-----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, R472gO9a4zkK5viTiJ+yqarDxuAP44jiiHyIwv14OXEXcHnM0TCc/KM1R40BT6NU L7fa6Yn4nCpoiDROSLms2g== 0000950148-99-001171.txt : 19990517 0000950148-99-001171.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950148-99-001171 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99624654 BUSINESS ADDRESS: STREET 1: 495A SOUTH FAIRVIEW AVENUE CITY: GOLETA STATE: CA ZIP: 93117 BUSINESS PHONE: 805-967-7611 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 (03/31/1999) 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 0-22446 DECKERS OUTDOOR CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-3015862 - -------------------------------------------------------------------------------- (State or other jurisdiction 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 MAY 7, 1999 ---------------------------- -------------- Common stock, $.01 par value 8,574,869
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 March 31, 1999 and December 31, 1998 1 Condensed Consolidated Statements of Operations for the Three-Month Period Ended March 31, 1999 and 1998 2 Condensed Consolidated Statements of Cash Flows for the Three-Month Period Ended March 31, 1999 and 1998 3-4 Notes to Condensed Consolidated Financial Statements 5-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-16 Part II. Other Information Item 1. Legal Proceedings 17 Item 2. Changes in Securities 17 Item 3. Defaults upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signature 18
3 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) ASSETS
MARCH 31, DECEMBER 31, 1999 1998 ------------ ------------ Current assets: Cash $ 4,120,000 263,000 Trade accounts receivable, less allowance for doubtful accounts of $1,506,000 and $1,204,000 as of March 31, 1999 and December 31, 1998, respectively 45,065,000 27,180,000 Inventories 24,403,000 23,665,000 Prepaid expenses and other current assets 2,069,000 2,178,000 Refundable and deferred tax assets 1,645,000 6,023,000 ------------ ------------ Total current assets 77,302,000 59,309,000 Property and equipment, at cost, net 2,982,000 2,994,000 Intangible assets, less applicable amortization 20,371,000 20,702,000 Note receivable from supplier, net 844,000 782,000 Other assets, net 457,000 586,000 ------------ ------------ $101,956,000 84,373,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 20,733,000 6,236,000 Trade accounts payable 7,207,000 7,947,000 Accrued expenses 4,550,000 2,991,000 ------------ ------------ Total current liabilities 32,490,000 17,174,000 ------------ ------------ Long-term debt, less current installments 15,168,000 15,199,000 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value. Authorized 5,000,000 shares; none issued -- -- Common stock, $.01 par value. Authorized 20,000,000 shares; issued 9,528,321 shares and outstanding 8,555,369 shares at March 31, 1999; issued 9,495,631 shares and outstanding 8,522,679 shares 86,000 85,000 at December 31, 1998 Additional paid-in capital 22,865,000 22,813,000 Retained earnings 31,971,000 29,726,000 ------------ ------------ 54,922,000 52,624,000 Less note receivable from stockholder/former director 624,000 624,000 ------------ ------------ Total stockholders' equity 54,298,000 52,000,000 ------------ ------------ $101,956,000 84,373,000 ============ ============
See accompanying notes to condensed consolidated financial statements. 4 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited)
THREE-MONTH PERIOD ENDED MARCH 31, ------------------------------- 1999 1998 ------------ ------------ Net sales $ 38,040,000 32,177,000 Cost of sales 20,817,000 18,640,000 ------------ ------------ Gross profit 17,223,000 13,537,000 Selling, general and administrative expenses 12,669,000 10,148,000 ------------ ------------ Earnings from operations 4,554,000 3,389,000 Other expense (income): Interest expense, net 631,000 294,000 Miscellaneous expense (income) (31,000) 7,000 ------------ ------------ Earnings before income taxes 3,954,000 3,088,000 Income taxes 1,709,000 1,335,000 ------------ ------------ Net earnings $ 2,245,000 1,753,000 ============ ============ Net earnings per share: Basic $ 0.26 0.20 Diluted 0.26 0.20 ============ ============ Weighted average shares: Basic 8,528,000 8,807,000 Diluted 8,732,000 8,832,000 ============ ============
See accompanying notes to condensed consolidated financial statements. 2 5 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited)
THREE-MONTH PERIOD ENDED MARCH 31, ------------------------------- 1999 1998 ------------ ------------ Cash flows from operating activities: Net earnings $ 2,245,000 1,753,000 ------------ ------------ Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 733,000 633,000 Provision for doubtful accounts 433,000 160,000 Loss on disposal of assets -- 3,000 Non-cash stock compensation -- 84,000 Changes in assets and liabilities: (Increase) decrease in: Trade accounts receivable (18,318,000) (14,476,000) Inventories (738,000) (273,000) Prepaid expenses and other current assets 109,000 (690,000) Note receivable from supplier (62,000) 195,000 Refundable and deferred income taxes 4,378,000 -- Other assets 129,000 (11,000) Increase (decrease) in: Accounts payable (740,000) 230,000 Accrued expenses 1,559,000 1,214,000 Income taxes payable -- (22,000) ------------ ------------ Total adjustments (12,517,000) (12,953,000) ------------ ------------ Net cash used in operating activities (10,272,000) (11,200,000) ------------ ------------ Cash flows from investing activities: Purchase of property and equipment (390,000) (440,000) Cash paid in connection with Ugg acquisition -- (2,000,000) ------------ ------------ Net cash used in investing activities (390,000) (2,440,000) ------------ ------------
