EX-99.2 7 v87441a1exv99w2.txt EXHIBIT 99.2 EX-99.2 FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT The Board of Directors Teva Sport Sandals, Inc.: We have audited the accompanying statements of assets acquired and liabilities assumed of Teva Sport Sandals, Inc. as of November 25, 2002 and December 31, 2001, and the related statements of earnings and cash flows for the period from January 1 to November 25, 2002 and the year ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Teva Sport Sandals, Inc. as of November 25, 2002 and December 31, 2001 and the results of its operations and its cash flows for the periods then ended in conformity with accounting principles generally accepted in the United States of America. KPMG LLP January 10, 2003 Los Angeles, California TEVA SPORT SANDALS, INC. Statements of Assets Acquired and Liabilities Assumed November 25, 2002 and December 31, 2001
ASSETS 2002 2001 ---- ---- Current assets: Accounts receivable $ 5,633 18,172 Inventories, net (note 3) 391,026 229,947 Prepaid expenses and other current assets 32,224 169,454 -------- -------- Total current assets 428,883 417,573 Property and equipment, net (note 2) 87,938 128,567 -------- -------- $516,821 546,140 ======== ======== LIABILITIES AND NET ASSETS ACQUIRED Current liabilities: Due to Deckers $ 50,000 -- Sales returns allowance 72,000 84,000 -------- -------- Total current liabilities 122,000 84,000 -------- -------- Commitments and contingencies (note 4) Net assets acquired $394,821 462,140 ======== ========
See accompanying notes to financial statements. TEVA SPORT SANDALS, INC. Statements of Earnings Period from January 1 to November 25, 2002 and for the year ended December 31, 2001
2002 2001 ---------- ---------- Revenues: Management fee (note 3) $ 1,530,451 1,318,898 Net product sales 4,018,314 3,706,176 ---------- ---------- Net revenues 5,548,765 5,025,074 Cost of goods sold from product sales (note 3) 2,086,536 1,915,594 ---------- ---------- Gross profit 3,462,229 3,109,480 Operating expenses 2,588,597 2,263,269 ---------- ---------- Earnings from operations 873,632 846,211 Interest income 53,213 34,300 ---------- ---------- Net earnings 926,845 880,511 ========== ==========
See accompanying notes to financial statements. TEVA SPORT SANDALS, INC. Statements of Cash Flows Period from January 1 to November 25, 2002 and for the year ended December 31, 2001
2002 2001 --------- --------- Cash flows from operating activities: Net earnings $ 926,845 880,511 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of property and equipment 79,208 84,608 Changes in assets and liabilities: Trade accounts receivable 12,539 (29,757) Inventories (161,079) 14,985 Prepaid expenses and other current assets 137,230 (83,302) Sales returns allowance (12,000) 35,000 --------- --------- Net cash provided by operating activities 982,743 902,045 Cash flows used in investing activities - purchase of property and equipment (38,579) (46,768) Cash flows from financing activities: Due to Deckers 50,000 -- Distributions to shareholder (994,164) (855,277) --------- --------- Net cash used in financing activities (944,164) (855,277) --------- --------- Net change in cash and balance at end of year $ -- -- ========= =========
See accompanying notes to financial statements. TEVA SPORT SANDALS, INC. Notes to Financial Statements November 25, 2002 and December 31, 2001 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) BASIS OF PRESENTATION Teva Sport Sandals, Inc. (the Company) sells footwear and apparel through a catalog and an on-line website. On November 25, 2002, Deckers Outdoor Corporation (Deckers) acquired the worldwide Teva patents, trademarks and other assets from Mark Thatcher and certain assets and liabilities of Teva Sport Sandals, Inc.(the Acquisition). The assets and liabilities presented include only those acquired by Deckers. No adjustments have been made to the accompanying financial statements related to any step-up in basis or other impact resulting from the Acquisition. (B) REVENUE RECOGNITION Revenue from product sales is recorded when risk of loss and title passes to the buyer. Allowances for sales returns are provided when the related revenue is recorded. Billings for freight are included in revenue and costs of outgoing freight are included in cost of sales. (C) INVENTORIES All inventories represent footwear and apparel purchased for resale. Substantially all of the purchases of the Company's inventory were made from Deckers at market prices. Inventories are stated at the lower of cost or market. Cost is determined under the first-in, first-out (FIFO) method. (D) PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization of property and equipment is computed on the straight-line method based upon the estimated useful lives of the assets, which range from three to seven years. (E) LONG-LIVED ASSETS The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. As part of an ongoing review of the valuation and amortization of long-lived assets, management assesses the carrying value of the Company's long-lived assets if facts and circumstances suggest that it may be impaired. If this review indicates that certain long-lived assets will not be recoverable, as determined by