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, 2001
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 8, 2001
- --------------------------------------- -------------------------
Common stock, $.01 par value 9,210,319
2
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Table of Contents
Page
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 1
Condensed Consolidated Statements of Earnings for the Three-Month Periods
Ended March 31, 2001 and 2000 2
Condensed Consolidated Statements of Cash Flows for the Three-Month
Periods Ended March 31, 2001 and 2000 3
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
3
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
ASSETS MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
Current assets:
Cash and cash equivalents $11,940,000 9,057,000
Trade accounts receivable, less allowance for
doubtful accounts of $3,204,000 and
$2,144,000 as of March 31, 2001 and December 31, 2000, 27,599,000 23,143,000
respectively
Inventories 15,440,000 17,146,000
Prepaid expenses and other current assets 1,606,000 1,541,000
Refundable and deferred tax assets 2,644,000 2,763,000
----------- ---------
Total current assets 59,229,000 53,650,000
Property and equipment, at cost, net 3,248,000 2,998,000
Intangible assets, less accumulated amortization 21,505,000 20,471,000
Other assets, net 1,158,000 593,000
----------- ---------
$85,140,000 77,712,000
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current installments of long-term debt $ 412,000 1,046,000
Trade accounts payable 10,999,000 8,020,000
Accrued expenses 4,528,000 4,102,000
Income taxes payable 1,981,000 --
----------- ---------
Total current liabilities 17,920,000 13,168,000
----------- ---------
Long-term debt, less current installments 342,000 449,000
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
10,177,271 shares and outstanding 9,204,319 shares at March 31,
2001; issued 10,108,929 shares and outstanding
9,135,977 shares at December 31, 2000 92,000 91,000
Additional paid-in capital 25,298,000 25,003,000
Retained earnings 42,112,000 39,625,000
----------- ---------
67,502,000 64,719,000
Less note receivable from stockholder/former officer 624,000 624,000
----------- ---------
Total stockholders' equity 66,878,000 64,095,000
----------- ---------
$85,140,000 77,712,000
=========== ==========
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,
--------------------------------
2001 2000
------------ ----------
Net sales $ 34,911,000 41,923,000
Cost of sales 19,177,000 22,497,000
------------ ----------
Gross profit 15,734,000 19,426,000
Selling, general and administrative expenses 11,653,000 11,362,000
------------ ----------
Earnings from operations 4,081,000 8,064,000
Other expense (income):
Interest, net (79,000) 201,000
Other (203,000) 171,000
------------ ----------
Earnings before income tax expense 4,363,000 7,692,000
Income tax expense 1,876,000 3,308,000
------------ ----------
Net earnings $ 2,487,000 4,384,000
============ =========
Net earnings per share:
Basic $ 0.27 0.48
Diluted 0.26 0.47
============ =========
Weighted-average shares:
Basic 9,179,000 9,071,000
Diluted 9,584,000 9,360,000
============ =========
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,
-----------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net earnings $ 2,487,000 4,384,000
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization 862,000 734,000
Provision for doubtful accounts 1,228,000 343,000
Gain on sale of Heirlooms subsidiary (185,000) --
Loss on disposal of assets 10,000 7,000
Non-cash stock compensation 163,000 78,000
Changes in assets and liabilities (net of effects of disposition of
Heirlooms subsidiary):
(Increase) decrease in:
Trade accounts receivable (5,990,000) (12,792,000)
Inventories 973,000 (280,000)
Prepaid expenses and other current assets (506,000) (98,000)
Refundable income taxes 34,000 1,624,000
Other assets (155,000) 2,000
Increase in:
Trade accounts payable 3,035,000 1,836,000
Accrued expenses 554,000 1,676,000
Income taxes payable 1,981,000 992,000
----------- ---------
Total adjustments 2,004,000 (5,878,000)
----------- ---------
Net cash provided by (used in) operating activities 4,491,000 (1,494,000)
----------- ---------
Cash flows from investing activities:
Cash paid for extension of Teva purchase option (1,566,000) --
Net proceeds from sale of Heirlooms subsidiary 599,000 --
Purchase of property and equipment (695,000) (505,000)
Proceeds from sale of property and equipment 18,000 18,000
----------- ---------
Net cash used in investing activities (1,644,000) (487,000)
----------- ---------
(Continued)
3
6
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, Continued
(Unaudited)
THREE-MONTH PERIOD ENDED
MARCH 31,
--------------------------------
2001 2000
------------ ----------
Cash flows from financing activities:
Net proceeds from (repayments of) long-term debt (97,000) 2,566,000
Cash received from issuances of common stock 133,000 38,000
------------ ---------
Net cash provided by financing activities 36,000 2,604,000
------------ ---------
Net increase in cash 2,883,000 623,000
Cash at beginning of period 9,057,000 1,633,000
------------ ---------
Cash at end of period $ 11,940,000 2,256,000
============ =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 32,000 251,000
Income taxes 726,000 53,000
============ =========
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, 2000 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, 2001 and 2000, the difference between the weighted-average number
of shares used in the basic computation compared to that used in the
diluted computation was due to the dilutive impact of options to purchase
common stock.
