-----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, JAO78D2YK6y1RNMwRAoFI/DtwIRZXOO27vTHO46KwtraZHe8cm6B3ah6AUzBXgOi ysEqVvBMyR1VQs58bHztIQ== 0000950148-00-001024.txt : 20000516 0000950148-00-001024.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950148-00-001024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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: 630602 BUSINESS ADDRESS: STREET 1: 495A SOUTH FAIRVIEW AVENUE CITY: GOLETA STATE: CA ZIP: 93117 BUSINESS PHONE: 8059677611 MAIL ADDRESS: STREET 1: 495-A S FAIRVIEW AVE CITY: GOLETA STATE: CA ZIP: 93117 FORMER COMPANY: FORMER CONFORMED NAME: DECKERS FOOTWEAR CORP DATE OF NAME CHANGE: 19930811 10-Q 1 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 March 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 0-22446 DECKERS OUTDOOR CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-3015862 ------------------------------- --------------------------- (State or other jurisdiction of IRS Employer Identification incorporation or organization) 495-A South Fairview Avenue, 93117 Goleta, California ---------- - ---------------------------------------- (zip code) (Address of principal executive offices) Registrant's telephone number, including area code (805) 967-7611 ----------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of the issuer's class of common stock, as of the latest practicable date.
Outstanding at Class May 9, 2000 -------------- Common stock, $.01 par value 9,082,535
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, 2000 and December 31, 1999 1 Condensed Consolidated Statements of Earnings for the Three-Month Periods Ended March 31, 2000 and 1999 2 Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2000 and 1999 3-4 Notes to Condensed Consolidated Financial Statements 5-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-14 Part II. Other Information Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Defaults upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signature 16
3 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited)
March 31, December 31, 2000 1999 ----------- ------------ Assets Current assets: Cash $ 2,256,000 1,633,000 Trade accounts receivable, less allowance for doubtful accounts of $1,799,000 and $1,813,000 as of March 31, 2000 and December 31, 1999, respectively 36,845,000 24,396,000 Inventories 18,383,000 18,103,000 Prepaid expenses and other current assets 2,333,000 2,235,000 Refundable and deferred tax assets 1,053,000 2,677,000 ----------- ----------- Total current assets 60,870,000 49,044,000 Property and equipment, at cost, net 2,263,000 2,125,000 Intangible assets, less applicable amortization 21,645,000 22,037,000 Other assets, net 274,000 276,000 ----------- ----------- $85,052,000 73,482,000 =========== ========== Liabilities and Stockholders' Equity Current liabilities: Current installments of long-term debt $ 128,000 125,000 Trade accounts payable 9,097,000 7,261,000 Accrued expenses 4,676,000 3,000,000 Income taxes payable 992,000 -- ----------- ----------- Total current liabilities 14,893,000 10,386,000 ----------- ----------- Long-term debt, less current installments 8,839,000 6,276,000 Stockholders' equity: Preferred stock, $.01 par value. Authorized 5,000,000 shares; none issued -- -- Common stock, $.01 par value. Authorized 20,000,000 shares; issued 10,055,487 shares and outstanding 9,082,535 shares at March 31, 2000; issued 10,037,957 shares and outstanding 9,065,005 shares at December 31, 1999 91,000 91,000 Additional paid-in capital 24,859,000 24,743,000 Retained earnings 36,994,000 32,610,000 ----------- ----------- 61,944,000 57,444,000 Less note receivable from stockholder/former director 624,000 624,000 ----------- ----------- Total stockholders' equity 61,320,000 56,820,000 ----------- ----------- $85,052,000 73,482,000 =========== ==========
See accompanying notes to condensed consolidated financial statements. 4 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Earnings (Unaudited)
Three-month period ended March 31, ---------------------------- 2000 1999 ----------- ---------- Net sales $41,466,000 38,040,000 Cost of sales 22,084,000 20,817,000 ----------- ---------- Gross profit 19,382,000 17,223,000 Selling, general and administrative expenses 11,318,000 12,669,000 ----------- ---------- Earnings from operations 8,064,000 4,554,000 Other expense (income): Interest expense, net 201,000 631,000 Other 171,000 (31,000) ----------- ---------- Earnings before income taxes 7,692,000 3,954,000 Income taxes 3,308,000 1,709,000 ----------- ---------- Net earnings $ 4,384,000 2,245,000 =========== ========== Net earnings per share: Basic $ 0.48 0.26 Diluted 0.47 0.26 =========== ========== Weighted average shares: Basic 9,071,000 8,528,000 Diluted 9,360,000 8,732,000 =========== ==========