(Continued) 3 6 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows, Continued (Unaudited)
THREE-MONTH PERIOD ENDED MARCH 31, ------------------------------ 1999 1998 ------------ ------------ Cash flows from financing activities: Net proceeds from long-term debt 14,466,000 12,975,000 Cash paid for repurchases of common stock -- (521,000) Cash received from issuances of common stock 53,000 77,000 ------------ ------------ Net cash provided by financing activities 14,519,000 12,531,000 ------------ ------------ Net increase (decrease) in cash 3,857,000 (1,109,000) Cash at beginning of period 263,000 3,238,000 ------------ ------------ Cash at end of period $ 4,120,000 2,129,000 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 625,000 267,000 Income taxes 22,000 1,402,000 ============ ============
See accompanying notes to condensed consolidated financial statements. 4 7 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (1) General The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation for each of the periods presented. The results of operations for interim periods are not necessarily indicative of results to be achieved for full fiscal years. As contemplated by the Securities and Exchange Commission (SEC) under Rule 10-01 of Regulation S-X, the accompanying condensed consolidated financial statements and related footnotes have been condensed and do not contain certain information that will be included in the Company's annual consolidated financial statements and footnotes thereto. For further information, refer to the consolidated financial statements and related footnotes for the year ended December 31, 1998 included in the Company's Annual Report on Form 10-K. (2) Earnings per Share Basic earnings per share represents net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share represents net earnings divided by the weighted-average number of shares outstanding, inclusive of the dilutive impact of common stock equivalents. During the three-month periods ended March 31, 1999 and 1998, the difference between the weighted average number of shares used in the basic computation compared to that used in the diluted computation was due to the dilutive impact of options to purchase common stock. The reconciliation of basic to diluted weighted average shares are as follows:
THREE-MONTH PERIOD ENDED MARCH 31, -------------------------- 1999 1998 ---------- ---------- Net earnings $2,245,000 1,753,000 ---------- ---------- Weighted average shares used in basic computation 8,528,000 8,807,000 Dilutive stock options 204,000 25,000 ---------- ---------- Weighted average shares used for diluted computation 8,732,000 8,832,000 ========== ==========
5 8 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (2) Earnings per Share (Continued) Options to purchase 967,000 shares of common stock at prices ranging from $3.03 to $13.75 were outstanding during the three months ended March 31, 1999 and options to purchase 675,000 shares of common stock at prices ranging from $7.50 to $15.00 were outstanding during the three month period ended March 31, 1998, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares during the period and, therefore, were anti-dilutive. (3) Inventories Inventories are summarized as follows:
MARCH 31, DECEMBER 31, 1999 1998 ------------ ---------- Finished goods $ 23,761,000 22,396,000 Work in process 81,000 35,000 Raw materials 561,000 1,234,000 ------------ ---------- Total inventories $ 24,403,000 23,665,000 ============ ==========
(4) Credit Facility On January 21, 1999, the Company replaced its existing revolving credit agreement with a new financial institution. Under the new agreement, the Company is permitted 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 (7.75% at March 31, 1999) or, at the Company's election, an adjusted Eurodollar rate plus 2 %, is secured by substantially all assets of the Company and expires July 1, 2001. However, in the event that the Teva license agreements are extended beyond August 31, 2001 on terms acceptable to the lender, the agreement will be extended through the earlier of 60 days preceding the expiration of any new license arrangement or January 21, 2002. Additionally, under the terms of the agreement, should the Company terminate the arrangement prior to the expiration date, the Company may be required to pay the lender an early termination fee ranging between 1% and 3% of the commitment amount, depending upon when such termination occurs. The agreement underlying the credit facility includes a tangible net worth covenant. At March 31, 1999, the Company was in compliance with the terms of the agreement. 