 2,774,000 2,125,000
Intangible assets, less accumulated amortization 20,863,000 22,037,000
Other assets, net 809,000 276,000
------------- -------------
$ 74,081,000 73,482,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current installments of long-term debt $ 1,038,000 125,000
Trade accounts payable 6,229,000 7,261,000
Accrued expenses 3,071,000 3,000,000
------------- -------------
Total current liabilities 10,338,000 10,386,000
------------- -------------
Long-term debt, less current installments 520,000 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
10,085,658 shares and outstanding 9,112,706 shares at September
30, 2000; issued 10,037,957 shares and outstanding 9,065,005
shares at December 31, 1999 91,000 91,000
Additional paid-in capital 24,925,000 24,743,000
Retained earnings 38,831,000 32,610,000
------------- -------------
63,847,000 57,444,000
Less note receivable from stockholder/former director 624,000 624,000
------------- -------------
Total stockholders' equity 63,223,000 56,820,000
------------- -------------
$ 74,081,000 73,482,000
============= =============
</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,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 19,023,000 18,244,000
Cost of sales 11,837,000 12,523,000
------------ ------------
Gross profit 7,186,000 5,721,000
Selling, general and administrative expenses 8,036,000 7,846,000
------------ ------------
Loss from operations (850,000) (2,125,000)
Other expense (income):
Interest expense (income), net (153,000) 100,000
Other expense (income) (4,000) 4,000
------------ ------------
Loss before income tax benefit (693,000) (2,229,000)
------------ ------------
Income tax benefit (298,000) (954,000)
------------ ------------
Net loss $ (395,000) (1,275,000)
============ ============
Net loss per share:
Basic $ (0.04) (0.14)
Diluted (0.04) (0.14)
============ ============
Weighted-average shares:
Basic 9,099,000 9,026,000
Diluted 9,099,000 9,026,000
============ ============
</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,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net sales $88,936,000 87,644,000
Cost of sales 48,699,000 50,944,000
----------- -----------
Gross profit 40,237,000 36,700,000
Selling, general and administrative expenses 28,984,000 30,530,000
----------- -----------
Earnings from operations 11,253,000 6,170,000
Other expense (income):
Interest expense, net 122,000 1,230,000
Other expense (income) 217,000 (9,000)
----------- -----------
Earnings before income taxes 10,914,000 4,949,000
Income taxes 4,693,000 2,311,000
----------- -----------
Net earnings $ 6,221,000 2,638,000
=========== ===========
Net earnings per share:
Basic $ 0.68 0.30
Diluted 0.66 0.30
=========== ===========
Weighted-average shares:
Basic 9,084,000 8,761,000
Diluted 9,482,000 8,921,000
=========== ===========
</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,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,221,000 2,638,000
------------ ------------
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 2,165,000 2,406,000
Provision for doubtful accounts 1,341,000 1,409,000
Loss (gain) on disposal of assets 55,000 (10,000)
Non-cash stock compensation 78,000 34,000
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable 6,630,000 7,544,000
Inventories 3,473,000 6,744,000
Prepaid expenses and other current assets 853,000 775,000
Refundable income taxes 517,000 3,756,000
Other assets (533,000) 56,000
Increase (decrease) in:
Trade accounts payable (1,032,000) (2,312,000)
Accrued expenses 71,000 (636,000)
------------ ------------
Total adjustments 13,618,000 19,766,000
------------ ------------
Net cash provided by operating activities 19,839,000 22,404,000
------------ ------------
Cash flows from investing activities:
Cash paid in connection with Teva license -- (1,000,000)
Purchase of property and equipment (1,714,000) (857,000)
Proceeds from sale of property and equipment 19,000 10,000
------------ ------------
Net cash used in investing activities (1,695,000) (1,847,000)
------------ ------------
</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,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Net repayments of long-term debt (4,843,000) (19,305,000)
Cash received from exercise of stock options 104,000 132,000
------------ ------------
Net cash used in financing activities (4,739,000) (19,173,000)
------------ ------------
Net increase in cash and cash equivalents 13,405,000 1,384,000
Cash and cash equivalents at beginning of period 1,633,000 263,000
------------ ------------
Cash and cash equivalents at end of period $ 15,038,000 1,647,000
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 320,000 1,257,000
