-----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, MCcNPBFwbp4vv59W+iyEJDKYiyVRcqxTmjPFrOrQweugjO2KH6lgJSQZFi8FS9n0 n/mNRqnoXrTt0BStgP1YUg== 0000950148-98-002013.txt : 19980817 0000950148-98-002013.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950148-98-002013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DECKERS OUTDOOR CORP CENTRAL INDEX KEY: 0000910521 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [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: 98689607 BUSINESS ADDRESS: STREET 1: 495-A S FAIRVIEW AVE 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 FORM 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 June 30, 1998 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 August 7, 1998 ----- -------------- Common stock, $.01 par value 8,522,470
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 June 30, 1998 and December 31, 1997 1 Condensed Consolidated Statements of Earnings for the Three-Month Period Ended June 30, 1998 and 1997 2 Condensed Consolidated Statements of Earnings for the Six-Month Period Ended June 30, 1998 and 1997 3 Condensed Consolidated Statements of Cash Flows for the Six-Month Period Ended June 30, 1998 and 1997 4-5 Notes to Condensed Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-15 Part II. Other Information Item 1. Legal Proceedings 16 Item 2. Changes in Securities 16 Item 3. Defaults upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 Signature 17
3 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited)
ASSETS JUNE 30, DECEMBER 31, 1998 1997 ----------- ----------- Current assets: Cash $ 5,812,000 3,238,000 Trade accounts receivable, less allowance for doubtful accounts of $1,191,000 and $1,092,000 as of June 30, 1998 and December 31, 1997, respectively 24,339,000 23,037,000 Inventories 16,545,000 18,979,000 Prepaid expenses and other current assets 2,831,000 2,190,000 Refundable income taxes 1,286,000 -- Deferred tax assets 1,357,000 1,357,000 ----------- ----------- Total current assets 52,170,000 48,801,000 Property and equipment, at cost, net 2,775,000 2,509,000 Intangible assets, less applicable amortization 21,189,000 21,866,000 Note receivable from supplier, net 664,000 966,000 Other assets, net 572,000 551,000 ----------- ----------- $77,370,000 74,693,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ -- 2,000,000 Current installments of long-term debt 111,000 107,000 Trade accounts payable 4,385,000 3,629,000 Accrued expenses 2,629,000 3,821,000 Income taxes payable -- 22,000 ----------- ----------- Total current liabilities 7,125,000 9,579,000 ----------- ----------- Long-term debt, less current installments 11,926,000 7,983,000 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value. Authorized 5,000,000 shares; none issued -- -- Common stock, $.01 par value. Authorized 20,000,000 shares; issued 9,476,722 shares and outstanding 8,553,770 shares at June 30, 1998; issued 9,419,431 shares and outstanding 8,789,431 shares at December 31, 1997 86,000 88,000 Additional paid-in capital 23,065,000 25,034,000 Retained earnings 35,792,000 32,633,000 ----------- ----------- 58,943,000 57,755,000 Less note receivable from stockholder/officer 624,000 624,000 ----------- ----------- Total stockholders' equity 58,319,000 57,131,000 ----------- ----------- $77,370,000 74,693,000 =========== ===========
See accompanying notes to condensed consolidated financial statements. 1 4 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Earnings (Unaudited)
THREE-MONTH PERIOD ENDED JUNE 30, -------------------------------- 1998 1997 ------------ ------------ Net sales $ 31,142,000 28,103,000 Cost of sales 18,220,000 15,571,000 ------------ ------------ Gross profit 12,922,000 12,532,000 Selling, general and administrative expenses 10,058,000 9,614,000 ------------ ------------ Earnings from operations 2,864,000 2,918,000 Other expense (income): Interest expense, net 392,000 129,000 Miscellaneous income (4,000) (10,000) ------------ ------------ Earnings before income taxes 2,476,000 2,799,000 Income taxes 1,070,000 1,210,000 ------------ ------------ Net earnings $ 1,406,000 1,589,000 ============ ============ Net earnings per share: Basic $ 0.16 0.18 Diluted 0.16 0.18 ============ ============ Weighted average shares: Basic 8,704,000 9,008,000 Diluted 8,727,000 9,070,000 ============ ============
See accompanying notes to condensed consolidated financial statements. 2 5 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Earnings (Unaudited)
SIX-MONTH PERIOD ENDED JUNE 30, ----------------------------- 1998 1997 ----------- ----------- Net sales $63,319,000 62,544,000 Cost of sales 36,860,000 35,062,000 ----------- ----------- Gross profit 26,459,000 27,482,000 Selling, general and administrative expenses 20,206,000 20,384,000 Loss on factory closure -- 500,000 ----------- ----------- Earnings from operations 6,253,000 6,598,000 Other expense (income): Interest expense, net 686,000 381,000 Minority interest in net loss of unconsolidated subsidiary -- (81,000) Miscellaneous expense (income) 3,000 (6,000) ----------- ----------- Earnings before income taxes 5,564,000 6,304,000 Income taxes 2,405,000 2,725,000 ----------- ----------- Net earnings $ 3,159,000 3,579,000 =========== =========== Net earnings per share: Basic $ 0.36 0.40 Diluted 0.36 0.40 =========== =========== Weighted average shares: Basic 8,756,000 8,996,000 Diluted 8,780,000 9,057,000 =========== ===========
