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, 1996
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)
1140 Mark Avenue, Carpinteria, California 93013
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (805) 684-7722
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
---------- ----------
The number of shares outstanding of Registrant's Common Stock, par value $.01
on April 30, 1996 was 9,242,375.
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Table of Contents
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1996 and December 31, 1995 1
Condensed Consolidated Statements of Earnings for the
Three-Month Period Ended March 31, 1996 and 1995 2
Condensed Consolidated Statements of Cash Flows for
the Three-Month Period Ended March 31, 1996 and 1995 3-4
Notes to Condensed Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
Part II. Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
ASSETS MARCH 31, DECEMBER 31,
1996 1995
Current assets:
Cash and cash equivalents $ 3,596,000 3,222,000
Trade accounts receivable, less allowance
for doubtful accounts of $3,595,000 and
$2,625,000 as of March 31, 1996 and
December 31, 1995, respectively 24,808,000 19,716,000
Inventories 17,565,000 19,556,000
Prepaid expenses and other current assets 1,195,000 2,542,000
Refundable income taxes 551,000 2,969,000
Deferred tax assets 2,026,000 2,026,000
---------- ----------
Total current assets 49,741,000 50,031,000
Property and equipment, at cost, net 3,234,000 3,273,000
Intangible assets, less applicable amortization 18,817,000 16,907,000
Note receivable from supplier 2,785,000 2,839,000
Other assets, net 1,135,000 1,867,000
---------- ----------
$ 75,712,000 74,917,000
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes Payable $ 1,736,000 -----
Current maturities of long-term debt 113,000 111,000
Trade accounts payable 2,962,000 3,020,000
Accrued expenses 4,548,000 3,131,000
---------- ----------
Total current liabilities 9,359,000 6,262,000
Long-term debt, less current maturities 11,389,000 15,170,000
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 and outstanding
9,242,375 shares 92,000 92,000
Additional paid-in capital 28,940,000 28,940,000
Retained earnings 25,932,000 24,453,000
---------- ----------
Total stockholders' equity 54,964,000 53,485,000
---------- ----------
$ 75,712,000 74,917,000
---------- ----------
---------- ----------
See accompanying notes to condensed consolidated financial statements.
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
THREE MONTH PERIOD ENDED
MARCH 31
1996 1995
Net sales $ 28,772,000 36,083,000
Cost of sales 16,182,000 18,621,000
---------- ----------
Gross profit 12,590,000 17,462,000
Selling, general and administrative expenses 9,849,000 9,372,000
---------- ----------
Earnings from operations 2,741,000 8,090,000
Other expense (income):
Interest expense (income) 282,000 (53,000)
Minority interest in net loss of
subsidiary (63,000) -----
Miscellaneous expense (income) (148,000) 87,000
---------- ----------
Earnings before income taxes 2,670,000 8,056,000
Income taxes 1,191,000 3,343,000
---------- ----------
Net earnings $ 1,479,000 4,713,000
---------- ----------
---------- ----------
Net earnings per common and common
equivalent shares $ 0.16 0.49
---------- ----------
---------- ----------
Weighted average common and common
equivalent shares outstanding 9,304,000 9,644,000
---------- ----------
---------- ----------
See accompanying notes to condensed consolidated financial statements.
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
THREE-MONTH PERIOD ENDED
MARCH 31
1996 1995
Cash flows from operating activities:
Net earnings $ 1,479,000 4,713,000
---------- ----------
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 460,000 391,000
Provision for doubtful accounts 985,000 300,000
Minority interest in net loss of
subsidiary (63,000) -----
Changes in assets and liabilities:
Increase in trade accounts receivable (6,077,000) (19,052,000)
Decrease in inventory 1,991,000 6,884,000
Decrease (increase) in prepaid
expenses and other current assets 1,347,000 (718,000)
Decrease in refundable income taxes 2,418,000 -----
Decrease in note receivable from
supplier 54,000 186,000
Decrease in other assets 357,000 5,000
Increase (decrease) in accounts
payable (58,000) 142,000
Increase in accrued expenses 1,480,000 2,242,000
Increase in income taxes payable ----- 1,813,000
---------- ----------
Total adjustments 2,894,000 (7,807,000)
---------- -----------
Net cash provided (used) by
operating activities 4,373,000 (3,094,000)
---------- -----------
Cash flows from investing activities:
Purchase of property and equipment (220,000) (679,000)
Net proceeds from the sale of short-term
investments ----- 3,350,000
Other ----- (10,000)
---------- ----------
Net cash provided (used) by
investing activities (220,000) 2,661,000
----------- ----------
(Continued)
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, Continued
(Unaudited)
THREE-MONTH PERIOD ENDED
MARCH 31
1996 1995
Cash flows from financing activities:
Cash received from borrowings under
credit facility $ 750,000 5,000,000
Repayments of notes payable and
long-term debt (4,550,000) (50,000)
Proceeds from issuances of common stock ----- 12,000
Repurchase of common stock ----- (4,900,000)
Other 21,000 -----
---------- ----------
Net cash provided (used) by
financing activities (3,779,000) 62,000
---------- ----------
Net increase (decrease) in cash
and cash equivalents 374,000 (371,000)
Cash and cash equivalents at beginning
of period 3,222,000 2,872,000
---------- ----------
Cash and cash equivalents at end of period $ 3,596,000 2,501,000
---------- ----------
---------- ----------
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $ 269,000 ----
Income taxes 141,000 1,531,000
---------- ----------
---------- ----------
Supplemental disclosure of noncash investing and financing activities:
In connection with the repurchase of outstanding stock options of a
subsidiary from the Founder of the subsidiary during the three month
period ended March 31, 1996, the Company gave consideration of
$2,111,000, consisting of notes payable to the Founder of $1,736,000
and the forgiveness of a $375,000 note receivable from the Founder. The
Company allocated the entire purchase price to goodwill.