Income taxes 4,782,000 1,260,000
============ ============
</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
in 1999 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 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 (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. During the
three-month periods ended September 30, 2000 and 1999, the Company had a
net loss and accordingly, the inclusion of 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 periods ended September 30,
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 reconciliations of basic to diluted weighted-average shares are as
follows for the nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net earnings $6,221,000 2,638,000
========== ==========
Weighted-average shares used in basic computation 9,084,000 8,761,000
Dilutive stock options 398,000 160,000
---------- ----------
Weighted-average shares used for diluted computation 9,482,000 8,921,000
========== ==========
</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 1,284,000 shares of common stock at prices
ranging from $1.56 to $13.75 were outstanding during the three months
ended September 30, 2000 and options to purchase 794,000 shares of
common stock at prices ranging from $1.56 to $13.75 were outstanding
during the three months ended September 30, 1999, but were not
included in the computation of diluted loss per share because the
options were anti-dilutive, as the Company incurred a net loss.
Options to purchase 267,000 shares of common stock at prices ranging
from $5.50 to $13.75 were outstanding during the nine months ended
September 30, 2000 and options to purchase 284,000 shares of common
stock at prices ranging from $3.00 to $13.75 were outstanding during
the nine months ended September 30, 1999, but were not included in
the computation of diluted earnings (loss) per share because the
options' exercise prices were greater than the average market price
of the common shares during the period and, therefore, were
anti-dilutive.
(3) Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
Finished goods $ 16,076,000 18,578,000
Work in process 41,000 119,000
Raw materials 145,000 169,000
------------- -------------
Gross inventories 16,262,000 18,866,000
Less inventory reserves (1,632,000) (763,000)
------------- -------------
Total inventories, net $ 14,630,000 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 (9.50% at September 30, 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. At September 30, 2000, the Company had no
outstanding borrowings under the Facility and outstanding letters of
credit aggregated $4,798,000. The agreement underlying the credit
facility includes a tangible net worth covenant. At September 30,
2000, the Company was in compliance with such covenant and the terms
of the agreement.
7
<PAGE> 10
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(5) Income Taxes
Income taxes for the interim periods were computed using the
effective tax rate estimated to be applicable for the full fiscal
year, which is subject to ongoing review and evaluation by
management. For the three months ended September 30, 2000, the
Company had an income tax benefit of $298,000, representing an
effective income tax rate of 43.0%. 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
nine months ended September 30, 2000, the Company had income tax
expense of $4,693,000, representing an effective income tax rate of
43.0%. 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%.
(6) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FASB No. 133). FASB
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts and for other hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at
fair value. As issued, FASB No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. In June
1999, the Board issued Statement of Financial Accounting Standards
No. 137 "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB No. 133" (FASB No.
137). FASB No. 137 delays the effective date of FASB No. 133 to all
fiscal quarters of all fiscal years beginning after June 15, 2000,
with earlier application encouraged. The Company does not expect FASB
No. 133 to have a material impact on the financial statements.
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 effect on the
Company's financial reporting.
(7) Business 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 treatment is
consistent with the way management reviews and analyzes its segment
data. This presentation is also consistent with the treatment at
December 31, 1999, except that Teva-Canada is currently included in
Teva-domestic whereas it was included under "Other" at December 31,
1999. The prior period amounts have been reclassified to conform to
the current treatment.