See accompanying notes to condensed consolidated financial statements. 3 6 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited)
SIX-MONTH PERIOD ENDED JUNE 30, ------------------------------ 1998 1997 ----------- ----------- Cash flows from operating activities: Net earnings $ 3,159,000 3,579,000 ----------- ----------- Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,308,000 1,146,000 Provision for doubtful accounts 333,000 700,000 Loss on disposal of assets 24,000 626,000 Loss on factory closure -- 500,000 Non-cash stock compensation 84,000 -- Minority interest in net loss of unconsolidated subsidiary -- (81,000) Changes in assets and liabilities: (Increase) decrease in: Trade accounts receivable (1,635,000) (4,196,000) Inventories 2,434,000 11,043,000 Prepaid expenses and other current assets (641,000) 673,000 Refundable income taxes (1,286,000) -- Note receivable from supplier 302,000 (328,000) Other assets (21,000) (53,000) Increase (decrease) in: Accounts payable 756,000 (1,791,000) Accrued expenses (1,192,000) 492,000 Income taxes payable (22,000) (230,000) ----------- ----------- Total adjustments 444,000 8,501,000 ----------- ----------- Net cash provided by operating activities 3,603,000 12,080,000 ----------- ----------- Cash flows from investing activities: Proceeds from sale of property and equipment 5,000 -- Purchase of property and equipment (926,000) (1,189,000) Cash paid in connection with Ugg acquisition (2,000,000) (351,000) Cash paid to stockholder/officer for loan -- (624,000) ----------- ----------- Net cash used in investing activities (2,921,000) (2,164,000) ----------- -----------
(Continued) 4 7 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows, Continued (Unaudited)
SIX-MONTH PERIOD ENDED JUNE 30, -------------------------------- 1998 1997 ------------ ------------ Cash flows from financing activities: Proceeds from notes payable and long-term debt 17,300,000 5,500,000 Repayments of notes payable and long-term debt (13,353,000) (14,548,000) Cash paid for repurchases of common stock (2,159,000) (554,000) Cash received from issuances of common stock 104,000 676,000 ------------ ------------ Net cash provided by (used in) financing activities 1,892,000 (8,926,000) ------------ ------------ Net increase in cash 2,574,000 990,000 Cash at beginning of period 3,238,000 1,287,000 ------------ ------------ Cash at end of period $ 5,812,000 2,277,000 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 675,000 435,000 Income taxes 3,729,000 2,230,000 ============ ============
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 audited condensed 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, 1997 included in the Company's Annual Report on Form 10-K. (2) Earnings per Share Basic earnings per share represents net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share represents net earnings divided by the weighted-average number of shares outstanding, inclusive of the dilutive impact of common stock equivalents. During the three-month and six-month periods ended June 30, 1998 and June 30, 1997, 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:
THREE-MONTH PERIOD ENDED JUNE 30, --------------------------- 1998 1997 ---------- ---------- Net earnings $1,406,000 1,589,000 ---------- ---------- Weighted average shares used in basic computation 8,704,000 9,008,000 Dilutive stock options 23,000 62,000 ---------- ---------- Weighted average shares used for diluted computation 8,727,000 9,070,000 ========== ==========
6 9 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (2) Earnings per Share (Continued)
SIX-MONTH PERIOD ENDED JUNE 30, --------------------------- 1998 1997 ---------- ---------- Net earnings $3,159,000 3,579,000 ---------- ---------- Weighted average shares used in basic computation 8,756,000 8,996,000 Dilutive stock options 24,000 61,000 ---------- ---------- Weighted average shares used for diluted computation 8,780,000 9,057,000 ========== ==========
(3) Inventories Inventories are summarized as follows:
JUNE 30, DECEMBER 31, 1998 1997 ----------- ----------- Finished goods $14,104,000 14,081,000 Work in process 1,278,000 1,189,000 Raw materials 1,163,000 3,709,000 ----------- ----------- Total inventories $16,545,000 18,979,000 =========== ===========
(4) Credit Facility The Company has a revolving credit facility with a bank (the "Facility"), providing a maximum borrowing availability of $25,000,000, with an amended credit availability of $30,000,000 from March 16, 1998 to June 30, 1998. The Facility also requires the Company to pay down the outstanding balance to less than $2,500,000 for at least thirty consecutive days during each of the thirteen-month periods ending July 31, 1999 and 2000. The Facility can be used for working capital and general corporate purposes and expires August 1, 2000. Borrowings bear interest at the bank's prime rate (8.5% at June 30, 1998) plus up to 0.25%, depending on whether the Company satisfies certain financial ratios. Alternatively, the Company may elect to have borrowings bear interest at LIBOR plus 1.5% to 1.75%, depending on whether the Company satisfies such financial ratios. Up to $10,000,000 of borrowings may be in the form of letters of credit. The Facility is secured by substantially all assets of the Company. At June 30, 1998 the Company had borrowed $11,300,000 under the Facility and had outstanding letters of credit of $4,779,000, leaving approximately $13,921,000 available for borrowings. 