The reconciliations of basic to diluted weighted-average shares are as
follows for the three months ended March 31, 2001 and 2000:
THREE-MONTH PERIOD ENDED
MARCH 31,
---------------------------------
2001 2000
------------ ---------
Net earnings $ 2,487,000 4,384,000
============ =========
Weighted-average shares used in basic computation 9,179,000 9,071,000
Dilutive stock options 405,000 289,000
------------ ----------
Weighted-average shares used for diluted computation 9,584,000 9,360,000
============ ==========
5
8
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(2) Earnings per Share (Continued)
Options to purchase 282,000 shares of common stock at prices ranging from
$5.25 to $9.88 were outstanding during the three months ended March 31,
2001 and 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, 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,
2001 2000
--------- ------------
Finished goods $15,440,000 16,968,000
Work in process -- 48,000
Raw materials -- 130,000
----------- ----------
Total inventories, net $15,440,000 17,146,000
=========== ==========
(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.
Borrowings bear interest at the lender's prime rate (8.00% at March 31,
2001) 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 Facility,
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. At March 31, 2001, the Company had no outstanding
borrowings under the Facility and outstanding letters of credit aggregated
$3,438,000. The agreement underlying the credit facility includes a
tangible net worth covenant. At March 31, 2001, the Company was in
compliance with such covenant and the terms of the agreement. The Company
had credit availability under the Facility of $14,687,000 at March 31,
2001.
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, 2001, the Company had income tax expense of $1,876,000,
representing an effective income tax rate of 43.0%. 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%.
(6) New Accounting Pronouncements
The Company adopted Emerging Issues Task Force Issue 00-10 (EITF 00-10),
Accounting for Shipping and Handling Fees and Costs, effective October 1,
2000. EITF 00-10 established new guidelines for the classification of
shipping and handling costs billed to and collected from customers.
Pursuant to EITF 00-10, amounts billed for shipping and handling costs are
recorded as a component of net sales. Related costs paid to third-party
shippers are recorded as a cost of goods sold. Management has retroactively
reclassified these amounts from selling, general and administrative
expenses to net sales and cost of goods sold. Approximately $457,000 of
shipping cost reimbursements have been reclassified as an addition to net
sales for the three month period ended March 31, 2000 and approximately
$413,000 of shipping costs incurred were reclassified as additions to cost
of goods sold.
(7) Business Segments
The Company evaluates performance based on net revenues and earnings or
loss from operations. The Company's reportable segments are strategic
business units which are responsible for the worldwide operations of each
of its brands. They are managed separately because each business requires
different marketing, research and development, design, sourcing and sales
strategies.