6 9 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 March 31, 1999, the Company had income tax expense of $1,709,000, representing an effective income tax rate of 43.2%. For the three months ended March 31, 1998, the Company had income tax expense of $1,335,000, representing an effective income tax rate of 43.2%. (6) Computer Software Costs 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 adoption of SOP 98-1 requires the Company to modify its method of accounting for software. The Company adopted SOP 98-1 effective January 1, 1999. The adoption of SOP 98-1 did not have a significant impact on the Company's financial position or results of operations. (7) Comprehensive Income The Company adopted SFAS No. 130, "Reporting Comprehensive Income" on January 1, 1998. SFAS No. 130 establishes standards to measure all changes in equity that result from transactions and other economic events other than transactions with owners. Comprehensive income is the total of net earnings and all other non-owner changes in equity. Except for net earnings and foreign currency translation adjustments, the Company does not have any transactions and other economic events that qualify as comprehensive income as defined under SFAS No. 130. As foreign currency translation adjustments were immaterial to the Company's consolidated financial statements, net earnings approximated comprehensive income for each of the three month periods ended March 31, 1999 and 1998. (8) Start-Up Activities The American Institute of Certified Public Accountants ("AICPA") Accounting Standards Executive Committee issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires that costs of start-up activities, including organization costs and retail store openings, be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. Restatement of previously issued financial statements is not permitted. In the fiscal year in which the SOP is first adopted, the application should be reported as a cumulative effect of a change in accounting principle. The Company adopted SOP 98-5 on January 1, 1999. The adoption of this statement did not have a material impact on the Company's financial position or results of operations. (9) Recently Issued Pronouncements The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (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 all fiscal quarters of fiscal years beginning after June 15, 1999. Since the Company does not presently invest in derivatives or engage in hedging activities, FAS No. 133 is not expected to impact the Company's financial position or results of operations. 7 10 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (10) Business Segments The Company's accounting policies of the segments and the basis for segmentation are the same as those at December 31, 1998. The Company evaluates performance based on net revenues and profit or loss from operations. The Company's reportable segments are strategic business units that offer geographic brand images. They are managed separately because each business requires different marketing, sourcing and sales strategies. Business segment information for the three months ended March 31, 1999 and 1998 is summarized as follows:
1999 1998 ------------- ------------ Sales to external customers: Teva, domestic $ 24,734,000 19,309,000 Simple, domestic 2,586,000 4,013,000 Ugg, domestic 324,000 361,000 Other 10,396,000 8,494,000 ------------- ------------ $ 38,040,000 32,177,000 ============= ============ Intersegment sales: Teva, domestic $ 496,000 597,000 Simple, domestic -- 97,000 Ugg, domestic -- -- Other 140,000 2,255,000 ------------- ------------ $ 636,000 2,949,000 ============= ============ Earning from operations: Teva, domestic $ 2,730,000 2,680,000 Simple, domestic 265,000 114,000 Ugg, domestic (777,000) (770,000) Other 2,310,000 1,440,000 ------------- ------------ $ 4,528,000 3,464,000 ============= ============ Total assets: Teva, domestic $ 87,734,000 69,651,000 Simple, domestic 8,321,000 10,965,000 Ugg, domestic 20,194,000 19,050,000 Other 13,593,000 15,537,000 ------------- ------------ $ 129,842,000 115,203,000 ============= ============
8 11 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) The reconciliation of segment earnings from operations to consolidated earnings before income taxes is as follows:
1999 1998 ---------- ---------- Total earnings from operations for $4,528,000 3,464,000 reportable segments Intersegment profit change in beginning and ending inventory 26,000 (75,000) ---------- ---------- Consolidated earnings from operations 4,554,000 3,389,000 Interest expense, net 631,000 294,000 Other expense (income) (31,000) 7,000 ---------- ---------- Consolidated earnings before income taxes $3,954,000 3,088,000 ========== ==========
(11) Contingencies A judgment aggregating $1,785,000 was entered against the Company in May 1999 in an action brought against the Company in 1995 in the United States District Court, District of Montana (Missoula Division). The judgment was for breach of a non-disclosure contract, among other things. The Company is appealing the judgment and continues to believe such claims are without merit. The plaintiffs have filed a motion to enhance their damages, which the Company has opposed. The Company intends to continue contesting this claim vigorously. The Company, based on advice from legal counsel, does not anticipate that the ultimate outcome will have a material adverse effect upon its financial condition, results of operations or cash flows. The European Commission has enacted anti-dumping duties of 49.2% on certain types of footwear imported into Europe from China and Indonesia. Dutch Customs has issued an opinion to the Company that certain popular Teva styles are covered by this anti-dumping duty legislation. The Company does not believe that these styles are covered by the legislation and is working with Customs to resolve the situation. In the event that Customs makes a final determination that such styles are covered by the anti-dumping provisions, the Company expects