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. (6) Recently Issued Pronouncements The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (FAS) No. 130, "Reporting Comprehensive Income" and FAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." FAS No. 130 establishes standards for reporting and display of comprehensive income and its components. FAS No. 131 supersedes previous reporting requirements for reporting on segments of a business enterprise. FAS No. 130 and FAS No. 131 are effective for periods beginning after December 15, 1997. The Company adopted FAS No. 130 "Reporting Comprehensive Income" on January 1, 1998. The only difference between "net earnings" and "comprehensive income" for the Company is the impact from foreign currency translation adjustments. Foreign currency translation adjustments were immaterial to the Company's condensed consolidated financial statements. Accordingly, net earnings approximated comprehensive income for the three and six-month periods ended June 30, 1998 and June 30, 1997. Since FAS No. 131 is not required for interim reporting in the year of adoption, the Company plans to adopt this standard in the preparation of its annual financial statements to be included in the December 31, 1998 Form 10-K. As FAS No. 131 only requires additional disclosures, the Company expects there will be no impact on its financial position or results of operations from the implementation. In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." FAS No. 133 modifies the accounting for derivative and hedging activities and is effective for fiscal years beginning after December 15, 1999. Since the Company does not presently invest in derivatives or engage in hedging activities, SFAS No. 133 will not impact the Company's financial position or results of operations. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Company will adopt SOP 98-1 effective in 1999. The adoption of SOP 98-1 will require the Company to modify its method of accounting for software. Based on information currently available, the Company does not expect the adoption of SOP 98-1 to have a significant impact on its financial position or results of operations. 8 11 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (7) Contingencies An action was brought against the Company in 1995 whereby the plaintiff alleges, among other things, that the Company violated certain non-disclosure agreements and infringed purported trade secrets regarding certain footwear products and capitalized on the information by developing a competing product and incorporating certain concepts or technologies into other product lines. The complaint seeks specified damages of $15 million and other unspecified damages. The Company believes such claims are without merit. The Company anticipates that this matter will proceed to trial in 1998. The Company has contested, and intends to continue contesting this claim vigorously. A motion for summary judgment seeking dismissal of this matter is pending. The Company does not anticipate that the ultimate outcome of the complaint will have a material adverse effect upon the Company's financial position, results of operations or cash flows. The European Commission has enacted anti-dumping duties of 49.2% on certain types of footwear imported into Europe from China and Indonesia. Dutch Customs has issued an opinion to the Company that two of the most popular Teva styles, the Valkyrie and the Storm, are covered by this anti-dumping duty legislation. The Company does not believe that these styles are covered by the legislation and is working with Customs to resolve the situation. In the event that Customs makes a final determination that such styles are covered by the anti-dumping provisions, the Company expects that it would have an exposure to prior anti-dumping duties from 1997. In addition, if Customs determines that these styles are covered by the legislation, the duty amounts could cause such products to be too costly to import into Europe from China in the future. As a result, the Company may have to cease shipping such styles from China into Europe in the future or may have to begin to source these styles from countries not covered by the legislation. The Company is unable to predict the outcome of this matter and the effect, if any, on the Company's condensed consolidated financial statements. (8) Subsequent Event The Company currently intends to commence a recall of its Spring 1998 Teva(R) universal nylon infant sandals as the Company has determined that the sandals do not meet the Company's high standards of quality and performance. The sandals covered by the proposed recall were shipped between September 1997 and August 1998. The Company believes that approximately 65,000 pairs of these sandals were shipped during this period, resulting in net sales of approximately $800,000. The Company intends to seek recovery of loss, if any, from the independent factory which produced the sandals. The Company is not able to determine the amount of loss, if any, or the amount of recovery from the independent factory, if any, as a result of this product recall. 