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, ------------------------------- 2000 1999 ------------ ----------- Cash flows from operating activities: Net earnings $ 4,384,000 2,245,000 ----------- ----------- Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 734,000 733,000 Provision for doubtful accounts 343,000 433,000 Loss on disposal of assets 7,000 -- Non-cash stock compensation 78,000 -- Changes in assets and liabilities: (Increase) decrease in: Trade accounts receivable (12,792,000) (18,318,000) Inventories (280,000) (738,000) Prepaid expenses and other current assets (98,000) 109,000 Note receivable from supplier -- (62,000) Refundable and deferred tax assets 1,624,000 4,378,000 Other assets 2,000 129,000 Increase (decrease) in: Accounts payable 1,836,000 (740,000) Accrued expenses 1,676,000 1,559,000 Income taxes payable 992,000 -- ----------- ----------- Total adjustments (5,878,000) (12,517,000) ----------- ----------- Net cash used in operating activities (1,494,000) (10,272,000) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (505,000) (390,000) Proceeds from sale of property and equipment 18,000 -- ----------- ----------- Net cash used in investing activities (487,000) (390,000) ----------- -----------
(Continued) 3 6 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows, Continued (Unaudited)
Three-month period ended March 31, -------------------------- 2000 1999 ---------- ---------- Cash flows from financing activities: Net proceeds from long-term debt 2,566,000 14,466,000 Cash received from issuances of common stock 38,000 53,000 ---------- ---------- Net cash provided by financing activities 2,604,000 14,519,000 ---------- ---------- Net increase in cash 623,000 3,857,000 Cash at beginning of period 1,633,000 263,000 ---------- ---------- Cash at end of period $2,256,000 4,120,000 ========== ========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 251,000 625,000 Income taxes 53,000 22,000 ========== ==========
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 annual audited consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation for each of the periods presented. The results of operations for interim periods are not necessarily indicative of results to be achieved for full fiscal years. As contemplated by the Securities and Exchange Commission (SEC) under Rule 10-01 of Regulation S-X, the accompanying condensed consolidated financial statements and related footnotes have been condensed and do not contain certain information that will be included in the Company's annual consolidated financial statements and footnotes thereto. For further information, refer to the consolidated financial statements and related footnotes for the year ended December 31, 1999 included in the Company's Annual Report on Form 10-K. (2) Earnings per Share Basic earnings per share represents net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share represents net earnings divided by the weighted-average number of shares outstanding, inclusive of the dilutive impact of common stock equivalents. During the three-month periods ended March 31, 2000 and 1999, the difference between the weighted-average number of shares used in the basic computation compared to that used in the diluted computation was due to the dilutive impact of options to purchase common stock. The reconciliation of basic to diluted weighted-average shares are as follows:
Three-month period ended March 31, -------------------------- 2000 1999 ---------- --------- Net earnings $4,384,000 2,245,000 ========== ========= Weighted-average shares used in basic computation 9,071,000 8,528,000 Dilutive stock options 289,000 204,000 ---------- --------- Weighted-average shares used for diluted computation 9,360,000 8,732,000 ========== =========
Options to purchase 332,000 shares of common stock at prices ranging from $3.50 to $13.75 were outstanding during the three months ended March 31, 2000 and options to purchase 967,000 shares of common stock at prices ranging from $3.03 to $13.75 were outstanding during the three-month period ended March 31, 1999, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares during the period and, therefore, were anti-dilutive. 5 8 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (3) Inventories Inventories are summarized as follows:
March 31, December 31, 2000 1999 ----------- ------------ Finished goods $18,155,000 17,841,000 Work in process 86,000 119,000 Raw materials 142,000 143,000 ----------- ---------- Total inventories $18,383,000 18,103,000 =========== ==========
(4) Credit Facility The Company has a credit facility ("the Facility") which provides for borrowings up to $50,000,000, subject to a borrowing base up to 85% of eligible accounts receivable and 65% of eligible inventory, as defined. Up to $15,000,000 of borrowings may be in the form of letters of credit. The agreement bears interest at the lenders' prime rate (8.75% at March 31, 2000) or, at the Company's election, an adjusted Eurodollar rate plus 2%. The Facility is secured by substantially all assets of the Company and expires January 21, 2002. Additionally, under the terms of the agreement, should the Company terminate the arrangement prior to the expiration date, the Company may be required to pay the lender an early termination fee ranging between 1% and 3% of the commitment amount, depending upon when such termination occurs. The agreement underlying the credit facility includes a tangible net worth covenant. At March 31, 2000, the Company was in compliance with such covenant and the terms of the agreement. (5) Income Taxes Income taxes for the interim periods were computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. For the three months ended March 31, 2000, the Company had income tax expense of $3,308,000, representing an effective income tax rate of 43.0%. For the three months ended March 31, 1999, the Company had income tax expense of $1,709,000, representing an effective income tax rate of 43.2%. (6) New Accounting Pronouncements In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" (FIN 44). FIN 44 provides guidance for issues arising in applying APB Opinion No. 25, "Accounting for Stock Issued to Employees". FIN 44 applies specifically to new awards, exchanges of awards in a business combination, modification to outstanding awards, and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to repricings and the definition of an employee which apply to awards issued after December 15, 1998. Application of FIN 44 did not have an affect on the Company's financial reporting. 