that it would have an exposure to prior anti-dumping duties from 1997 of up to approximately $500,000. In addition, if Customs determines that these styles are covered by the legislation, the duty amounts could cause such products to be too costly to import into Europe from China in the future. As a result, the Company may have to cease shipping such styles from China into Europe in the future or may have to begin to source these styles from countries not covered by the legislation. As a precautionary measure, the Company has obtained alternative sourcing for the potentially impacted products from sources outside of China in an effort to reduce the potential risk in the future. The Company is unable to predict the outcome of this matter and the effect, if any, on the Company's results of operations, financial condition and cash flows. 9 12 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 Net sales increased by $5,863,000, or 18.2%, from the comparable three months ended March 31, 1998. Sales of the Teva footwear increased to $32,944,000 for the three months ended March 31, 1999 from $23,473,000 for the three months ended March 31, 1998, a 40.3% increase. This increase was a result of overall strength in the sandal market and an aggressive strategy to ship product earlier in the season in 1999 than in 1998. As product was shipped to retailers earlier in the season this year, a portion of the sales which otherwise would have been shipped in the second quarter were shipped in the first quarter this year. See discussion under "Outlook." Sales of Teva footwear represented 86.6% and 73.0% of net sales in the three months ended March 31, 1999 and 1998, respectively. Net sales of footwear under the Simple product line decreased 40.4% to $3,942,000 from $6,612,000 from the comparable three months ended March 31, 1998. The decrease in Simple sales occurred due to a decline in demand for the Simple products caused by a variety of factors including competition, an abundance of similar products at retail, and a general decrease in the popularity of the products. Net sales of Ugg footwear were $324,000 for the three months ended March 31, 1999, compared to net sales of $361,000 for the three months ended March 31, 1998. Due to the highly seasonal nature of Ugg's business, the first quarter is generally a low volume quarter for Ugg sales. Overall, international sales for all of the Company's products increased 24.1% to $10,589,000 from $8,532,000, representing 27.8% of net sales in 1999 and 26.5% in 1998. The volume of footwear sold increased 17.9% to 1,403,000 pairs during the three months ended March 31, 1999 from 1,190,000 pairs during the three months ended March 31, 1998, for the reasons discussed above. The weighted average wholesale price per pair sold during the three months ended March 31, 1999 increased 3.1% to $26.21 from $25.42 for the three months ended March 31, 1998. The increase was primarily due to a decrease in the volume of closeouts combined with improved selling prices for closeouts sold. Cost of sales increased by $2,177,000, or 11.7%, to $20,817,000 for the three months ended March 31, 1999, compared with $18,640,000 for the three months ended March 31, 1998. Gross profit increased by $3,686,000, or 27.2%, to $17,223,000 for the three months ended March 31, 1999 from $13,537,000 for the three months ended March 31, 1998 and increased as a percentage of net sales to 45.3% from 42.1%. The increase in gross margin during the quarter was due to several factors, including improved product sourcing, the exiting of the components business which typically carries a lower gross margin and a reduction in the impact of closeouts versus the same period last year. Selling, general and administrative expenses increased by $2,521,000, or 24.8%, for the three months ended March 31, 1999, compared with the three months ended March 31, 1998, and increased as a percentage of net sales to 33.3% in 1999 from 31.5% in 1998. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to nearly $1,000,000 of special charges incurred during the three months ended March 31, 1999. These costs include legal and other expenses associated with a lawsuit brought against the Company in 1995 in Montana, as well as severance costs in connection with a corporate restructuring. See discussion under "Legal Proceedings." Net interest expense was $631,000 for the three months ended March 31, 1999 compared with $294,000 for the three months ended March 31, 1998, primarily due to increased borrowings on the Company's credit facility in the current year. 10 13 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES For the three months ended March 31, 1999 the Company experienced an income tax expense of $1,709,000. This represents an effective income tax rate of 43.2%. For the three months ended March 31, 1998, the Company had income tax expense of $1,335,000, representing an effective income tax rate of 43.2%. Net earnings increased 28.1% to $2,245,000 for the three months ended March 31, 1999 versus net earnings of $1,753,000 for the three months ended March 31, 1998 due to the reasons discussed above. Outlook This "Outlook" section, the last paragraph under "Liquidity and Capital Resources," the discussion under "Seasonality" and other statements in this Form 10-Q contain a number of forward-looking statements including forward-looking statements relating to sales and operating expense expectations, the potential imposition of certain