In connection with the acquisition of substantially all of the assets
of Alp Sport Sandals during the three month period ended March 31, 1995,
the Company acquired net assets aggregating $1,258,000 for cash
consideration and $1,066,000 of indebtedness.
See accompanying notes to condensed consolidated financial statements.
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 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, 1995 included in the Company's
Annual Report on Form 10-K.
(2) Earnings per Share
Net earnings per share is based on the weighted average number of common
and common equivalent shares outstanding. Common stock equivalents
represent the number of shares which would be issued assuming the exercise
of common stock options and reduced by the number of shares which could be
purchased with the proceeds from the exercise of those options.
Fully diluted net earnings per share are not presented since the amounts
do not differ significantly from the primary net earnings per share
presented.
(3) Inventory
Inventory at March 31, 1996 and December 31, 1995 is summarized as
follows:
MARCH 31, DECEMBER 31,
1996 1995
Raw materials $ 1,606,000 1,892,000
Work in process 2,036,000 1,379,000
Finished goods 13,923,000 16,285,000
---------- ----------
Total inventory $ 17,565,000 19,556,000
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, Continued
(Unaudited)
(4) 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.
(5) Repurchase of Stock Options
In connection with the acquisition of Simple Shoes, Inc. ("Simple") in
1993, the founder and President of Simple (the "Founder") retained an
option to acquire up to a 10% interest in Simple. On April 4, 1996, the
Company entered into an agreement, effective January 1, 1996, to reacquire
such option from the Founder for $2,500,000, less the $300,000 exercise
price of the option. The Company made the first installment payment in
April 1996 and the remaining non-interest bearing installment of
$1,100,000 is due January 1, 1997.
The Company allocated the entire purchase price to goodwill, which is
being amortized over the remaining 18 year life of the goodwill.
(6) Credit Facility
Pursuant to an amendment, the availability under the Company's $45,000,000
revolving credit facility ("the Facility") was reduced to $25,000,000
based on certain eligible assets, as defined, effective as of February 29,
1996. The Facility can be used for working capital and general corporate
purposes and expires August 1, 2000. Borrowings bear interest at the
bank's prime rate (8.25% at March 31, 1996) plus up to 0.25%, depending on
whether the Company satisfies certain financial ratios. Alternatively,
the Company may elect to have borrowings bear interest at LIBOR plus 1.5%
to 1.75%, depending on whether the Company satisfies such financial
ratios. Up to $7,000,000 of borrowings may be in the form of letters of
credit. The Facility is secured by substantially all assets of the
Company. As of March 31, 1996, the Company had borrowed $10,000,000 under
the Facility and $14,268,000 was available for borrowing.
The agreement underlying the Facility includes certain restrictive
covenants which, among other things, require the Company to maintain
certain financial tests. The Company was in compliance with all
requirements as of March 31, 1996.
(7) Stock-Based Compensation
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
(FAS 123), which was issued in October 1995. This statement encourages,
but does not require, a fair value based method of accounting for employee
stock options or similar equity instruments. FAS 123 allows an entity to
elect to continue to measure compensation cost under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APBO No. 25), but requires pro forma disclosures of net earnings and
earnings per share as if the fair value based method of accounting had
been applied. The Company has elected to continue to measure compensation
cost under APBO No. 25, "Accounting for Stock Issued to Employees," and
will comply with the pro forma disclosure requirements in its December 31,
1996 Annual Report on Form 10-K. The adoption of FAS 123 had no impact
on the Company's financial position or results of operations.