6 9 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (7) Business Segments The Company's operating segments and the basis for segmentation are the same as those at December 31, 1999, except that the Company does not allocate income taxes or unusual items to segments. The Company evaluates performance based on net revenues and profit or loss from operations. The Company's reportable segments are strategic business units that offer geographic brand images. They are managed separately because each business requires different marketing, research and development, design, sourcing and sales strategies. The Teva-domestic, Simple-domestic and Ugg-domestic segments include all sales shipped under those brand names from the Company's North American distribution centers in California and Canada. The vast majority of those sales are to customers located in North America. A portion, however, is shipped from those North American distribution centers to overseas customers. As a result, a portion of the Company's international sales is included in the Teva-domestic, Simple-domestic and Ugg-domestic segments. This presentation is consistent with the way management reviews and analyzes its segment data. Business segment information for the three months ended March 31, 2000 and 1999 is summarized as follows:
2000 1999 ------------ ------------ Sales to external customers: Teva, domestic $ 22,173,000 27,190,000 Simple, domestic 3,312,000 2,586,000 Ugg, domestic 514,000 324,000 Other, primarily international 15,467,000 7,940,000 ------------ ------------ $ 41,466,000 38,040,000 ============ ============ Intersegment sales: Teva, domestic $ 523,000 496,000 Simple, domestic 1,000 -- Ugg, domestic -- -- Other, primarily international 1,054,000 827,000 ------------ ------------ $ 1,578,000 1,323,000 ============ ============ Earnings (loss) from operations: Teva, domestic $ 6,416,000 4,403,000 Simple, domestic 1,259,000 294,000 Ugg, domestic (149,000) (777,000) Other, primarily international 612,000 608,000 ------------ ------------ $ 8,138,000 4,528,000 ============ ============
7 10 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (7) Business Segments (Continued) The reconciliations of earnings from operations from segment information to the consolidated financial statements are as follows:
2000 1999 ----------- ----------- Total earnings from operations for reportable segments $ 8,138,000 4,528,000 Intersegment profit change in beginning and ending inventory (74,000) 26,000 ----------- ----------- Consolidated earnings from operations $ 8,064,000 4,554,000 =========== ===========
Business segment information as of March 31, 2000 and December 31, 1999 is summarized as follows:
2000 1999 ------------ ------------ Total assets: Teva, domestic $ 65,668,000 56,184,000 Simple, domestic 8,558,000 7,509,000 Ugg, domestic 19,379,000 25,947,000 Other, primarily international 11,780,000 8,355,000 ------------ ------------ $105,385,000 97,995,000 ============ ============
The reconciliations of total assets from segment information to the consolidated financial statements are as follows:
2000 1999 ------------- ----------- Total assets for reportable segments $ 105,385,000 97,995,000 Elimination of profit in ending inventories (96,000) (22,000) Elimination of intersegment investments (14,905,000) (14,905,000) Elimination of intersegment receivables (6,385,000) (12,263,000) Unallocated refundable income taxes and deferred tax assets 1,053,000 2,677,000 ------------- ----------- Consolidated total assets $ 85,052,000 73,482,000 ============= ===========
8 11 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (8) Contingencies An action was brought against the Company in 1995 by Molly Strong-Butts and Yetti by Molly, Ltd. (collectively, "Molly") which alleged, among other things, that the Company violated a certain nondisclosure agreement and obtained purported trade secrets regarding a line of winter footwear which Deckers stopped producing in 1994. A jury verdict was obtained against the Company in March 1999 aggregating $1,785,000 for the two plaintiffs. The Company is appealing the verdict and continues to believe such claims are without merit. The Company intends to continue contesting this claim vigorously. The Company, based on advice from legal counsel, does not anticipate that the ultimate outcome will have a material adverse effect upon its financial condition, results of operations or cash flows. The European Commission has enacted anti-dumping duties of 49.2% on certain types of footwear imported into Europe from China and Indonesia. Dutch Customs has issued an opinion to the