customs duties, the potential impact of the Teva license expiration, the potential impact of certain litigation, the potential impact of the Year 2000 on the Company and the impact of seasonality on the Company's operations. All of the forward-looking statements are based on current expectations. Actual results may differ materially for a variety of reasons, including the reasons discussed below. Sales and Operating Expense Expectations. The Company's net sales under the Teva product line increased 40% during the three month period ended March 31, 1999 compared to the same period last year as the Company continued its strategy of an aggressive sell-in program. Under this strategy, the Company shipped product earlier in the season this year than it had done last year. As product was shipped to retailers earlier in the season this year than in prior years, a portion of the sales which otherwise would have been shipped in the second quarter were shipped in the first quarter this year. For the year ending December 31, 1999 the Company expects that net sales for Teva will be greater than net sales for the previous year, but the Company expects that increase to be significantly less than that experienced for the three month period ended March 31, 1999. The Company expects net sales under the Ugg product line to increase for the year ending December 31, 1999 compared to last year and expects net sales of the Simple product line to decrease in 1999 compared to 1998. Selling, general and administrative expenses increased in 1998 to 38.5% of net sales, for a variety of reasons. The Company expects selling, general and administrative expenses as a percentage of sales to decrease for the year ended December 31, 1999 compared to 1998 as a result of the Company's restructuring as well as continued efforts to control operating expenses. The foregoing forward-looking statements represent the Company's current analysis of trends and information. Actual results could vary as a result of numerous factors. For example, the Company's results are directly dependent on consumer preferences, which are difficult to assess and can shift rapidly. Any shift in consumer preferences away from one or more of the Company's product lines could result in lower sales as well as obsolete inventory and the necessity of selling products at significantly reduced selling prices, all of which would adversely affect the Company's results of operations, financial condition and cash flows. The Company is also dependent on its customers continuing to carry and promote its various lines. The Company's sales can be adversely impacted by the ability of the Company's suppliers to manufacture and deliver products in time for the Company to meet its customers' orders. In addition, sales of each of the Company's different lines have historically been higher in different seasons, with the highest percentage of Teva sales occurring in the first and second quarter of each year, the highest percentage of Simple sales occurring in the third quarter and the highest percentage of Ugg sales occurring in the fourth quarter. Consequently, the results for these product lines are highly dependent on results during these specified periods. 11 14 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES In addition, the Company's results of operations, financial condition and cash flows are subject to risks and uncertainties with respect to the following: overall economic and market conditions; competition; demographic changes; the loss of significant customers or suppliers; the performance and reliability of the Company's products; customer service; the Company's ability to secure and maintain intellectual property rights; the Company's ability to secure and maintain adequate financing; the Company's ability to forecast and subsequently achieve those forecasts; its ability to attract and retain key employees; and the general risks associated with doing international business including foreign exchange risks, duties, quotas and political instability. Sales of the Company's products, particularly those under the Teva and Ugg lines, are very sensitive to weather conditions. Extended periods of unusually cold weather during the spring and summer could adversely impact demand for the Company's Teva line. Likewise, unseasonably warm weather during the fall and winter months could adversely impact demand for the Company's Ugg product line. Potential Imposition of Duties. The European Commission has enacted anti-dumping duties of 49.2% on certain types of footwear imported into Europe from China and Indonesia. Dutch Customs has issued an opinion to the Company that certain popular Teva styles are covered by this anti-dumping legislation. The Company does not believe that these styles are covered by the legislation and is working with Dutch Customs to resolve the situation. In the event that Dutch Customs makes a final determination that such styles are covered by the anti-dumping provisions, the Company expects that it would have an exposure to prior anti-dumping duties for 1997 of up to approximately $500,000. In addition, if Dutch Customs determines that these styles are covered by the legislation, the duty amounts could cause such products to be too costly to import into Europe from China in the future. As a result, the Company could have to cease shipping such styles from China into Europe in the future or could have to begin to source these styles from countries not