-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H/+wA7FG6K/fUcQg58simHTISW00wz/mJMz3RLDER3urrY2ue1dPpCMWuy28USPu oC6/uNUaJtCWsR4SaBXw1w== /in/edgar/work/0000950148-00-002367/0000950148-00-002367.txt : 20001115 0000950148-00-002367.hdr.sgml : 20001115 ACCESSION NUMBER: 0000950148-00-002367 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DECKERS OUTDOOR CORP CENTRAL INDEX KEY: 0000910521 STANDARD INDUSTRIAL CLASSIFICATION: [3021 ] IRS NUMBER: 953015862 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22446 FILM NUMBER: 766546 BUSINESS ADDRESS: STREET 1: 495A SOUTH FAIRVIEW AVENUE CITY: GOLETA STATE: CA ZIP: 93117 BUSINESS PHONE: 8059677611 MAIL ADDRESS: STREET 1: 495-A S FAIRVIEW AVE CITY: GOLETA STATE: CA ZIP: 93117 FORMER COMPANY: FORMER CONFORMED NAME: DECKERS FOOTWEAR CORP DATE OF NAME CHANGE: 19930811 10-Q 1 v67146e10-q.txt FROM 10-Q 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.
Outstanding at CLASS November 8, 2000 ---------------------------- ----------------- Common stock, $.01 par value 9,112,706
2 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Table of Contents
Page 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
3 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited)
ASSETS SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------- 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 ============= =============
See accompanying notes to condensed consolidated financial statements. 4 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited)
THREE-MONTH PERIOD ENDED SEPTEMBER 30, ------------------------------- 2000 1999 ------------ ------------ 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 ============ ============
See accompanying notes to condensed consolidated financial statements. 2 5 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited)
NINE-MONTH PERIOD ENDED SEPTEMBER 30, ---------------------------- 2000 1999 ----------- ----------- 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 =========== ===========
See accompanying notes to condensed consolidated financial statements. 3 6 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited)
NINE-MONTH PERIOD ENDED SEPTEMBER 30, ------------------------------- 2000 1999 ------------ ------------ 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) ------------ ------------
(Continued) 4 7 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows, Continued (Unaudited)
NINE-MONTH PERIOD ENDED SEPTEMBER 30, ------------------------------- 2000 1999 ------------ ------------ 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 ============ ============
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 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:
NINE-MONTH PERIOD ENDED SEPTEMBER 30, -------------------------- 2000 1999 ---------- ---------- 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 ========== ==========
6 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:
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------- 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 ============= =============
(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 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 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:
2000 1999 ----------- ----------- 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 =========== ===========
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:
2000 1999 ------------ ------------ 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 ============ ============
9 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:
2000 1999 ------------ ------------ 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 ============ ============
The reconciliations of total assets from segment information to the consolidated financial statements are as follows:
2000 1999 ------------ ------------ 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 ============ ============
(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 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 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 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. 13 16 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 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. 15 18 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. 16 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. 17 20 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 21 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 EX-27 2 v67146ex27.txt EXHIBIT 27
5 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 15,038,000 0 18,749,000 2,324,000 14,630,000 49,635,000 8,725,000 5,951,000 74,081,000 10,338,000 520,000 0 0 91,000 63,132,000 74,081,000 88,936,000 88,936,000 48,699,000 48,699,000 0 1,341,000 122,000 10,914,000 4,693,000 6,221,000 0 0 0 6,221,000 0.68 0.66
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