8
<PAGE> 11
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(7) Business Segments (Continued)
Business segment information for the nine months ended September 30,
2000 and 1999 is summarized as follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Sales to external customers:
Teva, domestic $49,233,000 54,781,000
Simple, domestic 9,937,000 8,881,000
Ugg, domestic 6,836,000 5,221,000
Other, primarily international 22,930,000 18,761,000
----------- -----------
$88,936,000 87,644,000
=========== ===========
Intersegment sales:
Teva, domestic $ 683,000 721,000
Simple, domestic 120,000 --
Ugg, domestic 48,000 --
Other, primarily international 1,583,000 1,980,000
----------- -----------
$ 2,434,000 2,701,000
=========== ===========
Earnings (loss) from operations:
Teva, domestic $ 7,402,000 4,581,000
Simple, domestic 2,472,000 1,511,000
Ugg, domestic 1,125,000 (599,000)
Other, primarily international 262,000 623,000
----------- -----------
$11,261,000 6,116,000
=========== ===========
</TABLE>
The reconciliations of earnings from operations from segment information to the
consolidated financial statements for the nine months ended September 30, 2000
and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Total earnings from operations for
reportable segments $ 11,261,000 6,116,000
Intersegment profit change in beginning
and ending inventory (8,000) 54,000
------------ ------------
Consolidated earnings from operations $ 11,253,000 6,170,000
============ ============
</TABLE>
9
<PAGE> 12
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(7) Business Segments (Continued)
Business segment information as of September 30, 2000 and December
31, 1999 is summarized as follows:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Total assets:
Teva, domestic $ 50,953,000 56,184,000
Simple, domestic 9,579,000 7,509,000
Ugg, domestic 26,049,000 25,947,000
Other, primarily international 8,373,000 8,355,000
------------ ------------
$ 94,954,000 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 $ 94,954,000 97,995,000
Elimination of profit in ending inventories (30,000) (22,000)
Elimination of intersegment investments (14,905,000) (14,905,000)
Elimination of intersegment receivables (8,098,000) (12,263,000)
Unallocated refundable income taxes and
deferred tax assets 2,160,000 2,677,000
------------ ------------
Consolidated total assets $ 74,081,000 73,482,000
============ ============
</TABLE>
(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.
10
<PAGE> 13
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(8) Contingencies (Continued)
In 1997, the European Commission 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 has been contesting the opinion and is
working with Customs to resolve the situation. The Company has since
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. In the event that Customs
makes a final determination that the anti-dumping provisions cover
such styles, the Company would have an exposure for prior unpaid
anti-dumping duties during 1997 of approximately $375,000. Recently,
the European Commission added an explanatory note to the anti-dumping
legislation which effectively strengthened its position. As a result
of this recent development, the Company recorded a $375,000 charge to
selling, general and administration expenses to accrue for the
potential loss on this matter during the quarter ended September 30,
2000. 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.
11
<PAGE> 14
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, expectations regarding the Company's liquidity, the
potential impact of certain litigation 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, 2000 Compared to Three Months Ended
September 30, 1999
Net sales increased by $779,000, or 4.3%, to $19,023,000 from the
comparable three months ended September 30, 1999 of $18,244,000.
Sales of the Teva brand increased to $8,124,000 for the three months
ended September 30, 2000 from $7,575,000 for the three months ended
September 30, 1999, a 7.2% increase, largely as a result of the
introduction of a Fall product line of hikers and similar products in
the third quarter of 2000. Sales of Teva footwear represented 42.7%
and 41.5% of net sales in the three months ended September 30, 2000
and 1999, respectively. Net sales of footwear under the Simple
product line decreased 17.2% to $4,372,000 from $5,281,000 for the
comparable three months ended September 30, 1999. The decrease in
Simple sales was due to continued weakness in the international
markets, partially offset by a 7% increase in Simple sales in the
United States. Net sales of Ugg footwear increased 27.1% to
$6,095,000 for the three months ended September 30, 2000, compared to
net sales of $4,797,000 for the three months ended September 30,
1999, driven by the strong acceptance of the new Street Collection of
casual footwear, and the success of our fall early delivery program.