covered by the legislation. Potential Impact of Teva License Expiration. As announced in November 1998, Mark Thatcher, the inventor and licensor of Teva Sport Sandals, has engaged a financial advisor to explore various strategic options for the Teva brand following the expiration of the existing licenses with the Company, which expire in August 2001. The Company is in continuing negotiations with Mr. Thatcher, pursuing various options including a renewal of the existing license or the purchase of the underlying Teva rights. The Company is hopeful that it will be able to successfully negotiate a favorable arrangement with Mr. Thatcher. However, there can be no assurances that such arrangements can be secured. In the event that the Company does not come to a favorable arrangement with Mr. Thatcher, the Company will not be able to sell Teva products beyond August 31, 2001, which would result in a material adverse impact on the Company's results of operations, financial condition and cash flows. 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. As a result, such systems may not be able to properly distinguish between years that begin with a "20" and years that begin with a "19". If not corrected, such hardware and software programs could create erroneous information by or at the year 2000, causing the Company, or its customers or suppliers, to become unable to process normal business transactions accurately or at all. State of Readiness. The Company's Year 2000 compliance strategy includes several overlapping phases, which the Company has defined as follows: 12 15 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Identification - This phase involves the identification of the hardware and software systems used by the Company which could be adversely impacted by the Year 2000 issue. It includes identification of information technology ("IT") systems and non-IT systems (including telecommunications systems and systems associated with facilities - such as utilities and security, among others), as well as identification of the impact that Year 2000 issues may have on the Company's key third party relationships (including customers, suppliers and financing sources, among others). Analysis - This phase involves the determination of the likelihood, impact and magnitude of potential Year 2000 non-compliance for each of the items in the areas previously identified in the Identification phase. Conversion - This phase involves the development and execution of a plan to bring the previously identified items into Year 2000 compliance. Testing - This phase involves the testing of the various systems to ascertain that the conversion procedures were successful at bringing the systems into compliance. Implementation - This phase involves putting the various Year 2000 compliant systems into use in the Company's operations. The Company is continuing to assess the readiness of its various systems for handling the Year 2000 issue. The Company determined that the version of the software that operated the Company's enterprise business systems prior to 1999 was not Year 2000 compliant. These enterprise business systems include the Company's systems for order entry and processing, allocations, inventory, accounts receivable, accounts payable and financial reporting. In late 1998, the Company received the current version of the underlying software, which the software vendor has stated is Year 2000 compliant. The Company has completed the Conversion phase of its Year 2000 strategy with respect to its enterprise business systems, and is currently in the Testing phase. The Company currently anticipates that it will complete the Testing and Implementation phases for its enterprise business systems by June 30, 1999. With respect to the Company's remaining IT systems, including desktops, networks and several departmental hardware and software systems, and its non-IT systems, the Company has recently completed the Analysis phase and has begun the Conversion phase. The Company currently expects completion of the Conversion phase for the majority of the remaining IT and non-IT systems by June 30, 1999 and currently anticipates completion of the Testing and Implementation phases by September 30, 1999. The Company's plan for addressing the readiness of its key external business partners includes requesting information from these partners regarding their own readiness to address their Year 2000 issues, and an assessment of the potential impact that any non-compliance might have on the Company's operations. The Company has requested compliance information from key business partners and has begun to receive responses. The Company may continue to add additional business partners to its Year 2000 program as the Company's Year 2000 readiness plan progresses. The various phases for this segment are expected to continue throughout 1999. Estimated Costs. The Company currently estimates that total costs related to all phases of the Year 2000 strategy with respect to its enterprise business systems will aggregate $350,000. This estimate is for outside goods and service providers only. The estimate does not include the time and costs associated with its in-house employees, the amount of which is not currently determinable. In addition, the estimated costs to bring the remaining IT and non-IT systems into compliance and to address and remedy any non-compliance issues at its key business partners are not yet determinable, but will likely exceed $200,000. These