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, Continued
(Unaudited)
(8) Impairment of Long-Lived Assets
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
was issued in March 1995. This statement establishes accounting standards
for the recognition and measurement of impairment of long-lived assets,
certain identifiable intangibles and goodwill either to be held or
disposed of. The adoption of FAS 121 did not have a material impact on
the Company's financial position or results of operations.
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 Compared to Three Months Ended March
31, 1995
Net sales decreased by $7,311,000 or 20.3% between the three months
ended March 31, 1996 and 1995. Whereas the first quarter of 1995 was
the best quarter ever for sales of the Company's Teva registered
trademark line, in the first quarter of 1996 the Company continued to
be impacted by the poor overall retail markets and the abundance of
sport sandals in the marketplace which began in the second quarter of
1995. As a result, sales of the Teva registered trademark line
decreased from $30,203,000 for the three months ended March 31, 1995
to $18,600,000 for the three months ended March 31, 1996, a 38.4%
decrease. Sales of Teva registered trademark products represented
83.7% and 64.6% of net sales in the three months ended March 31, 1995
and 1996, respectively. While Teva registered trademark sales
declined in comparison to the prior year period, the Company
experienced a continued increase in the net sales of footwear under
the Simple registered trademark product line, which increased 67.4%,
from $4,768,000 to $7,983,000 between the three months ended March 31,
1995 and 1996. Overall, international sales for all of the Company's
products increased 57.6% from $5,734,000 to $9,035,000, representing
15.9% of net sales in 1995 and 31.4% in 1996. The combination of these
factors lead to a net decrease in the volume of footwear sold, which
decreased from 1,263,000 pairs during the three months ended March 31,
1995 to 1,107,000 pairs during the three months ended March 31, 1996,
a 12.4% decrease.
The weighted average wholesale price per pair sold during these
respective periods decreased from $29.32 to $24.88, or by 15.1%. The
decrease in the average wholesale price reflects the continued sale of
the remaining 1995 Teva registered trademark sport sandals at
discounted prices, which selling prices approximated the carrying
value of the inventory. In addition, the Company reduced the prices
of certain Teva registered trademark styles since the first quarter of
1995 in order to promote a more even distribution of price points
between the high and low points. The Company believes that having
such an even price point distribution will place one or more styles at
each desired price level.
Cost of sales decreased by $2,439,000 to $16,182,000 for the three
months ended March 31, 1996, compared with $18,621,000 for the three
months ended March 31, 1995, a decrease of 13.1%. Gross profit
decreased by $4,872,000, or 27.9%, to $12,590,000 for the three months
ended March 31, 1996 from $17,462,000 for the three months ended March
31, 1995 and decreased as a percentage of net sales to 43.8% from
48.4%. The decrease in gross profit margin as a percentage of net
sales was primarily due to the sale of 1995 closeout inventory at
discounted prices as well as the reduction in prices on certain Teva
registered trademark styles for the 1996 season, as discussed above.
Selling, general and administrative expenses increased by $477,000, or
5.1%, between the three months ended March 31, 1995 and March 31, 1996
and increased as a percentage of net sales from 26.0% in 1995 to 34.2%
in 1996. The increase was primarily due to an increase in the reserve
for potential uncollectable receivables; the addition of the
operations of Ugg Holdings, Inc.; increased marketing efforts for the
Simple registered trademark product line; and increased payroll costs
related to newly created positions. Such increases were partially
offset by the decrease in royalty expense and sales commission expense
resulting from the decrease in sales volume. The increase as a
percentage of net sales also occurred as certain selling, general and
administrative expenses include certain fixed costs and, therefore,
total selling, general and administrative expenses do not fluctuate
proportionately with changes in sales volume.
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Income taxes were $1,191,000 for the three months ended March 31,
1996, representing an effective income tax rate of 44.6%, compared
with income taxes of $3,343,000 for the three months ended March 31,
1995, representing an effective income tax rate of 41.5%. The
increase in the effective income tax rate from 1995 to 1996 is largely
a result of the goodwill associated with the acquisition of Ugg
Holdings, Inc. which is not deductible for income tax reporting
purposes. In addition, the Company experienced non-deductible losses
at certain subsidiaries which are consolidated for financial reporting
purposes but which are not consolidated for income tax reporting
purposes.
The Company had net earnings of $1,479,000 for the three months ended
March 31, 1996 as compared with net earnings of $4,713,000 for the
three months ended March 31, 1995, a decrease of 68.6%, for the
reasons discussed above.