9 12 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997 Net sales increased by $3,039,000, or 10.8%, between the three months ended June 30, 1998 and 1997. Sales of the Teva(R) line increased to $25,706,000 for the three months ended June 30, 1998 from $20,752,000 for the three months ended June 30, 1997, a 23.9% increase. Sales of Teva(R) products represented 82.5% and 73.8% of net sales in the three months ended June 30, 1998 and 1997, respectively. Net sales of footwear under the Simple(R) product line decreased 25.6% to $4,479,000 from $6,018,000 between the three months ended June 30, 1998 and 1997. Overall, international sales for all of the Company's products increased 44.3% to $7,133,000 from $4,943,000, representing 22.9% of net sales in 1998 and 17.6% in 1997. The volume of footwear sold increased 8.8% to 1,169,000 pairs during the three months ended June 30, 1998 from 1,074,000 pairs during the three months ended June 30, 1997. The weighted average wholesale price per pair sold during the three months ended June 30, 1998 increased 3.3% to $25.72 from $24.89 for the three months ended June 30, 1997. The increase was primarily due to price increases in the spring 1998 Teva(R) product line as well as increased selling prices for Teva(R) and Simple(R) in certain European markets, as the Company began selling directly to retailers at higher prices than those previously charged to distributors in those markets in 1997. The impact of these items was partially offset by the increased volume of closeouts, particularly under the Simple(R) brand, during the three-month period ended June 30, 1998 compared to the three-month period ended June 30, 1997. Cost of sales increased by $2,649,000, or 17.0%, to $18,220,000 for the three months ended June 30, 1998, compared with $15,571,000 for the three months ended June 30, 1997. Gross profit increased by $390,000, or 3.1%, to $12,922,000 for the three months ended June 30, 1998 from $12,532,000 for the three months ended June 30, 1997 and decreased as a percentage of net sales to 41.5% from 44.6%. This decrease was largely due to an increase in the amount of inventory write-downs and closeouts, as well as an increase in the amount of airfreight costs incurred during the period. Selling, general and administrative expenses increased by $444,000, or 4.6%, for the three months ended June 30, 1998 compared with the three months ended June 30, 1997, and decreased slightly as a percentage of net sales to 32.3% in 1998 from 34.2% in 1997. This decrease as a percentage of sales was largely due to the non-recurrence of the costs associated with the 1997 litigation with the former shareholders of Ugg, decreases in bad debt expense and management bonuses, as well as reduced sales commission expense, resulting from a restructuring of the domestic sales commissions program. These decreases were partially offset by increased expenditures for research and development purposes and advertising and promotions, as well as increased costs for the Company's European operations. Net interest expense was $392,000 for the three months ended June 30, 1998 compared with net interest expense of $129,000 for the three months ended June 30, 1997, primarily due to increased borrowings on the Company's credit facility. Income taxes were $1,070,000 for the three months ended June 30, 1998, representing an effective income tax rate of 43.2% compared with income taxes of $1,210,000 for the three months ended June 30, 1997, representing a comparable effective income tax rate of 43.2%. 10 13 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES The Company had net earnings of $1,406,000 for the three months ended June 30, 1998 as compared with net earnings of $1,589,000 for the three months ended June 30, 1997, a decrease of 11.5%, for the reasons discussed above. Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997 Net sales increased by $775,000, or 1.2%, between the six months ended June 30, 1998 and 1997. Sales of the Teva(R) line increased to $48,927,000 for the six months ended June 30, 1998 from $45,005,000 for the six months ended June 30, 1997, an 8.7% increase. This Teva(R) sales increase was achieved on top of the approximately $5 to $6 million of sales which the Company believes were shifted from the first quarter of 1998 into the fourth quarter of 1997 under Teva's(R) fourth quarter early delivery program in 1997. Sales of Teva(R) products represented 77.3% and 72.0% of net sales in the six months ended June 30, 1998 and 1997, respectively. Net sales of footwear under the Simple(R) product line decreased 27.1% to $11,091,000 from $15,224,000 between the six months ended June 30, 1998 and 1997. Overall, international sales for all of the Company's products increased 10.0% to $15,665,000 from $14,240,000, representing 24.7% of net sales in 1998 and 22.8% in 1997. The volume of footwear sold decreased 1.5% to 2,358,000 pairs during the six months ended June 30, 1998 from 2,393,000 pairs during the six months ended June 30, 1997. The weighted average wholesale price per pair sold during the six months ended June 30, 1998 increased 2.3% to $25.57 from $25.00 for the six months ended June 30, 1997. The increase was primarily due to price increases in the spring 1998 Teva(R) product line as well as increased selling prices for Teva(R) and Simple(R) in certain European markets, as the Company began selling directly to retailers at higher prices than those previously charged to distributors in those markets in 1997. Those increases were partially offset by the