Company that certain popular Teva styles are covered by this antidumping duty legislation. The Company believes that this opinion is inappropriate and is working with Customs to resolve the situation. In the event that Customs makes a final determination that the antidumping provisions cover such styles, the Company expects that it would have an exposure to prior unpaid antidumping duties during 1997 of up to approximately $500,000. In addition, if Customs determines that these styles are covered by the legislation, the duty amounts could cause such products to be too costly to import into Europe from China in the future. As a precautionary measure, the Company has obtained, and is using, alternative sourcing for the potentially impacted products from sources outside of China in an effort to reduce the potential risk in the future. The Company is unable to predict the outcome of this matter and the effect, if any, on the Company's consolidated financial statements. The Company is currently involved in various other legal claims arising from the ordinary course of business. Management does not believe that the disposition of these matters will have a material effect on the Company's financial position or results of operations. (9) Subsequent Event On May 9, 2000 the Company entered into an agreement for the sale of its 50% interest in Heirlooms, Inc. (Heirlooms), the manufacturer and distributor of the Picante brand of apparel. The purchase price, inclusive of the repayment of outstanding notes, which is to be paid in cash, is an amount which approximates the net book value of Heirlooms' assets at March 31, 2000. The operations of Heirlooms were immaterial to the consolidated financial statements for the three months ended March 31, 2000 and the year ended December 31, 1999. The purchase price is subject to adjustment for the net cash advances and repayments made to Heirlooms between December 31, 1999 and the closing date. The closing date for the transaction will occur on the date of payment of the purchase price, but not later than August 31, 2000. 9 12 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto, as well as our Annual Report on Form 10-K for the year ended December 31, 1999. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that involve risk and uncertainty, such as forward-looking statements relating to sales and operating expense expectations, the potential imposition of certain customs duties, the potential impact of certain litigation, the impact of seasonality on the Company's operations and the potential impact of the Year 2000 on the Company. Actual results may vary. Some of the factors that could cause actual results to differ materially from those in the forward-looking statements are identified in the accompanying "Outlook" section of this Quarterly Report on Form 10-Q. Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999 Net sales increased by $3,426,000, or 9.0%, from the comparable three months ended March 31, 1999. Sales of the Teva brand increased to $34,781,000 for the three months ended March 31, 2000 from $32,944,000 for the three months ended March 31, 1999, a 5.6% increase. This increase was a result of the continued strength in international markets and in the sandal market in general. Sales of Teva footwear represented 83.9% and 86.6% of net sales in the three months ended March 31, 2000 and 1999, respectively. Net sales of footwear under the Simple product line increased 36.8% to $5,392,000 from $3,942,000 for the comparable three months ended March 31, 1999. The increase in Simple sales was driven by a resurgence in the popularity and strength of the brand. Net sales of Ugg footwear were $514,000 for the three months ended March 31, 2000, compared to net sales of $324,000 for the three months ended March 31, 1999. Due to the highly seasonal nature of Ugg's business, the first quarter is generally a low volume quarter for Ugg sales. Overall, international sales for all of the Company's products increased 62.0% to $17,159,000 from $10,589,000, representing 41.4% of net sales in 2000 and 27.8% in 1999. The volume of footwear sold increased 20.5% to 1,691,000 pairs during the three months ended March 31, 2000 from 1,403,000 pairs during the three months ended March 31, 1999, for the reasons discussed above. The weighted average wholesale price per pair sold during the three months ended March 31, 2000 decreased 9.2% to $23.80 from $26.21 for the three months ended March 31, 1999. The decrease was primarily due to an overall shift in sales mix toward international sales, which are generally at lower average wholesale prices as well as a change in domestic sales mix during the quarter away from styles with higher average wholesale prices toward styles with lower average prices. Cost of sales increased by $1,267,000, or 6.1%, to $22,084,000 for the three months ended March 31, 2000, compared with $20,817,000 for the three months ended March 31, 1999 and decreased as a percentage of net sales from 54.7% to 53.3%. Gross profit increased by $2,159,000, or 12.5%, to $19,382,000 for the three months ended March 31, 2000 from $17,223,000 for the three months ended March 31, 1999 and increased as a percentage of net sales to 46.7% from 45.3%. The increase in gross margin was primarily the result of improved pricing and sourcing for the Spring 2000 product line and a reduced impact of sales returns. Selling, general and administrative expenses decreased by $1,351,000, or 10.7%, for the three months ended March 31, 2000, compared with the three months ended March 31, 1999, and decreased as a percentage of net sales to 27.3% in 2000 from 33.3% in 1999. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily the result of several factors, including the non-recurrence of the $1 million of special charges incurred in the first quarter of 1999 related to severance costs and litigation, as well as reductions in payroll costs, apparel costs, sales commissions and warehouse costs. These cost reductions were partially offset by an increase in marketing costs for the three months ended March 31, 2000 versus the three months ended March 31, 1999. 10 13 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Net interest expense was $201,000 for the three months ended March 31, 2000 compared with $631,000 for the three months ended March 31, 1999, primarily due to decreased borrowings on the Company's credit facility in the current year, partially offset by higher interest rates. For the three months ended March 31, 2000 the Company had an income tax expense of $3,308,000, representing an effective income tax rate of 43.0%. For the three months ended March 31, 1999, the Company had income tax expense of $1,709,000, representing an effective income tax rate of 43.2%. Net earnings increased 95.3% to $4,384,000, or $0.47 per share - diluted, for the three months ended March 31, 2000 versus net earnings of $2,245,000, or $0.26 per share - diluted, for the three months ended March 31, 1999 due to the reasons discussed above. Outlook This "Outlook" section, the last paragraph under "Liquidity and Capital Resources," the discussion under "Seasonality" and other statements in this Form 10-Q contain a number of forward-looking statements including forward-looking statements relating to sales and operating expense expectations, the potential imposition of certain customs duties, the potential impact of certain litigation, the impact of seasonality on the Company's operations and the potential impact of the Year 2000 on the Company. All of the forward-looking statements are based on current expectations. Actual results may differ materially for a variety of reasons, including the reasons discussed below. Sales and Operating Expense Expectations. For the calendar year 2000, the Company expects net sales of Teva to be relatively flat compared to 1999, reflecting the effects of two offsetting factors. Domestically, the Company expects lower sales to retailers in the athletic footwear channels as a result of apparent weakness in this segment of the market. The Company expects this decrease to be offset by continued expansion in its international markets and through its greatly expanded Fall 2000 product offering of closed footwear. The Company currently expects an increase in Ugg sales for 2000 of approximately 10% to 15%, as the Company focuses on geographical expansion outside of California and product diversification in its casual footwear offering. The Simple brand is gaining popularity as it has been refocused toward the teen and twenty-something market, where the Simple brand had been successful years ago. The Company currently expects sales under the Simple line to increase approximately 15% to 20% in 2000 compared to 1999. In the fourth quarter of 1999, the Company restructured its European business and began selling product entirely through distributors whereas it used a combination of distributors and retailers a year ago. This has the effect of shifting a portion of sales from the second quarter to the first quarter, as the shipping window to distributors is generally earlier than that for retailers. The Company believes that while this shift better positions the Company for long-term growth and improved profits overseas, in the short-term it is expected to result in slightly lower year over year sales comparisons during the three months ended June 30, 2000. The Company's selling, general and administrative expenses decreased to 35.0% of sales in fiscal year 1999 from 38.5% of sales in fiscal year 1998. The Company plans to continue to improve its operating efficiencies in 2000 and expects that the resulting selling, general and administrative expenses as a percentage of sales for fiscal year 2000 will be lower than that for fiscal year 1999. However, the Company does not expect the reduction in those expenses to be as dramatic as that experienced during the three months ended March 31, 2000 compared to the year ago period, as a significant portion of the improvements was due to the non-recurrence of special charges for severance and litigation costs in the first quarter. 