Sales and operating income (loss) by business segment for the three months
ended March 31, 2001 and 2000 is summarized as follows:
2001 2000
----------- -----------
Sales to external customers:
Teva $ 30,037,000 35,150,000
Simple 4,231,000 5,463,000
Ugg 592,000 526,000
Other 51,000 784,000
----------- -----------
$ 34,911,000 41,923,000
=========== ===========
7
10
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(7) Business Segments (Continued)
2001 2000
----------- --------
Earnings (loss) from operations:
Teva $ 4,569,000 7,211,000
Simple (220,000) 902,000
Ugg (275,000) (199,000)
Other 7,000 150,000
----------- ---------
$ 4,081,000 8,064,000
=========== =========
The earnings from operations of each segment includes an allocation of
corporate overhead costs to the business segments, based on the ratio of
each segment's net sales to total net sales.
Business segment asset information as of March 31, 2001 and December 31,
2000 is summarized as follows:
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
Total assets for reportable segments:
Teva $ 42,461,000 25,682,000
Simple 10,808,000 10,684,000
Ugg 18,024,000 25,668,000
Other -- 1,835,000
------------ -----------
$ 71,293,000 63,869,000
============ ===========
Reconciliations of total assets from reportable segments to the condensed
consolidated balance sheets at March 31, 2001 and December 31, 2000 are as
follows:
MARCH 31, DECEMBER 31,
2001 2000
----------- -----------
Total assets for reportable segments $71,293,000 63,869,000
Elimination of intersegment payables 317,000 84,000
Unallocated refundable income taxes
and deferred tax assets 2,452,000 2,486,000
Other unallocated corporate assets 11,078,000 11,273,000
----------- -----------
Consolidated total assets $85,140,000 77,712,000
=========== ===========
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
Yeti 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 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
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, 2000. 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
earnings per share expectations, expectations regarding the Company's
liquidity, the potential impact of certain litigation and the impact of
seasonality on the Company's operations. 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, 2001 Compared to Three Months Ended March 31,
2000
Net sales decreased by $7,012,000, or 16.7%, to $34,911,000 from the
comparable three months ended March 31, 2000 of $41,923,000. The decrease
is largely attributed to the weakness in the economy, the softness in the
retail environment and sales declines in the overseas markets, particularly
in Europe. Sales of the Teva brand decreased 14.5% to $30,037,000 for the
three months ended March 31, 2001 from $35,150,000 for the three months
ended March 31, 2000 and represented 86.0% and 83.8% of net sales in the
three months ended March 31, 2001 and 2000, respectively. Net sales of
footwear under the Simple product line decreased 22.6% to $4,231,000 from
$5,463,000 for the comparable three months ended March 31, 2000. Net sales
of Ugg footwear increased 12.6% to $592,000 for the three months ended
March 31, 2001, compared to net sales of $526,000 for the three months
ended March 31, 2000. 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 decreased 21.2% for
the quarter to $13,542,000 from $17,179,000, representing 38.8% of net
sales in 2001 and 41.0% in 2000. The volume of footwear sold decreased 7.0%
to 1,572,000 pairs during the three months ended March 31, 2001 from
1,691,000 pairs during the three months ended March 31, 2000, for the
reasons discussed above.
The weighted-average wholesale price per pair sold during the three months
ended March 31, 2001 for all brands combined decreased 8.0% to $21.89 from
$23.80 for the three months ended March 31, 2000. The decrease was
primarily due to a change in sales mix away from the higher priced styles,
including the leather casuals, toward styles with lower average selling
prices, including thongs and several newly introduced styles at lower price
points.
Cost of sales decreased by $3,320,000 or 14.8%, to $19,177,000 for the
three months ended March 31, 2001, compared with $22,497,000 for the three
months ended March 31, 2000 and increased as a percentage of net sales to
54.9% from 53.7%. Gross profit decreased by $3,692,000, or 19.0%, to
$15,734,000 for the three months ended March 31, 2001 from $19,426,000 for
the three months ended March 31, 2000 and decreased as a percentage of net
sales to 45.1% from 46.3%. The decrease in gross margin was the result of a
combination of factors including the introduction of certain new styles
with lower gross margins and slightly increased factory costs on certain
styles.