costs are expected to be funded through operating cash flows and the Company's bank facility. The Company does not currently anticipate using any independent verification or validation 13 16 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES processes. The Company anticipates that the Year 2000 compliance efforts will ultimately result in the deferral of other IT projects. However, the deferral of such projects is not expected to have a material adverse impact on the Company's results of operations, financial condition or cash flows. The estimated Year 2000 compliance costs are based on the Company's current assessment of its Year 2000 situation and could change significantly as the Year 2000 compliance strategy progresses. As of March 31, 1999, the Company had incurred Year 2000 compliance costs of approximately $170,000. Risks and Contingency Plan. Although the Company is not aware of any material operational issues associated with preparing its internal systems for the year 2000, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of the necessary systems and changes to address the Year 2000 issues, and the Company's inability to implement such systems and changes in a timely manner could have a material adverse effect on future results of operations, financial condition and cash flows. The potential inability of the Company's business partners to address their own Year 2000 issues sufficiently and timely remains a risk which is difficult to assess. Among other things, the Company is currently highly dependent on the combination of approximately 12 key suppliers, primarily located in the Far East, for the production of its footwear products. The failure of one or more of these suppliers to adequately address their own Year 2000 issues could cause them to be unable to manufacture or deliver product to the Company on a timely basis, materially adversely impacting the Company's results of operations, financial condition and cash flows. In addition, the inability of one or more of the Company's significant customers to become compliant could adversely impact the customers' operations, thus impacting the Company's sales and subsequent collections with respect to those customers. The Company's Year 2000 compliance efforts are subject to many additional risks including the following, among others: the Company's failure to adequately identify and analyze issues, convert to compliant systems, fully test converted systems, and implement compliant systems; unanticipated issues or delays in any of the phases of the Company's strategy; the inability of customers, suppliers and other business partners to become compliant; and the breakdown of local and global infrastructures resulting from the non-compliance of utilities, banking systems, transportation, government and communications systems. As the Company has not yet completed various phases of its internal readiness and has not yet determined the readiness of its key business partners, the Company cannot yet fully and accurately identify and quantify the most reasonably likely worst case Year 2000 scenario at this time. However, the Company is currently assessing scenarios and will take steps to mitigate the impact of these scenarios if they were to occur. This contingency planning has been completed for certain areas while the contingency plans for most areas are still in process. The Company expects to more fully address such contingencies by the end of the second quarter of 1999. The Company's above assessment of the risks associated with Year 2000 issues is forward-looking. Actual results may vary for a variety of reasons including those described above. Liquidity and Capital Resources The Company's liquidity consists of cash, trade accounts receivable, inventories and a revolving credit facility. At March 31, 1999, working capital was $44,812,000, including $4,120,000 of cash. Cash used in operating activities aggregated $10,272,000 for the three months ended March 31, 1999. Trade accounts receivable increased 65.8% from December 31, 1998 as a result of normal seasonality, the high volume of net sales during the quarter, outstanding receivables with extended payment terms and the impact of a general deterioration in the average collection periods. Inventories increased 3.1% since 14 17 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES December 31, 1998 as the Company requested its suppliers to deliver its Spring 1999 Teva inventory earlier than it had done in the prior year. This acceleration of inventory deliveries was intended to increase available inventory to improve the Company's ability to fulfill its customers' orders on a timely basis and to improve the Company's ability to address its Spring Teva fill-in business. On January 21, 1999, the Company replaced the existing credit facility with a new revolving credit facility (the "Facility") with a new lender. The Facility provides a maximum availability of $50,000,000, subject to a borrowing base of up to 85% of eligible accounts receivables, as defined, and 65% of eligible inventory, as defined. Up to $15,000,000 of borrowings may be in the form of letters of credit. The Facility bears interest at the lender's prime rate (7.75% at March 31, 1999), or at the Company's election at an adjusted Eurodollar rate plus 2%. The Facility is secured by substantially all assets of the Company. The agreement underlying the Facility includes a tangible net worth covenant, requiring the Company to