11 14 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES The foregoing forward-looking statements represent the Company's current analysis of trends and information. Actual results could vary as a result of numerous factors. For example, the Company's results are directly dependent on consumer preferences, which are difficult to assess and can shift rapidly. Any shift in consumer preferences away from one or more of the Company's product lines could result in lower sales as well as obsolete inventory and the necessity of selling products at significantly reduced selling prices, all of which would adversely affect the Company's results of operations, financial condition and cash flows. The Company is also dependent on its customers continuing to carry and promote its various lines. The Company's sales can be adversely impacted by the ability of the Company's suppliers to manufacture and deliver products in time for the Company to meet its customers' orders. In addition, the Company's results of operations, financial condition and cash flows are subject to risks and uncertainties with respect to the following: overall economic and market conditions; competition; demographic changes; the loss of significant customers or suppliers; the performance and reliability of the Company's products; customer service; the Company's ability to secure and maintain intellectual property rights; the Company's ability to secure and maintain adequate financing; the Company's ability to forecast and subsequently achieve those forecasts; its ability to attract and retain key employees; and the general risks associated with doing international business including foreign exchange risks, duties, quotas and political instability. Sales of the Company's products, particularly those under the Teva and Ugg lines, are very sensitive to weather conditions. Extended periods of unusually cold weather during the spring and summer could adversely impact demand for the Company's Teva line. Likewise, unseasonably warm weather during the fall and winter months could adversely impact demand for the Company's Ugg product line. Potential Imposition of Duties. The European Commission has enacted anti-dumping duties of 49.2% on certain types of footwear imported into Europe from China and Indonesia. Dutch Customs has issued an opinion to the Company that certain popular Teva styles are covered by this antidumping duty legislation. The Company believes that this opinion is inappropriate and is working with Customs to resolve the situation. In the event that Customs makes a final determination that the antidumping provisions cover such styles, the Company expects that it would have an exposure to prior unpaid antidumping duties from 1997 of up to approximately $500,000. In addition, if Customs determines that these styles are covered by the legislation, the duty amounts could cause such products to be too costly to import into Europe from China in the future. As a precautionary measure, the Company has obtained, and is using, alternative sourcing for the potentially impacted products from sources outside of China in an effort to reduce the potential risk in the future. The Company is unable to predict the outcome of this matter and the effect, if any, on the Company's consolidated financial statements. Year 2000 Issue. The Company is not aware of any material Year 2000 failures which have occurred in its systems or at its key business partners. While the Company believes that it has achieved Year 2000 compliance, the Company's Year 2000 compliance is still subject to additional risks as discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 12 15 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Liquidity and Capital Resources The Company's liquidity consists of cash, trade accounts receivable, inventories and a revolving credit facility. At March 31, 2000, working capital was $45,977,000, including $2,256,000 of cash. Cash used in operating activities aggregated $1,494,000 for the three months ended March 31, 2000 compared to cash used in operating activities of $10,272,000 for the three months ended March 31, 1999. Trade accounts receivable increased 51.0% between December 31, 1999 and March 31, 2000 as a result of normal seasonality, the high volume of net sales during the quarter and outstanding receivables with extended payment terms. Inventories increased 1.5% since December 31, 1999 due to normal seasonality. The Company has a credit facility ("the Facility") which provides for borrowings up to $50,000,000, subject to a borrowing base up to 85% of eligible accounts receivable and 65% of eligible inventory, as defined. Up to $15,000,000 of borrowings may be in the form of letters of credit. The agreement bears interest at the lenders' prime rate (8.75% at March 31, 2000) or, at the Company's election, an adjusted Eurodollar rate plus 2 %. The Facility is secured by substantially all assets of the Company and expires January 21, 2002. Additionally, under the terms of the agreement, should the Company terminate the arrangement prior to the expiration date, the Company may be required to pay the lender an early termination fee ranging between 1% and 3% of the commitment amount, depending upon when such termination occurs. The agreement underlying the credit facility includes a tangible net worth covenant. At March 31, 2000, the Company was in compliance with the terms and covenants of the agreement. On March 31, 2000, the Company had outstanding borrowings under the Facility of $8,430,000, outstanding letters of credit aggregating $3,219,000 and borrowing availability of $17,754,000. Capital expenditures totaled $505,000 for the three months ended March 31, 2000. The Company's capital expenditures related primarily to trade show booths for all brands and promotional trucks and trailers for the traveling technical representatives for the