The Company carries its inventories at the lower of cost or market, using a
reserve for inventory obsolescence to adjust the carrying values to market
where necessary based on ongoing reviews of estimated net realizable values
of its inventories. For the three months ended March 31, 2001, the Company
had a net decrease to the reserve for inventory obsolescence of
approximately $65,000 primarily due to the sale of domestic inventory of
Teva and Simple product for which a reserve had previously been taken, as
well as the elimination of approximately $36,000 of reserve in connection
with the Company's
10
13
sale of its Heirlooms subsidiary during the quarter. For the three months
ended March 31, 2000, the Company had a net addition to the inventory
obsolescence reserve of approximately $218,000 as the Company recorded
inventory write-downs for its domestic Teva footwear inventory, as well as
write-downs for its Teva apparel inventory in connection with the Company's
exit from the Teva apparel business in 2000.
Selling, general and administrative expenses increased by $291,000, or
2.6%, to $11,653,000 for the three months ended March 31, 2001, compared
with the three months ended March 31, 2000 of $11,362,000, and increased as
a percentage of net sales to 33.4% in 2001 from 27.1% in 2000. The increase
in selling, general and administrative expenses as a percentage of sales
was primarily due to an increase in bad debt expense due to a bankruptcy
filing by one of the Company's larger customers, Track 'n Trail, on April
13, 2001. As a result of the Track 'n Trail bankruptcy filing, the Company
recorded approximately $1.0 million of bad debt expense for the three
months ended March 31, 2001 to reserve for 100% of the net accounts
receivable balance for this customer. In addition, the increase in selling,
general and administrative expenses as a percentage of sales occurred as
certain operating costs are fixed costs and did not decrease in proportion
to the decrease in sales levels.
Earnings from operations for the Teva brand were $4,569,000 for the three
months ended March 31, 2001 compared to $7,211,000 for the three months
ended March 31 2000. The decrease is largely due to the decrease in sales
and the bad debt write-off for Track `n Trail. The Simple brand experienced
a loss from operations of $220,000 for the three months ended March 31,
2001 compared to earnings from operations of $902,000 for the three months
ended March 31, 2000 as a result of the decrease in sales, lower gross
margins on certain newly introduced styles, increased marketing costs and
the bad debt write-off for Track `n Trail. The Ugg brand experienced a loss
from operations of $275,000 for the three months ended March 31, 2001
compared to a loss from operations of $199,000 for the three months ended
March 31, 2000 largely due to the bad debt write-off for Track `n Trail.
Additionally, the earnings from operations for all segments decreased
versus that experienced in the year ago period as certain costs are fixed
costs and did not decrease in proportion to the decrease in consolidated
net sales.
Net interest income was $79,000 for the three months ended March 31, 2001
compared with net interest expense of $201,000 for the three months ended
March 31, 2000, primarily due to the Company's significantly improved cash
position generated by the Company's cash flows from operations.
For the three months ended March 31, 2001 the Company had income tax
expense of $1,876,000, representing an effective income tax rate of 43.0%.
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%.
Income taxes for interim periods are computed using the effective tax rate
estimated to be applicable for the full fiscal year, which is subject to
ongoing review and evaluation by the Company.
The Company experienced net earnings of $2,487,000, or $0.26 per share -
diluted, for the three months ended March 31, 2001 versus net earnings of
$4,384,000, or $0.47 per share - diluted, for the three months ended March
31, 2000 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 earnings per share
expectations, expectations regarding the Company's liquidity, the potential
impact of certain litigation, and the impact of seasonality
11
14
on the Company's operations. These forward-looking statements are based on
the Company's expectations as of today, May 14, 2001. No one should assume
that any forward-looking statement made by the Company will remain
consistent with the company's expectations after the date the
forward-looking statement is made. The Company disclaims any obligation to
update any such factors or to publicly announce the results of any
revisions to any of the forward-looking statements contained in this
Quarterly Report on Form 10-Q. All of the forward-looking statements are
based on management's current expectations and are inherently uncertain.