increased volume of closeouts, particularly under the Simple(R) brand, during the six-month period ended June 30, 1998 compared to the six-month period ended June 30, 1997. Cost of sales increased by $1,798,000, or 5.1%, to $36,860,000 for the six months ended June 30, 1998, compared with $35,062,000 for the six months ended June 30, 1997. Gross profit decreased by $1,023,000, or 3.7%, to $26,459,000 for the six months ended June 30, 1998 from $27,482,000 for the six months ended June 30, 1997 and decreased as a percentage of net sales to 41.8% from 43.9%. This decrease was largely due to an increase in the amount of inventory write-downs and closeouts, and an increase in the amount of airfreight costs incurred during the period. Selling, general and administrative expenses decreased by $178,000, or 0.9%, for the six months ended June 30, 1998 compared with the six months ended June 30, 1997, and decreased slightly as a percentage of net sales to 31.9% in 1998 from 32.6% in 1997. This decrease as a percentage of sales was largely due to the non-recurrence of the costs associated with the 1997 litigation with the former shareholders of Ugg, decreases in bad debt expense and management bonuses, as well as reduced sales commission expense, resulting from a restructuring of the domestic sales commissions program. These decreases were partially offset by increased expenditures for research and development purposes and advertising and promotions, as well as increased costs for the Company's European operations. Net interest expense was $686,000 for the six months ended June 30, 1998 compared with net interest expense of $381,000 for the six months ended June 30, 1997, primarily due to increased borrowings on the Company's credit facility. Income taxes were $2,405,000 for the six months ended June 30, 1998, representing an effective income tax rate of 43.2% compared with income taxes of $2,725,000 for the six months ended June 30, 1997, representing a comparable effective income tax rate of 43.2%. 11 14 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES The Company had net earnings of $3,159,000 for the six months ended June 30, 1998 as compared with net earnings of $3,579,000 for the six months ended June 30, 1997, a decrease of 11.7%, for the reasons discussed above. Outlook This "Outlook" section, the last paragraph under "Liquidity and Capital Resources" and the discussion under "Seasonality" contain a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially. Sales Expectations. Based on current conditions, the Company expects sales of Simple(R), its strongest third quarter line, to be significantly less in the third quarter of 1998 than in last year's third quarter. The Company also expects Teva(R) and Ugg(R) sales to be flat to slightly down for the third quarter of 1998 compared to the third quarter of 1997, although it expects sales of these two lines to be up for the year. As a result, the Company anticipates that total sales will be significantly lower in the third quarter of 1998 than in the corresponding period last year and that it will incur a loss from operations and a net loss for the quarter. However, based on initial responses to its Spring '99 lines, the Company is optimistic about its growth prospects for 1999. The foregoing forward-looking statements represent the Company's current analysis of trends and information. Actual results could be affected by a variety of 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, both of which could 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. Availability of products can also affect the Company's ability to meet its customers' orders. In addition, sales of each of the Company's different lines have historically been higher in different seasons, with the highest percentage of Teva(R) sales occurring in the first and second quarter of each year, the highest percentage of Simple(R) sales occurring in the third quarter and the highest percentage of Ugg(R) sales occurring in the fourth quarter. Consequently, the results for these product lines are highly dependent on results during these specified periods. In addition, the Company's sales, results of operations and cash flows are subject to risks and uncertainties with respect to the following: overall economic and market conditions; competition; demographic changes; fluctuations and difficulty in forecasting sales, operating results and cash flows; 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; it's ability to attract and retain key employees; and the general risks associated with doing international business including foreign exchange risks, duties, quotas and political instability. Sales of the Company's products, particularly those under the Teva(R) and Ugg(R) 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(R) line. Likewise, unseasonably warm weather during the fall and winter months could adversely impact demand for the Company's Ugg(R) product line. Potential Impact of Certain Litigation. An action was brought against the Company in 1995 whereby the plaintiff alleges, among other things, that the Company violated certain non-disclosure agreements and infringed purported trade secrets regarding certain footwear products and capitalized on the information by developing a competing product and incorporating certain concepts or technologies into other product lines. 