undiscounted operating cash flow analysis over the remaining useful life of the asset, the carrying value of the Company's long-lived assets would be reduced to its estimated market value. (F) INCOME TAXES The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company is treated as an S Corporation for both federal and state income tax purposes. The S Corporation provisions of the Internal Revenue Code require that federal corporate earnings flow through and be taxed solely at the stockholder level. TEVA SPORT SANDALS, INC. Notes to Financial Statements November 25, 2002 and December 31, 2001 (G) COMPREHENSIVE INCOME The Company reports comprehensive income under Financial Accounting Standards Board Statement No 130 (SFAS No 130), Reporting Comprehensive Income. The Company does not have any components of comprehensive income other than its net earnings, and accordingly, the Company's comprehensive income is equal to net earnings. (H) BUSINESS CONCENTRATIONS The Company sells three lines of product: Teva, Ugg and Simple, but does not design any of them. The Company's business is subject to the market acceptance of these lines. (I) ADVERTISING, MARKETING, AND PROMOTION COSTS Advertising production costs are expensed the first time the advertisement is run. All other costs of advertising, marketing and promotion are expensed as incurred. These expenses charged to operations for the periods ended November 25, 2002 and December 31, 2001 were $622,758 and $66,050, respectively. (J) FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of all of the Company's financial assets and liabilities acquired approximate the carrying values due to the relatively short maturities of these instruments. (K) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and revenues and expenses during the reporting period to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. (L) NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS 144 supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," it retains many of the fundamental provisions of that statement. The adoption of this standard did not have a material impact on the Company's financial position or results from operations. TEVA SPORT SANDALS, INC. Notes to Financial Statements November 25, 2002 and December 31, 2001 In November 2001, the Emerging Issues Task Force ("EITF") issued EITF 01-9, "Accounting for Consideration Given by a Vendor to a Customer," which became effective for the first quarter beginning after December 31, 2001. EITF 01-9 requires certain consideration given by and to vendors or a customer be presented as a reduction of revenue rather than as a cost or an expense. The adoption of EITF 01-9 did not have a material impact on the Company's financial position or results from operations. On July 30, 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." It requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB's conceptual framework. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect that the adoption of SFAS 146 will have a material impact on its financial position or results from operations. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees it has issued. It also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company does not expect the adoption of FIN 45 will have a material impact on its financial position or results from operations. (2) PROPERTY AND EQUIPMENT Property and equipment consist of the following:
2002 2001 ---- ---- Machinery and equipment $365,516 326,937 Furniture and fixtures 28,907 28,907 -------- ------- 394,424 355,844 Less accumulated depreciation and amortization 306,485 227,277 -------- ------- $ 87,938 128,567 ======== =======
TEVA SPORT SANDALS, INC. Notes to Financial Statements November 25, 2002 and December 31, 2001 (3) RELATED PARTY TRANSACTIONS The Company provides services to its sole shareholder under a management agreement, including the management of his patent rights, copyrights and other intellectual property related to the Teva trademark. The Company is reimbursed for the costs of these services plus 5 percent. Management fees totaled $1,530,451 and $1,318,898 for the periods ended November 25, 2002 and December 31, 2001, respectively, and are recorded as revenue in the accompanying statement of earnings. Deckers loaned $50,000 to the Company immediately prior to the Acquisition. Such amount is unsecured and payable on demand. Substantially all of the purchases of the Company's inventory were made from Deckers at market prices. (4) COMMITMENTS AND CONTINGENCIES (A) LEASES The Company leases warehouse space under operating leases expiring through October 2005, which require monthly minimum rentals of $2,418. Rent expense paid under these leases in 2002 and 2001 were $19,175 and $24,194, respectively. Minimum rental commitments under operating leases are summarized as follows:
Year ending December 31: 2003 $29,016 2004 29,016 2005 24,180 ------- Total $82,212 =======
(B) LEGAL PROCEEDINGS The Company is party to routine claims and suits brought against it in the ordinary course of business. In the opinion of management, the outcome of such routine claims will not have a material adverse effect on the Company's financial condition, results of operations or liquidity.