Actual results may differ materially for a variety of reasons, including
the reasons discussed below. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements.
Sales and Earnings per Share Expectations
Based on the Track `n Trail bankruptcy, a slowdown in international
business, the continuing weakness in the domestic economy, and extended
periods of unseasonably cold weather this Spring, the Company currently
expects that net sales for the fiscal year ending December 31, 2001 will
range from $95 million to $100 million and fully-diluted earnings per share
will range from $0.40 to $0.45. For the second quarter ending June 30,
2001, the Company currently expects sales to range from $20 million to $21
million and fully-diluted earnings per share to range between $0.07 and
$0.08.
For the year ending December 31, 2001, the Company currently expects net
sales of its Teva brand to range from $67 million to $69 million, sales of
its Simple brand to range from $12 million to $14 million and sales of its
Ugg brand to range from $16 million to $17 million.
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.
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.
The Company's offices and distribution center are located in the state of
California, which has experienced, and is expected to continue to
experience, rolling electrical power outages. Depending on the timing,
length and frequency of the outages, the Company may be unable to ship
products in a timely manner, which could negatively impact the Company's
net sales.
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
12
15
risks associated with doing international business including foreign
exchange risks, duties, quotas and political instability.
Liquidity and Capital Resources
The Company's liquidity consists of cash, trade accounts receivable,
inventories and a revolving credit facility (the "Facility"). At March 31,
2001, working capital was $41,309,000, including $11,940,000 of cash and
cash equivalents. Cash provided by operating activities aggregated
$4,491,000 for the three months ended March 31, 2001. Trade accounts
receivable increased 19.3% from December 31, 2000 and inventories decreased
9.9% since December 31, 2000 primarily as a result of normal seasonality,
as well as continuing efforts to reduce inventory levels in light of the
Company's expectations for reduced sales levels in 2001.
The Facility 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. Borrowings bear interest at the lender's
prime rate (8.00% at March 31, 2001) 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 Facility includes a tangible net worth covenant. At March
31, 2001, the Company was in compliance with the terms and covenants of the
agreement. On March 31, 2001, the Company had no outstanding borrowings
under the Facility and outstanding letters of credit aggregated $3,438,000.
The Company had credit availability under the Facility of $14,687,000 at
March 31, 2001.
Capital expenditures totaled $695,000 for the three months ended March 31,
2001. The Company's capital expenditures related primarily to various
hardware and software purchases in conjunction with the Company's
implementation of a new ERP computer system, which is expected to be placed
into service later this year. 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 2000 or the three months ended March 31, 2001.
At March 31, 2001, 1,227,000 shares remained available for repurchase under
the program.
In 1999, the Company received an option to buy Teva and virtually all of
its assets, including all worldwide rights to all Teva products. The
Company's original option was exercisable during the period from January 1,
2000 to December 31, 2001 or during the period from January 1, 2006 to
December 31, 2008. On January 22, 2001, the Company amended its option
agreement, extending the first option window for two additional years. As a
result, the first option window now expires December 31, 2003. The Company
paid Mr. Thatcher $1.6 million in March 2001 as consideration for this
extension. The option price is based on formulas tied to net sales of Teva
products and varies depending on when the option is exercised. For the
first option period, the option price is for an amount equal to the greater
of (i) $61.6 million or (ii) 75% of the largest calendar year revenues
since January 1, 2000 for the Teva brand,
13
16
plus $1.6 million. In addition, the Company would issue to Mr. Thatcher
100,000 shares of common stock and options to purchase 100,000 shares of
common stock. The purchase price for the second option period, January 1,
2006 to December 31, 2008, is equal to 110% of the annual average of the
aggregate net sales for all Teva products for the two calendar years since
January 1, 2000 with the highest aggregate sales. 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.
In the event that the Company exercises its option to acquire the Teva
brand, the Company would acquire virtually all assets including all Teva
patents, tradenames, trademarks and all other intellectual property. The
Company currently has the worldwide license for Teva footwear and pays the
licensor a royalty ranging from 6.5% to 5.0% of net sales of Teva products.