12 15 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES The complaint seeks specified damages of $15 million and other unspecified damages. The Company believes such claims are without merit. The Company anticipates that this matter will proceed to trial in 1998. The Company has contested, and intends to continue contesting this claim vigorously. A motion for summary judgment seeking dismissal of this matter is pending. The Company does not anticipate that the ultimate outcome of the complaint will have a material adverse effect upon the Company's financial position, results of operations or cash flows. Potential Imposition of Duties. The European Commission has enacted anti-dumping duties of 49.2% on certain types of footwear imported into Europe from China and Indonesia. Dutch Customs has issued an opinion to the Company that two of the most popular Teva styles, the Valkyrie and the Storm, are covered by this anti-dumping duty legislation. The Company does not believe that these styles are covered by the legislation and is working with Customs to resolve the situation. In the event that Customs makes a final determination that such styles are covered by the anti-dumping provisions, the Company expects that it would have an exposure to prior anti-dumping duties from 1997. In addition, if Customs determines that these styles are covered by the legislation, the duty amounts could cause such products to be too costly to import into Europe from China in the future. As a result, the Company may have to cease shipping such styles from China into Europe in the future or may have to begin to source these styles from countries not covered by the legislation. The Company is unable to predict the outcome of this matter and the effect, if any, on the Company's condensed consolidated financial statements. Potential Impact of Product Recall. The Company currently intends to commence a recall of its Spring 1998 Teva(R) universal nylon infant sandals as the Company has determined that the sandals do not meet the Company's high standards of quality and performance. The sandals covered by the proposed recall were shipped between September 1997 and August 1998. The Company believes that approximately 65,000 pairs of these sandals were shipped during this period, resulting in net sales of approximately $800,000. The Company intends to seek recovery of loss, if any, from the independent factory which produced the sandals. The Company is not able to determine the amount of loss, if any, or the amount of recovery from the independent factory, if any, as a result of this product recall. Year 2000 Issue. The Year 2000 issue results from computer hardware or software programs written using two digits to identify the year. These computer programs and hardware were designed and developed without consideration of the impact of the upcoming change in the century. If not corrected, such hardware and software programs could create erroneous information by or at the year 2000. The Company is assessing the internal readiness of its computer systems for handling the Year 2000 issue. The Company expects to implement the systems and programming changes necessary to address Year 2000 issues with respect to its internal systems and does not believe that the cost of such actions will have a material adverse effect on its results of operations or financial condition. Although the Company is not aware of any material operational issues or costs associated with preparing its internal systems for the year 2000, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of the necessary systems and changes to address the Year 2000 issues, and the Company's inability to implement such systems and changes in a timely manner could have an adverse effect on future results of operations. The Company is in the process of evaluating the extent to which the Company is vulnerable to third parties' failure to address their own Year 2000 issues. Those parties include customers, suppliers and other third 13 16 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES party business partners. The Company has not yet completed a review process with respect to these third parties. As a result, the Company cannot determine at this time the extent, if any, to which the Company may be exposed to financial risk from the inability of the Company's customers, suppliers and other business partners to remediate their own Year 2000 issues. The Company's above assessment of the risks associated with Year 2000 issues is forward-looking. Actual results may vary for a variety of reasons including those described above. The Company cautions the reader not to rely on the forward-looking statements in the above "Outlook" section, the last paragraph under "Liquidity and Capital Resources" and the discussion under "Seasonality." They merely represent the Company's current assessment of trends and information and may not be indicative of actual future results. The Company disclaims any intent or obligation to update these forward-looking statements. Liquidity and Capital Resources The Company's liquidity consists of cash, trade accounts receivable, inventories and a revolving credit facility. At June 30, 1998, working capital was $45,045,000, including $5,812,000 of cash. Cash provided by operating activities aggregated $3,603,000 for the six months ended June 30, 1998. Trade accounts receivable increased 5.7% from December 31, 1997 to June 