Overall, international sales for all of the Company's products
increased 3.1% for the quarter to $5,590,000 from $5,421,000,
representing 29.4% of net sales in 2000 and 29.7% in 1999. The volume
of footwear sold decreased 5.8% to 633,000 pairs during the three
months ended September 30, 2000 from 672,000 pairs during the three
months ended September 30, 1999, for the reasons discussed above.
The weighted-average wholesale price per pair sold during the three
months ended September 30, 2000 increased 12.3% to $29.08 from $25.89
for the three months ended September 30, 1999. The increase was
primarily due to lower volumes of discounted sales in 2000 versus
1999 as well as a higher volume of Ugg sales in the third quarter of
2000, which generally carry a higher average wholesale price than
Teva and Simple.
Cost of sales decreased by $686,000 or 5.5%, to $11,837,000 for the
three months ended September 30, 2000, compared with $12,523,000 for
the three months ended September 30, 1999 and decreased as a
percentage of net sales to 62.2% from 68.6%. Gross profit increased
by $1,465,000, or 25.6%, to $7,186,000 for the three months ended
September 30, 2000 from $5,721,000 for the three months ended
September 30, 1999 and increased as a percentage of net sales to
37.8% from 31.4%. The increase in gross margin was primarily the
result of significantly better inventory management, which resulted
in a lower volume of closeouts, as well as improvements in product
sourcing and pricing.
The Company carries its inventories at the lower of cost or market,
using a reserve for inventory obsolescence to adjust the carrying
values to market where necessary based on ongoing reviews of
estimated net realizable values of its inventories. For the three
months ended September 30, 2000, the Company had net additions to the
reserve for inventory obsolescence of approximately $468,000
primarily
12
<PAGE> 15
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
due to write-downs for Teva with the end of the Spring 2000 Teva
season and due to write-downs of Canadian Teva and Simple inventory
in connection with the planned shift to a distributor for that
territory. For the three months ended September 30, 1999, the Company
had a net decrease in the reserve of approximately $315,000 as the
Company sold the underlying inventory for which a reserve had been
previously recorded.
Selling, general and administrative expenses increased by $190,000,
or 2.4%, to $8,036,000 for the three months ended September 30, 2000,
compared with the three months ended September 30, 1999 of
$7,846,000, and decreased as a percentage of net sales to 42.2% in
2000 from 43.0% in 1999. The decrease in selling, general and
administrative expenses as a percentage of sales was primarily due to
increased leverage on a higher level of sales and lower European
operating costs, partially offset by increased marketing and
promotional costs. In addition, during the quarter the Company
incurred a nonrecurring charge of $375,000 related to a reserve for
losses on European anti-dumping duties dating back to 1997, which was
included in selling, general and administrative expenses for the
current quarter.
Net interest income was $153,000 for the three months ended September
30, 2000 compared with net interest expense of $100,000 for the three
months ended September 30, 1999, primarily due to significantly
decreased borrowings on the credit facility in the current year
combined with a significant increase in interest bearing assets.
For the three months ended September 30, 2000 the Company had an
income tax benefit of $298,000, representing an effective income tax
rate of 43.0%. 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%. 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 experienced a net loss of $395,000 or $0.04 per share -
diluted, for the three months ended September 30, 2000 versus a net
loss of $1,275,000, or $0.14 per share - diluted, for the three
months ended September 30, 1999 due to the reasons discussed above.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
Net sales increased by $1,292,000, or 1.5%, to $88,936,000 for the
nine months ended September 30, 2000 from $87,644,000 for the
comparable nine months ended September 30, 1999. Sales of the Teva
brand decreased to $66,993,000 for the nine months ended September
30, 2000 from $67,275,000 for the nine months ended September 30,
1999, a 0.4% decrease. This decrease occurred as the Company sold
significantly fewer products to the athletic retail channels as the
Company did not target this distribution channel in 2000 due to an
apparent weakness in this sector, including store closures and
financial difficulties of certain of the retailers. This decrease was
partially offset by an increase in sales in international markets and
the sale of closed Teva footwear. Sales of Teva footwear represented
75.3% and 76.8% of net sales in the nine months ended September 30,
2000 and 1999, respectively. Net sales of footwear under the Simple
product line increased 2.8% to $13,217,000 from $12,863,000 for the
comparable nine months ended September 30, 1999. The increase in
Simple sales was driven primarily by a resurgence in the popularity
and strength of the brand in the United States market, partially
offset by weakness in the brand's international markets. Net sales of
Ugg footwear were $6,870,000 for the nine months ended September 30,
2000, compared to net sales of $5,221,000 for the nine months ended
September 30, 1999. Overall, international sales for all of the
Company's products increased 8.7% to $26,133,000 from $24,044,000,
representing 29.4% of net sales in 2000 and 27.4% in 1999. The volume
of footwear sold increased 2.6% to 3,413,000 pairs during the nine
months ended September 30, 2000 from 3,325,000 pairs during the nine
months ended September 30, 1999, for the reasons discussed above.