By acquiring Teva, the Company would eliminate the payment of royalties to
the licensor. In addition, the Company would own the Teva name and be able
to pursue extension of the brand into other areas including apparel,
outdoor gear and similar items, either through licensing to others or
otherwise. The Company believes there are significant opportunities in this
area given the strength of the Teva brand in the outdoor market. In
conjunction with the Company, the licensor has already developed licensing
arrangements for Teva apparel in the United States and Japanese markets and
is currently pursuing apparel licensees for additional territories. By
acquiring Teva, the Company would receive these existing royalty income
streams, as well as any royalties from additional future licensees. Also,
upon exercise of the option, the Company would own the licensor's rapidly
growing and profitable Teva catalog and internet retailing business.
The Company believes that by exercising its option to acquire Teva, it will
be able to significantly improve its earnings before interest, taxes,
depreciation and amortization ("EBITDA"). In 2000, the Company sold
approximately $80 million of Teva products, paying a royalty of
approximately $4.3 million and incurring approximately $0.8 million of
additional costs that the Company believes could have been eliminated had
the Company owned Teva outright. In addition, the licensor's
catalog/internet business yielded earnings before income taxes of
approximately $0.5 million in 2000. Accordingly, had the Company owned Teva
in 2000, it would have been able to improve its EBITDA by approximately
$5.6 million.
For 2004, the first year following the end of the first option window, the
Company currently expects that its net sales of Teva products will be in
excess of $108 million. Based on this sales level, the acquisition of Teva
would eliminate royalty expense of at least $6.1 million and achieve other
savings of approximately $1.1 million. In addition, the earnings before
income taxes provided from the licensor's catalog/internet business is
expected to yield approximately $0.9 million in 2004 and the royalty income
from apparel licensees in the United States and Japan alone, based on
minimums in the existing apparel license agreements, would be approximately
$0.3 million. As a result, the combined savings and additional operating
income generated from the acquisition of Teva would increase the Company's
EBITDA by approximately $8.4 million in 2004.
The Company continues to evaluate various alternatives for financing the
potential acquisition of Teva. While no assurances can be given, the
Company believes it will be able to obtain the necessary financing. Given
the wide range of financing possibilities, the EBITDA amounts above for
2000 and 2004 do not consider the impact on interest expense resulting from
the potential issuance of additional debt or any potential dilution impact
on earnings per share resulting from any potential issuance of additional
capital
14
17
stock for the potential acquisition. The amounts above also do not consider
any increase in depreciation or amortization resulting from the
acquisition.
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 (excluding the possible
acquisition of Teva). 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.
Historically, the Company's sales have been greater in the first and second
quarters, Teva's strong selling season, than in the third and fourth
quarters. However, given the Company's current expectations for a decrease
in Teva sales for the first half of 2001 compared to 2000 combined with the
anticipated continuing increase in Ugg sales in the Fall of 2001, the
Company currently expects sales in the fourth quarter to exceed the sales
levels for the second quarter of 2001. 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.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Derivative Instruments
The Company does not invest, and during the three months ended March 31,
2001, did not invest, in market risk sensitive instruments.
Market Risk
The Company's market risk exposure with respect to financial instruments is
to changes in the "prime rate" in the United States and changes in the
Eurodollar rate. The Company's credit facility (the "Facility") provides
for interest on outstanding borrowings at prime rate, or at the Company's
election at an adjusted Eurodollar rate plus 2%. At March 31, 2001, the
Company had no outstanding borrowings under the Facility.
15
18
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
Yeti 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.
(a) Exhibits
10.20 Employment Agreement dated February 27, 2001, between
Deckers Outdoor Corporation and Peter Benjamin
(b) Reports on Form 8-K. None
16
19
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Deckers Outdoor Corporation
Date: May 14, 2001 /s/ M. Scott Ash
--------------------------------------
M. Scott Ash, Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
17