30, 1998, and inventory levels decreased 12.8% from December 31, 1997 to June 30, 1998, largely due to the normal seasonality of the business. The Company has a revolving credit facility with a bank (the "Facility"), providing a maximum borrowing availability of $25,000,000, with an amended credit availability of $30,000,000 from March 16, 1998 to June 30, 1998. The Facility also requires the Company to pay down the outstanding balance to less than $2,500,000 for at least thirty consecutive days during each of the thirteen-month periods ending July 31, 1999 and 2000. The Facility can be used for working capital and general corporate purposes and expires August 1, 2000. Borrowings bear interest at the bank's prime rate (8.5% at June 30, 1998) plus up to 0.25%, depending on whether the Company satisfies certain financial ratios. Alternatively, the Company may elect to have borrowings bear interest at LIBOR plus 1.5% to 1.75%, depending on whether the Company satisfies such financial ratios. Up to $10,000,000 of borrowings may be in the form of letters of credit. The Facility is secured by substantially all assets of the Company. At June 30, 1998 the Company had borrowed $11,300,000 under the Facility and had outstanding letters of credit of $4,779,000, leaving approximately $13,921,000 available for borrowings. The Company has an agreement with a supplier, Prosperous Dragon, to provide financing to the supplier. At June 30, 1998, $2,164,000 was outstanding ($664,000 net of allowance). The note is secured by all assets of the supplier and bears interest at the prime rate (8.5% at June 30, 1998) plus 1%. Capital expenditures totaled $926,000 for the six months ended June 30, 1998. The Company's capital expenditures related primarily to a new warehouse management system at the Company's Ventura County, California distribution center, molds purchased for production, upgrades to corporate computer systems and a new booth for European tradeshows. The Company currently has no material future commitments for capital expenditures. In February 1998, the Company's Board of Directors approved an increase in the number of shares of common stock authorized for repurchase under its existing stock repurchase program from 900,000 shares to 1,200,000 shares. 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. Under this program, the Company 14 17 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES 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 293,000 shares in the first six months of 1998 for cash consideration of $2,159,000. The Company believes that internally generated funds, the available borrowings under its existing credit facilities and the cash on hand will provide sufficient liquidity to enable it to meet its current and foreseeable working capital requirements. Risks and uncertainties which could impact the Company's ability to maintain it's cash position include the Company's growth rate, it's ability to collect it's receivables in a timely manner, the Company's ability to effectively manage it's inventory, and the volume of letters of credit used to purchase product, among others. See also the discussion regarding forward-looking statements in the preceding "Outlook" section. Seasonality Financial results for the outdoor and footwear industries are generally seasonal. Sales of each of the Company's different product lines have historically been higher in different seasons, with the highest percentage of Teva(R) sales occurring in the first and second quarter of each year, the highest percentage of Simple(R) sales occurring in the third quarter and the highest percentage of Ugg(R) sales occurring in the fourth quarter. Based on the Company's historical experience, the Company would expect greater sales in the first and second quarters than in the third and fourth quarters. The actual results could differ materially depending upon consumer preferences, availability of product, competition, and the Company's customers continuing to carry and promote it's various product lines, among other risks and uncertainties. See also the discussion regarding forward-looking statements under "Outlook". Other The Company believes that the relatively moderate rates of inflation in recent years have not had a significant impact on its net sales or profitability. Recently Issued Pronouncements For recently issued pronouncements, see Note 6 to the Condensed Consolidated Financial Statements. 15 18 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION Item 1. Legal Proceedings. Not applicable 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. On May 15, 1998, the Company held its Annual Meeting of Stockholders. At the meeting, Rex A. Licklider and Karl F. Lopker were each re-elected as Class II directors until the Annual Meeting of Stockholders to be held in 2001, until such director's successor has been duly elected and qualified or until such director has otherwise ceased to serve as a director. For Rex A. Licklider, 7,748,143 votes were cast in favor and 154,884 votes were withheld. For Karl F. Lopker, 7,749,943 votes were cast in favor and 154,084 votes were withheld. There were no broker non-votes. The stockholders also ratified to approve an amendment to the Company's 1993 Employee Stock Incentive Plan, as amended (the "Plan"), to (a) increase the number of shares reserved for issuance thereunder by 1,000,000 shares, (b) extend the duration of the Plan by five years and (c) modify certain other provisions. 