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
The weighted-average wholesale price per pair sold during the nine
months ended September 30, 2000 remained comparable at $25.25 versus
$25.22 for the nine months ended September 30, 1999 reflecting the
effects of offsetting factors. The Company had fewer discounted sales
in the current year, offset by an increased volume of international
sales, which generally carry a lower average selling price than
domestic sales as well as the Company sold a higher percentage of
lower priced footwear such as children's styles and thongs.
Cost of sales decreased by $2,245,000, or 4.4% to $48,699,000 for the
nine months ended September 30, 2000, compared with $50,944,000 for
the nine months ended September 30, 1999 and decreased as a
percentage of net sales to 54.8% from 58.1%. Gross profit increased
by $3,537,000, or 9.6%, to $40,237,000 for the nine months ended
September 30, 2000 from $36,700,000 for the nine months ended
September 30, 1999 and increased as a percentage of net sales to
45.2% from 41.9%. The increase in gross margin was primarily the
result of improved inventory management, the reduced impact of sales
returns and discounted sales and improved pricing and sourcing for
the Spring 2000 product line.
For the nine months ended September 30, 2000, the Company had a net
increase in its reserve for inventory obsolescence of $869,000
reflecting inventory write-downs to estimated market values for Teva
with the end of the Spring 2000 Teva season and due to write-downs of
Canadian Teva and Simple inventory in connection with the planned
shift to a distributor for that territory. For the nine months ended
September 30, 1999, the Company had a net decrease in the reserve for
inventory obsolescence of approximately $728,000 reflecting the
Company's sales of closeout inventory for which the Company had
previously recorded a reserve for obsolescence.
Selling, general and administrative expenses decreased by $1,546,000,
or 5.1%, to $28,984,000 for the nine months ended September 30, 2000,
compared with the nine months ended September 30, 1999 of
$30,530,000, and decreased as a percentage of net sales to 32.6% in
2000 from 34.8% 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 nonrecurrence 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
European operating costs, apparel costs and warehouse costs. These
cost reductions were partially offset by an increase in marketing and
promotional costs for the nine months ended September 30, 2000 versus
the nine months ended September 30, 1999 and the increase in the
reserve for exposure to European anti-dumping duties in 2000.
Net interest expense decreased to $122,000 for the nine months ended
September 30, 2000, from $1,230,000 for the nine months ended
September 30, 1999, primarily due to significantly decreased average
borrowings on the Company's credit facility in the current year,
partially offset by higher average interest rates.
For the nine months ended September 30, 2000, the Company had an
income tax expense of $4,693,000, representing an effective income
tax rate of 43.0%. 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%. 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.
Net earnings increased 135.8% to $6,221,000, or $.66 per share -
diluted, for the nine months ended September 30, 2000 versus net
earnings of $2,638,000 or $.30 per share - diluted, for the nine
months ended September 30, 1999 due to the reasons discussed above.