maintain tangible net worth, as defined, of $30,000,000. The Company was in compliance with the covenant at March 31, 1999. The Facility expires July 1, 2001. However, in the event that the Teva license agreements are extended beyond August 31, 2001 on terms acceptable to the lender, the Facility will be extended through the earlier of 60 days preceding the expiration of any new license arrangement or January 21, 2002. On March 31, 1999, the Company had outstanding borrowings under the Facility of $35,246,000, outstanding letters of credit aggregating $165,000 and borrowing availability of $3,314,000. Under the terms of the Facility, if the Company terminates the arrangement prior to the expiration date of the Facility, the Company may be required to pay the lender an early termination fee ranging between 1% and 3% of the Facility's commitment amount, depending upon when such termination occurs. The Company has an agreement with a supplier, Prosperous Dragon, to provide financing to the supplier's operations, of which $2,344,000 was outstanding at March 31, 1999 ($844,000 net of allowance). The note is secured by all assets of the supplier and bears interest at the prime rate (7.75% at March 31, 1999) plus 1%. Capital expenditures totaled $390,000 for the three-months ended March 31, 1999. The Company's capital expenditures related primarily to 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 the three month period ended March 31, 1999. At March 31, 1999, 1,227,000 shares remained available for repurchase under the program. The Company is endeavoring to come to an agreement with the Teva licensor which would provide the Company with the ability to continue to sell the Teva products beyond the expiration of the current license terms. Among the possible arrangements, the Company may pursue the purchase of the underlying Teva rights, a renewal of the existing licenses or a variety of other possibilities. Certain of these possible arrangements may require a significant amount of additional financing. There are no assurances that the additional financing will be available or that a favorable arrangement with the licensor can be achieved. 15 18 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES The Company believes that internally generated funds, the available borrowings under its existing credit facility, and the cash on hand will provide sufficient liquidity to enable it to meet its current and foreseeable working capital requirements. However, risks and uncertainties which could impact the Company's ability to maintain its cash position include the Company's growth rate, its ability to collect its receivables in a timely manner, the Company's ability to effectively manage its inventory, and the volume of letters of credit used to purchase product, among others. Seasonality Financial results for the outdoor and footwear industries are generally seasonal. Sales of each of the Company's different product lines have historically been higher in different seasons, with the highest percentage of Teva sales occurring in the first and second quarter of each year, the highest percentage of Simple sales occurring in the third quarter and the highest percentage of Ugg 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 9 to the Condensed Consolidated Financial Statements. 16 19 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION Item 1. Legal Proceedings. A judgment aggregating $1,785,000 was entered against the Company in May 1999 in an action brought against the Company in 1995 in the United States District Court, District of Montana (Missoula Division). The judgment was for breach of a non-disclosure contract, among other things. The Company is appealing the judgment and continues to believe such claims are without merit. The plaintiffs have filed a motion to enhance their damages, which the Company has opposed. 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. In October 1998, the Company was served in an action brought by a Plaintiff claiming, among other things, breach of contract and misrepresentation related to the Company's sale of its interest in Trukke Winter Sports Products, Inc. ("Trukke") to the founder of Trukke, rather than to the Plaintiff. The Plaintiff contended, among other things, that a letter of intent between the Company and the Plaintiff was a binding agreement. The Plaintiff was indebted to the Company for approximately $270,000 for goods previously purchased by the Plaintiff from the Company in the ordinary course of business. This action was to be heard in the federal district court in Pocatello, Idaho. Effective February 1999, all parties settled the matter and in April 1999 the action was dismissed with prejudice. As full settlement, the terms provided that the Company extended the due dates of the $270,000 of previous indebtedness, requiring periodic payments through 2002. 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. 17 20 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Deckers Outdoor Corporation Date: May 14, 1999 /s/ M. Scott Ash ------------------------------------------- M. Scott Ash, Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 4,120,000 0 46,571,000 1,506,000 24,403,000 77,302,000 6,647,000 3,665,000 101,956,000 32,490,000 15,168,000 0 0 86,000 54,212,000 101,956,000 38,040,000 38,040,000 20,817,000 20,817,000 0 433,000 631,000 3,954,000 1,709,000 2,245,000 0 0 0 2,245,000 0.26 0.26
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