5,193,782 votes were cast in favor of the ratification; 931,743 were voted against; 40,185 abstained; and there were 1,737,317 broker non-votes. Lastly, the stockholders ratified the selection of KPMG Peat Marwick LLP as the Company's independent auditors. 7,788,066 votes were cast in favor of the ratification; 41,594 were voted against; and 73,367 abstained. There were no broker non-votes. Item 5. Other Information. Not applicable Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10.37 Fifth Amendment to Credit Agreement between Deckers Outdoor Corporation and Wells Fargo Bank, dated May 29, 1998. 10.38 Sixth Amendment to Credit Agreement between Deckers Outdoor Corporation and Wells Fargo Bank, dated July 22, 1998. (b) Reports on Form 8-K. None 16 19 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: August 14, 1998 /s/ M. Scott Ash -------------------------------------- M. Scott Ash, Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) 17 EX-10.37 2 EXHIBIT 10.37 1 Exhibit 10.37 FIFTH AMENDMENT TO CREDIT AGREEMENT This Fifth Amendment to Credit Agreement ("Fifth Amendment"), dated as of May 29, 1998, is executed by and between WELLS FARGO BANK, N.A., successor by merger to FIRST INTERSTATE BANK OF CALIFORNIA ("Bank") and DECKERS OUTDOOR CORPORATION ("Borrower"), with respect to that certain Credit Agreement dated as of July 27, 1995 (as heretofore amended, the "Credit Agreement") between Bank and Borrower. AGREEMENT Borrower and Bank hereby agree as follows: 1. Section 1.1. Section 1.1 of the Credit Agreement is amended by striking the definition of "Revolving Commitment" therein set forth and substituting in its place the following: "Revolving Commitment": The amount of (a) $45,000,000 during the period commencing on the Closing Date and ending on March 15, 1998, (b) $30,000,000 during the period commencing on March 16, 1998 and ending on June 30, 1998 and (c) $25,000,000 on July 1, 1998 and thereafter, in each case as such amount may be reduced pursuant to Section 2.1(d)(ii). 2. Section 6.1(p). Section 61.1(p) of the Loan Agreement is amended by striking the words "and, in any event, not later than 60 days after the execution of the Third Amendment" in clause (b) thereof and substituting in their place the following: "and, in any event, not later than June 30, 1998" 3. Representations and Warranties. Borrower hereby represents and warrants to Bank that all representations and warranties contained in the Loan Documents are true and correct as of the date of this Fifth Amendment. -1- 2 4. Conditions Precedent. The effectiveness of this Amendment is subject to the conditions precedent that: (a) this Fifth Amendment shall have been executed and delivered by Borrower and the Bank; and (b) the Bank shall have received the Consent in the form of Exhibit A executed by all of the Domestic Subsidiaries. 5. Confirmation. In all other respects, the Loan Documents are hereby confirmed. IN WITNESS WHEREOF, Bank and Borrower have executed this Amendment as of the date set forth in the preamble. "Borrower" "Bank" DECKERS OUTDOOR WELLS FARGO BANK, N.A. CORPORATION By: /s/ SCOTT ASH By: /s/ ANNA K. MERCER -------------------------- -------------------------- Name: Scott Ash Name: Anna K. Mercer Title: CFO Title: Vice President -2- EX-10.38 3 EXHIBIT 10.38 1 EXHIBIT 10.38 SIXTH AMENDMENT TO CREDIT AGREEMENT This Sixth Amendment to Credit Agreement ("Fifth Amendment"), dated as of July 22, 1998, is executed by and between WELLS FARGO BANK, N.A., successor by merger to FIRST INTERSTATE BANK OF CALIFORNIA ("Bank") and DECKERS OUTDOOR CORPORATION ("Borrower"), with respect to that certain Credit Agreement dated as of July 27, 1995 (as heretofore amended, the "Credit Agreement") between Bank and Borrower. AGREEMENT Borrower and Bank hereby agree as follows: 1. Section 6.1(o). Section 6.1(o) of the Loan Agreement is amended, effective as of June 30, 1998, by striking the date "April 30" set forth therein and substituting in its place the date "July 31." 2. Representations and Warranties. Borrower hereby represents and warrants to Bank that all representations and warranties contained in the Loan Documents are true and correct as of the date of this Fifth Amendment. 3. Conditions Precedent. The effectiveness of this Amendment is subject to the conditions precedent that: (a) this Sixth Amendment shall have been executed and delivered by Borrower and the Bank; and (b) the Bank shall have received the Consent in the form of Exhibit A executed by all of the Domestic Subsidiaries. 4. Confirmation. In all other respects, the Loan Documents are hereby confirmed. -1- 2 IN WITNESS WHEREOF, Bank and Borrower have executed this Amendment as of the date set forth alone. "Borrower" "Bank" DECKERS OUTDOOR CORPORATION WELLS FARGO BANK, N.A. By: /s/ SCOTT ASH By: /s/ ANNA K. MERCER ----------------------------- ----------------------------- Name: Scott Ash Name: Anna K. Mercer Title: CFO Title: Vice President -2- EX-27 4 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 5,812,000 0 25,530,000 1,191,000 16,545,000 52,170,000 6,122,000 3,347,000 77,370,000 7,125,000 11,926,000 0 0 86,000 58,233,000 77,370,000 63,319,000 63,319,000 36,860,000 36,860,000 0 333,000 686,000 5,564,000 2,405,000 3,159,000 0 0 0 3,159,000 0.36 0.36
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