14
<PAGE> 17
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
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, expectations regarding the Company's
liquidity, the potential impact of certain litigation, and the impact
of seasonality on the Company's operations. These forward-looking
statements are based on the Company's expectations as of today,
November 14, 2000. No one should assume that any forward-looking
statement made by the Company will remain consistent with the
company's expectations after the date the forward-looking statement
is made. The Company disclaims any obligation to update any such
factors or to publicly announce the results of any revisions to any
of the forward-looking statements contained in this Quarterly Report
on Form 10-Q. All of the forward-looking statements are based on
management's current expectations and are inherently uncertain.
Actual results may differ materially for a variety of reasons,
including the reasons discussed below. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on
such forward-looking statements.
Sales and Operating Expense Expectations. For 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 expanded Fall
2000 product offering of closed Teva 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 has been refocused toward the teen and
twenty-something market, where the Simple brand had previously been
successful. The Company currently expects Simple sales for 2000 to be
relatively flat to a slight increase compared to 1999 reflecting the
increased popularity of the brand in the United States, partially
offset by a continuing lag in the international markets.
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 has improved its operating efficiencies in the
first nine months of 2000 and currently expects that 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 nine months ended September
30, 2000 compared to the year ago period, as a significant portion of
the improvement was due to the non-recurrence of special charges for
severance compensation for the staff reduction and litigation costs
which were incurred in the nine-month period ended September 30,
1999.
The foregoing forward-looking statements represent the Company's
current analysis of trends and information. Actual results could vary
as a result of numerous factors. For example, the Company's results
are directly dependent on consumer preferences, which are difficult
to assess and can shift rapidly. Any shift in consumer preferences
away from one or more of the Company's product lines could result in
lower sales as well as obsolete inventory and the necessity of
selling products at significantly reduced selling prices, all of
which would adversely affect the Company's results of operations,
financial condition and cash flows. The Company is also dependent on
its customers continuing to carry and promote its various lines. The
Company's sales can be adversely impacted by the ability of the
Company's suppliers to manufacture and deliver products in time for
the Company to meet its customers' orders.
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
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.
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.
Liquidity and Capital Resources
The Company's liquidity consists of cash, trade accounts receivable,
inventories and a revolving credit facility. At September 30, 2000,
working capital was $39,297,000, including $15,038,000 of cash and
cash equivalents. Cash provided by operating activities aggregated
$19,839,000 for the nine months ended September 30, 2000. Trade
accounts receivable decreased 32.7% from December 31, 1999 and
inventories decreased 19.2% since December 31, 1999 primarily as a
result of 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 (9.50% at September 30, 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 September 30, 2000, the
Company was in compliance with the terms and covenants of the
agreement. On September 30, 2000, the Company had no outstanding
borrowings under the Facility and outstanding letters of credit
aggregated $4,798,000.
Capital expenditures totaled $1,714,000 for the nine months ended
September 30, 2000. The Company's capital expenditures related
primarily to trade show booths, promotional vehicles, various
computer hardware and software purchases and molds purchased for use
in the production process. The Company currently has no material
future commitments for capital expenditures.
The Company's Board of Directors has authorized the repurchase of
2,200,000 shares of common stock under a stock repurchase program.
Such repurchases are authorized to be made from time to time in open
market or in privately negotiated transactions, subject to price and
market conditions as well as the Company's cash availability. Under
this program, the Company repurchased 300,000 shares in 1996 for cash
consideration of $2,390,000, 330,000 shares in 1997 for cash
consideration of $2,581,000 and 343,000 shares in 1998 for cash
consideration of $2,528,000. No shares were repurchased during 1999
or during the nine-month period ended September 30, 2000. At
September 30, 2000, 1,227,000 shares remained available for
repurchase under the program.
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<PAGE> 19
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
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 of the Company's purchase options would require significant
additional financing. There are no assurances that the additional
financing will be available.
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. 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.
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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
18
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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 14, 2000 /s/ M. Scott Ash
------------------------------------------
M. Scott Ash, Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
19