Teva brand. The Company currently has no material future commitments for capital expenditures. The Company's Board of Directors has authorized the repurchase of 2,200,000 shares of common stock under a stock repurchase program. Such repurchases are authorized to be made from time to time in open market or in privately negotiated transactions, subject to price and market conditions as well as the Company's cash availability. Under this program, the Company repurchased 300,000 shares in 1996 for cash consideration of $2,390,000, 330,000 shares in 1997 for cash consideration of $2,581,000 and 343,000 shares in 1998 for cash consideration of $2,528,000. No shares were repurchased during 1999 or during the three-month period ended March 31, 2000. At March 31, 2000, 1,227,000 shares remained available for repurchase under the program. In June 1999, the Company obtained an option to buy Teva and all of its assets, including all worldwide rights to all Teva products. The option price is based on formulas tied to net sales of Teva products and varies depending on when the option is exercised. The Company's option is exercisable during the period from January 1, 2000 to December 31, 2001 or during the period from January 1, 2006 to December 31, 2008. If the Company does not exercise its option to acquire Teva, the licensor has the option to acquire the Teva distribution rights from the Company for the period from January 1, 2010 to December 31, 2011, the end of the license term, and the option price is based on a formula tied to the Company's earnings before interest, taxes, depreciation and amortization. The exercise of either option will require a significant amount of additional financing. There are no assurances that the additional financing will be available. 13 16 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES The Company believes that internally generated funds, the available borrowings under its existing credit facility, and the cash on hand will provide sufficient liquidity to enable it to meet its current and foreseeable working capital requirements. However, risks and uncertainties which could impact the Company's ability to maintain its cash position include the Company's growth rate, its ability to collect its receivables in a timely manner, the Company's ability to effectively manage its inventory, and the volume of letters of credit used to purchase product, among others. Seasonality Financial results for the outdoor and footwear industries are generally seasonal. Sales of each of the Company's different lines have historically been higher in different seasons, with the highest percentage of Teva sales occurring in the first and second quarter of each year and the highest percentage of Ugg sales occurring in the fourth quarter, while the quarter with the highest percentage of annual sales for Simple has varied from year to year. Consequently, the results for these specified periods are highly dependent on the results for each of these product lines. Based on the Company's historical experience, the Company would expect greater sales in the first and second quarters than in the third and fourth quarters. The actual results could differ materially depending upon consumer preferences, availability of product, competition, and the Company's customers continuing to carry and promote its various product lines, among other risks and uncertainties. See also the discussion regarding forward-looking statements under "Outlook". Other The Company believes that the relatively moderate rates of inflation in recent years have not had a significant impact on its net sales or profitability. 14 17 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Part II. OTHER INFORMATION Item 1. Legal Proceedings. An action was brought against the Company in 1995 by Molly Strong-Butts and Yetti by Molly, Ltd. (collectively, "Molly") which alleged, among other things, that the Company violated a certain nondisclosure agreement and obtained purported trade secrets regarding a line of winter footwear which Deckers stopped producing in 1994. A jury verdict was obtained against the Company in March 1999 aggregating $1,785,000 for the two plaintiffs. The Company is appealing the verdict and continues to believe such claims are without merit. The Company intends to continue contesting this claim vigorously. The Company, based on advice from legal counsel, does not anticipate that the ultimate outcome will have a material adverse effect upon its financial condition, results of operations or cash flows. Item 2. Changes in Securities. Not applicable Item 3. Defaults upon Senior Securities. Not applicable Item 4. Submission of Matters to a Vote of Security Holders. Not applicable Item 5. Other Information. Not applicable Item 6. Exhibits and Reports on Form 8-K. Not applicable 15 18 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Deckers Outdoor Corporation Date: May 15, 2000 /s/ M. Scott Ash ------------------------------------- M. Scott Ash, Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 2,256,000 0 38,644,000 1,799,000 18,383,000 60,870,000 7,574,000 5,311,000 85,052,000 14,893,000 8,839,000 0 0 91,000 61,229,000 85,052,000 41,466,000 41,466,000 22,084,000 22,084,000 0 343,000 201,000 7,692,000 3,308,000 4,384,000 0 0 0 4,384,000 0.48 0.47
-----END PRIVACY-ENHANCED MESSAGE-----