Liquidity and Capital Resources
At March 31, 1996, working capital was $40,382,000 including
$3,596,000 of cash and cash equivalents. Cash provided by operating
activities aggregated $4,373,000 for the three months ended March 31,
1996.
Pursuant to an amendment, the availability under the Company's
$45,000,000 revolving credit facility (the "Facility") was reduced to
$25,000,000 based on certain eligible assets, as defined, effective as
of February 29, 1996. The Facility can be used for working capital
and general corporate purposes and expires August 1, 2000. Borrowings
bear interest at the bank's prime rate (8.25% at March 31, 1996) plus
up to 0.25%, depending on whether the Company satisfies certain
financial ratios. Alternatively, the Company may elect to have
borrowings bear interest at LIBOR plus 1.5% to 1.75%, depending on
whether the Company satisfies such financial ratios. Up to $7,000,000
of borrowings may be in the form of letters of credit. The Facility
is secured by substantially all assets of the Company. As of March 31,
1996, the Company had $10,000,000 in borrowings outstanding under the
Facility and $14,268,000 was available for borrowings.
The agreement underlying the Facility includes certain restrictive
covenants which, among other things, require the Company to maintain
certain financial tests. The Company was in compliance with all
requirements as of March 31, 1996.
The Company has an agreement with a supplier to provide financing for
the start-up and the expansion of the supplier's operations, of which
$2,785,000 was outstanding at March 31, 1996. The note is secured by
all assets of the supplier and bears interest at the prime rate (8.25%
at March 31, 1996) plus 1%.
Capital expenditures totaled $220,000 for the three months ended March
31, 1996. The Company's capital expenditures related primarily to the
purchase of machinery and equipment, the continued expansion of the
Company's facilities and upgrades to the Company's computer systems.
The Company currently has no material future commitments for capital
expenditures.
In connection with the acquisition of Ugg Holdings, Inc. in 1995, the
Company is required to make future payments to the former shareholders
equal to 2 1/2% of net sales of Ugg Holdings, Inc. for the years
ending March 31, 1996 through March 31, 2000, an amount equal to
earnings before income taxes of Ugg Holdings, Inc., as adjusted for
certain items, for the year ended March 31, 1996 and an additional
$500,000 payment in March 2000.
The Company believes that internally generated funds, the available
borrowings under its existing credit facilities and the cash on hand
will provide sufficient liquidity to enable it to meet its current and
foreseeable working capital requirements.
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Seasonality
Financial results for the outdoor and footwear industries are
generally seasonal. Based on the Company's historical product mix,
the Company would expect greater sales in the first and second
quarters than in the third and fourth quarters. However, the Company
anticipates that the recent acquisition of Ugg Holdings, Inc., which
is counterseasonal to the Company's sport sandal line, will help
reduce the impact of seasonality.
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.
New Accounting Standards
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123), which was issued in October 1995. This
statement encourages, but does not require, a fair value based method
of accounting for employee stock options or similar equity
instruments. FAS 123 allows an entity to elect to continue to measure
compensation cost under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APBO No. 25), but requires
pro forma disclosures of net earnings and earnings per share as if the
fair value based method of accounting had been applied. The Company
has elected to continue to measure compensation cost under APBO No.
25, "Accounting for Stock Issued to Employees," and will comply with
the pro forma disclosure requirements in its December 31, 1996 Annual
Report on Form 10-K. The adoption of FAS 123 had no impact on the
Company's financial position or results of operations.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which was issued in March 1995. This statement establishes accounting
standards for the recognition and measurement of impairment of
long-lived assets, certain identifiable intangibles and goodwill
either to be held or disposed of. The adoption of FAS 121 did not
have a material impact on the Company's financial position or results
of operations.
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. Not applicable
Item 2. Changes in Securities. Not applicable
Item 3. Defaults upon Senior Securities. Not applicable
Item 4. Submission of Matters to a Vote of Security
Holders. Not applicable
Item 5. Other Information. Not applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 10.41 Option Purchase Agreement, dated April 4,
1996, by and between Eric Meyer, Deckers
Outdoor Corporation, Simple Shoes, Inc. and
Phillipsburg, Ltd.
Exhibit 11.1 Statement of Computation of Earnings per
Share.
(b) Reports on Form 8-K. None
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.
(REGISTRANT) Deckers Outdoor Corporation
BY (SIGNATURE) /s/ Diana M. Wilson
(NAME AND TITLE) Diana M. Wilson, Chief Operating and Financial
Officer, Vice President and Secretary
(Duly Authorized Officer and Principal Financial
and Accounting Officer)
(DATE) May 14, 1996